SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
x Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 [Fee Required]
For the fiscal year ended March 31, 1996 or
|_|Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required]
For the transition period from ___________ to___________
Commission File No. 1-10151
THE CONTINUUM COMPANY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 74-1609363
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9500 Arboretum Boulevard
Austin, Texas 78759-6399
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (512) 345-5700
Securities Registered Pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Common Stock, $.10 Par Value New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
None
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) has been subject to such
filing requirements for the past 90 days.
Yes x No___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.[x]
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant as of April 30, 1996:
Common Stock, $.10 Par Value -- $1,029,000,000
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock as of April 30, 1996:
Common Stock, $.10 Par Value -- 24,179,000
PART III
Part III is amended and restated in its entirety to reflect the following:
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth a brief description of the business
experience, including the present principal occupation, of one of the
registrant's directors, and the year such person first became a director.
OFFICES HELD WITH THE DIRECTOR
REGISTRANT AND BUSINESS OF THE
EXPERIENCE DURING THE REGISTRANT
NAME PRECEDING FIVE YEARS AGE SINCE
- --------------- -------------------------------- --- ----------
W. Michael Long Chief Executive Officer
and President of the
registrant (July 1991 to
present); President and
Chief Operating Officer
of the registrant (to July 1991) 43 1983
The Company will file with the Securities and Exchange Commission not later
than 120 days after March 31, 1996, the further information required by this
item with respect to officers and directors in an amendment to this Report or
pursuant to Regulation 14A in a definitive Proxy Statement involving the
election of directors. Such information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The Summary Compensation Table shows certain compensation information for
the registrant's Chief Executive Officer for each of the fiscal years ended
March 31, 1996, 1995, and 1994.
LONG-TERM COMPENSATION
ANNUAL COMPENSATION ----------------------
------------------- AWARDS
------
SECURITIES
OTHER UNDER- ALL
ANNUAL LYING OTHER
NAME AND COMPEN- RESTRICTED STOCK COMPEN-
PRINCIPAL SALARY BONUS SATION(1) STOCK(2) OPTIONS SATION(3)
POSITION YEAR ($) ($) ($) ($) (#) ($)
- ------------ ---- -------- -------- ------- --------- ------- --------
W.M. Long 1996 357,083 548,000 -- -- 80,000 400,251
Chief 1995 318,750 300,000 -- -- 100,000 181,425
Executive 1994 247,917 150,000 49,172 75,000 100,000 7,959
Officer
(1) All amounts in this column represent payments made directly to tax
authorities on behalf of Mr. Long when granted a restricted stock award
under the registrant's 1990 Restricted Stock and Bonus Plan in an amount
substantially sufficient to offset his income tax liabilities resulting
from the award.
(2) The restricted stock awards were made pursuant to the registrant's 1990
Restricted Stock and Bonus Plan. All shares awarded are subject to a
five-year vesting period, commencing one year after grant. During the
restriction period, dividends, if any, are paid on the shares awarded. The
total number of unvested restricted stock holdings for Mr. Long was $7,600
at a fair market value as of March 31, 1996, of $316,350.
(3) The amount reported in this column for the year 1994 represent
contributions by the registrant on behalf of Mr. Long to the registrant's
defined contribution retirement plan. The amounts reported in this column
for the 1996 and 1995 years include contributions to the defined
contribution retirement plan in the amounts of $5,451 and $5,030,
respectively.
Otherwise, the amounts in this column for the fiscal years ended March 31,
1996 and 1995 represent amounts accrued to Mr. Long under the registrant's
deferred compensation plan.
STOCK OPTIONS
The following table sets forth certain information with respect to stock
options granted to Mr. Long during the fiscal year ended March 31, 1996.
Further, in accordance with Securities and Exchange Commission rules,
hypothetical gains on the respective options are shown. These gains assume rates
of annual compounded stock price appreciation of five percent and ten percent
over the full option term. The hypothetical gains to Mr. Long are not possible
without an increase in the market value of the registrant's Common Stock, which
will likewise benefit all stockholders proportionately. In assessing these
hypothetical gains, it is important to emphasize that the ultimate value of the
options will depend on the market value of the registrant's Common Stock at a
future date.
OPTION GRANTS IN LAST FISCAL YEAR
% OF
NUMBER OF TOTAL POTENTIAL
SECURITIES OPTIONS REALIZABLE VALUE AT
UNDERLYING GRANTED EXERCISE ASSUMED ANNUAL RATES
OPTIONS IN PRICE OF STOCK PRICE APPRE-
GRANTED FISCAL ($ PER EXPIRATION CIATION FOR OPTION TERM
NAME (#) YEAR (%) SHARE) DATE 5% ($) 10% ($)
- ------------------ ---------- -------- ------ ---------- -----------------------------
Mr. Long 80,000 7.02 32.50 6/07/05(1) 1,635,126 4,143,730
(1) Subject to early vesting as discussed under "Change in Control Provisions"
in Item 13 and early vesting based on achievement of specified values of
Common Stock over a set time period, options vest twenty percent per year
for five consecutive years beginning June 7, 1996.
