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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from__to____
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 incorporation (I.R.S. Employer
or organization) Identification No.)
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 15 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 4,863,343
(Class) (Outstanding at May 5, 1997)
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CFI PROSERVICES, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION Page
- ------------------------------ ----
Item 1. Financial Statements
Consolidated Balance Sheets -March 31, 1997 and December 31,
1996 2
Consolidated Statements of Income - Three Months Ended March 31,
1997 and 1996 3
Consolidated Statements of Cash Flows - Three Months Ended
March 31, 1997 and 1996 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 6
PART II - OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
1
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CFI PROSERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------------- ---------------
<S> <C> <C>
ASSETS
Current Assets:
Accounts receivable, net of allowances of $1,361 and $1,303 $ 20,165 $ 23,307
Income taxes receivable 640 -
Inventory 189 156
Deferred tax asset 643 643
Prepaid expenses and other current assets 1,902 1,659
--------------- ---------------
Total Current Assets 23,539 25,765
Property and Equipment, net of accumulated
depreciation of $6,142 and $5,596 5,156 4,805
Software Development Costs, net of accumulated
amortization of $3,008 and $2,585 9,411 8,327
Purchased Software Costs, net of accumulated
amortization of $1,421 and $1,229 887 1,079
Other Intangibles, net of accumulated amortization
of $1,767 and $1,454 6,391 6,704
Deferred Tax Asset 165 165
--------------- ---------------
Total Assets $ 45,549 $ 46,845
--------------- ---------------
--------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Drafts payable $ 93 $ 425
Accounts payable 2,926 2,884
Accrued expenses 3,082 5,478
Deferred revenues 9,381 10,445
Customer deposits 1,003 869
Notes payable 3,936 2,896
Income taxes payable - 46
--------------- ---------------
Total Current Liabilities 20,421 23,043
Long-Term Debt, less current portion 2,688 2,810
--------------- ---------------
Total Liabilities 23,109 25,853
Mandatory Redeemable Class A Preferred Stock 752 754
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 4,863,343 and 4,824,973
shares issued and outstanding 18,427 17,745
Retained earnings 3,261 2,493
--------------- ---------------
Total Shareholders' Equity 21,688 20,238
--------------- ---------------
Total Liabilities and Shareholders' Equity $ 45,549 $ 46,845
--------------- ---------------
--------------- ---------------
</TABLE>
The accompany notes are an integral part of these consolidated balance sheets.
2
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CFI PROSERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
REVENUE
Software license fees $ 8,257 $ 6,000
Service and Support 6,564 4,174
Other 1,181 834
------------ ------------
Total Revenue 16,002 11,008
COST OF REVENUE 5,629 3,645
------------ ------------
Gross Profit 10,373 7,363
------------ ------------
OPERATING EXPENSES
Sales and marketing 3,442 2,802
Product development 2,947 2,008
General and administrative 1,751 1,080
Amortization of intangibles 313 70
------------ ------------
Total Operating Expenses 8,453 5,960
------------ ------------
Income From Operations 1,920 1,403
------------ ------------
NON-OPERATING INCOME (EXPENSE)
Interest expense (89) (7)
Interest income 70 119
Canceled stock offering costs (487) -
------------ ------------
Total Non-operating Income (506) 112
------------ ------------
INCOME BEFORE INCOME TAXES 1,414 1,515
PROVISION FOR INCOME TAXES 622 622
------------ ------------
NET INCOME 792 893
PREFERRED STOCK DIVIDEND 24 24
------------ ------------
NET INCOME APPLICABLE TO COMMON
SHAREHOLDERS $ 768 $ 869
------------ ------------
------------ ------------
NET INCOME PER SHARE $ 0.15 $ 0.18
------------ ------------
------------ ------------
SHARES USED IN PER SHARE CALCULATIONS 5,142 4,881
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements
3
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CFI PROSERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three months ended March 31,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income applicable to common shareholders $ 768 $ 869
Adjustments to reconcile net income applicable to common
shareholders to cash provided by operating activities:
Depreciation and amortization 1,474 840
Interest accreted (payments made) on mandatory
redeemable preferred stock, net (2) (27)
Equity in Vendor Payment Systems, Inc. loss - 23
(Increase) decrease in assets:
Accounts receivable, net 3,142 4,702
Income taxes receivable (228) -
Inventory, net (33) 17
Prepaid expenses and other current assets (243) 239
