<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
(Amendment No. 1)
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the fiscal year ended December 31, 1997
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ______ to ______.
Commission file number 0-20034
BROADWAY & SEYMOUR, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 41-1522214
-------- ----------
(State or other jurisdiction of (IRS 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 .
--- ---
Indicate by check mark 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 registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ].
The aggregate market value of voting stock held by non-affiliates of
the registrant as of February 28, 1998 computed by reference to the closing sale
price on such date, was $71,521,828. As of the same date, 9,228,623 shares of
Common Stock, $.01 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Notice of Annual Meeting of Stockholders and definitive Proxy Statement
pertaining to the 1998 Annual Meeting of Stockholders (the "Proxy Statement") to
be filed pursuant to Regulation 14A (no later than April 30, 1998) are
incorporated herein by reference into Parts II and IV, and Part III,
respectively, of the Registrant's 1997 Annual Report on Form 10-K.
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TOTAL PAGES - 7
<PAGE> 2
Amendment No. 1
Portions of the Registrant's 1997 Annual Report to shareholders, filed as
Exhibit 13 hereto, have been amended to correct typographical errors
effecting the presentation of amounts on the Consolidated Balance Sheet as
of December 31, 1997 and the Consolidated Statement of Cash Flows for the
period then ended.
2
<PAGE> 3
SIGNATURES
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: April 20, 1998 By: /s/ Keith B. Hall
----------------------------------
Keith B. Hall, Vice President and
Chief Financial Officer
3
<PAGE> 4
(a)(3) 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, dated as of April 10,1996 by and
between Fidelity Investments Institutional Services Company
Inc. and Broadway & Seymour, Inc., BancCorp Systems, Inc.,
Heebink Group, Inc., and National Systems Group, Inc.
(Incorporated by reference to Exhibit 2.1 to the Registrant's
Current Report on Form 8-K dated May 15, 1996)
10.07 Amendment No. 1 to Asset Purchase Agreement dated May 15, 1996
by and between Fidelity Investments Institutional Services
Company Inc. and Broadway & Seymour, Inc., BancCorp Systems,
Inc., Heebink Group, Inc., and National Systems Group, Inc.
(Incorporated by reference to Exhibit 2.1a to the Registrant's
Current Report on Form 8-K dated May 15, 1996)
10.08 Quantech License and Services Agreement, dated April 10, 1996,
by and between Fidelity Investments Institutional Services
Company, Inc. and Corbel & Co. (Incorporated by reference to
Exhibit 2.2 to the Registrant's Current Report on Form 8-K
dated May 15, 1996)
4
<PAGE> 5
Exhibit No. Description
----------- -----------
10.09 Licenses and Services Agreement, dated April 10, 1996, by and
between Fidelity Investments Institutional Services Company,
Inc. and BancCorp Systems, Inc. (Incorporated by reference to
Exhibit 2.3 to the Registrant's Current Report on Form 8-K
dated May 15, 1996)
10.10 Temporary Professional Services Agreement, dated May 15, 1996,
by and between Fidelity Investments Institutional Services
Company, Inc. and Broadway & Seymour, Inc. (Incorporated by
reference to Exhibit 2.4 to the Registrant's Current Report on
Form 8-K dated May 15, 1996)
10.11 Guaranty and Indemnity Agreement, dated April 10, 1996, by and
between Fidelity Investments Institutional Services Company,
Inc. and Broadway & Seymour, Inc. (Incorporated by reference
to Exhibit 2.5 to the Registrant's Current Report on Form 8-K
dated May 15, 1996)
10.12 Amendment No. 1 to the Guaranty and Indemnity Agreement, dated
May 15, 1996 by and between Fidelity Investments Institutional
Services Company, Inc. and Broadway & Seymour, Inc.
(Incorporated by reference to Exhibit 2.5a to the Registrant's
Current Report on Form 8-K dated May 15, 1996)
10.13 Transition Services and Support Agreement, dated May 15, 1996,
by and between Fidelity Investments Institutional Services
Company, Inc. and Broadway & Seymour, Inc. (Incorporated by
reference to Exhibit 2.6 to the Registrant's Current Report on
Form 8-K dated May 15, 1996)
10.14 Stock Purchase Agreement, dated as of November 19, 1996, by
and among Broadway & Seymour, Inc., Corbel & Co. and SunGard
Investment Ventures, Inc. (Incorporated by reference to
Exhibit 2.1 to the Registrant's Current Report on Form 8-K
dated November 19, 1996)
10.15 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)
10.16 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)
10.17 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)
10.18 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)
10.19 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)
5
<PAGE> 6
Exhibit No. Description
----------- -----------
10.20 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)
10.21 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)
10.22 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)
10.23 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)
10.24 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)
10.25 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)
10.26 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)
10.27 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)
10.28 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)
10.29 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)
10.30 Letter dated June 30, 1997 regarding the disposition of the
holdback and termination of the indemnification provisions
contained in the Asset Purchase Agreement between Broadway &
Seymour, Inc. and Fidelity Investments Institutional Services
Company, Inc. (Incorporated by reference to Exhibit 10.34 to
the Registrant's Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1997)
6
<PAGE> 7
Exhibit No. Description
----------- -----------
10.31 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).
10.32 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).
10.33** 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)
10.34** 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)
11 Computation of earnings per share (Incorporated by reference
to Exhibit 11 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1997).
13* Portions of the 1997 Annual Report to Shareholders
21 Subsidiaries of the Registrant (Incorporated by reference to
Exhibit 21 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1997).
23 Consent of Independent Accountants dated March 25, 1998
(Incorporated by reference to Exhibit 23 to the Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1997).
27 Financial Data Schedule, which is submitted electronically to
the Securities and Exchange Commission for information only
and not filed (Incorporated by reference to Exhibit 27 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997).
* Filed herewith.
** Management contract or compensatory plan or arrangement required to be filed
as an exhibit.
7
<PAGE> 1
FINANCIAL
TABLE OF CONTENTS
11 Selected Financial Data
12 Management's Discussion and Analysis of Financial Condition and
Results of Operations
18 Consolidated Statement of Operations
19 Consolidated Balance Sheet
20 Consolidated Statement of Cash Flows
21 Consolidated Statement of Changes in Stockholders' Equity
22 Notes to the Consolidated Financial Statements
31 Report of Independent Accountants
32 Corporate Information
10
<PAGE> 2
Broadway & Seymour, Inc.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Eleven
months
ended
Dec. 31,
OPERATIONS: 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenue $79,559 $ 89,351 $ 114,738 $ 132,858 $ 71,665
Operating costs and expenses 76,208 99,609 130,583 118,983 74,520
- ------------------------------------------------------------------------------------------------------------
Operating income (loss) 3,351 (10,258) (15,845) 13,875 (2,855)
Gain on disposition of non-strategic business units 1,155 9,652 -- -- --
Net interest income (expense) 832 (187) (493) (821) (25)
- ------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 5,338 (793) (16,338) 13,054 (2,880)
Provision (benefit) for income taxes
and income tax accounting change (1993) 2,399 1,455 (4,958) 5,858 921
- ------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 2,939 $ (2,248) $ (11,380) $ 7,196 $ (3,801)
============================================================================================================
Net income (loss) per share:
Basic $ 0.32 $ (0.25) $ (1.32) $ 0.85 $ (0.49)
Diluted $ 0.32 $ (0.25) $ (1.32) $ 0.85 $ (0.49)
SELECTED BALANCE SHEET DATA 12/31/97 12/31/96 12/31/95 12/31/94 12/31/93
- ------------------------------------------------------------------------------------------------------------
Working capital (deficit) $24,572 $ 15,907 $ 490 $ (407) $ (467)
Total assets 67,343 66,474 83,245 75,683 50,717
Long-term debt, including current portion 138 611 2,373 1,765 899
Stockholders' equity 37,373 32,190 32,437 34,780 25,087
</TABLE>
The selected financial data includes the results of acquired businesses from the
date of acquisition and in the case of Micro/Resources, Inc. (accounted for
using the pooling of interests method), for all periods presented. The
comparability of the results of operations for the periods presented are also
impacted by dispositions of certain businesses as discussed in Management's
Discussion and Analysis of Financial Condition and Results of Operations and by
the acquisition of certain businesses in 1995, 1994 and 1993.
MARKET FOR COMMON STOCK
The Company's common stock, $.01 par value, trades on the National Association
of Securities Dealers, Inc. Nasdaq National Market System ("Nasdaq") under the
symbol BSIS. The following table shows the price range in the Company's common
stock for the past two fiscal years:
<TABLE>
<CAPTION>
QUARTER ENDED: 12/31/97 9/30/97 6/30/97 3/31/97 12/31/96 9/30/96 6/30/96 3/31/96
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
High $11 3/4 14 3/8 13 1/8 13 1/4 $14 14 1/8 17 1/8 16 1/4
Low $7 3/8 9 1/2 10 2/3 10 3/8 $ 7 3/4 9 1/4 10 10 1/2
</TABLE>
11
<PAGE> 3
Broadway & Seymour, Inc.
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.
