<PAGE>
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ______________
Commission file number 000-18908
------------------------
CFI PROSERVICES, INC.
(Exact name of registrant as specified in its charter)
Oregon 93-0704365
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 SW Sixth Avenue, Portland, Oregon 97204
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 503-274-7280
------------------------
The index to exhibits appears on page 23 of this document.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- --------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common stock without par value 4,822,623
(Class) (Outstanding at November 1, 1996)
===============================================================================
<PAGE>
CFI PROSERVICES, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets -September 30, 1996 and
December 31, 1995 2
Consolidated Statements of Operations - Three Months Ended
September 30, 1996 and 1995 and Nine Months
Ended September 30, 1996 and 1995 3
Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 1996 and 1995 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
<PAGE>
CFI PROSERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 30, December 31,
1996 1995
------------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 186 $ 4,844
Short-term investments - 2,826
Accounts receivable, net of allowances
of $1,356 and $290 14,894 15,165
Income taxes receivable - 229
Inventory 155 215
Deferred tax asset 1,030 445
Prepaid expenses and other current assets 845 1,304
-------- --------
Total Current Assets 17,110 25,028
Property and Equipment, net of accumulated
depreciation of $5,096 and $3,875 4,669 2,968
Software Development Costs, net of accumulated
amortization of $2,469 and $2,514 7,214 4,317
Purchased Software Costs, net of accumulated
amortization of $1,056 and $1,176 1,272 849
Other Intangibles, net of accumulated amortization
of $1,161 and $410 6,551 3,079
Deferred Tax Asset 905 -
Other Assets - 346
-------- --------
Total Assets $ 37,721 $ 36,587
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,612 $ 1,443
Accrued expenses 4,568 3,317
Deferred revenues 5,458 6,860
Customer deposits 1,037 698
Notes payable 3,302 3,915
Income taxes payable 166
Other current liabilities - 36
-------- --------
Total Current Liabilities 16,143 16,269
Deferred Tax Liability - 965
Other Long-Term Liabilities 2,815 423
-------- --------
Total Liabilities 18,958 17,657
Mandatorily Redeemable Class A Preferred Stock 756 761
Shareholders' Equity:
Series Preferred Stock, 5,000,000 shares
authorized, none issued and outstanding - -
Common Stock, no par value, 10,000,000
shares authorized and 4,822,623 and 4,496,136
shares issued and outstanding 17,253 15,693
Retained earnings 754 2,476
-------- --------
Total Shareholders' Equity 18,007 18,169
-------- --------
Total Liabilities and Shareholders' Equity $ 37,721 $ 36,587
-------- --------
-------- --------
The accompanying notes are an integral part of these consolidated balance
sheets.
2
<PAGE>
CFI PROSERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUE
Software license fees $ 9,154 $ 4,844 $ 24,005 $ 12,253
Service and Support 6,189 3,859 16,087 10,922
Other 919 660 2,577 2,264
------------ ------------ ------------ ------------
Total Revenue 16,262 9,363 42,669 25,439
COST OF REVENUE 5,616 2,849 14,411 8,345
------------ ------------ ------------ ------------
Gross Profit 10,646 6,514 28,258 17,094
------------ ------------ ------------ ------------
OPERATING EXPENSES
Sales and marketing 3,337 2,298 9,526 6,515
Product development 2,783 1,595 7,841 4,373
General and administrative 1,532 1,224 4,034 3,244
Amortization of intangibles 330 76 752 220
Acquired in-process research and development - - 8,030 -
------------ ------------ ------------ ------------
Total Operating Expenses 7,982 5,193 30,183 14,352
------------ ------------ ------------ ------------
Income (Loss) From Operations 2,664 1,321 (1,925) 2,742
------------ ------------ ------------ ------------
NON-OPERATING INCOME (EXPENSE)
Interest expense (45) - (91) -
Interest income 39 120 237 344
Other, net (43) - (34) -
------------ ------------ ------------ ------------
Total Non-operating Income (Expense) (49) 120 112 344
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 2,615 1,441 (1,813) 3,086
PROVISION FOR (BENEFIT FROM) INCOME TAXES 1,123 458 (163) 1,049
------------ ------------ ------------ ------------
NET INCOME (LOSS) 1,492 983 (1,650) 2,037
PREFERRED STOCK DIVIDEND 24 24 72 72
------------ ------------ ------------ ------------
NET INCOME (LOSS) APPLICABLE TO COMMON
SHAREHOLDERS $ 1,468 $ 959 $ (1,722) $ 1,965
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
NET INCOME (LOSS) PER SHARE $ 0.28 $ 0.19 $ (0.36) $ 0.40
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
SHARES USED IN PER SHARE CALCULATIONS 5,194 4,919 4,746 4,870
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
3
<PAGE>
CFI PROSERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine months ended September 30,
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) applicable to common shareholders $ (1,722) $ 1,965
------------ ------------
Adjustments to reconcile net income (loss) applicable to common
shareholders to cash provided by operating activities:
Depreciation and amortization 3,358 2,075
Gain on sale of property and equipment (10) -
Write-off of in-process research and development 8,030 -
Deferred income taxes (2,076) -
Interest accreted (payments made) on mandatory
redeemable preferred stock, net (5) (25)
(Increase) decrease in assets, net of effects from
purchase of businesses:
Accounts receivable, net 1,887 2,305
Income taxes receivable 547 -
Inventories, net 60 175
Prepaid expenses and other current assets 489 169
Increase (decrease) in liabilities, net of effects from
purchase of businesses:
Accounts payable (105) (665)
Accrued expenses 1,251 (1,158)
Deferred revenues (2,955) (2,348)
Customer deposits (441) 150
Other current liabilities (338) 283
------------ ------------
Net cash provided by operating activities 7,970 2,926
Cash flows from investing activities:
Expenditures for property and equipment (2,084) (982)
Software development costs capitalized (3,685) (2,022)
Expenditures for purchased software (20) -
Purchase of investments - (8,128)
Proceeds from sale/maturity of investments 2,826 7,794
Proceeds from sale of property and equipment 19 -
Investment in Vendor Payment Systems, Inc. (359) -
Cash paid for acquisition of OnLine and COIN
Division, net of cash received (2,295) -
Cash paid for acquisition of Input Creations, Inc. (2,107) -
Cash paid for other acquisitions (812) (259)
Other assets 353 -
------------ ------------
Net cash used in investing activities (8,164) (3,597)
Cash flows from financing activities:
Net proceeds from line of credit 1,627 -
Payments on notes payable (6,910) -
Payments on long term debt (323) -
Proceeds from issuance of common stock 1,142 734
------------ ------------
Net cash provided by (used in) financing activities (4,464) 734
------------ ------------
Increase (decrease) in cash and cash equivalents (4,658) 63
Cash and cash equivalents:
Beginning of period 4,844 1,514
------------ ------------
End of period $ 186 $ 1,577
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are in integral part of these consolidated statements.
4
<PAGE>
CFI PROSERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS
OR AS OTHERWISE INDICATED)
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The financial information included herein for the three and nine month
periods ended September 30, 1996 and 1995 is unaudited; however, such
information reflects all adjustments consisting only of normal recurring
adjustments which are, in the opinion of management, necessary for a fair
presentation of the financial position, results of operations and cash flows
for the interim periods. The financial information as of December 31, 1995
is derived from the audited financial statements contained in the Annual
Report on Form 10-K as filed by CFI ProServices, Inc. (the Company). The
interim consolidated financial statements should be read in conjunction with
the consolidated financial statements and the notes thereto included in the
Company's 1995 Annual Report on Form 10-K.
The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the full year.
NOTE 2: SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information is as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1996 1995
-------------- --------------
<S> <C> <C>
Cash paid during the period for income taxes $ 1,367 $ 668
Cash paid during the period for interest and dividends 142 72
Tax benefit from exercise of nonqualified stock options 152 --
Issuance of Common Stock in relation to acquisition 266 --
Issuance of notes payable and other long-term
liabilities in relation to acquisitions 7,385 450
</TABLE>
NOTE 3: ACQUISITIONS
In November 1995, the Company acquired all of the outstanding common stock of
Culverin Corporation ("Culverin"), a software company. The transaction was
accounted for as a purchase and resulted in a $3,700 pretax charge for
acquired in-process research and development in the fourth quarter of 1995.
The interim financial statements herein include the results of Culverin's
operations for the three and nine month periods ended September 30, 1996.
