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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-22657
H.T.E., INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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FLORIDA 59-2133858
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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1000 BUSINESS CENTER DRIVE
LAKE MARY, FLORIDA 32746
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (407) 304-3235
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. [X]
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 March 12, 1999, was $30,186,839. 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 March 12, 1999, was 17,165,140.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement relating to the Registrant's 1999 Annual
Shareholders Meeting are incorporated by reference into Part III of this report.
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TABLE OF CONTENTS
PART I
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Item 1. BUSINESS.................................................... 1
Item 2. PROPERTIES.................................................. 10
Item 3. LEGAL PROCEEDINGS........................................... 11
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 11
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 11
Item 6. SELECTED FINANCIAL DATA..................................... 12
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 14
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................ 25
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 25
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 25
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 25
Item 11. EXECUTIVE COMPENSATION...................................... 25
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 25
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 25
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K......................................................... 26
ANNEX A
Exhibit 99.1 SAFE HARBOR COMPLIANCE STATEMENT FOR FORWARD-LOOKING
STATEMENTS.................................................. A-1
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THIS FORM 10-K AND OTHER STATEMENTS ISSUED OR MADE FROM TIME TO TIME BY
H.T.E., INC. OR ITS REPRESENTATIVES CONTAIN STATEMENTS WHICH MAY CONSTITUTE
"FORWARD LOOKING STATEMENTS" UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995. THOSE STATEMENTS INCLUDE STATEMENTS REGARDING THE INTENT, BELIEF OR
CURRENT EXPECTATIONS OF H.T.E., INC. AND MEMBERS OF ITS MANAGEMENT TEAM, AS WELL
AS THE ASSUMPTIONS ON WHICH SUCH STATEMENTS ARE BASED. PROSPECTIVE INVESTORS ARE
CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE
PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES AND THAT ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS.
IMPORTANT FACTORS CURRENTLY KNOWN TO MANAGEMENT THAT COULD CAUSE ACTUAL RESULTS
TO DIFFER MATERIALLY FROM THOSE IN FORWARD-LOOKING STATEMENTS ARE SET FORTH IN
THE SAFE HARBOR COMPLIANCE STATEMENT FOR FORWARD-LOOKING STATEMENTS INCLUDED AS
EXHIBIT 99.1 AND ANNEX A TO THIS FORM 10-K, AND ARE HEREBY INCORPORATED BY
REFERENCE. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE OR REVISE
FORWARD-LOOKING STATEMENTS TO REFLECT CHANGED ASSUMPTIONS, THE OCCURRENCE OF
UNANTICIPATED EVENTS OR CHANGES TO FUTURE OPERATING RESULTS OVER TIME.
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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 17 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 more than 50 applications
addressing five functional areas: financial management, community services,
public safety and justice, utility management and K-12 school administration.
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 part of its strategy to provide a completely integrated
solution to its customers, the Company also provides a variety of related
services, including consulting, implementation, education and training, and the
provision and configuration of hardware systems.
As of December 31, 1998, the Company had over 1,600 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 5,000,000 shares of common stock sold,
3,900,000 were sold by H.T.E., Inc. and 1,100,000 were sold by certain selling
shareholders. The Company sold the 3,900,000 shares of common stock for $19.0
million net of issuance costs of $2.4 million. In July 1997, the underwriters
exercised their option to purchase 750,000 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 two-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.
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 1997, state and local government
agencies spent approximately $36.7 billion on information technology and related
products according to G2 Research, Inc. This total
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included approximately $6.3 billion for software, $8.7 billion for external
services and $8.1 billion for hardware. Approximately $13.6 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 ("IT") 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 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
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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 SOLUTIONTM
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 17 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 more than 50
applications, which provides feature-rich systems for financial management,
community service, public safety and justice, utility management and K-12 school
administration. 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 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.
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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 17 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.
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.
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In connection with its growth strategy, the Company recently acquired the
assets of JALAN, Inc. and Vanguard Management and Information Systems, Inc. The
company also acquired Phoenix Systems, L.L.C. and UCS, Inc. through pooling of
interests transactions.
In January 1998, the Company purchased the net assets of JALAN, Inc. for
$1.7 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.
In April 1998, the Company acquired Phoenix Systems, L.L.C. for 272,036
shares of the Company's Common Stock valued at approximately $3 million. This
acquisition allowed the Company to enter the K-12 school software market and
strengthened its Windows NT platform offerings.
In June 1998, the Company acquired UCS, Inc. for 1,120,000 shares of the
Company's Common Stock valued at approximately $15 million. The software
applications acquired from UCS, Inc. provide field-based reporting that will
expand the Company's public safety and justice line in all three market
tiers-mobile workforce, wireless communication and enterprise-wide information
systems.
In August 1998, the Company purchased the net assets of Vanguard Management
and Information Systems, Inc. for $420,000. The software applications acquired
from Vanguard Management and Information Systems, Inc. allow the Company to
expand its justice system product line, enhance its UNIX client/server offerings
and provide solutions to large-scale trial courts and judicial agencies.
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.
- A comprehensive integrated financial reporting system designed to monitor
organizational goals and performance.
- Eliminates redundant data entry and centralizes and minimizes record
management and retrieval of historical information through interfacing
modules.
- Complies with Governmental Accounting, Auditing, and Financial Reporting
("GAAFR") and Government Finance Officers Association ("GFOA") standards.
- Streamlines IRS reporting and offers custom budgeting tools.
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COMMUNITY SERVICES SYSTEMS
16 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.
- 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.
- Generates all documentation and improves revenue tracking, processing and
payment collection.
- Routes projects to various agencies and promotes communication between
agencies.
- Maintains voter records and tracks voting history.
- Manages community parks and recreational facilities.
PUBLIC SAFETY AND JUSTICE SYSTEMS
33 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.
- A complete suite of applications which provides critical information to
users in emergency situations through mobile computing technologies.
- Integrates police, fire and emergency medical service reporting and
communications with state and federal information systems and facilitates
sharing of vital information.
- Increases personnel safety and provides for better public service by
allowing police and emergency personnel to remain in the field.
- Promotes effective management of time, staff and facilities involved in
the administration of justice.
UTILITY SYSTEMS
7 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.
- A broad utility management system designed to handle a full range of
services including bill processing, equipment management and customer
service information.
- Provides immediate access to customer information and work orders and
tracks assets and resources.
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K-12 SCHOOL ADMINISTRATION
4 APPLICATIONS
These integrated applications address four key areas of K-12 school
administration: general accounting, payroll, human resources and student
administration. All applications incorporate a variety of standard features and
functions to provide ease of use, customization capabilities and reporting
flexibility.
- Integrates system security to restrict users and protect confidentiality.
- Complies with state and federal reporting requirements.
- Client/server platform operates in a network environment.
- Supports bar coding and scanning for attendance, grade reporting and
employee photos.
HTE'S LAYERED SOFTWARE ARCHITECTURE
The Company's layered software architecture isolates the application logic
from the graphical user interface and the database. The layered architecture
enables the Company's products to run on a variety of platforms; however, most
of the Company's customers have selected the IBM AS/400 platform to run the
Company's products.
Layered software architecture permits application code containing the
business logic to operate across all supported platforms such as the
Hewlett-Packard, Siemens, IBM RS/6000 and IBM 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, Microsoft SQL Server 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 an n-tiered object-oriented approach. This approach
separates the graphical user interface, business object layer, and data services
layer, allowing use of existing business layer code and 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
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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.
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, 1998, the Company had 108 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
8
<PAGE> 12
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, 1998, the Company had over 1,600 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, 1998.
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, 1998,
HTE had 288 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. Additionally, HTE
seeks to improve and expand its object development environment, with two
fundamental objectives: (i) continue user empowerment with an emphasis on
ease-of-use and (ii) increase flexibility to modify base products in order to
suit specific customer requirements. The Company has established a System Change
Program which provides that, 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 providing customers the advantage of advances in network systems,
platforms, database and other relevant technologies. The Company's gross
development expenditures were $7.2 million, $11.0 million and $19.1 million for
nine months ended December 31, 1996 and the years ended December 31, 1997 and
1998, 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 staff. The Company believes
competitive differentiators are functionality, product flexibility, ease of
implementation in adapting products 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.
9
<PAGE> 13
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 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. Although the Company
currently provides only object code to its customers, the Company historically
provided source code to its customers for several products and has escrowed, and
continues to escrow, its source code for the benefit of all customers. A
misappropriation or other misuse of the Company's intellectual property,
including source code previously delivered to customers, could have an adverse
effect on the Company.
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 third-party
license agreement to which it is presently a party is material and that if any
third-party 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, 1998, the Company employed 818 people, including 108 in
sales and marketing, 288 in product development, 135 in customer support and
field services, 218 in professional services and 69 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 are
represented by a labor union or are 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 in June 2007, 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
10
<PAGE> 14
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 occupies approximately 12,000 square feet of space in Fort
Lauderdale, Florida, pursuant to a lease expiring in November 1999;
approximately 6,000 square feet of space in Golden, Colorado, pursuant to a
lease expiring in May 2000; approximately 4,000 square feet of space in Spokane,
Washington, pursuant to a lease expiring December 1999; approximately 5,000
square feet of space in Edmonton, Alberta, pursuant to a lease expiring October
2004; approximately 2,000 square feet of space in Vienna, Virginia, pursuant to
a lease expiring March 2000; and approximately 3,000 square feet of office space
in Southbury, Connecticut, for a one-year renewable term.
The Company also leases an aggregate of approximately 19,000 additional
square feet of office space in various other locations, which are used mostly
for sales offices and additional training facilities.
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, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ National Market System
under the symbol "HTEI". The number of shareholders of record as of March 12,
1999 was 188; however, the number of beneficial holders is approximately 3,632.
The closing price per share on that date was $2.875.
The table below sets forth information, for each quarter in 1998 and 1997,
concerning the high and low sales prices of a share of the Company's common
stock. Quotations for such periods are as reported by NASDAQ for National Market
Issues. The Company's common stock was not publicly traded prior to June 11,
1997, and, therefore, there is no data prior to June 1997.
<TABLE>
<CAPTION>
STOCK PRICE RANGE
------------------
HIGH LOW
------- -------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Second Quarter......................................... $ 5.500 $ 5.125
Third Quarter.......................................... $ 7.625 $ 5.250
Fourth Quarter......................................... $10.000 $ 7.313
YEAR ENDED DECEMBER 31, 1998
First Quarter.......................................... $11.063 $ 8.750
Second Quarter......................................... $17.625 $11.000
Third Quarter.......................................... $17.625 $ 8.313
Fourth Quarter......................................... $11.500 $ 5.625
</TABLE>
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.
11
<PAGE> 15
The Company has not paid cash dividends in the past and does not intend to
pay cash dividends in the forseeable future. The Company 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 5,750,000 shares of common stock (including the
underwriters' over-allotments) 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, 3,900,000 shares were sold by the
Company for gross proceeds of $21,450,000 and 1,100,000 shares were sold by
certain selling shareholders for gross proceeds of $6,050,000. In July 1997, the
underwriters exercised their option to purchase 750,000 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 4,650,000 shares of common stock
offered by the Company were approximately $22.6 million (includes the
underwriters' over-allotment option of 750,000 shares which were exercised in
July 1997), 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 a
revolving credit facility, which matured on June 30, 1998, and bore interest at
the fluctuating prime rate plus 1.25%. The Company also paid the $300,000
aggregate principal balance on notes payable to related parties which arose from
the purchase of Bellamy Software Ltd. in 1996. The sum of $624,000 in accrued
dividends was paid to holders of mandatorily redeemable preferred stock.
Additionally, $2.6 million was used for the acquisitions of Kb Systems, Inc.,
JALAN, Inc. and Vanguard Management and Information Systems, 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, and as of and for the nine months ended December 31, 1995,
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 March 31,
1995 and 1996, and for the year ended March 31, 1995, have been derived from
consolidated financial statements audited by Arthur Andersen LLP. The selected
consolidated financial data of the Company as of December 31, 1996, 1997 and
1998, and for the years ended March 31, 1996 and December 31, 1997 and 1998, and
the nine months ended December 31, 1996, 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,
included elsewhere herein.
12
<PAGE> 16
<TABLE>
<CAPTION>
YEAR ENDED MARCH NINE MONTHS ENDED
31, DECEMBER 31, YEAR ENDED DECEMBER 31,
----------------- ------------------ ---------------------------
1995 1996 1995 1996 1996 1997 1998
------- ------- ------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Software licenses........................ $10,498 $11,575 $6,791 $10,869 $15,847 $26,762 $43,277
Professional services.................... 8,390 10,686 7,376 8,943 11,715 14,543 20,870
Hardware................................. 6,802 7,323 5,836 7,740 9,219 11,768 15,516
Maintenance and other.................... 7,842 10,013 8,020 6,950 9,040 12,571 17,793
Resource management...................... -- -- -- -- -- 448 1,449
------- ------- ------ ------- ------- ------- -------
Total revenues.................... 33,532 39,597 28,023 34,502 45,821 66,092 98,905
------- ------- ------ ------- ------- ------- -------
Operating expenses:
Cost of software licenses................ 1,433 3,585 2,794 2,919 3,742 5,283 8,843
Cost of professional services............ 6,144 7,608 5,629 4,952 6,728 8,363 13,399
Cost of hardware......................... 6,240 5,774 4,656 6,186 7,308 9,209 13,050
Cost of maintenance and other............ 5,092 4,233 3,168 2,705 3,598 5,984 10,041
Cost of resource management.............. -- -- -- -- -- 343 918
Research and development................. 3,174 4,508 3,310 5,242 6,537 8,256 14,048
Sales and marketing...................... 4,610 5,474 3,949 6,186 7,742 11,520 20,526
General and administrative............... 5,565 6,764 5,006 5,830 7,702 10,925 15,614
Offering costs........................... -- -- -- -- -- -- 552
------- ------- ------ ------- ------- ------- -------
Total operating expenses.......... 32,258 37,946 28,512 34,020 43,357 59,883 96,991
------- ------- ------ ------- ------- ------- -------
Operating income (loss).................... 1,274 1,651 (489) 482 2,464 6,209 1,914
Interest expense (income).................. 104 127 70 191 248 (227) (321)
------- ------- ------ ------- ------- ------- -------
Income (loss) before income taxes.......... 1,170 1,524 (559) 291 2,216 6,436 2,235
Provision (benefit) for income taxes....... 139 211 (605) 581 1,397 2,482 1,253
------- ------- ------ ------- ------- ------- -------
Net income (loss).......................... 1,031 1,313 46 (290) 819 3,954 982
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............................. $ 947 $ 1,129 $ (92) $(1,293) $ (230) $ 2,646 $ 982
======= ======= ====== ======= ======= ======= =======
PRO FORMA OPERATIONS DATA:
Income (loss) before income taxes.......... $ 1,170 $ 1,524 $ (559) $ 291 $ 2,216 $ 6,436 $ 2,235
Pro forma provision (benefit) for income
taxes.................................... 508 593 (265) 158 956 2,463 864
------- ------- ------ ------- ------- ------- -------
Pro forma net income (loss)(1)............. $ 662 $ 931 $ (294) $ 133 $ 1,260 $ 3,973 $ 1,371
======= ======= ====== ======= ======= ======= =======
PER SHARE DATA:
Net income (loss) per share:
Basic.................................... $ 0.12 $ 0.14 $(0.01) $ (0.16) $ (0.03) $ 0.21 $ 0.06
======= ======= ====== ======= ======= ======= =======
Diluted.................................. $ 0.12 $ 0.12 $(0.01) $ (0.16) $ (0.03) $ 0.20 $ 0.06
======= ======= ====== ======= ======= ======= =======
Pro forma net income per share(2):
Basic.................................... $ 0.01 $ 0.28 $ 0.08
======= ======= =======
Diluted.................................. $ 0.01 $ 0.27 $ 0.08
======= ======= =======
</TABLE>
13
<PAGE> 17
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
------------------ -----------------------------
1995 1996 1996 1997 1998
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................ $ 1,738 $ 1,143 $ 1,038 $18,634 $ 7,553
Working (deficit) capital................ (307) 782 387 24,387 22,078
Total assets................... 16,084 21,514 27,415 54,208 69,831
Long-term debt........................... 75 -- 240 -- --
Total stockholders' equity
(deficit).................... 75 1,166 (175) 30,292 32,939
</TABLE>
- ---------------
(1) Prior to their acquisitions, certain businesses acquired by the Company were
taxed as S corporations. The pro forma net income (loss) reflects historical
data as adjusted for all income being taxed as if it were earned by a C
corporation.