Broadway & Seymour, the Company's customer relationship management business,
is based in Charlotte, North Carolina and provides product-based and
services-based solutions that address the customer relationship management needs
of the financial services industry and related markets. Broadway & Seymour's
solutions for customer relationship management include the proprietary software
products TouchPoint(TM), CRISP(TM) and BANCStar(R), which are often integrated
and customized to provide a tailored business solution to banks and other
financial institutions. Through its service-based solutions, Broadway & Seymour
provides consulting and custom systems integration and development services
focused on customer relationchip management.
Elite Information Systems, Inc. ("Elite"), the Company's legal and
professional services business, is based in Los Angeles, California and provides
integrated time tracking, invoicing, general ledger and office automation
software solutions and consulting services to the legal and professional
services markets.
Management has presented the following discussion and analysis in a way that
it believes best presents the significant events and trends affecting the
Company's results of operations. A comparative discussion and analysis of the
Company's ongoing operating results has been provided and significant
transactions impacting the Company's historical financial results in 1997, 1996
and 1995 have been separately highlighted (see "Significant Transactions"
below).
This Annual Report 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. 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" below. There can be no assurances
that future results will be achieved and actual results could differ materially.
1997 COMPARED TO 1996
The Company's consolidated results reflect revenue of $79.6 million and
operating income of $3.4 million for 1997 compared with revenue of $89.4 million
and an operating loss of $10.3 million for 1996. Because of the significant
impact of the transactions discussed below (see "Significant Transactions"), a
comparison of the consolidated historical results of operations for 1997 to 1996
may not be meaningful. The following table has been included to facilitate
discussion and analysis of the results of operations of the Company's ongoing
business.
<TABLE>
<CAPTION>
(In thousands, unaudited) 1997 1996
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<S> <C> <C>
Net revenue from ongoing business $76,203 $57,992
Net revenue from disposed business units 3,356 31,359
- -----------------------------------------------------------------------
Consolidated net revenue $79,559 $89,351
=======================================================================
Cost of revenue from ongoing business $49,113 $45,662
Cost of revenue from disposed business units 1,923 24,039
- -----------------------------------------------------------------------
Consolidated cost of revenue $51,036 $69,701
=======================================================================
</TABLE>
Net revenue from the Company's ongoing business increased $18.2 million, or
31.4%, to $76.2 million in 1997 from $58.0 million in 1996.
Revenue from the Broadway & Seymour customer relationship management
business increased $10.4 million in 1997 compared to 1996. This increase is
principally the result of continued revenue growth in its TouchPoint solution,
which increased $18.6 million over the prior year, reflecting several new
engagements with leading financial institutions. Revenue from its BANCStar and
CRISP products grew at a much lower rate, reflecting the relative maturity of
these products in the marketplace. Decreases of revenue in other areas (systems
integration, custom development, training and other services) of $9 million
reflects the Company's strategy to focus more on the customer relationship
management needs of the financial services industry.
Revenue from the Elite legal and professional services business increased
$7.8 million in 1997. This increase is principally due to work performed under
new contracts to provide professional service firms with the Elite suite of
products. These products were upgraded in 1996 and 1997 to allow them to work
with new database platforms while providing a Microsoft WindowsTM user interface
for the workstation. In addition, Elite has increased its sales of add-on
modules and custom services to existing customers as well as increased customer
support revenue, reflecting an expanding customer base.
12
<PAGE> 4
Broadway & Seymour, Inc.
For the periods presented, the Company has two customers that exceeded
certain disclosure requirement thresholds and are therefore classified as
significant customers.
In 1997, Chase Manhattan Bank ("Chase") accounted for $10.3 million, or 13%,
of the Company's consolidated revenue. Also, in 1997 and 1996, First Data Corp.
("FDC") accounted for $8.0 million, or 10.1%, of consolidated revenue and $9.6
million, or 10.6%, of consolidated revenue, respectively.
In September 1997, the Company amended its contract with FDC, substantially
reducing the scope of work and the amount of future revenue and eliminating
certain exclusivity restrictions on the Company. While the Company may provide
some ongoing services to FDC, the remaining personnel previously assigned to
work with this client have been reassigned to other projects.
Gross margins from the ongoing business increased to 35.5% of related
revenue (or $27.1 million) from 21.3% of related revenue (or $12.3 million) for
1997 and 1996, respectively. The majority of costs of revenue are direct project
expenses such as personnel costs, contract labor and the costs of purchasing
third party products for resale to customers. The improvement in gross margin in
1997 reflects improved utilization of project resources, improved pricing, as
well as an increase in the number of higher margin time and materials
engagements.
Consolidated research and development expenses for 1997 remained relatively
flat at $5.9 million when compared to 1996. However, excluding expenses related
to non-strategic business units sold or closed, research and development
expenses in 1997 increased $2.1 million over the prior year. This increase is
due to expenditures related principally to the ongoing development of Company's
TouchPoint and Elite software products. The Company is committed to maintaining
its research and development efforts to enhance and support its existing and
future software products.
Consolidated expenses for sales and marketing activities decreased $.2
million to $11.8 million in 1997 from $12 million in 1996. However, excluding
expenses related to non-strategic business units sold or closed, sales and
marketing expenses in 1997 increased of $3.1 million over the prior year. This
increase in sales and marketing expense related to business development efforts,
increased marketing and higher commissions and incentive awards for new business
growth achieved in the period. The Company views its sales and marketing as an
integral part of its business growth strategy and anticipates increases in the
level of expenditures due to planned additions to the sales staff and additional
marketing programs.
Consolidated general and administrative expenses decreased to $8.2 million,
or 10.3% of revenue, in 1997 from $9.8 million, or 11% of revenue, in 1996. This
decrease is principally due to the disposition of non-strategic business units
and expense control efforts for the ongoing business.
1996 COMPARED TO 1995
Because of the significant impact of the transactions discussed below (see
"Significant Transactions"), a comparison of the historical results of
operations for 1996 to those of 1995 may not be meaningful. The following table
has been included to facilitate discussion and analysis of the results of
operations for the Company's ongoing business.
<TABLE>
<CAPTION>
(In thousands, unaudited) 1996 1995
- ------------------------------------------------------------------------
<S> <C> <C>
Net revenue from ongoing business $57,992 $ 48,593
Net revenue from disposed business units 31,359 66,145
- ------------------------------------------------------------------------
Consolidated net revenue $89,351 $114,738
========================================================================
Cost of revenue from ongoing business $45,662 $ 46,737
Cost of revenue from disposed business units 24,039 46,870
- ------------------------------------------------------------------------
Consolidated cost of revenue $69,701 $93,607
========================================================================
</TABLE>
Net revenue from the Company's ongoing business increased $9.4 million from
1995 to 1996. Of this increase, $7.7 million is attributed to its Broadway &
Seymour customer relationship management business. This increase is principally
due to the Company's new customer relationship management product, TouchPoint,
which was under development in 1995. TouchPoint contributed revenue of $5.1
million in 1996. In addition, the Company recognized $4.0 million of software
license revenue in 1996 from a significant contract with a single customer. The
Company recorded substantially no expense associated with such revenue. Other
changes in the customer relationship management business revenue were due to
individually immaterial changes in specific year-to-year engagements with
customers. The Elite legal and professional services business contributed $1.7
million more revenue in 1996 than 1995 principally due to an acquisition that
was owned for only six months in 1995.
Cost of revenue from the Company's ongoing business decreased $1.1 million
in 1996 compared to 1995. The gross margins on revenue from ongoing business
were $12.3 million or 21.3% in 1996 compared to $1.9 million or 3.8% in 1995.
However, 1995 included $5.2 million of expense related to an accrual for
estimated contract losses and $2.6 million related to accelerated amortization
expense for software acquired in an acquisition. Additional improvements in the
1996 gross margin amounts and as a percent of revenue were principally the
result of the Company's change to focus on core operations, the integration of
independent business units and implementation of a new project management
process, including pricing guidelines.
13
<PAGE> 5
Broadway & Seymour, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Consolidated research and development expenses decreased to $5.8 million in
1996 from $6.7 million in 1995, principally due to the disposition of certain
business units. These amounts are net of capitalized development costs of $1.6
million and $2.2 million in 1996 and 1995, respectively. Including capitalized
costs, research and development expenditures were 8.3% and 7.8% of consolidated
revenue in 1996 and 1995, respectively.
Consolidated sales and marketing expenses decreased $3.8 million from
1995 to 1996. Of this decrease, $3.1 million is due to the disposition of
certain business units in 1996 and in the second half of 1995. In addition, in
the fourth quarter of 1995, the Company integrated independent business units
and changed its focus to core operations, resulting in a realignment of sales
and marketing personnel.
Consolidated general and administrative expenses decreased $1.8 million from
1995 to 1996. Of this decrease, $.4 million is due to the disposition of certain
units and $.8 million is due to expense recoveries related to transition
services provided to the purchaser of one of the businesses in 1996. In
addition, in 1995 the Company incurred $.6 million of non-recurring consulting
fees.
