<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ________ .
Commission file number 0-20034
BROADWAY & SEYMOUR, INC.
(Exact name of registrant as specified in its charter)
Delaware 41-1522214
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
128 South Tryon Street
Charlotte, North Carolina 28202
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
(704) 372-4281
(Registrant's telephone number, including area code)
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
(Title of class)
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 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 .
--- ---
As of October 21, 1998 there were 9,228,623 shares of Common Stock,
$.01 par value, outstanding.
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Page 1 of 18
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Broadway & Seymour, Inc.
Table of Contents
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Part I Financial Information:
Item 1. Financial Statements
Consolidated Statement of Operations -
Three months and nine months ended September 30, 1998
and September 30, 1997 3
Consolidated Balance Sheet -
September 30, 1998 and December 31, 1997 4
Consolidated Statement of Cash Flows -
Nine months ended September 30, 1998 and
September 30, 1997 5
Notes to Consolidated Financial Statements 6 - 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8 - 14
Part II Other Information:
Item 6. Exhibits and Reports on Form 8-K 15 - 17
Signature 18
</TABLE>
----------------------------
PRODUCTS MENTIONED IN THIS REPORT ARE USED FOR IDENTIFICATION PURPOSES ONLY AND
MAY BE TRADE NAMES OR TRADEMARKS OF BROADWAY & SEYMOUR, INC., ITS SUBSIDIARIES
OR THIRD PARTIES.
----------------------------
2
<PAGE> 3
PART I - Financial Information
Item 1. Financial Statements.
Broadway & Seymour, Inc.
Consolidated Statement of Operations
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue $ 17,505 $ 19,451 $ 50,690 $ 58,214
-------- -------- -------- --------
Operating expenses:
Cost of revenue 12,874 11,432 38,054 36,728
Research and development 2,094 1,504 5,304 4,248
Sales and marketing 3,402 2,912 8,941 8,173
General and administrative 2,814 2,568 8,240 7,568
Restructuring charge (credit) 639 (127) 639 (706)
-------- -------- -------- --------
Total operating expenses 21,823 18,289 61,178 56,011
-------- -------- -------- --------
Operating income (loss) (4,318) 1,162 (10,488) 2,203
Gain on disposition of non-strategic units 155 169 1,762 1,155
Interest income 266 286 785 625
Interest expense (20) (19) (55) (44)
-------- -------- -------- --------
Income (loss) before income taxes (3,917) 1,598 (7,996) 3,939
Provision (benefit) for income taxes (1,205) 724 (2,617) 1,802
-------- -------- -------- --------
Net income (loss) ($ 2,712) $ 874 ($ 5,379) $ 2,137
======== ======== ======== ========
Net income (loss) per share:
- Basic ($ 0.31) $ 0.10 ($ 0.60) $ 0.24
======== ======== ======== ========
- Diluted ($ 0.31) $ 0.09 ($ 0.60) $ 0.23
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
Broadway & Seymour, Inc.
Consolidated Balance Sheet
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 15,410 $ 17,965
Receivables 20,055 29,372
Income tax refund receivable 337
Deferred income taxes 4,163 2,945
Other current assets 1,683 2,128
-------- --------
Total current assets 41,648 52,410
-------- --------
Property and equipment 5,734 5,154
Software costs 3,438 3,630
Intangible assets 5,102 6,064
Other assets 85 85
-------- --------
$ 56,007 $ 67,343
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $ -- $ 138
Accounts payable-trade 3,693 6,325
Accrued compensation 2,951 2,295
Estimated liabilities for contract losses 625 1,162
Other accrued liabilities 4,198 3,807
Deferred revenue 14,703 11,732
Income taxes payable 127 2,379
-------- --------
Total current liabilities 26,297 27,838
-------- --------
Deferred income taxes 1,577 1,435
-------- --------
Other liabilities 896 697
-------- --------
Stockholders' equity:
Common stock, $.01 par value; Authorized 20,000,000 shares; Issued
9,228,623 and 9,228,623 shares, for 1998 and 1997, respectively 92 92
Paid-in capital 38,696 38,518
Treasury stock, at cost, 1,038,552 and 38,552 shares for 1998 and
1997, respectively (5,427) (492)
Accumulated deficit (6,124) (745)
-------- --------
Total stockholders' equity 27,237 37,373
-------- --------
$ 56,007 $ 67,343
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
Broadway & Seymour, Inc.
Consolidated Statement of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($ 5,379) $ 2,137
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization 3,990 4,327
Deferred income taxes (1,076) 48
Restructuring charge (credit) 639 (706)
Gain on disposition of non-strategic units (1,762) (1,155)
Loss on disposal of assets (3) 36
Change in assets and liabilities excluding effects of
disposition of non-strategic business units
Receivables 11,270 4,393
Other current assets 443 993
Accounts payable - trade (2,632) (2,306)
Accrued compensation 419 144
Estimated liabilities for contract losses (443) (1,515)
Other accrued liabilities 154 (851)
Deferred revenue 2,971 (5,840)
Income taxes (2,589) (78)
-------- --------
Net cash provided (used) by operating activities 6,002 (373)
-------- --------
Cash flows used by investing activities:
Purchase of property and equipment (2,646) (1,742)
Net proceeds from disposition of businesses 1,736
Investment in software costs (838) (239)
-------- --------
Net cash used by investing activities (3,484) (245)
-------- --------
Cash flows provided (used) by financing activities:
Payments of notes payable (138) (370)
Purchase of treasury stock (4,935)
Proceeds from issuance of common stock 1,442
-------- --------
Net cash provided (used) by financing activities (5,073) 1,072
-------- --------
Net increase (decrease) in cash and cash equivalents (2,555) 454
Cash and cash equivalents, beginning of period 17,965 15,010
-------- --------
Cash and cash equivalents, end of period $ 15,410 $ 15,464
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 - Basis of Presentation:
The consolidated financial statements of Broadway & Seymour, Inc.
