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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark one)
[ x ]10-K/A
Amendment No. 1
Amendment to Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (Fee Required) Forfor the fiscal year ended: DECEMBER 31, 1996
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required) For the transition period
from_____to_____
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Commission File Number: 0-26026
INTERACTIVE GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-2925769
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
5095 MURPHY CANYON ROAD, SAN DIEGO, CA 92123
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (619) 560-8525
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 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 for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate 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.10-K/A. [ ]
The aggregate market value of the voting stock (which consists solely of
shares of Common Stock) held by non-affiliates of the registrant as of March 19,
1997 was $15,146,949, based on the closing price on that date on the Nasdaq
Stock Market.*
The number of shares outstanding of the Registrant's Common Stock, $.001 par
value, as of March 19, 1997 was 4,485,712.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Company's Definitive Proxy Statement for the annual
meeting of stockholders to be held on June 3, 1997 to be filed with the
Securities and Exchange Commission (the "Commission") no later than 120 days
after December 31, 1996, are incorporated by reference into Part III of this
Form 10-K (Items 10 through 13).
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*Excludes 1,792,921 shares of Common Stock held by directors and officers and
stockholders whose beneficial ownership exceeds 10% of the shares outstanding on
March 19, 1997. Exclusion of shares held by any person should not be construed
to indicate that such person possesses the power, direct or indirect, to direct
or cause the direction of the management or policies of the registrant, or that
such person is controlled by or under common control with the registrant.
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ThisThe undersigned hereby amends Item 14 of Part IV of its Annual Report on Form
10-K contains forward-looking statements that
involve risks and uncertainties. The Company's actual future results could
differ materially from those statements. Factors that could cause or contribute
to such differences include, but are not limited to, those found in this Annual
Report on Form 10-K in Part I, Item 1 under the caption "Certain Risk Factors
Related to the Company's Business," as well as those additional factors
discussed elsewhere in this Annual Report.
PART I
ITEM 1. BUSINESS
COMPANY OVERVIEW
The Company develops, markets, implements and supports integrated business
information systems that enable discrete manufacturers to manage their
enterprise-wide information requirements. The Company's primary software
product, INFOFLO, supports make-to-order and make-to-stock manufacturers in
their business re-engineering efforts by providing customer-oriented
capabilities that allow manufacturers to reduce order fulfillment cycle times,
improve operating efficiencies and measure critical company performance against
defined plan objectives. INFOFLO contains a series of integrated software
application modules that are designed to support information processing in the
functional areas of sales and marketing, finance and accounting, manufacturing
and operations. The Company implements its INFOFLO systems as turnkey solutions
featuring the Company's software products integrated with computer and
networking hardware, operating system and database software and object-oriented
development tools. The Company also offers a full complement of services to
assist customers in maximizing the benefits of the Company's software products,
including implementation, customer support and maintenance services. The Company
developed INFOFLO using open systems technology that allows customers to migrate
to different hardware and software technologies and upgrade to new releases of
the Company's application software.
The Company's target market for INFOFLO is primarily mid-sized, make-to-order
manufacturing companies in the United States, United Kingdom, Canada and Europe
with annual revenues between $25 and $500 million. The Company primarily sells
directly to its customers and implements and supports its systems through its
network of offices in the United States, United Kingdom, and Europe.
MERGER WITH INTREPID SOFTWARE, INC.
In March 1995, the Company completed a stock-for-stock merger with Intrepid
Software, Inc. ("ISI"), which prior to the merger sold the Intrepid application
software product. The merger was accounted for as a pooling-of-interests. The
Company believes that the combination with ISI has allowed the Company to
achieve several strategic objectives, including acquiring ISI's customer base,
increasing the Company's revenues and adding ISI's skilled and experienced
personnel. Due to the functional synergy and common underlying technology of the
INFOFLO and Intrepid products, the Company has merged the two products into a
single integrated package, INFOFLO 8.0 , permitting users of both products to
migrate to a common product that contains the best functionality of both
products.
ACQUISITION OF JUST-IN-TIME ENTERPRISE SYSTEMS, INC.
On December 31, 1995, Interactive acquired all of the outstanding shares of
Just-In-Time Enterprise Systems, Inc. ("JIT"), a wholly-owned subsidiary of
Fourth Shift Corporation of Minneapolis, Minnesota, a publicly traded
manufacturing software company. JIT's software product, the JIT Enterprise
System, is a native Oracle-based client/server software product for the rapidly
growing Maintenance, Repair and Overhaul ("MRO") marketplace, combined with
traditional Material Requirements Planning ("MRP") II capabilities. See Note 2
of the notes to the accompanying consolidated financial statements and the
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Company's Form 8-K filed on December 29, 1995 and Forms 8-K/A filed on March 12,
1996 and February 20, 1997, respectively. The acquisition represents a strategic
opportunity by providing the Company access to the higher-end manufacturing
market segment, where Oracle's relational database management system is the
dominant database system currently in use among manufacturers with annual
revenues in excess of $100 million, and which the Company previously did not
target with its existing products. In addition, the acquisition provides
operating synergies for the Company, including a common implementation
methodology, a continued focus on niche markets, an installed base of 70-80
sites with a Fortune 1000 customer presence, and a high quality, mature product.
The Company's target market for the JIT Enterprise System is primarily "mixed
mode" MRO and contract manufacturers, including aerospace and defense, which
require a fully integrated enterprise-wide system that is capable of supporting
multi-site or multi-plant requirements. This market consists primarily of
companies with revenues in excess of $100 million, including Fortune 1000
companies or their divisions or subsidiaries.
In an effort to improve efficiency, reduce costs and shorten cycle times,
manufacturers are adopting business re-engineering initiatives such as total
quality management and world class manufacturing. In response to this trend,
manufacturing software suppliers have introduced applications that are
specifically designed to address manufacturers' re-engineering needs. In the
late 1980's, the Company recognized that most discrete manufacturing software
packages were focused on make-to-stock manufacturers and did not suit the
particular needs of make-to-order manufacturers. As a result, the Company
embarked on a strategy to develop a make-to-order functionality in its software,
and introduced customer-oriented business information systems designed for both
make-to-order and make-to-stock manufacturers. In the mid-1990's, the Company
recognized that there were very few Oracle-based MRO applications developed, and
that the demand for such applications from large companies would continue to
grow due to the continuing trend of downsizing from mainframe computing into
client/server technology.
STRATEGY
The Company's mission is to be a leading international provider of
enterprise-wide, customer-oriented business information systems and related
value-added implementation and support services to mid-sized, mixed-mode
manufacturers. The acquisition of JIT expands the objectives of the Company's
mission to include providing Oracle-based business information systems and
value-added implementation and support services. To achieve this mission, the
Company intends to pursue the following key strategies:
- Provide Software to Support Manufacturers' Business Re-Engineering Needs.
The Company's primary strategy is to continue to enhance its application
software offerings to meet the evolving needs of mid-sized discrete
manufacturers and mid-to-large sized contract manufacturers. The Company
works closely with its key customers and principal technology suppliers in
its product development efforts. As a result, most of the Company's
software modules have been and will continue to be significantly
influenced by its customer's needs.
- Implement Software Through Turnkey Solutions. The Company's strategy is to
provide a complete turnkey solution for its customers' business
information requirements. With the growing complexity and diversity of
enterprise-wide systems, the Company believes manufacturers and MRO
organizations are increasingly requiring their software suppliers to
assume turnkey responsibility for system implementation and maintenance.
By taking turnkey responsibility for implementing the system, the Company
frees its customers from having to rely completely on their own internal
resources.
- Commitment to Open Technologies. The Company is committed to providing
seamless integration to industry-recognized third-party application
software and technology that support manufacturing. The Company designs
its products using open systems technologies, including industry-standard
operating systems, relational databases, and open system computer
platforms. The Company continually evaluates the feasibility of
integrating its software products with new technologies as they are
developed and gain acceptance in the marketplace. The Company's products,
INFOFLO and the JIT Enterprise System, have been developed using open
systems technology that allows customers to
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migrate to different hardware and software technology and upgrade to new
releases of the Company's application software.
- Expand Existing International Base. The Company intends to expand its
international distribution channels by recruiting independent, experienced
manufacturing software suppliers with local expertise to market and
support the Company's systems through its proposed "affiliates", or
business partner program, initially in continental Europe and later in the
Pacific Rim and other international markets. The Company intends to
leverage its presence in the United Kingdom with each of its product lines
to implement and support its proposed business partner program in Europe.
In September 1996, the Company signed a distributor agreement with evosoft
Softwarevertrieb GmbH to provide turnkey solutions for mid-range
manufacturing companies in Germany and Hungary.
- Achieve High Levels of Customer Satisfaction. The Company seeks to
maintain a consistently high level of customer satisfaction by delivering
high quality products, providing excellent system implementation and
achieving world class customer service. The Company is committed to
delivering a high level of customer service and technical support for its
products and, consistent with that commitment, dedicates significant
effort to recruiting and training high quality service and support
personnel.
PRODUCTS
The Company sells and implements business information systems to mid-to-large
sized, discrete manufacturers with turnkey solutions comprised of the Company's
INFOFLO and JIT Enterprise System application software, as well as computer and
networking hardware, operating system software, relational database software,
4GL development tools and third-party application software. The Company's
primary niche markets consist of the customer-oriented, MRO and contract
manufacturing segments of the manufacturing industry. The Company also derives a
significant portion of its revenues from the sale of implementation, consulting
and maintenance services to its customers. The Company's systems have been
installed at more than 600 customer sites worldwide, predominantly in the United
States and United Kingdom. In 1996, the average selling price of the Company's
information systems sold to new customers was approximately $290,000.
INFOFLO Software
INFOFLO supports make-to-order and make-to-stock manufacturers in their
business re-engineering efforts by providing customer-oriented capabilities that
allow manufacturers to reduce order fulfillment cycle times, improve operating
efficiencies and measure critical company performance against defined plan
objectives. INFOFLO is designed for mixed-mode manufacturing environments that
may involve or combine elements of make-to-order and make-to-stock manufacturing
as well as other disciplines, such as focused factory and just-in-time. INFOFLO
is easily scaleable and can be implemented in multi-company, multi-plant and
multi-national solutions as well as in client/server, networked and host-based
configurations.
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INFOFLO, through a series of integrated software application modules,
provides feature-rich functionality in the areas of sales and marketing, finance
and administration, engineering, manufacturing, operations, distribution and
service. All modules adhere to a common architecture, meet a rigorous design
standard, share a common integrated nested-relational database, and while
modular, are typically licensed and implemented as part of an integrated system.
The manufacturing software application modules for INFOFLO are presented in the
table below and the related descriptions that follow:
INFOFLO MANUFACTURING SOFTWARE MODULES
PRODUCT DATA CUSTOMER SERVICE PLANNING
- --------------------------------- ---------------------------------- ------------------------------------
Bills of Material Estimating and Quotations Master Production Scheduling
Work Centers and Routings Field Sales Material Requirements Planning (MRP)
Product Costing Customer Order Processing Multi-Plant Planning
Product Configurator Field Service Management Capacity Requirements Planning
Return Material Tracking Distribution Requirements Planning
Forecast-Link
MANUFACTURING EXECUTION PROCUREMENT AND INVENTORY FINANCIAL ACCOUNTING
- --------------------------------- ---------------------------------- ------------------------------------
Shop Floor Control Purchasing Accounts Payable
Focused Factory Management Inventory Management Accounts Receivable
Job Order Tracking General Ledger
Equipment Maintenance and Repair Asset Management
Cost Accounting
HUMAN RESOURCES PERFORMANCE MEASUREMENT DECISION SUPPORT
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Payroll Quality Management Impromptu(R)
Human Resources Executive Information System (EIS) PowerPlay(R)
Time and Attendance Workflow
CIM
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Computer -Aided Design (CAD)-Link
Electronic Data Interchange
(EDI)-Link
IMAGE-Link
Data Collection
Fax-Link
The Product Data modules establish the foundation for a totally integrated
manufacturing system by setting up and maintaining all bills of material,
configuration master bills and rules, item master records and costing
information. Product design attributes, classifications and configuration rules
are also specified here and shared with all other INFOFLO modules. The Bills of
Material and Work Centers and Routings modules maintain product data structure
and process information including bills of material and routings. Engineering
change orders are used to track product revision history. The Product Costing
module provides functionality for full-cost collection, roll-ups and inventory
valuation based upon quoting, shop floor reporting and purchasing, establishing
unit and cumulative costs. The Product Configurator is a rules-based "expert
system" that allows the manufacturer's non-expert personnel to configure and
price custom-ordered products and report that information to other departments
throughout the enterprise. The Configurator collects the needed information
through a nested question-and-answer approach that incorporates the necessary
engineering expertise without requiring engineering support.
The Customer Service modules allow the manufacturer to enter, track and
report its sales and marketing activities and integrate seamlessly with the
other module groups. The Estimating and Quotations module provides for the
administration of the entire quotation process from initiation of a new prospect
to completion of a basic quotation, with custom features that reflect exact
customer specifications. The module permits the manufacturer to produce multiple
alternative quotations, any of which can be approved and automatically converted
to firm sales orders. Each quotation may be priced and costed so that the
manufacturer's gross margin on a sale is calculated on a "what-if" basis. The
Field Sales module deploys the Product Configurator as a Windows-based
application for installation on a laptop computer that allows either the
manufacturer's field sales personnel or customer to configure, quote and order
products remotely. The Custom Order Processing module processes quotations that
have been converted into orders for make-to-order items, off-the-shelf items or
a combination of both. With each make-to-order item, a
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corresponding custom job is automatically created in work-in-process. The module
also is integrated with the Product Configurator and converts the generated
build structure into actual bills of materials and routings that can be changed
while still part of the order.
The Field Service Management module provides comprehensive management of
service and maintenance contracts, call handling and technician dispatch,
including escalation tracking, and inventory and repair processing. This module
allows management to measure service operations as a profit center and includes
response, clearing time and service center/technician performance analyses. The
Company has integrated INFOFLO with a third-party forecasting package that
enables a manufacturer to download sales-history data for analysis and
statistical simulation and to upload a planned sales forecast into INFOFLO's
Master Production Scheduling module. The Return Material Tracking module
establishes and tracks information for product returns, product exchanges and
customer repairs and can automatically release orders to shipping.
The Planning modules are designed to support a number of manufacturing
environments, including make-to-order, make-to-stock, repetitive and
just-in-time. The Master Production Scheduling module makes critical comparisons
between actual resources on hand and planned orders and provides a
management-level perspective on anticipated demands for manufacturing resources.
The MRP module performs calculations that project purchasing and production
requirements necessary to support expected sales and production quotas, and in
its calculations considers factors such as engineering change orders and
manufacturing yields. The Multi-Plant Planning module coordinates production
requirements across multiple plants and the entire supply chain. Inter-plant
relationships can be established to form an integrated supply-chain management
planning system across all sites. The Capacity Requirements Planning module
supports production resource planning by scheduling labor, machine and tool
requirements and by identifying resource bottlenecks and associated alternatives
that may be used to meet the production plan. The Distribution Requirements
Planning module handles replenishment requirements from warehouses and
distribution centers and provides procedures and the supporting documentation
for tracking physical stock transactions between warehouses. The Forecast-Link
module creates and maintains the individual item or product group forecasts used
by the Master Production Scheduling module.