Increase (decrease) in liabilities:
Drafts payable (332) -
Accounts payable 42 (642)
Accrued expenses (2,396) (230)
Deferred revenues (1,064) (970)
Customer deposits 134 144
Income taxes payable (46) 310
------------ ------------
Net cash provided by operating activities 1,216 5,275
Cash flows from investing activities:
Expenditures for property and equipment (897) (466)
Software development costs capitalized (1,507) (957)
Proceeds from sale/maturity of investments - 1,064
Other assets - (30)
------------ ------------
Net cash used in investing activities (2,404) (389)
Cash flows from financing activities:
Net proceeds from line of credit 1,974 -
Payments on notes payable (934) (2,656)
Payments on long-term debt (122) (184)
Proceeds from issuance of common stock 270 163
------------ ------------
Net cash provided by (used in) financing activities 1,188 (2,677)
------------ ------------
Increase in cash and cash equivalents - 2,209
Cash and cash equivalents:
Beginning of period - 4,844
------------ ------------
End of period $ - $ 7,053
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an 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 month periods ended
March 31, 1997 and 1996 is unaudited; however, such information reflects all
adjustments consisting only of normal recurring adjustments which are, in the
opinion of management, necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods. The
financial information as of December 31, 1996 is derived from the audited
financial statements contained in the 1996 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 1996 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>
Three Months Ended March 31,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash paid during the period for income taxes $ 324 $ 83
Cash paid during the period for interest and dividends 46 31
Tax benefit from exercise of nonqualified stock
options 412 --
</TABLE>
NOTE 3. EARNINGS PER SHARE
In March 1997, the Financial Accounting Standards Board issued Statement 128,
EARNINGS PER SHARE ("SFAS 128"), superseding Opinion 15. SFAS 128 is required
to be adopted for periods ending after December 15, 1997. When adopted, all
prior earnings per share ("eps") calculations will be restated to conform to
SFAS 128. After pro forma effects of applying SFAS 128, eps are as follows:
Three Months Ended: March 31, 1997 March 31, 1996
- ------------------------------ ------------------ ------------------
Primary EPS as reported $ 0.15 $ 0.18
Effect of SFAS 128 0.01 0.01
------------------ ------------------
Basic EPS as restated $ 0.16 $ 0.19
------------------ ------------------
------------------ ------------------
Fully diluted EPS as reported $ 0.15 $ 0.18
Effect of SFAS 128 0.00 0.00
------------------ ------------------
Diluted EPS as restated $ 0.15 $ 0.18
------------------ ------------------
------------------ ------------------
NOTE 4. RECLASSIFICATIONS
Certain amounts in the prior period financial statements have been reclassified
to conform to the current period presentation.
5
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO SHOULD BE READ IN
CONJUNCTION WITH THE FOLLOWING DISCUSSION. THE DISCUSSIONS IN THIS FORM 10-Q
CONTAIN CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES,
SUCH AS STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS AND
INTENTIONS. THE CAUTIONARY STATEMENTS MADE IN THIS DISCUSSION SHOULD BE READ AS
BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR
IN THIS FILING. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
DISCUSSED HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES
INCLUDE THOSE DISCUSSED IN "RISK FACTORS" INCLUDED IN THE COMPANY'S 1996 ANNUAL
REPORT ON FORM 10-K, AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS FILING.
OVERVIEW
CFI 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, 174 institutions are offering private-dial personal computer-based
home banking services to their customers using CFI's Personal Branch products.
During 1993, substantially all of the Company's revenue was derived from the
Company's Laser Pro lending products and Deposit Pro retail delivery products.
Today, the Company licenses more than 20 products organized into five product
groups: lending, retail delivery, electronic delivery, marketing, 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
quarter ended March 31, 1997 revenue from these product lines decreased to 46%
of the Company's total revenue.
CFI generates recurring revenue from software maintenance agreements. For the
quarter ended March 31, 1997, service and support fees revenue accounted for
approximately 41% of consolidated revenue. 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
6
<PAGE>
and prolonged acceptance testing. Accordingly, the predictability of revenue
for any particular period may be diminished to the extent the Company
increases sales to larger banks.