(the "Company") include all adjustments of a normal recurring nature which, in
the opinion of management, are necessary for a fair presentation of financial
position as of September 30, 1998 and results of operations and cash flows for
the interim periods presented. The results of operations for the three months
and nine months ended September 30, 1998 are not necessarily indicative of the
results to be expected for the entire year.
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, certain information and footnotes required by
generally accepted accounting principles are not included herein. These interim
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto for the year ended December 31, 1997 as
reported by the Company in its Annual Report on Form 10-K.
Certain prior year amounts have been reclassified to conform with
current year presentation.
NOTE 2 - Accounting Policies:
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132 "Employers' Disclosures
About Pensions and Other Postretirement Benefits" ("SFAS No. 132"), which is
effective for fiscal years beginning after December 15, 1997. SFAS No. 132
significantly changes current financial statement disclosure requirements from
those that were required under SFAS No. 87 "Employers' Accounting for Pensions",
SFAS No. 88 "Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits" and SFAS No. 106 "Employers'
Accounting for Postretirement Benefits Other Than Pensions". SFAS No. 132 does
not change the existing measurement or recognition provisions of SFAS Nos. 87,
88 or 106. The Company does not have a pension plan and has no post-retirement
plans. As such there is currently no impact of this standard on the Company's
disclosures.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"), which is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. The Company will
adopt SFAS No. 133 on or before the effective date; however, it is not
anticipated that this standard will have a material impact on the results of
operations or financial position of the Company.
6
<PAGE> 7
NOTE 3 - Receivables:
Receivables at September 30, 1998 and December 31, 1997 consisted of
the following:
<TABLE>
<CAPTION>
September, 30 Dec. 31,
1998 1997
------------- ----------
(In thousands)
<S> <C> <C>
Trade $ 17,356 $ 24,302
Unbilled 3,052 4,631
Other 1,371 1,361
-------- --------
21,779 30,294
Less - Allowance for doubtful accounts (1,724) (922)
-------- --------
$ 20,055 $ 29,372
======== ========
</TABLE>
NOTE 4 - Software Costs:
The Company capitalizes a portion of its software development costs,
including costs for product enhancements that improve the marketability of the
original product or extend its life. These capitalized costs are incurred after
the establishment of technological feasibility and prior to the availability of
the software for general release. The Company capitalized software development
costs of approximately $.3 million and $ .1 million, during the three months
ended September 30, 1998 and 1997, respectively, and capitalized $.8 million and
$.2 million, for the nine months ended September 30, 1998 and 1997,
respectively. Software development costs are generally amortized over the
estimated economic life of the software product, up to a maximum of six years.
Accumulated amortization was $8.7 million and $7.7 million at September 30, 1998
and December 31, 1997, respectively. Amortization expense was approximately $.3
million for both the three month periods ended September 30, 1998 and 1997 and
$.8 million and $.9 million, respectively, for the nine-month periods then
ended.
NOTE 5 - Restructuring Charges:
In the third quarter of 1998, the Company incurred a one-time pre-tax
charge of $.6 million for termination benefits related to efforts to better
align its personnel with business levels at its Customer Relationship Management
("CRM") business. The charge includes termination benefits for seventeen
individuals from various parts of the organization, including direct client
service, indirect management and support and general and administrative
personnel. Through September 30, 1998, the Company had paid approximately $.3
million of the liability to the former employees and had approximately $.3
million remaining to be paid.
NOTE 6 - Risks and Uncertainties:
From time to time, the Company is involved in litigation incidental
to its business, including litigation regarding royalty obligations, contract
performance and personnel matters. Based on the status of current litigation and
provisions made by the Company, it is the opinion of management that no
litigation to which the Company currently is a party is likely to have a
material adverse effect on the Company's results of operations or financial
condition.
7
<PAGE> 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
Broadway & Seymour, Inc. (the "Company") is a software product and
services company, providing integrated solutions to the financial and legal and
professional services markets. The Company's customer relationship management
("CRM") business, located in Charlotte, North Carolina offers software products
and services, including TouchPoint(TM), CRISP(TM) and BANCStar(R), for banks and
other financial institutions. The Company also operates Elite Information
Systems, Inc. ("Elite"), a wholly owned subsidiary located in Los Angeles,
California. Elite offers integrated time tracking, invoicing, general ledger
accounting and other office management software products to the legal and
professional services industries.
This Quarterly Report on Form 10-Q may contain certain
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933,
as amended, that represent the Company's expectations or beliefs concerning
future events or projected financial results. Such forward-looking statements
are about matters that are inherently subject to risks and uncertainties.
Factors that could influence the matters discussed in certain forward-looking
statements include the timing and amount of revenue that may be recognized by
the Company, continuation of current expense trends, absence of unforeseen
changes in the Company's markets, continued acceptance of the Company's services
and products and general changes in the economy, as well as matters discussed in
"Risks and Uncertainties" in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997. There can be no assurance that such future events
or projected results will be achieved and actual results could differ
materially.
