SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For quarter ended Commission File No. 1-10151
September 30, 1995
THE CONTINUUM COMPANY, INC.
9500 Arboretum Boulevard
Austin, Texas 78759-6399
Telephone: (512) 345-5700
A Delaware Corporation I.R.S. Employer Identification
Number: 74-1609363
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) as been subject to such filing
requirements for the past 90 days. Yes X No __.
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock as of the latest practical date.
As of October 24, 1995, there were 19,201,000 shares of the registrant's $.10
par value Common Stock outstanding.
1
THE CONTINUUM COMPANY, INC.
10-Q September 30, 1995
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets - September 30, 1995
and March 31, 1995 ................................................... 3
Consolidated statements of operations - Three and six months
ended September 30, 1995 and 1994 .................................... 4
Condensed consolidated statements of cash flows - Three and
six months ended September 30, 1995 and 1994 ......................... 5
Notes to condensed consolidated financial statements -
September 30, 1995 ................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .......................................... 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ................................... 11
SIGNATURE ................................................................... 11
2
The Continuum Company, Inc.
Condensed Consolidated Balance Sheets
September 30, March 31,
1995 1995
------------- -----------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents ............................................ $ 25,016,000 $ 44,525,000
Receivables, net of allowance for doubtful accounts .................. 98,384,000 78,062,000
Other current assets ................................................. 16,663,000 14,721,000
--------------- ---------------
140,063,000 137,308,000
Property and equipment, net of depreciation ............................ 29,883,000 26,896,000
Goodwill, net of amortization .......................................... 22,636,000 15,995,000
Software systems, net of amortization .................................. 13,012,000 14,178,000
Other assets ........................................................... 9,976,000 5,323,000
-------------- ---------------
TOTAL ASSETS ........................................................... $ 215,570,000 $ 199,700,000
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................................... $ 19,165,000 $ 18,832,000
Deferred revenue ..................................................... 12,179,000 15,981,000
Accrued liabilities and other ........................................ 44,943,000 40,228,000
Current portion of long-term debt .................................... 863,000 822,000
--------------- ---------------
77,150,000 75,863,000
--------------- ---------------
Long-term debt ......................................................... 18,051,000 25,379,000
Other obligations ...................................................... 20,689,000 16,167,000
--------------- ---------------
38,740,000 41,546,000
--------------- ---------------
Stockholders' equity:
Common Stock, $.10 par value ......................................... 1,926,000 1,919,000
Capital in excess of par value ....................................... 123,640,000 122,279,000
Retained deficit ..................................................... (24,133,000) (39,870,000)
Other ................................................................ (1,753,000) (2,037,000)
--------------- ---------------
99,680,000 82,291,000
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................. $ 215,570,000 $ 199,700,000
=============== ================
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
3
The Continuum Company, Inc.
Consolidated Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
September 30, September 30,
-------------------------------- -------------------------------
1995 1994 1995 1994
------------- -------------- ------------- -------------
REVENUE:
Service revenues .......................... $ 91,858,000 $ 71,670,000 $ 180,159,000 $ 140,832,000
Software system licensing ................. 7,899,000 5,135,000 13,829,000 9,246,000
Interest income ........................... 205,000 88,000 543,000 130,000
------------- ------------- ------------- -------------
99,962,000 76,893,000 194,531,000 150,208,000
------------- ------------- ------------- -------------
EXPENSES:
Service expenses .......................... 70,253,000 53,993,000 137,744,000 105,604,000
Marketing and administration .............. 16,826,000 13,198,000 32,055,000 25,988,000
Interest expense .......................... 598,000 489,000 1,259,000 921,000
------------- ------------- ------------- ------------
87,677,000 67,680,000 171,058,000 132,513,000
------------- ------------- ------------- ------------
Income before income taxes .................. 12,285,000 9,213,000 23,473,000 17,695,000
Income tax provision ........................ 3,687,000 2,935,000 7,043,000 5,817,000
------------- ------------- ------------- -------------
Net income .................................. $ 8,598,000 $ 6,278,000 $ 16,430,000 $ 11,878,000
============= ============= ============= =============
Earnings per common share ................... $ 0.43 $ 0.33 $ 0.83 $ 0.63
============= ============= ============= =============
Average number of common shares and
common equivalent shares outstanding ...... 20,011,000 19,015,000 19,900,000 18,997,000
============= ============= ============= =============
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
4
The Continuum Company, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended Six Months Ended
September 30, September 30,
