UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number: 0-12317
HOGAN SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-1558550
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5080 Spectrum Drive
Suite 400E
Dallas, Texas 75248
(Address of principal executive offices)
(Zip code)
(214) 386-0020
(Registrant's telephone number, including area code)
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 [ ]
As of January 31, 1996, there were 15,290,764 shares of the registrant's $.01
par value common stock outstanding.
HOGAN SYSTEMS, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page No.
--------
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -
December 31, 1995 and March 31, 1995 2-3
Condensed Consolidated Statements of Income -
Three months and Nine months ended
December 31, 1995 and 1994 4
Condensed Consolidated Statements of Cash Flows -
Nine months ended December 31, 1995 and 1994 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-8
PART II. OTHER INFORMATION
Item 6(a). Exhibits 9
Item 6(b). Reports on Form 8-K 9
Signatures 10
Note: Items 1, 2, 3, 4 and 5 of Part II are omitted because they are not
applicable.
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HOGAN SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
------
December 31, March 31,
1995 1995
------------ ---------
Current assets:
Cash and cash equivalents $ 5,043 $ 7,764
Accounts receivable, net of
allowance for doubtful accounts of $993 and $911 43,748 40,577
Deferred income taxes 905 905
Prepaid expenses and other current assets 1,645 1,685
----------- ---------
Total current assets 51,341 50,931
Long-term receivables 1,370 359
Property and equipment at cost, net of accumulated
depreciation of $9,819 and $8,220 6,459 7,236
Capitalized software costs, net of accumulated
amortization of $15,794 and $10,894 31,711 32,149
Intangible assets 4,731 5,136
Other assets 1,406 870
----------- ---------
Total assets $ 97,018 $ 96,681
=========== =========
See accompanying notes to these condensed consolidated financial statements.
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HOGAN SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
December 31, March 31,
1995 1995
------------ ---------
Current liabilities:
Accounts payable $ 4,533 $ 5,666
Accrued salary and employee benefits 7,104 7,795
Working capital line of credit 1,500 1,920
Deferred maintenance revenue 8,493 11,741
Deferred support revenue 628 1,011
Other 5,301 4,027
------------ -------------
Total current liabilities 27,559 32,160
Deferred maintenance revenue 2,841 3,092
Deferred income taxes 4,647 4,502
Other long-term liabilities 62 257
------------ -------------
Total liabilities 35,109 40,011
Shareholders' equity:
Preferred stock, no par value -
authorized 1,000 shares - none issued
Common stock, par value $.01 - authorized 50,000
shares - issued 15,951 shares at December 31, 1995 and 15,078 shares at
March 31, 1995 - outstanding
15,263 and 14,390, respectively 160 151
Capital in excess of par value 49,219 44,618
Foreign currency translation adjustments (1,143) (886)
Retained earnings 23,410 18,636
------------ -------------
71,646 62,519
Less: Treasury stock at cost, 688 shares (5,849) (5,849)
Notes receivable from officers (3,888) -
------------ -------------
Shareholders' equity 61,909 56,670
------------ -------------
Total liabilities and shareholders' equity $ 97,018 $ 96,681
============ =============
See accompanying notes to these condensed consolidated financial statements.
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HOGAN SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Three Nine
Months Ended Months Ended
December 31, December 31,
1995 1994 1995 1994
---- ---- ---- ----
Revenues:
Professional service fees $ 17,039 $ 15,481 $ 51,324 $ 44,753
License fees 900 717 8,930 6,859
Maintenance fees 5,204 4,118 14,015 11,897
----------- ---------- ----------- -----------
Total revenues 23,143 20,316 74,269 63,509
Expenses:
Professional services 10,949 11,732 33,380 35,877
Development and product support 4,964 2,381 13,970 7,754
Selling and marketing 3,966 3,544 12,540 10,702
General and administrative 2,347 2,012 6,759 6,030
----------- ---------- ----------- -----------
Total expenses 22,226 19,669 66,649 60,363
----------- ---------- ----------- -----------
Operating income 917 647 7,620 3,146
Interest income(expense), net 104 (69) 80 5
----------- ---------- ----------- -----------
Income before taxes 1,021 578 7,700 3,151
Provision for income taxes 357 271 2,926 1,421
----------- ---------- ----------- -----------
Net income $ 664 $ 307 $ 4,774 $ 1,730
=========== ========== =========== ===========
Net income per common share $0.04 $0.02 $0.31 $0.12
===== ===== ===== =====
Weighted average number
of common shares 15,600 14,631 15,600 14,837
=========== ========== =========== ===========
See accompanying notes to these condensed consolidated financial statements.
