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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) : August 19, 1998
H.T.E., Inc.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
FLORIDA 0-22657 59-2133858
(State or Other Jurisdiction (Commission File No.) (I.R.S. Employer
of Incorporation) Identification No.)
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1000 Business Center Drive 32746
Lake Mary, Florida (Zip Code)
(Address of principal executive offices)
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Registrant's telephone number, including area code : (407) 304-3235
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(Former name or former address, if changed since last report.)
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Item 5. Other Events
The following consolidated financial statements of H.T.E., Inc.
reflecting pooled operations of H.T.E., Inc. and subsidiaries and UCS, Inc.,
which was acquired by H.T.E., Inc. on June 1, 1998, and related Management's
Discussion and Analysis of Financial Condition and Results of Operations for the
periods ended March 31, 1996, and December 31, 1996 and 1997, are filed as part
of this Report:
Reports of Independent Certified Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' (Deficit) Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's Consolidated Financial Statements, including the Notes thereto.
This description contains certain forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ significantly from
the results discussed in the forward-looking statements as a result of certain
of the factors set forth from time to time in the Company's filings with the
Securities and Exchange Commission (the "Commission").
OVERVIEW
The Company develops, markets, implements and supports fully integrated
enterprise-wide software applications designed specifically for public sector
organizations, including state, county and city governments and other municipal
agencies and for public and private utilities. For over 16 years, the Company
has strategically focused on providing software applications exclusively to
middle market public sector organizations and utilities, and has established
itself as a leading provider of software solutions to those markets. HTE's fully
integrated enterprise-wide software applications are designed to fulfill the
specific functional requirements of the public sector marketplace, such as
improvement of delivery of services, reduction of costs, enhancement of revenue
collection, operation within budgetary constraints, compliance with government
regulations and improvement of overall operating efficiencies. The Company's
Total Enterprise Solution currently includes more than 50 applications
addressing five functional areas: financial management, community services,
public safety and justice, education and utility management. The Company's
products operate as integrated suites or as stand-alone applications and
function with a variety of computer and network hardware, operating systems,
database software and desktop applications provided by other vendors. As part of
its strategy to provide a completely integrated solution to its customers, the
Company also provides a variety of related services, including consulting,
implementation, education and training, and the provision and configuration of
hardware systems.
The Company provides its software applications and business solutions to
customers in public sector and utility markets under license agreements and
service contracts. HTE's revenues are generated principally from (i) software
licenses that grant customers the right to use the Company's software products,
(ii) professional services derived from a variety of services related to the
implementation of the Company's software, including project management, custom
programming, consulting, conversion and education programs, systems planning and
integration and other services, (iii) sales of hardware such as computers, data
collection equipment, peripherals and related network and communications
products purchased from third-parties and sold by the Company to its software
customers, (iv) maintenance and other revenues which include revenues associated
with annual software maintenance and support services, and (v) resource
management revenues derived from Information Technology ("IT") outsourcing
services designed to assume total or partial control and responsibility of
customers' information resources, generally on a long-term basis.
The Company recognizes revenues from software licenses when the related
license agreement has been executed and the software has been shipped to the
customer, provided that no significant Company obligations remain related to the
software license and collection of the receivable is deemed probable. The
Company typically contracts professional services on a time and materials basis
and such revenues are recognized as services are performed. Hardware revenues
are recognized at the time the products are shipped. The Company drop-ships
hardware directly to the customer and does not carry hardware inventory.
Revenues from maintenance and other are recognized ratably over the term of the
applicable maintenance agreement. Resource management revenues are recognized
monthly as services are performed, according to the contractually agreed upon
rate.
The sales cycle for the Company's systems is typically six to 18 months
from initial contact to contract signing. The product delivery cycle varies
based on the customer's implementation plan. Complete product implementation
typically occurs within six to nine months, but can extend beyond nine months on
contracts involving significant and continuing customer service requirements,
particularly with enterprise-wide solutions.
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Accordingly, the product delivery cycle depends upon the combination of products
purchased and the defined implementation plan.
The Company accounts for costs related to computer software in accordance
with Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed." All costs
incurred to establish technological feasibility of a software product are
charged to research and development expense as incurred. Technological
feasibility is established when the Company has completed all planning,
designing, coding and testing activities that are necessary to establish that
the product can be produced to meet its design specifications, including
functions, features and technical performance requirements. Costs of producing
product masters incurred subsequent to establishing technological feasibility
are capitalized and are amortized on a straight-line basis over three years once
the product is available for general release to customers. The Company ceases
capitalization when the product is available for general release to customers.
Effective April 1, 1995, management changed the estimated useful life of
capitalized software development costs from 60 months to 36 months. As a result,
the Company recognized additional amortization expense of $1.3 million during
the year ended March 31, 1996. This change was reflected in the cost of software
licenses and resulted in an increase as a percentage of software license
revenues from 19.7% to 31.0% for the year ended March 31, 1996.
The Company derives substantially all of its revenues from domestic
operations. In November 1996, HTE established a presence in Canada through an
acquisition.
The Company's revenues and operating results are subject to quarterly and
other fluctuations resulting from a variety of factors, including the effect of
budgeting and purchasing practices of its customers, the length of the customer
evaluation process for the Company's solutions, the timing of customer system
conversions, and the Company's sales practices. Historically, the Company has
achieved its highest income in the fiscal quarter ended March 31 due to the
Company's sales practices. In 1996, the Company implemented a new sales and
marketing program and changed its fiscal year end to December 31, which the
Company believes will have the effect of moderating such fluctuations. Because
of these changes, the Company believes that historical quarterly operating data
should not be relied upon as an indicator of its future performance. However,
the Company has often recognized a substantial portion of its revenues during
the last month of each quarter. Since a significant portion of the Company's
operating expenses is relatively fixed, the Company may not be able to adjust or
reduce spending in response to sales shortfalls or delays. These factors can
cause significant variations in operating results from quarter to quarter. The
Company believes that quarter to quarter comparisons of its financial results
are not necessarily meaningful and should not be relied upon as an indication of
its future performance.
Recent Acquisitions
In December 1997, the Company purchased the assets of Kb Systems, Inc.
("Kb") for $400,000 in cash and the payment of a continuing royalty on license
fees over a five-year period. For its fiscal year ended June 30, 1997, Kb had
revenues of approximately $1.4 million. As of the date of the acquisition, Kb
had approximately 150 customers. The Kb software applications have enabled the
Company to expand its penetration into governmental tax departments by adding
property appraisal and assessment applications to its traditional tax billing
and collection capability.
In January 1998, the Company purchased the assets of JALAN, Inc.("JALAN")
for approximately $1.7 million in cash. For its fiscal year ended September 30,
1997, JALAN had revenues of approximately $2.5 million. As of the date of the
acquisition, JALAN had 18 employees and approximately 120 customers in 32
states. The JALAN software applications track inmate information for jails, case
status for courts, defendant case information for district attorneys' and public
defenders' offices, civil papers for sheriff departments, case information for
the probation system and claims for victim compensation.
In April 1998, the Company completed a pooling of interests acquisition of
Phoenix Systems, L.L.C. ("Phoenix") for 272,036 shares of Common Stock valued at
$3.0 million on or about the closing date. As of the date of the acquisition,
Phoenix had 22 employees and approximately 70 customers. The Phoenix software
applications encompass a complete
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suite of integrated Windows NT software products targeted towards financial
management and student administration for school districts (grades K through
12).
In June 1998, the Company completed a pooling of interests acquisition of
UCS, Inc. ("UCS") for 1,120,000 shares of Common Stock valued at $15.0 million
as of the April 1998 agreement valuation date. For its fiscal year ended
December 31, 1997, UCS had revenues of approximately $10.0 million. As of the
date of the acquisition UCS had approximately 130 employees in its Ft.
Lauderdale, Florida, Golden, Colorado and Vienna, Virginia offices and more than
200 customers throughout the United States. UCS is a leading mobile work force
automation provider of field-based reporting software. UCS's products and
services are utilized by federal, state, county and city government agencies, as
well as police and fire departments. UCS mobile data software enables law
enforcement officials to utilize HTE software through the entire criminal
justice process -- from the first point of contact with a suspect in the field
through the judicial system and throughout the incarceration period.
In July 1998, the Company entered into a letter of intent to acquire the
assets of Vanguard Management and Information Systems, Inc. ("Vanguard") for
$400,000 in cash and the payment of continuing royalties over a five-year
period. Subject to completion of due diligence and the execution of a definitive
purchase agreement, the acquisition is expected to close in the quarter ending
September 30, 1998. Vanguard provides professional management services and
software applications to trial courts and other judicial agencies. The Company
expects the acquisition to expand its justice system product line, enhance its
UNIX client/server offerings, and permit it to respond to proposals for large
scale courts administration systems.
Future Acquisitions
Over the past five years, the Company has supplemented its internal growth
with nine acquisitions, four of which have occurred since June 1997. The Company
intends to continue its growth strategy and expects growth from acquisitions to
complement internally generated growth. The Company views acquisitions as a
means of acquiring technology and industry expertise thereby expanding the
variety of enterprise-wide software applications the Company offers for sale and
servicing, broadening its customer base and expanding internationally. The
Company believes that the public sector application vendor market is highly
fragmented with many small point solution companies and that the industry is
currently entering a period of consolidation. The Company intends to pursue
acquisition opportunities which help it to accomplish its objective of becoming
the leading provider of enterprise-wide IT solutions to the public sector.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
revenues, income and expense items expressed as a percentage of the Company's
total revenues:
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NINE MONTHS ENDED YEAR ENDED SIX MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31, DECEMBER 31, JUNE 30,
--------------------- ----------------------- ------------------- -------------------
1995 1996 1995 1996 1996 1997 1997 1998
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Revenues:
Software licenses................. 31.3% 29.2% 24.2% 31.5% 34.6% 40.5% 39.9% 45.2%
Professional services............. 25.0 27.0 26.3 25.9 25.6 22.0 24.8 21.6
Hardware.......................... 20.3 18.5 20.9 22.4 20.1 17.8 15.4 12.5
Maintenance and other............. 23.4 25.3 28.6 20.2 19.7 19.0 19.9 19.1
Resource management............... -- -- -- -- -- 0.7 -- 1.6
----- ----- ----- ----- ----- ----- ----- -----
Total revenues.............. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- -----
Operating expenses:
Cost of software licenses......... 4.3 9.1 10.0 8.5 8.2 8.0 7.3 6.9
Cost of professional services..... 18.3 19.2 20.1 14.4 14.7 12.7 13.8 12.7
Cost of hardware.................. 18.6 14.6 16.6 17.9 15.9 13.9 11.8 10.0
Cost of maintenance and other..... 15.2 10.7 11.3 7.8 7.9 9.1 9.5 10.0
Cost of resource management....... -- -- -- -- -- 0.5 -- 1.1
Research and development.......... 9.5 11.4 11.8 15.2 14.3 12.5 13.5 14.2
Sales and marketing............... 13.7 13.8 14.1 17.9 16.9 17.4 17.0 19.0
General and administrative........ 16.6 17.1 17.9 16.9 16.8 16.5 18.2 16.1
----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses.... 96.2 95.9 101.8 98.6 94.7 90.6 91.1 90.0
----- ----- ----- ----- ----- ----- ----- -----
Operating income (loss)............. 3.8 4.1 (1.8) 1.4 5.3 9.4 8.9 10.0
Interest expense (income)........... 0.3 0.3 0.2 0.5 0.5 (0.3) 0.4 (0.6)
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before income taxes... 3.5 3.8 (2.0) 0.9 4.8 9.7 8.5 10.6
Provision (benefit) for income
taxes............................. 0.4 0.5 (2.2) 1.7 3.0 3.7 2.7 4.9
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Net income (loss)........... 3.1% 3.3% 0.2% (0.8)% 1.8% 6.0% 5.8% 5.7%
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Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Revenues
The Company's total revenues increased by 45% to $43.8 million for the six
months ended June 30, 1998, from $30.2 million for the six months ended June 30,
1997.
Software Licenses Revenues. Software licenses revenues increased by 64% to
$19.8 million for the six months ended June 30, 1998, from $12.0 million for the
six months ended June 30, 1997. As a percentage of total revenues, software
license revenues increased to 45.2% for the six months ended June 30, 1998, from
39.9% for the six months ended June 30, 1997. The dollar and percentage
increases resulted primarily from an increased number of software applications
available for sale and a continued investment in sales and marketing activities.
Professional Services Revenues. Professional services revenues increased
by 26% to $9.5 million for the six months ended June 30, 1998, from $7.5 million
for the six months ended June 30, 1997. As a percentage of total revenues,
professional services revenues decreased to 21.6% for the six months ended June
30, 1998, from 24.8% for the six months ended June 30, 1997. The dollar increase
in professional services was directly related to the increase in license fees
and service offerings. The decrease in professional services revenues as a
percentage of total revenues was primarily due to an increase in the sale of
products requiring less implementation services, along with an increased backlog
of services revenues associated with license fee bookings in the period.
Hardware Revenues. Hardware revenues increased by 18% to $5.5 million for
the six months ended June 30, 1998, from $4.6 million for the six months ended
June 30, 1997. As a percentage of total revenues, hardware revenues decreased to
12.5% for the six months ended June 30, 1998, from 15.4% for the six months
ended June 30, 1997. The dollar increase was primarily due to the increased
number of license fee contracts executed that required the installation of
hardware. The decrease in hardware revenues as a percentage of total
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revenues was primarily due to a larger number of sales of software licenses to
customers who did not require additional hardware.