Quarter Ended September 30, 1998 Compared to
Quarter Ended September 30, 1997
The Company's results for the third quarter of 1998 reflect a
decrease in consolidated revenue of $1.9 million or 10.0% when compared to the
same period of 1997. The Company also reported consolidated pre-tax operating
losses of $4.3 million in the third quarter of 1998, compared to pre-tax
operating income of $1.2 million for the same period of 1997.
<TABLE>
<CAPTION>
Three Months Ended
(in thousands)
September 30,
Revenue 1998 1997
- ------------------------------------------- ------- -------
<S> <C> <C>
Elite $12,121 $ 9,183
CRM Business 5,384 10,268
------- -------
Consolidated revenue $17,505 $19,451
======= =======
</TABLE>
Revenue from the Company's Elite legal and professional services
business increased $2.9 million (or 32.0%) in the third quarter of 1998 compared
to the same period in 1997, due principally to significant new contract signings
in late 1997 and throughout 1998. In addition, expansions of user licenses at
existing customer locations contributed to the revenue growth in the period.
Customer support and training revenue has also increased, reflecting Elite's
expanding customer base. Elite's product suite was upgraded in 1996 and 1997 to
allow it to work with new database platforms while providing an intuitive
graphical user interface for the workstation. These Windows(TM) based products
are gaining increased market acceptance. In addition, Management believes the
Year 2000 issue has focused an increasing number of professional service firms
on replacing their existing systems by the end of 1999.
Revenue from the Company's CRM business decreased $4.9 million (or
47.6%) in the third quarter of 1998 compared to the same period of 1997. This
decrease reflects a $2.2 million decline in custom development and integration
service revenue. The decrease in custom services is principally due to a $1.3
million decrease related to a single customer who terminated its services
contract with the Company during the first quarter of 1998. The remainder of the
decrease in
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<PAGE> 9
custom service revenue is due to completion of existing contracts with customers
without sufficient new business to replace them. In addition, product-based
software solutions revenue for the CRM business decreased $1.5 million due to
fewer billable hours with existing customers, reflecting completion of contracts
and/or the timing of work with those customers. The remainder of the decrease,
$1.2 million, is due to the disposition of certain business units in 1997.
The Company's ability to obtain sufficient new CRM business to
offset the decline in revenue continued to be impacted by consolidations in the
financial services industry, customer and industry concerns and spending on the
Year 2000 issue and a lengthy sales cycle for a relatively new product. If the
Company is unable to generate significant new engagements, or if there is any
delay or cancellation of existing engagements in a particular period, the
Company's financial condition, results of operations and, eventually, its
liquidity could be materially adversely affected. To address these declines in
revenue from the CRM business, the Company has added two new experienced sales
professionals and a new product development manager, implemented a solutions
selling program and changed its marketing plan to focus on new business
origination in both service-based and product-based CRM engagements.
Consolidated cost of revenue increased to $12.9 million in the third
quarter of 1998 from $11.4 million in the same period of 1997. The majority of
the Company's costs of revenue are project expenses such as personnel costs,
contract labor and costs of third party products for resale to customers. The
cost of revenue increase of $1.5 million principally reflects increases at Elite
for personnel, contract labor and royalties for third party software related to
Elite's increase in new business. The Company's CRM business has had declines in
personnel levels; however these declines were partially offset by increases in
compensation and other costs necessary to retain, train or recruit other highly
skilled personnel in a very competitive environment.
The decline in consolidated revenue, without a corresponding decrease
in cost of revenue, resulted in a decrease in consolidated gross margin to 26.4%
in the third quarter of 1998 from 41.2% for the same period of 1997.
Consolidated research and development expenses increased $.6 million,
principally related to ongoing efforts to develop and enhance the Company's
Elite and CRM products. Significant research and development efforts at Elite
include work on the next version of the Elite system, Elite Enterprise, a 32-bit
application. Research and development efforts in the CRM business include work
on the next TouchPoint releases and new functionality, including a
JAVA(TM)-based bank teller application. The Company has recently hired a senior
product manager for the CRM business and is committed to maintaining its
research and development efforts so it can continue to provide enhancements to
existing software solutions and marketable software solutions as the needs of
its customer base and target markets change.
Consolidated sales and marketing expenses increased $.5 million in
the third quarter of 1998 compared to the same period of 1997. This increase is
principally due to $.8 million in higher commissions and incentives at Elite
related to increases in sales and new contracts. This increase was offset by $.3
million in lower costs at the Company's CRM business which had incurred more
expenses in the prior year because of higher sales levels and the start-up
marketing and sales efforts related to a new service line. Currently, the
Company anticipates that sales and marketing expenses will continue to increase,
reflecting the additional sales and relationship managers hired for Elite and
CRM, as well as additional expenditures on marketing and promotional
initiatives.
Consolidated general and administrative expenses increased $.2
million in the third quarter of 1998 compared to the same period of 1997,
principally due to additional rent and support expenses at Elite, reflecting its
growth.
The restructuring charge of $.6 million in the third quarter of 1998
was for termination benefits related to the Company's efforts to re-size its CRM
staff reflecting changing business conditions.
Income Taxes:
The Company's income tax benefit of $1.2 million (or 30.8% of losses
before taxes) for the quarter ended September 30, 1998 is a direct result of
pre-tax losses, offset in part by permanent differences of non-deductible
goodwill amortization, stock compensation expense and state income taxes. The
income tax provision of $.7 million (or 45.3% of income before taxes) for the
quarter ended September 30, 1997 exceeds the tax expense at statutory rates
principally due to the permanent differences of non-deductible goodwill
amortization, stock compensation expense and state income taxes.
