ITEM 1. BUSINESS
OVERVIEW
H.T.E., Inc. ("HTE" or the "Company") develops, markets, implements and supports fully-integrated enterprise-wide application software, Internet, and wireless solutions designed specifically for public sector organizations, including state, county and city governments, other municipal agencies and both public and private utilities. The Company also develops custom solutions for use by Federal agencies including FEMA, the IRS, and the Census Bureau. For over 19 years, the Company has focused its applications, business and marketing exclusively on the public sector and utilities and has established itself as a market leader. HTE's fully-integrated enterprise-wide software applications are designed to enable these organizations to improve delivery of services, reduce costs, enhance revenue collection, operate within budgetary constraints, comply with government regulations and improve overall operating efficiencies. The Company's Total Enterprise Solution(R) currently includes more than 50 applications addressing six functional areas: financial management, community services, public safety, justice, utility management and K-12 school administration. The Company's products operate as integrated suites of applications or as stand-alone applications and function with a variety of computer and network hardware, operating systems, database software and desktop applications provided by other vendors. As part of its strategy to provide a completely integrated solution to its customers, the Company also provides related services, including consulting, implementation, education and training, and the provision and configuration of hardware systems. In 2000, the Company began outsourcing the sale and configuration of hardware systems through an agreement with Vertical VAR. Under this agreement, the Company will receive a royalty on hardware sales to HTE customers by Vertical VAR.
As of December 31, 2000, the Company's customers consisted of more than 2,100 offices, agencies, and utility companies in the U.S., Caribbean and Canada, including installations in all 50 U.S. states. The Company markets and sells its products primarily through a direct sales force. The Company's focus on the public sector and utilities industries has allowed it to develop significant domain expertise in these industries and to design feature-rich solutions that address the specific needs of these organizations.
INDUSTRY BACKGROUND
The public sector marketplace is composed of federal, state, county and city governments, other municipal agencies, and publicly owned utilities. The local government market comprises over 3,000 counties and over 19,000 municipalities in the U.S., not including school districts, townships and special governmental districts. The utility market includes approximately 1,800 water, gas and electric utilities, each serving between 25,000 and 500,000 consumers. With respect to public safety agencies, there are approximately 50,000 police, fire and emergency service agencies in the U.S.
The public sector marketplace is currently undergoing significant organizational and business changes. In recent years, the federal government gave additional program and funding responsibilities to state and local governments, resulting in a growing requirement at the local level to fill the gap between increasing constituent demands and limited resources. Like many private sector businesses, public sector organizations are facing increasing pressure to improve delivery of goods and services while striving to reduce costs and generate additional revenue. In response, public sector organizations are employing information technology ("IT") solutions in an effort to streamline and automate administrative intensive processes, improve timeliness and quality of services, and generally enhance operating efficiencies. They are also coming under pressures to provide services to citizens via the Internet and to improve operations with wireless capabilities. In addition, public organizations are seeking to use information technology to create new sources of revenue and enhance existing revenue collection.
Certain information technology issues facing state and local governments also impact public utilities, many of which are owned by municipalities. In addition, deregulation in the utility market has resulted in greater competition between public and private utilities. Consequently, public utilities are under pressure to retain their customer bases and focus their efforts on enhancing the level of service, improving operating
practices and reducing costs. Specifically, utilities seek to ensure timely and effective utilization of inventory, equipment and human resources, along with improved customer service levels. Utilities must also comply with government regulations covering environmental, worker health and safety, and other matters.
In the 1970's and 1980's, local governments and utility companies began to use computerized operations management systems principally based on mainframe computers and later based on minicomputers. These legacy systems typically use proprietary operating systems and database software and are frequently developed on a custom basis to meet the specific needs of a customer. The proprietary and custom nature of legacy systems often limits their accessibility and interoperability with other software applications, systems and resources. Further, these systems often do not address current needs and are becoming increasingly difficult and expensive to maintain, update and change. Currently, many public sector organizations are faced with a pressing need to integrate mission-critical functions and databases by replacing stand-alone applications and customized software with cost-effective enterprise-wide solutions that improve overall operational efficiencies and manage the flow of information between departments.
In recent years, the increased performance and lower cost of desktop computers, together with improvements in network communications, have contributed to a shift by organizations from centralized computer systems to more distributed environments that support the integration of a variety of "client" (end-user) and "server" (host-based) applications. The first generation of client/server software applications primarily consisted of "point solutions" that focused on a single function, such as the general ledger or human resource management. Point solutions are not easily interoperable with point solutions from other providers, making access to information between departments difficult and requiring redundant data entry or expensive customization and maintenance. Because point solutions frequently do not operate on the customer's existing system, they often require a long implementation process involving the costly migration of large amounts of data from existing systems and the purchase of new hardware and software.
A number of software vendors now offer generalized client/server products to the public sector market, though these are frequently private sector providers with little public sector industry expertise. Additionally, their solutions typically are not enterprise-wide and as a result do not enable multiple departments, such as police and court records departments, to share information. These solutions often do not fulfill the specific functional requirements of the public sector marketplace such as complying with government fund accounting standards, procurement processes, and regulated budgeting processes. Consequently, public sector organizations frequently experience lengthy and expensive customization and implementation cycles. Moreover, these solutions may not be sufficiently flexible to cost-effectively accommodate the ongoing needs of public sector organizations as they modify and improve their operations.
The deficiencies of these currently available solutions have become increasingly apparent as organizations have attempted to reengineer their operations management practices. Organizations are now attempting to identify and implement preferred approaches within their specific organizations to manage and control a broad range of operations and information. To implement this re-engineering, public sector organizations are seeking software solutions that allow them to manage enterprise-wide information and to distribute that information to employees and the public. As a result of the increased complexity and sophistication required to meet new computing challenges, public sector organizations are demanding robust solutions to their information processing needs that are based on proven technologies and incorporate the application knowledge specific to the public sector market.
HTE'S TOTAL ENTERPRISE SOLUTION(R)
The Company's integrated, enterprise-wide software solution enables public sector and utility organizations to improve delivery of services, reduce costs, enhance revenue collection, operate successfully within budgetary constraints, comply with government regulations and improve overall operating efficiencies. HTE's Total Enterprise Solution is based on over 19 years of public sector and utility expertise and consists of a full
suite of software applications, as well as a complete range of customer services, support and training. The Company's Total Enterprise Solution provides the following:
Integrated Enterprise-Wide Solutions and Depth of Functionality. HTE offers a Total Enterprise Solution, consisting of more than 50 applications, which provides feature-rich systems for financial management, community services, public safety, justice, utility management and K-12 school administration. HTE's products operate as stand-alone applications or as integrated suites, which provide users with a consistent graphical user interface and the ability to easily access data and share information between multiple departments and agencies. The Company's applications are based upon proven technologies and are designed to function in mission-critical environments.
Adaptability/Flexibility/Scalability. HTE solutions are readily adaptable to meet a customer's initial needs and are designed with sufficient flexibility to respond to a customer's specific system refinements and ongoing changes once the system is fully in service. The scalability of the Company's software applications and the customer's ability to migrate within the Company's product family allow public sector and utility organizations to increase operating levels and expand application functionality. In addition, the Company offers several application programming interfaces to enable customers to develop customized reporting and satisfy unique requirements.
N-tiered Software Architecture. The Company's layered software architecture isolates the application logic from the graphical user interface and database. This feature enables the Company to utilize multiple platforms and effectively integrate new technologies with existing software. N-tiered architecture allows customers to protect their investments in information systems while positioning them to adopt new object-based solutions, high performance servers and database management systems with no loss of functionality.
Centralized System Administration. System administration is centralized in HTE solutions, thereby simplifying system management, reducing the need for in-house system administrators and programmers and mitigating the need for third-party services. HTE's applications incorporate extensive security features designed to protect data from unauthorized retrieval or modification. Simplified menus and data access can be tailored to meet each organization's requirements.
Cost-Effective Implementation Methodology. The Company utilizes a highly responsive implementation planning process and focused consulting and training services specifically designed to satisfy the functionality and deployment needs of public sector and utilities customers. By offering rapid product deployment and easy migration among its product lines, the Company seeks to minimize the productivity interruption to organizations that typically results from the introduction of new technology, thereby enabling organizations to realize more quickly the associated benefits.
STRATEGY
The Company's objective is to be the leading provider of enterprise-wide information solutions to the public sector and utility marketplace. Principal elements of the Company's strategy include:
Promote Integrated Enterprise-Wide Solutions. HTE believes that the fully-integrated suite of proven, feature-rich applications comprising the Company's Total Enterprise Solution provides significant opportunities with its existing customer base as well as with new customers. The Company believes a substantial opportunity exists to sell additional products to current customers who have only a few of the Company's applications. HTE also intends to leverage its robust suite of applications to potential new customers that are currently looking for a point solution, such as a single department-based application, but prefer products which may be easily integrated with other applications in the future. HTE will continue to devote significant resources on marketing solutions to potential customers seeking enterprise-wide alternatives.
Enable Citizen and Business Access via the Internet. The Company estimates that millions of U.S. households and businesses are served by communities and organizations that use HTE software to manage their information systems. These citizens increasingly are looking to their counties/communities
to improve electronic services access for the payment of utility bills, tax bills, and parking tickets and for additional e-government capabilities for such activities as scheduling building inspections, filing court cases, reserving park facilities, and filing general citizen complaints or incident reports. As these business and citizen to government services become more Internet enabled, HTE is being asked by its customers to take a leading role in helping them migrate to this newer technology.
Move "down-market" with application hosting. HTE has developed a capability to use its CitySoft online product line as an entry vehicle to provide application hosting to smaller communities that lack sufficient size to justify their own hardware, software and internal information systems staff, which historically has been necessary to install and operate HTE's integrated solutions. As an application services provider, the Company anticipates that it will be able to offer remote information processing to these smaller communities with a shared processor configuration for a monthly processing fee. The Company expects that the primary market for this service will be communities with populations under 5,000.
Capitalize on Public Sector Expertise. The Company intends to capitalize on its public sector knowledge and experience to enhance sales in existing markets, such as the utilities market, and expand into new market segments, such as foreign governments and educational institutions. For over 19 years, the Company has focused exclusively on the public sector and utilities marketplace. The Company believes this focus has resulted in the development of a core expertise and background in areas such as government fund accounting, as well as the "front-office" and "back-office" mission-critical activities of police, fire and other emergency personnel. In addition, HTE believes its public sector focus has allowed the Company to develop a large customer base, consisting of more than 2,100 offices, agencies, and utility companies across North America. The Company believes the size and geographic breadth of its customer base offers significant leverage with regard to new business, since references from existing customers often result in future sales opportunities.
Deliver New Applications and Technology. The Company intends to continue to serve its customers' needs by maintaining its reputation for proven and effective use of recent advances in technology as they emerge and gain acceptance by these markets. The Company seeks to develop new applications and incorporate new product functionality, such as Internet integration, object technology, decision support, mobile computing, and wireless communications.
Expand Sales Force and Marketing Initiatives. The Company intends to increase its penetration of the public sector and utilities market by expanding the distribution of its products into new and existing geographic markets. In addition, the Company intends to continue to build collaborative relationships with customers in order to develop new applications and assist customers in keeping pace with technology and in maintaining compliance with government regulations. The Company has recently begun a program to work through various state municipal leagues of cities to reach an expanded market base.
Supplement Internal Growth Through Strategic Acquisitions. The Company views acquisitions as a means of acquiring technology and application expertise, broadening its customer base, and expanding internationally. The Company believes that the public sector application vendor market is highly fragmented with many small point solution companies and that the industry is currently entering a period of consolidation. In the longer term, the Company intends to pursue acquisition opportunities that accomplish its objective of becoming the leading provider of enterprise-wide information solutions to the public sector. Over the past six years, the Company has supplemented its internal growth with nine strategic acquisitions.
HTE'S INTEGRATED SOFTWARE PRODUCTS
HTE offers integrated enterprise-wide software solutions designed to automate and integrate the operations of public sector and utility organizations. The Company has designed its products based on the philosophy that complete application integration is essential for the effective sharing of information across an organization. Offering enterprise-wide integration, the Company's applications provide more than simple integration; they work together seamlessly, sharing functions and eliminating redundant data and repetitive
tasks. Transactions are processed by a single application, and the information is immediately ready for use by other interfaced applications. The license fee for a typical sale ranges from approximately $80,000 to $500,000, depending on hardware configurations, number of users and applications licensed.
The following summarizes the Company's applications and the principal benefits of the integrated application system:
FINANCIAL MANAGEMENT SYSTEMS
HTE's Integrated Accounting System provides a comprehensive fund accounting system that includes general ledger, budgeting, accounts payable, project and grant management and financial reporting. The system is available in two formats to accommodate a wide range of accounting practices, while maintaining compliance with financial reporting guidelines. Integrated Accounting can work independently or with other HTE applications to provide a completely integrated, enterprise-wide financial solution. The principal benefits of this integrated system are as follows:
- A comprehensive integrated financial reporting system designed to monitor organizational goals and performance.
- Eliminates redundant data entry and centralizes and minimizes record management and retrieval of historical information through interfacing modules.
- Complies with Governmental Accounting, Auditing, and Financial Reporting ("GAAFR") and Government Finance Officers Association ("GFOA") standards.
- Streamlines IRS reporting and offers custom budgeting tools.
COMMUNITY SERVICES SYSTEMS
The Company's systems provide a centralized land and location database solution that expedites access to property data, building licenses and permits, code enforcement proceedings, planning and zoning processes, appraisal and assessment, and tax billing and collections. The system also manages community parks and recreational facilities. The principal benefits of the systems are as follows:
- A centralized information system that expedites access to property data, building licenses and permits, code enforcement proceedings, planning and zoning processes, appraisals and assessments, and tax billing and collections.
- Generates all documentation and improves revenue tracking, processing and payment collection.
- Routes projects to various agencies and promotes communication between agencies.
- Manages community parks and recreational facilities.
PUBLIC SAFETY SYSTEMS
The public safety applications provide police, fire and emergency rescue entities with a complete public safety solution through an integrated suite of applications, which provide immediate in-the-field access to vital information. Such dispatch information includes locations, equipment and personnel response recommendations and current status of events or incidents. Applications allow for mobile collection of incident data mandated by state and federal regulatory agencies and promote greater safety of public service personnel through wireless communication. Critical communication links for rapid information dissemination in emergency situations are facilitated by the integration of mobile data computers, Emergency-911 operations, state and federal computers, and alarm panels. The principal benefits of the public safety applications are as follows:
- A complete suite of applications that provides critical information to users in emergency situations through mobile computing technologies.
- Reduces or eliminates "voice traffic" that can jeopardize officer safety.
- Integrates police, fire and emergency medical service reporting and communications with state and federal information systems and facilitates sharing of vital information.
- Increases personnel safety and provides for better public service by allowing police and emergency personnel to remain in the field.
JUSTICE SYSTEMS
The integrated justice suite provides a complete centralized system for managing information and activities associated with jails, court cases, juries, probation, prosecution, public defense and return of service. The principal benefits of the justice applications are as follows:
- An integrated suite of applications that ensures a smooth, efficient flow of information through all phases of the justice process.
- Promotes effective management of time, staff and facilities involved in the administration of justice.
UTILITY SYSTEMS
The Company offers a suite of integrated products designed to handle a full range of utility services including electric, water, gas and others. The flexibility of these programs lets customers tailor applications to meet specific business needs. HTE's Customer Information System ("CIS") is capable of interfacing with other software systems and with various databases, for engineering purposes such as plant maintenance. Some of the principal benefits of these products are as follows:
- A broad utility management system designed to handle a full range of services including bill processing, equipment management and customer service information.
- Provides immediate access to customer information and work orders and tracks assets and resources.
K-12 SCHOOL ADMINISTRATION
These integrated applications address four key areas of K-12 school administration: general accounting, payroll, human resources and student administration. All applications incorporate a variety of standard features and functions to provide ease of use, customization capabilities and reporting flexibility. Among the principal benefits of these applications are the following:
- Integrates system security to restrict users and protect confidentiality.
- Complies with state and federal reporting requirements.
- Client/server platform operates in a network environment.
- Supports bar coding and scanning for attendance, grade reporting and employee photos.
HTE'S LAYERED SOFTWARE ARCHITECTURE
The Company's software architecture is based on a layered software model. Under this model, Microsoft Windows 95, Windows 98 and Windows NT/2000 may host the client. The n-tier architecture, which isolates the application logic and database access from the presentation layer. A Java-based server running on either Windows NT/2000 or the IBM eServer iSeries will host the presentation layer. The presentation layer supports Java-capable browsers such as Microsoft's Internet Explorer and Netscape's Navigator.
CUSTOMER SERVICE
HTE offers a range of services, including implementation support, customer support, education and training and professional consulting services. The Company continues to devote substantial resources toward
improvements in customer service and has recently expanded its support system with Internet support capabilities.
Implementation Support Program. HTE offers its customers an Implementation Support Program with an initial system order or with a significant upgrade to an existing system. The Implementation Support Program provides a variety of project management and consulting services to assist in implementation and deployment of HTE's enterprise solutions. The Company offers a variety of site-specific technical and consulting services to assist in all phases of the implementation process. HTE may also provide assistance in integrating its products with the customer's existing software.
Customer Support Program. For ongoing support, HTE offers its customers a Comprehensive Support Program. The Company provides product enhancements and updates that maintain a customer's software and documentation. The Comprehensive Support Program also includes hotline telephone support, which is available 24 hours per day, seven days per week, and unlimited access to a support web site. As a separately priced option, customers can extend this support to personal computers, networks and hardware systems. The Company expanded this service to include a Customer Care Program whereby customers are called at predetermined time schedules to identify needs for service, support or new product offerings.
Through its HTE User Group ("HUG"), the Company involves its customers and end-users to help identify new functions and product features that offer the greatest benefit. The Company believes that HUG assists the Company in the development and support of products.
Education and Training. HTE offers education and training services that provide customers with a formalized program to ensure that applications are implemented and utilized in an efficient and cost-effective manner. Customers are also offered a variety of software installation, technical support and user training services, both on-site and in HTE's training centers. Customized education and training programs are also available to meet a customer's specific development needs. Education and training services are priced separately.
Professional Consulting Services. The Company offers professional consulting services that extend beyond standard maintenance contracts. These services include project management, hardware and software installation, classroom education, on-site training, conversion planning and programming services. Additional services include custom applications analysis, design, development, training and deployment for most of HTE's applications.
SALES AND MARKETING
The Company sells its products in North America through a direct sales force. As of December 31, 2000, the Company had 59 employees in its sales and marketing organization, including sales representatives, pre-sale consultants, sales and marketing management, proposal specialists, and product demonstrators. The Company employs a variety of business development and marketing techniques to communicate directly with current and prospective customers. These techniques include exhibiting at trade shows; conducting seminars for clients and prospective clients on technology and industry issues; and marketing through targeted mail campaigns, telemarketing and the corporate web site.
HTE uses a combination of electronic prospective client databases, telemarketing, and field sales methodologies to identify potential candidates for its Total Enterprise Solution systems. Prospective HTE customers are monitored through a prospect management system that segments the sales cycle into several phases, each with multiple measurement points, to assess properly the prospective client base.
