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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
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COMMISSION FILE NUMBER: 0-22657
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
incorporation or organization) Identification No.)
1000 BUSINESS CENTER DRIVE
LAKE MARY, FLORIDA 32746
(Address of Principal Executive (Zip Code)
Offices)
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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 20, 2000, was $57,283,365. 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 20, 2000, was 17,550,479.
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TABLE OF CONTENTS
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 10
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of Matters to a Vote of Security Holders......... 12
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 12
Item 6. Selected Financial Data..................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 15
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk...................................................... 31
Item 8. Financial Statements and Supplementary Data................. 31
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 31
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 32
Item 11. Executive Compensation...................................... 34
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 42
Item 13. Certain Relationships and Related Transactions.............. 43
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 44
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FORWARD LOOKING STATEMENTS
In addition to historical information, this Annual Report contains
forward-looking statements. These forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in these forward-looking statements. Factors
that might cause such a difference include, but are not limited to, those
discussed in the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Factors That May Affect Future
Results and Market Price of Our Stock." Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect management's
opinions only as of the date hereof. The Company undertakes no obligation to
revise or publicly release the results of any revision to these forward-looking
statements.
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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 18 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, 1999, 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 primarily 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.
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.
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The public sector marketplace is currently undergoing significant
organizational and business changes. In recent years, the federal government
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, 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 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
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sector organizations frequently experience lengthy and expensive customization
and implementation cycles. Moreover, these solutions may not be sufficiently
flexible to cost-effectively accommodate the ongoing needs of public sector
organizations as they modify and improve their operations.
The deficiencies of these currently available solutions have become
increasingly apparent as organizations have attempted to reengineer their
operations management practices. Organizations are now attempting to identify
and implement preferred approaches within their specific organizations to manage
and control a broad range of operations and information. To implement this
re-engineering, public sector organizations are seeking software solutions that
allow them to manage enterprise-wide information and to distribute that
information to employees and the public. As a result of the increased complexity
and sophistication required to meet new computing challenges, public sector
organizations are demanding robust solutions to their information processing
needs which are based on proven technologies and incorporate the application
knowledge specific to the public sector market.
HTE'S TOTAL ENTERPRISE SOLUTION(R)
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 18 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.
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
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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.
Enable Citizen Access via the Internet. The Company currently
estimates that millions of U.S. households are served by communities and
organizations which use HTE software to manage their information systems.
These citizens are increasingly looking to their counties/communities to
improve electronic services access for the payment of utility bills, tax
bills, and parking tickets and for additional e-government capabilities for
such things as court case filings, advanced park reservations, and general
citizen complaint or incident reporting. As these business and citizen to
government services become more Internet enabled, HTE is being asked by its
customers to take a leading role in helping them migrate to this newer
technology.
Move "down-market" with application hosting. HTE has developed a
capability to use its CitySoft product line as an entry vehicle to provide
application hosting to smaller communities which lack sufficient size to
justify their own hardware, software and internal information systems staff
which has been necessary, in the past, to install and operate HTE's
integrated solutions. As an application services provider, the Company
anticipates that it will be able to offer remote information processing to
these smaller communities with a shared processor configuration for a
monthly processing fee. The Company expects that the primary market for
this service will be communities with populations under 5,000.
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 18 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 1,600 customers 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.
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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. 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. In
the longer term, 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
five years, the Company has supplemented its internal growth with nine
strategic acquisitions.
In connection with its growth strategy, the Company acquired the assets of
JALAN, Inc., Vanguard Management and Information Systems, Inc. and Information
On Demand, 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.
In June 1999, the Company purchased certain assets of Information On
Demand, Inc. for $1 million. This acquisition allows the Company to provide
local governments with the ability to perform procurement and purchasing via the
Internet and positions HTE to help its customers do actual business on the web
as opposed to simply making information available.
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.
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The following summarizes the Company's applications and the principal
benefits of the integrated application system:
FINANCIAL MANAGEMENT SYSTEMS
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. The principal benefits of this integrated
system are as follows:
- 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.
COMMUNITY SERVICES SYSTEMS
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. The principal benefits of
the systems are as follows:
- 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
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. The principal benefits of the
public safety applications are as follows:
- A complete suite of applications which provides critical information to
users in emergency situations through mobile computing technologies.
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- 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
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. Some of the principal
benefits of these products are as follows:
- 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.
K-12 SCHOOL ADMINISTRATION
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. Among the principal benefits of these applications are the
following:
- 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 software architecture is based on a two-tier thin client
model. Microsoft Windows 95, Windows 98 and Windows NT may host the client. The
Company is moving from this architecture to an n-tier architecture, which
isolates the application logic and database access from the presentation layer.
A Java-based server running on either Windows NT or the IBM AS/400 will host the
presentation layer. The presentation layer supports Java capable browsers such
as Microsoft's Internet Explorer and Netscape's Navigator.
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.
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Customer Support Program. For ongoing support, HTE offers its customers a
Comprehensive Support Program. The Company provides product enhancements and
updates that maintain a customer's software and documentation. The Comprehensive
Support Program also includes hotline telephone support, which is available 24
hours per day, seven days per week. As a separately priced option, customers can
extend this support to personal computers, networks and hardware systems.
Recently, the Company expanded this service to include a Customer Care Program
whereby customers are called at predetermined time schedules to identify needs
for service, support or new product offerings.
Through its HTE User Group ("HUG"), the Company involves its customers and
end-users to help identify new functions and product features that offer the
greatest benefit. The Company believes that HUG seminars assist the Company in
the development and support of products.
Education and Training. HTE offers education and training services that
provide customers with a formalized program to ensure that applications are
implemented and utilized in an efficient and cost-effective manner. Customers
are also offered a variety of software installation, technical support and user
training services, both on-site and in HTE's training centers. Customized
education and training programs are also available to meet a customer's specific
development needs. Education and training services are priced separately.
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, 1999, the Company had 95 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).
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. Prospective HTE customers
are monitored through a prospect management system that segments the sales cycle
into several phases, each with multiple measurement points, to assess properly
the prospective client base.
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 relationships with companies such as IBM, Hewlett-Packard, Oracle
Corporation and Seagull Software. The Company believes that its marketing and
sales efforts are enhanced by the worldwide presence of many of these companies.
HTE has conducted several joint marketing and sales programs with these vendors,
including seminars, direct mail campaigns and trade show appearances.
Additionally, the Company plans to drive new growth through internet citizen
access and an ASP (application service provider) model. The Company's large
existing customer base of over 1,600 customers creates a ready market to
millions of household citizens and utility customers served by the Company's
application suite. The Company believes that a significant untapped business
opportunity exists in providing these household citizens and utility customers
online transaction-oriented services, 24 hours a day and seven days a week, from
the comfort of their homes.
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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, 1999, 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, 1999.
PRODUCT DEVELOPMENT
HTE's product development efforts are focused on enhancement of its
existing product line and its enterprise system in the areas of internet
enablement and end user ergonomics. Key product functionality enhancements will
also be addressed as identified by our user group through the Enhancement
Request System (ERS) and by our marketing research. In addition, HTE will
continue to evolve its enterprise wide solution by continuing to enhance and
streamline application interfaces toward increased performance and reliability.
At December 31, 1999, HTE had 258 full-time employees in product development.
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 $11.0 million, $19.1 million and $23.1 million for
the years ended December 31, 1997, 1998 and 1999, 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 Tyler Technologies, Inc. and
(iii) a significant number of smaller private companies. Many of these companies
do not focus exclusively on the public sector or offer fully-integrated
enterprise-wide software applications. There can be no assurance that such
competitors will not develop products or offer services that are superior to the
Company's products or services or that achieve greater market acceptance.
The Company could face additional competition as other established and
emerging companies enter the Company's public sector software application market
and new products and technologies are introduced. Increased competition could
result in price reductions, fewer customer orders, reduced gross margins and
loss of market share, any of which could materially adversely affect the
Company's business, operating results and financial condition. In addition,
current and potential competitors may make strategic acquisitions or establish
cooperative relationships among themselves or with third-parties, thereby
increasing the ability of their products to address the needs of the Company's
prospective customers. Accordingly, it is possible that new competitors or
alliances among current and new competitors may emerge and rapidly gain
significant market share. Further, competitive pressures could require the
Company to reduce the price of its software licenses and related services, which
could materially adversely affect the Company's business, operating results and
financial condition. There can be no assurance that the Company will be able to
compete successfully against
9
<PAGE> 12
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, 1999, the Company employed 798 people, including 95 in
sales and marketing, 258 in product development, 165 in customer support and
field services, 204 in professional services and 76 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 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 October 2000; 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 2002; approximately 6,500 square feet of
space in Edmonton, Alberta, pursuant to a lease expiring August 2000;
approximately 4,000 square feet of space in Vienna, Virginia, pursuant to a
lease expiring March 2003; and approximately 3,000 square feet of office space
in Southbury, Connecticut, pursuant to a lease expiring May 2000.
10
<PAGE> 13
The Company also leases an aggregate of approximately 15,000 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
On April 9, 1999, the City of Tacoma, Washington filed a demand for binding
arbitration and claim for damages against the Company with the American
Arbitration Association, alleging that the Company had breached certain
contractual duties and obligations under a Software License and Service
Agreement, which contained a narrowly drawn arbitration clause. On May 3, 1999,
the Company filed counterclaims in the Superior Court for Pierce County,
Washington alleging, among other things, that the City of Tacoma breached its
contractual duties and obligations under a Hardware Purchase Agreement, which
did not contain an arbitration clause. The trial court granted the City of
Tacoma's motion to compel arbitration of all allegations arising from both
contracts. On January 13, 2000, an arbitration panel composed of three
Washington State attorneys ("Arbitrators") rendered a final award ("Award")
against the Company for $5,174,000. A judgment for the Award was entered against
the Company by the Superior Court for Pierce County, Washington on January 15,
2000. As a result of the Award, the Company has filed a direct appeal to the
Washington State Supreme Court contesting the Award on a variety of grounds
including, but not limited to, the fact that the Arbitrators acted in "manifest
disregard of the law." The Company maintains that the terms of the binding
arbitration clause of the software contract was limited to only disputes arising
under that contract and, further, that the Arbitrators inappropriately
disregarded the damages limitation clause in both contracts and illegally
awarded Tacoma speculative "benefit of the bargain damages" -- which damages
were well beyond the scope of the agreements. One of the Arbitrators dissented
as to the "benefit of the bargain damages" in the Award. Further, as a result of
this Award, the Company subsequently sought coverage and a defense from its
insurance carriers (The Chubb Group of Insurance Companies, hereinafter the
"Chubb Carriers"), which claims were denied. Thereafter, the Company instituted
a "Declaratory Judgment Action" on January 28, 2000 in the Circuit Court of the
Eighteenth Judicial Circuit for Seminole County, Florida against the Chubb
Carriers who provided the relevant insurance policies for the Company. The
Company seeks insurance coverage, and a defense, pursuant to a variety of
policies purchased by the Company for computer software errors and omissions
coverage, a multi-media liability insurance policy and an umbrella policy for
coverage amounts in excess of the underlying limits for the aforementioned
policies. After the Company filed its case against the Chubb Carriers, they
responded by instituting a separate cause of action on January 31, 2000 seeking
a Declaratory Judgment against the Company in the United States District Court
for the Middle District of Florida. In light of the diversity of citizenship
issues presented, both matters have been transferred to the United States
District Court and are awaiting the appropriate management order setting down a
schedule for the case(s). Finally, on February 29, 2000, the Company instituted
a cause of action in the Circuit Court of the Eighteenth Judicial Circuit for
Seminole County, Florida, contesting, and/or seeking a stay of enforcement of
the foreign judgment rendered in the State of Washington regarding the Award.
The Company in its Florida Circuit Court Complaint, put forth similar arguments
as to that presently on appeal in the State of Washington. In addition, the
Company pointed out that one of the Company's contracts with the City of Tacoma
did not even contain an arbitration clause and that the remaining contract
contained only a narrowly drawn arbitration clause, limiting arbitration only to
disputes under the terms of such contract. The Company maintains that despite
the limited agreement to arbitrate certain matters, the Arbitrators proceeded to
hear and decide matters under both contracts, as well as extra contractual
matters which, once again, would clearly constitute a "manifest disregard of the
law." The Company maintains that this is a clear and reversible error. A
preliminary management conference on this matter has been scheduled for April
20, 2000, with an evidentiary hearing to follow in the Florida Circuit Court
sometime thereafter. While the Company intends to vigorously pursue these cases
and believes its positions have merit, it is unable to predict the ultimate
outcome at this time.
In regard to the binding arbitration proceeding between the Company and
Montana Power Company ("MPC") commenced on February 3, 1999, a settlement and
mutual release agreement was executed by the parties in January 2000. This
settlement agreement allows for a complete mutual release and discharge of any
and all outstanding obligations between the Company and MPC under the Software
License and Services Agreement and the arbitration proceeding. The Company
retained all of the $1,535,000 paid by MPC to the
11
<PAGE> 14
Company for software, hardware and services. As a result of this settlement, the
Company wrote off approximately $754,000 in revenue and $581,000 in capitalized
costs related to the Software License and Services Agreement in the fourth
quarter of 1999, which resulted in an after-tax charge of $819,000. This
settlement did not involve any cash payment by the Company to MPC.
The Company is involved in various other legal actions arising in the
normal course of business, both as claimant and 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 outstanding claims and
actions will not have a material adverse effect on the Company's financial
position or operating results.
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, 1999.
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 20,
2000 was 207; however, the number of beneficial holders is approximately 4,312.
The closing price per share on that date was $3.375.
The table below sets forth information, for each quarter in 1997, 1998 and
1999, 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
------------------
LOW HIGH
------- -------
<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
YEAR ENDED DECEMBER 31, 1999
First Quarter............................................. $ 2.250 $ 8.438
Second Quarter............................................ $ 2.531 $ 4.875
Third Quarter............................................. $ 2.000 $ 3.563
Fourth Quarter............................................ $ 1.625 $ 7.500
</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.
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.
12
<PAGE> 15
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, $3.6 million was used for the acquisitions of Kb Systems, Inc.,
JALAN, Inc., Vanguard Management and Information Systems, Inc. and Information
on Demand, 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 for the year ended December
31, 1996, 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, 1996 and December 31, 1996, and for the year
ended March 31, 1996, have been derived from consolidated financial statements
audited by Arthur Andersen LLP. The selected consolidated financial data of the
Company as of December 31, 1997, 1998 and 1999, and for the nine months ended
December 31, 1996 and for the years ended December 31, 1997, 1998 and 1999, and,
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.
