<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For quarter ended Commission File No. 1-10151
June 30, 1995
THE CONTINUUM COMPANY, INC.
9500 Arboretum Boulevard
Austin, Texas 78759-6399
Telephone: (512)345-5700
A Delaware Corporation I.R.S. Employer Identification
Number: 74-1609363
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) as been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock as of the latest practical date.
As of July 20, 1995, there were 19,149,000 shares of the registrant's $.10 par
value Common Stock outstanding.
1
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THE CONTINUUM COMPANY, INC.
10-Q June 30, 1995
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets - June 30, 1995
and March 31, 1995 ................................................ 3
Condensed consolidated statements of income - Three months
ended June 30, 1995 and 1994 ..................................... 4
Condensed consolidated statements of cash flows - Three months
ended June 30, 1995 and 1994 ...................................... 5
Notes to condensed consolidated financial statements - June 30, 1995.. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ..................................... 7
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders .............. 9
Item 6. Exhibits and Reports on Form 8-K ................................. 10
SIGNATURE ................................................................. 10
2
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<TABLE>
<CAPTION>
The Continuum Company, Inc.
Condensed Consolidated Balance Sheets
June 30, March 31,
1995 1995
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(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................... $ 29,845,000 $ 44,525,000
Receivables, net of allowance for doubtful accounts 97,388,000 78,062,000
Other current assets .............................. 16,649,000 14,721,000
------------ -------------
143,882,000 137,308,000
Property and equipment, net of depreciation ......... 29,470,000 26,896,000
Goodwill, net of amortization ....................... 23,193,000 15,995,000
Software systems, net of amortization ............... 13,517,000 14,178,000
Other assets ........................................ 9,859,000 5,323,000
----------- --------------
TOTAL ASSETS ........................................ $219,921,000 $ 199,700,000
============ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................. $ 19,219,000 $ 18,832,000
Deferred revenue .................................. 16,969,000 15,981,000
Accrued liabilities and other ..................... 46,781,000 40,228,000
Current portion of long-term debt ................. 848,000 822,000
------------- --------------
83,817,000 75,863,000
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Long-term debt .................................... 25,217,000 25,379,000
Other obligations ................................. 20,171,000 16,167,000
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45,388,000 41,546,000
------------- --------------
Stockholders' equity:
Common Stock, $.10 par value ...................... 1,921,000 1,919,000
Capital in excess of par value .................... 122,511,000 122,279,000
Retained deficit .................................. (31,846,000) (39,870,000)
Other ............................................. (1,870,000) (2,037,000)
------------- --------------
90,716,000 82,291,000
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .......... $219,921,000 $ 199,700,000
============= ==============
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
</TABLE>
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<TABLE>
<CAPTION>
The Continuum Company, Inc.
Consolidated Statements of Income
(Unaudited)
Three Months Ended
June 30,
-------------------
1995 1994
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<S> <C> <C>
REVENUE:
Service revenues .............................. $ 88,301,000 $ 69,162,000
Software system licensing ..................... 5,930,000 4,111,000
Interest income ............................... 338,000 42,000
------------ ------------
94,569,000 73,315,000
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EXPENSES:
Service expenses .............................. 67,491,000 51,611,000
Marketing and administration .................. 15,229,000 12,790,000
Interest expense .............................. 661,000 432,000
------------ ------------
83,381,000 64,833,000
------------ ------------
Income before income taxes ...................... 11,188,000 8,482,000
Income tax provision ............................ 3,356,000 2,882,000
------------ ------------
Net income ...................................... $ 7,832,000 $ 5,600,000
============ ============
Earnings per common share ....................... $ .40 $ 0.30
============ ============
Average number of common shares and 19,789,000 18,978,000
common equivalent shares outstanding .......... ============ ============
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
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<TABLE>
<CAPTION>
The Continuum Company, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
June 30,
--------------------
1995 1994
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................................. $ 7,832,000 $ 5,600,000
Items included in income which do not affect cash: .........................
Depreciation, amortization and other.................................... 3,394,000 2,665,000
Changes in operating assets and liabilities: ..............................