The following table shows stock options exercised by Mr. Long during the
fiscal year ended March 31, 1996, including the market value of the underlying
securities at each exercise date minus the option exercise price. In addition,
this table sets forth information concerning exercisable and unexercisable stock
options as of March 31, 1996. Also reported are the values of "in-the-money"
options which represent the positive spread between the exercise price of any
such existing stock options and the Common Stock price as of March 31, 1996.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT OPTIONS AT
ACQUIRED FISCAL YEAR-END (#) FISCAL YEAR-END ($)
ON VALUE ------------------- --------------------
EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($) UNEXERCISABLE UNEXERCISABLE
-------- -------- --------- ------------------- --------------------
Mr. Long 80,000 2,535,000 92,856/ 2,432,831/
257,144 4,332,169
The Company will file with the Securities and Exchange Commission not later
than 120 days after March 31, 1996, the further information required by this
item with respect to executive compensation in an amendment to this Report or
pursuant to Regulation 14A in a definitive Proxy Statement involving the
election of directors. Such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Mr. Long beneficially owns 157,406 shares of common stock, $0.10 par value
("Common Stock"), of the registrant as of April 25, 1996. Of such amount,
148,856 shares represent options which are exercisable within 60 days. Mr.
Long's beneficial ownership of Common Stock represents less than 1% of the total
Common Stock outstanding.
The Company will file with the Securities and Exchange Commission not later
than 120 days after March 31, 1996, the further information required by this
item with respect to security ownership in an amendment to this Report or
pursuant to Regulation 14A in a definitive Proxy Statement involving the
election of directors. Such information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
CHANGE IN CONTROL PROVISIONS
Mr. Long has received grants of options or restricted stock awards. These
restricted stock awards and options contain provisions relating to a possible
change in control of the registrant.
Each restricted stock award granted to Mr. Long on or before May 1, 1995,
has included a vesting period whereby a portion of the restricted stock vests
over a five-year period. However, all of the restricted stock awards immediately
vest in the event the holder's employment is involuntarily terminated after the
occurrence of a change in control.
The option awards granted to Mr. Long also contain change in control
provisions. Such provisions provide that the options shall automatically vest in
the event the option holder's employment is terminated (as defined therein),
other than for cause, after a change in control of the registrant.
For purposes of the restricted stock awards, as well as for purposes of the
option awards granted to Mr. Long during the fiscal year ended March 31, 1996, a
change in control is defined as having taken place when any third party
purchases or otherwise acquires beneficial ownership of more than thirty percent
of the Common Stock, or, as a result of a contested election of directors, a
majority of the Board of Directors of the registrant before such election cease
to be members of the Board of Directors. However, in the case of the option
grants during the last fiscal year, the required percentage of beneficial
ownership to constitute a change in control is thirty-two percent in the event
the acquiror is DST Systems, Inc.
The Company will file with the Securities and Exchange Commission not later
than 120 days after March 31, 1996, the further information required by this
item with respect to certain relationships and related transactions in an
amendment to this Report or pursuant to Regulation 14A in a definitive Proxy
Statement involving the election of directors. Such information is incorporated
herein by reference.
PART IV
Part IV is amended and restated in its entirety to reflect the following:
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) AND (2) LIST OF FINANCIAL STATEMENTS
The response to this item is submitted as a separate section of this
Report. See the index on page F-1.
(3) EXHIBITS
The following exhibits are filed with this report:
PAGE
2.1 -- Takeover Offer to Holders of Ordinary Shares of Paxus Corporation
Limited (filed as Annex A of the Registrant's Proxy Statement for
the special meeting of stockholders held July 13, 1993, and
incorporated herein by reference)
2.2 -- Agreement dated September 30, 1993, by and among the Registrant,
Continuum Acquisition, Inc., Vantage Computer Systems, Inc., DST
Systems, Inc., and Robert S. Maltempo (filed as Exhibit 2.1 to
the Registrant's Current Report on Form 8-K dated September 30,
1993, and incorporated herein by reference)
2.3 -- Plan and Agreement of Merger dated September 30, 1993, by and
between Continuum Acquisition, Inc. and Vantage Computer Systems,
Inc. (filed as Exhibit 2.2 to the Registrant's Current Report on
Form 8-K dated September 30, 1993, and incorporated herein by
reference)