<TABLE>
<CAPTION>
YEAR NINE MONTHS ENDED
ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
MARCH 31, ----------------- --------------------------------------
1996 1995 1996 1996 1997 1998 1999
--------- ------- ------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Software licenses.......... $11,575 $ 6,791 $10,869 $15,847 $26,762 $43,277 $ 24,641
Professional services...... 10,686 7,376 8,943 11,715 14,543 20,870 28,575
Hardware................... 7,323 5,836 7,740 9,219 11,768 15,516 14,945
Maintenance and other...... 10,013 8,020 6,950 9,040 12,571 17,793 25,772
Resource management........ -- -- -- -- 448 1,449 2,275
------- ------- ------- ------- ------- ------- --------
Total revenues..... 39,597 28,023 34,502 45,821 66,092 98,905 96,208
------- ------- ------- ------- ------- ------- --------
</TABLE>
13
<PAGE> 16
<TABLE>
<CAPTION>
YEAR NINE MONTHS ENDED
ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
MARCH 31, ----------------- --------------------------------------
1996 1995 1996 1996 1997 1998 1999
--------- ------- ------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating expenses:
Cost of software
licenses................ 3,585 2,794 2,919 3,742 5,283 8,843 7,489
Cost of professional
services................ 7,608 5,629 4,952 6,728 8,363 13,399 17,294
Cost of hardware........... 5,774 4,656 6,186 7,308 9,209 13,050 12,437
Cost of maintenance and
other................... 4,233 3,168 2,705 3,598 5,984 10,041 10,350
Cost of resource
management.............. -- -- -- -- 343 918 1,440
Research and development... 4,508 3,310 5,242 6,537 8,256 14,048 19,294
Sales and marketing........ 5,474 3,949 6,186 7,742 11,520 20,526 20,116
General and
administrative.......... 6,764 5,006 5,830 7,702 10,925 15,614 18,779
Contract judgement and
settlement, employee
termination benefits and
other costs............. -- -- -- -- -- 552 12,927
------- ------- ------- ------- ------- ------- --------
Total operating
expenses......... 37,946 28,512 34,020 43,357 59,883 96,991 120,126
------- ------- ------- ------- ------- ------- --------
Operating income (loss)...... 1,651 (489) 482 2,464 6,209 1,914 (23,918)
Interest expense (income).... 127 70 191 248 (227) (321) (154)
------- ------- ------- ------- ------- ------- --------
Income (loss) before income
taxes...................... 1,524 (559) 291 2,216 6,436 2,235 (23,764)
Provision (benefit) for
income taxes............... 211 (605) 581 1,397 2,482 1,253 (8,898)
------- ------- ------- ------- ------- ------- --------
Net income (loss)............ 1,313 46 (290) 819 3,954 982 (14,866)
Accretion and accrual of
dividends on mandatorily
redeemable preferred
stock...................... 184 138 1,003 1,049 1,308 -- --
------- ------- ------- ------- ------- ------- --------
Net income (loss)
attributable to common
stockholders............... $ 1,129 $ (92) $(1,293) $ (230) $ 2,646 $ 982 $(14,866)
======= ======= ======= ======= ======= ======= ========
PER SHARE DATA:
Net income (loss) per share:
Basic...................... $ 0.14 $ (0.01) $ (0.16) $ (0.03) $ 0.21 $ 0.06 $ (0.86)
======= ======= ======= ======= ======= ======= ========
Diluted.................... $ 0.12 $ (0.01) $ (0.16) $ (0.03) $ 0.20 $ 0.06 $ (0.86)
======= ======= ======= ======= ======= ======= ========
PRO FORMA OPERATIONS DATA:
Income (loss) before income
taxes...................... $ 1,524 $ (559) $ 291 $ 2,216 $ 6,436 $ 2,235 $(23,764)
Pro forma provision (benefit)
for income taxes........... 593 (265) 158 956 2,463 864 (8,898)
------- ------- ------- ------- ------- ------- --------
Pro forma net income
(loss)(1).................. $ 931 $ (294) $ 133 $ 1,260 $ 3,973 $ 1,371 $(14,866)
======= ======= ======= ======= ======= ======= ========
Pro forma net income per
share(2):
Basic...................... $ 0.28 $ 0.08 $ (0.86)
------- ------- --------
Diluted.................... $ 0.27 $ 0.08 $ (0.86)
======= ======= ========
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -------------------------------------
1996 1996 1997 1998 1999
--------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 1,143 $ 1,038 $18,634 $ 7,553 $ 6,901
Working capital.................................. 782 387 24,387 22,078 6,408
Total assets..................................... 21,514 27,415 54,208 69,831 61,009
Long-term debt................................... -- 240 -- -- --
Total stockholders' equity (deficit)............. 1,166 (175) 30,292 32,939 19,306
</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 18 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.
15
<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. 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 ACQUISITION
In June 1999, the Company created HTE-IOD, Inc., a wholly-owned subsidiary,
which later changed its name to DemandStar.com, Inc. (DemandStar). DemandStar
purchased certain assets of Information On Demand, Inc. for $1.0 million in
cash. The Company could pay up to an additional $2.0 million for the purchase if
DemandStar meets certain financial targets set forth in the Agreement for Sale
and Purchase of Assets. The assets purchased consisted of customer lists and
goodwill. As part of the purchase, HTE also assumed various customer service
liabilities. The Company intends to spin-off DemandStar (but will still retain
an equity interest in DemandStar), through a rights offering for DemandStar
common stock. On December 22, 1999, DemandStar filed a registration statement
with the SEC in contemplation of a rights offering to the Company's shareholders
of record as of March 6, 2000, and certain qualified employees and optionees,
and the sale of Series A and Series B preferred stock to the Company. The
registration statement was declared effective by the SEC on March 27, 2000 and
the rights offering is essentially DemandStar's initial public offering. The
rights distributed to the shareholders, employees and optionees of the Company
16
<PAGE> 19
entitle each holder to purchase shares of common stock of DemandStar for $1.00
per share until the expiration of the rights offering.
FUTURE ACQUISITIONS
Over the past five years, the Company has supplemented its internal growth
with nine acquisitions, six of which have occurred since December 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.
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 DECEMBER 31, YEAR ENDED DECEMBER 31,
MARCH 31, ------------- -----------------------------
1996 1995 1996 1996 1997 1998 1999
--------- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software licenses................... 29.2% 24.2% 31.5% 34.6% 40.5% 43.7% 25.6%
Professional services............... 27.0 26.3 25.9 25.6 22.0 21.1 29.7
Hardware............................ 18.5 20.9 22.4 20.1 17.8 15.7 15.5
Maintenance and other............... 25.3 28.6 20.2 19.7 19.0 18.0 26.8
Resource management................. -- -- -- -- 0.7 1.5 2.4
----- ----- ----- ----- ----- ----- -----
Total revenues.............. 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- -----
Operating expenses:
Cost of software licenses........... 9.1 10.0 8.5 8.2 8.0 8.9 7.8
Cost of professional services....... 19.2 20.1 14.4 14.7 12.7 13.5 18.0
Cost of hardware.................... 14.6 16.6 17.9 15.9 13.9 13.2 12.9
Cost of maintenance and other....... 10.7 11.3 7.8 7.9 9.1 10.2 10.8
Cost of resource management......... -- -- -- -- 0.5 0.9 1.5
Research and development............ 11.4 11.8 15.2 14.3 12.5 14.2 20.1
Sales and marketing................. 13.8 14.1 17.9 16.9 17.4 20.8 20.9
General and administrative.......... 17.1 17.9 16.9 16.8 16.5 15.8 19.5
Contract judgement and settlement,
employee termination benefits and
other costs...................... -- -- -- -- -- 0.6 13.4
----- ----- ----- ----- ----- ----- -----
Total operating expenses.... 95.9 101.8 98.6 94.7 90.6 98.1 124.9
----- ----- ----- ----- ----- ----- -----
Operating income (loss)............... 4.1 (1.8) 1.4 5.3 9.4 1.9 (24.9)
Interest expense (income)............. 0.3 0.2 0.5 0.5 (0.3) (0.4) (0.2)
----- ----- ----- ----- ----- ----- -----
Income (loss) before income taxes..... 3.8 (2.0) 0.9 4.8 9.7 2.3 (24.7)
Provision (benefit) for income
taxes............................... 0.5 (2.2) 1.7 3.0 3.7 1.3 (9.2)
----- ----- ----- ----- ----- ----- -----
Net income (loss)................ 3.3% 0.2% (0.8)% 1.8% 6.0% 1.0% (15.5)%
===== ===== ===== ===== ===== ===== =====
</TABLE>
17
<PAGE> 20
Comparison of Year Ended December 31, 1999 and December 31, 1998 (Amounts in
thousands)
Revenues
The Company's total revenues decreased by 3% to $96,208 for the year ended
December 31, 1999, from $98,905 for the year ended December 31, 1998.
Software License Revenues. Revenues from software licenses decreased 43%
to $24,641 for the year ended December 31, 1999, from $43,277 for the year ended
December 31, 1998. As a percentage of total revenues, software license revenues
decreased to 25.6% for the year ended December 31, 1999, from 43.7% for the year
ended December 31, 1998. The dollar and percentage decreases resulted primarily
from a general slowdown across the software industry as businesses, including
governments, adopted a "wait and see" attitude towards Y2K. In addition, the
decrease as a percentage of total revenues resulted from increased service
revenues due to an effort to reduce the services backlog related to 1998
bookings.
Professional Services Revenues. Revenues from professional services
increased 37% to $28,575 for the year ended December 31, 1999, from $20,870 for
the year ended December 31, 1998. As a percentage of total revenues,
professional services revenues increased to 29.7% for the year ended December
31, 1999, from 21.1% for the year ended December 31, 1998. The dollar and
percentage increases in professional services were directly related to the
growth in revenue generating (billable) staff and related revenue stemming from
the increase in license fees and service offerings in 1998. In addition, the
increase as a percentage of total revenues was due to lower software license
revenues.
Hardware Revenues. Hardware revenues decreased 4% to $14,945 for the year
ended December 31, 1999, from $15,516 for the year ended December 31, 1998. As a
percentage of total revenues, hardware revenues decreased to 15.5% for the year
ended December 31, 1999, from 15.7% for the year ended December 31, 1998. The
dollar and percentage decreases were primarily due to the decrease in software
license purchases. The majority of hardware sales are made in conjunction with
software license purchases.
Maintenance and Other Revenues. Revenues from maintenance and other
increased 45% to $25,772 for the year ended December 31, 1999, from $17,793 for
the year ended December 31, 1998. As a percentage of total revenues, maintenance
and other revenues increased to 26.8% for the year ended December 31, 1999, from
18.0% for the year ended December 31, 1998. The dollar and percentage increases
were primarily due to maintenance contracts associated with new software
licenses booked in 1998, customer system upgrades and price increases in the
fees charged for annual maintenance. In addition, the increase as a percentage
of total revenues was due to lower software license revenues.
Resource Management Revenues. Revenues from resource management increased
57% to $2,275 for the year ended December 31, 1999, from $1,449 for the year
ended December 31, 1998. As a percentage of total revenues, resource management
revenues increased to 2.4% for the year ended December 31, 1999, from 1.5% for
the year ended December 31, 1998. The dollar and percentage increases were
primarily related to the sale of a new outsourcing contract in July 1999, along
with the sale of additional services and an annual price increase on the
existing contract.
Cost of Revenues
Cost of Software License Revenues. Cost of software licenses decreased 15%
to $7,489 for the year ended December 31, 1999, from $8,843 for the year ended
December 31, 1998. As a percentage of software license revenues, cost of
software licenses increased to 30.4% for the year ended December 31, 1999, from
20.4% for the year ended December 31, 1998. The dollar decrease was primarily
related to the decrease in software license revenues. The increase in the cost
of software licenses as a percentage of software license revenues resulted
primarily from an increased number of third-party software licenses,
specifically module enhancements such as report writers and imaging products and
third-party software related to public safety applications which typically carry
a higher cost of sale than other third-party products. In addition, the
percentage increase is also due to relatively fixed computer software
development amortization costs with lower software license revenues.
18
<PAGE> 21
Cost of Professional Services Revenues. Cost of professional services
increased 29% to $17,294 for the year ended December 31, 1999, from $13,399 for
the year ended December 31, 1998. As a percentage of professional services
revenues, cost of professional services decreased to 60.5% for the year ended
December 31, 1999, from 64.2% for the year ended December 31, 1998. The dollar
increase was directly related to increased professional services revenues and
expanded offerings of full service professional services. The decrease in the
cost of professional services as a percentage of professional services revenues
is primarily due to an increase in the billable percentage of employees as new
staff increased productivity.
Cost of Hardware Revenues. Cost of hardware decreased 5% to $12,437 for
the year ended December 31, 1999, from $13,050 for the year ended December 31,
1998. As a percentage of hardware revenues, cost of hardware decreased to 83.2%
for the year ended December 31, 1999, from 84.1% for the year ended December 31,
1998. The dollar and slight percentage decreases were related to the decreased
hardware sales and the mix of equipment sold.
Cost of Maintenance and Other Revenues. Cost of maintenance and other
increased 3% to $10,350 for the year ended December 31, 1999, from $10,041 for
the year ended December 31, 1998. As a percentage of maintenance and other
revenues, cost of maintenance and other decreased to 40.2% for the year ended
December 31, 1999, from 56.4% for the year ended December 31, 1998. The dollar
increase was primarily due to increased personnel to enhance products and
support a larger client base. The decrease in the cost of maintenance and other
as a percentage of maintenance and other revenue was related to more efficient
use of existing resources and improved processes.
Cost of Resource Management Revenues. Cost of resource management
increased 57% to $1,440 for the year ended December 31, 1999, from $918 for the
year ended December 31, 1998. As a percentage of resource management revenues,
cost of resource management remained relatively constant at 63.3% and 63.4% for
the years ended December 31, 1999 and 1998, respectively. The dollar increase
was primarily related to costs associated with a new outsourcing contract which
began in July 1999 and additional services.
Research and Development Expenses. Research and development expenses
increased 37% to $19,294 for the year ended December 31, 1999, from $14,048 for
the year ended December 31, 1998. As a percentage of total revenues, research
and development increased to 20.1% for the year ended December 31, 1999, from
14.2% for the year ended December 31, 1998. The dollar and percentage increases
were primarily due to an increased focus on product enhancements, which resulted
in lower capitalization of software development costs and increased expense. In
addition, the increase as a percentage of total revenues was due to lower
software license revenues.
