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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
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 0-28654
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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
incorporation or organization) Identification No.)
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
----- -----
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 9,846,799
(Class) (Outstanding at November 6, 1997)
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CLAREMONT TECHNOLOGY GROUP, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION Page
- ------------------------------ ----
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1997 and
June 30, 1997 2
Consolidated Statements of Operations - Three Months Ended
September 30, 1997 and 1996 3
Consolidated Statements of Cash Flows - Three Months Ended
September 30,1997 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
- ---------------------------
Item 2. Changes in Securities and Use of Proceeds 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
1
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
CLAREMONT TECHNOLOGY GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
September 30, June 30,
1997 1997
------------- ----------
ASSETS
Current Assets:
Cash and cash equivalents $ 8,527 $ 15,240
Receivables:
Accounts receivable, net of allowances of $217 and $136 18,242 13,975
Revenue earned in excess of billings 8,436 6,537
Other 186 179
Prepaid expenses and other current assets 882 745
Refundable income taxes 2,034 2,745
Deferred income taxes 1,001 1,048
------------- ----------
Total Current Assets 39,308 40,469
Property and equipment, net of accumulated depreciation
of $5,541 and $4,487 6,339 5,844
Software development costs, net of accumulated amortization
of $928 and $554 9,813 8,554
Goodwill, net of accumulated amortization of $128 and $89 3,253 30
Other non-current assets, net of accumulated amortization
of $645 and $500 2,987 1,244
------------- ----------
Total Assets $ 61,700 $ 56,141
------------- ----------
------------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 3,067 $ 1,975
Line of credit 29 -
Current installments of long-term debt 1,056 993
Accrued payroll and related liabilities 4,577 3,158
Accrued profit sharing 305 366
Other accrued expenses 37 40
Deferred revenue 600 763
------------- ----------
Total Current Liabilities 9,671 7,295
Long-term debt, excluding current installments 643 585
Deferred income taxes 2,856 2,856
------------- ----------
Total Liabilities 13,170 10,736
Commitments and Contingencies
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;
8,468 and 8,257 shares issued and outstanding at
September 30 and June 30, 1997, respectively 35,750 33,343
Retained earnings 12,679 12,043
Cumulative translation adjustment 101 19
------------- ----------
Total Shareholders' Equity 48,530 45,405
------------- ----------
Total Liabilities and Shareholders' Equity $ 61,700 $ 56,141
------------- ----------
------------- ----------
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 September 30,
--------------------------------
1997 1996
----------- -----------
Revenue:
Professional fees $ 20,402 $ 13,537
Resold products and services 360 342
Other 942 -
----------- -----------
Total revenue 21,704 13,879
----------- -----------
Costs and expenses:
Project costs and expenses 11,979 7,059
Resold products and services 316 310
Other 345 -
Selling, general and administrative 7,964 4,797
----------- -----------
Total costs and expenses 20,604 12,166
----------- -----------
Income from operations 1,100 1,713
----------- -----------
Other income (expense):
Interest income 96 159
Interest expense (40) (70)
Other, net (52) 8
----------- -----------
Total other income (expense) 4 97
----------- -----------
Income before income taxes 1,104 1,810
Income tax expense 469 743
----------- -----------
Net income $ 635 $ 1,067
----------- -----------
----------- -----------
Net income per common share $ 0.06 $ 0.12
----------- -----------
----------- -----------
Weighted average number of common and
common equivalent shares outstanding 9,988 9,280
----------- -----------
----------- -----------
See accompanying notes to unaudited consolidated financial statements.
3
CLAREMONT TECHNOLOGY GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended September 30,
--------------------------------
1997 1996
------------ ------------
Cash flows from operating activities:
Net income $ 635 $ 1,067
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation and amortization 1,344 625
Deferred income taxes - 701
Non-cash expenses recognized 360 -
Changes in assets and liabilities:
Receivables (5,371) (3,816)
Income taxes receivable, net 757 (3,497)
Prepaid expenses (120) 245
Other non-current assets (238) (133)
Accounts payable and accrued expenses 1,965 146
Deferred revenue (167) (434)
-------- --------
Net cash used by operating activities (834) (5,096)
-------- --------
-------- --------
Cash flows from investing activities:
Acquisition, net of cash acquired (3,149) -
Purchase of property and equipment (723) (806)
Expenditures for software development costs (1,634) (1,634)
-------- --------
Net cash used by investing activities (5,506) (2,440)
-------- --------
Cash flows from financing activities:
Proceeds/(payments) on line of credit, net 29 (4,600)
Payments of long-term debt (540) (230)
Net proceeds from common stock offering - 27,024
Proceeds from exercise of stock options 113 3,049
-------- --------
Net cash (used) provided by financing activities (398) 25,243
-------- --------
Effect of exchange rate on cash 26 7
-------- --------
Net (decrease) increase in cash and cash equivalents (6,713) 17,714
Cash and cash equivalents at beginning of year 15,240 526
-------- --------
Cash and cash equivalents at end of year $ 8,527 $ 18,240
-------- --------
-------- --------
See accompanying notes to unaudited consolidated financial statements.