2.4 -- Acquisition Agreement of 100% of the Issued Shares of SOCS
Holding dated December 19, 1995, by and among Registrant,
Jean-Michel Renck, Jean-Louis Rossignol, and Jean-Charles
Miginiac (filed as Exhibit 2.1 of the Registrant's Current Report
on Form 8-K dated January 12, 1996, and incorporated herein by
reference)
2.5 -- Plan and Agreement of Merger dated December 10, 1995, as
amended, by and among the Registrant, Continuum Acquisition
Corporation and Hogan Systems, Inc. (filed as Appendix I to the
Registrant's Registration Statement on Form S-4 (No. 33-65405),
and incorporated herein by reference)
2.6 -- Agreement and Plan of Merger dated April 28, 1996, among the
Registrant, Computer Sciences Corporation and Continental
Acquisition, Inc. (filed as Exhibit 2.1 to the Registrant's
Current Report on Form 8-K dated April 28, 1996, and incorporated
herein by reference)
3.1 -- Certificate of Incorporation of the Registrant and Amendment
thereto (filed as an Exhibit to the Registrant's Annual Report on
Form 10-K for the fiscal year ended March 31, 1994, and
incorporated herein by reference)
3.2 -- Bylaws of the Registrant, as amended (filed as an Exhibit to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1994, and incorporated herein by reference)
10.1 -- Lease Agreement dated June 11, 1985, between the Registrant and
Crow - Gottesman - Buchanan #3 (filed as an Exhibit to the
Registrant's Current Report on Form 8-K dated June 13, 1985, and
incorporated herein by reference)
10.2* -- Registrant's 1983 Incentive Stock Option Plan (filed as Annex A
of the Registrant's Proxy Statement for the fiscal year ended
March 31, 1990, and incorporated herein by reference)
10.3* -- Stock Option Agreement dated September 19, 1989, between the
Registrant and W. Michael Long (filed as an Exhibit to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1990, and incorporated herein by reference)
10.4* -- Stock Option Agreement dated February 1, 1990, between the
Registrant and E. Lee Walker (filed as an Exhibit to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1994, and incorporated herein by reference)
10.5* -- Registrant's 1990 Restricted Stock and Bonus Plan (filed as
Annex A of the Registrant's Proxy Statement for the fiscal year
ended March 31, 1990, and incorporated herein by reference)
10.6* -- Registrant's 1992 Stock Option Plan (filed as Annex A of the
Registrant's Proxy Statement for the fiscal year ended March 31,
1992, and incorporated herein by reference)
10.7* -- Registrant's 1994 Directors Stock Option Plan (filed as an
Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1994, and incorporated herein by
reference)
10.8* -- Registrant's 1994 Incentive Stock Plan (filed as an Exhibit to
the Registrant's Proxy Statement for the fiscal year ended March
31, 1994, and incorporated herein by reference)
10.9* -- Registrant's 1995 Directors' Stock Option Plan (filed as an
Exhibit of the Registrant's Registration Statement on Form S-8
(No. 33-61733), and incorporated herein by reference)
10.10* -- Stock Option Agreement dated April 1, 1996, between the
Registrant and Michael H. Anderson (filed as an Exhibit to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1996, and incorporated herein by reference)
10.11 -- Data Processing Services Agreement dated September 30, 1993, by
and between the Registrant and DST Systems, Inc. (filed as an
Exhibit to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995, and incorporated herein by
reference)
10.12 -- Software License Distribution Agreement dated September 30, 1993,
by and between the Registrant and DST Systems, Inc. (filed as an
Exhibit to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995, and incorporated herein by
reference)
10.13* -- Description of Compensatory Arrangement between the Registrant
and Edward C. Stanton, III (filed as an Exhibit to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1996, and incorporated herein by reference)
21.1 -- Subsidiaries of the Registrant (filed as an Exhibit to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1996, and incorporated herein by reference)
23.1 -- Consent of Independent Auditors (filed as an Exhibit to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1996, and incorporated herein by reference)
23.2 -- Consent of Independent Accountants (filed as an Exhibit to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1996, and incorporated herein by reference)
99.1 -- Consolidated Financial Statements of Hogan Systems, Inc. S-1
* Indicates Registrant's management compensation plans
The Registrant will furnish a copy of each long-term debt instrument to the
Commission upon request.
(b) REPORTS ON FORM 8-K
Reports on Form 8-K filed by the Registrant during the last quarter covered
by this report:
Form 8-K reporting date - December 28, 1995
Items reported: Acquisition of SOCS Holding
Form 8-K reporting date - March 15, 1996
Items reported: Acquisition of Hogan Systems, Inc.
Form 8-K reporting date - April 28, 1996
Items reported: Execution of an agreement whereby the Company would be
acquired by Computer Sciences Corporation
SIGNATURES
Pursuant to the requirements 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.
THE CONTINUUM COMPANY, INC.