RISKS AND UNCERTAINTIES
FLUCTUATIONS IN OPERATING RESULTS:
The business and organizational characteristics of the Company's customer
base may vary significantly from period to period and may cause fluctuations in
the size and timing of revenue. The Company's personnel and other operating
expenses are based in part on its expectations for future revenue and are
relatively fixed in the short-term. If the Company is unable to continue to
generate significant new engagements, or if there is any delay or cancellation
of such engagements in a particular period, there will be a material adverse
affect on the Company's financial condition and results of operations.
Management believes that the Company will continue to experience significant
fluctuations in future quarterly operating results as a result of several
factors, including the size and timing of customer engagements; market
acceptance of its software systems and services; technological changes in
computer systems and environments; changes in the Company's or its competitors'
pricing policies; the length of the sales cycle; the Company's success in
expanding to new markets; the mix of software systems and services; loss of key
personnel; and changes in general economic conditions.
As a result of all of these factors, the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
In addition, the Company's stock price may be subject to the volatility
generally associated with software and technology stocks and may also be
affected by market trends unrelated to the Company's performance.
Volatility of the Company's Market:
The Company derives a significant portion of its revenue from commercial
bank customers and other segments of the financial services industry. As a
result of economic and regulatory factors, commercial banking and other segments
of the financial services industry are consolidating, and over the last few
years a number of the company's clients and prospects have been acquired. The
Company anticipates that this trend toward consolidation may continue. No
assurance can be given that such consolidation will not have a material adverse
effect on the Company's financial condition and results of operations.
Year 2000 Issues:
From the early days of the software industry, many software applications
have been designed to store only the last two digits of the four-digit year
date, for example, "98" rather than "1998". These applications, and other
applications which retrieve or process such data, then "assume" the first two
digits of the year date to be "19". Applications designed in this manner may not
be able to process dates with years following 1999; for example, "00" may be
treated as 1900 rather than the year 2000. Results of this failure to process
the date correctly could include miscalculations and system breakdowns. The
Company has recognized this potential problem and has reviewed, and when
necessary modified, its current software products so that they can process data
relating to dates subsequent to December 31, 1999 ("Year 2000 compliance").
Although the Company believes that its current versions of proprietary
software products are Year 2000 compliant, no assurance can be given that
additional modifications for Year 2000 compliance will not be necessary. The
Company's software systems as installed are integrated with its customers'
software and hardware systems and other vendors' software and hardware systems
and have, in many cases, been uniquely customized to the customers'
specifications. The customers' systems and other vendors' systems with which the
Company's systems interoperate may not be Year 2000 compliant. Generally, the
operation of the Company's software in these environments or the failure of
these systems to be compliant could impact the Year 2000 compliance of the
Company's systems and the Company may incur costs in ascertaining the cause of
the failure and modifying its software.
In addition to its proprietary software products, the Company offers related
software products developed and provided by other software vendors. The Company
is seeking assurances from these vendors that such products are compliant.
However, the risks of interoperability with other software products exist for
these products as well. While in some cases the Company has Year 2000 compliance
obligations to its customers for such third party products, the Company believes
that the vendors of such products bear primary responsibility for such
obligations.
14
<PAGE> 6
Broadway & Seymour, Inc.
Many of the Company's customers presently use earlier versions of the
Company's software products that are not Year 2000 compliant. These customers
will need to upgrade to a Year 2000 compliant version of the Company's software
or implement other alternatives to meet their business needs. The Company's
customers may be entitled to receive such software upgrades as part of their
regular maintenance contracts or may purchase such upgrades. However, customers
may need to upgrade add-on third party products and their host software and
hardware systems that share data with the Company's products in order to utilize
the Company's software upgrades. Many clients, as part of their upgrade effort,
may also need to modify previous customizations to the Company's software and
third party software provided by the Company or others. The Company does not
believe that it would have any contractual responsibility for upgrades of third
party products, host system upgrades or modifications of custom software.
The Company believes that Year 2000 compliance 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.
Conversely, Year 2000 compliance issues may cause other companies to
accelerate purchases, thereby causing an increase in short-term demand and a
consequent decrease in long-term demand for software products. 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.
While management believes it is successfully addressing the Year 2000
compliance issue in its proprietary software products, upon which its results of
operations are significantly dependent, any of the foregoing could result in a
material adverse effect on the Company's business, operating results and
financial condition. In addition, third party software and computer technology
used internally, if not Year 2000 compliant, may materially impact the Company.
The Company is reviewing what actions will be required to make all software
systems used internally Year 2000 compliant as well as to mitigate its
vulnerability to Year 2000 compliance problems that its service suppliers may
have.
The Company will continue to test current and new versions of its
proprietary software, work with the vendors of third party software that it
resells, update its inventory of potentially affected internal systems and
communicate with vendors and customers regarding the Year 2000 compliance issue.
The total cost and time associated with the impact of Year 2000 compliance
cannot presently be determined. Any costs of addressing Year 2000 compliance are
being expensed as incurred.
EXCHANGE RATE FLUCTUATIONS:
The Company's revenue is principally generated in North America, however for
the years ending December 31, 1997, 1996, and 1995 revenues generated in Europe
represented 9.4%, 5.0%, and 2.2% of consolidated revenue, respectively. Since
the Company's contracts with non-U.S. customers generally denominate the amount
of payments to be received by the Company in local currencies, exchange rate
fluctuations between such local currencies and the U.S. dollar will subject the
Company to currency translation risks. Also, the Company may be subject to
currency transaction risks when the Company's contracts are denominated in a
currency other than the currency in which the Company incurs expenses related to
such contracts.
EURO CURRENCY:
Beginning in January 1999, a new currency called the ECU or the "euro" is
scheduled to be introduced in certain Economic and Monetary Union (the "EMU")
countries. During 2002, all EMU countries are expected to be operating with the
euro as their single currency. As a result, in less than one year, computer
software used by many organizations headquartered or maintaining a subsidiary in
an EMU country will need to be euro currency enabled, and in less than three
years all organizations headquartered or maintaining a subsidiary in an EMU
country are expected to need to be euro currency enabled. The transition to the
euro currency will involve the handling of parallel currencies and conversion of
legacy data. Uncertainty exists as to the effects the euro currency will have on
the marketplace. Additionally, all of the final rules and regulations have not
yet been defined and finalized by the European Commission with regard to the
euro currency. The Company is monitoring the rules and regulations as they
become known in order to make any changes to the software that the Company deems
necessary to comply with such rules and regulations. Although the Company
currently offers certain software products that are designed to be
multi-currency enabled and the Company believes that it will be able to
accommodate any required euro currency changes in its software products, there
can be no assurance that once the final rules and regulations are completed that
the Company's software will contain all of the necessary changes or meet all of
the euro currency requirements.
15
<PAGE> 7
Broadway & Seymour, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
SIGNIFICANT TRANSACTIONS
The following is a brief summary of the significant transactions that have
had a material effect on the Company's historical operating results and
financial condition. See the notes to the Company's Consolidated Financial
Statements, included herein, for additional discussion related to such
transactions.
DISPOSITIONS:
In September 1997, the Company sold substantially all of the assets,
including proprietary rights, object code and source code, related to its
VisualImpactTM software product line, resulting in a $.2 million gain. In
addition, the Company is entitled to receive royalties based primarily on the
business' end user revenue, determined quarterly through the fourth quarter of
the year 2000. For the years ended December 31, 1997, 1996 and 1995, the
VisualImpact product line contributed revenue of $3.0 million, $3.0 million and
$2.2 million, respectively. The VisualImpact product line had operating income
of $.4 million in 1997 and operating losses of $.6 million in 1996 and $.8
million in 1995.
In November 1996, the Company sold all of the issued and outstanding common
stock of its wholly owned subsidiary, Corbel & Co. ("Corbel"), which included
the assets of EBG & Associates, Inc. (acquired in January 1995), resulting in a
gain of $.9 million. The Company may be entitled to receive an earnout payment
of up to a maximum of $3.5 million in 1998 based on Corbel's revenue in 1997.
This amount had not been determined as of February 28, 1998. Corbel contributed
revenue of $17.4 million in 1996 (prior to the sale) and $18.5 million in 1995.
Operating income from Corbel was $3.4 million in 1996 (prior to the sale) and
$2.4 million in 1995. However, revenue and operating income for 1996 include a
one-time software license fee of $5.0 million from a single transaction.
Excluding this $5.0 million, 1996 revenue decreased $6.1 million from the prior
year and the 1996 operating loss would have been $1.6 million. This decrease in
revenue and operating income was due in part to including only eleven months of
operations in 1996, compared to twelve months in 1995, and also due to lower
pension document processing volumes in 1996.
In May 1996, the Company sold substantially all of the assets of its Asset
Management Services group ("AMSG"), which included BancCorp Systems Inc.
(acquired in January 1995). The gain on the sale of AMSG was $8.7 million. AMSG
contributed revenue of $5.8 million in 1996 (prior to the sale) and $15.5
million in 1995. Operating losses from AMSG were $2.8 million in 1996 (prior to
the sale) and $9.3 million in 1995. In addition, in 1996, subsequent to the sale
of AMSG, the Company recorded an additional $4.0 million of non-recurring
revenue, and approximately $3 million of related expense, related to certain
professional and transition services provided to the purchaser of AMSG under
agreements entered into at the time of the sale. The decreases in revenue and
operating losses from 1995 to 1996 are principally due to the inclusion of AMSG
operations for twelve months in 1995 compared to five months 1996.