4
CLAREMONT TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The financial information included herein for the three months ended
September 30, 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, 1997 is derived from the audited
financial statements included in Claremont Technology Group, Inc.'s (the
Company's) 1997 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 1997
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 AND NON-CASH INVESTING AND FINANCING INFORMATION
Supplemental disclosure of cash flow information is as follows:
Three months ended
September 30,
------------------
1997 1996
-------- --------
Cash paid during the period for income taxes $ 8 $ 550
Cash paid during the period for interest 17 91
Stock issued in connection with acquisition 2,295 -
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 September 30,
--------------------------------
1997 1996
------------ ------------
Primary EPS as reported $ 0.06 $ 0.12
Effect of SFAS 128 0.02 0.04
------------ ------------
Basic EPS as restated $ 0.08 $ 0.16
------------ ------------
------------ ------------
Fully diluted EPS as reported $ 0.06 $ 0.11
Effect of SFAS 128 0.00 0.01
------------ ------------
Diluted EPS as restated $ 0.06 $ 0.12
------------ ------------
------------ ------------
NOTE 4. ACQUISITIONS
In July 1997, the Company completed two business combinations that were
accounted for as purchases. The Company purchased Communications
Informatiques Trilan Canada, Inc. ("Trilan") and OpTex, Inc. ("OpTex"). The
results of operations of each acquisition are included in the Company's
results of operations from the date of acquisition. Trilan offers technology
consulting services specializing in network management, call and help center
5
management and outsourcing. OpTex develops billing and customer management
software for the communications industry and provides customer service and
complete billing services through its fully functional service bureau for
communications industry clients. The total purchase price for OpTex was
$1,000 in cash and 240,000 shares of unregistered common stock of the
Company, with $360 of the purchase price being allocated to in process
research and development. The purchase of Trilan was not considered a
significant acquisition and therefore, the purchase price is not disclosed.
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 Items 1
and 7 of the Company's 1997 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 set forth, for the periods indicated, certain financial data
as a percentage of total revenue:
Three Months Ended
September 30,
------------------
1997 1996
-------- --------
Revenue:
Professional fees 94% 98%
Resold products and services 2 2
Other 4 -
-------- --------
Total revenue 100 100
Costs and expenses:
Project costs and expenses 55 51
Resold products and services and other 3 2
Selling, general and administrative 37 35
-------- --------
Total costs and expenses 95 88
-------- --------
Income from operations 5 12
Other income (expense), net 0 1
-------- --------
Income before income taxes 5 13
Income tax expense 2 5
-------- --------
Net income 3% 8%
-------- --------
-------- --------
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 and
other revenue. Other revenue consists of license fees and maintenance fees,
which began in December 1996 and service bureau
6
revenue associated with the Company's acquisition of OpTex in July 1997. The
Company expects other revenue to increase as a percentage of total revenue
during the remainder of fiscal 1998. The Company's professional fees
increased 51 percent to $20.4 million in the first three months of fiscal
1998 from $13.5 million in the first three months of fiscal 1997.
Professional fees increased primarily due to an increase in the number of
projects performed both for new and existing clients. Revenue from foreign
operations increased to $1.7 million in the first three months of fiscal 1998
compared to $1.2 million in the first three months of fiscal 1997. The
Company expects foreign revenue to increase as a percentage of total revenue
over the remainder of fiscal 1998, primarily as a result of recent
acquisitions. The Company's top five clients accounted for 49 percent of
professional fees for the three months ended September 30, 1997 compared to
39 percent for the three months ended September 30, 1996.
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 70 percent to $12.0 million (59 percent of professional
fees) in the first three months of fiscal 1998 from $7.1 million (52 percent
of professional fees) in the first three months of fiscal 1997. 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. The
increase as a percentage of professional fees is primarily a result of the
hiring of several new employees during the early part of the quarter,
therefore lowering utilization rates during the early part of the quarter.
Utilization rates were back to Company standards of approximately 80 percent
by the end of the quarter.
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 66 percent to $8.0 million (39 percent of professional
fees) in the first three months of fiscal 1998 from $4.8 million (35 percent
of professional fees) in the first three months of fiscal 1997. 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 and increased numbers of Administrative Personnel.
Selling, general and administrative costs and expenses in the first quarter
of fiscal 1998 also include $360,000 related to the write-off of purchased
research and development related to the OpTex acquisition. Without the
$360,000, selling, general and administrative costs and expenses would have
been 37 percent of professional fees. The Company does not expect selling,
general and administrative costs and expenses to continue to increase as a
percentage of professional fees.
The Company had a total of 844 professional and administrative personnel at
September 30, 1997 and estimates that it will have approximately 900 by
December 31, 1997.
Income tax expense represents combined federal, state and foreign taxes at an
effective rate of 42 percent, or $469,000, for the first three months of
fiscal 1998 compared to 41 percent, or $743,000 for fiscal 1997. The
Company's tax rate is sensitive to shifts in
7
income and losses among the various tax jurisdictions in which the Company's
operations are conducted.