9
<PAGE> 10
Nine Months Ended September 30, 1998 Compared to
Nine Months Ended September 30, 1997
The Company's results for the nine months ended September 30, 1998
reflect a decrease in consolidated revenue of $7.5 million or 12.9% when
compared to the same period of 1997. The Company also reported consolidated
pre-tax operating losses of $10.5 million for the nine months ended September
30, 1998, compared to pre-tax operating income of $2.2 million for the same
period of 1997.
<TABLE>
<CAPTION>
Nine Months Ended
(in thousands)
September 30,
Revenue 1998 1997
- ------------------------------------ ------- -------
<S> <C> <C>
Elite $31,165 $26,557
CRM Business 19,524 31,658
------- -------
Consolidated revenue $50,689 $58,215
======= =======
</TABLE>
Revenue from the Company's Elite legal and professional services
business increased $4.6 million (or 17.4%) in the nine months ended September
30, 1998 compared to the same period in 1997, due principally to volume
increases resulting from significant new contract signings in late 1997 and
throughout 1998. In addition, expansions of user licenses at existing customer
locations contributed to the revenue growth in the period. Customer support and
training revenue has also increased, reflecting Elite's expanding customer base.
Elite's product suite was upgraded in 1996 and 1997 to allow it to work with new
database platforms while providing an intuitive graphical user interface for the
workstation. These Windows(TM) based products are gaining increased market
acceptance. In addition, Management believes the Year 2000 issue has focused an
increasing number of professional service firms on replacing their existing
systems by the end of 1999.
Revenue from the Company's CRM business decreased $12.1 million (or
38.3%) in the first nine months of 1998 compared to the same period of 1997.
This decrease principally reflects a $8.1 million decline in custom development
and integration services revenue, of which $5.0 million was due to a single
customer which terminated its services contract with the Company during the
first quarter of 1998. The remainder of the decrease in custom service revenue
is due to completion of existing contracts with customers without sufficient new
business to replace them. In addition, product-based software solutions revenue
from the CRM business decreased $1.2 million due to fewer billable hours with
existing customers, reflecting completion of certain contracts and/or the
timing of work with those customers. The remainder of the decrease, $2.8 million
is due to the disposition of certain business units in 1997.
The Company's ability to obtain sufficient new CRM business to
offset these declines continued to be impacted by consolidations in the
financial services industry, customer and industry concerns and spending on the
Year 2000 issue and a lengthy sales cycle for a relatively new product. If the
Company is unable to generate significant new engagements, or if there is any
delay or cancellation of existing engagements in a particular period, the
Company's financial condition, results of operations and, eventually, its
liquidity could be materially adversely affected. To address these declines in
revenue from the CRM business, the Company has added two new experienced sales
professionals, and a new product development manager, implemented a solutions
selling program and changed its marketing plan to focus on new business
origination in both service-based and product-based CRM engagements.
Consolidated cost of revenue increased $1.3 million to $38 million in
the first nine months of 1998 compared to $36.7 million for the same period of
1997. The majority of costs of revenue are project expenses such as personnel
costs, contract labor and costs of third party products for resale to customers.
This increase in cost of revenue principally relates to Elite, which incurred
$2.2 million more expenses for personnel, contract labor, bad debt reserves and
royalties for third party software related to Elite's increase in new business.
The cost of revenue for the Company's CRM business decreased $.9 million
principally due to the disposition of certain business units in 1997. The CRM
business has had declines in personnel levels in 1998; however, these declines
were partially offset by increases in compensation and other costs necessary to
retain, train or recruit other highly skilled personnel in a very competitive
environment. In addition, because TouchPoint is
10
<PAGE> 11
relatively early in its lifecycle, one of the Company's initial installation
efforts did not progress as originally expected and the Company retained
employees at the customer site longer than anticipated, thereby continuing to
incur costs and lowering its margins on this fixed price engagement.
The decline in consolidated revenue, without a corresponding decrease
in cost of revenue, resulted in a decrease in consolidated gross margin to 24.9%
for the nine months ended September 30, 1998 from 36.9% for the same period of
1997.
Consolidated research and development expenses increased $1.1 million
for the nine months ended September 30, 1998 compared to the same period of
1997, principally related to ongoing efforts to develop and enhance the
Company's Elite and CRM products. Significant research and development efforts
at Elite include work on the next version of the Elite system, Elite Enterprise,
a 32-bit application. Research and development efforts in the CRM business
include work on the next TouchPoint releases and new TouchPoint functionality,
including a JAVA-based bank teller application. The Company is committed to
maintaining its research and development efforts so it can continue to provide
enhancements to existing software solutions and marketable software solutions as
the needs of its customer base and target markets change.
Consolidated sales and marketing expenses increased $.8 million for
the nine months ended September 30, 1998 compared to the same period of 1997.
This increase is principally due to approximately $1.7 million in higher
commissions at Elite related to the increases in sales and new contracts.
Offsetting this increase was a $.9 million decrease in salaries and commissions
in the CRM business due to fewer personnel in the first part of the year and the
decrease in sales volume. In addition, the prior year also included expenses
related to the start-up of a new service line. Currently, the Company
anticipates that sales and marketing expenses will continue to increase,
reflecting the additional sales and relationship managers hired for the Elite
and CRM markets, as well as additional expenditures on marketing and promotional
initiatives.