A key aspect of the Company's sales and marketing strategy is to build and maintain strong relationships with businesses that the Company believes play a role in the successful marketing of its software products. The Company's customers and potential customers often rely on third-party system integrators to develop, deploy and manage information systems. These providers include software and hardware vendors and technology consulting firms, some of which are active in the selection and implementation of information systems for organizations that comprise the Company's principal customer base. HTE maintains relationships with companies such as Microsoft, IBM, Cognos, Jacada, and ESRI. The Company believes that its marketing and
sales efforts are enhanced by the worldwide presence of many of these companies. HTE has conducted several joint marketing and sales programs with these vendors, including seminars, direct mail campaigns and trade show appearances. Additionally, the Company plans to drive new growth through Internet citizen access and an ASP (application service provider) model. The Company's large existing customer base of over 2,100 government offices, agencies, and utility companies creates a ready market to millions of household citizens and utility customers served by the Company's application suite. The Company believes that a significant untapped business opportunity exists in providing these household citizens and utility customers online transaction-oriented services, 24 hours a day and seven days a week, from the comfort of their homes.
CUSTOMERS
The Company provides fully-integrated, enterprise-wide software solutions to federal, state, city and county governments, utilities, transportation authorities, parks and recreation departments and police, fire and emergency personnel. As of December 31, 2000, the Company had a customer base of over 2,100 offices, agencies and utility companies, including installations in all 50 U.S. states. No customer accounted for more than 10% of total revenues for the years ended December 31, 1998, 1999 or 2000.
PRODUCT DEVELOPMENT
HTE's product development efforts are focused on enhancement of its existing product line and its enterprise system in the areas of Internet enablement and end-user ergonomics. Key product functionality enhancements will also be addressed as identified by our user group through the Enhancement Request System (ERS) and by our marketing research. In addition, HTE will continue to evolve its enterprise wide solution by continuing to enhance and streamline application interfaces toward increased performance and reliability. At December 31, 2000, HTE had 203 full-time employees in product development.
HTE plans to continue to add new products and services, both through internal development and potential acquisitions, to leverage the Company's core technologies and expertise. In the development of new applications, the Company intends to strive to allow customers to utilize existing systems while at the same time providing customers the advantage of advances in network systems, platforms, database and other relevant technologies. The Company's gross development expenditures were $19.1 million, $23.1 million and $17.4 million for the years ended December 31, 1998, 1999 and 2000, respectively.
COMPETITION
The Company faces competition from a variety of software vendors that offer products and services similar to those offered by the Company and from companies offering to develop custom software. Certain competitors have greater technical, marketing and financial resources than the Company. The Company also competes with in-house management information services staff. The Company believes competitive differentiators are functionality, product flexibility, ease of implementation in adapting products to individual customers' needs without custom programming, enterprise product breadth and integration, individual product features, service reputation and price.
The Company believes the market is highly fragmented with a large number of competitors that vary in size, primary computer platforms and overall product scope. Within its markets, the Company competes from time to time with (i) the consulting divisions of national and regional accounting firms, (ii) publicly held companies which focus on selected segments of the public sector and utilities markets including PeopleSoft, Inc., Systems Computer & Technology, Inc., J.D. Edwards & Company, Inc., SunGard Data Systems, Inc., Tyler Technologies, Inc., and E-gov and (iii) a significant number of smaller companies. Many of these companies do not focus exclusively on the public sector or offer fully-integrated enterprise-wide software applications. There can be no assurance that such competitors will not develop products or offer services that are superior to the Company's products or services or that achieve greater market acceptance.
The Company could face additional competition as other established and emerging companies enter the Company's public sector software application market and new products and technologies are introduced. Increased competition could result in price reductions, fewer customer orders, reduced gross margins and loss
of market share, any of which could materially adversely affect the Company's business, operating results and financial condition. In addition, current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third-parties, thereby increasing the ability of their products to address the needs of the Company's prospective customers. Accordingly, it is possible that new competitors or alliances among current and new competitors may emerge and rapidly gain significant market share. Further, competitive pressures could require the Company to reduce the price of its software licenses and related services, which could materially adversely affect the Company's business, operating results and financial condition. There can be no assurance that the Company will be able to compete successfully against current and future competitors, and the failure to do so would have a material adverse effect upon the Company's business, operating results and financial condition.
INTELLECTUAL PROPERTY, PROPRIETARY RIGHTS AND LICENSES
The Company regards certain features of its internal operations, software and documentation as confidential and proprietary, and relies on a combination of contract and trade secret laws and other measures to protect its proprietary intellectual property. The Company has no patents and, under existing copyright laws, has only limited protection. The Company believes that, due to the rapid rate of technological change in the computer software industry, trade secret and copyright protection are less significant than factors such as knowledge, ability and experience of the Company's employees, frequent product enhancements and timeliness and quality of support services.
The Company provides its products to customers under exclusive licenses, which generally are non-transferable and have a perpetual term. The Company generally licenses its products solely for the customer's internal operations and only on designated computers. In certain circumstances, the Company makes enterprise-wide licenses available for select applications. Although the Company currently provides only object code to its customers, the Company historically provided source code to its customers for several products and has escrowed, and continues to escrow, its source code for the benefit of all customers. A misappropriation or other misuse of the Company's intellectual property, including source code previously delivered to customers, could have an adverse effect on the Company.
From time to time, the Company licenses software from third parties for use with its products. Typically, the Company resells such third-party software products as an integrated part of one or more of the applications included in HTE's Total Enterprise Solution. If any third party license agreement for such software product was to terminate and the Company was not able to obtain another license or otherwise acquire comparable technology or software, the Company would be adversely affected.
EMPLOYEES
As of December 31, 2000, the Company employed 531 people, including 59 in sales and marketing, 203 in product development, 123 in customer support and field services, 95 in professional services and 51 in administration. The Company's success will depend in large part upon its ability to continue to attract and retain qualified employees. None of the Company's employees are represented by a labor union or are subject to a collective bargaining agreement. The Company believes that its relations with its employees are good.
ITEM 2.
ITEM 2. PROPERTIES
In June 1997, the Company moved its headquarters to Lake Mary, Florida, where it leases an aggregate of approximately 87,000 square feet in the Heathrow International Business Center. Administrative, marketing, product development and customer support and service operations are located in this space. The initial lease term for the new headquarters expires in June 2007, and may be renewed by HTE for up to three consecutive renewal terms of five years each. In connection with the lease, HTE entered into an expansion agreement pursuant to which it may, at its option during the term of the main lease, lease two additional office buildings in the Heathrow Business Center, each of which would contain approximately 27,000 to 40,000 gross square feet of space.
The Company also occupies approximately 17,000 square feet of space in Fort Lauderdale, Florida, pursuant to a lease expiring in November 2001; approximately 4,400 square feet of space in Spokane, Washington, pursuant to a lease expiring December 2002; approximately 6,500 square feet of space in Edmonton, Alberta, pursuant to a lease expiring August 2002; approximately 2,300 square feet of space in Vienna, Virginia, pursuant to a lease expiring March 2003; and approximately 3,700 square feet of office space in Southbury, Connecticut, pursuant to a lease expiring December 2001.
The Company also leases an aggregate of approximately 2,000 additional square feet of office space in various other locations, which are used mostly for sales offices and additional training facilities.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On January 13, 2000, an arbitration panel composed of three Washington State attorneys rendered a final award against the Company for $5,174,000 in a dispute between the Company and the City of Tacoma, Washington. This award was recorded by the Company during the year ended December 31, 1999, and remained in accrued liabilities in the accompanying consolidated balance sheet as of December 31, 1999. In June 2000, the Company entered into a settlement agreement with the City of Tacoma, Washington and the Company's insurance carriers, settling all claims and litigation proceedings arising from the binding arbitration award. Under the terms of the settlement, the arbitration award was reduced to approximately $4,250,000. Of that amount, $1,500,000 was paid by insurance proceeds. The Company agreed to pay the remaining $2,750,000 as follows: (i) $1,500,000, which was paid in June 2000; (ii) $625,000 due June 1, 2001; and (iii) $625,000 due June 1, 2002. The last two payments are subject to a secured promissory note executed by the Company in favor of the City of Tacoma, Washington. Interest accrues on the note at 9 percent per annum and is payable concurrently with the principal payments. The note is secured by 750,000 shares of DemandStar.com, Inc. ("DemandStar") Series A preferred stock and 1,250,000 shares of DemandStar common stock held by the Company. Pursuant to the merger between DemandStar and Onvia.com, Inc. ("Onvia"), these shares will be exchanged for 1,200,000 shares of Onvia common stock. See discussion of this transaction in "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Recent Rights Offering of DemandStar.com, Inc. and Subsequent Event". The note is recorded as a note payable in the accompanying consolidated balance sheet as of December 31, 2000. Accrued interest of $61,000 is included in accrued liabilities in the accompanying consolidated balance sheet as of December 31, 2000.
In regard to the binding arbitration proceeding between the Company and Montana Power Company ("MPC") which commenced on February 3, 1999, a settlement and mutual release agreement was executed by the parties in January 2000. This settlement agreement allows for a complete mutual release and discharge of any and all outstanding obligations between the Company and MPC under the Software License and Services Agreement and the arbitration proceeding. The Company retained all of the $1,535,000 paid by MPC to the Company for software, hardware and services. As a result of this settlement, the Company wrote off approximately $754,000 in revenue and $581,000 in capitalized costs related to the Software License and Services Agreement in the fourth quarter of 1999, which resulted in an after-tax charge of $819,000. This settlement did not involve any cash payment by the Company to MPC.
The Company is a party to some contracts, which may result in financial penalties in the event of non-performance. Management anticipates that these penalties will not have a material adverse effect on the Company's financial position or operating results.
The Company is involved in various other legal actions arising in the normal course of business, both as claimant and defendant. While it is not possible to determine with certainty the outcome of these matters, in the opinion of management, the eventual resolution of these claims and actions outstanding will not have a material adverse effect on the Company's financial position or operating results.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 16, 2000, at the Company's Annual Meeting of Shareholders, the following was approved:
1) The election of two members to the Company's Board of Directors to hold office until the 2003 Annual Meeting of Shareholders or until their successors are duly elected and qualified;
2) An increase in the number of shares of the Company's common stock reserved for issuance under the Company's 1997 Employee Stock Purchase Plan from 600,000 to 800,000 shares;
3) An increase in the number of shares of the Company's common stock reserved for issuance under the Company's 1997 Employee Incentive Compensation Plan from 2,908,000 to 3,700,000 shares;
4) Denial of the proposal to confer voting rights on 5,618,952 shares of the Company's common stock acquired by Tyler Technologies, Inc. from Dennis Harward and Jack Harward in a control share acquisition.
The total number of shares entitled to vote at this meeting was 11,939,587, and the tabulation of proxies was as follows:
ELECTION OF DIRECTORS:
SHARE INCREASE UNDER 1997 EMPLOYEE STOCK PURCHASE PLAN:
SHARE INCREASE UNDER 1997 EMPLOYEE INCENTIVE COMPENSATION PLAN:
CONFERRING VOTING RIGHTS ON 5,618,952 SHARES HELD BY TYLER TECHNOLOGIES, INC.:
No other business was brought before the Annual Meeting.
The Company's 2001 Annual Meeting of Shareholders is scheduled for June 28, 2001. Proposals of shareholders intended to be presented at the 2001 Annual Meeting of Shareholders must be received by the Company no later than April 20, 2001 to be included in the Company's Proxy Statement and form of proxy related to that meeting. Shareholders who intend to present a proposal at the 2001 Annual Meeting of Shareholders without inclusion of such proposal in the Company's proxy materials are required to provide notice of such proposal to the Company no later than April 20, 2001. In submitting proposals, shareholders must comply with the rules and regulations promulgated by the Securities and Exchange Commission ("SEC") relating to shareholder proposals, as well as the Company's advance notice provisions contained in its Articles of Incorporation. Shareholder proposals should be addressed to L. A. Gornto, Jr., Executive Vice President, Secretary and General Counsel, H.T.E., Inc., 1000 Business Center Drive, Lake Mary, Florida 32746.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ National Market System under the symbol "HTEI". The number of shareholders of record as of March 8, 2001 was 198; however, the number of beneficial holders is approximately 3,406. The closing price per share on that date was $1.563.
The table below sets forth information, for each quarter in 1999 and 2000, concerning the high and low sales prices of a share of the Company's common stock. Quotations for such periods are as reported by NASDAQ for National Market Issues.
Such market quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission and may not necessarily represent actual transactions. The transfer agent for HTE's common stock is Continental Stock Transfer and Trust Company.
The Company has not paid cash dividends in the past and does not intend to pay cash dividends in the foreseeable future. The Company presently intends to retain earnings for use in its business with any future decision to pay cash dividends dependent on its growth, profitability, financial condition and other factors the Board of Directors may deem relevant.
USE OF PROCEEDS FROM INITIAL PUBLIC OFFERING
The Company's registration statement for its initial public offering of common stock (SEC File No. 333-22637) was declared effective by the SEC on June 10, 1997. A total of 5,750,000 shares of common stock (including the underwriters' over-allotments) were registered for offer and sale for an aggregate offering price of $31,625,000. The Company's representatives for the offering were Volpe Brown Whelan & Company and Janney Montgomery Scott Inc. Of the shares of common stock initially offered, 3,900,000 shares were sold by the Company for gross proceeds of $21,450,000 and 1,100,000 shares were sold by certain selling shareholders for gross proceeds of $6,050,000. In July 1997, the underwriters exercised their option to purchase 750,000 additional shares of common stock to cover over-allotments, for gross proceeds to the Company of $4,125,000.
The net proceeds from the sale of the 4,650,000 shares of common stock offered by the Company were approximately $22.6 million (includes the underwriters' over-allotment option of 750,000 shares which were exercised in July 1997), after deducting underwriting commissions and discounts of $1.8 million and other expenses of $1.2 million, for an aggregate total of $3.0 million. The selling shareholders paid their respective underwriters commissions ($424,000), while the Company paid the remaining discounts and expenses on their behalf. The Company used a portion of the proceeds ($2.3 million) to repay a revolving credit facility, which matured on June 30, 1998, and bore interest at the fluctuating prime rate plus 1.25%. The Company also paid the $300,000 aggregate principal balance on notes payable to related parties which arose from the purchase of Bellamy Software Ltd. in 1996. The sum of $624,000 in accrued dividends was paid to holders of mandatorily redeemable preferred stock. Additionally, $3.6 million was used for the acquisitions of Kb Systems, Inc.,
JALAN, Inc., Vanguard Management and Information Systems, Inc. and Information on Demand, Inc. The Company used all of the remaining net proceeds to fund working capital and investment requirements.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Form 10-K. The following selected consolidated financial data of the Company for the year ended December 31, 1996, and for the nine months ended December 31, 1995, have been derived from unaudited consolidated financial statements of the Company. In the Company's opinion, such unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments (except for the effect of the change in the estimated life of capitalized computer software development costs), necessary for a fair presentation of the financial position and results of operations for such periods. The selected consolidated financial data of the Company as of December 31, 1996, 1997 and 1998, and for the nine months ended December 31, 1996 and for the year ended December 31, 1997, have been derived from consolidated financial statements audited by Arthur Andersen LLP. The selected consolidated financial data of the Company as of December 31, 1999 and 2000, and for the years ended December 31, 1998, 1999 and 2000, have been derived from and are qualified by reference to the Company's Consolidated Financial Statements audited by Arthur Andersen LLP, independent certified public accountants, included elsewhere herein.
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(1) Prior to their acquisitions, certain businesses acquired by the Company were taxed as S corporations. The pro forma net income (loss) reflects historical data as adjusted for all income being taxed as if it were earned by a C corporation. (2) Pro forma net income per share is determined by dividing pro forma net income by the pro forma weighted-average number of shares outstanding during the period. Pro forma weighted-average number of shares outstanding for all periods reported were determined assuming the conversion of the mandatorily redeemable preferred stock and the mandatorily redeemable Class C common stock into the Company's common stock as of the date it was first issued. Common share equivalents included in the diluted calculation are computed using the treasury stock method and consist of common stock which may be issuable upon the exercise of outstanding stock options, when dilutive.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company develops, markets, implements and supports fully integrated enterprise-wide software applications designed specifically for public sector organizations, including state, county and city governments and other municipal agencies and for public and private utilities. For over 19 years, the Company has strategically focused on providing software applications exclusively to middle market public sector organizations and utilities, and has established itself as a leading provider of software solutions to those markets. HTE's fully integrated enterprise-wide software applications are designed to fulfill the specific functional requirements of the public sector marketplace, such as improvement of delivery of services, reduction of costs, enhancement of revenue collection, operation within budgetary constraints, compliance with government regulations and improvement of overall operating efficiencies. The Company's Total Enterprise Solution currently includes more than 50 applications addressing six functional areas: financial management, community services, public safety, justice, utility management and K-12 school administration. The Company's products operate as integrated suites or as stand-alone applications and function with a variety of computer and network hardware, operating systems, database software and desktop applications provided by other vendors. As part of its strategy to provide a completely integrated solution to its customers, the Company also provides a variety of related services, including consulting, implementation, education and training and the provision and configuration of hardware systems. In 2000, the Company began outsourcing the sale and configuration of hardware systems through an agreement with Vertical VAR. Under this agreement, the Company will receive a royalty on hardware sales to HTE customers by Vertical VAR.
The Company provides its software applications and business solutions to customers in public sector and utility markets under license agreements and service contracts. HTE's revenues are generated principally from (i) software licenses that grant customers the right to use the Company's software products, (ii) professional services derived from a variety of services related to the implementation of the Company's software, including project management, custom programming, consulting, conversion and education programs, systems planning and integration and other services, (iii) sales of hardware such as computers, data collection equipment, peripherals and related network and communications products purchased from third-parties and sold by the Company to its software customers, (iv) maintenance and other revenues which include revenues associated with annual software maintenance and support services, and (v) resource management revenues derived from IT outsourcing services designed to assume total or partial control and responsibility of customers' information resources, generally on a long-term basis.
The Company recognizes revenues from software licenses when the related license agreement has been executed and the software has been shipped to the customer, provided that no significant Company obligations remain related to the software license and collection of the receivable is deemed probable. The Company typically contracts professional services on a time and materials basis and such revenues are recognized as services are performed. Hardware revenues are recognized at the time the products are shipped. The Company drop-ships hardware directly to the customer and does not carry hardware inventory. Revenues from maintenance and other are recognized ratably over the term of the applicable maintenance agreement. Resource management revenues are recognized monthly as services are performed, according to the contractually agreed upon rate.
The sales cycle for the Company's systems is typically six to 18 months from initial contact to contract signing. The product delivery cycle varies based on the customer's implementation plan. Complete product implementation typically occurs within six to nine months, but can extend beyond nine months on contracts involving significant and continuing customer service requirements, particularly with enterprise-wide solutions.
Accordingly, the product delivery cycle depends upon the combination of products purchased and the defined implementation plan.
The Company accounts for costs related to computer software in accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed." All costs incurred to establish technological feasibility of a software product are
charged to research and development expense as incurred. Technological feasibility is established when the Company has completed all planning, designing, coding and testing activities that are necessary to establish that the product can be produced to meet its design specifications, including functions, features and technical performance requirements. Costs of producing product masters incurred subsequent to establishing technological feasibility are capitalized and are amortized on a straight-line basis over three years once the product is available for general release to customers. The Company ceases capitalization when the product is available for general release to customers.