The Manufacturing Execution modules enable the manufacturer to plan, manage,
measure and report on manufacturing work-in-process ("WIP"), including WIP
tracking, shop floor control, lot traceability, product rework, work-center
management and on-line scheduling. The Shop Floor Control module interfaces cost
collection and identification to financial function, updates status conditions,
provides scheduling tools for managing changing conditions on the shop floor and
aids in the management of production processes. The Focused Factory Management
module defines which products will be produced and the required materials for
each focused factory and its workcells. The Job Order Tracking module monitors
the progress and job profitability of customer orders. The Equipment Maintenance
and Repair module maintains a catalog of repair and maintenance profiles which
describe how to perform maintenance work and the resources required. The Cost
Accounting module supports standard product and actual job costing. Standard
costs are derived from the bills of material and routings, and are used to
measure variances in the production process. Job costing provides detailed
analysis of material, labor and outside processing costs and their associated
overheads.
The Procurement and Inventory modules perform a number of critical
manufacturing functions. The Purchasing module tracks purchase orders from
requisition through closure and provides the flexibility to purchase goods
either for inventory or directly for work-in-process. This module records
delivery and rejects data that allow the manufacturer to analyze supplier
performance. The Inventory Management module establishes and maintains an
inventory database that tracks and traces data (on the basis of serial or lot
numbers), activity statistics and warehouse data, and supports physical
inventory and cycle counting.
The Financial Accounting modules supply the enterprise's financial
information and assist in the administration of manufacturing operations. The
Accounts Receivable and Accounts Payable modules track customer and supplier
obligations, support foreign currency revaluation and produce extensive
management reporting. The General Ledger module records all financial summary
data necessary to define
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the manufacturer's current financial position. This module also has a number of
budgeting, auditing and financial reporting features. The Asset Management
module is used to record, track and report on fixed assets and is integrated
with the General Ledger module. The Asset Management module includes a wide
range of depreciation, tracking, maintenance, scheduling and management options.
The Human Resources modules provide management tools for personnel planning
and recruiting, salary administration, time and attendance, payroll, benefits
tracking and personnel development. The Payroll and Human Resource modules
include a comprehensive employee database for tracking wage and salary data, in
addition to job performance, education and training, and regulatory reporting.
The Payroll module provides national and local taxation support in both the
United States and United Kingdom. The Payroll module is integrated with the
General Ledger module and provides electronic filing of payroll tax information.
The Time and Attendance module is used with plant timeclocks to track employee
attendance and interfaces with the payroll module.
The Performance Measurements and Decision Support modules include the
Company's Executive Information System ("EIS") and certain third-party database
analysis tools that have been integrated with INFOFLO. The Quality Management
module collects inspection data that allow the manufacturer to track and correct
quality problems either in the manufacturing process or with its suppliers. The
module was developed to support the international ISO 9000 documentation
standards. The EIS module is an integrated and intrinsic component of the
INFOFLO software and provides timely, secure, on-line, high-level performance
analysis to departmental and executive management. In contrast to many competing
manufacturing software systems that require the manufacturer to separately
license a stand-alone EIS product, the Company's EIS module is coupled tightly
to the manufacturer's INFOFLO database and automatically presents graphical
critical performance measurements, including current status and condition
information and historical trends and warnings. The EIS module supports the
manufacturer's re-engineering efforts by providing timely feedback on whether
implemented process improvements are, in fact, resulting in order fulfillment
cycle time reductions.
The Impromptu(R) and Powerplay(R) modules are business intelligence tools
from Cognos, a third-party strategic partner, that allow the user to navigate
through and analyze large amounts of data without the need to regenerate lengthy
reports after each analysis. They permit the user to "drill down" through data
from any module in the system and allow for on-demand analysis of executive or
management information. The Workflow module is a set of advanced tools which
permit users to plan how business processes should be performed, and then manage
and control those processes.
The CIM modules are integration tools that seamlessly link the core
enterprise system to off-the-shelf third party products. The CAD-Link integrates
INFOFLO with Computer-Aided Design systems. EDI-Link provides the import and
export interfaces needed to utilize third-party EDI, enabling packages to
perform translation and transfer of EDI transactions to and from trading
partners. IMAGE-Link integrates INFOFLO with electronically "imaged" documents
to manage and streamline workflow in manufacturing companies. Data Collection
software and hardware permits production, material usage and warehouse activity
to be reported in real time using bar-coding applications. Fax-Link permits
selected INFOFLO documents and printed reports to be faxed to designated
recipients.
JIT Enterprise System Software
The JIT Enterprise System ("JES") is a software system consisting of
standardized modules and a family of additional integration modules. JES is
designed primarily for MRO and contract manufacturing, including a fully
integrated suite of software supporting supply chain management, repair and
overhaul, manufacturing, quality, financial and project management applications
which are designed to support an enterprise's business processes in an
industrial company. JES is typically sold to large organizations in need of a
fully integrated enterprise-wide system that can accommodate multiple geographic
sites.
JES is a complete set of Oracle-based client/server applications which
operates in a flexible UNIX operating environment and is designed to
manufacturing, accounting and human engineering standards.
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The major components of JES's architecture are (i) client/server enterprise
resource planning within an open systems UNIX platform; (ii) a three-tiered
model (Presentation Clients, Application and Database Servers); (iii) use of the
Oracle 4GL toolset and Developer/2000 which provides easy site extension,
personalization and deployment of applications on the Internet and Intranet; and
(iv) use of the Oracle version 7 database. The software application modules for
the JIT Enterprise System are presented in the table below and the related
descriptions that follow:
JIT ENTERPRISE SYSTEM SOFTWARE MODULES
SUPPLY CHAIN MANAGEMENT OPERATIONS SYSTEM APPLICATIONS
- ----------------------- ---------- -------------------
Customer Order Processing Capacity Planning JIT Development Environment
Distribution Management Finite Scheduling JIT Toolbox
Forecasting Job Costing System Control
Inspection/MRB Labor Applications
Inventory Applications Lot Control/Serial Tracking INTEGRATION
Model and Options Planning And Scheduling -----------
Multi-Plant Applications (MRP/MPS) Bar Code Printing
Physical/Cycle Count Inventory Project Control Data Collection Interface
Purchasing Applications Quality Assurance Data Migration
Repair and Overhaul EDI Vendor Interface
FINANCIAL APPLICATIONS Repetitive Manufacturing EDI Customer Interface
- ---------------------- Rough Cut Capacity Planning Imaging
Time and Attendance Logistics
Oracle Financials Interface Vertex Sales Tax Interface
Travel and Expense ENGINEERING
Accounts Payable -----------
Accounts Receivable Average Costing
Financial Statement Generator Bills of Material
Fixed Assets End Item Effectivity
Multi-Currency Engineering Change Control
General Ledger Product Costing
Routings/Work Centers
The JES software modules can be roughly grouped into the functions of supply
chain management, operations, system applications, financial applications,
engineering and integration.
The Supply Chain Management modules coordinate activities with customers and
vendors with particular emphasis on MRO services provided to the aircraft,
automotive, rail and marine industries. From the customer's viewpoint, the
software provides forecasting, quotation/estimating, order entry, pricing,
rules-based product configuration, distribution management, shipping, returns
processing and sales analysis. From the vendor's viewpoint, the software
provides vendor quotes, requisition approval, purchase order processing and
performance measurement. The software also supports EDI for transactions with
customers and vendors, and for material movement between a firm's plants.
The Operations modules help plan and control the stripdown, disposition,
repair and rebuild activities of repair and overhaul and re-manufacturing, as
well as production activities for discrete, repetitive and project
manufacturers. The software can be used to identify potential bottlenecks via
capacity planning, optimize resource utilization via finite scheduling,
coordinate work across multiple work centers via dispatch lists, track work in
process via material/labor reporting, and highlight job costs and associated
variances. The software supports bar code printing and data collection systems.
As part of quality management, the software also provides lot/serial control,
tracking of test results, and material tracking through receiving, inspection,
rejection and disposition.
The Financial Applications modules provide the key financial applications of
invoicing, accounts receivable, accounts payable, fixed assets and general
ledger. With integrated applications, the software can process transactions from
purchasing to payables and from shipping to receivables, and can automatically
collect information in the general ledger while providing audit trails to source
transactions. Users can easily access the common database using SQL and/or
PC-based decision support tools to perform regular and ad-hoc analyses. The
software also provides an interface between Oracle financial applications and
JES.
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The Engineering modules maintain the common database of information about
items, bills of material, work centers and routings that provides the basis for
product specifications, product costing, option selection, material planning,
capacity planning, production scheduling, and shop paperwork. The software
manages engineering changes to products and processes, and supports access to
images such as CAD drawings or other graphics.
The JES software provides the foundation for a manufacturer's management
information system, with easy customization to handle unique user requirements,
changing business conditions and interfaces with legacy systems.
JES has been designed to meet changing business conditions and unique user
requirements. The standard JES modules, in combination with user-specified
configuration options, will normally meet the majority of a company's needs. In
addition, however, JES can be dynamically engineered for company-specific needs
or to respond to competitive business conditions. JES uses industry-standard 4GL
coding and report writer capabilities including extensive CASE and data model
documentation. JES's unique configuration management tool makes it easier to
upgrade customizations to the next software release.
JES has the capacity to accept additional customization that may be dictated
by user experience. Some JES applications originate as customer prototypes for
conversion to standard code, providing a real-world development lab. Direction
for future JES applications and enhancements is often influenced by customer
input which is communicated and evaluated during annual international user group
meetings and via special interest groups meeting on a more frequent basis.
Services
The Company offers a full complement of services that allow its customers to
maximize the benefits of the Company's software products, including project
management, consulting, implementation, education and training, custom
programming, system integration and support, maintenance and customer service.
Customers are offered a variety of project management and consulting services
to assist in effectively implementing and deploying the Company's business
solutions. Services offered include a variety of site-specific technical and
consulting services to assist in all phases of the implementation process, as
well as assistance in integrating the software with the customer's other
automated systems and devices. As part of the implementation of its software,
Interactive offers a pilot program methodology that allows its customers to
simulate running their businesses with the new software prior to full-scale
"live" implementation of the new system. Pilot program simulations are conducted
in an integrated series of hands-on classroom exercises that emphasize system
controls and procedures, using a test database that is representative of the
customer's business. By simulating a number of relevant business scenarios, the
pilot program gives key users valuable experience with Interactive's software,
generates involvement in and commitment to the new system, and provides a means
to track the progress of the implementation and "shake down" the system before
going "live."
Education and training services provide customers with a formalized
educational program to ensure that their applications are implemented and
utilized in an efficient and cost-effective manner. Customers are also offered a
variety of software installation, technical support and user training services,
both on-site and in the Company's regional training centers. Customized
education and training programs are also available to meet customers' specific
development needs.
The Company's national customer service program provides customers with
ongoing software maintenance, product enhancement and hotline telephone support
for its software products. Product enhancements and updates maintain the
customers' software and documentation to the then-current standard release level
licensed and supported by the Company. The Company's toll-free hotline provides
telephone support during normal business hours for questions regarding software
use or perceived software "bugs." The Company's customer service department also
offers programming and consulting services for
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software modifications during and following full implementation of the system.
In addition, the Company offers "first call" support that allows its customers
to call Interactive to manage all initial system service inquiries.
The Company does not bundle any of its services in the price of its software.
The Company's services are contracted for and billed separately from software
and hardware. Maintenance services are generally billed monthly in advance,
while implementation and consulting services are billed monthly as incurred.
Hardware
As part of its turnkey solutions, the Company sells complete third-party
computer hardware systems and related computer peripherals, primarily when
selling its INFOFLO product. The Company implements its business information
systems on a number of hardware platforms, including Hewlett-Packard (with which
the Company has a volume-reseller agreement), IBM and Digital Equipment. In
addition, the Company has established reseller and support agreements with
peripherals and communications equipment manufacturers to facilitate the sale of
related equipment to the Company's customers.
PRODUCT DEVELOPMENT
The Company seeks to strengthen its position in the discrete manufacturing
marketplace by consistently developing and offering additional functionality in
its software to address customers' evolving needs. In pursuit of this goal, the
Company actively solicits input from its customers regarding their needs and
requirements and uses such information, along with information from its
principal technology suppliers, to enhance its software products. For example,
the Company has worked with customers to port its Quotations and Product
Configurator modules to run as a Microsoft Windows application for laptop
computers. With these modules, the manufacturer's sales representatives and its
customers are now able to process orders in the field, thereby allowing for
improved customer service and shorter order fulfillment cycle times. The Company
also supports independent user groups that meet regularly and provide the
Company with valuable input on desired features and functionality.
The Company seeks to continue to enhance its enterprise-wide solutions
through a combination of internally developed and third-party software. The
Company is currently working with some of its third-party technology suppliers
to develop foreign language versions of its software products to support its
business partner program.
SALES AND MARKETING
The Company currently sells its products and services primarily through a
direct sales force. In 1996, approximately 68% of the Company's revenue was
generated in North America and 32% was generated in Europe.
The Company intends to expand its international distribution channels by
recruiting independent, experienced manufacturing software suppliers to market
and support the Company's systems through its business partner program,
initially in continental Europe and later in the Pacific Rim and other
international markets. This program is designed to qualify and train established
software suppliers with expertise in local markets outside the United States and
United Kingdom to implement turnkey systems using the Company's software
products and methodologies. These foreign partners will work within exclusive
territories in partnership with the Company, using the Company's implementation
methodology, service-oriented approach and international sales and support
resources to sell systems to local businesses in the Company's target market.
The Company markets its products through advertising campaigns in national
trade periodicals, direct mail and telemarketing. These efforts are supplemented
by listings in relevant directories and trade show and conference appearances.
The Company also receives sales leads from its hardware and services suppliers,
customers and various professional service firms. Sales cycles for the Company's
products vary
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substantially based on the degree of integration, consulting and training
required, the timing of a customer's procurement process, the application
requirements of the proposed system and the size of the customer's business.
However, the sales cycle is usually six to twelve months, and can be as long as
eighteen to twenty four months, from the time an initial sales contact is made
with a qualified prospect.
COMPETITION
The manufacturing information systems industry is intensely competitive and
rapidly changing. A number of companies offer products similar to the Company's
products. Some of the Company's existing competitors, as well as a number of
potential competitors, have larger technical staffs, more established and larger
marketing and sales organizations and significantly greater financial resources
than the Company. Moreover, the Company has no proprietary barriers to entry
that could keep its competitors from developing similar products or selling
competing products into the Company's markets. As a result, there can be no
assurance that such competitors will not develop products that are superior to
the Company's products or that achieve greater market acceptance.
The Company sells in highly fragmented markets, and its competitors consist
of a few relatively large multinational suppliers and a much larger number of
mid-size, national and small, regional competitors. No single competitor has a
dominant market share in the Company's targeted market segments, and the Company
generally competes with a variety of competitors, depending, in each sales
opportunity, on factors such as the size of the customer, specific niche product
requirements, geographic location and anticipated investment by the customer.
The Company believes that its industry may experience consolidation as
manufacturing information systems become more complex and as more manufacturers
adopt sophisticated information systems, forcing smaller companies in the
industry to specialize or attempt to merge with their competitors. To compete
effectively in the markets the Company targets, the Company will need to
continue to grow and attain sufficient size to have the resources to continue to
timely develop new products in response to evolving technology and customer
demands, and sell products to a variety of manufacturing industries worldwide.
