<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 12, 1997
REGISTRATION NO. 333-15505
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 3
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
CFI PROSERVICES, INC.
(Exact name of small business issuer as specified in its charter)
OREGON 93-0704365
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 S.W. SIXTH AVENUE
PORTLAND, OREGON 97204
(503) 274-7280
(Address and telephone number of registrant's principal executive offices and
principal place of business)
----------------
MATTHEW W. CHAPMAN
CHIEF EXECUTIVE OFFICER AND CHAIRMAN
400 S.W. SIXTH AVENUE
PORTLAND, OREGON 97204
(503) 274-7280
(Name, address and telephone number of agent for service)
----------------
COPIES TO:
F. Scott Farleigh, Esq. Gavin B. Grover, Esq.
Heather Zane Anderson, Esq. Tamara Powell Tate, Esq.
Farleigh, Wada & Witt, P.C. Eda S.L. Tan, Esq.
121 S.W. Morrison St., Suite 600 Morrison & Foerster LLP
Portland, Oregon 97204 425 Market Street
(503) 228-6044 San Francisco, California 94105
(415) 268-7000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
----------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / ________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION FEE
SECURITIES TO BE REGISTERED BE REGISTERED PER SHARE OFFERING PRICE (1)
<S> <C> <C> <C> <C>
Common Stock, no par value 1,560,000 $15.50 $24,180,000 $7,327
</TABLE>
(1) Registration fee of $10,330 paid in connection with initial filing.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. THESE
SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY THEM BE ACCEPTED PRIOR TO THE
TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. A REGISTRATION STATEMENT
RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION, OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED FEBRUARY 12, 1997
PROSPECTUS
1,550,000 SHARES
[LOGO]
COMMON STOCK
All of the 1,550,000 shares of Common Stock offered hereby are being sold by
CFI ProServices, Inc. The Company's Common Stock is quoted on the Nasdaq
National Market under the symbol PROI. On February 11, 1997, the last reported
sale price of the Company's Common Stock was $15.50 per share. See "Price Range
of Common Stock."
--------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
<S> <C> <C> <C>
Per Share................................ $ $ $
Total (3)................................ $ $ $
</TABLE>
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $500,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to an aggregate of 10,000 additional shares of Common Stock solely to cover
over-allotments, if any. If all such shares are purchased, the total Price
to Public, Underwriting Discount and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
--------------
The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1997, at the office of the agent of
Hambrecht & Quist LLC in New York, New York.
HAMBRECHT & QUIST
DAIN BOSWORTH
INCORPORATED
PACIFIC CREST SECURITIES INC.
, 1997
<PAGE>
CFI SOLUTIONS STRATEGY
[Diagram showing the clustering of the Company's products, by product category
(listed below), around a wheel representing both a NETWORK SERVER and LOCAL/WIDE
AREA NETWORK with HOST SYSTEMS CONNECTIVITY connecting to the NETWORK SERVER in
the center of the wheel.]
LENDING WORKSTATION
Consumer, Commercial
Indirect
Real Estate
Loan Decision Support
CORPORATE OFFICES
Community Investment Analysis
CALL CENTER
Sales & Service
BRANCH OFFICES
Teller
Sales & Service
New Account Opening
ELECTRONIC DELIVERY
PC Private-Dial Banking
PC Internet Banking
ACH Transactions
Remittance Processing
CFI's software solutions have been licensed by more than 4,700 financial
institutions to automate customer service and other operations at multiple
points of customer contact. CFI provides a broad suite of products in the areas
of lending, operations, electronic delivery and connectivity. Financial
institutions use CFI products to improve sales and services, increase
productivity, strengthen customer relationships and maintain compliance with
both internal business policies and external government regulations. The
Company's products are designed to operate in network environments and interface
to host computing systems.
--------------
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 10b-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE
"UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
--------------
Some of the Company's products are currently undergoing development. There can
be no assurance that such products will be released according to schedule or at
all.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS, OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, OR THE CONTEXT
OTHERWISE REQUIRES, THE TERM "CFI" OR THE "COMPANY" REFERS TO CFI PROSERVICES,
INC. AND ITS SUBSIDIARIES. CERTAIN OF THE STATEMENTS CONTAINED IN THIS
PROSPECTUS ARE FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENTS. SEE "RISK
FACTORS."
THE COMPANY
CFI ProServices, Inc. ("CFI" or the "Company") is a leading provider of
software solutions which automate customer service and support functions within
the financial services industry. The Company integrates extensive knowledge of
banking, technology and regulatory compliance requirements into a broad suite of
software solutions. The Company's solutions enable financial institutions to
perform transactions across multiple delivery channels, including branches, call
centers and electronic banking. Over 40% of U.S. commercial banks have licensed
at least one of the Company's solutions. The Company believes its brand name and
reputation as a provider of high-quality solutions are widely recognized in the
financial institution community. The Company's strategy is to establish
long-term relationships with its customers and cross-sell multiple products
throughout its customer base.
The Company's products provide a number of benefits to financial
institutions by addressing the regulatory requirements, system connectivity
issues and internal business processes faced by these institutions. Using CFI's
solutions, financial institutions are able to simplify sales and service
processes and improve productivity through reduced operating costs and expanded
capacity. CFI's products also enable institutions to comply with both internal
business processes and external government regulations.
CFI's products address the functions of a financial institution in the areas
of lending, operations, electronic delivery and connectivity. CFI's lending
products automate nearly every step in the lending process for consumer,
commercial, indirect and real estate lines of business, including loan
application and analysis, loan closing, portfolio analysis and risk management,
as well as connectivity to credit scoring and reporting systems and for remote
printing of loan documents. CFI's operations products automate the customer
service, sales and account opening functions for the branch office platform,
teller station and telephone call center. These products provide a common view
of the entire customer relationship, enabling service personnel to leverage
selling opportunities. CFI's electronic delivery products provide personal
computer private-dial and Internet access to account inquiry and transaction
capabilities, as well as automated clearinghouse ("ACH") transaction management
and remittance processing. The Company's home banking products provide over a
dozen functions, including account balance, account history, bill payment and
online loan applications. The Company is currently a leading provider of
personal computer banking solutions in the United States, with approximately 150
institutions offering private-dial or Internet banking services using the
Company's solutions. CFI's connectivity products and services enable
institutions to transfer or exchange data between CFI software and host systems
across incompatible host systems.
CFI has licensed its products to more than 4,700 commercial banks, thrifts
and credit unions. Some of the Company's largest accounts include the following
institutions: First Union National Bank, Star Banc Corporation, Banc One
Services Corporation, The BISYS Group, Chase Manhattan Bank, First Citizens Bank
& Trust Co., Barnett Banks, Inc., Banco Santander Puerto Rico, Union Planters
Corporation and Regions Financial Corp. The Company distributes its products and
services through an internal direct sales force of 37 professionals,
supplemented by third-party vendor and turnkey relationships with numerous
product and service vendors, including IBM and NCR.
3
<PAGE>
During 1993, substantially all of the Company's revenue was derived from the
Company's compliance oriented Laser Pro lending products and Deposit Pro
operations products. Today, the Company licenses over 20 products and is much
less reliant on the Laser Pro and Deposit Pro product lines. For the year ended
December 31, 1996, revenue from these compliance oriented product lines
decreased to 51% of the Company's total revenue. CFI generates recurring revenue
from software maintenance agreements. For the year ended December 31, 1996,
service and support fee revenue accounted for approximately 37% of consolidated
revenue. Substantially all software customers subscribe to the Company's service
and support programs.
As part of its growth strategy, the Company has acquired businesses,
products and technologies which enhance its product suite, expand its customer
base and leverage product cross-selling opportunities. The Company has acquired
ten companies or businesses since 1994. CFI believes that it has achieved its
objectives of growth and of broadening its product offerings through this
acquisition program and intends to continue to selectively pursue acquisition
opportunities.
The Company's principal executive offices are located at 400 S.W. Sixth
Avenue, Portland, Oregon 97204, and the telephone number at that address is
(503) 274-7280.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company... 1,550,000 shares
Common Stock to be outstanding after
this offering........................ 6,374,973 shares (1)
Use of proceeds....................... For general corporate purposes, working
capital (including payment on the line
of credit) and possible acquisitions.
Nasdaq National Market symbol......... PROI
</TABLE>
- ------------------------------
(1) Based on shares outstanding as of December 31, 1996. Excludes 831,820 shares
of Common Stock issuable upon exercise of stock options outstanding as of
December 31, 1996 at an average exercise price of $10.92 per share and
33,341 shares of Common Stock that the Company is obligated to issue in
January 1998 in connection with an acquisition. See "Capitalization."
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(reclassified (1); in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1992 1993 1994 1995 (2) 1996 (3)
---------- ---------- ---------- ---------- -----------------------
PRO FORMA
ACTUAL (UNAUDITED)(4)
---------- ----------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenue
Software license fees................. $ 8,307 $ 14,686 $ 16,781 $ 18,918 $ 33,935 $ 35,535
Service and support................... 6,626 9,748 12,775 15,060 22,336 23,983
Other................................. 2,045 2,720 3,060 2,798 3,676 3,705
---------- ---------- ---------- ---------- ---------- ----------
Total revenue....................... 16,978 27,154 32,616 36,776 59,947 63,223
Cost of revenue......................... 4,493 8,047 9,646 11,672 20,844 21,981
---------- ---------- ---------- ---------- ---------- ----------
Gross profit............................ 12,485 19,107 22,970 25,104 39,103 41,242
---------- ---------- ---------- ---------- ---------- ----------
Operating expenses...................... 10,389 15,670 17,859 20,552 29,810 31,742
Acquired in-process research and
development and restructuring.......... -- -- -- 4,549 8,030 8,030
---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses............ 10,389 15,670 17,859 25,101 37,840 39,772
---------- ---------- ---------- ---------- ---------- ----------
Income from operations.................. 2,096 3,437 5,111 3 1,263 1,470
Net income.............................. 1,744 2,264 3,514 323 114 130
Preferred stock dividend................ 908 733 97 97 97 97
---------- ---------- ---------- ---------- ---------- ----------
Net income applicable to common
shareholders........................... $ 836 $ 1,531 $ 3,417 $ 226 $ 17 $ 33
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Net income per share.................... $ 0.25 $ 0.41 $ 0.71 $ 0.05 $ -- $ 0.01
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Shares used in per share calculations... 3,321 3,775 4,806 4,877 5,112 5,112
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------
ACTUAL AS ADJUSTED (5)
--------- ---------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................................................ $ -- $ 20,128
Working capital.......................................................................... 2,722 24,866
Total assets............................................................................. 46,845 66,973
Short-term debt.......................................................................... 2,896 1,305
Long-term debt, less current portion..................................................... 2,810 2,810
Mandatory Redeemable Class A Preferred Stock............................................. 754 754
Shareholders' equity..................................................................... 20,238 42,382
</TABLE>
- ------------------------------
(1) Certain amounts for all periods prior to 1996 have been reclassified to
conform to the current presentation.
