SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
For the Fiscal Year Ended December 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from____________ to ______________
COMMISSION FILE NO: 0-22657
H.T.E., INC.
(Exact name of registrant as specified in its charter)
FLORIDA 59-2133858
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1000 BUSINESS CENTER DRIVE
LAKE MARY, FLORIDA 32746
(407) 304-3235
(Address, including zip code, and telephone number,
including area code, of Registrant's
principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes[x] No[ ]
Indicate by checkmark if disclosure of delinquent filers pursuant to
Item 405 of regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this 10-K or any amendment
to this form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of
the Registrant, computed by reference to the last reported price at which the
stock was sold on February 27, 1998, was $161,987,931. For purposes of the above
statement only, all directors and executive officers of the Registrant are
assumed to be affiliates.
The number of shares of the Registrants Common Stock, $.01 par value,
outstanding as of February 27, 1998, was 7,713,711.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement relating to the Registrant's 1998 Annual
Shareholders Meeting are incorporated by reference into Part III of this report.
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PART I
ITEM 1. BUSINESS
OVERVIEW
H.T.E., Inc. ("HTE" or 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, other municipal agencies and both public and private utilities. For
over 16 years, the Company has focused its applications, business and marketing
exclusively on the public sector and utilities and has established itself as a
market leader. HTE's fully-integrated enterprise-wide software applications are
designed to enable these organizations to improve delivery of services, reduce
costs, enhance revenue collection, operate within budgetary constraints, comply
with government regulations and improve overall operating efficiencies. The
Company's Total Enterprise Solution currently includes 50 applications
addressing four functional areas: financial management, community services,
public safety and justice, and utility management. The Company's products
operate as integrated suites of applications 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 of December 31, 1997, the Company had over 1,300 customers in the U.S.,
Caribbean, United Kingdom and Canada, including installations in all 50 U.S.
states. The Company markets and sells its products through a direct sales force.
The Company's focus on the public sector and utilities industries has allowed it
to develop significant expertise in these industries and to design feature-rich
solutions that address the specific needs of these organizations.
INITIAL PUBLIC OFFERING AND RECAPITALIZATION
On June 11, 1997, the Company successfully completed its initial public
offering of common stock. Of the 2,500,000 shares of common stock sold,
1,950,000 were sold by H.T.E., Inc. and 550,000 were sold by certain selling
shareholders. The Company sold the 1,950,000 shares of common stock for $19.0
million net of issuance costs of $2.4 million. In July, the underwriters
exercised their option to purchase 375,000 additional shares of common stock to
cover over-allotments. The Company received $3.6 million from the transaction,
net of additional issuance costs of $561,000.
Concurrent with the effectiveness of the Company's registration statement
on Form S-1, the Company completed a recapitalization pursuant to which all
outstanding shares of mandatorily redeemable preferred stock, Class A common
stock and mandatorily redeemable Class C common stock were split 53-for-one and
exchanged simultaneously on a one-for-one basis for shares of the Company's
newly authorized common stock. As part of the recapitalization, the Company paid
$624,000 in accrued dividends on the mandatorily redeemable preferred stock. The
mandatorily redeemable preferred stock, Class A common stock, Class B common
stock and mandatorily redeemable Class C common stock were then canceled,
retired and eliminated from the shares the Company is authorized to issue.
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INDUSTRY BACKGROUND
The public sector marketplace is composed of state, county and city
governments, other municipal agencies and publicly owned utilities. The local
government market comprises over 3,000 counties and over 19,000 municipalities
in the U.S., not including school districts, townships and special governmental
districts. The utility market includes approximately 1,800 water, gas and
electric utilities, each serving between 25,000 and 500,000 consumers. With
respect to public safety agencies, there are approximately 50,000 police, fire
and emergency service agencies in the U.S. In 1996, state and local government
agencies spent approximately $34.5 billion on information technology and related
products according to G2 Research, Inc. This total included approximately $5.0
billion for software, $6.7 billion for external services and $7.4 billion for
hardware. Approximately $15.4 billion was spent on internal services such as
in-house MIS staffs.
The public sector marketplace is currently undergoing significant
organizational and business changes. Recently, the federal government has ceded
additional program and funding responsibilities to state and local governments,
resulting in a growing requirement at the local level to fill the gap between
increasing constituent demands and limited resources. Like many private sector
businesses, public sector organizations are facing increasing pressure to
improve delivery of goods and services while striving to reduce costs and
generate additional revenue. In response, public sector organizations are
employing information technology solutions in an effort to streamline and
automate administrative intensive processes, improve timeliness and quality of
services and generally enhance operating efficiencies. In addition, public
organizations are seeking to use information technology to create new sources of
revenue and enhance existing revenue collection.
Certain information technology issues facing state and local governments
also impact public utilities, many of which are owned by municipalities. In
addition, recent deregulation in the utility market has resulted in greater
competition between public and private utilities. Consequently, public utilities
are under pressure to retain their customer bases and focus their efforts on
enhancing the level of service, improving operating practices and reducing
costs. Specifically, utilities seek to ensure timely and effective utilization
of inventory, equipment and human resources, along with improved customer
service levels. Utilities must also comply with government regulations covering
environmental, worker health and safety and other matters.
In the 1970s and 1980s, local governments and utility companies began to
use computerized operations management systems principally based on mainframe
computers and later based on minicomputers. These legacy systems typically use
proprietary operating systems and database software and are frequently developed
on a custom basis to meet the specific needs of a customer. The proprietary and
custom nature of legacy systems often limits their accessibility and
interoperability with other software applications, systems and resources.
Further, these systems often do not address current needs and are becoming
increasingly difficult and expensive to maintain, update and change. Currently,
many public sector organizations are faced with a pressing need to integrate
mission-critical functions and databases by replacing stand-alone applications
and customized software with cost-effective enterprise-wide solutions that
improve overall operational efficiencies and manage the flow of information
between departments.
In recent years, the increased performance and lower cost of desktop
computers, together with improvements in network communications, have
contributed to a shift by organizations from centralized computer systems to
more distributed environments that support the integration of a variety of
"client" (end-user) and "server" (host-based) applications. The first generation
of client/server software applications primarily consisted of "point solutions"
that focused on a single function, such as the general ledger or human resource
management. Point solutions are not easily interoperable with point solutions
from other providers, making access to information between departments difficult
and requiring redundant data entry or expensive customization and maintenance.
Because point solutions frequently do not operate on the customer's existing
system, they often require a long implementation process involving the costly
migration of large amounts of data from existing systems and the purchase of new
hardware and software.
One alternative to replacing or upgrading a legacy system is to outsource
information technology needs to independent providers. Outsourcing generally
encompasses a wide array of services ranging from custom software
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development to assuming full responsibility for information systems management,
including both equipment and personnel. Outsourcing often provides a solution to
the problem faced by public organizations of retaining the expertise and
personnel necessary to maintain legacy systems. Further, outsourcing often
represents a means of avoiding many of the costs associated with the in-house
design, implementation and management of complex information systems. However,
in many cases, outsourcing itself does not provide an enterprise-wide solution,
but rather simply represents a shift of the information management problems from
the public sector organization to an independent third-party service provider.
A number of software vendors have begun to offer generalized client/server
products to the public sector market, though these are frequently private sector
providers with little public sector industry expertise. Additionally, their
solutions typically are not enterprise-wide and as a result do not enable
multiple departments, such as police and court records departments, to share
information. These solutions often do not fulfill the specific functional
requirements of the public sector marketplace such as complying with government
fund accounting, procurement processes and regulated budgeting processes.
Consequently, public sector organizations frequently experience lengthy and
expensive customization and implementation cycles. Moreover, these solutions may
not be sufficiently flexible to cost-effectively accommodate the ongoing needs
of public sector organizations as they modify and improve their operations.
The deficiencies of these currently available solutions have become
increasingly apparent as organizations have attempted to reengineer their
operations management practices. Organizations are now attempting to identify
and implement preferred approaches within their specific organizations to manage
and control a broad range of operations and information. To implement this
re-engineering, public sector organizations are seeking software solutions that
allow them to manage enterprise-wide information and to distribute that
information to employees and the public. As a result of the increased complexity
and sophistication required to meet new computing challenges, public sector
organizations are demanding robust solutions to their information processing
needs which are based on proven technologies and incorporate the application
knowledge specific to the public sector market.
HTE'S TOTAL ENTERPRISE SOLUTION
The Company's fully-integrated, enterprise-wide software solution enables
public sector and utility organizations to improve delivery of services, reduce
costs, enhance revenue collection, operate successfully within budgetary
constraints, comply with government regulations and improve overall operating
efficiencies. HTE's Total Enterprise Solution is based on 16 years of public
sector and utility expertise and consists of a full suite of software
applications, as well as a complete range of customer services, support and
training. The Company's Total Enterprise Solution provides the following:
INTEGRATED ENTERPRISE-WIDE SOLUTIONS AND DEPTH OF FUNCTIONALITY. HTE offers
a Total Enterprise Solution, currently consisting of 50 applications, which
provides feature-rich systems for financial management, community service,
public safety and justice, and utility management. HTE's products operate as
stand-alone applications or as integrated suites which provide users with a
consistent graphical user interface and the ability to easily access data and
share information between multiple departments and agencies. The Company's
applications are based upon proven technologies and are designed to function in
mission-critical environments.
ADAPTABILITY/FLEXIBILITY/SCALABILITY. HTE solutions are readily adaptable
to meet a customer's initial needs and are designed with sufficient flexibility
to respond to a customer's specific system refinements and ongoing changes once
the system is fully in service. The scalability of the Company's software
applications and the customer's ability to migrate within the Company's product
family allow public sector and utility organizations to increase operating
levels and expand application functionality. In addition, the Company offers
several application programming interfaces to enable customers to develop
customized reporting and satisfy unique requirements.
MULTI-PLATFORM LAYERED SOFTWARE ARCHITECTURE. The Company's layered
software architecture isolates the application logic from the graphical user
interface and database. This feature enables the Company to utilize multiple
platforms and effectively integrate new technologies with existing software. The
layered architecture
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allows customers to protect their investments in information systems while
positioning them to adopt new object-based solutions, high performance servers
and database management systems with no loss of functionality.
CENTRALIZED SYSTEM ADMINISTRATION. System administration is centralized in
HTE solutions, thereby simplifying system management, reducing the need for
in-house system administrators and programmers and mitigating the need for
third-party services. HTE's applications incorporate extensive security features
designed to protect data from unauthorized retrieval or modification. Simplified
menus and data access can be tailored to meet each organization's requirements.
COST EFFECTIVE IMPLEMENTATION METHODOLOGY. The Company utilizes a highly
responsive implementation planning process and focused consulting and training
services specifically designed to satisfy the functionality and deployment needs
of public sector and utilities customers. By offering rapid product deployment
and easy migration among its product lines, the Company seeks to minimize the
productivity interruption to organizations that typically results from the
introduction of new technology, thereby enabling organizations to realize more
quickly the associated benefits.
STRATEGY
The Company's objective is to be the leading provider of enterprise-wide
information solutions to the public sector and utility marketplace. Principal
elements of the Company's strategy include:
PROMOTE INTEGRATED ENTERPRISE-WIDE SOLUTIONS. HTE believes that the
fully-integrated suite of proven, feature-rich applications comprising the
Company's Total Enterprise Solution provides significant opportunities with its
existing customer base as well as with new customers. The Company believes a
substantial opportunity exists to sell additional products to current customers
who have only a few of the Company's applications. HTE also intends to leverage
its robust suite of applications to potential new customers that are currently
looking for a point solution, such as a single department-based application,
but prefer products which may be easily integrated with other applications in
the future. HTE will continue to devote significant resources on marketing
solutions to potential customers seeking enterprise-wide alternatives.
CAPITALIZE ON PUBLIC SECTOR EXPERTISE. The Company intends to capitalize on
its public sector knowledge and experience to enhance sales in existing markets,
such as the utilities market, and expand into new market segments, such as
foreign governments and educational institutions. For over 16 years, the Company
has focused exclusively on the public sector and utilities marketplace. The
Company believes this focus has resulted in the development of a core expertise
and background in areas such as government fund accounting, as well as the
"front-office" and "back-office" mission-critical activities of police, fire and
other emergency personnel. In addition, HTE believes its public sector focus has
allowed the Company to develop a large customer base, with over 1,300
installations across North America. The Company believes the size and geographic
breadth of its customer base offers significant leverage with regards to new
business, since references from existing customers often result in future sales
opportunities.