The Company derives substantially all of its revenues from domestic operations. In November 1996, HTE established a presence in Canada through an acquisition.
The Company's revenues and operating results are subject to quarterly and other fluctuations resulting from a variety of factors, including the budgeting and purchasing practices of its customers, the length of the customer evaluation process for the Company's solutions, the timing of customer system conversions, and the Company's sales practices. The Company has often recognized a substantial portion of its revenues during the last month of each quarter. Since a significant portion of the Company's operating expenses is relatively fixed, the Company may not be able to adjust or reduce spending in response to sales shortfalls or delays. These factors can cause significant variations in operating results from quarter to quarter. The Company believes that quarter to quarter comparisons of its financial results are not necessarily meaningful and should not be relied upon as an indication of its future performance.
RECENT RIGHTS OFFERING OF DEMANDSTAR.COM, INC. AND SUBSEQUENT EVENT
Pursuant to a registration statement on Form S-1 (File No. 333-93445), as amended, filed with the SEC and which became effective March 27, 2000, DemandStar, a wholly-owned subsidiary of the Company, completed a rights offering of its common stock as of May 1, 2000. This rights offering was essentially DemandStar's initial public offering. Rights to purchase an aggregate of 6,374,080 shares of common stock were exercised for an aggregate purchase price of $6.4 million. As a result, only DemandStar's operating results through April 2000 are included in the Company's consolidated financial statements in this report since the Company's ownership of DemandStar was reduced to below twenty percent as of May 1, 2000.
On March 2, 2001, the shareholders of DemandStar approved at a special shareholders meeting an acquisition of DemandStar by Onvia pursuant to which DemandStar became a wholly-owned subsidiary of Onvia effective March 5, 2001. Shareholders of outstanding DemandStar common stock were issued 0.60 of a share of Onvia's common stock for every share of DemandStar common stock they held (representing approximately 6.4% of Onvia's outstanding common stock following the merger), and outstanding shares of DemandStar common stock were canceled. Cash was paid to DemandStar shareholders in lieu of fractional shares of Onvia common stock. The Company was issued a total of 1,200,000 shares of Onvia common stock in respect of the common stock and preferred stock the Company held in DemandStar.
FUTURE ACQUISITIONS
Over the past six years, the Company has supplemented its internal growth with nine acquisitions, six of which have occurred since December 1997. The Company intends to continue its growth strategy and expects growth from acquisitions to complement internally generated growth. The Company views acquisitions as a means of acquiring technology and industry expertise thereby expanding the variety of enterprise-wide software applications the Company offers for sale and servicing, broadening its customer base and expanding internationally. The Company believes that the public sector application vendor market is highly fragmented with many small point solution companies and that the industry is currently entering a period of consolidation. The Company intends to pursue acquisition opportunities which help it to accomplish its objective of becoming the leading provider of enterprise-wide IT solutions to the public sector.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of total revenues represented by certain revenue, expense and income items:
Comparison of Year Ended December 31, 2000 and December 31, 1999
Revenues
The Company's total revenues decreased by 34% to $63.5 million for the year ended December 31, 2000, from $96.2 million for the year ended December 31, 1999.
Software License Revenues. Revenues from software licenses decreased 54% to $11.3 million for the year ended December 31, 2000, compared to $24.6 million for the year ended December 31, 1999. As a percentage of total revenues, software license revenues decreased to 17.7% for the year ended December 31, 2000, from 25.6% for the year ended December 31, 1999. The dollar and percentage decreases resulted primarily from the long sales cycle associated with governmental customers, combined with the general slowdown across the software industry related to Y2K.
Professional Services Revenues. Revenues from professional services decreased 48% to $14.9 million for the year ended December 31, 2000, from $28.6 million for the year ended December 31, 1999. As a percentage of total revenues, professional services revenues decreased to 23.5% for the year ended December 31, 2000, from 29.7% for the year ended December 31, 1999. The dollar and percentage decreases were related to a decrease in professional services backlog related to 1999 and 2000 contracts.
Hardware Revenues. Hardware revenues decreased 75% to $3.7 million for the year ended December 31, 2000, from $14.9 million for the year ended December 31, 1999. As a percentage of total revenues, hardware revenues decreased to 5.9% for the year ended December 31, 2000, from 15.5% for the year ended December 31, 1999. The dollar and percentage decreases were primarily due to a smaller number of customers who required additional hardware with software purchases. The Company is also transitioning out of the hardware business and has entered into an agreement with Vertical VAR. Under this agreement, the Company will receive a royalty on hardware sales to HTE customers by Vertical VAR.
Maintenance and Other Revenues. Revenues from maintenance and other increased 23% to $31.6 million for the year ended December 31, 2000, from $25.8 million for the year ended December 31, 1999. As a percentage of total revenues, maintenance and other revenues increased to 49.8% for the year ended December 31, 2000, from 26.8% for the year ended December 31, 1999. The dollar and percentage increases were primarily due to maintenance contracts associated with new software licenses booked in 1998, 1999 and 2000, customer system upgrades and price increases in the fees charged for annual maintenance. In addition, the increase as a percentage of total revenues was due to lower software license and hardware revenues.
Resource Management Revenues. Revenues from resource management decreased 14% to $2.0 million for the year ended December 31, 2000, from $2.3 million for the year ended December 31, 1999. As a percentage of total revenues, resource management revenues increased to 3.1% for the year ended December 31, 2000, from 2.4% for the year ended December 31, 1999. The dollar decrease was primarily related to the conversion of an outsourcing customer to an in-house customer. The increase in resource management revenues as a percentage of total revenues was primarily related to lower software license and hardware revenues.
Cost of Revenues
Cost of Software License Revenues. Cost of software licenses decreased 28% to $5.4 million for the year ended December 31, 2000, from $7.5 million for the year ended December 31, 1999. As a percentage of software license revenues, cost of software licenses increased to 47.8% for the year ended December 31, 2000, from 30.4% for the year ended December 31, 1999. The dollar decrease was primarily due to lower software license revenues. The increase in the cost of software licenses as a percentage of software license revenues was primarily due to relatively fixed computer software development amortization costs with lower software license revenues and sales of third party products related to public safety applications, which typically carry a higher cost of sale.
Cost of Professional Services Revenues. Cost of professional services decreased 32% to $11.7 million for the year ended December 31, 2000, from $17.3 million for the year ended December 31, 1999. As a percentage of professional services revenues, cost of professional services increased to 78.4% for the year ended December 31, 2000, from 60.5% for the year ended December 31, 1999. The dollar decrease was directly related to decreased professional services revenues. The increase in the cost of professional services as a percentage of professional services revenues is primarily due to lower professional services revenues with a limited decrease in employee related costs.
Cost of Hardware Revenues. Cost of hardware decreased 74% to $3.2 million for the year ended December 31, 2000, from $12.4 million for the year ended December 31, 1999. As a percentage of hardware revenues, cost of hardware increased to 85.3% for the year ended December 31, 2000, from 83.2% for the year ended December 31, 1999. The dollar decrease was directly related to decreased hardware revenues. The increase in the cost of hardware as a percentage of hardware revenues was primarily due to the mix of equipment sold and the lower margins associated with smaller contracts.
Cost of Maintenance and Other Revenues. Cost of maintenance and other decreased 10% to $9.3 million for the year ended December 31, 2000, from $10.4 million for the year ended December 31, 1999. As a percentage of maintenance and other revenues, cost of maintenance and other decreased to 29.5% for the year ended December 31, 2000, from 40.2% for the year ended December 31, 1999. The dollar and percentage decreases were primarily related to more efficient use of existing resources and improved processes.
Cost of Resource Management Revenues. Cost of resource management decreased 19% to $1.2 million for the year ended December 31, 2000, from $1.4 million for the year ended December 31, 1999. As a percentage of resource management revenues, cost of resource management decreased to 59.7% for the year ended December 31, 2000, from 63.3% for the year ended December 31, 1999. The slight dollar and percentage decreases were primarily related to the conversion of an outsourcing customer to an in-house customer, partially offset by costs associated with a new outsourcing contract, which began in July 1999.
Research and Development Expenses. Research and development expenses decreased 26% to $14.2 million for the year ended December 31, 2000, from $19.3 million for the year ended December 31, 1999. As a percentage of total revenues, research and development increased to 22.3% for the year ended December 31, 2000, from 20.1% for the year ended December 31, 1999. The dollar decrease was primarily due to a reduction in the number of contractors used in 2000, along with a reduction in workforce. The increase in research and development expenses as a percentage of total revenues was due to lower software license and hardware revenues.
Sales and Marketing Expenses. Sales and marketing expenses decreased 40% to $12.2 million for the year ended December 31, 2000, from $20.1 million for the year ended December 31, 1999. As a percentage of total revenues, sales and marketing decreased to 19.2% for the year ended December 31, 2000, from 20.9% for the year ended December 31, 1999. The dollar and percentage decreases were primarily related to lower sales and a decrease in the resources required to support the sales effort. The Company's sales team has recently initiated programs to refocus attention on its existing base of 2,100 offices, agencies, and utility companies in selected traditionally higher opportunity states.
General and Administrative Expenses. General and administrative expenses decreased 28% to $13.5 million for the year ended December 31, 2000, from $18.8 million for the year ended December 31, 1999. As a percentage of total revenues, general and administrative expenses increased to 21.2% for the year ended December 31, 2000, from 19.5% for the year ended December 31, 1999. The dollar decrease was primarily due to an effort by management to reduce and control expenses by improving efficiencies. The increase in general and administrative expenses as a percentage of total revenues was due to lower software license and hardware revenues.
Contract Judgement and Settlement, Employee Termination Benefits and Other Costs. Employee termination benefits and other costs were $(1.1) million, or (1.8)% of total revenues, for the year ended December 31, 2000. This amount primarily represents $(2.2) million for the reversal of previously expensed one-time charges primarily related to the reduced Tacoma settlement, partially offset by $1.1 million of costs associated with a workforce reduction, discontinuance of various product lines and the closing of offices. During the year ended December 31, 1999, the comparable costs were $12.9 million, or 13.4% of total revenues. These costs primarily include $7.5 million for contract judgement and settlement, $2.5 million for employee severance packages and a non-cash charge of $1.1 million for discontinuation of various product lines. The remaining charge of $1.8 million primarily included other costs associated with the discontinuation of product lines and certain lease termination costs.
Comparison of Year Ended December 31, 1999 and December 31, 1998
Revenues
The Company's total revenues decreased by 3% to $96.2 million for the year ended December 31, 1999, from $98.9 million for the year ended December 31, 1998.
Software License Revenues. Revenues from software licenses decreased 43% to $24.6 million for the year ended December 31, 1999, from $43.3 million for the year ended December 31, 1998. As a percentage of total revenues, software license revenues decreased to 25.6% for the year ended December 31, 1999, from 43.7% for the year ended December 31, 1998. The dollar and percentage decreases resulted primarily from a general slowdown across the software industry as businesses, including governments, adopted a "wait and see" attitude towards Y2K. In addition, the decrease as a percentage of total revenues resulted from increased service revenues due to an effort to reduce the services backlog related to 1998 bookings.
Professional Services Revenues. Revenues from professional services increased 37% to $28.6 million for the year ended December 31, 1999, from $20.9 million for the year ended December 31, 1998. As a percentage of total revenues, professional services revenues increased to 29.7% for the year ended December 31, 1999, from 21.1% for the year ended December 31, 1998. The dollar and percentage increases in professional services were directly related to the growth in revenue generating (billable) staff and related revenue stemming from the increase in license fees and service offerings in 1998. In addition, the increase as a percentage of total revenues was due to lower software license revenues.
Hardware Revenues. Hardware revenues decreased 4% to $14.9 million for the year ended December 31, 1999, from $15.5 million for the year ended December 31, 1998. As a percentage of total revenues, hardware revenues decreased to 15.5% for the year ended December 31, 1999, from 15.7% for the year ended December 31, 1998. The dollar and percentage decreases were primarily due to the decrease in software license purchases. The majority of hardware sales are made in conjunction with software license purchases.
Maintenance and Other Revenues. Revenues from maintenance and other increased 45% to $25.8 million for the year ended December 31, 1999, from $17.8 million for the year ended December 31, 1998. As a percentage of total revenues, maintenance and other revenues increased to 26.8% for the year ended December 31, 1999, from 18.0% for the year ended December 31, 1998. The dollar and percentage increases were primarily due to maintenance contracts associated with new software licenses booked in 1998, customer system upgrades and price increases in the fees charged for annual maintenance. In addition, the increase as a percentage of total revenues was due to lower software license revenues.
Resource Management Revenues. Revenues from resource management increased 57% to $2.3 million for the year ended December 31, 1999, from $1.4 million for the year ended December 31, 1998. As a percentage of total revenues, resource management revenues increased to 2.4% for the year ended December 31, 1999, from 1.5% for the year ended December 31, 1998. The dollar and percentage increases were primarily related to the sale of a new outsourcing contract in July 1999, along with the sale of additional services and an annual price increase on the existing contract.
Cost of Revenues
Cost of Software License Revenues. Cost of software licenses decreased 15% to $7.5 million for the year ended December 31, 1999, from $8.8 million for the year ended December 31, 1998. As a percentage of software license revenues, cost of software licenses increased to 30.4% for the year ended December 31, 1999, from 20.4% for the year ended December 31, 1998. The dollar decrease was primarily related to the decrease in software license revenues. The increase in the cost of software licenses as a percentage of software license revenues resulted primarily from an increased number of third-party software licenses, specifically module enhancements such as report writers and imaging products and third-party software related to public safety applications which typically carry a higher cost of sale than other third-party products. In addition, the percentage increase is also due to relatively fixed computer software development amortization costs with lower software license revenues.
Cost of Professional Services Revenues. Cost of professional services increased 29% to $17.3 million for the year ended December 31, 1999, from $13.4 million for the year ended December 31, 1998. As a percentage of professional services revenues, cost of professional services decreased to 60.5% for the year ended December 31, 1999, from 64.2% for the year ended December 31, 1998. The dollar increase was directly related to increased professional services revenues and expanded offerings of full service professional services. The decrease in the cost of professional services as a percentage of professional services revenues is primarily due to an increase in the billable percentage of employees as new staff increased productivity.
Cost of Hardware Revenues. Cost of hardware decreased 5% to $12.4 million for the year ended December 31, 1999, from $13.1 million for the year ended December 31, 1998. As a percentage of hardware revenues, cost of hardware decreased to 83.2% for the year ended December 31, 1999, from 84.1% for the year ended December 31, 1998. The dollar and slight percentage decreases were related to the decreased hardware sales and the mix of equipment sold.
Cost of Maintenance and Other Revenues. Cost of maintenance and other increased 3% to $10.4 million for the year ended December 31, 1999, from $10.0 million for the year ended December 31, 1998. As a percentage of maintenance and other revenues, cost of maintenance and other decreased to 40.2% for the year ended December 31, 1999, from 56.4% for the year ended December 31, 1998. The dollar increase was primarily due to increased personnel to enhance products and support a larger client base. The decrease in the cost of maintenance and other as a percentage of maintenance and other revenue was related to more efficient use of existing resources and improved processes.
Cost of Resource Management Revenues. Cost of resource management increased 57% to $1.4 million for the year ended December 31, 1999, from $918,000 for the year ended December 31, 1998. As a percentage of resource management revenues, cost of resource management remained relatively constant at 63.3% and 63.4% for the years ended December 31, 1999 and 1998, respectively. The dollar increase was primarily related to costs associated with a new outsourcing contract which began in July 1999 and additional services.
Research and Development Expenses. Research and development expenses increased 37% to $19.3 million for the year ended December 31, 1999, from $14.0 million for the year ended December 31, 1998. As a percentage of total revenues, research and development increased to 20.1% for the year ended December 31, 1999, from 14.2% for the year ended December 31, 1998. The dollar and percentage increases were primarily due to an increased focus on product enhancements, which resulted in lower capitalization of software development costs and increased expense. In addition, the increase as a percentage of total revenues was due to lower software license revenues.
Sales and Marketing Expenses. Sales and marketing expenses decreased 2% to $20.1 million for the year ended December 31, 1999, from $20.5 million for the year ended December 31, 1998. As a percentage of total revenues, sales and marketing remained relatively constant at 20.9% and 20.8% for the years ended December 31, 1999 and 1998, respectively. The slight dollar decrease was attributable to a decrease in the resources required to support the sales effort.
General and Administrative Expenses. General and administrative expenses increased 20% to $18.8 million for the year ended December 31, 1999, from $15.6 million for the year ended December 31, 1998. As a percentage of total revenues, general and administrative expenses increased to 19.5% for the year ended December 31, 1999, from 15.8% for the year ended December 31, 1998. The dollar and percentage increases were due to the recent changes in management and the Company's strategy. These expenses consist primarily of additional staffing, increased allowance for doubtful accounts, additional facility related expenses and additional computer equipment and software required to build the infrastructure to support the Company's growth of services revenue. In addition, the increase as a percentage of total revenues was due to lower software license revenues. Management anticipates that general and administrative expenses as a percentage of total revenues will decrease in future years and that current trends are not indicative of the future.
Contract Judgement and Settlement, Employee Termination Benefits and Other Costs. Contract judgement and settlement, employee termination benefits and other costs were $12.9 million, or 13.4% of total revenues, for the year ended December 31, 1999. These costs consist primarily of $7.5 million for contract judgement and settlement, $2.5 million for employee severance packages and a non-cash charge of $1.1 million for discontinuation of various product lines. The remaining charge of $1.8 million primarily included other costs associated with the discontinuation of product lines and certain lease termination costs. In 1998, the Company recorded a charge of $552,000, or 0.6% of total revenue, related to the Company's planned underwritten offering, which was terminated on October 15, 1998.
Comparison of Year Ended December 31, 1998 and December 31, 1997
Revenues
The Company's total revenues increased by 50% to $98.9 million for the year ended December 31, 1998, from $66.1 million for the year ended December 31, 1997.
Software License Revenues. Revenues from software licenses increased 62% to $43.3 million for the year ended December 31, 1998, from $26.8 million for the year ended December 31, 1997. As a percentage of
total revenues, software license revenues increased to 43.7% for the year ended December 31, 1998, from 40.5% for the year ended December 31, 1997. The dollar and percentage increases resulted primarily from an increased number of applications available for sale and an increased investment in sales and marketing.
Professional Services Revenues. Revenues from professional services increased 44% to $20.9 million for the year ended December 31, 1998, from $14.5 million for the year ended December 31, 1997. As a percentage of total revenues, professional services revenues decreased to 21.1% for the year ended December 31, 1998, from 22.0% for the year ended December 31, 1997. The dollar increase in professional services was directly related to the growth in staff and related revenue stemming from the increase in license fees and service offerings. The decrease in professional services revenues as a percentage of total revenues was primarily due to changes in the mix of products, along with an increased backlog of services revenue associated with license fee bookings.
Hardware Revenues. Hardware revenues increased 32% to $15.5 million for the year ended December 31, 1998, from $11.8 million for the year ended December 31, 1997. As a percentage of total revenues, hardware revenues decreased to 15.7% for the year ended December 31, 1998, from 17.8% for the year ended December 31, 1997. The dollar increase was primarily due to the increased number of license fee contracts executed that require the installation of hardware. The decrease in hardware revenue as a percentage of total revenue was primarily due to stronger growth in software license revenues.