Maintenance and Other Revenues. Maintenance and other revenues increased
by 39% to $8.4 million for the six months ended June 30, 1998, from $6.0 million
for the six months ended June 30, 1997. As a percentage of total revenues,
maintenance and other revenues decreased to 19.1% for the six months ended June
30, 1998, from 19.9% for the six months ended June 30, 1997. The dollar increase
was primarily due to maintenance contracts associated with new software
licenses, customer system upgrades and price increases in the fees charged for
annual maintenance. The decrease in maintenance and other revenues as a
percentage of total revenues was primarily due to the lag time between the sale
and booking of software licenses and the commencement of annual maintenance
contracts.
Resource Management Revenues. Resource management revenues were $723,000
or 1.6% of total revenues for the six months ended June 30, 1998. There were no
comparable revenues for the six months ended June 30, 1997 as this division
began operations in the fourth quarter of 1997.
Cost of Revenues
Cost of Software Licenses Revenues. Cost of software licenses includes
third party royalties and amortization of computer software development costs.
Cost of software licenses increased by 37% to $3.0 million for the six months
ended June 30, 1998, from $2.2 million for the six months ended June 30, 1997.
As a percentage of software license revenues, cost of software licenses
decreased to 15.2% for the six months ended June 30, 1998, from 18.3% for the
six months ended June 30, 1997. The dollar increase resulted primarily from an
increased number of third party software licenses sold, specifically module
enhancements such as report writers and imaging products. The decrease in the
cost of software licenses as a percentage of software license revenues was
primarily due to the growth of internal software licenses which exceeded the
growth of third party software licenses.
Cost of Professional Services Revenues. Cost of professional services
consists primarily of personnel costs and other costs related to the services
business. Cost of professional services increased by 33% to $5.5 million for the
six months ended June 30, 1998, from $4.2 million for the six months ended June
30, 1997. As a percentage of professional services revenues, cost of
professional services increased to 58.7% for the six months ended June 30, 1998,
from 55.5% for the six months ended June 30, 1997. The dollar increase was
directly related to increased professional services revenues. The increase in
cost of professional services as a percentage of professional services revenues
was primarily due to lower utilization rates resulting from an increased number
of non-billable consultants in training.
Cost of Hardware Revenues. Cost of hardware consists primarily of costs
payable to vendors for hardware. Cost of hardware increased by 23% to $4.4
million for the six months ended June 30, 1998, from $3.6 million for the six
months ended June 30, 1997. As a percentage of hardware revenues, cost of
hardware increased to 79.9% for the six months ended June 30, 1998, from 76.9%
for the six months ended June 30, 1997. The dollar increase was related to the
increased hardware sales in the period. The increase in the cost of hardware as
a percentage of hardware revenues was primarily due to the higher number of and
smaller size of new contracts signed.
Cost of Maintenance and Other Revenues. Cost of maintenance and other
consists primarily of seven days a week, 24 hours a day telephone support,
documentation and related administrative and personnel expenses. Cost of
maintenance and other increased by 53% to $4.4 million for the six months ended
June 30, 1998, from $2.9 million for the six months ended June 30, 1997. As a
percentage of maintenance and other revenues, cost of maintenance and other
increased to 52.6% for the six months ended June 30, 1998, from 48.0% for the
six months ended June 30, 1997. The dollar and percentage increases were
primarily due to investment in a new customer interaction software system and
increased personnel to enhance products and support a larger client base.
Cost of Resource Management Revenues. Cost of resource management consists
primarily of personnel, hardware and administrative costs associated with
managing data processing operations. Cost of resource management was $467,000
for the six months ended June 30, 1998. As a percentage of resource management
revenues, costs of resource management was 64.6% for the six months ended June
30, 1998. There were no
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comparable costs for the six months ended June 30, 1997, as this division began
operations in the fourth quarter of 1997.
Research and Development Expenses. Research and development expenses are
comprised primarily of salaries and a portion of the Company's overhead for its
in-house staff and amounts paid to outside consultants to supplement the product
development efforts of its in-house staff. Research and development expenses
increased by 53% to $6.2 million for the six months ended June 30, 1998, from
$4.1 million for the six months ended June 30, 1997. As a percentage of total
revenues, research and development increased to 14.2% for the six months ended
June 30, 1998, from 13.5% for the six months ended June 30, 1997. The dollar and
percentage increases were primarily due to increased staffing levels and
expenses for additional software and hardware required for the development of
additional products and platforms as well as maintenance and enhancements of
existing products.
Sales and Marketing Expenses. Sales and marketing expenses consist
primarily of salaries, commissions, travel related benefits and administrative
costs allocated to the Company's sales and marketing personnel. Sales and
marketing expenses increased by 62% to $8.3 million for the six months ended
June 30, 1998, from $5.1 million for the six months ended June 30, 1997. As a
percentage of total revenues, sales and marketing increased to 19.0% for the six
months ended June 30, 1998, from 17.0% for the six months ended June 30, 1997.
The dollar and percentage increases were attributable to the Company's continued
expansion of its direct sales force, increased marketing efforts, travel and
other expenses related to increased sales activity.
General and Administrative Expenses. General and administrative expenses
include the costs of corporate operations, finance and accounting, human
resources and other general operations of the Company. General and
administrative expenses increased by 29% to $7.1 million for the six months
ended June 30, 1998, from $5.5 million for the six months ended June 30, 1997.
As a percentage of total revenues, general and administrative expenses decreased
to 16.1% for the six months ended June 30, 1998, from 18.2% for the six months
ended June 30, 1997. The dollar increase was due to additional staffing,
additional facility related expenses and additional computer equipment and
software required to build the infrastructure to support the Company's growth.
The decrease in general and administrative expenses as a percentage of total
revenues was primarily due to leveraging of existing resources. In the period
ended June 30, 1998, the Company recorded a non-recurring charge of $237,000
related to the acquisitions of Phoenix and UCS. In the period ended June 30,
1997, the Company incurred non-recurring expenses of $300,000 related to the
relocation and closing of certain offices.
Provision for Income Taxes. The Company's income taxes have been recorded
on a quarterly basis based on the Company's anticipated annual tax rate.
However, during the six months ended June 30, 1998, the Company recorded a
non-recurring deferred income tax charge of $339,000 in connection with the
acquisitions of UCS and Phoenix. This provision recorded the deferred tax
liabilities of UCS and Phoenix due to changes in tax status on the acquisition
dates for federal income tax reporting purposes.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues
The Company's total revenues increased by 44% to $66.1 million for the year
ended December 31, 1997, from $45.8 million for the year ended December 31,
1996.
Software Licenses Revenues. Software licenses revenues increased by 69% to
$26.8 million for the year ended December 31, 1997, from $15.8 million for the
year ended December 31, 1996. As a percentage of total revenues, software
license revenues increased to 40.5% for the year ended December 31, 1997, from
34.6% for the year ended December 31, 1996. The dollar and percentage increases
resulted from an increased number of applications available for sale and an
increased investment in sales and marketing.
Professional Services Revenues. Professional services revenues increased
by 24% to $14.5 million for the year ended December 31, 1997, from $11.7 million
for the year ended December 31, 1996. As a percentage of total revenues,
professional services revenues decreased to 22.0% for the year ended December
31, 1997, from 25.6% for the year ended December 31, 1996. The dollar increase
was primarily due to the Company's
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increased number of services offered. The decrease in professional services
revenues as a percentage of total revenues was primarily due to strong growth in
revenues from software licenses, along with an increase in related professional
services backlog.
Hardware Revenues. Hardware revenues increased by 28% to $11.8 million for
the year ended December 31, 1997, from $9.2 million for the year ended December
31, 1996. As a percentage of total revenues, hardware revenues decreased to
17.8% for the year ended December 31, 1997, from 20.1% for the year ended
December 31, 1996. The dollar increase resulted from the Company's expansion of
its third-party re-marketing sales through IBM. The decrease in hardware
revenues as a percentage of total revenues was primarily due to stronger growth
in software license revenues.
Maintenance and Other Revenues. Maintenance and other revenues increased
by 39% to $12.6 million for the year ended December 31, 1997, from $9.0 million
for the year ended December 31, 1996. As a percentage of total revenues,
maintenance and other revenues decreased to 19.0% for the year ended December
31, 1997, from 19.7% for the year ended December 31, 1996. The dollar increase
resulted from maintenance contracts associated with new software licenses,
customer system upgrades and price increases in the fees charged for annual
maintenance. The decrease in maintenance and other revenues as a percentage of
total revenues was primarily due to stronger growth in software license
revenues.
Resource Management Revenues. During 1997, the Company began offering the
resource management service that allows customers to turn over management of all
computer related functions. In October 1997, the Company signed its first
resource management contract with Seminole County, Florida. Resource management
revenues for the year ended December 31, 1997 were $448,000 or 0.7% of total
revenues.
Cost of Revenues
Cost of Software Licenses Revenues. Cost of software licenses increased by
41% to $5.3 million for the year ended December 31, 1997, from $3.7 million for
the year ended December 31, 1996. As a percentage of software license revenues,
cost of software licenses decreased to 19.7% for the year ended December 31,
1997, from 23.6% for the year ended December 31, 1996. The dollar increase
resulted from an increased number of software licenses. The decrease in the cost
of software licenses as a percentage of software license revenues was primarily
due to the growth of internal software licenses which exceeded the growth of
third party software licenses.
Cost of Professional Services Revenues. Cost of professional services
increased by 24% to $8.4 million for the year ended December 31, 1997, from $6.7
million for the year ended December 31, 1996. As a percentage of professional
services revenues, cost of professional services increased to 57.5% for the year
ended December 31, 1997, from 57.4% for the year ended December 31, 1996. The
dollar increase resulted from the growth in professional services revenues.
Cost of Hardware Revenues. Cost of hardware increased by 26% to $9.2
million for the year ended December 31, 1997, from $7.3 million for the year
ended December 31, 1996. As a percentage of hardware revenues, cost of hardware
decreased to 78.3% for the year ended December 31, 1997, from 79.3% for the year
ended December 31, 1996. The dollar increase is directly related to the
increased hardware sales. The decrease in the cost of hardware revenues as a
percentage of hardware revenues was primarily due to slightly improved margins
on the larger hardware transactions.
Cost of Maintenance and Other Revenues. Cost of maintenance and other
increased by 66% to $6.0 million for the year ended December 31, 1997, from $3.6
million for the year ended December 31, 1996. As a percentage of maintenance and
other revenues, cost of maintenance and other increased to 47.6% for the year
ended December 31, 1997, from 39.8% for the year ended December 31, 1996. The
dollar increase was primarily due to investment in new customer support
processes, increased personnel to enhance products and additional computer
equipment required to handle graphical user interfaces. The increase in the cost
of maintenance and other revenues as a percentage of maintenance and other
revenues was primarily due to costs related to building infrastructure to
accommodate the growth in client base.
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Cost of Resource Management Revenues. Cost of resource management was
$343,000 for the year ended December 31, 1997. As a percentage of resource
management revenues, cost of resource management was 76.6% for the year ended
December 31, 1997. There were no comparable costs for the year ended December
31, 1996, as this division began operations in the fourth quarter of 1997.
Research and Development Expenses. Research and development expenses
increased by 26% to $8.3 million for the year ended December 31, 1997, from $6.5
million for the year ended December 31, 1996. As a percentage of total revenues,
research and development expenses decreased to 12.5% for the year ended December
31, 1997, from 14.3% for the year ended December 31, 1996. The dollar increase
was primarily due to increased staffing levels and associated costs and expenses
related to additional software and hardware required to enable the development
of additional products and platforms. The decrease in research and development
expenses as a percentage of total revenues was primarily due to revenues growing
at a faster rate than research and development expenditures.
Sales and Marketing Expenses. Sales and marketing expenses increased by
49% to $11.5 million for the year ended December 31, 1997, from $7.7 million for
the year ended December 31, 1996. As a percentage of total revenues, sales and
marketing expenses increased to 17.4% for the year ended December 31, 1997, from
16.9% for the year ended December 31, 1996. The dollar and percentage increases
were attributable to the Company's continued expansion of its direct sales
force, increased marketing efforts, travel and other expenses related to
increased sales activity.
General and Administrative Expenses. General and administrative expenses
increased by 42% to $10.9 million for the year ended December 31, 1997, from
$7.7 million for the year ended December 31, 1996. As a percentage of total
revenues, general and administrative expenses decreased to 16.5% for the year
ended December 31, 1997, from 16.8% for the year ended December 31, 1996. The
dollar increase was due to additional staffing, space, computer equipment and
software required to build the infrastructure to support the Company's growth.
The decrease in general and administrative expenses as a percentage of total
revenues was primarily due to the leveraging of existing resources.
Nine Months Ended December 31, 1996 Compared to Nine Months Ended December 31,
1995
Revenues
The Company's total revenues increased by 23% to $34.5 million for the nine
months ended December 31, 1996, from $28.0 million for the nine months ended
December 31, 1995.
Software Licenses Revenues. Software licenses revenues increased by 60% to
$10.9 million for the nine months ended December 31, 1996, from $6.8 million for
the nine months ended December 31, 1995. As a percentage of total revenues,
software license revenues increased to 31.5% for the nine months ended December
31, 1996, from 24.2% for the nine months ended December 31, 1995. The dollar and
percentage increases resulted primarily from an increased number of applications
available for sale combined with the benefits of an increased investment in
sales and marketing.