DELIVER NEW APPLICATIONS AND TECHNOLOGY . The advantages of open systems
are being demanded in the public sector and utilities marketplace. The Company
intends to continue to serve these needs by maintaining its reputation for
proven and effective use of recent advances in technology as they emerge and
gain acceptance by these markets. The Company seeks to develop new applications
and incorporate new product functionality, such as internet integration, object
technology, decision support and wireless communications.
EXPAND SALES FORCE AND MARKETING INITIATIVES. The Company intends to
increase its penetration of the public sector and utilities market by expanding
the distribution of its products into new and existing geographic markets. To
accomplish this expansion, the Company is actively increasing the size of its
direct sales force and is currently implementing a new multi-phased sales
approach combining telemarketing with field sales operations. In addition, the
Company intends to continue to build collaborative relationships with customers
in order to develop new applications and assist customers in keeping pace with
technology and in maintaining compliance with government regulations.
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SUPPLEMENT INTERNAL GROWTH THROUGH STRATEGIC ACQUISITIONS. The Company
views acquisitions as a means of acquiring technology and application expertise,
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 accomplish its objective of becoming the leading provider of
enterprise-wide information solutions to the public sector. Over the past four
years, the Company has supplemented its internal growth with seven strategic
acquisitions.
In connection with its growth strategy, the Company recently acquired the
assets of Kb Systems, Inc. and JALAN, Inc. In December 1997, the Company
purchased the net assets of Kb Systems, Inc. for $400,000. The software
applications acquired from Kb Systems, Inc. are directed to the property
appraisal, assessment, tax and billing activities for governmental
organizations.
In January 1998, the Company purchased the net assets of JALAN, Inc. for $2
million. The software applications acquired from JALAN, Inc. track inmate
information for jails, court cases for general or limited jurisdictions,
defendant case information for the district attorneys' office and the public
defenders' office, civil papers for sheriff departments, case information for
the probation system and claims for victim compensation.
HTE'S INTEGRATED SOFTWARE PRODUCTS
HTE offers fully-integrated enterprise-wide software solutions designed to
automate and integrate the operations of public sector and utility
organizations. The Company has designed its products based on the philosophy
that complete application integration is essential for the effective sharing of
information across an organization. Offering true enterprise-wide integration,
the Company's applications provide more than simple integration; they work
together seamlessly, sharing functions and eliminating redundant data and
repetitive tasks. Transactions are processed by a single application, and the
information is immediately ready for use by other interfaced applications. The
license fee for a typical sale ranges from approximately $80,000 to $500,000,
depending on hardware configurations, number of users and applications licensed.
The following summarizes the Company's applications and the principal
benefits of the integrated application system:
FINANCIAL MANAGEMENT SYSTEMS
12 APPLICATIONS
HTE's Integrated Accounting System provides a comprehensive fund accounting
system that includes general ledger, budgeting, accounts payable, project and
grant management and financial reporting. The system is available in two formats
to accommodate a wide range of accounting practices, while maintaining
compliance with financial reporting guidelines. Integrated Accounting can work
independently or with other HTE applications to provide a completely integrated,
enterprise-wide financial solution.
/bullet/ A comprehensive integrated financial reporting system designed
to monitor organizational goals and performance.
/bullet/ Eliminates redundant data entry and centralizes and minimizes
record management and retrieval of historical information
through interfacing modules.
/bullet/ Complies with Governmental Accounting, Auditing, and Financial
Reporting ("GAAFR") and Government Finance Officers
Association ("GFOA") standards.
/bullet/ Streamlines IRS reporting and offers custom budgeting tools.
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COMMUNITY SERVICE SYSTEMS
12 APPLICATIONS
The Company's systems provide a centralized land and location database
solution which expedites access to property data, building licenses and permits,
code enforcement proceedings, planning and zoning processes, voter registration,
appraisal and assessment, and tax billing and collections. The system also
manages community parks and recreational facilities.
/bullet/ A centralized information system which expedites access to
property data, building licenses and permits, code enforcement
proceedings, planning and zoning processes, appraisals and
assessments, and tax billing and collections.
/bullet/ Generates all documentation and improves revenue tracking,
processing and payment collection.
/bullet/ Routes projects to various agencies and promotes communication
between agencies.
/bullet/ Maintains voter records and tracks voting history.
/bullet/ Manages community parks and recreational facilities.
PUBLIC SAFETY AND JUSTICE SYSTEMS
20 APPLICATIONS
The public safety applications offer police, fire and rescue entities and
other emergency personnel a complete public safety solution through an
integrated suite of applications which provide immediate in-the-field access to
vital information. Such dispatch information includes locations, equipment and
personnel response recommendations and current status of events or incidents.
Applications allow for mobile collection of incident data mandated by state and
federal regulatory agencies and promote greater safety of public service
personnel. Critical communication links for rapid information dissemination in
emergency situations are facilitated by the integration of mobile data
computers, Emergency-911 operations, state and federal computers, and alarm
panels. The justice suite provides a complete centralized system for managing
information and activities associated with jails, court cases, probation,
prosecution, public defense and return of service.
/bullet/ A complete suite of applications which provides critical
information to users in emergency situations through mobile
computing technologies.
/bullet/ Integrates police, fire and emergency medical service
reporting and communications with state and federal
information systems and facilitates sharing of vital
information.
/bullet/ Increases personnel safety and provides for better public
service by allowing police and emergency personnel to remain
in the field.
/bullet/ Promotes effective management of time, staff and facilities
involved in the administration of justice.
UTILITY SYSTEMS
6 APPLICATIONS
The Company offers a suite of integrated products designed to handle a full
range of utility services including electric, water and gas. The flexibility of
these programs lets customers tailor applications to meet specific business
needs. HTE's Customer Information System ("CIS") is capable of interfacing with
software systems which run on open systems platforms and with various databases,
for engineering purposes such as plant maintenance.
/bullet/ A broad utility management system designed to handle a full
range of services including bill processing, equipment
management and customer service information.
/bullet/ Provides immediate access to customer information and work
orders and tracks assets and resources.
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HTE'S LAYERED SOFTWARE ARCHITECTURE
The Company's layered software architecture isolates the application logic
from the graphical user interface and the database. While the layered
architecture enables the Company's products to run on a variety of platforms,
most of the Company's customers have selected the IBM AS/400 platform.
This approach permits application code containing the business logic to
operate across all supported platforms such as the Hewlett-Packard, Siemens, IBM
RS/6000 and AS/400 in their native runtime environments. Applications can be
implemented on multiple platforms with no loss of functionality. Additionally,
the applications operate on systems running databases such as IBM DB2/400,
Oracle and Datagate. Currently, the client workstation software provides a
graphical user interface to the Company's applications. The applications may be
deployed on a variety of client operating systems, including Microsoft Windows,
Windows 95, Windows NT and IBM OS/2. The Company's layered software architecture
requires that only the adapter code layer, and not the application code, be
reconfigured to enable HTE applications to operate on additional platforms,
databases, or operating systems. This layered architecture allows customers to
protect their investments in information systems while positioning them to adapt
to emerging operating systems, high performance servers and databases. Also, the
scalability of the Company's applications allows users to extend their systems
to accommodate facility expansion. The Company is currently developing server
applications on the Intel platform using the Windows NT operating system. The
Company's architecture also allows for easy implementation of an internet-based
browser interface. In addition, the Company is currently developing its next
generation of applications based upon a three-tiered object-oriented approach.
This approach utilizes existing database and server code while utilizing a
Windows NT-based application server.
CUSTOMER SERVICE
HTE offers a range of services, including implementation support, customer
support, education and training and professional consulting services. The
Company continues to devote substantial resources toward improvements in
customer service and has recently implemented a new Customer Care Program.
IMPLEMENTATION SUPPORT PROGRAM. HTE offers its customers an Implementation
Support Program with an initial system order or with a significant upgrade to an
existing system. The Implementation Support Program provides a variety of
project management and consulting services to assist in implementation and
deployment of HTE's enterprise solutions. The Company offers a variety of
site-specific technical and consulting services to assist in all phases of the
implementation process. HTE may also provide assistance in integrating its
products with the customer's existing software.
CUSTOMER SUPPORT PROGRAM. For ongoing support, HTE offers its customers a
Comprehensive Support Program. The Company provides product enhancements and
updates that maintain a customer's software and documentation. The Comprehensive
Support Program also includes hotline telephone support, which is available 24
hours per day, seven days per week. As a separately priced option, customers can
extend this support to personal computers, networks and hardware systems.
Recently, the Company expanded this service to include a Customer Care Program
whereby customers are called at predetermined time schedules to identify needs
for service, support or new product offerings.
Through its HTE User Group ("HUG"), the Company involves its customers and
end-users to help identify new functions and product features that offer the
greatest benefit. The Company believes that HUG seminars assist the Company in
the development and support of products.
EDUCATION AND TRAINING. HTE offers education and training services that
provide customers with a formalized program to ensure that applications are
implemented and utilized in an efficient and cost-effective manner. Customers
are also offered a variety of software installation, technical support and user
training services, both on-site and in HTE's training centers. Customized
education and training programs are also available to meet a customer's specific
development needs. Education and training services are priced separately.
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PROFESSIONAL CONSULTING SERVICES. The Company offers professional
consulting services that extend beyond standard maintenance contracts. These
services include project management, hardware and software installation,
classroom education, on-site training, conversion planning and programming
services. Additional services include custom applications analysis, design,
development, training and deployment for most of HTE's applications.
SALES AND MARKETING
The Company sells its products in North America through a direct sales
force. As of December 31, 1997, the Company had 72 employees in its sales and
marketing organization, including sales representatives, pre-sale consultants,
telemarketers, sales management, proposal specialists, product demonstrators and
systems hardware specialists. The Company employs a variety of business
development and marketing techniques to communicate directly with current and
prospective customers. These techniques include exhibiting at trade shows,
holding seminars for clients and prospective clients on technology and industry
issues, marketing through targeted mail campaigns and publishing SOLUTIONS
Magazine (a semi-annual Company publication).
The Company has implemented a new sales strategy which includes
sophisticated prospect development and sales cycle management processes. HTE
uses a combination of electronic prospective client databases, computer aided
telemarketing and field sales methodologies to identify potential candidates for
its Total Enterprise Solution systems. The Company believes this process
accounts for a large percentage of the Company's new accounts and lessens the
time spent by field sales representatives prospecting unqualified leads.
Prospective HTE customers are monitored through a comprehensive prospect
management system that segments the sales cycle into several phases, each with
multiple measurement points, to assess properly the prospective client base.
The Company's sales strategy also emphasizes a "regionalization" concept.
HTE believes a strong local presence is an important factor in addressing the
needs of local governments and establishing long-term relationships. Under the
Company's regionalization approach, the Company has decentralized much of its
client development, customer service and customer account responsibilities. HTE
has regional centers in Boston, Houston, Irvine, Lake Mary and Phoenix. In
addition, HTE has local offices in ten other locations across the U.S. and one
in Canada.
A key aspect of the Company's sales and marketing strategy is to build and
maintain strong relationships with businesses that the Company believes play a
role in the successful marketing of its software products. The Company's
customers and potential customers often rely on third-party system integrators
to develop, deploy and manage information systems. These providers include
software and hardware vendors and technology consulting firms, some of which are
active in the selection and implementation of information systems for
organizations that comprise the Company's principal customer base. HTE has
maintained strategic relationships with companies such as IBM, Hewlett-Packard,
Software Corporation of America, Oracle Corporation and Seagull Software. The
Company believes that its marketing and sales efforts are enhanced by the
worldwide presence of many of these companies. HTE has conducted several joint
marketing and sales programs with these vendors, including seminars, direct mail
campaigns and trade show appearances.
CUSTOMERS
The Company provides fully-integrated, enterprise-wide software solutions
to state, city and county governments, utilities, transportation authorities,
parks and recreation departments and police, fire and emergency personnel. As of
December 31, 1997, the Company had over 1,300 customers, including installations
in all 50 U.S. states. No customer accounted for more than 5% of total revenues
for the period ended December 31, 1997.
PRODUCT DEVELOPMENT
HTE's product development efforts are focused on the enhancement of its
existing products and expansion of its enterprise system. At December 31, 1997,
HTE had 118 full-time employees in product development. HTE plans to continue to
enhance its applications to suit the evolving needs of the public sector and
utilities market. In particular, HTE intends to develop additional functionality
on existing application modules and to create new modules.
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Additionally, HTE seeks to improve and expand its object development
environment, with two fundamental objectives: (i) continued user empowerment
with an emphasis on ease-of-use and (ii) increased flexibility to modify base
products in order to suit specific customer requirements. The Company
incorporates a System Change Program whereby if the development of a custom
feature for a particular client is practical or in demand, such a feature will
be deployed within the next version of the Company's software. The Company
believes that HUG seminars assist the Company in development and sale of
products. All product development enhancements of applications, regardless of
scope, are created using HTE's published guidelines for standards and
conventions.