The Company's backlog as of March 31, 1997 was approximately $10.8 million, as
compared to approximately $10.0 million and $6.5 million at December 31, 1996
and March 31, 1996, respectively. 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 since
1995 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.
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. See Note 2 of Notes to Consolidated Financial
Statements.
<TABLE>
<CAPTION>
COMPANY DATE ACQUIRED PRINCIPAL PRODUCTS/MARKETS ACQUIRED
- ------- ------------- -----------------------------------
<S> <C> <C>
Assets of the Products Division June 1994 Access to certain Midwestern states for the
of Professional Bank Company's compliance products
Systems, Inc.
The Genesys Solutions September 1994 Call center software
Group, Inc.
Texas Southwest Technology April 1995 StarGate connectivity products and ACH
Group products
Culverin Corporation November 1995 Encore! Platform and teller branch automation
products and RPxpress! remittance processing
product
OnLine Financial April 1996 Over 1,000 branch automation customers
Communications employing DOS-based technology
Systems, Inc.
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 April 1996 LoansPlus neural net loan decision support and
Software, Inc. 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 and
customer base 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.
7
<PAGE>
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.
The Company may also evaluate from time to time establishing new business
operations or making minority investments in new business ventures.
In March 1997, CFI announced the creation of Lori Mae (Loan Origination
Management and Exchange Corp.), a company which will securitize small business
loans originated by community banks. The Company expects to invest approximately
$1.0 million for up to 50% ownership in the new entity. The Company will use the
equity method to account for its investment. The other investor will beTIS
Financial Services, Inc. Lori Mae leverages the strength of the Company's Laser
Pro and fisCAL products, which are the required software for financial
institutions participating in this securitization opportunity. The Company
believes that this new entity will not only contribute commissions from internal
transactions but it will also provide a competitive edge to CFI's lending suite
of products and it will serve to further strengthen and expand the Company's
leadership in the market for lending products. Still in its initial stages of
execution at this point, Lori Mae is not expected to materially affect CFI's
financial results in 1997.
8
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth statements of income data of the Company
expressed as a percentage of total revenue for the periods indicated:
Three Months Ended March 31,
-----------------------------
1997 1996
------------ -----------
Revenue
Software license fees 51.6 % 54.5 %
Service and support 41.0 37.9
Other 7.4 7.6
------------ -----------
Total revenue 100.0 100.0
Gross profit 64.8 66.8
Operating expenses
Sales and marketing 21.5 25.5
Product development 18.4 18.2
General and administrative 10.9 9.8
Amortization of intangibles 2.0 0.6
------------ -----------
Total operating expenses 52.8 54.1
------------ -----------
Income from operations 12.0 12.7
Non-operating income (expense) (3.2) 1.0
------------ -----------
Income before income taxes 8.8 13.7
Provision for income taxes 3.9 5.6
Preferred stock dividend 0.1 0.2
------------ -----------
Net income applicable to common shareholders 4.8 % 7.9 %
------------ -----------
------------ -----------
The following table sets forth percentage changes period over period in the
statements of income data of the Company:
THREE MONTHS ENDED
MARCH 31, 1997 OVER
MARCH 31, 1996
-----------------------
Revenue
Software license fees 37.6 %
Service and support 57.3
Other 41.6
Total revenue 45.4
Gross profit 40.9
Operating expenses
Sales and marketing 22.8
Product development 46.8
General and administrative 62.1
Amortization of intangibles 347.1
Total operating expenses 41.8
Income from operations 36.8
Non-operating income (expense) (551.8) (1)
Income before income taxes (6.7) (1)
Provision for income taxes -- (1)
Net income applicable to common shareholders (11.6) (1)
(1) Without the $0.5 million charge due to cancellation of a supplemental stock
offering in the first quarter of 1997, the change for non-operating income
(expense), income before income taxes, provision for income taxes and net
income applicable to common shareholders would have been (117%), 26%, 35%
and 20%, respectively.
9
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REVENUE
Total revenue increased 45% to $16.0 million for the quarter ended March 31,
1997 compared to $11.0 million for the comparable period in 1996, with the
companies acquired in April 1996 accounting for $4.2 million of the $5.0 million
increase.