Sales and Marketing Expenses. Sales and marketing expenses decreased 2% to
$20,116 for the year ended December 31, 1999, from $20,526 for the year ended
December 31, 1998. As a percentage of total revenues, sales and marketing
remained relatively constant at 20.9% and 20.8% for the years ended December 31,
1999 and 1998, respectively. The slight dollar decrease was attributable to a
decrease in the resources required to support the sales effort.
General and Administrative Expenses. General and administrative expenses
increased 20% to $18,779 for the year ended December 31, 1999, from $15,614 for
the year ended December 31, 1998. As a percentage of total revenues, general and
administrative expenses increased to 19.5% for the year ended December 31, 1999,
from 15.8% for the year ended December 31, 1998. The dollar and percentage
increases were due to the recent changes in management and the Company's
strategy. These expenses consist primarily of additional staffing, increased
allowance for doubtful accounts, additional facility related expenses and
additional computer equipment and software required to build the infrastructure
to support the Company's growth of services revenue. In addition, the increase
as a percentage of total revenues was due to lower software license revenues.
Management anticipates that general and administrative expenses as a percentage
of total revenues will decrease in future years and that current trends are not
indicative of the future.
Contract Judgement and Settlement, Employee Termination Benefits and Other
Costs. Contract judgement and settlement, employee termination benefits and
other costs were $12,927, or 13.4% of total revenues, for the year ended
December 31, 1999. These costs consist primarily of $7,493 for contract
19
<PAGE> 22
judgement and settlement, $2,459 for employee severance packages and a non-cash
charge of $1,138 for discontinuation of various product lines. The remaining
charge of $1,837 primarily included other costs associated with the
discontinuation of product lines and certain lease termination costs. In 1998,
the Company recorded a charge of $552,000, or 0.6% of total revenue, related to
the Company's planned underwritten offering, which was terminated on October 15,
1998.
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.
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
20
<PAGE> 23
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 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.
21
<PAGE> 24
Contract Judgement and Settlement, Employee Termination Benefits and Other
Costs. Contract judgement and settlement, employee termination benefits and
other 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 recorded a pre-tax cost reduction
charge during the first quarter of 1999 of $1.8 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 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.
22
<PAGE> 25
Resource Management Revenues. During 1997, the Company began offering the
resource management service that allows customers to turn over management of all
computer related functions. In October 1997, the Company signed its first
resource management contract with Seminole County, Florida. Resource management
revenues for the year ended December 31, 1997 were $448,000 or 0.7% of total
revenues.
Cost of Revenues
Cost of Software Licenses Revenues. Cost of software licenses increased by
41% to $5.3 million for the year ended December 31, 1997, from $3.7 million for
the year ended December 31, 1996. As a percentage of software license revenues,
cost of software licenses decreased to 19.7% for the year ended December 31,
1997, from 23.6% for the year ended December 31, 1996. The dollar increase
resulted from an increased number of software licenses. The decrease in the cost
of software licenses as a percentage of software license revenues was primarily
due to the growth of internal software licenses which exceeded the growth of
third party software licenses.
Cost of Professional Services Revenues. Cost of professional services
increased by 24% to $8.4 million for the year ended December 31, 1997, from $6.7
million for the year ended December 31, 1996. As a percentage of professional
services revenues, cost of professional services increased to 57.5% for the year
ended December 31, 1997, from 57.4% for the year ended December 31, 1996. The
dollar increase resulted from the growth in professional services revenues.
Cost of Hardware Revenues. Cost of hardware increased by 26% to $9.2
million for the year ended December 31, 1997, from $7.3 million for the year
ended December 31, 1996. As a percentage of hardware revenues, cost of hardware
decreased to 78.3% for the year ended December 31, 1997, from 79.3% for the year
ended December 31, 1996. The dollar increase is directly related to the
increased hardware sales. The decrease in the cost of hardware revenues as a
percentage of hardware revenues was primarily due to slightly improved margins
on the larger hardware transactions.
Cost of Maintenance and Other Revenues. Cost of maintenance and other
increased by 66% to $6.0 million for the year ended December 31, 1997, from $3.6
million for the year ended December 31, 1996. As a percentage of maintenance and
other revenues, cost of maintenance and other increased to 47.6% for the year
ended December 31, 1997, from 39.8% for the year ended December 31, 1996. The
dollar increase was primarily due to investment in new customer support
processes, increased personnel to enhance products and additional computer
equipment required to handle graphical user interfaces. The increase in the cost
of maintenance and other revenues as a percentage of maintenance and other
revenues was primarily due to costs related to building infrastructure to
accommodate the growth in client base.
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
23
<PAGE> 26
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.
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 provided
by (used in) operating activities was $3.5 million and $(3.3) million for the
year ended December 31, 1999 and 1998, on net (loss) income of $(14.9) million
and $982,000, respectively. 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 used in investing activities (capital expenditures, software
development investments and acquisitions) totaled $5.3 million and $7.9 million
during the year ended December 31, 1999 and 1998, respectively. Cash used in
investing activities 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. In 1999, the Company acquired certain assets of Information On Demand,
Inc. for $1.0 million in cash. The Company's capital expenditures were primarily
comprised of investments in equipment and related software. The Company made
expenditures of $3.4 million in 1999 related to software development efforts for
additional products and platforms. 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 $1.2 million in the year
ended December 31, 1999, related to the proceeds from sales of common stock
through the Employee Stock Purchase Plan and stock option agreements, compared
to net cash provided of $167,000 in the year ended December 31, 1998. 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. Net cash provided
by financing activities was $19.5 million in the year ended December 31, 1997,
related primarily to the proceeds from the IPO of $22.6 million, offset
partially by the repayment of a line of credit, payment of dividends on the
mandatorily redeemable preferred stock and pay-off of a note payable to related
parties, compared to $341,000 in the comparable 1996 period.
In 1998, the Company replaced the existing line of credit with a revolving
line of credit of $15.0 million, which was terminated in 1999. The Company never
borrowed under this line of credit. The Company believes its cash balances and
cash generated from operations will satisfy the Company's working capital and
capital expenditure requirements for at least the next 12 months. However, the
potential payment of a judgment arising from a recent arbitration award could
require the Company to seek additional financing sources. In the
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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
Prior to January 1, 2000, there was considerable concern regarding the
ability of computers to adequately recognize 21st century dates from 20th
century dates due to the two-digit date fields used by many systems. Most
reports today, however, are that computer systems and software programs are
functioning normally and the compliance and remediation work accomplished during
the years leading up to 2000 was effective to prevent any problems. The Company
develops, markets, implements and supports fully integrated enterprise-wide
software applications for public sector organizations and public and private
utilities. The Company has completed the Year 2000 upgrades of its systems. The
Company used existing resources for its Year 2000 compliance efforts, without
incurring significant incremental expenses. As of the date of this Report, the
Company has not experienced any significant disruption in its products as a
result of any failure of any of its systems to function properly as of January
1, 2000 or February 29, 2000. The Company also has not experienced any Year 2000
failures related to any of its vendors or suppliers. The Company does not expect
to incur any significant costs in 2000 related to Year 2000 activities.
Year 2000 compliance has many elements and potential consequences, some of
which may not be foreseeable or may be realized in future periods. In addition,
unforeseen circumstances may arise, and we may not, in the future, adequately
identify equipment or systems that are not Year 2000 compliant.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF OUR STOCK
The Company operates in a rapidly changing environment that involves
numerous risks, some of which are beyond the Company's control. The following
discussion highlights some of these risks.
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.
Recent Losses and Liquidity Factors
We experienced significant operating losses for the twelve months ended
December 31, 1999, and there is no guarantee that we will return to
profitability in the near future. The Company realized a net loss for the twelve
months ended December 31, 1999, of $14,866,000 compared to a net income of
$982,000 for the same period in 1998. Our revenues may not grow or continue at
their current level.
We cannot assure that our current cash resources will be sufficient to meet
our working capital requirements for the next twelve months as a result of a
potential payment of a judgment arising from a recent arbitration award,
combined with the fact that we have not obtained a credit facility.
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
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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.
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 detailed written response to product demonstrations;
- the design of software that addresses customer-specified needs;
- the integration of HTE and third party products;
- political influences;
- award protests initiated by unsuccessful bidders; and
- 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
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personnel is intense, and there can be no assurance that HTE will be successful
in attracting and retaining such personnel.
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.
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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:
- the consulting divisions of national and regional accounting firms;
- companies which focus on selected segments of the public sector and
utilities markets including PeopleSoft, Inc., Systems & Computer
Technology Corp., J.D. Edwards & Company, Inc. and Tyler Technologies,
Inc.; and
- 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.
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
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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, 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 approved 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
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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:
- 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;
- 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;
- 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;
- an advance notice procedure must be followed for nomination of directors
and for other shareholder proposals to be considered at annual
shareholders' meetings; and
- 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.
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, 1999,
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.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Bernard B. Markey............ 35 Director -- Class III and Chairman
Joseph M. Loughry, III....... 54 Director -- Class II, President and Chief Executive Officer
L. A. Gornto, Jr............. 57 Director -- Class II and Executive Vice President, Secretary,
Treasurer and General Counsel
Susan D. Falotico............ 37 Vice President and Chief Financial Officer
Gilbert O. Santos............ 40 Vice President -- Product Solutions and Business Development
Brian B. Heafy............... 38 Vice President -- Public Safety and Justice
Robert W. Nelson............. 55 Vice President -- Marketing & Sales and Chief Marketing Officer
Nancy D. Tallent............. 45 Vice President -- Human Resources and Corporate Communications
Edward A. Moses.............. 57 Director -- Class I
O. F. Ramos.................. 41 Director -- Class I
</TABLE>
Mr. Bernard B. Markey has been a director of the Company since 1995 and has
served as Chairman since 1999. Mr. Markey is a Managing Partner of Advest New
Century Capital, a private equity firm which he joined in September 1999. Mr.
Markey was a general partner of MeridianVenture Partners, a privately-held
venture capital fund, from 1995 through September 1999. Mr. Markey also serves
on the Board of Directors of several privately-held companies.
Mr. Joseph M. Loughry, III joined the Company in January 2000 as President
and Chief Executive Officer. He also serves as a director. Mr. Loughry's
background includes several years at General Electric Information Services where
he was involved in sales and product development. Mr. Loughry also served in
senior management positions at Goal Systems, Inc., UCCEL Corporation, and Legent
Corporation. Mr. Loughry held several positions with First Union Corporation
from January 1993 through January 1999. These positions include Chief Executive
Officer of Nationwide Remittance Centers, Inc., which was acquired by CoreStates
Bank (now a part of First Union Corporation). Mr. Loughry thereafter became the
President and Chief Executive Officer of QuestPoint Holdings, Inc., a $300
million revenue information technology affiliate of the bank. During 1999, Mr.
Loughry was temporarily retired.
Mr. L. A. Gornto, Jr. was appointed as a member of the Company's Board of
Directors in December 1999. Mr. Gornto joined the Company in January 1997 and
also serves as Executive Vice President, Secretary and General Counsel. Mr.
Gornto was also appointed as Chief Financial Officer, Secretary, and a director
of DemandStar, a subsidiary of the Company, in November 1999 and has served as
DemandStar's Executive Vice President and General Counsel since its inception in
June 1999. From January 1997 until November 1997, he served as the Company's
Chief Financial Officer. Since 1988, Mr. Gornto has been engaged in the private
practice of law in central Florida and provides legal services to the Company as
General Counsel. From 1985 to 1987, Mr. Gornto served as Senior Vice
President-Finance and Chief Financial Officer of Jerrico, Inc., formerly a
publicly-traded company and holding company of Long John Silvers, a seafood
restaurant chain. From 1977 to 1985, he was engaged in the private practice of
law and also served as a management consultant. From 1968 to 1977, he served as
Executive Vice President and Chief Financial Officer and a director of Red
Lobster Restaurants, a seafood restaurant chain and formerly a subsidiary of
General Mills, Inc. Mr. Gornto is an attorney-at-law and certified public
accountant licensed in the states of Florida and Georgia and holds an L.L.M.
degree from Emory University School of Law.
Ms. Susan D. Falotico joined the Company in 1995 and serves as Vice
President, Treasurer and in November 1997 was also appointed Chief Financial
Officer. From 1995 to November 1997, Ms. Falotico
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served as the Company's Vice President -- Controller and Chief Accounting
Officer. From 1988 to 1995, Mrs. Falotico served as Controller of the Newtrend
Division of EDS, Inc., a systems integration company, where she headed the
Financial Accounting and Corporate Planning Department. From 1986 to 1988, Ms.
Falotico was a Financial Analyst for ISI, a division of Mars, Inc., a food
company, where she was responsible for monthly financial reporting and for
coordinating a $70 million budget.
Mr. Gilbert O. Santos joined the Company in September 1998 and currently
serves as its Vice President -- Product Solutions and Business Development. From
1998 to 1999, Mr. Santos served as Vice President -- Customer Services,
responsible for various functional areas including customer support and
training, documentation and media, software quality assurance and testing,
service management and project management and implementation. Mr. Santos held
various marketing and engineering management positions with the Land Mobile
Products Sector of Motorola, Inc. from 1983 to September 1998, most recently as
Director of Operations.
Mr. Brian B. Heafy joined the Company in August 1994 and currently serves
as Vice President -- Public Safety and Justice. From 1988 to 1999, Mr. Heafy
served as Vice President of Human Resources & Organizational Development. From
1994 to 1998, Mr. Heafy served as the Company's Director of Public Safety and
Justice Systems division, where he was responsible for consolidating three
operating groups into one and for improving customer satisfaction, revenue
growth and profit. From 1990 to 1994, Mr. Heafy served as Manager of Information
Services for the City of Coral Springs, Florida. His major responsibilities
included the successful implementation of a multi-million dollar information
technology project. From 1987 to 1990, Mr. Heafy served as Program Manager for
CACI, Inc., Federal division. Prior to 1987, Mr. Heafy served in various
technical management and staff capacities with the United States Marine Corps.
