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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-28654
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CLAREMONT TECHNOLOGY GROUP, INC.
(Exact name of registrant as specified in its charter)
Oregon 93-1004490
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1600 NW Compton Drive, Suite 210
Beaverton, Oregon 97006
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 503-690-4000
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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock without par value 8,218,961
(Class) (Outstanding at May 6, 1997)
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CLAREMONT TECHNOLOGY GROUP, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION Page
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Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1997 and June 30, 1996 2
Consolidated Statements of Operations - Three Months and
Nine Months Ended March 31, 1997 and 1996 3
Consolidated Statements of Cash Flows - Nine Months Ended March
31, 1997 and 1996 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 6
PART II - OTHER INFORMATION
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Item 2. Changes in Securities 9
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 10
1
ITEM 1. FINANCIAL STATEMENTS
CLAREMONT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
March 31, June 30,
1997 1996
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $16,126 $ 526
Receivables:
Accounts receivable, net of allowances of $136 and $110 13,504 7,811
Revenue earned in excess of billings 7,556 5,653
Other 250 78
Prepaid expenses and other current assets 797 683
Refundable income taxes 3,261 -
Deferred income taxes 331 266
Notes receivable - 75
------------ ------------
Total Current Assets 41,825 15,092
Property and equipment, net of accumulated depreciation
of $3,773 and $2,161 5,842 4,069
Software development costs, net of accumulated amortization
of $369 and $61 6,973 2,146
Other non-current assets, net of accumulated amortization
of $492 and $197 1,357 1,658
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Total Assets $55,997 $22,965
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,693 $ 1,464
Line of credit - 4,600
Current installments of long-term debt 975 944
Accrued payroll and related liabilities 4,088 2,602
Accrued profit sharing 646 682
Other accrued expenses 40 70
Income taxes payable - 619
Deferred revenue 799 661
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Total Current Liabilities 8,241 11,642
Long-term debt, excluding current installments 845 1,578
Deferred income taxes 2,518 775
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Total Liabilities 11,604 13,995
Shareholders' Equity:
Preferred stock, no par value. Authorized 10,000
shares; no shares issued or outstanding - -
Common stock, no par value. Authorized 25,000 shares;
8,134 and 4,832 shares issued and outstanding at
March 31, 1997 and June 30, 1996, respectively 32,943 1,331
Retained earnings 11,462 7,649
Cumulative translation adjustment (12) (10)
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Total Shareholders' Equity 44,393 8,970
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Total Liabilities and Shareholders' Equity $ 55,997 $ 22,965
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See accompanying notes to unaudited consolidated financial statements.
2
CLAREMONT TECHNOLOGY GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended March 31, Nine Months Ended March 31,
---------------------------- ---------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
Revenue:
Professional fees $18,477 $12,024 $47,600 $31,711
Resold products and services - 861 491 1,964
----------- ----------- ----------- -----------
Total revenue 18,477 12,885 48,091 33,675
----------- ----------- ----------- -----------
Costs and expenses:
Project costs and expenses 9,932 6,619 24,851 16,791
Resold products and services - 817 454 1,874
Selling, general and administrative 6,423 4,573 16,616 11,131
----------- ----------- ----------- -----------
Total costs and expenses 16,355 12,009 41,921 29,796
----------- ----------- ----------- -----------
Income from operations 2,122 876 6,170 3,879
----------- ----------- ----------- -----------
Other income (expense):
Interest income 152 22 500 38
Interest expense (38) (37) (151) (77)
Other, net (37) (2) (51) (19)
----------- ----------- ----------- -----------
Total other income (expense) 77 (17) 298 (58)
----------- ----------- ----------- -----------
Income before income taxes 2,199 859 6,468 3,821
Income tax expense 903 364 2,655 1,616
----------- ----------- ----------- -----------
Net income $ 1,296 $ 495 $ 3,813 $ 2,205
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income per common share $ 0.13 $ 0.07 $ 0.40 $ 0.29
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average number of common and
common equivalent shares outstanding 9,924 7,685 9,673 7,662
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
See accompanying notes to unaudited consolidated financial statements.