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HOGAN SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months
Ended December 31,
1995 1994
------ -----
Cash flow from operating activities:
Net income $ 4,774 $ 1,730
Adjustments to reconcile net income to cash used by operating activities:
Depreciation and amortization 6,905 3,979
Provision for losses on accounts receivable 82 90
Foreign currency translation (257) 229
Changes in assets and liabilities:
Accounts receivable (4,264) 4,004
Prepaid expenses and other current assets 40 (12)
Accounts payable (1,133) 635
Accrued salary and employee benefits (691) (683)
Deferred maintenance revenue (3,499) (1,654)
Deferred support revenue (383) 538
Deferred income taxes 145 666
Other assets (536) 56
Other liabilities 1,027 243
------------ ------------
2,210 9,821
------------ ------------
Cash flow from investing activities:
Purchase of property and equipment (860) (4,518)
Additions to capitalized software (4,373) (10,626)
------------ ------------
(5,233) (15,144)
------------ ------------
Cash flow from financing activities:
Cash dividend - (2,443)
Exercise of stock options 722 28
Proceeds from working capital line of credit (420) -
------------ ------------
302 (2,415)
------------ ------------
Net decrease in cash and cash equivalents (2,721) (7,738)
Cash and cash equivalents at beginning of period 7,764 10,374
------------ ------------
Cash and cash equivalents at end of period $ 5,043 $ 2,636
============ ============
See accompanying notes to these condensed consolidated financial statements.
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HOGAN SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) In the opinion of management, the unaudited financial information
contained herein reflects all adjustments which are necessary to fairly
state the Company's consolidated financial position and the consolidated
results of its operations and cash flows for the periods presented. All
such adjustments are of a normal recurring nature. This report on Form
10-Q should be read in conjunction with the Company's 1995 Annual Report
on Form 10-K. The Company presumes that users of the accompanying
interim financial information have read or have access to the audited
financial statements for the preceding fiscal year. Accordingly,
disclosure of information included in the Company's 1995 Annual Report
on Form 10-K has been omitted. The results of operations for the quarter
ended December 31, 1995, are not necessarily indicative of results for
the fiscal year ending March 31, 1996.
(2) On November 28, 1995 several of the Company's senior officers exercised
options to purchase the Company's common stock. The Company entered into
loan agreements with each of the officers for their respective cost of
exercise. The issuance of common stock and the associated notes
receivable from the officers are reflected in the shareholders' equity
section of the condensed consolidated balance sheet.
(3) On December 13, 1995 the Company filed a report on Form 8-K for the
purpose of announcing that on December 10, 1995 the Company signed a
definitive agreement to merge with The Continuum Company, Inc. The
merger, expected to be completed in March, 1996, is subject to the
approval of the stockholders of each company.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations (In thousands, except per share data)
- -----------------------------------------------------------
Revenues for the quarter ended December 31, 1995, aggregated $23,143 compared to
$20,316 for the comparable quarter of the prior fiscal year. The Company
reported net income of $664 ($.04 per share) as compared to net income of $307
($.02 per share) for the quarter ended December 31, 1994.
For the nine-month period ended December 31, 1995, revenues totaled $74,269
compared to $63,509 in the same period of the prior fiscal year, an increase of
$10,760 (17%). Net income of $4,774 ($.31 per share) for the nine-month period
ended December 31, 1995 compares to net income of $1,730 ($.12 per share) for
the nine-month period ended December 31, 1994.
Professional service revenues for the current fiscal quarter increased to
$17,039 from $15,481 in the comparable quarter of last fiscal year, an increase
of 10 percent. For the nine-month period ended December 31, 1995, professional
service revenues increased 15 percent to $51,324 from $44,753 in the comparable
period a year ago. These increases are primarily attributable to increased
consulting rates and current period additions to the number and scope of new
service contracts associated with the license agreements entered into by the
Company during fiscal 1995 and 1996.
License fees increased by $183 and $2,071 for the quarter and nine-month period
ended December 31, 1995, respectively, as compared to the comparable periods of
the prior fiscal year. These increases are attributable to the number of
software products delivered in the respective fiscal periods. These products are
sophisticated software products that typically require a significant purchase
commitment by customers, and therefore, result in a lengthy and variable sales
cycle.