Professional Services Revenues. Professional services revenues increased
by 21% to $8.9 million for the nine months ended December 31, 1996, from $7.4
million for the nine months ending December 31, 1995. As a percentage of total
revenues, professional services revenues decreased to 25.9% for the nine months
ended December 31, 1996, from 26.3% for the nine months ended December 31, 1995.
The dollar increase was primarily due to the increase in the number of its
service offerings. The decrease in professional services revenues as a
percentage of total revenues was primarily due to the impact of a large contract
that ended in the year ended December 31, 1995.
Hardware Revenues. Hardware revenues increased by 33% to $7.7 million for
the nine months ended December 31, 1996, from $5.8 million for the nine months
ended December 31, 1995. As a percentage of total revenues, hardware revenues
increased to 22.4% for the nine months ended December 31, 1996, from 20.9% for
the nine months ended December 31, 1995. The dollar and percentage increases
were primarily due to the Company's expansion of its third party remarketing
sales through IBM.
<PAGE> 11
Maintenance and Other Revenues. Maintenance and other revenues decreased
by 13% to $7.0 million for the nine months ended December 31, 1996, from $8.0
million for the nine months ended December 31, 1995. As a percentage of total
revenues, maintenance and other revenues decreased to 20.2% for the nine months
ended December 31, 1996, from 28.6% for the nine months ended December 31, 1995.
The dollar and percentage decreases were primarily due to a large support
contract in the nine months ended December 31, 1995.
Cost of Revenues
Cost of Software Licenses Revenues. Cost of software licenses increased by
5% to $2.9 million for the nine months ended December 31, 1996, from $2.8
million for the nine months ended December 31, 1995. As a percentage of software
license revenues, cost of software licenses decreased to 26.9% for the nine
months ended December 31, 1996, from 41.1% for the nine months ended December
31, 1995. Excluding the charge related to the acceleration of amortization of
computer software development costs of $1.0 million during the nine months ended
December 31, 1995, the increase was $1.1 million or 62% in the nine months ended
December 31, 1996 compared to the nine months ended December 31, 1995. This
change was primarily due to increased costs related to third party public safety
products.
Cost of Professional Services Revenues. Cost of professional services
decreased by 12% to $5.0 million for the nine months ended December 31, 1996,
from $5.6 million for the nine months ended December 31, 1995. As a percentage
of professional services revenues, cost of professional services decreased to
55.4% for the nine months ended December 31, 1996, from 76.3% for the nine
months ended December 31, 1995. The dollar and percentage decreases resulted
from minimizing non-billable travel and other administrative costs as this line
of business expanded.
Cost of Hardware Revenues. Cost of hardware increased by 33% to $6.2
million for the nine months ended December 31, 1996, from $4.7 million for the
nine months ended December 31, 1995. As a percentage of hardware revenues, cost
of hardware increased to 79.9% for the nine months ended December 31, 1996, from
79.8% for the nine months ended December 31, 1995. The dollar increase is
directly related to increased sales of hardware.
Cost of Maintenance and Other Revenues. Cost of maintenance and other
decreased by 15% to $2.7 million for the nine months ended December 31, 1996,
from $3.2 million for the nine months ended December 31, 1995. As a percentage
of maintenance and other revenues, cost of maintenance and other decreased to
38.9% for the nine months ended December 31, 1996, from 39.5% for the nine
months ended December 31, 1995. The dollar and percentage decreases were
primarily due to a large support contract in 1995.
Research and Development Expenses. Research and development expenses
increased by 58% to $5.2 million for the nine months ended December 31, 1996,
from $3.3 million for the nine months ended December 31, 1995. As a percentage
of total revenues, research and development expenses increased to 15.2% for the
nine months ended December 31, 1996, from 11.8% for the nine months ended
December 31, 1995. The dollar increase was primarily due to increased staffing
levels and associated costs. The increase in research and development expenses
as a percentage of total revenues was primarily due to increased staffing levels
and expenses for additional software and hardware required for the development
of additional products and platforms as well as maintenance and enhancements of
existing products.
Sales and Marketing Expenses. Sales and marketing expenses increased by
57% to $6.2 million for the nine months ended December 31, 1996, from $3.9
million for the nine months ended December 31, 1995. As a percentage of total
revenues, sales and marketing expenses increased to 17.9% for the nine months
ended December 31, 1996, from 14.1% for the nine months ended December 31, 1995.
The dollar and percentage increases were attributable to the Company's expansion
of its direct sales force, increased marketing efforts, travel and other
expenses related directly to increased sales activity.
General and Administrative Expenses. General and administrative expenses
increased by 17% to $5.8 million for the nine months ended December 31, 1996,
from $5.0 million for the nine months ended
<PAGE> 12
December 31, 1995. As a percentage of total revenues, general and administrative
expenses decreased to 16.9% for the nine months ended December 31, 1996, from
17.9% for the nine months ended December 31, 1995. The dollar increase was
primarily due to additional staffing in finance and accounting, human resources
and contract administration required to support the Company's growth. The
decrease in general and administrative expenses as a percentage of total
revenues was primarily due to better leveraging of resources compared to growth
in revenues.
Year Ended March 31, 1996 Compared to Year Ended March 31, 1995
Revenues
The Company's total revenues increased by 18% to $39.6 million for the year
ended March 31, 1996, from $33.5 million for the year ended March 31, 1995.
Software Licenses Revenues. Software licenses revenues increased by 10% to
$11.6 million for the year ended March 31, 1996, from $10.5 million for the year
ended March 31, 1995. As a percentage of total revenues, software license
revenues decreased to 29.2% for the year ended March 31, 1996, from 31.3% for
the year ended March 31, 1995. The dollar increase resulted from new software
licenses. The decrease in software licenses revenues as a percentage of total
revenues was primarily due to increased professional services compared to growth
in software license sales.
Professional Services Revenues. Professional services revenues increased
by 27% to $10.7 million for the year ended March 31, 1996, from $8.4 million for
the year ended March 31, 1995. As a percentage of total revenues, professional
services revenues increased to 27.0% for the year ended March 31, 1996, from
25.0% for the year ended March 31, 1995. The dollar increase resulted from the
Company's expansion of its professional services business. The increase in
professional services revenues as a percentage of total revenues was primarily
due to increased professional services compared to growth in software license
sales.
Hardware Revenues. Hardware revenues increased by 8% to $7.3 million for
the year ended March 31, 1996, from $6.8 million for the year ended March 31,
1995. As a percentage of total revenues, hardware revenues decreased to 18.5%
for the year ended March 31, 1996, from 20.3% for the year ended March 31, 1995.
The dollar amount increased as the Company entered into a new remarketing
agreement with IBM. The decrease in hardware revenues as a percentage of total
revenues was primarily due to a larger proportional increase in software license
revenues.
Maintenance and Other Revenues. Maintenance and other revenues increased
by 28% to $10.0 million for the year ended March 31, 1996, from $7.8 million for
the year ended March 31, 1995. As a percentage of total revenues, maintenance
and other revenues increased to 25.3% for the year ended March 31, 1996, from
23.4% for the year ended March 31, 1995 as a result of new software licenses and
customer system upgrades.
Cost of Revenues
Cost of Software Licenses Revenues. Cost of software licenses increased by
150% to $3.6 million for the year ended March 31, 1996, from $1.4 million for
the year ended March 31, 1995. As a percentage of software licenses revenues,
cost of software licenses increased to 31.0% for the year ended March 31, 1996,
from 13.7% for the year ended March 31, 1995. Excluding the charge related to
the acceleration of amortization of computer software development costs of $1.3
million during the year ended March 31, 1995, the dollar increase was $822,000,
or 57.4%, in the year ended March 31, 1996 compared to the year ended March, 31
1995. The change was primarily due to additional costs associated with third
party products.
Cost of Professional Services Revenues. Cost of professional services
increased by 24% to $7.6 million for the year ended March 31, 1996, from $6.1
million for the year ended March 31, 1995. As a percentage of professional
services revenues, cost of professional services decreased to 71.2% for the year
ended March 31, 1996, from 73.2% for the year ended March 31, 1995. The dollar
increase resulted from the Company's expansion of its professional services to
offer full service in this area. The percentage decrease was primarily due to
improved operating efficiencies.
<PAGE> 13
Cost of Hardware Revenues. Cost of hardware decreased by 8% to $5.8
million for the year ended March 31, 1996, from $6.2 million for the year ended
March 31, 1995. As a percentage of hardware revenues, cost of hardware decreased
to 78.8% for the year ended March 31, 1996, from 91.7% for the year ended March
31, 1995. The dollar decrease was due to a new remarketing agreement with IBM
offset by a large hardware sale in the year ended March 31, 1995. The percentage
decrease was due to the lower margin on hardware in the prior year from a large
contract compared to normal hardware margins.
Cost of Maintenance and Other Revenues. Cost of maintenance and other
decreased by 17% to $4.2 million for the year ended March 31, 1996, from $5.1
million for the year ended March 31, 1995. As a percentage of maintenance and
other revenues, cost of maintenance and other decreased to 42.3% for the year
ended March 31, 1996, from 64.9% for the year ended March 31, 1995. The dollar
and percentage decreases were primarily due to a corporate restructuring in the
earlier period to build an infrastructure to support future growth.
Research and Development Expenses. Research and development expenses
increased by 42% to $4.5 million for the year ended March 31, 1996, from $3.2
million for the year ended March 31, 1995. As a percentage of total revenues,
research and development expenses increased to 11.4% for the year ended March
31, 1996, from 9.5% for the year ended March 31, 1995. The dollar and percentage
increases were primarily due to increased staffing levels and associated costs.
Sales and Marketing Expenses. Sales and marketing expenses increased by
19% to $5.5 million for the year ended March 31, 1996, from $4.6 million for the
year ended March 31, 1995. As a percentage of total revenues, sales and
marketing expenses increased to 13.8% for the year ended March 31, 1996, from
13.7% for the year ended March 31, 1995. The dollar increase was attributable to
travel and other expenses related directly to increased sales activity.
General and Administrative Expenses. General and administrative expenses
increased by 22% to $6.8 million for the year ended March 31, 1996, from $5.6
million for the year ended March 31, 1995. As a percentage of total revenues,
general and administrative expenses increased to 17.1% for the year ended March
31, 1996, from 16.6% for the year ended March 31, 1995. The dollar and
percentage increases were due to additional staffing and related expenses in
finance and accounting, human resources and contract administration required to
support the Company's growth.
LIQUIDITY AND CAPITAL RESOURCES
Prior to 1997, the Company funded its operations primarily through cash
generated from operations, supplemented by borrowings under a bank line of
credit and the private sale of equity securities. On June 11, 1997, the Company
completed its initial public offering of Common Stock (the "IPO"). The Company
received $22.6 million from the IPO, net of issuance costs. Cash flow (used in)
provided by operating activities was $(3.2 million) and $2.1 million for the six
months ended June 30, 1998 and 1997, on net income of $2.5 million and $1.8
million, respectively. Cash flow provided by operating activities was $4.7
million and $2.9 million for the years ended December 31, 1997 and 1996, on net
income of $4.0 million and $819,000 respectively. Cash flow provided by (used
in) operating activities was $1.8 million and $(488,000) for the nine months
ended December 31, 1996 and 1995, on net (loss) income of $(290,000) and
$46,000, respectively. Cash flow provided by operating activities was $721,000
and $1.8 million for the fiscal years ended March 31, 1996 and 1995, on net
income of $1.3 million and $1.0 million, respectively.
Cash used in investing activities (capital expenditures, software
development investments and acquisitions) totaled $3.6 million and $1.4 million
during the six months ended June 30, 1998 and 1997, respectively. Cash used in
investing activities totaled $6.6 million and $3.3 million for the years ended
December 31, 1997 and 1996. Cash used in investing activities totaled $2.6
million for each of the nine months ended December 31, 1996 and 1995. Cash used
in investing activities totaled $3.4 million and $2.6 million in the fiscal
years ended March 31, 1996 and 1995, respectively. In 1997, the Company made
significant investments in leasehold improvements related to its new
headquarters facility in Lake Mary, Florida, and also acquired the assets of Kb.
The increase in restricted cash in 1997 reflects cash held in escrow related to
the JALAN acquisition. The JALAN acquisition was closed in January 1998. Capital
expenditures were primarily
<PAGE> 14
comprised of the Company's investments in equipment and related software
associated with increased staffing. In addition, the Company made significant
investments in upgrading internal systems. The Company continues to capitalize
between $2.6 million and $2.7 million on an annual basis related to software
development efforts for additional products and platforms.
Net cash used in financing activities was $901,000 in the six months ended
June 30, 1998, reflecting the payment of the amounts due to stockholders related
to the UCS acquisition, partially offset by the net proceeds from the Employee
Stock Purchase Plan, compared to cash provided of $15.8 million in the
comparable 1997 period, related primarily to the proceeds from the IPO, offset
partially by the repayment of a line of credit and payment of dividends on the
mandatorily redeemable preferred stock. Net cash provided by financing
activities was $19.5 million in the year ended December 31, 1997, compared to
$341,000 in the comparable 1996 period. In 1997, net proceeds from the IPO of
$22.6 million were partially offset by repayment of long-term debt, payment of
accrued dividends on mandatorily redeemable preferred stock and pay-off of a
note payable to related parties. Cash flow provided by financing activities was
$914,000 for the nine months ended December 31, 1996, relating primarily to the
issuance of capital stock which raised $252,000 and net borrowings of $662,000,
compared to cash provided of $2.2 million for the nine months ended December 31,
1995. For the 12-month period ended March 31, 1996, net cash provided by
financing activities was $2.1 million comprised of $2.0 million in net borrowing
under the line of credit offset by repayments under capital leases and related
party advances. For fiscal year ended March 31, 1995, net cash provided was $1.6
million consisting of $2.8 million from the issuance of preferred stock offset
by repayments under capital leases and the line of credit along with shareholder
distributions.