HTE plans to continue to add new products and services, both through
internal development and potential acquisitions, to leverage the Company's core
technologies and expertise. In the development of new applications, the Company
intends to strive to allow customers to utilize existing systems while at the
same time allowing customers to take advantage of advances in network systems,
platforms, database and other relevant technologies. The Company's gross
development expenditures were $8.1 million, $5.4 million, and $5.7 million for
year ended December 31, 1997, the nine months ended December 31, 1996, and for
the year ended March 31, 1996, respectively.
COMPETITION
The Company faces competition from a variety of software vendors that offer
products and services similar to those offered by the Company and from companies
offering to develop custom software. Certain competitors have greater technical,
marketing and financial resources than the Company. The Company also competes
with in-house management information services staffs. The Company believes
competitive differentiators are functionality, product flexibility, ease of
implementation in adapting product to individual customers' needs without custom
programming, enterprise product breadth, individual product features, service
reputation and price.
The Company believes the market is highly fragmented with a large number of
competitors that vary in size, primary computer platforms and overall product
scope. Within its markets, the Company competes from time to time with (i)
custom software and services providers such as Andersen Consulting, KPMG Peat
Marwick, and Oracle Corporation, (ii) companies which focus on selected segments
of the public sector market including PeopleSoft, Inc., Systems Computer &
Technology, Inc., J.D. Edwards & Company, Inc. and (iii) a significant number of
smaller private companies. Many of these companies do not focus exclusively on
the public sector or offer fully-integrated enterprise-wide software
applications. There can be no assurance that such competitors will not develop
products or offer services that are superior to the Company's products or
services or that achieve greater market acceptance.
The Company could face additional competition as other established and
emerging companies enter the Company's public sector software application market
and new products and technologies are introduced. Increased competition could
result in price reductions, fewer customer orders, reduced gross margins and
loss of market share, any of which could materially adversely affect the
Company's business, operating results and financial condition. In addition,
current and potential competitors may make strategic acquisitions or establish
cooperative relationships among themselves or with third-parties, thereby
increasing the ability of their products to address the needs of the Company's
prospective customers. Accordingly, it is possible that new competitors or
alliances among current and new competitors may emerge and rapidly gain
significant market share. Further, competitive pressures could require the
Company to reduce the price of its software licenses and related services, which
could materially adversely affect the Company's business, operating results and
financial condition. There can be no assurance that the Company will be able to
compete successfully against current and future competitors, and the failure to
do so would have a material adverse effect upon the Company's business,
operating results and financial condition.
INTELLECTUAL PROPERTY, PROPRIETARY RIGHTS AND LICENSES
The Company regards certain features of its internal operations, software
and documentation as confidential and proprietary, and relies on a combination
of contract and trade secret laws and other measures to protect its proprietary
intellectual property. The Company has no patents and, under existing copyright
laws, has only limited protection. The Company believes that, due to the rapid
rate of technological change in the computer software
10
<PAGE>
industry, trade secret and copyright protection are less significant than
factors such as knowledge, ability and experience of the Company's employees,
frequent product enhancements and timeliness and quality of support services.
The Company provides its products to customers under exclusive licenses,
which generally are non-transferable and have a perpetual term. The Company
generally licenses its products solely for the customer's internal operations
and only on designated computers. In certain circumstances, the Company makes
enterprise-wide licenses available for select applications. The Company provides
source code to its customers for several products and has escrowed its source
code for the benefit of all customers. The provision of source code may increase
the likelihood of misappropriation or other misuse of the Company's intellectual
property. See "Factors That May Affect Future Results and Market Price of
Stock-Proprietary Rights, Risks of Infringement and Source Code Release."
From time to time, the Company licenses software from third-parties for use
with its products. Typically, the Company resells such third-party software
products as an integrated part of one or more of the applications included in
HTE's Total Enterprise Solution. The Company believes that no such license
agreement to which it is presently a party is material and that if any such
license agreement were to terminate for any reason, the Company would be able to
obtain another license or otherwise acquire other comparable technology or
software on terms that would not be materially adverse to the Company.
EMPLOYEES
As of December 31, 1997, the Company employed 449 people, including 72 in
sales and marketing, 118 in product development, 96 in customer support and
field services, 103 in professional services and 60 in administration. The
Company's success will depend in large part upon its ability to continue to
attract and retain qualified employees. None of the Company's employees is
represented by a labor union or is subject to a collective bargaining agreement.
The Company believes that its relations with its employees are good.
ITEM 2. PROPERTIES
In June 1997, the Company moved its headquarters to Lake Mary, Florida,
where it leases an aggregate of approximately 87,000 square feet in the Heathrow
International Business Center. Administrative, marketing, product development
and customer support and service operations are located in this space. The
initial lease term for the new headquarters expires ten years from the
commencement date of the lease, and may be renewed by HTE for up to three
consecutive renewal terms of five years each. In connection with the lease, HTE
entered into an expansion agreement pursuant to which it may, at its option
during the term of the main lease, lease two additional office buildings in the
Heathrow Business Center, each of which would contain approximately 27,000 to
40,000 gross square feet of space. The Company also leases an aggregate of
approximately 19,000 additional square feet of office space in various other
locations which are used for sales offices.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. The Company is
not a party to any legal proceedings, the adverse outcome of which, individually
or in the aggregate, would have a material adverse effect on the Company's
results of operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
Company's fourth quarter ended December 31, 1997.
11
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
HTE's common stock is traded on the National Market System of the NASDAQ
Stock Market under the symbol "HTEI". The number of shareholders of record as of
February 27, 1998 was 41; however the number of beneficial holders is
approximately 1,127. The closing price per share on that date was $21.00.
The table below sets forth information, for each quarter in 1997 during
which HTE's common stock was traded, concerning the high and low sales prices.
Quotations for such periods are as reported by NASDAQ for National Market
Issues. HTE stock was not publicly traded prior to June 11, 1997, and,
therefore, there is no data for the first quarter in 1997 or for any quarters in
1996.
STOCK PRICE RANGE
-------------------------------
HIGH LOW
------------- --------------
1997
Second Quarter $ 11 $ 10-1/4
Third Quarter $ 15-1/4 $ 10-1/2
Fourth Quarter $ 20 $ 14-5/8
Such market quotations reflect inter-dealer prices, without retail mark-up,
mark-down, or commission and may not necessarily represent actual transactions.
The transfer agent for HTE's common stock is Continental Stock Transfer and
Trust Company.
HTE has not paid cash dividends in the past and does not intend to pay cash
dividends in the forseeable future. HTE presently intends to retain earnings for
use in its business with any future decision to pay cash dividends dependent on
its growth, profitability, financial condition and other factors the Board of
Directors may deem relevant.
USE OF PROCEEDS FROM INITIAL PUBLIC OFFERING
The Company's registration statement for its initial public offering of
common stock (SEC File No. 333-22637) was declared effective by the SEC on June
10, 1997. A total of 2,875,000 shares of common stock were registered for offer
and sale for an aggregate offering price of $31,625,000. The Company's
representatives for the offering were Volpe Brown Whelan & Company and Janney
Montgomery Scott Inc. Of the shares of common stock initially offered, 1,950,000
shares were sold by the Company for gross proceeds of $21,450,000 and 550,000
shares were sold by certain selling shareholders for gross proceeds of
$6,050,000. In July 1997, the underwriters exercised their option to purchase
375,000 additional shares of common stock to cover over-allotments, for gross
proceeds to the Company of $4,125,000.
The net proceeds from the sale of the 2,325,000 shares of common stock
offered by the Company were approximately $22.6 million (includes the
underwriters' over-allotment option of 375,000 shares which were exercised in
July), after deducting underwriting commissions and discounts of $1.8 million
and other expenses of $1.2 million, for an aggregate total of $3.0 million. The
selling shareholders paid their respective underwriters commissions ($424,000),
while the Company paid the remaining discounts and expenses on their behalf. The
Company used a portion of the proceeds ($2.3 million) to repay its revolving
credit facility, which matures on June 30, 1998, and bears interest at the
fluctuating prime rate plus 1.25%. Amounts repaid on the revolving credit
facility may be reborrowed. The Company also paid the $300,000 aggregate
principal balance on notes payable to related parties which arose from the
purchase of Bellamy. The sum of $624,000 in accrued dividends was paid to
holders of mandatorily redeemable preferred stock. Additionally, $2.4 million
will be used for the acquisition of Kb Systems,
12
<PAGE>
Inc. and JALAN, Inc. The Company has invested the remaining net proceeds in
short-term, investment grade, interest-bearing securities.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements and the Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Form 10-K. The following
selected consolidated financial data of the Company as of and for the year ended
December 31, 1996, as of and for the nine months ended December 31, 1995, and as
of and for the year ended March 31, 1994, have been derived from unaudited
consolidated financial statements of the Company. In the Company's opinion, such
unaudited consolidated financial statements reflect all adjustments, consisting
only of normal recurring adjustments (except for the effect of the change in the
estimated life of capitalized computer software development costs), necessary
for a fair presentation of the financial position and results of operations for
such periods. The selected consolidated financial data of the Company as of
December 31, 1996 and 1997, and March 31, 1995 and 1996, and for the periods
ended March 31, 1995 and 1996, and December 31, 1996 and 1997, have been derived
from and are qualified by reference to the Company's Consolidated Financial
Statements audited by Arthur Andersen LLP, independent certified public
accountants.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
YEAR ENDED MARCH 31, DECEMBER 31, DECEMBER 31,
-------------------------------- ------------------- -----------------------
1994 1995 1996 1995 1996 1996 1997
--------- -------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues:
Software licenses $6,149 $9,808 $11,151 $6,552 $9,139 $13,738 $24,097
Professional services 3,087 3,666 6,203 4,528 5,586 7,261 8,927
Hardware 1,757 921 6,157 4,788 7,435 8,804 10,898
Maintenance and other 3,591 5,311 6,689 4,805 6,528 8,412 12,047
Resource management - - - - - - 448
--------- -------- -------- -------- -------- --------- ---------
Total revenues 14,584 19,706 30,200 20,673 28,688 38,215 56,417
--------- -------- -------- -------- -------- --------- ---------
Operating Expenses:
Cost of software licenses 1,379 1,280 3,396 2,647 2,402 3,151 5,094
Cost of professional services 2,942 3,452 5,029 3,823 3,223 4,429 5,390
Cost of hardware 1,116 719 4,822 3,741 5,890 6,971 8,605
Cost of maintenance and other 2,090 3,246 3,118 2,317 2,216 3,017 5,414
Cost of resource management - - - - - - 343
Research and development 1,604 2,006 3,491 2,586 3,729 4,634 5,715
Sales and marketing 2,293 3,829 4,666 3,312 5,228 6,582 10,547
General and administrative 4,179 4,219 5,041 3,640 4,394 5,795 9,051
--------- -------- -------- -------- -------- --------- ---------
Total operating expenses 15,603 18,751 29,563 22,066 27,082 34,579 50,159
--------- -------- -------- -------- -------- --------- ---------
Income (loss) from operations (1,019) 955 637 (1,393) 1,606 3,636 6,258
Interest expense (income) 135 104 127 70 191 248 (227)
--------- -------- -------- -------- -------- --------- ---------
Income (loss) before income
taxes (1,154) 851 510 (1,463) 1,415 3,388 6,485
Provision (benefit) for income
taxes (109) 139 211 (605) 581 1,397 2,482
--------- -------- -------- -------- -------- --------- ---------
Net income (loss) (1,045) 712 299 (858) 834 1,991 4,003
Accretion and accrual of
dividends on mandatorily
redeemable preferred stock - (84) (184) (138) (1,003) (1,049) (1,308)
--------- -------- -------- -------- -------- --------- ---------
Net income (loss) attributable
to common stockholders $ (1,045) $628 $115 $ (996) $ (169) $942 $2,695
========= ======== ======== ======== ======== ========= =========
Proforma provision (benefit)
for income taxes (353) 249 - - - - -
--------- -------- -------- -------- -------- --------- ---------
Proforma net income (loss)
available to common
stockholders $ (692) $379 $115 $ (996) $(169) $942 $2,695
========= ======== ======== ======== ======== ========= =========
Proforma net income (loss)
per common and
common equivalent share:
Basic $ (0.34) $0.18 $0.06 $ (0.17) $ 0.16 $ 0.38 $ 0.61
========= ======== ======== ======== ======== ========= =========
Diluted $ (0.34) $0.18 $0.06 $ (0.17) $ 0.16 $ 0.38 $ 0.58
========= ======== ======== ======== ======== ========= =========
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
------------------------------------ ---------------------------
1994 1995 1996 1996 1997
---------- -------- ---------- ------------- ------------
Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 737 $ 1,653 $ 388 $ 740 $ 18,466
Working capital (deficit) (3,173) (919) (916) (354) 23,644
Total assets 8,180 13,786 17,941 24,781 51,658
Long-term debt 150 75 - 240 -
Total stockholders' equity
(deficit) (591) (629) (552) (722) 29,794
</TABLE>
(1) Prior to their October 31, 1994, acquisition, certain businesses acquired by
the Company were taxed as S corporations. The pro forma net income (loss) for
the years ended March 31, 1993, 1994 and 1995 reflects historical data as
adjusted for all income being taxed as a C corporation. See Note 10 of Notes to
Consolidated Financial Statements.