No assurance can be given that the Company will be able to grow sufficiently to
enable it to continue to compete effectively.
The Company believes its use of open systems technologies in its products is
an important competitive element. The Company also believes that the number of
competitors offering open systems solutions will grow significantly over the
next several years. The Company anticipates that a significant source of such
future competition may be from larger manufacturing software companies that may
tailor their products for this market. Larger and better capitalized software
systems companies currently compete in the Company's targeted markets. There can
be no assurance that such companies will not develop products that are superior
to the Company's products or that achieve greater market acceptance.
The Company believes that some of the most important considerations for
potential customers for its software products include product technology,
capability and flexibility; system compatibility, ease of use, and product
enhancements during the license or maintenance term; reliability and quality of
implementation and technical support, particularly project management,
documentation and education; and the size of the installed user base,
competitive pricing, and corporate reputation. The Company believes that it
competes favorably in many of these areas.
The Company's future success will depend significantly upon its ability to
increase its share of its target markets, to persuade existing customers to
purchase additional upgrades and user licenses, and to persuade both new and
existing customers to purchase additional consulting and other professional
services.
INTELLECTUAL PROPERTY
The Company regards its products as proprietary trade secrets and
confidential information. The Company relies largely upon its license agreements
with customers, dealer agreements with suppliers and technology partners, its
own security systems, and confidentiality procedures and employee agreements to
maintain the trade secrecy of its products. The Company seeks to protect its
programs, documentation and
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other written materials under copyright law. There can be no assurance that
these means of protection will be effective against unauthorized reproduction or
"pirating." Policing unauthorized use of computer software is difficult, and
software "piracy" is and can be expected to remain a persistent problem within
the software industry.
The Company believes that, due to the rapid pace of innovation within the
computer industry, factors such as technological and creative skill of
personnel, knowledge and experience of management, name recognition, maintenance
and support of software products, the ability to develop, enhance, market and
acquire software products and services, and the establishment of strategic
relationships in the industry are more important than patent, copyright and
other legal protections for its technology.
None of the Company's software is patented. The Company believes that it has
all necessary rights to market its products, although there can be no assurance
that third parties will not assert infringement claims in the future.
BACKLOG AND INVENTORY
Because the Company typically ships software products shortly after receipt
of an order, the Company typically does not have a significant backlog of
unfulfilled orders, and revenues in any quarter are substantially dependent on
orders received and delivered in that quarter. However, the Company from time to
time experiences higher than normal backlog depending on factors such as the
configuration of the system and hardware availability resulting from new product
introductions.
The Company does not maintain hardware inventory, but at times the Company
does purchase hardware pursuant to specific customer requests contained in a
signed sales agreement and/or purchase order. At times, the Company has
experienced delays in obtaining certain hardware from suppliers due to product
availability. These delays are beyond the control of the Company, and may
periodically result in the deferral of certain related software revenue
recognition, which in turn could have a material effect on the Company's results
of operations.
EMPLOYEES
As of December 31, 1996, the Company had 364 full-time employees, including
71 in sales and marketing, 39 in product development, 151 in software support
services, 65 in customer support services and 38 in general and administration.
The Company's employees are not represented by any collective bargaining
organization, and the Company has never experienced a work stoppage. The Company
believes that its relations with its employees are good.
EXECUTIVE OFFICERS AND KEY EMPLOYEES
The executive officers and key employees of the Company and their ages as of
December 31, 1996 are as follows:
NAME AGE POSITION
---- --- --------
Robert C. Vernon 52 Chairman of the Board and Chief Executive Officer
Mark Hellinger 37 President and Chief Operating Officer - North American
Operations and Director
Randolph S. Naylor 55 Senior Vice President and Director
Michael D. Reynolds 39 Vice President, Finance and Administration, Chief Financial
Officer and Secretary
Michael K. Grad 44 Vice President, Sales - North American Operations
Jeffrey W. Scime 34 Vice President, Operations - North American Operations
Bruce H. Leith 45 Vice President, European Operations
Kenneth Cooper 44 Managing Director, Interactive (UK) Ltd.
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Robert C. Vernon joined the Company in 1975 and has served as President,
Chief Executive Officer and a director of the Company since 1978 and as Chairman
of the Board of Directors since 1979. From 1973 to 1975, Mr. Vernon served as
Director, Software Development for SDA Digital, a software developer for the
security industry, and from 1971 to 1973 as a Project Manager for Computer
Sciences Corporation, a software developer and integrator. Mr. Vernon received a
B.S. in Operations Research from the University of California, Berkeley.
Mark Hellinger joined the Company in 1985 and has served as President and
Chief Operating Officer-North American Operations since April 1996. He has
served as Vice President and General Manager since 1994, and as a director of
the Company since October 1992. From 1990 to 1994, Mr. Hellinger served as Vice
President, Operations of the Company. From 1985 to 1990, Mr. Hellinger served as
branch manager of the Company's New York office. Mr. Hellinger received a B.S.
in Management Science from the Massachusetts Institute of Technology.
Randolph S. Naylor, a founder of ISI, served as President of ISI from 1976 to
March 1995. Since the merger of ISI with the Company in March 1995, Mr. Naylor
has served as Senior Vice President, Vice President, Marketing and as a director
of the Company. Mr. Naylor also serves as a director of VMARK Software, Inc., a
software developer. Mr. Naylor received a B.A. in Economics from Princeton
University.
Michael D. Reynolds joined the Company in 1991 and has served as Vice
President, Finance and Administration since April 1996. He has served as Chief
Financial Officer and Secretary of the Company since February 1995. From 1980
through 1990, he held financial management positions with Fujitsu Systems of
America, Inc., a software developer and manufacturer of computer equipment, and
Price Waterhouse LLP, an international accounting firm. Mr. Reynolds received a
B.S. in Business Administration and an M.B.A. in Management from San Diego State
University, and is a Certified Public Accountant.
Michael K. Grad joined the Company in 1990 and has served as Vice President,
Sales-North American Operations since April 1996. He has served as the Company's
Eastern Regional Sales Manager since 1990 and as Director of Sales-Eastern
Region since 1994. From 1980 through 1990, Mr. Grad held a number of management
positions at ADP, a data processing company, including Regional Sales Manager,
Director of Product Training and Director of Customer Service. Mr. Grad received
a B.S. in Political Science from Franklin and Marshall College.
Jeffrey W. Scime joined the Company in July 1996 and has served as Vice
President, Operations-North American Operations since that time. From 1992
through May 1996, Mr. Scime served as a Principal of New Resources Corporation,
a consulting firm. From 1990 through 1992, Mr. Scime served as Director of
Information Services for Reliable Office Superstores, a chain of retail office
supplies stores. Mr. Scime received a B.S. in Quantitative Information Science
from Western Illinois University.
Bruce H. Leith joined the Company in 1991 and has served as Vice President,
European Operations since December 1996. He has served as Managing Director of
Interactive (UK) Ltd., the Company's wholly-owned subsidiary, since May 1992.
From January 1991 to May 1992, Mr. Leith served as the Operations Director of
Interactive (UK) Ltd. From 1989 to January 1991, he served as European
Operations Director of Continuum, a developer of financial applications
software. Mr. Leith received a B.S. in Business Studies and Computers from
Twickenham College, London.
Kenneth Cooper joined the Company in 1991 and has served as Managing Director
of Interactive (UK) Ltd. since December 1996. He has served as General Manager
of Interactive (UK) Ltd. since October 1995. From 1991 to September 1995, Mr.
Cooper served as Operations Director of Interactive (UK) Ltd. From 1987 to 1991,
Mr. Cooper served as Operations Director of MSP, plc., a manufacturing software
systems reseller in the United Kingdom. Mr. Cooper received a Metallurgist
degree from Sheffield University.
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CERTAIN RISK FACTORS RELATED TO THE COMPANY'S BUSINESS
In addition to those risks identified elsewhere in this Annual Report on Form
10-K, the Company's business, financial position, results of operations and cash
flows are subject to other risks, including the following risk factors.
Significant Fluctuations in Quarterly Results, Seasonality. The Company has
experienced and expects to continue to experience significant fluctuations in
its quarterly results. Such fluctuations may be caused by many factors,
including, but not limited to: the size and timing of individual orders;
seasonality of revenues; lengthy sales cycles; delays in introduction of new
products or product enhancements by the Company or other providers of hardware,
software and components for the Company's systems; competition and pricing in
the software industry; market acceptance of new products; reduction in demand
for existing products and shortening of product life cycles as a result of new
product introductions by competitors; foreign currency exchange rates; mix of
products sold; conditions or events in the manufacturing industry; and general
economic conditions. The Company does not typically maintain a significant
backlog, therefore the revenue recognized each quarter depends substantially on
orders received and delivered during that quarter. The average price of the
Company's information systems sold in 1996 to new customers was approximately
$290,000. As a result of the relatively high revenue amount per order and
relatively low unit volume, any lost or delayed sales will have a
disproportionately greater effect on the Company's revenues and quarterly
results of operations relative to companies that have higher unit sales volumes
and less revenue associated with each sale. The Company's sales cycle is
typically six to twelve months from the time initial sales contact is made with
a qualified prospect, making the timing of the recognition of the Company's
license fees difficult to predict and the Company's quarterly results of
operations difficult to forecast. The Company's expense levels are based in part
on its forecasts of future revenues. Accordingly, since the majority of the
Company's expenses are fixed in nature, the Company would not be able to quickly
curtail expenses in response to a decline in revenues, and operating results for
a given quarter would be adversely affected. As a result, revenues for any
quarter are subject to significant variation and 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.
Fluctuations in operating results may also result in volatility in the price of
the Company's Common Stock.
During its recent history, the Company's revenues have varied from quarter to
quarter, with the largest portion of revenues typically recognized in the fourth
quarter of each year. The procurement process of the Company's customers is long
and involves competing capital budget decisions. As a result of such budgeting
and buying patterns, the Company's prospective customers are more likely to
order the Company's products, if at all, near the end of each year.
Consequently, the Company has historically realized lower revenues in the first
quarter of each year than in the preceding fourth quarter, and the first quarter
has typically resulted in an operating loss. There can be no assurance that the
Company will be profitable on a quarter-to-quarter basis.
Intense Competition. The manufacturing information systems industry is
intensely competitive and rapidly changing. A number of companies offer products
similar to the Company's products. Many of the Company's existing competitors,
as well as a number of potential competitors, have larger technical staffs, more
established and larger marketing and sales organizations, and significantly
greater financial resources than the Company. Moreover, the Company has no
proprietary barriers to entry that could keep its competitors from developing
similar products or selling competing products in the Company's markets. As a
result, there can be no assurance that such competitors will not develop
products that are superior to the Company's products or that achieve greater
market acceptance. There also can be no assurance that suppliers of relational
database management systems or companies that develop management information
software applications for large multinational manufacturers will not target the
manufacturers targeted by the Company or otherwise develop applications that
compete effectively in the Company's targeted markets. The Company's future
success will depend, in part, upon its ability to increase revenues in its
targeted markets. There can be no assurance that the Company will be able to
continue to compete successfully against its competitors or that the competitive
pressures faced by the Company will not adversely affect its future financial
performance. The Company believes its use of open systems
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technologies is an important competitive element. The Company also believes that
the number of competitors offering open systems solutions will grow over the
next several years. The Company anticipates that a significant source of such
future competition may be from larger manufacturing software companies that may
tailor their products for this market. Only a few of the larger and better
capitalized manufacturing software companies currently compete in the Company's
targeted markets. There can be no assurance that such companies will not develop
products that are superior to the Company's products or achieve greater market
acceptance for their products due to greater sales, marketing or product
development resources. Due to intense competition in the computer hardware
market, the Company has experienced declining hardware revenues as a percentage
of each system it sells and shrinking profit margins with respect to such
hardware revenues. The Company believes this trend will continue. As a result,
the Company's average revenues from each system it sells and its overall profit
margins and results of operations may be materially adversely affected unless
the Company is able to increase its revenues with respect to its other products
and services. There can be no assurance that the Company will be able to
increase its revenues with respect to its other products and services.
The Company sells its products and services in a highly fragmented market and
its competitors consist of a few relatively large multinational suppliers and a
much larger number of mid-size, national and small, regional competitors. The
Company believes that its industry may experience consolidation as business
information systems become more complex and as more manufacturers adopt
sophisticated business information systems, forcing smaller companies in the
industry to specialize or attempt to merge with their competitors. To compete
effectively in the markets the Company targets, the Company will need to
continue to grow and attain sufficient size to have the resources to continue to
timely develop new products in response to evolving technology and customer
demands, and sell products to a variety of manufacturing industries worldwide.
No assurance can be given that the Company will be able to grow sufficiently to
enable it to continue to compete effectively.
Integration and Profitability of Just-In-Time Enterprise Systems, Inc. On
December 31, 1995, the Company acquired all of the outstanding shares of JIT,
which, prior to the acquisition, developed and marketed the Company's JIT
Enterprise System application software product. Interactive and JIT differ in
certain respects, and the Company anticipates that the integration of JIT will
continue to divert some of its management resources for an indefinite period of
time. There can be no assurance that difficulties will not arise in integrating
the operations of JIT, or that the JIT product line will become profitable.
Moreover, there can be no assurance that the Company will realize any product
enhancements or increased revenues as a result of the acquisition of JIT. The
success of the acquisition of JIT will depend, in large part, on the ability of
the Company to retain the customers and employees of JIT, and to continue to
develop and release product enhancements and new product releases of the JIT
product. There can be no assurance that the Company will be successful in this
regard. The failure to accomplish any of the goals of the acquisition, or the
failure to successfully integrate the operations of JIT, would have a material
adverse effect on the Company's future results of operations and financial
position.
Dependence on Manufacturing Industry. The Company's business depends
substantially upon the capital expenditures of mid-sized discrete manufacturers
and large contract manufacturers which, in part, depends upon the demand for
such manufacturers' products. A recession or other adverse event affecting the
manufacturing industry in the United States, the United Kingdom, or other
markets served by the Company could affect such demand, forcing manufacturers in
the Company's targeted markets to curtail or postpone capital expenditures on
business information systems. Any such change in the amount or timing of capital
expenditures in its targeted markets would have a material adverse effect on the
Company's financial position and results of operations.
Dependence on Principal Products. Substantially all of the Company's revenue
is derived from the sale of manufacturing information systems and related
support services. Accordingly, any event that adversely affects fees derived
from the sale of such systems, such as competition from other products,
significant flaws in the Company's software products or incompatibility with
third party hardware or software products, negative publicity or evaluation, or
obsolescence of the hardware platforms or software environments in which the
systems run, would have a material adverse effect on the Company's results of
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operations. The Company's future financial performance will depend, in
substantial part, on the continued development and introduction of new and
enhanced versions of INFOFLO, JES and other products, and customer acceptance of
such new and enhanced products.