Maintenance and Other Revenues. Revenues from maintenance and other increased 42% to $17.8 million for the year ended December 31, 1998, from $12.6 million for the year ended December 31, 1997. As a percentage of total revenues, maintenance and other revenues decreased to 18.0% for the year ended December 31, 1998, from 19.0% for the year ended December 31, 1997. The dollar increase was primarily due to maintenance contracts associated with new software licenses, customer system upgrades and price increases in the fees charged for annual maintenance. The decrease in maintenance and other revenues as a percentage of total revenues was primarily due to the growth of software license revenues exceeding the growth of the maintenance backlog, which is recognized ratably over the maintenance term.
Resource Management Revenues. Revenues from resource management increased 223% to $1.4 million for the year ended December 31, 1998, from $448,000 for the year ended December 31, 1997. As a percentage of total revenues, resource management revenues increased to 1.5% for the year ended December 31, 1998, from 0.7% for the year ended December 31, 1997. The dollar and percentage increases were primarily due to this division beginning operations in the fourth quarter of 1997.
Cost of Revenues
Cost of Software License Revenues. Cost of software licenses increased by 67% to $8.8 million for the year ended December 31, 1998, compared to $5.3 million for the year ended December 31, 1997. As a percentage of software license revenues, cost of software licenses increased to 20.4% for the year ended December 31, 1998, from 19.7% for the year ended December 31, 1997. The dollar and percentage increases resulted primarily from an increased number of third party software licenses, specifically module enhancements such as report writers and imaging products.
Cost of Professional Services Revenues. Cost of professional services increased 60% to $13.4 million for the year ended December 31, 1998, from $8.4 million for the year ended December 31, 1997. As a percentage of professional services revenues, cost of professional services increased to 64.2% for the year ended December 31, 1998, from 57.5% for the year ended December 31, 1997. The dollar increase was directly related to increased professional services revenues and expanded offerings of full service professional services. The increase in the cost of professional services as a percentage of professional services revenues was primarily due to lower utilization rates resulting from an increased number of non-billable consultants in training coupled with the use of high cost third party consultants.
Cost of Hardware Revenues. Cost of hardware increased 42% to $13.1 million for the year ended December 31, 1998, from $9.2 million for the year ended December 31, 1997. As a percentage of hardware revenues, cost of hardware increased to 84.1% for the year ended December 31, 1998, from 78.3% for the year
ended December 31, 1997. The dollar increase was related to the increased hardware sales and the mix of equipment sold. The increase in the cost of hardware as a percentage of hardware revenues was primarily due to the higher volume and smaller size of new contracts signed.
Cost of Maintenance and Other Revenues. Cost of maintenance and other increased 68% to $10.0 million for the year ended December 31, 1998, from $6.0 million for the year ended December 31, 1997. As a percentage of maintenance and other revenues, cost of maintenance and other increased to 56.4% for the year ended December 31, 1998, from 47.6% for the year ended December 31, 1997. The dollar and percentage increases were primarily due to investment in a new customer interaction software system and increased personnel to enhance products and support a larger client base.
Cost of Resource Management Revenues. Cost of resource management increased 168% to $918,000 for the year ended December 31, 1998, from $343,000 for the year ended December 31, 1997. As a percentage of resource management revenues, cost of resource management decreased to 63.4% for the year ended December 31, 1998, from 76.6% for the year ended December 31, 1997. The dollar increase was primarily due to this division beginning operations in the fourth quarter of 1997. The decrease in the cost of resource management as a percentage of resource management revenues was primarily due to more effective use of existing resources.
Research and Development Expenses. Research and development expenses increased 70% to $14.0 million for the year ended December 31, 1998, from $8.3 million for the year ended December 31, 1997. As a percentage of total revenues, research and development increased to 14.2% for the year ended December 31, 1998, from 12.5% for the year ended December 31, 1997. The dollar and percentage increases were primarily due to increased staffing levels and expenses for additional software and hardware required for the development of additional products and platforms.
Sales and Marketing Expenses. Sales and marketing expenses increased 78% to $20.5 million for the year ended December 31, 1998, from $11.5 million for the year ended December 31, 1997. As a percentage of total revenues, sales and marketing increased to 20.8% for the year ended December 31, 1998, from 17.4% for the year ended December 31, 1997. The dollar and percentage increases were attributable to the Company's continued expansion of its direct sales force, increased marketing efforts, travel and other expenses related to the expected increased sales activity.
General and Administrative Expenses. General and administrative expenses increased 43% to $15.6 million for the year ended December 31, 1998, from $10.9 million for the year ended December 31, 1997. As a percentage of total revenues, general and administrative expenses decreased to 15.8% for the year ended December 31, 1998, from 16.5% for the year ended December 31, 1997. The dollar increase was due to additional staffing, additional facility related expenses and additional computer equipment and software required to build the infrastructure to support the Company's growth. The decrease in general and administrative expenses as a percentage of total revenue was primarily due to leveraging of existing resources.
Contract Judgement and Settlement, Employee Termination Benefits and Other Costs. Contract judgement and settlement, employee termination benefits and other costs include the non-recurring charges related to the Company's planned underwritten offering, which was terminated on October 15, 1998. These costs were $552,000 or 0.6% of total revenue for the year ended December 31, 1998, and were expensed in the fourth quarter of 1998. There were no comparable expenses in the year ended December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Prior to 1997, the Company funded its operations primarily through cash generated from operations, supplemented by borrowings under a bank line of credit and the private sale of equity securities. On June 11, 1997, the Company completed its initial public offering of common stock (the "IPO"). The Company received $22.6 million from the IPO, net of issuance costs. Cash flow provided by operating activities was $8.3 million and $3.5 million for the year ended December 31, 2000 and 1999, on net loss of $(3.4) million and $(14.9) million, respectively. Cash flow provided by (used in) operating activities was $3.5 million and $(3.3) million for the year ended December 31, 1999 and 1998, on net (loss) income of $(14.9) million and
$982,000, respectively. Cash flow (used in) provided by operating activities was $(3.3) million and $4.7 million for the year ended December 31, 1998 and 1997, on net income of $982,000 and $4.0 million, respectively.
Cash used in investing activities (capital expenditures, software development investments and acquisitions) totaled $5.4 million and $5.3 million during the year ended December 31, 2000 and 1999, respectively. Cash used in investing activities totaled $5.3 million and $7.9 million during the year ended December 31, 1999 and 1998, respectively. Cash used in investing activities totaled $7.9 million and $6.6 million during the year ended December 31, 1998 and 1997, respectively. In 2000, the Company spun-off DemandStar, a wholly owned subsidiary, which reduced cash by $923,000. The Company's capital expenditures of $1.7 million were primarily comprised of investments in equipment and related software. The Company made expenditures of $2.8 million in 2000 related to software development efforts for additional products and platforms. In 1999, the Company acquired certain assets of Information On Demand, Inc. for $1.0 million in cash. The Company's capital expenditures of $925,000 were primarily comprised of investments in equipment and related software. The Company made expenditures of $3.4 million in 1999 related to software development efforts for additional products and platforms. In 1998, the Company completed two cash purchase acquisitions: Jalan, Inc. and Vanguard Management and Information Systems, Inc. The Company's capital expenditures of $2.6 million were primarily comprised of investments in equipment and related software associated with increased staffing. In addition, the Company made significant investments in upgrading internal systems. The Company made expenditures of $4.7 million in 1998 related to software development efforts for additional products and platforms.
Net cash provided by financing activities was $24,000 in the year ended December 31, 2000, which related to the proceeds from sales of common stock through the Employee Stock Purchase Plan, stock option agreements and employment agreements, partially offset by common stock repurchased. Net cash provided by financing activities was $1.2 million in the year ended December 31, 1999, which related to the proceeds from sales of common stock through the Employee Stock Purchase Plan and stock option agreements. Net cash provided by financing activities was $167,000 in the year ended December 31, 1998, reflecting the proceeds from sales of common stock through the Employee Stock Purchase Plan and stock option agreements, partially offset by the payment of amounts due to stockholders related to the UCS acquisition, compared to cash provided of $19.5 million in the year ended December 31, 1997.
Based on current operating projections, the Company believes its cash balances and cash generated from operations will satisfy the Company's working capital and capital expenditure requirements for at least the next 12 months. In September 2000, the Company signed a Loan and Security Agreement with Silicon Valley Bank (the "Loan") for a line of credit of up to $5 million based on the Company's accounts receivable balance. The term of the Loan is for one year from the date of the Loan and bears interest at the bank's prime rate plus 2 percent. The Loan is collateralized by the assets of the Company and requires the Company to maintain a financial covenant related to tangible net worth. In the longer term or if the Company's current operating projections do not materialize, the Company may require additional sources of liquidity to fund future growth and operations. Such sources of liquidity may include additional equity offerings or debt financings.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF OUR STOCK
We operate in a rapidly changing environment that involves numerous risks, some of which are beyond our control. The following discussion highlights some of these risks.
We experience fluctuations in quarterly operating results related to significant contracts signed towards the end of the quarter.
Our revenues and operating results are subject to quarterly and other fluctuations resulting from a variety of factors. Such factors include the budgeting and purchasing practices of our customers, the length of customer evaluation processes for our solutions and the timing of customer system conversions. Because a substantial portion of revenues may not be generated until the end of each quarter, we may not be able to
adjust or reduce spending in response to sales shortfalls or delays. In addition, our expense levels are based, in significant part, on our expectations of future revenues and are therefore relatively fixed in the short term. If revenues fall below expectations, net income is likely to be adversely affected. These factors can cause significant variations in operating results from quarter to quarter. We believe that quarter to quarter comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of future performance.
We have had recent losses.
We experienced significant operating losses for the twelve months ended December 31, 2000 and 1999, and there is no guarantee that we will return to annual profitability in the near future. We realized net losses for the twelve months ended December 31, 2000 and 1999 of $3,381,000 and $14,866,000, respectively. Our revenues may not grow or continue at their current level.
Our business depends on acceptance of our products and services by governmental agencies through a regulated and protracted process.
Substantially all of our revenues to date have been attributable to sales of software and services rendered to state, county and city governments, other municipal agencies and publicly owned utilities. We expect that sales to public sector customers will continue to account for substantially all of our revenues in the future. The sales cycle associated with the purchase of our products is typically complex, lengthy and subject to a number of significant risks, including customers' budgetary constraints and governmental acceptance reviews over which we have little or no control.
For each contract with a public sector customer, we are typically subject to a protracted procurement process. The process can include one or more of the following hurdles:
- a detailed written response to product demonstrations;
- the design of software that addresses customer-specified needs;
- the integration of our products and third party products;
- political influences;
- award protests initiated by unsuccessful bidders; and
- changes in budgets or appropriations which are beyond our control.
Contracts with public sector customers are typically subject to procurement policies which may be onerous and may include profit limitations and rights of the agency to terminate for convenience or if funds are unavailable. Some public sector customers require liquidated damages for defective products and/or for delays or interruptions caused by system failures. Payments under some public sector contracts are subject to achieving implementation milestones, and we have had, and may in the future have, differences with customers as to whether milestones have been achieved.
Government organizations require compliance with various legal and other special considerations in the procurement process. The adoption of new or modified procurement regulations could increase costs to us of competing for sales or impact our ability to perform government contracts, which could adversely affect us. Any violation, intentional or otherwise, of these regulations could result in the imposition of fines, and/or debarment from award of additional government contracts which could have a material adverse effect on us.
Our business and operating results could suffer if we do not manage our growth effectively.
In the past, we have grown through acquisitions and expanded operations. This growth resulted in new and increased responsibility for management personnel and placed additional demands upon our operational, administrative and financial resources. To compete effectively and manage potential future growth, we must continue to implement and improve information systems, procedures and controls and expand, train, motivate and manage our staff. These demands will require the addition of new management and other qualified
personnel. We cannot assure you that our personnel, systems, procedures and controls will be adequate to support our future operations or to integrate successfully operations and personnel of acquired entities. Any failure to implement and improve our operational, financial and management systems, to integrate operations of acquired businesses or to expand, train, motivate or manage employees could have a material adverse effect on our business, operating results and financial condition.
We may be unable to hire, integrate or retain qualified personnel.
Our continued success will depend upon the availability and performance of our key management, sales, marketing, customer support and product development personnel. The loss of key management or technical personnel could adversely affect us. We believe that our continued success will depend in large part upon our ability to attract, integrate and retain such personnel. We have at times experienced and continue to experience difficulty in recruiting qualified personnel. Competition for qualified software development, sales and other personnel is intense, and we cannot assure you that we will be successful in attracting and retaining such personnel.
We must respond to rapid technological changes to be competitive.
The market for our products is characterized by rapid technological change, evolving industry standards in computer hardware and software technology, changes in customer requirements and frequent new product introductions and enhancements. The introduction of products embodying new technologies and the emergence of new industry standards can render existing products obsolete and unmarketable. As a result, our future success will depend, in part, upon our ability to continue to enhance existing products and develop and introduce in a timely manner or acquire new products that keep pace with technological developments, satisfy increasingly sophisticated customer requirements and achieve market acceptance. We cannot assure you that we will successfully identify new product opportunities and develop and bring new products to market in a timely and cost-effective manner. Further, we cannot assure you that products, capabilities or technologies developed by others will not render our products or technologies obsolete or noncompetitive. If we are unable to develop or acquire on a timely and cost-effective basis new software products or enhancements to existing products, or if such new products or enhancements do not achieve market acceptance, our business, operating results and financial condition may be materially adversely affected.
We may have difficulty integrating businesses and/or generating acceptable returns from future acquisitions.
As part of our long-term growth strategy, we evaluate the acquisition of other companies, assets or product lines that would complement or expand our business in attractive geographic or service markets or that would broaden our customer relationships. We cannot assure you that we will be able to identify suitable acquisition candidates available for sale at reasonable prices, consummate any acquisition or successfully integrate any acquired business into our operations. The success of any completed acquisition will depend in large measure on our ability to integrate the operations of the acquired business with our operations and otherwise to maintain and improve the results of operations of the acquired business. Acquisitions may involve a number of special risks, including diversion of management's attention, failure to retain key acquired personnel, unanticipated events or circumstances, legal liabilities and amortization of acquired intangible assets. Some or all of these risks could have a material adverse effect on our business, financial condition and results of operations. Although we conduct due diligence reviews of potential acquisition candidates, we may not identify all material liabilities or risks related to acquisition candidates.
We may elect to finance acquisitions with debt financing, through the issuance of common stock or other securities convertible into common stock, or any combination of the foregoing. We cannot assure you that we will be able to arrange adequate financing on acceptable terms. If we were to consummate one or more significant acquisitions in which the consideration consisted of stock, our shareholders could suffer dilution of their interests. Most of the businesses that might become attractive acquisition candidates for us are likely to have significant intangible assets. Acquisition of these businesses, if accounted for as a purchase, would typically result in substantial amortization charges to us, which would reduce future earnings. In addition, such acquisitions could involve non-recurring acquisition-related charges, such as write-offs or write-downs of
acquired research and development costs, which could have a material adverse effect on our results of operations for the accounting period in which such charges are incurred.
We face significant competition from other vendors and potential new entrants into our markets.
We believe we are a leading provider of integrated enterprise-wide solutions for the public sector and utility markets. However, we face competition from a variety of software vendors that offer products and services similar to those offered by us, and from companies offering to develop custom software. Certain competitors have greater technical, marketing and financial resources. We also compete with in-house management information services staffs.
We believe the market is highly fragmented with a large number of competitors that vary in size, primary computer platforms and overall product scope. We compete from time to time with the following:
- the consulting divisions of national and regional accounting firms;
- publicly held companies which focus on selected segments of the public sector and utilities markets including PeopleSoft, Inc., Systems & Computer Technology Corp., J.D. Edwards & Company, Inc., SunGard Data Systems, Inc., Tyler Technologies, Inc. and E-gov; and
- a significant number of smaller companies.
We cannot assure you that such competitors will not develop products or offer services that are superior to our products or services or that achieve greater market acceptance.
We could face additional competition as other established and emerging companies enter the public sector software application market and new products and technologies are introduced. Increased competition could result in price reductions, fewer customer orders, reduced gross margins and loss of market share. In addition, current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third-parties, thereby increasing the ability of their products to address the needs of our prospective customers. It is possible that new competitors or alliances among current and new competitors may emerge and rapidly gain significant market share. Further, competitive pressures could require us to reduce the price of our software licenses and related services. We cannot assure you that we will be able to compete successfully against current and future competitors, and the failure to do so would have a material adverse effect upon our business, operating results and financial condition.
We are dependent on key suppliers and strategic relationships for our products.
We purchase certain key components of our products from single or limited source suppliers. Those components include the adapter code and certain application development tools. There are relatively few suppliers for certain of those components. We currently have relatively few agreements that would assure delivery of such components from our suppliers. Generally, these contracts are terminable by either party upon 60 to 90 days notice. Establishing additional or replacement suppliers for any of the numerous components used in our products, if required, may not be accomplished or could involve significant additional costs. The ability of any of our suppliers to provide functional components in a timely manner, or the inability of us to locate qualified alternative suppliers for components at a reasonable cost, could adversely affect our business, financial condition and results of operations. Our success also depends in part upon our alliances and relationships with leading hardware and software vendors. Any change in these relationships could have an adverse effect on our financial performance while we seek to establish alternative relationships. Further, we may need to establish additional alliances and relationships in order to keep pace with changes in technology and we cannot assure you that such additional alliances will be established.
Our products are complex and, as such, we run the risk of errors or defects with new product introductions or enhancements.
Software products as complex as those developed by us may contain errors or defects, especially when first introduced or when new versions or enhancements are released. Although we have not experienced
material adverse effects resulting from any such defects or errors to date, we cannot assure you that material defects and errors will not be found after commencement of product shipments. Any such defects could result in loss of revenues or delay market acceptance.
We market complex, mission-critical, enterprise-wide applications. Our license agreements with our customers typically contain provisions designed to limit our exposure to potential product liability claims. It is possible, however, that the limitation of liability provisions contained in our license agreements may not be effective as a result of existing or future federal, state or local laws or ordinances or judicial decisions. The sale and support of software by us may entail the risk of product liability claims, which may be substantial. A successful product liability claim brought against us could have a material adverse effect upon our business, operating results and financial condition.
We may be unable to protect our proprietary rights.
We regard certain features of our internal operations, software and documentation as confidential and proprietary. We rely on a combination of contract and trade secret laws and other measures to protect our proprietary intellectual property. We own no patents and, under existing copyright laws, have only limited protection for its intellectual property. We believe that, due to the rapid rate of technological change in the computer software industry, trade secret and copyright protection are less significant than factors such as the knowledge, ability and experience of our employees, frequent product enhancements and timeliness and quality of support services.