In April 1996, the Company acquired all of the capital stock of two software
companies and certain assets of three other software companies in four
separate transactions. The companies acquired were OnLine Financial
Communication Systems, Inc. ("OnLIne"), COIN Banking Systems, Inc. ("COIN")
(formerly subsidiaries of MicroBilt Corporation), Input Creations, Inc.
("Input"), Pathways Software, Inc. ("Pathways") and The Halcyon Group, Inc.
("Halcyon"). All of these acquisitions were accounted for as purchases. The
combined purchase prices totaled $13.6 million plus certain contingent
royalties tied to future revenue production or to software conversions. The
$13.6 million included $5.2 million of cash, $7.4 million in notes payable
and other long-term liabilities, $0.3 million of Common Stock and $0.7
million of other assumed liabilities. In conjunction with these
acquisitions, the Company recorded $3.9 million of goodwill which is being
amortized ratably over a seven year period and $8.0 million of acquired
in-process research and development, determined by independent appraisal, all
of which was expensed currently. The technological feasibility of the
acquired technology, which has no alternative future use, had not been
established prior to the purchase. In connection with the April 1996
acquisitions and in accordance with the Emerging Issues Task Force issue 96-7
(EITF 96-7) issued in 1996, the Company did not provide deferred taxes on
5
<PAGE>
the portion of the acquired in-process research and development costs which
had no underlying tax basis. Prior to the issuance of EITF 96-7, the Company
provided deferred taxes on acquired in-process research and development costs
which had no underlying tax basis.
Subsequent to executing and closing the agreement for the OnLine and COIN
acquisitions, a dispute over the assets excluded from the acquisition has
arisen between CFI and MicroBilt Corporation. The parties are currently
attempting to resolve this dispute and management does not believe that the
ultimate resolution of this item will have a material effect on the Company's
financial position or results of operations.
Unaudited proforma results of operations for the three month and nine month
periods ended September 30, 1996 and 1995, assuming such acquisitions
occurred at the beginning of the periods are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- --------------------
1996 1995 1996 1995
--------- -------- -------- ---------
<S> <C> <C> <C> <C>
Total revenues $ 16,262 $ 13,753 $ 45,945 $ 38,754
Net income (loss) applicable to common stock 1,468 4,733 (1,706) 2,812
Earnings (loss) per share 0.28 0.96 (0.36) 0.58
</TABLE>
Pro forma results for the three and nine month periods ended September 30,
1996 and 1995 include the write-off of acquired in-process research and
development in the period when occurred.
NOTE 4: LONG-TERM DEBT AND LINE OF CREDIT
LONG-TERM DEBT
At September 30, 1996, notes payable consists of the following:
<TABLE>
<CAPTION>
<S> <C>
6.0 percent note payable, in relation to Culverin acquisition, in payments,
including interest of $346, due November 1, 1996 and $50 due January 1998. $ 396
Note payable, in relation to Pathways acquisition, final payment due
January 1997. 900
Note payable, in relation to Halcyon acquisition, with imputed interest at 8
percent, due in quarterly installments of $50, including interest, payable
through 2001. 770
Note payable, in relation to Halcyon acquisition, due upon completion of the
development of a new specified product 225
8.5 percent note payable, assumed in the Halcyon acquisition in monthly
installments of $6, including interest with final payment due October 2004. 391
Guaranteed royalties to be paid in relation to Input acquisition, with imputed
interest at 8 percent, payable through March 2001 1,533
TSTG non-compete payments through April 1999. 275
--------
4,490
Less current installment of long-term debt, included in notes payable 1,675
--------
Long-term debt, excluding current installments $ 2,815
========
</TABLE>
6
<PAGE>
Payments under long-term debt over the next five years is as follows:
YEARS ENDING DECEMBER 31,
1996 $ 564
1997 1,111
1998 245
1999 312
2000 229
Thereafter 2,029
-----------
$ 4,490
===========
LINE OF CREDIT
The Company may borrow up to $7.5 million under the terms of a committed,
unsecured, revolving bank line of credit. At the Company's option, interest
on outstanding borrowings may be at the Bank's published reference rate or
alternative rates specified in the agreement. The line of credit expires on
December 1, 1996, and the Company is seeking to renew this facility. The
agreement contains covenants which require the Company to maintain certain
liquidity and long-term solvency ratios and prohibits the Company from
incurring other debts or liens outside the ordinary course of business. The
Company pays an annual commitment fee of .2 percent on the average unused
balance. There were no borrowings under the line at December 31, 1995 and at
September 30, 1996, borrowings under the line totaled $1,627.
NOTE 5: SUBSEQUENT EVENT
In November 1996, the Company filed a Registration Statement on Form S-3 for
the registration of 1,550,000 shares (1,782,500 shares with the underwriters'
over-allotment option) of its Common Stock to be sold to the public for
approximately $19 per share.
NOTE 6: RECLASSIFICATIONS
Certain amounts in the prior period financial statements have been
reclassified to conform to the current period presentation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
The Consolidated Financial Statements and Notes in this Form 10-Q should be
read in conjunction with the following discussion. The discussion in this
Form 10-Q contains certain forward-looking statements within the meaning of
Section 27A of the Securities Exchange Act of 1933, as amended and Section
21E of the Securities Exchange Act of 1933, as amended, such as statements of
the Company's plans, objectives, expectations and intentions. The Company
cautions investors that its business is subject to significant risks and
uncertainties. The following factors are among those factors that could cause
actual results to differ materially from the forward-looking statements:
potential fluctuations in quarterly results, uncertainty of market and
product acceptance, early stage market for electronic delivery products,
evolving market for call center products, dependence on host processor
relationships, management of growth and dependence on key employees and
contract engineers, uncertainties associated with the integration of
acquisitions and risks of new business ventures, delays in introduction of
new products and product enhancements, lengthy sales and implementation
cycles, competition, product concentration, dependence on the financial
services industry, product liability risks and software defects, and
dependence on proprietary technology and intellectual property rights. While
sometimes presented with numerical specificity, such forward-looking
statements are based upon a variety of assumptions relating to the business
of the Company, which, although considered reasonable by the Company, may not
be realized and are subject to significant uncertainties and contingencies
that are beyond the control of the Company. Consequently, the inclusion of
forward-looking statements should not be regarded as a representation by the
Company or any other person that these estimates and projections will be
realized, and actual results may vary materially as a result of certain
factors, including those set forth below. These forward-looking statements
are based on current expectations, and the Company assumes no obligation to
update this information.
7
<PAGE>
RISK FACTORS
The following risk factors are reprinted from the Company's Registration
Statement on Form S-3 currently on file with the US Securities and Exchange
Commission.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS. The Company has experienced,
and expects in the future to experience, significant quarterly fluctuations in
its results of operations. These fluctuations may be caused by various factors,
including, among others: the size and timing of product orders and shipments;
the timing and market acceptance of new products and product enhancements
introduced by the Company and its competitors; the timing of the Company's
completion of work under contracts accounted for under the percentage of
completion method; customer order deferrals in anticipation of new products;
aspects of the customers' purchasing processes, including the evaluation,
decision-making and acceptance of products within the customers' organizations;
factors affecting the sales process for the Company's products, including the
complexity of customer implementation of the Company's products; the number of
working days in a quarter; federal and state regulatory events; competitive
pricing pressures; technological changes in hardware platforms, networking or
communication technology; changes in Company personnel; the timing of the
Company's operating expenditures; specific economic conditions in the financial
services industry and general economic conditions.
The Company typically ships or installs many of its products within three
months of receipt of an order. As a result, software license fees in any quarter
are substantially dependent on orders booked in that quarter or the previous
quarter. In addition, the Company has generally recognized a substantial portion
of its revenue in the last month of each quarter, with this revenue concentrated
in the last weeks of the quarter. The Company's results of operations may also
be affected by seasonal trends, including the tendency of some customers to
complete purchases of products in the quarter ended December 31 or not to
implement new orders in the quarter ended March 31. Furthermore, during typical
vacation periods, key decision-making personnel at prospect financial
institutions may not be available, which can adversely affect revenue for such
periods. Because the Company's operating expenses are based on anticipated
revenue levels and a high percentage of these expenses are relatively fixed, a
small variation in the timing of recognition of specific revenue items can cause
significant variations in operating results from quarter to quarter. Due to all
of the foregoing factors, it is possible that in some future quarter the
Company's operating results may be below the expectations of public market
analysts and investors. In such event, the price of the Company's Common Stock
would likely be adversely affected. Accordingly, the Company believes that
quarter-to-quarter comparisons of its results of operations should not be relied
upon as an indication of future performance.