(2) Pro forma net income per share is determined by dividing pro forma net
income by the pro forma weighted-average number of shares outstanding during
the period. Pro forma weighted-average number of shares outstanding for all
periods reported were 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
The Company develops, markets, implements and supports fully integrated
enterprise-wide software applications designed specifically for public sector
organizations, including state, county and city governments and other municipal
agencies and for public and private utilities. For over 17 years, the Company
has strategically focused on providing software applications exclusively to
middle market public sector organizations and utilities, and has established
itself as a leading provider of software solutions to those markets. HTE's fully
integrated enterprise-wide software applications are designed to fulfill the
specific functional requirements of the public sector marketplace, such as
improvement of delivery of services, reduction of costs, enhancement of revenue
collection, operation within budgetary constraints, compliance with government
regulations and improvement of overall operating efficiencies. The Company's
Total Enterprise Solution currently includes more than 50 applications
addressing five functional areas: financial management, community services,
public safety and justice, education and utility management. The Company's
products operate as integrated suites or as stand-alone applications and
function with a variety of computer and network hardware, operating systems,
database software and desktop applications provided by other vendors. As part of
its strategy to provide a completely integrated solution to its customers, the
Company also provides a variety of related services, including consulting,
implementation, education and training, and the provision and configuration of
hardware systems.
The Company provides its software applications and business solutions to
customers in public sector and utility markets under license agreements and
service contracts. HTE's revenues are generated principally from (i) software
licenses that grant customers the right to use the Company's software products,
(ii) professional services derived from a variety of services related to the
implementation of the Company's software, including project management, custom
programming, consulting, conversion and education programs, systems planning and
integration and other services, (iii) sales of hardware such as computers, data
collection equipment, peripherals and related network and communications
products purchased from third-parties and sold by the Company to its software
customers, (iv) maintenance and other revenues which include revenues associated
with annual software maintenance and support services, and (v) resource
management revenues derived from IT outsourcing services designed to assume
total or partial control and responsibility of customers' information resources,
generally on a long-term basis.
14
<PAGE> 18
The Company recognizes revenues from software licenses when the related
license agreement has been executed and the software has been shipped to the
customer, provided that no significant Company obligations remain related to the
software license and collection of the receivable is deemed probable. The
Company typically contracts professional services on a time and materials basis
and such revenues are recognized as services are performed. Hardware revenues
are recognized at the time the products are shipped. The Company drop-ships
hardware directly to the customer and does not carry hardware inventory.
Revenues from maintenance and other are recognized ratably over the term of the
applicable maintenance agreement. Resource management revenues are recognized
monthly as services are performed, according to the contractually agreed upon
rate.
The sales cycle for the Company's systems is typically six to 18 months
from initial contact to contract signing. The product delivery cycle varies
based on the customer's implementation plan. Complete product implementation
typically occurs within six to nine months, but can extend beyond nine months on
contracts involving significant and continuing customer service requirements,
particularly with enterprise-wide solutions.
Accordingly, the product delivery cycle depends upon the combination of
products purchased and the defined implementation plan.
The Company accounts for costs related to computer software in accordance
with Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed." All costs
incurred to establish technological feasibility of a software product are
charged to research and development expense as incurred. Technological
feasibility is established when the Company has completed all planning,
designing, coding and testing activities that are necessary to establish that
the product can be produced to meet its design specifications, including
functions, features and technical performance requirements. Costs of producing
product masters incurred subsequent to establishing technological feasibility
are capitalized and are amortized on a straight-line basis over three years once
the product is available for general release to customers. The Company ceases
capitalization when the product is available for general release to customers.
The Company derives substantially all of its revenues from domestic
operations. In November 1996, HTE established a presence in Canada through an
acquisition.
The Company's revenues and operating results are subject to quarterly and
other fluctuations resulting from a variety of factors, including the budgeting
and purchasing practices of its customers, the length of the customer evaluation
process for the Company's solutions, the timing of customer system conversions,
and the Company's sales practices. Historically, the Company has achieved its
highest income in the fiscal quarter ended March 31 due to the Company's sales
practices. In 1996, the Company implemented a new sales and marketing program
and changed its fiscal year end to December 31, which the Company believes will
have the effect of moderating such fluctuations. Because of these changes, the
Company believes that historical quarterly operating data should not be relied
upon as an indicator of its future performance. However, the Company has often
recognized a substantial portion of its revenues during the last month of each
quarter. Since a significant portion of the Company's operating expenses is
relatively fixed, the Company may not be able to adjust or reduce spending in
response to sales shortfalls or delays. These factors can cause significant
variations in operating results from quarter to quarter. The Company believes
that quarter to quarter comparisons of its financial results are not necessarily
meaningful and should not be relied upon as an indication of its future
performance.
Recent Acquisitions
In December 1997, the Company purchased the assets of Kb Systems, Inc. (Kb
Systems) for $461,000 in cash and the payment of a continuing royalty on license
fees over a five-year period. For its fiscal year ended June 30, 1997, Kb
Systems had revenues of approximately $1.4 million. As of the date of the
acquisition, Kb Systems had approximately 150 customers. The Kb Systems software
applications have enabled the Company to expand its penetration into
governmental tax departments by adding property appraisal and assessment
applications to its traditional tax billing and collection capability.
15
<PAGE> 19
In January 1998, the Company purchased the assets of JALAN, Inc. (JALAN)
for approximately $1.7 million in cash. For its fiscal year ended September 30,
1997, JALAN had revenues of approximately $2.5 million. As of the date of the
acquisition, JALAN had 18 employees and approximately 120 customers in 32
states. The JALAN software applications track inmate information for jails, case
status for courts, defendant case information for district attorneys' and public
defenders' offices, civil papers for sheriff departments, case information for
the probation system and claims for victim compensation.
In April 1998, the Company completed a pooling of interests acquisition of
Phoenix Systems, L.L.C. (Phoenix) for 272,036 shares of HTE's common stock,
valued at $3.0 million on or about the closing date. As of the date of the
acquisition, Phoenix had 22 employees and approximately 70 customers. The
Phoenix software applications encompass a complete suite of integrated Windows
NT software products targeted towards financial management and student
administration for school districts (grades K through 12).
In June 1998, the Company completed a pooling of interests acquisition of
UCS, Inc. (UCS) for 1,120,000 shares of HTE's common stock, valued at $15.0
million as of the April 1998 agreement valuation date. For its fiscal year ended
December 31, 1997, UCS had revenues of approximately $10.0 million. As of the
date of the acquisition UCS had approximately 130 employees in its Ft.
Lauderdale, Florida, Golden, Colorado and Vienna, Virginia offices and more than
200 customers throughout the United States. UCS is a leading mobile work force
automation provider of field-based reporting software. UCS's products and
services are utilized by federal, state, county and city government agencies, as
well as police and fire departments. UCS mobile data software enables law
enforcement officials to utilize HTE software through the entire criminal
justice process -- from the first point of contact with a suspect in the field
through the judicial system and throughout the incarceration period.
In August 1998, the Company purchased the assets of Vanguard Management and
Information Systems, Inc. (Vanguard) for $420,000 in cash and the payment of
continuing royalties over a five-year period. Vanguard provided professional
management services and software applications to trial courts and other judicial
agencies. The Company expects the acquisition to expand its justice system
product line, enhance its UNIX client/server offerings, and permit it to respond
to proposals for large-scale court administration systems.
Future Acquisitions
Over the past five years, the Company has supplemented its internal growth
with ten acquisitions, five of which have occurred since June 1997. The Company
intends to continue its growth strategy and expects growth from acquisitions to
complement internally generated growth. The Company views acquisitions as a
means of acquiring technology and industry expertise thereby expanding the
variety of enterprise-wide software applications the Company offers for sale and
servicing, broadening its customer base and expanding internationally. The
Company believes that the public sector application vendor market is highly
fragmented with many small point solution companies and that the industry is
currently entering a period of consolidation. The Company intends to pursue
acquisition opportunities which help it to accomplish its objective of becoming
the leading provider of enterprise-wide IT solutions to the public sector.
16
<PAGE> 20
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>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
MARCH 31, DECEMBER 31, DECEMBER 31,
-------------- -------------- -----------------------
1995 1996 1995 1996 1996 1997 1998
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software licenses......................... 31.3% 29.2% 24.2% 31.5% 34.6% 40.5% 43.7%
Professional services..................... 25.0 27.0 26.3 25.9 25.6 22.0 21.1
Hardware.................................. 20.3 18.5 20.9 22.4 20.1 17.8 15.7
Maintenance and other..................... 23.4 25.3 28.6 20.2 19.7 19.0 18.0
Resource management....................... -- -- -- -- -- 0.7 1.5
----- ----- ----- ----- ----- ----- -----
Total revenues..................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- -----
Operating expenses:
Cost of software licenses................. 4.3 9.1 10.0 8.5 8.2 8.0 8.9
Cost of professional services............. 18.3 19.2 20.1 14.4 14.7 12.7 13.5
Cost of hardware.......................... 18.6 14.6 16.6 17.9 15.9 13.9 13.2
Cost of maintenance and other............. 15.2 10.7 11.3 7.8 7.9 9.1 10.2
Cost of resource management............... -- -- -- -- -- 0.5 0.9
Research and development.................. 9.5 11.4 11.8 15.2 14.3 12.5 14.2
Sales and marketing....................... 13.7 13.8 14.1 17.9 16.9 17.4 20.8
General and administrative................ 16.6 17.1 17.9 16.9 16.8 16.5 15.8
Offering costs............................ -- -- -- -- -- -- 0.6
----- ----- ----- ----- ----- ----- -----
Total operating expenses........... 96.2 95.9 101.8 98.6 94.7 90.6 98.1
----- ----- ----- ----- ----- ----- -----
Operating income (loss)..................... 3.8 4.1 (1.8) 1.4 5.3 9.4 1.9
Interest expense (income)................... 0.3 0.3 0.2 0.5 0.5 (0.3) (0.4)
----- ----- ----- ----- ----- ----- -----
Income (loss) before income taxes........... 3.5 3.8 (2.0) 0.9 4.8 9.7 2.3
Provision (benefit) for income taxes........ 0.4 0.5 (2.2) 1.7 3.0 3.7 1.3
----- ----- ----- ----- ----- ----- -----
Net income (loss)......................... 3.1% 3.3% 0.2% (0.8)% 1.8% 6.0% 1.0%
===== ===== ===== ===== ===== ===== =====
</TABLE>
Comparison of Year Ended December 31, 1998 and December 31, 1997
Revenues
The Company's total revenues increased by 50% to $98.9 million for the year
ended December 31, 1998, from $66.1 million for the year ended December 31,
1997.
Software License Revenues. Revenues from software licenses increased 62%
to $43.3 million for the year ended December 31, 1998, from $26.8 million for
the year ended December 31, 1997. As a percentage of total revenues, software
license revenues increased to 43.7% for the year ended December 31, 1998, from
40.5% for the year ended December 31, 1997. The dollar and percentage increases
resulted primarily from an increased number of applications available for sale
and an increased investment in sales and marketing.
Professional Services Revenues. Revenues from professional services
increased 44% to $20.9 million for the year ended December 31, 1998, from $14.5
million for the year ended December 31, 1997. As a percentage of total revenues,
professional services revenues decreased to 21.1% for the year ended December
31, 1998, from 22.0% for the year ended December 31, 1997. The dollar increase
in professional services was directly related to the growth in staff and related
revenue stemming from the increase in license fees and service offerings. The
decrease in professional services revenues as a percentage of total revenues was
primarily due to changes in the mix of products, along with an increased backlog
of services revenue associated with license fee bookings.
17
<PAGE> 21
Hardware Revenues. Hardware revenues increased 32% to $15.5 million for
the year ended December 31, 1998, from $11.8 million for the year ended December
31, 1997. As a percentage of total revenues, hardware revenues decreased to
15.7% for the year ended December 31, 1998, from 17.8% for the year ended
December 31, 1997. The dollar increase was primarily due to the increased number
of license fee contracts executed that require the installation of hardware. The
decrease in hardware revenue as a percentage of total revenue was primarily due
to stronger growth in software license revenues.
Maintenance and Other Revenues. Revenues from maintenance and other
increased 42% to $17.8 million for the year ended December 31, 1998, from $12.6
million for the year ended December 31, 1997. As a percentage of total revenues,
maintenance and other revenues decreased to 18.0% for the year ended December
31, 1998, from 19.0% for the year ended December 31, 1997. The dollar increase
was primarily due to maintenance contracts associated with new software
licenses, customer system upgrades and price increases in the fees charged for
annual maintenance. The decrease in maintenance and other revenues as a
percentage of total revenues was primarily due to the growth of software license
revenues exceeding the growth of the maintenance backlog, which is recognized
ratably over the maintenance term.
Resource Management Revenues. Revenues from resource management increased
223% to $1.4 million for the year ended December 31, 1998, from $448,000 for the
year ended December 31, 1997. As a percentage of total revenues, resource
management revenues increased to 1.5% for the year ended December 31, 1998, from
0.7% for the year ended December 31, 1997. The dollar and percentage increases
were primarily due to this division beginning operations in the fourth quarter
of 1997.
Cost of Revenues
Cost of Software License Revenues. Cost of software licenses increased by
67% to $8.8 million for the year ended December 31, 1998, compared to $5.3
million for the year ended December 31, 1997. As a percentage of software
license revenues, cost of software licenses increased to 20.4% for the year
ended December 31, 1998, from 19.7% for the year ended December 31, 1997. The
dollar and percentage increases resulted primarily from an increased number of
third party software licenses, specifically module enhancements such as report
writers and imaging products.
Cost of Professional Services Revenues. Cost of professional services
increased 60% to $13.4 million for the year ended December 31, 1998, from $8.4
million for the year ended December 31, 1997. As a percentage of professional
services revenues, cost of professional services increased to 64.2% for the year
ended December 31, 1998, from 57.5% for the year ended December 31, 1997. The
dollar increase was directly related to increased professional services revenues
and expanded offerings of full service professional services. The increase in
the cost of professional services as a percentage of professional services
revenues was primarily due to lower utilization rates resulting from an
increased number of non-billable consultants in training coupled with the use of
high cost third party consultants.