We provide our products to customers under exclusive licenses, which generally are non-transferable and have a perpetual term. We generally license our products solely for the customer's internal operations and only on designated computers. In certain circumstances, we make enterprise-wide licenses available for select applications. Although we currently provide object code to our customers and not source code, we historically provided source code to our customers for several products. We have escrowed and continue to escrow our source code for the benefit of all customers. A misappropriation or other misuse of our intellectual property, including source codes previously delivered to customers, could have an adverse effect on us. Further, we cannot assure you that third parties will not assert infringement or misappropriation claims against us in the future with respect to current or future products. Any claims or litigation, with or without merit, could be time-consuming and result in costly litigation and diversion of management's attention. Further, any claims and litigation could cause product shipment delays or require us to enter into royalty or licensing arrangements. Such royalty or licensing arrangements, if required, may not be available on terms acceptable to us, if at all. Thus, litigation to defend and enforce our intellectual property rights could have a material adverse effect on our business, financial condition and results of operations, regardless of the final outcome of such litigation. We may be subject to additional risks as we enter into transactions in countries where intellectual property laws are not well developed or are poorly enforced. Legal protections of our rights may be ineffective in such countries.
There are numerous additional risks associated with selling our products to foreign markets.
We have sold and continue to sell products to customers in Canada and the Caribbean. Our management expects to augment our presence in international markets. Accordingly, our business, and our ability to expand our operations internationally, is subject to various risks inherent in international business activities. We may have difficulty in safeguarding our intellectual property in countries where intellectual property laws are not well developed or are poorly enforced.
General economic conditions and political conditions of various countries may be subject to severe fluctuations at any time. Such fluctuations could hinder our performance under contracts in those countries or could hinder our ability to collect for product and services delivered in those countries.
Unexpected changes in foreign regulatory requirements could also make it difficult or too costly for us to conduct business internationally.
In addition, although we have normally been successful in stipulating that our foreign customers pay in U.S. dollars, any payment provisions involving foreign currencies may result in less revenue than expected due to foreign currency rate fluctuations. Further, the payment cycle for accounts receivable is longer in many countries than it is for domestic customers. If we significantly expand our international business, we anticipate that it will hedge exchange rate movements on either side of a locked-in spot rate for movements within certain ranges on dollar-foreign currency rates. Changes in the value of foreign currencies relative to the dollar beyond the ranges hedged by us could affect our financial condition and results of operations, and gains and losses on currency translations could contribute to fluctuations in our results of operations.
Other risks associated with international operations include import and export licensing requirements, trade restrictions, changes in tariff rates, overlapping tax structures, and compliance with a variety of foreign laws and regulations. In addition, if we elect to establish a presence in international markets rather than marketing through independent sales representatives, as we do presently, we could encounter difficulty in staffing and managing an organization spread over various countries.
In addition, we must translate our software into foreign languages. To the extent that we are unable to accomplish such translations in a timely manner, our ability to further penetrate international markets would be adversely affected. The deeper exposure to international markets creates new areas with which we are not familiar and places us in competition with new vendors. We cannot assure you that we will be successful in its efforts to compete in these international markets.
Our stock price may be volatile.
The market price of our common stock may be volatile and may be significantly affected by many different factors. Some examples of factors that can have a significant impact on our stock price are as follows:
- actual or anticipated fluctuations in our operating results;
- announcements of technological innovations, new products or new contracts by us or our competitors;
- developments with respect to patents, copyrights or proprietary rights;
- conditions and trends in the software and other technology industries;
- adoption of new accounting standards affecting the software industry;
- changes in financial estimates by securities analysts;
- general market conditions and other factors.
In addition, the stock market has from time to time experienced significant price and volume fluctuations that have particularly affected the market prices for the common stock of technology companies. These broad market fluctuations may adversely affect the market price of our common stock. In the past, following periods of volatility in the market price of a particular company's securities, securities class action litigation has often been brought against that company. We cannot assure you that similar litigation will not occur in the future with respect to us. Such litigation could result in substantial costs and a diversion of management's attention and resources, which could have a material adverse effect upon our business, operating results and financial condition.
The anti-takeover provisions in our corporate documents and under Florida law may frustrate a take-over attempt of our company that a shareholder may consider in its best interest.
Certain provisions of Florida law and our articles of incorporation, as amended, may deter or frustrate a takeover attempt of our company that a shareholder might consider in its best interest. We are subject to the "affiliated transactions" and "control share acquisition" provisions of the Florida Business Corporation Act. These provisions require, subject to certain exceptions, that certain business combinations and corporate transactions with beneficial owners of more than 10 percent of a corporation's voting stock, or any entity or individual controlled by such owner, an "interested shareholder", be approved by a majority of disinterested directors or the holders of two-thirds of the voting shares other than those beneficially owned by an "interested
shareholder." Voting rights must also be conferred on "control shares" acquired in specified control share acquisitions, generally only to the extent conferred by resolution approved by the shareholders, excluding holders of shares defined as "interested shares." "Control shares" are defined as shares that, except for the application of the statute, would have voting power that, when added to all other shares that the acquirer owns or has the power to vote, would give the acquirer, directly, indirectly, alone, or as a member of a group, voting power in excess of certain statutory parameters. "Interested shares" are defined as a corporation's shares for which any of the following persons have direct or indirect voting power in the election of directors: (a) the person or group that acquires control shares, (b) every officer of the corporation, and (c) every employee of the corporation who is also a director.
In addition, certain provisions of our amended articles or bylaws, among other things, provide that:
- any action required or permitted to be taken by our shareholders may be effected only at an annual or special meeting of shareholders, and not by written consent of our shareholders;
- the annual meeting of shareholders shall be held on such date and at such time fixed from time to time by the Board of Directors, provided that there shall be an annual meeting held every calendar year;
- any special meeting of the shareholders may be called only by the Chairman of the Board, or upon the affirmative vote of at least a majority of the members of the Board of Directors, or upon the written demand of the holders of not less than 50% of the votes entitled to be cast at a special meeting;
- an advance notice procedure must be followed for nomination of directors and for other shareholder proposals to be considered at annual shareholders' meetings; and
- our Board of Directors be divided into three classes, each of which serves for different three-year periods.
In addition, we are authorized to issue additional shares of common stock and up to five million shares of preferred stock. Preferred stock may be issued in one or more series, having terms fixed by the Board of Directors without shareholder approval, including voting, dividend or liquidation rights that could be greater than or senior to the rights of holders of common stock. Issuance of additional shares of common stock or new shares of preferred stock could also be used as an anti-takeover device.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No information has been presented pursuant to Item 7A as the Company does not have any financial instruments outstanding as of December 31, 2000, requiring market risk disclosure or material foreign currency exposure requiring market risk disclosure.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements appear beginning at page of this Report. See Item 14 of this Report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company are as follows:
Mr. Bernard B. Markey has been a director of the Company since 1995 and has served as Chairman since 1999. Mr. Markey is a Managing Partner of ANC Capital, LLC a private equity firm which he joined in September 1999. Mr. Markey was a general partner of Meridian Venture Partners, a privately-held venture capital fund, from 1995 through September 1999. Mr. Markey also serves on the Board of Directors of several privately-held companies.
Mr. Joseph M. Loughry, III joined the Company in January 2000 as President and Chief Executive Officer. He also serves as a director. Mr. Loughry's background includes several years at General Electric Information Services where he was involved in sales and product development. Mr. Loughry also served in senior management positions at Goal Systems, Inc., UCCEL Corporation, and Legent Corporation. Mr. Loughry held several positions with First Union Corporation from January 1993 through January 1999. These positions include Chief Executive Officer of Nationwide Remittance Centers, Inc., which was acquired by CoreStates Bank (now a part of First Union Corporation). Mr. Loughry thereafter became the President and Chief Executive Officer of Questpoint Holdings, Inc., a $300 million revenue information technology affiliate of the bank. During 1999, Mr. Loughry was temporarily retired.
Mr. L.A. Gornto, Jr. was appointed as a member of the Company's Board of Directors in December 1999. Mr. Gornto joined the Company in January 1997 and also serves as Executive Vice President, Secretary and General Counsel. Mr. Gornto was also appointed as Chief Financial Officer, Secretary, and a director of DemandStar, a subsidiary of the Company, in November 1999 and has served as DemandStar's Executive Vice President and General Counsel since its inception in June 1999. From January 1997 until November 1997, he served as the Company's Chief Financial Officer. Since 1988, Mr. Gornto has been engaged in the private practice of law in central Florida and provides legal services to the Company as General Counsel. From 1985 to 1987, Mr. Gornto served as Senior Vice President -- Finance and Chief Financial Officer of Jerrico, Inc., formerly a publicly-traded company and holding company of Long John Silvers, a seafood restaurant chain. From 1977 to 1985, he was engaged in the private practice of law and also served as a management consultant. From 1968 to 1977, he served as Executive Vice President and Chief Financial Officer and a
director of Red Lobster Restaurants, a seafood restaurant chain and formerly a subsidiary of General Mills, Inc. Mr. Gornto is an attorney-at-law and certified public accountant licensed in the states of Florida and Georgia and holds an L.L.M. degree from Emory University School of Law.
Mr. Ronald E. Goodrow rejoined the Company September 11, 2000 as Executive Vice President -- Operations. Mr. Goodrow's responsibilities include the Company's product divisions and professional services organization, with a focus on continuing to improve quality and customer service. Mr. Goodrow initially joined HTE in 1988 as Director of Operations. During his tenure with the Company, he was instrumental in the creation of the Company's product implementation methodology, its customer support systems and the formation of a professional services consulting division. Mr. Goodrow resigned from HTE in 1998 to pursue other business opportunities. Most recently, he was with a subsidiary of Tyler Technologies, Inc., where he was responsible for sales and implementation of the Munis product line for the southern region of the United States. Prior to his initial employment with HTE, he served as vice president of field operations and director of customer support for the Travenol Corporation, now part of McKesson HBOC, which specializes in software for the healthcare industry. He began his career in the software industry at GCC Beverages, Inc., where he was responsible for development, implementation and support of the software systems used by the company's franchises.
Ms. Susan D. Falotico joined the Company in 1995 and serves as Vice President, Treasurer and in November 1997 was also appointed Chief Financial Officer. From 1995 to November 1997, Ms. Falotico served as the Company's Vice President -- Controller and Chief Accounting Officer. From 1988 to 1995, Mrs. Falotico served as Controller of the Newtrend Division of EDS, Inc., a systems integration company, where she headed the Financial Accounting and Corporate Planning Department. From 1986 to 1988, Ms. Falotico was a Financial Analyst for ISI, a division of Mars, Inc., a food company, where she was responsible for monthly financial reporting and for coordinating a $70 million budget.
Mr. Gilbert O. Santos joined the Company in September 1998 and currently serves as its Vice President -- Product Solutions and Business Development. From 1998 to 1999, Mr. Santos served as Vice President -- Customer Services, responsible for various functional areas including customer support and training, documentation and media, software quality assurance and testing, service management and project management and implementation. Mr. Santos held various marketing and engineering management positions with the Land Mobile Products Sector of Motorola, Inc. from 1983 to September 1998, most recently as Director of Operations.
Mr. James T. Vickers joined the Company in April 1991 and currently serves as Vice President -- Sales and Marketing. From April 1991 until June 1994, Mr. Vickers was one of the Company's account executives for the state of Florida. In June 1994, Mr. Vickers transferred to the State of North Carolina, where he was responsible for developing the Mid-Atlantic states for the Company as a senior account executive. From January 1999 to April 2000, Mr. Vickers served as the eastern regional manager for the Company, with responsibility for all sales activity from Eastern Canada to the Caribbean. In April 2000, Mr. Vickers was promoted to Vice President of Sales and Marketing for the Company and charged with the mission of restructuring the Company's national sales and marketing strategy. Prior to joining the Company, Mr. Vickers was a vice president at Coral Gables Federal in Florida and later served as a senior lending officer with Southeast Bank.
Mr. William C. Barnett joined the Company in July 1988, and was appointed as Vice President -- Integrated Solutions in May 2000. From 1999 to 2000, Mr. Barnett served as the Director of Financial Applications. During his twelve-year tenure, Mr. Barnett has worked with a broad range of HTE applications, giving him intimate knowledge of cross-application integration. He began his career with the Company as a programmer analyst for Utility Billing applications and subsequently served as product manager for Fleet Management, Tax Billing, Fire Records Systems, and Case Management. He also served as applications manager for the Company's AS/400 Public Safety and Justice products. Prior to joining the Company, Mr. Barnett worked as a programmer and systems analyst for the City of Orlando and for a private sector company.
Mr. Brian B. Heafy joined the Company in August 1994 and served as Vice President -- Public Safety and Justice until his resignation, which was effective January 23, 2001. From 1988 to 1999, Mr. Heafy served as Vice President of Human Resources & Organizational Development. From 1994 to 1998, Mr. Heafy served as the Company's Director of Public Safety and Justice Systems division, where he was responsible for consolidating three operating groups into one and for improving customer satisfaction, revenue growth and profit. From 1990 to 1994, Mr. Heafy served as Manager of Information Services for the City of Coral Springs, Florida. His major responsibilities included the successful implementation of a multi-million dollar information technology project. From 1987 to 1990, Mr. Heafy served as Program Manager for CACI, Inc., Federal division. Prior to 1987, Mr. Heafy served in various technical management and staff capacities with the United States Marine Corps.
Mr. Edward A. Moses was appointed as a member of the Company's Board of Directors in December 1998. Mr. Moses was appointed a director of DemandStar, a subsidiary of the Company, in November 1999 and serves as a part-time consultant to DemandStar. Mr. Moses served as dean of the Roy E. Crummer Graduate School of Business at Rollins College from 1994 until 2000, and currently serves as Bank of America professor of finance. From 1985 to 1989 he served as dean and professor of finance at the University of North Florida. He has also served in academic and administrative positions at the University of Tulsa, Georgia State University and the University of Central Florida, and currently serves as a faculty member in the Graduate School of Banking of the South. Mr. Moses also serves as a director of CNL Health Care Properties, Inc., a publicly-held real estate holding company. Mr. Moses received a B.S. in Accounting from the Wharton School at the University of Pennsylvania and a Masters of Business Administration and Ph.D. in finance from the University of Georgia in 1971.
Mr. O.F. Ramos joined the Company in June 1998 and was appointed to the Board of Directors in August 1998. He currently serves as Chief Executive Officer, President and a director of DemandStar, a subsidiary of the Company. Formerly, Mr. Ramos served as Executive Vice President of the Company and President of HTE-UCS, Inc., a wholly-owned subsidiary of the Company from June 1998 to November 1999. From 1986 to 1998, Mr. Ramos served as the President and Chief Executive Officer of UCS, Inc. As the co-founder of UCS, Inc., he was responsible for the corporate direction and financial development of that company and for overseeing operations. Prior to 1986, Mr. Ramos served in various engineering and management capacities at Motorola, Inc., where he was responsible for the development of diverse software and hardware projects for several platforms.
Mr. George P. Keeley was appointed as a member of the Company's Board of Directors in July 2000. From 1985 to 1996 Mr. Keeley was Chairman of the Board of PQ Corporation, a privately held, global manufacturer of industrial and specialty chemicals. From 1986 to 1997, he was General Partner of Meridian Venture Partners, a pre-IPO investor in HTE. From 1979 to 1993, he was the CEO and owner of Keeley Management Company, a specialized investment banking firm. Over the years, Mr. Keeley served as a director of many other public and private companies. He was Chairman of both the Buckeye Pipeline Company and the Detroit Toledo and Ironton Railroad. In addition to his board position with HTE, Mr. Keeley is a director of the Clearfield Companies, an oil and natural gas transport and propane distribution company and of the Rockland Growth Fund, a small cap mutual fund.
Mr. Mark H. Leonard was appointed as a member of the Company's Board of Directors in November 2000. Since July 1995, Mr. Leonard has been President and a director of Constellation Software, Inc., of Toronto. Constellation Software, Inc. is a vendor of mission critical software packages and related services of mid-sized enterprises. Certain subsidiaries of Constellation Software, Inc. compete with the Company with respect to some of its products. Mr. Leonard serves on the boards of various affiliates of Constellation Software, Inc. and various other private companies.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's officers and directors and greater than ten percent shareholders (collectively, "Reporting Persons") to file reports of ownership and changes in ownership with the SEC and NASDAQ. Reporting Persons are required by SEC
regulations to furnish the Company with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms received or written representations from Reporting Persons, the Company believes that with respect to the fiscal year ended December 31, 2000, all the Reporting Persons complied with all applicable filing requirements.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
The Company reimburses all directors for the expenses incurred in attending meetings of the Board of Directors. Directors who are full-time employees of the Company receive no additional compensation for service as directors. Directors who are not full-time employees receive $1,000 per day for attending Board and committee meetings and are eligible for stock awards or option grants under the Company's 1997 Employee Incentive Compensation Plan. During 2000, the Company granted to each of George Keeley and Mark Leonard options to acquire 10,000 shares of the Company's common stock. These options have exercise prices of $1.45 for Mr. Keeley and $1.50 for Mr. Leonard and vest over three-year periods. Additionally, the Company granted to each of Bernard Markey and L.A. Gornto, Jr. options to acquire 25,000 shares of the Company's common stock. These options are exercisable at $1.50 and vest based on the amount of days worked on the Company's business. During fiscal year 1999, the Company granted to Bernard Markey options to acquire 10,000 shares of the Company's common stock. The options have an exercise price of $2.06 per share and vest over a one-year period. The Company also granted to Edward Moses an option to acquire 3,333 shares of the Company's common stock. The options have an exercise price of $2.06 per share and vest after one year. In 1999, the Company granted to L.A. Gornto, Jr. options to acquire 10,000 shares of the Company's common stock. The options have an exercise price of $2.41 per share and vest immediately. Additionally, in 1999, the Company granted to O.F. Ramos an option to acquire 20,000 shares of the Company's common stock. The options have an exercise price of $2.06 per share and vest immediately. During fiscal year 1998, the Company granted to Mr. Moses an option to acquire 10,000 shares of the Company's common stock. The options have an exercise price of $8.38 per share and vest over a three-year period. All of the options were granted under the Company's 1997 Employee Incentive Compensation Plan.
INFORMATION REGARDING EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation paid by the Company for services performed on the Company's behalf during the fiscal years ended December 31, 2000, 1999 and 1998 with respect to the Company's Chief Executive Officer and the Company's four most highly compensated executive officers, other than the Chief Executive Officer, who served as such on December 31, 2000, and whose total annual salary and bonus for the fiscal year ended December 31, 2000 exceeded $100,000 (the "Named Executive Officers").
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(1) The amounts reflected in the above table do not include any amounts for perquisites and other personal benefits extended to the Named Executive Officers. The aggregate amount of such compensation for each Named Executive Officer is less than 10% of the total annual salary and bonus. (2) The Company has had a policy of granting discretionary annual bonuses to its executive officers and employees based primarily on certain performance criteria. The Board of Directors intends to continue this policy in the future. See "Annual Incentive Compensation Bonuses." (3) Represents matching contributions to the accounts of the Named Executive Officers under the Company's 401(k) savings plan. (4) Represents relocation moving expenses. (5) Ms. Falotico was employed as an officer of the Company until July 19, 1999. She served as interim CFO from September 13, 1999 to January 28, 2000, at which time she was re-appointed as an officer of the Company. (6) Represents $58,950 in contract employment as an interim Chief Financial Officer, $55,000 in severance and $4,050 in matching contributions to Ms. Falotico's account under the Company's 401(k) savings plan. (7) Represents $17,460 in contract employment as an interim Chief Financial Officer, $41,250 in severance and $4,725 in matching contributions to Ms. Falotico's account under the Company's 401(k) savings plan.