Consolidated general and administrative expenses increased $.7
million for the nine months ended September 30, 1998 compared to the same period
of 1997. The increase was due in part to higher levels of external legal fees
and increased litigation reserves because certain matters have advanced to more
costly stages in the litigation process or were settled at amounts in excess of
original estimates. Based on the status of current litigation matters and
provisions made by the Company, it is the opinion of management that no
litigation to which the Company currently is a party is likely to have a
material adverse effect on the Company's results of operations or financial
condition. In addition, the Company incurred increased legal and consulting fees
in connection with certain corporate transactions that were not consummated.
Currently, the Company anticipates that external legal fees will continue to be
incurred at the same rate or higher than the prior year.
Additional general and administrative expense increases resulted from
higher rent and other occupancy costs related to the relocation of Elite's
operations to a new office building. Revenue growth at Elite also contributed to
additional support expenses. In addition, in the nine months ended September 30,
1998, the Company incurred bank fees related to its line of credit which was
obtained in the third quarter of 1997 and also experienced a higher level of
401k contribution matching expense in 1998 due to higher levels of participation
by the Company's employees. Offsetting these increases to a degree were lower
general and administrative payroll expenses at the Company's headquarters in
Charlotte, reflecting lower headcount during the first nine months of 1998
compared to 1997.
Income Taxes:
The Company's income tax benefit of $2.6 million (or 32.7% of losses
before taxes) for the nine month period ended September 30, 1998 is a direct
result of pre-tax losses, offset in part by permanent differences of
non-deductible goodwill amortization, stock compensation expense and state
income taxes. The income tax provision of $1.8 million (or 45.7% of income
before taxes) for the nine months ended September 30, 1997 exceeds the tax
expense at statutory rates principally due to the permanent differences of
non-deductible goodwill amortization, stock compensation expense and state
income taxes.
11
<PAGE> 12
Year 2000 Issues:
Overview
Many software products, custom-developed software, and products
embedded with microprocessor chips were designed to store, process or perform
calculations using only the last two digits of a four-digit year date, for
example, "98" rather than "1998". These software systems and embedded products
may assume the first two digits of the year date to be "19" and as such they may
not be able to process dates with years following 1999. For example, "00" may be
treated by certain software systems as the year 1900 rather than the year 2000.
Results of this failure to process the date correctly could include
miscalculations, unpredictable or inconsistent results or complete system
failures. Companies in all lines of business face issues in addressing whether
their software products, custom-developed software and third-party products
used internally, sold by the company, or used by its vendors or customers or
other entities upon which the company relies, will be able to process data
properly relating to dates subsequent to December 31, 1999 ("Year 2000
compliance").
State of Readiness
The Company has recognized the need to address the Year 2000
compliance issues and in 1997 established a Year 2000 committee to supervise and
monitor the planning, performance and assessment of the Company's Year 2000
compliance efforts. This committee has involved members of senior management,
product development leaders, information systems management, facilities
management and corporate finance management in efforts to develop a
comprehensive and coordinated Year 2000 compliance effort. The chairman of the
committee periodically reports plans, progress and issues to executive
management and the audit committee of the Board of Directors.
Beginning in the second half of 1997, the Company began developing an
inventory list of all its proprietary software products, third party products it
incorporates in its products or resells, infrastructure and internal use
products, facilities and office service systems and hardware products upon which
it relies. Upon completion of the inventory list, the Company's Year 2000
committee appointed individual team leaders from various functional areas to be
responsible for the efforts of assessing Year 2000 compliance for each of the
inventory list items.
Proprietary Software Products and Custom Developed Software: In
1997, the Company adopted the widely accepted definition for Year 2000 readiness
set out in the "Compliance with British Standards Institution DISC PD2000-1 for
Year 2000". In May 1998, following a period of assessment and testing, the
Company issued its Year 2000 readiness statement which specifically identified
the current versions of each of the Company's proprietary products that met the
adopted standard. The Company continues to test new versions of its products for
compliance with this standard on an ongoing basis. The Company believes that its
current versions of proprietary software products are Year 2000 compliant;
however no assurance can be given that additional modifications for Year 2000
compliance will not be necessary. The Company's software products are integrated
with its customers' software and hardware systems and have, in many cases, been
uniquely customized to the customers' specifications. The Company has generally
not tested its products as integrated in its customers' operating environments,
although it is in the process of developing methods to do so for current
TouchPoint customers. The customers' systems with which the Company's products
interoperate may not be Year 2000 compliant which may affect the operation of
the Company's products. As a result the Company, in the course of providing its
software maintenance services, may incur costs in ascertaining the cause(s) of
system failures not caused by its own products. Such costs, if any, that the
Company may incur are not estimable, but, will generally be charged to
customers.
Many of the Company's former customers and current customers
presently use earlier versions of the Company's software products and/or
associated custom or systems integration code, that are not Year 2000
compliant. The Company has made efforts to communicate with these customers to
advise them that they will need to upgrade to a Year 2000 compliant version of
the Company's software product, revise custom code or implement other
alternatives to meet their business needs. Customers paying support fees are
entitled to receive software product upgrades as part of their regular
maintenance contracts. Customers who have not maintained support agreements with
the Company may purchase such upgrades. Changes to custom or systems
integration code provided by the Company that is not Year 2000 compliant are
not covered by customer maintenance agreements. Customers may perform such
changes themselves, engage the Company to perform such changes, or, in some
cases, engage third parties to perform such changes. Customers may need to
upgrade third party products and their host software and hardware systems that
share data or interoperate with the Company's products in order to utilize the
Company's software upgrades or modified custom or systems integration code. Such
costs could impact customer purchasing decisions and may lead customers to
choose alternatives to the Company's products or services.