(2) Results for the year ended December 31, 1995 include a pretax charge of $4.5
million. The charge consists of $3.7 million for the value of Culverin
Corporation's ("Culverin") in-process research and development efforts at
the date of acquisition and $0.8 million for restructuring. Excluding the
impact of the acquired in-process research and development and restructuring
charges, net income and net income per share would have been $3.1 million
and $0.64, respectively. The year ended December 31, 1995 statement of
income includes the results of Culverin's operations since the date of
acquisition in November 1995. See Note 2 of Notes to Consolidated Financial
Statements.
(3) Results for the year ended December 31, 1996 include a pretax charge of $8.0
million for the value of in-process research and development efforts at the
date of acquisition pertaining to five companies acquired in April 1996.
Excluding the impact of the acquired in-process research and development
charges, net income and net income per share would have been $5.2 million
and $1.02, respectively. The results of operations for the year ended
December 31, 1996 include the results of these companies' operations since
the date of acquisition in April 1996. See Note 2 of Notes to Consolidated
Financial Statements.
(4) The unaudited pro forma consolidated statement of operations for the year
ended December 31, 1996 reflects the acquisitions of five companies acquired
in April 1996 as if the acquisitions had occurred on January 1, 1996. See
Note 2 of Notes to Consolidated Financial Statements. Such information is
not necessarily indicative of either future results of operations or the
results that might have occurred if the acquisitions had occurred on January
1, 1996. See "Pro Forma Consolidated Financial Statements."
(5) Adjusted to reflect the sale of 1,550,000 shares of Common Stock offered by
the Company hereby at an assumed public offering price of $15.50 per share
after deduction of the estimated underwriting discount and offering expenses
payable by the Company. See "Use of Proceeds." Supplemental net income per
share, giving effect to the repayment of the line of credit with a portion
of the net proceeds of this offering, is $0.01 for the year ended December
31, 1996.
5
<PAGE>
EXCEPT AS OTHERWISE INDICATED, THE INFORMATION CONTAINED IN THIS PROSPECTUS
ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION.
The Company and its subsidiaries own the following trademarks: ACH Manager,
ACH Remote, Application Manager, CFI, CFI ProServices, Contact!, Culverin,
Deposit Pro, Encore!, fisCAL, fisCAL Plus, Genesys, GeoPro, Laser Pro, Laser Pro
Lightning, LOANscape, LoansPlus, Personal Branch, Pro Active, ProForms,
ProServices, RPxpress!, StarGate, StarGate F/X, and TriScore. All other brands
and product names referenced in this Prospectus are registered trademarks,
trademarks, or service marks of their respective holders.
6
<PAGE>
RISK FACTORS
THE STATEMENTS CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS
THAT ARE NOT HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT, INCLUDING
STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS, BELIEFS, INTENTIONS OR
STRATEGIES REGARDING THE FUTURE. FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT
LIMITATION, STATEMENTS IN "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," "BUSINESS" AND ELSEWHERE IN
THIS PROSPECTUS (OR INCORPORATED BY REFERENCE HEREIN) REGARDING, AMONG OTHER
THINGS, EXPECTATION OF FUTURE QUARTERLY FLUCTUATIONS, MARKET ACCEPTANCE,
INTRODUCTION OF NEW PRODUCTS AND ENHANCEMENTS, DEPENDENCE ON HOST PROCESSOR
RELATIONSHIPS, INTEGRATION OF ACQUISITIONS, SALES AND IMPLEMENTATION CYCLES,
MANAGEMENT OF GROWTH, COMPETITION, DEPENDENCE ON THE FINANCIAL SERVICES
INDUSTRY, DEVELOPMENT AND INTRODUCTION OF ELECTRONIC DELIVERY AND CALL CENTER
PRODUCTS, PRODUCT CONCENTRATION, PRODUCT LIABILITY, DEPENDENCE UPON PROPRIETARY
TECHNOLOGY, DEPENDENCE ON KEY EMPLOYEES, AND BROAD MANAGEMENT DISCRETION IN USE
OF PROCEEDS. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS ARE
BASED ON INFORMATION AVAILABLE TO THE COMPANY AS OF THE DATE HEREOF, AND THE
COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. IT
IS IMPORTANT TO NOTE THAT THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY
FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. AMONG THE FACTORS
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY ARE THE FACTORS DETAILED
BELOW. ACCORDINGLY, IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS AND
THE DOCUMENTS INCORPORATED HEREIN, THE FOLLOWING RISK FACTORS SHOULD BE
CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS BUSINESS BEFORE
PURCHASING SHARES OF THE COMMON STOCK OFFERED HEREBY.
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 Company's product mix,
including expenses of implementation and royalties related to certain products;
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
platform, 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'
7
<PAGE>
products, some of the Company's products have been licensed to a limited number
of customers or, as to any 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 introduced
a Windows-based loan documentation product. Although this competing product has
only recently 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 introduction of this product.
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,
8
<PAGE>
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.
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
489 employees as of December 31, 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
9
<PAGE>
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 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. For example,
one of the Company's competitors has introduced a Windows-based loan
documentation product. Although this competing product has only recently been
released and the Company believes that its Windows products will
10
<PAGE>
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 introduction of this product. There also can be no
assurance that the introduction or announcement of new product offerings by the
Company or one or 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
11
<PAGE>
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.
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 51% of the Company's total
revenue for the year ended December 31, 1996, and over 91%, 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
12
<PAGE>
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.
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
13
<PAGE>
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.
ANTITAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS; POSSIBLE ISSUANCES OF
PREFERRED STOCK. Certain provisions of the Company's Amended and Restated
Articles of Incorporation (the "Articles"), including the classified Board of
Directors currently in effect, could delay the removal of incumbent directors
and could make more difficult a merger, tender offer or proxy contest involving
the Company, even if such event would be beneficial to the interests of the
shareholders. In addition, the Company has 5,000,000 shares of authorized Series
Preferred Stock. The Company may issue shares of such Series Preferred Stock in
the future without further shareholder approval and upon such terms and
conditions, and having such rights, privileges and preferences, as the Board of
Directors may determine. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Series Preferred Stock that may be issued in the future. The issuance of Series
Preferred Stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from acquiring, a majority of the outstanding voting stock of the Company. The
Articles also provide that certain business combinations must be approved by
holders of at least 75% of the outstanding shares of Common Stock. See
"Description of Securities Being Registered."
SHARES ELIGIBLE FOR FUTURE SALE. Future sales of a substantial number of
restricted shares of Common Stock in the public market, or the issuance of
shares of Common Stock, upon the exercise of options or otherwise, could affect
adversely the market price of Common Stock. Upon completion of this offering,
the Company will have outstanding an aggregate of 6,374,973 shares of Common
Stock, assuming no exercise of the Underwriters' over-allotment option and no
exercise of outstanding options, based upon the number of shares outstanding as
of December 31, 1996. Substantially all of such shares will be freely saleable
without restriction or further registration under the Securities Act of 1933, as
amended (the "Securities Act"), except that 34,026 shares are held in escrow
until April 1998 and shares of Common Stock held by affiliates are "restricted
securities" as that term is defined in Rule 144 under the Securities Act
("Restricted Shares"). Restricted Shares may be sold in the public market only
if registered or if they qualify for an exemption from registration under Rule
144, 144(k) or 701 promulgated under the Securities Act. Of the Restricted
Shares, a total of 497,578 shares as of December 31, 1996 are subject to lock-up
agreements that expire 90 days from the date of this Prospectus. The Company is
obligated to issue 33,341 shares of Common Stock in connection with an
acquisition, which shares will be eligible for sale under Rule 144 in January
1998. Furthermore, the Company may elect to issue additional shares in lieu of
cash royalty obligations arising from prior acquisitions. In addition, the
Company has filed registration statements under the Securities Act registering
shares of Common Stock issued and issuable upon exercise of options granted
pursuant to the Company's stock option plans, stock option agreements and
employee stock purchase plan. As of December 31, 1996, the Company has reserved
1,162,104 shares of Common Stock for issuance pursuant to the Company's stock
option plans, stock option agreements, and employee stock purchase plan. Of this
amount, 831,820 shares were subject to outstanding options, 250,990 of which
were subject to options that were exercisable as of December 31, 1996. See
"Shares Eligible For Future Sale."
BROAD MANAGEMENT DISCRETION IN USE OF PROCEEDS. The Company intends to use
the net proceeds of this offering for working capital (including payment on the
line of credit) and other corporate purposes. The Company may use a portion of
the net proceeds for acquisitions of complementary products, technologies or
businesses. However, no plan or agreement with respect to any such acquisition
currently exists. Accordingly,
14
<PAGE>
the Company's management will retain broad discretion as to the application of
the net proceeds of the offering. There can be no assurance that management will
make such application effectively or in a manner that will not result in a
material adverse effect on the Company or its results of operations.
VOLATILITY OF STOCK PRICE. The public offering price of the Common Stock
offered hereby will be determined through negotiations between the Company and
the Underwriters and may be lower than recent trading prices of the Company's
Common Stock on the Nasdaq National Market. See "Underwriting." On February 11,
1997, the last reported sales price for the Common Stock on the Nasdaq National
Market was $15.50 per share. There can be no assurance that the trading price of
the Common Stock on the Nasdaq National Market will not decline below the public
offering price or recent trading prices. Future announcements concerning the
Company or its competitors, technological innovations, new product
introductions, government regulations, market conditions in the Company's
industries or changes in earnings estimates by analysts may cause the trading
price of the Common Stock to fluctuate substantially.
The trading price of the Company's Common Stock on the Nasdaq National
Market has been and may continue to be subject to wide fluctuations in response
to the Company's financial performance, market conditions in the software
industry, new product introductions by the Company or its competitors or planned
capital raising activities, as well as factors that may have no relevance to the
Company or its markets including general economic, political and market
conditions, such as recessions. In addition, historical trading volumes of the
Company's Common Stock on the Nasdaq National Market have been consistently low,
which the Company believes has amplified, and will continue to amplify, the
volatility in the trading prices of the Common Stock.