UNCERTAINTY OF MARKET; PRODUCT ACCEPTANCE. The market for software products
and services to financial institutions is evolving and the Company's success is,
in large part, dependent on the continuing development of this market. Although
the Company believes that its existing products compete effectively with
competitors' products, some of the Company's products have been licensed to a
limited number of customers or, as to any
8
<PAGE>
specific customer, may only be used in a part of that customer's organization. A
significant part of the Company's business strategy depends on financial
institutions' adoption of new technologies in handling functions that previously
may have been performed without the use of computers or with more rudimentary
software applications. There can be no assurance that banks and other financial
institutions will adopt new technologies required for, or that the Company's
products will otherwise achieve, broad acceptance in this evolving market. In
some instances, banks and other financial institutions may be reluctant to
consider transitioning to some of the Company's products without first making
significant decisions regarding the procurement or upgrade of computer systems
or operating systems. In the event that the market for software solutions being
offered by the Company should fail to develop, or that the Company's products
should fail to succeed in this market, the Company's business, operating results
and financial condition would be materially adversely affected. For example, one
of the Company's competitors has recently announced the introduction of a
Windows-based loan documentation product. Although this competing product has
not yet been released and the Company believes that its Windows-based Laser Pro
products will compete effectively against this product introduction, there can
be no assurance that sales of the Company's Laser Pro products will not be
adversely affected by its competitor's announcement. Furthermore, market
acceptance of the Company's products will also depend on the Company's ability
to ensure that its products operate together and, when appropriate, are
integrated across the Company's product lines and with the products of other
major service providers and vendors of hardware and software used in the
financial services industry. In addition, a significant part of the Company's
revenues are derived from continued support of the software after the initial
sale and are in some cases based on per-transaction or per-user pricing. There
can be no assurance that such pricing structures will continue to be accepted by
customers of the Company.
EARLY STAGE MARKET FOR ELECTRONIC DELIVERY PRODUCTS. The electronic banking
market, and in particular the home banking portion of the market, is at a very
early stage of development, is rapidly evolving, and is characterized by an
increasing number of market entrants who have introduced or are developing
competing products and services. As is typical for a new and evolving industry,
demand and market acceptance for recently introduced products and services are
subject to a high level of uncertainty. In particular, while the number of
customers utilizing the Internet or private-dial connection as a vehicle for
banking has grown rapidly, it remains limited and it is not known whether these
markets will continue to develop such that a sufficient demand for the Company's
software will emerge and be sustainable. The use of such electronic delivery
channels by the banking community and its customers will require broad
acceptance of new methods of conducting business and exchanging information. In
particular, bankers and financial institutions with established methods of
handling funds may be reluctant to accept commercial transactions over the
Internet. Moreover, concerns regarding the security and confidentiality of
Internet transactions may inhibit the growth of Internet commerce generally and
as a result impact market acceptance of the Company's products. The Company's
business will include procedures and services that have only recently been
developed in the emerging electronic delivery market. The use of the Company's
products is dependent, in part, upon the continued development of an industry
and infrastructure for providing secure Internet access and carrying Internet
traffic. In addition, the Internet may not prove to be a viable commercial
marketplace, because of inadequate development of the necessary infrastructure,
such as undercapacity, a reliable network backbone or timely development of
complementary products, including high speed modems. There can be no assurance
that commerce over the Internet will become generally adopted. If the market
fails to develop or develops more slowly than expected, the infrastructure for
the Internet is not adequately developed, or the Company's home banking products
and services do not achieve market acceptance by a significant number of
individuals, businesses and financial institutions, the Company's business,
financial condition and operating results could be materially and adversely
affected.
EVOLVING MARKET FOR CALL CENTER PRODUCTS. While the Company anticipates
that the market for its call center products will expand rapidly over the next
two years and the Company has expended substantial resources in the development
and improvement of its call center products, including the Company's current
efforts toward reengineering its call center products for an anticipated release
of an upgraded product in 1997, there can be no assurance that the Company's
upgraded call center products will be released on a timely basis or will achieve
market acceptance upon release. If the market fails to grow or grows more slowly
than expected, the Company's business, results of operations and financial
condition could be adversely affected.
9
<PAGE>
DEPENDENCE ON HOST PROCESSOR RELATIONSHIPS. The Company believes that
market acceptance of its products is based in significant part on the ability of
the products to share information with a financial institution's host processor
system, or with the host processor systems of vendors providing processing
services to such institution. The Company has developed significant expertise
with most available host processor systems and the methods necessary to transfer
data to and from such systems. Although the Company generally is able to develop
interfaces that allow its products to operate effectively with host processor
systems, integration is optimized where the Company and the provider of a host
processor system cooperatively share information regarding the respective
products' technologies, development schedules and enhancements. CFI has had
varying degrees of success in establishing such relationships with host
providers. In some cases, providers of host processor systems or processing
services are or may become competitors of the Company with respect to one or
more of the Company's products. As such, the Company is not always able to
obtain access to host system technology necessary for developing optimal
third-party system integration. There can be no assurance that the Company will
be able to establish and maintain adequate relationships with important
providers of host processor systems or processing services in the future.
Failure to do so could have a material adverse effect on the business, results
of operations and financial condition of the Company.
UNCERTAINTIES ASSOCIATED WITH THE INTEGRATION OF ACQUISITIONS AND RISKS OF
NEW BUSINESS VENTURES. One of the Company's strategies is to continue to
acquire complementary businesses, products and technologies, as well as to enter
into new business ventures, including minority equity investments and joint
ventures. Since 1994, the Company has acquired ten businesses or companies.
Acquisitions of companies, businesses, products, or technologies, as well as
entry into new business ventures, require the dedication of management resources
in order to achieve the strategic objectives of the acquisitions and ventures.
No assurance can be given that difficulties encountered in integrating the
operations of businesses previously acquired or in the future acquired or
entered into by the Company will be overcome, or that the specific benefits
expected from integration of any particular acquisition or any new business
venture, including the addition of new products and technologies, or increased
sales and growth of the Company's customer base, will be achieved or that any
anticipated cost savings will be realized. The difficulties of combining
acquired operations into the Company have been, and, along with any entry into
new business ventures in the future, can be expected to be exacerbated by the
necessity of coordinating geographically separated organizations. The process of
integrating operations could cause an interruption of, or loss of momentum in,
the activities of the Company's business and operations, including those of the
businesses acquired or new business ventures. Difficulties encountered in
connection with the Company's acquisition of businesses, products or
technologies, and new business ventures, including those previously acquired,
could have an adverse effect on the business, results of operations and
financial condition of the Company. There can be no assurance that integration
of businesses, products or technologies previously acquired by the Company, or
acquired or entered into in the future, will be accomplished without having an
adverse impact on the business, results of operations and financial condition of
the Company or that the benefits or strategic objectives expected from any such
integration or new business venture will be realized.
MANAGEMENT OF GROWTH. The growth in the size and complexity of the
Company's business and the expansion of its product lines and its customer base
have placed and are expected to continue to place a significant strain on all
aspects of the Company's business. In particular, the Company's emphasis on
selling to large institutions has placed significant additional demands on its
installation and implementation operations, and the growing installed base has
placed additional demands on the customer support operation. The Company has
grown from approximately 330 employees as of December 31, 1995 to approximately
480 employees as of September 30, 1996, and currently plans to continue to
expand its staff. To accommodate growth, the Company will be required to upgrade
or implement a variety of operational and financial systems, procedures and
controls, including the improvement of its accounting and other internal
management systems. There can be no assurance that the Company will be able to
do so successfully. The Company's future operating results will depend on its
ability to expand its support organization and infrastructure commensurate with
its expanding base of installed products and on its ability to attract, hire and
retain skilled personnel. There can be no assurance that the Company's
personnel, systems, procedures and controls will be adequate to support the
Company's operations. Any failure to implement and improve the Company's
operational, financial and management systems or to expand, train, motivate or
manage personnel could have a material adverse effect on the
10
<PAGE>
Company's business, operating results and financial condition. There can be no
assurance that the Company will be able to effectively manage any future growth
and any failure to do so would have a material adverse effect on the Company's
business, operating results and financial condition. To the extent the
anticipated growth fails to materialize, the Company's operating results could
be adversely affected.