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 $2.3 million, or 38%, to $8.3 million for the
quarter ended March 31, 1997 from $6.0 million for the comparable period in
1996. Of the increase, $2.2 million was contributed by the companies acquired in
April 1996, and the remainder was from internal growth, with growth provided by
Laser Pro, Encore! Personal Branch, and Encore! Desktop being offset by lower
revenues in Encore! branch automation, remittance, and call center products.
$1.4 million of the increased revenue attributable to the April 1996
acquisitions was due to sales of the COIN Banking Systems, Inc. ("COIN")
indirect lending and OnLine Financial Communications Systems, Inc. ("OnLine")
branch automation products acquired from MicroBilt Corporation. 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 still in the early phases of converting the DOS-based
COIN indirect lending product to the Windows platform.
PERCENTAGE OF SOFTWARE LICENSE FEES
THREE MONTHS ENDED
MARCH 31,
--------------------------
1997 1996
-------- --------
Lending Products 52 % 43 %
Retail Delivery Products 25 33
Electronic Delivery Products 15 21
Marketing Products 5 3
Connectivity Products 3 --
-------- --------
Total 100 % 100 %
-------- --------
-------- --------
Lending products license revenue grew $1.8 million, or 68%, for the quarter
ended March 31, 1997 over the comparable period in 1996. $1.4 million of the
increase came from sales of Application Manager, fisCAL, and Laser Pro Mortgage,
all products from April 1996 acquisitions. Laser Pro continues to show strong
performance, supplying the remaining $0.4 million increase recorded in the
lending products group. As a percentage of total license fee revenues, lending
products accounted for 52% for the three month period ended March 31, 1997,
compared to 43% for the same period in 1996. Of particular interest, Laser Pro
revenue from major accounts doubled to $1.4 million for the quarter ended March
31, 1997 compared to the comparable quarter in 1996.
Retail delivery products increased $0.1 million, or 7%, for the quarter ended
March 31, 1997, over the comparable period in 1996. As a percentage of total
license revenue, first quarter retail delivery products revenue declined from
21% in 1996 to 15% in 1997. Growth
10
<PAGE>
in branch automation sales of $0.5 million (including both Encore! And OnLine
products) offset a transitional quarter for Encore! Call Center when the
newly engineered replacement call center product was introduced during the
first quarter, and efforts to sell the older call center product were
discontinued.
License fees from the sale of electronic delivery products were approximately
level for the quarter ended March 31, 1997, compared to the same period a year
ago. The growth in license fees for the Encore! Personal Branch home banking
products of $0.3 million, or 44% over the same period of 1996 offset a decline
in remittance processing revenues. As of March 31, 1997, Encore! Personal Branch
has been licensed to 174 financial institutions.
Marketing products license fee revenue grew $0.2 million, for the quarter ended
March 31, 1997 compared to the same period of 1996. Encore! Desktop, released in
the second quarter of 1996, accounted for this increase, offsetting a decline in
the ProActive fair lending product during the quarter. As a percentage of
Company license fee revenue, marketing products accounted for 5% in the first
quarter of 1997, compared to 3% for the same period a year ago.
Stargate connectivity products grew to $0.2 million in the three month period
ended March 31, 1997 from approximately zero for the same period a year earlier.
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 $2.4
million, or 57%, for the quarter ended March 31, 1997 over the comparable period
in 1996. Service and support fees for products acquired in April 1996 accounted
for $1.7 million of this increase, with the remaining increase directly
attributable to growth in the Company's existing customer base for its products.
OTHER REVENUE. Other revenue includes Vendor Payment Systems' processing fees,
sales of preprinted forms and supplies, and certain consulting revenue. This
revenue increased $0.3 million, or 42%, for the quarter ended March 31, 1997,
over the comparable period in 1996. Other revenue declined to 7% of total
revenue for the first quarter of 1997, compared to 8% for the comparable period
in 1996. The acquisition of Vendor Payment Systems in April 1996 was the primary
cause for the increase in absolute dollars in this revenue category. The Company
does not expect this category of revenue to grow significantly in the future.