POSSIBLE EQUITY ISSUANCES; DILUTION. To the extent outstanding options to
purchase the Company's Common Stock are exercised, there will be further
dilution. In connection with future capital-raising activities, or the
acquisition of products, technologies or businesses, the Company may issue
additional equity or convertible debt securities. In connection with several of
the Company's acquisitions since 1994, including the acquisitions of Halcyon
Group, Inc., Culverin and The Genesys Solutions Group, Inc., the Company has
issued or is obligated to issue shares of Common Stock to the shareholders of
these acquired entities. In certain acquisitions, the Company has the option to
issue shares of its Common Stock in lieu of cash royalty payments that may
become payable in the future. Future issuances of additional equity or
convertible debt securities could result in additional dilution to the Company's
shareholders. Investors purchasing shares of Common Stock in this offering will
incur immediate and substantial dilution.
15
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,550,000 shares of
Common Stock offered by the Company hereby, at an assumed public offering price
of $15.50, are estimated to be approximately $22.1 million ($22.3 million if the
Underwriters' over-allotment option is exercised in full), after deducting the
estimated underwriting discount and estimated offering expenses. The net
proceeds will be used for general corporate purposes, working capital (including
payment on the line of credit) and possible acquisitions. The amounts actually
expended by the Company for working capital purposes will vary significantly
depending upon a number of factors, including future revenue growth, if any, the
amount of cash generated by the Company's operations, and the progress of the
Company's product development efforts. Hence, the Company's management will
retain broad discretion in the allocation of the net proceeds of this offering.
From time to time, in the ordinary course of business, the Company evaluates
potential acquisitions of complementary businesses, products or technologies,
for which a portion of the net proceeds may be used. However, the Company
currently has no understandings, commitments or agreements with respect to any
material acquisition of other businesses, products or technologies. Pending use
of the net proceeds for the above purposes, the Company intends to invest the
funds in investment-grade, short-term, interest-bearing securities.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its Common Stock.
The Company currently intends to retain any future earnings to finance the
growth and development of its business and, therefore, does not currently
anticipate paying any cash dividends on its Common Stock in the foreseeable
future.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has traded publicly on the Nasdaq National Market
under the trading symbol PROI since August 18, 1993. Prior to that time, there
was no public market for the Company's Common Stock. The table below sets forth
the high and low sales prices for the Company's Common Stock for the periods
indicated as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1994
First Quarter............................................. $14 3/4 $ 9 7/8
Second Quarter............................................ 15 1/2 10 1/2
Third Quarter............................................. 15 1/4 12
Fourth Quarter............................................ 15 3/4 13 1/4
1995
First Quarter............................................. 17 3/4 11 3/4
Second Quarter............................................ 14 3/4 9 1/4
Third Quarter............................................. 17 1/2 12 5/8
Fourth Quarter............................................ 16 1/4 11 1/4
1996
First Quarter............................................. 15 3/4 9 1/4
Second Quarter............................................ 28 1/4 15 1/8
Third Quarter............................................. 25 5/8 15 1/4
Fourth Quarter............................................ 20 13 1/2
1997
First Quarter (through February 11)....................... 20 7/8 14
</TABLE>
On February 11, 1997, the last reported sales price reported on the Nasdaq
National Market for the Common Stock was $15.50 per share. On the same date,
there were approximately 230 holders of record of the Common Stock.
16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1996 and as adjusted to give effect to the receipt by the Company
of the estimated net proceeds from the sale by the Company of the 1,550,000
shares of Common Stock offered hereby at an assumed public offering price of
$15.50 per share after deducting the estimated underwriting discount and
estimated offering expenses. This table should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt................................................................. $ 2,896 $ 1,305
--------- -----------
--------- -----------
Long-term debt, less current portion............................................ $ 2,810 $ 2,810
Mandatory Redeemable Class A Preferred Stock.................................... 754 754
Shareholders' equity
Series Preferred Stock, 5,000,000 shares authorized, none issued and
outstanding.................................................................. -- --
Common Stock, no par value; 10,000,000 shares authorized, 4,824,973 shares
issued and outstanding actual; and 6,374,973 shares issued and outstanding as
adjusted..................................................................... 17,745 39,889
Retained earnings............................................................... 2,493 2,493
--------- -----------
Total shareholders' equity...................................................... 20,238 42,382
--------- -----------
Total capitalization.......................................................... $ 23,802 $ 45,946
--------- -----------
--------- -----------
</TABLE>
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial information should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto included
elsewhere herein. The selected financial data regarding the Company set forth
below are as of and for each of its most recent five years ended December 31,
1996. The financial information for each of the three years in the period ended
December 31, 1996 has been derived from the Company's consolidated financial
statements for such periods, which were audited by Arthur Andersen LLP as
indicated in their report included elsewhere in this Prospectus. The financial
data for the years ended December 31, 1992 and 1993 have been derived from
audited financial statements not included herein. Certain amounts for all
periods prior to 1996 have been reclassified to conform to the current
presentation. The unaudited pro forma statement of operations for the year ended
December 31, 1996 reflects the acquisition of five companies acquired in April
1996 as if the acquisitions had occurred on January 1, 1996. See Note 2 of Notes
to Consolidated Financial Statements. Such information is not necessarily
indicative of either future results of operations or the results that might have
occurred if the acquisition had occurred on January 1, 1996. See "Pro Forma
Consolidated Financial Statements."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1992 1993 1994 1995 (1) 1996 (2)
----------- ----------- ----------- ----------- -------------------------
ACTUAL PRO FORMA
----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenue
Software license fees................. $ 8,307 $ 14,686 $ 16,781 $ 18,918 $ 33,935 $ 35,535
Service and support................... 6,626 9,748 12,775 15,060 22,336 23,983
Other................................. 2,045 2,720 3,060 2,798 3,676 3,705
----------- ----------- ----------- ----------- ----------- -----------
Total revenue......................... 16,978 27,154 32,616 36,776 59,947 63,223
Cost of revenue......................... 4,493 8,047 9,646 11,672 20,844 21,981
----------- ----------- ----------- ----------- ----------- -----------
Gross profit............................ 12,485 19,107 22,970 25,104 39,103 41,242
----------- ----------- ----------- ----------- ----------- -----------
Operating expenses
Sales and marketing................... 5,477 7,840 8,194 9,558 12,725 13,222
Product development................... 2,861 4,803 5,153 6,356 10,615 11,262
General and administrative............ 1,981 2,957 4,352 4,295 5,425 6,126
Amortization of intangibles........... 70 70 160 343 1,045 1,132
Acquired in-process research and
development and restructuring........ -- -- -- 4,549 8,030 8,030
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses............ 10,389 15,670 17,859 25,101 37,840 39,772
----------- ----------- ----------- ----------- ----------- -----------
Income from operations.................. 2,096 3,437 5,111 3 1,263 1,470
Non-operating income (expense).......... (37) 138 377 487 18 (129)
----------- ----------- ----------- ----------- ----------- -----------
Income before income taxes.............. 2,059 3,575 5,488 490 1,281 1,341
Provision for income taxes.............. 315 1,311 1,974 167 1,167 1,211
----------- ----------- ----------- ----------- ----------- -----------
Net income.............................. 1,744 2,264 3,514 323 114 130
Preferred stock dividend................ 908 733 97 97 97 97
----------- ----------- ----------- ----------- ----------- -----------
Net income applicable to common
shareholders........................... $ 836 $ 1,531 $ 3,417 $ 226 $ 17 $ 33
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Net income per share.................... $ 0.25 $ 0.41 $ 0.71 $ 0.05 $ -- $ 0.01
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Shares used in per share calculations... 3,321 3,775 4,806 4,877 5,112 5,112
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents....................................... $ 1,844 $ 3,253 $ 1,514 $ 4,844 $ --
Working capital................................................. 1,343 10,583 10,336 8,759 2,722
Property and equipment, net..................................... 924 1,516 2,579 2,968 4,805
Total assets.................................................... 10,041 23,165 27,487 36,587 46,845
Short-term debt................................................. 301 120 -- 3,951 2,896
Long-term debt, less current portion............................ 103 17 -- 423 2,810
Mandatory Redeemable Class A Preferred Stock.................... 742 757 764 761 754
Shareholders' equity (deficit).................................. (1,998) 13,071 16,591 18,169 20,238
</TABLE>
- --------------------------
(1) Results for the year ended December 31, 1995 include a pretax charge of $4.5
million. The charge consists of $3.7 million for the value of Culverin's
in-process research and development efforts at the date of acquisition and
$0.8 million for restructuring. Excluding the impact of the acquired
in-process research and development and restructuring charges, net income
and net income per share would have been $3.1 million and $0.64,
respectively. The year ended December 31, 1995 statement of income includes
the results of Culverin's operations since the date of acquisition in
November 1995. See Note 2 of Notes to Consolidated Financial Statements.
(2) Results for the year ended December 31, 1996 include a pretax charge of $8.0
million for the value of in-process research and development efforts at the
date of acquisition pertaining to five companies acquired in April 1996.
Excluding the impact of the acquired in-process research and development
charges, net income and net income per share would have been $5.2 million
and $1.02, respectively. The results of operations for the year ended
December 31, 1996 include the results of these companies' operations since
the date of acquisition in April 1996. See Note 2 of Notes to Consolidated
Financial Statements.
19
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The unaudited Pro Forma Consolidated Statement of Operations presents the
effect of the acquisitions discussed in Note 1 of the Pro Forma Consolidated
Financial Statements as if the acquisitions had occurred at January 1, 1996. The
unaudited Pro Forma Consolidated Financial Statements of the Company are
presented for informational purposes only and may not reflect the Company's
future results of operations or what the results of operations of the Company
would have been had such transactions occurred as of the date indicated.
The unaudited Pro Forma Consolidated Financial Statements of the Company
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto contained elsewhere in this Prospectus.
CFI PROSERVICES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
MICROBILT
CFI FINANCIAL INPUT
PROSERVICES, PRODUCTS CREATIONS,
INC. DIVISION INC.