New Products and Rapid Technological Change. The markets for the Company's
products are characterized by rapid technological advances, evolving industry
standards, changes in end-user requirements and frequent new product
introductions and enhancements. The introduction of products embodying new
technologies and the emergence of new industry standards could render the
Company's existing products and products currently under development obsolete
and unmarketable. The Company's future success will depend upon its ability to
enhance its current products and develop and successfully introduce and sell new
products that keep pace with technological developments and respond to evolving
end-user requirements. Any failure by the Company to anticipate or respond
adequately to technological developments or end-user requirements, or any
significant delays in product development or introduction, could damage the
Company's competitive position in the marketplace and result in reduced
revenues. The Company may need to increase the size of its product development
staff in the near term to meet these challenges. There can be no assurance that
the Company will be successful in hiring and training adequate product
development personnel to meet its needs. In the past, the Company has
occasionally experienced delays in the introduction of new products and product
enhancements. There can be no assurance that the Company will be successful in
developing and marketing new products or product enhancements on a timely basis
or that the Company will not experience significant delays in the future. Any
failure to successfully develop and market new products and product enhancements
would have a material adverse effect on the Company's results of operations and
financial position.
Key Employees. The Company's continued success will depend upon its ability
to retain a number of key employees, including Robert C. Vernon, Mark Hellinger,
Bruce H. Leith and Kenneth Cooper, none of whom is subject to employment
agreements that restrict their ability to compete with the Company following the
termination of their employment. In addition, the Company believes that its
future success will depend in large part on its ability to attract and retain
highly skilled technical, managerial and marketing personnel. Competition for
such personnel, in particular for product development and product implementation
personnel, is intense, and the Company competes in the market for such personnel
against numerous companies, including larger, more established companies with
significantly greater financial resources than the Company. The Company has at
times experienced difficulty in recruiting qualified personnel, and there can be
no assurance that the Company will not experience such difficulties in the
future. There can be no assurance that the Company will be successful in
attracting and retaining skilled personnel. The loss of certain key employees or
the Company's inability to attract and retain other qualified employees could
have a material adverse effect on the Company's business.
Expansion Plans. The Company plans to expand its business through expansion
of its distribution network in the United States and internationally with the
objective of increasing revenues, profits and shareholders' equity. There can be
no assurance, however, that the efforts and funds directed to expansion of the
Company's distribution network will result in revenue, profit and shareholders'
equity growth. Any future growth of the Company will also depend on, among other
things, the Company's ability to gain market acceptance for its products in new
geographic areas and to monitor and control the additional costs and expenses
associated with expansion and new product development. There can be no assurance
that the Company will be able to successfully manage these aspects of its
business. The success of the Company's expansion in continental Europe and other
international markets will depend largely upon the success of the Company's
business partner program. This program is, in turn, dependent upon the
successful identification and recruitment of appropriate international partners,
the Company's success in instilling a service-driven culture in these foreign
organizations that the Company does not own or control, and the development of
adequate resources within each affiliate to successfully sell and implement the
Company's business information systems on a turnkey basis. No assurance can be
given that the Company will be able to meet these challenges or successfully
implement its proposed international business partner program.
Management of Growth. The Company has recently experienced rapid growth in
the number of its employees. During 1996 the Company grew from approximately 292
employees to 364 employees. This
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growth has resulted in an increase in the level of responsibility for both
existing and new management personnel. To manage its growth effectively, the
Company will be required to improve its operating and financial systems and to
expand, train and manage its employee base. There can be no assurance that the
management skills and systems currently in place will be adequate if the Company
continues to grow or that the Company will be able to effectively manage its
recent growth and successfully assimilate its new employees.
International Operations and Risk of International Sales. The Company derived
approximately 32% of its total revenues from operations outside North America in
1996. The international business is subject to various risks common to
international activities, including exposure to currency fluctuations, political
and economic instability, the greater difficulty of administering business
abroad, and the need to comply with a wide variety of foreign import and United
States export laws and regulatory requirements. The Company does not currently
engage in foreign currency hedging transactions.
Dependence on Third Party Software and Hardware. INFOFLO and JES incorporate
and use software products and computer hardware and equipment developed by other
entities. The fourth generation language ("4GL") set of development tools used
by the Company is provided by Unidata, Inc. (previously Millsoft, Inc.) and
Oracle Corporation. The relational database management systems used in the
Company's products have been developed by UniData, Inc., VMARK Software, Inc.,
and Oracle Corporation, and the operating systems on which the Company's
products function (UNIX and NT) have been developed or are owned by Novell
Corporation and Microsoft Corporation. A portion of the software in the
Company's Product Configurator module is provided by Expert Application Systems,
Limited. The computer hardware and equipment sold as part of the Company's
turnkey systems are manufactured by Hewlett-Packard Company ("Hewlett-Packard"),
International Business Machines Corporation ("IBM"), Digital Equipment
Corporation ("Digital Equipment") and others. There can be no assurance that all
of these entities will remain in business, that their product lines will remain
viable or that these products will otherwise continue to be available to the
Company. If any of these entities ceases to do business, or abandons or fails to
enhance a particular product line, the Company may need to seek other suppliers.
This could have a material adverse effect on the Company's results of
operations. In addition, there also can be no assurance that the Company's
current suppliers will not significantly alter their pricing in a manner adverse
to the Company.
Significant Risk of Product Liability and Lack of lnsurance. Because the
Company markets and sells its software products on a turnkey basis, which
includes rendering professional consulting services, the Company incurs
significant risks of professional and other liability. The Company has no
insurance covering product liability or damages arising from negligent acts,
errors, mistakes or omissions in rendering or failing to render its professional
services. In addition, there can be no assurance that the limitations of
liability set forth in the Company's license agreements or other contracts would
be enforceable or would otherwise protect the Company from liability for damages
to a customer resulting from a defect in one of the Company's products or
arising as a result of professional services rendered by the Company. Such a
claim, if successful and of sufficient magnitude, could have a material adverse
effect on the Company's results of operations and financial position.
Intellectual Property and Proprietary Rights. The Company attempts to protect
ownership of its software with a combination of copyright, trademark and trade
secret laws, employee and third-party nondisclosure agreements, and other
methods of protection common in the industry. Despite these precautions, it may
be possible for an unauthorized third party to copy or reverse-engineer certain
portions of the Company's products or to obtain and use information that the
Company regards as proprietary. The Company has no patents. The Company licenses
the source code for its software to some customers to enable them to customize
the software to meet particular requirements. Although the Company's source code
license contains confidentiality and nondisclosure provisions, there can be no
assurance that such customers will take adequate precautions to protect the
source code. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights to the same extent as do the laws of the United
States. There can be no assurance that the mechanisms used by the Company to
protect its software will be adequate or that the Company's competition will not
independently develop software products that are
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substantially equivalent or superior to the Company's software products. As the
number of software products in the industry increases and the functionality of
these products further overlaps, the Company believes that software programs
could become increasingly the subject of infringement claims. Although the
Company's products have never been the subject of infringement claims, there can
be no assurance that third parties will not assert infringement claims against
the Company in the future or that any such assertion will not require the
Company to enter into royalty arrangements or result in costly litigation and
liability.
Control by Existing Stockholders. As of December 31, 1996, the Company's
executive officers and directors beneficially owned, in the aggregate,
approximately 40% of the Company's outstanding shares of Common Stock. As a
result, these stockholders, if acting together, would effectively be able to
control most matters requiring approval by the stockholders of the Company,
including the election of a majority of the directors. The voting power of these
stockholders under certain circumstances could have the effect of delaying or
preventing a change in control of the Company. The Company has entered into
agreements with its executive officers and directors indemnifying them against
losses they may incur in legal proceedings arising from their service to the
Company.
Anti-takeover Effect of Certain Charter Provisions. The Company's Board of
Directors has the authority to issue up to 5,000,000 shares of Preferred Stock
and to determine the price, rights, preferences and privileges of those shares
without any further vote or action by the stockholders. The rights of the
holders of common stock will be subject to, and may be adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire a majority
of the outstanding voting stock of the Company. The Company has no present plans
to issue shares of Preferred Stock. In addition, the Company will become subject
to the anti-takeover provisions of Section 203 of the Delaware General
Corporation Law, which could delay or make more difficult a merger, tender offer
or proxy contest involving the Company. Furthermore, certain provisions of the
Company's Certificate of Incorporation may have the effect of delaying or
preventing changes in control or management of the Company, which could
adversely affect the market price of the Company's Common Stock.
ITEM 2. PROPERTIES
The Company maintains its headquarters, along with its western regional
office, in leased facilities approximating 22,500 square feet in San Diego,
California. The leases on this space will expire in February 1998. The Company's
eastern regional office is located in an approximately 9,000 square foot leased
facility near Boston in Burlington, Massachusetts. The lease on this space will
expire in February 2000. The Company also leases office and training space in
metropolitan Los Angeles, San Francisco, Seattle, Las Vegas, Dallas, Denver,
Chicago, Cleveland, Atlanta, Washington, D.C., Boston and New York.
Under the terms of the JIT Purchase Agreement, the Company subleased
approximately 12,500 square feet of space from Fourth Shift Corporation in
Minneapolis. The sublease was for a thirteen month term through January 31,
1997. The Company has signed a lease for a new location in Minneapolis for
approximately 12,000 square feet effective February 1, 1997, which will expire
in January 2002.
The Company's United Kingdom headquarters is in an approximately 8,500 square
foot facility leased by the Company near London in Watford, England. The lease
on this space will expire in December 2014, with an option to terminate at
specified times over the lease term. In addition, the Company's subsidiary
leases office space in metropolitan Birmingham, Manchester, Newcastle,
Bracknell, Edinburgh, Scotland, and Dublin, Ireland.
The Company considers its leased real property adequate for its current
needs, and is seeking to lease additional office and training space to
accommodate future growth in personnel.
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ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company is traded on NASDAQ National Market System
under the symbol "INTE". The following table sets forth high and low "sales"
prices of the shares of Common Stock of the Company for the periods indicated
(as reported by the National Quotation Bureau).
Sales Price
------------------------
High Low
------------------------
1995 Second Quarter (commencing May 23, 1995).. 6 3/4 6
1995 Third Quarter ............................ 8 1/4 5 1/4
1995 Fourth Quarter ........................... 8 5/8 5 5/8
1996 First Quarter ............................ 7 3/8 4 1/8
1996 Second Quarter ........................... 6 3/8 4
1996 Third Quarter ............................ 6 3/4 4 3/8
1996 Fourth Quarter ........................... 8 3/4 4 5/8
As of March 19, 1997, there were 150 stockholders of record and approximately
1,500 beneficial owners of the Company's common stock.
The Company has never paid cash dividends on its common stock and the Board
of Directors intends to retain all of its earnings, if any, to finance the
development and expansion of the Company. However, there can be no assurance
that the Company can successfully expand its operations, or that such expansion
will prove profitable.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto included elsewhere in this Annual Report on Form 10-K.
Years ended December 31,
------------------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------ -------
(In thousands, except per share amounts)
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues:
Software licenses ...................... $19,643 $11,255 $10,633 $6,368 $ 4,575
Software support services .............. 18,629 9,680 7,078 5,855 5,833
Hardware ............................... 8,014 5,613 5,891 5,197 4,571
Maintenance contracts .................. 8,650 5,347 3,655 2,627 2,243
Other .................................. 1,255 1,098 1,368 1,685 1,989
------- ------- ------- ------ -------
Total revenues ....................... 56,191 32,993 28,625 21,732 19,211
Cost of revenues:
Software licenses ...................... 3,826 2,548 2,789 1,629 821
Software support services .............. 13,377 5,575 4,172 3,271 3,941
Hardware ............................... 5,849 4,021 4,506 3,830 3,022
Maintenance contracts .................. 3,784 1,954 963 643 452
Other .................................. 1,494 1,133 1,167 1,196 1,577
------- ------- ------- ------ -------
Total cost of revenues ............... 28,330 15,231 13,597 10,569 9,813
------- ------- ------- ------ -------
Gross margin ............................. 27,861 17,762 15,028 11,163 9,398
Operating expenses:
Research and development ............... 4,064 1,588 1,320 957 900
Selling, general and administrative .... 21,791 13,891 10,847 8,414 8,685
Write-off of software license .......... -- 235 -- -- --
Compensation expense associated with
employee stock bonus (1) ............. -- 871 -- -- --
Purchased research and development (2).. -- 3,250 -- -- --
------- ------- ------- ------ -------
Income (loss) from operations ............ 2,006 (2,073) 2,861 1,792 (187)
Other income (expense), net .............. (197) 87 (80) (134) (175)
Gain on litigation settlement ............ -- -- -- -- 1,051
------- ------- ------- ------ -------
Income (loss) before income tax .......... 1,809 (1,986) 2,781 1,658 689
Provision (benefit) for income taxes ..... 548 (848) 972 216 (57)
------- ------- ------- ------ -------
Net income (loss) ........................ $ 1,261 $(1,138) $ 1,809 $1,442 $ 746
======= ======= ======= ====== =======
Net income (loss) per share (3) .......... $ .28 $ (.28) $ .49 $ .40 $ .21
======= ======= ======= ====== =======
December 31,
-------------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------ ------
(in thousands)
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit) ..................... $ 5,022 $ 4,581 $ 1,850 $ 604 $ (786)
Total assets .................................. 28,976 24,763 11,635 8,649 5,944
Long-term obligations, net of current portion.. 1,864 2,105 212 359 292
Stockholders' equity (deficit) ................ 10,287 8,348 3,129 1,313 (102)
- --------------
(l) Represents a non-recurring compensation expense of $871,000 associated
with the final stock grant and cash bonus pursuant to a compensation
arrangement with an officer of the Company.
(2) Relates to acquisition of JIT. See Note 2 of Notes to Consolidated
Financial Statements.
(3) See Note 1 of Notes to Consolidated Financial Statements for the basis of
computing net income (loss) per common share.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company develops, markets, implements and supports integrated business
information systems that enable discrete manufacturers to manage their
enterprise-wide information requirements. The Company primarily sells and
implements its business information systems directly. Since 1992, the Company
has expanded its sales, implementation, and customer service capabilities
through the addition of offices as well as the establishment of centralized
customer service centers in both the United States and United Kingdom.
Substantially all of the Company's revenues are generated from the sale of its
systems, which usually consist of proprietary and third-party software licenses,
implementation and software support services, third-party hardware and
maintenance contracts. The Company's proprietary software licenses are sold on a
packaged or individual module basis, and the license fee is determined in part
by the number of modules and concurrent system users. Implementation and
software support services are furnished on a daily or hourly basis and billed
monthly as incurred. Maintenance fees are based on a percentage of software
license fees.
In March 1995, Interactive, Inc. merged with Intrepid Software, Inc., in a
combination accounted for as a pooling-of-interests, and on December 31, 1995,
the Company acquired all of the outstanding common shares of Just-In-Time
Enterprise Systems, Inc. ("JIT") in a combination accounted for as a purchase.
See Note 2 of the notes to the accompanying consolidated financial statements.
Accordingly, Management's Discussion and Analysis of Financial Condition and
Results of Operations reflects the financial condition and results of operations
of the merged entity for the periods indicated, including the combination of
JIT's balance sheet with that of the Company's as of December 31, 1995. The
results of operations for JIT are reflected only for thefiscal year ended December 31,
1996 since the acquisition took place on December 31, 1995.