(2) Proforma basic and diluted net income per common and common equivalent share
was determined assuming the conversion of the mandatorily redeemable preferred
stock and the mandatorily redeemable Class C common stock into the Company's
common stock as of the date it was first issued. Common share equivalents
included in the diluted calculation are computed using the treasury stock method
and consist of common stock which may be issuable upon the exercise of
outstanding stock options, when dilutive.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
HTE develops, markets, implements and supports fully-integrated
enterprise-wide software applications designed specifically for public sector
organizations, including state, county and city governments, other municipal
agencies and both public and private utilities. HTE's fully-integrated
enterprise-wide software applications are designed to enable these organizations
to improve delivery of services, reduce costs, enhance revenue collection,
operate successfully within budgetary constraints, comply with government
regulations and improve overall operating efficiencies. The Company's Total
Enterprise Solution currently includes 50 applications addressing four
functional areas: financial management systems, community service, public safety
and justice, and utility management. The Company's products operate as
integrated suites of applications or as stand-alone applications and function
with a variety of computer and network hardware, operating systems, database
software and desktop software provided by other vendors.
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 derived principally from (i) software
licenses, (ii) professional services, (iii) hardware, (iv) maintenance/other and
(v) resource management. Revenues from software licenses are generated from
contracts that grant the right to use the Company's software products. Revenues
from professional services are derived from a variety of services, including
project management, custom programming, consulting, conversion and education
programs, systems planning and integration and other services. Hardware revenues
include sales of computers, data collection equipment, peripherals and related
network and communications products purchased from third-parties and sold by the
Company to its customers. Maintenance and other revenues include revenues
associated with software maintenance and support services. Resource management
revenues arise from a fixed monthly fee assessed to the customer.
The Company recognizes revenue 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 cost-plus-fixed-fee
basis, although the Company also provides certain services on a
time-and-material basis, depending on the overall project scope, project risks
and client requirements. Professional services are recognized as services are
performed. Hardware revenues are recognized at the time the products are
shipped. Revenues from maintenance and other are recognized ratably over the
term of the applicable maintenance agreement. Resource management revenues are
recognized monthly according to the monthly fee the customer is paying.
14
<PAGE>
The sales cycle for the Company's systems is typically six to 18 months
from initial contact to contract signing. The product delivery cycle is variable
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. Accordingly, the product delivery
cycle depends upon the combination of products purchased and the defined
implementation plan.
The Company capitalizes software development for costs associated with the
development of product masters incurred subsequent to establishing technological
feasibility. This methodology is in accordance with Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer Software to
be Sold, Leased, or Otherwise Marketed." These costs relate primarily to the
development of new products and major enhancements to existing products to
accommodate new markets or platforms using existing technologies and programming
methods. The capitalized costs are amortized on a straight-line basis over a
36-month period, commencing when each product is available to the market.
Effective April 1, 1995, management changed the estimated useful life of
capitalized computer 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
licenses revenue from 18.5% to 30.5% for the year ended March 31, 1996.
In fiscal year 1995, the Company entered into a new remarketer agreement
with IBM. Prior to fiscal 1996, the Company derived hardware revenues primarily
from royalties for customer referrals. This new arrangement resulted in an
increase of hardware revenues and associated costs of hardware. This increase in
revenue was derived principally from the sale of AS/400 systems.
The Company derives substantially all of its revenues from domestic
operations. In November 1996, HTE established a presence in Canada through the
acquisition of Bellamy. Effective December 31, 1996, the Company changed its
fiscal year end from March 31 to December 31 to conform to industry practices.
15
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of total revenues represented by certain revenue, expense and income items:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
----------------------- -------------------- ----------------------
MARCH 31, MARCH 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31,
1995 1996 1995 1996 1996 1997
---------- ---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Software licenses 49.8 % 36.9 % 31.7 % 31.9 % 36.0 % 42.7 %
Professional services 18.6 20.6 21.9 19.5 19.0 15.8
Hardware 4.7 20.4 23.2 25.9 23.0 19.3
Maintenance and other 26.9 22.1 23.2 22.7 22.0 21.4
Resource management - - - - - 0.8
---------- ---------- ---------- --------- ---------- ----------
Total revenues 100.0 100.0 100.0 100.0 100.0 100.0
---------- ---------- ---------- --------- ---------- ----------
Expenses:
Cost of software licenses 6.5 11.2 12.8 8.4 8.3 9.0
Cost of professional services 17.5 16.7 18.5 11.3 11.6 9.6
Cost of hardware 3.7 16.0 18.1 20.5 18.2 15.3
Cost of maintenance and other 16.5 10.3 11.2 7.7 7.9 9.6
Cost of resource management - - - - - 0.6
Research and development 10.2 11.6 12.5 13.0 12.1 10.1
Sales and marketing 19.4 15.4 16.0 18.2 17.2 18.7
General and administrative 21.4 16.7 17.6 15.3 15.2 16.0
---------- ---------- ---------- --------- ---------- ----------
Total operating expenses 95.2 97.9 106.7 94.4 90.5 88.9
---------- ---------- ---------- --------- ---------- ----------
Income (loss) from operations 4.8 2.1 (6.7) 5.6 9.5 11.1
Interest expense (income) 0.5 0.4 0.3 0.7 0.6 (0.4)
---------- ---------- ---------- --------- ---------- ----------
Income (loss) before income taxes 4.3 1.7 (7.0) 4.9 8.9 11.5
Provision (benefit) for income taxes 0.7 0.7 (2.9) 2.0 3.7 4.4
---------- ---------- ---------- --------- ---------- ----------
Net income (loss) 3.6 % 1.0 % (4.1) % 2.9 % 5.2 % 7.1 %
========== ========== ========== ========= =========== ==========
</TABLE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996
REVENUES. The Company's total revenues were $56.4 million for the year
ended December 31, 1997 compared to $38.2 million for the year ended December
31, 1996, an increase of $18.2 million or 47.6%. Revenues from software licenses
were $24.1 million for the year ended December 31, 1997 compared to $13.7
million for the year ended December 31, 1996, an increase of $10.4 million or
75.4%, as a result of an increased number of applications available for sale and
an increased investment in sales and marketing. Revenues from professional
services were $8.9 million for the year ended December 31, 1997 compared to $7.3
million for the year ended December 31, 1996, an increase of $1.7 million or
22.9%, as the Company increased the number of services offered. Hardware
revenues were $10.9 million for the year ended December 31, 1997 compared to
$8.8 million for the year ended December 31, 1996, an increase of $2.1 million
or 23.8%, as the Company expanded its third-party re-marketing sales through
IBM. Revenues from maintenance and other were $12.0 million for the year ended
December 31, 1997 compared to $8.4 million for the year ended December 31, 1996,
an increase of $3.6 million or 43.2%, as a result of maintenance contracts
associated with new software licenses, customer system upgrades and price
increases in the fees charged for annual maintenance.
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 outsourcing contract with Seminole
County, Florida, with anticipated revenues of $8 million contracted over five
years. Outsourcing revenue for the year ended December 31, 1997 was $448,000.
COST OF REVENUES. Cost of software licenses, which includes third-party
royalties and amortization of computer software development costs, was $5.1
million for the year ended December 31, 1997 compared to $3.2 million for the
year ended December 31, 1996, an increase of $1.9 million or 61.7%, as a result
of an increased number of
16
<PAGE>
software licenses. Cost of professional services, which consists primarily of
personnel costs and other costs related to the services business, was $5.4
million for the year ended December 31, 1997 compared to $4.4 million for the
year ended December 31, 1996, an increase of $961,000 or 21.7%, as a result of
the growth in professional services revenue. Cost of hardware, which consists
primarily of costs payable to vendors for hardware, was $8.6 million for the
year ended December 31, 1997 compared to $7.0 million for the year ended
December 31, 1996, an increase of $1.6 million or 23.4%, which is directly
related to the increased hardware sales. Cost of maintenance and other for the
year ended December 31, 1997 was $5.4 million compared to $3.0 million for the
year ended December 31, 1996, an increase of $2.4 million or 79.4%, due to
investment in new customer support processes, increased personnel to enhance
products and additional computer equipment required to handle GUI interfaces to
the AS/400. The cost of resource management expenses is comprised primarily of
salaries and a portion of the Company's overhead for on-site staff. The cost for
1997 was $343,000 on revenue of $448,000, or a 23.4% margin.
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
were $5.7 million for the year ended December 31, 1997 compared to $4.6 million
for the year ended December 31, 1996, an increase of $1.1 million or 23.3%, 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.
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 were $10.5 million for the year ended December 31, 1997
compared to $6.6 million for the year ended December 31, 1996, an increase of
$4.0 million or 60.2%. This increase was 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 were $9.1 million for the year ended December 31, 1997
compared to $5.8 million for the year ended December 31, 1996, an increase of
$3.3 million or 56.2%. This increase was due to additional staffing, additional
space and additional computer equipment and software required to build the
infrastructure to support the Company's growth.
COMPARISON OF NINE MONTHS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995
REVENUES. The Company's total revenues were $28.7 million for the nine
months ended December 31, 1996 compared to $20.7 million for the nine months
ended December 31, 1995, an increase of $8.0 million, or 38.8%. Revenues from
software licenses were $9.1 million for the nine months ended December 31, 1996
compared to $6.6 million, an increase of $2.6 million or 39.5%, as a result of
an increase in the number of applications available for sale combined with the
benefits of an increased investment in sales and marketing. Revenues from
professional services were $5.6 million for the nine months ended December 31,
1996 compared to $4.5 million for the nine months ending December 31, 1995, an
increase of $1.1 million, or 23.4%, as the Company increased the number of its
service offerings. Hardware revenues were $7.4 million for the nine months ended
December 31, 1996 compared to $4.8 million for the nine months ended December
31, 1995, an increase of $2.6 million or 55.3%, as the Company expanded its
third-party remarketing sales through IBM. Revenues from maintenance and other
were $6.5 million for the nine months ended December 31, 1996, compared to $4.8
million for the nine months ended December 31, 1995, an increase of $1.7
million, or 35.9%, as a result of maintenance contracts associated with new
software licenses, customer system upgrades and prices increases in the fees
charged for annual maintenance.
COST OF REVENUES. Cost of software licenses was $2.4 million for the nine
months ended December 31, 1996 compared to $2.6 million for the nine months
ended December 31, 1995, a decrease of $245,000 or 9.3%. This was due to the
acceleration of amortization of computer software development costs of $1.0
million during the year ended March 31, 1996 as a result of the change in the
estimated useful life from 60 months to 36 months. Taking into account the
change in estimated useful life adjustment, the normalized increase was
$755,000, or 45.8%, for the
17
<PAGE>
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 was $3.2
million for the nine months ended December 31, 1996 compared to $3.8 million for
the nine months ended December 31, 1995, a decrease of $600,000, or 15.7%, a
result of minimizing non-billable travel and other administrative costs as this
line of business expanded. Cost of hardware was $5.9 million for the nine months
ended December 31, 1996 compared to $3.7 million for the nine months ended
December 31, 1995, an increase of $2.1 million, or 57.4%, which is directly
related to increased sales of hardware. Cost of maintenance and other for the
nine months ended December 31, 1996 was $2.2 million compared to $2.3 million
for the nine months ended December 31, 1995, a decrease of $101,000, or 4.4%.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$3.7 million for the nine months ended December 31, 1996 compared to $2.6
million for the nine months ended December 31, 1995, an increase of $1.1
million, or 44.2%, due to increased staffing levels and associated costs.
SALES AND MARKETING EXPENSES. Sales and marketing expenses were $5.2
million for the nine months ended December 31, 1996 compared to $3.3 million for
the nine months ended December 31, 1995, an increase of $1.9 million, or 57.9%.