Cost of Hardware Revenues. Cost of hardware increased 42% to $13.1 million
for the year ended December 31, 1998, from $9.2 million for the year ended
December 31, 1997. As a percentage of hardware revenues, cost of hardware
increased to 84.1% for the year ended December 31, 1998, from 78.3% for the year
ended December 31, 1997. The dollar increase was related to the increased
hardware sales and the mix of equipment sold. The increase in the cost of
hardware as a percentage of hardware revenues was primarily due to the higher
volume and smaller size of new contracts signed.
Cost of Maintenance and Other Revenues. Cost of maintenance and other
increased 68% to $10.0 million for the year ended December 31, 1998, from $6.0
million for the year ended December 31, 1997. As a percentage of maintenance and
other revenues, cost of maintenance and other increased to 56.4% for the year
ended December 31, 1998, from 47.6% for the year ended December 31, 1997. The
dollar and percentage increases were primarily due to investment in a new
customer interaction software system and increased personnel to enhance products
and support a larger client base.
Cost of Resource Management Revenues. Cost of resource management
increased 168% to $918,000 for the year ended December 31, 1998, from $343,000
for the year ended December 31, 1997. As a percentage of
18
<PAGE> 22
resource management revenues, cost of resource management decreased to 63.4% for
the year ended December 31, 1998, from 76.6% for the year ended December 31,
1997. The dollar increase was primarily due to this division beginning
operations in the fourth quarter of 1997. The decrease in the cost of resource
management as a percentage of resource management revenues was primarily due to
more effective use of existing resources.
Research and Development Expenses. Research and development expenses
increased 70% to $14.0 million for the year ended December 31, 1998, from $8.3
million for the year ended December 31, 1997. As a percentage of total revenues,
research and development increased to 14.2% for the year ended December 31,
1998, from 12.5% for the year ended December 31, 1997. The dollar and percentage
increases were primarily due to increased staffing levels and expenses for
additional software and hardware required for the development of additional
products and platforms.
Sales and Marketing Expenses. Sales and marketing expenses increased 78%
to $20.5 million for the year ended December 31, 1998, from $11.5 million for
the year ended December 31, 1997. As a percentage of total revenues, sales and
marketing increased to 20.8% for the year ended December 31, 1998, from 17.4%
for the year ended December 31, 1997. The dollar and percentage increases were
attributable to the Company's continued expansion of its direct sales force,
increased marketing efforts, travel and other expenses related to the expected
increased sales activity.
General and Administrative Expenses. General and administrative expenses
increased 43% to $15.6 million for the year ended December 31, 1998, from $10.9
million for the year ended December 31, 1997. As a percentage of total revenues,
general and administrative expenses decreased to 15.8% for the year ended
December 31, 1998, from 16.5% for the year ended December 31, 1997. The dollar
increase was due to additional staffing, additional facility related expenses
and additional computer equipment and software required to build the
infrastructure to support the Company's growth. The decrease in general and
administrative expenses as a percentage of total revenue was primarily due to
leveraging of existing resources.
Offering Costs. Offering costs include the non-recurring charges related
to the Company's planned underwritten offering, which was terminated on October
15, 1998. These costs were $552,000 or 0.6% of total revenue for the year ended
December 31, 1998, and were expensed in the fourth quarter of 1998. There were
no comparable expenses in the year ended December 31, 1997.
Fourth Quarter Results. Beginning with the Company's IPO in June 1997, HTE
has publicly communicated a 30% annual revenue growth rate objective. In the
first three quarters of 1998, the Company significantly exceeded this revenue
objective. The Company has successfully executed over five successive quarters
its long-term growth strategy of making planned investments in building the
Company's sales and marketing and professional staff infrastructure at levels
consistent with current revenue increases. Accordingly, in 1998, the Company
increased expenditures for infrastructure and product development based on a
higher than 30% revenue growth and expense run rate. However, in the fourth
quarter of 1998, the Company realized a 36.5% revenue growth, which was
insufficient to support the previously committed increases in its infrastructure
expense run rate. To address this unanticipated development, the Company intends
to return to a more sustainable annual revenue growth rate objective for 1999
and plans to implement a comprehensive cost reduction program to achieve an
expense run rate consistent with such revenue growth objective. In this manner,
it is the Company 's objective to quickly return to reporting consistent future
earnings growth each quarter. The Company will take a one-time pre-tax cost
reduction restructuring charge during the first quarter of 1999 between $2.0
million and $2.5 million.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues
The Company's total revenues increased by 44% to $66.1 million for the year
ended December 31, 1997, from $45.8 million for the year ended December 31,
1996.
Software Licenses Revenues. Software licenses revenues increased by 69% to
$26.8 million for the year ended December 31, 1997, from $15.8 million for the
year ended December 31, 1996. As a percentage of total
19
<PAGE> 23
revenues, software license revenues increased to 40.5% for the year ended
December 31, 1997, from 34.6% for the year ended December 31, 1996. The dollar
and percentage increases resulted from an increased number of applications
available for sale and an increased investment in sales and marketing.
Professional Services Revenues. Professional services revenues increased
by 24% to $14.5 million for the year ended December 31, 1997, from $11.7 million
for the year ended December 31, 1996. As a percentage of total revenues,
professional services revenues decreased to 22.0% for the year ended December
31, 1997, from 25.6% for the year ended December 31, 1996. The dollar increase
was primarily due to the Company's increased number of services offered. The
decrease in professional services revenues as a percentage of total revenues was
primarily due to strong growth in revenues from software licenses, along with an
increase in related professional services backlog.
Hardware Revenues. Hardware revenues increased by 28% to $11.8 million for
the year ended December 31, 1997, from $9.2 million for the year ended December
31, 1996. As a percentage of total revenues, hardware revenues decreased to
17.8% for the year ended December 31, 1997, from 20.1% for the year ended
December 31, 1996. The dollar increase resulted from the Company's expansion of
its third-party re-marketing sales through IBM. The decrease in hardware
revenues as a percentage of total revenues was primarily due to stronger growth
in software license revenues.
Maintenance and Other Revenues. Maintenance and other revenues increased
by 39% to $12.6 million for the year ended December 31, 1997, from $9.0 million
for the year ended December 31, 1996. As a percentage of total revenues,
maintenance and other revenues decreased to 19.0% for the year ended December
31, 1997, from 19.7% for the year ended December 31, 1996. The dollar increase
resulted from maintenance contracts associated with new software licenses,
customer system upgrades and price increases in the fees charged for annual
maintenance. The decrease in maintenance and other revenues as a percentage of
total revenues was primarily due to stronger growth in software license
revenues.
Resource Management Revenues. During 1997, the Company began offering the
resource management service that allows customers to turn over management of all
computer related functions. In October 1997, the Company signed its first
resource management contract with Seminole County, Florida. Resource management
revenues for the year ended December 31, 1997 were $448,000 or 0.7% of total
revenues.
Cost of Revenues
Cost of Software Licenses Revenues. Cost of software licenses increased by
41% to $5.3 million for the year ended December 31, 1997, from $3.7 million for
the year ended December 31, 1996. As a percentage of software license revenues,
cost of software licenses decreased to 19.7% for the year ended December 31,
1997, from 23.6% for the year ended December 31, 1996. The dollar increase
resulted from an increased number of software licenses. The decrease in the cost
of software licenses as a percentage of software license revenues was primarily
due to the growth of internal software licenses which exceeded the growth of
third party software licenses.
Cost of Professional Services Revenues. Cost of professional services
increased by 24% to $8.4 million for the year ended December 31, 1997, from $6.7
million for the year ended December 31, 1996. As a percentage of professional
services revenues, cost of professional services increased to 57.5% for the year
ended December 31, 1997, from 57.4% for the year ended December 31, 1996. The
dollar increase resulted from the growth in professional services revenues.
Cost of Hardware Revenues. Cost of hardware increased by 26% to $9.2
million for the year ended December 31, 1997, from $7.3 million for the year
ended December 31, 1996. As a percentage of hardware revenues, cost of hardware
decreased to 78.3% for the year ended December 31, 1997, from 79.3% for the year
ended December 31, 1996. The dollar increase is directly related to the
increased hardware sales. The decrease in the cost of hardware revenues as a
percentage of hardware revenues was primarily due to slightly improved margins
on the larger hardware transactions.
Cost of Maintenance and Other Revenues. Cost of maintenance and other
increased by 66% to $6.0 million for the year ended December 31, 1997, from $3.6
million for the year ended December 31, 1996.
20
<PAGE> 24
As a percentage of maintenance and other revenues, cost of maintenance and other
increased to 47.6% for the year ended December 31, 1997, from 39.8% for the year
ended December 31, 1996. The dollar increase was primarily due to investment in
new customer support processes, increased personnel to enhance products and
additional computer equipment required to handle graphical user interfaces. The
increase in the cost of maintenance and other revenues as a percentage of
maintenance and other revenues was primarily due to costs related to building
infrastructure to accommodate the growth in client base.
Cost of Resource Management Revenues. Cost of resource management was
$343,000 for the year ended December 31, 1997. As a percentage of resource
management revenues, cost of resource management was 76.6% for the year ended
December 31, 1997. There were no comparable costs for the year ended December
31, 1996, as this division began operations in the fourth quarter of 1997.
Research and Development Expenses. Research and development expenses
increased by 26% to $8.3 million for the year ended December 31, 1997, from $6.5
million for the year ended December 31, 1996. As a percentage of total revenues,
research and development expenses decreased to 12.5% for the year ended December
31, 1997, from 14.3% for the year ended December 31, 1996. The dollar increase
was primarily due to increased staffing levels and associated costs and expenses
related to additional software and hardware required to enable the development
of additional products and platforms. The decrease in research and development
expenses as a percentage of total revenues was primarily due to revenues growing
at a faster rate than research and development expenditures.
Sales and Marketing Expenses. Sales and marketing expenses increased by
49% to $11.5 million for the year ended December 31, 1997, from $7.7 million for
the year ended December 31, 1996. As a percentage of total revenues, sales and
marketing expenses increased to 17.4% for the year ended December 31, 1997, from
16.9% for the year ended December 31, 1996. The dollar and percentage increases
were attributable to the Company's continued expansion of its direct sales
force, increased marketing efforts, travel and other expenses related to
increased sales activity.
General and Administrative Expenses. General and administrative expenses
increased by 42% to $10.9 million for the year ended December 31, 1997, from
$7.7 million for the year ended December 31, 1996. As a percentage of total
revenues, general and administrative expenses decreased to 16.5% for the year
ended December 31, 1997, from 16.8% for the year ended December 31, 1996. The
dollar increase was due to additional staffing, space, computer equipment and
software required to build the infrastructure to support the Company's growth.
The decrease in general and administrative expenses as a percentage of total
revenues was primarily due to the leveraging of existing resources.
Nine Months Ended December 31, 1996 Compared to Nine Months Ended December 31,
1995
Revenues
The Company's total revenues increased by 23% to $34.5 million for the nine
months ended December 31, 1996, from $28.0 million for the nine months ended
December 31, 1995.
Software Licenses Revenues. Software licenses revenues increased by 60% to
$10.9 million for the nine months ended December 31, 1996, from $6.8 million for
the nine months ended December 31, 1995. As a percentage of total revenues,
software license revenues increased to 31.5% for the nine months ended December
31, 1996, from 24.2% for the nine months ended December 31, 1995. The dollar and
percentage increases resulted primarily from an increased number of applications
available for sale combined with the benefits of an increased investment in
sales and marketing.
Professional Services Revenues. Professional services revenues increased
by 21% to $8.9 million for the nine months ended December 31, 1996, from $7.4
million for the nine months ending December 31, 1995. As a percentage of total
revenues, professional services revenues decreased to 25.9% for the nine months
ended December 31, 1996, from 26.3% for the nine months ended December 31, 1995.
The dollar increase was primarily due to the increase in the number of its
service offerings. The decrease in professional services revenues as a
percentage of total revenues was primarily due to the impact of a large contract
that ended in the year ended December 31, 1995.
21
<PAGE> 25
Hardware Revenues. Hardware revenues increased by 33% to $7.7 million for
the nine months ended December 31, 1996, from $5.8 million for the nine months
ended December 31, 1995. As a percentage of total revenues, hardware revenues
increased to 22.4% for the nine months ended December 31, 1996, from 20.9% for
the nine months ended December 31, 1995. The dollar and percentage increases
were primarily due to the Company's expansion of its third party remarketing
sales through IBM.
Maintenance and Other Revenues. Maintenance and other revenues decreased
by 13% to $7.0 million for the nine months ended December 31, 1996, from $8.0
million for the nine months ended December 31, 1995. As a percentage of total
revenues, maintenance and other revenues decreased to 20.2% for the nine months
ended December 31, 1996, from 28.6% for the nine months ended December 31, 1995.
The dollar and percentage decreases were primarily due to a large support
contract in the nine months ended December 31, 1995.
Cost of Revenues
Cost of Software Licenses Revenues. Cost of software licenses increased by
5% to $2.9 million for the nine months ended December 31, 1996, from $2.8
million for the nine months ended December 31, 1995. As a percentage of software
license revenues, cost of software licenses decreased to 26.9% for the nine
months ended December 31, 1996, from 41.1% for the nine months ended December
31, 1995. Excluding the charge related to the acceleration of amortization of
computer software development costs of $1.0 million during the nine months ended
December 31, 1995, the increase was $1.1 million or 62% in the nine months ended
December 31, 1996 compared to the nine months ended December 31, 1995. This
change was primarily due to increased costs related to third party public safety
products.
Cost of Professional Services Revenues. Cost of professional services
decreased by 12% to $5.0 million for the nine months ended December 31, 1996,
from $5.6 million for the nine months ended December 31, 1995. As a percentage
of professional services revenues, cost of professional services decreased to
55.4% for the nine months ended December 31, 1996, from 76.3% for the nine
months ended December 31, 1995. The dollar and percentage decreases resulted
from minimizing non-billable travel and other administrative costs as this line
of business expanded.
Cost of Hardware Revenues. Cost of hardware increased by 33% to $6.2
million for the nine months ended December 31, 1996, from $4.7 million for the
nine months ended December 31, 1995. As a percentage of hardware revenues, cost
of hardware increased to 79.9% for the nine months ended December 31, 1996, from
79.8% for the nine months ended December 31, 1995. The dollar increase is
directly related to increased sales of hardware.
Cost of Maintenance and Other Revenues. Cost of maintenance and other
decreased by 15% to $2.7 million for the nine months ended December 31, 1996,
from $3.2 million for the nine months ended December 31, 1995. As a percentage
of maintenance and other revenues, cost of maintenance and other decreased to
38.9% for the nine months ended December 31, 1996, from 39.5% for the nine
months ended December 31, 1995. The dollar and percentage decreases were
primarily due to a large support contract in 1995.
Research and Development Expenses. Research and development expenses
increased by 58% to $5.2 million for the nine months ended December 31, 1996,
from $3.3 million for the nine months ended December 31, 1995. As a percentage
of total revenues, research and development expenses increased to 15.2% for the
nine months ended December 31, 1996, from 11.8% for the nine months ended
December 31, 1995. The dollar increase was primarily due to increased staffing
levels and associated costs. The increase in research and development expenses
as a percentage of total revenues was primarily due to increased staffing levels
and expenses for additional software and hardware required for the development
of additional products and platforms as well as maintenance and enhancements of
existing products.