By: JOHN L. WESTERMANN III
Vice President and Chief
Financial Officer
Date: June 5, 1996
HOGAN SYSTEMS, INC. EXHIBIT 99.1
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
MARCH 31,
--------------------
1995 1994
-------- --------
Current assets:
Cash and cash equivalents .................................................................................. $ 7,764 $10,374
Accounts receivable, net of allowance for doubtful accounts of $911 and
$525 ..................................................................................................... 40,577 35,484
Deferred income taxes ...................................................................................... 905 799
Prepaid expenses and other current assets .................................................................. 1,685 3,253
-------- --------
Total current assets ..................................................................................... 50,931 49,910
Long-term receivables ......................................................................................... 359 1,204
Property and equipment at cost, net of accumulated depreciation of $8,220
and $6,365 .................................................................................................. 7,236 4,587
Capitalized software costs, net of accumulated amortization of $10,894 and
$7,827 ...................................................................................................... 32,149 20,853
Intangible assets ............................................................................................. 5,136 6,000
Other assets .................................................................................................. 870 936
-------- --------
Total assets ............................................................................................... $96,681 $83,490
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................................................... $5,666 $3,630
Accrued salary and employee benefits ....................................................................... 7,795 5,291
Working capital line of credit ............................................................................. 1,920 --
Deferred maintenance revenue ............................................................................... 11,741 10,097
Deferred support revenue ................................................................................... 1,011 538
Other ...................................................................................................... 4,027 5,045
-------- --------
Total current liabilities ................................................................................ 32,160 24,601
Deferred maintenance revenue .................................................................................. 3,092 4,115
Deferred income taxes ......................................................................................... 4,502 2,485
Other long-term liabilities ................................................................................... 257 160
-------- --------
Total liabilities ........................................................................................ 40,011 31,361
Shareholders' equity:
Preferred stock, no par value - authorized 1,000 shares - none issued
Common stock, par value $.01 - authorized 50,000 shares - issued 15,078 and
15,070 shares at March 31, 1995 and 1994, respectively -
outstanding 14,390 and 14,381 shares at March 31, 1995 and 1994,
respectively
Capital in excess of par value ............................................................................. 44,618 44,625
Foreign currency translation adjustments ................................................................... (886) (1,577)
Retained earnings .......................................................................................... 18,636 14,785
-------- --------
62,519 57,984
Less: Treasury stock at cost, 688 and 689 shares ......................................................... (5,849) (5,855)
-------- --------
Shareholders' equity .......................................................................................... 56,670 52,129
-------- --------
Total liabilities and shareholders' equity ............................................................... $96,681 $83,490
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
S-1
HOGAN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED MARCH 31,
--------------------------------
1995 1994 1993
-------- -------- --------
Revenues:
Professional service fees ...................................................................... $62,563 $43,297 $46,529
License fees ................................................................................... 13,991 17,199 8,277
Maintenance fees ............................................................................... 16,052 11,144 9,712
-------- -------- --------
Total revenues ............................................................................... 92,606 71,640 64,518
Expenses:
Professional services .......................................................................... 48,752 33,648 32,372
Development and product support ................................................................ 10,769 6,256 6,951
Selling and marketing .......................................................................... 15,106 13,891 9,645
General and administrative ..................................................................... 8,917 8,128 7,212
-------- -------- --------
Total expenses ............................................................................... 83,544 61,923 56,180
-------- -------- --------
Operating income .................................................................................. 9,062 9,717 8,338
Interest income ................................................................................... 301 845 1,383
Interest expense .................................................................................. (369) (70) (71)
-------- -------- --------
Income before taxes ............................................................................... 8,994 10,492 9,650
Provision for income taxes ........................................................................ 2,700 4,600 4,170
-------- -------- --------
Income before cumulative effect of accounting change .............................................. 6,294 5,892 5,480
Cumulative effect of change in accounting for income taxes ........................................ -- 350 --
Net income ........................................................................................ $6,294 $6,242 $5,480
======= ======= =======
Per share data:
Income before cumulative effect of accounting change ........................................... $ 0.43 $ 0.39 $ 0.38
======= ======= =======
Net income ..................................................................................... $ 0.43 $ 0.41 $ 0.38
======= ======= =======
Weighted average number of common shares .......................................................... 14,800 15,300 14,500
The accompanying notes are an integral part of these consolidated financial statements.
S-2
HOGAN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED MARCH 31,
------------------------------------
1995 1994 1993
--------- --------- ---------
Cash flow from operating activities:
Income before cumulative effect of accounting change ....................................... $ 6,294 $ 5,892 $ 5,480
Cumulative effect of change in accounting for income taxes ................................. -- 350 --
--------- --------- ---------
Net income .................................................................................... 6,294 6,242 5,480
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation and amortization .............................................................. 6,274 3,185 2,021
Provision for losses on accounts receivable ................................................ 420 468 858
Foreign currency translation ............................................................... 691 (167) (762)
Cancellation of stock subscription receivable .............................................. (80) -- --
Changes in assets and liabilities:
Accounts receivable ...................................................................... (5,513) (13,759) 446
Current deferred income taxes ............................................................ (106) -- --