Mr. Robert W. Nelson has served as the Vice President of Marketing and
Sales and Chief Marketing Officer since January 2000. Mr. Nelson previously
served as Vice President of Marketing for HTE-UCS, Inc., a wholly-owned
subsidiary of the Company. From 1990 to 1998, prior to its acquisition by HTE,
he served as Vice President of Sales and Marketing for UCS and was instrumental
in building the company from a small startup to an established national mobile
software provider. From 1984 to 1989 he served as Vice President and Chief
Financial Officer of Certified Vacations, the provider of the Delta Airlines
vacation program. Prior to 1984, Mr. Nelson held various financial and technical
management positions in the investment, banking and consulting industries.
Ms. Nancy D. Tallent joined the Company in May 1999 and serves as Vice
President, Human Resources & Corporate Communications and is also responsible
for Facilities Management. From 1997 to 1999, Ms. Tallent was the Director of
Human Resources for Seminole County Government, Seminole County, Florida, where
she had previously served as the Assistant Human Resources Director from 1992 to
1995. From 1995 to 1997, she was the Human Resources Manager for Orange County
Government, Orange County, Florida. From 1989 to 1992, Ms. Tallent was the Human
Resources Manager for the Orlando Science Center, Orlando, Florida.
Mr. Edward A. Moses was appointed as a member of the Company's Board of
Directors in December 1998. Mr. Moses was appointed a director of DemandStar, a
subsidiary of the Company, in November 1999 and serves as a part-time consultant
to DemandStar. Mr. Moses has served as dean of the Roy E. Crummer Graduate
School of Business at Rollins College since 1994, and as a professor and
NationsBank professor of finance since 1989. From 1985 to 1989 he served as dean
and professor of finance at the University of North Florida. He has also served
in academic and administrative positions at the University of Tulsa, Georgia
State University and the University of Central Florida, and currently serves as
a faculty member in the Graduate School of Banking of the South. Mr. Moses also
serves as a director of CNL Health Care Properties, Inc., a publicly-held real
estate holding company. Mr. Moses received a B.S. in Accounting from the Wharton
School at the University of Pennsylvania and a Masters of Business
Administration and Ph.D. in finance from the University of Georgia in 1971.
Mr. O. F. Ramos joined the Company in June 1998 and was appointed to the
Board of Directors in August 1998. He currently serves as Chief Executive
Officer, President and a director of DemandStar, a subsidiary of the Company.
Formerly, Mr. Ramos served as Executive Vice President of the Company and
33
<PAGE> 36
President of HTE-UCS, Inc., a wholly-owned subsidiary of the Company from June
1998 to November 1999. From 1986 to 1998, Mr. Ramos served as the President and
Chief Executive Officer of UCS, Inc. As the co-founder of UCS, Inc., he was
responsible for the corporate direction and financial development of that
company and for overseeing operations. Prior to 1986, Mr. Ramos served in
various engineering and management capacities at Motorola, Inc., where he was
responsible for the development of diverse software and hardware projects for
several platforms.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers and directors and greater than ten percent shareholders
(collectively, "Reporting Persons") to file reports of ownership and changes in
ownership with the Securities and Exchange Commission ("SEC") and NASDAQ.
Reporting Persons are required by SEC regulations to furnish the Company with
copies of all Section 16(a) forms they file. Based solely on its review of the
copies of such forms received or written representations from Reporting Persons,
the Company believes that with respect to the fiscal year ended December 31,
1999, all the Reporting Persons complied with all applicable filing
requirements.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
The Company reimburses all directors for the expenses incurred in attending
meetings of the Board of Directors. Directors who are officers of the Company
receive no additional compensation for service as directors. Non-employee
directors receive $1,000 per day for attending Board and committee meetings and
are eligible for option grants under the Company's 1997 Employee Incentive
Compensation Plan. During fiscal year 1999, the Company granted to Bernard
Markey options to acquire 10,000 shares of the Company's common stock. The
options have an exercise price of $2.06 per share and vest over a one-year
period. The Company also granted to Edward Moses an option to acquire 3,333
shares of the Company's common stock. The options have an exercise price of
$2.06 per share and vest after one year. The Company granted to L.A. Gornto, Jr.
options to acquire 10,000 shares of the Company's common stock. The options have
an exercise price of $2.41 per share and vest immediately. Additionally, in
1999, the Company granted to Ozzie F. Ramos an option to acquire 20,000 shares
of the Company's common stock. The options have an exercise price of $2.06 per
share and vest immediately. During fiscal year 1998, the Company granted to Mr.
Moses an option to acquire 10,000 shares of the Company's common stock. The
options have an exercise price of $8.38 per share and vest over a three-year
period. The options were granted under the Company's 1997 Employee Incentive
Compensation Plan.
34
<PAGE> 37
INFORMATION REGARDING EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation paid by the Company for
services performed on the Company's behalf during the fiscal years ended
December 31, 1999, 1998 and 1997 with respect to the Company's Chief Executive
Officer and the Company's four most highly compensated executive officers, other
than the Chief Executive Officer, who served as such on December 31, 1999, and
whose total annual salary and bonus for the fiscal year ended December 31, 1999
exceeded $100,000 (the "Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION(1) AWARDS
------------------------------------ SECURITIES
FISCAL OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPLE POSITION YEAR SALARY BONUS(2) COMPENSATION(3) OPTIONS (#) COMPENSATION
- --------------------------- -------- ------- -------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Dennis J. Harward(4).................. 12/31/99 204,167 -- -- -- $179,800(5)
Former Chairman, 12/31/98 351,618 237,500 6,999 -- 7,813(6)
President and Chief 12/31/97 260,417 140,000 35,883 -- 7,813(6)
Executive Officer
O.F. Ramos(14)........................ 12/31/99 160,000 -- -- -- 4,800(6)
Executive Vice President -- 12/31/98 155,833 84,685 -- -- 48,886(7)
HTE-UCS 12/31/97 150,000 10,394 -- -- 4,750(6)
Gilbert O. Santos..................... 12/31/99 154,166 -- -- -- 22,505(8)
Vice President -- Product 12/31/98 42,115 -- 27,897(8)
Solutions and Business 12/31/97 -- --
Development
Brian B. Heafy........................ 12/31/99 146,667 -- -- -- 1,650(6)
Vice President -- Public 12/31/98 113,591 62,972 -- -- 1,650(6)
Safety and Justice 12/31/97 123,585 -- -- -- 4,966(9)
Gary Kaiser(10)....................... 12/31/99 102,980 -- -- -- 21,500(11)
Vice President 12/31/98 -- -- -- -- --
12/31/97 -- -- -- -- --
Susan D. Falotico(12)................. 12/31/99 102,500 -- -- -- 118,000(13)
Vice President and Chief 12/31/98 135,000 53,325 -- -- 4,050(6)
Financial Officer 12/31/97 99,375 50,755 -- -- 2,981(6)
</TABLE>
- ---------------
(1) The amounts reflected in the above table do not include any amounts for
perquisites and other personal benefits extended to the Named Executive
Officers. The aggregate amount of such compensation for each Named
Executive Officer is less than 10% of the total annual salary and bonus.
(2) The Company has had a policy of granting discretionary annual bonuses to
its executive officers and employees based primarily on certain performance
criteria. The Board of Directors intends to continue this policy in the
future. See "Annual Incentive Compensation Bonuses."
(3) Represents special compensation paid pursuant to an agreement dated
November 9, 1994, which provided for approximately $2,333 per month for
Dennis Harward until March 31, 1998.
(4) Mr. Harward was employed with the Company until August 3, 1999.
(5) Represents $175,000 of severance pay and $4,800 in matching contributions
to Mr. Harward's account under the Company 401(k) savings plan.
(6) Represents matching contributions to the accounts of the Named Executive
Officers under the Company's 401(k) savings plan.
(7) Represents $44,136 of deferred salary from 1993 and $4,750 in matching
contributions to Mr. Ramos' account under the Company's 401(k) savings
plan.
(8) Represents relocation moving expenses.
(9) Includes $3,316 in relocation moving expenses and $1,650 in matching
contributions to Mr. Heafy's account under the Company's 401(k) savings
plan.
35
<PAGE> 38
(10) Mr. Kaiser was employed as an officer of the Company from April 12, 1999 to
October 15, 1999.
(11) Represents severance pay.
(12) Ms. Falotico was employed as an officer of the Company until July 19, 1999.
She served as interim CFO from September 13, 1999 to January 28, 2000, at
which time she was re-appointed as an officer of the Company.
(13) Represents $58,950 in contract employment as an interim Chief Financial
Officer, $55,000 in severance and $4,050 in matching contributions to Ms.
Falotico's account under the Company's 401(k) savings plan.
(14) Mr. Ramos was employed by the Company until November 1, 1999.
STOCK OPTIONS GRANTED IN FISCAL 1999
The following table sets forth certain information concerning grants of
options made during fiscal 1999 to the Named Executive Officers.
<TABLE>
<CAPTION>
POTENTIAL REALIZED VALUE
PERCENT AT ASSUMED ANNUAL
NUMBER OF OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS/SARS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO OR BASE OPTION TERM(1)
OPTIONS/SARS EMPLOYEES PRICE EXPIRATION ------------------------
NAME GRANTED(#) IN 1999 ($/SH)(2) DATE 5% ($) 10% ($)
---- ------------ ------------ -------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Dennis J. Harward........ 32,000 3% $2.75 3/17/2009 $ 55,343 $140,249
O.F. Ramos............... 20,000 2 2.06 10/01/2009 25,948 65,758
Gilbert O. Santos........ 50,000 5 5.00 2/11/2009 157,224 398,436
100,000 10 2.00 10/20/2009 125,779 318,748
Brian B. Heafy........... 50,000 5 2.75 3/17/2009 86,473 219,140
100,000 10 2.00 10/20/2009 125,779 318,748
Gary Kaiser(3)........... 50,000 5 3.00 8/15/2000(3) 94,334 239,061
Susan D. Falotico........ 50,000 5 2.75 3/17/2009 86,473 219,140
</TABLE>
- ---------------
(1) The dollar amounts set forth in these columns are the result of calculations
at the five percent and ten percent rates set by the SEC, and therefore are
not intended to forecast possible future appreciation, if any, of the market
price of the common stock.
(2) Fair market value as of the date of grant.
(3) Expiration date accelerated to August 15, 2000 in connection with
termination of employment.
AGGREGATE STOCK OPTION EXERCISES AND YEAR-END OPTION VALUE TABLE
The following table sets forth certain information concerning option
exercises in fiscal 1999, the number of stock options held by the Named
Executive Officers as of December 31, 1999 and the value (based on the fair
market value of a share of stock at fiscal year-end) of in-the-money options
outstanding as of such date.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS HELD AT IN-THE-MONEY OPTIONS/SARS
NUMBER OF FISCAL YEAR END (#) AT FISCAL YEAR END(1)
SHARES ACQUIRED VALUE ---------------------------- ----------------------------
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ------------ ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Dennis J. Harward............ -- -- -- -- $ -- $ --
O.F. Ramos................... -- -- 20,000 -- 78,740 --
Gilbert O. Santos............ -- -- 13,171 151,829 40,684 409,316
Brian B. Heafy............... -- -- 65,831 105,369 225,301 364,441
Gary Kaiser.................. -- -- 20,000 -- 60,000 --
Susan D. Falotico............ -- -- 71,200 31,800 231,400 103,350
</TABLE>
- ---------------
(1) The closing sale price for the Company's common stock as reported by the
NASDAQ National Market System on December 31, 1999 was $6.00 per share.
Value is calculated by multiplying (a) the difference between $6.00 and the
option exercise price by (b) the number of shares of common stock underlying
the option.
36
<PAGE> 39
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL AGREEMENTS
In August 1999, Dennis J. Harward, the Company's then President, Chief
Executive Officer and Chairman of the Board and Jack L. Harward, the company's
then Executive Vice President, resigned as officers of the Company, resulting in
the termination of their employment agreements and severance agreements with the
Company. In connection with their resignations, they entered into a separation
agreement with the Company in August 1999. Under the terms of the agreement,
Dennis Harward received a lump sum payment of $175,000 and Jack Harward received
a lump sum payment of $71,250 (representing one-half of their respective annual
base salaries), less applicable tax withholdings, plus amounts incurred by them
to retain their health insurance coverage for a six month period. In addition,
this agreement provides each of Messrs. Dennis Harward and Jack Harward are to
receive their then base annual salaries ($350,000 and $142,500, respectively)
for a period of 18 calendar months commencing with the month of February 2000,
less applicable tax withholdings, and payable in accordance with the Company's
normal payroll practices. Also, the Company agreed to reimburse them for amounts
incurred by them to retain their health insurance coverage under COBRA or the
equivalent. Although the agreement provided that Messrs. Dennis Harward and Jack
Harward would continue as directors of the Company for their respective terms,
subject to their retaining a threshold percentage ownership of the Company, they
resigned as directors of the Company after selling most of their equity interest
in the Company. The separation agreement also provides, among other things, a
voting agreement prohibiting the Harwards (until August 3, 2001) from soliciting
proxies in opposition to the recommendations of the Company's board of directors
on any matters and to vote their shares in favor of all nominees to, and
proposals of, the board of directors. The separation agreement incorporates the
confidentiality provisions and non-competition provisions of the terminated
employment agreements. Under those terms, the Harwards are prohibited from
competing with the Company for a period of two years from the date of
termination of their employment agreements.
On June 1, 1998, the Company entered into an employment agreement with O.
F. Ramos, the former Executive Vice President of the Company, which provided for
an annual salary of $160,000. The agreement terminated on November 1, 1999, when
Mr. Ramos resigned as an officer of the Company and HTE-UCS, Inc., to assume the
offices of President and Chief Executive Officer of DemandStar, a subsidiary of
the Company.
An employment agreement was entered into with Gary Kaiser, former executive
officer of the Company, which provided for an annual salary of $172,000. In
connection with Mr. Kaiser's severance arrangement with the Company, the Company
agreed to continue to employ and pay Mr. Kaiser and Mr. Kaiser agreed to
continue to serve the Company, at his annualized base salary through April 15,
2000. Pursuant to the termination provisions in his employment agreement, Mr.
Kaiser received a severance payment in fiscal 1999 of $21,000. During the
remaining employment term of the agreement the executive will serve as a
consultant to the Company. The agreement contains confidentiality provisions and
also prohibits the executive from competing with the Company during the term of
the agreement and for six months thereafter.
Effective September 1998, the Company entered into an employment agreement
with Gilbert O. Santos, the Company's Vice President -- Product solutions and
Business Development, and in October 1999, the Company amended his agreement.
The amended agreement provides for a base salary and incentive compensation
payments based on performance. Mr. Santos' current base salary is $170,000. Mr.