Third Party Products: Third party products embedded within the
Company's products are included in the test plans and compliance efforts that
the Company already has underway for its own products. In addition, the
12
<PAGE> 13
Company has obtained certification of Year 2000 compliance from each third party
vendor whose products are embedded in the Company's products or that are resold
by the Company.
Infrastructure and Third Party Products Used Internally: The Company
has obtained certifications of Year 2000 compliance from each of the vendors of
its internal use information technology systems. The Company is developing test
plans for these internal use systems following the same guidelines and standards
that it has used for its own products. Currently the Company anticipates having
all test plans developed for critical internal use technology systems by
mid-1999. The Company also intends to begin testing during that period and will
continue testing through 1999.
The majority of non-information technology systems on which the
Company relies in its operations are owned and managed by the lessors of the
buildings in which the Company's offices are located. The Company has developed
check lists of critical systems upon which it relies and certification documents
are being sought from its lessors and other appropriate providers as applicable
regarding Year 2000 compliance of their systems. The Company will prioritize
these systems and develop test plans based on the responses it receives, or does
not receive, from its lessors and other providers. This effort is scheduled for
completion in the first half of 1999.
Risks and Costs
Because of the nature of the Company's business, the Company may be
subject to Year 2000 claims or litigation by its customers or other parties.
Many customers will incur significant costs in making their information
processing systems Year 2000 compliant and may seek to transfer such costs
through litigation to information processing industry vendors such as the
Company. Although the ultimate outcome of any litigation is uncertain, the
Company does not believe that the ultimate amount of liability, if any, from
such actions would have a material adverse affect on the Company.
The Company believes that Year 2000 issues may affect the purchasing
patterns of its customers and potential customers in a variety of ways. Many
companies are expending significant amounts and rededicating personnel to
correct or patch their current software systems for Year 2000 compliance. These
expenditures may result in reduced funds available to purchase software products
such as those offered by the Company. It is possible that certain of the
Company's customers are purchasing support contracts with the intent of
discontinuing such support after January 1, 2000 when they have satisfied
themselves that the supported product is Year 2000 compliant. Many potential
customers may also choose to defer purchasing Year 2000 compliant products until
they believe it is absolutely necessary, thus resulting in potentially stalled
market sales within the industry. Additionally, Year 2000 compliance issues
could cause a significant number of companies, including current Company
customers, to reevaluate their current system needs and as a result to consider
switching to other systems or suppliers.
The Company has not specifically hired additional personnel or made
material purchases of products to address its Year 2000 compliance issues, nor
does the Company expect it will be necessary to do so. The expenditures made to
date have principally related to salary costs of existing personnel assigned to
participate at various levels in the Company's compliance efforts. All costs
related to achieving Year 2000 compliance are being expensed as incurred. The
Company estimates that the costs incurred to date related to Year 2000
compliance efforts range between $.5 and $1.0 million. The Company expects to
continue to test current and new versions of its proprietary software, work with
vendors of third party software that the Company uses or resells, update and
test its inventory of potentially affected internal systems and communicate with
vendors and customers regarding the Year 2000 compliance issue. The Company
estimates the costs of these efforts will be below $.5 million.
Liquidity and Capital Resources:
At September 30, 1998, the Company had cash and cash equivalents of
approximately $15.4 million and working capital of approximately $15.4 million.
The Company also has a two-year, $15 million revolving credit facility under
which the Company may borrow up to a maximum of 80% of eligible accounts
receivable. As of September 30, 1998, the Company had $8.6 million available for
borrowing under the revolving credit facility, against which it has made no
borrowings. The credit revolving facility is secured by substantially all of the
Company's tangible and intangible assets. Additionally, the loan agreement
governing the revolving credit facility contains customary covenants that
require compliance with certain financial ratios and targets and restrict the
incurrence of additional indebtedness, payment of dividends and acquisitions or
dispositions of assets, among other things. As of September 30, 1998, the
Company was not in compliance with the covenant that required a certain level
of tangible net worth. However, subsequent to the period end the Company
obtained a waiver of compliance from its lender.
13
<PAGE> 14
If the Company is unable to generate significant new engagements, or
if there is any delay or cancellation of existing engagements, there could be a
material reduction in the Company's liquidity, including decreases in cash from
operations, and increased use of cash on hand and borrowings available under the
revolving credit facility. However, management currently believes that cash and
cash equivalents, cash from operations, the issuance of stock pursuant to its
employee stock purchase plan, and availability under its revolving credit
facility will be sufficient to meet currently anticipated operating needs and
capital requirements.