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenue
Software license fees........................... $ 33,935 $ 1,424 --
Service and support............................. 22,336 987 $ 525
Other........................................... 3,676 29 --
----------- ----------- -----
Total revenue................................. 59,947 2,440 525
Cost of revenue................................... 20,844 900 133
----------- ----------- -----
Gross profit.................................. 39,103 1,540 392
Operating expenses
Sales and marketing............................. 12,725 345 --
Product development............................. 10,615 529 16
General and administrative...................... 5,425 589 105
Amortization of intangibles..................... 1,045 -- --
Acquired in-process research and development.... 8,030 -- --
----------- ----------- -----
Total operating expenses...................... 37,840 1,463 121
----------- ----------- -----
Income (loss) from operations................. 1,263 77 271
Non-operating income (expense)
Interest expense................................ (251) -- --
Interest income................................. 271 -- --
Other, net...................................... (2) -- --
----------- ----------- -----
Total non-operating income (expense).......... 18 -- --
----------- ----------- -----
Income (loss) before income taxes................. 1,281 77 271
Provision for (benefit from) income taxes......... 1,167 27 --
----------- ----------- -----
Net income (loss)................................. 114 50 271
Preferred stock dividend.......................... 97 -- --
----------- ----------- -----
Net income (loss) applicable to common
shareholders..................................... $ 17 $ 50 $ 271
----------- ----------- -----
----------- ----------- -----
Net income (loss) per share....................... $ --
-----------
-----------
Shares used in per share calculations............. 5,112
-----------
-----------
<CAPTION>
CFI
PATHWAYS PROSERVICES,
HALCYON SOFTWARE, PRO FORMA INC. PRO
GROUP, INC. INC. ADJUSTMENTS FORMA
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue
Software license fees........................... $ 176 -- -- $ 35,535
Service and support............................. 135 -- -- 23,983
Other........................................... -- -- -- 3,705
----- --- ----- -----------
Total revenue................................. 311 -- -- 63,223
Cost of revenue................................... 36 -- $ 68(a) 21,981
----- --- ----- -----------
Gross profit.................................. 275 -- (68) 41,242
Operating expenses
Sales and marketing............................. 152 -- -- 13,222
Product development............................. 72 $ 30 -- 11,262
General and administrative...................... -- 7 -- 6,126
Amortization of intangibles..................... -- -- 87(b) 1,132
Acquired in-process research and development.... -- -- -- 8,030
----- --- ----- -----------
Total operating expenses...................... 224 37 87 39,772
----- --- ----- -----------
Income (loss) from operations................. 51 (37) (155) 1,470
Non-operating income (expense)
Interest expense................................ (5) -- (65)(c) (321)
Interest income................................. -- -- (77)(d) 194
Other, net...................................... -- -- -- (2)
----- --- ----- -----------
Total non-operating income (expense).......... (5) -- (142) (129)
----- --- ----- -----------
Income (loss) before income taxes................. 46 (37) (297) 1,341
Provision for (benefit from) income taxes......... -- (13) 30(e) 1,211
----- --- ----- -----------
Net income (loss)................................. 46 (24) (327) 130
Preferred stock dividend.......................... -- -- -- 97
----- --- ----- -----------
Net income (loss) applicable to common
shareholders..................................... $ 46 $ (24) $ (327) $ 33
----- --- ----- -----------
----- --- ----- -----------
Net income (loss) per share....................... $ 0.01
-----------
-----------
Shares used in per share calculations............. 5,112
-----------
-----------
</TABLE>
The accompanying notes are an integral part of this pro forma consolidated
statement.
20
<PAGE>
CFI PROSERVICES, INC.
FOOTNOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
1. BASIS OF PRESENTATION
The accompanying unaudited pro forma consolidated financial statements have
been prepared to present the effect of the acquisition by the Company of
MicroBilt Financial Products Division ("MFPD"), which includes OnLine Financial
Communication Systems, Inc. and COIN Banking Systems, Inc., Input Creations,
Inc. ("Input"), Halcyon Group, Inc. ("Halcyon") and Pathways Software, Inc.
("Pathways"). The pro forma consolidated financial statements have been prepared
based upon the historical financial statements of the Company, MFPD, Input,
Halcyon and Pathways as if the acquisitions had occurred on January 1, 1996. The
historical amounts reflected in the pro forma consolidated financial statements
for MFPD, Input, Halcyon and Pathways are for the periods prior to their
respective acquisitions by the Company.
The Pro Forma Consolidated Statements of Operations are presented for
informational purposes only and may not be indicative of the results of
operations that actually would have occurred if the transactions had been in
effect as of January 1, 1996, nor do they purport to indicate the results of
future operations of the Company. The pro forma consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in this Prospectus. Management
believes that all adjustments necessary to present fairly such pro forma
consolidated financial statements have been made based on the terms and
structure of the transactions.
2. PRO FORMA ADJUSTMENTS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
---------------
<S> <C>
a. Cost of revenue was adjusted as follows:
To record purchased software amortization............. $ 68
---
$ 68
---
---
b. Amortization of intangibles expense was adjusted as
follows:
To record other intangible amortization............... $ 87
---
---
c. To record interest expense on acquisition-related
debt....................................................... $ 65
---
---
d. To record lost interest income on cash paid for
acquisitions............................................... $ 77
---
---
e. Income tax expense (benefit) was adjusted as follows:
To record pro forma taxes related to Input's and
Halcyon's S Corporation status....................... $ 127
To record decrease in taxes due to additional interest
expense.............................................. (22)
To record decrease in taxes due to lost interest
income............................................... (26)
To record tax benefit of deductible purchased software
amortization......................................... (26)
To record tax benefit of deductible other intangible
amortization......................................... (23)
---
$ 30
---
---
</TABLE>
21
<PAGE>
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 DISCUSSION IN THIS PROSPECTUS
CONTAINS 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 PROSPECTUS
SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS
WHEREVER THEY APPEAR IN THIS PROSPECTUS. 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," AS
WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS.
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, approximately 150 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 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 year ended December 31, 1996 revenue
from these product lines decreased to 51% of the Company's total revenue.
CFI generates recurring revenue from software maintenance agreements. For
the year ended December 31, 1996, service and support fees revenue, primarily
for Laser Pro and Deposit Pro, accounted for approximately 37% 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 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 December 31, 1996 was approximately $10.0
million, as compared to approximately $6.1 million and $2.0 million at the end
of 1995 and 1994, 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
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.
22
<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. 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 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 April 1996 Over 1,000 branch automation customers
Systems, Inc. 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. See "--
Cost of Revenue." 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, including
joint ventures.
23
<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:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenue
Software license fees............................................................ 51.5% 51.4% 56.6%
Service and support.............................................................. 39.2 41.0 37.3
Other............................................................................ 9.3 7.6 6.1
----- ----- -----
Total revenue...................................................................... 100.0 100.0 100.0
Gross profit....................................................................... 70.4 68.3 65.2
Operating expenses
Sales and marketing.............................................................. 25.1 26.0 21.2
Product development.............................................................. 15.8 17.3 17.7
General and administrative....................................................... 13.3 11.7 9.1
Amortization of intangibles...................................................... 0.6 0.9 1.7
Acquired in-process research and development and restructuring................... -- 12.4 13.4
----- ----- -----
Total operating expenses........................................................... 54.8 68.3 63.1
----- ----- -----
Income from operations............................................................. 15.6 -- 2.1
Non-operating income............................................................... 1.2 1.4 --
----- ----- -----
Income before income taxes......................................................... 16.8 1.4 2.1
Provision for income taxes......................................................... 6.0 0.5 1.9
Preferred stock dividend........................................................... 0.3 0.3 0.2
Net income applicable to common shareholders....................................... 10.5% 0.6% --
----- ----- -----
----- ----- -----
</TABLE>
The following table sets forth percentage changes period over period in the
statements of income data of the Company:
<TABLE>
<CAPTION>
FISCAL YEAR
1996
FISCAL YEAR 1995 OVER
OVER FISCAL YEAR
FISCAL YEAR 1994 1995
------------------- ---------------
<S> <C> <C>
Revenue
Software license fees......................................................... 13% 79%
Service and support........................................................... 18 48
Other......................................................................... (9) 31
Total revenue................................................................... 13 63
Gross profit.................................................................... 9 56
Operating expenses
Sales and marketing........................................................... 17 33
Product development........................................................... 23 67
General and administrative.................................................... (1) 26
Total operating expenses........................................................ 40 51
Income from operations.......................................................... (99) NM(1)
Non-operating income............................................................ 29 (96)
Income before income taxes...................................................... (91) 162
Provision for income taxes...................................................... (92) 599
Net income applicable to common shareholders.................................... (93) (93)
</TABLE>
- ------------------------
(1) Not meaningful.
24
<PAGE>
REVENUE
Total revenue increased 63% to $59.9 million for the year ended December 31,
1996 compared to $36.8 million for the comparable period in 1995. Revenue
attributable to the companies acquired in April 1996 accounted for $12.5 million
of the $23.1 million increase, and the Culverin products acquired in November
1995 accounted for an additional $5.8 million. Total revenue increased 13% to
$36.8 million and 20% to $32.6 million for the years ended December 31, 1995 and
1994, respectively. Revenue attributable to Culverin products accounted for $1.1
million of the increase in 1995.
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 $15.0 million, or 79%, to $33.9 million for
the year ended December 31, 1996 from $18.9 million for the comparable period in
1995. Of the increase, $7.0 million was contributed by the companies acquired in
April 1996, $5.1 million was attributable to the Culverin products acquired in
November 1995 and $1.8 million was from internal growth, principally from
Deposit Pro and Personal Branch. Of the $7.0 million increased revenue
attributable to the April 1996 acquisitions, 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 $5.1 million. 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>
YEAR ENDED
DECEMBER 31,
----------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Lending Products.................................................. 72% 66% 48%
Operations Products............................................... 26 22 37
Electronic Delivery Products...................................... 2 10 12
Connectivity Products............................................. -- 2 3
-- -- --
Total............................................................. 100% 100% 100%
-- -- --
-- -- --
</TABLE>
Lending products license revenue grew $4.1 million, or 34%, for the year
ended December 31, 1996 over the comparable period in 1995. Substantially all of
the increase came from sales of Application Manager, fisCAL, and LOANscape, all
products from April 1996 acquisitions. As a percentage of total license revenue,
lending products declined from 66% in 1995 to 48% in 1996, reflecting the
Company's successful efforts to broaden its product offerings.
Operations products increased $8.4 million, or 197%, for the year ended
December 31, 1996, over the comparable period in 1995. As a percentage of total
license revenue, operations products revenue increased from 22% in 1995 to 37%
in 1996. Sales of the Encore! products acquired in November 1995 and OnLine
branch automation products acquired in April 1996, accounted for nearly $7.4
million of the increase. Increased Deposit Pro sales, attributable to the
release of the Windows version of that product, accounted for most of the
remainder of the increase.