This increase was 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
were $4.4 million for the nine months ended December 31, 1996 compared to $3.6
million for the nine months ended December 31, 1995, an increase of $754,000, or
20.7%. This increase was due to additional staffing in finance and accounting,
human resources and contract administration required to support the Company's
growth.
COMPARISON OF FISCAL YEARS ENDED MARCH 31, 1996 AND MARCH 31, 1995
REVENUES. The Company's total revenues were $30.2 million for the year
ended March 31, 1996 compared to $19.7 million for the year ended March 31,
1995, an increase of $10.5 million, or 53.3%. Software licenses were $11.2
million for the year ended March 31, 1996 compared to $9.8 million for the year
ended March 31, 1995, an increase of $1.3 million, or 13.7%, as result of new
software licenses. Professional services were $6.2 million for the year ended
March 31, 1996 compared to $3.7 million for the year ended March 31, 1995, an
increase of $2.5 million, or 69.2%, as the Company began to expand its
professional services business. Hardware revenues were $6.2 million for the year
ended March 31, 1996 compared to $921,000 for the year ended March 31, 1995, an
increase of $5.2 million, or 568.5%, as the Company entered into a new
remarketing agreement with IBM. Revenues from maintenance and other were $6.7
million for the year ended March 31, 1996 compared to $5.3 million for the year
ended March 31, 1995, an increase of $1.4 million, or 25.9%, as a result of new
software licenses and customer system upgrades.
COST OF REVENUES. Cost of software licenses was $3.4 million for the year
ended March 31, 1996 compared to $1.3 million for the year ended March 31, 1995,
an increase of $2.1 million, or 165.3%. This increase is primarily due to the
acceleration of software development capitalization amortization of $1.3 million
during the year ended March 31, 1996 as a result of the change in useful life
from 60 months to 36 months. Taking into account the change in life adjustment,
the normalized increase from the year ended March 31, 1996 compared to the year
ended March, 31 1995 was $786,000, primarily due to additional costs associated
with third-party products. Cost of professional services was $5.0 million for
the year ended March 31, 1996 compared to $3.5 million for the year ended March
31, 1995, an increase of $1.6 million, or 45.7%, a result of expanding to offer
full service professional services. Cost of hardware revenues was $4.8 million
for the year ended March 31, 1996 compared to $719,000 for the year ended March
31, 1995, a $4.1 million increase, or 570.7%, directly related to the increased
revenue from year to year. Cost of maintenance and other for the year ended
March 31, 1996 was $3.1 million compared to $3.2 million for the year ended
March 31, 1995, a decrease of $128,000, or 3.9%.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$3.5 million for the year ended March 31, 1996 compared to $2.0 million for the
year ended March 31, 1995, an increase of $1.5 million, or 74.0%, due to
increased staffing levels and associated costs.
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<PAGE>
SALES AND MARKETING EXPENSES. Sales and marketing expenses were $4.7
million for the year ended March 31, 1996, compared to the $3.8 million for the
year ended March 31, 1995, an increase of $837,000, or 21.9%. This increase was
attributable to travel and other expenses related directly to increased sales
activity.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $5.0 million for the year ended March 31, 1996 compared to $4.2 million for
the year ended March 31, 1995, an increase of $822,000, or 19.5%. This increase
was due to additional staffing and related expenses in finance and accounting,
human resources and contract administration required to support comparison
expansion.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has funded its operations primarily through cash
generated from operations, supplemented by borrowings under a bank line of
credit and the private sale of certain 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 offering, net of issuance costs. Cash
flow provided by operating activities was $4.6 million and $2.9 million for the
years ended December 31, 1997 and 1996, on net income of $4.0 million and $2.0
million respectively. Cash flow provided by (used in) operating activities was
$2.1 million and $(887,000) for the nine months ended December 31, 1996 and
1995, on net income (loss) of $834,000 and $(858,000), respectively. Cash flow
provided by (used in) operating activities was $(104,000) and $1.4 million for
the fiscal years ended March 31, 1996 and 1995, on net income of $299,000 and
$712,000, respectively.
Cash used in investing activities (capital expenditures, software
development investments and acquisitions) totaled $6.2 million and $2.8 million
for the years ended December 31, 1997 and 1996, respectively. Cash used in
investing activities totaled $2.2 million for each of the nine months ended
December 31, 1996 and 1995. Cash used in investing activities totaled $2.8
million and $1.9 million in the fiscal years ended March 31, 1996 and 1995,
respectively. In 1997, the Company made significant investments in leasehold
improvements related to the new office facility in Lake Mary and also acquired
the assets of Kb Systems, Inc. The increase in restricted cash reflects cash
held in escrow related to the JALAN, Inc. acquisition (See Note 1 to the
financial statements). Capital expenditures were primarily 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 $2.1 and
$2.3 million on an annual basis related to software development efforts for
additional products and platforms.
Net cash provided by financing activities was $19.4 million in the year
ended December 31, 1997, compared to $333,000 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 preferred stock and
pay-off of a note payable to related parties. Cash flow provided by financing
activities was $431,000 for the nine months ended December 31, 1996, relating
primarily to the issuance of capital stock which raised $252,000 and net
borrowings of $179,000. For the 12-month period ended March 31, 1996, net cash
provided by financing activities was $1.7 million comprised of $1.9 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 $1.4 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.
On January 16, 1997, the Company entered into an Advised Line of Credit
Agreement (the "Loan Agreement") with Barnett Bank, N.A. (the "Bank"), under
which the Bank extended a line of credit of up to a maximum borrowing amount of
$6.0 million with an expiration date of June 30, 1998. Borrowings under the Loan
Agreement are collateralized by accounts receivable, inventory, equipment,
furniture, furnishings, fixtures and intellectual property. The line of credit
bears interest at the Bank's prime interest rate plus 1.25% per annum. The
Company may not declare or pay any dividends on any shares of common stock of
the Company now or hereafter outstanding, without the Bank's prior written
consent. There are no borrowings currently outstanding under this line.
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<PAGE>
The Company believes its cash balances, cash generated from operations and
borrowings available under its line of credit 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. In the normal course of business, the Company evaluates
acquisitions of businesses, products and technologies that complement the
Company's business.
The Company signed a definitive agreement and plan of merger, dated March
10, 1998, to acquire privately held Phoenix Systems, LLC of Southbury,
Connecticut, in exchange for newly issued shares of the Company's common stock
valued at $3,000. Phoenix Systems provides a suite of integrated software
products targeted towards school districts (kindergarten through 12th grade).
The acquisition, subject to completion of due diligence, is expected to close in
April of 1998. Upon closing, Phoenix Systems will become a wholly owned
subsidiary of HTE named HTE-Phoenix Systems. The acquisition is intended to be
accounted for as a pooling of interests.
The Company has no present commitments or agreements with respect to other
transactions than those mentioned above. However, the Company may acquire other
businesses, products or technologies in the future.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK
FORWARD-LOOKING INFORMATION. Statements contained in this document that
state the Company's or management's anticipations, beliefs, expectations, hopes,
intentions, predictions and/or strategies which are not purely historical in
fact or which apply prospectively are "forward-looking" statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21 of the
Securities Exchange Act of 1934. All forward looking statements contained in
this document are based on information available to the Company on the date
hereof, and the Company assumes no obligation to update any such forward-looking
statements. It is important to note that the Company's actual results could
differ materially from those contained or projected in, or even implied by, such
forward-looking statements. The Company operates in a rapidly changing
environment that involves numerous risks, some of which are beyond the Company's
control. Some of the factors that could cause the actual results to differ
materially are set forth below and elsewhere in this report. Additional
information concerning these, or other factors which could cause actual results
to differ materially from those in the forward-looking statements is contained
from time to time in the Company's other SEC filings. Copies of those filings
are available from the Company and/or the SEC.
YEAR 2000 COMPLIANCE. The Company anticipates having all of its products
year 2000 compliant during 1998. Many installed non-HTE 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. A significant amount of
current demand for applications software may be generated by customers in the
process of replacing and upgrading applications in order to accommodate the
change in date to the year 2000. Significant uncertainty exists in the software
industry concerning the potential effects of such compliance. The Company is
currently reviewing processes to facilitate faster implementation to support
demand for year 2000 transitions. The Company could incur increased expenses in
addressing the transition of customers to software that is year 2000 compliant.
The Company has assessed the impact of Year 2000 issues with regard to its
internal reporting systems and operations and determined that the remaining
costs associated with addressing such issues will not be material. The Company
believes that the likelihood of a disruption in operations related to Year 2000
issues is remote.
UNEVEN PATTERNS OF QUARTERLY OPERATING RESULTS. The Company does not
believe that the percentage increases in revenues achieved in prior periods
should be indicative of anticipated results in future periods. 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 customer evaluation
processes for the Company's solutions, the timing of customer system
conversions, and the Company's sales practices. Historically, the Company has
recognized a decrease in software licenses in the fiscal quarter ended June 30
and achieved its highest income in the fiscal quarter ended March 31 primarily
due to the Company's sales practices. This quarterly trend may not continue in
the future. Because a substantial portion of revenues may not be
20
<PAGE>
generated until the end of each quarter, 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
future performance.
OPERATING LEVERAGE. Consistent with many companies in the software
industry, the Company's business model is characterized by a high degree of
operating leverage. The Company's expense levels are based, in significant part,
on the Company's expectations of future revenues and are therefore relatively
fixed in the short term. If revenue levels fall below expectations, net income
is likely to be adversely affected. There can be no assurance that the Company
will be able to increase or even maintain its current level of profitability on
a quarterly or annual basis in the future.
RISKS ASSOCIATED WITH PUBLIC SECTOR MARKET. Substantially all of the
Company's revenues to date have been attributable to sales of software and
services to state, county and city governments, other municipal agencies and
publicly owned utilities. The Company expects that sales to such public sector
customers will account for substantially all of the Company's revenues in the
future. Virtually all of these public sector organizations have existing
information processing systems. Accordingly, in order to continue to increase
its sales to this market, the Company must persuade these organizations to
replace or upgrade existing information processing systems. Change to an
organization's information system is a costly, time consuming and operationally
disruptive process for the customer. Conversion to a new information processing
system must typically be done without any disruption of service and,
accordingly, the Company's potential customers perceive a high degree of risk in
connection with the adoption of a new system. In addition, the purchase of the
Company's products involves a significant commitment of capital, with attendant
delays frequently associated with large capital expenditures by an organization.
For these and other reasons, the sales cycle associated with the purchase of the
Company's products is typically lengthy and subject to a number of significant
risks, including customers' budgetary constraints and internal acceptance
reviews, over which the Company has little or no control. There can be no
assurance that potential customers for the Company's products in the public
sector market will continue to make information processing system replacement
decisions at rates necessary to maintain demand for the Company's products and
sustain market growth or that the Company's products will be accepted by public
sector organizations that consider replacing their current information
processing systems. A significant reduction in demand or acceptance of the
Company's products could have a material adverse effect on the Company's
business, financial condition and results of operations.
COMPETITION. The Company faces competition from a variety of software
vendors which offer products and services similar to those offered by the
Company and from companies offering to develop custom software. Certain
competitors have greater technical, marketing and financial resources than the
Company. The Company also competes with in-house management information services
staff. The Company believes competitive differentiators in the public sector
market are functionality, product flexibility, ease of implementation in
adapting product to individual customers' needs without custom programming,
enterprise product breadth, individual product features, service reputation and
price.
The Company believes the market is highly fragmented with a large number of
competitors that vary in size, primary computer platforms and overall product
scope. Within its markets, the Company competes from time to time with (i)
custom software and services providers such as Andersen Consulting, KPMG Peat
Marwick and Oracle Corporation, (ii) companies which focus on selected segments
of the public sector market including PeopleSoft, Inc., Systems Computer &
Technology, Inc., J.D. Edwards & Company, Inc. and (iii) a significant number of
smaller private companies. Many of these companies currently do not focus
exclusively on the public sector or offer fully-integrated enterprise-wide
software applications. There can be no assurance that such competitors will not
develop products or offer services that are superior to the Company's products
or services or that achieve greater market acceptance.
The Company could face additional competition as other established and
emerging companies enter the public sector software application market and new
products and technologies are introduced. Increased competition could result in
price reductions, fewer customer orders, reduced gross margins and loss of
market share, any of which could materially adversely affect the Company's
business, operating results and financial condition. In addition,
21
<PAGE>
current and potential competitors may make strategic acquisitions or establish
cooperative relationships among themselves or with third-parties, thereby
increasing the ability of their products to address the needs of the Company's
prospective customers. Accordingly, it is possible that new competitors or
alliances among current and new competitors may emerge and rapidly gain
significant market share. Further, competitive pressures could require the
Company to reduce the price of its software licenses and related services, which
could materially adversely affect the Company's business, operating results and
financial condition. There can be no assurance that the Company will be able to
compete successfully against current and future competitors, and the failure to
do so would have a material adverse effect upon the Company's business,
operating results and financial condition.