Sales and Marketing Expenses. Sales and marketing expenses increased by
57% to $6.2 million for the nine months ended December 31, 1996, from $3.9
million for the nine months ended December 31, 1995. As a percentage of total
revenues, sales and marketing expenses increased to 17.9% for the nine months
ended
22
<PAGE> 26
December 31, 1996, from 14.1% for the nine months ended December 31, 1995. The
dollar and percentage increases were attributable to the Company's expansion of
its direct sales force, increased marketing efforts, travel and other expenses
related directly to increased sales activity.
General and Administrative Expenses. General and administrative expenses
increased by 17% to $5.8 million for the nine months ended December 31, 1996,
from $5.0 million for the nine months ended December 31, 1995. As a percentage
of total revenues, general and administrative expenses decreased to 16.9% for
the nine months ended December 31, 1996, from 17.9% for the nine months ended
December 31, 1995. The dollar increase was primarily due to additional staffing
in finance and accounting, human resources and contract administration required
to support the Company's growth. The decrease in general and administrative
expenses as a percentage of total revenues was primarily due to better
leveraging of resources compared to growth in revenues.
LIQUIDITY AND CAPITAL RESOURCES
Prior to 1997, the Company funded its operations primarily through cash
generated from operations, supplemented by borrowings under a bank line of
credit and the private sale of equity securities. On June 11, 1997, the Company
completed its initial public offering of common stock (the "IPO"). The Company
received $22.6 million from the IPO, net of issuance costs. Cash flow (used in)
provided by operating activities was $(3.3) million and $4.7 million for the
year ended December 31, 1998 and 1997, on net income of $982,000 and $4.0
million, respectively. Cash flow provided by operating activities was $4.7
million and $2.9 million for the years ended December 31, 1997 and 1996, on net
income of $4.0 million and $819,000 respectively. Cash flow provided by (used
in) operating activities was $1.8 million and $(488,000) for the nine months
ended December 31, 1996 and 1995, on net (loss) income of $(290,000) and
$46,000, respectively.
Cash used in investing activities (capital expenditures, software
development investments and acquisitions) totaled $7.9 million and $6.6 million
during the year ended December 31, 1998 and 1997, respectively. Cash used in
investing activities totaled $6.6 million and $3.3 million for the years ended
December 31, 1997 and 1996. Cash used in investing activities totaled $2.6
million for each of the nine months ended December 31, 1996 and 1995. In 1998,
the Company completed two cash purchase acquisitions: Jalan, Inc. and Vanguard
Management and Information Systems, Inc. The Company's capital expenditures were
primarily comprised of investments in equipment and related software associated
with increased staffing. In addition, the Company made significant investments
in upgrading internal systems. The Company made expenditures of $4.7 million in
1998 related to software development efforts for additional products and
platforms.
Net cash provided by financing activities was $167,000 in the year ended
December 31, 1998, reflecting the proceeds from sales of common stock through
the Employee Stock Purchase Plan and stock option agreements, partially offset
by the payment of amounts due to stockholders related to the UCS acquisition,
compared to cash provided of $19.5 million in the year ended December 31, 1997,
related primarily to the proceeds from the IPO, offset partially by the
repayment of a line of credit and payment of dividends on the mandatorily
redeemable preferred stock. Net cash provided by financing activities was $19.5
million in the year ended December 31, 1997, compared to $341,000 in the
comparable 1996 period. In 1997, net proceeds from the IPO of $22.6 million were
partially offset by repayment of long-term debt, payment of accrued dividends on
mandatorily redeemable preferred stock and pay-off of a note payable to related
parties. Cash flow provided by financing activities was $914,000 for the nine
months ended December 31, 1996, relating primarily to the issuance of capital
stock which raised $252,000 and net borrowings of $662,000, compared to cash
provided of $2.2 million for the nine months ended December 31, 1995.
In October 1998, the Company signed an agreement (the "Loan Agreement")
with SunTrust Bank, Central Florida, National Association (the "Bank") for a
revolving line of credit of $15.0 million. This line of credit bears interest at
LIBOR plus 1.7 percent and extends through June 30, 2000, at which time the
entire unpaid principal balance and any accrued interest is payable in full. The
line of credit is collateralized by the Company's assets, including, but not
limited to, accounts receivable, general intangibles, inventory and
23
<PAGE> 27
equipment, and requires the Company to maintain certain financial ratios.
Borrowings under the Loan Agreement may be made for financing operations and
interim acquisition financing.
The Company believes its cash balances, cash generated from operations, and
borrowings available under the Loan Agreement will satisfy the Company's working
capital and capital expenditure requirements for at least the next 12 months. In
the longer term, the Company may require additional sources of liquidity to fund
future growth. Such sources of liquidity may include additional equity offerings
or debt financings.
YEAR 2000 COMPLIANCE
Risks Associated with the Year 2000. Many currently installed computer
systems and software products are coded to accept only two digit entries in the
date code field. These date code fields will need to accept four digit entries
to distinguish 21st century dates from 20th century dates. As a result, in less
than two years, computer systems and software used by many companies will need
to be upgraded to comply with such "Year 2000" requirements. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such compliance. There are several aspects to the Year 2000
issues as follows:
Impact on Revenues. The Company believes that the purchasing patterns of
customers and potential customers may be affected by Year 2000 issues in a
variety of ways. Many companies are expending significant resources to correct
or patch their current software systems for Year 2000 compliance. These
expenditures may result in reduced funds available to purchase software products
such as those offered by the Company. Conversely, Year 2000 issues may cause
other companies to accelerate purchases of software to replace non-Year 2000
compliant applications, causing a short-term increase in demand for the
Company's products. There is no assurance that such increase in demand will be
realized. Either of the foregoing could have a material adverse effect upon the
Company's business, operating results and financial condition.
Year 2000 Compliance. The Company believes that the current versions of
its products are Year 2000 compliant. The Company regularly runs regression
tests on its software, including tests of the Year 2000 rollover. Based on the
above, it is not expected that the Company's products will be adversely affected
by date changes in the Year 2000. However, there can be no assurance that the
Company's products contain and will contain all features and functionality
considered necessary by customers, distributors, resellers and systems
integrators to be Year 2000 compliant. Notwithstanding that the Company
regularly provides free software upgrades to its customers and that these recent
upgrades are Year 2000 compliant, certain customers of the Company may still be
running earlier, non-compliant versions of the Company's products. The Company
is in the process of informing customers of the need to migrate to current
products that management believes are Year 2000 compliant. The Company
anticipates that generally throughout the software industry substantial
litigation may be brought against software vendors of non-compliant operating
environments. The Company believes that any such claims against the Company,
with or without merit, could have a material adverse effect on the Company's
business, operating results and financial condition.
Internal Systems. The Company has also reviewed its internal systems for
Year 2000 compliance and is in the process of upgrading to Year 2000 compliant
versions from third party software vendors, modifying certain systems, and
planning to replace certain systems with new third party software, which the
Company expects to complete prior to January 1, 2000. In addition to making its
own systems Year 2000 ready, the Company has also begun to contact its key
suppliers and vendors to determine the extent to which the systems of such
suppliers and vendors are Year 2000 compliant and the extent to which the
Company could be affected by the failure of such third parties to be Year 2000
compliant. The Company has appointed its Manager of Quality Assurance to oversee
all activities associated with Year 2000 compliance issues. A standing committee
meets on a monthly basis to review appropriate activities. Management does not
believe that the cost to bring its software products and internal systems into
Year 2000 compliance will have a material adverse effect on the Company's
results of operations or financial condition. However, delays in upgrading some
systems to Year 2000 compliance, or a failure to fully identify all Year 2000
dependencies in the Company's systems and in the systems of its suppliers,
vendors, and financial institutions could have material adverse consequences,
including delays in the delivery or sale of products.
24
<PAGE> 28
Expenses Related to Year 2000 Compliance. The Company has not incurred
significant expense in becoming Year 2000 compliant as this has been achieved as
a part of regular upgrades to its internal operating systems. Future costs
related to Year 2000 compliance are not expected to have a material adverse
effect on the Company's results of operations or financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No information has been presented pursuant to Item 7A as the Company does
not have any financial instruments outstanding as of December 31, 1998,
requiring market risk disclosure or material foreign currency exposure requiring
market risk disclosure.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements appear beginning at page
F-1 of this Report. See Item 14 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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 12, 1999.
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 12, 1999. 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 12, 1999 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 12, 1999.
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 12, 1999.
25
<PAGE> 29
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 1998........... F-4
Statements of Operations for the nine months ended
December 31, 1996 and the years ended December 31, 1997
and 1998............................................... F-5
Statements of Stockholders' Equity (Deficit) and
Comprehensive Income for the nine months ended December
31, 1996 and the years ended December 31, 1997 and
1998................................................... F-6
Statements of Cash Flows for the nine months ended
December 31, 1996 and the years ended December 31, 1997
and 1998............................................... F-7
Notes to Consolidated Financial Statements................ F-9
</TABLE>
(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
No reports on Form 8-K were filed during the last quarter of the fiscal
year ended December 31, 1998.
26
<PAGE> 30
(C) EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER NAME
- ------ ------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement (1)
3.1 Amended Articles of Incorporation (1)
3.11 Articles of Amendment to Articles of Incorporation (3)
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)
10.13 Agreement and Plan of Merger (acquisition of UCS, Inc.) (4)
10.13 Amendment to Agreement and Plan of Merger (acquisition of
UCS, Inc.) (4)
21.0 Subsidiaries of the Registrant (5)
23.1 Consent of Arthur Andersen LLP (5)
23.2 Consent of PricewaterhouseCoopers LLP (5)
27.0 Financial Data Schedule (submitted only in electronic
format) (5)
99.1 Safe Harbor Compliance Statement for Forward-Looking
Statements (5)
</TABLE>
- ---------------
(1) Incorporated by reference to Registrant's Form S-1 Registration Statement
(File No. 333-22637).
(2) Incorporated by reference to Registrant's Form 10-Q for the quarter ended
June 30, 1997.
(3) Incorporated by reference to Registrant's Form 10-Q for the quarter ended
June 30, 1998.
(4) Incorporated by reference to Registrant's Form 8-K dated June 1, 1998.
(5) Filed herewith.
27
<PAGE> 31
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.
/s/ DENNIS J. HARWARD
--------------------------------------
Dennis J. Harward
Chairman of the Board of Directors,
President and Chief Executive Officer
and Director (principal executive
officer)
Date: March 30, 1999
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
- --------- ----- ----
<C> <S> <C>
/s/ DENNIS J. HARWARD Chairman of the Board of March 30, 1999
- --------------------------------------------------- Directors, President and Chief
Dennis J. Harward Executive Officer and Director
(principal executive officer)
/s/ JACK L. HARWARD Executive Vice President and March 30, 1999
- --------------------------------------------------- Director
Jack L. Harward
/s/ SUSAN D. FALOTICO Vice President, Chief Financial March 30, 1999
- --------------------------------------------------- Officer (principal financial
Susan D. Falotico officer)
/s/ O.F. RAMOS Executive Vice President and March 30, 1999
- --------------------------------------------------- Director
O.F. Ramos
/s/ BERNARD B. MARKEY Director March 30, 1999
- ---------------------------------------------------
Bernard B. Markey
/s/ RAYMOND AMBROSE Director March 30, 1999
- ---------------------------------------------------
Raymond Ambrose
/s/ EDWARD A. MOSES Director March 30, 1999
- ---------------------------------------------------
Edward Moses
</TABLE>
28
<PAGE> 32
HTE, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.......... F-2
CONSOLIDATED BALANCE SHEETS................................. F-4
CONSOLIDATED STATEMENTS OF OPERATIONS....................... F-5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE INCOME.................................. F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS....................... F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-9
</TABLE>
F-1
<PAGE> 33
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To H.T.E., Inc.:
We have audited the accompanying consolidated balance sheets of H.T.E.,
Inc. (a Florida corporation) and subsidiaries as of December 31, 1997 and 1998,
and the related consolidated statements of operations, stockholders' equity
(deficit) and comprehensive income and cash flows for the nine months ended
December 31, 1996, and the years ended December 31, 1997 and 1998, which give
retroactive effect to the merger with UCS, Inc. on June 1, 1998, which has been
accounted for as a pooling of interests. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of UCS, Inc. for the nine months ended December 31, 1996,
and the year ended December 31, 1997, which statements reflect total assets
constituting five percent, as of December 31, 1997, and total revenues
constituting 17 percent and 15 percent, for the nine months ended December 31,
1996, and the year ended December 31, 1997, respectively, of the related
consolidated totals. Those statements were audited by other auditors whose
reports thereon have been furnished to us, and our opinion, insofar as it
relates to amounts included for UCS, Inc., is based solely upon the reports of
the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based upon our audits and the reports of the other
auditors, the financial statements referred to above present fairly, in all
material respects, the financial position of H.T.E., Inc. and its subsidiaries
as of December 31, 1997 and 1998, and the results of their operations and their
cash flows for the nine months ended December 31, 1996, and the years ended
December 31, 1997 and 1998, after giving retroactive effect to the merger with
UCS, Inc. as described in Note 1 to the consolidated financial statements, in
conformity with generally accepted accounting principles.
/S/ ARTHUR ANDERSEN LLP
Orlando, Florida,
February 10, 1999
F-2
<PAGE> 34
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of UCS, Inc.:
In our opinion, the related statements of operations and stockholders'
equity and of cash flows (not presented separately herein), present fairly, in
all material respects, the results of the operations of UCS, Inc. and its cash
flows for the period April 1, 1996 through December 31, 1996 in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Miami, Florida
July 7, 1998
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of UCS, Inc.:
In our opinion, the balance sheet and the related statements of operations
and stockholders' equity and of cash flows (not presented separately herein),
present fairly, in all material respects, the financial position of UCS, Inc. at
December 31, 1997, and the results of its operations and its cash flows for the
year in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above. We have not audited the financial statements of UCS, Inc. as of any date
or for any period subsequent to December 31, 1997.