LIQUIDITY AND CAPITAL RESOURCES
Cash decreased $6.7 million during the first three months of fiscal 1998
primarily as a result of $0.8 million used in operations, $3.1 million
related to an acquisition, $0.7 million for the purchase of property and
equipment, $1.6 million for software development costs and $0.5 million net
payments on debt.
At September 30, 1997, the Company had working capital of $29.6 million,
including $8.5 million of cash and cash equivalents. The Company's current
ratio decreased to 4.1:1 at September 30, 1997 from 5.5:1 at June 30, 1997.
Accounts receivable increased $4.3 million to $18.2 million at September 30,
1997 from $14.0 million at June 30, 1997 primarily as a result of growth in
revenues. Days sales outstanding were 68 at September 30, 1997 compared to 66
at June 30, 1997. The Company experienced an increase in past due accounts
(defined as accounts outstanding more than 60 days) to $2.7 million at
September 30, 1997 compared to $529,000 at June 30, 1997. A significant
amount of the past due accounts at September 30, 1997 were collected in the
first half of October 1997.
Revenue earned in excess of billings, which represents amounts due to the
Company under contracts, primarily from communications and government
entities, that can not be billed until certain milestones are met, increased
$1.9 million to $8.4 million at September 30, 1997 from $6.5 million at June
30, 1997. The Company continues to work closely with its clients to attempt
to reduce the collection cycle of this asset group.
Refundable income taxes decreased to $2.0 million at September 30, 1997 from
$2.7 million at June 30, 1997 primarily as a result of the timing of
estimated tax payments and receipts.
Accounts payable increased $1.1 million to $3.1 million at September 30, 1997
from $2.0 million at June 30, 1997 primarily due to growth of the business.
Accrued payroll and related liabilities increased $1.4 million to $4.6
million at September 30, 1997 from $3.2 million at June 30, 1997 primarily as
a result of increased personnel and the accrual of $500,000 for estimated
1998 fiscal year-end bonuses.
During the first three months of fiscal 1998, the Company had capital
expenditures of $0.7 million, primarily related to furniture and personal
computers, and $1.6 million associated with the capitalization of software
development costs. As of September 30, 1997 the Company did not have any
material commitments for capital expenditures.
As of September 30, 1997, the Company had a total of $9.8 million of
capitalized software development costs associated with the Company's reusable
software modules, including CLARETY and PREMOST. The Company expects
capitalized software development costs to continue to increase during the
remainder of fiscal 1998. 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
8
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 time.
Recognition of such expenses, if any, could have a material adverse effect on
the Company's results of operations.
Goodwill increased $3.2 million to $3.3 million at September 30, 1997 as a
result of acquisitions that occurred during the first quarter of fiscal 1998.
On August 21, 1997, the Company signed a business loan agreement (the
"Agreement") with a commercial bank. This Agreement includes a $2.0 million
line of credit and a $750 standby letter of credit. The line of credit and
letter of credit bear interest at the bank's reference rate plus .25 percent,
or, at the Company's option, at rates based on the Offshore Rate or the LIBOR
rate. The expiration date of this Agreement is September 1, 1999. This
Agreement also covers currently outstanding term loans for an original
principal amount of $5,000,000 which had previously been covered under the
Business Loan Agreement dated April 24, 1995. The Agreement is secured by
all machinery and equipment and receivables of the Company and contains
certain financial ratio and other covenants. As of the date of this report,
the Company was in compliance with all such covenants.
NEW ACCOUNTING PRONOUNCEMENTS
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 is 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 previously presented net income per share as the effect of dilutive
stock options is not considered in computing basic net income per share.
Diluted net income per share is expected to be comparable or slightly higher
than the previously presented net income per share. The Company will adopt
SFAS 128 in the quarter ended December 31, 1997 and will restate all prior
earnings per share presentations to conform to the provisions of SFAS 128.
In June 1997, the FASB issued Statement of Financial Accounting Standard No.
130, "Reporting Comprehensive Income" ("SFAS 130"). This statement
establishes standards for reporting and displaying comprehensive income and
its components in a full set of general purpose financial statements. The
objective of SFAS 130 is to report a measure of all changes in equity of an
enterprise that result from transactions and other economic events of the
period other than transactions with owners. The Company expects to adopt
SFAS 130 for its fiscal year beginning July 1, 1998 and does not expect
comprehensive income to be materially different from currently reported net
income.
9
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(C) During the period from July 1, 1997 through September 30, 1997, the
Company issued an aggregate of 240,000 shares of Common Stock in connection
with the merger of Claremont Acquisition Corporation, a wholly owned
subsidiary of the Company, and OpTex in reliance on Section 4(2) of 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:
The Company filed a report on Form 8-K dated July 10, 1997 under Item 2.
Acquisition or Disposition of Assets and Item 7. Financial Statements
and Exhibits.
10
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: November 7, 1997 CLAREMONT TECHNOLOGY GROUP, INC.
By: /s/ PAUL J. COSGRAVE
-----------------------------------
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)
11