Prepaid expenses and other current assets ................................................ 1,568 (849) (71)
Accounts payable ......................................................................... 2,036 1,237 191
Accrued salary and employee benefits ..................................................... 2,504 1,039 1,144
Deferred maintenance revenue ............................................................. 621 3,713 3,763
Deferred support ......................................................................... 473 (309) 537
Long-term deferred income taxes .......................................................... 2,017 2,611 87
Other assets and long-term receivables ................................................... 911 180 725
Other current liabilities ................................................................ (1,018) 547 139
Other long-term liabilities .............................................................. 97 (66) (607)
--------- --------- ---------
17,189 4,072 13,951
--------- --------- ---------
Cash flow from investing activities:
Purchase of property and equipment ......................................................... (5,102) (3,113) (1,260)
Proceeds from sale of property and equipment ............................................... 110 -- --
Purchase of marketing and support rights ................................................... -- (6,000) --
Additions to capitalized software .......................................................... (14,363) (18,599) (3,407)
--------- --------- ---------
(19,355) (27,712) (4,667)
--------- --------- ---------
Cash flow from financing activities:
Proceeds from working capital line of credit ............................................... 1,920 -- --
Dividends paid ............................................................................. (2,443) (2,510) (2,098)
Purchase of treasury stock ................................................................. -- (5,855) --
Exercise of stock options .................................................................. 79 3,026 1,758
--------- --------- ---------
(444) (5,339) (340)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents .......................................... (2,610) (28,979) 8,944
--------- --------- ---------
Cash and cash equivalents at beginning of period .............................................. 10,374 39,353 30,409
--------- --------- ---------
Cash and cash equivalents at end of period .................................................... $ 7,764 $10,374 $39,353
========= ======== ========
Supplemental cash flow information:
Cash paid for interest ..................................................................... $ 300 $ 65 $ 74
========= ======== ========
Cash paid for income taxes ................................................................. $ 900 $ 2,000 $ 3,000
========= ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
S-3
HOGAN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
COMMON STOCK CAPITAL FOREIGN CURRENCY
----------------- EXCESS OF TRANSLATION RETAINED TREASURY
SHARES AMOUNT PAR VALUE ADJUSTMENTS EARNINGS STOCK TOTAL
------- ------ --------- ----------- -------- -------- --------
Balance, March 31, 1992 ...... 14,002 $ 155 $44,553 $ (648) $ 7,671 $(7,804) $43,927
Exercise of stock options ... 403 4 1,754 1,758
Special dividend - $.15 per
common share ............... (2,098) (2,098)
Retirement of treasury stock (15) (7,789) 7,804 --
Tax benefit from exercise of
stock options .............. 1,500 1,500
Translation adjustment ...... (762) (762)
Net income .................. 5,480 5,480
------- ------ -------- -------- -------- -------- --------
Balance, March 31, 1993 ...... 14,405 144 40,018 (1,410) 11,053 -- 49,805
Exercise of stock options ... 665 7 3,019 3,026
Special dividend - $.17 per
common share ............... (2,510) (2,510)
Acquisition of treasury stock (689) (5,855) (5,855)
Tax benefit from exercise of
stock options .............. 1,588 1,588
Translation adjustment ...... (167) (167)
Net income .................. 6,242 6,242
------- ------ -------- -------- -------- -------- --------
Balance, March 31, 1994 ...... 14,381 151 44,625 (1,577) 14,785 (5,855) 52,129
Exercise of stock options ... 21 79 79
Issuance of treasury stock .. 1 (6) 6 --
Special dividend - $.17 per
common share ............... (2,443) (2,443)
Cancellation of stock
subscription ............... (13) (80) (80)
Translation adjustment ...... 691 691
Net income .................. 6,294 6,294
------- ------ -------- -------- -------- -------- --------
Balance, March 31, 1995 ...... 14,390 $ 151 $44,618 $ (886) $18,636 $(5,849) $56,670
======= ====== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
S-4
HOGAN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Hogan
Systems, Inc. ("Hogan" or the "Company") and its wholly-owned subsidiaries. All
intercompany transactions and balances have been eliminated in consolidation.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign operations are translated into United
States dollars using exchange rates prevailing at the balance sheet date. Income
and expense accounts are translated at average exchange rates prevailing during
the year. Resulting translation adjustments are included in retained earnings.
Transaction gains or losses, which historically have not been material, are
included in the results of operations of the period in which they occur.
REVENUE RECOGNITION
The Company's revenues are generated primarily by licensing to customers
standardized financial software systems and providing related services and
support to the banking industry.
The Company enters into agreements whereby the Company licenses software to
a customer under the terms of nontransferable and nonexclusive license
agreements. An agreement provides the customer the right to use the software and
usually obligates the Company to provide post-contract support (PCS) in the form
of maintenance for a period of time, typically one year, at no additional cost
to the customer. Revenue related to the PCS is carved out of the contract price
and recognized ratably over the period of the PCS arrangement. Software license
revenue is recognized upon the execution of a contract and delivery of system
software.
The Company enters into professional service contracts with customers,
whereby the Company provides consulting, installation, customization and
training. These services are generally provided under time and materials
contracts and in some circumstances under fixed price arrangements. Under fixed
price contracts, revenue is recognized on the basis of the estimated percentage
of completion of services provided. Changes in estimates to complete and losses,
if any, are recognized in the period in which they are determined.
Hogan offers maintenance support to customers in addition to the PCS
arrangements. This support is contracted and billed independently of other
arrangements and generally begins after the initial PCS period and continues in
annual increments. Maintenance revenue is recognized ratably over the term of
the maintenance period.
Deferred revenue consists primarily of advance billing for maintenance and
professional services and is recognized as revenue when the services are
provided.
S-5
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Such cash
equivalents aggregated $274 and $494 at March 31, 1995 and 1994, respectively.
PROPERTY AND EQUIPMENT
Property and equipment, including equipment acquired under capital leases,
are recorded at cost. Property and equipment are depreciated on a straight-line
basis over their estimated useful lives. Assets acquired under capital leases
are amortized over the term of the related lease.
CAPITALIZED SOFTWARE COSTS
In accordance with the Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise
Marketed", certain costs incurred in the internal development of computer
software which is to be licensed to customers and costs of purchased computer
software are capitalized. These costs are amortized at the greater of the amount
computed using (a) the ratio of current gross revenues of a product to the total
of current and anticipated future gross revenues of that product or (b) the
straight-line method over the remaining estimated economic life of the product.
The amount by which unamortized software costs exceed the net realizable value,
if any, is recognized in the period it is determined.