In August 1998, the Company entered into a letter of intent with SunTrust
Bank, Central Florida, National Association (the "Bank"), under which the Bank
has agreed to extend a line of credit of up to a maximum borrowing amount of
$15.0 million with an expiration date of June 30, 2000, subject to review by
June 30, 1999. Borrowings under the proposed loan agreement are collateralized
by first liens on accounts receivable, inventory, equipment, furniture,
furnishings, fixtures and intellectual property. The line of credit will bear
interest at LIBOR plus 1.7% per annum. Under the terms of the proposed loan
agreement, the Company will be required to comply with certain financial
covenants. Borrowings under the proposed loan agreement may be made for
financing operations and interim acquisition financing. The Company is in the
process of finalizing loan documents.
The Company believes its cash balances, cash generated from operations and
its planned stock offering (as discussed in its Registration Statement on Form
S-3 filed with the Commission on August 13, 1998), and borrowings available
under the Loan Agreement will satisfy the Company's working capital and capital
expenditure requirements for at least the next 12 months. In the longer term,
the Company may require additional sources of liquidity to fund future growth.
Such sources of liquidity may include additional equity offerings or debt
financings.
INFLATION
The Company believes that inflation has not had a material impact on the
Company's operating results and does not expect inflation to have a material
impact on the Company's operating results in 1998.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
97-2, "Software Revenue Recognition" ("SOP 97-2"), later amended by Statement of
Position 98-4 ("SOP 98-4"). SOP 97-2 and SOP 98-4 require companies to defer
revenue and profit recognition if four required criteria of a sale are not met.
In addition, SOP 97-2 and SOP 98-4 require that revenue be allocated to multiple
element arrangements. SOP 97-2 and SOP 98-4 are effective for all transactions
entered into in fiscal years beginning after December 15, 1997. The Company has
adopted the provisions of SOP 97-2, as amended, effective January 1, 1998 and
such adoption did not have a material impact on the Company's operating results
or financial position.
In June 1997, the FASB issued Statements of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"), and No. 131,
"Disclosures about Segments of an Enterprise and
<PAGE> 15
Related Information" ("SFAS 131"). The Company adopted these statements
effective in 1998. SFAS 130 establishes standards for reporting comprehensive
income and SFAS 131 establishes standards for reporting information about
operating segments. The Company does not expect that the adoption of SFAS 130
and SFAS 131 will have a material impact on the Company's operating results or
financial position.
YEAR 2000 COMPLIANCE
Risks Associated with the Year 2000. Many currently installed computer
systems and software products are coded to accept only two digit entries in the
date code field. These date code fields will need to accept four digit entries
to distinguish 21st century dates from 20th century dates. As a result, in less
than two years, computer systems and software used by many companies will need
to be upgraded to comply with such "Year 2000" requirements. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such compliance. There are several aspects to the Year 2000
issues as follows:
Impact on Revenues. The Company believes that the purchasing patterns of
customers and potential customers may be affected by Year 2000 issues in a
variety of ways. Many companies are expending significant resources to correct
or patch their current software systems for Year 2000 compliance. These
expenditures may result in reduced funds available to purchase software products
such as those offered by the Company. Conversely, Year 2000 issues may cause
other companies to accelerate purchases of software to replace non-Year 2000
compliant applications, causing a short-term increase in demand for the
Company's products. There is no assurance that such increase in demand will be
realized. Either of the foregoing could have a material adverse effect upon the
Company's business, operating results and financial condition.
Year 2000 Compliance. The Company believes that the current versions of
its products are Year 2000 compliant. The Company regularly runs regression
tests on its software, including tests of the Year 2000 rollover. Based on the
above, it is not expected that the Company's products will be adversely affected
by date changes in the year 2000. However, there can be no assurance that the
Company's products contain and will contain all features and functionality
considered necessary by customers, distributors, resellers and systems
integrators to be Year 2000 compliant. Notwithstanding that the Company
regularly provides free software upgrades to its customers and that these recent
upgrades are Year 2000 compliant, certain customers of the Company may still be
running earlier, noncompliant versions of the Company's products. The Company is
in the process of informing customers of the need to migrate to current products
that management believes are Year 2000 compliant. The Company anticipates that
generally throughout the software industry substantial litigation may be brought
against software vendors of noncompliant operating environments. The Company
believes that any such claims against the Company, with or without merit, could
have a material adverse effect on the Company's business, operating results and
financial condition.
Internal Systems. The Company has also reviewed its internal systems for
Year 2000 compliance and is in the process of upgrading to Year 2000 compliant
versions from third party software vendors, modifying certain systems, and
planning to replace certain systems with new third party software, which the
Company expects to complete prior to January 1, 2000. In addition to making its
own systems Year 2000 ready, the Company has also begun to contact its key
suppliers and vendors to determine the extent to which the systems of such
suppliers and vendors are Year 2000 compliant and the extent to which the
Company could be affected by the failure of such third parties to be Year 2000
compliant. The Company has appointed its Manager of Quality Assurance to oversee
all activities associated with Year 2000 compliance issues. A standing committee
meets on a monthly basis to review appropriate activities. Management does not
believe that the cost to bring its software products and internal systems into
Year 2000 compliance will have a material adverse effect on the Company's
results of operations or financial condition. However, delays in upgrading some
systems to Year 2000 compliance, or a failure to fully identify all Year 2000
dependencies in the Company's systems and in the systems of its suppliers,
vendors, and financial institutions could have material adverse consequences,
including delays in the delivery or sale of products.
Expenses Related to Year 2000 Compliance. The Company has not incurred
significant expense in becoming Year 2000 compliant as this has been achieved as
a part of regular upgrades to its internal operating systems. Future costs
related to Year 2000 compliance are not expected to have a material adverse
effect on the Company's results of operations or financial condition.
Vendors. The Company believes that the information systems of its major
vendors (insofar as they relate to the Company's business) comply with Year 2000
requirements. However, there can be no assurance that the Year 2000 issue will
not affect the information systems of the Company's major vendors as they relate
to the Company's business, or that any such impact of a major vendor's
information system would not have a material adverse effect on the Company. The
Company has no contingency plan as such, however the Company believes it should
be able to identify alternative vendors if the need arises.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended. Discussion containing
such forward-looking statements may be found in Management's Discussion and
Analysis of Financial Condition and Results of Operations. These statements by
their nature involve substantial risks and uncertainties, certain of which are
beyond the Company's control, and actual results for future periods could
differ materially from those discussed in this section depending on a variety
of important factors. Factors that could cause or contribute to such
differences include, but are not limited to, the level of acquisition
opportunities available to the Company and the Company's ability to price and
negotiate such transactions on a favorable basis, the ability of the Company to
properly manage growth and successfully integrate acquired companies and
operations, the ability of the Company to respond to technological changes for
enhancement of existing products and development of new products, changes in
budgetary and regulatory conditions in the Company's public sector customers,
demand for the Company's products and changes in the competitive and economic
environment generally. A comprehensive summary of these and other risks
and uncertainties can be found in the Company's filings with the Securities
and Exchange Commission from time to time, including the Company's annual
report on Form 10-K for the fiscal year ended December 31, 1997 (File No.
0-22657).
<PAGE> 16
Item 7. Financial Statements and Exhibits
(c) Exhibits:
The following exhibits are filed as part of this Report:
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
<C><S>
23.1 Consent of Arthur Andersen LLP
23.2 Consent of PricewaterhouseCoopers LLP
</TABLE>
<PAGE> 17
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.
H.T.E., INC.
/s/ Susan D. Falotico
---------------------------------------------
By: Susan D. Falotico
Chief Financial Officer
Dated: August 19, 1998
<PAGE> 18
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Reports of Independent Certified Public Accountants......... F-2
Consolidated Balance Sheets................................. F-4
Consolidated Statements of Operations....................... F-5
Consolidated Statements of Stockholders' (Deficit) Equity... F-6
Consolidated Statements of Cash Flows....................... F-8
Notes to Consolidated Financial Statements.................. F-9
</TABLE>
F-1
<PAGE> 19
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To H.T.E., Inc.:
We have audited the accompanying consolidated balance sheets of H.T.E.,
Inc. (a Florida corporation) and subsidiaries as of December 31, 1996 and 1997,
and the related consolidated statements of operations, stockholders' (deficit)
equity and cash flows for the year ended March 31, 1996, the nine months ended
December 31, 1996, and the year ended December 31, 1997, which give retroactive
effect to the merger with UCS, Inc. on June 1, 1998, which has been accounted
for as a pooling of interests. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits. We did not audit the financial
statements of UCS, Inc., which statements reflect total assets constituting 10
percent and five percent, as of December 31, 1996 and 1997, respectively, and
total revenues constituting 24 percent, 17 percent and 15 percent, for the year
ended March 31, 1996, the nine months ended December 31, 1996, and the year
ended December 31, 1997, respectively, of the related consolidated totals. Those
statements were audited by other auditors whose reports thereon have been
furnished to us, and our opinion, insofar as it relates to the amounts included
for UCS, Inc., is based solely upon the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based upon our audits and the reports of the other
auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of H.T.E., Inc. and its
subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for the year ended March 31, 1996, the nine
months ended December 31, 1996, and the year ended December 31, 1997, after
giving retroactive effect to the merger with UCS, Inc. as described in Note 1 to
the consolidated financial statements, all in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
Orlando, Florida
August 3, 1998
F-2
<PAGE> 20
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of UCS, Inc.:
In our opinion, the balance sheet and the related statements of operations
and stockholders' equity and of cash flows (not presented separately herein),
present fairly, in all material respects, the financial position of UCS, Inc. at
December 31, 1995, and the results of its operations and its cash flows for the
year in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
Miami, Florida
September 4, 1996
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of UCS, Inc.:
In our opinion, the balance sheet and the related statements of operations
and stockholders' equity and of cash flows (not presented separately herein),
present fairly, in all material respects, the financial position of UCS, Inc. at
December 31, 1996, and the results of its operations and its cash flows for the
period April 1, 1996 through December 31, 1996 in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Miami, Florida
July 7, 1998
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of UCS, Inc.:
In our opinion, the balance sheet and the related statements of operations
and stockholders' equity and of cash flows (not presented separately herein),
present fairly, in all material respects, the financial position of UCS, Inc. at
December 31, 1997, and the results of its operations and its cash flows for the
year in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above. We have not audited the financial statements of UCS, Inc. as of any date
or for any period subsequent to December 31, 1997.