STOCK OPTIONS GRANTED IN FISCAL 2000
The following table sets forth certain information concerning grants of options made during fiscal 2000 to the Named Executive Officers.
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(1) The dollar amounts set forth in these columns are the result of calculations at the five percent and ten percent rates set by the SEC, and therefore are not intended to forecast possible future appreciation, if any, of the market price of the common stock. (2) Fair market value as of the date of grant.
AGGREGATE STOCK OPTION EXERCISES AND YEAR-END OPTION VALUE TABLE
The following table sets forth certain information concerning option exercises in fiscal 2000, the number of stock options held by the Named Executive Officers as of December 31, 2000 and the value (based on the fair market value of a share of stock at fiscal year-end) of in-the-money options outstanding as of such date.
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(1) The closing sale price for the Company's common stock as reported by the NASDAQ National Market System on December 31, 2000 was $0.91 per share. Value is calculated by multiplying (a) the difference between $0.91 and the option exercise price by (b) the number of shares of common stock underlying the option.
EMPLOYMENT AGREEMENTS
Effective January 17, 2000, the Company entered into an employment agreement with Joseph M. Loughry, III, the Company's President and Chief Executive Officer. The agreement provides for a base salary and incentive compensation payments based on performance. Mr. Loughry's current base salary is $270,000. Mr. Loughry's agreement provides for a bonus aggregating up to a maximum of 50% of his annual base salary if certain performance goals are met. The agreement provides for an initial term through January 17, 2004. At the end of the initial term, the agreement automatically renews and continues until terminated by either of the parties upon no less than 90 days notice. The agreement provides for a nine month severance arrangement upon termination without "Cause" if within the first two years of the initial employment agreement, and for a period of six months thereafter. The agreement contains confidentiality provisions and also prohibits the executive from competing with the Company during the term of the agreement and for two years thereafter.
Upon resignation, the Company shall pay to the executive any unpaid base salary and any accrued but unpaid incentive compensation through the date of resignation.
Effective September 1998, the Company entered into an employment agreement with Gilbert O. Santos, the Company's Vice President -- Product Solutions and Business Development, and, in October 1999, the Company amended his agreement. The amended agreement provides for a base salary and incentive compensation payments based on performance. Mr. Santos' current base salary is $170,000. Mr. Santos' agreement provides for a bonus aggregating up to a maximum of 50% of his annual base salary if certain performance goals are met. The agreement provides for a two-year initial term with successive one-year renewals thereafter. The agreement also provides that, upon the termination of the executive's employment or death, the Company will pay to the executive's estate any unpaid base salary and any accrued but unpaid incentive compensation through the date of termination. In the event the executive is terminated without "Cause," the Company will pay to the executive any unpaid base salary, any accrued but unpaid incentive compensation through the date of termination and continue to pay the executive's base salary with benefits for a period of six months. The agreement also provides that the executive may receive stock options pursuant to the Employee Incentive Compensation Plan. The agreement contains confidentiality provisions and also prohibits the executive from competing with the Company during the term of the agreement and for one year thereafter. Upon resignation, the Company shall pay to the executive any unpaid base salary and any accrued but unpaid incentive compensation through the date of resignation.
Effective October 19, 1999, the Company entered into an employment agreement with Brian B. Heafy, the Company's Vice President -- Public Safety and Justice. The agreement provides for a base salary and incentive compensation payments based on performance. Mr. Heafy's current base salary is $170,000. Mr. Heafy's agreement provides for a bonus aggregating up to a maximum of 50% of his annual base salary if certain performance goals are met. The agreement provides for a two-year initial term with successive one-year renewals thereafter. The agreement also provides that, upon the termination of the executive's employment or death, the Company will pay to the executive's estate any unpaid base salary and any accrued but unpaid incentive compensation through the date of termination. In the event the executive is terminated without "Cause," the Company will pay to the executive any unpaid base salary, any accrued but unpaid incentive compensation through the date of termination and continue to pay the executive's base salary with benefits for a period of six months. The agreement also provides that the executive may receive stock options pursuant to the Employee Incentive Compensation Plan. The agreement contains confidentiality provisions and also prohibits the executive from competing with the Company during the term of the agreement and for one year thereafter. Upon resignation, the Company shall pay to the executive any unpaid base salary and any accrued but unpaid incentive compensation through the date of resignation.
On January 28, 2000, the Company entered into an employment agreement with Susan D. Falotico, the Company's Vice President and Chief Financial Officer. The agreement provides for a base salary and incentive compensation payments based on performance. Ms. Falotico's current base salary is $170,000. Ms. Falotico's agreement provides for a bonus aggregating up to a maximum of 50% of her annual base salary if certain performance goals are met. The agreement provides for an initial term through December 31, 2001 with successive one-year renewals thereafter. The agreement also provides that, upon the termination of the executive's employment or death, the Company will pay to the executive's estate any unpaid base salary and any accrued but unpaid incentive compensation through the date of termination. In the event the executive is terminated without "Cause", the Company will pay to the executive any unpaid base salary, any accrued but unpaid incentive compensation through the date of termination and continue to pay the executive's base salary with benefits for a period of six months. The agreement also provides that the executive may receive stock options pursuant to the Employee Incentive Compensation Plan. The agreement contains confidentiality provisions and also prohibits the executive from competing with the Company during the term of the agreement and for one year thereafter. Upon resignation, the Company shall pay to the executive any unpaid base salary and any accrued but unpaid incentive compensation through the date of resignation.
Effective May 10, 2000, the Company entered into an employment agreement with William C. Barnett, the Company's Vice President -- Integrated Solutions. The agreement provides for a base salary and incentive compensation payments based on performance. Mr. Barnett's current base salary is $150,000. Mr. Barnett's
agreement provides for a bonus aggregating up to a maximum of 50% of his annual base salary if certain performance goals are met. The agreement provides for an initial term ending December 31, 2000, with successive one-year renewals thereafter. The agreement also provides that, upon the termination of the executive's employment or death, the Company will pay to the executive's estate any unpaid base salary and any accrued but unpaid incentive compensation through the date of termination. In the event the executive is terminated without "Cause," the Company will pay to the executive any unpaid base salary, any accrued but unpaid incentive compensation through the date of termination and continue to pay the executive's base salary with benefits for a period of six months. The agreement also provides that the executive may receive stock options pursuant to the Employee Incentive Compensation Plan. The agreement contains confidentiality provisions and also prohibits the executive from competing with the Company during the term of the agreement and for one year thereafter. Upon resignation, the Company shall pay to the executive any unpaid base salary and any accrued but unpaid incentive compensation through the date of resignation.
ANNUAL INCENTIVE COMPENSATION BONUSES
The Company has an incentive compensation bonus program for its executive officers pursuant to which distributions may be made annually based on the Company's earnings and on each participating officer's contributions to the Company's profits and other corporate goals. Distributions are made from a pool, the amount of which is established by the Company's Board of Directors. Individual distributions from the pool are determined by the Company's Compensation Committee and are generally based on a percentage of the participating officer's base salary.
EMPLOYEE INCENTIVE COMPENSATION PLAN
The Employee Incentive Compensation Plan was established by the Company in January 1997. The plan is currently administered by the Company's Board of Directors which has broad powers to administer and interpret the plan. The purpose of the employee Incentive Compensation plan is to attract and retain key employees and consultants of the company, to provide an incentive for them to achieve long range performance goals, and to enable them to participate in the long term growth of the Company. The Employee Incentive Compensation plan authorizes the grant of stock options (incentive and nonstatutory), stock appreciation rights ("SARs") and restricted stock to employees and consultants of the Company capable of contributing to the Company's performance. The Company has reserved an aggregate of 3,700,000 shares of common stock for grants under the Employee Incentive Compensation plan. Incentive stock options may be granted only to employees eligible to receive them under the Internal Revenue Code of 1986, as amended. As of December 31, 2000, the Company had options (both incentive and nonstatutory) for a total of 2,282,085 shares of the Company's common stock outstanding, leaving a total of 1,247,925 shares available for future grants. Upon expiration of unexercised options, the unpurchased shares subject to such options will again be available for purposes of the plan.
EMPLOYEE STOCK PURCHASE PLAN
The Employee Stock Purchase Plan was approved by the Board of Directors in July 1997 and approved by the Company's shareholders at the 1998 annual meeting. It is currently administered by the Company's Board of Directors who has broad powers to administer and interpret the plan. The employee stock purchase plan permits employees to purchase stock of the company at a favorable price and possibly with favorable tax consequences to the participants. All employees (including officers) of the Company or of those subsidiaries designated by the Board who are regularly scheduled to work at least 20 hours per week and more than five months per year are eligible to participate in any purchase periods of the plan after completing 90 days of continuous employment. However, any participant who would own (as determined under the internal revenue code), immediately after the grant of an option, stock possessing 5% or more of the total combined voting power or value of all classes of stock of the Company will not be granted an option under the plan. As of December 31, 2000, 216,418 shares of common stock remain available for issuance under the plan.
Under the Employee Stock Purchase Plan, eligible employees may elect to participate in the plan on January 1 or July 1 of each year. On the date he becomes a participant, and on the first business day in
January and July thereafter, subject to certain limitations determined in accordance with calculations set forth in the plan, an eligible employee is granted a right to purchase shares of common stock (up to a maximum of 1,000 shares) on the last business day on or before each June 30 and December 31 during which he is a participant. Upon enrollment in the plan, the participant authorizes a payroll deduction, on an after-tax basis, in an amount of not less than 1% and not more than 25% of the participant's compensation on each payroll date. Unless the participant withdraws from the plan, the participant's option for the purchase of shares is exercised automatically on each exercise date, and paid for with the accumulated plan contributions. The option exercise price per share may not be less than 85% of the lower of the market price on the first day of the offering period or the market price on the exercise date, unless the participant's entry date is not the first day of the offering period, in which case the exercise price may not be lower than 85% of the market price of the common stock on the entry date.
As of December 31, 2000, 583,582 shares of common stock had been purchased under the Employee Stock Purchase Plan. If any option granted under the plan expires or terminates for any reason other than having been exercised in full, the unpurchased shares subject to that option will again be available for purposes of the plan.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
GENERAL
During fiscal year 2000, the Compensation Committee of the Board of Directors consisted of Bernard B. Markey, Edward A. Moses, George P. Keeley and O.F. Ramos. (Effective July 27, 2000, George P. Keeley and O.F. Ramos were added to the Compensation Committee and Bernard B. Markey resigned.) Each Compensation Committee member is a non-employee director of the Company. The Compensation Committee administers the Company's executive compensation program, monitors corporate performance and its relationship to compensation for executive officers, and makes appropriate recommendations concerning matters of executive compensation.
COMPENSATION PHILOSOPHY
The Company has developed and implemented a compensation program that is designed to attract, motivate, reward and retain the broad-based management talent required to achieve the Company's business objectives and increase shareholder value. There are two major components of the Company's compensation program: base salary and incentives, each of which is intended to serve the overall compensation philosophy.
BASE SALARY
The Company's salary levels for executive officers, including its Chief Executive Officer, are intended to be consistent with competitive pay practices of similarly-sized companies within the industry. In determining executive officers' salaries, the Compensation Committee considers level of responsibility, competitive trends, the financial performance and resources of the Company, general economic conditions, as well as factors relating to the particular individual, including overall job performance, level of experience and prior service, ability, and knowledge of the job.
INCENTIVES
Incentives consist of stock options and cash bonus awards. The Compensation Committee strongly believes that the compensation program should provide employees with an opportunity to increase their ownership and potential for financial gain from increases in the Company's stock price. This approach closely aligns the best interests of shareholders and executives and employees. Therefore, executives and other employees are eligible to receive stock options, giving them the right to purchase shares of the Company's common stock at a specified price in the future. Stock option grants are determined by the Company's Board of Directors. The grant of options is based primarily on a key employee's potential contribution to the
Company's growth and profitability, as measured by the market value of the Company's common stock. The Company has an incentive compensation bonus program for its executive officers pursuant to which distributions may be made annually based on the Company's earnings and on each participating officer's contributions to the Company's profits and other corporate goals. Distributions are made from a pool, the amount of which is established by the Company's Board of Directors. Individual distributions from the pool are determined by the Company's Compensation Committee and are generally based on a percentage of the participating officer's base salary.
Respectfully submitted,
THE COMPENSATION COMMITTEE George P. Keeley Edward A. Moses O.F. Ramos
STOCK PERFORMANCE GRAPH
The graph below compares the cumulative total shareholder return on the Company's common stock (Company Index) with the cumulative total return of the NASDAQ Stock Market (Market Index) and the NASDAQ Computer and Data Processing Stocks (Peer Index) for the period commencing June 11, 1997 (the date on which trading in the Company's common stock commenced) through December 31, 2000, assuming an investment of $100 and the reinvestment of any dividends. The base price for the Company's common stock is the initial public offering price of $5.50 per share. The comparisons in the graph below are based upon historical data and are not indicative of, nor intended to forecast, future performance of the Company's common stock.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of March 8, 2001 with respect to the beneficial ownership of the Company's common stock by: (i) each shareholder known by the Company to be the beneficial owner of more than 5% of the Company's common stock; (ii) each director; (iii) each executive officer named in the Summary Compensation Table; and (iv) all executive officers and directors as a group.
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* Less than one percent (1) Except as otherwise noted, and subject to community property laws where applicable, each person named in the table has sole voting and investment power with respect to all securities owned by such person. (2) Unless otherwise noted, the address of each person or entity listed is H.T.E., Inc., 1000 Business Center Drive, Lake Mary, Florida 32764. (3) A person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days from the date hereof either from the exercise of options or from the conversion of a security. (4) It is the Company's position that these shares are non-voting shares since they were acquired in a transaction subject to the control share acquisition provisions of Florida's statutes. (5) Includes 281,800 shares of common stock that Mr. Gornto may acquire within 60 days from the date hereof upon exercise of stock options. (6) Includes 20,000 shares of common stock that Mr. Ramos may acquire within 60 days from the date hereof upon exercise of stock options. (7) Includes 32,713 shares of common stock that Mr. Heafy may acquire within 60 days from the date hereof upon exercise of stock options. (8) Includes 11,200 shares of common stock that Mr. Markey may acquire within 60 days from the date hereof upon exercise of stock options. (9) Includes 86,700 shares of common stock that Ms. Falotico may acquire within 60 days from the date hereof upon exercise of stock options. (10) Includes 22,457 shares of common stock that Mr. Santos may acquire within 60 days from the date hereof upon exercise of stock options. (11) Includes 53,334 shares of common stock that Mr. Loughry may acquire within 60 days from the date hereof upon exercise of stock options. (12) Includes 10,000 shares of common stock that Mr. Moses may acquire within 60 days from the date hereof upon exercise of stock options. (13) Includes 959,800 shares held by Constellation Software, Inc., of which Mr. Leonard is President.
(14) Includes 21,982 shares of common stock that Mr. Barnett may acquire within 60 days from the date hereof upon exercise of stock options.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
L.A. Gornto, Jr., the Company's Executive Vice President, General Counsel and Secretary, has performed certain legal services for the Company through his law firm, L.A. Gornto, Jr., P.A., for which the Company paid approximately $189,000 during fiscal 2000, and from which office rent, secretarial and certain other expenses incurred by Mr. Gornto in providing such services were paid.
O.F. Ramos, a director of the Company, entered into a three-year employment agreement with DemandStar, a subsidiary of the Company at the time, effective November 1, 1999, under which he served as DemandStar's Chief Executive Officer. The agreement provides for an annual salary of $160,000 and incentive compensation payments based on performance. Pursuant to the employment agreement, Mr. Ramos was granted stock options under DemandStar's stock option plan to purchase an aggregate of 990,000 shares of DemandStar common stock at $1.00 per share. The options have various vesting schedules. In connection with the acquisition of DemandStar by Onvia, Mr. Ramos entered into an amended and restated employment agreement pursuant to which he became an officer of Onvia following the merger.
Bernard B. Markey, a director of the Company, and L.A. Gornto, Jr., a director and officer of the Company, entered into three-year part-time employment agreements with DemandStar, effective December 15, 1999, under which Mr. Markey served as a financial assistant to DemandStar's principal executive officers and Mr. Gornto served as Chief Financial Officer, Executive Vice President, Secretary and General Counsel. Each agreement provides for an annual salary of $12,000 for up to 200 hours of each such executive's time per year. If either executive is required to devote more than 16 hours of time in any particular month, then he will be paid $1,000 per day in addition to his base salary. Further, Mr. Gornto's agreement provides for a mutually agreed higher compensation amount if he devotes more than 40 hours in any calendar month to DemandStar. Pursuant to the employment agreements, each executive received options to purchase an aggregate of 90,000 shares of DemandStar common stock at $1.00 per share, with incremental vesting schedules. In connection with the acquisition of DemandStar by Onvia, the employment agreements of Messrs. Markey and Gornto were amended to provide post-merger consulting services.
On December 15, 1999, DemandStar entered into a three-year consulting agreement with Edward Moses, a director of the Company, pursuant to which Mr. Moses provides consulting services to DemandStar regarding strategic planning, operations matters, growth and development matters and other areas as requested by DemandStar. In exchange for those services, DemandStar granted Mr. Moses options to purchase a total of 90,000 shares of DemandStar common stock at $1.00 per share, which options vest incrementally. In connection with the acquisition of DemandStar by Onvia, Mr. Moses' consulting agreement was amended to provide post-merger consulting services.
In connection with DemandStar's rights offering, the Company and O.F. Ramos, L.A. Gornto, Jr., Bernard B. Markey, and Edward A. Moses, directors of the Company, agreed to add capital to DemandStar in the event DemandStar did not receive $5,000,000 in gross proceeds from its rights offering. In consideration of such a commitment, DemandStar issued a total of 1,000,000 warrants to the Company and Messrs. Ramos, Gornto, Markey and Moses, entitling them to purchase an aggregate of 1,000,000 shares of DemandStar common stock at an exercise price of $2.00 per share. Of that total amount, each of the individuals received warrants to purchase 125,000 shares of DemandStar common stock and the Company received warrants to purchase 500,000 shares of DemandStar common stock. At the time the warrants were issued, they were independently appraised at $0.05 per warrant. As a result of the acquisition of DemandStar by Onvia effected on March 5, 2001, the DemandStar warrants held by the Company and each of Messrs. Ramos, Gornto, Markey and Moses converted to Onvia warrants and the number of underlying shares and exercise price were adjusted by the 0.60 exchange ratio.
In DemandStar's rights offering, Messrs. O.F. Ramos, Bernard B. Markey, L.A. Gornto, Jr., and Edward Moses acquired for $1.00 per share an aggregate of 656,821 restricted shares of DemandStar common stock, representing the rights to which they were entitled in the rights offering. Messrs. Ramos, Markey and Moses,
together with certain other officers of DemandStar, purchased from the shares of unsubscribed common stock available on the closing date of DemandStar's rights offering, an additional 718,568 shares of common stock for $1.00 per share. The acquisition was made to assure of DemandStar sufficient initial capital from its rights offering. All shares issued to Messrs. Ramos, Gornto, Markey, Moses and the other participating officers were restricted shares.