DEPENDENCE ON KEY EMPLOYEES AND CONTRACT ENGINEERS. The Company believes
that its future success will depend to a significant extent upon the
contributions of its executive officers and key sales, engineering, marketing
and technical personnel, including independent contractors used by the Company
primarily in product development. The Company does not have "key person" life
insurance on any of its employees. The loss of the services of one or more of
the Company's key personnel could have a material adverse effect on the
Company's business, operating results and financial condition. The Company also
believes its future success will depend in large part upon its ability to
attract and retain additional highly skilled personnel, particularly sales
personnel and software engineers. Because of the sophistication of the Company's
products and the technology environments in which they operate, the Company's
sales, engineering and other personnel generally require advanced technical
knowledge and significant training to perform competently. Competition for such
personnel, particularly qualified software development engineers, is intense and
the Company has, at times, experienced difficulty in locating personnel with the
requisite level of expertise and experience. There can be no assurance that the
Company will be successful in retaining its existing key personnel or in
attracting and retaining the personnel it requires in the future.
DELAYS IN INTRODUCTION OF NEW PRODUCTS AND PRODUCT ENHANCEMENTS. The
Company's future success will depend upon its ability, on a timely basis, to
develop or acquire and successfully introduce new products and to maintain and
enhance its current products to meet customers' expanding needs. In addition,
the Company must identify emerging trends and technological changes in its
target markets, develop and maintain competitive products, enhance its products
by adding innovative features that differentiate its products from those of its
competitors and develop and bring products to market quickly at cost-effective
prices. In particular, the Company believes its software-based products must
respond quickly to users' needs for broad functionality and multi-platform
support and to advances in hardware and operating systems. As a result of these
requirements, the Company will need to make substantial investments in design
and product development. Any failure by the Company to anticipate or respond
adequately to technological and regulatory developments and customer
requirements, or any significant delays in product development or introductions,
could result in a loss of competitiveness and could materially adversely affect
the Company's business, operating results and financial condition. There can be
no assurance that the Company will be successful in developing and marketing new
products or product enhancements that respond to technological or regulatory
changes, evolving standards or changing customer requirements.
In the past, the Company has experienced delays in the introduction of new
products and product enhancements, including the Windows versions of its Deposit
Pro and Laser Pro products, and in achieving market acceptance for certain of
its products, including its Pro Active product. There can be no assurance that
the Company will successfully complete on a timely basis products currently
under development, including the Windows version of its Laser Pro Closing
product, or that current or future products will achieve market acceptance. If
the Company is not successful in developing new products and providing product
enhancements in a timely manner, including those that incorporate regulatory
changes into its products, it could have a material adverse impact on the
Company's business, results of operations and financial condition.
In addition, the introduction or announcement of products embodying new
technologies, changes in industry standards, applicable regulations, or customer
requirements, either by the Company or one or more of its competitors, could
render the Company's existing products obsolete or unmarketable. One of the
Company's competitors has recently announced, for example, the introduction of a
Windows-based loan documentation product. Although this competing product has
not yet been released and the Company believes that its Windows products will
compete effectively against this product introduction, there can be no assurance
that sales of the Company's Laser Pro Windows products will not be adversely
affected by its competitor's announcement. There can be no assurance that the
introduction or announcement of new product offerings by the Company or one or
11
<PAGE>
more of its competitors will not cause customers to defer purchases of existing
Company products. Such deferment of purchases could have a material adverse
effect on the Company's business, operating results and financial condition.
LENGTHY SALES AND IMPLEMENTATION CYCLES. The license of the Company's
software products generally requires the Company to educate prospective
customers regarding the use and benefits of the Company's products. In addition,
the implementation of the Company's products involves a significant commitment
of resources by prospective customers and can be associated with substantial
changes in workflow, processing or the configuration of hardware and other
software. The product license and other fees charged by the Company are
typically only a portion of the customer's related hardware, software,
development, training and integration costs in implementing a system containing
the Company's products. The license of the Company's software products can often
require a board-level or executive decision by prospective customers. For these
and other reasons, the period between initial indications of interest by a
customer in the Company's product and the ultimate sale and implementation of
the Company's product to the customer can often be lengthy (often ranging from
three months to in excess of one year) and is subject to a number of significant
delays over which the Company has little or no control. The Company's sales and
implementation cycle could be lengthened by increases in the size and complexity
of its license transactions and by delays in its customers' implementation or
upgrade of the necessary computing environments.
In addition, as the Company increases its emphasis on obtaining orders from
larger financial institutions, particularly very large multistate institutions,
the Company's overall mix of product licenses may involve an increased reliance
on orders that have a longer sales and implementation cycle. Reliance on sales
with a lengthy lead time for completion of the order and implementation of the
product can result in delays in completion of expected sales and fluctuations in
the recognition of sales revenue which may adversely affect the Company's
business, results of operations and financial condition.
COMPETITION. The market for the Company's products is intensely competitive
and rapidly changing. A number of companies offer competitive products
addressing certain of the Company's target markets. With respect to the
Company's lending products, the principal competitors include Bankers Systems,
Inc., FormAtion Technologies, Inc. (a subsidiary of John H. Harland Company),
Interlinq Software Corporation, Fair Isaac & Company, Inc., Affinity Technology
Group, Inc., Great Lakes Forms, Inc., APPRO Systems, Inc., and JetForm Corp.
With respect to the Company's operations products, the principal competitors
include Olivetti North America, Broadway & Seymour, Inc., Early, Cloud & Company
and Footprint Software, Inc. (both subsidiaries of International Business
Machines Corporation ("IBM")), Electronic Data Systems Corporation, Argo &
Company, FIserv, Inc. ("FIserv"), Edify Corporation, and Software Dynamics, Inc.
With respect to the Company's electronic delivery products, the principal
competitors include CheckFree Incorporated, Visa Interactive, Edify Corporation,
Online Resources & Communications Corporation, GOLDPAC Products, and Politzer &
Haney. In addition, a number of prospective and existing customers of the
Company have the internal capability to provide alternative solutions to the
Company's lending, operations, or electronic delivery products and may,
therefore, be viewed as competing with the Company. These alternatives may
include internally developed software and hardware solutions, or methods of
process management that do not involve software solutions. Some of the Company's
competitors have significantly greater financial, technical, sales and marketing
resources than the Company. The Company believes that the primary competitive
factors in this market include product quality, reliability, performance, price,
vendor and product reputation, financial stability, features and functions, ease
of use and quality of support. There can be no assurance that competitors will
not develop products that are superior to the Company's products or that achieve
greater market acceptance. Further, because of the rapidly evolving nature of
the industry, many of the Company's collaborative partners are current or
potential competitors. In addition, a number of current or potential competitors
have established or may establish cooperative relationships among themselves and
with third parties that may present additional competition with products offered
by the Company. The Company's competitors may also be able to undertake more
extensive marketing campaigns, adopt more aggressive pricing policies, utilize
more extensive distribution channels, and bundle competing products.
12
<PAGE>
The Company's future success will depend significantly upon its ability to
increase its share of the large bank market and to license additional products
and product enhancements to existing customers. As the Company develops new
products or enters new markets, it expects to encounter additional competitors,
some of which may have significantly greater financial, technical, sales and
marketing resources than the Company. There can be no assurance that the Company
will be able to compete successfully in the future, or that competition will not
have a material adverse effect on the Company's results of operations.
PRODUCT CONCENTRATION. A significant portion of the Company's revenue is
derived from a limited number of products. Revenue from the Company's Laser Pro
products and Deposit Pro products represented over 82% and 52% of the Company's
total revenue for the nine months ended September 30, 1995 and September 30,
1996, respectively, and over 88%, 82% and 79% for the years ended December 31,
1993, 1994 and 1995, respectively. Although the Company believes that these
products will continue to represent a significant percentage of the Company's
revenue for the near term, an important part of the Company's business strategy
depends upon the ability of the Company to continue to develop and market its
call center, branch automation, electronic banking and other new products. A
decline in demand or prices for the Company's Laser Pro products or Deposit Pro
products, whether as a result of new product introductions by the Company or its
competitors, price competition, technological change, or failure of the
Company's products to address customer requirements, could have a material
adverse effect on the Company's business, results of operations and financial
condition. The failure of the financial services industry in general to adopt
new or modified technologies to improve and simplify business processes (in
particular the products developed by the Company), or the failure of the Company
to support this industry transition with products that effectively address
customer requirements, would have a material adverse effect on the Company's
business, results of operations and financial condition.