(Increase) in receivables .............................................. (17,050,000) (2,035,000)
Increase in accounts payable ........................................... 329,000 30,000
Increase (decrease) in deferred revenue ................................ 815,000 (2,376,000)
(Increase) in other net assets ......................................... (3,811,000) (1,719,000)
------------- -------------
Net cash (used) provided by operating activities ........................... (8,491,000) 2,165,000
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CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, equipment, and software systems ..................... (3,869,000) (782,000)
Purchase of business, net of cash acquired (2,453,000) __
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Net cash (used) by investing activities .................................... (6,322,000) (782,000)
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CASH FLOWS FROM FINANCING ACTIVITIES
Debt borrowings (payments), net ............................................ (204,000) (688,000)
Common Stock transactions .................................................. 234,000 1,512,000
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Net cash provided by financing activities .................................. 30,000 824,000
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EFFECT OF EXCHANGE RATE CHANGES ON CASH ......................................... 103,000 (143,000)
------------- -------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ................................ (14,680,000) 2,064,000
Cash and cash equivalents at beginning of period ................................ 44,525,000 10,664,000
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ...................................... $ 29,845,000 $ 12,728,000
============= =============
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
</TABLE>
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note (1) Summary of Accounting Policies
- ---------------------------------------
The condensed consolidated financial statements included herein have been
prepared by the Company without independent audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, the condensed consolidated financial statements include all
adjustments necessary to present fairly the information required to be set forth
therein and these adjustments were of a normal recurring nature. The results of
operations for the periods presented are not necessarily indicative of the
results to be expected for the full fiscal year. Certain footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The Company believes that the disclosures included herein
are adequate to make the information presented not misleading. It is suggested
that these condensed consolidated financial statements be read in conjunction
with the financial statements and notes thereto included in the Company's Form
10-K annual report for the fiscal year ended March 31, 1995.
Note (2) Earnings Per Share
- ----------------------------
For the three months ended June 30, 1995 earnings per share are computed using
the weighted average number of shares outstanding adjusted for the incremental
shares attributable to outstanding options, primarily unvested employee stock
options, to purchase Common Stock. For the three months ended June 30, 1994 the
effect of options were excluded due to immateriality. The average number of
common shares and common equivalent shares outstanding are summarized as follows
(000's):
<TABLE>
<CAPTION>
Three months ended
June 30,
----------------------
1995 1994
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<S> <C> <C>
Average outstanding common shares .................. 19,134 18,978
Common equivalent shares ........................... 655 __
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Average number of common shares and
common equivalent shares outstanding ............ 19,789 18,978
======= =======
</TABLE>
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Note (3) Acquisitions
- ---------------------
On May 3, 1995, the Company acquired all of the outstanding shares of Ra Systems
for $10,823,000. A cash payment of $5,423,000 was remitted at closing, and the
remainder payable December 31, 1995. The acquisition was accounted for using the
purchase method and, accordingly, the operating results of Ra Systems have been
included in the consolidated financial statements from the date of acquisition.
Ra Systems' tangible assets, including cash of $2,970,000 were recorded at their
estimated fair value of $7,242,000 and Ra Systems' liabilities were recorded at
their estimated fair value of $3,965,000. The estimated excess of $7,546,000 was
assigned to goodwill. The acquisition did not have a material pro forma impact
on operations.
Note (4) Income Taxes
- ---------------------
For the three months ended June 30, 1995, the effective tax rate was 30%, which
is lower than the statutory rate primarily due to utilization of tax net
operating loss carry-forwards in foreign jurisdictions. The effective tax rate
for the three months ended June 30, 1994 was 34%, which approximated the
statutory rate.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Material Changes in Results of Operations
- -----------------------------------------
Three months ended June 30, 1995 compared
to the three months ended June 30, 1994.
For the three months ended June 30, 1995, the Company recorded net income of
$7,832,000 or $.40 per share compared to a net income of $5,600,000 or $.30 per
share for the same quarter last year.
Revenue for the three months ended June 30, 1995 increased to $94,569,000
compared to $73,315,000 for the same period last year, an increase of 29%. North
American customers accounted for 48% of revenue for the three months ended June
30, 1995, European customers accounted for 20% and Pacific Rim customers
accounted for 32%.
License revenue was $5,930,000 for the three months ended June 30, 1995 compared
to $4,111,000 for the same quarter last year. Approximately 80% of the product
sales came from North American customers, while most of the remainder came from
European life insurance customers. License sales included sales of
COLOSSUS(trademark), the Company's expert system for evaluating bodily injury
claims, and sales of Automated Work Distributor (AWD(registered trademark)), the
Company's business re-engineering workflow management system.
Service revenue for the quarter ended June 30, 1995 totaled $88,301,000, an
increase of 28% compared to a year ago. Over half of the service revenue growth
was from outsourcing customers. North American customers accounted for 46% of
service revenue for the three months ended June 30, 1995, European customers
accounted for 20% and Pacific Rim customers accounted for 34%. The following
table summarizes the increase in service revenue by region ($ in millions):
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<TABLE>
<CAPTION>
Quarter ended June 95 vs June 94
------------------ increase (decrease)
June 30, June 30, -------------------
1995 1994 $ %
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Outsourcing Revenue
North America ......... $ 23.3 $ 13.3 $ 10.0 75%
Europe ................ 1.6 1.7 (0.1) (6%)
Pacific ............... 10.5 9.1 1.4 15%
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35.4 24.1 11.3 47%
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Other Service Revenue
North America ......... 17.5 13.9 3.6 26%
Europe ................ 15.9 13.4 2.5 19%
Pacific ............... 19.5 17.8 1.7 10%
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52.9 45.1 7.8 17%
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Total Service Revenue
North America ......... 40.8 27.2 13.6 50%
Europe ................ 17.5 15.1 2.4 16%
Pacific ............... 30.0 26.9 3.1 12%
------ ------ -------
$ 88.3 $ 69.2 $ 19.1 28%
====== ====== =======
</TABLE>
Outsourcing revenues increased 47% to $35,400,000 compared to the same period
last year. The increase is attributed to new outsourcing agreements signed in
the second half of fiscal 1995.