In September 1995, the Company transferred a contract for services provided
to International Business Machines Corporation ("IBM") to another service
provider and recorded $.9 million of revenue with substantially no associated
expense. Prior to the transfer, services provided under this contract in 1995
contributed approximately $1.9 million of revenue and incurred costs of $1.6
million.
In June 1995, the Company transferred all of the assets and liabilities of
its community banking business to its wholly owned subsidiary, Liberty Software,
Inc. ("Liberty"), and simultaneously therewith sold all of the issued and
outstanding capital stock of Liberty. During 1995, the Company received
approximately $9.5 million related to certain software license fees, software
maintenance and transition services provided to the purchaser of Liberty,
against which the Company incurred substantially no expense. The Company
received a final payment of $.5 million in March 1996. In 1995, prior to the
sale, Liberty revenue was $10.1 million and operating income was $.4 million.
In December 1994, the Company sold certain of its Gateway imaging and
document conversion operations ("Gateway"). During 1995, the purchaser paid $6.8
million to the Company under the maintenance provisions of a software license
agreement. The $6.8 million in maintenance revenue recorded in 1995 had
substantially no associated expense.
IMPAIRMENT OF LONG-TERM ASSETS AND
RESTRUCTURING OF OPERATIONS:
In August 1996, the Company developed a plan to close the National Pension
Alliance ("NPA"), a partnership of which Corbel/NPA, Inc., a wholly owned
subsidiary of the Company, was a 75% general partner. For the years ended
December 31, 1996 and 1995, NPA had revenue of $.6 million and $.8 million,
respectively, and a loss before restructuring charges of $2.3 million and $2.2
million, respectively. The Company reserved approximately $2.5 million related
to the exit costs of NPA, including $1.3 million for customer refunds, $.8
million related to asset write-offs, and $.4 million related to employee
severance costs. During the year ended 1996, $1.3 million, related principally
to customer refunds and asset write-offs was charged against the reserve, using
$1.0 million of cash. In 1997, the Company charged approximately $.7 million
against the accrual, using cash of $.4 million, relating principally to employee
severance costs, asset write-offs and customer refunds and reduced its estimate
of the remaining cost to complete the exit plan by $.5 million. As of December
31, 1997 the restructuring was completed.
16
<PAGE> 8
Broadway & Seymour, Inc.
The results of operations for 1995 included a non-recurring charge of $2.9
million, which consisted of a $1.5 million restructuring charge and $1.4 million
in impairment of intangible assets related to the June 1995 acquisition of TMC.
The $1.5 million restructuring charge consisted of approximately $1.0
million for the consolidation of certain facilities and approximately $.5
million for severance costs for employees who were terminated. For the years
ended December 31, 1997, 1996 and 1995, the Company utilized cash of
approximately $.2 million, $.8 million and $.1 million, respectively, to satisfy
obligations related to these reserves. Also, in 1997 and 1996, the Company
reduced its estimate of the remaining costs to complete this restructuring by
$.2 million and $.2 million, respectively. As of December 31, 1997, the
restructuring was completed.
In addition, in the fourth quarter of 1995, the Company wrote-off
unamortized software costs of $2.6 million. The $2.6 million of accelerated
amortization of software cost is included in 1995 cost of revenue.
INCOME TAXES
The provisions for income taxes of $2.4 million (45% of pre-tax income) in
1997 and $1.5 million (183% of the pre-tax loss) in 1996 exceed the income tax
expense at the statutory rates for these periods primarily due to the permanent
difference of non-deductible goodwill amortization, stock compensation expense,
and state income taxes. The 1995 income tax benefit of $5.0 million is a direct
result of the 1995 pre-tax loss. This benefit was offset, in part, by the
permanent difference of non-deductible amortization of goodwill. The Company
believes that the effective tax rate in 1998 will remain higher than the
statutory rate due to the ongoing non-deductible goodwill amortization and stock
compensation expense associated with the Company's acquisitions.
The Company has net operating losses ("NOLs") for state income tax purposes
of $7.3 million. A valuation allowance has been recorded against the deferred
tax assets arising from the state NOLs based on uncertainty of realization under
current separate company income limitations.
QUARTERLY RESULTS OF OPERATIONS
Note 14 to the Company's Consolidated Financial Statements included herein
sets forth unaudited quarterly operating results for the four fiscal quarters of
1997 and 1996. The Company believes that all necessary adjustments have been
included to present fairly its quarterly results when read in conjunction with
the financial statements, including the notes thereto. Results of operations for
any particular fiscal quarter are not necessarily indicative of results of
operations for any future period.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had cash and cash equivalents of
approximately $18.0 million and working capital of approximately $24.6 million.
The Company had positive cash flows of approximately $3 million, $13 million and
$.4 million for 1997, 1996, and 1995, respectively.
The Company utilized portions of the proceeds from the sales of
non-strategic business units to fund working capital requirements, pay off
certain debt and to pay certain expenses. The reduction in debt and investment
of cash proceeds from the sales of non-strategic business units resulted in
lower interest expense and higher interest income for 1997 as compared to 1996.
The remainder of the proceeds from these sales was invested in short-term
discount notes.
The Company has a two-year, $15 million revolving credit facility, against
which it has made no borrowings. Based on current operating expectations, the
Company does not anticipate drawing on the facility in the near term. The
Company may borrow up to a maximum of 80% of eligible accounts receivable. As of
February 28, 1998, the Company had $11.2 million available for borrowing under
this agreement. The credit facility is secured by substantially all of the
Company's tangible and intangible assets. Additionally, the loan agreement
contains customary covenants that require compliance with certain financial
ratios and targets and restricts the incurrence of additional indebtedness,
payment of dividends and acquisitions or dispositions of assets, among other
things. As of February 28, 1998, the Company was in compliance with such
covenants, as amended.
Management believes that cash and cash equivalents, the issuance of stock
pursuant to its employee stock purchase and stock option plans, projected cash
from operations, and availability under the credit facility will be sufficient
to meet currently anticipated operating needs through the end of 1998.
Management currently has no specific plans with respect to acquisitions or
investments in other businesses and is not actively seeking to acquire or invest
in any business; however, the Company might consider prospects if they are
complementary to its existing business. There can be no assurance, however, that
the Company will successfully identify or complete any investment or
acquisition.
17
<PAGE> 9
Broadway & Seymour, Inc.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended December 31,
(In thousands, except per share data) 1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenue $ 79,559 $ 89,351 $ 114,738
-------- -------- ---------
Operating expenses:
Cost of revenue 51,036 69,701 93,607
Research and development 5,868 5,830 6,729
Sales and marketing 11,809 11,958 15,760
General and administrative 8,201 9,801 11,566
Restructuring and impairment (706) 2,319 2,921
-------- -------- ---------
Total operating expenses 76,208 99,609 130,583
-------- -------- ---------
Operating income (loss) 3,351 (10,258) (15,845)
Gain on disposition of non-strategic business units 1,155 9,652 --
Interest income 890 260 93
Interest expense (58) (447) (586)
-------- -------- ---------
Income (loss) before income taxes 5,338 (793) (16,338)
Income tax (provision) benefit (2,399) (1,455) 4,958
-------- -------- ---------
Net income (loss) $ 2,939 $ (2,248) $ (11,380)
=======================================================================================
Net income (loss) per share:
- - Basic $ 0.32 $ (0.25) $ (1.32)
- - Diluted $ 0.32 $ (0.25) $ (1.32)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE> 10
Broadway & Seymour, Inc.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(In thousands, except share data) As of December 31,
1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 17,965 $ 15,010
Receivables 29,372 25,706
Inventories 828 890
Deferred income taxes 2,945 4,417
Other current assets 1,300 1,308
- ---------------------------------------------------------------------------------
Total current assets 52,410 47,331
Property and equipment, net 5,154 6,291
Software costs, net 3,630 4,748
Intangible assets, net 6,064 7,346
Other assets 85 758
- ---------------------------------------------------------------------------------
$ 67,343 $ 66,474
=================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable and current portion of long-term debt $ 138 $ 473
Accounts payable-trade 6,325 5,836
Accrued compensation 2,295 2,615
Estimated liabilities for contract losses 1,162 2,922
Other current liabilities 3,807 4,554
Deferred revenue and customer deposits 11,732 12,476
Income taxes payable 2,379 2,548
- ---------------------------------------------------------------------------------
Total current liabilities 27,838 31,424
Long-term debt 138
- ---------------------------------------------------------------------------------
Deferred income taxes 1,435 2,557
- ---------------------------------------------------------------------------------
Other liabilities 697 165
- ---------------------------------------------------------------------------------
Stockholders' equity:
Common stock, $.01 par value; Authorized 20,000,000
shares; Issued 9,228,623 and 8,988,608 shares,
respectively 92 90
Paid-in capital 38,518 36,276
Treasury stock, at cost, 38,552 shares (492) (492)
Accumulated deficit (745) (3,684)
- ---------------------------------------------------------------------------------
Total stockholders' equity 37,373 32,190
- ---------------------------------------------------------------------------------
$ 67,343 $ 66,474
=================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE> 11
Broadway & Seymour, Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
(In thousands, except per share data) 1997 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,939 $ (2,248) $(11,380)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization 5,687 8,888 12,890