/s/ Price Waterhouse LLP
Miami, Florida
April 10, 1998
F-3
<PAGE> 21
H.T.E., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1997 1998
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,038 $18,634 $10,892
Restricted cash........................................... -- 1,574 --
Trade accounts receivable, less allowance of $520, $617
and $617 for doubtful accounts at December 31, 1996 and
1997, and June 30, 1998, respectively (Note 4).......... 18,086 22,822 31,257
Deferred income taxes (Note 10)........................... 667 751 755
Other current assets...................................... 663 1,405 2,662
------- ------- -------
Total current assets................................ 20,454 45,186 45,566
------- ------- -------
EQUIPMENT, FURNITURE AND FIXTURES, net (Note 2)............. 1,969 3,257 3,876
------- ------- -------
OTHER ASSETS:
Computer software development costs, net of accumulated
amortization of $6,312, $8,361 and $9,133 at December
31, 1996 and 1997, and June 30, 1998, respectively...... 3,817 4,297 5,211
Other intangible assets, net (Note 3)..................... 1,045 1,271 2,658
Deposits.................................................. 130 197 262
------- ------- -------
4,992 5,765 8,131
------- ------- -------
$27,415 $54,208 $57,573
======= ======= =======
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 3,009 $ 3,134 $ 3,469
Accrued liabilities....................................... 4,314 5,235 4,103
Line of credit (Note 4)................................... 2,306 -- --
Deferred revenue.......................................... 10,378 12,430 14,588
Current portion of notes payable to related parties (Note
3)...................................................... 60 -- --
------- ------- -------
Total current liabilities........................... 20,067 20,799 22,160
------- ------- -------
LONG-TERM LIABILITIES:
Notes payable to related parties, less current portion
(Note 3)................................................ 240 -- --
Due to stockholders....................................... 1,064 1,213 --
Other long-term liabilities............................... 66 173 227
Deferred income taxes (Note 10)........................... 1,731 1,731 2,070
------- ------- -------
Total long-term liabilities......................... 3,101 3,117 2,297
------- ------- -------
COMMITMENTS AND CONTINGENCIES
(Notes 9, 11 and 12)
MANDATORILY REDEEMABLE PREFERRED STOCK, 7% cumulative
convertible preferred stock (including accrued dividends
of $433 at December 31, 1996), $.0002 par value, 2,000,000
shares authorized and 1,769,494 shares issued and
outstanding at December 31, 1996, 0 shares authorized,
issued and outstanding at December 31, 1997 and June 30,
1998 (Note 5)............................................. 4,303 -- --
------- ------- -------
MANDATORILY REDEEMABLE CLASS C COMMON STOCK, $.0002 par
value, 200,000 shares authorized and 63,600 issued and
outstanding at December 31, 1996, 0 shares authorized,
issued and outstanding at December 31, 1997 and June 30,
1998 (Notes 3 and 6)...................................... 119 -- --
------- ------- -------
STOCKHOLDERS' (DEFICIT) EQUITY (Note 7)
Common stock--
Class A, $.0002 par value, 4,000,000 shares authorized
and 3,530,557 shares issued and outstanding at December
31, 1996, 0 shares authorized, issued and outstanding
at December 31, 1997 and June 30, 1998................. 1 -- --
Class B, $.01 par value, 200,000 authorized at December
31, 1996, 0 shares authorized at December 31, 1997 and
June 30, 1998, none issued and outstanding............. -- -- --
Common stock, $.01 par value, 50,000,000 shares
authorized, 1,082,536, 16,472,792 and 16,819,458 shares
issued and outstanding as of December 31, 1996 and
1997, and June 30, 1998, respectively.................. 11 165 168
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued and outstanding................. -- -- --
Additional paid-in capital................................ 342 27,999 28,309
Accumulated (deficit) earnings............................ (524) 2,122 4,672
Cumulative translation adjustment......................... (5) 6 (33)
------- ------- -------
Total stockholders' (deficit) equity................ (175) 30,292 33,116
------- ------- -------
$27,415 $54,208 $57,573
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE> 22
H.T.E., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS
NINE MONTHS ENDED
YEAR ENDED ENDED YEAR ENDED JUNE 30,
MARCH 31, DECEMBER 31, DECEMBER 31, -----------------
1996 1996 1997 1997 1998
---------- ------------ ------------ ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Software licenses....................................... $11,575 $10,869 $26,762 $12,049 $19,801
Professional services................................... 10,686 8,943 14,543 7,498 9,454
Hardware................................................ 7,323 7,740 11,768 4,640 5,477
Maintenance and other................................... 10,013 6,950 12,571 5,997 8,362
Resource management..................................... -- -- 448 -- 723
------- ------- ------- ------- -------
Total revenues.................................... 39,597 34,502 66,092 30,184 43,817
------- ------- ------- ------- -------
OPERATING EXPENSES:
Cost of software licenses............................... 3,585 2,919 5,283 2,207 3,016
Cost of professional services........................... 7,608 4,952 8,363 4,159 5,546
Cost of hardware........................................ 5,774 6,186 9,209 3,570 4,378
Cost of maintenance and other........................... 4,233 2,705 5,984 2,877 4,400
Cost of resource management............................. -- -- 343 -- 467
Research and development................................ 4,508 5,242 8,256 4,064 6,226
Sales and marketing..................................... 5,474 6,186 11,520 5,133 8,322
General and administrative.............................. 6,764 5,830 10,925 5,488 7,063
------- ------- ------- ------- -------
Total operating expenses.......................... 37,946 34,020 59,883 27,498 39,418
------- ------- ------- ------- -------
OPERATING INCOME.......................................... 1,651 482 6,209 2,686 4,399
OTHER EXPENSE (INCOME):
Interest expense........................................ 127 191 175 127 2
Interest income......................................... -- -- (402) (1) (257)
------- ------- ------- ------- -------
Total other expense (income)...................... 127 191 (227) 126 (255)
------- ------- ------- ------- -------
INCOME BEFORE INCOME TAXES................................ 1,524 291 6,436 2,560 4,654
TAXES:
Deferred tax provision related to acquisitions.......... -- -- -- -- 339
Provision for income taxes (Note 10).................... 211 581 2,482 803 1,806
------- ------- ------- ------- -------
NET INCOME (LOSS)......................................... 1,313 (290) 3,954 1,757 2,509
ACCRETION AND ACCRUAL OF
DIVIDENDS ON MANDATORILY
REDEEMABLE PREFERRED STOCK.............................. 184 1,003 1,308 1,308 --
------- ------- ------- ------- -------
NET INCOME (LOSS) ATTRIBUTABLE
TO COMMON STOCKHOLDERS.................................. $ 1,129 $(1,293) $ 2,646 $ 449 $ 2,509
======= ======= ======= ======= =======
PRO FORMA INCOME DATA (Unaudited)
Income before income taxes.............................. $ 1,524 $ 291 $ 6,436 $ 2,560 $ 4,654
Pro forma provision for income taxes.................... 593 158 2,463 1,005 1,756
------- ------- ------- ------- -------
PRO FORMA NET INCOME...................................... $ 931 $ 133 $ 3,973 $ 1,555 $ 2,898
======= ======= ======= ======= =======
NET INCOME (LOSS) PER SHARE
Basic................................................... $ 0.14 $ (0.16) $ 0.21 $ 0.05 $ 0.15
======= ======= ======= ======= =======
Diluted................................................. $ 0.12 $ (0.16) $ 0.20 $ 0.05 $ 0.14
======= ======= ======= ======= =======
PRO FORMA NET INCOME PER SHARE (Unaudited)
Basic................................................... $ 0.01 $ 0.28 $ 0.13 $ 0.17
------- ------- ------- -------
Diluted................................................. $ 0.01 $ 0.27 $ 0.13 $ 0.17
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 23
H.T.E., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS A NOTES
COMMON STOCK COMMON STOCK ADDITIONAL ACCUMULATED CUMULATIVE RECEIVABLE
--------------- --------------- PAID-IN (DEFICIT) TRANSLATION FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT STOCKHOLDERS TOTAL
------ ------ ------ ------ ---------- ----------- ----------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1995.. 1,061 $ 11 3,392 $ 1 $ 113 $ (50) $ -- $ -- $ 75
Issuance of common
stock.................. -- -- 136 -- 224 -- -- -- 224
Stock issued in
connection with UCS
merger................. 22 -- -- -- -- -- -- -- --
Accretion of mandatorily
redeemable preferred
stock to redemption
value.................. -- -- -- -- -- 26 -- -- 26
Accrual of mandatorily
redeemable preferred
stock dividends........ -- -- -- -- -- (210) -- -- (210)
Advances on notes
receivable from
stockholders........... -- -- -- -- -- -- -- (262) (262)
Net income............... -- -- -- -- -- 1,313 -- -- 1,313
Adjustment for difference
in fiscal years........ -- -- -- -- -- (47) -- -- (47)
------ ---- ------ ----- ------- ------ ----- ---- -------
BALANCE, MARCH 31, 1996.. 1,083 11 3,528 1 337 1,032 -- (262) 1,119
Issuance of common
stock.................. -- -- 3 -- 5 -- -- -- 5
Accretion of mandatorily
redeemable preferred
stock to redemption
value.................. -- -- -- -- -- (838) -- -- (838)
Accrual of mandatorily
redeemable preferred
stock dividends........ -- -- -- -- -- (165) -- -- (165)
Advances on notes
receivable from
stockholders........... -- -- -- -- -- -- -- (1) (1)
Forgiveness of notes
receivable from
stockholders........... -- -- -- -- -- (263) -- 263 --
Translation adjustment... -- -- -- -- -- -- (5) -- (5)
Net loss................. -- -- -- -- -- (290) -- -- (290)
------ ---- ------ ----- ------- ------ ----- ---- -------
BALANCE, DECEMBER 31,
1996................... 1,083 11 3,531 1 342 (524) (5) -- (175)
Stock issued in
connection with UCS
merger................. 13 -- -- -- -- -- -- -- --
Accretion of mandatorily
redeemable preferred
stock to redemption
value.................. -- -- -- -- -- (1,117) -- -- (1,117)
Accrual of mandatorily
redeemable preferred
stock dividends........ -- -- -- -- -- (191) -- -- (191)
Compensation due to sale
of stock............... -- -- -- -- 65 -- -- -- 65
Conversion of mandatorily
redeemable preferred
stock.................. 3,539 35 -- -- 4,952 -- -- -- 4,987
Conversion of mandatorily
redeemable Class C
common stock........... 127 1 -- -- 137 -- -- -- 138
Conversion of Class A
common stock........... 7,061 71 (3,531) (1) (70) -- -- -- --
Proceeds from sale of
common stock........... 4,650 47 -- -- 22,573 -- -- -- 22,620
Translation adjustment... -- -- -- -- -- -- 11 -- 11
Net income............... -- -- -- -- -- 3,954 -- -- 3,954
------ ---- ------ ----- ------- ------ ----- ---- -------
BALANCE, DECEMBER 31,
1997................... 16,473 $165 -- $ -- $27,999 $2,122 $ 6 $ -- $30,292
====== ==== ====== ===== ======= ====== ===== ==== =======
</TABLE>
F-6
<PAGE> 24
H.T.E., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS A NOTES
COMMON STOCK COMMON STOCK ADDITIONAL ACCUMULATED CUMULATIVE RECEIVABLE
--------------- --------------- PAID-IN (DEFICIT) TRANSLATION FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT STOCKHOLDERS TOTAL
------ ------ ------ ------ ---------- ----------- ----------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
UNAUDITED STOCKHOLDERS'
(DEFICIT) EQUITY DATA:
BALANCE, DECEMBER 31,
1997................... 16,473 $165 -- $ -- $27,999 $2,122 $ 6 $ -- $30,292
Stock issued in
connection with UCS
merger............... 24 -- -- -- (2) -- -- -- (2)
Proceeds from exercise
of stock options..... 10 -- -- -- 47 -- -- -- 47
Proceeds from issuance
of stock under
benefit plan......... 40 -- -- -- 265 -- -- -- 265
Stock issued in
connection with
Phoenix
acquisition.......... 272 3 -- -- -- 41 -- -- 44
Translation
adjustment........... -- -- -- -- -- -- (39) -- (39)
Net income............. -- -- -- -- -- 2,509 -- -- 2,509
------ ---- ----- ----- ------- ------ ----- ---- -------
BALANCE, JUNE 30, 1998... 16,819 $168 -- $ -- $28,309 $4,672 $ (33) $ -- $33,116
====== ==== ===== ===== ======= ====== ===== ==== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE> 25
H.T.E., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(NOTE 14)
<TABLE>
<CAPTION>
NINE MONTHS SIX MONTHS ENDED
YEAR ENDED ENDED YEAR ENDED JUNE 30,
MARCH 31, DECEMBER 31, DECEMBER 31, -------------------
1996 1996 1997 1997 1998
---------- ------------ ------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...................................... $ 1,313 $ (290) $ 3,954 $ 1,757 $ 2,509
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization........................ 3,200 2,381 3,226 1,592 2,430
Accretion of mandatorily redeemable Class C common
stock charged to interest expense.................. -- 7 19 19 --
Loss on disposal of equipment, furniture and
fixtures........................................... 3 6 -- -- --
Gain on forgiveness of accounts payable.............. (210) -- -- -- --
Compensation due to sale of stock.................... -- -- 65 65 --
Deferred income taxes................................ 145 237 (84) (38) 335
Changes in operating assets and liabilities--
Decrease (increase) in assets--
Trade accounts receivable -- net................... (5,410) (5,085) (4,736) (1,036) (8,296)
Other current assets............................... (253) (124) (544) (952) (1,257)
Deposits........................................... 29 (61) (67) (114) (65)
Increase (decrease) in liabilities--
Accounts payable and accrued liabilities........... 1,735 1,410 980 (957) (797)
Deferred revenue................................... 340 3,404 1,802 1,763 1,902
Other liabilities.................................. (171) (105) 107 20 54
------- ------- ------- ------- -------
Net cash provided by (used in) operating
activities..................................... 721 1,780 4,722 2,119 (3,185)
------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................... (671) (505) (2,091) (302) (1,194)
Proceeds from sale of investments...................... -- 119 -- -- --
Change in restricted cash.............................. -- -- (1,574) -- 1,574
Cash paid for acquisitions............................. (6) (375) (361) -- (1,792)
Computer software development costs.................... (2,693) (1,856) (2,616) (1,091) (2,205)
------- ------- ------- ------- -------
Net cash used in investing activities............ (3,370) (2,617) (6,642) (1,393) (3,617)
------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of preferred stock.......... -- 247 -- -- --
Payment of dividends on preferred stock................ -- -- (624) (624) --
Net proceeds from issuance of common stock............. 224 5 22,620 19,056 312
Net proceeds (repayments) under line of credit......... 1,970 336 (2,306) (2,306) --
Repayments of long-term debt........................... (75) (83) -- -- --
Repayments of obligations under capital leases......... (149) (23) (34) (17) --
Net repayments of notes payable to related parties..... (50) (50) (300) -- --
Increase (decrease) in due to stockholders............. 396 483 149 (329) (1,213)
Advances on notes receivable from stockholders......... (262) (1) -- -- --
------- ------- ------- ------- -------
Net cash provided by (used in) financing
activities..................................... 2,054 914 19,505 15,780 (901)
------- ------- ------- ------- -------
Effect of foreign currency exchange rate changes on cash
and cash equivalents................................... -- (5) 11 21 (39)
------- ------- ------- ------- -------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS................................... (595) 72 17,596 16,527 (7,742)
CASH AND CASH EQUIVALENTS, beginning of period........... 1,738 966 1,038 1,038 18,634
------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS, end of period................. $ 1,143 $ 1,038 $18,634 $17,565 $10,892
======= ======= ======= ======= =======
SUPPLEMENTAL SCHEDULES OF CASH
FLOW INFORMATION
Cash paid for interest................................. $ 128 $ 187 $ 111 $ 116 $ 5
Cash paid for income taxes............................. 160 14 1,940 1,129 2,661
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-8
<PAGE> 26
H.T.E., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH AND DECEMBER 31, 1996 AND DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The accompanying consolidated financial statements include the accounts of
H.T.E., Inc. (HTE) a Florida corporation, and its wholly-owned subsidiaries, HTE
Public Safety Illinois, Inc. (PSI), a Florida corporation, HTE-Software
Management, Inc. (SMI), a Florida corporation, HTE-Programmed For Success, Inc.