3
CLAREMONT TECHNOLOGY GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Nine Months Ended March 31,
---------------------------
1997 1996
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Cash flows from operating activities:
Net income $ 3,813 $ 2,205
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,356 966
Deferred income taxes 1,678 456
Non-cash stock compensation recognized - 107
Changes in assets and liabilities:
Receivables (7,851) (4,419)
Prepaid expenses (37) (178)
Refundable income taxes (3,861) -
Accounts payable and accrued expenses 1,634 2,516
Deferred revenue 138 661
Income taxes payable - (42)
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Net cash provided by (used in) operating
activities (2,130) 2,272
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Cash flows from investing activities:
Acquisition, net of cash acquired - (130)
Purchase of property and equipment (3,393) (2,936)
Expenditures for software development costs (5,135) (1,236)
Other non-current assets (134) (1,058)
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Net cash used by investing activities (8,662) (5,360)
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Cash flows from financing activities:
Proceeds/(payments) on line of credit, net (4,600) (200)
Payments of long-term debt (702) (375)
Proceeds from issuance of long-term debt - 2,570
Payments of obligations under capital lease - (3)
Purchase of common stock - (275)
Proceeds from common stock offering, net 26,870 -
Proceeds from exercise of stock options 838 997
Tax benefit related to stock option activity 3,904 -
Payments (issuance) of notes receivable, net 75 116
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Net cash provided by financing activities 26,385 2,830
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Effect of exchange rate on cash 7 (2)
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Net increase (decrease) in cash and cash
equivalents 15,600 (260)
Cash and cash equivalents at beginning of period 526 340
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Cash and cash equivalents at end of period $ 16,126 $ 80
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See accompanying notes to unaudited consolidated financial statements.
4
CLAREMONT TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The financial information included herein for the three-month and nine-month
periods ended March 31, 1997 and 1996 is unaudited; however, such information
reflects all adjustments consisting only of normal recurring adjustments
which are, in the opinion of management, necessary for a fair presentation of
the financial position, results of operations and cash flows for the interim
periods. The financial information as of June 30, 1996 is derived from the
audited financial statements included in Claremont Technology Group, Inc.'s
(the Company's) 1996 Annual Report on Form 10-K. The interim consolidated
financial statements should be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's 1996
Annual Report on Form 10-K.
The results of operations for the interim period presented are not
necessarily indicative of the results to be expected for the full year.
NOTE 2. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information is as follows:
Nine Months Ended March 31,
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1997 1996
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Cash paid during the period for income taxes $818 $673
Cash paid during the period for interest 175 78
NOTE 3. EARNINGS PER SHARE
In March 1997, the Financial Accounting Standards Board issued Statement 128,
EARNINGS PER SHARE ("SFAS 128"), superseding Opinion 15. SFAS 128 is
required to be adopted for periods ending after December 15, 1997. Pro forma
effects of applying SFAS 128 are as follows:
Three Months Ended March 31, Nine Months Ended March 31,
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1997 1996 1997 1996
----------- ----------- ----------- -----------
Primary EPS as reported $ 0.13 $ 0.07 $ 0.40 $ 0.29
Effect of SFAS 128 0.03 0.04 0.12 0.20
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Basic EPS as restated $ 0.16 $ 0.11 $ 0.52 $ 0.49
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Fully diluted EPS as reported $ 0.13 $ 0.07 $ 0.39 $ 0.30
Effect of SFAS 128 0.00 0.00 0.01 0.01
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Diluted EPS as restated $ 0.13 $ 0.07 $ 0.40 $ 0.31
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NOTE 4. SUBSEQUENT EVENTS - ACQUISITIONS
In April 1997, the Company acquired TDS Group, Inc., which has a proprietary
child care management system. The TDS, Inc. acquisition was accounted for
using the pooling method of accounting. Also in April 1997, the Company
completed the acquisition of certain assets of Queensland Systems in
Australia, which specializes in the communications area. This acquisition
was accounted for using the purchase method of accounting. Pro Forma
financial information for the acquisition of Queensland Systems is not
materially different from reported results.