As a result of the acquisition of DemandStar by Onvia effected on March 5, 2001, the DemandStar shares held by Messrs. Ramos, Gornto, Markey and Moses were converted to Onvia common stock in accordance with the 0.60 exchange ratio.
The Company entered into an unsecured loan agreement with DemandStar, which has a principal amount of $1,750,000. Interest accrues on the outstanding principal and accrued interest at 8 percent per annum. In October 2000, the Company entered into the Modification to Promissory Note Agreement (the Agreement). The Agreement deferred the payment of the principal and interest due October 31, 2000, (the "10-31-00 Note Payment") under the loan agreement until October 31, 2001 and allows DemandStar to repay the 10-31-00 Note Payment by issuing equity securities to the Company only if DemandStar issues a new equity security in a third party transaction in which equity capital in excess of $3,000,000 is raised prior to October 31, 2001. In consideration of this deferral, the Agreement increases the interest rate from 8 to 10 percent per annum effective November 1, 2000, and requires DemandStar to pay the Company a one-time modification fee of $10 on or before January 15, 2001. The note, as amended by the Agreement, is payable in four installments of $450,000, $350,000, $450,000 and $500,000 on October 31, 2001, 2002, 2003 and 2004, respectively.
In November 2000, the Company entered into an agreement with Mark H. Leonard, Constellation Software, Inc. and its Board of Directors ("the Agreement"), pursuant to which Mr. Leonard was appointed to the Company's Board of Directors (the "Board") for a two-year term expiring on the date of the annual meeting in 2002. Since Constellation Software, Inc. competes with the Company with respect to some of its products and services, the Agreement limits Mr. Leonard's access to and disclosure of confidential competitive information of the Company and requires Constellation Software, Inc. to vote its shares consistent with the recommendation of the Company's Board during Mr. Leonard's term as a director of the Company or 90 days after resignation, whichever is earlier. In addition, it requires all directors to vote consistent with the recommendation of the Board and limits the transfer of the Company's shares owned by Constellation Software, Inc. for that same period. The Agreement also limits the number of shares Constellation Software, Inc. and the directors can purchase and any involvement with proxy solicitation without prior written consent of the Company until the day after the annual meeting in 2002.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
The following financial statements are filed as a part of this report:
(B) REPORTS ON FORM 8-K
The Company filed a report on Form 8-K on October 23, 2000, indicating the Company issued a press release that responded to public statements made by Tyler Technologies, Inc.
(C) EXHIBIT INDEX
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(1) Incorporated by reference to Registrant's Form S-1 Registration Statement (File No. 333-22637). (2) Incorporated by reference to Registrant's Form 10-Q for the quarter ended June 30, 1998. (3) Incorporated by reference to Registrant's Form S-8 Registration Statement filed December 22, 2000 (File No. 333-52552) (4) Incorporated by reference to Registrant's Form S-8 Registration Statement filed December 22, 2000 (File No. 333-52566) (5) Incorporated by reference to Registrant's Form 8-K dated June 1, 1998. (6) Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
H.T.E., INC.
/s/ JOSEPH M. LOUGHRY, III -------------------------------------- Joseph M. Loughry, III President and Chief Executive Officer and Director (principal executive officer)
Date: March 29, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
HTE, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders of H.T.E., Inc.:
We have audited the accompanying consolidated balance sheets of H.T.E., Inc. (a Florida corporation) and subsidiaries as of December 31, 1999 and 2000, and the related consolidated statements of operations, stockholders' equity and comprehensive income (loss) and cash flows for the years ended December 31, 1998, 1999 and 2000. 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 in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, the financial statements referred to above present fairly, in all material respects, the financial position of H.T.E., Inc. and its subsidiaries as of December 31, 1999 and 2000, and the results of their operations and their cash flows for the years ended December 31, 1998, 1999 and 2000, in conformity with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Tampa, Florida, February 9, 2001
HTE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The accompanying notes are an integral part of these consolidated balance sheets.
HTE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The accompanying notes are an integral part of these consolidated statements.
HTE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) (AMOUNTS IN THOUSANDS)
The accompanying notes are an integral part of these consolidated statements.
HTE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS) (NOTE 14)
The accompanying notes are an integral part of these consolidated statements.
HTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1999 AND 2000 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The accompanying consolidated financial statements include the accounts of H.T.E., Inc. (HTE), a Florida corporation, and its wholly-owned subsidiaries, HTE-Bellamy Ltd. (Bellamy), a Canadian corporation, HTE-Kb Systems, Inc. (Kb Systems), a Florida corporation, HTE-Jalan, Inc. (Jalan), a Florida corporation, HTE-Phoenix Systems, Inc., a Florida corporation, HTE-UCS, Inc. (UCS), a Florida corporation, HTE-Vanguard Systems, Inc., a Florida corporation and DemandStar.com, Inc. (DSI), a Florida corporation through April 30, 2000 (see below)(collectively, the Company). The Company develops, markets, implements and supports fully-integrated enterprise-wide software applications designed specifically for public sector and utility organizations, including state, county and city governments, other municipal agencies, and publicly and privately owned utilities. The Company was also engaged in remarketing IBM hardware systems to run in concert with their application software. In 2000, the Company began outsourcing the sale and configuration of hardware systems through an agreement with Vertical VAR. Under this agreement, the Company will receive a royalty on hardware sales to HTE customers by Vertical VAR. The effect of the Company's foreign operations on the accompanying consolidated financial statements was not material.
On June 1, 1998, the Company, through UCS, purchased privately held UCS, Inc., in exchange for 1,120,000 shares of the Company's common stock valued at approximately $15,000 as of the April 1998 agreement valuation date. UCS, Inc. is a mobile work force automation provider of field-based reporting software. The acquisition has been accounted for as a pooling of interests. Therefore, the accompanying consolidated financial statements include the results of operations of UCS, Inc. for all periods presented. The common stock issued in conjunction with the UCS, Inc. acquisition has been reflected as outstanding for all periods presented.
Pursuant to a registration statement on Form S-1 (File No. 333-93445), as amended, filed with the Securities and Exchange Commission and which became effective March 27, 2000, DSI completed a rights offering of its common stock as of May 1, 2000. Rights to purchase an aggregate of 6,374,080 shares of common stock were exercised for an aggregate purchase price of $6,374. As a result, only DSI's operating results through April 30, 2000 are included in the Company's consolidated financial statements since the Company's ownership of DSI was reduced to 16.4 percent as of May 1, 2000, and the Company's investment in DSI is accounted for using the cost method after that. In addition, the spin-off resulted in a gain of $2,470 which is recorded as equity from investment in subsidiary in comprehensive loss in the accompanying consolidated statements of stockholders' equity and comprehensive income (loss). Subsequent to year-end, DSI stock was acquired by Onvia.com, Inc. (Onvia) in a stock for stock transaction. See Note 13.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned domestic and foreign subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Restricted Cash
Restricted cash represents cash held in escrow in connection with the JALAN, Inc. acquisition which is discussed further in Note 3.
Trade Accounts Receivable
Included in trade accounts receivable at December 31, 1999 and 2000, are unbilled receivables of $4,634 and $2,613, respectively. The following table reflects the activity in the allowance for doubtful accounts for the years ended December 31, 1998, 1999 and 2000:
Equipment, Furniture and Fixtures
Equipment, furniture and fixtures are recorded at cost. Depreciation and amortization are recorded for financial statement purposes on a straight-line basis over the estimated useful lives of the assets. Repair and maintenance costs, which do not extend the useful lives of the related assets, are expensed as incurred.
The estimated useful lives of equipment, furniture and fixtures are as follows:
Depreciation and amortization expense related to equipment, furniture and fixtures of $1,285, $1,616 and $1,575, is included in general and administrative expenses on the accompanying consolidated statements of operations for the years ended December 31, 1998, 1999 and 2000, respectively.
Computer Software Development Costs
All costs incurred to establish the technological feasibility of a computer software product to be sold, leased or otherwise marketed are charged to research and development expense as incurred. Technological feasibility of a computer software product is established when the Company has completed all planning, designing, coding and testing activities that are necessary to establish that the product can be produced to meet its design specifications including functions, features and technical performance requirements.
Costs of producing product masters incurred subsequent to establishing technological feasibility are capitalized and are amortized on a straight-line basis over three years once the product is available for general release to customers. Such capitalized costs are reported at the lower of unamortized cost or net realizable value.
The Company ceases capitalization of computer software costs when the product is available for general release to customers. Costs of maintenance and customer support are charged to expense when the related revenue is recognized or when those costs are incurred, whichever occurs first.
Amortization expense related to computer software development costs of $2,943, $3,379 and $3,473 is included in cost of software licenses in the accompanying consolidated statements of operations for the years ended December 31, 1998, 1999 and 2000, respectively.
Other Intangible Assets
Other intangible assets consisted of the following as of December 31, 1999 and 2000:
Goodwill represents amounts paid in excess of the fair market value of net tangible and identifiable intangible assets purchased in the acquisitions of Software Management, Inc., Bellamy, Kb Systems, Inc. and Information On Demand, Inc. (IOD), subsequently renamed DSI, and is amortized using the straight-line method over a period of 60 months. Customer lists represent identifiable intangible assets purchased in connection with the acquisitions of Bellamy, Kb Systems, Inc., JALAN, Inc., Vanguard Management and Information Systems, Inc. (Vanguard) and IOD and are amortized over a period of 60 months. Purchased software represents identifiable intangible assets purchased in connection with the acquisitions of Programmed-For-Success, Inc., Bellamy, Kb Systems, Inc., JALAN, Inc. and Vanguard and is amortized using the straight-line method over a period of 36 months. Amortization expense related to goodwill and customer lists of $274, $473 and $377 is included in general and administrative expenses in the accompanying consolidated statements of operations for the years ended December 31, 1998, 1999 and 2000, respectively. Amortization expense related to the purchased software of $756, $817 and $661 is included in the cost of software licenses in the accompanying consolidated statements of operations for the years ended December 31, 1998, 1999 and 2000, respectively.
Deferred Revenue and Revenue Recognition
Deferred revenue represents advance payments by customers for software licenses, maintenance and professional services. Revenue from software licenses is recognized when a contract has been executed, the product has been shipped, all significant contractual obligations related to the software licenses have been satisfied, uncertainty surrounding customer acceptance becomes insignificant and collection of the related receivable is probable. Maintenance revenue is deferred and recognized ratably over the service period. Professional services include system planning and implementation, project management and training and education services and are recognized as revenue as the work is performed. As the functionality of the hardware is not dependent on any other services provided by the Company, hardware sales are recognized upon shipment.
During 1998, the Company adopted Statement of Position (SOP) 97-2, "Software Revenue Recognition," as amended by SOP 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue Recognition" which deferred for one year the effective date of certain provisions of SOP 97-2, with respect to vendor-specific objective evidence. The adoption of this SOP did not have a material impact on the Company's operating results and financial position.
During 1998, the American Institute of Certified Public Accountants issued SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions," which further amended SOP 97-2 to require revenue recognition using the "residual method" when certain criteria are met. SOP 98-9 also extends the deferral period of SOP 98-4 through fiscal years beginning on or before March 15, 1999. All other provisions of SOP 98-9 are effective for transactions entered into in fiscal years beginning after March 15, 1999. The effect of the guidance set forth in SOP 98-9 did not have a material effect on the Company's operating results and financial position.
Income Taxes
The Company accounts for income taxes using an asset and liability approach which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, the Company considers all expected future events other than enactments of changes in the tax law or rates. Changes in the tax law or rates will be recognized in the future years in which they occur.
Significant Concentrations
Financial instruments which potentially expose the Company to concentrations of credit risk consist primarily of accounts receivable from governmental entities. To minimize this risk, the Company generally requires a significant cash deposit upon contract signing. In addition, the Company maintains reserves for potential credit losses.
During 1998 and 1999, substantially all of the Company's hardware revenues are derived from the sale of IBM AS/400 systems in connection with the Company's Industry Remarketing agreement with IBM. In 2000, the Company began outsourcing the sale and configuration of hardware systems through an agreement with Vertical VAR. Under this agreement, the Company will receive a royalty on hardware sales to HTE customers by Vertical VAR.
Stock-Based Compensation
The Company measures compensation cost for stock options issued to employees using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25). Under APB No. 25, if the exercise price of the Company's stock options equals or exceeds the estimated fair market value of the underlying stock on the date of grant, no compensation expense is generally recognized. As the stock options issued to employees have had no intrinsic value at the date of grant, no compensation expense related to stock options issued to employees has been recorded. For stock options granted to non-employees, compensation cost is measured using the fair value based method. Additionally, the Company has provided pro forma disclosures of net income and earnings per share as if the fair value based method had been applied to all stock options issued by the Company as required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). See Note 6.
Foreign Currency Translation
The functional currency of the Company's foreign subsidiary is the Canadian dollar. The financial statements of the Company's foreign subsidiary have been translated into U.S. dollars. Accordingly, assets and liabilities of foreign operations are translated at period-end rates of exchange, with any resulting translation adjustments reported as a separate component of stockholders' equity. Statement of operations accounts are translated at average exchange rates for the period and gains and losses from foreign currency transactions are included in net income (loss).
Net Income (Loss) Per Share
Basic earnings per share was calculated by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted earnings per share was calculated by dividing net income (loss) after assumed conversion of dilutive securities by the sum of the weighted-average number of common shares outstanding plus all dilutive potential common shares that were outstanding during the period. Potential common shares included in the diluted calculation related to stock options are computed using the treasury stock method and consist of common stock which may be issuable upon the exercise of outstanding common stock options, when dilutive.
The following table reconciles the number of shares utilized in the earnings per share calculations (amounts in thousands):
Options to purchase approximately 1,801,000 and 2,282,000 shares were outstanding as of December 31, 1999 and 2000, respectively, but were not included in the computation of diluted earnings per share because they are antidilutive. All share and per share information in the consolidated financial statements have been adjusted to give effect to the two-for-one common stock split, which was effective June 18, 1998.
Pro Forma Net Income (Loss) and Pro Forma Net Income (Loss) Per Share (Unaudited)
Pro forma net income (loss) has been presented to reflect tax expense based on statutory rates for a subsidiary included in the consolidated results of operations that had previously been taxed as a Sub-S corporation.
Pro forma basic net income (loss) per share has been calculated by dividing pro forma net income (loss) by the weighted-average number of common shares outstanding during the period. Pro forma diluted net income (loss) per share was calculated by dividing pro forma net income (loss) by the sum of the weighted-average number of common shares outstanding plus all additional common shares that would have been outstanding if potentially dilutive common shares had been issued.
Carrying Value of Long-Lived Assets
The Company reviews the carrying value of all long-lived assets, including equipment, furniture and fixtures, computer software development costs, and other intangible assets, whenever events or changes in circumstances indicate that the carrying value may not be recoverable through projected undiscounted future operating cash flows. Although no impairment is indicated at December 31, 2000, the assessment of recoverability will be impacted if estimated projected undiscounted operating cash flows are not achieved.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial assets and liabilities, including cash and cash equivalents, trade accounts receivable, note receivable, accounts payable and note payable at December 31, 1999 and 2000, approximate fair value because of the short maturity of these instruments. The carrying amount of the investment in DSI has been adjusted to reflect the fair value of the investment by recording an unrealized loss of $586 for the year ending December 31, 2000 in the accompanying consolidated statements of stockholders' equity and comprehensive income (loss).
Comprehensive Income (Loss)
The Company presents comprehensive income (loss) in accordance with Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 establishes standards for reporting and display of comprehensive income (loss) and its components. As this statement
pertains to disclosure and informational requirements, it has no impact on the Company's operating results or financial position. The Company's adjustments to arrive at comprehensive income (loss) include the foreign currency translation adjustment, the unrealized loss related to the investment in DSI and the equity from investment in subsidiary. These amounts are presented in the accompanying consolidated statements of stockholders' equity and comprehensive income (loss).
Segment Reporting
The Company has adopted Statement of Financial Accounting Standards No. 131 (SFAS 131), which establishes standards for reporting information about operating segments. As this statement pertains to disclosure and informational requirements, it has no impact on the Company's operating results or financial position. Although the Company has five operating segments, separate segment data has not been presented as they meet the criteria set forth in SFAS 131 for aggregation.
New Accounting Pronouncement
The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative and Hedging Activities," effective for fiscal years beginning after June 15, 2000. Management does not believe that this new pronouncement will be applicable to the Company.
Reclassifications
Certain reclassifications have been made to the 1999 financial statements to conform to the 2000 presentation.
2. EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures consisted of the following as of December 31, 1999 and 2000:
3. BUSINESS COMBINATIONS
PURCHASES
During the year ended December 31, 1998, the Company purchased the net assets of JALAN, Inc. for $1,723. The assets purchased consisted of equipment, furniture and fixtures and purchased software. As part of the purchase, the Company also assumed various customer service liabilities. Additionally, the Company entered into a consulting agreement with the former owners of JALAN, Inc. This acquisition has been accounted for as a purchase in the accompanying consolidated financial statements.
During the year ended December 31, 1998, the Company created HTE-Vanguard Systems, Inc., a wholly-owned subsidiary, which purchased the net assets of Vanguard Management and Information Systems, Inc. for $400 in cash plus $20 in legal fees. The assets purchased consisted of accounts receivable, equipment, furniture and fixtures, purchased software and other intangible assets. As part of the purchase agreement, the Company also assumed various customer service liabilities. Additionally, the Company entered into a royalty agreement with Vanguard for approximately 5 years and was granted offset rights against royalty payments due under the purchase agreement of $63. This acquisition has been accounted for as a purchase in the accompanying consolidated financial statements.
In June 1999, the Company created HTE-IOD, Inc., a wholly-owned subsidiary, which later changed its name to DemandStar.com, Inc. DSI purchased certain assets of IOD for $1,000 in cash. The assets purchased consisted of customer lists and goodwill, which were recorded as other intangible assets in the accompanying consolidated financial statements. As part of the purchase, the Company also assumed various customer service liabilities. Under the original agreement, the Company could have paid up to an additional $2,000 for the purchase if DSI meets certain financial targets set forth in the Agreement for Sale and Purchase of Assets. However, this liability was transferred to DSI effective with the rights offering as of May 1, 2000. This acquisition was accounted for as a purchase in the accompanying consolidated financial statements.
Revenues, net income and earnings per share presented on a pro forma basis, as if the acquisitions had occurred at the beginning of each year presented, are as follows (unaudited):
POOLING OF INTERESTS
On April 1, 1998, the Company purchased privately held Phoenix Systems, LLC (Phoenix), in exchange for 272,036 shares of the Company's common stock valued at approximately $3,000 on or about the closing date. Phoenix provides a suite of integrated software products targeted towards school districts (kindergarten through 12th grade). The acquisition was accounted for as a pooling-of-interests, although the Company did not restate the results of prior periods due to the financial immateriality of Phoenix's historical operations. Therefore, the transaction has been recorded through an adjustment of $40 to retained earnings during 1998.
In connection with the acquisitions of UCS, Inc. (described in Note 1) and Phoenix, the Company recorded a non-recurring deferred income tax charge of $339 during the year ended December 31, 1998. This provision recorded the deferred tax liability of UCS, Inc. and Phoenix due to changes in tax status on the acquisition dates for federal income tax reporting purposes.