Restructuring and impairment costs (706) 2,319 2,921
Gain on sale of non-strategic business units (1,155) (9,652) --
Deferred income taxes 350 (1,511) (7,123)
Loss (gain) on disposal of property and equipment 47 (11) 90
Changes in assets and liabilities excluding
effects of businesses divested:
Receivables (4,166) (3,337) (2,680)
Inventories 62 (578) --
Other assets 590 (542) 252
Accounts payable-trade 489 (75) (3,509)
Accrued compensation 457 (104) (121)
Other liabilities (2,475) (9,102) 7,403
Deferred revenue and customer deposits 464 4,170 4,791
Income taxes (102) 4,456 (3,244)
- -----------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 2,481 (7,327) 290
- -----------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (2,492) (3,337) (6,660)
Investment in software costs (239) (1,576) (2,193)
Proceeds from sale of businesses 1,736 31,219 2,088
Cash used in business acquisitions -- (864) (1,479)
- -----------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (995) 25,442 (8,244)
- -----------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings (payments) under credit facility -- (5,217) 5,217
Proceeds from issuance of long-term debt and notes payable -- 251 572
Payment of notes payable and long-term debt (473) (1,860) (1,186)
Proceeds from issuance of common stock 1,942 1,668 3,765
- -----------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 1,469 (5,158) 8,368
- -----------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 2,955 12,957 414
Cash and cash equivalents, beginning of period 15,010 2,053 1,639
- -----------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 17,965 $ 15,010 $ 2,053
===============================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE> 12
Broadway & Seymour, Inc.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Retained
Common Stock Paid-in Earnings Treasury Stock
(In thousands, except share data) Shares Par value capital (deficit) Shares Cost Total
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 8,198,256 $82 $25,246 $ 9,944 (38,552) $(492) $ 34,780
Issuance of common shares in
business acquisitions (Note 12) 172,308 2 3,473 3,475
Issuance of common shares pursuant to
option and employee purchase plans 430,452 4 4,121 4,125
Tax benefit from exercise of certain
stock options 1,437 1,437
Net loss (11,380) (11,380)
- ----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 8,801,016 $88 $34,277 $(1,436) (38,552) $(492) $ 32,437
Issuance of common shares in
business acquisitions (Note 12) 15,723 250 250
Issuance of common shares pursuant to
option and employee purchase plans 171,869 2 1,666 1,668
Tax benefit from exercise of certain
stock options 83 83
Net loss (2,248) (2,248)
- ----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 8,988,608 $90 $36,276 $(3,684) (38,552) $(492) $ 32,190
Issuance of common shares in
business acquisitions (Note 12) 18,800 235 235
Issuance of common shares pursuant to
option and employee purchase plans 221,215 2 1,940 1,942
Tax benefit from exercise of certain
stock options 67 67
Net income 2,939 2,939
- ----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 9,228,623 $92 $38,518 $ (745) (38,552) $(492) $ 37,373
======================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE> 13
Broadway & Seymour, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS, CERTAIN SIGNIFICANT ESTIMATES AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES:
Broadway & Seymour, Inc. (the "Company") is a software product and services
company, providing integrated solutions to the financial and legal and
professional services markets.
Broadway & Seymour, the Company's customer relationship management
business, is based in Charlotte, North Carolina and provides product-based and
services-based solutions that address the customer relationship management needs
of the financial services industry and related markets. Broadway & Seymour's
solutions for customer relationship management include the proprietary software
products TouchPoint(TM), CRISP(TM) and BANCStar(R), which are often integrated
and customized to provide a tailored business solution to banks and other
financial institutions. Through its service-based solutions, Broadway & Seymour
provides consulting and custom systems integration and development services
focused on customer relationship management.
Elite Information Systems, Inc. ("Elite"), the Company's legal and
professional services business, is based in Los Angeles, California and provides
integrated time tracking, invoicing, general ledger and office automation
software solutions and consulting services to the legal and professional
services markets.
The presentation 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 and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The more
significant estimates affecting the Company's financial statements relate to
revenue recognition and loss accruals for long-term contracts, allowance for
uncollectible receivables and useful lives used in depreciating property and
equipment and amortizing capitalized software costs and intangible assets.
The significant accounting policies used in the preparation of the
accompanying financial statements are as follows:
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of the Company and its majority-owned subsidiaries. All significant
intercompany transactions have been eliminated in consolidation.
REVENUE RECOGNITION. Revenue from services and from the licensing of software
with related services is generally recognized as work is performed under the
percentage of completion method with progress measured using costs incurred to
date compared to total estimated costs to be incurred. Revenue from the
licensing of software and the sale of hardware products having no significant
ongoing obligations is generally recognized upon delivery of the product.
Maintenance revenue is recognized ratably over the contract term. Losses are
recognized on contracts in the period in which the liability is identified.
CASH EQUIVALENTS. Cash equivalents are short-term, highly liquid investments
with original maturities of three months or less.
INVENTORIES. Inventories consist principally of licensed third party software
and hardware held for resale and are stated at the lower of cost or market, with
cost determined using the first-in, first-out method.
PROPERTY AND EQUIPMENT. Property and equipment are recorded at cost.
Depreciation of property and equipment is computed using the straight-line
method over the estimated useful lives of the related assets, which range from
three to ten years. Leasehold improvements are amortized using the straight-line
method over the lesser of their estimated useful lives, generally ten years, or
the remaining terms of the leases.
SOFTWARE COSTS AND INTANGIBLE ASSETS. The Company capitalizes a portion of its
costs of developing software to be licensed. These costs are incurred after the
establishment of technological feasibility and prior to the availability of the
software for general release, including costs of product enhancements that
improve the marketability of the original product or extend its life. Software
costs are amortized using the straight-line method over the estimated economic
life of the products, up to a maximum of six years.
22
<PAGE> 14
Broadway & Seymour, Inc.
The excess of cost over fair value of assets acquired is amortized using the
straight-line method over ten years. Other intangible assets are amortized using
the straight-line method over the useful lives of the assets, which range from
five to ten years.
The Company continually monitors conditions that may affect the carrying
value of its software costs and intangible assets. When conditions indicate
potential impairment of such assets, the Company undertakes necessary market and
technology studies and evaluates projected future earnings associated with these
assets. When projected future cash flows, not discounted for the time value of
money, are less than the carrying value of the asset, an impairment loss is
recognized.
STOCK-BASED COMPENSATION. The Company adopted Statement of Financial Accounting
Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation,"
effective January 1, 1996. Upon adoption, the Company elected to disclose in its
footnotes to its financial statements the impact of utilizing the fair value
approach to measure stock-based compensation, as provided for under the
provisions of SFAS 123, and to exclude such impact from its recorded earnings.
The Company measures stock-based compensation based on the intrinsic value
approach as provided for under the provisions of Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25").
ADVERTISING COSTS. The Company expenses advertising costs as incurred.
Advertising expenses for 1997, 1996 and 1995 were $1.0 million, $1.3 million and
$1.5 million, respectively.
SOFTWARE REVENUE RECOGNITION. During 1997, the American Institute of Certified
Public Accountants ("AICPA") issued Statement of Position 97-2, "Software
Revenue Recognition," ("SOP 97-2") which provides guidance on applying generally
accepted accounting principles in recognizing revenue on software transactions.
The SOP 97-2 is effective for transactions entered into in fiscal years
beginning after December 31, 1997. This SOP is not anticipated to have a
material effect on the Company's revenue recognition practices, since a majority
of the Company's software revenues are generated from transactions for which
long-term contract accounting is applicable.
Income (loss) per share. In February 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
Number 128 "Earnings per Share" ("SFAS 128") which changed the method of
calculating and reporting earnings per share. SFAS 128 is effective for
financial statements with periods ending after December 15, 1997. Accordingly,
the Company adopted SFAS No. 128 in its year-end 1997 consolidated financial
statements and for all periods presented. The following is a reconciliation of
the numerators and denominators of the basic and diluted earnings per share
("EPS") computation for December 31, 1997. For the years ended December 31, 1996
and 1995, there was no difference between the basic and diluted numerators and
denominators because both years had a net loss and the effect of the assumed
exercise of common stock equivalents (principally stock options) would have been
anti-dilutive.
<TABLE>
<CAPTION>
For the Year Ended Per Share
December 31, 1997 Income Shares Amount
- --------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Basic EPS: $2,939 9,085 $ 0.32
Effect of Dilutive Securities:
Options 52
- --------------------------------------------------------------------------
Diluted EPS: $2,939 9,137 $ 0.32
==========================================================================
</TABLE>
Options with an exercise price greater than the average market price of the
common shares (or "antidilutive options") were not included in the computation
of diluted earnings per share. At December 31, 1997, there were outstanding
antidilutive options to purchase 1,008,749 shares of common stock at a weighted
average price of $11.97.