Other service revenue increased 17% to $52,900,000, including increases in all
regions. The increase in North American service revenue reflects an increased
demand for consulting and implementation services associated with VANTAGE-
ONE(registered trademark), the Company's life administration system, and
increases in utilization and support fees and services for the COLOSSUS product.
The increase in European service revenue of 19% to $15,900,000 is primarily
attributable to the acquisition of Ra Systems on May 3, 1995. Continuum Ra is
the leading provider of systems to insurance brokers in the United Kingdom.
Compared to a year earlier, service revenue increased $19,139,000, or 28%, and
service gross profit increased $3,259,000, or 19%. The decline in gross profit
as a percentage of revenue from 25% for the three months ended June 30, 1994 to
24% for the same period this year is primarily the result of increased
investments in the Company's products, start up costs associated with new
projects and a change in the mix of business.
Marketing and administration expenses for the June 1995 quarter were $15,229,000
or 16% of total revenue compared to a year ago when they were $12,790,000 or 17%
of total revenue. The improvement as a percent of revenue results from the
significant growth in the Company's revenues.
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The effective tax rate of 30% for the three months ended June 30, 1995 is lower
than the statutory rate due to the utilization of net operating loss
carry-forwards in foreign jurisdictions. The effective tax rate of 34% for the
three months ended June 30, 1994 approximated the statutory rate.
The average number of common shares and common equivalent shares outstanding was
19,789,000 for the June 1995 quarter, an increase of 811,000 shares compared to
a year ago. The increase results primarily from the inclusion of common
equivalent shares. The effect of employee stock options, mostly unvested, are
now reflected as common equivalent shares due to the recent appreciation in the
Company's share price. Prior to the June 1995 quarter, employee stock options
were excluded because of immateriality.
In summary, net income for the three months ended June 30, 1995 was $7,832,000
compared to a net income of $5,600,000 for the same period last year. The
improved performance was due to an increase in license revenue, service revenue
and gross profit.
Liquidity and Capital Resources
At June 30, 1995, cash totaled $29,845,000. Cash decreased $14,680,000 during
the June 1995 quarter, but is $17,117,000 greater than a year ago. Cash
requirements for the quarter included the acquisition of Ra Systems, investments
in recent outsourcing contracts, and annual payments of some fiscal 1995
accruals of employee benefits.
The Company expects to meet its cash needs from cash generated by operating
activities. In addition, the Company has a revolving credit line for up to
$20,000,000.
The Company had no material commitments for capital expenditures as of June 30,
1995.
VANTAGE-ONE and COLOSSUS are trademarks of The Continuum Company, Inc. AWD is a
registered trademark of DST Systems, Inc.
PART II -- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of the Stockholders of the Company was held on July
26, 1995.
(b) Proxies were solicited by the Company pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended. There was no
solicitation in opposition to management's nominees for directors as
listed in the proxy statement, and all of such nominees were elected.
(c) The Registrant's 1995 Directors' Stock Option Plan reserving 100,000
shares of the Company's Common Stock under certain conditions was
approved by the requisite majority of the outstanding shares of the
Company as follows:
For 16,415,926
Against 1,238,820
Abstain 87,772
(d) The total number of shares of the Company, $.10 par value,
outstanding and entitled to vote as of May 26, 1995, the record date
of the Annual Meeting, was 19,142,958.
9
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Item 6. Exhibits and Reports on Form 8-K
No reports on Form 8-K were filed with the Securities and Exchange Commission by
the Registrant for the quarter ended June 30, 1995.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: August 3, 1995 THE CONTINUUM COMPANY, INC.
John L. Westermann III
Vice President and Chief Financial Officer
10
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> JUN-30-1995
<CASH> 29,845,000
<SECURITIES> 0
<RECEIVABLES> 97,388,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 143,882,000
<PP&E> 77,903,000
<DEPRECIATION> 48,433,000
<TOTAL-ASSETS> 219,921,000
<CURRENT-LIABILITIES> 83,817,000
<BONDS> 0
<COMMON> 1,921,000
0
0
<OTHER-SE> 88,795,000
<TOTAL-LIABILITY-AND-EQUITY> 219,921,000
<SALES> 94,231,000
<TOTAL-REVENUES> 94,569,000
<CGS> 0
<TOTAL-COSTS> 82,720,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 661,000
<INCOME-PRETAX> 11,188,000
<INCOME-TAX> 3,356,000
<INCOME-CONTINUING> 7,832,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,832,000
<EPS-PRIMARY> .40
<EPS-DILUTED> .40
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