ABILITY TO RESPOND TO TECHNOLOGICAL CHANGE. The Company's future success
will depend significantly on its ability to enhance its current products and
develop or acquire and market new products which keep pace with technological
developments and evolving industry standards as well as respond to changes in
customer needs. There can be no assurance that the Company will be successful in
developing or acquiring product enhancements or new products to address changing
technologies and customer requirements.
MANAGEMENT OF GROWTH. The Company has recently experienced a period of
significant revenue growth and an expansion in the number of its employees, the
scope of its operating and financial systems and the geographic area of its
operations. This growth has resulted in new and increased responsibility for
management personnel and has placed additional strain upon the Company's
operational, administrative and financial resources. To accommodate recent
growth, compete effectively and manage potential future growth, the Company must
continue to implement and improve information systems, procedures and controls
and expand, train, motivate and manage its staff. These demands will require the
addition of new management personnel. The Company's future success will depend
in part on the ability to attract and retain personnel. There can be no
assurance that the Company's personnel, systems, procedures and controls will be
adequate to support the Company's future operations. Any failure to implement
and improve the Company's operational, financial and management systems or to
expand, train, motivate or manage employees could have a material adverse effect
on the Company's business, operating results and financial condition.
DEPENDENCE ON KEY PERSONNEL. The Company's continued success will depend
upon the availability and performance of its senior management team,
particularly Dennis J. Harward, President and Chief Executive Officer, and Jack
L. Harward, Executive Vice President, each of whom possess unique and extensive
industry knowledge and experience. The Company currently maintains a $3.0
million key-man life insurance policy on Dennis J. Harward. Success will also
depend to a significant degree upon the continuing contributions of its key
management, sales, marketing, customer support and product development
personnel. The loss of key management or technical personnel could adversely
affect the Company. The Company believes that its future success will depend in
large part upon its ability to attract and retain highly-skilled managerial,
sales, customer support and product development personnel. The Company has at
times experienced and continues to experience difficulty in recruiting qualified
personnel. Competition for qualified software development, sales and other
personnel is intense, and there can be no assurance that the Company will be
successful in attracting and retaining such personnel.
ACQUISITION RISK. In December of 1997, the Company acquired the net assets
of Kb Systems, Inc. for $400,000. In January 1998, the Company purchased the net
assets of JALAN, Inc. for consideration of $2,000,000. Additionally, in March
1998, the Company signed a definitive agreement and plan of merger to acquire
privately held Phoenix Systems, LLC of Southbury, Connecticut. The acquisition,
subject to completion of due diligence, is expected to close in April of 1998.
For additional information regarding this and other recent acquisitions by the
Company, see Note 3 of Notes to Consolidated Financial Statements. As part of
its growth strategy, the Company intends to evaluate the acquisition of other
companies, assets or product lines that would complement or expand its existing
business in attractive geographic or service markets or that would broaden its
customer relationships. Although the Company conducts due diligence reviews of
potential acquisition candidates, the Company may not be able to identify all
material liabilities or risks related to potential acquisition candidates. There
can be no assurance that the Company will be able to locate and acquire any
business, retain key personnel and customers of an acquired business or
integrate any acquired business successfully. Additionally, there can be no
assurance that financing for any acquisition, if necessary, will be available on
acceptable terms, if at all, or that the Company will be able to accomplish its
strategic objectives in connection with any acquisition.
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RISKS ASSOCIATED WITH EXPANDING SALES FORCE. To date, the Company has sold
its products and services through its direct sales force. The Company's ability
to achieve significant revenue growth in the future will depend in large part on
its success in recruiting and training sufficient sales personnel and
establishing and maintaining relationships with strategic partners. Although the
Company is currently investing, and plans to continue to invest, significant
resources to expand its sales force, the Company has at times experienced and
may continue to experience difficulty in recruiting qualified sales personnel.
There can be no assurance that the Company will be able to expand its sales
force successfully or that any such expansion will result in an increase in
revenues. Failure by the Company to expand its sales force could adversely
affect the Company's business, operating results and financial condition.
DEPENDENCE ON KEY SUPPLIERS AND RELATIONSHIPS. The Company purchases
certain key components of its products, including the adapter code and certain
application development tools from single or limited source suppliers. For
certain of these components, there are relatively few suppliers. The Company
currently has relatively few agreements that would assure delivery of such
components from such suppliers. Generally, these contracts are terminable by
either party upon 60 to 90 days notice. Establishing additional or replacement
suppliers for any of the numerous components used in the Company's products, if
required, may not be accomplished or could involve significant additional costs.
The ability of any of the Company's suppliers to provide functional components
in a timely manner, or the inability of the Company to locate qualified
alternative suppliers for components at a reasonable cost, could adversely
affect the Company's business, financial condition and results of operations.
The Company's success also depends in part upon its alliances and relationships
with leading hardware and software vendors. A change in these relationships
could have a material adverse effect on the results of operations and financial
condition while the Company seeks to establish alternative relationships. In
addition, substantially all of the Company's hardware revenues are derived from
the sale of IBM AS/400 systems in connection with the Company's remarketer
arrangements with IBM. Any change in this relationship potentially could have an
adverse effect on the Company's financial performance. The Company may also need
to establish additional alliances and relationships in order to keep pace with
evolutions in technology and enhance its service offerings, and there can be no
assurance such additional alliances will be established.
RISKS ASSOCIATED WITH SALES TO GOVERNMENT AGENCIES. Government
organizations require compliance with various legal provisions and procurement
regulations. The adoption of new or modified procurement regulations could
adversely affect the Company by increasing costs to the Company of competing for
sales or by impacting the Company's ability to perform government contracts. Any
violation (intentional or otherwise) of these regulations could result in the
imposition of fines, and/or debarment from award of additional government
contracts which could have a material adverse effect on the Company.
RISK OF SOFTWARE DEFECTS. Software products as internally complex as those
developed by the Company may contain errors or defects, especially when first
introduced or when new versions or enhancements are released. Although the
Company has not experienced material adverse effects resulting from any such
defects or errors to date, there can be no assurance that defects and errors
will not be found after commencement of product shipments. Any such defects
could result in loss of revenues or delay market acceptance, which could have a
material adverse effect upon the Company's business, operating results and
financial condition.
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.
23
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PROPRIETARY RIGHTS, RISKS OF INFRINGEMENT AND SOURCE CODE RELEASE. The
Company regards certain features of its internal operations, software and
documentation as confidential and proprietary, and relies on a combination of
contract and trade secret laws and other measures to protect its proprietary
intellectual property. The Company has no patents and, under existing copyright
laws, has only limited protection. The Company believes that, due to the rapid
rate of technological change in the computer software industry, trade secret and
copyright protection are less significant than factors such as the knowledge,
ability and experience of the Company's employees, frequent product enhancements
and timeliness and quality of support services.
The Company provides its products to customers under exclusive licenses,
which generally are non-transferable and have a perpetual term. The Company
generally licenses its products solely for the customer's internal operations
and only on designated computers. In certain circumstances, the Company makes
enterprise-wide licenses available for select applications. The Company provides
source code to its customers for several products and has escrowed its source
code for the benefit of all customers. The provision of source code may increase
the likelihood of misappropriation or other misuse of the Company's intellectual
property.
POTENTIAL VOLATILITY OF STOCK PRICE. The market price of the shares of
common stock is likely to be highly volatile and may be significantly affected
by factors such as actual or anticipated fluctuations in the Company's operating
results, announcements of technological innovations, new products or new
contracts by the Company or its competitors, developments with respect to
patents, copyrights or proprietary rights, conditions and trends in the software
and other technology industries, adoption of new accounting standards affecting
the software industry, changes in financial estimates by securities analysts,
general market conditions and other factors. In addition, the stock market has
from time to time experienced significant price and volume fluctuations that
have particularly affected the market prices for the common stock of technology
companies. These broad market fluctuations may adversely affect the market price
of the common stock. In the past, following periods of volatility in the market
price of a particular Company's securities, securities class action litigation
has often been brought against the Company. There can be no assurance that such
litigation will not occur in the future with respect to the Company; such
litigation could result in substantial costs and a diversion of management's
attention and resources, which could have a material adverse effect upon the
Company's business, operating results and Financial Condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this Form
10-K. See Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors required by Item 10 is incorporated by
reference from the Company's definitive proxy statement for its annual
shareholders' meeting to be held on May 13, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from the
company's definitive proxy statement for its annual shareholders' meeting to be
held on May 13, 1998. The information specified in Item 402 (k) and (l) of
regulation S-K (the report of the Compensation Committee on executive
compensation and the stock performance graph) and set forth in the Company's
definitive proxy statement for its annual shareholders' meeting to be held on
May 13, 1998 is not incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference from the
Company's definitive proxy statement for its annual shareholders' meeting to be
held on May 13, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from the
Company's definitive proxy statement for its annual shareholders' meeting to be
held on May 13, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
THE FOLLOWING FINANCIAL STATEMENTS ARE FILED AS A PART OF THIS REPORT:
<TABLE>
<CAPTION>
PAGE
----------------
<S> <C>
Report of Independent Certified Public Accountants F-2
Consolidated Financial Statements:
Balance Sheets as of December 31, 1997 and 1996 F-3
Statements of Operations for the year ended December 31, 1997, nine months ended F-6
December 31, 1996 and the year ended March 31, 1996.
Statements of Stockholders' (Deficit) Equity for the year ended December 31, 1997, nine F-7
months ended December 31, 1996 and the year ended March 31, 1996.
Statements of Cash Flows for the years ended December 31, 1997, nine months ended F-8
December 31, 1996 and the year ended March 31, 1996.
Notes to Consolidated Financial Statements F-10
</TABLE>
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(A) 2. FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because they are not required or the required
information is shown in the financial statements or notes thereto.
(B) REPORTS ON FORM 8-K
A Form 8-K was filed on December 19, 1997. This filing reports the
acquisition of assets from Kb Systems, Inc., and the acquisition of assets from
JALAN, Inc.
(C) EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER NAME
-------------- --------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement (1)
3.1 Amended Articles of Incorporation (1)
3.2 Amended and Restated Bylaws (1)
10.1 Registrant's 1997 Executive Incentive Compensation Plan (1)
10.3 Catan Option Agreement (1)
10.4 Registration Rights Agreement (1)
10.5 Form of Stock Option Agreement (1)
10.6 Form of Indemnification Agreement between the Registrant and each of its Directors and
certain executive officers (1)
10.7 Form of Employment Agreement for Dennis Harward and Jack Harward (1)
10.8 Form of Employment Agreement for L.A. Gornto, Jr. (1)
10.9 Form of Employment Agreement for certain other employees (1)
10.10 Form of Severance Agreement (1)
10.11 Lease agreement (Heathrow International Business Center, Lake Mary, Florida) (1)
10.12 1997 Employee Stock Purchase Plan (2)
21.0 Subsidiaries of the Registrant (1)
23.1 Consent of Arthur Andersen LLP (3)
27.0 Financial Data Schedule (submitted only in electronic format) (3)
27.1 Financial Data Schedule (submitted only in electronic format) (4)
27.2 Financial Data Schedule (submitted only in electronic format) (4)
27.3 Financial Data Schedule (submitted only in electronic format) (4)
27.4 Financial Data Schedule (submitted only in electronic format) (4)
</TABLE>
1) Incorporated by reference to H.T.E., Inc.'s Form S-1 Registration Statement
(File No. 333-22637).
2) Incorporated by reference to H.T.E., Inc.'s Form 10-Q for the quarter ended
June 30,1997.
3) Filed herewith.
4) Refiled herewith to reflect the new accounting standard (SFAS No. 128)
pertaining to earnings per share calculations.
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HTE, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS......................... F-2
CONSOLIDATED BALANCE SHEETS................................................ F-3
CONSOLIDATED STATEMENTS OF OPERATIONS...................................... F-6
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY.................. F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS...................................... F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................. F-10
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To HTE, Inc.:
We have audited the consolidated balance sheets of HTE, 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, nine months ended December 31, 1996
and year ended December 31, 1997. 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 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 provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of HTE, Inc. and 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, nine months ended December 31,
1996 and year ended December 31, 1997, in conformity with generally accepted
accounting principles.