JIT's assets and liabilities are included in the accompanying consolidated
balance sheet at December 31, 1995 at values representing the Company's
allocation of the purchase price. The excess of the purchase price over the fair
value of the tangible assets and liabilities of JIT was assigned31,1996 to acquired
research and development and to acquired technology and other intangible assets.
The portion of the purchase price allocated to acquired research and development
which had not yet reached technological feasibility was charged to expense in
the amount of $3,250,000. The portion allocated to acquired technology and other
intangible assets is being amortized over estimated useful lives ranging from
five to ten years. The allocation of purchase price is summarized in Note 2 of
the notes to the accompanying consolidated financial statements. In addition,
aggregate costs of $235,000 incurred by the Company during 1995 in connection
with obtaining the license rights to an Oracle-based product were written offread as a one-time charge as a result of the JIT acquisition rendering this product
redundant.
Revenues from software licenses are recognized upon delivery, provided that
no significant obligations of the Company remain and collection of the related
receivable is deemed probable. Software support services revenues are recognized
in the period in which the services are performed. Revenues from hardware sales
are recognized upon shipment of the product. Revenues from software maintenance
contracts are recognized ratably over the period of the contract. Revenues from
turnkey systems, which include both hardware and software, are recognized upon
delivery of the software and related hardware that is considered essential to
the functionality of the system, provided that no significant obligations remain
and collection of the related receivable is deemed probable.
The Company derived approximately 32%, 38% and 37% of its total revenues
from operations outside North America in 1996, 1995 and 1994, respectively. The
Company's international business is subject to various risks common to
international activities, including currency fluctuations. Revenues and expenses
of the Company's international operations are translated at the average exchange
rate in effect during the period. Translation adjustments are reported as a
separate component of stockholders' equity.
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22
The Company's results of operations may fluctuate significantly, and there
can be no assurance that the Company will experience revenue growth or be
profitable in the future.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
total revenues represented by certain items included in the Company's
Consolidated Statements of Operations:
YEARS ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
----- ----- ------
Consolidated Statements of Operations Data:
Revenues:
Software licenses ........................... 35.0% 34.1% 37.1%
Software support services ................... 33.1 29.3 24.7
Hardware .................................... 14.3 17.0 20.6
Maintenance contracts ....................... 15.4 16.2 12.8
Other ....................................... 2.2 3.4 4.8
----- ----- -----
Total revenues ........................... 100.0 100.0 100.0
Cost of revenues:
Software licenses ........................... 6.8 7.7 9.7
Software support services ................... 23.8 16.9 14.6
Hardware .................................... 10.4 12.2 15.7
Maintenance contracts ....................... 6.7 5.9 3.4
Other ....................................... 2.7 3.5 4.1
----- ----- -----
Total cost of revenues ................... 50.4 46.2 47.5
----- ----- -----
Gross margin .................................. 49.6 53.8 52.5
Operating expenses:
Research and development .................... 7.2 4.8 4.6
Selling, general and administrative ......... 38.8 42.1 37.9
Write-off of software license ............... -- .7 --
Compensation expense associated with employee
stock bonus .............................. -- 2.6 --
Purchased research and development .......... -- 9.9 --
----- ----- -----
Income (loss) from operations ................. 3.6 (6.3) 10.0
Other income (expense), net ................... (.4) .3 (.3)
----- ----- -----
Income (loss) before income taxes ............. 3.2 (6.0) 9.7
Provision (benefit) for income taxes .......... 1.0 (2.6) 3.4
----- ----- -----
Net income (loss) ............................. 2.2% (3.4)% 6.3%
===== ===== =====
Comparison of Years Ended December 31, 1996 and 1995
Revenues. Total revenues increased 70.3% to $56.2 million in 1996 from $33.0
million in 1995. The increase was primarily attributable to increases in
revenues from software licenses and software support services.
Software License Revenues. Software license revenues increased 74.5% to
$19.6 million in 1996 from $11.3 million in 1995. The increase in software
license revenues was due to an increase in system sales and system upgrades to
new and existing customers.
Software Support Services Revenues. Revenues from software support
services increased 92.4% to $18.6 million in 1996 from $9.7 million in 1995. The
increase in revenues was principally due to incremental software support
services revenues associated with the acquisition of JIT, as well as an increase
in implementation services and programming services associated with increases in
billable personnel to support the increase in software license revenues.
Revenues from software support services do not necessarily increase at the same
rate or time as increases in software license revenues due to the length of time
encountered between the delivery and implementation of software licenses.
Hardware Revenues. Hardware revenues increased 42.8% to $8.0 million in
1996 from $5.6 million in 1995. The increase was primarily due to increased
computer hardware revenue to support the increase in system sales and upgrades
to new and existing customers.
22
23
Maintenance Contracts Revenues. Revenues from maintenance contracts
increased 61.8% to $8.7 million from $5.3 million in 1995. The increase in
maintenance contracts revenues was due to an increase in the number of customers
paying maintenance fees for new and upgraded systems and incremental maintenance
revenues associated with the acquisition of JIT.
Cost of Revenues. Total cost of revenues increased 86.0% to $28.3 million in
1996 from $15.2 million in 1995.
Cost of Software Licenses. The cost of software licenses consists
primarily of the cost of software products included in the Company's systems
that are provided by third-party suppliers, including royalties, based on
license revenues earned by the Company. The cost of software licenses increased
by 50.2% to $3.8 million in 1996 compared to $2.5 million in 1995. The increase
was primarily attributable to increases in the purchases of software products
from third party software vendors to support the increase in system sales.
Cost of Software Support Services. The cost of software support
services increased 139.9% to $13.4 million in 1996 from $5.6 million in 1995 as
a result of the increase in related software support services provided by the
Company, primarily consisting of personnel and contractor costs associated with
the operations of JIT, as well as travel and other costs associated with
providing implementation, programming, education and training, and other
technical and consulting services.
Cost of Hardware. The cost of hardware consists primarily of the cost
of computer hardware and related peripheral equipment purchased by the Company
from various suppliers for resale as part of the Company's turnkey systems. The
cost of hardware increased by 45.5% to $5.8 million in 1996 from $4.0 million in
1995 due primarily to the increase in related hardware revenues.
Cost of Maintenance Contracts. The cost of maintenance contracts
increased by 93.7% to $3.8 million in 1996 from $2.0 million in 1995 as a result
of an increase in personnel and contractor costs associated with the operations
of JIT, royalty costs for third party software vendors, and other costs to
support the growth in sales of new systems and system upgrades. The Company
plans on continuing to increase spending in absolute dollars in order to
continue to increase the quality and response time of its customer service
organization on a national and international basis.
Gross Margin. Gross margin increased by 56.9% to $27.9 million in 1996 from
$17.8 million in 1995 primarily due to the increase in total revenues from 1995
to 1996. Overall gross margin as a percentage of total revenues decreased to
49.6% in 1996 from 53.8% in 1995, mainly as a result of a decrease in gross
margin on software support services as a result of contractor costs associated
with JIT's software support services revenue. Gross margin on the Company's
software license revenues is significantly higher than on revenues from
hardware, services and maintenance. Gross margins on software licenses increased
to 80.5% in 1996 compared to 77.4% in 1995 due primarily to an increase in the
Company's proprietary software revenue as a percentage of product mix, price
increases and a reduction in the cost of royalties paid to third party software
vendors. Gross margins on software support services decreased significantly to
28.2% in 1996 from 42.4% in 1995. The Company attributes this decrease to higher
personnel and contractor costs associated with JIT, increases in other costs
associated with providing implementation, programming, education and training
services, and lower utilization of billable personnel due to training required
on the Company's new software release. Hardware gross margins decreased slightly
to 27.0% in 1996 from 28.4% in 1995. The Company, in general, expects to realize
hardware margins in the approximate range of 25%-28% under normal conditions.
Gross margins on maintenance contracts decreased to 56.3% in 1996 from 63.5% in
1995 due mainly to increases in customer support personnel, third party royalty
costs, and contractor costs associated with JIT's maintenance contracts revenue.
Research and Development Expenses. Research and development expenses, which
consist largely of software development costs, increased 155.9% to $4.1 million
in 1996 from $1.6 million in 1995 primarily as a result of the incremental
addition of JIT's research and development personnel and costs to the
23
24
Company's existing research and development organization, as well as contractor
costs associated with JIT's research and development expenditures. Research and
development expenses as a percentage of total revenues increased to 7.2% in 1996
from 4.8% in 1995, and increased as a percentage of software license revenues to
20.7% in 1996 from 14.1% in 1995, due primarily to the expansion of the
Company's software development resources as a result of the JIT acquisition. The
Company intends to increase spending in absolute dollars on research and
development in general to continue to expand its product development resources.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 56.9% to $21.8 million in 1996 from $13.9
million in 1995. As a percentage of total revenue, selling, general and
administrative expenses decreased to 38.8% in 1996 compared to 42.1% in 1995.
The increase in absolute dollars in selling, general and administrative expenses
is primarily due to increases in selling and marketing activities, increases in
sales personnel, higher sales commissions associated with increased revenues and
margins, and increased travel and administrative costs to support the
acquisition of JIT and the general growth of the Company. The Company expects
selling, general and administrative expenses to increase in absolute dollars in
future periods to support the Company's growth.
Provision (Benefit) for Income Taxes. The Company's effective tax rate
decreased to 30.3% in 1996 from 42.7% in 1995, due primarily to the realization
of research and development tax credits in 1996.
Comparison of Years Ended December 31, 1995 and 1994
Revenues. Total revenues increased 15.3% to $33.0 million in 1995 from $28.6
million in 1994. The increase was primarily attributable to increases in
revenues from software support services and maintenance contracts.
Software License Revenues. Software license revenues increased 5.8% to
$11.3 million in 1995 from $10.6 million in 1994. The increase in software
license revenues was due to an increase in system sales to new customers.
Software Support Services Revenues. Revenues from software support
services increased 36.8% to $9.7 million in 1995 from $7.1 million in 1994. The
increase in revenues was principally due to an increase in implementation
services, programming, and billable hours, as well as an increase in billable
software support services personnel and higher utilization of software support
services personnel. Revenues from software support services do not typically
increase at the same rate or time as increases in software license revenues due
to the length of time encountered between the delivery and implementation of
software licenses.
Hardware Revenues. Hardware revenues decreased 4.7% to $5.6 million in
1995 from $5.9 million in 1994. The decrease in revenue was primarily due to
vendor delays in computer hardware shipments.
Maintenance Contracts Revenues. Revenues from maintenance contracts
increased 46.3% to $5.3 million in 1995 from $3.7 million in 1994. The increase
in maintenance contracts revenues was primarily due to an increase in the number
of customers paying maintenance fees for new and upgraded systems.
Cost of Revenues. Total cost of revenues increased 12.0% to $15.2 million in
1995 from $13.6 million in 1994.
Cost of Software Licenses. The cost of software licenses consists
primarily of the cost of software products included in the Company's systems
that are provided by third-party suppliers, including royalties, based on
license revenues earned by the Company. The cost of software licenses decreased
by 8.6% to $2.5 million in 1995 compared to $2.8 million in 1994 due to an
increase in the Company's proprietary software license revenue as a percentage
of product mix and a reduction in the cost of royalties paid to third party
software vendors.
24
25
Cost of Software Support Services. The cost of software support
services increased by 33.6% to $5.6 million in 1995 from $4.2 million in 1994 as
a result of the increase in related software support services provided by the
Company, primarily consisting of personnel costs, travel, materials, and other
costs associated with providing implementation, programming, education and
training, and other technical and consulting services.
Cost of Hardware. The cost of hardware consists primarily of the cost
of computer hardware and related peripheral equipment purchased by the Company
from various suppliers for resale as part of the Company's turnkey systems. The
cost of hardware decreased by 10.8% to $4.0 million in 1995 from $4.5 million in
1994 due primarily to vendor delays in computer hardware shipments of booked
hardware orders.
Cost of Maintenance Contracts. The cost of maintenance contracts
doubled to $2.0 million in 1995 from $1.0 million in 1994 as a result of a
significant increase in personnel, royalty costs for third party software
vendors, and other costs to support the growth in sales of new systems and
system upgrades. The Company plans on continuing to increase spending in
absolute dollars in order to continue to increase the quality and response time
of its customer service organization on a national and international basis.
Gross Margin. Gross margin increased by 18.2% to $17.8 million in 1995 from
$15.0 million in 1994 primarily due to the increase in total revenues from 1994
to 1995. Overall gross margin as a percentage of total revenues increased to
53.8% in 1995 from 52.5% in 1994, mainly as a result of the increase in gross
margins on software license revenues and hardware revenue. Gross margin on the
Company's software license revenues is significantly higher than on revenues
from hardware, services and maintenance. Gross margins on software licenses
increased by 3.6% to 77.4% in 1995 compared to 73.8% in 1994 due primarily to an
increase in the Company's proprietary software revenue as a percentage of
product mix, price increases, and a reduction in the cost of royalties paid to
third party software vendors. Gross margins on software support services
increased to 42.4% in 1995 from 41.1% in 1994, due mainly to increased
utilization of billable implementation and programming personnel. Hardware gross
margins increased to 28.4% in 1995 from 23.5% in 1994 due to the absence in 1995
of certain low margin sales that occurred in 1994 to meet specific customer
contractual requirements. The Company, in general, realizes hardware margins in
the approximate range of 25%-28% under normal conditions. Gross margins on
maintenance contracts decreased to 63.5% in 1995 from 73.7% in 1994 due to the
addition of a significant number of new support personnel, travel and materials,
and third party royalty costs to support the increase in new customer accounts.
Research and Development Expenses. Research and development expenses, which
consist largely of software development costs, increased 20.3% to $1.6 million
in 1995 from $1.3 million in 1994 as a result of the Company's continuing focus
on product enhancements and new product design. Research and development
expenses as a percentage of total revenues increased slightly to 4.8% in 1995
from 4.6% in 1994, and increased as a percentage of software license revenues to
14.1% in 1995 from 12.4% in 1994.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 28.1% to $13.9 million in 1995 from $10.8
million in 1994. The increase in selling, general and administrative expenses
was largely due to increases in selling and marketing activities, increased
travel, the opening of new offices in the United States and Europe, including
offices in Atlanta, San Francisco, Cleveland and Eindhoven, The Netherlands,
increases in sales personnel, higher sales commissions associated with increased
revenues and margins, and increases in the number of personnel and
administrative expenses to support the Company's growing operations. In
addition, the Company incurred increased legal, accounting, and other expenses
associated with regulatory and public reporting requirements. The Company's
selling, general and administrative expenses increased as a percentage of total
revenue to 42.1% in 1995 compared to 37.9% in 1994. The Company increased
selling, general and administrative expenses in 1995 in order to support total
revenues in the $35-36 million range, which did not occur due to the deferral of
certain revenues from the quarter ended December 31, 1995 into the first quarter
of 1996.
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26
Write-off of Software License. See "Overview-Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Compensation Expense Associated with Employee Stock Bonus. In the quarter
ended March 31, 1995, the Company recorded compensation expense of $871,000 in
connection with the grant of a stock bonus of 112,800 shares of common stock to
an officer of the Company and the related cash bonus associated with income
taxes payable as a result of the stock bonus. Such compensation was paid to the
officer pursuant to an arrangement entered into between the Company and the
officer in January 1991. No additional compensation will be paid to the officer
or to any other employee of the Company pursuant to such an arrangement, and the
Company is taking this expense as a one-time charge for the year ended December
31, 1995.