DEPENDENCE ON FINANCIAL SERVICES INDUSTRY. Substantially all of the
Company's revenue is derived from licenses and services to banks and other
financial institutions, and its future growth is dependent on increased sales to
the financial services industry. The success of the Company's customers is
intrinsically linked to economic conditions in the financial services industry,
which in turn are subject to intense competitive pressures and are affected by
overall economic conditions. In addition, the Company believes that the license
of its products is relatively discretionary and often requires a significant
commitment of capital if accompanied by large-scale hardware purchases or
commitments. As a result, although the Company believes that its products can be
of substantial assistance to financial institutions in a competitive
environment, demand for the Company's products and services could be
disproportionately affected by instability or downturns in the financial
services industry, which may cause existing or potential customers to exit the
industry or delay, cancel or reduce any planned expenditures for technology
solutions, including those offered by the Company. The financial services
industry is currently experiencing consolidation that may affect demand for the
Company's products. The financial services industry is highly regulated and
changes in regulations affecting the financial services industry or the
Company's products could have a significant effect on the Company. These and
other factors adversely affecting the financial services industry and its
purchasing capabilities could have a material adverse effect on the Company's
business, results of operations and financial condition.
PRODUCT LIABILITY RISKS; SOFTWARE DEFECTS. The Company's software products
are highly complex and sophisticated and could, from time to time, contain
design defects or software errors that could be difficult to detect and correct.
In addition, implementation of the Company's products may involve a significant
amount of customer-specific customization and may involve integration with
systems developed by third parties. Software products offered by the Company are
highly complex and normally contain undetected errors or failures that, despite
significant testing by the Company, are discovered only after a product has been
installed and used by customers. Although the Company's business has not been
adversely affected by any such errors to date, there can be no assurance that
significant errors will not be found in the Company's products in the future.
Such errors could give rise to warranty or other liability of the Company, cause
delays in product introduction and shipments, require design modifications,
result in loss of or delay in market acceptance of the Company's products or
loss of existing customers, any of which could adversely affect the Company's
business, operating results and financial condition.
13
<PAGE>
The Company's products enable its customers to comply with a variety of
complex and changing federal and state laws and regulations. Should
documentation generated by the Company's products result in a customer's
violation of such requirements due to a product defect, the customer, or
possibly the governmental authority whose requirements were not met, could claim
that the Company is responsible. The Company provides a compliance warranty on
certain of its products that limits its liability to $1.0 million per customer
per year and further limits the Company's liability for all of its customers to
an aggregate of $2.5 million per year per occurrence of a common defect. There
can be no assurance that these contract limits would be enforceable, or that
claims would be covered by or would not exceed the limits of the Company's
indemnity insurance policy issued by Lloyds of London. Further, there can be no
assurance that this indemnity policy will be renewed or will remain priced
within the Company's capacity to pay the premiums. In the event that the
Company's contract limits are found to be unenforceable or that its insurance
policy does not adequately cover claims, the Company's results of operations may
be materially and adversely affected. In addition, there can be no assurance
that the Company will be able to correct claimed or actual product defects in a
timely manner, or at all.
DEPENDENCE UPON PROPRIETARY TECHNOLOGY; INTELLECTUAL PROPERTY RIGHTS. The
Company's success and ability to compete is dependent in part upon its
proprietary technology, including its software. The Company relies primarily on
a combination of copyright, trade secret, and trademark laws, confidentiality
procedures and contractual provisions to protect its proprietary rights. The
Company also believes that factors such as know-how concerning the financial
services industry and the kinds of software products that the Company licenses
as well as the technological and creative skills of its personnel, new product
developments, frequent product enhancements, name recognition and reliable
product service are essential for the Company in establishing and maintaining a
technology leadership position. The Company may from time to time seek patent
protection for innovations related to certain of its software products, but has
not generally sought patent protections for its software. There has been an
increase in the number of patents related to software that have been issued or
applied for in the United States and, accordingly, the risk of patent
infringement for software companies can be expected to increase. There can be no
assurance that others will not develop technologies that are similar or superior
to the Company's technology. The Company has, with a small number of customers,
provided limited access and restricted rights to the source code of certain
products. Despite the Company's efforts to protect its proprietary rights, other
parties may attempt to reverse engineer, copy or otherwise engage in
unauthorized use of the Company's proprietary information. There can be no
assurance that such unauthorized use will not occur. Monitoring unauthorized use
of the Company's proprietary information is difficult, and while the Company is
unable to determine the extent to which piracy of its software products exists,
software piracy could occur. To the extent that the Company licenses software
products in foreign countries (which it has done only on a limited basis to
date), it may experience greater risks of software piracy inasmuch as the laws
of certain foreign countries do not provide meaningful protection against piracy
of software. There can be no assurance that the Company's means of protecting
its proprietary rights will be adequate.
Certain technology or proprietary information incorporated in the Company's
products is licensed from third parties, generally on a non-exclusive basis. The
termination of any such licenses, or the failure of the third-party licensors to
adequately maintain or update their products, could result in delay in the
Company's ability to ship certain of its products while it seeks to implement
technology offered by alternative sources, and any required replacement licenses
could prove costly. While it may be necessary or desirable in the future to
obtain rights to third party technology, there can be no assurance that the
Company will be able to do so on commercially reasonable terms, or at all.
In the future, the Company may receive notices claiming that it is
infringing the proprietary rights of third parties, and there can be no
assurance that the Company will not become the subject of infringement claims or
legal proceedings by third parties with respect to current or future products,
services or technologies. The Company expects that software product developers
will increasingly be subject to infringement claims as the number of products
and competition in the Company's industry grows and the functionality and scope
of products overlaps. Furthermore, there can be no assurance that employees or
third parties have not improperly disclosed confidential or proprietary
information to the Company. Any such claims, with or without merit, could be
time consuming and expensive to defend, divert management's attention and
resources, cause product
shipment delays or require the Company to pay money damages or enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company, or at all. In
the event of a successful claim of product infringement against the Company and
failure of the Company or its licensors to license the infringing or similar
technology on reasonable terms, the Company's business, operating results and
financial condition could be adversely affected. In addition, the Company may
initiate claims against third parties for infringement of the Company's
proprietary rights or to establish the validity of the Company's proprietary
rights. Any such claim could be time consuming, result in costly litigation, and
have a material adverse effect on the Company's business, operating results and
financial condition.
14
<PAGE>
OVERVIEW
CFI ProServices, Inc. ("CFI" or the "Company") is a leading provider of
customer service software products and services to financial institutions.
The Company combines its technology, banking, and legal expertise to deliver
knowledge-based software solutions that enable institutions to simplify key
business processes such as sales and service, improve productivity,
strengthen customer relationships, and maintain compliance with both internal
business policies and external government regulations. Over 4,700 financial
institutions have licensed one or more of the Company's products. In
addition, approximately 125 institutions are offering private-dial personal
computer-based home banking services to their customers using CFI's Personal
Branch products.
During 1993, essentially all of the Company's revenue was derived from the
Company's Laser Pro lending products and Deposit Pro operations products.
Today, the Company licenses more than 20 products organized into four product
groups: lending, operations, electronic delivery, and connectivity software.
Due to its product diversification efforts, the Company is now less reliant
on the Laser Pro and Deposit Pro product lines. For the nine months ended
September 30, 1996 revenue from these product lines has decreased to 52% of
the Company's total revenue.
CFI generates recurring revenue from software maintenance agreements. For the
nine months ended September 30, 1996, service and support fees revenue,
primarily for Laser Pro and Deposit Pro, accounted for approximately 38% of
consolidated revenues. Substantially all software customers subscribe to the
Company's service and support programs, which provide ongoing product
enhancements and, where applicable, updates to facilitate compliance with
changing banking regulations.
The Company's cost structure is relatively fixed and cost of revenue, in
aggregate, does not vary significantly with changes in revenue. As a result,
the Company typically generates greater profit margins from incremental sales
once fixed costs are covered. In addition, any failure to achieve revenue
targets in a particular period would adversely affect profits for that
period.
Sales to larger banks are expected to constitute a higher percentage of total
revenue in future periods. Transactions with these larger banks are typically
of greater scope, usually involve a greater sales effort over a longer period
of time, and require more customization and prolonged acceptance testing.
Accordingly, the predictability of revenue for any particular period will be
diminished to the extent the Company increases sales to larger banks.
The Company's backlog as of September 30, 1996 was approximately $9.2
million, as compared to $5.1 million as of September 30, 1995. The Company's
backlog as of December 31, 1995 was approximately $6.1 million. CFI's backlog
consists of orders taken but not yet booked as revenue and is not indicative
of future operating results. Orders constituting the Company's backlog are
subject to changes in delivery schedules or to cancellation at the option of
the purchaser without significant penalty. The timing of the Company's orders
and revenue has become less predictable during 1995 and 1996 as CFI has
increased its focus on generating business from large accounts and multiple
product sales. In light of its increased emphasis on large accounts and
multiple product sales, the Company has taken steps to increase and maintain
its backlog. The stated backlog is not necessarily indicative of the
Company's revenue for any future period.