Santos' agreement provides for a bonus aggregating up to a maximum of 50% of his
annual base salary if certain performance goals are met. The agreement provides
for a two-year initial term with successive one-year renewals thereafter. The
agreement also provides that, upon the termination of the executive's employment
or death, the Company will pay to the executive's estate any unpaid base salary
and any accrued but unpaid incentive compensation through the date of
termination. In the event the executive is terminated without "Cause," the
Company will pay to the 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 with benefits for a period of six (6) months. The
agreement also provides that the executive may receive stock options pursuant to
the Employee Incentive Compensation Plan. The agreement contains confidentiality
provisions and also prohibits the executive from competing with the Company
during the term of the agreement and for one year
37
<PAGE> 40
thereafter. Upon resignation, the Company shall pay to the executive any unpaid
base salary and any accrued but unpaid incentive compensation through the date
of resignation.
Effective October 19, 1999, the Company entered into an employment
agreement with Brian B. Heafy, the Company's Vice President -- Public Safety and
Justice. The agreement provides for a base salary and incentive compensation
payments based on performance. Mr. Heafy's current base salary is $170,000. Mr.
Heafy's agreement provides for a bonus aggregating up to a maximum of 50% of his
annual base salary if certain performance goals are met. The agreement provides
for a two-year initial term with successive one-year renewals thereafter. The
agreement also provides that, upon the termination of the executive's employment
or death, the Company will pay to the executive's estate any unpaid base salary
and any accrued but unpaid incentive compensation through the date of
termination. In the event the executive is terminated without "Cause," the
Company will pay to the 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 with benefits for a period of six (6) months. The
agreement also provides that the executive may receive stock options pursuant to
the Employee Incentive Compensation Plan. The agreement contains confidentiality
provisions and also prohibits the executive from competing with the Company
during the term of the agreement and for one year thereafter. Upon resignation,
the Company shall pay to the executive any unpaid base salary and any accrued
but unpaid incentive compensation through the date of resignation.
On January 28, 2000, the Company entered into an employment agreement with
Susan D. Falotico, the Company's Vice President and Chief Financial Officer. The
agreement provides for a base salary and incentive compensation payments based
on performance. Ms. Falotico's current base salary is $170,000. Ms. Falotico's
agreement provides for a bonus aggregating up to a maximum of 50% of her annual
base salary if certain performance goals are met. The agreement provides for an
initial term through December 31, 2001 with successive one-year renewals
thereafter. The agreement also provides that, upon the termination of the
executive's employment or death, the Company will pay to the executive's estate
any unpaid base salary and any accrued but unpaid incentive compensation through
the date of termination. In the event the executive is terminated without
"Cause", the Company will pay to the 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 with benefits for a period of six
(6) months. The agreement also provides that the executive may receive stock
options pursuant to the Employee Incentive Compensation Plan. The agreement
contains confidentiality provisions and also prohibits the executive from
competing with the Company during the term of the agreement and for one year
thereafter. Upon resignation, the Company shall pay to the executive any unpaid
base salary and any accrued but unpaid incentive compensation through the date
of resignation.
Effective December 17, 1999, the Company entered into an employment
agreement with Robert W. Nelson, the Company's Vice President -- Marketing and
Sales and Chief Marketing Officer. The agreement provides for a base salary and
incentive compensation payments based on performance. Mr. Nelson's current base
salary is $150,000. Mr. Nelson's agreement provides for quarterly bonuses up to
$25,000 and an annual bonus up to $50,000 based on meeting certain revenue
attainment and expense controls pursuant to the Vice President of Marketing and
Sales Incentive Compensation Plan. The agreement provides for a one-year initial
term with automatic renewal until terminated by either party upon 90 days
written notice. The agreement also provides that, upon the termination of the
executive's employment or death, the Company will pay to the executive's estate
any unpaid base salary and any accrued but unpaid incentive compensation through
the date of termination. In the event the executive is terminated without
"Cause," the Company will pay to the 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 the longer of (a) the remaining
initial term of the agreement, or (b) 90 days. The agreement also provides that
the executive may receive stock options pursuant to the Employee Incentive
Compensation Plan. The agreement contains confidentiality provisions and also
prohibits the executive from competing with the Company during the term of the
agreement and for two years thereafter. Upon resignation, the Company shall pay
to the executive any unpaid base salary and any accrued but unpaid incentive
compensation through the date of resignation.
38
<PAGE> 41
ANNUAL INCENTIVE COMPENSATION BONUSES
The Company has an incentive compensation bonus program for its executive
officers pursuant to which distributions may be made annually based on the
Company's earnings and on each participating officer's contributions to the
Company's profits and other corporate goals. Distributions are made from a pool,
the amount of which is established by the Company's Board of Directors.
Individual distributions from the pool are determined by the Company's
Compensation Committee and are generally based on a percentage of the
participating officer's base salary.
EMPLOYEE INCENTIVE COMPENSATION PLAN
The Employee Incentive Compensation Plan was established by the Company in
January 1997. The plan is currently administered by the company's Board of
Directors which has broad powers to administer and interpret the plan. The
purpose of the employee Incentive Compensation 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 Employee Incentive Compensation plan
authorizes the grant of stock options (incentive and nonstatutory), stock
appreciation rights ("SAR"s) 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 2,908,000 shares of common stock for grants under
the Employee Incentive Compensation plan. Incentive stock options may be granted
only to employees eligible to receive them under the Internal Revenue Code of
1986, as amended. As of December 31, 1999, the Company had options (both
incentive and nonstatutory) for a total of 1,800,826 shares of the Company's
common stock outstanding, leaving a total of 1,107,174 shares available for
future grants. Upon expiration of unexercised options, the unpurchased shares
subject to such options will again be available for purposes of the plan.
EMPLOYEE STOCK PURCHASE PLAN
The Employee Stock Purchase Plan was approved by the Board of Directors in
July 1997 and approved by the company's shareholders at the 1998 annual meeting.
It is currently administered by the Company's Board of Directors who has broad
powers to administer and interpret the plan. The employee stock purchase plan
permits employees to purchase stock of the company at a favorable price and
possibly with favorable tax consequences to the participants. All employees
(including officers) of the Company or of those subsidiaries designated by the
Board who are regularly scheduled to work at least 20 hours per week and more
than five months per year are eligible to participate in any purchase periods of
the plan after completing 90 days of continuous employment. However, any
participant who would own (as determined under the internal revenue code),
immediately after the grant of an option, stock possessing 5% or more of the
total combined voting power or value of all classes of stock of the Company will
not be granted an option under the plan. As of December 31, 1999, 203,728 shares
of common stock remain available for issuance under the plan.
Under the Employee Stock Purchase Plan, eligible employees may elect to
participate in the plan on January 1 or July 1 of each year. On the date he
becomes a participant, and on the first business day in January and July
thereafter, subject to certain limitations determined in accordance with
calculations set forth in the plan, an eligible employee is granted a right to
purchase shares of common stock (up to a maximum of 500 shares) on the last
business day on or before each June 30 and December 31 during which he is a
participant. Upon enrollment in the plan, the participant authorizes a payroll
deduction, on an after-tax basis, in an amount of not less than 1% and not more
than 25% of the participant's compensation on each payroll date. Unless the
participant withdraws from the plan, the participant's option for the purchase
of shares is exercised automatically on each exercise date, and paid for with
the accumulated plan contributions. The option exercise price per share may not
be less than 85% of the lower of the market price on the first day of the
offering period or the market price on the exercise date, unless the
participant's entry date is not the first day of the offering period, in which
case the exercise price may not be lower than 85% of the market price of the
common stock on the entry date.
39
<PAGE> 42
As of December 31, 1999, 396,272 shares of common stock had been purchased
under the Employee Stock Purchase Plan. If any option granted under the plan
expires or terminates for any reason other than having been exercised in full,
the unpurchased shares subject to that option will again be available for
purposes of the Plan.
REPORT OF THE COMPENSATION COMMITTEE OF THE
BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
GENERAL
The Compensation Committee of the Board of Directors during fiscal year
1999 consisted of Bernard B. Markey and Edward A. Moses. Each Compensation
Committee member is a non-employee director of the Company. The Compensation
Committee administers the Company's executive compensation program, monitors
corporate performance and its relationship to compensation for executive
officers, and makes appropriate recommendations concerning matters of executive
compensation.
COMPENSATION PHILOSOPHY
The Company has developed and implemented a compensation program that is
designed to attract, motivate, reward and retain the broad-based management
talent required to achieve the Company's business objectives and increase
shareholder value. There are two major components of the Company's compensation
program: base salary and incentives, each of which is intended to serve the
overall compensation philosophy.
BASE SALARY
The Company's salary levels for executive officers, including its Chief
Executive Officer, are intended to be consistent with competitive pay practices
of similarly-sized companies within the industry. In determining executive
officers' salaries, the Compensation Committee considers level of
responsibility, competitive trends, the financial performance and resources of
the Company, general economic conditions, as well as factors relating to the
particular individual, including overall job performance, level of experience
and prior service, ability, and knowledge of the job.
INCENTIVES
Incentives consist of stock options and cash bonus awards. The Compensation
Committee strongly believes that the compensation program should provide
employees with an opportunity to increase their ownership and potential for
financial gain from increases in the Company's stock price. This approach
closely aligns the best interests of shareholders and executives and employees.
Therefore, executives and other employees are eligible to receive stock options,
giving them the right to purchase shares of the Company's common stock at a
specified price in the future. Stock option grants are determined by the
Company's Board of Directors. The grant of options is based primarily on a key
employee's potential contribution to the Company's growth and profitability, as
measured by the market value of the Company's common stock. The Company has an
incentive compensation bonus program for its executive officers pursuant to
which distributions may be made annually based on the Company's earnings and on
each participating officer's contributions to the Company's profits and other
corporate goals. Distributions are made from a pool, the amount of which is
established by the Company's Board of Directors. Individual distributions from
the pool are determined by the Company's Compensation Committee and are
generally based on a percentage of the participating officer's base salary.
Respectfully submitted,
THE COMPENSATION COMMITTEE
Bernard B. Markey
Edward A. Moses
40
<PAGE> 43
STOCK PERFORMANCE GRAPH
The graph below compares the cumulative total shareholder return on the
Company's common stock (Company Index) with the cumulative total return of the
NASDAQ Stock Market (Market Index) and the NASDAQ Computer and Data Processing
Stocks (Peer Index) for the period commencing June 11, 1997 (the date on which
trading in the Company's common stock commenced) through December 31, 1999,
assuming an investment of $100 and the reinvestment of any dividends. The base
price for the Company's stock is the initial public offering price of $5.50 per
share. The comparisons in the graph below are based upon historical data and are
not indicative of, nor intended to forecast, future performance of the Company's
common stock.
<TABLE>
<CAPTION>
COMPANY INDEX MARKET INDEX PEER INDEX
------------- ------------ ----------
<S> <C> <C> <C>
6/11/97 100.000 100.000 100.000
12/31/97 195.294 112.443 104.794
12/31/98 94.118 158.210 187.822
12/31/99 112.941 293.050 410.731
</TABLE>
41
<PAGE> 44
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of March 20, 2000
with respect to the beneficial ownership of the Company's common stock by: (i)
each shareholder known by the Company to be the beneficial owner of more than 5%
of the Company's common stock; (ii) each director; (iii) each executive officer
named in the Summary Compensation Table; and (iv) all executive officers and
directors as a group.
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER(1)(2) OWNED(3) SHARES OWNED
- ------------------------------------------ ------------ -------------
<S> <C> <C>
Tyler Technologies, Inc.(4)................................. 5,618,952 30%
2800 West Mockingbird Lane
Dallas, TX 75235
L.A. Gornto, Jr.(5)......................................... 344,000 2%
O.F. Ramos(6)............................................... 222,924 1%
Brian B. Heafy(7)........................................... 59,771 *
Bernard B. Markey(8)........................................ 59,766 *
Susan D. Falotico(9)........................................ 72,265 *
Gary Kaiser(10)............................................. 20,000 *
Gilbert O. Santos(11)....................................... 17,375 *
Joseph M. Loughry, III...................................... 9,000 *
Edward A. Moses(12)......................................... 5,834 *
All executive officers and directors as a group (10
persons)(13).............................................. 1,038,275 6%
</TABLE>
- ---------------
* Less than one percent
(1) Except as otherwise noted, and subject to community property laws where
applicable, each person named in the table has sole voting and investment
power with respect to all securities owned by such person.
(2) Unless otherwise noted, the address of each person or entity listed is
H.T.E., Inc., 1000 Business Center Drive, Lake Mary, Florida 32764.
(3) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date hereof either from the
exercise of options or from the conversion of a security.
(4) It is the Company's position that these shares are non-voting shares since
they were acquired in a transaction subject to the control share
acquisition provisions of Florida's statutes.
(5) Includes 275,000 shares of common stock that Mr. Gornto may acquire within
60 days from the date hereof upon exercise of stock options.
(6) Includes 20,000 shares of common stock that Mr. Ramos may acquire within 60
days from the date hereof upon exercise of stock options.
(7) Includes 59,771 shares of common stock that Mr. Heafy may acquire within 60
days from the date hereof upon exercise of stock options.
(8) Includes 6,666 shares of common stock that Mr. Markey may acquire within 60
days from the date hereof upon exercise of stock options.
(9) Includes 71,100 shares of common stock that Ms. Falotico may acquire within
60 days from the date hereof upon exercise of stock options.
(10) Includes 20,000 shares of common stock that Mr. Kaiser may acquire within
60 days from the date hereof upon exercise of stock options.
(11) Includes 13,000 shares of common stock that Mr. Santos may acquire within
60 days from the date hereof upon exercise of stock options.
(12) Includes 3,334 shares of common stock that Mr. Moses may acquire within 60
days from the date hereof upon exercise of stock options.
(13) Excludes shares beneficially owned by former executive officers Gary Kaiser
and Dennis Harward.
42
<PAGE> 45
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
L.A. Gornto, Jr., the Company's Executive Vice President, General Counsel
and Secretary, has performed certain legal services for the Company through his
law firm, L.A. Gornto, Jr., P.A., for which the Company paid approximately
$191,696 during fiscal 1999, and from which office rent, secretarial and certain
other expenses incurred by Mr. Gornto in providing such services were paid.
O. R. Ramos, a director of the Company, entered into a three-year
employment agreement with DemandStar, a subsidiary of the Company, effective
November 1, 1999, under which he serves as DemandStar's Chief Executive Officer.