Purchased Research and Development. See "Overview-Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Provision (Benefit) for Income Taxes. The Company's effective tax rate
increased to 42.7% in 1995 from 35% in 1994, due primarily to the realization of
tax credits in 1994 and the release of the remaining valuation allowance in
1994, both of which reduced the 1994 effective rate. In addition, the effective
rate for 1995 was affected by the realization of tax credits.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations to date through cash flow from
operations, bank lines of credit, long-term equipment financing, and its initial
public offering in May 1995. The Company has lines of credit with commercial
banks under which the Company may borrow up to a total of $4.3 million, secured
by substantially all assets of the Company. As of December 31, 1996, $1.2
million was outstanding under these lines. The lines of credit are scheduled to
expire on May 31, 1997 and June 30, 1997.
In 1996, operating activities provided net cash of $629,000, primarily due
to earnings from operations of $1.3 million and increases in accrued expenses
and accounts payable in the aggregate of $3.1 million. This was offset by a $3.1
million increase in accounts receivable, a $772,000 increase in prepaid expenses
and other assets, and a $1.3 million decrease in deferred revenue and customer
deposits. The Company used net cash of $1.6 million in investing activities,
primarily for the purchase of property and equipment. Financing activities
provided net cash of $36,000, primarily from $1.2 million of proceeds from
short-term borrowings and $415,000 of proceeds from the Company's employee stock
purchase and option plans, offset by approximately $1.6 million in payments on
short-term borrowings, long-term obligations and capital leases.
As of December 31, 1996, the Company had approximately $3.7 million in cash
and $5.0 million in working capital, compared to $4.5 million in cash and $4.6
million in working capital as of December 31, 1995. The Company believes that
its current cash balances, available lines of credit, and cash flow from
operations will be sufficient to meet its working capital, debt servicing, and
capital expenditure requirements for at least the next 12 months. However, the
Company may seek additional sources of funds in the future for the acquisition
of businesses, products, or technologies complementary to the Company's current
business, working capital, and other corporate needs. There can be no assurance
that such potential sources of financing will be available on reasonable terms.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company listed in Item 14
(a)(1) are included herein on pages 31 through 47 and are incorporated herein by
reference.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. ALL DIRECTORS AND OFFICERS OF THE REGISTRANT
See the section entitled "Executive Officers and Key Employees" in Part I,
Item 1 hereof for information regarding executive officers.
The information required by this item with respect to directors is
incorporated by reference from the information under the caption "Election of
Directors," contained in the Company's Definitive Proxy Statement which will be
filed with the Securities and Exchange Commission in connection with the
solicitation of proxies for the Company's Annual Meeting of Stockholders to be
held on June 3, 1997 (the "Proxy Statement")
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information appearing under the caption "Executive Compensation" in the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information appearing under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information appearing under the caption "Certain Transactions" in the Proxy
Statement.
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PART IVfollows:
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Index to Consolidated Financial Statements
The consolidated financial statements required by this item arewere submitted
in a separate section beginning on page 31 of thisthe Company's Annual Report on
Form 10-K.
PAGE
----
Report of Ernst & Young LLP, Independent Auditors .................... 32
Consolidated Balance Sheets as of December 31, 1996 and 1995.......... 33
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994................................... 34
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994................................... 35
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994................................... 36
Notes to Consolidated Financial Statements............................ 37-47
10-K for the fiscal year ended December 31, 1996, previously filed with the
Securities and Exchange Commission.
(a)(2) Index to Financial Statement Schedules
All schedules are omitted because they are not required, are not applicable,
or the information is included in the consolidated financial statements or notes
thereto.
(a)(3) Index to Exhibits
See Index to Exhibits beginning on page 48.4.
The following management compensatory plans and arrangements are required to
be filed as exhibits to this Report on Form 10-K pursuant to Item 14(c):
Exhibit
Number Description of Document
------- -----------------------
10.2 Registrant's 1995 Stock Option Plan (the "Option Plan"), as
amended.
10.3 Form of Incentive Stock Option under the Option Plan. (1)
10.25 Registrant's Employee Stock Purchase Plan. (2)
(1) Filed as an exhibit to Registrant's Registration Statement on
Form S-1 (No. 33-90816) and incorporated herein by reference.
(2) Filed as an exhibit to Registrant's Registration Statement on
Form S-8 (No. 333-290) and incorporated herein by reference.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended December 31, 1996.
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29
(c) Exhibits
The exhibits required by this Item are listed under Item 14(a)(3).
(d) Financial Statement Schedules
The financial statement schedules required by this Item are listed
under Item 14(a)(2).
292
303
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of San
Diego, County of San Diego, State of California, on the 26th12th day of March,May, 1997.
INTERACTIVE GROUP, INC.
By /s/ Robert C. Vernon
----------------------------
Robert C. Vernon
Chairman of the Board
and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Robert C. Vernon and Michael D. Reynolds, or any
of them, his attorney-in-fact, each with the power of substitution, for him in
any and all capacities, to sign any amendments to this Report, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ----------------------- ------------------------------------------------ --------------
Chairman of the Board and Chief Executive March 26,May 12, 1997
/s/ Robert C. Vernon Officer (Principal Executive Officer)
- -----------------------
Robert C. Vernon
Chief Financial Officer and Secretary March 26, 1997
/s/ Michael D. Reynolds (Principal Financial and Accounting Officer)
- -----------------------
Michael D. Reynolds
/s/ Mark Hellinger President, Chief Operating Officer and Director March 26,May 12, 1997
- ----------------------- (Acting Principal Financial and Accounting
Mark Hellinger Officer)
/s/ Randolph S. NaylorNaylor* Senior Vice President and Director March 26,May 12, 1997
- -----------------------
Randolph S. Naylor
/s/ Lyndol L. CookCook* Director March 26,May 12, 1997
- -----------------------
Lyndol L. Cook
/s/ Michael H. Gay* Director May 12, 1997
- -----------------------
Michael H. Gay
Director March 26, 1997
- -----------------------
Michael H. Gay*By: /s/ Robert C. Vernon
------------------------
Robert C. Vernon
Attorney-in-fact
303
31
INTERACTIVE GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996
PAGE
Report of Ernst & Young LLP, Independent Auditors.................... 32
Consolidated Balance Sheets as of December 31, 1996 and 1995......... 33
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994................................... 34
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996, 1995 and 1994....................... 35
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994................................... 36
Notes to Consolidated Financial Statements........................... 37-47
31
32
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Interactive Group, Inc.
We have audited the accompanying consolidated balance sheets of Interactive
Group, Inc. as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits. We did not audit the combined financial statements of Intrepid Software,
Inc. and Affiliates, which statements reflect net income constituting
approximately 14% of the related consolidated statement of operations total for
the year ended December 31, 1994. The aforementioned statements were audited by
other auditors whose report has been furnished to us, and our opinion, insofar
as it relates to data included for Intrepid Software, Inc. for the
aforementioned period, is based solely on the report of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Interactive Group,
Inc. at December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
February 19, 1997
32
33
INTERACTIVE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, December 31,
1996 1995
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 3,682 $ 4,467
Accounts receivable, net of allowance for doubtful accounts of 16,064 12,977
$547 and $399 at December 31, 1996 and 1995, respectively
Deferred income taxes 540 333
Prepaid expenses and other current assets 1,561 1,114
------- -------
Total current assets 21,847 18,891
Property and equipment, net 3,063 2,330
Intangible assets, net 2,353 2,040
Deferred income taxes 1,134 1,173
Deposits and other assets 579 329
------- -------
Total assets $28,976 $24,763
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,770 $ 5,188
Accrued salaries and commissions 2,086 1,016
Value added taxes payable 682 506
Other accrued expenses 2,766 2,450
Current portion of obligations under capital leases 172 404
Short-term borrowings and current portion of long-term obligations 2,013 1,099
Customer deposits 448 643
Deferred revenue 1,888 3,004
------- -------
Total current liabilities 16,825 14,310
Obligations under capital leases, less current portion 170 171
Long-term obligations, less current portion 1,694 1,934
Commitments and contingencies (Note 9)
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized shares - 5,000,000
None issued and outstanding -- --
Common stock, $.001 par value:
Authorized shares - 30,000,000
Issued and outstanding shares - 4,485,712 and 4,385,216
shares at December 31, 1996 and December 31, 1995, respectively 4 4
Additional capital 7,019 6,461
Retained earnings 3,127 1,866
Cumulative foreign currency translation adjustments 137 17
------- -------
Total stockholders' equity 10,287 8,348
------- -------
Total liabilities and stockholders' equity $28,976 $24,763
======= =======
See accompanying notes.
33
34
INTERACTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
------- ------- -------
REVENUES:
Software licenses $19,643 $11,255 $10,633
Software support services 18,629 9,680 7,078
Hardware 8,014 5,613 5,891
Maintenance contracts 8,650 5,347 3,655
Other 1,255 1,098 1,368
------- ------- -------
Total revenues 56,191 32,993 28,625
COST OF REVENUES:
Software licenses 3,826 2,548 2,789
Software support services 13,377 5,575 4,172
Hardware 5,849 4,021 4,506
Maintenance contracts 3,784 1,954 963
Other 1,494 1,133 1,167
------- ------- -------
Total cost of revenues 28,330 15,231 13,597
------- ------- -------
GROSS MARGIN 27,861 17,762 15,028
OPERATING EXPENSES:
Research and development 4,064 1,588 1,320
Selling, general and administrative 21,791 13,891 10,847
Write-off of software license -- 235 --
Compensation expense associated with
employee stock bonus -- 871 --
Purchased research and development -- 3,250 --
------- ------- -------
INCOME (LOSS) FROM OPERATIONS 2,006 (2,073) 2,861
OTHER INCOME (EXPENSE):
Interest income 82 167 26
Interest expense (279) (80) (106)
------- ------- -------
Total other income (expense) (197) 87 (80)
------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES 1,809 (1,986) 2,781
Provision (benefit) for income taxes 548 (848) 972
------- ------- -------
NET INCOME (LOSS) $ 1,261 $(1,138) $ 1,809
======= ======= =======
Net income (loss) per common and common
share equivalents outstanding $ 0.28 $ (0.28) $ 0.49
======= ======= =======
Weighted average number of common and
common share equivalents outstanding 4,468 4,084 3,685
======= ======= =======
See accompanying notes.
34
35
INTERACTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
CUMULATIVE
FOREIGN
COMMON STOCK CURRENCY TOTAL
---------------------- ADDITIONAL RETAINED TRANSLATION STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENTS EQUITY
---------- ------ ---------- -------- ---------- ------------
Balance December 31, 1993 3,387,764 $ 3 $ 76 $ 1,195 $ 39 $ 1,313
Employee stock bonus 28,200 -- 19 -- -- 19
Foreign currency translation
adjustment -- -- -- -- (12) (12)
Net income -- -- -- 1,809 -- 1,809
---------- --- ------ ------- ---- -------
Balance December 31, 1994 3,415,964 3 95 3,004 27 3,129
Compensation relating to the granting
of stock options and stock bonus 112,800 -- 466 -- -- 466
Issuance of common stock 1,200,000 1 6,191 -- -- 6,192
Repurchase of common stock (535,800) -- (400) -- -- (400)
Exercise of warrants and stock options 192,252 -- 47 -- -- 47
Tax benefit related to stock options
exercised -- -- 62 -- -- 62
Foreign currency translation
adjustment -- -- -- -- (10) (10)
Net loss -- -- -- (1,138) -- (1,138)
---------- --- ------ ------- ---- -------
Balance December 31, 1995 4,385,216 4 6,461 1,866 17 8,348
Compensation relating to the
granting of stock options -- -- 161 -- -- 161
Issuance of common stock 92,623 -- 410 -- -- 410
Repurchase of common stock (4,127) -- (18) -- -- (18)
Exercise of stock options 12,000 -- 5 -- -- 5
Foreign currency translation
adjustment -- -- -- -- 120 120
Net income -- -- -- 1,261 -- 1,261
---------- --- ------ ------- ---- -------
Balance December 31, 1996 4,485,712 $ 4 $7,019 $ 3,127 $137 $10,287
========== === ====== ======= ==== =======
See accompanying notes.
35
36
INTERACTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
------- ------- -------
OPERATING ACTIVITIES:
Net income (loss) $ 1,261 $(1,138) $ 1,809
Adjustments to reconcile net income (loss) to cash provided by
(used in) operating activities:
Depreciation and amortization 1,414 515 368
Compensation relating to the granting of options
and stock bonus 161 466 19
Deferred income taxes (168) (1,377) 45
Purchased research and development -- 3,250 --
Write-off of software license -- 235 --
Other (13) 62 (4)
Changes in operating assets and liabilities:
Accounts receivable (3,087) (2,685) (2,254)
Prepaid expenses and other assets (772) (798) 49
Accounts payable 1,582 64 318
Accrued expenses 1,562 985 567
Deferred revenue and customer deposits (1,311) 323 469
------- ------- -------
Net cash provided by (used in) operating activities 629 (98) 1,386
INVESTING ACTIVITIES:
Purchase of property and equipment (1,664) (936) (797)
Proceeds from sale of property and equipment 109 -- 40
Acquisition of businesses -- (1,500) --
------- ------- -------
Net cash used in investing activities (1,555) (2,436) (757)
FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 415 6,214 --
Repurchase of common stock (18) (400) --
Proceeds from short- and long-term borrowings 1,200 -- 100
Payments of short- and long-term borrowings and capital leases (1,561) (568) (337)
------- ------- -------
Net cash provided by (used in) financing activities 36 5,246 (237)
EFFECT OF EXCHANGE RATE ON CASH 105 34 73
------ ------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (785) 2,746 465
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,467 1,721 1,256
------- ------- -------
=======
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,682 $ 4,467 $ 1,721
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period:
Interest $ 237 $ 80 $ 68
======= ======= =======
Income taxes $ 154 $ 456 $ 696
======= ======= =======
Non-cash transactions:
Property and equipment acquired under capital lease obligation $ 184 $ -- $ 27
======= ======= =======
Note payable for business acquisition $ -- $ 2,500 $ --
======= ======= =======
Earnout payable for business acquisitions $ 573 $ -- $ --
======= ======= =======
See accompanying notes.
36
37
INTERACTIVE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
On March 20, 1995, Interactive, Inc. ("Interactive") completed a merger (Note
2) with Intrepid Software, Inc. ("Intrepid"), and the combined entity changed
its name to Interactive Group, Inc. (the "Company") and reincorporated in the
state of Delaware. The consolidated financial statements are derived from the
historical consolidated financial statements of Interactive and its wholly owned
United Kingdom subsidiaries (the "United Kingdom operations"), and the
historical combined financial statements of Intrepid.
On December 31, 1995, the Company acquired all of the outstanding shares of
Just-In-Time Enterprise Systems, Inc. ("JIT") from Fourth Shift Corporation
("FSC") of Minneapolis, Minnesota, a publicly traded manufacturing software
company (Note 2). The consolidated balance sheet as of December 31, 1995
reflects the acquisition which was accounted for under the purchase method of
accounting. The results of operations of JIT are included in the consolidated
statements of operations since the date of the acquisition.
All significant intercompany accounts and transactions have been eliminated
in the consolidated financial statements.