14
<PAGE> 15
PART II - Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit No. Description
----------- -----------
3.1 Restated Certificate of Incorporation of Broadway & Seymour,
Inc., dated June 16, 1992 (Incorporated by reference to
Exhibit 3.1 to the Registrants Annual Report on Form 10-K for
the Fiscal Year Ended January 31, 1993)
3.2 Restated By-laws of the Company (Incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on Form
S-1, SEC File No. 33-46672)
4.1 Specimen share certificate (Incorporated by reference to
Exhibit 4.1 to the Registrant's Registration Statement on Form
S-1, SEC File No. 33-46672)
4.2 Articles 4 and 5 of Broadway & Seymour, Inc.'s Restated
Certificate of Incorporation (Incorporated by reference to
Exhibit 4.2 to the Registrant's Registration Statement on Form
S-1, SEC File No. 33-46672)
4.3 Article II, Section 2.2 of the Company's Restated By-laws
(Incorporated by reference to Exhibit 4.3 to the Registrant's
Registration Statement on Form S-1, SEC File No. 33-46672)
10.01** Restated 1985 Incentive Stock Option Plan of Broadway &
Seymour, Inc. dated June 12, 1985 (Incorporated by reference
to Exhibit 10.1 to the Registrant's Registration Statement on
Form S-1, SEC File No. 33-46672)
10.02** Amendment No. 1 to Restated 1985 Incentive Stock Option Plan
of Broadway & Seymour, Inc. dated February 25, 1993
(Incorporated by reference to Exhibit 10.2 to the Registrant's
Annual Report on Form 10-K for the Fiscal Year Ended January
31, 1993)
10.03** Amendment No. 2 to Restated 1985 Incentive Stock Option Plan
of Broadway & Seymour, Inc. dated February 17, 1994
(Incorporated by reference to Exhibit 10.16 to the
Registrant's Transition Report on Form 10-K for the Eleven
Months Ended December 31, 1993)
10.04** Amendment No. 3 to Restated 1985 Incentive Stock Option Plan
of Broadway & Seymour, Inc. dated May 15, 1995 (Incorporated
by reference to Exhibit 10.4 to the Registrant's Quarterly
Report on Form 10-Q for the Quarter Ended September 30, 1995)
10.05** Broadway & Seymour, Inc. 1996 Stock Option Plan dated
September 16, 1996 (Incorporated by reference to Appendix B to
the Registrant's Definitive Proxy Statement on Form DEFS14A
dated August 14, 1996)
10.06 Asset Purchase Agreement between Unisys Corporation and
Broadway & Seymour, Inc. dated as of July 24, 1997.
(Incorporated by reference to Exhibit 10.35 to the
Registrant's Quarterly Report on Form 10-Q for the Quarter
Ended September 30, 1997)
10.07 Amendment to Asset Purchase Agreement between Unisys
Corporation and Broadway & Seymour, Inc. dated September 17,
1997. (Incorporated by reference to Exhibit 10.36 to the
Registrant's Quarterly Report on Form 10-Q for the Quarter
Ended September 30, 1997)
15
<PAGE> 16
Exhibit No. Description
----------- -----------
10.08 Loan Agreement by and among Broadway & Seymour, Inc., Elite
Information Systems, Inc., The Minicomputer Company of
Maryland, Inc., Elite Information Systems International, Inc.,
Pragmatix Telephony Solutions, Inc., and Fleet National Bank
(as agent and lender) for $15,000,000 secured revolving credit
loan dated as of July 23, 1997. (Incorporated by reference to
Exhibit 10.21 to the Registrant's Quarterly Report on Form
10-Q for the Quarter Ended June 30, 1997)
10.09 Security Agreement by and between Broadway & Seymour, Inc. and
Fleet National Bank dated as of July 23, 1997 (Incorporated by
reference to Exhibit 10.22 to the Registrant's Quarterly
Report on Form 10-Q for the Quarter Ended June 30, 1997)
10.10 Security Agreement by and between Elite Information Systems,
Inc. and Fleet National Bank dated as of July 23, 1997
(Incorporated by reference to Exhibit 10.23 to the
Registrant's Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1997)
10.11 Security Agreement by and between Elite Information Systems
International, Inc. and Fleet National Bank dated as of July
23, 1997 (Incorporated by reference to Exhibit 10.24 to the
Registrant's Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1997)
10.12 Security Agreement by and between The Minicomputer of
Maryland, Inc. and Fleet National Bank dated as of July 23,
1997 (Incorporated by reference to Exhibit 10.26 to the
Registrant's Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1997)
10.13 Security Agreement by and between Pragmatix Telephony
Solutions, Inc. and Fleet National Bank dated as of July 23,
1997 (Incorporated by reference to Exhibit 10.26 to the
Registrant's Quarterly Report of Form 10-Q for the Quarter
Ended June 30, 1997)
10.14 Conditional Trademark Assignment by and between Broadway &
Seymour, Inc. and Fleet National Bank dated as of July 23,
1997 (Incorporated by reference to Exhibit 10.27 to the
Registrant's Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1997)
10.15 Conditional Trademark Assignment by and between Elite
Information Systems, Inc. and Fleet National Bank dated as of
July 23, 1997 (Incorporated by reference to Exhibit 10.28 to
the Registrant's Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1997)
10.16 Conditional Trademark Assignment by and between Elite
Information Systems International, Inc. and Fleet National
Bank dated as of July 23, 1997 (Incorporated by reference to
Exhibit 10.29 to the Registrant's Quarterly Report on Form
10-Q for the Quarter Ended June 30, 1997)
10.17 Conditional Trademark Assignment by and between The
Minicomputer of Maryland, Inc. and Fleet National Bank dated
as of July 23, 1997 (Incorporated by reference to Exhibit
10.30 to the Registrant's Quarterly Report on Form 10-Q for
the Quarter Ended June 30, 1997)
10.18 Conditional Trademark Assignment by and between Pragmatix
Telephony Solutions, Inc. and Fleet National Bank dated as of
July 23, 1997 (Incorporated by reference to Exhibit 10.31 to
the Registrant's Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1997)