INTANGIBLE ASSETS
Intangible assets are amortized at the greater of the amount computed using
(a) the ratio of current cash flows to the total of current and anticipated
future cash flows or (b) the straight-line method over their estimated useful
lives. It is the Company's policy to periodically review the net realizable
value of its intangible assets through an assessment of the estimated future
cash flows related to such assets. The specific business to which these
intangible assets relate is reviewed to determine whether future cash flows,
over the remaining estimated life of the asset, provide for recovery of the
assets. In the event that assets are found to be stated at amounts which are in
excess of those which are supported by estimated future cash flows, then the
intangible assets are adjusted for impairment to a level commensurate with a
discounted cash flow analysis of the underlying assets.
INCOME TAXES
The provision for income taxes and corresponding balance sheet accounts are
determined in accordance with the Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" (FAS 109). Under FAS 109, the deferred
tax liabilities and assets are determined based on temporary differences between
the bases of certain assets and liabilities for income tax and financial
reporting purposes. These differences are primarily attributable to differences
in the recognition of depreciation and amortization of property, equipment and
intangible assets and certain software development. The Company adopted FAS 109
effective April 1, 1993.
S-6
NET INCOME PER SHARE
Net income per common share has been computed using the treasury stock
method based on the weighted average number of common shares and equivalent
common shares outstanding.
BASIS OF PRESENTATION
For comparative purposes, certain amounts have been reclassified for years
prior to 1995.
NOTE 2 - ACCOUNTS RECEIVABLE
Accounts receivable at March 31, 1995 and 1994 are comprised of the
following:
MARCH 31,
-------------------
1995 1994
------- -------
Billed ..................................................... $21,106 $19,953
Unbilled ................................................... 19,063 15,581
Employee ................................................... 246 261
Other ...................................................... 1,432 1,418
------- -------
41,847 37,213
Less allowance for doubtful accounts ....................... 911 525
------- -------
40,936 36,688
Less amounts not collectible until after one year .......... 359 1,204
------- -------
Current accounts receivable, net ........................... $40,577 $35,484
======= =======
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment at March 31, 1995 and 1994 consist of the following:
ESTIMATED LIFE 1995 1994
-------------- ------- -------
Building and improvements .................................. 40 years $ 2,894 $ --
Furniture and equipment .................................... 2-7 years 10,587 9,232
Remaining
Leasehold improvements ..................................... life of lease 1,975 1,720
------- -------
15,456 10,952
Less accumulated depreciation and amortization ............. 8,220 6,365
------- -------
$ 7,236 $ 4,587
======= =======
S-7
The Company is committed under operating leases, domestically and abroad,
for office space and office equipment as follows:
OFFICE OFFICE
SPACE EQUIPMENT
------ ---------
Year ending March 31,
1996 .................................. $2,030 $1,575
1997 .................................. 703 1,534
1998 .................................. 233 345
1999 .................................. 233 --
2000 .................................. 116 --
------ ------
$3,315 $3,454
====== ======
Rent expense was $1,993, $1,831, and $1,683 for fiscal years 1995, 1994,
and 1993, respectively. Leases for office space provide that the base rent may
be increased to cover increased building operating expenses. The lease for the
Company's home office in Dallas, Texas, expires in June 1996. Management is
currently exploring alternatives, including renewal of the current lease, which
will meet the Company's needs at that date.
In April 1994, the Company made a cash payment of $2,894 to acquire the
building which it had leased for its United Kingdom office.
NOTE 4 - CAPITALIZED SOFTWARE COSTS
The Company capitalizes both software to be sold (internally developed
software) and software purchased for internal use (purchased software) which is
not sold, leased or otherwise marketed. A summary of capitalized software costs
at March 31, 1995 and 1994 is as follows:
INTERNALLY DEVELOPED PURCHASED
-------------------- -----------------
1995 1994 1995 1994
-------- ------- ------ ------
Capitalized software costs ................. $34,922 $21,752 $8,121 $6,928
Less accumulated amortization .............. 4,781 2,626 6,113 5,201
------- ------- ------ ------
Net ........................................ $30,141 $19,126 $2,008 $1,727
======= ======= ====== ======
Amortization charged to expense for internally developed software amounted
to $2,155, $641 and $541 in 1995, 1994 and 1993, respectively. Amortization
charged to expense for purchased software was $912, $521 and $122 in 1995, 1994
and 1993, respectively.
S-8
NOTE 5 - DEVELOPMENT AND PRODUCT SUPPORT
Development and product support expense for the three years ended March 31,
1995 is comprised of the following:
1995 1994 1993
------ ------ ------
Customer Support ............................................... $5,849 $3,886 $3,201
Research and development ....................................... 2,765 1,729 3,209
Amortization of internally developed software costs ............ 2,155 641 541
------- ------ ------
$10,769 $6,256 $6,951
======= ====== ======
Customer support represents the direct costs of providing maintenance to
customers. Amortization reflects the amortization of internally developed
capitalized software costs as described in Note 1 to the financial statements.
Research and development expense reflects the software development costs
incurred for product development prior to capitalization under FAS 86, as well
as costs of minor modifications to existing products. Such modifications benefit
both existing maintenance customers and future product licensees.