15
<PAGE>
ACQUISITIONS AND NEW BUSINESS VENTURES
The Company continues to pursue opportunities to expand its market presence
by acquiring products, technologies and companies that complement the
Company's product suite or increase its market share. The Company has
completed ten acquisitions since June 1994.
<TABLE>
<CAPTION>
COMPANY DATE ACQUIRED PRINCIPAL PRODUCTS/MARKETS ACQUIRED
- ------- ------------- -----------------------------------
<S> <C> <C>
Assets of the Products Division of June 1994 Access to certain midwestern states for the
Professional Bank Systems, Inc. Company's compliance products
The Genesys Solutions Group, Inc. September 1994 Call center software
Texas Southwest Technology Group April 1995 StarGate connectivity products and ACH products
Culverin Corporation November 1995 Encore! Platform and teller branch automation
products and RPxpress! remittance processing
product
OnLine Financial Communications Systems, Inc. April 1996 Over 1,000 branch automation customers employing
DOS-based technology
COIN Banking Systems, Inc. April 1996 Application Manager indirect lending product
Assets of Input Creations, Inc. April 1996 LOANscape mortgage lending product
Assets of Halcyon Group, Inc. April 1996 fisCAL loan decision support product and TriScore
Assets of Pathways Software, Inc. April 1996 LoansPlus neural net loan decision support and
portfolio management product
Vendor Payment Systems, Inc. April 1996 Bill payment services company
</TABLE>
There can be no assurance that any of these or future acquisitions will have
a favorable impact on the performance of the Company. The Company believes
that it has achieved its objectives of growth and broadening its product
offerings through this acquisition program and intends to continue to pursue
acquisitions in the future. However, the Company currently has no
understandings, commitments or agreements with respect to any material
acquisition of other businesses, products or technologies.
The aggregate purchase price for these ten acquisitions was $20.2 million and
380,967 shares of Common Stock, plus contingent royalties. In connection with
such acquisitions, the Company incurred non-cash charges primarily relating
to the write-off of acquired in-process research and development efforts
totaling $8.0 million in April 1996 and $4.5 million in November 1995. The
terms of certain of the acquisitions provide that, based on various factors
including the passage of time, certain product revenue or product
development, the Company will be required to pay contingent royalties some of
which obligations the Company may satisfy through the issuance of shares of
its Common Stock. Because amortization of certain intangible assets arising
from the Company's acquisition activity is not deductible for federal income
tax purposes, certain amortization expense incurred by the Company has the
effect of increasing the Company's effective tax rate for financial reporting
purposes.
16
<PAGE>
The Company may also evaluate from time to time establishing new business
operations or making minority investments in new business ventures, including
joint ventures.
RESULTS OF OPERATIONS
The following table sets forth statements of operations data of the Company
expressed as a percentage of total revenue for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- -------------------
1996 1995 1996 1995
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Revenue
Software license fees 56.3% 51.7% 56.3% 48.2%
Service and support 38.1 41.2 37.7 42.9
Other 5.6 7.1 6.0 8.9
--------- --------- --------- --------
Total revenue 100.0 100.0 100.0 100.0
Gross profit 65.5 69.6 66.2 67.2
Operating expenses
Sales and marketing 20.6 24.6 22.2 25.6
Product development 17.1 17.0 18.4 17.2
General and administrative 9.4 13.1 9.5 12.7
Amortization of intangibles 2.0 .8 1.8 0.9
Acquired in-process research and
development and restructuring -- -- 18.8 --
--------- --------- --------- --------
Total operating expenses 49.1 55.5 70.7 56.4
--------- --------- --------- --------
Income (loss) from operations 16.4 14.1 (4.5) 10.8
Nonoperating income (.3) 1.3 0.3 1.3
--------- --------- --------- --------
Income (loss) before income taxes 16.1 15.4 (4.2) 12.1
Provision for (benefit from) income taxes 6.9 4.9 (0.4) 4.1
Preferred stock dividend .2 .3 0.2 0.3
--------- --------- --------- --------
Net income (loss) applicable to 9.0% 10.2% (4.0)% 7.7%
common shareholders ========= ========= ========= ========
</TABLE>
The following table sets forth percentage changes period over period in the
statements of operations data of the Company:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1996
OVER OVER
SEPTEMBER 30, 1995 SEPTEMBER 30, 1995
------------------ ------------------
<S> <C> <C>
Revenue
Software license fees 89% 96%
Service and support 61 47
Other 39 14
Total revenue 74 68
Gross profit 63 65
Operating expenses
Sales and marketing 45 46
Product development 75 79
General and administrative 25 24
Total operating expenses 54 110
Income (loss) from operations 102 (170)
Nonoperating income (140) (67)
Income (loss) before income taxes 82 (159)
Provision for (benefit from) income taxes 146 (116)
Net income (loss) applicable to 53 (188)
common shareholders
</TABLE>
17
<PAGE>
REVENUE
Total revenue increased 74% to $16.3 million and 68% to $42.7 million for
the three month and nine month periods ended September 30, 1996,
respectively, compared to $9.4 million and $25.4 million for the comparable
periods in 1995. Revenue attributable to the companies acquired in April 1996
accounted for $4.2 million and $7.8 million for the three month and nine
month periods ended September 30, 1996, respectively. Culverin products
acquired in November 1995 accounted for an additional $1.7 million and $5.5
million for the three month and nine month periods ended September 30, 1996,
respectively.
SOFTWARE LICENSE FEES. Software license fees include sales of software to
customers, fees for software customization, and fees related to implementing
software and systems at customer sites.
Software license fees increased $4.3 million, or 89%, and $11.7 million, or
96%, to $9.2 million and $24.0 million for the three month and nine month
periods ended September 30, 1996, respectively, from $4.8 million and $12.3
million for the comparable periods in 1995. Of these increases, $2.4 million
and $4.4 million were contributed by the companies acquired in April 1996 for
the three and nine month periods ended September 30, 1996, respectively.
Culverin products acquired in November 1995 accounted for another $1.5
million and $4.8 million of the increases for the three and nine month
periods ended September 30, 1996, respectively. Internal growth, primarily
from sales of Encore! Desktop and Personal Branch for the three months period
ended September 30, 1996 and primarily from sales of Deposit Pro and Personal
Branch for the nine month period ended September 30, 1996, accounted for the
remainder of the increases over the 1995 periods. Of the $2.4 million and
$4.4 million increases in revenue attributable to the April 1996 acquisitions
for the three month and nine month periods ended September 30, 1996,
respectively, sales of the COIN Banking Systems, Inc. ("COIN") indirect
lending and OnLine Financial Communications Systems, Inc. ("OnLine") branch
automation products acquired from MicroBilt Corporation accounted for $1.6
million and $3.2 million for the three month and nine month periods ended
September 30, 1996, respectively. The Company expects sales of the OnLine
and COIN products to decrease in future quarters because the Company is not
actively selling the OnLine DOS-based branch automation products and is only
in the initial phases of converting the DOS-based COIN indirect lending
product to the Windows platform.
PERCENTAGE OF SOFTWARE LICENSE FEES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- -------------------
1996 1995 1996 1995
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Lending Products 70% 48% 71% 45%
Operations Products 16 38 20 40
Electronic Delivery Products 9 11 7 12
Connectivity Products 5 3 2 3
--------- --------- --------- --------
Total 100% 100% 100% 100%
========= ========= ========= ========
</TABLE>
Lending products license revenue grew $1.0 million, or 30%, and $2.3 million,
or 26%, for the three month and nine month periods ended September 30, 1996,
respectively, over the comparable periods in 1995. Substantially all of the
increases came from sales of Application Manager, fisCAL, and LOANscape, all
products derived from the April 1996 acquisitions. As a percentage of total
license revenue, lending products declined from 70% to 48% and from 71% to
45% for the three month and nine month periods ended September 30, 1996,
respectively, reflecting the Company's successful efforts to broaden its
product offerings. License revenue from sales of Laser Pro decreased ten% for
the three month period ended September 30, 1996 compared to the three month
period ended September 30, 1995 and were essentially flat for the nine month
period ended September 30, 1996 compared to the nine month period ended
September 30, 1995.
Operations products increased $2.7 million, or 348%, and $7.0 million, or
281%, for the three month and nine month periods ended September 30, 1996,
respectively, over the comparable periods in
18
<PAGE>
1995. As a percentage of total license revenue, operations products revenue
increased from 16% to 38% and doubled from 20% to 40% for the three month and
nine month periods ended September 30, 1996, respectively. Sales of the
Encore! and OnLine branch automation products acquired after the 1995 periods
accounted for nearly $2.3 million and $6.0 million of the increase for the
three and nine months periods ended September 30, 1996, respectively.