(PFS), a Florida corporation, Bellamy Software Ltd. (Bellamy), a Canadian
corporation, HTE-Kb Systems, Inc. (Kb Systems), a Florida corporation and
HTE-UCS, Inc. (UCS), a Florida corporation (collectively, the Company). HTE
develops, markets, implements and supports fully-integrated enterprise-wide
software applications designed specifically for public sector and utility
organizations, including state, county and city governments, other municipal
agencies, and publicly and privately owned utilities. The Company is also
engaged in remarketing IBM hardware systems to run in concert with their
application software. The effect of the Company's foreign operations on the
accompanying consolidated financial statements was not material.
On June 1, 1998, the Company acquired UCS, Inc., in exchange for 1,120,000
shares of the Company's common stock valued at approximately $15 million as of
the April 1998 agreement valuation date. UCS, Inc. is a mobile work force
automation provider of field-based reporting software. The acquisition has been
accounted for as a pooling of interests. Therefore, the consolidated financial
statements include the results of operations of UCS, Inc. for all periods
presented.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned domestic and foreign subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
Change in Fiscal Year
The Company changed its fiscal year end from March 31 to December 31
effective with the year ended December 31, 1996. As a result, the fiscal period
ended December 31, 1996, presented herein is a nine-month period.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Restricted cash
Restricted cash represents cash held in escrow in connection with the
JALAN, Inc. acquisition further discussed in Note 13.
F-9
<PAGE> 27
H.T.E., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH AND DECEMBER 31, 1996 AND DECEMBER 31, 1997
Trade Accounts Receivable
Included in trade accounts receivable at December 31, 1996 and 1997, are
unbilled receivables of $4,252 and $7,898, respectively. The following table
reflects the activity in the allowance for doubtful accounts for the year ended
March 31, 1996, the nine months ended December 31, 1996 and the year ended
December 31, 1997:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, DECEMBER 31,
1996 1996 1997
--------- ------------ ------------
<S> <C> <C> <C>
Balance at the beginning of the period.............. $ 285 $ 300 $ 520
Provision........................................... 139 320 200
Write-offs.......................................... (124) (100) (103)
----- ----- -----
Balance at the end of the period.................... $ 300 $ 520 $ 617
===== ===== =====
</TABLE>
Equipment, Furniture and Fixtures
Equipment, furniture and fixtures are recorded at cost. Depreciation and
amortization are recorded for financial statement purposes on a straight-line
basis over the estimated useful lives of the assets. Repair and maintenance
costs which do not extend the useful lives of the related assets are expensed as
incurred.
The estimated useful lives of equipment, furniture and fixtures are as
follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Equipment................................................... 3-10
Office furniture and fixtures............................... 5-10
Leasehold improvements...................................... 5-10
</TABLE>
Depreciation and amortization expense related to equipment, furniture and
fixtures and leasehold improvements of $324, $350 and $643 is included in
general and administrative expenses on the accompanying statements of operations
for the year ended March 31, 1996, the nine months ended December 31, 1996 and
the year ended December 31, 1997, respectively.
Computer Software Development Costs
All costs incurred to establish the technological feasibility of a computer
software product to be sold, leased or otherwise marketed are charged to
research and development expense as incurred. Technological feasibility of a
computer software product is established when the Company has completed all
planning, designing, coding and testing activities that are necessary to
establish that the product can be produced to meet its design specifications
including functions, features and technical performance requirements.
Costs of producing product masters incurred subsequent to establishing
technological feasibility are capitalized and are amortized on a straight-line
basis over three years once the product is available for general release to
customers. Such capitalized costs are reported at the lower of unamortized cost
or net realizable value.
The Company ceases capitalization of computer software costs when the
product is available for general release to customers. Costs of maintenance and
customer support are charged to expense when the related revenue is recognized
or when those costs are incurred, whichever occurs first.
Effective April 1, 1995, management changed the estimated useful life of
capitalized computer software development costs from 60 months to 36 months. The
effect of this change in accounting estimate was to
F-10
<PAGE> 28
H.T.E., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH AND DECEMBER 31, 1996 AND DECEMBER 31, 1997
reduce net income by approximately $798, net of the related tax benefit of $532,
or $0.07 per diluted share for the year ended March 31, 1996.
Amortization expense related to computer software development costs of
$2,831, $1,947 and $2,296 is included in cost of software license fees in the
accompanying consolidated statements of operations for the year ended March 31,
1996, the nine months ended December 31, 1996 and the year ended December 31,
1997, respectively.
Other Intangible Assets
Other intangible assets consisted of the following as of December 31, 1996
and 1997:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
DESCRIPTION 1996 1997
- ----------- ------------ ------------
<S> <C> <C>
Goodwill.................................................... $ 401 $ 401
Purchased software.......................................... 387 706
Customer lists.............................................. 386 580
------ ------
1,174 1,687
Less -- Accumulated amortization............................ (129) (416)
------ ------
$1,045 $1,271
====== ======
</TABLE>
Goodwill represents amounts paid in excess of the fair market value of net
tangible and identifiable intangible assets purchased in the acquisitions of SMI
and Bellamy and is amortized using the straight-line method over a period of 60
months. Customer lists represent identifiable intangible assets purchased in
connection with the acquisitions of Bellamy and Kb Systems, Inc. and are
amortized over a period of 60 months. Purchased software represents identifiable
intangible assets purchased in connection with the acquisitions of PFS, Bellamy
and Kb Systems, Inc. and is amortized using the straight-line method over a
period of 36 months. Amortization expense related to goodwill and customer lists
of $23, $38 and $158 is included in general and administrative expenses in the
accompanying statements of operations for the year ended March 31, 1996, the
nine months ended December 31, 1996 and the year ended December 31, 1997,
respectively. Amortization expense related to the purchased software of $22, $46
and $129 is included in the cost of software license fees in the accompanying
consolidated statements of operations for the year ended March 31, 1996, the
nine months ended December 31, 1996 and the year ended December 31, 1997,
respectively.
Deferred Revenue and Revenue Recognition
Deferred revenue represents advance payments by customers for software
licenses, maintenance and professional services. Revenue from software licenses
is recognized when a contract has been executed, the product has been shipped,
all significant contractual obligations related to the software licenses have
been satisfied, uncertainty surrounding customer acceptance becomes
insignificant and collection of the related receivable is probable. Maintenance
revenue is deferred and recognized ratably over the service period. Professional
services include system planning and implementation, project management and
training and education services and are recognized as the work is performed. As
the functionality of the hardware is not dependent on any other services
provided by the Company, hardware sales are recognized upon shipment.
During 1997, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 97-2, "Software Revenue Recognition," which
is effective for transactions entered into in fiscal years beginning after
December 15, 1997, and supersedes SOP 91-1. The AICPA subsequently issued SOP
98-4, which deferred for one year the effective date of certain provisions of
SOP 97-2 with respect to
F-11
<PAGE> 29
H.T.E., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH AND DECEMBER 31, 1996 AND DECEMBER 31, 1997
vendor-specific objective evidence. Management does not anticipate that the
implementation of the guidance set forth in SOP 97-2, as amended by SOP 98-4,
will have a material impact on its current revenue recognition policies.
Income Taxes and Pro Forma Provision for Income Taxes
The Company accounts for income taxes using an asset and liability approach
in accordance with Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes," which requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns. In
estimating future tax consequences, the Company considers all expected future
events other than enactments of changes in the tax law or rates. Changes in the
tax law or rates will be recognized in the future years in which they occur.
As noted above, the consolidated financial statements include the results
of operations of UCS, Inc. for all periods presented. UCS, Inc. was an S
corporation, and therefore no tax provision was reflected in its results of
operations. The pro forma provision for income taxes includes the tax impact of
UCS, Inc.'s operations, as adjusted for elimination of intercompany
transactions, based on the appropriate statutory rate.
Significant Concentrations
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of accounts receivable from
governmental entities. To minimize this risk, the Company generally requires a
significant cash deposit upon contract signing. In addition, the Company
maintains reserves for potential credit losses.
Substantially all of the Company's hardware revenues are derived from the
sale of IBM AS/400 systems in connection with the Company's Industry Remarketing
agreement with IBM. Any change in this relationship could potentially have an
adverse effect on the Company's financial performance.
Stock-Based Compensation
The Company measures compensation expense for stock-based compensation
granted to employees in accordance with APB Opinion No. 25, "Accounting for
Stock Issued to Employees." The Company has elected to adopt only the disclosure
requirements of SFAS No. 123, "Accounting for Stock-Based Compensation," which
are presented in Note 8.
Foreign Currency Translation
The functional currency of the Company's foreign subsidiary is the Canadian
dollar. The financial statements of the Company's foreign subsidiary have been
translated into U.S. dollars in accordance with SFAS No. 52. Accordingly, assets
and liabilities of foreign operations are translated at period-end rates of
exchange, with any resulting translation adjustments reported as a separate
component of stockholders' (deficit) equity. Income statement accounts are
translated at average exchange rates for the period and gains and losses from
foreign currency transactions are included in net income.
F-12
<PAGE> 30
H.T.E., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH AND DECEMBER 31, 1996 AND DECEMBER 31, 1997
Net Income (Loss) Per Share
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share." The Company adopted SFAS No. 128 in 1997 and, as a
result, restated all prior period income per share data presented. The following
disclosures comply with the requirements of SFAS No. 128 (amounts in thousands):
<TABLE>
<CAPTION>
YEAR NINE MONTHS YEAR
ENDED ENDED ENDED
MARCH 31, DECEMBER 31, DECEMBER 31,
1996 1996 1997
--------- ------------ ------------
<S> <C> <C> <C>
Basic weighted-average shares outstanding........... 7,873 8,144 12,677
Common shares applicable to:
Stock options..................................... -- 51 442
Mandatorily redeemable preferred stock............ 3,271 -- --
------ ------ ------
Diluted weighted-average shares outstanding......... 11,144 8,195 13,119
====== ====== ======
</TABLE>
Common share equivalents included in the diluted calculation related to
stock options are computed using the treasury stock method and consist of common
stock which may be issuable upon the exercise of outstanding common stock
options, when dilutive. Common share equivalents included in the diluted
calculation related to mandatorily redeemable preferred stock are computed using
the if converted method assuming conversion at the later of the beginning of
each period or the date issued, when dilutive.
All share and per share information in the consolidated financial
statements have been adjusted to give effect to the 53-for-one stock split and
par value restatement (related to the Company's mandatorily redeemable preferred
stock, mandatorily redeemable Class C common stock and Class A common stock),
which was effective on June 10, 1997. Additionally, the share and per share
information in the consolidated financial statements have been further adjusted
to give effect to the two-for-one common stock split which was effective on June
18, 1998.
Pro Forma Net Income Per Share (Unaudited)
Pro forma net income per share is determined by dividing pro forma net
income by the pro forma weighted-average number of shares outstanding during the
period. The basic and diluted pro forma weighted-average number of shares
outstanding during the periods presented, except for the six months ended June
30, 1998, which is not pro forma, assume the conversion of the mandatorily
redeemable preferred stock shares and the mandatorily redeemable Class C common
stock into Class A common stock as of the date such stock was first issued.
Carrying Value of Long-Lived Assets
The Company reviews the carrying value of all long-lived assets, including
equipment, furniture and fixtures, computer software development costs, and
other intangible assets, whenever events or changes in circumstances indicate
that the carrying value may not be recoverable through projected undiscounted
future operating cash flows. Although no impairment is indicated at December 31,
1997, the assessment of recoverability will be impacted if estimated projected
undiscounted operating cash flows are not achieved.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make 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, as well as
F-13
<PAGE> 31
H.T.E., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH AND DECEMBER 31, 1996 AND DECEMBER 31, 1997
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial assets and liabilities,
including cash and cash equivalents, accounts receivable, accounts payable,
notes payable to related parties and line of credit at December 31, 1996 and
1997, approximate fair value because of the short maturity of these instruments.
Recent Accounting Pronouncements
In June 1997, the FASB issued Statements of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" (SFAS 130) and No. 131, "Disclosures
about Segments of an Enterprise and Related Information" (SFAS 131). SFAS 130
establishes standards for reporting and display of comprehensive income and its
components and SFAS 131 establishes standards for reporting information about
operating segments. The provisions of these statements become effective for
fiscal years beginning after December 31, 1997. As these statements pertain to
disclosure and informational requirements, they will have no impact on the
Company's operating results or financial position. Comprehensive income has not
been reported for the periods included in the accompanying consolidated
financial statements due to the immaterial nature of the related adjustments.
Reclassifications
Certain prior-year balances have been reclassified in order to conform to
the current-period financial statement presentation.
Interim Financial Information (Unaudited)
The accompanying consolidated balance sheet as of June 30, 1998, the
accompanying consolidated statements of operations and cash flows for the six
months ended June 30, 1997 and 1998, and the accompanying consolidated statement
of stockholders' (deficit) equity for the six months ended June 30, 1998,
included herein have been prepared by the Company and are unaudited. The
information furnished in the unaudited financial statements referred to above
includes all adjustments which are, in the opinion of management, necessary for
a fair presentation of such financial statements. These adjustments are all of a
normal, recurring nature. The results of operations for the six months ended
June 30, 1998, are not necessarily indicative of the results to be expected for
the entire fiscal year.
2. EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures consisted of the following as of December
31, 1996 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Equipment................................................... $ 3,489 $ 4,593
Office furniture and fixtures............................... 850 900
Leasehold improvements...................................... 102 1,018
------- -------
4,441 6,511
Less -- Accumulated depreciation and amortization........... (2,472) (3,254)
------- -------
$ 1,969 $ 3,257
======= =======
</TABLE>
F-14
<PAGE> 32
H.T.E., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH AND DECEMBER 31, 1996 AND DECEMBER 31, 1997
3. BUSINESS COMBINATIONS
During the year ended March 31, 1996, the Company created PFS as a
wholly-owned subsidiary. In September 1995, PFS purchased the net assets of
Programmed-For-Success, Inc. by paying $6 in cash and issuing a note payable for
$100. The assets purchased consisted of equipment, furniture and fixtures,
miscellaneous deposits and purchased software. As part of the purchase, PFS also
assumed various customer service liabilities. Additionally, the Company entered
into an employment agreement with the owner of Programmed-For-Success, Inc. for
a period of at least one year.
On November 1, 1996, the Company acquired all of the outstanding common
stock of Bellamy by paying cash of $375, issuing notes payable totaling $300 and
by issuing 63,600 shares of mandatorily redeemable Class C common stock of the
Company (see Note 6) valued at $1.76 per share. The value of the mandatorily
redeemable Class C common stock at the acquisition date was determined based on
an appraisal of the fair market value of the Company on that date. The assets
purchased consisted primarily of investments, accounts receivable, equipment,
furniture and fixtures, prepaid expenses, purchased software and other
intangible assets. Additionally, the Company assumed various liabilities
including accounts payable and accrued expenses, certain customer service
liabilities, deferred taxes and a bank loan payable. The acquisition has been
accounted for as a purchase in the accompanying consolidated financial
statements. Accordingly, Bellamy's operating results are included in the
consolidated results of operations for the period subsequent to its acquisition.
Goodwill of $289 was recognized in connection with the purchase. The notes
payable issued in connection with the Bellamy acquisition are included in notes
payable to related parties on the accompanying consolidated balance sheet as of
December 31, 1996, since the former owners are now employees of the Company. The
notes bear interest at 10 percent per annum and were repaid during 1997.
During the year ended December 31, 1997, the Company created Kb Systems as
a wholly-owned subsidiary. In December 1997, Kb Systems purchased the net assets
of Kb Systems, Inc. for $400 in cash. As of December 31, 1997, $300 had been
paid by the Company. The remaining $100 was paid in March 1998 upon receipt by
the Company of evidence of satisfaction of certain liabilities of Kb Systems,
Inc. The assets purchased consisted principally of purchased software and other
intangible assets. As part of the purchase, HTE also assumed limited customer
service liabilities. Additionally, the Company entered into a royalty agreement
with Kb Systems, Inc., for a period of five years. This acquisition has been
accounted for as a purchase in the accompanying consolidated financial
statements.
Revenues, net income and earnings per share presented on a pro forma basis,
as if the acquisitions had occurred at the beginning of each period presented,
are as follows (unaudited):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Revenues.................................................... $36,305 $67,136
Net income (loss)........................................... (216) 3,985
Basic earnings per share.................................... (0.03) 0.31
Diluted earnings per share.................................. (0.03) 0.30
</TABLE>
The earnings per share information above was calculated using the pro forma
weighted-average shares outstanding during the periods presented as described in
Note 1.
4. LINE OF CREDIT
On January 16, 1997, the Company refinanced its existing line of credit
(LOC) with a commercial bank in which the bank agreed to make available a
principal amount equal to a percentage of qualified accounts receivable not to
exceed $6,000. The LOC extends through June 30, 1998, at which time the entire
unpaid principal balance and any accrued interest is payable in full. In
accordance with the agreement, the LOC bears
F-15
<PAGE> 33
H.T.E., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH AND DECEMBER 31, 1996 AND DECEMBER 31, 1997
interest at the bank's prime rate plus 1.25 percent and is collateralized by the
Company's accounts receivable, inventory, intangible assets and equipment. At
December 31, 1996, borrowings of $2,306 were outstanding under the line of
credit. There were no borrowings outstanding under the line of credit at
December 31, 1997. The line of credit contains financial covenants which require
the Company to maintain certain financial ratios. As of December 31, 1997, the
Company was either in compliance with or had received appropriate waivers for
all debt covenants. The Company intends to refinance this line of credit during
1998.
5. MANDATORILY REDEEMABLE PREFERRED STOCK
Effective October 31, 1994, the Company authorized 200,000 shares of
mandatorily redeemable preferred stock. The preferred stock had full voting
rights and was convertible into common stock at any time based on a formula
defined in the Company's Articles of Incorporation. Annual dividends, which were
cumulative, were computed at seven percent per annum and totaled $268 and $433
as of March 31 and December 31, 1996, respectively. For the year ended March 31,
1996, the nine months ended December 31, 1996 and the year ended December 31,
1997, the amount of accretion related to the preferred stock totaled $(26), $838
and $1,117, respectively, which is reflected as an (decrease) increase in
mandatorily redeemable preferred stock, with the offset going to accumulated
(deficit) earnings. The accretion related to the preferred stock was determined
based on the liquidation preference as of March 31, 1996, the formula value as
of December 31, 1996, and the initial public offering (IPO) price during the
year ended December 31, 1997. As further described in Note 7, the mandatorily
redeemable preferred stock was converted to common stock during 1997 in
connection with the IPO, at which time $624 of accumulated dividends were paid.
6. MANDATORILY REDEEMABLE CLASS C COMMON STOCK
On November 1, 1996, the Company issued 63,600 shares of mandatorily
redeemable Class C common stock as partial consideration in connection with the
acquisition of Bellamy (see Note 3). As further described in Note 7, all
outstanding shares of mandatorily redeemable Class C common stock were converted
into 127,200 shares of common stock during 1997 in connection with the IPO.
7. STOCKHOLDERS' (DEFICIT) EQUITY
During the periods ended March 31 and December 31, 1996, the Company made
advances to its principal common stockholders evidenced by notes receivable
which were unsecured, non-interest bearing and had no specified maturity date.
Effective December 31, 1996, notes receivable from stockholders of $263 were
forgiven by the Company. The forgiveness of the notes receivable from
stockholders was reflected as a distribution to stockholders resulting in an
increase to the accumulated deficit as of December 31, 1996.
On June 10, 1997, the Company's IPO registration statement on Form S-1 was
declared effective by the U.S. Securities and Exchange Commission. Concurrent
with the effectiveness of the registration statement, the Company completed a
recapitalization pursuant to which (i) the number of authorized shares of the
Company's Class A common stock and mandatorily redeemable preferred stock were
increased to 4,000,000 and 2,000,000, respectively, (ii) all outstanding shares
of mandatorily redeemable preferred stock, mandatorily redeemable Class C common
stock and Class A common stock were split 53-for-one and exchanged
simultaneously on a two-for-one basis for shares of the Company's newly
authorized common stock, (iii) the Company paid in cash all accrued dividends on
the mandatorily redeemable preferred stock to the date of the stock splits and
exchanges described above and (iv) following the exchanges described above, the
mandatorily redeemable preferred stock, Class A common stock, Class B common
stock and mandatorily redeemable Class C common stock were canceled, retired and
eliminated from the shares the Company is authorized to issue (the
Recapitalization).
F-16
<PAGE> 34
H.T.E., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH AND DECEMBER 31, 1996 AND DECEMBER 31, 1997
The Company sold a total of 4,650,000 shares of common stock in the IPO,
3,900,000 of which were sold in June 1997, and 750,000 of which were sold in
July 1997, when the underwriters exercised their over-allotment option. Proceeds
received by the Company were approximately $22,620, net of offering costs of
$2,955.
The common stock issued in conjunction with the UCS, Inc. acquisition has
been reflected as outstanding for all periods presented.
8. STOCK COMPENSATION PLANS
EMPLOYEE STOCK OPTIONS
On July 1, 1996, the Company granted options to an employee to purchase
106,000 shares of the Company's common stock. The options are exercisable
beginning January 1, 1997, at $0.91 per share, which approximated the fair
market value of the stock at the date of grant. The options expire the earlier
of five years from the date of grant or seven months from the employee's date of
termination.
EXECUTIVE INCENTIVE PLAN
The Company's 1997 Executive Incentive Compensation Plan (the Executive
Incentive Plan) was adopted by the Board of Directors and approved by the
stockholders in January 1997. The purpose of the Executive Incentive Plan is to
attract and retain key employees and consultants of the Company, to provide an
incentive for them to achieve long-range performance goals and to enable them to
participate in the long-term growth of the Company. The Executive Incentive Plan
authorizes the grant of stock options (incentive and nonstatutory), stock
appreciation rights and restricted stock to employees and consultants of the
Company. The Company has reserved an aggregate of 1,908,000 shares (subject to
adjustment for stock splits and similar capital changes) of common stock for
grants under the Executive Incentive Plan. The exercise price of each option
equals the market price of the Company's stock on the date of grant and an
option's maximum term is 10 years. Some options have been granted with immediate
vesting, although most of the options granted to-date provide vesting schedules
of four or five years.
A summary of the status of the Company's outstanding stock options, each of
which is fixed with respect to number of shares and exercise price, including
employee stock options discussed above, as of December 31, 1996 and 1997, and
changes during the periods ending on those dates are presented below:
<TABLE>
<CAPTION>
1996 1997
-------------------------- ----------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year.... -- $ -- 106,000 $0.91
Granted........................... 106,000 $0.91 1,061,000 $4.83
Exercised......................... -- $ -- -- $ --
Forfeited......................... -- $ -- -- $ --
------- ---------
Outstanding at end of year.......... 106,000 $0.91 1,167,000 $4.47
======= =========
Options exercisable at year end..... -- $ -- 339,200 $3.52
Weighted-average fair value of
options granted during the year... $0.55 $1.35
</TABLE>
F-17
<PAGE> 35
H.T.E., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH AND DECEMBER 31, 1996 AND DECEMBER 31, 1997
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------ ------------------------------------
NUMBER WEIGHTED- WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING AT AVERAGE AVERAGE EXERCISABLE AT AVERAGE
EXERCISE DECEMBER 31, REMAINING EXERCISE DECEMBER 31, EXERCISE
PRICES 1997 CONTRACTUAL LIFE PRICE 1997 PRICE
- -------------- ------------------- --------------------- -------------- ------------------- --------------
<S> <C> <C> <C> <C> <C>
$0.91 106,000 8.5 $0.91 106,000 $0.91
$4.72 1,007,000 9.0 $4.72 233,200 $4.72
$5.94 to $8.57 54,000 9.7 $6.94 -- $ --
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
The Company adopted an Employee Stock Purchase Plan (ESPP) on July 23,
1997, which was approved by the stockholders in May 1998. The ESPP is effective
as of September 1, 1997, and is designed to qualify as an employee stock
purchase plan under Section 423 of the Internal Revenues Code of 1986, as
amended. Four hundred thousand shares are reserved for issuance over the term of
the ESPP, subject to periodic adjustment for changes in the outstanding common
stock occasioned by stock splits, stock dividends, recapitalizations or other
similar changes. The ESPP qualifies as a non-compensatory plan under APB Opinion
No. 25; therefore, the ESPP is not expected to have any effect on the results of
operations.
Under the terms of the ESPP, employees can choose each year to have up to
25 percent of their annual base earnings withheld to purchase the Company's
common stock. The purchase price of the stock is 85 percent of the lower of its
beginning of period or end of period market price. To date, approximately 80
percent of the Company's employees participate in the ESPP. No shares were sold
under the ESPP in 1997. As of December 31, 1997, there were 40,120 purchase
rights outstanding. These purchase rights were all granted in the initial
offering period in 1997, were exercisable at year-end and had a weighted-average
exercise price of $6.59. The weighted-average fair value of purchase rights
granted during 1997 under the ESPP was $1.90. All outstanding purchase rights at
December 31, 1997, were exercised in January 1998.
The fair value of options granted during the fiscal years ended December
31, 1996 and 1997, reported below has been estimated at the date of grant using
a Black-Scholes option pricing model. The Black-Scholes option valuation model
was developed for use in estimating the fair value of traded options that have
no vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions, including
the expected stock price volatility. The Company's options have characteristics
significantly different from those of traded options, and changes in the
subjective assumptions can materially affect the fair value estimate. The fair
value of each option grant was estimated on the date of grant based on the
following weighted-average assumptions for options granted during 1996 and 1997:
<TABLE>
<CAPTION>
STOCK OPTION PLAN ESPP
-------------------------------- ------------
NINE MONTHS ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1997
----------------- ------------ ------------
<S> <C> <C> <C>
Expected life (in years)..................... 10 10 .3
Weighted-average risk-free interest rate..... 7.05% 6.74% 5.21%
Volatility................................... 45.4% 45.4% 45.4%
Dividend yield............................... -- -- --
</TABLE>
F-18
<PAGE> 36
H.T.E., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH AND DECEMBER 31, 1996 AND DECEMBER 31, 1997
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method under SFAS No. 123, the Company's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
----------------- ------------
<S> <C> <C>
Net income (loss) attributable to common stockholders
As reported........................................... $(1,293) $2,646
Pro forma............................................. (1,328) 2,180
Basic earnings per share
As reported........................................... $ (0.16) $ 0.21
Pro forma............................................. (0.16) 0.17
Diluted earnings per share
As reported........................................... $ (0.16) $ 0.20
Pro forma............................................. (0.16) 0.16
</TABLE>
The effects of applying SFAS No. 123 on pro forma disclosures of net income
and earnings per share for fiscal 1997 and 1996 are not likely to be
representative of the pro forma effects on net income and earnings per share in
future years.