Description of Business
The Company develops, markets, implements and supports integrated business
information systems that enable discrete manufacturers to manage their
enterprise-wide information requirements. The Company primarily sells and
implements its business information systems directly to mid-to-large size
manufacturing companies in the U.S., U.K., Canada and Europe. Since 1992, the
Company has expanded its sales, implementation, and customer service
capabilities through the addition of offices as well as the establishment of
centralized customer service centers in both the United States and United
Kingdom. Substantially all of the Company's revenues are generated from the sale
of its systems, which usually consist of proprietary and third-party software
licenses, implementation and software support services, third-party hardware and
maintenance contracts. The Company's proprietary software licenses are sold on a
packaged or individual module basis, and the license fee is determined in part
by the number of modules and concurrent system users. Implementation and
software support services are furnished on a daily or hourly basis and billed
monthly as incurred. Maintenance fees are based on a percentage of software
license fees.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities
of less than ninety days to be cash equivalents.
Concentration of Credit Risk
Concentration of credit risk with respect to accounts receivable is limited
due to the wide variety of customers to which the Company's products are sold,
as well as their dispersion across geographic areas. The Company sells its
products and services primarily to customers in the manufacturing industry.
Credit is extended based on an evaluation of the customer's financial condition
and collateral is generally not required. Credit losses have been minimal and
have been within management's expectations. For the three years ended December
31, 1996, the Company had no individual customer which accounted for 10% or more
of total annual revenues.
37
38
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets (principally
three to seven years). Leasehold improvements are amortized over the lesser of
their estimated useful life or term of the lease.
Intangible Assets
Intangible assets primarily were acquired in the JIT acquisition, and are
comprised of the trademarks and trade names, assembled work force, customer
base, and developed technology purchased as detailed in Note 3. The intangible
assets are being amortized on a straight-line basis over estimated useful lives
ranging from 3 to 10 years. Amortization expense for the years ended December
31, 1996 and 1995 was $336,000 and $0, respectively.
In July 1995, the Company exercised its option to purchase licensing rights
to an Oracle-based manufacturing software package. As a direct result of the
acquisition of JIT in December 1995 (Note 2), the Company has taken a write-off
of $235,000 which represents the value of the license rights and related
capitalized software costs, net of accumulated amortization of $84,000, which
were deemed by the Company to be redundant.
Foreign Currency Translation
The Company has determined that the local currency of the United Kingdom
operations is the functional currency. Accordingly, assets and liabilities are
translated at the current exchange rate at the balance sheet date, and revenues
and expenses are translated at the average exchange rate in effect during the
period. Translation adjustments are reported as a separate component of
stockholders' equity. Realized gains and losses related to foreign currency
transactions are reported as income or expense in the period presented. Such
gains and losses were not material for any period presented.
Revenue Recognition
Revenues from software licenses are recognized upon delivery, provided that
no significant obligations remain and collection of the related receivable is
deemed probable. Software support services revenues are recognized in the period
in which the services are performed. Revenues from hardware sales are recognized
upon shipment of the product. Revenues from software maintenance contracts are
recognized ratably over the period of the contract. Revenues from turnkey
systems, which include both hardware and software, are recognized upon delivery
of the software and hardware that is considered essential to the functionality
of the system, provided that no significant obligations remain and collection of
the related receivable is deemed probable. Insignificant vendor obligations are
accounted for by deferring revenue attributable to the obligations and
recognizing it ratably as the obligations are fulfilled. Revenues on long-term
contracts are recognized on the percentage-of-completion method with
progress-to-completion measured based upon labor hours incurred. Estimates
related to all long-term contracts are reviewed periodically. The effect on
revenues or costs from any revisions to estimates is recorded in the period in
which such revisions are made.
Research and Development
Costs incurred in the research and development of new software products and
enhancements to existing software products are expensed as incurred until
technological feasibility has been established. After technological feasibility
is established, any additional costs would be capitalized in accordance with
Statement of Financial Accounting Standards No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed. Because the Company
believes that its current process for developing software is essentially
completed concurrently with the establishment of technological feasibility, no
software development costs are capitalized at December 31, 1996 or 1995.
38
39
Reliance on Estimates
The financial statements have been prepared in accordance with generally
accepted accounting principles and have required 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates. With the
acquisition of JIT, the Company may incur up to a total of $1.2 million of
contingent consideration due to FSC, which is payable based on a percentage of
future revenues generated from the JIT software after December 31, 1995. This
contingent payment is due on January 31, 1999 (Notes 2 and 4).
Per Share Information
For the periods prior to the initial public offering completed May 23, 1995,
per share information was computed pursuant to the rules of the Securities and
Exchange Commission ("SEC"), which require that common stock issued by the
Company during the twelve months immediately preceding the Company's initial
public offering, plus the number of common shares issuable pursuant to the grant
of stock options during the same period, be included in the calculation of the
shares outstanding using the treasury stock method.
For the period subsequent to the closing of the initial public offering, per
share information is computed using the weighted average number of common shares
and common share equivalents outstanding which have a dilutive effect when
applying the treasury stock method. Common share equivalents result from
outstanding warrants and options to purchase common stock.
All share and per share information has been adjusted to reflect the 282-to-1
stock split completed in March 1995.
Impairment of Long-Lived Assets
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of ("SFAS 121"). The adoption of SFAS 121 did
not impact the financial position or results of operations of the Company in
1996.
NOTE 2. BUSINESS MERGER AND ACQUISITION
Business Merger
Pursuant to a Plan and Agreement of Merger on March 20, 1995, the Company
issued 511,725 shares of its common stock for all of the outstanding common
stock of Intrepid. All share and per share amounts in the accompanying
consolidated financial statements and notes thereto have been retroactively
adjusted to give effect to the exchange of shares. The accompanying consolidated
financial statements of the Company have been restated to reflect the merger,
which has been accounted for as a pooling-of-interests.
The combined historical financial statements of Intrepid include the accounts
of Intrepid and its affiliate, Ultimate Business Systems, Inc. ("UBS"). In
December 1994, UBS was merged into Intrepid in a tax-free statutory merger, with
Intrepid the surviving entity. Because these companies were under common
control, the merger was accounted for in a manner similar to that in
pooling-of-interests accounting.
39
40
Business Acquisitions
On December 31, 1995, the Company acquired all of the outstanding shares of
JIT in exchange for $1.5 million of cash, a $2.5 million note payable, and the
assumption of net liabilities of $4.3 million. These liabilities do not take
into account any potential losses associated with litigation that JIT is subject
to 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 results of operations or financial position.
In addition, $1.2 million of contingent consideration is payable based on a
percentage of future revenues generated from the JIT software. During the year
ended December 31, 1996, the Company accrued $415,000 under the earnout
calculation and recorded a corresponding increase to its intangible assets
related to the purchase price of JIT (Note 4).
A summary of the purchase price and the allocation of costs to the assets
acquired is as follows as of December 31, 1996 (in thousands):
Current assets $2,165
Fixed assets 863
Intangible assets 2,455
In-process technology 3,250
------
$8,733
======
For the year ended December 31, 1995, the Company recorded a non-recurring
expense of $3,250,000 for purchased in-process research and development relating
to the JIT acquisition.
NOTE 3. BALANCE SHEET INFORMATION
Property and equipment consist of the following (in thousands):
DECEMBER 31,
-----------------------
1996 1995
---- ----
Computers and peripheral equipment $ 5,052 $ 3,832
Furniture and fixtures 1,523 1,164
Leasehold improvements and other 951 679
------- -------
7,526 5,675
Less accumulated depreciation and amortization (4,463) (3,345)
------- -------
$ 3,063 $ 2,330
======= =======
Intangible assets consist of the following (in thousands):
DECEMBER 31,
-------------------------------
1996 1995
---- ----
Assembled workforce $ 831 $ 790
Trademarks and tradenames 457 457
Customer base 563 440
Developed technology 770 353
Other 68 --
------- -------
2,689 2,040
Less accumulated amortization (336) --
------- -------
$ 2,353 $ 2,040
======= =======
40
41
NOTE 4. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (in thousands):
DECEMBER 31,
-----------------------------
1996 1995
---- ----
8.75% note payable to Fourth Shift Corporation; principal and
interest payable in twelve equal quarterly installments
of $239,130 each, commencing on April 1, 1996 through
January 1, 1999 $ 1,934 $ 2,500
Revolving line of credit agreement with United Kingdom Bank (the "United Kingdom
Agreement"); interest payable monthly at the bank's prime rate plus 2% (8% at
December 31, 1996); expires May 31, 1997 -- 533
Revolving line of credit agreement; interest payable monthly (8.06% - 8.25% at
December 31, 1996); expires June 30, 1997 1,200 --
Non-interest bearing earnout payable to Fourth Shift Corporation; due
January 31, 1999 415 --
Other 158 --
------- -------
3,707 3,033
Less current portion of long-term obligations (2,013) (1,099)
------- -------
$ 1,694 $ 1,934
======= =======
Maturities of long-term obligations after 1996 are as follows: 1997,
$2,013; 1998, $1,045; 1999, $649.
The note payable to Fourth Shift Corporation is secured by a security
interest granted to Fourth Shift Corporation in all of the outstanding capital
stock of JIT, the JIT Software and the receivables of the Company related to the
JIT Software.
The United Kingdom Agreement is limited to borrowings of 800,000 British
pounds ($1.3 million at December 31, 1996) and is secured by the accounts
receivable of Interactive (U.K.) Ltd. The United Kingdom Agreement contains
restrictive covenants, including limitations on the payment of dividends. At
December 31, 1996, the Company was in compliance with all such covenants.
The Company has a revolving line of credit under an agreement (the
"Interactive Agreement") with its bank which provides for borrowings of up to $3
million through June 30, 1997. Under the Interactive Agreement, the Company may
elect to receive certain advances (the "Variable Rate Advances") in any amount,
which bear interest at the bank's reference rate per annum (8.25% at December
31, 1996). Interest on the Variable Rate Advances is payable monthly. Principal
is due upon maturity of the Interactive Agreement. The Company had $600,000 in
variable rate advances outstanding under the Interactive Agreement at December
31, 1996 and none outstanding at December 31, 1995. In addition, the Company may
elect to receive certain advances (the "Fixed Rate Advances") in the minimum
amount of $100,000, to remain outstanding for a fixed period of time, generally
30 or 60 days, which bear interest at the Eurodollar rate plus 2% per annum
(8.06% at December 31, 1996). Principal and interest on Fixed Rate Advances are
due at the end of the fixed period; however, the outstanding balance may be
renewed indefinitely through June 30, 1997. The Company had $600,000 in fixed
rate advances outstanding under the Interactive Agreement at December 31, 1996
and none outstanding at December 31, 1995. In January 1997, the Company
increased its bank line of credit for borrowings to $4 million.
41
42
The Interactive Agreement also contains a clause providing for the issuance
by the bank of standby letters of credit on behalf of the Company, not to exceed
$3 million. No such letters of credit were outstanding at December 31, 1996.
Advances under the Interactive Agreement are secured by substantially all of
the Company's assets. The agreement contains restrictive covenants including the
maintenance of certain financial ratios, limitations on dividend payments,
additional borrowings, loans and advances, and limitations on repurchase of the
Company's stock, except repurchases made under the Stock Purchase Agreement
referred to in Note 5. At December 31, 1996, the Company obtained a waiver from
its bank for a covenant violation relating to the purchase of certain assets
and was in compliance with all remaining covenants.
NOTE 5. STOCKHOLDERS' EQUITY
In 1990, a stockholder of the Company was issued a warrant to purchase
141,361 shares of the Company's common stock at $.18 per share. The warrant was
exercised in March 1995 by reducing the subordinated debenture payable to the
stockholder.
In January 1991, the Company entered into a stock and cash bonus arrangement
(the "Arrangement") with an officer of the Company that provides for the
issuance of common stock as a bonus for services rendered. On each January 1,
1992, 1993 and 1994, 28,200 shares of common stock were issued. In conjunction
with these stock bonuses, the officer received cash bonuses sufficient to cover
the income taxes payable as a result of such stock bonuses. The Company has
recognized as compensation expense the total of the current fair value of the
common stock at the date the bonuses were paid, as determined by an independent
valuation, and the cash bonus amount. On January 1, 1995, the Company issued
112,800 shares of common stock and the related cash bonus under the Arrangement.
No further cash or stock bonuses have been provided for under this Arrangement.
On March 20, 1995, the Company removed the forfeiture provisions associated with
the Arrangement, and compensation expense of $871,000 related to this bonus was
recorded by the Company, consisting of the then current fair value of the common
stock and the related cash bonus under the Arrangement.
In June 1994, the Company entered into a stock purchase agreement with a
stockholder under which the Company had the option to purchase 535,800 shares
held by the stockholder for $.75 per share. On May 25, 1995, the Company
exercised its option and repurchased the shares of common stock from the
stockholder for $400,000.
On May 23, 1995, the Company completed its initial public offering of common
stock in which the Company sold 1,200,000 shares and a stockholder sold 100,000
shares. The Company received net proceeds of approximately $6.2 million from the
offering. On June 30, 1995, the Company's underwriter exercised its
over-allotment option for the purchase of 140,000 shares of common stock from
certain of the Company's stockholders. The Company did not receive any portion
of the proceeds from the sales of shares by any of the selling stockholders.
In conjunction with this offering, a warrant was granted to the underwriter
for the purchase of up to 130,000 shares of common stock at an exercise price of
$7.80 per share. The warrant expires May 23, 2000.
NOTE 6. STOCK OPTION PLANS
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under the
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123") requires use of option valuation models that were not
developed for use in valuing employee stock options.
42
43
In July 1993, the Company adopted an incentive stock option plan and granted
options to key employees to purchase shares of the Company's common stock.
Options to purchase 4,963 shares of the Company's common stock at $.44 per share
were outstanding at December 31, 1996, of which all were exercisable.
The Company's 1995 Stock Option Plan (the "Plan") provides for the grant of
stock options to employees, directors, affiliates, and consultants. As of
December 31, 1996, the Company has authorized 500,000 options to be granted
under the Plan. The Company granted options to purchase 30,000 and 243,000
shares in 1996 and 1995, respectively, to employees under the Plan which vest
over a four year period. As of December 31, 1996, 297,500 shares were
outstanding, of which 79,000 were exercisable at $6.06 per share.
In 1995, the Company granted options to purchase 57,000 shares at $5.15 per
share to other employees under the Plan which vest over a 31 month period. The
options expire ten years from the date of grant, unless otherwise provided in
the option agreements. As of December 31, 1996, 57,000 shares were outstanding,
of which 19,000 were exercisable. For the years ended December 31, 1996 and
1995, the Company recorded $91,000 and $15,000, respectively, in compensation
expense related to employee stock options granted at less than fair market value
on the date of grant.
In 1995, the Company granted options to purchase 60,000 shares at $3 per
share to a certain employee outside of the Plan. As of December 31, 1996, all
60,000 shares were outstanding, of which 20,000 were exercisable. In 1996, the
Company also granted to a consultant outside of the Plan options to purchase
35,000 shares at $4 per share, which were entirely outstanding and exercisable
as of December 31, 1996. The Company recorded $70,000 of expense related to the
estimated fair market value of the options on the date of grant.