11
<PAGE>
COST OF REVENUE
Cost of revenue primarily consists 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 $2.0 million, or 56%, to $5.6 million for the quarter
ended March 31, 1997 over the comparable period in 1996. Of this increase,
$1.6 million resulted from the companies acquired in April 1996, and the
remainder of the increase is attributable to additional personnel required to
support the increased installed base of customers and increased software
amortization. As the breadth of the Company's product line has expanded, the
complexity and cost of providing high quality customer service and support has
increased both in absolute dollars and as a percentage of revenue. Software
amortization was $0.6 million for the quarter ended March 31, 1997 as compared
to $0.4 million for 1996.
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.
The Company's gross margin in the first quarter of 1997 declined to 65% from 67%
in the comparable period of 1996. This decline was primarily attributable to
four factors: increased software amortization, a shift in product mix an
increasing number of major account sales requiring more complex implementation
and support services, and increased royalty expenses for products acquired
through acquisitions.
During 1996, several software development projects reached commercial
feasibility. As a result, the Company began to amortize certain product
development costs, which had been capitalized in prior periods. In addition, the
Company recorded amortization as a result of software acquired in connection
with the 1996 acquisitions. In the first quarter of 1997 the Company amortized
$0.4 million and $0.2 million of internally developed and purchased software
development costs, respectively. This represented an increase from the prior
year first quarter of $0.1 million of amortized internally developed software
costs, and $0.1 million in amortized purchased software costs. The Company
expects that the amount of software amortization in 1997 will materially exceed
the amount amortized in 1996.
The Company capitalized $1.5 million in software development costs in the
quarter ended March 31, 1997. Capitalized software development costs net of
accumulated amortization were $9.4 million as of March 31, 1997, up from $5.0
million as of March 31, 1996. The Company anticipates that the amount of
software development costs it will capitalize in 1997 will be less than in 1996.
Finally, the Company's product mix was comprised of an increased portion of
products with higher implementation costs and of acquired products with
associated royalty expenses.
12
<PAGE>
The Company expects this shift in product mix to continue in future periods,
which may continue to adversely affect the Company's gross margin.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses increased to $3.4 million, or
22% of revenue, for the quarter ended March 31, 1997, compared to $2.8 million,
or 26% of revenue in the comparable period of 1996. Substantially all of the
$0.6 million increase for the quarter ended March 31, 1997, was attributable to
the companies acquired in April 1996. None of these acquired organizations had
significant sales and marketing operations prior to such acquisition. The
decrease in expenses as a percentage of revenue is 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 net of software capitalization stayed at 18% of revenue in the first
quarter of 1997, increasing in absolute terms from $2.0 million in the first
quarter of 1996 to $2.9 million in the comparable period of 1997. The companies
acquired in April 1996 accounted for $0.4 million of the increase for the
quarter ended March 31, 1997. In addition to the acquisitions, increases in
product development expenses were largely the result of increased staffing in
the development areas of the Company, 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 were $1.5 million and
$1.0 million for the first quarters of 1997 and 1996, 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.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$1.8 million for the quarter ended March 31, 1997 compared to $1.1 million for
the same period in 1996. General and administrative expenses were the only
category of operating expenses to increase as a percentage of revenue, rising
from 10% to 11% of revenue for the first quarter of 1996 and 1997, respectively.
This increase was a result of investments in systems and infrastructure
necessitated by the growth of the Company in recent periods and will provide the
foundation needed to accommodate future growth plans. Successful integration of
administrative costs of the April acquisitions served to accentuate the impact
of these investments. The Company does not expect general and administrative
expense to increase significantly in future quarters of 1997.
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 increase to
$0.3 million for the quarter ended March 31, 1997 from $0.1 million for the
comparable period of 1996 was directly attributable to the April 1996
acquisitions of five companies.
13
<PAGE>
NON-OPERATING INCOME
The most significant non-operating item for the Company this quarter was a $0.5
million charge due to cancellation of a supplemental stock offering this
quarter. The Company's Board of Directors decided in February to forego this
offering based on the determination that the stock price at which the Company
would be required to offer the shares would be insufficient to justify the
dilution effect on existing shareholders.