--------------------------- ----------------------------
1995 1994 1995 1994
---------- ----------- ----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .................................................. $ 8,598,000 $ 6,278,000 $ 16,430,000 $ 11,878,000
Items included in income which do not affect cash:
Depreciation, amortization and other ..................... 3,705,000 2,769,000 7,099,000 5,434,000
Changes in operating assets and liabilities:
(Increase) decrease in receivables ....................... (2,111,000) 6,894,000 (19,161,000) 4,859,000
Increase in accounts payable ............................. 239,000 2,316,000 568,000 2,346,000
(Decrease) in deferred revenue ........................... (4,628,000) (1,040,000) (3,813,000) (3,416,000)
(Increase) in other net assets ........................... (1,270,000) (968,000) (5,081,000) (2,687,000)
------------- ------------- ------------- -------------
Net cash provided (used) by operating activities ............ 4,533,000 16,249,000 (3,958,000) 18,414,000
------------- ------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, equipment and software ............... (3,397,000) (1,687,000) (7,266,000) (2,469,000)
Purchase of business, net of cash received .................. -- -- (2,453,000) --
------------- ------------- ------------- -------------
Net cash (used) by investing activities ..................... (3,397,000) (1,687,000) (9,719,000) (2,469,000)
------------- ------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Debt (payments) borrowings, net ............................. (7,070,000) 1,692,000 (7,274,000) 1,004,000
Common Stock transactions ................................... 1,191,000 1,092,000 1,425,000 2,604,000
------------- ------------- ------------- -------------
Net cash (used) provided by financing activities ............ (5,879,000) 2,784,000 (5,849,000) 3,608,000
------------- ------------- ------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ....................... (86,000) (105,000) 17,000 (248,000)
------------- ------------- ------------- -------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS .............. (4,829,000) 17,241,000 (19,509,000) 19,305,000
Cash and cash equivalents at beginning of period .............. 29,845,000 12,728,000 44,525,000 10,664,000
------------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................... $ 25,016,000 $ 29,969,000 $ 25,016,000 $ 29,969,000
============= ============= ============= =============
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE (1) SUMMARY OF ACCOUNTING POLICIES
The condensed consolidated financial statements included herein have been
prepared by the Company without independent audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, the condensed consolidated financial statements include all
adjustments necessary to present fairly the information required to be set forth
therein and these adjustments were of a normal recurring nature. The results of
operations for the periods presented are not necessarily indicative of the
results to be expected for the full fiscal year. Certain footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The Company believes that the disclosures included herein
are adequate to make the information presented not misleading. It is suggested
that these condensed consolidated financial statements be read in conjunction
with the financial statements and notes thereto included in the Company's Form
10-K annual report for the fiscal year ended March 31, 1995.
NOTE (2) EARNINGS PER SHARE
For the three and six months ended September 30, 1995 earnings per share are
computed using the weighted average number of shares outstanding adjusted for
incremental shares attributable to outstanding options, primarily unvested
employee stock options, to purchase Common Stock. For the three and six months
ended September 30, 1994 the effect of options were excluded due to
immateriality. The average number of common shares and common equivalent shares
outstanding are summarized as follows (000's):
Three months ended Six months ended
September 30, September 30,
------------------ ------------------
1995 1994 1995 1994
------ ------ ------ ------
Average outstanding common shares ........ 19,166 19,015 19,150 18,997
Common equivalent shares ................. 845 -- 750 --
------ ------ ------ ------
Average number of common shares and
common equivalent shares outstanding .... 20,011 19,015 19,900 18,997
====== ====== ====== ======
NOTE (3) ACQUISITIONS
On May 3, 1995, the Company acquired all of the outstanding shares of Ra Systems
for $10,823,000. A cash payment of $5,423,000 was remitted at closing and the
remainder is payable December 31, 1995. The acquisition was accounted for using
the purchase method and, accordingly, the operating results of Ra Systems have
been included in the consolidated financial statements from the date of
acquisition. Ra Systems' tangible assets, including cash of $2,970,000, were
recorded at their estimated fair value of $7,242,000 and Ra Systems' liabilities
were recorded at their estimated fair value of $3,965,000. The estimated excess
of $7,546,000 was assigned to goodwill. The acquisition did not have a material
impact on operations.
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NOTE (4) INCOME TAXES
For the three and six months ended September 30, 1995, the effective tax rate
was 30%, which is lower than the statutory rate primarily due to utilization of
tax net operating loss carry-forwards in foreign jurisdictions. The effective
tax rate for the three and six months ended September 30, 1994 was 32% and 34%,
respectively. Tax rates for fiscal 1994 approximated the statutory rate.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MATERIAL CHANGES IN RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1994.