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This report on Form 10-Q contains certain statements, trend analysis and
other information that constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act, which involve risks
and uncertainties. Actual results may differ materially from the results
described in the forward-looking statements. Such forward looking statements
include, but are not limited to, statements including the words "anticipate,"
"believe," "estimate," "expect," "intend," "plan" and other similar
expressions. Such statements reflect the current views of the Company with
respect to future events and are subject to certain risks, uncertainties and
assumptions that include, but are not limited to, those discussed in Item 1
of the Company's 1996 Annual Report on Form 10-K and in the following
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain financial
data as a percentage of total revenue:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
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1997 1996 1997 1996
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Revenue:
Professional fees 100% 93% 99% 94%
Resold products and services - 7 1 6
--------- -------- --------- --------
Total revenue 100 100 100 100
Costs and expenses:
Project costs and expenses 54 51 52 50
Resold products and services - 6 1 5
Selling, general and administrative 35 36 34 33
--------- -------- --------- --------
Total costs and expenses 89 93 87 88
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Income from operations 11 7 13 12
Other income (expense), net 1 - 1 -
--------- -------- --------- --------
Income before income taxes 12 7 14 12
Income tax expense 5 3 6 5
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Net income 7% 4% 8% 7%
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--------- -------- --------- --------
The Company's revenue consists primarily of professional fees (including
license fees for Claremont's reusable software modules), and to a lesser
extent resold hardware and software products and resold contract services.
The Company's professional fees increased 54% to $18.5 million for the three
months ended March 31, 1997 compared to $12.0 million for the three months
ended March 31, 1996. Professional fees increased 50% to $47.6 million for
the nine months ended March 31, 1997 compared to $31.7 million for the nine
months ended March 31, 1996. Professional fees increased primarily due to an
increase in the number of projects performed both for new and existing
clients. The communications, manufacturing and state and local government
practices contributed a majority of the increases. Revenue from foreign
operations increased to $0.9 million and $4.0 million, respectively, for the
three and nine month periods ended March 31, 1997, compared to $0.8 million
and $1.7 million, respectively, for the comparable periods ended March 31,
1996. The Company's top five clients accounted for 45% of revenues for the
nine months ended March 31, 1997 compared to 53% for the nine months ended
March
6
31, 1996. Resold products and services are offered to clients on an
as-needed basis and are resold with little or no mark-up. The Company does
not expect resold products and services to contribute materially to its
income from operations, and generally expects to make little or no profit on
such products and services. The Company expects to provide such products and
services only as an accommodation to the Company's clients as requested for
particular projects.
Project costs and expenses consist primarily of salaries and employee
benefits for personnel dedicated to client projects and associated overhead
costs including equipment depreciation and amortization. Project costs and
expenses increased to $9.9 million and $24.9 million (54% and 52% of
professional fees, respectively) for the three and nine month periods ended
March 31, 1997 from $6.6 million and $16.8 million (55% and 53% of
professional fees, respectively) for the comparable periods ended March 31,
1996. The increase in project costs and expenses was due primarily to the
addition of project personnel necessary to perform the larger number of
client projects.
Selling, general and administrative costs and expenses consist of costs
associated with the Company's executive staff, finance, facilities and human
resources departments (collectively, "Administrative Personnel"), travel and
business development costs. Selling, general and administrative costs and
expenses increased to $6.4 million and $16.6 million (35% and 35% of
professional fees, respectively) for the three and nine month periods ended
March 31, 1997 from $4.6 million and $11.1 million (38% and 35% of
professional fees, respectively) for the comparable periods ended March 31,
1996. The increase is primarily due to increases in professional development
and recruiting expenses associated with the increased professional personnel,
increased facility expenses associated with increased space needs resulting
from increased software development efforts performed at Company facilities
rather than at client locations, increased numbers of Administrative
Personnel, costs related to acquisitions and increased costs associated with
being a public company.
The Company had a total of 646 professional and administrative personnel at
March 31, 1997 and estimates that it will have approximately 900 by December
31, 1997.
Other income (expense), net consists primarily of interest income on cash and
cash equivalents and interest expense associated with short-term borrowings.
Other income (expense), net increased to $77,000 and $298,000 for the three
month and nine month periods ended March 31, 1997 from $(17,000) and
$(58,000) for the comparable periods ended March 31, 1996. The increase is
primarily due to the increase in interest income to $152,000 and $500,000 for
the three and nine month periods ended March 31, 1997 from $22,000 and
$38,000 for the comparable periods ended March 31, 1996, due to higher cash
balances resulting from the Company's initial public offering which occurred
in July 1996.
Income tax expense represents combined federal, state and foreign taxes at an
effective rate of 41%, or $2.7 million, for the first nine months of fiscal
1997 compared to 42%, or $1.6 million, for the comparable period ended March
31, 1996. The slight decrease in the effective tax rate is due to a change in
the mix of jurisdictions in which the Company does business.