Increased Deposit Pro sales, attributable to the release of the Windows
version of that product, accounted for most of the remainder of the
increases.
License fees from the sale of electronic delivery products increased $0.5
million, or 126%, and $2.1 million, or 254%, for the three month and nine
month periods ended September 30, 1996, respectively, over the comparable
periods in 1995. The Personal Branch home banking product accounted for $0.3
million and $1.0 million of the increases for the three month and nine month
periods ended September 30, 1996, respectively. The remainder of the
increases are attributable to sales of the Culverin remittance processing
product. As a percentage of license revenue for the same periods, electronic
delivery product revenue grew from 9% to 11% and 7% to 12% for the three
month and nine month periods ended September 30, 1996, respectively. The
Personal Branch home banking product has been licensed to approximately 125
financial institutions.
License fees from sales of the StarGate connectivity products were $0.3
million and $0.6 million for the three and nine month periods ended September
30, 1996,respectively, up 21% and 136%, respectively, from the comparable
periods of 1995. Volumes for these products are tied closely to the
Company's sales of its various products to larger institutions and through
third party host software providers. To the extent sales to larger
institutions increase, license revenue for StarGate connectivity products
would be expected to increase.
SERVICE AND SUPPORT FEES. Service and support fees consist primarily of
recurring software support charges and revenue from training customers in the
use of the Company's products. Substantially all of the Company's software
customers subscribe to its support services, which provide for the payment of
annual or quarterly maintenance fees. Service and support fees increased $2.3
million, or 60%, and $5.2 million, or 47%, to $6.2 million and $16.1 million
for the three month and nine month periods ended September 30, 1996,
respectively, over the comparable periods in 1995. Service and support fees
for products acquired in April 1996 accounted for $1.6 million and $3.0
million of these increases for the three month and nine month periods ended
September 30, 1996, respectively. The remainder of the increases resulted
primarily from increases in the installed base of the Company's products. No
significant changes in service and support fees for individual products have
occurred in the periods presented.
OTHER REVENUE. Other revenue includes Vendor Payment Systems' processing
fees, sales of preprinted forms and supplies, and certain consulting
revenue. Other revenue increased $0.3 million for both the three month and
nine month periods ended September 30, 1996, respectively, but was 6% of
total revenue, down from 7% and 9% in the comparable periods in 1995. The
acquisition of Vendor Payment Systems in April 1996 caused the increase in
other revenue. The Company does not expect other revenue to grow
significantly in the future.
COST OF REVENUE
Cost of revenue primarily consist of amortization of internally developed
and purchased software, royalty payments, compliance warranty insurance
premiums, software production costs, costs of product support, training and
implementation, costs of software customization, materials costs for forms
and supplies, and bill payment processing costs.
Cost of revenue increased $2.8 million, or 97%, and $6.1 million, or 73%, to
$5.6 million and $14.4 million for the three month and nine month periods
ended September 30, 1996, respectively over the comparable periods in 1995.
Of these increases, $0.6 million and $1.4 million resulted from the November
1995 acquisition of Culverin, for the three month and nine month periods ended
19
<PAGE>
September 30, 1996, respectively. Companies acquired in April accounted for
$1.8 million and $3.5 million of the increases, for the three month and nine
month periods ended September 30, 1996, respectively. The remainder of these
increases are attributable to higher implementation costs associated with the
growing number of large financial institution projects, additional personnel
required to support the increased installed base of customers, and increased
software amortization. Software amortization was $0.5 million and $1.3
million for the three month and nine month periods ended September 30, 1996,
respectively, as compared to $0.3 million and $0.8 million for the comparable
periods in 1995.
As a result of recent acquisitions and product development efforts, costs
resulting from royalty payments and amortization of internally developed and
purchased software will increase in future periods. The Company is obligated
to pay royalties ranging from 3% to 18% of revenue related to certain
products acquired in the various acquisitions since June 1994. In addition,
the Company is obligated to pay MicroBilt Corporation a fixed amount per
OnLine customer converted to the Company's products. The royalty obligations
generally extend three to five years from the acquisition date.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses increased to $3.3
million, or 21% of revenue, and $9.5 million, or 22% of revenue, for the
three month and nine month periods ended September 30, 1996, respectively,
compared to $2.3 million, or 25% of revenue, and $6.5 million, or 26% of
revenue, for the comparable periods in 1995. Less than $0.5 million and $1.0
million of the increases for the three month and nine month periods ended
September 30, 1996, respectively, are attributable to the companies acquired
in April 1996. Less than $0.2 million and $0.5 million of the increases for
the three month and nine month periods ended September 30, 1996,
respectively, are attributable to the November 1995 acquisition of Culverin.
None of these acquired organizations had significant sales and marketing
operations. The remainder of the increases resulted from increased commissions
on higher sales, continued growth in the major accounts sales force and an
increase of more than twofold in the size of the Personal Branch sales force.
The decreases in expenses as a percentage of revenue are primarily a result
of revenue from acquired companies and new products sold through the
Company's existing national direct sales and telemarketing operations.
PRODUCT DEVELOPMENT. Product development expenses include costs of
maintaining and enhancing existing products and developing new products.
Product development expenses increased to $2.8 million, or 17%, and $7.8
million, or 18%, of revenue, for the three month and nine month periods ended
September 30, 1996, respectively, compared to $1.6 million, or 17%, and $4.4
million, or 17%, of revenue, for the comparable periods in 1995. The
companies acquired in April 1996 accounted for $0.5 million and $1.2 million
of the increases for the three month and nine month periods ended September
30, 1996, respectively. The Culverin acquisition in November 1995 accounted
for $0.6 million and $1.9 million of the increases for the three month and
nine month periods ended September 30, 1996, respectively. In addition to the
acquisitions, increases in product development expenses are largely the
result of increased staffing in the development areas of the Company, and
additional costs for integrating acquired products, migrating the Company's
DOS-based products to Windows-based products and accelerating development of
the Company's electronic delivery products. The expenses associated with
these activities were partially offset by increased capitalization of
software development efforts. Software development costs capitalized
increased from $0.8 million to $1.8 million and from $2.0 million to $3.7
million for the three month and nine month periods ended September 30, 1996,
and 1995, respectively. The Company will continue to commit significant
resources to product development efforts, although such expenses are not
expected to vary significantly as a percentage of revenue.
20
<PAGE>
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased to
$1.5 million and $4.0 million, or 9% of revenue for both the three month and
nine month periods ended September 30, 1996, respectively, from $1.2 million
and $3.2 million, or 13% of revenue for both the three month and nine month
periods ended September 30, 1995, respectively. The growth in these expenses
is directly attributable to the growth of the Company. Consolidation of the
general and administrative functions of the acquired companies is the
principal reason for the decrease of these expenses as a percentage of
revenue.
AMORTIZATION OF INTANGIBLES
Intangibles include acquisition payments assigned to goodwill, noncompetition
agreements, and customer lists. These costs are amortized over lives ranging
from five to seven years. The increases to $0.3 million and $0.8 million for
the three month and nine month periods ended September 30, 1996,
respectively, from $0.1 million and $0.2 million for the comparable periods
in 1995 are directly attributable to the November 1995 acquisition of
Culverin and the five April 1996 acquisitions.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with its acquisitions of five companies in April 1996, the
Company recorded a non-cash, pretax charge of $8.0 million in the second
quarter of 1996 for in-process research and development efforts in process at
the date of acquisition. The value assigned to the in-process research and
development efforts was determined by independent appraisal and represents
those efforts in process at the date of acquisition that had not reached the
point where technological feasibility had been established and that had no
alternative future uses. Accounting rules require that these costs be
expensed as incurred. The Company believes that these research and
development efforts will result in commercially viable products within the
next two years, at an additional cost of approximately $10.0 million.
INCOME (LOSS) FROM OPERATIONS
Income from operations for the three month period ended September 30, 1996,
increased by $1.3 million to $2.7 million, or 16% of revenues, over the three
month period ended September 30, 1995 due to higher revenue levels and
reductions in operating costs as a percentage of revenue. For the nine month
period ended September 30, 1996, the $8.0 million non-cash charge for
acquired in-process research and development efforts caused an operating loss
of $1.9 million. Without the charge, operating income would have been $6.1
million, or 14% of revenues, compared with $2.7 million, or 11%, for the
comparable period in 1995. Historically, operating income has been higher as
a percentage of revenue in the latter half of a year than in the first half.