10.19 Stock Pledge Agreement by and between Broadway & Seymour, Inc.
and Fleet National Bank dated as of July 23, 1997
(Incorporated by reference to Exhibit 10.32 to the
Registrant's Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1997)
16
<PAGE> 17
Exhibit No. Description
----------- -----------
10.20 Stock Pledge Agreement by and between Elite Information
Systems, Inc. and Fleet National Bank dated as of July 23,
1997 (Incorporated by reference to Exhibit 10.33 to the
Registrant's Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1997)
10.22 First Amendment to Loan Agreement by and among Broadway &
Seymour, Inc., Elite Information Systems, Inc., The
Minicomputer Company of Maryland, Inc., Elite Information
Systems International, Inc., and Fleet National Bank (as agent
and lender) dated September 30, 1997 (Incorporated by
reference to Exhibit 10.31 to the Registrant's Annual Report
on form 10-K for the year ended December 31, 1997)
10.23 Second Amendment to Loan Agreement by and among Broadway &
Seymour, Inc., Elite Information Systems, Inc., The
Minicomputer Company of Maryland, Inc., Elite Information
Systems International, Inc., and Fleet National Bank (as agent
and lender) dated February 6, 1998 (Incorporated by reference
to Exhibit 10.32 to the Registrant's Annual Report on form
10-K for the year ended December 31, 1997)
10.24 Third Amendment to Loan Agreement by and among Broadway &
Seymour, Inc., Elite Information Systems, Inc., The
Minicomputer Company of Maryland, Inc., Elite Information
Systems International, Inc., and Fleet National Bank (as agent
and lender) dated May 6, 1998
10.25 Fourth Amendment to Loan Agreement by and among Broadway &
Seymour, Inc., Elite Information Systems, Inc., The
Minicomputer Company of Maryland, Inc., Elite Information
Systems International, Inc., and Fleet National Bank (as agent
and lender) dated August 7, 1998
10.26** Employment Agreement, dated as of May 29, 1997 (executed June
1, 1997), by and between Broadway & Seymour, Inc. and Keith B.
Hall (Incorporated by reference to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997)
10.27** Amendment No. 1 to Employment Agreement for Keith B. Hall
dated February 19, 1998
10.28** Employment Agreement dated as of September 1, 1995 by and
between Broadway & Seymour, Inc. and Alan C. Stanford
(Incorporated by reference to Exhibit 10.28 to the
Registrant's Quarterly Report on Form 10-Q for the Quarter
Ended September 30, 1995)
10.29** Amendment No. 1 to Employment Agreement for Alan C. Stanford
dated February 19, 1998
11* Computation of earnings per share
27* Financial Data Schedule, which is submitted electronically to
the Securities and Exchange Commission for information only
and not filed.
* Filed herewith.
** Management contract or compensatory plan or arrangement required to
be filed as an exhibit.
(b) Reports on Form 8-K:
None
17
<PAGE> 18
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) 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.
BROADWAY & SEYMOUR, INC.
Date: October 27, 1998 By: /s/Keith B. Hall
---------------- --------------------------------------
Keith B. Hall, Vice President and
Chief Financial Officer
18
<PAGE> 1
EXHIBIT 11
Broadway & Seymour, Inc.
Computation of Earnings per Share
(In thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
------- ------ ------- ------
<S> <C> <C> <C> <C>
Net income (loss) ($2,712) $ 874 ($5,379) $2,137
======= ====== ======= ======
Basic earnings (loss) per share:
Weighted average common shares outstanding 8,765 9,128 9,023 9,061
Net income (loss) per common share ($ 0.31) $ 0.10 ($ 0.60) $ 0.24
======= ====== ======= ======
Diluted earnings (loss) per share:
Weighted average common shares outstanding 8,765 9,216 9,023 9,193
Addition from assumed exercise of stock options
------- ------ ------- ------
Weighted average common and common equivalent
shares outstanding 8,765 9,216 9,023 9,193
======= ====== ======= ======
Net income (loss) per common and common
equivalent share ($ 0.31) $ 0.09 ($ 0.60) $ 0.23
======= ====== ======= ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 15,410,000
<SECURITIES> 0
<RECEIVABLES> 21,779,000
<ALLOWANCES> (1,724,000)
<INVENTORY> 0
<CURRENT-ASSETS> 41,648,000
<PP&E> 17,934,000
<DEPRECIATION> (12,200,000)
<TOTAL-ASSETS> 56,007,000
<CURRENT-LIABILITIES> 26,296,000
<BONDS> 0
0
0
<COMMON> 92,000
<OTHER-SE> 27,146,000
<TOTAL-LIABILITY-AND-EQUITY> 56,007,000
<SALES> 50,690,000
<TOTAL-REVENUES> 50,690,000
<CGS> 38,054,000
<TOTAL-COSTS> 38,054,000
<OTHER-EXPENSES> 23,124,000
<LOSS-PROVISION> 1,205,000
<INTEREST-EXPENSE> 55,000
<INCOME-PRETAX> (7,996,000)
<INCOME-TAX> 2,617,000
<INCOME-CONTINUING> (5,379,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,379,000)
<EPS-PRIMARY> (0.60)
<EPS-DILUTED> (0.60)
</TABLE>