License fees from the sale of electronic delivery products increased $2.1
million, or 103%, for the year ended December 31, 1996 compared to the same
period a year ago. The Personal Branch home banking products license revenue,
which grew 71% in 1996 over 1995, accounted for $1.2 million of the increase for
the year, and the remainder of the increase is attributable to sales of the
Culverin remittance processing products. As a percentage of license revenue,
electronic delivery products revenue grew from 10% in 1995 to 12% in 1996.
Personal Branch has been licensed to approximately 150 financial institutions.
25
<PAGE>
The StarGate connectivity products grew 110% to $0.8 million in the year
ended 1996, compared to the same period a year ago. 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.
Software license revenue increased $2.1 million, or 13%, in 1995 over 1994.
Higher sales of Personal Branch, along with revenue from the newly acquired
Culverin products, were the primary causes of the increase. Sales of Laser Pro
and Deposit Pro, the Company's core historical product lines, were essentially
flat for 1995 compared to 1994. Consequently, with increased sales of Personal
Branch and the Culverin products, revenue for Laser Pro and Deposit Pro declined
as a percentage of total software fees from 85% in 1994 to 76% in 1995.
During 1995, pricing for Personal Branch was restructured to make the
product more appealing to the market. The initial sale price is now generally
fixed (where previously it varied with the size of the institution), but annual
support fees are now based on the number of end-users utilizing the customer's
system. Management believes this pricing structure addresses the concerns of
many prospective customers about making significant investments in the
electronic banking arena, thereby improving the marketability of Personal
Branch. No significant price changes for other product lines occurred during the
periods presented.
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 $7.3
million, or 48%, for the year ended December 31, 1996 over the comparable period
in 1995. Service and support fees for products acquired in April 1996 accounted
for $4.8 million of this increase. Service and support fees grew 18%, or $2.3
million, in 1995 over 1994. The increases resulted primarily from increases in
the installed base of the Company's products, in part driven by the 1993 Truth
in Savings legislation and in part by the Company's acquisition of new products.
Aside from changes to Personal Branch pricing in 1995, no other significant
changes in service and support pricing have occurred during the periods
presented.
OTHER REVENUE. Other revenue includes Vendor Payment Systems' processing
fees, sales of preprinted forms and supplies, and certain consulting revenue.
This revenue increased $0.9 million, or 31%, for the year ended December 31,
1996, over the comparable period in 1995. Other revenue declined to 6% of total
revenue in 1996, compared to 8% for the comparable period in 1995. The
acquisition of Vendor Payment Systems in April 1996 was the primary cause for
the increase in absolute dollars in this revenue category during 1996. The
Company does not expect other revenue to grow significantly in the future.
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 $9.2 million, or 79%, to $20.8 million for the
year ended December 31, 1996 over the comparable period in 1995. Of this
increase, $1.9 million resulted from the November 1995 acquisition of Culverin
and $5.6 million resulted from the companies acquired in April 1996. The
remainder of the increase is 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. 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 $1.9 million for the year ended
December 31, 1996 as compared to $1.4 million and $0.6 million for 1995 and
1994, respectively.
Cost of revenue increased by 21% in 1995 over 1994, and was 32% of total
revenue in 1995 compared to 30% in 1994. The increase in 1995 over 1994 was
largely a result of increased amortization of internally
26
<PAGE>
developed and purchased software, along with increased implementation cost
necessary to support the Company's entry into the market of larger financial
institutions. In addition, increased staffing in the Customer Service
department, which occurred mostly in the middle of 1994 to meet the greater
support and training needs of a larger customer base, contributed to the
increase.
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 1996 declined to 65% from 68% in 1995. This
decline was primarily attributable to three factors: increased software
amortization, a shift in product mix 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 1996 the Company amortized $1.2 million and $0.7
million of internally developed and purchased software development costs,
respectively. This represented an increase from the prior period of $0.4 million
of amortized internally developed software costs, and $0.1 million in amortized
purchased software costs. The Company anticipates that the amount of software
amortization in 1997 could materially exceed the amount amortized in 1996.
The Company capitalized $5.2 million in software development costs in 1996.
Capitalized software development costs net of accumulated amortization were $8.3
million as of December 31, 1996, up from $4.3 million as of December 31, 1995.
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. 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 $12.7
million, or 21% of revenue, for the year ended December 31, 1996, compared to
$9.6 million, or 26% of revenue in 1995. A total of $1.4 million of the increase
for the year ended December 31, 1996, was attributable to the companies acquired
in April 1996, and an additional $0.4 million of the increase was attributable
to the November 1995 acquisition of Culverin. None of these acquired
organizations had significant sales and marketing operations prior to such
acquisition. The remainder of the increase 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 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.
Sales and marketing expenses increased $1.4 million in 1995 compared to $0.4
million in 1994, and were 26% of total revenue in 1995 compared to 25% in 1994.
The increase in expenses resulted largely from higher commissions and bonuses
associated with increased revenue, along with additional costs associated with
the development of a major accounts group targeted exclusively at larger
financial institutions. The increase in expenses as a percentage of revenue was
primarily a consequence of lower than expected new product sales and sales to
larger banks, particularly in the first quarter of 1995.
PRODUCT DEVELOPMENT. Product development expenses include costs of
maintaining and enhancing existing products and developing new products. Product
development expenses increased to $10.6 million, or 18%
27
<PAGE>
of revenue, for the year ended December 31, 1996 compared to $6.4 million, or
17% of revenue, and to $5.2 million, or 16% of revenue, in 1995 and 1994,
respectively. The companies acquired in April 1996 accounted for $1.7 million of
the increase for the year ended December 31, 1996, and the Culverin acquisition
in November 1995 accounted for an additional $2.2 million of the increase. In
addition to the acquisitions, increases in product development expenses were
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 were $5.2 million, $2.7 million and $1.1 million for 1996, 1995 and
1994, 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 $5.4
million for the year ended December 31, 1996 compared to $4.3 million and $4.4
million for 1995 and 1994, respectively. The growth in these expenses was
directly attributable to the growth of the Company. Consolidation of the general
and administrative functions of the acquired companies was the principal reason
for the decrease of these expenses as a percentage of revenue.
General and administrative expenses decreased 1% to $4.3 million, from $4.4
million between 1995 and 1994, partially due to reduced incentive compensation
resulting from operating income that was below incentive compensation plan
targets. As a percentage of total revenue, general and administrative expenses
were 9%, 12% and 13% in 1996, 1995 and 1994, respectively.
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 $1.0 million for the
year ended December 31, 1996 from $0.3 million for 1995 was directly
attributable to the November 1995 acquisition of Culverin and the April 1996
acquisitions of five companies. Amortization amounts increased in 1995 to $0.3
million from $0.2 million in 1994 because of the 1995 acquisitions of Texas
Southwest Technology Group and Culverin.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT AND RESTRUCTURING CHARGES
In connection with its acquisitions of Culverin in November 1995 and of five
companies in April 1996, the Company recorded non-cash, pretax charges of $3.7
million in the fourth quarter of 1995 and $8.0 million in the second quarter of
1996 for in-process research and development efforts in process at the date of
acquisition. In addition, in the fourth quarter of 1995 the Company also
recorded a restructuring charge of $0.8 million consisting primarily of
severance costs. The values assigned to the in-process research and development
efforts were determined by independent appraisal and represent 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 FROM OPERATIONS
Income from operations for the year ended December 31, 1996, was $1.3
million, or 2% of revenue, compared to $3,000, or 0% of revenue, for the year
ended December 31, 1995 due to higher revenue levels and improved efficiencies
in operating costs. Excluding the impact of the $8.0 million non-cash charge for
acquired in-process research and development efforts for the April 1996
acquisitions, and a similar $4.5 million charge for the November 1995 Culverin
acquisition, operating income would have been $9.3 million, or 16% of revenue,
for the year ended December 31, 1996, compared with $4.5 million, or 12% of
revenue, for the comparable period in 1995.
28
<PAGE>
NON-OPERATING INCOME
Non-operating income, which consists primarily of interest income and
expense, declined 96% to $18,000 for the year ended December 31, 1996 from the
comparable period in 1995. Cash paid for acquisitions combined with interest on
acquisition-related debt caused the decline. Proceeds from the sale of the
Company's Common Stock in this offering may result in an increase in
non-operating income in future periods. Non-operating income for the years ended
December 31, 1995 and 1994 was $0.5 million and $0.4 million, respectively.
PROVISION FOR INCOME TAXES
The effective tax rate for 1996, excluding the impact of the $8 million
acquired in-process research and development write-off, was 43% compared with
34% in 1995, excluding the impact of a $3.7 million acquired in-process research
and development write-off, and compared with 36% in 1994. 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.
The impact of tax-free interest income and other favorable permanent differences
on a much lower income before taxes caused the decline between 1994 and 1995.
QUARTERLY RESULTS
The financial information included below for the quarterly periods 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 results of operations for the quarterly
periods. The Company believes that quarter-to-quarter comparisons of its results
of operations should not be relied upon as an indication of future performance.
Certain amounts for all periods prior to June 30, 1996 have been reclassified to
conform to the current presentation.
<TABLE>
<CAPTION>
QUARTER ENDED (UNAUDITED)
---------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1995 1995 1996 1996 1996 1996
--------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue
Software license fees............ $ 3,197 $ 4,212 $ 4,844 $ 6,665 $ 6,000 $ 8,852 $ 9,154 $ 9,929
Service and support.............. 3,416 3,647 3,859 4,138 4,174 5,724 6,189 6,249
Other............................ 707 897 660 534 834 823 919 1,100
--------- --------- --------- --------- --------- --------- --------- ---------
Total revenue.................. 7,320 8,756 9,363 11,337 11,008 15,399 16,262 17,278
Gross profit....................... 4,675 5,905 6,514 8,010 7,363 10,249 10,646 10,845
Operating expenses
Sales and marketing.............. 2,065 2,152 2,298 3,043 2,802 3,386 3,337 3,200
Product development.............. 1,296 1,483 1,595 1,983 2,008 3,051 2,783 2,775
General and administrative....... 976 1,043 1,224 1,051 1,080 1,422 1,532 1,390
Amortization of intangibles...... 62 82 76 123 70 352 330 293
Acquired in-process research
development and restructuring... -- -- -- 4,549 -- 8,030 -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Total operating expenses....... 4,399 4,760 5,193 10,749 5,960 16,241 7,982 7,658
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations...... 276 1,145 1,321 (2,739) 1,403 (5,992) 2,664 3,187
Net income (loss).................. 244 810 983 (1,714) 893 (4,035) 1,492 1,763
Preferred stock dividend........... 24 24 24 25 24 24 24 24
Net income (loss) applicable to
common shareholders............... $ 220 $ 786 $ 959 $ (1,739) $ 869 $ (4,059) $ 1,468 $ 1,739
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss) per share........ $ 0.05 $ 0.16 $ 0.19 $ (0.35) $ 0.18 $ (0.84) $ 0.28 $ 0.34
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Shares used in per share
calculations...................... 4,851 4,839 4,919 4,903 4,881 4,787 5,194 5,154
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF REVENUE
-------------------------------------------------------------
MAR. JUNE SEPT. DEC. MAR. JUNE SEPT. DEC.