NOTE 6 - INTANGIBLE ASSETS
Hogan acquired the marketing and support service rights to the Company's
Integrated Banking Application software and certain other products in the United
States, Canada, Puerto Rico and Latin America from International Business
Machines Corporation ("IBM") effective February 1, 1994 (marketing) and March 1,
1994 (maintenance support). The Company is amortizing the rights over the
anticipated periods of benefit of 15 months and 12 years for the maintenance
support and marketing rights, respectively. Amortization charged to expense for
these rights amounted to $864 in 1995.
NOTE 7 - FINANCING ARRANGEMENT
The Company entered into an unsecured bank revolving credit agreement on
March 4, 1994 which provides for borrowings up to $20,000 through June 14, 1996.
Borrowings under the credit agreement will, at the Company's option, bear
interest at either the Prime Rate (9% at March 31, 1995) or a rate based on the
London Interbank Offered Rate plus .875 percent (7.625% at March 31, 1995). The
agreement contains, among other covenants, provisions requiring certain
financial ratios be maintained and limits on loan indebtedness, advances and
investments. A commitment fee of 0.125 percent is paid on the unused portion of
the revolving credit agreement and no compensating balances are required. At
March 31, 1995, the unused portion of the revolving credit agreement was
$18,080.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
There are no outstanding claims against the Company which management
believes will have a material adverse effect on the Company's financial position
or results of operations.
S-9
NOTE 9 - SHAREHOLDERS' EQUITY
The Company has 1,000,000 shares of authorized preferred stock. The Board
of Directors has the authority to determine the terms and provisions of any
series of preferred stock.
During fiscal 1994, the Company repurchased 688,772 shares of Hogan stock
from IBM for $5,855.
NOTE 10 - BUSINESS SEGMENTS AND FOREIGN OPERATIONS
The Company supplies integrated software products and support services to
financial institutions and operates from three principal geographic areas: 1)
the United States, 2) Europe and Africa and 3) Asia Pacific. The following is a
summary of information by area:
MARCH 31,
--------------------------------
1995 1994 1993
-------- -------- --------
Revenues:
United States ....................................................................... $70,636 $45,754 $43,772
Europe and Africa ................................................................... 17,163 22,280 17,224
Asia Pacific ........................................................................ 4,807 3,606 3,522
-------- -------- --------
Total revenues .................................................................... $92,606 $71,640 $64,518
======== ======== ========
Operating income (loss):
United States ....................................................................... $ 1,190 $9,372 $8,671
Europe and Africa ................................................................... 6,884 1,175 (141)
Asia Pacific ........................................................................ 988 (830) (192)
-------- -------- -------
....................................................................................... 9,062 9,717 8,338
Interest income (expense), net ......................................................... (68) 775 1,312
-------- -------- -------
Income before income taxes, and cumulative effect of
accounting change .................................................................... $ 8,994 $10,492 $9,650
======== ======== =======
Identifiable Assets:
United States ....................................................................... $82,834 $65,309 $59,278
Europe and Africa ................................................................... 12,337 16,722 11,244
Asia Pacific ........................................................................ 1,510 1,459 1,123
-------- -------- --------
Total assets ...................................................................... $96,681 $83,490 $71,645
======== ======== ========
S-10
During 1995, the Company changed its agreements with regard to its foreign
subsidiaries. The agreements resulted in substantial financial support of the
foreign operations by the parent. The application of this modification resulted
in the fluctuation in the operating income figures detailed in the table above.
Total 1995 U.S. revenues include export sales to unaffiliated customers
principally in South America, Australia, Canada and Mexico of $22,977. In fiscal
years 1994 and 1993, total U.S. revenues included export sales to unaffiliated
customers principally in Canada, South America, Mexico, Australia and Europe of
$13,440 and $2,268, respectively.
Professional services, license fee and maintenance fee revenues from two
customers aggregated 11% of total revenues in 1995. Revenues from IBM aggregated
7%, 35% and 61% of total revenues in 1995, 1994 and 1993, respectively.
NOTE 11 - EMPLOYEE BENEFIT PLANS
A total of 3,500,000 shares of common stock have been reserved under the
Company's 1984 and 1985 stock option plans. The option prices of grants made
under these plans are equal to the fair market value of the Company's stock on
the date of grant. The options are exercisable cumulatively at rates varying
from 20 percent to 50 percent annually and expire ten years from the date of
grant. At March 31, 1995, options for 1,153,473 shares were exercisable under
the stock option plans. As of March 31, 1995, there were 2,013 shares available
for grant under the Company's stock option plans.
NUMBER OF SHARES PRICE PER SHARE
---------------- ---------------
Outstanding, March 31, 1992 .................... 2,192,823 $ 1.675-$10.375
Granted ..................................... 1,327,000 $ 3.75 -$ 7.625
Exercised ................................... (403,441) $ 1.675-$ 5.75
Cancelled ................................... (538,417) $ 2.375-$ 6.875
----------
Outstanding, March 31, 1993 .................... 2,577,965 $ 3.625-$10.375
Granted ..................................... 262,000 $10.00 -$11.125
Exercised ................................... (664,159) $ 3.625-$ 6.875
Cancelled ................................... (112,234) $ 3.625-$ 7.125
----------
Outstanding, March 31, 1994 .................... 2,063,572 $ 3.625-$11.125
Granted ..................................... 604,600 $ 5.50 -$ 5.75
Exercised ................................... (21,332) $ 6.00 -$ 9.625
Cancelled ................................... (108,703) $ 3.625-$11.125
----------
Outstanding, March 31, 1995 .................... 2,538,137 $ 3.625-$11.125
The Company has a Savings and Profit Sharing Plan pursuant to Section
401(k) of the Internal Revenue Code. Company contributions to the plan
aggregated $965 for 1995; $820 for 1994 and $600 for 1993.