Pro forma information regarding net income and earnings per share is required
by SFAS 123 and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1996
and 1995, respectively: risk-free interest rates of 6%; dividend yields of 0%,
volatility factors of the expected market price of the Company's common stock of
.48 and .66; and a weighted-average life of the options of 6.75 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion the existing models do not necessarily provide a reliable single measure
of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting periods. The Company's pro
forma information follows (in thousands, except for earnings per share
information):
1996 1995
---- ----
Pro forma net income (loss) $ 849 $(1,182)
Pro forma earnings (loss) per share $ .19 $ (.29)
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44
The following table summarizes stock option activity for the three years
ended December 31, 1996:
Weighted
Number of Exercise average
shares price per share price per share
-------------------------------------------------
Outstanding at December 31, 1993 and 1994 67,853 $0.44 $0.44
Granted ................................. 360,000 $ 3.00 - $6.06 $5.41
Exercised ............................... (50,890) $0.44 $0.44
-------------------------------------------------
Outstanding at December 31, 1995 ........ 376,963 $0.44 - $6.06 $5.18
Granted ................................. 65,000 $ 4.00 - $ 5.12 $4.50
Forfeited ............................... (32,500) $ 4.87 - $ 6.06 $5.88
Exercised ............................... (12,000) $0.44 $0.44
-------------------------------------------------
Outstanding at December 31, 1996 ........ 397,463 $0.44 - $ 6.06 $5.15
=================================================
The weighted average remaining contractual life of the options outstanding as of
December 31, 1996 was 8.1 years.
NOTE 7. INCOME TAXES
Components of the Company's provision (benefit) for income taxes are as follows
(in thousands):
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
------- ------- -------
Current:
Federal ...... $ 138 $ 131 $ 523
Foreign ...... 561 398 322
State ........ 17 -- 82
------- ------- -------
Total current 716 529 927
Deferred:
Federal ...... (66) (1,253) 67
Foreign ...... -- -- --
State ........ (102) (124) (22)
------- ------- -------
Total deferred (168) (1,377) 45
------- ------- -------
$ 548 $ (848) $ 972
======= ======= =======
The following is a reconciliation of the actual tax provision (benefit) to the
expected tax provision (benefit) computed by applying the statutory federal
income tax rate to income before income taxes (in thousands):
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
---- ---- ----
Income tax provision (benefit) at
statutory rate ..................... $632 $(675) $973
State income tax provision (benefit),
net of federal tax benefit ......... 55 (81) 74
Effect of foreign rates .............. 16 (38) 32
Utilization of research tax credits
and net operating loss carryforwards (228) -- (102)
Permanent differences and other ...... 73 (54) 61
Change in deferred tax asset
valuation allowance ................ -- -- (66)
---- ----- ----
Total provision (benefit) for
income taxes ....................... $548 $(848) $972
==== ===== ====
44
45
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred income taxes are as follows (in thousands):
DECEMBER 31,
---------------------------------------
1996 1995 1994
------- ------- -------
Deferred tax assets:
Purchased research and development ..... $ 1,183 $ 1,267 $ --
Research tax credits ................... 211 158 75
Net operating loss carryforwards ....... -- 112 29
Accrued liabilities and other .......... 439 128 95
------- ------- -------
Total deferred tax assets ................ 1,833 1,665 199
Deferred tax liabilities:
Depreciation ........................... (49) (94) (44)
Other .................................. (110) (65) (26)
------- ------- -------
Total deferred tax liabilities ........... (159) (159) (70)
------- ------- -------
Net deferred tax assets .................. $ 1,674 $ 1,506 $ 129
======= ======= =======
The earnings of the foreign subsidiary are considered to be indefinitely
reinvested and, accordingly, no provision for U.S. federal income taxes has been
provided. As of December 31, 1996, the Company has federal and state research
and development credit carryforwards of approximately $274,000 and $80,000,
respectively. The federal and state research credit carryforwards will begin
expiring in 2002 unless previously utilized.
NOTE 8. BENEFIT PLANS
Interactive maintains profit sharing and deferred savings plans for its
employees, which allow participants to make contributions by salary reduction
pursuant to Section 401(k) of the Internal Revenue Code. Under both plans, the
Company's contributions are discretionary, and employees vest immediately in
their contributions. The UK Subsidiary also maintains a defined contribution
pension plan for its employees. Expenses for the plans aggregated approximately
$571,000, $314,000, and $220,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
The Company's Employee Stock Purchase Plan permits company employees to
purchase stock at a price equal to 85% of the lower of the fair market value of
the stock at the beginning or end of a six-month plan period. As of December
31, 1996, 92,623 shares have been sold under this plan with a maximum of
100,000 shares available for sale.
NOTE 9. COMMITMENTS AND CONTINGENCIES
Commitments
The Company is obligated under various noncancellable operating leases for
equipment, vehicles and office space through 2002. The Company's headquarters
facilities lease in the United Kingdom contains a clause under which the Company
may cancel the lease in 1997 with a maximum penalty of six month's rental
payments. Accordingly, minimum lease commitments reflect only the noncancellable
portion of the total portion of the total payments due under this lease. Certain
of the leases provide that the Company pay all or a portion of taxes,
maintenance, insurance and other operating expenses, and certain of the rents
are subject to adjustment for changes as determined by certain consumer price
indices and exchange rates. The Company has also entered into various capital
leases for property and equipment. Capitalized costs related to these leases of
$539,000 and $557,000 are included in property and equipment at December 31,
1996 and 1995, respectively. Accumulated amortization of these leased assets was
$324,000 and $160,000 at
45
46
December 31, 1996 and 1995, respectively. Aggregate
rent expense was approximately $2,117,000, $1,732,000, and $1,705,000 in 1996,
1995 and 1994, respectively.
Minimum lease commitments for noncancellable operating and capital leases as
of December 31, 1996 are as follows:
Years ending Operating Capital
December 31, Leases Leases
------- -------
1997 ................... $ 1,833 $ 204
1998 ................... 941 128
1999 ................... 548 57
2000 ................... 334 --
2001 ................... 328 --
Thereafter ............. 107 --
------- -------
$ 4,091 389
=======
Less amount representing interest ..... (47)
-------
Present value of future
minimum capital lease payments ....... 342
Less current portion .................. (172)
-------
Long-term portion ..................... $ 170
=======
Contingencies
The Company is subject to legal proceedings and claims that arise in the
normal course of business. While the outcome of the proceedings and claims
cannot be predicted with certainty, management does not believe that the outcome
of any of these matters will have a material adverse effect on the Company's
consolidated financial position or results of operations.
NOTE 10. GEOGRAPHIC DATA
The Company's operations consist of one business segment: the development,
marketing, implementation and support of integrated business information systems
for the discrete manufacturing industry. The Company has operations in North
America and Europe. The operations and identifiable assets of the Company by
geographic area are as follows (in thousands):
YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
------- ------- -------
Revenues from unaffiliated customers:
North America .............. $38,177 $20,404 $17,969
Europe ..................... 18,014 12,589 10,656
------- ------- -------
$56,191 $32,993 $28,625
======= ======= =======
Income before income taxes:
North America .............. $ 238 $(3,159) $1,933
Europe ..................... 1,571 1,173 848
------- ------- -------
$ 1,809 $(1,986) $2,781
======= ======= =======
Identifiable assets:
North America .............. $20,906 $18,126 $ 6,560
Europe ..................... 8,070 6,637 5,075
------- ------- -------
$28,976 $24,763 $11,635
======= ======= =======
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47
NOTE 11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
In thousands, except per share data
YEAR ENDED DECEMBER 31, 1996
- -----------------------------------------------------------------------------------------------------------
First Second Third Fourth Total
- -----------------------------------------------------------------------------------------------------------
Revenues ................. $ 13,831 $ 13,761 $ 12,869 $ 15,730 $ 56,191
Gross margin ............. 6,795 6,862 6,084 8,120 27,861
Net income (loss) ........ 442 453 (325) 691 1,261
Net income (loss)per share $ .10 $ .10 $ (.07) $ .15 $ .28
YEAR ENDED DECEMBER 31, 1995
- -----------------------------------------------------------------------------------------------------------
First Second Third Fourth Total
- -----------------------------------------------------------------------------------------------------------
Revenues ................. $ 7,529 $ 7,794 $ 7,410 $ 10,260 $ 32,993
Gross margin ............. 3,862 4,076 3,992 5,832 17,762
Net income (loss)......... (342)(b) 372 204 (1,372)(C) (1,138)
Net income (loss)per share(a) $ (.09) $ .09 $ .05 $ (.31) $ (.28)
(a) The sum of quarterly net income per share does not equal the annual
amount due to changes in the average common and common share
equivalents outstanding.
(b) Includes a non-recurring, after-tax compensation expense of $560,000
associated with the final stock grant and cash bonus pursuant to a
compensation arrangement with an officer of the Company.
(c) Includes one-time charges in the aggregate, after-tax amount of
$2,091,000 in connection with the JIT acquisition.
47
48
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ------------- -------------------------------------------------------------
3.1 Registrant's Certificate of Incorporation.(1)
3.2 Registrant's Bylaws.(1)
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Specimen stock certificate.(1)
10.1 Form of Indemnity Agreement entered into between
the Registrant and its directors and officers.(1)
10.2 Registrant's 1995 Stock Option Plan (the "Option
Plan"), as amended.
10.3 Form of Incentive Stock Option under the Option
Plan. (1)
10.4 Form of Representative's Warrant Agreement
issued by Registrant to Cruttenden Roth
Incorporated. (1)
10.5 Stock Purchase Agreement between Harvey N. Short
and Registrant dated June 1, 1994. (1)
10.6 Pickedi License Agreement between Apex Systems
Limited and Registrant dated March 4, 1992 (with
certain confidential portions deleted). (1)
10.7 Dealer Agreement between Expert Application
Systems Limited and Registrant dated January 1,
1995 (with certain confidential portions
deleted). (1)
10.8 Purchase Agreement between Hewlett-Packard
Company and Registrant dated February 1, 1995
(with certain confidential portions deleted). (1)
10.9 Letter Agreement between Smart Software, Inc.
and Registrant dated October 20, 1993 (with
certain confidential portions deleted). (1)
10.10 SB+ Value Improvement Program/Dealer License
Agreement between Millsoft, Inc. and Registrant
dated October 17, 1990 (with certain
confidential portions deleted). (1)
10.11 SB+ Value Improvement Program/Dealer License
Agreement between Registrant (formerly Intrepid
Software, Inc.) and Millsoft, Inc. dated
February 1, 1991 (with certain confidential
portions deleted). (1)
10.12 Value Added Reseller Agreement between UniData,
Inc. and Registrant dated January 15, 1992 (with
certain confidential portions deleted). (1)
10.13 Distributor Agreement between Registrant
(formerly Intrepid Software, Inc.) and VMARK
Software, Inc. dated January 1, 1993
484
495
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ------------- -------------------------------------------------------------
(with certain confidential portions deleted). (1)
10.14 License Agreement between Registrant and
Enterprise Power International, Inc. dated
February 1, 1995 (with certain confidential
portions deleted). (1)
10.15 Letter Agreement between Registrant (formerly
Intrepid Software, Inc.) and System Builder
dated June 8, 1994 (with certain confidential
portions deleted). (1)
10.16 EDI*Port Distribution Agreement between Userbase
Systems, Inc. and Registrant (formerly Intrepid
Software, Inc.) dated October 23, 1991 (with
certain confidential portions deleted). (1)
10.17 Line of Credit Agreement between Registrant and
Sanwa Bank California dated June 29, 1994. (1)
10.18 Equipment Purchase Line of Credit Agreement
between Registrant and Sanwa Bank California
dated June 29, 1994. (1)
10.19 Letter Agreement regarding overdraft facility
entered between the Royal Bank of Scotland plc
and Interactive (U.K.) Limited dated June 27,
1994, including related security interest
documents. (1)
10.20 Line of Credit Agreement dated September 7, 1994
between Eastern Bank and Registrant (formerly
Intrepid Software, Inc.), including related
Security Agreement, Note and Term Note. (1)
10.21 Office Building Lease between Sunland
Diversified and Registrant dated October 1,
1994. (1)
10.22 Lease between Registrant and The Standard Life
Assurance Company dated July 13, 1990. (1)
10.23 Lease dated September 23, 1991 between
Registrant (formerly Intrepid Software, Inc.)
and James S. Hekimian and William G. Finard as
Trustees of Burlington Woods Office Trust No. 11
under a Declaration of Trust dated September 10,
1980. (1)
10.24 Plan and Agreement of Merger between
Interactive, Inc., Intrepid Software, Inc. and
Randolph S. Naylor dated March 17, 1995. (1)
10.25 Registrant's Employee Stock Purchase Plan. (2)
10.26 Office building sublease between Fourth Shift
Corporation and Registrant dated December 31,
1995. (3)
10.27* License, Reseller and Maintenance Agreement
between Registrant and Diamonds Workflow
Management Ltd. effective as of January 2, 1997
(with certain confidential portions deleted).
495
506
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ------------- -------------------------------------------------------------
10.28 Amendment to Line of Credit Agreement between
Registrant and Sanwa Bank California dated April
24, 1996.
10.29 Amendment to Line of Credit Agreement between
Registrant and Sanwa Bank California dated January
15, 1997.
10.30 Term Loan Agreement between Registrant and Sanwa
Bank California dated January 15, 1997.
10.31 Line of Credit Agreement between Registrant and
Sanwa Bank California dated January 15, 1997.
10.32 Standard Office Lease between Appletree Ltd. and
Registrant dated September 6, 1996.
10.33* Distribution Agreement between Registrant and
evosoft Softwarevertrieb GmbH dated September 6,
1996 (with certain confidential portions deleted).
11.1 Statement of Computation of Net Income Per Share.
21.1 Subsidiaries of Registrant. (1)
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Romito, Tomasetti & Assoc., P.C.,
Independent Auditors.
24.1 Power of Attorney. Reference is made to page 30.
27 Financial Data Schedule
- ------------------
* The Registrant is applying for confidential treatment ofCertain portions of this exhibit.exhibit have been omitted based upon a request by
the Registrant for confidential treatment. The omitted portions have been
separately filed with the Commission pursuant to such request for
confidential treatment.
(1) Filed as an exhibit to Registrant's Registration Statement on Form S-1 (No.
33-90816) and incorporated herein by reference.
(2) Filed as an exhibit to Registrant's Registration Statement on Form S-8 (No.
333-290) and incorporated herein by reference.
(3) Incorporated by reference to the Company's Annual Report on Form 10-K, for
the fiscal year ended December 31, 1995, filed on March 28, 1996.
50
51
[ROMITO, TOMASETTI & ASSOCIATES, P.C. LETTERHEAD]
Independent Auditor's Report
To the Board of Directors
Intrepid Software, Inc. and Affiliates:
We have audited the combined balance sheet of Intrepid Software, Inc. and
Affiliates as of December 31, 1994, and the related combined statements of
earnings, stockholder's equity and cash flows for each of the years in the two
year period ended December 31, 1994 (not included herein). 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Intrepid
Software, Inc. and Affiliates as of December 31, 1994, and the results of its
operations and its cash flows for each of the years in the two year period
ended December 31, 1994, in conformity with generally accepted accounting
principles.
/s/ Romito, Tomasetti & Associates, P.C.
516