Other non-operating income, which consists primarily of interest income and
expense, was approximately zero for the first quarter of 1997, down from $0.1
million for the first quarter of 1996. This change is due to the Company's
change in cash position following the April 1996 acquisitions, for which a
significant amount of cash was used.
PROVISION FOR INCOME TAXES
The effective tax rate for the three months ended March 31, 1997 was 44%,
compared to the 41% rate experienced during the comparable period in 1996. This
increase in the effective rate is primarily due to increasing amounts of non-
deductible royalty and amortization expense resulting from the Company's various
acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at March 31, 1997 was $3.1 million compared to $2.7 million at
December 31, 1996. The current ratio remained relatively constant at 1.2:1 at
March 31, 1997 compared to 1.1:1 at December 31, 1996.
Operations provided $1.2 million in cash for the quarter ended March 31, 1997.
Net income, excluding non-cash items, provided $2.2 million during the quarter,
with another $3.1 million attributable to the seasonal decline in accounts
receivable, resulting from the Company's annual maintenance billing cycle. The
major operating uses of funds during the period included $2.4 million
attributable to a decline in accrued expenses due primarily to the payment of
bonus and commission amounts for 1996 performance directly related to the
Company's success in 1996 and an additional $1.0 million related to the decline
in deferred revenue, another result of the annual maintenance billing pattern.
Net cash used in investing activities was $2.4 million for the quarter ended
March 31, 1997. Approximately $1.5 million of this amount was due to increased
investment in software development on new and existing products to fuel future
Company growth, such as the Laser Pro Mortgage and forthcoming Laser Pro 5.0
Windows based products. Investments in Company infrastructure necessary to
accommodate the Company's continuing expansion, both in physical space and in
systems requirements, used another $0.9 million.
Cash provided by financing activities of $1.2 million during the quarter ended
March 31, 1997, primarily resulted from $2.0 million in borrowings from the bank
line of credit facility, offset by the payment of approximately $0.9 million in
notes related to the April 1996 acquisitions. In addition, $0.3 million of cash
was provided by the exercise of stock options and $0.1 million was used for
payments on long term debt.
14
<PAGE>
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
$3.6 million had been used at March 31, 1997.
The Company believes that funds expected to be generated from existing
operations and borrowings under its revolving line of credit will provide the
Company with sufficient funds to finance its operations. However, any
significant new acquisitions or investments would require additional financing.
In the short term, any such additional financing would most likely take the form
of convertible debt. In the longer term, the Company plans to revisit the
alternative of a stock offering. No assurance can be given that additional
financing will be available or, that if available, such financing will be
obtainable on terms favorable to the Company or its 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
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 March 31, 1997.
15
<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: May 8, 1997 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)
16
<PAGE>
CFI PROSERVICES, INC.
CALCULATIONS OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------------------------------
1997 1996
-------------------------- --------------------------
Primary Fully Diluted Primary Fully Diluted
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Weighted Average Shares Outstanding
For The Period 4,872 4,872 4,604 4,604
Dilutive Common Stock Options Using The
Treasury Stock Method 270 270 277 355
-------------------------- --------------------------
Total Shares Used For Per Share Calculations 5,142 5,142 4,881 4,959
Net Income Applicable to Common Stock 768 768 869 869
-------------------------- --------------------------
Net Income Per Common Share $ 0.15 $ 0.15 $ 0.18 $ 0.18
-------------------------- --------------------------
-------------------------- --------------------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 20,165
<ALLOWANCES> 1,361
<INVENTORY> 189
<CURRENT-ASSETS> 23,539
<PP&E> 5,156
<DEPRECIATION> 6,142
<TOTAL-ASSETS> 45,549
<CURRENT-LIABILITIES> 20,421
<BONDS> 6,624
752
0
<COMMON> 18,427
<OTHER-SE> 3,261
<TOTAL-LIABILITY-AND-EQUITY> 45,549
<SALES> 1,181
<TOTAL-REVENUES> 16,002
<CGS> 517
<TOTAL-COSTS> 5,629
<OTHER-EXPENSES> 8,453
<LOSS-PROVISION> 206
<INTEREST-EXPENSE> (89)
<INCOME-PRETAX> 1,414
<INCOME-TAX> 622
<INCOME-CONTINUING> 792
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 768
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