S-11
NOTE 12 - INCOME TAXES
Effective April 1, 1993, the Company adopted FAS 109. The cumulative effect
of the change in the method of accounting for income taxes of $350 was
determined as of April 1, 1993 and is reported separately in the Consolidated
Statements of Income for the fiscal year ended March 31, 1994. Prior years'
financial statements have not been restated to apply the provisions of SFAS No.
109.
Pursuant to the deferred method under APB Opinion 11, which was applied in
fiscal years ended March 31, 1993 and prior, deferred income taxes are
recognized for income and expense items that are reported in different years for
financial reporting purposes and income tax purposes using the tax rate
applicable for the year of the calculation.
The components of income tax expense (benefit) are:
YEAR ENDED MARCH 31,
---------------------------------
1995 1994 1993
------- -------- ------
Current:
Federal ............................. $ (73) $(1,138) $3,088
Foreign ............................. 2,246 1,788 282
State ............................... -- -- 260
Deferred ............................... 527 3,950 540
------- -------- ------
Total Provision ..................... $2,700 $ 4,600 $4,170
======= ======== ======
A reconciliation of income tax expense at the statutory rate to income tax
expense at the Company's effective rate is as follows:
YEAR ENDED MARCH 31,
--------------------------------
1995 1994 1993
-------- ------- ------
Computed tax at the Federal statutory rate of 34% .............................. $ 3,058 $3,567 $3,281
Benefit of net operating loss .................................................. -- (761) --
Foreign tax withheld ........................................................... 1,745 1,401 130
Foreign net operating loss, not previously benefited ........................... (2,908) -- --
Rate differential on foreign subsidiary income ................................. 367 -- 120
State income tax and other ..................................................... 438 393 639
-------- ------- ------
Income tax expense ............................................................. $ 2,700 $4,600 $4,170
======== ======= ======
S-12
The components of the non-current deferred tax liability are as follows at
March 31, 1995 and 1994:
1995 1994
------- -------
Non-current deferred tax liability:
Capitalized software ........................................................................... $ 9,097 $ 6,956
State taxes .................................................................................... 411 316
Non-current deferred tax assets:
Depreciation ................................................................................... (309) (278)
Deferred revenue ............................................................................... (658) (267)
Foreign subsidiary net operating loss carryforwards ............................................ -- (2,908)
R&D credit carryforward ........................................................................ (5,138) (3,488)
Other carryforwards ............................................................................ -- (520)
Other .......................................................................................... 1,099 (234)
Valuation allowance:
Foreign subsidiary net operating loss carryforwards ............................................ -- 2,908
-------- --------
Non-current deferred tax liability ............................................................. $ 4,502 $ 2,485
======== ========
The components of the current deferred tax asset are as follows:
Allowance for doubtful accounts ................................................................ $ 209 $ 107
Various accruals ............................................................................... 696 692
-------- --------
Current deferred tax asset ..................................................................... $ 905 $ 799
======== ========
As of March 31, 1995, for tax purposes the Company has $5,138 of available
general business credits which expire from 1998 to 2010. Under Section 382 of
the Internal Revenue Code, annual use of loss or credit carryforwards may be
limited if a cumulative change in ownership of more than 50 percent occurs
within a three year period. The 1995 reduction in the valuation allowance was
attributable to the realization of foreign net operating loss carryforwards not
previously benefited.
S-13
NOTE 13 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the two years ended March 31, 1995 is
as follows:
QUARTER ENDED
-----------------------------------------------
JUN. 30, SEP. 30, DEC. 31, MAR. 31,
1994 1994 1994 1995
-------- -------- -------- --------
Revenues ....................................... $19,784 $23,409 $20,316 $29,097
Operating income ............................... 150 2,349 647 5,916
Net income ..................................... 80 1,343 307 4,564
Net income per share ........................... $ .01 $ .09 $ .02 $ .31
QUARTER ENDED
-----------------------------------------------
JUN. 30, SEP. 30, DEC. 31, MAR. 31,
1993 1993 1993 1994
-------- -------- -------- --------
Revenues ....................................... $15,629 $14,726 $18,608 $22,677
Operating income ............................... 2,014 563 3,053 4,087
Net income ..................................... 1,804 332 1,658 2,448
Net income per share ........................... $ .12 $ .02 $ .11 $ .16
S-14
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Hogan Systems, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of cash flows and of changes in
shareholders' equity, present fairly, in all material respects, the financial
position of Hogan Systems, Inc. and its subsidiaries at March 31, 1995 and 1994
and the results of their operations and their cash flows for each of the three
years in the period ended March 31, 1995, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As discussed in Note 12 to the financial statements, the Company changed
its method of accounting for income taxes in the year ended March 31, 1994.
PRICE WATERHOUSE LLP
Dallas, Texas
April 21, 1995
S-15