NON-OPERATING INCOME
Non-operating income, which consists primarily of interest income and
expense, declined 140% to a net expense of $49,000 and 67% to a net income of
$0.1 million for the three month and nine month periods ended September 30,
1996, respectively, from the comparable periods in 1995. Cash paid for
acquisitions combined with interest on acquisition-related debt caused the
declines. Proceeds from the sale of the Company's Common Stock to be offered
pursuant to an offering document filed with the Securities and Exchange
Commission in November 1996 on Form S-3 may result in an increase in
non-operating income in future periods. (See Note 5 of the Notes to
Consolidated Financial Statements).
21
<PAGE>
PROVISION FOR INCOME TAXES
Income taxes for the nine months ended September 30, 1996 are based on an
estimated rate of 43% (without the effect of the acquired in-process research
and development write-off) which increased from 34% in the comparable period
in 1995. The increase over 1995 is primarily a result of increased
amortization of nondeductible intangibles related to acquisitions and a
substantial reduction in tax-free interest income.
LIQUIDITY AND CAPITAL RESOURCES
Payments for the companies acquired in April 1996 substantially reduced
working capital and cash from December 31, 1995. Of the $13.6 million paid
for those acquisitions, including expenses, $5.2 million was paid on closing,
$4.0 million was paid subsequently and at September 30, 1996 $1.4 million was
carried in current liabilities. Primarily because of these acquisition
payments, working capital decreased from December 31, 1995 by $7.8 million to
$1.0 million at September 30, 1996.
Operations provided $8.0 million of cash for the nine months ended September
30, 1996, compared to $2.9 million for the comparable period in 1995. The
increase in cash from operations compared to 1995 was primarily due to
improved earnings, excluding the non-cash charges for acquired in-process
research and development efforts and for depreciation and amortization.
Net cash used in investing activities of $8.2 million for the nine months
ended September 30, 1996 represented an increase of $7.3 million over the
year ended December 31, 1995. Net cash payments of $5.2 million for
acquisitions made in April 1996 comprised the largest portion of these
investments. Additionally, software development costs of $3.7 million were
capitalized in the nine months ended September 30, 1996, as compared to $2.0
million for the comparable period in 1995. This increase was a result of
ongoing work related to the Company's migration of Laser Pro and Deposit Pro
products to the Windows platform, conversion of its call center product to be
more compatible with the Company's branch platform product, and enhancements
to its electronic banking product. Spending on property and equipment of $2.1
million in the nine months ended September 30, 1996, was primarily
attributable to expansion of the Company's wide area network to accommodate
the recent acquisitions, computing infrastructure for the Company's
electronic delivery group and other information systems upgrades to
facilitate greater productivity. Maturities of $2.8 million in investments
used to make the acquisition-related payments offset some of the spending on
property and equipment.
Cash used in financing activities of $4.5 million during the nine months
ended September 30, 1996, primarily resulted from $6.9 million of payments on
acquisition-related notes payable, less net borrowings of $1.6 million from
the line of credit, and less proceeds of $1.1 million from the exercise of
stock options and stock issuances under the Company's employee stock purchase
plan.
Future cash requirements could include, among other things, purchases of
companies, products or technologies, expenditures for internal software
development, capital expenditures necessary to the expansion of the business,
and installment payments on debt related to acquisitions. Available cash
resources include cash generated by the Company's operations and a $7.5
million revolving line of credit with the Company's principal bank, of which
$1.6 million had been used at September 30, 1996. The line of credit expires
on December 1, 1996, and the Company is seeking to renew this facility.
The Company currently expects to fund its requirements through (i) the
proposed offering of 1.55 million shares of its Common Stock pursuant to its
Registration Statement on Form S-3 filed with
22
<PAGE>
the Commission on November 5, 1996, (ii) existing cash balances, (iii) funds
expected to be generated from operations and (iv) borrowings under its
revolving line of credit.
The Company may require additional funds to support its working capital
requirements, future acquisitions or for other purposes and may seek to raise
such additional funds through one or more public or private financings of
equity or debt, or from other sources.
No assurances can be given that the Company's currently proposed public
offering, or any other source of financing, will be successfully completed,
or if completed, that the terms thereof will be favorable to the Company and
its existing shareholders.
PART II -OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits filed as part of this report are listed below:
EXHIBIT NUMBER AND DESCRIPTION
10 Amendment No. 3, dated September 24, 1996, to Business Loan Agreement dated
November 8, 1995.
11 Calculations of Net Income Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended
September 30, 1996.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 8, 1996 CFI PROSERVICES, INC.
By: /S/ MATTHEW W. CHAPMAN
-----------------------------------------
Matthew W. Chapman
Chairman and Chief Executive Officer
(Principal Executive Officer)
By: /S/ FRED HALL
-------------------------------------------
Fred Hall
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
24
<PAGE>
EXHIBIT 10
[LOGO]Bank of America Amendment to Documents
AMENDMENT NO. 3 TO BUSINESS LOAN AGREEMENT
This Amendment No. 3 (the "Amendment") dated as of September 24, 1996,
is between Bank of America NT & SA (the "Bank") and CFI ProServices, Inc.
(the "Borrower").
RECITALS
A. The Bank and the Borrower entered into a certain Business Loan
Agreement dated as of November 8, 1995, as previously amended (the
"Agreement").
B. The Bank and the Borrower desire to amend the Agreement.
AGREEMENT
1. DEFINITIONS. Capitalized terms used but not defined in this
Amendment shall have the meaning given to them in the Agreement.
2. AMENDMENTS. The Agreement is hereby amended as follows:
2.1 In Paragraph 1.2 of the Agreement, the date "December 1, 1996"
is substituted for the date "October 1, 1996".
3. EFFECT OF AMENDMENT. Except as provided in this Amendment, all
of the terms and conditions of the Agreement shall remain in full
force and effect.
This Amendment is executed as of the date stated at the beginning of this
Amendment.
Bank of America NT & SA CFI ProServices, Inc.
/S/ STEVE WILKINS /S/ FRED HALL
- ----------------------------------- -------------------------------
By: Steve Wilkins By: Fred Hall
Title: Vice President Title: Vice President and CFO
<PAGE>
EXHIBIT 11
CFI PROSERVICES, INC.
CALCULATIONS OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------- ---------------------------------------------
1996 1995 1996 1995
-------------------- -------------------- -------------------- --------------------
FULLY FULLY FULLY FULLY
PRIMARY DILUTED PRIMARY DILUTED PRIMARY DILUTED PRIMARY DILUTED
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Weighted Average Shares
Outstanding For The Period 4,846 4,846 4,487 4,487 4,746 4,746 4,321 4,321
Dilutive Common Stock Options
Using The Treasury Stock Method 348 348 432 452 - - 549 588
-------------------- -------------------- -------------------- --------------------
Total Shares Used For Per Share
Calculations 5,194 5,194 4,919 4,939 4,746 4,746 4,870 4,909
Net Income (Loss) Applicable to
Common Stock 1,468 1,468 959 959 (1,722) (1,722) 1,965 1,965
-------------------- -------------------- -------------------- --------------------
Net Income (Loss) Per Common Share $ 0.28 $ 0.28 $ 0.19 $ 0.19 $ (0.36) $ (0.36) $ 0.40 $ 0.40
-------------------- -------------------- -------------------- --------------------
-------------------- -------------------- -------------------- --------------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-30-1996
<PERIOD-START> JAN-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 186
<SECURITIES> 0
<RECEIVABLES> 14,894
<ALLOWANCES> 1,356
<INVENTORY> 155
<CURRENT-ASSETS> 17,110
<PP&E> 4,669
<DEPRECIATION> 5,096
<TOTAL-ASSETS> 37,721
<CURRENT-LIABILITIES> 16,143
<BONDS> 2,815
756
0
<COMMON> 17,253
<OTHER-SE> 754
<TOTAL-LIABILITY-AND-EQUITY> 37,721
<SALES> 26,582
<TOTAL-REVENUES> 42,669
<CGS> 3,850
<TOTAL-COSTS> 14,411
<OTHER-EXPENSES> 30,183
<LOSS-PROVISION> 1,066
<INTEREST-EXPENSE> 91
<INCOME-PRETAX> (1,813)
<INCOME-TAX> (163)
<INCOME-CONTINUING> (1,722)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,722)
<EPS-PRIMARY> (0.36)
<EPS-DILUTED> (0.36)
</TABLE>