For the three months ended September 30, 1995, the Company recorded net income
of $8,598,000 or $.43 per share compared to a net income of $6,278,000 or $.33
per share for the same quarter last year.
Revenue for the three months ended September 30, 1995 increased to $99,962,000
compared to $76,893,000 for the same period last year, an increase of 30%. North
American customers accounted for 48% of revenue for the three months ended
September 30, 1995, European customers accounted for 18% and Pacific Rim
customers accounted for 34%.
License revenue was $7,899,000 for the three months ended September 30, 1995
compared to $5,135,000 for the same quarter last year. Approximately 94% of the
product sales came from North American customers. License sales were primarily
derived from sales of COLOSSUS(TM), the Company's expert system for evaluating
bodily injury claims.
Service revenue for the quarter ended September 30, 1995 totaled $91,858,000, an
increase of 28% compared to a year ago. Over half of the service revenue growth
was from outsourcing customers. North American customers accounted for 44% of
service revenue for the three months ended September 30, 1995, European
customers accounted for 19% and Pacific Rim customers accounted for 37%. The
following table summarizes the increase in service revenue by region ($ in
millions):
7
Quarter ended Sep 95 vs Sep 94
----------------- increase (decrease)
Sep 30, Sep 30, -------------------
1995 1994 $ %
------- ------- ------- ------
Outsourcing Revenue
North America $ 22.7 $ 13.1 $ 9.6 73%
Europe 1.3 2.0 (0.7) (35%)
Pacific 11.8 9.7 2.1 22%
------ ------ -------
35.8 24.8 11.0 44%
====== ====== =======
Other Service Revenue
North America 17.4 13.8 3.6 26%
Europe 16.4 14.4 2.0 14%
Pacific 22.3 18.7 3.6 19%
------ ------ -------
56.1 46.9 9.2 20%
------ ------ -------
Total Service Revenue
North America 40.1 26.9 13.2 49%
Europe 17.7 16.4 1.3 8%
Pacific 34.1 28.4 5.7 20%
------ ------ -------
$ 91.9 $ 71.7 $ 20.2 28%
====== ====== =======
Outsourcing revenues increased 44% to $35,800,000 compared to the same period
last year. The increase is attributed to new outsourcing agreements signed in
North America and Australia during the second half of fiscal 1995.
Other service revenue increased 20% to $56,100,000, including increases in all
regions. The increase in North American service revenue reflects an increased
demand for consulting and implementation services associated with
VANTAGE-ONE(R), the Company's life administration system, and increases in
utilization and support fees and services for the COLOSSUS product. The increase
in European service revenue of 14% to $16,400,000 is attributable to the
acquisition of Ra Systems on May 3, 1995. Continuum Ra is the leading provider
of systems to insurance brokers in the United Kingdom. The incremental revenues
generated by Ra were partially offset by declines in mainframe consulting
revenues. The increase in the Pacific region is attributable to an increased
demand for programming services in Australia.
Compared to a year earlier, service revenue increased $20,188,000 or 28%, and
service gross profit increased $3,928,000 or 22%. The decline in gross profit as
a percentage of revenue from 25% for the three months ended September 30, 1994
to 24% for the same period this year is primarily the result of increased
investments in the Company's products, start up costs associated with new
projects and a change in the mix of business.
8
Marketing and administration expenses for the September 1995 quarter were
$16,826,000 or 17% of total revenue compared to a year ago when they were
$13,198,000 or 17% of total revenue. The increase in expense is primarily
attributable to marketing investments including worldwide outsourcing
initiatives.
The effective tax rate of 30% for the three months ended September 30, 1995 is
lower than the statutory rate due to the utilization of net operating loss
carry-forwards in foreign jurisdictions.
The average number of common shares and common equivalent shares outstanding was
20,011,000 for the September 1995 quarter, an increase of 996,000 shares
compared to a year ago. The increase results primarily from the inclusion of
common equivalent shares. The effect of employee stock options, mostly unvested,
are now reflected as common equivalent shares due to the recent appreciation in
the Company's share price. Prior to the June 1995 quarter, employee stock
options were excluded because of immateriality.
In summary, net income for the three months ended September 30, 1995 was
$8,598,000 compared to a net income of $6,278,000 for the same period last year.