CAPITAL STRUCTURE. In February 1997, the FASB issued Statement of Financial
Accounting Standards Number 129 "Disclosure of Information about Capital
Structure" ("SFAS 129") which establishes standards for disclosing information
about an entity's capital structure. SFAS 129 is effective for financial
statements for periods ending after December 15, 1997. The provisions of SFAS
129 had no significant impact on the disclosures made by the Company in its
consolidated financial statements.
23
<PAGE> 15
Broadway & Seymour, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
COMPREHENSIVE INCOME. In June 1997, the FASB issued Statement of Financial
Accounting Standards Number 130 "Reporting Comprehensive Income" ("SFAS 130")
which changes the method of reporting and displaying comprehensive income and
its components in a full set of general purpose financial statements. SFAS 130
is effective for periods beginning after December 15, 1997. The Company will
adopt SFAS 130 beginning in the first quarter of 1998.
SEGMENT DISCLOSURES. In June 1997, the FASB issued Statement of Financial
Accounting Standards Number 131 "Disclosure about Segments of an Enterprise and
Related Information" ("SFAS 131") which changes the way that public companies
report information about operating segments in annual financial statements and
interim financial reports. SFAS 131 is effective for financial statements for
periods beginning after December 15, 1997. In the initial year of application,
SFAS 131 need not be applied to interim financial statements. The Company will
adopt SFAS 131 beginning in its 1998 annual financial statements. The Company
has not yet completed its analysis of the impact of adopting SFAS 131.
RECLASSIFICATIONS. Certain prior year amounts have been reclassified to conform
with the current year presentation.
NOTE 2- SIGNIFICANT TRANSACTIONS:
In September 1997, the Company sold substantially all of the assets,
including proprietary rights, object code and source code related to its
VisualImpact software product line. The Company has received cash payments of
$3.3 million for the net assets sold and payments for certain royalties and
software licenses. The gain on the transaction was approximately $.2 million. In
addition, the Company is entitled to receive additional royalties based
primarily on the business' end user revenue, determined quarterly through the
fourth quarter of the year 2000.
In November 1996, the Company sold all of the issued and outstanding capital
stock of the Company's wholly owned subsidiary, Corbel & Co. ("Corbel")
(excluding its interest in the National Pension Alliance ("NPA") - See Note 7).
The consideration paid to the Company at closing was approximately $13.5
million, with an additional $.5 million to be paid to the Company twenty-four
months after the closing date, subject to certain holdback provisions for
indemnification obligations. Also, the Company may be entitled to receive an
earnout payment of up to a maximum of $3.5 million based on Corbel's revenue in
1997. The gain on the transaction was approximately $.9 million.
In May 1996, the Company sold substantially all of the assets of its Asset
Management Services group ("AMSG"), including the Company's wholly owned
subsidiary BancCorp Systems, Inc. The Company has received cash proceeds of
$18.5 million, net of certain fees and expenses, for the net assets of AMSG and
licensing of certain software. Certain additional proceeds were scheduled to be
paid to the Company over the twenty-four months following the closing, subject
to certain holdback provisions for indemnification obligations. Effective June
30, 1997, the Company and the purchaser terminated these provisions, resulting
in the release of the net remaining proceeds to the Company and termination of
all future indemnity claims. As a result of this settlement, the Company
recognized an additional $.8 million gain on the disposition of AMSG in the
quarter ended June 30, 1997.
In September 1995, the Company transferred a contract for services provided
to International Business Machines Corporation ("IBM") to another service
provider and recorded $.9 million of revenue with substantially no associated
expense.
In June 1995, the Company transferred certain assets and related liabilities
of its community banking business to a newly formed subsidiary, Liberty
Software, Inc. ("Liberty"), and simultaneously therewith sold all of the issued
and outstanding capital stock of Liberty. At closing, the Company received $2
million for the stock of Liberty and recognized no gain or loss on such sale. In
addition, during 1995 the Company received approximately $9.5 million related to
certain software license fees, software maintenance and transition services
provided to the purchaser of Liberty, against which the Company incurred
substantially no expense. The Company received a final payment of $.5 million in
March 1996.
24
<PAGE> 16
Broadway & Seymour, Inc.
NOTE 3 - RECEIVABLES
At December 31, 1997 and 1996 receivables consisted of the following:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
- -----------------------------------------------------------------------
<S> <C> <C>
Trade $24,302 $23,349
Unbilled 4,631 2,584
Other 1,361 665
- -----------------------------------------------------------------------
30,294 26,598
Less - Allowance for doubtful accounts (922) (892)
- -----------------------------------------------------------------------
$29,372 $25,706
=======================================================================
</TABLE>
NOTE 4 - PROPERTY AND EQUIPMENT:
At December 31, 1997 and 1996 property and equipment consisted of the
following:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
- -----------------------------------------------------------------------
<S> <C> <C>
Equipment $13,280 $13,339
Furniture and fixtures 2,270 1,881
Leasehold improvements 1,026 1,007
- -----------------------------------------------------------------------
16,576 16,227
Less - Accumulated depreciation and
amortization (11,422) (9,936)
- -----------------------------------------------------------------------
$ 5,154 $ 6,291
=======================================================================
</TABLE>
Depreciation expense related to property and equipment was $2.8 million,
$3.3 million and $3.1 million for 1997, 1996 and 1995, respectively.
NOTE 5 - SOFTWARE COSTS:
During 1997, 1996 and 1995, the Company capitalized software development
costs of $.2 million, $1.6 million and $2.2 million, respectively. Software
costs in the accompanying balance sheet also include the cost of purchased
software.
Accumulated amortization for software costs was $7.7 million and $6.4
million at December 31, 1997 and 1996, respectively. Amortization expense was
$1.4 million, $2.3 million and $5.9 million in 1997, 1996 and 1995,
respectively. Included in amortization expense for 1995 was approximately $2.6
million associated with the accelerated amortization of software costs related
to a technology study evaluating the viability of the DOS-based BancCorp product
which indicated that the software costs were not recoverable.
In connection with certain software developed or acquired by the Company and
licensed to customers, the Company is obligated to pay royalties to third
parties. The agreements generally provide for payment of a specific amount for
each software license granted by the Company. Royalty expense was $.7 million,
$.7 million and $1.4 million for 1997, 1996 and 1995, respectively.
NOTE 6 - INTANGIBLE ASSETS:
At December 31, 1997 and 1996 intangible assets consisted of the following:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C>
Excess of cost over fair value of assets acquired $ 6,443 $ 6,443
Customer lists and maintenance contracts 2,700 2,700
Assembled workforce 1,800 1,800
Other 2 2
- ----------------------------------------------------------------------------
10,945 10,945
Less - Accumulated amortization (4,881) (3,599)
- ----------------------------------------------------------------------------
$ 6,064 $ 7,346
============================================================================
</TABLE>
Amortization expense was $1.3 million, $3.3 million and $3.6 million for
1997, 1996 and 1995, respectively.
NOTE 7 - RESTRUCTURING AND IMPAIRMENT CHARGES:
In August 1996, the Company developed a plan to close its NPA business. The
Company reserved approximately $2.5 million related to the exit costs of NPA,
including $1.3 million for customer refunds, $.8 million related to asset
write-offs, and $.4 million related to employee severance costs. During the year
ended 1996, $1.3 million, related principally to customer refunds and asset
write-offs had been charged against the reserve, using $1.0 million of cash. In
1997, the Company charged approximately $.7 million against the accrual, using
cash of $.4 million, relating principally to employee severance costs, asset
write-offs and customer refunds and reduced its estimate of the remaining cost
to complete the exit plan by $.5 million. As of December 31, 1997, the
restructuring was completed.
In the fourth quarter of 1995, the Company recorded a pre-tax charge of $2.9
million comprised of $1.5 million in restructuring charges related to costs for
the consolidation of certain facilities of $1.0 million and employee severance
costs of $.5 million and $1.4 million in asset impairments related to the TMC
product line. In addition, certain software assets were written down as
discussed in Note 5. During the years ended December 31, 1997, 1996 and 1995,
the Company utilized cash of approximately $.3 million, $.8 million and $.1
million, respectively, to satisfy obligations related to these reserves. During
1997 and 1996, the Company reduced its estimate of the remaining costs to
complete the restructuring by $.1 million and $.2 million, respectively. As of
December 31, 1997, the restructuring was completed.
25
<PAGE> 17
Broadway & Seymour, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 8 - NOTES PAYABLE AND LONG-TERM DEBT:
At December 31, 1997, notes payable and long-term debt consisted of an
unsecured promissory note due in quarterly installments plus interest at 7.7%
through May 1998 with a balance of $67,000, related to a 1995 acquisition, and
an unsecured note due through September 1998 plus interest at 9.0% with a
balance of $71,000.
The Company has a two-year, $15 million revolving credit facility, against
which it has made no borrowings. The Company may borrow up to a maximum of 80%
of eligible accounts receivable. As of February 28, 1998 the Company had $11.2
million available for borrowing under this agreement. Borrowings under the
credit facility will bear interest at the adjusted LIBOR or prime rate (as
defined by the loan agreement). The credit facility is secured by substantially
all of the Company's tangible and intangible assets. Additionally, the loan
agreement contains customary covenants that require compliance with certain
financial ratios and targets and restricts the incurrence of additional
indebtedness, payment of dividends and acquisitions or dispositions of assets,
among other things. As of December 31, 1997 the Company was in compliance with
such covenants, as amended.
Cash paid for interest on debt was less than $.1 million, $.3 million and
$.4 million for 1997, 1996 and 1995, respectively.
NOTE 9 - EMPLOYEE BENEFIT PLANS:
The Company maintains a 401(k) retirement plan to which qualified employees
may contribute from 1% to 15% of eligible annual compensation. The Company
matches 50% of these contributions, up to a maximum of 6% of each participant's
compensation for the plan year. Company contributions totaled $.7 million, $.9
million and $.7 million for 1997, 1996 and 1995, respectively.
Effective January 1, 1995, the Company adopted the Broadway & Seymour, Inc.
1995 Employee Stock Purchase Plan covering a five-year period, under which
substantially all employees may purchase up to an aggregate of 1,000,000 shares
of the Company's common stock. The purchase price of the shares under the plan
is 85% of the lesser of the fair value of the Company's common stock at the
beginning of the plan year or at the end of the plan year. Employees may
designate up to 10% of their compensation to be withheld towards the purchase of
stock under the plan, up to a maximum value of $25,000 based on the fair market
value as of the beginning of each plan year. The Company may provide shares
under the plan from shares authorized and unissued or from shares
acquired and held in treasury.
In 1995, the Company issued common stock, valued at approximately $.4
million, to former employees of Corbel related to compensation requirements of
the Corbel acquisition agreements.
26
<PAGE> 18
NOTE 10 - INCOME TAXES:
The components of the provision for income taxes for 1997, 1996 and 1995
consist of the following:
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
- ------------------------------------------------------------------
<S> <C> <C> <C>
Current provision:
Federal $ 1,829 $ 2,740 $ 1,952
State 219 226 213
- ------------------------------------------------------------------
2,048 2,966 2,165
- ------------------------------------------------------------------
Deferred provision (benefit):
Federal 354 (1,096) (6,606)
State (3) (415) (517)
- ------------------------------------------------------------------
351 (1,511) (7,123)
- ------------------------------------------------------------------
$ 2,399 $ 1,455 $(4,958)
==================================================================
</TABLE>
A reconciliation of income taxes computed at the statutory federal income
tax rate to the recorded provision for income taxes is as follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Provision (benefit) for income taxes
computed at the statutory federal rate $1,815 $ (270) $(5,555)
Non-deductible amortization and
impairment of intangible assets 204 1,374 631
Stock compensation 181
State income taxes, net of federal
income tax benefit 143 127 (313)
Other 56 224 279
- ------------------------------------------------------------------------
$2,399 $ 1,455 $(4,958)
========================================================================
</TABLE>
Deferred tax assets (liabilities) recognized in the Company's balance sheet
at December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Asset allowances $ 339 $ 329
Loss accruals on contracts 288 1,324
Deferred revenue 83 1,677
Net operating losses and other carryforwards 527 819
Other accruals 1,816 1,075
Other deductions 419 12
- ----------------------------------------------------------------------------
Gross deferred tax assets 3,472 5,236
- ----------------------------------------------------------------------------
Less: valuation allowance (527) (819)
- ----------------------------------------------------------------------------
2,945 4,417
- ----------------------------------------------------------------------------
Deferred tax liabilities, net:
Property and equipment 289 (215)
Software costs and intangible assets (1,531) (1,899)
Other liabilities (193) (443)
- ----------------------------------------------------------------------------
(1,435) (2,557)
- ----------------------------------------------------------------------------
$ 1,510 $ 1,860
============================================================================
</TABLE>
Cash paid for income taxes was approximately $3.4 million, $1 million and
$5.5 million for 1997, 1996 and 1995, respectively.
At December 31, 1997, the Company had $7.3 million in state net operating
loss ("NOL") carryforwards. The state NOLs begin to expire in the year 1999. A
full valuation allowance has been recorded against the state NOLs based on
current separate company income limitations. The Company utilized $4.9 million,
$1 million and $.4 million of its state NOLs during 1997, 1996 and 1995,
respectively.
NOTE 11 - STOCKHOLDERS' EQUITY:
The Company's authorized capital stock consists of 20,000,000 shares of $.01
par value common stock and 2,000,000 shares of $.01 par value preferred stock.
The preferred stock is issuable in one or more series with such rights,
preferences and privileges as the Company's Board of Directors shall determine.
At December 31, 1997, options for 248,416 shares of common stock were
outstanding under the Company's former Restated 1985 Incentive Stock Option Plan
(the "1985 Plan"), which was terminated in June 1995. No additional options may
be granted under this plan. The 1985 Plan was administered by the Compensation
Committee of the Company's Board of Directors. Options were granted under the
1985 Plan at a price not less than 100% of the fair market value of the shares
subject to options (or 110% of fair market value in the case of an optionee who
owns, directly or indirectly, more than 10% of the total combined voting power
of all classes of shares of the Company immediately before such option is
granted). Options became exercisable in six equal annual installments beginning
on the date of grant and expired ten years from the date of grant.
27
<PAGE> 19
Broadway & Seymour, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
During 1996, the Company adopted the 1996 Stock Option Plan (the "1996
Plan") under which options for up to 875,000 shares of the Company's common
stock may be granted to key employees and directors. Options for 801,667 shares
of common stock were outstanding under the 1996 Plan at December 31, 1997. The
1996 Plan is administered by the Compensation Committee of the Company's Board
of Directors which determines the price, exercise date and term (not to exceed
10 years) of each option granted to employees. Options may be granted under the
1996 Plan at a price not less than 100% of the fair market value of the shares
subject to options. In addition, the 1996 Plan provides for the formula grant of
options to members of the Company's Board of Directors. The Company recognized
$.5 million and $.2 million of stock based compensation related to options
granted under this plan in its 1997 and 1996 statement of operations,
respectively.
The remaining compensation of $. 8 million from the options granted under
this plan will be recognized over the remaining vesting periods of such options,
ranging from 2 to 3 years. The following table sets forth the changes in the
number of shares subject to options during 1997, 1996 and 1995:
<TABLE>
<CAPTION>
STOCK OPTIONS
- ------------------------------------------------------------------------------
Weighted
Average
Number Option Price Option
of shares per Share ($) Price($)
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at December 31, 1994 995,889 3.14-15.50 9.77
Granted 850,500 18.00-28.38 25.05
Exercised (329,184) 3.14-25.50 9.80
Canceled or expired (57,116) 3.14-18.00 12.05
---------
Outstanding at December 31, 1995 1,460,089 3.14-28.38 18.58
Granted 790,000 9.50-11.19 10.99
Exercised (103,618) 3.14-15.50 6.99
Canceled or expired (829,966) 6.80-25.50 23.12
---------
Outstanding at December 31, 1996 1,316,505 6.80-25.50 12.10
Granted 37,000 11.00-14.00 12.60
Exercised (101,668) 6.80-11.25 9.05
Canceled or expired (201,754) 7.75-25.50 15.24
---------
Outstanding at December 31, 1997 1,050,083 7.75-25.50 11.82
=========
Available for grant at
December 31, 1997 73,000
=========
</TABLE>
Pursuant to the requirements of SFAS No. 123, the following disclosures are
presented to reflect the Company's pro forma net income (loss) and net income
(loss) per common and common equivalent share, as if the Company had elected to
use the fair value method of accounting prescribed by SFAS No. 123, rather than
continuing to apply the provisions of APB 25. In preparing these disclosures,
the Company has determined the value of all options granted during 1997, 1996
and 1995 using the average value method, as described in SFAS No. 123, and based
on an assumed dividend yield rate of 0%, a weighted average risk free rate of
6.1% for 1997, 6.7% for 1996 and 6.8% for 1995 and weighted average expected
lives of approximately 5 to 9 years, depending on the grant date. Had
compensation expense been determined consistent with SFAS No. 123, utilizing
these assumptions and the straight-line amortization method over the vesting
period, the Company's net income (loss) and net income (loss) per common and
common equivalent share would have been as follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $ 2,939 $ (2,248) $ (11,380)
Pro forma adjustment for
stock compensation expense (2,460) (1,470) (403)
- -----------------------------------------------------------------------------
Pro forma net income (loss) $ 479 $ (3,718) $ (11,783)
=============================================================================
Net income (loss) per common and
common equivalent share -
Basic and Diluted $ 0.32 $ (0.25) $ (1.32)
Pro forma adjustment for stock
compensation expense (0.27) (0.17) (0.04)
- -----------------------------------------------------------------------------
Pro forma net income (loss) per
common and common equivalent
share - Basic and Diluted $ 0.05 $ (0.42) $ (1.36)
=============================================================================
</TABLE>
NOTE 12 - COMMITMENTS, SIGNIFICANT RISKS AND UNCERTAINTIES:
LEGAL MATTERS
The Company is exposed to a number of asserted and unasserted claims
encountered in the normal course of business. In the opinion of management, the
resolution of these matters will not have a material adverse effect on the
Company's financial position or results of operations.
28
<PAGE> 20
Broadway & Seymour, Inc.