9. EMPLOYEE RETIREMENT PLAN
The Company has established an employee retirement savings plan that covers
substantially all employees who have met certain service and age requirements.
Employees may contribute from two percent to 10 percent of their annual
compensation to the plan as limited by Internal Revenue Service regulations. The
Company will match contributions up to three percent of each individual's
compensation. Contributions made by the Company totaled $515, $384 and $616 for
the year ended March 31, 1996, the nine months ended December 31, 1996 and the
year ended December 31, 1997, respectively, and are included in general and
administrative expenses in the accompanying consolidated statements of
operations.
10. INCOME TAXES
The provision for income taxes is as follows for the year ended March 31,
1996, the nine months ended December 31, 1996 and the year ended December 31,
1997:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, DECEMBER 31,
1996 1996 1997
--------- ------------ ------------
<S> <C> <C> <C>
Current:
Federal........................................... $ 40 $284 $2,126
State............................................. 26 60 440
---- ---- ------
66 344 2,566
Deferred............................................ 145 237 (84)
---- ---- ------
$211 $581 $2,482
==== ==== ======
</TABLE>
Included in the current federal portion of the provision for income taxes
for the nine months ended December 31, 1996, and the year ended December 31,
1997, are foreign taxes of $33 and $53, respectively, arising from the
operations of Bellamy.
F-19
<PAGE> 37
H.T.E., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH AND DECEMBER 31, 1996 AND DECEMBER 31, 1997
The provision for income taxes differs from the amount computed by applying
the U.S. federal corporate tax rate of 34 percent to income before provision for
income taxes for the year ended March 31, 1996, nine months ended December 31,
1996 and year ended December 31, 1997, as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, DECEMBER 31,
1996 1996 1997
--------- ------------ ------------
<S> <C> <C> <C>
U.S. federal income tax rate........................ 34.00% 34.00% 34.00%
UCS taxed as an S corporation..................... (27.52) 158.57 .29
State taxes....................................... 3.63 3.63 4.62
Tax-exempt interest............................... -- -- (2.03)
Meals and entertainment........................... 2.40 2.87 .67
Foreign tax rate.................................. -- -- .20
Other............................................. 1.34 .59 .81
------ ------ -----
Effective tax rate.................................. 13.85% 199.66% 38.56%
====== ====== =====
</TABLE>
Deferred income taxes consisted of the following as of December 31, 1997:
<TABLE>
<CAPTION>
CURRENT NONCURRENT TOTAL
------- ---------- -------
<S> <C> <C> <C>
Tax assets:
Accrued liabilities..................................... $439 $ -- $ 439
Allowance for doubtful accounts......................... 238 -- 238
Deferred lease commitment............................... -- 67 67
Other................................................... 74 32 106
---- ------- -------
Total assets.................................... 751 99 850
---- ------- -------
Tax liabilities:
Basis difference in fixed assets........................ -- (203) (203)
Capitalized software development costs.................. -- (1,494) (1,494)
Other intangible assets................................. -- (133) (133)
---- ------- -------
Total liabilities............................... -- (1,830) (1,830)
---- ------- -------
Net deferred tax asset (liability)........................ $751 $(1,731) $ (980)
==== ======= =======
</TABLE>
Deferred income taxes consisted of the following as of December 31, 1996:
<TABLE>
<CAPTION>
CURRENT NONCURRENT TOTAL
------- ---------- -------
<S> <C> <C> <C>
Tax assets:
Cumulative change in tax accounting method.............. $ 34 $ -- $ 34
Accrued liabilities..................................... 431 -- 431
Allowance for doubtful accounts......................... 196 -- 196
Deferred lease commitment............................... -- 25 25
Other................................................... 6 10 16
---- ------- -------
Total assets.................................... 667 35 702
---- ------- -------
Tax liabilities:
Basis difference in fixed assets........................ -- (204) (204)
Capitalized software development costs.................. -- (1,394) (1,394)
Other intangible assets................................. -- (168) (168)
---- ------- -------
Total liabilities............................... -- (1,766) (1,766)
---- ------- -------
Net deferred tax asset (liability)........................ $667 $(1,731) $(1,064)
==== ======= =======
</TABLE>
F-20
<PAGE> 38
H.T.E., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH AND DECEMBER 31, 1996 AND DECEMBER 31, 1997
11. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases office space, furniture, automobiles and equipment under
certain long-term noncancellable operating lease agreements with varying terms
and conditions.
Future aggregate minimum rental payments under these agreements are as
follows as of December 31, 1997:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- ------------------------ -------
<S> <C>
1998........................................................ $ 2,766
1999........................................................ 2,245
2000........................................................ 1,587
2001........................................................ 1,479
2002........................................................ 1,317
Thereafter.................................................. 5,008
-------
$14,402
=======
</TABLE>
In April 1996, the Company entered into a lease agreement for its corporate
headquarters office in Lake Mary, Florida, under a 10-year, noncancelable
operating lease which began on May 1, 1997. The lease agreement also provides
the Company with three five-year renewal options. The Company expenses the total
estimated cash payments on a straight-line basis over the life of the lease. The
cumulative difference between the amount expensed and the amount actually paid
is included in other long-term liabilities on the accompanying consolidated
balance sheets at December 31, 1996 and 1997. Rent expense under operating
leases totaled approximately $1,392, $1,129 and $2,359 for the year ended March
31, 1996, the nine months ended December 31, 1996 and the year ended December
31, 1997, respectively.
PRODUCT ROYALTY AGREEMENTS
The Company has entered into several product royalty agreements with
various entities who have sold their application rights or product designs to
the Company. The majority of these agreements are similar in nature in that they
each state that royalties shall be paid on the basis of applicable software
license revenues collected by the Company. However, each agreement may have a
different percentage upon which the product royalty is based. The Company
accrues these product royalties as the applicable software license revenues are
recognized. The Company has recorded $370 and $611 as accrued liabilities for
product royalties as of December 31, 1996 and 1997, respectively. Royalty
expense was approximately $163, $263 and $325 for the year ended March 31, 1996,
nine months ended December 31, 1996 and the year ended December 31, 1997,
respectively, and is included in cost of software licenses. As discussed further
below, royalty expense for the year ended March 31, 1996, was reduced due to the
forgiveness of an account payable which was offset against royalty expense in
that year.
During the year ended March 31, 1996, an account payable for outstanding
product royalties under an application development agreement with IBM, which
totaled $210 as of March 31, 1995, was forgiven. In consideration of this
forgiveness of debt, the agreement was amended to provide for a five percent
royalty on software license fees of the "work orders" application for a period
of two years beginning April 1996 and a 10 percent royalty on software license
fees of the "courts" application for a period of three years beginning April
1996. This forgiveness was recorded as a reduction in royalty expense in the
accompanying consolidated statement of operations for the year ended March 31,
1996.
F-21
<PAGE> 39
H.T.E., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH AND DECEMBER 31, 1996 AND DECEMBER 31, 1997
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL AGREEMENTS
Effective February 1997, the Company entered into employment agreements
with Dennis J. Harward, the Company's President, Chief Executive Officer and
Chairman of the Board and Jack L. Harward, the Company's Executive Vice
President. Each of the agreements is for a term of three years, and
automatically renews for successive one-year periods. In the event either
executive is terminated without "Cause," the Company must pay to such executive
any unpaid base salary, any accrued but unpaid incentive compensation through
the date of termination and continue to pay the executive's base salary for a
period of 12 months as well as continue to provide the executive with incentive
compensation and the other benefits under the agreement for the same period.
Additionally, upon termination without "Cause" the Company must pay to each
executive a single lump sum payment equal to the value of the portion of his
benefits under any savings, pension, profit sharing or deferred compensation
plans.
The Company has also entered into severance agreements with Dennis J.
Harward and Jack L. Harward that will become effective on, and provide for
continued employment or retention following, a "Change in Control" (as defined)
of the Company. Such agreements generally provide that upon (i) termination by
the Company of the executive's employment for any reason other than death,
mental or physical incapacity, illness, disability or "Cause" (as defined), (ii)
termination by the executive for "Good Reason" (generally defined as the
diminution of the executive's duties or other breach by the Company of the
agreement), or (iii) termination by the executive during a 30-day period
commencing one year after the "Change in Control," he will receive, in addition
to base salary, bonus and other compensation accrued through the date of
termination, a lump sum cash payment equal to 2.5 times his then-existing base
salary and incentive compensation.
PRODUCT LIABILITY
The Company markets to its customers complex, mission-critical,
enterprise-wide applications. The Company's license agreements with its
customers typically contain provisions designed to limit the Company's exposure
to potential product liability claims. It is possible, however, that the
limitation of liability provisions contained in the Company's license agreements
may not be effective as a result of existing or future federal, state or local
laws or ordinances or unfavorable judicial decisions. Although the Company has
not experienced any significant product liability claims to date, the sale and
support of software by the Company may entail the risk of such claims, which may
be substantial. A successful product liability claim brought against the Company
could have a material adverse effect upon the Company's business, operating
results and financial condition.
12. LITIGATION
The Company is involved in various legal actions arising in the normal
course of business, as both a claimant and a defendant. While it is not possible
to determine with certainty the outcome of these matters, in the opinion of
management, the eventual resolution of these claims and actions outstanding will
not have a material adverse effect on the Company's financial position or
operating results.
13. SUBSEQUENT EVENTS
In January 1998, the Company purchased the net assets of JALAN, Inc. for
$1,723. The assets purchased consisted of equipment, furniture and fixtures,
miscellaneous deposits and purchased software. As part of the purchase, HTE also
assumed various customer service liabilities. Additionally, the Company entered
into a consulting agreement with the former owners of JALAN, Inc. This
acquisition was accounted for as a purchase.
F-22
<PAGE> 40
H.T.E., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH AND DECEMBER 31, 1996 AND DECEMBER 31, 1997
In April 1998, the Company purchased Phoenix Systems, LLC (Phoenix), in
exchange for 272,036 shares of the Company's common stock valued at
approximately $3 million on or about the closing date. The acquisition was
accounted for as a pooling of interests, although the Company did not restate
the results of prior periods due to the financial immateriality of Phoenix's
historical operations.
As discussed in Note 1, in June 1998 the Company acquired UCS, Inc. in a
transaction accounted for as a pooling of interests.
In July 1998, the Company entered into a letter of intent to acquire the
assets of Vanguard Management & Information Systems, Inc. for $400 in cash and
the payment of continuing royalties over a five-year period. The Company expects
the acquisition to close during the third quarter of 1998 and intends to account
for it as a purchase.
14. SUPPLEMENTAL NONCASH TRANSACTIONS
The Company includes depreciation on certain equipment in the costs
capitalized as computer software development costs. During the year ended March
31, 1996, the nine months ended December 31, 1996 and the year ended December
31, 1997, depreciation of $86, $88 and $160, respectively, was capitalized as
computer software development costs.
During the year ended March 31, 1996, PFS purchased the net assets of
Programmed-For-Success, Inc. (the PFS Acquisition). PFS paid $6 in cash and
issued a note payable of $100 in connection with the PFS Acquisition. During the
nine months ended December 31, 1996, the Company purchased all of the
outstanding common stock of Bellamy (the Bellamy Acquisition). The Company paid
$375 in cash, issued notes payable with an aggregate value of $300 and issued
63,600 shares of mandatorily redeemable Class C common stock with a value of
$112 in connection with the Bellamy Acquisition.
In December 1997, the Company purchased net assets of Kb Systems, Inc. for
$400 plus legal costs of $61. As of December 31, 1997, $100 of the purchase
price remained unpaid pending satisfactory resolution of certain matters related
to Kb Systems, Inc.
The acquisitions discussed above in this note had the following noncash
effect of increasing the following assets and liabilities during the year ended
March 31, 1996, the nine months ended December 31, 1996 and the year ended
December 31, 1997:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, DECEMBER 31,
1996 1996 1997
--------- ------------ ------------
<S> <C> <C> <C>
Trade accounts receivable........................... $ -- $124 $ --
Other current assets................................ -- 121 198
Equipment, furniture and fixtures................... 20 158 --
Purchased software.................................. 130 257 319
Other intangible assets............................. -- 386 194
Goodwill established due to recognition of deferred
income taxes (included in other intangible
assets)........................................... -- 289 --
Deposits............................................ 1 -- --
Accounts payable.................................... -- 123 --
Accrued liabilities................................. -- -- 100
Deferred revenue.................................... 45 128 250
Notes payable to related parties.................... 100 300 --
Long-term debt...................................... -- 8 --
Deferred income taxes (long-term liability)......... -- 289 --
Mandatorily redeemable Class C common stock......... -- 112 --
</TABLE>
F-23
<PAGE> 1
Ex-23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation of our report included in this Current Report on Form 8-K, into
the Company's previously filed Registration Statement File Nos. 333-34109,
333-34139 and 333-61383.
/s/ ARTHUR ANDERSEN LLP
Orlando, Florida
August 18, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 333-61383) and
the Registration Statements on Form S-8 (No. 333-34109 and No. 333-34139) of
H.T.E., Inc. of our reports dated April 10, 1998, July 7, 1998 and September 4,
1996, relating to the financial statements of UCS, Inc. (not presented
separately herein), which appear in this Current Report on Form 8-K.
/s/ PricewaterhouseCoopers LLP
---------------------------------
PricewaterhouseCoopers LLP
Miami, Florida
August 18, 1998