The improved performance was due to an increase in license revenue, service
revenue and gross profit.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
SIX MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO THE SIX MONTHS ENDED SEPTEMBER
30, 1994.
For the six months ended September 30, 1995, the Company recorded net income of
$16,430,000 or $.83 per share compared to a net income of $11,878,000 or $.63
per share for the same quarter last year.
Revenue for the six months ended September 30, 1995 increased to $194,531,000
compared to $150,208,000 for the same period last year, an increase of 30%.
License revenue was $13,829,000 for the six months ended September 30, 1995
compared to $9,246,000 for the same period last year. Approximately 88% of the
product sales came from North American customers, while most of the remainder
came from European life insurance customers. License sales included sales of
COLOSSUS(TM), the Company's expert system for evaluating bodily injury claims,
and sales of Automated Work Distributor (AWD(R)), the Company's business
re-engineering workflow management system.
Service revenue for the six months ended September 30, 1995 totaled
$180,159,000, an increase of 28% compared to a year ago. Over half of the
service revenue growth was from outsourcing customers. The following table
summarizes the increase in service revenue by region ($ in millions):
9
Six months ended Sep 95 vs Sep 94
------------------- increase (decrease)
Sep 30, Sep 30, --------------------
1995 1994 $ %
-------- -------- -------- -------
Outsourcing Revenue
North America $ 46.0 $ 26.4 $ 19.6 74%
Europe 2.9 3.7 (0.8) (22%)
Pacific 22.3 18.8 3.5 19%
------ ------ -------
71.2 48.9 22.3 46%
------ ------ -------
Other Service Revenue
North America 34.9 27.7 7.2 26%
Europe 32.3 27.8 4.5 16%
Pacific 41.8 36.5 5.3 15%
------ ------ -------
109.0 92.0 17.0 18%
------ ------ -------
Total Service Revenue
North America 80.9 54.1 26.8 50%
Europe 35.2 31.5 3.7 12%
Pacific 64.1 55.3 8.8 16%
------ ------ -------
$180.2 $140.9 $ 39.3 28%
====== ====== =======
Outsourcing revenues increased 46% to $71,200,000 compared to the same period
last year. Other service revenue increased 18% to $109,000,000, including
increases in all regions. The increase in outsourcing and other service revenues
are attributable to the factors discussed above.
Compared to a year earlier, service revenue increased $39,327,000 or 28%, and
service gross profit increased $7,187,000 or 20%. The decline in gross profit as
a percentage of revenue from 25% for the six months ended September 30, 1994 to
24% for the same period this year is primarily attributable to the factors
discussed above.
Marketing and administration expenses for the six months ended September 30,
1995 were $32,055,000 or 16% of total revenue compared to a year ago when they
were $25,988,000 or 17% of total revenue. The improvement as a percent of
revenue results from the significant growth in the Company's revenues and
increased sales and marketing investments.
The effective tax rate of 30% for the six months ended September 30, 1995 was
lower than the statutory rate due to the utilization of net operating loss
carry-forwards in foreign jurisdictions.
10
The average number of common shares and common equivalent shares outstanding was
19,900,000 for the six months ended September 30, 1995, an increase of 903,000
shares compared to a year ago due to the inclusion of common equivalent shares
as previously discussed.
In summary, net income for the six months ended September 30, 1995 was
$16,430,000 compared to a net income of $11,878,000 for the same period last
year. The improved performance was due to an increase in license revenue,
service revenue and gross profit.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended September 30, 1995 cash decreased $4,829,000 and
totaled $25,016,000. Cash requirements for the quarter included investments in
recent outsourcing contracts, as well as long-term debt reduction of
approximately $7,000,000.
The Company expects to meet its cash needs from cash generated by operating
activities. In addition, the Company has a revolving credit line for up to
$20,000,000.
The Company had no material commitments for capital expenditures as of September
30, 1995.
VANTAGE-ONE and COLOSSUS are trademarks of The Continuum Company, Inc. AWD is a
registered trademark of DST Systems, Inc.
11
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 10.9 DST/Continuum Processing Agreement dated October 1, 1993 by
and between the Registrant and DST Systems, Inc.
Exhibit 10.10 DST/Continuum AWD Distribution Agreement dated October 1, 1993
and between the Registrant and DST Systems, Inc.
(b) No reports on Form 8-K were filed with the Securities and Exchange
Commission by the Registrant for the quarter ended September 30, 1995.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: November 13, 1995 THE CONTINUUM COMPANY, INC.
John L. Westermann III
Vice President and Chief Financial Officer
12