/s/ PRICE WATERHOUSE LLP
Miami, Florida
April 10, 1998
F-3
<PAGE> 35
HTE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $18,634 $ 7,553
Restricted cash........................................... 1,574 --
Trade accounts receivable, less allowance of $617 and
$1,351 for doubtful accounts at December 31, 1997 and
1998, respectively..................................... 22,822 40,635
Income tax receivable..................................... -- 3,050
Deferred income taxes (Note 8)............................ 751 485
Prepaid commissions....................................... -- 2,774
Other current assets...................................... 1,405 1,573
------- -------
Total current assets.............................. 45,186 56,070
------- -------
EQUIPMENT, FURNITURE AND FIXTURES, net (Note 2)............. 3,257 4,587
------- -------
OTHER ASSETS:
Computer software development costs, net of accumulated
amortization of $8,458 and $11,401 at December 31, 1997
and 1998, respectively................................. 4,329 6,393
Other intangible assets, net (Note 3)..................... 1,239 2,498
Deposits.................................................. 197 283
------- -------
Total other assets................................ 5,765 9,174
------- -------
$54,208 $69,831
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 3,134 $ 5,856
Accrued liabilities....................................... 5,235 5,973
Deferred revenue.......................................... 12,430 22,163
------- -------
Total current liabilities......................... 20,799 33,992
------- -------
LONG-TERM LIABILITIES:
Due to stockholders....................................... 1,213 --
Deferred lease commitment (Note 9)........................ 173 385
Deferred income taxes (Note 8)............................ 1,731 2,515
------- -------
Total long-term liabilities....................... 3,117 2,900
------- -------
COMMITMENTS AND CONTINGENCIES (Notes 4, 7, 9 and 10)
STOCKHOLDERS' EQUITY (Note 5):
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued and outstanding................ -- --
Common stock, $.01 par value, 50,000,000 shares
authorized, 16,472,792 and 17,012,864 shares issued and
outstanding as of December 31, 1997 and 1998,
respectively........................................... 165 170
Additional paid-in capital................................ 27,999 29,661
Retained earnings......................................... 2,122 3,144
Cumulative translation adjustment......................... 6 (36)
------- -------
Total stockholders' equity........................ 30,292 32,939
------- -------
$54,208 $69,831
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE> 36
HTE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Software licenses......................................... $10,869 $26,762 $43,277
Professional services..................................... 8,943 14,543 20,870
Hardware.................................................. 7,740 11,768 15,516
Maintenance and other..................................... 6,950 12,571 17,793
Resource management....................................... -- 448 1,449
------- ------- -------
Total revenues..................................... 34,502 66,092 98,905
------- ------- -------
EXPENSES:
Cost of software licenses................................. 2,919 5,283 8,843
Cost of professional services............................. 4,952 8,363 13,399
Cost of hardware.......................................... 6,186 9,209 13,050
Cost of maintenance and other............................. 2,705 5,984 10,041
Cost of resource management............................... -- 343 918
Research and development.................................. 5,242 8,256 14,048
Sales and marketing....................................... 6,186 11,520 20,526
General and administrative................................ 5,830 10,925 15,614
Offering costs............................................ -- -- 552
------- ------- -------
Total expenses..................................... 34,020 59,883 96,991
------- ------- -------
INCOME FROM OPERATIONS...................................... 482 6,209 1,914
OTHER EXPENSE (INCOME):
Interest expense.......................................... 191 175 49
Interest income........................................... -- (402) (370)
------- ------- -------
Total other expense (income)....................... 191 (227) (321)
------- ------- -------
INCOME BEFORE INCOME TAXES.................................. 291 6,436 2,235
INCOME TAXES:
Deferred tax provision related to acquisitions............ -- -- 339
Provision for income taxes (Note 8)....................... 581 2,482 914
------- ------- -------
NET INCOME (LOSS)........................................... (290) 3,954 982
ACCRETION AND ACCRUAL OF DIVIDENDS ON MANDATORILY REDEEMABLE
PREFERRED STOCK........................................... 1,003 1,308 --
------- ------- -------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS....... $(1,293) $ 2,646 $ 982
======= ======= =======
NET INCOME (LOSS) PER SHARE:
Basic..................................................... $ (0.16) $ 0.21 $ 0.06
======= ======= =======
Diluted................................................... $ (0.16) $ 0.20 $ 0.06
======= ======= =======
PRO FORMA NET INCOME DATA (UNAUDITED):
Income before income taxes................................ $ 291 $ 6,436 $ 2,235
Pro forma provision for income taxes...................... 158 2,463 864
------- ------- -------
PRO FORMA NET INCOME........................................ $ 133 $ 3,973 $ 1,371
======= ======= =======
PRO FORMA NET INCOME PER SHARE:
Basic..................................................... $ 0.01 $ 0.28 $ 0.08
======= ======= =======
Diluted................................................... $ 0.01 $ 0.27 $ 0.08
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 37
HTE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE INCOME
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS A NOTES
COMMON STOCK COMMON STOCK ADDITIONAL RETAINED CUMULATIVE RECEIVABLE
--------------- --------------- PAID-IN EARNINGS TRANSLATION FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) ADJUSTMENT STOCKHOLDERS TOTAL
------ ------ ------ ------ ---------- ----------- ----------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1996..... 1,083 $ 11 3,528 $ 1 $ 337 $1,032 $ -- $(262) $ 1,119
Issuance of common
stock................... -- -- 3 -- 5 -- -- -- 5
Accretion of mandatorily
redeemable preferred
stock to redemption
value................... -- -- -- -- -- (838) -- -- (838)
Accrual of mandatorily
redeemable preferred
stock dividends......... -- -- -- -- -- (165) -- -- (165)
Advances on notes
receivable from
stockholders............ -- -- -- -- -- -- -- (1) (1)
Forgiveness of notes
receivable from
stockholders............ -- -- -- -- -- (263) -- 263 --
Comprehensive income:
Net loss................ -- -- -- -- -- (290) -- --
Translation
adjustment............ -- -- -- -- -- -- (5) --
Total comprehensive
income............ -- -- -- -- -- -- -- -- (295)
------ ---- ------ ---- ------- ------ ---- ----- -------
BALANCE, DECEMBER 31,
1996...................... 1,083 11 3,531 1 342 (524) (5) -- (175)
Stock exchanged for
options in connection
with UCS Merger......... 13 -- -- -- -- -- -- -- --
Accretion of mandatorily
redeemable preferred
stock to redemption
value................... -- -- -- -- -- (1,117) -- -- (1,117)
Accrual of mandatorily
redeemable preferred
stock dividends......... -- -- -- -- -- (191) -- -- (191)
Compensation due to sale
of stock................ -- -- -- -- 65 -- -- -- 65
Conversion of mandatorily
redeemable preferred
stock................... 3,539 35 -- -- 4,952 -- -- -- 4,987
Conversion of mandatorily
redeemable Class C
common stock............ 127 1 -- -- 137 -- -- -- 138
Conversion of Class A
common stock............ 7,061 71 (3,531) (1) (70) -- -- -- --
Proceeds from sale of
common stock............ 4,650 47 -- -- 22,573 -- -- -- 22,620
Comprehensive income:
Net income.............. -- -- -- -- -- 3,954 -- --
Translation
adjustment............ -- -- -- -- -- -- 11 --
Total Comprehensive
income............ -- -- -- -- -- -- -- -- 3,965
------ ---- ------ ---- ------- ------ ---- ----- -------
BALANCE, DECEMBER 31,
1997...................... 16,473 165 -- -- 27,999 2,122 6 -- 30,292
Stock exchanged for
options in connection
with UCS merger, net of
fractional shares
repurchased............. 24 -- -- -- (2) -- -- -- (2)
Proceeds from exercise of
stock options........... 147 1 -- -- 613 -- -- -- 614
Proceeds from issuance of
stock under benefit
plan.................... 97 1 -- -- 765 -- -- 766
Stock issued in connection
with Phoenix
acquisition............. 272 3 -- -- -- 40 -- -- 43
Tax benefit associated
with stock options...... -- -- -- -- 286 -- -- -- 286
Comprehensive income:
Net income.............. -- -- -- -- -- 982 -- --
Translation
adjustment............ -- -- -- -- -- -- (42) --
Total comprehensive
income............ -- -- -- -- -- -- -- -- 940
------ ---- ------ ---- ------- ------ ---- ----- -------
BALANCE, DECEMBER 31,
1998...................... 17,013 $170 -- $ -- $29,661 $3,144 $(36) $ -- $32,939
====== ==== ====== ==== ======= ====== ==== ===== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 38
HTE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(NOTE 12)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................... $ (290) $ 3,954 $ 982
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................. 2,381 3,226 4,935
Accretion of mandatorily redeemable Class C
common stock charged to interest expense.... 7 19 --
Loss on disposal of equipment, furniture and
fixtures.................................... 6 -- 43
Compensation due to sale of stock.............. -- 65 --
Deferred income taxes.......................... 237 (84) 1,050
Tax benefit associated with stock options...... -- -- 286
Changes in operating assets and liabilities, net of
effect of acquisitions --
Increase in assets --
Trade accounts receivable -- net............... (5,085) (4,736) (17,586)
Income tax receivable.......................... -- -- (3,050)
Prepaid commissions............................ -- -- (2,774)
Other current assets........................... (124) (544) (105)
Deposits....................................... (61) (67) (86)
Increase (decrease) in liabilities --
Accounts payable............................... 755 125 2,722
Accrued liabilities............................ 655 855 738
Deferred revenue............................... 3,404 1,802 9,345
Deferred lease commitment...................... (105) 107 212
------- ------- --------
Net cash provided by (used in) operating
activities..................................... 1,780 4,722 (3,288)
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................ (505) (2,091) (2,595)
Proceeds from sale of investments................... 119 -- --
Change in restricted cash........................... -- (1,574) 1,574
Cash paid for acquisitions.......................... (375) (361) (2,213)
Computer software development costs................. (1,856) (2,616) (4,684)
------- ------- --------
Net cash used in investing activities............ (2,617) (6,642) (7,918)
------- ------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE> 39
HTE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(CONTINUED) (NOTE 12)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
------------ ------------ ------------
<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.......... 5 22,620 1,380
Net proceeds (repayments) under line of credit...... 336 (2,306) --
Repayments of long-term debt........................ (83) -- --
Repayments of obligations under capital leases...... (23) (34) --
Net repayments of notes payable to related
parties.......................................... (50) (300) --
Increase (decrease) in due to stockholders.......... 483 149 (1,213)
Advances on notes receivable from stockholders...... (1) -- --
------------ ------------ ------------
Net cash provided by financing activities........ 914 19,505 167
------------ ------------ ------------
Effect of foreign currency exchange rate changes on
cash and cash equivalents........................... (5) 11 (42)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS......................................... 72 17,596 (11,081)
CASH AND CASH EQUIVALENTS, beginning of period........ 966 1,038 18,634
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period.............. $ 1,038 $ 18,634 $ 7,553
============ ============ ============
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid for interest.............................. $ 187 $ 111 $ 49
Cash paid for income taxes.......................... 14 1,940 4,031
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-8
<PAGE> 40
HTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998
(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
H.T.E., Inc. (HTE), a Florida corporation, and its wholly-owned subsidiaries,
HTE Public Safety Illinois, Inc. (PSI), a Florida corporation, HTE-Software
Management, Inc. (SMI), a Florida corporation, HTE-Programmed For Success, Inc.
(PFS), a Florida corporation, HTE-Bellamy Ltd. (Bellamy), a Canadian
corporation, HTE-Kb Systems, Inc. (Kb Systems), a Florida corporation,
HTE-Jalan, Inc. (Jalan), a Florida corporation, HTE-Phoenix Systems, Inc., a
Florida corporation, HTE-UCS, Inc. (UCS), a Florida corporation and HTE-
Vanguard Systems, Inc., a Florida corporation (collectively, the Company). The
Company develops, markets, implements and supports fully-integrated
enterprise-wide software applications designed specifically for public sector
and utility organizations, including state, county and city governments, other
municipal agencies, and publicly and privately owned utilities. The Company is
also engaged in remarketing IBM hardware systems to run in concert with their
application software. The effect of the Company's foreign operations on the
accompanying consolidated financial statements was not material.
On June 1, 1998, the Company, through UCS, purchased privately held UCS,
Inc., in exchange for 1,120,000 shares of the Company's common stock valued at
approximately $15 million as of the April 1998 agreement valuation date. UCS,
Inc. is a mobile work force automation provider of field-based reporting
software. The acquisition has been accounted for as a pooling of interests.
Therefore, the accompanying consolidated financial statements include the
results of operations of UCS, Inc. for all periods presented.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned domestic and foreign subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
Change in Fiscal Year
The Company changed its fiscal year end from March 31 to December 31
effective with the year ended December 31, 1996. As a result, the fiscal period
ended December 31, 1996, presented herein is a nine-month period.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Restricted Cash
Restricted cash represents cash held in escrow in connection with the
JALAN, Inc. acquisition further discussed in Note 3.
F-9
<PAGE> 41
HTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 -- (CONTINUED)
Trade Accounts Receivable
Included in trade accounts receivable at December 31, 1997 and 1998, are
unbilled receivables of $7,898 and $12,210, respectively. The following table
reflects the activity in the allowance for doubtful accounts for the nine months
ended December 31, 1996, and the years ended December 31, 1997 and 1998:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Balance at the beginning of the
period.............................. $ 300 $ 520 $ 617
Provision............................. 320 200 934
Write-offs............................ (100) (103) (200)
----- ----- ------
Balance at the end of the period...... $ 520 $ 617 $1,351
===== ===== ======
</TABLE>
Equipment, Furniture and Fixtures
Equipment, furniture and fixtures are recorded at cost. Depreciation and
amortization are recorded for financial statement purposes on a straight-line
basis over the estimated useful lives of the assets. Repair and maintenance
costs which do not extend the useful lives of the related assets are expensed as
incurred.
The estimated useful lives of equipment, furniture and fixtures are as
follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Equipment.................................................. 2-10
Office furniture and fixtures.............................. 5-10
Leasehold improvements..................................... 5-10
</TABLE>
Depreciation and amortization expense related to equipment, furniture and
fixtures and leasehold improvements of $350, $643 and $1,285, is included in
general and administrative expenses on the accompanying consolidated statements
of operations for the nine months ended December 31, 1996, and the years ended
December 31, 1997 and 1998, respectively.
Computer Software Development Costs
All costs incurred to establish the technological feasibility of a computer
software product to be sold, leased or otherwise marketed are charged to
research and development expense as incurred. Technological feasibility of a
computer software product is established when the Company has completed all
planning, designing, coding and testing activities that are necessary to
establish that the product can be produced to meet its design specifications
including functions, features and technical performance requirements.
Costs of producing product masters incurred subsequent to establishing
technological feasibility are capitalized and are amortized on a straight-line
basis over three years once the product is available for general release to
customers. Such capitalized costs are reported at the lower of unamortized cost
or net realizable value.
The Company ceases capitalization of computer software costs when the
product is available for general release to customers. Costs of maintenance and
customer support are charged to expense when the related revenue is recognized
or when those costs are incurred, whichever occurs first.
Amortization expense related to computer software development costs of
$1,947, $2,296 and $2,943 is included in cost of software licenses in the
accompanying consolidated statements of operations for the nine months ended
December 31, 1996, and the years ended December 31, 1997 and 1998, respectively.
F-10
<PAGE> 42
HTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 -- (CONTINUED)
Other Intangible Assets
Other intangible assets consisted of the following as of December 31, 1997
and 1998:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
DESCRIPTION 1997 1998
- ----------- ------------ ------------
<S> <C> <C>
Goodwill........................................... $ 401 $ 416
Purchased software................................. 577 2,492
Customer lists..................................... 580 939
------ -------
1,558 3,847
Less -- Accumulated amortization................... (319) (1,349)
------ -------
$1,239 $ 2,498
====== =======
</TABLE>
Goodwill represents amounts paid in excess of the fair market value of net
tangible and identifiable intangible assets purchased in the acquisitions of
SMI, Bellamy and Kb Systems, Inc. and is amortized using the straight-line
method over a period of 60 months. Customer lists represent identifiable
intangible assets purchased in connection with the acquisitions of Bellamy, Kb
Systems, Inc., JALAN, Inc. and Vanguard Management and Information Systems, Inc.
(Vanguard) and are amortized over a period of 60 months. Purchased software
represents identifiable intangible assets purchased in connection with the
acquisitions of PFS, Bellamy, Kb Systems, Inc., JALAN, Inc. and Vanguard and is
amortized using the straight-line method over a period of 36 months.