31, 30, 30, 31, 31, 30, 30, 31,
1995 1995 1995 1995 1996 1996 1996 1996
----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue
Software license fees........................... 44% 48% 52% 59% 54% 58% 56% 58%
Service and support............................. 47 42 41 36 38 37 38 36
Other........................................... 9 10 7 5 8 5 6 6
----- ----- ----- ----- ----- ----- ----- -----
Total revenue................................. 100 100 100 100 100 100 100 100
Gross profit...................................... 64 67 70 71 67 67 65 63
Operating expenses
Sales and marketing............................. 28 24 25 27 25 23 21 18
Product development............................. 18 17 17 18 18 20 17 16
General and administrative...................... 13 12 13 9 10 10 9 8
Amortization of intangibles..................... 1 1 1 1 1 2 2 2
Acquired in-process research development and
restructuring.................................. -- -- -- 40 -- 52 -- --
----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses...................... 60 54 56 95 54 107 49 44
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from operations..................... 4 13 14 (24) 13 (40) 16 19
Net income (loss)................................. 3 9 10 (15) 8 (26) 9 10
Preferred stock dividend.......................... -- -- -- -- -- -- -- --
Net income (loss) applicable to common
shareholders..................................... 3% 9% 10% (15)% 8% (26)% 9% 10%
----- ----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- ----- -----
</TABLE>
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 Company's product mix, including expenses of implementation and
royalties related to certain products; 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 process, 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 platform, 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. See "Risk Factors-- Potential Fluctuations in
Quarterly Results" and "--Lengthy Sales and Implementation Cycles."
The Company's business has experienced, and is expected to continue to
experience, some degree of seasonality due to its customers' budgeting and
buying cycles. The Company's strongest revenue quarter in any year is typically
its fourth quarter and its weakest revenue quarter is typically its first
quarter. Customer purchases are tied closely to their internal budget processes.
For some of the Company's customers, budgets are approved at the beginning of
the year and budgeted amounts often must be utilized by the end of the year. In
addition, the Company's incentive sales compensation plan provides for increases
in commission percentages as sales people approach or exceed their annual sales
quotas. As a result of these two factors, the Company usually experiences
increased sales orders in the last quarter.
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, $4.3
million was paid subsequently and at December 31, 1996 $1.2 million was carried
in current liabilities. Primarily because of these acquisition payments, working
capital decreased from December 31, 1995 by $6.1 million to $2.7 million at
December 31, 1996.
30
<PAGE>
Operations provided $10.1 million in cash for the year ended December 31,
1996, compared to $3.5 million 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 $10.1 million for the year ended
December 31, 1996 represented an increase over the year ended December 31, 1995
of $9.2 million. 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 $5.2 million were capitalized in the year ended
December 31, 1996, as compared to $2.7 million 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 $2.7 million in the year ended December 31, 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 and expansion of office space to accommodate higher staffing
levels. Proceeds from the sale of short-term investments in the amount of $3.0
million was used to make the acquisition-related payments.
Cash used in financing activities of $4.9 million during the year ended
December 31, 1996, primarily resulted from $7.6 million of payments on
acquisition-related notes payable and long-term debt, less net borrowings of
$1.6 million from its line of credit, and less proceeds of $1.2 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 revolving
line of credit with the Company's principal bank, of which $1.6 million had been
used at December 31, 1996. The revolving line of credit is limited to the lesser
of $7.5 million or 60% of the Company's accounts (as defined in the revolving
bank line of credit agreement) and expires on December 1, 1997.
The Company believes that the net proceeds from this offering, together with
funds expected to be generated from operations and borrowings under its
revolving line of credit will provide the Company with sufficient funds to
finance its operations for at least the next 12 months. 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 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.
31
<PAGE>
BUSINESS
OVERVIEW
CFI is a leading provider of software solutions that automate customer
service and support functions within the financial services industry. The
Company integrates extensive knowledge of banking, technology and regulatory
compliance requirements into a broad suite of software solutions. These products
enable financial institutions to automate the delivery of financial products and
services to their customers through multiple channels, including branch offices,
in telephone call centers, and through electronic-based banking (such as home
banking). CFI's solutions help banks, thrifts and credit unions reduce operating
costs, enhance revenue and remain in compliance with both internal business
policies and external government regulations. During the last five years, CFI
has significantly expanded its product offerings and more than doubled its
customer base. To date, over 4,700 financial institutions have licensed the
Company's products.
THE FINANCIAL SERVICES INDUSTRY
The financial services industry is undergoing a period of rapid change
characterized by increased competition. In response to this rapidly changing and
increasingly competitive market, commercial banks are consolidating in order to
achieve operational efficiencies and increased revenues. Financial institutions
are embracing technological solutions that enable them to automate operations,
redirect routine transactions to more cost-effective solutions such as
electronic banking, and develop new service and sales delivery channels.
CONSOLIDATION. Consolidation continues at a rapid pace within the financial
services industry, particularly among larger banks. At the current pace of
consolidation, some banking analysts believe that by the year 2000 there will be
fewer than 100 major U.S. banks. The Company believes that this trend is leading
to an increasingly two-tiered market consisting of larger, multibank holding
companies and smaller community banks. Both types of organizations face unique
challenges.
Large banks that have grown through acquisition often must integrate
disparate host processing systems, which often lack the flexibility needed to
easily utilize and deliver information across different systems. Bank customer
service representatives often are limited in their ability to access
comprehensive customer information on one screen, which limits their ability to
cross-sell products and services. Banks must also be able to support customer
transactions in a number of channels, such as electronic banking and telephone
call centers. Accordingly, large banks increasingly find it necessary to
centralize data from several disparate host processing systems. Interstate
banking presents these institutions with additional and costly administrative
and legal complexities relating to compliance with complex and changing
regulatory requirements across states.
Smaller community institutions face similar operational difficulties.
Lacking the economies of scale of larger banks, smaller institutions find it
increasingly necessary to exploit technological solutions that enable them to
reduce operating costs, generate additional revenues from existing customers and
focus on specific market niches. In addition, compliance with regulatory
requirements can be more burdensome to these smaller institutions given their
resource limitations.
NEW DELIVERY CHANNELS. Banks of all sizes are increasingly recognizing that
the value-added role of branch offices lies not in their traditional capacity as
a transaction processor, but as a new sales channel for financial products and
services. A recent study by a financial services consulting firm estimates that
the average cost of a call center transaction is 61% of a branch transaction, an
ATM transaction is 36% of a branch transaction, and a home banking transaction
is 30% of a branch transaction. In order to make these new delivery channels
attractive and user-friendly, the Company believes that consumers require access
to consolidated information and services that are consistent across all delivery
channels.
CHANGING REGULATIONS. Financial institutions in the United States remain
highly regulated and in recent years have been subjected to heightened scrutiny
by regulatory agencies for compliance and other matters. To understand and
remain in compliance with the numerous complex and changing interstate banking
regulations, a regulated financial institution must invest significant resources
in developing a compliance infrastructure.
32
<PAGE>
Because regulatory requirements are often triggered simply by the
interaction between a financial institution and its customer, institutions are
increasingly subject to compliance issues as they migrate their sales efforts to
new forms of delivery channels, such as telephone and online banking.
Increasingly, these regulations extend beyond simple disclosure or form content
requirements, and financial institutions must also focus on customer data
collection and analysis as well as internal business procedures. This collection
and analysis must be obtained from, and available to, multiple delivery
channels. Data collection and analysis is complicated by the emergence of new
channels for interacting with customers and potential customers.
EVOLVING NETWORK TECHNOLOGY. Personal computer network technology is
becoming increasingly integrated into all facets of the financial services
business. Financial institutions are transitioning from mainframe-based systems
to client/server computing for customer service applications, with continued
reliance on mainframe technology for back-office functions. The growth of the
Internet is expected to have a substantial impact on the banking industry. Not
only are institutions themselves connected through local and wide area networks,
but their customers are increasingly using the Internet to gain access to these
institutions and financial data. The Company believes the rapidly growing
network banking environment is demanding compatible software applications and
connectivity.
THE CFI SOLUTION
The Company relies on a variety of knowledge-based and technical core
competencies. The Company's vertical market focus on the financial services
industry has enabled it to develop specialized knowledge and expertise
pertaining to business processes and regulations affecting the industry. The
Company incorporates this knowledge into its software solutions to automate
lending, operations, electronic delivery and connectivity. CFI's products and
services are designed to meet the evolving needs of financial institutions by
addressing a broad range of these banking, technology and regulatory
requirements.
CFI's products provide a number of benefits to financial institutions by
addressing regulatory requirements, system connectivity issues and internal
business processes faced by institutions in the increasingly competitive
financial services industry. Using CFI's solutions, these institutions are able
to simplify sales and service processes and improve productivity through reduced
operating costs and expanded capacity. The ability to view an entire customer
account relationship on-screen enables financial institutions to strengthen
relationships with their customers at each point of contact and across multiple
delivery channels. CFI's products also enable institutions to comply with both
internal business processes and external government regulations.
The Company's products provide support and service solutions to both large
and small financial institutions. CFI's products enable larger financial
institutions to utilize data among disparate and often incompatible host
processor platforms. The Company's suite of products also addresses the
preference of larger institutions to work with fewer vendors that provide
comprehensive software solutions. Smaller institutions benefit through
streamlined operations and enhanced cross-selling abilities, while ensuring
cost-effective regulatory compliance.
The Company has also developed substantial technological capabilities
necessary to meet the evolving requirements of financial institutions. The
Company has established substantial knowledge of host processing systems
commonly used in the financial services industry. Through its StarGate
connectivity software and other applications, the Company has developed the
capability to retrieve, view and update data stored on these systems. To date,
the Company has established relationships with numerous service bureaus and
turnkey host vendors such as IBM, NCR Corporation ("NCR"), FIserv and The BISYS
Group, Inc. The Company intends to establish additional relationships with other
leading service bureaus and turnkey host vendors.