The agreement provides for an annual salary of $160,000 and incentive
compensation payments based on performance. Pursuant to the employment
agreement, Mr. Ramos was granted stock options under DemandStar's stock option
plan to purchase an aggregate of 990,000 shares of DemandStar common stock at
$1.00 per share. The options have various vesting schedules.
Bernard B. Markey, a director of the Company, and L. A. Gornto, Jr., a
director and officer of the Company, entered into three-year part-time
employment agreements with DemandStar, effective December 15, 1999, under which
Mr. Markey serves as a financial assistant to DemandStar's principal executive
officers and Mr. Gornto serves as Chief Financial Officer, Executive Vice
President, Secretary and General Counsel. Each agreement provides for an annual
salary of $12,000 for up to 200 hours of each such executive's time per year. If
either executive is required to devote more than 16 hours of time in any
particular month, then he will be paid $1,000 per day in addition to his base
salary. Further, Mr. Gornto's agreement provides for a mutually agreed higher
compensation amount if he devotes more than 40 hours in any calendar month to
DemandStar. Pursuant to the employment agreements, each executive received
options to purchase an aggregate of 90,000 shares of DemandStar common stock at
$1.00 per share, with incremental vesting schedules.
On December 15, 1999, DemandStar entered into a three-year consulting
agreement with Edward Moses, a director of the Company, pursuant to which Mr.
Moses provides consulting services to DemandStar regarding strategic planning,
operations matters, growth and development matters and other areas as requested
by DemandStar. In exchange for those services, DemandStar granted Mr. Moses
options to purchase a total of 90,000 shares of DemandStar common stock at $1.00
per share, which options vest incrementally.
In connection with DemandStar's rights offering, the Company, O. R. Ramos,
L. A. Gornto, Jr., Bernard B. Markey, and Edward Moses, directors and/or
executive officers of the Company, and certain other officers of DemandStar,
agreed, pursuant to the terms of a Conditional Series B Stock Purchase Agreement
with DemandStar, to purchase in the aggregate 2,000,000 shares of DemandStar's
Series B preferred stock for an aggregate purchase price of $2,000,000 only in
the event that less than $5,000,000 in the aggregate of DemandStar rights are
exercised by HTE shareholders, employees and optionees under DemandStar's rights
offering. Of that total amount, each of the individuals committed to purchase
250,000 shares of DemandStar Series B preferred stock. In connection with this
agreement, DemandStar issued the Company and the individuals warrants entitling
them to purchase an aggregate of 1,000,000 shares of DemandStar common stock at
an exercise price of $2.00 per share. Of that total amount, each of the
individuals received warrants to purchase 125,000 shares of DemandStar common
stock.
O. R. Ramos, Bernard B. Markey, L. A. Gornto, Jr., and Edward Moses,
directors and/or executive officers of the Company, entered into an agreement
with DemandStar to subscribe for an aggregate of 656,821 restricted shares of
DemandStar common stock, representing the rights to which they are entitled in
DemandStar's rights offering. Pursuant to the same agreement, Messrs. Ramos,
Markey and Moses, together with certain other officers of DemandStar, have
agreed to purchase additional shares in DemandStar's rights offering in an
amount representing the lesser of (a) an aggregate of 718,568 restricted shares
of common stock or (b) the number of shares of unsubscribed common stock
available on the closing date of DemandStar's rights offering.
43
<PAGE> 46
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, 1998 and 1999........... F-4
Statements of Operations for the years ended December 31,
1997, 1998 and 1999.................................... F-5
Statements of Stockholders' Equity (Deficit) and
Comprehensive Income (Loss) for the years ended
December 31, 1997, 1998 and 1999....................... F-6
Statements of Cash Flows for the years ended December 31,
1997, 1998 and 1999.................................... 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, 1999.
44
<PAGE> 47
(C) Exhibit Index
<TABLE>
<CAPTION>
NUMBER NAME
- ------ ----
<C> <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) (for SEC use only)(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.
45
<PAGE> 48
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/ JOSEPH M. LOUGHRY
--------------------------------------
Joseph M. Loughry
President and Chief Executive Officer
and Director (principal executive
officer)
Date: March 29, 2000
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/ JOSEPH M. LOUGHRY President and Chief Executive March 29, 2000
- ----------------------------------------------------- Officer and Director
Joseph M. Loughry (principal executive officer)
/s/ BERNARD B. MARKEY Chairman of the Board of March 29, 2000
- ----------------------------------------------------- Directors
Bernard B. Markey
/s/ L.A. GORNTO, JR. Executive Vice March 29, 2000
- ----------------------------------------------------- President,General Counsel,
L.A. Gornto, Jr. Secretary and Director
/s/ SUSAN D. FALOTICO Vice President, Chief Financial March 29, 2000
- ----------------------------------------------------- Officer (principal financial
Susan D. Falotico officer)
/s/ O.F. RAMOS Director March 29, 2000
- -----------------------------------------------------
O.F. Ramos
/s/ EDWARD MOSES Director March 29, 2000
- -----------------------------------------------------
Edward Moses
</TABLE>
46
<PAGE> 49
HTE, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED 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 (Loss)........................... F-6
Consolidated Statements of Cash Flows....................... F-7
Notes to Consolidated Financial Statements.................. F-9
</TABLE>
F-1
<PAGE> 50
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, 1998 and 1999,
and the related consolidated statements of operations, stockholders' equity
(deficit) and comprehensive income (loss) and cash flows for the years ended
December 31, 1997, 1998 and 1999, 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 year ended December 31, 1997, which statements reflect total
revenues constituting 15 percent of the related consolidated total. These
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to amounts included for UCS, Inc., is
based solely upon the report of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report 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, 1998 and 1999, and the results of their operations and their cash
flows for the years ended December 31, 1997, 1998 and 1999, after giving
retroactive effect to the merger with UCS, Inc. as described in Note 1 to the
consolidated financial statements, in conformity with accounting principles
generally accepted in the United States.
/s/ Arthur Andersen LLP
Orlando, Florida,
February 16, 2000 (except with respect to the
matter discussed in Note 12,
as to which the date is
March 27, 2000)
F-2
<PAGE> 51
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of UCS, Inc.:
In our opinion, the statements of operations, of stockholders' equity and
of cash flows of UCS, Inc. (not presented separately herein) present fairly, in
all material respects, the results of the operations of UCS, Inc. and its cash
flows for the year ended December 31, 1997 in conformity with accounting
principles generally accepted in the United States. 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 auditing standards
generally accepted in the United States 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> 52
HTE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1999
------- -------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 7,553 $ 6,901
Trade accounts receivable, less allowance of $1,351 and
$2,074 for doubtful accounts at December 31, 1998 and
1999, respectively..................................... 40,635 33,407
Income tax receivable..................................... 3,050 --
Deferred income taxes..................................... 485 5,614
Prepaid commissions....................................... 2,774 101
Other current assets...................................... 1,573 1,613
------- -------
Total current assets.............................. 56,070 47,636
------- -------
Equipment, furniture and fixtures, net...................... 4,587 3,839
------- -------
Other Assets:
Computer software development costs, net of accumulated
amortization of $11,401 and $13,613 at December 31,
1998 and 1999, respectively............................ 6,393 5,653
Other intangible assets, net.............................. 2,498 2,381
Deferred income taxes..................................... -- 1,254
Deposits.................................................. 283 246
------- -------
Total other assets................................ 9,174 9,534
------- -------
$69,831 $61,009
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 5,856 $ 3,701
Accrued liabilities....................................... 5,973 11,965
Deferred revenue.......................................... 22,163 25,562
------- -------
Total current liabilities......................... 33,992 41,228
------- -------
Long-Term Liabilities:
Deferred lease commitment................................. 385 475
Deferred income taxes..................................... 2,515 --
------- -------
Total long-term liabilities....................... 2,900 475
------- -------
Commitments and Contingencies (Notes 4, 10, 11 and 12)
Stockholders' Equity:
Common stock, $.01 par value, 50,000,000 shares
authorized, 17,012,864 and 17,401,110 shares issued and
outstanding as of December 31, 1998 and 1999........... 170 174
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued and outstanding................ -- --
Additional paid-in capital................................ 29,661 30,890
Retained earnings (deficit)............................... 3,144 (11,722)
Cumulative translation adjustment......................... (36) (36)
------- -------
Total stockholders' equity........................ 32,939 19,306
------- -------
$69,831 $61,009
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE> 53
HTE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------- ------- ---------
<S> <C> <C> <C>
Revenues:
Software licenses......................................... $26,762 $43,277 $ 24,641
Professional services..................................... 14,543 20,870 28,575
Hardware.................................................. 11,768 15,516 14,945
Maintenance and other..................................... 12,571 17,793 25,772
Resource management....................................... 448 1,449 2,275
------- ------- ---------
Total revenues.................................... 66,092 98,905 96,208
------- ------- ---------
Operating expenses:
Cost of software licenses................................. 5,283 8,843 7,489
Cost of professional services............................. 8,363 13,399 17,294
Cost of hardware.......................................... 9,209 13,050 12,437
Cost of maintenance and other............................. 5,984 10,041 10,350
Cost of resource management............................... 343 918 1,440
Research and development.................................. 8,256 14,048 19,294
Sales and marketing....................................... 11,520 20,526 20,116
General and administrative................................ 10,925 15,614 18,779
Contract judgement and settlement, employee termination
benefits and other costs............................... -- 552 12,927
------- ------- ---------
Total operating expenses.......................... 59,883 96,991 120,126
------- ------- ---------
Income (loss) from operations............................... 6,209 1,914 (23,918)
Other expense (income):
Interest expense.......................................... 175 49 61
Interest income........................................... (402) (370) (215)
------- ------- ---------
Total other income, net........................... (227) (321) (154)
------- ------- ---------
Income (loss) before income taxes........................... 6,436 2,235 (23,764)
Income taxes:
Deferred tax provision related to acquisitions............ -- 339 --
Provision (benefit) for income taxes (Note 9)............. 2,482 914 (8,898)
------- ------- ---------
Net income (loss)........................................... 3,954 982 (14,866)
Accretion and accrual of dividends on
Mandatorily redeemable preferred stock...................... 1,308 -- --
------- ------- ---------
Net income (loss) attributable to common stockholders....... $ 2,646 $ 982 $ (14,866)
======= ======= =========
Net income (loss) per share:
Basic..................................................... $ 0.21 $ 0.06 $ (0.86)
======= ======= =========
Diluted................................................... $ 0.20 $ 0.06 $ (0.86)
======= ======= =========
PRO FORMA NET INCOME DATA (UNAUDITED):
Income (loss) before income taxes......................... $ 6,436 $ 2,235 $ (23,764)
Pro forma provision (benefit) for income taxes............ 2,463 864 (8,898)
------- ------- ---------
Pro forma net income (loss)................................. $ 3,973 $ 1,371 $ (14,866)
======= ======= =========
Pro forma net income (loss) per share:
Basic..................................................... $ 0.28 $ 0.08 $ (0.86)
======= ======= =========
Diluted................................................... $ 0.27 $ 0.08 $ (0.86)
======= ======= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 54
HTE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE INCOME (LOSS)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS A
COMMON STOCK COMMON STOCK ADDITIONAL RETAINED CUMULATIVE
--------------- --------------- PAID-IN EARNINGS TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) ADJUSTMENT TOTAL
------ ------ ------ ------ ---------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996.................. 1,083 $ 11 3,531 $ 1 $ 342 $ (524) $ (5) $ (175)
Issuance of common stock.................. 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.................................. 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
Proceeds from exercise of stock options... 89 1 -- -- 85 -- -- 86
Proceeds from issuance of stock under
benefit plan............................ 299 3 -- -- 1,066 -- -- 1,069
Compensation from stock options........... -- -- -- -- 13 -- -- 13
Tax benefit associated with stock
options................................. -- -- -- -- 65 -- -- 65
Comprehensive income (loss):
Net income.............................. -- -- -- -- -- (14,866) --
Translation adjustment.................. -- -- -- -- -- -- --
Total comprehensive income (loss)... -- -- -- -- -- -- -- (14,866)
------ ---- ------ ---- ------- -------- ---- --------
BALANCE, DECEMBER 31, 1999.................. 17,401 $174 -- $ -- $30,890 $(11,722) $(36) $ 19,306
====== ==== ====== ==== ======= ======== ==== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 55
HTE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(NOTE 13)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 3,954 $ 982 $(14,866)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 3,226 4,935 5,865
Accretion of mandatorily redeemable Class C common
stock charged to interest expense.................... 19 -- --
Loss on disposal of equipment, furniture and
fixtures............................................. -- 43 57
Loss from discontinuation of product line.............. -- -- 1,138
Compensation due to sale of stock...................... 65 -- --
Compensation due to stock options...................... -- -- 13
Deferred income taxes.................................. (84) 1,050 (8,898)
Tax benefit associated with stock options.............. -- 286 65
Changes in operating assets and liabilities, net of effect
of acquisitions --
Decrease (increase) in assets --
Trade accounts receivable, net....................... (4,736) (17,586) 7,228
Income tax receivable................................ -- (3,050) 3,050
Prepaid commissions.................................. -- (2,774) 2,673
Other current assets................................. (544) (105) (40)
Deposits............................................. (67) (86) 37
Increase (decrease) in liabilities --
Accounts payable..................................... 125 2,722 (2,155)
Accrued liabilities.................................. 855 738 5,992
Deferred revenue..................................... 1,802 9,345 3,226
Deferred lease commitment............................ 107 212 90
------- -------- --------
Net cash provided by (used in) operating
activities...................................... 4,722 (3,288) 3,475
------- -------- --------
Cash flows from investing activities:
Capital expenditures...................................... (2,091) (2,595) (925)
Change in restricted cash................................. (1,574) 1,574 --
Cash paid for acquisitions................................ (361) (2,213) (1,000)
Computer software development costs....................... (2,616) (4,684) (3,357)
------- -------- --------
Net cash used in investing activities............. (6,642) (7,918) (5,282)
------- -------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE> 56
HTE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(CONTINUED) (NOTE 13)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1998 1999
------- -------- ------
<S> <C> <C> <C>
Cash flows from financing activities:
Payment of dividends on preferred stock................... $ (624) $ -- $ --
Net proceeds from issuance of common stock................ 22,620 1,380 1,155
Repayments on line of credit.............................. (2,306) -- --
Repayments of obligations under capital leases............ (34) -- --
Net repayments of notes payable to related parties........ (300) -- --
Increase (decrease) in due to stockholders................ 149 (1,213) --
------- -------- ------
Net cash provided by financing activities......... 19,505 167 1,155
------- -------- ------
Effect of foreign currency exchange rate changes on cash and
cash equivalents.......................................... 11 (42) --
------- -------- ------
Net increase (decrease) in cash and cash equivalents........ 17,596 (11,081) (652)
Cash and cash equivalents, beginning of period.............. 1,038 18,634 7,553
------- -------- ------
Cash and cash equivalents, end of period.................... $18,634 $ 7,553 $6,901
======= ======== ======
Supplemental schedules of cash flow information
Cash paid for interest.................................... $ 111 $ 49 $ 61
Cash paid for income taxes................................ $ 1,940 $ 4,031 $ --
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-8
<PAGE> 57
HTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999
(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-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, HTE-Vanguard Systems, Inc., a Florida corporation and
DemandStar.com, Inc. (DSI), 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 $15,000 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.