Amortization expense related to goodwill and customer lists of $38, $158 and
$274 is included in general and administrative expenses in the accompanying
consolidated statements of operations for the nine months ended December 31,
1996 and the years ended December 31, 1997 and 1998, respectively. Amortization
expense related to the purchased software of $46, $129 and $756 is included in
the cost of software licenses in the accompanying consolidated statements of
operations for the nine months ended December 31, 1996 and the years ended
December 31, 1997 and 1998, 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 revenue 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 1998, the Company adopted Statement of Position (SOP) 97-2,
"Software Revenue Recognition," as amended by SOP 98-4, "Deferral of the
Effective Date of a Provision of SOP 97-2, Software Revenue Recognition" which
deferred for one year the effective date of certain provisions of SOP 97-2, with
respect to vendor-specific objective evidence. The adoption of this SOP did not
have a material impact on the Company's operating results and financial
position.
During 1998, the American Institute of Certified Public Accountants issued
SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect
to Certain Transactions," which further amended SOP 97-2 to require revenue
recognition using the "residual method" when certain criteria are met. SOP 98-9
also extends the deferral period of SOP 98-4 through fiscal years beginning on
or before March 15, 1999. All
F-11
<PAGE> 43
HTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 -- (CONTINUED)
other provisions of SOP 98-9 are effective for transactions entered into in
fiscal years beginning after March 15, 1999. Management has not determined the
effect, if any, of the guidance set forth in SOP 98-9 on its operating results
and financial position.
Income Taxes
The Company accounts for income taxes using an asset and liability approach
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.
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 cost for stock options issued to
employees using the intrinsic value based method of accounting. For stock
options granted to non-employees, compensation cost is measured using the fair
value based method. Additionally, the Company has provided pro forma disclosures
of net income and earnings per share as if the fair value based method had been
applied to all stock options issued by the Company (see Note 6). As the stock
options issued to employees have had no intrinsic value at the date of grant, no
compensation expense related to stock options issued has been recorded.
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. 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' equity
(deficit). 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.
Net Income (Loss) Per Share
Basic earnings per share was calculated by dividing net income (loss)
attributable to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted earnings per share was calculated
by dividing net income (loss) attributable to common stockholders after assumed
conversion of dilutive securities by the sum of the weighted average number of
common shares outstanding plus all dilutive potential common shares that were
outstanding during the period. Potential common shares included in the diluted
calculation related to stock options are computed using the treasury stock
method and consist of common stock which may be issuable upon the exercise of
outstanding common
F-12
<PAGE> 44
HTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 -- (CONTINUED)
stock options, when dilutive. Additionally, there were no securities that would
have impacted the net income (loss) amount used in the dilutive earnings per
share calculation for the periods presented.
The following table reconciles the number of shares utilized in the
earnings per share calculations (amounts in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Basic weighted-average shares outstanding..... 8,144 12,677 16,785
Common shares applicable to stock options..... -- 442 713
----- ------ ------
Diluted weighted-average shares outstanding... 8,144 13,119 17,498
===== ====== ======
</TABLE>
Options to purchase approximately 411,000 shares were outstanding as of
December 31, 1998, but were not included in the computation of diluted earnings
per share because they are antidilutive. All share and per share information in
the consolidated financial statements have been adjusted to give effect to the
two-for-one common stock split which was effective June 18, 1998.
Pro Forma Net Income and Pro Forma Net Income Per Share (Unaudited)
Pro forma net income has been presented to reflect tax expense based on
statutory rates for a subsidiary included in the consolidated results of
operations that had previously been taxed as a Sub-S corporation.
Pro forma basic net income per share has been calculated by dividing pro
forma net income by the weighted average number of common shares outstanding
during the period. Pro forma diluted net income per share was calculated by
dividing pro forma net income by the sum of the weighted average number of
common shares outstanding plus all additional common shares that would have been
outstanding if potentially dilutive common shares had been issued. The weighted
average number of common shares outstanding during the periods presented for the
pro forma net income per share calculations assume the conversion of the
mandatorily redeemable preferred stock and the mandatorily redeemable Class C
common stock into common stock as of the date such stock was first issued.
Carrying Value of Long-Lived Assets
The Company reviews the carrying value of all long-lived assets, including
equipment, furniture and fixtures, computer software development costs, and
other intangible assets, whenever events or changes in circumstances indicate
that the carrying value may not be recoverable through projected undiscounted
future operating cash flows. Although no impairment is indicated at December 31,
1998, 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.
F-13
<PAGE> 45
HTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 -- (CONTINUED)
Fair Value of Financial Instruments
The carrying amounts of the Company's financial assets and liabilities,
including cash and cash equivalents, trade accounts receivable and accounts
payable at December 31, 1997 and 1998, approximate fair value because of the
short maturity of these instruments.
Recent Accounting Pronouncements
In June 1997, the FASB issued the Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130
establishes standards for reporting and display of comprehensive income and its
components. The provisions of this statement became effective for fiscal years
beginning after December 31, 1997, and were adopted by the Company for the year
ended December 31, 1998. As this statement pertains to disclosure and
informational requirements, it has no impact on the Company's operating results
or financial position. The Company's only adjustment to arrive at comprehensive
income is the foreign currency translation adjustment and is presented in the
accompanying consolidated statements of stockholders' equity (deficit) and
comprehensive income.
In June 1997, the FASB also issued the Statement of Financial Accounting
Standards No. 131 "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131). SFAS 131 establishes standards for reporting
information about operating segments. The provisions of this statement became
effective for fiscal years beginning after December 31, 1997, and were adopted
by the Company for the year ended December 31, 1998. As this statement pertains
to disclosure and informational requirements, it has no impact on the Company's
operating results or financial position. Although the Company has five operating
segments, separate segment data has not been presented as they meet the criteria
set forth in SFAS 131 for aggregation.
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, 1997 and 1998:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
Equipment.......................................... $ 4,593 $ 6,063
Office furniture and fixtures...................... 900 855
Leasehold improvements............................. 1,018 1,002
------- -------
6,511 7,920
Less -- Accumulated depreciation and
amortization..................................... (3,254) (3,333)
------- -------
$ 3,257 $ 4,587
======= =======
</TABLE>
3. BUSINESS COMBINATIONS:
PURCHASES
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 5) valued at $1.76 per share. The value of the mandatorily
F-14
<PAGE> 46
HTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 -- (CONTINUED)
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.
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 plus $61 in legal fees. 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 the purchase agreement of $199. This
acquisition has been accounted for as a purchase in the accompanying
consolidated financial statements.
During the year ended December 31, 1998, the Company purchased the net
assets of JALAN, Inc. for $1,723. The assets purchased consisted of equipment,
furniture and fixtures 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 has been accounted for as a purchase in the accompanying
consolidated financial statements.
During the year ended December 31, 1998, the Company created HTE-Vanguard
Systems, Inc., a wholly-owned subsidiary, which purchased the net assets of
Vanguard Management and Information Systems, Inc. for $400 in cash plus $20 in
legal fees. The assets purchased consisted of accounts receivable, equipment,
furniture and fixtures, purchased software and other intangible assets. As part
of the purchase agreement, the Company also assumed various customer service
liabilities. Additionally, the Company entered into a royalty agreement with
Vanguard for approximately 5 years and was granted offset rights against royalty
payments due under the purchase agreement of $63. This acquisition has been
accounted for as a purchase in the accompanying consolidated financial
statements.
Revenues, net income and earnings per share presented on a pro forma basis,
as if the acquisitions had occurred at the beginning of each period presented,
are as follows (unaudited):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
Revenues........................................... $69,955 $99,316
Net income......................................... 4,195 1,080
Basic earnings per share........................... $ 0.33 $ 0.06
Diluted earnings per share......................... $ 0.32 $ 0.06
</TABLE>
POOLING OF INTERESTS
On April 1, 1998, the Company purchased privately held Phoenix Systems, LLC
(Phoenix), in exchange for 272,036 shares of the Company's common stock valued
at approximately $3 million on or about the closing date. Phoenix provides a
suite of integrated software products targeted towards school districts
(kindergarten through 12th grade). The acquisition was accounted for as a
pooling-of-interests, although the Company did not restate the results of prior
periods due to the financial immateriality of Phoenix's historical operations.
Therefore, the transaction has been recorded through an adjustment of $40 to
retained earnings during 1998.
F-15
<PAGE> 47
HTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 -- (CONTINUED)
In connection with the acquisitions of UCS, Inc. (described in Note 1) and
Phoenix, the Company recorded a non-recurring deferred income tax charge of $339
during the year ended December 31, 1998. This provision recorded the deferred
tax liability of UCS, Inc. and Phoenix due to changes in tax status on the
acquisition dates for federal income tax reporting purposes.
4. LINE OF CREDIT:
During 1996, 1997 and part of 1998, the Company had a line of credit with a
commercial bank. There were no borrowings outstanding under the line of credit
at December 31, 1997.
In 1998, the Company replaced the existing line of credit with a revolving
line of credit of $15,000. This line of credit bears interest at LIBOR plus 1.7
percent and extends through June 30, 2000, at which time the entire unpaid
principal balance and any accrued interest is payable in full. The line of
credit is collateralized by the Company's assets, including, but not limited to,
accounts receivable, general intangibles, inventory and equipment. There were no
borrowings outstanding under the line of credit at December 31, 1998. The line
of credit requires the Company to maintain certain financial ratios. As of
December 31, 1998, the Company was in compliance with all debt covenants.
5. STOCKHOLDERS' EQUITY (DEFICIT):
During the year ended 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 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.
Prior to the IPO, the Company had two classes of mandatorily redeemable
securities outstanding. The mandatorily redeemable preferred stock carried
annual dividends, which were cumulative, and were convertible into common stock
based on a formula defined in the Company's Articles of Incorporation. During
the nine months ended December 31, 1996, and the year ended December 31, 1997,
the Company recorded an accretion in value for the mandatorily redeemable
preferred stock of $838 and $1,117, respectively. The Company had also issued
mandatorily redeemable Class C common stock in connection with the Bellamy
acquisition (see Note 3).
On June 10, 1997, the Company's IPO registration statement on Form S-1 was
declared effective by the U.S. Securities and Exchange Commission. Concurrent
with the effectiveness of the registration statement, the Company completed a
recapitalization pursuant to which (i) the number of authorized shares of the
Company's Class A common stock and mandatorily redeemable preferred stock were
increased to 4,000,000 and 2,000,000, respectively, (ii) all outstanding shares
of mandatorily redeemable preferred stock, mandatorily redeemable Class C common
stock and Class A common stock were split 53-for-one and exchanged
simultaneously on a two-for-one basis for shares of the Company's newly
authorized common stock, (iii) the Company paid in cash the accrued dividends of
$624 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 a total of 4,650,000 shares of common stock in the IPO,
3,900,000 of which were sold in the initial offering in June 1997, and 750,000
of which were sold in July 1997, when the underwriters exercised their
over-allotment option. Proceeds received by the Company were approximately
$22,620, net of offering costs of $2,955.
F-16
<PAGE> 48
HTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 -- (CONTINUED)
The common stock issued in conjunction with the UCS, Inc. acquisition has
been reflected as outstanding for all periods presented.
6. STOCK COMPENSATION PLANS:
EMPLOYEE STOCK OPTIONS
On July 1, 1996, the Company granted options to an employee to purchase
106,000 shares of the Company's common stock. The options are exercisable
beginning January 1, 1997, at $0.91 per share, which approximated the fair
market value of the stock at the date of grant. The options expire the earlier
of five years from the date of grant or seven months from the employee's date of
termination.
EXECUTIVE INCENTIVE PLAN
The Company's 1997 Executive Incentive Compensation Plan (the "Executive
Incentive Plan") was adopted by the Board of Directors 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 non-statutory), 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 1,908,000 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 four
or five years.
A summary of the status of the Company's outstanding stock options, each of
which is fixed with respect to number of shares and exercise price, including
employee stock options discussed above, as of December 31, 1997 and 1998, and
changes during the periods ending on those dates is presented below:
<TABLE>
<CAPTION>
1997 1998
----------------------------- -----------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year..... 106,000 $0.91 1,167,000 $ 4.47
Granted............................ 1,061,000 4.83 593,241 12.22
Exercised.......................... -- -- 146,600 4.20
Forfeited.......................... -- -- 98,700 8.15
--------- ---------
Outstanding at end of year........... 1,167,000 $4.47 1,514,941 $ 7.29
========= =========
Options exercisable at year end...... 339,200 $3.52 368,093 $ 3.89
Weighted-average fair value of
options granted during the year.... $1.35 $10.44
</TABLE>
F-17
<PAGE> 49
HTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 -- (CONTINUED)
The following table summarizes information about fixed stock options
outstanding at December 31, 1998:
<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 1998 CONTRACTUAL LIFE PRICE 1998 PRICE
- --------------- -------------- ---------------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.91 to 4.72 926,120 8.0 $ 4.36 357,960 $3.80
5.94 to 7.32 34,000 8.7 6.34 6,800 6.34
8.38 to 11.00 144,041 9.3 10.13 3,333 8.57
12.00 to 14.88 410,780 9.3 12.99 -- --
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
The Company adopted an Employee Stock Purchase Plan (ESPP) on July 23,
1997, which was approved by the stockholders in May 1998. The plan was effective
as of September 1, 1997, and has been designed to qualify as an employee stock
purchase plan under Section 423 of the Internal Revenue Code of 1986, as
amended. Four 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. The ESPP 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 ESPP, employees can choose each year to have up to
25 percent of their annual base earnings withheld to purchase the Company's
common stock. The purchase price of the stock is 85 percent of the lower of its
beginning of period or end of period market price. As of December 31, 1998, 51
percent of the Company's employees participate in the plan. As of December 31,
1997 and 1998, there were 40,120 and 152,276 purchase rights outstanding. These
purchase rights were exercisable at the respective year-ends and had a
weighted-average exercise price of $6.59 and $4.25 as of December 31, 1997 and
1998, respectively. The weighted-average fair value of purchase rights granted
during 1997 and 1998 under the ESPP was $1.90 and $1.97, respectively. All
outstanding purchase rights at December 31, 1997 and 1998, were exercised in
January 1998 and 1999, respectively.
The fair value of options granted during the fiscal years ended December
31, 1997 and 1998, 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 1997 and 1998:
<TABLE>
<CAPTION>
STOCK OPTION PLAN ESPP
---------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1998 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Expected life (in years)................ 10 10 .3 .3
Weighted-average risk-free interest
rate.................................. 6.74% 5.50% 5.21% 4.32%
Volatility.............................. 45.4% 76.7% 45.4% 76.7%
Dividend yield.......................... -- -- -- --
</TABLE>
F-18
<PAGE> 50
HTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 -- (CONTINUED)
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method under SFAS No. 123, the Company's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net income (loss) attributable to
common stockholders:
As reported......................... $(1,293) $2,646 $ 982
Pro forma........................... (1,328) 2,180 (535)
Basic earnings per share:
As reported......................... $ (0.16) $ 0.21 $ 0.06
Pro forma........................... (0.16) 0.17 (0.03)
Diluted earnings per share:
As reported......................... $ (0.16) $ 0.20 $ 0.06
Pro forma........................... (0.16) 0.17 (0.03)
</TABLE>
The effects of applying SFAS No. 123 on pro forma disclosures of net income
and earnings per share for the periods presented are not likely to be
representative of the pro forma effects on net income and earnings per share in
future years.