/S/ ARTHUR ANDERSEN LLP
------------------------
ARTHUR ANDERSEN LLP
Orlando, Florida,
February 10, 1998 (except with respect
to the matter discussed in Note 13, as to
which the date is March 10, 1998)
F-2
<PAGE>
<TABLE>
<CAPTION>
HTE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31, DECEMBER 31,
1996 1997
------------------ -------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 740 $ 18,466
Restricted cash - 1,574
Trade accounts receivable, less allowance of
$520 and $617 for doubtful accounts at December 31,
1996 and 1997, respectively (Note 4) 16,767 21,243
Deferred income taxes (Note 10) 667 751
Other current assets 516 1,570
------------------ -------------------
Total current assets 18,690 43,604
------------------ -------------------
EQUIPMENT, FURNITURE AND
FIXTURES, net (Note 2) 1,592 2,952
------------------ -------------------
OTHER ASSETS:
Computer software development costs,
net of accumulated amortization of $6,244 and $8,111 at
December 31, 1996 and 1997, respectively 3,338 3,651
Other intangible assets, net (Note 3) 1,045 1,271
Deposits 116 180
------------------ -------------------
4,499 5,102
------------------ -------------------
$ 24,781 $ 51,658
================== ===================
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
<TABLE>
<CAPTION>
HTE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (CONTINUED)
DECEMBER 31, DECEMBER 31,
1996 1997
--------------- ----------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,845 $ 2,967
Accrued liabilities 3,455 4,563
Line of credit (Note 4) 2,306 -
Deferred revenue 10,378 12,430
Current portion of notes payable to related parties (Note 3) 60 -
--------------- ----------------
Total current liabilities 19,044 19,960
--------------- ----------------
LONG-TERM LIABILITIES:
Notes payable to related parties, less current
portion (Note 3) 240 -
Deferred lease commitment (Note 11) 66 173
Deferred income taxes (Note 10) 1,731 1,731
--------------- ----------------
Total long-term liabilities 2,037 1,904
--------------- ----------------
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 and 0 shares authorized at December 31, 1996
and 1997, respectively, 1,769,494 and 0 shares issued and
outstanding at December 31, 1996 and 1997, respectively (Note 5) 4,303 -
--------------- ----------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE>
<TABLE>
<CAPTION>
HTE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (CONTINUED)
DECEMBER 31, DECEMBER 31,
1996 1997
---------------- -----------------
<S> <C> <C>
LIABILITES AND STOCKHOLDERS' (DEFICIT)
EQUITY-(CONTINUED)
MANDATORILY REDEEMABLE CLASS C
COMMON STOCK, $.0002 par value, 200,000 and 0 shares
authorized at December 31, 1996 and 1997, respectively,
63,600 and 0 shares issued and outstanding at December 31,
1996 and 1997, respectively (Notes 3 and 6) 119 -
---------------- -----------------
STOCKHOLDERS' (DEFICIT) EQUITY (Note 7)
Common stock-
Class A, $.0002 par value, 4,000,000 and 0 shares
authorized at December 31, 1996 and 1997,
respectively, 3,530,557 and 0 shares issued and
outstanding at December 31, 1996 and 1997, respectively 1 -
Class B, $.01 par value, 200,000 and 0 shares
authorized at December 31, 1996 and 1997,
respectively, none issued and outstanding - -
Common stock, $.01 par value, 25,000,000 shares
authorized, 7,688,651 shares issued and outstanding as
of December 31, 1997 - 77
Preferred stock, $.01 par value, 5,000,000 shares authorized,
none issued and outstanding - -
Additional paid-in capital 229 27,963
Accumulated (deficit) earnings (947) 1,748
Cumulative translation adjustment (5) 6
---------------- -----------------
Total stockholders' (deficit) equity (722) 29,794
---------------- -----------------
$ 24,781 $ 51,658
================ =================
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-5
<PAGE>
<TABLE>
<CAPTION>
HTE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31, DECEMBER 31,
1996 1996 1997
--------------------- ------------------------ ------------------
<S> <C> <C> <C>
REVENUES:
Software licenses $ 11,151 $ 9,139 $ 24,097
Professional services 6,203 5,586 8,927
Hardware 6,157 7,435 10,898
Maintenance and other 6,689 6,528 12,047
Resource management - - 448
--------------------- ------------------------ ------------------
Total revenues 30,200 28,688 56,417
--------------------- ------------------------ ------------------
EXPENSES:
Cost of software licenses 3,396 2,402 5,094
Cost of professional services 5,029 3,223 5,390
Cost of hardware 4,822 5,890 8,605
Cost of maintenance and other 3,118 2,216 5,414
Cost of resource management - - 343
Research and development 3,491 3,729 5,715
Sales and marketing 4,666 5,228 10,547
General and administrative 5,041 4,394 9,051
--------------------- ------------------------ ------------------
Total operating expenses 29,563 27,082 50,159
--------------------- ------------------------ ------------------
INCOME FROM OPERATIONS 637 1,606 6,258
OTHER (INCOME) EXPENSE:
Interest income - - (402)
Interest expense 127 191 175
--------------------- ------------------------ ------------------
Total other (income) expense 127 191 (227)
--------------------- ------------------------ ------------------
INCOME BEFORE INCOME TAXES 510 1,415 6,485
PROVISION FOR INCOME TAXES (Note 10) 211 581 2,482
--------------------- ------------------------ ------------------
NET INCOME 299 834 4,003
ACCRETION AND ACCRUAL OF
DIVIDENDS ON MANDATORILY
REDEEMABLE PREFERRED STOCK (184) (1,003) (1,308)
--------------------- ------------------------ ------------------
NET INCOME (LOSS) ATTRIBUTABLE
TO COMMON STOCKHOLDERS $ 115 $ (169) $ 2,695
===================== ======================== ==================
BASIC PRO FORMA NET INCOME
PER SHARE $ 0.06 $ 0.16 $ 0.61
===================== ======================== ==================
DILUTED PRO FORMA NET INCOME
PER SHARE $ 0.06 $ 0.16 $ 0.58
===================== ======================== ==================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
HTE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(AMOUNTS IN THOUSANDS)
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 - $ - 3,392 $ 1 $ - $ (630) $ - $ - $ (629)
Issuance of common stock - - 136 - 224 - - - 224
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 - - - - - 299 - - 299
------ ------ ------ ------ ------- -------- ------- -------- ------
BALANCE, MARCH 31, 1996 - - 3,528 1 224 (515) - (262) (552)
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 income - - - - - 834 - - 834
------ ------ ------ ------ ------- -------- ------- -------- ------
BALANCE, DECEMBER 31, 1996 - - 3,531 1 229 (947) (5) - (722)
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 1,769 18 - - 4,969 - - - 4,987
Conversion of mandatorily
redeemable Class C
common stock 64 1 - - 137 - - - 138
Conversion of Class A
common stock 3,531 35 (3,531) (1) (34) - - - -
Proceeds from sale of
common stock 2,325 23 - - 22,597 - - - 22,620
Translation adjustment - - - - - - 11 - 11
Net income - - - - - 4,003 - - 4,003
------ ------ ------ ------ ------- -------- ------- -------- -------
BALANCE, DECEMBER 31, 1997 7,689 $ 77 - $ - $27,963 $ 1,748 $ 6 $ - $29,794
====== ====== ====== ====== ======= ======== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements
F-7
<PAGE>
<TABLE>
<CAPTION>
HTE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(NOTE 14)
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31, DECEMBER 31,
1996 1996 1997
----------------- ------------------------ ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 299 $ 834 $ 4,003
Adjustments to reconcile net income
to net cash (used in) provided by
operating activities
Depreciation and amortization 2,972 1,764 2,880
Accretion of mandatorily redeemable
Class C common stock charged to interest
expense - 7 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
Deferred income taxes 145 237 (84)
Changes in operating assets and
liabilities--
Decrease (increase) in assets-
Trade accounts receivable - net (5,049) (5,065) (4,476)
Other current assets (334) (44) (856)
Deposits 30 (61) (64)
Increase (decrease) in liabilities-
Accounts payable 1,096 675 122
Accrued liabilities 775 472 1,042
Deferred revenue 340 3,404 1,802
Deferred lease commitment (171) (105) 107
----------------- ------------------------ ------------------
Net cash (used in) provided by
operating activities (104) 2,124 4,560
----------------- ------------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (618) (386) (1,998)
Proceeds from sale of investments - 119 -
Increase in restricted cash - - (1,574)
Acquisition of net assets of Programmed-
For-Success, Inc. (6) - -
Acquisition of net assets of Bellamy
Software, Ltd. - (375) -
Acquisition of net assets of Kb Systems, Inc. - - (361)
Computer software development costs (2,195) (1,556) (2,268)
----------------- ------------------------ ------------------
Net cash used in investing activities (2,819) (2,198) (6,201)
----------------- ------------------------ ------------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-8
<PAGE>
<TABLE>
<CAPTION>
HTE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(CONTINUED) (NOTE 14)
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31, DECEMBER 31,
1996 1996 1997
---------------- ------------------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of
preferred stock - 247 -
Payment of dividends on preferred stock - - (624)
Net proceeds from issuance of
common stock 224 5 22,620
Net proceeds (repayments) under line
of credit 1,970 336 (2,306)
Repayments of long-term debt (75) (83) -
Repayments of obligations under
capital leases (149) (23) (34)
Net repayments of notes payable to
related parties (50) (50) (300)
Advances on notes receivable from stockholders (262) (1) -
---------------- ------------------------- -----------------
Net cash provided by financing activities 1,658 431 19,356
---------------- ------------------------- -----------------
Effect of foreign currency exchange rate
changes on cash and cash equivalents - (5) 11
---------------- ------------------------- -----------------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (1,265) 352 17,726
CASH AND CASH EQUIVALENTS,
beginning of period 1,653 388 740
---------------- ------------------------- -----------------
CASH AND CASH EQUIVALENTS,
end of period $ 388 $ 740 $ 18,466
================ ========================= =================
SUPPLEMENTAL SCHEDULES OF CASH
FLOW INFORMATION
Cash paid for interest $ 127 $ 185 $ 106
Cash paid for income taxes 160 14 1,940
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-9
<PAGE>
HTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH AND DECEMBER 31, 1996 AND DECEMBER 31, 1997
(DOLLAR 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
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 and HTE-Kb
Systems, Inc. (Kb Systems), 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
financial statements was not material.
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.
TRADE ACCOUNTS RECEIVABLE
Included in trade accounts receivable at December 31, 1996 and 1997, are
unbilled receivables of $4,252 and $7,124, 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>
F-10
<PAGE>
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:
YEARS
-----
Equipment...................................................... 3 - 10
Office furniture and fixtures.................................. 5 - 10
Leasehold improvements......................................... 5 - 10
Depreciation and amortization expense related to equipment, furniture and
fixtures and leasehold improvements of $221, $242 and $479, 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 is 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 reduce net income by
approximately $798, net of the related tax benefit of $532, or $.16 per share
for the year ended March 31, 1996.
Amortization expense related to computer software development costs of
$2,707, $1,437 and $2,114 is included in cost of software license fees 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.
F-11
<PAGE>
OTHER INTANGIBLE ASSETS
Other intangible assets consisted of the following as of December 31, 1996
and 1997:
DECEMBER 31, DECEMBER 31,
DESCRIPTION 1996 1997
----------- ------------- -------------
Goodwill $ 401 $ 401
Purchased software 387 706
Customer list 386 580
------------- -------------
1,174 1,687
Less - Accumulated amortization (129) (416)
------------- -------------
$ 1,045 $ 1,271
============= =============
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 list represents identifiable intangible assets purchased
in connection with the acquisitions of Bellamy and Kb Systems, Inc. and is
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 list
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
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 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. Management does not anticipate that the
implementation of the guidance set forth in SOP 97-2 will have a material impact
on its current revenue recognition policies.
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.
F-12
<PAGE>
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.
PROFORMA NET INCOME 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 pro forma weighted-average shares outstanding 5,028 5,284 6,609
Common shares applicable to stock options
using the treasury stock method - 43 284
---------------- ----------------- -----------------
Diluted pro forma weighted-average shares outstanding 5,028 5,327 6,893
================ ================= =================
</TABLE>
Pro forma net income per common share is determined by dividing net income,
as adjusted for the effects of the assumed conversion of the mandatorily
redeemable Class C common stock as of the date it was first issued, by the pro
forma weighted-average number of shares outstanding during the period.
The basic and diluted pro forma weighted-average shares outstanding during
the periods presented above 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. Common share
equivalents included in the diluted calculation 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.
F-13
<PAGE>
All share and per share information in the financial statements have been
adjusted to give effect to the 53-for-one common stock split and par value
restatement which was effective on June 10, 1997.