LEASE COMMITMENTS
The Company leases equipment and facilities under operating leases. Rental
expense from operating leases was $3.7 million, $5.2 million and $6.1 million
for 1997, 1996 and 1995, respectively. Future minimum lease payments under
operating leases having an initial or remaining non-cancelable term in excess of
one year are as follows:
<TABLE>
<CAPTION>
Future Minimum
Lease Payments
- -------------------------------------------------------------------------
<S> <C>
Years ending December 31: (In thousands)
1998 $ 2,871
1999 2,910
2000 2,797
2001 538
2002 & thereafter 3,663
-------
$12,779
=========================================================================
</TABLE>
ACQUISITION EARNOUT
In June 1995, the Company acquired certain assets and liabilities of The
MiniComputer Company of Maryland, Inc. ("TMC"). In connection with this
acquisition, the sellers of TMC may be entitled to receive additional shares of
the Company's common stock through 1998 in the event certain annual financial
and other targets are met. In connection with this earn-out provision, the
Company issued stock during the years ended 1997 and 1996 valued at
approximately $235,000 and $250,000, respectively, to the sellers of TMC and
immediately expensed such amounts.
CONCENTRATIONS OF REVENUE
The business and organizational characteristics of the Company's customer
base may vary significantly from period to period and may cause fluctuations in
the size and timing of revenue.
For the periods presented, the Company had two customers that exceeded
certain disclosure requirement thresholds and are therefore classified as
significant customers.
In 1997, Chase Manhattan Bank ("Chase") accounted for $10.3 million, or 13%,
of the Company's consolidated revenue. Also, in 1997 and 1996, First Data Corp.
("FDC") accounted for $8.0 million, or 10.1%, of consolidated revenue and $9.6
million, or 10.6%, of consolidated revenue, respectively.
In September 1997, the Company amended its contract with FDC, substantially
reducing the scope of work and the amount of future revenue and eliminating
certain exclusivity restrictions on the Company. While the Company may provide
some ongoing services to FDC, all remaining personnel previously assigned to
work with this client have been reassigned to other projects.
GEOGRAPHIC INFORMATION
The Company's assets are principally located in North America. The Company's
revenue is principally generated in North America, however for the years ending
December 31, 1997, 1996, and 1995 revenue generated in Europe represented 9.4%,
5.0%, and 2.2% of consolidated revenue, respectively. Since the Company's
contracts with non-U.S. customers generally denominate the amount of payments to
be received by the Company in local currencies, exchange rate fluctuations
between such local currencies and the U.S. dollar will subject the Company to
currency translation risks. Also, the Company may be subject to currency
transaction risks when the Company's contracts are denominated in a currency
other than the currency in which the Company incurs expenses related to such
contracts.
YEAR 2000 ISSUE
From the early days of the software industry, many software applications
have been designed to store only the last two digits of the four-digit year
date, for example, "98" rather than "1998". These applications, and other
applications which retrieve or process such data, then "assume" the first two
digits of the year date to be "19". Applications designed in this manner may not
be able to process dates with years following 1999; for example, "00" may be
treated as 1900 rather than the year 2000. Results of this failure to process
the date correctly could include miscalculations and system breakdowns. The
Company has recognized this potential problem and has reviewed, and when
necessary modified, its current software products so that they can process data
relating to dates subsequent to December 31, 1999 ("Year 2000 compliance").
29
<PAGE> 21
Broadway & Seymour, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Although the Company believes that its current versions of proprietary
software products are Year 2000 compliant, no assurance can be given that
additional modifications for Year 2000 compliance will not be necessary. The
Company's software systems as installed are integrated with its customers'
software and hardware systems and other vendors' software and hardware systems
and have, in many cases, been uniquely customized to the customers'
specifications. The customers' systems and other vendors' systems with which the
Company's systems interoperate may not be Year 2000 compliant. Generally, the
operation of the Company's software in these environments or the failure of
these systems to be compliant could impact the Year 2000 compliance of the
Company's systems and the Company may incur costs in ascertaining the cause of
the failure and modifying its software.
In addition to its proprietary software products, the Company offers related
software products developed and provided by other software vendors. The Company
is seeking assurances from these vendors that such products are compliant.
However, the risks of interoperability with other software products exist for
these products as well. While in some cases the Company has Year 2000 compliance
obligations to its customers for such third party products, the Company believes
that the vendors of such products bear primary responsibility for such
obligations. Any costs of modifying software products to address Year 2000
compliance are being expensed as incurred.
NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS:
The fair value of the Company's financial instruments such as cash and
short-term investments, trade receivables, trade payables and notes payable
approximates the carrying value of such instruments at December 31, 1997. All of
the Company's financial instruments are held for purposes other than trading.
NOTE 14 - QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized quarterly financial data for 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
Quarter ended: 12/31/97 9/30/97 6/30/97 3/31/97 12/31/96 9/30/96 6/30/96 3/31/96
- ------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data) (In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $ 21,344 $ 19,451 $ 19,103 $ 19,659 $ 21,515 $ 19,479 $ 23,624 $ 24,733
Cost of revenue 13,556 11,618 12,340 13,600 15,095 17,641 18,904 18,061
Operating expenses 6,641 6,672 6,328 5,452 6,416 8,591 7,249 7,652
Gain (loss) on disposition of
non-strategic business units -- 169 896 91 1,809 (430) 8,273 --
Net interest income (expense) 251 267 130 184 31 35 (78) (175)
- ------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 1,398 1,597 1,461 882 1,844 (7,148) 5,666 (1,155)
Income tax benefit (provision) (597) (724) (676) (402) (694) 2,343 (3,424) 320
- ------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 801 $ 873 $ 785 $ 480 $ 1,150 $ (4,805) $ 2,242 $ (835)
========================================================================================================================
Net income (loss) per share:
- - Basic $ 0.09 $ 0.10 $ 0.09 $ 0.05 $ 0.13 $ (0.54) $ 0.25 $ (0.09)
- - Diluted $ 0.09 $ 0.09 $ 0.09 $ 0.05 $ 0.13 $ (0.54) $ 0.25 $ (0.09)
</TABLE>
30
<PAGE> 22
Broadway & Seymour, Inc.
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
OF BROADWAY & SEYMOUR, INC.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of cash flows and of changes in
stockholders' equity present fairly, in all material respects, the financial
position of Broadway & Seymour, Inc. and its subsidiaries at December 31, 1997
and 1996, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards that 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
audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Charlotte, North Carolina
February 6, 1998
31
<PAGE> 23
Broadway & Seymour, Inc.
CORPORATE INFORMATION
BOARD OF DIRECTORS
Steven S. Elbaum(2)
Chairman and Chief Executive Officer,
The Alpine Group, Inc.;
President and Chief Executive Officer,
Superior Telecom Inc.
David A. Finley(2)
Private Investor;
President,
Investment Management Partners, Inc.;
Treasurer (retired),
International Business Machines Corporation
Robert J. Kelly(1)
Private Investor,
Co-Chairman (retired),
Ernst & Young, LLP
George L. McTavish(1)
Chairman and Chief Executive Officer,
Aurora Electronics, Inc.
Roger Noall(1)
Executive,
KeyCorp.
William G. Seymour(2)
President,
PriMax Properties, LLC
Alan C. Stanford
Chairman and Chief Executive Officer,
Broadway & Seymour, Inc.
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
NationsBank Corporate Center
Charlotte, North Carolina 28202
TRANSFER AGENT
Wachovia Bank of North Carolina, N.A.
Post Office Box 3001
Winston-Salem, North Carolina 27102
NASDAQ Symbol: BSIS
ANNUAL STOCKHOLDERS' MEETING
The Annual Stockholders' Meeting of Broadway & Seymour, Inc. will be held on
Friday, May 8, 1998 at 10:00 a.m. at the Hilton Hotel (formerly the Westin
Hotel), 222 East Third Street, Charlotte, North Carolina 28202. A Form Proxy and
Proxy Statement are being mailed to stockholders with this report.
ADDITIONAL INFORMATION
For additional information about Broadway & Seymour, Inc. or its subsidiaries,
please contact:
Keith B. Hall
Vice President and Chief Financial Officer
Broadway & Seymour, Inc.
128 South Tryon Street
Charlotte, North Carolina 28202
(704) 372-4281
e-mail: [email protected]
A copy of the Company's Annual Report to the Securities and Exchange Commission
(Form 10-K) will be furnished, without charge, to any stockholder upon written
request to the contact listed above.
COMPANY FACILITIES
Headquarters and Corporate Offices
Broadway & Seymour, Inc.
128 South Tryon Street
Charlotte, North Carolina 28202
(704) 372-4281
http://www.bsis.com
OPERATING LOCATIONS
CUSTOMER RELATIONSHIP MANAGEMENT
Broadway & Seymour
128 South Tryon Street
Charlotte, North Carolina 28202
(704) 372-4281
LEGAL AND PROFESSIONAL SERVICES
Elite Information Systems
3415 South Sepulveda Boulevard
Suite 500
Los Angeles, California 90034
(310) 398-4900
Products mentioned in this publication are used for identification purposes only
and may be trademarks of Broadway & Seymour, Inc., it subsidiaries, or
third-party holders.