7. EMPLOYEE RETIREMENT PLAN:
The Company has established an employee retirement savings plan that covers
substantially all employees who have met certain service and age requirements.
Employees may contribute from two percent to 10 percent of their annual
compensation to the plan as limited by Internal Revenue Service regulations. The
Company will match contributions up to three percent of each individual's
compensation. Contributions made by the Company totaled $384, $616 and $577 for
the nine months ended December 31, 1996 and the years ended December 31, 1997
and 1998, respectively, and are included in general and administrative expenses
in the accompanying consolidated statements of operations.
8. INCOME TAXES:
The provision for income taxes consists of the following for the nine
months ended December 31, 1996 and the years ended December 31, 1997 and 1998:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal................................... $284 $2,126 $ 170
State..................................... 60 440 33
---- ------ ------
344 2,566 203
Deferred.................................... 237 (84) 1,050
---- ------ ------
$581 $2,482 $1,253
==== ====== ======
</TABLE>
F-19
<PAGE> 51
HTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 -- (CONTINUED)
Included in the current federal portion of the provision for income taxes
for the years ended December 31, 1997 and 1998, are foreign taxes of $53 and
$101, 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 nine months ended December 31, 1996, and years ended
December 31, 1997 and 1998, as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
U.S. federal income tax rate................ 34.00% 34.00% 34.00%
UCS and Phoenix taxable status............ 158.57 0.29 13.28
State taxes............................... 3.63 4.62 4.62
Tax-exempt interest....................... -- (2.03) (6.04)
Meals and entertainment................... 2.87 0.67 4.06
Pooling of interests acquisition
expenses............................... -- -- 4.09
Other..................................... 0.59 1.01 2.05
------ ----- -----
Effective tax rate.......................... 199.66% 38.56% 56.06%
====== ===== =====
</TABLE>
Deferred income taxes consisted of the following as of December 31, 1998:
<TABLE>
<CAPTION>
CURRENT NONCURRENT TOTAL
------- ---------- -------
<S> <C> <C> <C>
Tax assets:
Accrued liabilities............................... $ 515 $ -- $ 515
Allowance for doubtful accounts................... 522 -- 522
Deferred lease commitment......................... -- 149 149
Other intangible assets........................... -- 180 180
Other............................................. 3 -- 3
------ ------- -------
Total assets.............................. 1,040 329 1,369
------ ------- -------
Tax liabilities:
Prepaid expenses.................................. (555) -- (555)
Basis difference in fixed assets.................. -- (335) (335)
Capitalized software development costs............ -- (2,509) (2,509)
------ ------- -------
Total liabilities......................... (555) (2,844) (3,399)
------ ------- -------
Net deferred tax asset (liability).................. $ 485 $(2,515) $(2,030)
====== ======= =======
</TABLE>
F-20
<PAGE> 52
HTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 -- (CONTINUED)
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>
9. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company leases office space, furniture, automobiles and equipment under
certain long-term non-cancelable operating lease agreements with varying terms
and conditions.
Future aggregate minimum rental payments under these agreements are as
follows as of December 31, 1998:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ -------
<S> <C>
1999........................................................ $ 3,799
2000........................................................ 2,384
2001........................................................ 1,719
2002........................................................ 1,496
2003........................................................ 1,213
Thereafter.................................................. 4,339
-------
$14,950
=======
</TABLE>
In April 1996, the Company entered into a lease agreement for the corporate
office in Lake Mary under a 10-year, non-cancelable operating lease, which began
on May 1, 1997. The lease agreement also provides the Company with three
five-year renewal options. The Company expenses the total estimated cash
payments on a straight-line basis over the life of the lease. The cumulative
difference between the amount expensed and the amount actually paid is recorded
as a deferred lease commitment on the accompanying consolidated balance sheets
at December 31, 1997 and 1998. Rent expense under operating leases totaled
approximately $1,129, $2,359 and $4,892 for the nine months ended December 31,
1996, and the years ended December 31, 1997 and 1998, 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
F-21
<PAGE> 53
HTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 -- (CONTINUED)
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 $611 and $433 as
accrued liabilities for product royalties as of December 31, 1997 and 1998,
respectively. Royalty expense was approximately $263, $325 and $196 for the nine
months ended December 31, 1996, and the years ended December 31, 1997 and 1998,
respectively, and is included in cost of software licenses in the accompanying
consolidated statements of operations.
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL AGREEMENTS
Effective February 1997, the Company entered into employment agreements
with Dennis J. Harward, the Company's President, Chief Executive Officer and
Chairman of the Board and Jack L. Harward, the Company's Executive Vice
President. Each of the agreements is for a term of three years, and
automatically renews for successive one-year periods. In the event either
executive is terminated without "Cause," the Company must pay to such executive
any unpaid base salary, any accrued but unpaid incentive compensation through
the date of termination and continue to pay the executive's base salary for a
period of 12 months as well as continue to provide the executive with incentive
compensation and the other benefits under the agreement for the same period.
Additionally, upon termination without "Cause," the Company must pay to each
executive a single lump sum payment equal to the value of the portion of his
benefits under any savings, pension, profit sharing or deferred compensation
plans.
The Company has also entered into severance agreements with Dennis J.
Harward and Jack L. Harward that will become effective on, and provide for
continued employment or retention following, a "Change in Control" (as defined)
of the Company. Such agreements generally provide that upon (i) termination by
the Company of the executive's employment for any reason other than death,
mental or physical incapacity, illness, disability or "Cause" (as defined), (ii)
termination by the executive for "Good Reason" (generally defined as the
diminution of the executive's duties or other breach by the Company of the
agreement), or (iii) termination by the executive during a 30-day period
commencing one year after the "Change in Control," he will receive, in addition
to base salary, bonus and other compensation accrued through the date of
termination, a lump sum cash payment equal to 2.5 times his then-existing base
salary and incentive compensation.
PRODUCT LIABILITY
The Company markets to its customers complex, mission-critical,
enterprise-wide applications. The Company's license agreements with its
customers typically contain provisions designed to limit the Company's exposure
to potential product liability claims. It is possible, however, that the
limitation of liability provisions contained in the Company's license agreements
may not be effective as a result of existing or future federal, state or local
laws or ordinances or unfavorable judicial decisions. Although the Company has
not experienced any significant product liability claims to date, the sale and
support of software by the Company may entail the risk of such claims, which may
be substantial. A successful product liability claim brought against the Company
could have a material adverse effect upon the Company's business, operating
results and financial condition.
10. 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.
F-22
<PAGE> 54
HTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 -- (CONTINUED)
11. SUBSEQUENT EVENTS:
In January 1999, the Company announced that it would take a one-time
pre-tax cost reduction restructuring charge during the first quarter of 1999
between $2,000 and $2,500.
12. SUPPLEMENTAL NONCASH TRANSACTIONS:
The Company includes depreciation on certain equipment in the costs
capitalized as computer software development costs. During the nine months ended
December 31, 1996, and the years ended December 31, 1997 and 1998, depreciation
of $88, $160 and $323, respectively, was capitalized as computer software
development costs.
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.
In 1998, the Company purchased the net assets of Jalan, Inc. for $1,723 and
Vanguard Management and Information Systems, Inc. for $420. The Company also
capitalized an additional $15 for the purchase price of KB Systems, Inc. in
1998. Additionally, the Company acquired Phoenix Systems, L.L.C and UCS, Inc.
through pooling of interests transactions, which resulted in immaterial cash
payments of $53 and $2, respectively.
The acquisitions had the following non-cash effect of increasing
(decreasing) the following accounts for the nine months ended December 31, 1996,
and the years ended December 31, 1997 and 1998:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Trade accounts receivable..................... $124 $ -- $ 227
Other current assets.......................... 121 198 63
Equipment, furniture and fixtures............. 158 -- 63
Purchased software............................ 257 319 1,915
Other intangible assets....................... 386 194 359
Goodwill established due to recognition of
deferred income taxes (included in other
intangible assets).......................... 289 -- 15
Accounts payable.............................. 123 -- --
Accrued liabilities........................... -- 100 --
Deferred revenue.............................. 128 250 388
Notes payable to related parties.............. 300 -- --
Long-term debt................................ 8 -- --
Deferred income taxes (long-term liability)... 289 -- --
Mandatorily redeemable Class C common stock... 112 -- --
Common stock.................................. -- -- 3
Additional paid in capital.................... -- -- (2)
Retained earnings............................. -- -- 40
</TABLE>
F-23
<PAGE> 1
EXHIBIT 21.0
Registrant's Subsidiaries as of December 31, 1998:
HTE - Bellamy Ltd. - a Canadian corporation
HTE - Kb Systems, Inc. - a Florida corporation
HTE - Jalan, Inc. - a Florida corporation
HTE - Phoenix Systems, Inc. - a Florida corporation
HTE - UCS, Inc. - a Florida corporation
HTE - Vanguard Systems, Inc. - a Florida corporation
<PAGE> 1
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 Statement File Nos. 333-61383 on Form S-3 and
333-34109, 333-34139, 333-62267 and 333-22637 on Form S-8.
/S/ ARTHUR ANDERSEN LLP
Orlando, Florida,
March 29, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 333-61383) and
the Registration Statements on Form S-8 (Nos. 333-34109, 333-22637, 333-34139
and 333-62267) of H.T.E., Inc. of our reports dated April 10, 1998 and July 7,
1998, relating to the financial statements of UCS, Inc. (not presented
separately herein), which appear in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Miami, Florida
March 29, 1999
<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, 1998, 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 7,553
<SECURITIES> 0
<RECEIVABLES> 40,635
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 56,070
<PP&E> 4,587
<DEPRECIATION> 0
<TOTAL-ASSETS> 69,831
<CURRENT-LIABILITIES> 33,992
<BONDS> 0
0
0
<COMMON> 170
<OTHER-SE> 32,769
<TOTAL-LIABILITY-AND-EQUITY> 69,831
<SALES> 0
<TOTAL-REVENUES> 98,905
<CGS> 0
<TOTAL-COSTS> 96,991
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (321)
<INCOME-PRETAX> 2,235
<INCOME-TAX> 1,253
<INCOME-CONTINUING> 982
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 982
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
<PAGE> 1
ANNEX A
EXHIBIT 99.1
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR COMPLIANCE STATEMENT
FOR FORWARD-LOOKING STATEMENTS
In passing the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"), Congress encouraged public companies to make "forward-looking
statements" by creating a safe harbor to protect companies from securities law
liability in connection with forward-looking statements. The Company intends to
qualify both its written and oral forward-looking statements for protection
under the Reform Act and any other similar safe harbor provisions.
"Forward-looking statements" are defined under the Reform Act. Generally,
forward-looking statements include expressed expectations of future events and
the assumptions on which the expressed expectations are based. All
forward-looking statements are inherently uncertain as they are based on various
expectations and assumptions concerning future events and they are subject to
numerous known and unknown risks and uncertainties which could cause actual
events or results to differ materially from those projected. H.T.E., Inc.
("HTE") operates in a rapidly changing environment that involves numerous risks,
some of which are beyond HTE's control. Due to those uncertainties and risks,
the investment community is urged not to place undue reliance on written or oral
forward-looking statements of HTE. HTE undertakes no obligation to update or
revise this Safe Harbor Compliance Statement for Forward-Looking Statements (the
"Safe Harbor Statement") to reflect future developments. In addition, HTE
undertakes no obligation to update or revise forward-looking statements to
reflect changed assumptions, the occurrence of unanticipated events or changes
to future operating results over time.
HTE provides the following risk factor disclosure in connection with its
continuing effort to qualify its written and oral forward-looking statements for
the safe harbor protection of the Reform Act and any other similar safe harbor
provisions. Important factors currently known to management that could cause
actual results to differ materially from those in forward-looking statements
include the following:
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS RELATED TO SIGNIFICANT CONTRACTS
SIGNED TOWARDS THE END OF
THE QUARTER
HTE's revenues and operating results are subject to quarterly and other
fluctuations resulting from a variety of factors. Such factors include the
budgeting and purchasing practices of its customers, the length of customer
evaluation processes for HTE's solutions and the timing of customer system
conversions. Because a substantial portion of revenues may not be generated
until the end of each quarter, HTE may not be able to adjust or reduce spending
in response to sales shortfalls or delays. In addition, HTE's expense levels are
based, in significant part, on HTE's expectations of future revenues and are
therefore relatively fixed in the short term. If revenues fall below
expectations, net income is likely to be adversely affected. These factors can
cause significant variations in operating results from quarter to quarter. HTE
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.
RISKS ASSOCIATED WITH PUBLIC SECTOR MARKET
Substantially all of HTE's revenues to date have been attributable to sales
of software and services rendered to state, county and city governments, other
municipal agencies and publicly owned utilities. HTE expects that sales to
public sector customers will continue to account for substantially all of HTE's
revenues in the future. The sales cycle associated with the purchase of HTE's
products is typically complex, lengthy and subject to a number of significant
risks, including customers' budgetary constraints and governmental acceptance
reviews over which HTE has little or no control.
A-1
<PAGE> 2
For each contract with a public sector customer, HTE is typically subject
to a protracted procurement process. The process can include one or more of the
following hurdles:
(a) a detailed written response to product demonstrations,
(b) the design of software that addresses customer-specified needs,
(c) the integration of HTE and third party products,
(d) political influences,
(e) award protests initiated by unsuccessful bidders and
(f) changes in budgets or appropriations which are beyond HTE's control.
Contracts with public sector customers are typically subject to procurement
policies which may be onerous and may include profit limitations and rights of
the agency to terminate for convenience or if funds are unavailable. Some public
sector customers require liquidated damages for defective products and/or for
delays or interruptions caused by system failures. Payments under some public
sector contracts are subject to achieving implementation milestones, and HTE has
had, and may in the future have, differences with customers as to whether
milestones have been achieved.
Government organizations require compliance with various legal and other
special considerations in the procurement process. The adoption of new or
modified procurement regulations could increase costs to HTE of competing for
sales or impact HTE's ability to perform government contracts, which could
adversely affect HTE. 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
HTE.
MANAGEMENT OF SIGNIFICANT GROWTH REQUIRED
HTE has grown significantly through acquisitions and expanded operations.
As a result, HTE 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
resulted in new and increased responsibility for management personnel and placed
additional demands upon HTE's operational, administrative and financial
resources. To accommodate recent growth, compete effectively and manage
potential future growth, HTE 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 and other
qualified personnel. There can be no assurance that HTE's personnel, systems,
procedures and controls will be adequate to support HTE's future operations or
to integrate successfully operations and personnel of acquired entities. Any
failure to implement and improve HTE's operational, financial and management
systems, to integrate operations of acquired businesses or to expand, train,
motivate or manage employees could have a material adverse effect on HTE's
business, operating results and financial condition.
ABILITY TO RETAIN AND ATTRACT PERSONNEL
HTE's continued success will depend upon the availability and performance
of its key management, sales, marketing, customer support and product
development personnel. The loss of key management or technical personnel could
adversely affect HTE. HTE believes that its continued success will depend in
large part upon its ability to attract and retain such personnel. HTE 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 HTE will be successful
in attracting and retaining such personnel.