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 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.
RECLASSIFICATIONS
Certain prior-year balances have been reclassified in order to conform to
the current-period financial statement presentation.
2. EQUIPMENT, FURNITURE AND FIXTURES:
Equipment, furniture and fixtures consisted of the following as of December
31, 1996 and 1997:
DECEMBER 31, DECEMBER 31,
1996 1997
-------------- --------------
Equipment $ 2,787 $ 3,822
Office furniture and fixtures 755 787
Leasehold improvements 96 1,007
-------------- ---------------
3,638 5,616
Less - Accumulated depreciation
and amortization (2,046) (2,664)
============== ===============
$ 1,592 $ 2,952
============== ===============
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
F-14
<PAGE>
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 7) 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 paid off 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 will be paid 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 various customer
service liabilities. Additionally, the Company entered into a royalty agreement
with Kb Systems, Inc., for a period of five years. The Company was granted
offset rights against royalty payments due under this agreement of $199. 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):
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
Revenues $ 30,491 $ 57,461
Net income 908 4,034
Basic earnings per share $ 0.17 $ 0.61
Diluted earnings per share $ 0.17 $ 0.58
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 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
$2,030 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.
F-15
<PAGE>
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 7 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 increase (decrease) in
mandatorily redeemable preferred stock, with the offset going to accumulated
earnings (deficit). 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 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 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 stockholders under notes receivable. The notes
receivable from stockholders 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 notes receivable from
stockholders have been classified as an increase to stockholders' deficit in the
accompanying consolidated balance sheet as of March 31, 1996. 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 filed a registration statement with the U.S.
Securities and Exchange Commission on Form S-1. 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 one-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).
The Company sold 2,325,000 shares of common stock under the registration
statement, 1,950,000 of which were sold in the initial offering in June 1997,
and 375,000 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.
8. STOCK COMPENSATION PLANS:
EMPLOYEE STOCK OPTIONS
On July 1, 1996, the Company granted options to an employee to purchase up
to 53,000 shares of the Company's Class A common stock which later converted to
the Company's common stock in connection with the
F-16
<PAGE>
Recapitalization on June 10, 1997. The options are exercisable beginning January
1, 1997, at $1.81 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 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 capable of
contributing to the Company's performance. The Company has reserved an aggregate
of 954,000 shares (subject to adjustment for stock splits and similar capital
changes) of common stock for grants under the Executive Incentive Plan.
Incentive stock options may be granted only to employees eligible to receive
them under the Internal Revenue Code of 1986, as amended. 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 have vesting schedules over 4 or
5 years.
A summary of the status of the Company's fixed stock option plan, including
employee stock options discussed above, as of December 31, 1996 and 1997, and
changes during the periods ending on those dates is 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 - - 53,000 $ 1.81
Granted 53,000 $ 1.81 530,500 $ 9.66
Exercised - - - -
Forfeited - - - -
------ -------
Outstanding at end of year 53,000 $ 1.81 583,500 $ 8.94
====== =======
Options exercisable at year end - $ - 169,600 $ 7.05
Weighted-average fair value of options
granted during the year $ 1.09 $ 2.70
</TABLE>
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> <C>
$ 1.81 53,000 8.5 $ 1.81 53,000 $ 1.81
$ 9.43 503,500 9.0 $ 9.43 116,600 $ 9.43
$ 11.88 to $17.13 27,000 9.7 $ 13.87 - -
</TABLE>
EMPLOYEES STOCK PURCHASE PLAN
The Company adopted an Employee Stock Purchase Plan (ESPP) on July 23,
1997, subject to stockholder approval at the next annual meeting. The plan is
effective as of September 1, 1997, and is designed to qualify as an employee
stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as
amended. Two hundred thousand shares are reserved for issuance over the term of
the plan, subject to periodic adjustment for changes in the outstanding common
stock occasioned by stock splits, stock dividends, recapitalizations or other
similar changes.
F-17
<PAGE>
The plan qualifies as a non-compensatory plan under APB Opinion No. 25;
therefore, the plan is not expected to have any effect on the results of
operations.
Under the terms of the plan, 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 plan. No shares were sold
under the ESPP in 1997. As of December 31, 1997, there were 20,060 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 $13.18. The weighted-average fair value of purchase rights
granted during 1997 under the ESPP was $3.81. 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>
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:
NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
---- ----
Net income
As reported $ 834 $ 4,003
Pro forma 799 3,537
Basic earnings per share
As reported $ 0.16 $ 0.61
Pro forma 0.15 0.54
Diluted earnings per share
As reported $ 0.16 $ 0.58
Pro forma 0.15 0.51
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.
F-18
<PAGE>
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 2 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 3 percent of each individual's
compensation. Contributions made by the Company totaled $277, $278 and $459 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 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.
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 %
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 41.37 % 41.09 % 38.27 %
============= ============= ===============
</TABLE>
F-19
<PAGE>
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>
11. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company leases office space, furniture, automobiles and equipment under
certain long-term noncancelable operating lease agreements with varying terms
and conditions.
Future aggregate minimum rental payments under these agreements are as
follows as of December 31, 1997:
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ ------
1998 $ 2,489
1999 1,977
2000 1,544
2001 1,477
2002 1,317
Thereafter 5,008
-----------
$13,812
===========
In April 1996, the Company entered into a lease agreement for the corporate
office in Lake Mary under a 10-year, noncancelable operating lease which began
on May 1, 1997. The lease agreement also provides the Company
F-20
<PAGE>
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 recorded as a deferred lease commitment on the accompanying consolidated
balance sheets at December 31, 1996 and 1997. Rent expense under operating
leases totaled approximately $1,179, $967 and $2,102 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 5 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.
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.
F-21
<PAGE>
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
$2,000. 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 will be accounted for as a purchase.
The Company signed a definitive agreement and plan of merger, dated March
10, 1998, to acquire privately held Phoenix Systems, LLC (Phoenix) of Southbury,
Connecticut, in exchange for newly issued shares of the Company's common stock
valued at $3,000. Phoenix provides a suite of integrated software products
targeted towards school districts (kindergarten through 12th grade). The
acquisition, subject to completion of due diligence, is expected to close in
April 1998. Upon closing, Phoenix will become a wholly owned subsidiary of the
Company. The acquisition is intended to be accounted for as a pooling of
interests.
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.
F-22
<PAGE>
The acquisitions had the following noncash effect of increasing the
following assets and liabilities 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>
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>
SIGNATURES
Pursuant to the requirements of the Securities and 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.
Date: March 30, 1998
/S/ DENNIS J. HARWARD
------------------------------------------
Dennis J. Harward
CHAIRMAN OF THE BOARD OF DIRECTORS,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
AND DIRECTOR (PRINCIPAL EXECUTIVE OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/S/ DENNIS J. HARWARD Chairman of the Board of Directors, President and March 30, 1998
- ----------------------- Chief Executive Officer and Director
Dennis J. Harward (principal executive officer)
/S/ JACK L. HARWARD Executive Vice President March 30, 1998
- --------------------- and Director
Jack L. Harward
/S/ L.A. GORNTO, JR. Executive Vice President, General March 30, 1998
- -------------------------- Counsel, Secretary
L.A. Gornto, Jr.
/S/ SUSAN D. FALOTICO Vice President, Chief Financial Officer March 30, 1998
- ------------------------ (principal financial officer)
Susan D. Falotico
/S/ BERNARD B. MARKEY Director March 30, 1998
- ------------------------
Bernard B. Markey
/S/ RAYMOND AMBROSE Director March 30, 1998
- ---------------------------------
Raymond Ambrose
</TABLE>
<PAGE>
EXHIBIT INDEX
23.1 Consent of Independent Certified Public Accountants
27.0 Financial Data Schedule
27.1 Financial Data Schedule
27.2 Financial Data Schedule
27.3 Financial Data Schedule
27.4 Financial Data Schedule
EXHIBIT 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 Form 10-K into the Company's
previously filed Registration Statements File Nos. 333-34109 and 333-34139 on
Form S-8.
Orlando, Florida, /S/ ARTHUR ANDERSEN LLP
March 30, 1998 --------------------------
ARTHUR ANDERSEN LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF H.T.E., INC. FOR THE YEAR ENDED DECEMBER 31, 1997, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 18,466
<SECURITIES> 0
<RECEIVABLES> 21,243
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 43,604
<PP&E> 2,952
<DEPRECIATION> 0
<TOTAL-ASSETS> 51,658
<CURRENT-LIABILITIES> 19,960
<BONDS> 0
0
0
<COMMON> 77
<OTHER-SE> 29,717
<TOTAL-LIABILITY-AND-EQUITY> 51,658
<SALES> 0
<TOTAL-REVENUES> 56,417
<CGS> 0
<TOTAL-COSTS> 50,159
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (227)
<INCOME-PRETAX> 6,485
<INCOME-TAX> 2,482
<INCOME-CONTINUING> 4,003
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,003
<EPS-PRIMARY> .61
<EPS-DILUTED> .58
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 740,263
<SECURITIES> 0
<RECEIVABLES> 17,287,214
<ALLOWANCES> 520,000
<INVENTORY> 38,453
<CURRENT-ASSETS> 18,689,802
<PP&E> 3,637,881
<DEPRECIATION> 2,045,488
<TOTAL-ASSETS> 24,780,799
<CURRENT-LIABILITIES> 19,099,848
<BONDS> 0
4,303,213
0
<COMMON> 119,380
<OTHER-SE> (722,870)
<TOTAL-LIABILITY-AND-EQUITY> 24,780,799
<SALES> 7,434,828
<TOTAL-REVENUES> 28,688,374
<CGS> 5,890,302
<TOTAL-COSTS> 27,081,777
<OTHER-EXPENSES> 191,212
<LOSS-PROVISION> 320,000
<INTEREST-EXPENSE> 191,212
<INCOME-PRETAX> 1,415,385
<INCOME-TAX> 581,683
<INCOME-CONTINUING> 833,702
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 833,702
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 387,550
<SECURITIES> 0
<RECEIVABLES> 11,878,553
<ALLOWANCES> 300,000
<INVENTORY> 26,180
<CURRENT-ASSETS> 13,173,002
<PP&E> 2,960,735
<DEPRECIATION> 1,575,998
<TOTAL-ASSETS> 17,941,294
<CURRENT-LIABILITIES> 14,088,937
<BONDS> 0
3,054,033
0
<COMMON> 666
<OTHER-SE> (552,904)
<TOTAL-LIABILITY-AND-EQUITY> 17,941,294
<SALES> 6,157,367
<TOTAL-REVENUES> 30,200,594
<CGS> 4,821,588
<TOTAL-COSTS> 29,562,925
<OTHER-EXPENSES> 127,143
<LOSS-PROVISION> 138,725
<INTEREST-EXPENSE> 127,143
<INCOME-PRETAX> 510,526
<INCOME-TAX> 211,183
<INCOME-CONTINUING> 299,343
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 299,343
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF H.T.E., INC. FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 20,890
<SECURITIES> 0
<RECEIVABLES> 18,199
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 41,362
<PP&E> 2,080
<DEPRECIATION> 0
<TOTAL-ASSETS> 47,908
<CURRENT-LIABILITIES> 17,960
<BONDS> 0
0
0
<COMMON> 77
<OTHER-SE> 28,017
<TOTAL-LIABILITY-AND-EQUITY> 47,908
<SALES> 0
<TOTAL-REVENUES> 38,135
<CGS> 0
<TOTAL-COSTS> 34,391
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (5)
<INCOME-PRETAX> 3,749
<INCOME-TAX> 1,442
<INCOME-CONTINUING> 2,307
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,307
<EPS-PRIMARY> .37
<EPS-DILUTED> .36
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF H.T.E., INC. FOR THE SIX MONTHS ENDED JUNE 30, 1997,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 17,413
<SECURITIES> 0
<RECEIVABLES> 17,960
<ALLOWANCES> 417
<INVENTORY> 0
<CURRENT-ASSETS> 37,217
<PP&E> 3,907
<DEPRECIATION> 2,317
<TOTAL-ASSETS> 43,312
<CURRENT-LIABILITIES> 17,784
<BONDS> 0
0
0
<COMMON> 73
<OTHER-SE> 23,398
<TOTAL-LIABILITY-AND-EQUITY> 43,312
<SALES> 0
<TOTAL-REVENUES> 24,820
<CGS> 0
<TOTAL-COSTS> 22,657
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 126
<INCOME-PRETAX> 2,037
<INCOME-TAX> 803
<INCOME-CONTINUING> 1,234
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,234
<EPS-PRIMARY> .22
<EPS-DILUTED> .21
</TABLE>