33
<PAGE>
THE CFI STRATEGY
The Company's strategic objective is to be the leading provider of customer
service software solutions to financial institutions at key points of customer
contact. The Company intends to achieve this objective by combining its
expertise in regulatory issues, banking, and technology. Primary elements of the
Company's strategy include:
OFFERING A BROAD SUITE OF DELIVERY CHANNEL SOLUTIONS. The Company believes
it is unique in its ability to offer solutions enabling financial institutions
to perform transactions across multiple delivery channels, including branches,
call centers, and electronic banking. By providing a broad suite of solutions,
the Company believes it can address the need for consistent processes across
delivery channels for an institution's products (such as loans and new accounts)
and services (such as account inquiries or transfers). The Company's strategy is
to establish long-term relationships with its customers and cross-sell multiple
products throughout its customer base. The Company believes this ability
provides an important market advantage over competitors who are able to address
only a limited number of delivery channels or provide a limited number of
products and services.
ADDRESSING EXPANDING HOME BANKING MARKET. The Company is currently a
leading provider of personal computer banking solutions in the United States,
with approximately 150 institutions offering private-dial or Internet banking
services using the Company's solutions. The Company offers its home banking
solutions on a private label basis, running on a server controlled by the
financial institution. This approach permits the financial institution to retain
its proprietary customer relationship and brand name identity. The Company's
home banking solution also supports the financial institution's customers who
use personal finance software such as Microsoft-Registered Trademark- Money. The
Company believes it was the first to support a consumer banking transaction
through the Internet and to connect a home banking solution to Microsoft Money
through Microsoft's Open Financial Connectivity specification. The Company has
also sold its home banking product to an Internet service provider, Mesa
Internet Systems, which intends to make the product more economically accessible
to community banks in Texas. The Company, together with Microsoft, CompUSA, Mesa
Internet Systems, Visa Interactive, Southwestern Bell, PRIMEVEST Financial
Services and PULSE EFT Association, have announced plans to offer Internet
banking, bill payment and brokerage services to several hundred Texas community
banks. See "-- Sales and Marketing."
EXPANDING CUSTOMER BASE. Over 40% of U.S. commercial banks have licensed at
least one of the Company's solutions. The Company believes its brand name and
reputation as a provider of high-quality solutions are widely recognized in the
financial institution community. The Company intends to expand its customer base
through its direct sales force of 37 professionals. CFI seeks to enter into
formal and informal arrangements whereby it makes its solutions compatible with
the software and hardware solutions offered by leading technology vendors to the
financial institutions, enabling those vendors to act as joint marketers of the
Company's solutions. The Company has entered into such arrangements with more
than 60 technology vendors, including IBM. In particular, the Company will
continue its focus on expanding its market share with large banks through its
own major account sales force and through formal and informal partnerships such
as the Company's relationship with NCR. The Company has launched an initiative
in the credit union market through a strategic alliance with the CUNA Mutual
Insurance Group, a key marketer and supplier of technology in that market. The
Company intends to increase its marketing and sales efforts to further penetrate
the mortgage banking and thrift markets.
LEVERAGING CUSTOMER RELATIONSHIPS. The Company builds long-term customer
relationships by employing relationship selling techniques and through long-term
service and support agreements. These techniques and such service and support
relationships keep the Company in frequent contact with the customer, enabling
the Company to sell additional products to its customers as they grow,
cross-sell additional products and sell product upgrades. Substantially all of
the Company's customers enter into long-term service and support agreements.
MAINTAINING LEADING KNOWLEDGE-BASED SOFTWARE TECHNOLOGY. The Company
believes its proprietary software and service solutions are competitive
strengths. Therefore, the Company intends to continue to invest in product
development in order to maintain and strengthen its technology position and to
improve its
34
<PAGE>
compatibility with other major applications. For example, the Company is moving
forward with the migration of its software solutions to the Windows and Windows
NT platforms. The Company anticipates that it will have migrated most of its
software solutions to the Windows or Windows NT platforms by the end of the
first quarter of 1997, with the principal exception of Laser Pro Closing, which
is scheduled to be completed later in 1997. See "--Product Development and New
Products."
PROVIDING CONNECTIVITY SOLUTIONS. Financial institutions increasingly seek
to integrate technology systems through networks and other connectivity
solutions, so that operations at multiple locations and through multiple
distribution channels can access common customer account and transaction data
and processes. CFI entered the connectivity solutions market through its April
1995 acquisition of Texas Southwest Technology Group and is increasingly
offering integrated connectivity solutions to its customer base.
GROWING THROUGH STRATEGIC ACQUISITIONS. The Company has acquired ten
businesses or companies since June 1994. These transactions have enabled the
Company to expand its product suite and customer base, leverage product
cross-selling opportunities and add engineering expertise. The Company intends
to continue to selectively pursue acquisitions of businesses, products or
technologies that enhance its competitive position.
PRODUCTS
LENDING PRODUCTS. CFI's lending products automate processes at nearly every
step in the lending process for consumer, commercial, indirect, and real estate
lending lines of business. General business functions automated by CFI lending
solutions include loan application and analysis, loan closing, portfolio
analysis, and risk management, as well as connectivity for interfaces to credit
scoring and reporting systems and remote printing of loan documents. In the
fourth quarter of 1996, CFI released a Windows version of its Laser Pro
Application product, and it is scheduled to release a Windows version of Laser
Pro Closing in 1997. The Company is engineering its lending products to operate
with common user interfaces and databases. CFI is also developing and expects to
offer a shrink-wrapped version of its mortgage origination software, which
currently is available only on a customized basis. See "Risk Factors--Product
Concentration" and "Business--Product Development and New Products."
OPERATIONS PRODUCTS. CFI's operations products automate the customer
service, sales, and account opening functions for the branch office platform,
teller station, and telephone call center. These products provide a common view
of the entire customer relationship, enabling service personnel to leverage
selling opportunities. In 1997, CFI plans to introduce a re-engineered call
center product that will integrate more effectively with its branch sales and
service products. The Company has released Deposit Pro for Windows, its account
opening product. See "Risk Factors--Product Concentration" and
"Business--Product Development and New Products."
ELECTRONIC DELIVERY PRODUCTS. CFI's electronic delivery products provide
personal computer private-dial and Internet access to account inquiry and
transaction capabilities, as well as ACH transaction management and remittance
processing. The Company's home banking products provide over a dozen functions,
including account balance, account history, bill payment, and online loan
applications. In the first half of calendar 1997, CFI plans to complete its
latest version of Personal Branch home banking software, its client/server-based
system that allows financial institutions to provide personal computer-based
home banking services via private-dial or the Internet. The latest version of
this software will be designed to improve performance and provide additional
functionality and connectivity capabilities. See "--Product Development and New
Products."
CONNECTIVITY PRODUCTS. Connectivity products and services enable
institutions to transfer or exchange data between CFI software and host systems
and across incompatible host systems. The Company's software connects
back-office systems to front-end delivery systems, such as the home personal
computer, branch office platform or telephone call center. See "--Product
Development and New Products."
35
<PAGE>
LENDING PRODUCTS
<TABLE>
<CAPTION>
DATE
INTRODUCED/
PRODUCT ACQUIRED DESCRIPTION BENEFITS TO CUSTOMER
- ------------ ----------- -------------------------------------------- --------------------------------------------
<S> <C> <C> <C>
Laser Pro Released Integrated, modular loan processing system Standardizes lending policies and products,
1986 for consumer, commercial, SBA, real estate streamlines processing, incorporates a
home equity and agricultural loans national database of regulations
Application Acquired Processes applications for indirect consumer Speeds the loan application and approval
Manager 1996 lending process for indirect lenders
LOANscape Acquired Provides mortgage origination, processing Improves consistency of loan processes,
1996 and servicing capabilities speeds origination, increases capacity
TriScore Acquired Commercial loan scoring and underwriting Reduces underwriting risks
1996 system
fisCAL Acquired Analyzes commercial loan applicants and Standardizes and streamlines underwriting
1996 evaluates underwriting criteria and policies and practices
performance over time
fisCAL Plus Released Combines spreadsheet analysis, loan decision Increases the quality of credit decisions,
1996 support, and portfolio management improves the consistency of lending
technologies to provide comprehensive practices, enhances portfolio management,
commercial loan underwriting capabilities and reduces underwriting risk
for small-to-medium sized lenders
LoansPlus Acquired Portfolio and credit risk analysis system Balances acceptable credit risk and lending
1996 that uses neural network technology and opportunities to recommend credit decisions
case-based reasoning and manage portfolios
Pro Active Released Collects, analyzes, reports and maps HDMA Simplifies the process of meeting fair
1994 loan application information, non-real lending and community reinvestment
estate loan data, and community demographic requirements
data
</TABLE>
OPERATIONS PRODUCTS
<TABLE>
<CAPTION>
DATE
INTRODUCED/
PRODUCT ACQUIRED DESCRIPTION BENEFITS TO CUSTOMER
- ------------ ----------- -------------------------------------------- --------------------------------------------
<S> <C> <C> <C>
Encore! Acquired Automates the teller station by providing Improves productivity and facilitates sales
Teller 1995 comprehensive transaction automation, referrals
electronic journaling, store-and-forward
capabilities, simplified balancing, and
access to the customer database
Encore! Acquired Provides sales and service capabilities, Opens accounts, enables cross-selling and
Platform 1995 including account opening screens, customer/ fulfillment of customer information requests
Sales & product matching, customer contact
Service histories, letter and fulfillment
generation, and institution and product
information
Encore! Call Acquired Integrates in a common and consistent format Enables cross-selling and improves service
Center 1994 customer, product and internal procedure
Sales & information
Service
Deposit Pro Acquired Automates and ensures regulatory compliance Speeds account opening, ensures compliance
1990 in the account opening and cross-selling with regulations, improves the consistency
processes for checking, savings, of new account policies and practices
certificates of deposit, and IRA accounts. A
Windows-based version of this production,
Deposit Pro for Windows, was introduced in
1996
Encore! Released Windows-based system that graphically links Allows customized arrangements of modules
Desktop 1996 each user to CFI software and other business and access
applications
ProForms Released Generates laser printed forms used daily by Eliminates the need for costly inventories
Laser 1994 financial institutions of preprinted forms, speeds form processing
</TABLE>
36
<PAGE>
ELECTRONIC DELIVERY PRODUCTS
<TABLE>
<CAPTION>
DATE
INTRODUCED/
PRODUCT ACQUIRED DESCRIPTION BENEFITS TO CUSTOMER
- ------------ ----------- -------------------------------------------- --------------------------------------------
<S> <C> <C> <C>
Personal Released Server-based system that allows institutions Provides low-cost service delivery channel,
Branch 1993 to provide personal computer-based home strengthens customer relationships, extends
banking services via private-dial or institution branding, increases customer
Internet channels convenience
RPxpress! Acquired Remittance processing system for financial Streamlines processing, improves the quality
1995 institutions to provide retail lockbox of encoding, reduces errors
services
ACH Manager Acquired Originates and receives ACH electronic Cost-effective processes ACH business,
1995 payments and collections monitors business for risk
ACH Remote Acquired System licensed by financial institutions to Generates new fee income and simplifies
1995 its corporate customers for transmitting automated procedures
data files from the customer personal
computer to the financial institution's ACH
system
Vendor Acquired Bill payment processing for the Company's Required component of home banking services;
Payment 1996 Personal Branch customers generates new fee income
Systems
</TABLE>
CONNECTIVITY PRODUCTS
<TABLE>
<CAPTION>
DATE
INTRODUCED/
PRODUCT ACQUIRED DESCRIPTION BENEFITS TO CUSTOMER
- ------------ ----------- -------------------------------------------- --------------------------------------------
<S> <C> <C> <C>
StarGate Acquired Connectivity software system which transfers Allows institutions to integrate data from
1995 or exchanges data between CFI products and multiple host systems and present that data
other host or client/server systems through networks to multiple front-end
systems
StarGate Acquired Connectivity software which enables Reduces costs, increases transaction speed
F/X 1995 institutions to print Laser Pro documents and productivity; enables institutions to
remotely through the institution's mainframe centralize loan document preparation
network
</TABLE>
REVENUE BY PRODUCT GROUP
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1994 1995 1996
------------------------ ------------------------ ------------------------
PRODUCT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
- ------------------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Lending Products................................. $ 22,122 67.8% $ 23,893 65.0% $ 31,034 51.8%
Operations Products.............................. 7,051 21.6 7,564 20.6 19,761 33.0
Electronic Delivery Products..................... 383 1.2 2,099 5.7 4,653 7.8
Connectivity Products............................ 0 0.0 423 1.1 823 1.3
Other (1)........................................ 3,060 9.4 2,797 7.6 3,676 6.1
----------- ----- ----------- ----- ----------- -----
Total Revenue.................................... $ 32,616 100.0% $ 36,776 100.0% 59,947 100.0%
----------- ----- ----------- ----- ----------- -----
----------- ----- ----------- ----- ----------- -----
</TABLE>
- ------------------------------
(1) Other products include bill payment systems processing fees, sales of
preprinted forms and supplies, and certain consulting revenue.