A-2
<PAGE> 3
ABILITY TO RESPOND TO TECHNOLOGICAL CHANGE
The market for HTE's products is characterized by rapid technological
change, evolving industry standards in computer hardware and software
technology, changes in customer requirements and frequent new product
introductions and enhancements. The introduction of products embodying new
technologies and the emergence of new industry standards can render existing
products obsolete and unmarketable. As a result, HTE's future success will
depend, in part, upon its ability to continue to enhance existing products and
develop and introduce in a timely manner or acquire new products that keep pace
with technological developments, satisfy increasingly sophisticated customer
requirements and achieve market acceptance. There is no assurance that HTE will
successfully identify new product opportunities and develop and bring new
products to market in a timely and cost-effective manner. Further there is no
assurance that products, capabilities or technologies developed by others will
not render HTE's products or technologies obsolete or noncompetitive. If HTE is
unable to develop or acquire on a timely and cost-effective basis new software
products or enhancements to existing products, or if such new products or
enhancements do not achieve market acceptance, HTE's business, operating results
and financial condition may be materially adversely affected.
RISKS ASSOCIATED WITH ASSIMILATION OF ACQUISITIONS
A fundamental element of HTE's strategy is to grow through acquisitions. As
part of its growth strategy, HTE evaluates the acquisition of other companies,
assets or product lines that would complement or expand its business in
attractive geographic or service markets or that would broaden its customer
relationships. There can be no assurance that HTE will be able to identify
suitable acquisition candidates available for sale at reasonable prices,
consummate any acquisition or successfully integrate any acquired business into
HTE's operations. The success of any completed acquisition will depend in large
measure on HTE's ability to integrate the operations of the acquired business
with those of HTE and otherwise to maintain and improve the results of
operations of the acquired business. Acquisitions may involve a number of
special risks, including diversion of management's attention, failure to retain
key acquired personnel, unanticipated events or circumstances, legal liabilities
and amortization of acquired intangible assets. Some or all of these risks could
have a material adverse effect on HTE's business, financial condition and
results of operations. Although HTE conducts due diligence reviews of potential
acquisition candidates, HTE may not identify all material liabilities or risks
related to acquisition candidates.
HTE may elect to finance acquisitions with debt financing, through the
issuance of common stock or other securities convertible into common stock, or
any combination of the foregoing. There can be no assurance that HTE will be
able to arrange adequate financing on acceptable terms. If HTE were to
consummate one or more significant acquisitions in which the consideration
consisted of stock, shareholders of HTE could suffer dilution of their interests
in HTE. Most of the businesses that might become attractive acquisition
candidates for HTE are likely to have significant intangible assets. Acquisition
of these businesses, if accounted for as a purchase, would typically result in
substantial amortization charges to HTE, which would reduce future earnings. In
addition, such acquisitions could involve non-recurring acquisition-related
charges, such as write-offs or write-downs of acquired research and development
costs, which could have a material adverse effect on HTE's results of operations
for the accounting period in which such charges are incurred.
COMPETITION
HTE believes it is a leading provider of integrated enterprise-wide
solutions for the public sector and utility markets. However, HTE faces
competition from a variety of software vendors that offer products and services
similar to those offered by HTE, and from companies offering to develop custom
software. Certain competitors have greater technical, marketing and financial
resources than HTE. HTE also competes with in-house management information
services staffs.
A-3
<PAGE> 4
HTE believes the market is highly fragmented with a large number of
competitors that vary in size, primary computer platforms and overall product
scope. HTE competes from time to time with the following:
(a) the consulting divisions of national and regional accounting firms,
(b) companies which focus on selected segments of the public sector and
utilities markets including PeopleSoft, Inc., Systems & Computer
Technology Corp. and J.D. Edwards & Company, Inc. and
(c) a significant number of smaller private companies.
There can be no assurance that such competitors will not develop products
or offer services that are superior to HTE's products or services or that
achieve greater market acceptance.
HTE 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. 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 HTE's prospective customers. 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 HTE to
reduce the price of its software licenses and related services. There can be no
assurance that HTE will be able to compete successfully against current and
future competitors, and the failure to do so would have a material adverse
effect upon HTE's business, operating results and financial condition.
DEPENDENCE ON KEY SUPPLIERS AND STRATEGIC RELATIONSHIPS
HTE purchases certain key components of its products from single or limited
source suppliers. Those components include the adapter code and certain
application development tools. There are relatively few suppliers for certain of
those components. HTE currently has relatively few agreements that would assure
delivery of such components from its 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 HTE's products,
if required, may not be accomplished or could involve significant additional
costs. The ability of any of HTE's suppliers to provide functional components in
a timely manner, or the inability of HTE to locate qualified alternative
suppliers for components at a reasonable cost, could adversely affect HTE's
business, financial condition and results of operations. HTE's success also
depends in part upon its alliances and relationships with leading hardware and
software vendors. In addition, substantially all of HTE's hardware revenues are
derived from the sale of IBM AS/400 systems in connection with HTE's remarketer
arrangements with IBM. Any change in this or other relationships could have an
adverse effect on HTE's financial performance while HTE seeks to establish
alternative relationships. Further, HTE may need to establish additional
alliances and relationships in order to keep pace with changes in technology and
there can be no assurance such additional alliances will be established.
HTE relies primarily on distribution channels for sales of its recently
acquired line of field-based reporting software products. HTE has established
strategic marketing alliances with several large vendors for these products.
Other businesses that HTE may acquire in the future may also sell their products
primarily through similar marketing alliances or other collaborative
relationships. The maintenance of those alliances and the establishment of
additional alliances may be necessary for increased market penetration for such
products. Certain of HTE's competitors may have already established such
alliances with desired vendors who, as a result, may have limited interests in
creating alliances with HTE. There can be no assurance that HTE will be able to
negotiate any additional strategic relationships, that such additional
relationships will be available to HTE on acceptable terms or that any such
relationships, if established, will be commercially successful. Failure to do so
could have a material adverse effect on HTE's business, financial condition and
results of operations.
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RISKS OF SOFTWARE DEFECTS AND PRODUCT LIABILITY
Software products as complex as those developed by HTE may contain errors
or defects, especially when first introduced or when new versions or
enhancements are released. Although HTE has not experienced material adverse
effects resulting from any such defects or errors to date, there can be no
assurance that material 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.
HTE markets complex, mission-critical, enterprise-wide applications. HTE's
license agreements with its customers typically contain provisions designed to
limit HTE's exposure to potential product liability claims. It is possible,
however, that the limitation of liability provisions contained in HTE's license
agreements may not be effective as a result of existing or future federal, state
or local laws or ordinances or judicial decisions. Although HTE has not
experienced any significant product liability claims to date, the sale and
support of software by HTE may entail the risk of such claims, which may be
substantial. A successful product liability claim brought against HTE could have
a material adverse effect upon HTE's business, operating results and financial
condition.
PROPRIETARY RIGHTS, RISKS OF INFRINGEMENT AND SOURCE CODE RELEASE
HTE regards certain features of its internal operations, software and
documentation as confidential and proprietary. HTE relies on a combination of
contract and trade secret laws and other measures to protect its proprietary
intellectual property. HTE owns no patents and, under existing copyright laws,
has only limited protection for its intellectual property. HTE 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 HTE's employees, frequent product
enhancements and timeliness and quality of support services.
HTE provides its products to customers under exclusive licenses, which
generally are non-transferable and have a perpetual term. HTE generally licenses
its products solely for the customer's internal operations and only on
designated computers. In certain circumstances, HTE makes enterprise-wide
licenses available for select applications. Although HTE currently provides
object code to its customers and not source code, HTE historically provided
source code to its customers for several products. HTE has escrowed and
continues to escrow its source code for the benefit of all customers. A
misappropriation or other misuse of HTE's intellectual property, including
source codes previously delivered to customers, could have an adverse effect on
HTE. Further, there can be no assurance that third parties will not assert
infringement or misappropriation claims against HTE in the future with respect
to current or future products. Any claims or litigation, with or without merit,
could be time-consuming and result in costly litigation and diversion of
management's attention. Further, any claims and litigation could cause product
shipment delays or require HTE to enter into royalty or licensing arrangements.
Such royalty or licensing arrangements, if required, may not be available on
terms acceptable to HTE, if at all. Thus, litigation to defend and enforce HTE's
intellectual property rights could have a material adverse effect on HTE's
business, financial condition and results of operations, regardless of the final
outcome of such litigation. HTE may be subject to additional risks as it enters
into transactions in countries where intellectual property laws are not well
developed or are poorly enforced. Legal protections of HTE's rights may be
ineffective in such countries.
YEAR 2000 COMPLIANCE
Many installed computer systems and software products are coded to accept
only two digit entries in the date code field. These date code fields will need
to accept four digit entries to distinguish 21st century dates from 20th century
dates. As a result, in less than two years, computer systems and/or software
used by many organizations may need to be upgraded to comply with such "Year
2000" requirements. Significant uncertainty exists in the software industry
concerning the potential effects associated with such compliance. HTE does not
believe that it has material exposure to the Year 2000 issue with respect to its
own information systems. HTE believes that the current versions of its products
are Year 2000 compliant. HTE regularly runs regression tests on its software,
including tests of the Year 2000 rollover. Based on the above, it is not
expected
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that HTE's products will be adversely affected by date changes in the year 2000.
However, there can be no assurance that HTE's products contain and will contain
all features and functionality considered necessary by customers, distributors,
resellers and systems integrators to be Year 2000 compliant. Notwithstanding
that HTE regularly provides free software upgrades to its customers and that
recent upgrades are Year 2000 compliant, certain customers of HTE may still be
running earlier, noncompliant versions of HTE's products. HTE is in the process
of informing customers of the need to migrate to current products that
management believes are Year 2000 compliant. Although HTE believes that the
information systems of its major vendors (insofar as they relate to HTE's
business) comply with Year 2000 requirements, there can be no assurance that the
Year 2000 issue will not affect the information systems of HTE's major vendors
as they relate to HTE's business, or that any such impact of a major vendor's
information system would not have a material adverse effect on HTE. HTE has no
contingency plan as such, however HTE believes it should be able to identify
alternative vendors if the need arises. HTE anticipates that generally
throughout the software industry substantial litigation may be brought against
software vendors of non-compliant operating environments. Any such claims
against HTE, with or without merit, could have a material adverse effect on
HTE's business, operating results and financial condition.
RISKS ASSOCIATED WITH INTERNATIONAL SALES
HTE has sold products to customers in Canada, the Caribbean, and the United
Kingdom. Management expects to augment its presence in international markets.
Accordingly, HTE's business, and its ability to expand its operations
internationally, is subject to various risks inherent in international business
activities. HTE may have difficulty in safeguarding its intellectual property in
countries where intellectual property laws are not well developed or are poorly
enforced. General economic conditions and political conditions of various
countries may be subject to severe fluctuations at any time. Such fluctuations
could hinder HTE's performance under contracts in those countries or could
hinder its ability to collect for product and services delivered in those
countries. Unexpected changes in foreign regulatory requirements could also make
it difficult or too costly for HTE to conduct business internationally. In
addition, although HTE has normally been successful in stipulating that its
foreign customers pay in U.S. dollars, any payment provisions involving foreign
currencies may result in less revenue to HTE than expected due to foreign
currency rate fluctuations. Further, the payment cycle for accounts receivable
is longer in many countries than it is for domestic customers. Other risks
associated with international operations include import and export licensing
requirements, trade restrictions, changes in tariff rates, overlapping tax
structures, and compliance with a variety of foreign laws and regulations. In
addition, if HTE elects to establish a presence in international markets rather
than marketing through independent sales representatives, as it does presently,
HTE could encounter difficulty in staffing and managing an organization spread
over various countries. Any of the foregoing factors could have a material
adverse effect on HTE's ability to expand its international sales. In addition,
HTE must translate its software into foreign languages. To the extent that HTE
is unable to accomplish such translations in a timely manner, HTE's ability to
further penetrate international markets would be adversely affected. The deeper
exposure to international markets creates new areas with which HTE is not
familiar and places HTE in competition with new vendors. There is no assurance
HTE will be successful in its efforts to compete in these international markets.
If HTE significantly expands its international business, it anticipates
that it will hedge exchange rate movements on either side of a locked-in spot
rate for movements within certain ranges on dollar-foreign currency rates.
Changes in the value of foreign currencies relative to the dollar beyond the
ranges hedged by HTE could affect its financial condition and results of
operations, and gains and losses on currency translations could contribute to
fluctuations in HTE's results of operations.
POTENTIAL VOLATILITY OF STOCK PRICE
The market price of the common stock may be volatile and may be
significantly affected by many different factors. Some examples of factors that
can have a significant impact on HTE's stock price are as follows: actual or
anticipated fluctuations in HTE's operating results; announcements of
technological innovations, new products or new contracts by HTE or its
competitors; developments with respect to patents,
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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
similar litigation will not occur in the future with respect to HTE. Such
litigation could result in substantial costs and a diversion of management's
attention and resources, which could have a material adverse effect upon HTE's
business, operating results and financial condition.
EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS; ANTI-TAKEOVER EFFECTS
Certain provisions of Florida law and HTE's Articles of Incorporation, as
amended ("Amended Articles"), may deter or frustrate a takeover attempt of HTE
that a shareholder might consider in its best interest. HTE is subject to the
"affiliated transactions" and "control share acquisition" provisions of the
Florida Business Corporation Act. These provisions require, subject to certain
exceptions, that certain business combinations and corporate transactions with
beneficial owners of more than 10 percent of a corporation's voting stock, or
any entity or individual controlled by such owner (an "interested shareholder")
be approved by a majority of disinterested directors or the holders of
two-thirds of the voting shares other than those beneficially owned by an
"interested shareholder." Voting rights must also be conferred on "control
shares" acquired in specified control share acquisitions, generally only to the
extent conferred by resolution approval by the shareholders, excluding holders
of shares defined as "interested shares." "Control shares" are defined as shares
that, except for the application of the statute, would have voting power that,
when added to all other shares that the acquirer owns or has the power to vote,
would give the acquirer (directly, indirectly, alone, or as a member of a group)
voting power in excess of certain statutory parameters. "Interested shares" are
defined as a corporation's shares for which any of the following persons have
direct or indirect voting power in the election of directors: (a) the person or
group that acquires control shares, (b) every officer of the corporation, and
(c) every employee of the corporation who is also a director.
In addition, certain provisions of HTE's Amended Articles or Bylaws, among
other things, provide that:
(a) any action required or permitted to be taken by the shareholders of HTE
may be effected only at an annual or special meeting of shareholders,
and not by written consent of the shareholders,
(b) the annual meeting of shareholders shall be held on such date and at
such time fixed from time to time by the Board of Directors, provided
that there shall be an annual meeting held every calendar year,
(c) any special meeting of the shareholders may be called only by the
Chairman of the Board, or upon the affirmative vote of at least a
majority of the members of the Board of Directors, or upon the written
demand of the holders of not less than 50% of the votes entitled to be
cast at a special meeting,
(d) an advance notice procedure must be followed for nomination of
directors and for other shareholder proposals to be considered at
annual shareholders' meetings, and
(e) HTE's Board of Directors be divided into three classes, each of which
serves for different three-year periods.
In addition, HTE is authorized to issue additional shares of common stock
and up to five million shares of preferred stock. Preferred stock may be issued
in one or more series, having terms fixed by the Board of Directors without
shareholder approval, including voting, dividend or liquidation rights that
could be greater than or senior to the rights of holders of common stock.
Issuance of additional shares of common stock or new shares of preferred stock
could also be used as an anti-takeover device.
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