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 which is discussed further in Note 3.
F-9
<PAGE> 58
HTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Trade Accounts Receivable
Included in trade accounts receivable at December 31, 1998 and 1999, are
unbilled receivables of $12,210 and $4,634, respectively. The following table
reflects the activity in the allowance for doubtful accounts for the years ended
December 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1998 1999
----- ------ -------
<S> <C> <C> <C>
Balance at the beginning of the period...................... $ 520 $ 617 $ 1,351
Provision................................................... 200 934 2,237
Write-offs.................................................. (103) (200) (1,514)
----- ------ -------
Balance at the end of the period............................ $ 617 $1,351 $ 2,074
===== ====== =======
</TABLE>
Equipment, Furniture and Fixtures
Equipment, furniture and fixtures are recorded at cost. Depreciation and
amortization are recorded for financial statement purposes on a straight-line
basis over the estimated useful lives of the assets. Repair and maintenance
costs, which do not extend the useful lives of the related assets, are expensed
as incurred.
The estimated useful lives of equipment, furniture and fixtures are as
follows:
<TABLE>
<CAPTION>
YEARS
------
<S> <C>
Equipment................................................... 3 - 10
Office furniture and fixtures............................... 5 - 10
Leasehold improvements...................................... 5 - 10
</TABLE>
Depreciation and amortization expense related to equipment, furniture and
fixtures of $643, $1,285 and $1,616, is included in general and administrative
expenses on the accompanying consolidated statements of operations for the years
ended December 31, 1997, 1998 and 1999, 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
$2,296, $2,943 and $3,379 is included in cost of software licenses in the
accompanying consolidated statements of operations for the years ended December
31, 1997, 1998 and 1999, respectively.
F-10
<PAGE> 59
HTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other Intangible Assets
Other intangible assets consisted of the following as of December 31, 1998
and 1999:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
DESCRIPTION 1998 1999
- ----------- ------- -------
<S> <C> <C>
Goodwill.................................................... $ 416 $ 1,291
Purchased software.......................................... 2,492 2,492
Customer lists.............................................. 939 1,237
------- -------
3,847 5,020
Less -- Accumulated amortization............................ (1,349) (2,639)
------- -------
$ 2,498 $ 2,381
======= =======
</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, Kb Systems, Inc. and Information On Demand, Inc. (IOD) 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., Vanguard Management and
Information Systems, Inc. (Vanguard) and IOD 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 $158, $274 and $473 is included in general and administrative expenses in the
accompanying consolidated statements of operations for the years ended December
31, 1997, 1998 and 1999, respectively. Amortization expense related to the
purchased software of $129, $756 and $817 is included in the cost of software
licenses in the accompanying consolidated statements of operations for the years
ended December 31, 1997, 1998 and 1999, 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 other provisions of SOP 98-9 are effective for
transactions entered into in fiscal years beginning after
F-11
<PAGE> 60
HTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
March 15, 1999. Management has determined that the effect of the guidance set
forth in SOP 98-9 will not have a material effect 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 prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB No. 25). Under APB No. 25, if the exercise price of the Company's
stock options equals or exceeds the estimated fair market value of the
underlying stock on the date of grant, no compensation expense is generally
recognized. 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 as required by Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS 123). 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). Statement of operations accounts are translated at average exchange
rates for the period and gains and losses from foreign currency transactions are
included in net income (loss).
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
F-12
<PAGE> 61
HTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock method and consist of common stock which may be issuable upon the exercise
of outstanding common 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>
YEAR ENDED DECEMBER 31,
------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Basic weighted-average shares outstanding................... 12,677 16,785 17,282
Common shares applicable to stock options................... 442 713 --
------ ------ ------
Diluted weighted-average shares outstanding................. 13,119 17,498 17,282
====== ====== ======
</TABLE>
Options to purchase approximately 411,000 and 1,801,000 shares were
outstanding as of December 31, 1998 and 1999, respectively, 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,
1999, the assessment of recoverability will be impacted if estimated projected
undiscounted operating cash flows are not achieved.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial assets and liabilities,
including cash and cash equivalents, trade accounts receivable and accounts
payable at December 31, 1998 and 1999, approximate fair value because of the
short maturity of these instruments.
F-13
<PAGE> 62
HTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Comprehensive Income
The Company presents comprehensive income (loss) in accordance with
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130). SFAS 130 establishes standards for reporting and display of
comprehensive income (loss) and its components. 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 (loss) is the foreign currency translation adjustment
and is presented in the accompanying consolidated statements of stockholders'
equity (deficit) and comprehensive income (loss).
Segment Reporting
The Company has adopted Statement of Financial Accounting Standards No. 131
(SFAS 131), which establishes standards for reporting information about
operating segments. 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.
2. EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures consisted of the following as of December
31, 1998 and 1999:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
<S> <C> <C>
Equipment................................................... $ 6,063 $ 6,625
Office furniture and fixtures............................... 855 936
Leasehold improvements...................................... 1,002 1,131
------- -------
7,920 8,692
Less -- Accumulated depreciation and amortization........... (3,333) (4,853)
------- -------
$ 4,587 $ 3,839
======= =======
</TABLE>
3. BUSINESS COMBINATIONS
PURCHASES
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, the Company 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, the
Company 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,
F-14
<PAGE> 63
HTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
In June 1999, the Company created HTE-IOD, Inc., a wholly-owned subsidiary,
which later changed its name to DemandStar.com, Inc. DSI purchased certain
assets of IOD for $1,000 in cash. The Company could pay up to an additional
$2,000 for the purchase if DSI meets certain financial targets set forth in the
Agreement for Sale and Purchase of Assets. The assets purchased consisted of
customer lists and goodwill, which were recorded as other intangible assets in
the accompanying consolidated financial statements. As part of the purchase, the
Company also assumed various customer service liabilities. This acquisition was
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 year presented, are
as follows (unaudited):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Revenues.............................................. $69,955 $99,350 $ 96,340
Net income (loss)..................................... 4,195 799 (15,136)
Basic net income (loss) per share..................... 0.33 0.05 (0.88)
Diluted net income (loss) per share................... 0.32 0.05 (0.88)
</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 $3,000 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.
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 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
as of December 31, 1997.
In 1998, the Company replaced the existing line of credit with a revolving
line of credit of $15,000, which was terminated in 1999. The Company never
borrowed under this line of credit. The Company believes its cash balances and
cash generated from operations will satisfy the Company's working capital and
capital expenditure requirements for at least the next 12 months. However, the
potential payment of a judgement arising from a recent arbitration award could
require the Company to seek additional financing sources.
5. STOCKHOLDERS' EQUITY (DEFICIT)
Prior to the Company's initial public offering (IPO), the Company had two
classes of mandatorily redeemable securities outstanding. The mandatorily
redeemable preferred stock carried annual dividends,
F-15
<PAGE> 64
HTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
which were cumulative, and were convertible into common stock based on a formula
defined in the Company's Articles of Incorporation. During the year ended
December 31, 1997, the Company recorded an accretion in value for the
mandatorily redeemable preferred stock of $1,117. 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 (SEC).
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.
The common stock issued in conjunction with the UCS, Inc. acquisition has
been reflected as outstanding for all periods presented.
On December 22, 1999, DSI, a wholly-owned subsidiary of the Company, filed
a registration statement with the SEC on Form S-1 in contemplation of a rights
offering to the Company's shareholders and employees and the sale of Series A
and Series B preferred stock. Under the terms of the rights offering, DSI
intends to distribute rights to the shareholders and employees of the Company
that will entitle each holder to purchase shares of common stock at $1 per
share. Immediately following the consummation of the rights offering, DSI's
authorized preferred stock will consist of 10,000,000 shares with a par value of
$.01 per share, of which 2,000,000 shares are designated as Series A preferred
stock, 4,000,000 shares are designated as Series B preferred stock, and
4,000,000 shares are undesignated. As of December 31, 1999, DSI had no preferred
stock issued or outstanding.
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. There are no outstanding options under this grant as of December
31, 1999, as all of these options were exercised during 1998 and 1999.
HTE EMPLOYEE INCENTIVE PLAN
The Company's 1997 Employee Incentive Compensation Plan (the "HTE Plan")
was adopted by the Board of Directors in January 1997. The purpose of the HTE
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 HTE Plan
authorizes the grant of stock options (incentive and non-statutory), stock
appreciation rights and restricted stock to employees and
F-16
<PAGE> 65
HTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
consultants of the Company capable of contributing to the Company's performance.
The Company has reserved an aggregate of 2,908,000 shares (subject to adjustment
for stock splits and similar capital changes) of common stock for grants under
the HTE 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, 1998 and 1999, and
changes during the periods ending on those dates is presented below:
<TABLE>
<CAPTION>
1998 1999
---------------------------- ----------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year... 1,167,000 $ 4.47 1,514,941 $7.29
Granted.......................... 593,241 12.22 1,008,727 2.61
Exercised........................ 146,600 4.20 93,056 1.03
Forfeited........................ 98,700 8.15 629,786 7.24
--------- ---------
Outstanding at end of year......... 1,514,941 $ 7.29 1,800,826 $5.14
========= =========
Options exercisable at year end.... 368,093 $ 3.89 825,028 $4.46
Weighted-average fair value of
options granted during the
year............................. $10.44 $2.65
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- --------------------------
NUMBER WEIGHTED- WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING AT AVERAGE AVERAGE EXERCISABLE AT AVERAGE
DECEMBER 31, REMAINING EXERCISE DECEMBER 31, EXERCISE
RANGE OF EXERCISE PRICES 1999 CONTRACTUAL LIFE PRICE 1999 PRICE
- ------------------------ -------------- ---------------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.91 to 4.72 1,401,212 8.4 $ 3.44 753,373 $ 3.75
5.00 to 5.94 52,000 9.0 5.04 800 5.94
8.38 to 11.00 89,000 8.4 10.37 19,133 10.23
12.00 to 13.50 258,614 8.3 12.57 51,722 12.57
</TABLE>
DSI 1999 EMPLOYEE INCENTIVE COMPENSATION PLAN
In December 1999, DSI's board of directors approved the 1999 Employee
Incentive Compensation Plan (the "DSI Plan"). The DSI Plan provides that awards
may be granted to DSI's key officers, employees, consultants, advisors and
directors or others designated by the board of directors at the fair market
value at the date of grant. Awards under the DSI Plan may take the form of stock
options, share appreciation rights or restricted stock. The DSI Plan limits the
number of shares, which may be issued pursuant to incentive stock options to
4,000,000 shares. As of December 31, 1999, DSI had not awarded share
appreciation rights or restricted stock under the DSI Plan.
F-17
<PAGE> 66
HTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of DSI'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, 1999, and changes during the
period ending on that date is presented below:
<TABLE>
<CAPTION>
1999
----------------------------------------------------
EMPLOYEES NON-EMPLOYEES
-------------------------- -----------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- -------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding at inception................... -- $ -- -- $ --
Granted.................................. 1,310,000 1.00 90,000 1.00
Exercised................................ -- -- -- --
Forfeited................................ -- -- -- --
--------- ------
Outstanding at end of year................. 1,310,000 $1.00 90,000 $1.00
========= ======
Options exercisable at year end............ 167,500 $1.00 22,500 $1.00
Weighted-average fair value of options
granted during the year.................. $0.26 $0.52
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ---------------------------
NUMBER WEIGHTED- WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING AT AVERAGE AVERAGE EXERCISABLE AT AVERAGE
EXERCISE DECEMBER 31, REMAINING EXERCISE DECEMBER 31, EXERCISE
TYPE PRICE 1999 CONTRACTUAL LIFE PRICE 1999 PRICE
- ---- -------- -------------- ---------------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Employees............. $1.00 1,310,000 9.9 $1.00 167,500 $1.00
Non-employees......... 1.00 90,000 10.0 1.00 22,500 1.00
</TABLE>
The compensation from stock options of $13 was related to options granted
to a consultant and was calculated at the fair value using the Black-Scholes
options valuation model as described below. This expense is included in general
and administrative expenses in the consolidated statement of operations for the
year ended December 31, 1999.
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. Six 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, 1999, 36
percent of the Company's employees participate in the plan. As of December 31,
1998 and 1999, there were 152,276 and 98,370 purchase rights outstanding. These
purchase rights were exercisable at the respective year-ends and had a
weighted-average exercise price of $4.25 and $2.87 as of December 31, 1998 and
1999, respectively. The weighted-average fair value of purchase rights granted
during 1998 and 1999 under the ESPP was $1.97 and $1.98, respectively. All
outstanding purchase rights at December 31, 1998 and 1999, were exercised in
January 1999 and 2000, respectively.