4. NOTE RECEIVABLE
In October 1999, the Company entered into an unsecured loan agreement with DSI which has a principal balance of $1,750. Interest accrues on the outstanding principal and accrued interest at 8 percent. In October 2000, the Company entered into the Modification to Promissory Note Agreement (the Agreement). The Agreement deferred the payment of the principal and interest due October 31, 2000, (the "10-31-00 Note Payment") under the loan agreement until October 31, 2001 and allows DSI to repay the 10-31-00 Note Payment by issuing equity securities to HTE only if DSI issues a new equity security in a third party transaction in which equity capital in excess of $3,000 is raised prior to October 31, 2001. In consideration of this deferral, the Agreement increases the interest rate from 8 to 10 percent effective November 1, 2000, and requires DSI to pay HTE a one-time modification fee of $10 on or before January 15, 2001. The note, as amended by the Agreement, provides for the principal balance to be repaid by DSI according to the following schedule:
Subsequent to year-end, DSI was acquired by Onvia. See Note 13. In connection with this acquisition, this note was assumed by Onvia.
5. LINE OF CREDIT
During part of 1998, the Company had a line of credit with a commercial bank. During 1998, the Company replaced the existing line of credit with a revolving line of credit of $15,000, which was terminated in 1999. The Company never borrowed under this line of credit.
On September 7, 2000, the Company entered into a Loan and Security Agreement with Silicon Valley Bank for up to $5,000 secured by the Company's accounts receivable balance (the Loan). The term of the Loan is for one year from the date of the Loan and bears interest at the bank's prime rate plus 2 percent (11.5 percent at December 31, 2000). The Loan is collateralized by the assets of the Company and requires the Company to maintain a financial covenant related to tangible net worth. As of December 31, 2000, the Company was in compliance with this debt covenant, and there were no borrowings outstanding under the Loan.
6. STOCK COMPENSATION PLANS
EMPLOYEE STOCK OPTIONS
On July 1, 1996, the Company granted options to an employee to purchase 106,000 shares of the Company's common stock. The options were exercisable beginning January 1, 1997, at $0.91 per share, which approximated the fair market value of the stock at the date of grant. The options expire the earlier of five years from the date of grant or seven months from the employee's date of termination. There are no outstanding options under this grant as of December 31, 2000, as all of these options were exercised during 1998 and 1999.
HTE EMPLOYEE INCENTIVE PLAN
The Company's 1997 Employee Incentive Compensation Plan (the "HTE Plan") was adopted by the Board of Directors in January 1997. The purpose of the HTE Plan is to attract and retain key employees and consultants of the Company, to provide an incentive for them to achieve long-range performance goals and to enable them to participate in the long-term growth of the Company. The HTE Plan authorizes the grant of stock options (incentive and non-statutory), stock appreciation rights and restricted stock to employees and consultants of the Company capable of contributing to the Company's performance. As of December 31, 2000, the Company had not awarded stock appreciation rights and restricted stock under the HTE Plan. The Company has reserved an aggregate of 3,700,000 shares (subject to adjustment for stock splits and similar capital changes) of common stock for grants under the HTE Plan, of which 1,247,925 shares are available for future grants as of December 31, 2000. Incentive stock options may be granted only to employees eligible to receive them under the Internal Revenue Code of 1986, as amended. The exercise price of each option equals the market price of the Company's stock on the date of grant and an option's maximum term is 10 years. Some options have been granted with immediate vesting, although most of the options have vesting schedules over four or five years.
A summary of the status of the Company's outstanding stock options, each of which is fixed with respect to number of shares and exercise price, including employee stock options discussed above, as of December 31, 1998, 1999 and 2000, and changes during the periods ending on those dates is presented below:
The following table summarizes information about fixed stock options outstanding at December 31, 2000:
DSI 1999 EMPLOYEE INCENTIVE COMPENSATION PLAN
In December 1999, DSI's board of directors approved the 1999 Employee Incentive Compensation Plan (the "DSI Plan"). The DSI Plan provides that awards may be granted to DSI's key officers, employees, consultants, advisors and directors or others designated by the board of directors at the fair market value at the date of grant. Awards under the DSI Plan may take the form of stock options, share appreciation rights or restricted stock. The DSI Plan limits the number of shares, which may be issued pursuant to incentive stock options to 4,000,000 shares. As of December 31, 1999, DSI had not awarded share appreciation rights or restricted stock under the DSI Plan.
A summary of the status of DSI's outstanding stock options, each of which is fixed with respect to number of shares and exercise price, including employee stock options discussed above, as of December 31, 1999, and changes during the period ending on that date is presented below:
Subsequent to December 31, 1999 and prior to the rights offering, DSI issued approximately 1,011,000 stock options to employees at an average exercise price of $1.00. The weighted-average fair value of the options granted during this time was not material to the pro forma disclosures shown below. Since DSI completed a rights offering as of May 1, 2000, and HTE did not own more than twenty percent of DSI at December 31, 2000, no stock option information is presented for DSI from May 1, 2000 through December 31, 2000.
During the years ended December 31, 2000 and 1999, the compensation from stock options of $19 and $13, respectively, was related to options granted to a consultant and was calculated at the fair value using the Black-Scholes options valuation model as described below. This expense is included in general and administrative expenses in the consolidated statement of operations.
EMPLOYEE STOCK PURCHASE PLAN
The Company adopted an Employee Stock Purchase Plan (ESPP) on July 23, 1997, which was approved by the stockholders in May 1998. The plan was effective as of September 1, 1997, and has been designed to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as amended. Eight hundred thousand shares are reserved for issuance over the term of the plan, subject to periodic adjustment for changes in the outstanding common stock occasioned by stock splits, stock dividends, recapitalizations or other similar changes. The ESPP qualifies as a non-compensatory plan under APB Opinion No. 25; therefore, the plan is not expected to have any effect on the results of operations.
Under the terms of the ESPP, employees can choose each year to have up to 25 percent of their annual base earnings withheld to purchase the Company's common stock. The purchase price of the stock is 85 percent of the lower of its beginning of period or end of period market price. As of December 31, 2000, 29 percent of the Company's employees participate in the plan. As of December 31, 1999 and 2000, there were 98,370 and 93,278 purchase rights outstanding. These purchase rights were exercisable at the respective year-ends and had a weighted-average exercise price of $2.87 and $0.77 as of December 31, 1999 and 2000, respectively. The weighted-average fair value of purchase rights granted during 1999 and 2000 under the ESPP was $1.98 and $0.42, respectively. All outstanding purchase rights at December 31, 1999 and 2000, were exercised in January 2000 and 2001, respectively.
BLACK-SCHOLES OPTION PRICING MODEL
The fair value of options granted during the fiscal years ended December 31, 1998, 1999 and 2000, reported below has been estimated at the date of grant using a Black-Scholes option pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. The Company's options have characteristics significantly different from those of traded options, and changes in the subjective assumptions
can materially affect the fair value estimate. The fair value of each option grant was estimated on the date of grant based on the following weighted-average assumptions for options granted during 1998, 1999 and 2000:
PRO FORMA DISCLOSURES
Had compensation cost related to employees for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method under SFAS No. 123, the Company's net income (loss) and per share amounts would have changed to the pro forma amounts indicated below:
The effects of applying SFAS No. 123 on pro forma disclosures of net income (loss) and per share amounts for the periods presented are not likely to be representative of the pro forma effects on net income (loss) and per share amounts in future years.
7. EMPLOYEE RETIREMENT PLAN
The Company has established an employee retirement savings plan that covers substantially all employees who have met certain service and age requirements. Employees may contribute from 2 percent to 15 percent of their annual compensation to the plan as limited by Internal Revenue Service regulations. The Company will match contributions up to three percent of each individual's compensation. Contributions made by the Company totaled $577, $413 and $482 for the years ended December 31, 1998, 1999 and 2000, respectively, and are included in general and administrative expenses in the accompanying consolidated statements of operations.
8. CONTRACT JUDGEMENT AND SETTLEMENT, EMPLOYEE TERMINATION BENEFITS AND OTHER COSTS
During the years ended December 31, 2000 and 1999, the Company recorded a charge and benefit of $(1,131) and $12,927, respectively. These amounts were primarily related to a contract judgement, a contract settlement, employee termination benefits, and the discontinuance of product lines.
CONTRACT JUDGEMENT AND SETTLEMENT
During the years ended December 31, 2000 and 1999, the Company recorded a benefit and charge of $(2,234) and $7,493, respectively, related to a contract judgement and a contract settlement. In 2000, the benefit included $(2,234) related to a reduction in a judgement award. In 1999, the charge included $2,319
related to a write-off of certain assets related to the contract settlement and contract judgement and $5,174 related to a judgement award. The judgement award is included in accrued liabilities in the accompanying consolidated balance sheet as of December 31, 1999. See Note 11.
EMPLOYEE TERMINATION BENEFITS
During the years ended December 31, 2000 and 1999, the Company recorded charges of $622 and $2,459, respectively, related to employee severance packages and benefits. After reviewing its staffing requirements, the Company terminated employees across all areas of the Company. As of December 31, 2000, $830 of employee termination benefit charges remain in accrued liabilities in the accompanying consolidated balance sheet.
DISCONTINUATION OF PRODUCT LINES
During the years ended December 31, 2000 and 1999, and as a result of the change in management, the Company decided to discontinue several product lines. As a result of this decision, the Company recorded a non-cash charge for the net book value of these product lines, which totaled $160 and $1,138 during the years ended December 31, 2000 and 1999, respectively.
OTHER COSTS
The remaining charges of $321, $1,837 and $552 in the years ended December 31, 2000, 1999 and 1998, respectively, primarily included costs associated with certain lease termination costs, the closing of offices and offering costs.
9. INCOME TAXES
The provision (benefit) for income taxes consists of the following for the years ended December 31, 1998, 1999 and 2000:
Included in the current federal portion of the provision for income taxes for the year ended December 31, 1998 are foreign taxes of $101 arising from the operations of Bellamy.
The provision (benefit) for income taxes differs from the amount computed by applying the U.S. federal corporate tax rate of 34 percent to income before provision (benefit) for income taxes for years ended December 31, 1998, 1999 and 2000, as follows:
Deferred income taxes consisted of the following as of December 31, 2000:
Deferred income taxes consisted of the following as of December 31, 1999:
Included in the net operating losses of the deferred tax asset as of December 31, 1999, was an amount to be received as a tax refund and an amount relating to the net operating losses of DSI. The Company received a
tax refund of $1,703 during the year ended December 31, 2000. In connection with the DSI rights offering, deferred tax assets of $1,271 were transferred to DSI.
As of December 31, 2000, the Company had net operating losses for federal tax purposes totaling $5,882 which may be used to offset future taxable income, or, if unused, expire between 2019 and 2020. Management believes the deferred tax asset is fully realizable.
10. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases office space, furniture, automobiles and equipment under certain long-term non-cancelable operating lease agreements with varying terms and conditions.
Future aggregate minimum rental payments under these agreements are as follows as of December 31, 2000:
In April 1996, the Company entered into a lease agreement for the corporate office in Lake Mary under a 10-year, non-cancelable operating lease, which began on May 1, 1997. The lease agreement also provides the Company with three five-year renewal options. The Company expenses the total estimated cash payments on a straight-line basis over the life of the lease. The cumulative difference between the amount expensed and the amount actually paid is recorded as a deferred lease commitment on the accompanying consolidated balance sheets as of December 31, 1999 and 2000. Rent expense under operating leases totaled approximately $4,892, $5,418 and $4,710 for the years ended December 31, 1998, 1999 and 2000, respectively.
PRODUCT ROYALTY AGREEMENTS
The Company has entered into several product royalty agreements with various entities who have sold their application rights or product designs to the Company. The majority of these agreements are similar in nature in that they each state that royalties shall be paid on the basis of applicable software license revenues collected by the Company. However, each agreement may have a different percentage upon which the product royalty is based. The Company accrues these product royalties as the applicable software license revenues are recognized. The Company has recorded $146 and $18 as accrued liabilities for product royalties as of December 31, 1999 and 2000, respectively. Royalty expense was approximately $196, $39 and $5 for the years ended December 31, 1998, 1999 and 2000, respectively, and is included in cost of software licenses in the accompanying consolidated statements of operations.
EMPLOYMENT AGREEMENT
Effective January 2000, the Company entered into an employment agreement with Joseph M. Loughry III to serve as the President and Chief Executive Officer. This agreement is for a term of four years. In the event the executive is terminated "without cause" during the first two years, the executive is entitled to receive nine months of continued salary and benefits. If the executive is terminated "without cause" during the last two years, the executive is entitled to receive six months of continued salary and benefits. Under the agreement, the executive is entitled to receive annual bonuses up to 50 percent of the base salary based on achieving goals set by the Board of Directors. The Company also granted a total of 400,000 stock options to
purchase the Company's common stock. These options include both qualified and non-qualified options and have various vesting schedules based on time and performance measures.
The Company has entered into other various employment agreements with certain key employees which call for salary continuation and other severance benefits to be paid in the approximate aggregate amount of $578 in the event such employees are terminated "without cause."
PRODUCT LIABILITY
The Company markets to its customers complex, mission-critical, enterprise-wide applications. The Company's license agreements with its customers typically contain provisions designed to limit the Company's exposure to potential product liability claims. It is possible, however, that the limitation of liability provisions contained in the Company's license agreements may not be effective as a result of existing or future federal, state or local laws or ordinances or unfavorable judicial decisions. Although the Company has not experienced any significant product liability claims to date, the sale and support of software by the Company may entail the risk of such claims, which may be substantial. A successful product liability claim brought against the Company could have a material adverse effect upon the Company's business, operating results and financial condition.
11. LITIGATION
On January 13, 2000, an arbitration panel composed of three Washington State attorneys rendered a final award against the Company for $5,174 in a dispute between the Company and the City of Tacoma, Washington. This award was recorded by the Company during the year ended December 31, 1999, and remained in accrued liabilities in the accompanying consolidated balance sheet as of December 31, 1999. In June 2000, the Company entered into a settlement agreement with the City of Tacoma, Washington and the Company's insurance carriers, settling all claims and litigation proceedings arising from the binding arbitration award. Under the terms of the settlement, the arbitration award was reduced to approximately $4,250. Of that amount, $1,500 was paid by insurance proceeds. The Company agreed to pay the remaining $2,750 as follows: (i) $1,500, which was paid in June 2000; (ii) $625 due June 1, 2001 and (iii) $625 due June 1, 2002. The last two payments are subject to a secured promissory note executed by the Company in favor of the City of Tacoma, Washington. Interest accrues on the note at 9 percent per annum and is payable concurrently with the principal payments. The note is secured by 750,000 shares of DSI Series A Preferred stock and 1,250,000 shares of DSI common stock held by the Company. Pursuant to the merger between DSI and Onvia, these shares will be exchanged for 1,200,000 shares of Onvia common stock. See Note 13. The note is recorded as a note payable in the accompanying consolidated balance sheet as of December 31, 2000. Accrued interest of $61 is included in accrued liabilities in the accompanying consolidated balance sheet as of December 31, 2000.
In regard to the binding arbitration proceeding between the Company and Montana Power Company ("MPC") which commenced on February 3, 1999, a settlement and mutual release agreement was executed by the parties in January 2000. This settlement agreement allows for a complete mutual release and discharge of any and all outstanding obligations between the Company and MPC under the Software License and Services Agreement and the arbitration proceeding. The Company retained all of the $1,535 paid by MPC to the Company for software, hardware and services. As a result of this settlement, the Company wrote off approximately $754 in revenue and $581 in capitalized costs related to the Software License and Services Agreement in the fourth quarter of 1999, which resulted in an after-tax charge of $819. This settlement did not involve any cash payment by the Company to MPC.
The Company is a party to some contracts, which may result in financial penalties in the event of non-performance. Management anticipates that these penalties will not have a material adverse effect on the Company's financial position or operating results.
The Company is involved in various other legal actions arising in the normal course of business, both as claimant and defendant. While it is not possible to determine with certainty the outcome of these matters, in the opinion of management, the eventual resolution of these claims and actions outstanding will not have a material adverse effect on the Company's financial position or operating results.
12. RELATED PARTIES
One of the Company's directors has performed certain legal services for the Company through his law firm, for which the Company paid approximately $189 during fiscal 2000, and from which office rent, secretarial and certain other expenses incurred by him in providing such services were paid.
In November 2000, the Company entered into an agreement with Mark H. Leonard, Constellation Software, Inc. and its Board of Directors (the "Agreement"), pursuant to which Mr. Leonard was appointed to the Company's Board of Directors (the "Board") for a two-year term expiring on the date of the annual meeting in 2002. Since Constellation Software, Inc. competes with the Company with respect to some of its products and services, the Agreement limits Mr. Leonard's access to and disclosure of confidential competitive information of the Company and requires Constellation Software, Inc. to vote its shares consistent with the recommendation of the Company's Board during Mr. Leonard's term as a director of the Company or 90 days after resignation, whichever is earlier. In addition, it requires all directors to vote consistent with the recommendation of the Board and limits the transfer of the Company's shares owned by Constellation Software, Inc. for that same period. The Agreement also limits the number of shares Constellation Software, Inc. and the directors can purchase and any involvement with proxy solicitation without prior written consent of the Company until the day after the annual meeting in 2002.
13. SUBSEQUENT EVENT
On March 2, 2001, the shareholders of DSI approved at a special shareholders meeting an acquisition of DSI by Onvia pursuant to which DSI became a wholly-owned subsidiary of Onvia effective March 5, 2001. Shareholders of outstanding DSI common stock were issued 0.60 of a share of Onvia's common stock for every share of DSI common stock they held (representing approximately 6.4% of Onvia's outstanding common stock following the merger), and outstanding shares of DSI common stock were canceled. Cash was paid to DSI shareholders in lieu of fractional shares of Onvia common stock. The Company was issued a total of 1,200,000 shares of Onvia common stock in respect of the common stock and preferred stock the Company held in DSI. In connection with this transaction, the Company recorded a loss on investment of $1,888 in the first quarter of 2001, of which $586 had been recorded as an unrealized loss in comprehensive loss as of December 31, 2000.
14. SUPPLEMENTAL NONCASH TRANSACTIONS
The Company includes depreciation on certain equipment in the costs capitalized as computer software development costs. During the years ended December 31, 1998, 1999 and 2000, depreciation of $323, $420 and $447, respectively, was capitalized as computer software development costs.
In 1998, the Company purchased the net assets of Jalan, Inc. for $1,723 and Vanguard for $420. The Company also capitalized an additional $15 for the purchase price of KB Systems, Inc. in 1998. Additionally, the Company acquired Phoenix Systems, L.L.C. and UCS, Inc. through pooling of interests transactions, which resulted in immaterial cash payments of $53 and $2, respectively.
In 1999, the Company purchased certain assets of IOD for $1,000 in cash. Additionally, the Company accrued fees related to a legal judgement with Tacoma. This case was settled in 2000 and was subsequently reclassed to a note payable for the year ended December 31, 2000.
In 2000, DSI completed a rights offering of its common stock which was effective as of May 1, 2000. As a result, the Company recorded a reduction of cash of $923.
The acquisitions, reclassification and spin-off had the following non-cash effect of increasing (decreasing) the following accounts for the years ended December 31, 1998, 1999 and 2000: