-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L+LE1WBfDwUzzhjFfUBBH77l23an2DgdqjqHyC1Bd6Fcx0JmiWT1kOU6ctGwe0jY VGh2yuaI1zryd/mj5XjMlg== 0000950144-99-002511.txt : 19990311 0000950144-99-002511.hdr.sgml : 19990311 ACCESSION NUMBER: 0000950144-99-002511 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990310 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BROADWAY & SEYMOUR INC CENTRAL INDEX KEY: 0000885533 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 411522214 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20034 FILM NUMBER: 99562101 BUSINESS ADDRESS: STREET 1: 128 S TRYON STREET CITY: CHARLOTTE STATE: NC ZIP: 28202 BUSINESS PHONE: 7043724281 MAIL ADDRESS: STREET 1: 128 SOUTH TRYON STREET CITY: CHARLOTTE STATE: NC ZIP: 28202 10-K 1 BROADWAY & SEYMOUR FORM 10-K 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 Form 10-K (Mark one) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the fiscal year ended December 31, 1998 [ ] 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 number 0-20034 BROADWAY & SEYMOUR, INC. (Exact name of registrant as specified in its charter) Delaware 41-1522214 -------- ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 128 South Tryon Street Charlotte, North Carolina 28202 ------------------------- ----- (Address of principal executive (Zip code) offices) (704) 372-4281 -------------- (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $.01 par value (Title of class) 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 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 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. [ ]. The aggregate market value of voting stock held by non-affiliates of the registrant as of February 26, 1999 computed by reference to the closing sale price on such date, was $31,728,006. As of the same date, 9,228,623 shares of Common Stock, $.01 par value, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's 1998 Annual Report (the "Annual Report"), filed as an Exhibit hereto, and the Notice of Annual Meeting of Stockholders and definitive Proxy Statement pertaining to the 1999 Annual Meeting of Stockholders (the "Proxy Statement") to be filed pursuant to Regulation 14A (no later than April 30, 1999) are incorporated herein by reference into Parts II and IV, and Part III, respectively. - -------------------------------------------------------------------------------- Total pages - 19 2 Item 1. Description of Business Overview Broadway & Seymour, Inc. (the "Company") is a software product and services company, providing integrated solutions to the financial, legal and professional services markets. The Company serves these markets through three separately managed operating segments which are summarized below: Elite Information Systems, Inc. ("Elite"), the Company's legal and professional services business, is based in Los Angeles, California and provides an integrated suite of practice management software for the legal and professional services markets. Elite's products are focused primarily on time tracking, billing, internal accounting and other administrative functions, including marketing, records management, case management and conflicts of interest prevention. Elite's software products are often sold with related services to aid the customer in implementation, data conversion, user training, support and maintenance of those products. Broadway & Seymour, the Company's customer relationship management business (the "CRM business"), is based in Charlotte, North Carolina and provides product-based and services-based solutions that address the customer relationship management needs of the financial services industry. The CRM business' product-based solutions for customer relationship management include the proprietary software products TouchPoint(TM), CRISP(TM) and BANCStar(R), which are generally integrated and customized to provide a tailored business solution to banks and other financial institutions. Through its services-based solutions the CRM business provides consulting and custom system integration and development services focused on customer relationship management. The MiniComputer Company of Maryland, Inc. ("TMC"), based in HuntValley, Maryland, is a marketer of proprietary time and billing software, custom programming services and other computer related services primarily to law firms. The majority of TMC's operations are focused on supporting existing customers that have previously licensed TMC's software product. Subsequent to the period covered by this report the Company signed a definitive stock purchase agreement (effective March 5, 1999) to sell all of the outstanding shares of TMC to a holding company owned by TMC management. General Development of the Business The Company was incorporated in 1985 in connection with the acquisition of Broadway & Seymour, Inc., a North Carolina corporation that had been doing business since 1981. The Company followed a strategy of growth through the acquisition of products and businesses through mid-1995. At the end of 1995, the Company changed its strategic direction to focus on achieving sustained performance of core operations and growth through internally developed product-based solutions and other selected services, rather than acquisitions. Operations were reorganized to integrate independent business units, and certain non-core business units were disposed of in 1995, 1996 and 1997 (see Management's Discussion and Analysis - Significant Transactions). Business Strategy The Company's strategy is to develop and provide business solutions that address the business management and customer relationship management needs of its targeted markets which include legal and other service firms of all sizes and top financial institutions. In the legal and professional service industries, Elite will continue to develop and market its client-server Windows and internet/intranet practice management products (see "Product and Services Based Solutions" below), while also focusing efforts such as the planned release of its 32-bit system with enhanced 2 3 query capabilities and object-oriented architecture. Elite markets its practice management tools principally to law firms in the United States, Canada, the United Kingdom and Europe. In addition, Elite will continue to focus on expanding its market presence in other segments of the services industry, including accounting, actuarial, consulting, advertising, public relations and other services firms. Elite has an extensive field operations unit that performs services including installation, implementation, data conversion, training and consulting on Elite products. Elite's Professional Services unit also provides follow-on consulting and technical services to its client base on a fee for services basis. Principally all Elite customers contract with Elite for maintenance and telephone support services on an annual basis. The Company's CRM business' strategy is to continue to address the customer relationship management needs of large, market leading financial services organizations that will offer opportunities for growth through value-added relationships. CRM will continue to focus its primary marketing efforts on its TouchPoint customer relationship management solution, targeting large banks and thrifts and insurance companies in North America. CRM intends to continue providing client and market support of its BANCStar and CRISP products (see "Product and Services Based Solutions" below). CRM also plans to continue providing consulting, system integration and custom development services in conjunction with its product offerings and on a consulting-only basis by leveraging its knowledge, software and services into financial services and other markets with customer relationship management needs. Product and Services Based Solutions Software products mentioned in this document are for identification purposes only and may be trademarks of Broadway & Seymour, Inc., its subsidiaries or third parties. Solutions for the Legal and Professional Services Markets Elite's solutions incorporate client-server and open systems architecture using either a Windows or internet browser interface and can be run on multiple operating systems and major databases including Unix, Windows NT Server, Microsoft SQL Server and Informix. Elite Billing System is a comprehensive accounting and information management software product serving legal and professional service firms. The Elite Billing System responds to clients' billing requirements with on-line management information and processes. Elite Financial Management System is a general ledger and accounts payable software product that supports multi-currency and simultaneous cash and accrual-based accounting as well as budgeting features. Elite Case Management System is a case tracking software system and conflicts/related-party database. This system also includes calendar and docket functions, a case database, a related-party tracking system, on-line viewing of case information and personal calendars and a user-defined reporting system. Elite Practice Development System is a comprehensive marketing and practice development tool that tracks relationships, manages mailings and monitors the effectiveness of client development efforts. Elite Conflict of Interest Module is an integrated software tool for checking conflicts of interest, based on a full-text search engine. Elite Records Management Module is a software tool for managing both internal and external records, with bar code support and integration with the Elite Conflict of Interest System. 3 4 Elite Professional's Desktop is a software tool that summarizes key information from all Elite applications in a simple and concise manner within a web-browser. By using built in HTML hyperlinks, a user can quickly move from application to application. Solutions for the Financial Services Market TouchPoint(TM) is a software solution that is integrated with a financial institution or other company's existing hardware and software systems to retrieve customer data and present it through a variety of delivery channels, including call centers, offices and branches. TouchPoint can be modified to address specific requirements and the solution may involve integrated third party hardware and software developed and provided by other vendors. TouchPoint allows improved customer service by consolidating customer and account information from existing legacy systems and presenting it on a universal workstation to a customer service representative. The open client/server architecture also makes TouchPoint scaleable so that it can be implemented in single departments or enterprise-wide using a phased installation approach. BANCStar(R) is a branch automation software product used to automate branch and teller bank operations and integrate branch networks. BANCStar supports teller, customer service, sales and loan calculation activities, as well as basic system functions such as providing branch statistics and storing and forwarding information to other computers. BANCStar Prism(TM) is an automated banking system that supports a graphical user interface, allowing for video and sound, dynamic data exchange and a multi-tasking environment to help streamline banking operations to the bank's other computers without interrupting workstation activity. Custom systems integration and development services, as well as third party hardware and software, may be provided as part of the BANCStar solution. CRISP(TM) is a decision support software product that assists commercial bankers in the management of their relationships, products and employees. Fully graphical and intuitive, CRISP delivers comprehensive product and profitability analyses on a variety of bank or customer organizational levels. CRISP provides a single repository of on-line customer information from multiple other systems. Custom systems integration and development services, as well as third party hardware and software, may be provided as part of the CRISP solution. Systems Integration, Consulting and Custom Development Services are provided as services-based solutions. These engagements typically involve the development of technology solutions for difficult business and technical problems and are often provided as part of a complex system that may include third party hardware and software products and training and documentation services. The Company may be retained to perform all aspects of a complex project or a discrete portion of a project. Support Services The Company views its customer support services as a significant part of its strategy to establish and maintain strong customer relationships. The Company offers system maintenance and support at fixed prices under renewable contracts as well as conversion and installation services as needed by its customers. The degree of maintenance service provided to customers differs depending on the system being supported. Generally, support contracts entitle users to telephone support and regular upgraded product releases. In addition, the Company offers certain training classes and multi-media based instruction to customers that aid in the implementation and effective use of the Company's solutions. 4 5 Year 2000 Issues Overview Many software products, custom-developed software, and products embedded with microprocessor chips were designed to store, process or perform calculations using only the last two digits of a four-digit year date, for example, "98" rather than "1998". These software systems and embedded products may assume the first two digits of the year date to be "19" and as such they may not be able to process dates with years following 1999. For example, "00" may be treated by certain software systems as the year 1900 rather than the year 2000. Results of this failure to process the date correctly could include miscalculations, unpredictable or inconsistent results or complete system failures. Companies in all lines of business face issues in addressing whether their software products, custom developed software and third party software used internally, sold by the company or used by its vendors or customers or other entities upon which the company relies, will be able to process data properly relating to dates subsequent to December 31, 1999 ("Year 2000 compliance"). State of Readiness The Company has recognized the need to address the Year 2000 compliance issues and in 1997 established a Year 2000 compliance committee to supervise and monitor the planning, performance and assessment of the Company's Year 2000 compliance efforts. This committee has involved members of senior management, product development leaders, information systems management, facilities management and corporate finance management in efforts to develop a comprehensive and coordinated Year 2000 compliance effort. The chairman of the committee periodically reports plans, progress and issues to executive management and the audit committee of the Board of Directors. Beginning in the second half of 1997, the Company began developing an inventory list of all its proprietary software products, third party products it incorporates in its products or resells, infrastructure and internal use products, facilities and office service systems and hardware products upon which it relies. Upon completion of the inventory list, the Company's Year 2000 committee appointed individual team leaders from various functional areas to be responsible for the efforts of assessing Year 2000 compliance for each of the inventory list items. Proprietary Software Products and Custom Developed Software: In 1997, the Company adopted the widely accepted definition for Year 2000 readiness set out in the "Compliance with British Standards Institution DISC PD2000-1 for Year 2000". In May 1998, following a period of assessment and testing, the Company issued its Year 2000 readiness statement which specifically identified the current versions of each of the Company's proprietary products that met the adopted standard. The Company continues to test new versions of its products for compliance with this standard on an ongoing basis. The Company believes that its current versions of proprietary software products are Year 2000 compliant; however, no assurance can be given that additional modifications for Year 2000 compliance will not be necessary. The Company's software products are integrated with its customers' software and hardware systems and have, in many cases, been uniquely customized to the customers' specifications. The Company has generally not tested its products as integrated in its customers' operating environments, although it is in the process of developing methods to do so for current TouchPoint customers. The customers' systems with which the Company's products interoperate may not be Year 2000 compliant which may affect the operation of the Company's products. As a result the Company, in the course of providing its software maintenance services, may incur costs in ascertaining the cause(s) of system failures not caused by its own products. Such costs, if any that the Company may incur are not estimable, but will generally be charged to customers. 5 6 Many of the Company's former customers and current customers presently use earlier versions of the Company's software products, and/or associated custom or systems integration code, that are not Year 2000 compliant. The Company has made efforts to communicate with these customers to advise them that they will need to upgrade to a Year 2000 compliant version of the Company's software product, revise custom code or implement other alternatives to meet their business needs. Customers paying support fees are entitled to receive software product upgrades as part of their regular maintenance contracts. Customers who have not maintained support agreements with the Company may purchase such upgrades. Changes to custom or systems integration code provided by the Company that is not Year 2000 compliant are not covered by customer maintenance agreements. Customers may perform such changes themselves, engage the Company to perform such changes, or, in some cases, engage third parties to perform such changes. Customers may need to upgrade third party products and their host software and hardware systems that share data or interoperate with the Company's products in order to utilize the Company's software upgrades or modified custom or systems integration code. Such costs could impact customer purchasing decisions and may lead customers to choose alternatives to the Company's products or services. Third Party Products: Third party products embedded within the Company's products are included in the test plans and compliance efforts that the Company already has underway for its own products. In addition, the Company has obtained certification of Year 2000 compliance from each third party vendor whose products are embedded in the Company's products or that are resold by the Company. Infrastructure and Third Party Products Used Internally: The Company has obtained certification of Year 2000 compliance from each of the vendors of its internal use information technology systems. The Company is developing test plans for these internal use systems following the same guidelines and standards that it has used for its own products. Currently the Company anticipates having all test plans developed for critical internal use technology systems by mid-1999. The Company also intends to begin testing during that period and will continue testing through 1999. During the first half of 1999, the Company will begin developing a contingency plan against Year 2000 failure for its mission critical software applications, hardware and other systems. The majority of non-information technology systems on which the Company relies in its operations are owned and managed by the lessors of the buildings in which the Company's offices are located. The Company has developed checklists of critical systems upon which it relies and certification documents are being sought from its lessors and other appropriate providers as applicable regarding Year 2000 compliance of their systems. The Company will prioritize these systems and develop test plans based on the responses it receives, or does not receive, from its lessors and other providers. This effort is scheduled for completion in the first half of 1999. Risks and Costs Because of the nature of the Company's business, the Company may be subject to Year 2000 claims or litigation by its customers or other parties. Many customers will incur significant costs in making their information processing systems Year 2000 compliant and may seek to transfer such costs through litigation to information processing industry vendors such as the Company. Although the ultimate outcome of any litigation is uncertain, the Company does not believe that the ultimate amount of liability, if any, from such actions would have a material adverse affect on the Company. The Company believes that Year 2000 issues may affect the purchasing patterns of its customers and potential customers in a variety of ways. Many companies are expending significant amounts and rededicating personnel to correct or patch their current software systems for Year 2000 compliance. These expenditures may result in reduced funds available to purchase software products such as those offered by the Company. It is possible that certain of the Company's customers are purchasing support contracts with the intent of discontinuing such support after January 1, 2000 when they have satisfied themselves that the supported product is Year 2000 compliant. Many potential customers may also choose to defer purchasing Year 2000 compliant products until they believe it is absolutely necessary, thus resulting in potentially stalled market sales within the industry. Additionally, Year 2000 compliance issues could cause a significant number of companies, including current Company customers, to reevaluate their current system needs and as a result to consider switching to other systems or suppliers. 6 7 The Company has not specifically hired additional personnel or made material purchases of products to address Year 2000 compliance issues, nor does the Company expect it will be necessary to do so. The expenditures made to date have principally related to salary costs of existing personnel assigned to participate at various levels in the Company's compliance efforts. All costs related to achieving Year 2000 compliance are being expensed as incurred. The Company estimates that the costs incurred to date related to Year 2000 compliance efforts range between $.5 and $1.0 million. The Company expects to continue to test current and new versions of its proprietary software, work with vendors of third party software that the Company uses or resells, update and test its inventory of potentially affected internal systems and communicate with vendors and customers regarding the Year 2000 compliance issue. The Company estimates the costs of these efforts will be below $.5 million. Euro Currency Beginning in January 1999, a new currency called the ECU or the "euro" was introduced in certain Economic and Monetary Union (the "EMU") countries. During 2002, all EMU countries are expected to be operating with the euro as their single currency. As a result, computer software used by many organizations headquartered or maintaining a subsidiary in an EMU country will need to be euro currency enabled, and in less than three years all organizations headquartered or maintaining a subsidiary in an EMU country are expected to need to be euro currency enabled. The transition to the euro currency will involve the handling of parallel currencies and conversion of legacy data. Uncertainty exists as to the effects the euro currency will have on the marketplace. Additionally, all of the final rules and regulations have not yet been defined and finalized by the European Commission with regard to the euro currency. The Company is monitoring the rules and regulations as they become known in order to make any changes to the software that the Company deems necessary to comply with such rules and regulations. Although the Company currently offers certain software products that are designed to be multi-currency enabled and the Company believes that it will be able to accommodate any required euro currency changes in its software products, there can be no assurance that once the final rules and regulations are completed that the Company's software will contain all of the necessary changes or meet all of the euro currency requirements. Research and Development To meet the changing needs of the financial and professional services industries, the Company expends resources to continually develop and enhance its proprietary software products. The Company believes that ongoing commitment to research and development is important to the long-term success of the business. For the years ended December 31, 1998, 1997 and 1996, the Company's total research and development expenditures (including capitalized costs) were $8.5 million, $6.0 million and $7.4 million, respectively. There are inherent risks in the development and introduction of a new product. For example, new products may have quality or other defects in the early stages of introduction that were not anticipated in the design of those products. The Company cannot determine the effects on operating results of unanticipated complications in product introductions or transitions. Sales and Marketing New customer contacts are generated by a variety of methods, including customer referrals, personal sales calls, attendance at trade shows and seminars, advertising in trade publications, direct mailings to targeted customers and telemarketing. 7 8 The Company's sales personnel are given sales responsibility within their targeted customer markets. Additionally, senior management and technical subject matter experts within the Company are directly involved in obtaining and supporting relationships. The Company's business strategy also emphasizes sales to existing customers. Follow-on sales to existing customers include system upgrades, expansion of license rights, migration to new products and maintenance and support services. Customers The Company serves a client base of law firms and other professional service firms through its Elite and TMC operations. Elite's customers include over half of the 100 largest law firms in the United States and several large firms in the United Kingdom and the largest law firm in the world. In addition, the CRM business' customers include a broad variety of institutions and companies in the financial services industry, including several of the largest banks in the United States. The Company provides software solutions under a variety of financial arrangements, including fixed fee contracts and billings on a time and materials basis. The majority of Elite's revenue is concentrated in the legal services industry. However, no single customer accounts for 10% or more of Elite's revenue. A majority of the CRM business revenue is concentrated among a few customers in the financial services industry. In 1998, 1997 and 1996 the five largest CRM business customers accounted for approximately 73%, 62% and 68%, respectively, of the CRM business' revenue and 25%, 37% and 24% of consolidated revenue for the same periods. For the periods presented, the CRM business had two customers that exceeded certain disclosure requirement thresholds and are therefore classified as significant customers. In 1998 and 1997, Chase Manhattan Bank ("Chase") accounted for $8.3 million, or 12.1%, and $10.3 million, or 13%, of the Company's consolidated revenue, respectively. Also, in 1997 and 1996 First Data Corp. ("FDC") accounted for $8.0 million, or 10.1%, and $9.6 million, or 10.6%, of consolidated revenue, respectively. Geographic Information The Company's assets are principally located in the United States. The Company's revenue is principally generated in United States, however for the years ending December 31, 1998, 1997, and 1996 Elite revenue generated in Europe represented 8%, 9%, and 5% of consolidated revenue, respectively, and 14%, 22% and 11% of Elite's revenue for the same periods. In addition, for the years ending December 31, 1998 and 1997, Elite's other international revenue was approximately 2% and 1% of consolidated revenue, respectively, and 4% and 2% of Elite's revenue for the same periods. Since the Company's contracts with non-U.S. customers generally denominate the amount of payments to be received by the Company in local currencies, exchange rate fluctuations between such local currencies and the U.S. dollar will subject the Company to currency translation risks. Also, the Company may be subject to currency transaction risks when the Company's contracts are denominated in a currency other than the currency in which the Company incurs expenses related to such contracts. Competition The Company's businesses are competitive. The Company is not aware of any one competitor that offers the same combination of services and products offered by the Company, but believes that a number of firms compete with the Company in all areas. In the markets in which it competes, the Company believes 8 9 there are participants that have greater financial, technical and marketing resources. However, the Company believes that no one competitor is dominant in its markets. Elite principally competes for engagements with two other companies that target similar prospects with office automation solutions for the legal and professional services industry. The CRM business is focused in an increasingly competitive environment of software solutions for customer relationship management. A wide variety of computer hardware and software companies are becoming involved in offering similar solutions. Many large accounting and management consulting firms offer services that overlap with at least a portion of the CRM business' solutions and services. In addition, the CRM business also competes with the internal operations of its customers and prospects. The Company believes that competitive factors for engagements in both the legal and professional services industry and the financial services industry include knowledge of the respective industry, capabilities of resources, ease of use or abilities to customize the solution, breadth of functionality and price. Backlog A significant portion of the Company's revenue is derived from work to be performed under long-term, cancelable contracts entered into in the ordinary course of business. These contracts often relate to ongoing projects with respect to which the continuation of work is at the option of the customer. At December 31, 1998 and 1997, the Company's Elite and CRM businesses had unearned revenue in the following approximate amounts from signed contracts. Substantially all of TMC's unearned revenue at those dates related to maintenance services.
December 31, 1998 1997 ($ in thousands) ------------------------- Elite $25,959 $14,100 CRM $9,535 $6,772
Employees and Recruitment The Company believes that its future success will depend in part on its continued ability to hire and retain qualified employees. The Company believes its relations with employees are good. Competition for personnel in the Company's industry is intense. Although it actively recruits personnel and provides professional employees with career path opportunities, there can be no assurance that the Company will be successful in attracting and retaining sufficient numbers of qualified personnel to conduct its business in the future. The Company actively recruits at college campuses and also seeks employees with expertise and experience in its chosen markets. At February 28, 1999, the Company had approximately 465 full-time employees. Elite had 231 employees, the CRM business had 216 and TMC had 18. None of the Company's employees is represented by a labor union. 9 10 Copyrights, Trademarks, Patents and Licenses The Company currently markets several proprietary software products. The Company attempts to protect its rights in its proprietary software by retaining the title to and copyright in the software and documentation and attempts to protect rights in all software it markets (including third-party software) by including appropriate contractual restrictions on use and disclosure in its licenses and by requiring its employees to execute non-disclosure and assignment of inventions agreements. However, the Company sometimes provides source code for some of its software products to users for their internal use in connection with the license of these products. The Company believes that, due to the rapid pace of innovation within its industry, factors such as the technological and creative skills of its personnel are more important in establishing and maintaining a leadership position within the industry than are the various legal protections of its technology. The Company believes that the nature of its customers, the importance of the Company's products to them and their need for continuing product support reduce the risk of unauthorized reproduction. However, there can be no assurance that any such steps taken by the Company in this regard will be adequate to deter misappropriation of its proprietary rights or independent third-party development of functionally equivalent products. The Company's business includes the development of custom software in connection with specific customer engagements. Although the Company sometimes assigns to its customer the copyright and other intellectual property rights in the software and documentation developed for the customer, in these cases the Company negotiates to retain the right to develop similar products for other customers. In a limited number of circumstances, the Company has agreed not to use certain specific technological code or functionality developed in an engagement for one customer to perform projects for other customers or to develop a system for a competitor of the customer that is similar to the system developed for the customer. However, the Company believes these restrictions will not have a material adverse effect on the Company. The Company believes that its services and products do not infringe on the intellectual property rights of its customers or other third parties. However, particularly given the rapid changes in copyright and patent law, there can be no assurance that an infringement claim will not be asserted against the Company in the future. Any such claim, if resolved against the Company, could adversely affect the Company's reputation, preclude it from offering certain products and services, and subject it to substantial liability. Item 2. Properties The Company's corporate and the CRM business offices and are located at 128 South Tryon Street in Charlotte, North Carolina. The Company's lease of those premises (approximately 107,000 square feet) expires December 31, 2000, with two five-year renewal options thereafter. The Company has subleased approximately 29,000 square feet of this space. Elite maintains its offices (approximately 25,000 square feet) in Los Angeles, California under a lease that expires July 2008. The Company also leases additional facilities, as needed, principally as sales offices in other cities in North America and the United Kingdom. The Company believes that its facilities are adequate for its current needs. Item 3. Legal Proceedings The Company is involved in litigation from time to time that is routine in nature and incidental to the conduct of its business. The Company believes that the outcome of any such litigation would not have a material adverse effect on the financial condition or results of operations of the Company. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of the Company's stockholders during the fourth quarter of the fiscal year ended December 31, 1998. 10 11 PART II Item 5. Market for Registrant's Common Stock and Related Stockholders' Matters Market for Common Stock The information under the caption "Market for Common Stock" on page 2 of the Annual Report is incorporated herein by reference. Holders of Record As of February 26, 1999, there were approximately 115 holders of record of the Company's Common Stock. Dividends The Company has never declared or paid any cash dividends on its Common Stock. The Company currently intends to retain any earnings for use in its business and therefore does not anticipate paying any cash dividends in the foreseeable future. Item 6. Selected Financial Data The information under the caption "Selected Financial Data" on page 2 of the Annual Report is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 3 through 14 of the Annual Report is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data Financial Statements: The consolidated financial statements and related notes, together with the report thereon of PricewaterhouseCoopers LLP dated February 6, 1999 except as to Note 14, which is as of March 5, 1999 appearing in the Annual Report are incorporated herein by reference. Financial Statement Schedules: Item 14 includes an index to the financial statement schedules. 11 12 Item 9. Disagreements on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant The information under the captions "Election of Directors" and "Stock Ownership of Directors and Executive Officers" in the Proxy Statement is incorporated herein by reference. Item 11. Executive Compensation The information under the captions "Executive Officers, Compensation and Other Information", "Employment Agreement" and "Compensation Committee Report on Executive Compensation" in the Proxy Statement is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information under the captions "Principal Stockholders", "Election of Directors" and "Stock Ownership of Directors and Executive Officers" in the Proxy Statement is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The information under the captions "Employment Agreements" in the Proxy Statement is incorporated herein by reference. 12 13 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a)(1) Financial Statements. The following consolidated financial statements and related notes, including the report thereon of PricewaterhouseCoopers LLP dated February 6, 1999, except as to note 14, which is as of March 5, 1999 appearing in the Annual Report, are incorporated herein by reference: Consolidated Statement of Operations Consolidated Balance Sheet Consolidated Statement of Stockholders' Equity Consolidated Statement of Cash Flows Notes to Consolidated Financial Statements Report of Independent Accountants (a)(2) Financial Statement Schedules. The following schedules are filed as a part of this report: Page ---- Schedule II - Valuation and Qualifying Accounts and Reserves 18 Report of Independent Accountants on the Financial Statement Schedule 19 All other schedules for which provision is made in the applicable regulation of the Securities and Exchange Commission are not required under the related instructions, are inapplicable, or the required information is included elsewhere in the financial statements. 13 14 (a)(3) Exhibits:
Exhibit No. Description ----------- ----------- 3.1 Restated Certificate of Incorporation of Broadway & Seymour, Inc., dated June 16, 1992 (Incorporated by reference to Exhibit 3.1 to the Registrants Annual Report on Form 10-K for the Fiscal Year Ended January 31, 1993) 3.2 Restated By-laws of the Company (Incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1, SEC File No. 33-46672) 4.1 Specimen share certificate (Incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-1, SEC File No. 33-46672) 4.2 Articles 4 and 5 of Broadway & Seymour, Inc.'s Restated Certificate of Incorporation (Incorporated by reference to Exhibit 4.2 to the Registrant's Registration Statement on Form S-1, SEC File No. 33-46672) 4.3 Article II, Section 2.2 of the Company's Restated By-laws (Incorporated by reference to Exhibit 4.3 to the Registrant's Registration Statement on Form S-1, SEC File No. 33-46672) 10.01+ Restated 1985 Incentive Stock Option Plan of Broadway & Seymour, Inc. dated June 12, 1985 (Incorporated by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form S-1, SEC File No. 33-46672) 10.02+ Amendment No. 1 to Restated 1985 Incentive Stock Option Plan of Broadway & Seymour, Inc. dated February 25, 1993 (Incorporated by reference to Exhibit 10.2 to the Registrant's Annual Report on Form 10-K for the Fiscal Year Ended January 31, 1993) 10.03+ Amendment No. 2 to Restated 1985 Incentive Stock Option Plan of Broadway & Seymour, Inc. dated February 17, 1994 (Incorporated by reference to Exhibit 10.16 to the Registrant's Transition Report on Form 10-K for the Eleven Months Ended December 31, 1993) 10.04+ Amendment No. 3 to Restated 1985 Incentive Stock Option Plan of Broadway & Seymour, Inc. dated May 15, 1995 (Incorporated by reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the Quarter Ended September 30, 1995) 10.05+ Broadway & Seymour, Inc. 1996 Stock Option Plan dated September 16, 1996 (Incorporated by reference to Appendix B to the Registrant's Definitive Proxy Statement on Form DEFS14A dated August 14, 1996) 10.06 Asset Purchase Agreement between Unisys Corporation and Broadway & Seymour, Inc. dated as of July 24, 1997. (Incorporated by reference to Exhibit 10.35 to the Registrant's Quarterly Report on Form 10-Q for the Quarter Ended September 30, 1997) 10.07 Amendment to Asset Purchase Agreement between Unisys Corporation and Broadway & Seymour, Inc. dated September 17, 1997. (Incorporated by reference to Exhibit 10.36 to the Registrant's Quarterly Report on Form 10-Q for the Quarter Ended September 30, 1997)
14 15 10.08 Loan Agreement by and among Broadway & Seymour, Inc., Elite Information Systems, Inc., The Minicomputer Company of Maryland, Inc., Elite Information Systems International, Inc., Pragmatix Telephony Solutions, Inc., and Fleet National Bank (as agent and lender) for $15,000,000 secured revolving credit loan dated as of July 23, 1997. (Incorporated by reference to Exhibit 10.21 to the Registrant's Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1997) 10.09 Security Agreement by and between Broadway & Seymour, Inc. and Fleet National Bank dated as of July 23, 1997 (Incorporated by reference to Exhibit 10.22 to the Registrant's Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1997) 10.10 Security Agreement by and between Elite Information Systems, Inc. and Fleet National Bank dated as of July 23, 1997 (Incorporated by reference to Exhibit 10.23 to the Registrant's Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1997) 10.11 Security Agreement by and between Elite Information Systems International, Inc. and Fleet National Bank dated as of July 23, 1997 (Incorporated by reference to Exhibit 10.24 to the Registrant's Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1997) 10.12 Security Agreement by and between The Minicomputer of Maryland, Inc. and Fleet National Bank dated as of July 23, 1997 (Incorporated by reference to Exhibit 10.26 to the Registrant's Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1997) 10.13 Security Agreement by and between Pragmatix Telephony Solutions, Inc. and Fleet National Bank dated as of July 23, 1997 (Incorporated by reference to Exhibit 10.26 to the Registrant's Quarterly Report of Form 10-Q for the Quarter Ended June 30, 1997) 10.14 Conditional Trademark Assignment by and between Broadway & Seymour, Inc. and Fleet National Bank dated as of July 23, 1997 (Incorporated by reference to Exhibit 10.27 to the Registrant's Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1997) 10.15 Conditional Trademark Assignment by and between Elite Information Systems, Inc. and Fleet National Bank dated as of July 23, 1997 (Incorporated by reference to Exhibit 10.28 to the Registrant's Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1997) 10.16 Conditional Trademark Assignment by and between Elite Information Systems International, Inc. and Fleet National Bank dated as of July 23, 1997 (Incorporated by reference to Exhibit 10.29 to the Registrant's Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1997) 10.17 Conditional Trademark Assignment by and between The Minicomputer of Maryland, Inc. and Fleet National Bank dated as of July 23, 1997 (Incorporated by reference to Exhibit 10.30 to the Registrant's Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1997) 10.18 Conditional Trademark Assignment by and between Pragmatix Telephony Solutions, Inc. and Fleet National Bank dated as of July 23, 1997 (Incorporated by reference to Exhibit 10.31 to the Registrant's Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1997) 10.19 Stock Pledge Agreement by and between Broadway & Seymour, Inc. and Fleet National Bank dated as of July 23, 1997 (Incorporated by reference to Exhibit 10.32 to the Registrant's Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1997) 10.20 Stock Pledge Agreement by and between Elite Information Systems, Inc. and Fleet National Bank dated as of July 23, 1997 (Incorporated by reference to Exhibit 10.33 to the Registrant's Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1997)
15 16 10.22 First Amendment to Loan Agreement by and among Broadway & Seymour, Inc., Elite Information Systems, Inc., The Minicomputer Company of Maryland, Inc., Elite Information Systems International, Inc., and Fleet National Bank (as agent and lender) dated September 30, 1997 (Incorporated by reference to Exhibit 10.31 to the Registrant's Annual Report on form 10-K for the year ended December 31, 1997) 10.23 Second Amendment to Loan Agreement by and among Broadway & Seymour, Inc., Elite Information Systems, Inc., The Minicomputer Company of Maryland, Inc., Elite Information Systems International, Inc., and Fleet National Bank (as agent and lender) dated February 6, 1998 (Incorporated by reference to Exhibit 10.32 to the Registrant's Annual Report on form 10-K for the year ended December 31, 1997) 10.24 Third Amendment to Loan Agreement by and among Broadway & Seymour, Inc., Elite Information Systems, Inc., The Minicomputer Company of Maryland, Inc., Elite Information Systems International, Inc., and Fleet National Bank (as agent and lender) dated May 6, 1998 10.25 Fourth Amendment to Loan Agreement by and among Broadway & Seymour, Inc., Elite Information Systems, Inc., The Minicomputer Company of Maryland, Inc., Elite Information Systems International, Inc., and Fleet National Bank (as agent and lender) dated August 7, 1998 10.26* Fifth Amendment to Loan Agreement by and among Broadway & Seymour, Inc., Elite Information Systems, Inc., The Minicomputer Company of Maryland, Inc., Elite Information Systems International, Inc., and Fleet National Bank (as agent and lender) dated February 19, 1999 10.27+ Employment Agreement, dated as of May 29, 1997 (executed June 1, 1997), by and between Broadway & Seymour, Inc. and Keith B. Hall (Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997) 10.28+ Amendment No. 1 to Employment Agreement for Keith B. Hall dated February 19, 1998 10.29+ Employment Agreement dated as of September 1, 1995 by and between Broadway & Seymour, Inc. and Alan C. Stanford (Incorporated by reference to Exhibit 10.28 to the Registrant's Quarterly Report on Form 10-Q for the Quarter Ended September 30, 1995) 10.30+ Amendment No. 1 to Employment Agreement for Alan C. Stanford dated February 19, 1998 10.31* Stock Purchase Agreement among TMC Holding Corporation and Broadway & Seymour, Inc. dated March 5, 1999. 11* Computation of earnings per share 13* Portions of the Broadway & Seymour, Inc. 1998 Annual Report. 21* Subsidiaries of the Registrant 23* Consent of Independent Accountants dated March 8, 1999. 27* Financial Data Schedule, which is submitted electronically to the Securities and Exchange Commission for information only and not filed.
* Filed herewith. + Management contract or compensatory plan or arrangement required to be filed as an exhibit. 16 17 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BROADWAY & SEYMOUR, INC. Date: March 8, 1999 By:/s/ Keith B. Hall --------------------------------- Keith B. Hall, Vice President and Chief Financial Officer Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities set forth below and on the 8th day of March 1999. Signature Title --------- ----- /s/ Alan C. Stanford - ---------------------------- Alan C. Stanford Chairman, President, Chief Executive Officer and Director /s/ William G. Seymour - ---------------------------- William G. Seymour Vice Chairman and Director /s/ David A. Finley - ---------------------------- David A. Finley Director /s/ Roger Noall - ---------------------------- Roger Noall Director /s/ George L. McTavish - ---------------------------- George L. McTavish Director /s/ Christopher K. Poole - ---------------------------- Christopher K. Poole Director /s/ Robert J. Kelly - ---------------------------- Robert J. Kelly Director 17 18 Item 14a(2) Schedule II - Valuation and Qualifying Accounts and Reserves: Broadway & Seymour, Inc. Schedule II - Valuation and Qualifying Accounts and Reserves For the Years ended December 31, 1998, 1998 and 1996 ($ in thousands)
Balance at Additions Balance at beginning charged to Deductions end of period expense of period ---------- ---------- ---------- ----------- Allowance for doubtful accounts December 31, 1998 $ 922 $ 1,400 $ 684 $ 1,638 December 31, 1997 892 1,046 1,016 922 December 31, 1996 941 1,076 1,125 892
18 19 Report of Independent Accountants on Financial Statement Schedule To the Board of Directors of Broadway & Seymour, Inc. Our audits of the consolidated financial statements referred to in our report dated February 6, 1999, except as to Note 14, which is as of March 5, 1999, appearing in the Company's 1998 Annual Report (which is incorporated by reference in this Form 10-K) also included an audit of the Financial Statement Schedule listed in Item 14 (a)(2) of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP Charlotte, North Carolina February 6, 1999 19 EX-10.26 2 FIFTH AMENDMENT TO LOAN AGREEMENT 1 EXHIBIT 10.26 FIFTH AMENDMENT TO LOAN AGREEMENT AND WAIVER This Fifth Amendment to Loan Agreement is made by and among BROADWAY & SEYMOUR, INC., a Delaware corporation ("Broadway") with a principal place of business at 128 South Tryon Street, Charlotte, North Carolina 28202-5050, ELITE INFORMATION SYSTEMS, INC., a California corporation ("Elite") with a principal place of business at 5100 West Goldleaf Circle, Suite 100, Los Angeles, California 90056, THE MINICOMPUTER COMPANY OF MARYLAND, INC., a Maryland corporation ("TMC") with a principal place of business at Executive Plaza I, 11350 McCormick Road, Suite 600, Hunt Valley, MD 21031-1012, ELITE INFORMATION SYSTEMS INTERNATIONAL, INC., a California corporation ("Elite International") with a principal place of business at 5100 West Goldleaf Circle, Suite 100, Los Angeles, California 90056 (Broadway, Elite, TMC and Elite International are hereinafter jointly and severally referred to as, the "Borrower") and FLEET NATIONAL BANK, a national banking association organized under the laws of the United States and having an office at One Federal Street, Boston, Massachusetts 02110 as Agent for itself and each of the other Lenders who now and/or hereafter become parties to the hereinafter defined Loan Agreement pursuant to the terms of Section 9.11 thereof (sometimes the "Agent" and sometimes "Fleet" and in its capacity as a Lender, sometimes "Fleet" and sometimes a "Lender"). Capitalized terms used herein and not expressly defined herein shall have the respective meanings ascribed to such terms in the hereinafter defined Loan Agreement. WITNESSETH THAT: WHEREAS, the Borrower and the Agent are parties to that certain Loan Agreement dated as of July 23, 1997 pursuant to which the Lenders extended a $15,000,000 revolving credit facility, as amended by that certain First Amendment to Loan Agreement dated September 30, 1997, as further amended by that certain Second Amendment to Loan Agreement dated February , 1998, effective as of December 31, 1997, as further amended by that certain Third Amendment to Loan Agreement dated May 5, 1998, effective as of March 31, 1998 and as further amended by that certain Fourth Amendment to Loan Agreement dated August 7, 1998 (as amended hereby and as hereafter amended from time to time, the "Loan Agreement"); and WHEREAS, the Borrower and the Agent desire to amend a certain provision of the Loan Agreement and waive Borrower's compliance therewith at December 31, 1998 as hereinafter set forth. NOW, THEREFORE, the Borrower and the Agent hereby agree as follows: 1. All references in the Loan Agreement to the Financing Documents shall be deemed to refer to such documents and in addition shall also refer to this Fifth Amendment to Loan Agreement. 2 2. Effective as of December 31, 1998, Section 5.1.10 of the Loan Agreement is hereby deleted in its entirety and the following shall be substituted in lieu thereof: "Section 5.1.10. Minimum Consolidated Tangible Net Worth. Maintain a Consolidated Tangible Net Worth in an amount not less the sum of (i) $15,000,000, plus (ii) eighty-five percent (85%) of Adjusted Net Income for the period beginning as of the Closing Date without any reduction for losses, plus (iii) eighty-five percent (85%) of the gross proceeds of an offering or sale of a security, note or other instrument of the Borrower or any Subsidiaries after the Closing Date, to be measured at each Borrower fiscal quarter end on a cumulative basis from the Closing Date." 3. (a) The Borrower has informed the Agent of its failure to comply with Section 5.1.10 of the Agreement. Specifically, the Borrower has informed the Agent that it was unable to meet its obligation to maintain Minimum Consolidated Tangible Net Worth as required in such section of the Agreement for the Borrower fiscal quarter ending December 31, 1998. (b) In reliance on the accuracy of the Borrower's representation referred to above and upon the verbal representations of the Borrower that no Default or Event of Default (other than the Event of Default resulting from the Borrower's failure to comply with Section 5.1.10 of the Agreement) exists under the Agreement, Fleet hereby waives the Borrower's compliance with Section 5.1.10 of the Agreement for the Borrower fiscal quarter ended December 31, 1998. This waiver is strictly limited to the Borrower's failure to meet its Minimum Consolidated Tangible Net Worth obligation described above and is not, nor shall it be construed as, a waiver of any other Default or Event of Default under the Agreement, now existing or hereafter occurring. 4. The Borrower hereby restates all of the representations, warranties and covenants (as amended hereby) of the Borrower set forth in the Loan Agreement to the same extent as if fully set forth herein and the Borrower hereby certifies that all such representations and warranties are true and accurate and Borrower is in compliance with all such covenants as of the date hereof. 5. The Borrower and the Agent hereby ratify, confirm and approve the Loan Agreement, amended as set forth herein, as a binding obligation, enforceable in accordance with its terms. The Borrower further acknowledges and agrees that Agent has not waived any of its rights under the Loan Agreement, amended as set forth herein, or any Event(s) of Default that may hereafter exist thereunder and that there does not exist (i) any offset or defense against payment or performance of any of the Indebtedness and Obligations of the Borrower evidenced thereby, or (ii) any claim or cause of action by Borrower against Agent with respect to the transactions described therein. 6. The Borrower represents and warrants to the Agent that no Default or Event of Default exists under the Loan Agreement, amended as set forth herein, any of the Financing Documents or any document or agreement executed in connection therewith or herewith. 2 3 7. This Fifth Amendment to Loan Agreement shall be effective as of December 31, 1998. IN WITNESS WHEREOF, the Borrower and the Agent have caused this Fourth Amendment to Loan Agreement to be executed as a sealed instrument by their proper representatives hereunto duly authorized as of the 19th day of February, 1999. Witness: Broadway & Seymour, Inc. /s/ Delores C. Tune By: /s/ Timothy Maness - -------------------- ------------------------------ Timothy Maness, Treasurer Witness: Elite Information Systems, Inc. /s/ Delores C. Tune By: /s/ Timothy Maness - -------------------- ------------------------------ Timothy Maness, Assistant Treasurer Witness: The MiniComputer Company of Maryland, Inc. /s/ Delores C. Tune By: /s/ Timothy Maness - -------------------- ------------------------------ Timothy Maness, Treasurer Witness: Elite Information Systems International, Inc. /s/ Delores C. Tune By: /s/ Timothy Maness - -------------------- ------------------------------ Timothy Maness, Treasurer Witness: Fleet National Bank, as Agent for the Lenders and as a Lender /s/ Andrew C. Wigren By: /s/ Michael S. Barclay - -------------------- ------------------------------ Name: Michael S. Barclay Title: Vice President 3 EX-10.31 3 STOCK PURCHASE AGREEMENT 1 EXHIBIT 10.31 STOCK PURCHASE AGREEMENT AMONG TMC HOLDING CORPORATION (BUYER) AND BROADWAY & SEYMOUR, INC. (SELLER) MARCH 5, 1999 2 STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (the "Agreement"), dated as of March 5, 1999 (the "Effective Date"), is by and between Broadway & Seymour, Inc., a Delaware corporation (the "Seller"); and TMC Holding Corporation, a Maryland corporation (the "Buyer"). BACKGROUND STATEMENT The Seller owns all of the outstanding capital stock (the "Shares") of The Minicomputer Company of Maryland, Inc., a North Carolina company (the "Company"). The Buyer desires to purchase from the Seller, and the Seller desires to sell to the Buyer, the Shares in return for cash and a note (the "Transaction"). Based upon and subject to the representations and warranties made by each of the Buyer and the Seller to the other in this Agreement, and in those agreements attached hereto and referenced herein, and subject to the respective conditions set forth in this Agreement, the parties have agreed to consummate the Transaction on the terms contained herein. STATEMENT OF AGREEMENT In consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows: ARTICLE I PURCHASE OF THE SHARES 1.1 PURCHASE AND SALE. On and subject to the terms and conditions of this Agreement and for the consideration specified below, the Buyer agrees to purchase from the Seller, and the Seller agrees to sell to the Buyer, the Shares, representing in the aggregate all of the outstanding capital stock of the Company. 1.2 PURCHASE PRICE. The Buyer agrees to pay the Seller $350,000 (the "Purchase Price") for the Shares. The Buyer will pay Seller $80,000 of the Purchase Price by wire transfer or delivery of immediately available funds on the Closing Date (the "Closing Payment"). The Buyer will give Seller a Promissory Note, in the form attached hereto as EXHIBIT 1.2, for $270,000 (the balance of the Purchase Price) payable at an annual rate of interest of ten (10%) in accordance with the payment schedule attached to and made part of the Promissory Note. 3 ARTICLE II THE CLOSING 2.1 CLOSING DATE. Subject to fulfillment of the conditions herein, on March 5, 1999, or an earlier date acceptable to Buyer and Seller (the "Closing Date"), the closing of the Transaction (the "Closing") shall take place at the offices of the Seller in Charlotte, North Carolina, commencing at 10:00 a.m. on the Closing Date. 2.2 DELIVERIES BY SELLER AT CLOSING. At the Closing the Seller will deliver the following items to Buyer (except as otherwise set forth below): a) the prepayments received by the Company for services to be performed and products to be delivered by the Company after the Closing Date as calculated pursuant to SECTION 2.4 below in cash (the "Prepayments"); b) a stock certificate representing all of the Shares (to be delivered to the escrow agent as provided in the Stock Pledge Agreement to be executed by the parties as set forth in SECTION 2.3(C)); c) an executed Termination and Release Agreement in the form of EXHIBIT 2.3(C) by which Seller agrees to pay Johnson $50,000 eight (8) days following the Closing Date (the "Release Payment"). 2.3 DELIVERIES BY BUYER AT CLOSING. At the Closing the Buyer will deliver the following items: a) the Closing Payment by wire transfer or by delivery in immediately available funds; provided, however, that the Buyer may elect to offset the Closing Payment against the Prepayments upon notice to the Seller prior to the Closing Date; b) a promissory note for the amount of $270,000 in the form attached hereto as EXHIBIT 1.2; c) a stock pledge agreement, in the form attached hereto as EXHIBIT 2.3(C) (the "Stock Pledge Agreement"), granting a security interest in the Shares, and pledging the Shares to, Seller to secure the amount of the Purchase Price not paid at Closing; d) an executed Termination and Release and Settlement Agreement, in the form attached hereto as EXHIBIT 2.3(D), duly executed by Johnson releasing the Seller from any and all claims under the Employment Agreement, dated June 9, 1995, as amended, between Seller and Johnson, in consideration of the Release Payment; 2 4 e) the Cooperation and Non-Compete Agreement, in the form attached hereto as EXHIBIT 2.3(E), duly executed by Buyer and the following individuals: Johnson, Bob Moore, Mike Stone, Marlene Abramson and Kelly Long; f) an assignment assigning the lease by and between Seller/Company and Hill Management Services, Inc. (the "Landlord"), dated February 5, 1994, as amended, for the premises occupied by the Company (the "Lease") to the Company, which assignment (the "Assignment") shall have been executed by the Landlord and pursuant to which the Landlord shall have released the Seller from liability thereunder. g) the various certificates, instruments, agreements and other documents required from the Buyer hereunder. 2.4 PREPAYMENTS. The Prepayments will be calculated as follows: the sum of (i) five-sixths (5/6) of the maintenance revenues for calendar year 1999 payable on an annual basis collected as of the February 28, 1999, (ii) one third (1/3) of the maintenance revenues for calendar year 1999 payable on a quarterly basis collected as of February 28, 1999; and (iii) one third (1/3) of the maintenance fees for the Universe Database Software payable for the year running from July 1, 1998 to June 30, 1999 collected as of February 28, 1999. A calculation of the Prepayments based on the preliminary February 28, 1999, balance sheet for the Company is attached hereto as EXHIBIT 2.4. The Prepayments paid on the Closing Date will be the amount set forth in EXHIBIT 2.4; provided, however, that the amount of the Prepayments will be adjusted within thirty (30) days of the Closing Date, as necessary, based on the final February 28, 1999 balance sheet for the Company and the amount of any adjustment will be returned to Seller by Buyer or paid by Seller to Buyer as appropriate within such time. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE SELLER The Seller represents and warrants to the Buyer that the statements contained in this ARTICLE III are correct as of the date of this Agreement (except as expressly set forth below), and they will take no action to render them incorrect as of the Closing Date. 3.1 THE SHARES. The Seller holds of record and owns beneficially the Shares, which Shares shall be, within thirty (30) days following the Closing Date, free and clear of any restrictions on transfer (other than any restrictions under federal and state securities laws), taxes, security interests, options, warrants, purchase rights, contracts, commitments, equities, claims, and demands. 3.2 ORGANIZATION AND STANDING OF THE COMPANY. The Company is a corporation duly organized, validly existing and in good standing under the laws of the state of North Carolina. 3 5 3.3 CAPITAL STOCK OF THE COMPANY. As of the date hereof, 100 shares of capital stock of the Company are outstanding. All outstanding shares of capital stock of the Company are duly authorized, validly issued and outstanding and fully paid and nonassessable. There are no outstanding, and at Closing there will be no outstanding, warrants, options, agreements, convertible or exchangeable securities or other commitments pursuant to which the Company is or may become obligated to issue, sell, purchase or redeem any shares of capital stock or other securities of the Company, and there are not any equity securities of the Company reserved for issuance for any purpose. 3.4 TAXES AND TAX RETURNS. (a) All tax returns that are required to be filed (taking into account all extensions) on or before the Closing Date for the Company relating to the income of the Company and those which include or should include the Company (whether on a separate, consolidated, combined or any other basis) have been or will be filed with the appropriate federal or state authorities on or before the Closing Date, and all taxes shown to be due and payable on such tax returns have been or will be paid in full on or before the Closing Date; (b) To the knowledge of the Seller, all tax returns referred to in Section 3.4(a) above and the information and data contained therein fairly present or will fairly present, in all material respects, the information purported to be shown therein, and reflect or will reflect all liabilities for taxes for the periods covered by such tax returns; and (c) To the knowledge of the Seller, none of such tax returns are now under audit or examination by any governmental authority, and there are no agreements, waivers or other arrangements providing for an extension of time with respect of the assessment or collection of any tax or deficiency of any nature against the Company or with respect to any such tax return, and no proceedings or claims now pending or threatened against the Company with respect to any tax. 3.5 OTHER LIABILITIES. Within thirty (30) days after the Closing Date, Seller shall cause that certain Loan Agreement by and among Seller, the Company and other affiliates of Seller and Fleet National Bank ("Fleet"), dated July 23, 1997 (the "Loan Agreement"), and the following related documents of even date therewith (i) the Security Agreement between Fleet and the Company, and (ii) the Conditional Assignment of Trademark between the Company and Fleet, to be amended and terminated, as the context requires, to relieve the Company of liability thereunder. As of the date thirty (30) days following the Closing Date, there shall be no liabilities, liens, or encumbrances that affect the Company or its assets arising under or relating to any agreement entered on the Company's behalf by the Seller. 4 6 ARTICLE III-A COVENANTS OF SELLER 3A.1. CORPORATE INCOME TAXES FOR 1999. Seller will in its federal and state income tax returns for 1999 report taxable income for the Company for the period of January 1, 1999 through February 28, 1999, and pay any income taxes thereon. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER The Buyer represents and warrants to the Company and the Seller as follows: 4.1 NO VIOLATION. This Agreement has been duly and validly authorized by the Buyer; neither the execution, delivery or performance of this Agreement by the Buyer nor the operation of the Company's business by the Buyer will violate any applicable legal requirement; and the Buyer has the power and authority, and all necessary consents and approvals, to execute and deliver this Agreement and to consummate the Transaction. 4.2 BROKERS' FEES. The Buyer has no liability or obligation to pay any fees or commissions to any broker, finder, or agent with respect to the Transaction contemplated by this Agreement for which the Seller could become liable or obligated. 4.3 INVESTMENT INTENT. The Buyer is not acquiring the Shares with a view to or for sale in connection with any distribution thereof within the meaning of the Securities Act of 1933, as amended. ARTICLE V COVENANTS OF BUYER 5.1 CONFIDENTIALITY. The Buyer (a) will hold, and cause its lenders, accountants, representatives, agents, consultants and advisors to hold, in strict confidence, all information, other than such information as may be or become (other than as a result of the violation of this Agreement by the Buyer) publicly available, furnished to the Buyer in connection with the Transaction as well as all information concerning the Company contained in any analyses, compilations, studies or other documents prepared by or on behalf of Buyer (collectively, the "Information"); and (b) will not, without the prior written consent of the Sellers, except as required by law, release or disclose any Information to any other person, except to the Buyer's employees, lenders, accountants, representatives, agents, consultants and advisors who need to know the Information in connection with the consummation of the Transaction, who are 5 7 informed by the Buyer of the confidential nature of the Information and who are instructed, and agree, to comply with the terms and conditions of this SECTION 5.1. 5.2 COOPERATION AND ACCESS TO RECORDS. Following the Closing, the Buyer will, upon reasonable advance notice from Seller, make the Company's books and records available for inspection by Seller, including Seller's accountants, auditors and attorneys, and cooperate with and assist Seller in such inspection, for the purpose of an audit of Seller or for Seller's use in preparing tax returns for the periods through and including the Closing Date or in responding to any audit(s) for such periods by any federal or state tax authority. 5.3 RETURN OF EQUIPMENT. Within ten (10) days of the Closing Date, the Buyer shall return to Seller at Seller's Charlotte, North Carolina offices those items of equipment listed in EXHIBIT 5.3 hereto. ARTICLE VI MUTUAL COVENANTS 6.1 CONSUMMATION OF AGREEMENT. The Seller and the Buyer will each use its best efforts to achieve the fulfillment of all conditions to each party's obligations to closing hereunder so that the Transaction shall be consummated. Except for events that are the subject of specific provisions of this Agreement, if any event should occur that would materially delay or prevent fulfillment of the conditions upon the obligations of any party hereto to consummate the Transaction, that party will notify the other of any such event and the parties will use their respective reasonable, diligent and good faith efforts to cure or minimize the same as expeditiously as possible. 6.2 SECTION 338(H)(10) ELECTION. The Seller and Buyer shall jointly make an election under Section 338(h)(10) of the Internal Revenue Code, and any applicable analogous provision of any state law, for treatment of the transactions contemplated by this Agreement. A schedule showing the allocation of the purchase price, which has been agreed upon by the parties, and which is based on the preliminary February 28, 1999, balance sheet for the Company, is attached hereto as EXHIBIT 6.2. Within thirty (30) days after the Closing Date the Seller shall prepare and deliver to Buyer a proposed modified purchase price allocation schedule using the final February 28, 1999, balance sheet for the Company, for Buyer's approval, which approval shall not be unreasonably withheld or delayed. This modified schedule shall be adopted by the parties in the preparation of the federal, and, if appropriate, state income tax returns. The parties will do such other things necessary, including, but not limited to, making all necessary filings with tax authorities, to accomplish the purposes of this SECTION 6.2. 6 8 ARTICLE VII CLOSING CONDITIONS 7.1 CONDITION TO EACH PARTY'S OBLIGATIONS TO EFFECT THE TRANSACTION. The respective obligations of each party to effect the transactions contemplated hereby shall be subject to the following conditions: (a) No party shall be subject on the Closing Date to any order, decree or injunction of a court of competent jurisdiction that enjoins or prohibits the consummation of this Agreement, nor shall there be pending a suit or proceeding by any governmental authority that seeks injunctive or other relief in connection with the Transaction. (b) Any required approvals by governmental authorities of the Transaction, including any approvals required under permit(s) held by Company, shall have been provided; provided, however, the Buyer hereby agrees to use its best efforts to obtain all such required approvals as soon as is reasonably possible (the Seller hereby agreeing to provide any reasonable cooperation that the Buyer may request, provided the Seller is not required to incur any liability or obligation, or substantial expense). 7.2 CONDITIONS TO THE OBLIGATIONS OF THE SELLER TO EFFECT THE TRANSACTION. The obligations of the Seller to effect the Transaction shall be further subject to the fulfillment of the following conditions, any one or more of which may be waived by the Seller: (a) All representations and warranties of the Buyer contained in this Agreement shall be true and correct in all material respects as of such Closing Date as though made as of such date. The Buyer shall have performed and complied in all material respects with all covenants and agreements contained in this Agreement required to be performed and complied with by it at or prior to the Closing Date. (b) All documents required hereunder to have been delivered by the Buyer to the Seller, at or prior to the Closing Date, as well as the Closing Payment, shall have been delivered to the Seller. 7.3 CONDITIONS TO THE OBLIGATIONS OF BUYER TO EFFECT THE TRANSACTIONS CONTEMPLATED HEREBY. The obligations of the Buyer to effect the transactions contemplated hereby shall be further subject to the fulfillment of the following conditions, any one or more of which may be waived by the Buyer: (a) All representations and warranties of the Seller contained in this Agreement shall be true and correct in all material respects as of the Closing Date as though made as of such date. The Seller shall have performed and complied in all material respects with all covenants and agreements contained in this Agreement required to be performed and complied with by it at or prior to the Closing Date. 7 9 (b) All documents, if any, required hereunder to have been delivered by the Seller to the Buyer, at or prior to the Closing Date, as well as the Prepayments, shall have been delivered. ARTICLE VIII TERMINATION 8.1 TERMINATION. The obligations of the parties hereunder may be terminated and the transactions contemplated hereby abandoned at any time prior to the Closing Date: (a) by mutual written consent of the Seller and the Buyer; (b) by either the Seller or the Buyer, if there shall be any law or regulation that hereafter becomes effective that makes consummation of this Agreement illegal or otherwise prohibited or if any judgment, injunction, order or decree permanently enjoining the Buyer or the Seller from consummating this Agreement is entered and such judgment, injunction, order or decree shall become final and non-appealable; (c) by either the Buyer or the Seller, if the conditions to their respective obligations to effect the Transaction shall not have been fulfilled or waived by the Closing Date and if the party seeking termination is in material compliance with all of its obligations under this Agreement; and (d) by either the Buyer or the Seller, if a condition of its obligation to effect the Transaction shall have become incapable of fulfillment (notwithstanding the efforts of the party seeking to terminate as set forth in SECTION 6.1) and shall not have been waived. (e) By either the Buyer or the Seller, if there shall be any material misrepresentation or breach of warranty by the other party or any failure by the other party to perform one or more of its other obligations under this Agreement which are performable on or prior to the Closing Date. 8.2 PROCEDURE AND EFFECT OF TERMINATION OR FAILURE TO CLOSE. (a) In the event of a termination contemplated hereby by any party pursuant to SECTION 8.1, prompt written notice thereof shall be given to the other party, and the Transaction shall be abandoned, without further action by the parties hereto. In such event: (i) The Buyer shall return to the Seller all documents and other material received from or on behalf of the Seller or the Company, whether obtained before or after the execution hereof; (ii) All filings, applications and other submissions relating to the Transaction shall, to the extent practicable, be withdrawn from the agency or other person to which made; and 8 10 (iii) None of the parties hereto nor any of their partners, directors, officers, shareholders, employees, agents, or affiliates shall have any further obligation to the other party or any of its partners, directors, officers, shareholders, employees, agents, or affiliates pursuant to this Agreement, except (A) as stated in SECTIONS 5.1 (relating to confidentiality) and 11.1 (expenses) hereof and (B) the Buyer and the Seller shall nevertheless be entitled to seek any remedy to which it or they may be entitled at law or in equity for the material violation or breach by any other party of any agreement, covenant, representation or warranty contained in this Agreement. ARTICLE IX SELLER'S AGREEMENT TO INDEMNIFY 9.1 SELLERS' AGREEMENT TO INDEMNIFY. (a) INDEMNIFICATION. Subject to the limitations, conditions and provisions set forth herein, the Seller agrees, effective upon the Closing, to indemnify, defend and hold harmless the Buyer, the Company, and its officers, directors, agents, and representatives from and against all demands, claims, actions, losses, damages, liabilities, costs and expenses, including without limitation, reasonable attorney's fees, asserted against or incurred by them resulting from a breach of the representation and warranty of the Seller contained in ARTICLE 3 and the convenants contained in ARTICLE 3A of this Agreement (collectively, "Buyer's Damages"). (b) LIMITATION OF LIABILITY. The Seller's obligation to indemnify Buyer pursuant to this SECTION 9.1 shall be subject to all of the following limitations: (i) The Seller shall be obligated to indemnify the Buyer pursuant to SECTION 9.1(A) only for those Buyer's Damages as to which the Buyer has given the Seller written notice within 48 months after the Closing Date. Any written notice delivered by the Buyer to the Seller pursuant to this Section shall set forth with specificity the basis of the claim for Buyer's Damages and an estimate of the amount thereof. (ii) Notwithstanding anything to the contrary contained in this Agreement, the Seller's total liability to the Buyer arising under this Section or otherwise out of the transactions contemplated herein shall be limited to the amount of the Purchase Price paid as of the date of claim hereunder. (c) CONDITIONS OF INDEMNIFICATION. The obligations and liabilities of the Seller under SECTION 9.1 hereof with respect to claims for Buyer's Damages resulting from the assertion of liability by third parties including, without limitation, governmental entities, ("Buyer's 9 11 Claims") shall be subject to the condition that within ten days after receiving notice thereof, the Buyer will give the Seller notice of any Buyer's Claims asserted against or incurred by the Buyer, and the Seller may undertake the defense thereof by counsel of its own choosing and further that Buyer comply, and have complied, in all respects with SECTION 5.2 hereof. The Buyer may, by counsel, participate in such proceedings, negotiations or defense, at its own expense, but the Seller shall retain control over such litigation. In all such cases, the Buyer will give reasonable assistance to the Seller, including making employees available without charge as reasonably requested. ARTICLE X BUYER'S AGREEMENT TO INDEMNIFY 10.1 BUYER'S AGREEMENT TO INDEMNIFY. (a) INDEMNIFICATION. Subject to the conditions and provisions set forth herein, the Buyer hereby agrees, effective upon the Closing, to indemnify, defend and hold the Seller harmless from and against all demands, claims, actions, losses, damages, liabilities, costs and expenses, including, without limitation, reasonable attorney's fees, asserted against or incurred by the Seller which (i) results from a breach of any covenant, agreement, representation or warranty of Buyer contained in this Agreement, (ii) arises under or relates to the Lease or (iii) relates to the Company, including, but not limited to, claims by customers or suppliers of the Company (collectively the "Seller's Damages"). (b) LIMITATION OF LIABILITY. The Buyer's obligation to indemnify the Seller pursuant to this SECTION 10.1 shall be subject to the following limitations: (i) Except with respect to ARTICLE XI below, the Buyer shall be obligated to indemnify the Seller pursuant to SECTION 10.1(A) only for those Seller's Damages as to which the Seller have given the Buyer written notice within 48 months after the Closing Date. Any written notice delivered by the Seller to the Buyer pursuant to this Section shall set forth with specificity the basis of the claim for the Seller's Damages and an estimate of the amount thereof. (c) CONDITIONS OF INDEMNIFICATION. The obligations and liabilities of the Buyer under SECTION 10.1(A) hereof with respect to claims for Seller's Damages resulting from the assertion of liability by third parties including, without limitation, governmental entities ("Seller's Claims") shall be subject to the condition that within ten days after receiving notice thereof, the Seller will give the Buyer notice of any Seller's Claims asserted against or incurred by the Seller and the Buyer will undertake the defense thereof by counsel of his own choosing. The Seller may, by counsel, participate in such proceedings, negotiations or defense, at their own expense, but the Buyer shall retain control over such litigation. In all such cases, the Seller shall give reasonable assistance to the Buyer. 10 12 ARTICLE XI MISCELLANEOUS PROVISIONS 11.1 EXPENSES. Whether or not the transactions contemplated hereby are consummated, except as otherwise provided herein, the Buyer will pay all costs and expenses incurred by it in connection with this Agreement and the Transaction, and the Seller will pay all costs and expenses incurred by the Seller in connection with this Agreement and the Transaction. 11.2 SURVIVAL OF REPRESENTATIONS. All representations, warranties and agreements made by the parties to this Agreement or pursuant hereto shall survive the Closing, but except as otherwise expressly provided herein, all claims made by virtue of such representations, warranties and agreements shall be made under, and subject to the applicable limitations set forth in, ARTICLES IX and X. 11.3 DEFINITION OF "KNOWLEDGE". For purposes of this Agreement, the term "knowledge," when referring to the Seller's knowledge, shall mean the actual knowledge of the executive officers of the Seller. 11.4 AMENDMENT AND MODIFICATION. This Agreement may be amended, modified or supplemented only by written agreement of the Seller and the Buyer. 11.5 WAIVER OF COMPLIANCE; CONSENTS. Except as otherwise provided in this Agreement, any failure of any of the parties to comply with any obligation, representation, warranty, covenant, agreement or condition herein may be waived by the party entitled to the benefits thereof only by a written instrument signed by the party granting such waiver, but such waiver or failure to insist upon strict compliance with such obligation, representation, warranty, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. Whenever this Agreement requires or permits consent by or on behalf of any party hereto, such consent shall be given in writing in a manner consistent with the requirements for a waiver of compliance as set forth in this Section. 11.6 NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed given when delivered by hand or by facsimile transmission or mailed by registered or certified mail (return receipt requested), postage prepaid, to the parties at the following addresses (or at such other address for a party as shall be specified by like notice; provided that notices of a change of address shall be effective only upon receipt thereof): 11 13 (a) If to the Seller, to: Broadway & Seymour, Inc. Attn: General Counsel 128 South Tryon Street Charlotte, NC 28202-5050 Facsimile: 704-344-3542 With copy to: Elite Information Systems, Inc. Attn: President 5100 West Goldleaf Circle, Suite 100 Los Angeles, CA 90056-1271 (b) If to the Buyer, to: TMC, Inc. Attn: Robert Johnson 11350 McCormick Road Executive Plaza III #601 Hunt Valley, MD 21031 Facsimile: 410-584-7736 11.7 ASSIGNMENT. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any party hereto without the prior written consent of the other party, nor is this Agreement intended to confer upon any other person except the parties hereto any rights or remedies hereunder except as otherwise expressly provided herein. Notwithstanding the foregoing, the Seller may assign its rights and remedies hereunder in connection with any sale or other transfer of assets of the Seller (including a transfer by merger, liquidation or otherwise). 11.8 GOVERNING LAW; JURISDICTION. This Agreement shall be construed in accordance with the laws of the State of North Carolina without reference to the conflicts of laws provisions thereof. The parties hereby consent to the personal jurisdiction of the state and federal courts of and for the County of Mecklenburg, State of North Carolina, for the adjudication of all matters relating hereto or arising hereunder, and shall accept as due and binding service of legal process there for service by receipted mail directed to the parties' respective offices. 11.9 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 12 14 11.10 INTERPRETATION. The article and section headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the parties and shall not in any way affect the meaning or interpretation of this Agreement. 11.11 ENTIRE AGREEMENT. This Agreement, including the Exhibits and any Schedules hereto and the documents delivered pursuant to this Agreement, embody the entire agreement and understanding of the parties hereto in respect of the subject matter hereof. The Exhibits and any Schedules hereto are an integral part of this Agreement and are incorporated by reference herein. This Agreement supersedes all prior agreements and understandings between the parties with respect to the Transaction. IN WITNESS WHEREOF, the Sellers and Buyer have caused this Agreement to be signed by their respective duly authorized officers as of the date first above written. SELLER ------------------------------------------- By: ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- BUYER ------------------------------------------- By: ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- 13 EX-11 4 COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11 Broadway & Seymour, Inc. Computation of Earnings per Share (In thousands, except per share data) (Unaudited)
Year Ended December 31, 1998 1997 1996 ------- --------- -------- Net income (loss) ($7,597) $ 2,939 ($2,248) ======= ========= ======= Basic earnings per share: Weighted average common shares outstanding 8,815 9,085 8,914 ======= ========= ======= Net income (loss) per common share ($ 0.86) $ 0.32 ($ 0.25) ======= ========= ======= Diluted earnings per share: Weighted average common shares outstanding 8,815 9,085 8,914 Addition from assumed exercise of stock options 52 ------- --------- ------- Weighted average common and common equivalent shares outstanding 8,815 9,137 8,914 ======= ========= ======= Net income (loss) per common and common equivalent share ($ 0.86) $ 0.32 ($ 0.25) ======= ========= =======
EX-13 5 PORTIONS OF 1998 ANNUAL REPORT 1
FINANCIAL TABLE OF CONTENTS PAGE - --------------------------- ---- Selected Financial Data 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 3 Consolidated Statement of Operations 15 Consolidated Balance Sheet 16 Consolidated Statement of Changes in Stockholders' Equity 17 Consolidated Statement of Cash Flows 18 Notes to the Consolidated Financial Statements 19 Report of Independent Accountants 30
1 2 SELECTED FINANCIAL DATA
CONSOLIDATED OPERATIONS: 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------- Net revenue $ 69,035 $ 79,559 $ 89,351 $ 114,738 $ 132,858 Operating costs and expenses 82,948 76,208 99,609 130,583 118,983 --------- --------- --------- --------- --------- Operating income (loss) (13,913) 3,351 (10,258) (15,845) 13,875 --------- --------- --------- --------- --------- Gain on disposition of non-strategic business units 1,917 1,155 9,652 -- -- Net interest income (expense) 857 832 (187) (493) (821) --------- --------- --------- --------- --------- Income (loss) before income taxes (11,139) 5,338 (793) (16,338) 13,054 Income tax (provision) benefit 3,542 (2,399) (1,455) 4,958 (5,858) --------- --------- --------- --------- --------- Net income (loss) $ (7,597) $ 2,939 $ (2,248) $ (11,380) $ 7,196 ========= ========= ========= ========= ========= Net income (loss) per share: Basic $ (0.86) $ 0.32 $ (0.25) $ (1.32) $ 0.85 Diluted $ (0.86) $ 0.32 $ (0.25) $ (1.32) $ 0.85
SELECTED BALANCE SHEET DATA 12/31/98 12/31/97 12/31/96 12/31/95 12/31/94 - ---------------------------------------------------------------------------------------------------------------------------- Working capital (deficit) $ 14,070 $ 24,572 $ 15,907 $ 490 $ (407) Total assets $ 65,096 $ 67,343 $ 66,474 $ 83,245 $ 75,683 Long-term debt, including current portion -- $ 138 $ 611 $ 2,373 $ 1,765 Stockholders' equity $ 25,019 $ 37,373 $ 32,190 $ 32,437 $ 34,780
The selected financial data includes the results of acquired businesses from the date of acquisition and, in the case of Micro/Resources, Inc. (accounted for using the pooling of interests method), for all periods presented. The comparability of the results of operations for the periods presented are also impacted by dispositions of certain businesses as discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations and by the acquisition of certain businesses in 1995 and 1994. MARKET FOR COMMON STOCK The Company's common stock, $.01 par value, trades on the National Association of Securities Dealers, Inc. Nasdaq National Market System ("Nasdaq") under the symbol BSIS. The following table shows the price range in the Company's common stock for the past two fiscal years:
Quarter ended: 12/31/98 9/30/98 6/30/98 3/31/98 12/31/97 9/30/97 6/30/97 3/31/97 - ------------------------------------------------------------------------------------------------------ High $3.75 $7.63 $8.00 $9.06 $11.75 $14.38 $13.13 $13.25 Low $2.25 $3.25 $5.25 $7.13 $ 7.38 $ 9.50 $10.67 $10.38
2 3 BROADWAY & SEYMOUR, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Broadway & Seymour, Inc. (the "Company") is a software product and services company, providing integrated solutions to the financial, legal and professional services markets. The Company serves these markets through three separately managed operating segments that are summarized below: Elite Information Systems, Inc. ("Elite"), the Company's legal and professional services business, is based in Los Angeles, California and provides a suite of practice management software products including integrated time and billing, general ledger and practice management solutions as well as consulting services to the legal and professional services markets. Elite's software products are often sold with related services to aid the customer in implementation, data conversion and user training efforts. Broadway & Seymour, the Company's customer relationship management business (the "CRM business"), is based in Charlotte, North Carolina and provides product-based and services-based solutions that address the customer relationship management needs of the financial services industry. The CRM business' product-based solutions for customer relationship management include the proprietary software products TouchPoint(TM), CRISP(TM) and BANCStar(R), which are generally integrated and customized to provide a tailored business solution to banks and other financial institutions. Through its services-based solutions, the CRM business provides consulting and system integration and custom development services focused on customer relationship management. The MiniComputer Company of Maryland, Inc. ("TMC"), based in HuntValley, Maryland, is a marketer of proprietary time and billing software, custom programming services and other computer related services primarily to law firms. The majority of TMC's operations are focused on supporting existing customers that have previously licensed TMC's software product. Subsequent to the period covered by this report the Company signed a definitive stock purchase agreement (effective March 5, 1999) to sell all of the outstanding shares of TMC to a holding company owned by TMC management. This Annual Report may contain certain "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, that represent the Company's expectations or beliefs concerning future events or projected financial results. Such forward-looking statements are about matters that are inherently subject to risks and uncertainties. Factors that could influence the matters discussed in certain forward-looking statements include the timing and amount of revenue that may be recognized by the Company, continuation of current expense trends, absence of unforeseen changes in the Company's markets, continued acceptance of the Company's services and products and general changes in the economy, as well as matters discussed in "Risks and Uncertainties" below. There can be no assurances that projected results will be achieved and actual results could differ materially. 3 4 1998 COMPARED TO 1997
1998 (IN THOUSANDS, UNAUDITED) Reconciling Elite CRM TMC Headquarters (1) Items (2) Consolidated ----- --- --- ---------------- --------- ------------ Revenue $ 41,693 $ 23,973 $ 2,805 $ -- $ 564 $ 69,035 Cost of revenue 24,161 21,804 2,266 2,254 -- 50,485 --------------------------------------------------------------------------- Gross margin 17,532 2,169 539 (2,254) 564 18,550 Research and development 3,059 4,443 -- -- -- 7,502 Sales and marketing 8,901 4,333 -- -- -- 13,234 General and administrative 2,368 4,413 191 4,116 -- 11,088 Restructuring -- -- -- 639 -- 639 --------------------------------------------------------------------------- Operating income (loss) $ 3,204 $(11,020) $ 348 $ (7,009) $ 564 $(13,913) ---------------------------------------------------------------------------
1997 (IN THOUSANDS, UNAUDITED) Reconciling Elite CRM TMC Headquarters (1) Items (2) Consolidated ----- --- --- ---------------- --------- ------------ Revenue $ 31,086 $ 42,270 $ 2,847 $ -- $ 3,356 $ 79,559 Cost of revenue 19,430 24,087 2,337 2,016 1,924 49,794 --------------------------------------------------------------------------- Gross margin 11,656 18,183 510 (2,016) 1,432 29,765 Research and development 1,470 3,415 -- -- 983 5,868 Sales and marketing 5,933 4,720 23 -- 425 11,101 General and administrative 1,778 4,110 215 4,048 -- 10,151 Restructuring -- -- -- (706) -- (706) --------------------------------------------------------------------------- Operating income (loss) $ 2,475 $ 5,938 $ 272 $ (5,358) $ 24 $ 3,351 ---------------------------------------------------------------------------
(1) Headquarters includes the non-allocated costs such as professional fees, property and casualty insurance, directors and officers insurance, the costs of the corporate executive and legal departments, restructuring charges and amortization expense associated with the excess costs over the fair value of assets acquired in the Elite and TMC purchase transactions. (2) Reconciling items include the results of operations from disposed business units (see separate discussion and analysis under "Significant Transactions"). 4 5 Elite Revenue from the Company's Elite legal and professional services business increased $10.6 million in 1998 from 1997. This 34% increase was due in part to increased emphasis on expanding sales to existing customers but was principally due to work performed under new contracts to provide professional service firms with the Elite suite of products. In 1998 Elite's volume of new contract signings increased 67% over the prior year. Management also believes that the increases in revenue were due to Elite's introduction of products utilizing a wider variety of database platforms. Also, the functionality of existing products was enhanced with multi-language and multi-currency capabilities. The expansion of Elite's customer base has also increased customer support and training revenue. In addition, management believes the Year 2000 issue may have focused an increasing number of professional service firms on replacing their existing systems by the end of 1999. Elite's gross margin increased to $17.5 million (or 42% of revenue) in 1998 from $11.7 million (or 37% of revenue) in 1997. This improvement reflects the increases in revenue noted above without corresponding equivalent increases in costs of revenue. A substantial part of Elite's costs of revenue are expenses for deployable resources such as implementation personnel and contract labor. The improved margin reflects a more efficient utilization of these resources and a lower proportion of contract labor in 1998. In addition, a more favorable sales mix with lower third party hardware content also improved the gross margin. Research and development expenses increased by $1.6 million in 1998 to $3.1 million (or 7% of revenue) from $1.5 million (or 5% of revenue) in 1997. The increase was principally related to efforts during the year to develop the next version of the Elite suite of products, a 32-bit system with enhanced query capabilities and object-oriented architecture. In addition, Elite's 1998 research and development efforts included enhancement of its software products to work on additional platforms as well as adding functionality. The Company is committed to maintaining its research and development efforts so it can continue to provide marketable software solutions as the needs of its customer base and target markets change. Sales and marketing expenses increased $3.0 million in 1998 to $8.9 million (or 21% of revenue) from $5.9 million (or 19% of revenue) in 1997 due primarily to higher commissions related to the increased revenue. In 1998, Elite also started a new sales incentive plan that increased awards for contract signings and added a number of additional sales people. General and administrative expenses increased by $.6 million in 1998 to $2.4 million (or 6% of revenue) from $1.8 million (or 6% of revenue), due primarily to higher occupancy costs related to a move to a new office facility and additional support expenses related to business growth. CRM Business Revenue from the Company's CRM business decreased $18.3 million or 43% in 1998 when compared to 1997. This decrease reflects a $10.0 million decline in services-based revenue and a $8.3 million decline in revenue from product-based solutions. The decrease in custom services revenue was principally the result of the Company amending its contract in late 1997 with a significant customer, substantially reducing the scope of work and the amount of future revenue for the Company. Revenue from this customer in 1997 was $8.0 million and in 1998 it was $1.4 million. Product-based solutions revenue declined principally due to the completion of several projects with existing customers and a lack of new customers to offset the loss of revenue. Management believes the CRM business' ability to obtain new or expanded CRM business during 1998 was negatively impacted by consolidations in the financial services industry, a lengthy sales cycle for a relatively new product and industry focus on the Year 2000 issue. To address these declines in revenue from the CRM business, the Company has added two new experienced sales professionals, a new product development manager, implemented a solutions selling program and changed its marketing plan to focus on new business origination in both service-based and product-based CRM engagements. Gross margin for the CRM business decreased to 9% of revenue (or $ 2.2 million) for 1998 from 43% of revenue (or $18.2 million) for 1997. The lower gross margin in 1998 is largely the result of significantly lower revenue levels without corresponding decreases in costs. The majority of the CRM business' costs of revenue are for deployable resources such as 5 6 technical personnel and contract labor. Personnel levels are based, in part, on expectations for work efforts needed to generate future revenue and are relatively fixed in the short-term. Although the CRM business has had declines in personnel levels in 1998, these declines were partially offset by increases in compensation and other costs necessary to retain, train or recruit highly skilled personnel in a very competitive environment. Research and development expenses for 1998 increased by $1.0 million ($1.8 million before software capitalization) to $4.4 million in 1998 (or 19% of revenue) from $3.4 million (or 8% of revenue) in 1997. Research and development efforts in the CRM business include work on the next TouchPoint releases and new TouchPoint functionality, including a JAVA-based bank teller application. The Company is committed to maintaining its research and development efforts so it can continue to meet the needs of its customer base and target markets. Sales and marketing and general and administrative expenses for the CRM business remained relatively consistent with the prior year. TMC The majority of TMC's revenue is earned from maintenance support contracts with customers that have previously licensed its proprietary software product. TMC's revenue remained consistent at $2.8 million for both 1998 and 1997. Gross margin increased in 1998 to 19%, compared to 18% in 1997. The increase in gross margin reflects consistent revenue levels in 1998 and 1997 while reducing personnel related expenses by $.1 million and depreciation and other equipment expenses also decreased approximately $.1 million. TMC operating expenses remained fairly constant at $.2 million in 1998 and 1997. 6 7 1997 COMPARED TO 1996
1997 (IN THOUSANDS, UNAUDITED) Reconciling Elite CRM TMC Headquarters (1) Items (2) Consolidated ----- --- --- ---------------- --------- ------------ Revenue $ 31,086 $ 42,270 $ 2,847 $ -- $ 3,356 $ 79,559 Cost of revenue 19,430 24,087 2,337 2,016 1,924 49,794 -------------------------------------------------------------------------- Gross margin 11,656 18,183 510 (2,016) 1,432 29,765 Research and development 1,470 3,415 -- -- 983 5,868 Sales and marketing 5,933 4,720 23 -- 425 11,101 General and administrative 1,778 4,110 215 4,048 -- 10,151 Restructuring -- -- -- (706) -- (706) -------------------------------------------------------------------------- Operating income (loss) $ 2,475 $ 5,938 $ 272 $ (5,358) $ 24 $ 3,351 --------------------------------------------------------------------------
1996 (IN THOUSANDS, UNAUDITED) Reconciling Elite CRM TMC Headquarters (1) Items (2) Consolidated ----- --- --- ---------------- --------- ------------ Revenue $ 22,756 $ 31,902 $ 3,333 $ -- $ 31,360 $ 89,351 Cost of revenue 16,420 22,556 2,825 2,016 24,145 67,962 -------------------------------------------------------------------------- Gross margin 6,336 9,346 508 (2,016) 7,215 21,389 Research and development 649 2,236 -- -- 2,945 5,830 Sales and marketing 4,573 3,982 29 -- 3,731 12,315 General and administrative 1,674 4,910 264 3,061 1,274 11,183 Restructuring -- -- -- 2,319 -- 2,319 -------------------------------------------------------------------------- Operating income (loss) $ (560) $ (1,782) $ 215 $ (7,396) $ (735) $(10,258) --------------------------------------------------------------------------
(1) Headquarters includes the non-allocated costs such as professional fees, property and casualty insurance, directors and officers insurance, costs of the corporate executive and legal departments, restructuring charges and amortization expense associated with the excess costs over the fair value of assets acquired in the Elite and TMC purchase transactions. (2) Reconciling items include the results of operations from disposed business units (see separate discussion and analysis under "Significant Transactions"). 7 8 Elite Elite revenue increased $8.3 million in 1997 from 1996. This 37% increase was principally due to increased contract signings over the prior year and additional custom programming and training revenue in excess of the original contract amounts. In addition, Elite increased its sales of add-on modules to existing customers as well as customer support revenue, reflecting an expanding customer base. Gross margins increased to 37% of revenue (or $11.7 million) from 28% of revenue (or $6.3 million) for 1997 and 1996, respectively. This improvement reflects the increases in revenue noted above without corresponding proportionate increases in costs of revenue. A substantial part of Elite's costs of revenue are expenses for deployable resources such as implementation personnel and contract labor. The improved margin reflects a more efficient utilization of these resources and a lower proportion of contract labor in 1997. Research and development expenses for 1997 increased $.8 million to $1.5 million (or 5% of revenue) from $.7 million (or 3% of revenue) in 1996 due to expenditures related principally to the ongoing development of the Company's Elite software products, including efforts to expand the ability of the software to function on additional database platforms. Sales and marketing activities increased $1.3 million in 1997 to $5.9 million (or 19% of revenue) from $4.6 million (or 20% of revenue) in 1996. The overall increase in sales and marketing expenses is related to business development efforts, increased marketing and higher commissions and incentive awards for new business growth achieved in the period. General and administrative expenses for 1997 remained relatively consistent with 1996. CRM Business Revenue from the CRM business increased $10.4 million in 1997 compared to 1996. This increase was principally the result of continued revenue growth from the Company's TouchPoint solution, which increased $18.6 million over the prior year, reflecting several new engagements with leading financial institutions. Revenue from its BANCStar and CRISP products grew at a much lower rate, reflecting the relative maturity of these products in the marketplace. Decreases in revenue from other areas (systems integration, custom development, training and other services) of $9 million reflected the Company's strategy, at that time, to focus more on sales of the product-based solutions. Gross margin for the CRM business increased to 43% of related revenue (or $18.2 million) from 29% of related revenue (or $9.3 million) for 1997 and 1996, respectively. The majority of costs of revenue are direct project expenses such as personnel costs, contract labor and the costs of purchasing third party products for resale to customers. The overall improvement in gross margin in 1997 reflects improved utilization of project resources, improved pricing, as well as an increase in the number of higher margin time and materials engagements. Research and development expenses for 1997 increased by $1.2 million from 1996 due to expenditures related principally to the ongoing development of the Company's TouchPoint solution. The Company is committed to maintaining its research and development efforts to enhance and support its existing and future software products. Sales and marketing activities increased $.7 million to $4.7 million in 1997 from $4.0 million in 1996. Overall the increase in sales and marketing expense is related to business development efforts, increased marketing and higher commissions and incentive awards for new business growth achieved in the period. General and administrative expenses decreased to $4.1 million, or 10 % of revenue, in 1997 from $4.9 million, or 15% of revenue, in 1996 principally due to lower depreciation expense in 1997 as compared to 1996. 8 9 TMC Revenue from TMC decreased $.5 million in 1997 from 1996. The majority of TMC's revenue is earned from maintenance support contracts with customers that have previously licensed its proprietary software products. However, the decrease in revenue from 1996 to 1997 reflects a decline in software customization fees and sales of third party hardware products from one year to the next. Gross margins for TMC increased to 18% of related revenue (or $.5 million) in 1997 from 15.2% of related revenue (or $.5 million) in 1996 due to a $.5 million reduction in costs in 1997. Operating expenses for TMC remained fairly constant at $.2 million in 1997 and $.3 million in 1996. SIGNIFICANT TRANSACTIONS The following is a brief summary of the significant transactions that have had a material effect on the Company's historical operating results and financial condition. See the notes to the Company's Consolidated Financial Statements, included herein, for additional discussion related to such transactions. Dispositions: In September 1997, the Company sold substantially all of the assets, including proprietary rights, object code and source code, related to its VisualImpact(TM) software product line, resulting in a $.2 million gain. For the years ended December 31, 1997 and 1996, the VisualImpact product line contributed revenue of approximately $3.0 million in each year. The VisualImpact product line had operating income of $. 4 million in 1997 and operating losses of $.6 million in 1996. Subsequent to the sale and under the terms of the sale agreement, the Company has received royalties from the buyer of the VisualImpact product line of approximately $.2 million in 1997 and $.6 million in 1998. In November 1996, the Company sold all of the issued and outstanding common stock of its wholly owned subsidiary, Corbel & Co. ("Corbel"), which included the assets of EBG & Associates, Inc. (acquired in January 1995), resulting in a gain of $.9 million. The Company received a net earnout payment of $1.6 million in 1998 based on Corbel's operating performance. No additional earnout payments are due to the Company. In 1996 (prior to the sale), Corbel contributed revenue of $17.4 million and operating income of $3.4 million. However, revenue and operating income for 1996 include a one-time software license fee of $5.0 million from a single transaction. In May 1996, the Company sold substantially all of the assets of its Asset Management Services group ("AMSG"), which included BancCorp Systems Inc. (acquired in January 1995). The gain on the sale of AMSG was $8.7 million. In 1996 (prior to the sale), AMSG's revenue was $5.8 million, and its operating losses for the same period were $2.8 million. In addition, in 1996, subsequent to the sale of AMSG, the Company recorded an additional $4.0 million of non-recurring revenue, and approximately $3 million of expense related to certain professional and transition services provided to the purchaser of AMSG under agreements entered into at the time of the sale. In 1996 the Company received $.5 million related to certain software license fees, software maintenance and transition services provided to the purchaser of its wholly owned subsidiary, Liberty Software Inc. The Company incurred substantially no expense in connection with this revenue. Impairment of Long-Term Assets and Restructuring of Operations: In 1998 the Company incurred restructuring charges of $.6 million for termination benefits for 17 people related to the Company's efforts to re-size its CRM staff, reflecting changing business conditions. In 1998 the Company utilized cash of approximately $.4 million for termination benefits and has paid approximately $.2 million in January 1999. In August 1996, the Company developed a plan to close the National Pension Alliance ("NPA"), a partnership of which Corbel/NPA, Inc., a wholly owned subsidiary of the Company, was a 75% general partner. For the year ended December 31, 1996 NPA had revenue of $.6 million, and a loss before restructuring charges of $2.3 million. The Company reserved approximately $2.5 million related to the exit costs of NPA, including $1.3 million for customer refunds, $.8 million related to asset write-offs, and $.4 million related to employee severance costs. During the year ended 1996, $1.3 million, related principally to customer refunds and asset write-offs was charged against the reserve, using $1.0 million of cash. In 9 10 1997, the Company charged approximately $.7 million against the accrual, using cash of $.4 million, relating principally to employee severance costs, asset write-offs and customer refunds and reduced its estimate of the remaining cost to complete the exit plan by $.5 million. As of December 31, 1997 the restructuring was completed. RISKS AND UNCERTAINTIES Concentration of Revenue Sources: The business and organizational characteristics of the Company's customer base may vary significantly from period to period and may cause fluctuations in the size and timing of revenue. The majority of Elite's revenue is concentrated in the legal services industry. However, no single customer accounts for 10% or more of Elite's revenue. The majority of the CRM business revenue is concentrated among a few customers in the financial services industry. In 1998, 1997 and 1996 the 5 largest CRM business customers accounted for approximately 73%, 62% and 68%, respectively, of the CRM business' revenue and 25%, 37% and 24% of consolidated revenue for the same periods. For the periods presented, the CRM business had two customers that exceeded certain disclosure requirement thresholds and are therefore classified as significant customers. In 1998 and 1997, Chase Manhattan Bank ("Chase") accounted for $8.3 million, or 12.1%, and $10.3 million, or 13%, of the Company's consolidated revenue, respectively. Also, in 1997 and 1996 First Data Corp. ("FDC") accounted for $8.0 million, or 10.1%, and $9.6 million, or 10.6%, of consolidated revenue, respectively. Fluctuations in Operating Results: The Company's personnel and other operating expenses are based in part on its expectations for work efforts needed to generate future revenue and are relatively fixed in the short-term. If the Company is unable to generate significant new engagements, or if there is any delay or cancellation of engagements in a particular period, there could be a material adverse affect on the Company's financial condition and results of operations. Management believes that the Company could experience significant fluctuations in future operating results as a result of several factors, including the size and timing of customer engagements; the length of the sales cycle; market acceptance of its software systems and services; technological changes in computer systems and environments; changes in the Company's or its competitors' pricing policies; the Company's success in expanding to new markets; the mix of software systems and services; and changes in general economic conditions. As a result of all of these factors, the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. Volatility of the Financial Services Market: The Company derives a significant portion of its CRM business revenue from bank customers and other segments of the financial services industry. As a result of economic and regulatory factors, banks and other segments of the financial services industry are consolidating, and over the last few years a number of the Company's clients and prospects have been acquired. The Company anticipates that this trend toward consolidation may continue. No assurance can be given that such consolidation will not have a material adverse effect on the Company's financial condition and results of operations. 10 11 Year 2000 Issues: Overview Many software products, custom-developed software, and products embedded with microprocessor chips were designed to store, process or perform calculations using only the last two digits of a four-digit year date, for example, "98" rather than "1998". These software systems and embedded products may assume the first two digits of the year date to be "19" and as such they may not be able to process dates with years following 1999. For example, "00" may be treated by certain software systems as the year 1900 rather than the year 2000. Results of this failure to process the date correctly could include miscalculations, unpredictable or inconsistent results or complete system failures. Companies in all lines of business face issues in addressing whether their software products, custom developed software and third party software used internally, sold by the company or used by its vendors or customers or other entities upon which the company relies, will be able to process data properly relating to dates subsequent to December 31, 1999 ("Year 2000 compliance"). State of Readiness The Company has recognized the need to address the Year 2000 compliance issues and in 1997 established a Year 2000 compliance committee to supervise and monitor the planning, performance and assessment of the Company's Year 2000 compliance efforts. This committee has involved members of senior management, product development leaders, information systems management, facilities management and corporate finance management in efforts to develop a comprehensive and coordinated Year 2000 compliance effort. The chairman of the committee periodically reports plans, progress and issues to executive management and the audit committee of the Board of Directors. Beginning in the second half of 1997, the Company began developing an inventory list of all its proprietary software products, third party products it incorporates in its products or resells, infrastructure and internal use products, facilities and office service systems and hardware products upon which it relies. Upon completion of the inventory list, the Company's Year 2000 committee appointed individual team leaders from various functional areas to be responsible for the efforts of assessing Year 2000 compliance for each of the inventory list items. Proprietary Software Products and Custom Developed Software: In 1997, the Company adopted the widely accepted definition for Year 2000 readiness set out in the "Compliance with British Standards Institution DISC PD2000-1 for Year 2000". In May 1998, following a period of assessment and testing, the Company issued its Year 2000 readiness statement which specifically identified the current versions of each of the Company's proprietary products that met the adopted standard. The Company continues to test new versions of its products for compliance with this standard on an ongoing basis. The Company believes that its current versions of proprietary software products are Year 2000 compliant; however, no assurance can be given that additional modifications for Year 2000 compliance will not be necessary. The Company's software products are integrated with its customers' software and hardware systems and have, in many cases, been uniquely customized to the customers' specifications. The Company has generally not tested its products as integrated in its customers' operating environments, although it is in the process of developing methods to do so for current TouchPoint customers. The customers' systems with which the Company's products interoperate may not be Year 2000 compliant which may affect the operation of the Company's products. As a result the Company, in the course of providing its software maintenance services, may incur costs in ascertaining the cause(s) of system failures not caused by its own products. Such costs, if any that the Company may incur are not estimable, but will generally be charged to customers. Many of the Company's former customers and current customers presently use earlier versions of the Company's software products, and/or associated custom or systems integration code, that are not Year 2000 compliant. The Company has made efforts to communicate with these customers to advise them that they will need to upgrade to a Year 2000 compliant version of the Company's software product, revise custom code or implement other alternatives to meet their business needs. Customers paying support fees are entitled to receive software product upgrades as part of their regular maintenance contracts. Customers who have not maintained support agreements with the Company may purchase such upgrades. Changes to custom or systems integration code provided by the Company that is not Year 2000 compliant are not covered by customer maintenance agreements. Customers may perform such changes themselves, engage the Company to perform such changes, or, in some cases, engage third parties to perform such changes. Customers may need to upgrade third party products and their host software and hardware systems that share data or interoperate with the Company's products in order to utilize the 11 12 Company's software upgrades or modified custom or systems integration code. Such costs could impact customer purchasing decisions and may lead customers to choose alternatives to the Company's products or services. Third Party Products: Third party products embedded within the Company's products are included in the test plans and compliance efforts that the Company already has underway for its own products. In addition, the Company has obtained certification of Year 2000 compliance from each third party vendor whose products are embedded in the Company's products or that are resold by the Company. Infrastructure and Third Party Products Used Internally: The Company has obtained certification of Year 2000 compliance from each of the vendors of its internal use information technology systems. The Company is developing test plans for these internal use systems following the same guidelines and standards that it has used for its own products. Currently the Company anticipates having all test plans developed for critical internal use technology systems by mid-1999. The Company also intends to begin testing during that period and will continue testing through 1999. During the first half of 1999, the Company will begin developing a contingency plan against Year 2000 failure for its mission critical software applications, hardware and other systems. The majority of non-information technology systems on which the Company relies in its operations are owned and managed by the lessors of the buildings in which the Company's offices are located. The Company has developed checklists of critical systems upon which it relies and certification documents are being sought from its lessors and other appropriate providers as applicable regarding Year 2000 compliance of their systems. The Company will prioritize these systems and develop test plans based on the responses it receives, or does not receive, from its lessors and other providers. This effort is scheduled for completion in the first half of 1999. Risks and Costs Because of the nature of the Company's business, the Company may be subject to Year 2000 claims or litigation by its customers or other parties. Many customers will incur significant costs in making their information processing systems Year 2000 compliant and may seek to transfer such costs through litigation to information processing industry vendors such as the Company. Although the ultimate outcome of any litigation is uncertain, the Company does not believe that the ultimate amount of liability, if any, from such actions would have a material adverse affect on the Company. The Company believes that Year 2000 issues may affect the purchasing patterns of its customers and potential customers in a variety of ways. Many companies are expending significant amounts and rededicating personnel to correct or patch their current software systems for Year 2000 compliance. These expenditures may result in reduced funds available to purchase software products such as those offered by the Company. It is possible that certain of the Company's customers are purchasing support contracts with the intent of discontinuing such support after January 1, 2000 when they have satisfied themselves that the supported product is Year 2000 compliant. Many potential customers may also choose to defer purchasing Year 2000 compliant products until they believe it is absolutely necessary, thus resulting in potentially stalled market sales within the industry. Additionally, Year 2000 compliance issues could cause a significant number of companies, including current Company customers, to reevaluate their current system needs and as a result to consider switching to other systems or suppliers. The Company has not specifically hired additional personnel or made material purchases of products to address Year 2000 compliance issues, nor does the Company expect it will be necessary to do so. The expenditures made to date have principally related to salary costs of existing personnel assigned to participate at various levels in the Company's compliance efforts. All costs related to achieving Year 2000 compliance are being expensed as incurred. The Company estimates that the costs incurred to date related to Year 2000 compliance efforts range between $.5 and $1.0 million. The Company expects to continue to test current and new versions of its proprietary software, work with vendors of third party software that the Company uses or resells, update and test its inventory of potentially affected internal systems and communicate with vendors and customers regarding the Year 2000 compliance issue. The Company estimates the costs of these efforts will be below $.5 million. Exchange Rate Fluctuations: The Company's revenue is principally generated in the United States, however for the years ending December 31, 1998, 1997, and 1996 Elite revenue generated in Europe represented approximately 8%, 9%, and 5% of consolidated revenue, respectively, and 14%, 22% and 11% of Elite's revenue for the same periods. In addition, for the years ending December 31, 1998 and 1997, Elite revenue generated in Canada represented approximately 2% and 1% of consolidated revenue, respectively, and 4% and 2% of Elite's revenue for the same periods. Since the Company's contracts with non-U.S. customers 12 13 generally denominate the amount of payments to be received by the Company in local currencies, exchange rate fluctuations between such local currencies and the U.S. dollar will subject the Company to currency translation risks. Also, the Company may be subject to currency transaction risks when the Company's contracts are denominated in a currency other than the currency in which the Company incurs expenses related to such contracts. Euro Currency: Beginning in January 1999, a new currency called the ECU or the "euro" was introduced in certain Economic and Monetary Union (the "EMU") countries. During 2002, all EMU countries are expected to be operating with the euro as their single currency. As a result, computer software used by many organizations headquartered or maintaining a subsidiary in an EMU country will need to be euro currency enabled, and in less than three years all organizations headquartered or maintaining a subsidiary in an EMU country are expected to need to be euro currency enabled. The transition to the euro currency will involve the handling of parallel currencies and conversion of legacy data. Uncertainty exists as to the effects the euro currency will have on the marketplace. Additionally, all of the final rules and regulations have not yet been defined and finalized by the European Commission with regard to the euro currency. The Company is monitoring the rules and regulations as they become known in order to make any changes to the software that the Company deems necessary to comply with such rules and regulations. Although the Company currently offers certain software products that are designed to be multi-currency enabled and the Company believes that it will be able to accommodate any required euro currency changes in its software products, there can be no assurance that once the final rules and regulations are completed that the Company's software will contain all of the necessary changes or meet all of the euro currency requirements. INCOME TAXES The benefit for income taxes of $3.5 million in 1998 is a direct result of the pre-tax loss, offset in part, by the permanent difference of non-deductible goodwill amortization, stock compensation expense, and state income taxes. The provisions for income taxes of $2.4 million (45% of the pre-tax income) in 1997 and $1.5 million (183% of pre-tax loss) in 1996 exceed the income tax expense at the statutory rates for these periods primarily due to the permanent difference of non-deductible goodwill amortization, stock compensation expense, and state income taxes. The Company believes that the effective tax rate in 1999 will remain higher than the statutory rate due to the ongoing non-deductible goodwill amortization associated with the Company's acquisitions. The Company has net operating losses ("NOLs") for state income tax purposes of $21.1 million. A valuation allowance has been recorded against the deferred tax assets arising from the state NOLs based on uncertainty of realization under current separate company income limitations. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1998, the Company had cash and cash equivalents of approximately $15.3 million and working capital of approximately $14.1 million. During 1998, the Company utilized approximately $5 million to acquire 1,000,000 shares of its own common stock. The Company had positive cash flows from operations of approximately $6.3 million and $2.5 million for 1998 and 1997, respectively, and negative cash flows from operations of $7.3 million in 1996. The Company utilized portions of the proceeds from the sales of non-strategic business units to fund working capital requirements, pay off certain debt and to pay certain expenses. The reduction in debt and investment of cash proceeds from the sales of non-strategic business units resulted in lower interest expense and higher interest income for 1998 and 1997 as compared to 1996. The remainder of the proceeds from these sales was invested in short-term discount notes. 13 14 The Company has a two-year, $15 million revolving credit facility, against which it has made no borrowings. Based on current operating expectations, the Company does not anticipate drawing on the facility in the near-term. The credit facility expires in July of 1999. The Company currently intends to begin negotiations for a renewal of or a replacement of the credit facility prior to its expiration. The Company may borrow up to a maximum of 80% of eligible accounts receivable. As of January 31, 1999, the Company had $13.5 million available for borrowing under this agreement. The credit facility is secured by substantially all of the Company's tangible and intangible assets. Additionally, the loan agreement contains customary covenants that require compliance with certain financial ratios and targets and restricts the incurrence of additional indebtedness, payment of dividends and acquisitions or dispositions of assets, among other things. As of December 31, 1998, the Company was in compliance with such covenants, as amended. Management believes that cash and cash equivalents, projected cash from operations, and availability under the credit facility (or a similar facility) will be sufficient to meet currently anticipated operating needs through the end of 1999. 14 15 BROADWAY & SEYMOUR, INC. CONSOLIDATED STATEMENT OF OPERATIONS (In thousands, except per share data)
For the Years Ended December 31, 1998 1997 1996 -------- -------- -------- Net revenue $ 69,035 $ 79,559 $ 89,351 -------- -------- -------- Operating expenses: Cost of revenue 50,485 49,794 67,962 Research and development 7,502 5,868 5,830 Sales and marketing 13,234 11,101 12,315 General and administrative 11,088 10,151 11,183 Restructuring and impairment 639 (706) 2,319 -------- -------- -------- Total operating expenses 82,948 76,208 99,609 -------- -------- -------- Operating income (loss) (13,913) 3,351 (10,258) Gain on disposition of non-strategic business units 1,917 1,155 9,652 Interest income 920 890 260 Interest expense (63) (58) (447) -------- -------- -------- Income (loss) before income taxes (11,139) 5,338 (793) Income tax (provision) benefit 3,542 (2,399) (1,455) -------- -------- -------- Net income (loss) $ (7,597) $ 2,939 $ (2,248) ======== ======== ======== Net income (loss) per share: - Basic $ (0.86) $ 0.32 $ (0.25) - Diluted $ (0.86) $ 0.32 $ (0.25)
The accompanying notes are an integral part of these consolidated financial statements. 15 16 BROADWAY & SEYMOUR, INC. CONSOLIDATED BALANCE SHEET (In thousands, except share data)
As of December 31, 1998 1997 -------- -------- ASSETS Current assets: Cash and cash equivalents $ 15,273 $ 17,965 Receivables 28,417 29,372 Deferred income taxes 6,131 2,945 Other current assets 1,930 2,128 -------- -------- Total current assets 51,751 52,410 Property and equipment, net 5,167 5,154 Software costs, net 3,309 3,630 Intangible assets, net 4,782 6,064 Other assets 87 85 -------- -------- $ 65,096 $ 67,343 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current portion of long-term debt $ -- $ 138 Accounts payable-trade 5,070 6,325 Accrued compensation 3,974 2,295 Estimated liabilities for contract losses 439 1,162 Other current liabilities 4,319 3,807 Deferred revenue and customer deposits 22,710 11,732 Income taxes payable 1,169 2,379 -------- -------- Total current liabilities 37,681 27,838 -------- -------- Deferred income taxes 1,392 1,435 -------- -------- Other liabilities 1,004 697 -------- -------- Stockholders' equity: Common stock, $.01 par value; Authorized 20,000,000 shares; Issued 9,228,623 shares, 1998 and 1997 92 92 Paid-in capital 38,696 38,518 Treasury stock, at cost, 1,038,552 and 38,552 shares, respectively (5,427) (492) Accumulated deficit (8,342) (745) -------- -------- Total stockholders' equity 25,019 37,373 -------- -------- $ 65,096 $ 67,343 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 16 17 BROADWAY & SEYMOUR, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (In thousands, except share data)
Retained Common Stock Paid-in earnings Treasury Stock Shares Par value capital (deficit) Shares Cost Total --------- --------- ------- --------- ----------- -------- ------- Balance, December 31, 1995 8,801,016 $88 $34,277 $(1,436) (38,552) $ (492) Issuance of common shares in business acquisitions 15,723 250 250 Issuance of common shares pursuant to option and employee purchase plans 171,869 2 1,666 1,668 Tax benefit from exercise of certain stock options 83 83 Net loss (2,248) (2,248) ---------------------------------------------------------------------------------- Balance, December 31, 1996 8,988,608 $90 $36,276 $(3,684) (38,552) $ (492) $ (247) Issuance of common shares in business acquisitions 18,800 235 235 Issuance of common shares pursuant to option and employee purchase plans 221,215 2 1,940 1,942 Tax benefit from exercise of certain stock options 67 67 Net income 2,939 2,939 ---------------------------------------------------------------------------------- Balance, December 31, 1997 9,228,623 $92 $38,518 $ (745) (38,552) $ (492) $ 4,936 Purchase of treasury stock (1,000,000) (4,935) (4,935) Adjustments to be paid-in capital related to cancelled compensatory stock options 178 178 Net loss (7,597) (7,597) ---------------------------------------------------------------------------------- Balance, December 31, 1998 9,228,623 $92 $38,696 $(8,342) (1,038,552) $(5,427) $(7,418) ==================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 17 18 BROADWAY & SEYMOUR, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands)
For the Years Ended December 31, 1998 1997 1996 -------- -------- -------- Cash flows from operating activities: Net income (loss) $ (7,597) $ 2,939 $ (2,248) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization 5,277 5,687 8,888 Restructuring and impairment costs 639 (706) 2,319 Gain on sale of non-strategic business units (1,917) (1,155) (9,652) Deferred income taxes (3,229) 350 (1,511) Loss (gain) on disposal of property and equipment 24 47 (11) Changes in assets and liabilities excluding effects of businesses divested: Receivables 2,910 (4,166) (3,337) Other assets 194 652 (1,120) Accounts payable-trade (1,255) 489 (75) Accrued compensation 1,333 457 (104) Other liabilities 139 (2,475) (9,102) Deferred revenue and customer deposits 10,978 464 4,170 Income taxes (1,210) (102) 4,456 -------- -------- -------- Net cash provided (used) by operating activities 6,286 2,481 (7,327) -------- -------- -------- Cash flows provided (used) by investing activities: Purchase of property and equipment (2,885) (2,492) (3,337) Investment in software costs (1,020) (239) (1,576) Proceeds from sale of businesses -- 1,736 31,219 Cash used in business acquisitions -- -- (864) -------- -------- -------- Net cash provided (used) by investing activities (3,905) (995) 25,442 -------- -------- -------- Cash flows provided (used) by financing activities: Net borrowings (payments) under credit facility -- -- (5,217) Proceeds from issuance of long-term debt and notes payable -- -- 251 Purchase of treasury stock (4,935) -- -- Payment of notes payable and long-term debt (138) (473) (1,860) Proceeds from issuance of common stock -- 1,942 1,668 -------- -------- -------- Net cash provided (used) by financing activities (5,073) 1,469 (5,158) -------- -------- -------- Net increase (decrease) in cash and cash equivalents (2,692) 2,955 12,957 Cash and cash equivalents, beginning of period 17,965 15,010 2,053 -------- -------- -------- Cash and cash equivalents, end of period $ 15,273 $ 17,965 $ 15,010 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 18 19 BROADWAY & SEYMOUR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - NATURE OF BUSINESS, CERTAIN SIGNIFICANT ESTIMATES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Broadway & Seymour, Inc. (the "Company") is a software product and services company, providing integrated solutions to the financial and legal and professional services markets. The Company serves these markets through three separately managed operating segments which are summarized below (see also note 2): Elite Information Systems, Inc. ("Elite"), the Company's legal and professional services business, is based in Los Angeles, California and provides a suite of practice management software products including integrated time and billing, general ledger and practice management solutions and consulting services to the legal and professional services markets. Elite's software products are often sold with related services to aid the customer in implementation, data conversion and user training efforts. Broadway & Seymour, the Company's customer relationship management business (the "CRM business"), is based in Charlotte, North Carolina and provides product-based and services-based solutions that address the customer relationship management needs of the financial services industry. The CRM business' product-based solutions for customer relationship management include the proprietary software products TouchPoint(TM), CRISP(TM) and BANCStar(R), which are generally integrated and customized to provide a tailored business solution to banks and other financial institutions. Through its services-based solutions, the CRM business provides consulting and system integration and custom development services focused on customer relationship management. The MiniComputer Company of Maryland, Inc. ("TMC"), based in HuntValley, Maryland, is a marketer of proprietary time and billing software, custom programming services and other computer related services primarily to law firms. The majority of TMC's operations are focused on supporting existing customers that have previously licensed TMC's software product. The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The more significant estimates affecting the Company's financial statements relate to revenue recognition, realizability of assets, allowance for uncollectible receivables and useful lives used in depreciating property and equipment and amortizing capitalized software costs and intangible assets. The significant accounting policies used in the preparation of the accompanying financial statements are as follows: Principles of consolidation. The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation. Revenue recognition. Revenue from services and from the licensing of software with related services is generally recognized as work is performed under the percentage of completion method with progress measured using labor hours incurred to date compared to total estimated labor hours to be incurred. Revenue from the licensing of software and the sale of hardware products having no significant ongoing obligations is generally recognized upon delivery of the product. Maintenance revenue is recognized ratably over the contract term. Losses are recognized on contracts in the period in which the loss is determined to be probable and estimable. Cash equivalents. Cash equivalents are short-term, highly liquid investments with maturities of three months or less. Property and equipment. Property and equipment are recorded at cost. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the related assets, which range from three to ten years. Leasehold improvements are amortized using the straight-line method over the lesser of their estimated useful lives, generally ten years, or the remaining terms of the leases. 19 20 Software costs and intangible assets. The Company capitalizes a portion of its costs of developing software to be licensed. These costs are incurred after the establishment of technological feasibility and prior to the availability of the software for general release, including costs of product enhancements that improve the marketability of the original product or extend its life. Software costs are amortized using the straight-line method over the estimated economic life of the products, up to a maximum of six years. The excess of cost over fair value of assets acquired is amortized using the straight-line method over ten years. Other intangible assets are amortized using the straight-line method over the useful lives of the assets, which range from five to ten years. The Company continually monitors conditions that may affect the carrying value of its software costs and intangible assets. When conditions indicate potential impairment of such assets, the Company undertakes necessary market and technology studies and evaluates projected future earnings associated with these assets. When projected future cash flows, not discounted for the time value of money, are less than the carrying value of the asset, an impairment loss is recognized. Stock-based compensation. The Company adopted Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," effective January 1, 1996. Upon adoption, the Company elected to disclose in its footnotes to its financial statements the impact of utilizing the fair value approach to measure stock-based compensation, as provided for under the provisions of SFAS 123, and to exclude such impact from its recorded earnings. The Company measures stock-based compensation based on the intrinsic value approach as provided for under the provisions of Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25"). Fair Value of Financial Instruments. The fair value of the Company's financial instruments such as cash and short-term investments, trade receivables, trade payables and notes payable approximates the carrying value of such instruments at December 31, 1998. All of the Company's financial instruments are held for purposes other than trading. Advertising costs. The Company expenses advertising costs as incurred. Advertising expenses for 1998, 1997 and 1996 were $1.0 million, $1.0 million and $1.3 million, respectively. Income (loss) per share. In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards Number 128 "Earnings per Share" ("SFAS 128") which changed the method of calculating and reporting earnings per share. The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share ("EPS") computation for December 31, 1997. For the years ended December 31, 1998 and 1996, there was no difference between the basic and diluted numerators and denominators because both years had a net loss and the effect of the assumed exercise of common stock equivalents (principally stock options) would have been anti-dilutive.
For the Year Ended Per Share December 31, 1997 Income Shares Amount --------------------------- ------ ------ ------ (In thousands) BASIC EPS: $2,939 9,085 $0.32 EFFECT OF DILUTIVE SECURITIES: Options 52 ------ ----- ----- DILUTED EPS: $2,939 9,137 $0.32 ====== ===== =====
Options with an exercise price greater than the average market price of the common shares (or "anti-dilutive options") were not included in the computation of diluted earnings per share. At December 31, 1997, there were outstanding anti-dilutive options to purchase 1,008,749 shares of common stock at a weighted average price of $11.97 Reclassifications. Certain prior year amounts have been reclassified to conform with the current year presentation. 20 21 NOTE 2 - SEGMENT DISCLOSURES: In June 1997, the FASB issued Statement of Financial Accounting Standards Number 131 "Disclosure about Segments of an Enterprise and Related Information" ("SFAS 131") which changes the way that public companies report information about operating segments in annual financial statements and interim financial reports. The Company has adopted SFAS 131 beginning in its 1998 annual financial statements. Segment Information The Company has determined that its reportable segments are Elite, the CRM business and TMC based on each business unit having separate management teams that independently review financial and operating performance, differences in products and services offered, distinct geographic locations and the respective markets served. The following tables provide key data related to each reportable segment, a summary of headquarters cost and a reconciliation to consolidated results for the years ended December 31, 1998, 1997 and 1996:
1998 (IN THOUSANDS, UNAUDITED) Reconciling Elite CRM TMC Headquarters (1) Items (2) Consolidated ----- --- --- ---------------- --------- ------------ Revenue $41,693 $ 23,973 $2,805 $564 $ 69,035 Operating income (loss) $ 3,204 $(11,020) $ 348 $(7,009) $564 $(13,913) Total assets $24,713 $ 33,568 (3) $1,239 $ 5,576 $ 65,096 Depreciation and amortization $ 865 $ 2,254 $ 91 $ 2,067 $ 5,277 Capital expenditures $ 1,503 $ 1,380 $ 2 $ 2,885
1997 (IN THOUSANDS, UNAUDITED) Reconciling Elite CRM TMC Headquarters (1) Items (2) Consolidated ----- --- --- ---------------- --------- ------------ Revenue $31,086 $42,270 $2,847 $3,356 $79,559 Operating income (loss) $ 2,475 $ 5,938 $ 272 $(5,358) $ 24 $ 3,351 Total assets $17,026 $41,587 (3) $1,139 $ 7,591 $67,343 Depreciation and amortization $ 709 $ 2,412 $ 379 $ 2,067 $ 120 $ 5,687 Capital expenditures $ 382 $ 2,043 $ 67 $ 2,492
21 22
1996 (IN THOUSANDS, UNAUDITED) Reconciling Elite CRM TMC Headquarters (1) Items (2) Consolidated ----- --- --- ---------------- --------- ------------ Revenue $ 22,756 $ 31,902 $ 3,333 $ 31,360 $ 89,351 Operating income (loss) $ (560) $ (1,782) $ 427 $ (7,608) $ (735) $(10,258) Total assets $ 12,947 $ 41,955 (3) $ 1,374 $ 9,607 $ 591 $ 66,474 Depreciation and amortization $ 606 $ 2,379 $ 127 $ 2,239 $ 3,537 $ 8,888 Capital expenditures $ 372 $ 2,573 $ 2 $ 390 $ 3,337
(1) Headquarters operating loss includes the non-allocated costs such as professional fees, property and casualty insurance, directors and officers insurance, the costs of corporate executives and legal departments, restructuring charges and amortization expense associated with the excess costs over the fair value of assets acquired in the Elite and TMC purchase transactions. Headquarters total assets include the excess costs over the fair value of assets acquired in the Elite and TMC purchase transactions. (2) Reconciling items include the results of operations, total assets and capital expenditures from disposed business units (see separate discussion and analysis under "Significant Transactions"). (3) Total assets of the CRM business include unsegregated assets utilized by Headquarters personnel as well as substantially all of the cash balances of the Company and all of the Company's deferred tax assets. NOTE 3 - SIGNIFICANT TRANSACTIONS: In September 1997, the Company sold substantially all of the assets, including proprietary rights, object code and source code related to its VisualImpact software product line. The Company has received cash payments of $3.3 million for the net assets sold and payments for certain royalties and software licenses. The gain on the transaction was approximately $.2 million. In addition, the Company is entitled to receive additional royalties based primarily on the business' end user revenue, determined quarterly through the fourth quarter of the year 2000. Subsequent to the sale and under the terms of the sale agreement, the Company has received royalties from the buyer of the VisualImpact product line of approximately $.2 million in 1997 and $.6 million in 1998. In November 1996, the Company sold all of the issued and outstanding capital stock of the Company's wholly owned subsidiary, Corbel & Co. ("Corbel") (excluding its interest in the National Pension Alliance ("NPA") - See Note 7). The consideration paid to the Company at closing was approximately $13.5 million and the gain on the transaction was approximately $.9 million. In addition, in 1998 the Company received an earnout payment from the purchasor of Corbel of $1.6 million, net of certain fees, expenses and provisions for indemnification obligations. In May 1996, the Company sold substantially all of the assets of its Asset Management Services group ("AMSG"), including the Company's wholly owned subsidiary BancCorp Systems, Inc. The Company has received cash proceeds of $18.5 million, net of certain fees and expenses, for the net assets of AMSG and licensing of certain software. Certain additional proceeds were scheduled to be paid to the Company over the twenty-four months following the closing, subject to certain holdback provisions for indemnification obligations. Effective June 30, 1997, the Company and the purchaser terminated these provisions, resulting in the release of the net remaining proceeds to the Company and termination of all future indemnity claims. As a result of this settlement, the Company recognized an additional $.8 million gain on the disposition of AMSG in the quarter ended June 30, 1997. In 1996 the Company received $.5 million related to certain software license fees, software maintenance and transition services provided to the purchaser of its wholly owned subsidiary, Liberty Software Inc. The Company incurred substantially no expense in connection with this revenue. 22 23 NOTE 4 - Receivables At December 31, 1998 and 1997 receivables consisted of the following:
1998 1997 --------- --------- (In thousands) Trade $ 26,052 $ 24,302 Unbilled 2,967 4,631 Other 1,036 1,361 --------- --------- 30,055 30,294 Less - Allowance for doubtful accounts (1,638) (922) --------- --------- $ 28,417 $ 29,372 ========= =========
NOTE 5 - Property and Equipment: At December 31, 1998 and 1997 property and equipment consisted of the following:
1998 1997 --------- --------- (In thousands) Equipment $ 13,847 $ 13,280 Furniture and fixtures 2,345 2,270 Leasehold improvements 1,568 1,026 --------- --------- 17,760 16,576 Less - Accumulated depreciation (12,593) (11,422) --------- --------- $ 5,167 $ 5,154 ========= =========
Depreciation expense related to property and equipment was $2.6 million, $2.8 million and $3.3 million for 1998, 1997 and 1996, respectively. NOTE 6 - SOFTWARE COSTS: During 1998, 1997 and 1996, the Company capitalized software development costs of $1 million, $.2 million and $1.6 million, respectively. Software costs in the accompanying balance sheet also include the cost of purchased software. Accumulated amortization for software costs was $9.0 million and $7.7 million at December 31, 1998 and 1997, respectively. Amortization expense was $1.3 million, $1.4 million and $2.3 million in 1998, 1997 and 1996, respectively. In connection with certain software developed or acquired by the Company and licensed to customers, the Company is obligated to pay royalties to third parties. The agreements generally provide for payment of a specific amount for each software license granted by the Company. Royalty expense was $1.6 million, $.7 million and $.7 million for 1998, 1997 and 1996, respectively. 23 24 NOTE 7 - INTANGIBLE ASSETS: At December 31, 1998 and 1997 intangible assets consisted of the following:
1998 1997 -------- -------- (In thousands) Excess of cost over fair value of assets acquired $ 6,443 $ 6,443 Customer lists and maintenance contracts 2,700 2,700 Assembled workforce 1,800 1,800 -------- -------- 10,943 10,943 Less - Accumulated amortization (6,161) (4,879) -------- -------- $ 4,782 $ 6,064 ======== ========
Amortization expense was $1.3 million, $1.3 million and $3.3 million for 1998, 1997 and 1996, respectively. NOTE 8 - RESTRUCTURING AND IMPAIRMENT CHARGES: In 1998 the Company incurred restructuring charges of $.6 million for termination benefits for 17 people related to the Company's efforts to re-size its CRM staff, reflecting changing business conditions. In 1998 the Company utilized cash of approximately $.4 million to satisfy obligations related to this reserve and will pay approximately $.2 million in January 1999. In August 1996, the Company developed a plan to close its NPA business. The Company reserved approximately $2.5 million related to the exit costs of NPA, including $1.3 million for customer refunds, $.8 million related to asset write-offs, and $.4 million related to employee severance costs for 8 people. During the year ended 1996, $1.3 million, related principally to customer refunds and asset write-offs had been charged against the reserve, using $1.0 million of cash. In 1997, the Company charged approximately $.7 million against the accrual, using cash of $.4 million, relating principally to employee severance costs, asset write-offs and customer refunds and reduced its estimate of the remaining cost to complete the exit plan by $.5 million. As of December 31, 1997, the restructuring was completed. NOTE 9 - NOTES PAYABLE AND CREDIT FACILITY: At December 31, 1998, the Company had no outstanding notes payable. At December 31, 1997 notes payable consisted of an unsecured promissory note due in quarterly installments plus interest at 7.7% through May 1998 with a balance of $67,000, related to a 1995 acquisition, and an unsecured note due through September 1998 plus interest at 9.0% with a balance of $71,000. The Company has a two-year, $15 million revolving credit facility, against which it has made no borrowings. The Company may borrow up to a maximum of 80% of eligible accounts receivable. As of January 31, 1999 the Company had $13.5 million available for borrowing under this agreement. Borrowings under the credit facility will bear interest at the adjusted LIBOR or prime rate (as defined by the loan agreement). The credit facility is secured by substantially all of the Company's tangible and intangible assets. Additionally, the loan agreement contains customary covenants that require compliance with certain financial ratios and targets and restricts the incurrance of additional indebtedness, payment of dividends and acquisitions or dispositions of assets, among other things. As of December 31, 1998 the Company was in compliance with such covenants, as amended. The credit facility expires in July of 1999. The Company currently intends to begin negotiations for a renewal of or a replacement of the credit facility prior to its expiration. Cash paid for interest on debt and credit line fees was less than $.1 million for 1998 and 1997 and approximately $.3 million for 1996. 24 25 NOTE 10 - EMPLOYEE BENEFIT PLANS: The Company maintains a 401(k) retirement plan to which qualified employees may contribute from 1% to 15% of eligible annual compensation. The Company matches 50% of these contributions, up to a maximum of 6% of each participant's compensation for the plan year. Company contributions totaled $.8 million, $.7 million and $.9 million for 1998, 1997 and 1996, respectively. Effective January 1, 1995, the Company adopted the Broadway & Seymour, Inc. 1995 Employee Stock Purchase Plan covering a five-year period, under which substantially all employees may purchase up to an aggregate of 1,000,000 shares of the Company's common stock. The purchase price of the shares under the plan is 85% of the lesser of the fair value of the Company's common stock at the beginning of the plan year or at the end of the plan year. Employees may designate up to 10% of their compensation to be withheld towards the purchase of stock under the plan, up to a maximum value of $25,000 based on the fair market value as of the beginning of each plan year. The Company may provide shares under the plan from shares authorized and unissued or from shares acquired and held in treasury. NOTE 11 - INCOME TAXES: The components of the provision for income taxes for 1998, 1997 and 1996 consist of the following:
1998 1997 1996 -------- ------- -------- (In thousands) Current provision (benefit): Federal $ (660) $ 1,829 $ 2,740 State 346 219 226 -------- ------- -------- (314) 2,048 2,966 -------- ------- -------- Deferred provision (benefit): Federal (2,934) 354 (1,096) State (294) (3) (415) -------- ------- -------- (3,228) 351 (1,511) -------- ------- -------- $ (3,542) $ 2,399 $ 1,455 ======== ======= ========
25 26 A reconciliation of income taxes computed at the statutory federal income tax rate to the recorded provision for income taxes is as follows:
1998 1997 1996 ------- ------ ------ (In thousands) Provision (benefit) for income taxes computed at the statutory federal rate $(3,788) $1,815 $ (270) Non-deductible amortization and impairment of intangible assets 204 204 1,374 Stock compensation 165 181 State income taxes, net of federal income tax benefit 34 143 127 Research and development tax credit (283) Other 126 56 224 ------- ------ ------ $(3,542) $2,399 $1,455 ======= ====== ======
Deferred tax assets (liabilities) recognized in the Company's balance sheet at December 31, 1998 and 1997 were as follows:
1998 1997 ------- ------- (In thousands) Deferred tax assets: Asset allowances $ 710 $ 339 Loss accruals on contracts 140 288 Deferred revenue and other accruals 4,989 1,899 Net operating losses and other carryforwards 1,555 527 Other deductions 292 419 ------- ------- Gross deferred tax assets 7,686 3,472 ------- ------- Less: valuation allowance (1,555) (527) ------- ------- Deferred tax assets 6,131 2,945 ------- ------- Deferred tax liabilities, net: Property and equipment (73) 289 Software costs and intangible assets (1,094) (1,531) Other liabilities (225) (193) ------- ------- (1,392) (1,435) ------- ------- $ 4,739 $ 1,510 ======= =======
Cash paid for income taxes was approximately $1 million, $3.4 million and $1 million for 1998, 1997 and 1996, respectively. At December 31, 1998, the Company had approximately $21 million in state net operating loss ("NOL") carryforwards. The state NOLs begin to expire in the year 1999. A full valuation allowance has been recorded against the state NOLs based on management's judgement as to current separate company income limitations. Management has evaluated the Company's other deferred tax assets and believes that such assets will more likely than not be realized. The Company utilized $0, $4.9 million and $1 million of its state NOLs during 1998, 1997 and 1996, respectively. 26 27 NOTE 12 - STOCKHOLDERS' EQUITY: The Company's authorized capital stock consists of 20,000,000 shares of $.01 par value common stock and 2,000,000 shares of $.01 par value preferred stock. The preferred stock is issuable in one or more series with such rights, preferences and privileges as the Company's Board of Directors shall determine. At December 31, 1998, options for 207,916 shares of common stock were outstanding under the Company's former Restated 1985 Incentive Stock Option Plan (the "1985 Plan"), which was terminated in June 1995. No additional options may be granted under this plan. The 1985 Plan was administered by the Compensation Committee of the Company's Board of Directors. Options were granted under the 1985 Plan at a price not less than 100% of the fair market value of the shares subject to options (or 110% of fair market value in the case of an optionee who owns, directly or indirectly, more than 10% of the total combined voting power of all classes of shares of the Company immediately before such option is granted). Options became exercisable in six equal annual installments beginning on the date of grant and expired ten years from the date of grant. During 1996, the Company adopted the 1996 Stock Option Plan (the "1996 Plan") under which options for up to 875,000 shares of the Company's common stock may be granted to key employees and directors. Options for 767,328 shares of common stock were outstanding under the 1996 Plan at December 31, 1998. The 1996 Plan is administered by the Compensation Committee of the Company's Board of Directors which determines the price, exercise date and term (not to exceed 10 years) of each option granted to employees. Options may be granted under the 1996 Plan at a price not less than 100% of the fair market value of the shares subject to options. In addition, the 1996 Plan provides for the formula grant of options to members of the Company's Board of Directors. The Company recognized $.5 million, $.5 million and $.2 million of stock based compensation related to options granted under this plan in its 1998, 1997 and 1996 statement of operations, respectively. The following table sets forth the changes in the number of shares subject to options during 1998, 1997 and 1996:
Weighted Number Option Price Average of shares per Share ($) Option Price ($) --------- -------------- ---------------- Outstanding at December 31, 1995 1,460,089 3.14-28.38 18.58 Granted 790,000 9.50-11.19 10.99 Exercised (103,618) 3.14-15.50 6.99 Canceled or expired (829,966) 6.80-25.50 23.12 --------- Outstanding at December 31, 1996 1,316,505 6.80-25.50 12.10 Granted 37,000 11.00-14.00 12.60 Exercised (101,668) 6.80-11.25 9.05 Canceled or expired (201,754) 7.75-25.50 15.24 --------- Outstanding at December 31, 1997 1,050,083 7.75-25.50 11.82 Granted 28,000 3.06-8.69 6.19 Exercised -- Canceled or expired (102,839) 7.75-25.50 11.02 --------- Outstanding at December 31, 1998 975,244 3.06-25.50 11.62 ========= Available for grant at December 31, 1998 107,672 =========
Subsequent to December 31, 1998, an employee of the Company voluntarily forfeited 400,000 options, returning them to the Company and thereby increasing the total available options for grant to above 500,000 at that time. In January 1999, the Company granted 503,000 options under the 1996 plan at the then current fair market value of $2.34 to certain key employees, which did not include the employee who had forfeited his options. These reissued options vested one-half upon grant and one-half one-year later. 27 28 Pursuant to the requirements of SFAS No. 123, the following disclosures are presented to reflect the Company's pro forma net income (loss) and net income (loss) per common and common equivalent share, as if the Company had elected to use the fair value method of accounting prescribed by SFAS No. 123, rather than continuing to apply the provisions of APB 25. In preparing these disclosures, the Company has determined the value of all options granted during 1998, 1997 and 1996 using the average value method, as described in SFAS No. 123, and based on an assumed dividend yield rate of 0%, a weighted average risk free rate of 4.5% for 1998, 6.1% for 1997 and 6.7% for 1996 and weighted average expected lives of approximately 5 to 9 years, depending on the grant date. Had compensation expense been determined consistent with SFAS No. 123, utilizing these assumptions and the straight-line amortization method over the vesting period, the Company's net income (loss) and net income (loss) per common and common equivalent share would have been as follows:
1998 1997 1996 ---------- ---------- --------- ($ in thousands, except per share amounts) Net income (loss) $ (7,597) $ 2,939 $ (2,248) Pro forma adjustment for stock compensation expense (1,768) (2,460) (1,470) ---------- ---------- --------- Pro forma net income (loss) $ (9,365) $ 479 $ (3,718) ========== ========== ========= Net income (loss) per common and common equivalent share - Basic and Diluted $ (0.86) $ 0.32 $ (0.25) Pro forma adjustment for stock compensation expense (0.20) (0.27) (0.17) ---------- ---------- --------- Pro forma net income (loss) per common and common equivalent share - Basic and Diluted $ (1.06) $ 0.05 $ (0.42) ========== ========== =========
NOTE 13 - COMMITMENTS, SIGNIFICANT RISKS AND UNCERTAINTIES: Legal Matters The Company is exposed to a number of asserted and unasserted claims encountered in the normal course of business. In the opinion of management, the resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations. Lease Commitments The Company leases equipment and facilities under operating leases. Rental expense from operating leases was $3.6 million, $3.7 million and $5.2 million for 1998, 1997 and 1996, respectively. As of December 31, 1998 there is approximately $1 million of deferred lease incentives that will reduce the annual lease expense related to the Company's Elite office facilities by approximately $.1 million per year through June 30, 2008. Future minimum lease payments under operating leases having an initial or remaining non-cancelable term in excess of one year are as follows: 28 29
Future Minimum Lease Payments -------------- Years ending December 31: (In thousands) 1999 $ 2,160 2000 2,042 2001 561 2002 541 2003 & thereafter 3,050 ------- $ 8,354 =======
Acquisition Earnout In June 1995, the Company acquired certain assets and liabilities of TMC. In connection with this acquisition, the sellers of TMC were entitled to receive additional shares of the Company's common stock through June of 1998 in the event certain annual financial and other targets were met. In 1998 the Company amended its purchase agreement with the sellers of TMC to specify that the 1998 earnout would be paid in cash. In connection with this earn-out provision, the Company paid cash of $320,000 in 1998 and issued stock during the years ended 1997 and 1996 valued at approximately $235,000 and $250,000, respectively, to the sellers of TMC and recorded expense for such amounts. Concentrations of Revenue The business and organizational characteristics of the Company's customer base may vary significantly from period to period and may cause fluctuations in the size and timing of revenue. The majority of Elite's revenue is concentrated in the legal services industry. However, no single customer accounts for 10% or more of Elite's revenue. The majority of the CRM business revenue is concentrated among a few customers in the financial services industry. In 1998, 1997 and 1996 the 5 largest CRM business customers accounted for approximately 73%, 62% and 68%, respectively, of the CRM business revenue and approximately 25%, 37% and 24%, respectively, of consolidated revenue. For the periods presented, the CRM business had two customers that exceeded certain disclosure requirement thresholds and are therefore classified as significant customers. In 1998 and 1997, Chase Manhattan Bank ("Chase") accounted for $8.3 million, or 12.1%, and $10.3 million, or 13%, of the Company's consolidated revenue, respectively. Also, in 1997 and 1996 First Data Corp. ("FDC") accounted for $8.0 million, or 10.1%, and $9.6 million, or 10.6%, of consolidated revenue, respectively. Geographic Information The Company's assets are principally located in North America. The Company's revenue is principally generated in North America, however for the years ending December 31, 1998, 1997, and 1996 Elite revenue generated in Europe represented 8% 9%, and 5% of consolidated revenue, respectively and 14%, 22% and 11% of Elite's revenue for the same periods. In addition, for the years ending December 31, 1998 and 1997 Elite revenue generated in Canada represented approximately 2% and 1% of consolidated revenue, respectively, and 4% and 2% of Elite's revenue for the same periods. Since the Company's contracts with non-U.S. customers generally denominate the amount of payments to be received by the Company in local currencies, exchange rate fluctuations between such local currencies and the U.S. dollar will subject the Company to currency translation risks. Also, the Company may be subject to currency transaction risks when the Company's contracts are denominated in a currency other than the currency in which the Company incurs expenses related to such contracts. NOTE 14 SUBSEQUENT EVENT: On March 5, 1999 the Company entered into a stock purchase agreement whereby the Company sold all of the outstanding shares of its wholly owned subsidiary, The MiniComputer Company of Maryland, Inc. ("TMC"), for $350,000. The purchase price is payable with $80,000 in cash at closing and the balance in installments with interest at 10% over a three year period. The loss on the transaction in the first quarter of 1999 was approximately $.3 million before tax. 29 30 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Broadway & Seymour, Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of cash flows and of changes in stockholders' equity present fairly, in all material respects, the financial position of Broadway & Seymour, Inc. and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, 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 that 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. PricewaterhouseCoopers LLP Charlotte, North Carolina February 6, 1999, except as to Note 14 which is as of March 5, 1999 30 EX-21 6 SUBSIDIARIES OF THE REGISTRANT 1 Exhibit 21 Broadway & Seymour, Inc. Subsidiaries of the Registrant
State of Percentage Name of subsidiary Incorporation ownership ------------------ ------------- ---------- Elite Information Systems, Inc. California 100% The MiniComputer Company of Maryland, Inc. North Carolina 100% Elite Information Systems International, Inc. California 100%
EX-23 7 CONSENT OF INDEPENDENT ACCOUNTANTS 1 Exhibit 23 Consent of Independent Accountants We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 of the Broadway & Seymour, Inc. 1995 Employee Stock Purchase Plan (33-85924) and the Broadway & Seymour, Inc. Restated 1985 Incentive Stock Option Plan (33-81130) of our report dated February 6, 1999, except as to note 14, which is as of March 5, 1999 appearing in the Company's 1998 Annual Report (which is incorporated by reference in this Form 10-K). PricewaterhouseCoopers LLP Charlotte, North Carolina March 8, 1999 EX-27 8 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 15,273,000 0 30,055,000 (1,638,000) 0 51,751,000 17,760,000 (12,593,000) 65,096,000 37,681,000 0 0 0 92,000 24,927,000 65,096,000 69,035,000 69,035,000 50,485,000 50,485,000 31,824,000 1,522,000 (857,000) (11,139,000) (3,542,000) (7,597,000) 0 0 0 (7,597,000) (0.86) (0.86)
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