Maintenance fees increased by $1,086 (26%) and $2,118 (18%) during the three
month and nine-month periods ended December 31, 1995, respectively, as compared
to the comparable periods of the prior fiscal year, as the Company continued to
benefit from maintenance agreements related to license sales made in fiscal
years 1995 and 1996.
Professional service expenses decreased from $11,732 during the quarter ended
December 31, 1994, to $10,949 during the quarter ended December 31, 1995,
resulting in an increase in services margin (ratio of professional service
revenues exceeding professional service expenses to professional service
revenues) from 24% to 36%. For the nine-month periods ended December 31, 1994
and 1995 this expense decreased from $35,877 to $33,380 while the services
margin increased from 20% to 35%. The overall expense decreases result
principally from cost reduction steps (including decreased subcontractor and
personnel costs) taken by the management team as well as improved utilization of
personnel.
As compared to the comparable periods for the prior fiscal year, development and
product support expenses increased by $2,583 and $6,216 for the quarter and
nine-month period ended December 31, 1995, respectively. These increases are
attributable to a significant increase in software amortization expense
resulting from new product releases during the latter part of fiscal year 1995
and the shift of activity from capitalizable projects to product support. The
remaining increases are related to ongoing research and development efforts.
-7-
Results of Operations (Continued)
- ---------------------------------
Selling and marketing expenses increased $422 (12%) and $1,838 (17%),
respectively, for the current quarter and the nine-month period ended December
31, 1995, as compared to the comparable periods a year ago. This change results
from increased compensation expense due to an increase in the number of
personnel required to meet the Company's planned world-wide sales force goals.
The total sales and marketing cost as a percentage of revenues has remained at
approximately 17% in each of the corresponding quarters and nine-month periods.
General and administrative expense increases of 17 percent and 12 percent,
respectively, for the quarter and nine-month period ended December 31, 1995 have
resulted primarily from increases in compensation and outside audit and legal
expenses related to the proposed merger with The Continuum Company.
Liquidity and Capital Resources (In thousands)
- ----------------------------------------------
The Company's principal sources of liquidity have historically resulted from
cash flow from operations, the issuance of common stock, existing cash balances
and its line of credit. During the nine-month period ended December 31, 1995,
the Company's cash flow from operations was negatively impacted by an increase
in accounts receivable of $4,264. This increase is attributable to several
factors, including market conditions, contractual issues and timing of product
deliveries. The timing of collections of accounts receivable can also be
impacted by local economic and political conditions which are outside of
management's control.
During the second fiscal quarter, one of the Company's South American customers
was placed under government control. Subsequently, an agreement in principle was
reached with a major Brazilian bank to purchase the customer bank and continue
its operations. The Company will continue to monitor the situation.
The Company believes that its working capital, capital equipment and software
development expenditures for the foreseeable future, including those for the
current product marketing and development plans, will be met by cash flow from
operations and available borrowing capacity under its $20,000 revolving bank
line of credit.
Seasonality (In thousands)
- --------------------------
Operating results do not usually follow a predictable seasonal pattern. As
discussed earlier, the software products and services delivered are
sophisticated in nature and require a significant purchase commitment by
customers. Therefore, this process results in a lengthy and variable sales cycle
resulting in quarterly revenues and net income which have historically been
variable.
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PART II. OTHER INFORMATION
Items 1, 2, 3, 4 and 5 are not applicable.
Item 6(a): Exhibits
Exhibit 11 - Calculation of weighted average number of common
shares and common share equivalents outstanding for the
three-month and nine-month periods ended December 31, 1995 and
1994.
Item 6(b): Reports on Form 8-K
On December 13, 1995 the Company filed a report on Form 8-K for
the purpose of announcing that on December 10, 1995, the
Registrant signed a definitive agreement to merge with The
Continuum Company, Inc. On December 11, 1995 the Company and The
Continuum Company, Inc. issued a joint press release describing
the transaction. The Form 8-K filing incorporated by reference the
Agreement and Plan of Merger as Exhibit 2.1 and the press release
as Exhibit 99.1.
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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.
February 7, 1996
HOGAN SYSTEMS, INC.
- ------------------------------------------------------------
(Registrant)
/s/MICHAEL H. ANDERSON
- ------------------------------------------------------------
Michael H. Anderson
Chairman, President and
Chief Executive Officer
(Principal Executive Officer
and Director)
/s/DAVID R. BANKHEAD
- ------------------------------------------------------------
David R. Bankhead
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
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