7
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations and investments
in property and equipment primarily through cash generated from operations,
bank borrowings and capital lease financing. In July 1996, the Company
completed its initial public offering and in August 1996, the Company sold
additional shares pursuant to the exercise of the underwriters'
over-allotment option. Net proceeds from the offering and over-allotment
totaled $26.9 million.
At March 31, 1997, the Company had working capital of $33.6 million,
including $16.1 million of cash and cash equivalents. Cash increased $15.6
million during the first nine months of fiscal 1997, primarily as a result of
net cash provided from financing activities of $26.4 million, offset by $2.1
million used in operations, $3.4 million for the purchase of property and
equipment and $5.1 million for software development costs.
Accounts receivable increased $5.7 million to $13.5 million at March 31, 1997
from $7.8 million at June 30, 1996 primarily as a result of growth in
revenue. Days sales outstanding were 61 at March 31, 1997 compared to 64 at
June 30, 1996. The Company experienced an 82 percent reduction in past due
accounts (defined as accounts outstanding more than 60 days) to $295,000 at
March 31, 1997 compared to $1.5 million at December 31, 1996.
Revenue earned in excess of billings, which represents amounts due to the
Company under contracts, primarily from government entities, that can not be
billed until certain milestones are met, increased $1.9 million to $7.6
million at March 31, 1997 from $5.7 million at June 30, 1996. The Company
continues to work closely with its clients to reduce the collection cycle of
this asset group.
Refundable income taxes, net of income taxes payable, increased to $3.3
million at March 31, 1997 from a payable of $619,000 at June 30, 1996
primarily as a result of the income tax benefit from certain stock option
exercises.
In July 1996, the Company repaid all amounts outstanding under its line of
credit with a portion of the proceeds from its initial public offering, and
at March 31, 1997 there were no amounts outstanding under the line of credit.
At March 31, 1997, the Company had total debt of $1.8 million compared to
$7.1 million at June 30, 1996.
During the first nine months of fiscal 1997, the Company had capital
expenditures of $3.4 million, primarily related to furniture and personal
computers, and $5.1 million associated with the capitalization of software
development costs. As of March 31, 1997, the Company did not have any
material commitments for capital expenditures.
As of March 31, 1997, the Company had a total of $7.0 million of capitalized
software development costs associated with the Company's reusable software
modules, including CLARETY and PREMOST. To the extent capitalized software
development costs are greater than the potential revenue associated with the
developed software, the Company would be required to immediately expense such
excess amount under SFAS 86. The amount of the excess required to be
expensed in any particular period may be as much as the total amount of
capitalized software development costs then carried on the Company's balance
sheet, depending on the potential revenue associated with the developed
software at such
8
time. Recognition of such expenses, if any, could have a material adverse
effect on the Company's results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS 121"), which the Company will adopt for its year ending June 30, 1997,
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable." The adoption of SFAS 121 is not expected to have an effect on the
Company's financial position.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128, "Earnings per Share" ("SFAS 128").
This statement establishes a different method of computing net income per
share than is currently required under the provisions of Accounting
Principles Board Opinion No. 15. Under SFAS 128, the Company will be
required to present both basic net income per share and diluted net income
per share. Basic net income per share is expected to be comparable or
slightly higher than the currently presented net income per share as the
effect of dilutive stock options will not be considered in computing basic
net income per share. Diluted net income per share is expected to be
comparable or slightly lower than the currently presented net income per
share. The Company expects to adopt SFAS 128 in the fourth quarter of 1997
and, at that time, all historical net income per share data presented will be
restated to conform to the provisions of SFAS 128.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
(c) During the period from January 1, 1997 through March 31, 1997, the
Company sold an aggregate of 482,331 shares of Common Stock for an
aggregate purchase price of $567,000 to various persons pursuant to
the exercise of options granted under the 1992 Stock Incentive Plan
in reliance on Rule 701 promulgated under the Securities Act of 1933.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits filed as part of this report are listed below:
EXHIBIT NO. AND DESCRIPTION
11 Calculations of Net Income Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K:
There were no reports on Form 8-K during the quarter ended March 31, 1997.
9
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.
Date: May 8, 1997 CLAREMONT TECHNOLOGY GROUP, INC.
By: /s/ PAUL J. COSGRAVE
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Paul J. Cosgrave
Chairman of the Board, President and Chief
Executive Officer
(Principal Executive Officer)
By: /s/ DENNIS M. GOETT
------------------------------------
Dennis M. Goett
Chief Financial Officer and Director
(Principal Financial and Accounting Officer)
10