F-18
<PAGE> 67
HTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BLACK-SCHOLES OPTION PRICING MODEL
The fair value of options granted during the fiscal years ended December
31, 1998 and 1999, 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 1998 and 1999:
<TABLE>
<CAPTION>
HTE PLAN ESPP
-------------- DSI PLAN --------------
YEAR ENDED ------------ YEAR ENDED
DECEMBER 31, YEAR ENDED DECEMBER 31,
-------------- DECEMBER 31, --------------
1998 1999 1999 1998 1999
----- ------ ------------ ----- ------
<S> <C> <C> <C> <C> <C>
Expected life (in years).................... 10 10 4.9 .3 .3
Weighted-average risk-free interest rate.... 5.50% 5.19% 6.15% 4.32% 4.97%
Volatility -- employees..................... 76.7 238.5 0 76.7 238.5
Volatility -- non-employees................. -- -- 60 -- --
Dividend yield.............................. -- -- -- -- --
</TABLE>
PRO FORMA DISCLOSURES
Had compensation cost related to employees 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 (loss) and per share amounts would have changed to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1998 1999
------ ------ --------
<S> <C> <C> <C>
Net income (loss) attributable to common stockholders:
As reported.............................................. $2,646 $ 982 $(14,866)
Pro forma................................................ 2,180 (535) (16,004)
Basic earnings (loss) per share:
As reported.............................................. $ 0.21 $ 0.06 $ (0.86)
Pro forma................................................ 0.17 (0.03) (0.93)
Diluted earnings (loss) per share:
As reported.............................................. $ 0.20 $ 0.06 $ (0.86)
Pro forma................................................ 0.17 (0.03) (0.93)
</TABLE>
The effects of applying SFAS No. 123 on pro forma disclosures of net income
(loss) and per share amounts for the periods presented are not likely to be
representative of the pro forma effects on net income (loss) and per share
amounts 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 $616, $577 and $413 for
the years ended December 31, 1997, 1998 and 1999,
F-19
<PAGE> 68
HTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respectively, and are included in general and administrative expenses in the
accompanying consolidated statements of operations.
8. CONTRACT JUDGEMENT AND SETTLEMENT, EMPLOYEE TERMINATION BENEFITS AND OTHER
COSTS
During the year ended December 31, 1999, the Company recorded a charge of
$12,927, which primarily included amounts related to a contract judgement, a
contract settlement, employee termination benefits, and the discontinuance of
product lines.
CONTRACT JUDGEMENT AND SETTLEMENT
During the fourth quarter of 1999, the Company recorded a total charge of
$7,493 related to both a contract judgement and a contract settlement. This
charge includes $2,319 related to a write-off of certain assets related to the
contract settlement and contract judgement and $5,174 related to a judgement
award. The judgement award is included in accrued liabilities in the
accompanying consolidated balance sheet as of December 31, 1999. See Note 11.
EMPLOYEE TERMINATION BENEFITS
During the year ended December 31, 1999, the Company recorded a charge of
$2,459 related to employee severance packages and benefits. After reviewing its
staffing requirements, the Company terminated employees across all areas of the
Company. As of December 31, 1999, $992 of employee termination benefit charges
remain in accrued liabilities in the accompanying consolidated balance sheet.
DISCONTINUATION OF PRODUCT LINES
During the third quarter of 1999 and as a result of the change in
management, the Company decided to discontinue several product lines. As a
result of this decision, the Company recorded a non-cash charge for the net book
value of these product lines, which totaled $1,138 during the year ended
December 31, 1999.
OTHER COSTS
The remaining charge of $1,837 primarily included costs associated with the
discontinuation of product lines and certain lease termination costs.
9. INCOME TAXES
The provision for income taxes consists of the following for the years
ended December 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1998 1999
------ ------ -------
<S> <C> <C> <C>
Current:
Federal................................................... $2,126 $ 170 $ --
State..................................................... 440 33 --
------ ------ -------
2,566 203 --
Deferred.................................................... (84) 1,050 (8,898)
------ ------ -------
$2,482 $1,253 $(8,898)
====== ====== =======
</TABLE>
F-20
<PAGE> 69
HTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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 years ended December 31, 1997, 1998 and 1999, as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
U.S. federal income tax rate................................ 34.00% 34.00% 34.00%
UCS and Phoenix taxed as an S corporation................. 0.29 13.28 --
State taxes............................................... 4.62 4.62 4.62
Tax-exempt interest....................................... (2.03) (6.04) --
Meals and entertainment................................... 0.67 4.06 0.76
Pooling of interests acquisition expenses................. -- 4.09 --
Other..................................................... 1.01 2.05 (1.94)
----- ----- -----
Effective tax rate.......................................... 38.56% 56.06% 37.44%
===== ===== =====
</TABLE>
Deferred income taxes consisted of the following as of December 31, 1999:
<TABLE>
<CAPTION>
CURRENT NONCURRENT TOTAL
------- ---------- -------
<S> <C> <C> <C>
Tax assets:
Net operating losses.................................... $1,800 $ 3,672 $ 5,472
Accrued liabilities..................................... 2,843 -- 2,843
Allowance for doubtful accounts......................... 801 -- 801
Deferred lease commitment............................... -- 184 184
Other intangible assets................................. -- 128 128
Other................................................... 170 -- 170
------ ------- -------
Total assets.................................... 5,614 3,984 9,598
------ ------- -------
Tax liabilities:
Basis difference in equipment, furniture and fixtures... $ -- $ (405) $ (405)
Capitalized computer software development costs......... -- (2,238) (2,238)
Other intangible assets................................. -- (87) (87)
------ ------- -------
Total liabilities............................... -- (2,730) (2,730)
------ ------- -------
Net deferred tax asset.................................... $5,614 $ 1,254 $ 6,868
====== ======= =======
</TABLE>
F-21
<PAGE> 70
HTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 equipment, furniture and fixtures... -- (335) (335)
Capitalized computer 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>
10. 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, 1999:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ -------
<S> <C>
2000........................................................ $ 3,749
2001........................................................ 2,324
2002........................................................ 1,634
2003........................................................ 1,228
2004........................................................ 1,231
Thereafter.................................................. 3,107
-------
$13,273
=======
</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
as of December 31, 1998 and 1999. Rent expense under operating leases totaled
approximately $2,359, $4,892 and $5,418 for the years ended December 31, 1997,
1998 and 1999, respectively.
PRODUCT ROYALTY AGREEMENTS
The Company has entered into several product royalty agreements with
various entities who have sold their application rights or product designs to
the Company. The majority of these agreements are similar in nature in that they
each state that royalties shall be paid on the basis of applicable software
license revenues collected by the Company. However, each agreement may have a
different percentage upon which the product
F-22
<PAGE> 71
HTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
royalty is based. The Company accrues these product royalties as the applicable
software license revenues are recognized. The Company has recorded $433 and $146
as accrued liabilities for product royalties as of December 31, 1998 and 1999,
respectively. Royalty expense was approximately $325, $196 and $39 for the years
ended December 31, 1997, 1998 and 1999, respectively, and is included in cost of
software licenses in the accompanying consolidated statements of operations.
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.
11. LITIGATION
On April 9, 1999, the City of Tacoma, Washington filed a demand for binding
arbitration and claim for damages against the Company with the American
Arbitration Association, alleging that the Company had breached certain
contractual duties and obligations under a Software License and Service
Agreement, which contained a narrowly drawn arbitration clause. On May 3, 1999,
the Company filed counterclaims in the Superior Court for Pierce County,
Washington alleging, among other things, that the City of Tacoma breached its
contractual duties and obligations under a Hardware Purchase Agreement, which
did not contain an arbitration clause. The trial court granted the City of
Tacoma's motion to compel arbitration of all allegations arising from both
contracts. On January 13, 2000, an arbitration panel composed of three
Washington State attorneys ("Arbitrators") rendered a final award ("Award")
against the Company for $5,174. A judgment for the Award was entered against the
Company by the Superior Court for Pierce County, Washington on January 15, 2000.
As a result of the Award, the Company has filed a direct appeal to the
Washington State Supreme Court contesting the Award on a variety of grounds
including, but not limited to, the fact that the Arbitrators acted in "manifest
disregard of the law." The Company maintains that the terms of the binding
arbitration clause of the software contract was limited to only disputes arising
under that contract and, further, that the Arbitrators inappropriately
disregarded the damages limitation clause in both contracts and illegally
awarded Tacoma speculative "benefit of the bargain damages" -- which damages
were well beyond the scope of the agreements. One of the Arbitrators dissented
as to the "benefit of the bargain damages" in the Award. Further, as a result of
this Award, the Company subsequently sought coverage and a defense from its
insurance carriers (The Chubb Group of Insurance Companies, hereinafter the
"Chubb Carriers"), which claims were denied. Thereafter, the Company instituted
a "Declaratory Judgment Action" on January 28, 2000 in the Circuit Court of the
Eighteenth Judicial Circuit for Seminole County, Florida against the Chubb
Carriers who provided the relevant insurance policies for the Company. The
Company seeks insurance coverage, and a defense, pursuant to a variety of
policies purchased by the Company for computer software errors and omissions
coverage, a multi-media liability insurance policy and an umbrella policy for
coverage amounts in excess of the underlying limits for the aforementioned
policies. After the Company filed its case against the Chubb Carriers, they
responded by instituting a separate cause of action on January 31, 2000 seeking
a Declaratory Judgment against the Company in the United States District Court
for the Middle District of Florida. In light of the diversity of citizenship
issues presented, both matters have been transferred to the United States
District Court and are awaiting the appropriate management order setting down a
schedule for the case(s). Finally, on February 29, 2000, the Company instituted
a cause of
F-23
<PAGE> 72
HTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
action in the Circuit Court of the Eighteenth Judicial Circuit for Seminole
County, Florida, contesting, and/or seeking a stay of enforcement of the foreign
judgment rendered in the State of Washington regarding the Award. The Company in
its Florida Circuit Court Complaint, put forth similar arguments as to that
presently on appeal in the State of Washington. In addition, the Company pointed
out that one of the Company's contracts with the City of Tacoma did not even
contain an arbitration clause and that the remaining contract contained only a
narrowly drawn arbitration clause, limiting arbitration only to disputes under
the terms of such contract. The Company maintains that despite the limited
agreement to arbitrate certain matters, the Arbitrators proceeded to hear and
decide matters under both contracts, as well as extra contractual matters which,
once again, would clearly constitute a "manifest disregard of the law." The
Company maintains that this is a clear and reversible error. A preliminary
management conference on this matter has been scheduled for April 20, 2000, with
an evidentiary hearing to follow in the Florida Circuit Court sometime
thereafter. During the year ended December 31, 1999, the Company recorded a
charge for the original judgment of $5,174, which remains in accrued liabilities
in the accompanying consolidated balance sheet as of December 31, 1999. While
the Company intends to vigorously pursue these cases and believes its positions
have merit, it is unable to predict the ultimate outcome at this time.
In regard to the binding arbitration proceeding between the Company and
Montana Power Company ("MPC") commenced on February 3, 1999, a settlement and
mutual release agreement was executed by the parties in January 2000. This
settlement agreement allows for a complete mutual release and discharge of any
and all outstanding obligations between the Company and MPC under the Software
License and Services Agreement and the arbitration proceeding. The Company
retained all of the $1,535 paid by MPC to the Company for software, hardware and
services. As a result of this settlement, the Company wrote off approximately
$754 in revenue and $581 in capitalized costs related to the Software License
and Services Agreement in the fourth quarter of 1999, which resulted in an
after-tax charge of $819. This settlement did not involve any cash payment by
the Company to MPC. The Company is a party to some contracts, which may result
in financial penalties in the event of non-performance. Management anticipates
that these penalties will not have a material adverse effect on the Company's
financial position or operating results.
The Company is involved in various other legal actions arising in the
normal course of business, both as claimant and 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.
12. SUBSEQUENT EVENTS
Effective January 2000, the Company entered into an employment agreement
with Joseph M. Loughry III to serve as the President and Chief Executive
Officer. This agreement is for a term of four years. In the event the executive
is terminated without "Cause" during the first two years, the executive is
entitled to receive nine months of continued salary and benefits. If the
executive is terminated without "Cause" during the last two years, the executive
is entitled to receive six months of continued salary and benefits. Under the
agreement, the executive is entitled to receive annual bonuses up to 50 percent
of the base salary based on achieving goals set by the Board of Directors. The
Company also granted a total of 400,000 stock options to purchase the Company's
common stock. These options include both qualified and non-qualified options and
have various vesting schedules based on time and performance measures.
On March 27, 2000, the DSI registration statement filed on Form S-1 for
18,811,330 shares of DSI's common stock was declared effective by the SEC.
F-24
<PAGE> 73
HTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. SUPPLEMENTAL NONCASH TRANSACTIONS
The Company includes depreciation on certain equipment in the costs
capitalized as computer software development costs. During the years ended
December 31, 1997, 1998 and 1999, depreciation of $160, $323 and $420,
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 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.
In 1999, the Company purchased certain assets of IOD for $1,000 in cash.
The acquisitions had the following non-cash effect of increasing
(decreasing) the following accounts for the years ended December 31, 1997, 1998
and 1999:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1998 1999
---- ------ ------
<S> <C> <C> <C>
Trade accounts receivable................................... $ -- $ 227 $ --
Other current assets........................................ 198 63 --
Equipment, furniture and fixtures........................... -- 63 --
Purchased software.......................................... 319 1,915 --
Other intangible assets..................................... 194 359 1,173
Goodwill established due to recognition of deferred income
taxes (included in other intangible assets)............... -- 15 --
Accrued liabilities......................................... 100 -- --
Deferred revenue............................................ 250 388 173
Common stock................................................ -- 3 --
Additional paid-in capital.................................. -- (2) --
Retained earnings (deficit)................................. -- 40 --
</TABLE>
F-25
<PAGE> 1
EXHIBIT 21.0
REGISTRANT'S SUBSIDIARIES AS OF DECEMBER 31, 1999:
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
DemandStar.com, 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. 333-34109, 333-34139,
333-81869 and 333-81891 on Form S-8.
/s/ Arthur Andersen LLP
Orlando, Florida,
March 29, 2000
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-34109, 333-34139, 333-81869 and 333-81891) of
H.T.E., Inc. of our report dated April 10, 1998, relating to the financial
statements of UCS, Inc. (not presented separately herein), which appears in this
Form 10-K.
/s/ PricewaterhouseCoopers LLP
Miami, Florida
March 29, 2000
<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, 1999, 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 6,901
<SECURITIES> 0
<RECEIVABLES> 33,407
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 47,636
<PP&E> 3,839
<DEPRECIATION> 0
<TOTAL-ASSETS> 61,009
<CURRENT-LIABILITIES> 41,228
<BONDS> 0
0
0
<COMMON> 174
<OTHER-SE> 19,132
<TOTAL-LIABILITY-AND-EQUITY> 61,009
<SALES> 0
<TOTAL-REVENUES> 96,208
<CGS> 0
<TOTAL-COSTS> 120,126
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (154)
<INCOME-PRETAX> (23,764)
<INCOME-TAX> (8,898)
<INCOME-CONTINUING> (14,866)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,866)
<EPS-BASIC> (0.86)
<EPS-DILUTED> (0.86)
</TABLE>