37
<PAGE>
PRODUCT DEVELOPMENT AND NEW PRODUCTS
The Company's products enable institutions to increase sales capabilities,
improve productivity, and remain in compliance with internal policies and
government regulations. CFI ensures that its products meet customer requirements
by conducting primary research and holding product user and focus group
meetings. The Company also incorporates knowledge learned during the sales and
installation process into development of new and enhanced products.
CFI continues to invest significantly in its product development efforts.
The Company intends to increase the ability of its products to operate in
networked environments throughout the entire banking enterprise. Its integration
strategy addresses the movement in the industry toward common user interfaces
and databases driving consistent information to all points of customer contact.
In addition to offering products that operate in the growing network-centric
banking environment, CFI will continue developing the Internet capabilities of
its product suite where appropriate.
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 vendor 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
its customers' host systems, integration is optimized where the Company and the
host processor provider cooperatively share information regarding the respective
products' technologies, development schedules and enhancements. There can be no
assurance that the Company will be able to establish and maintain adequate
relationships with important host processor providers in the future.
The Company is in the process of migrating its Laser Pro lending products to
Windows and Windows NT operating environments. In the fourth quarter of 1996,
CFI released a Windows version of its Laser Pro Application product, and it is
scheduled to release a Windows version of Laser Pro Closing in 1997. Many of its
other lending products and most of its operations, electronic delivery and
connectivity products already run on the Windows platform. The Company supports
both DOS and Windows-based versions of several products, enabling its customers
to upgrade easily and at a reasonable pace. See "Risk Factors--Uncertainty of
Market; Product Acceptance," "--Early Stage Market for Electronic Delivery
Products," "--Evolving Market for Call Center Products," "--Dependence on Host
Processor Relationships," "--Delays in Introduction of New Products and Product
Enhancements," "--Product Liability Risks; Software Defects," and
"Business--Intellectual Property."
SERVICE AND SUPPORT
The Company licenses substantially all its products with mandatory annual
maintenance agreements under which CFI provides periodic product updates
reflecting evolving regulations, product enhancements and toll-free telephone
support. Annual support fees consist of per-item or per-user charges or are
calculated based on a percentage of the current product list price. Furthermore,
CFI provides training to its customers. Software service and support fees have
grown significantly over the last three years. For the year ended December 31,
1996, such fees represented 37% of the Company's total revenue. The Company
accounts for this revenue as service and support fees.
The Company installs, implements and customizes its software solutions at
certain customer sites, particularly at larger institutions. As the Company's
sales to larger institutions increase, the Company anticipates demand for these
services to increase. Revenue from these services is accounted for as software
license fees.
CUSTOMERS
CFI has licensed its software to over 4,700 commercial banks, thrifts and
credit unions in the United States. In addition, the Company's acquisitions have
opened limited opportunities in non-financial service industries and have added
a small number of international institutions to CFI's customer base. CFI's
target customer base includes commercial banks, thrifts and credit unions. No
customer accounted for 10% or more of the Company's total revenues in 1994, 1995
or 1996.
38
<PAGE>
The Company's largest accounts include the following: First Union National
Bank, Star Banc Corporation, Banc One Services Corporation, The BISYS Group
Inc., Chase Manhattan Bank, First Citizens Bank & Trust Co., Barnett Banks,
Inc., Banco Santander Puerto Rico, Union Planters Corporation and Regions
Financial Corp.
SALES AND MARKETING
CFI sells its products through two experienced, national direct field sales
teams; one team is devoted exclusively to large financial institutions, and the
other team focuses on all other accounts. Both teams are supported by a
marketing group, product specialists and a telemarketing team. Telemarketing
personnel contact institutions for lead generation and qualification, and sales
support personnel are responsible for direct sales campaigns, trade media
support and advertisements. As of December 31, 1996, the Company's field sales
force consisted of 37 persons. Sales of the Company's products, particularly to
large institutions, generally require a lengthy sales and implementation
process. See "Risk Factors--Lengthy Sales and Implementation Cycles."
The Company has a number of third-party reseller and co-marketing alliances,
including agreements with some of the largest host processors and hardware
vendors. For example, the Company has relationships with IBM and NCR whereby
such companies' sales teams resell a large portion of the Company's product
line. These third-party reseller and co-marketing alliances provide access to
institutions with which the Company would otherwise have no relationship.
The Company, together with Microsoft, CompUSA, Mesa Internet Systems, Visa
Interactive, Southwestern Bell, PRIMEVEST Financial Services and PULSE EFT
Association have announced plans to offer Internet banking, bill payment and
brokerage services to several hundred Texas community banks.
LEGAL NETWORK
The Company maintains a network of independent legal counsel in all 50
states and the District of Columbia. This network, as well as the Company's
internal legal staff, keeps the Company informed of changes in state and federal
laws, changes in state and local documentation requirements, pending legislation
and court actions affecting financial institution practices, as well as other
information required to maintain regulatory compliance. The Company's management
believes that the quality of this information, the Company's ability to
effectively manage the continuous information flow provided by the network
participants, and the capability of the Company to integrate this information
into its software products provide the Company with a significant competitive
advantage.
The Company utilizes legal counsel in all jurisdictions, other than
Louisiana, under agreements that are terminable at will by either party and that
provide for compensation based on an hourly rate. The Company has entered into a
long-term legal services agreement with a Louisiana law firm pursuant to which
it pays legal fees based upon sales of the Company's products in Louisiana.
ACQUISITIONS
To remain competitive and to meet the changing needs of its customers, CFI
pursues acquisitions of products, technologies and businesses as one part of its
growth strategy. The Company continuously evaluates acquisition candidates that
provide opportunities to expand its customer base, cross-sell products, and
broaden its product offerings with proven solutions in a timely and
cost-effective manner. Since 1994, the Company has made ten acquisitions and
believes that to date it has achieved its objectives of growth and broadening
its product offerings through this acquisition program and intends to continue
such activity 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. Acquisitions of
businesses or companies require the dedication of management resources in order
to achieve the strategic objectives of the acquisitions. See "Risk Factors --
Uncertainties Associated with the Integration of Acquisitions and Risks of New
Business Ventures" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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
39
<PAGE>
Company's lending products, the principal competitors include Bankers Systems,
Inc., FormAtion Technologies Inc., 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 IBM), Electronic Data Systems Corporation, Argo & Company,
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 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.
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.
INTELLECTUAL PROPERTY
The Company's success and ability to compete are 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 to 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 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. In addition, the integration of the Company's products with
40
<PAGE>
financial institutions' host systems is optimized if the Company has access to
the host system technology. The parties controlling the host processor
technologies may also be current or future competitors of the Company and as
such may restrict access to such technologies. In some instances, the Company
has not been able to obtain sufficient access to host system technology
necessary for developing optimal system interfaces. 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. 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 overlap. 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.
LEGAL PROCEEDINGS
The Company and its subsidiaries are from time to time involved in routine
legal matters incidental to their respective businesses. In the opinion of the
Company, the resolution of any such matters that are currently outstanding will
not have a material effect on its financial condition or results of operations.
EMPLOYEES
As of December 31, 1996, the Company had 489 full-time employees. Of this
number, 172 were engaged in product groups (primarily product development), 106
in customer service and support, 78 in sales and marketing, 81 in implementation
and training, and 52 in general and administrative functions.
41
<PAGE>
MANAGEMENT
The Company's executive officers and directors as of December 31, 1996 are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- --------------------------------------
<S> <C> <C>
Matthew W. Chapman (1)(2)(3)....... 46 Chairman and Chief Executive Officer
Robert P. Chamness (1)(3).......... 43 President, Chief Operating Officer and
Director
Robert T. Jett (3)................. 52 Executive Vice President, Secretary
and Director
Michael J. Clement................. 49 Senior Vice President
A.O. Clemons, Jr................... 48 Vice President of Sales and Service
Fred Hall.......................... 47 Vice President and Chief Financial
Officer, Treasurer and Assistant
Secretary
Daniel C. Larlee................... 44 Vice President and Chief Technology
Officer
John Loveless...................... 45 Vice President
James C. Montague.................. 52 Vice President
Lois M. Roberts.................... 51 Vice President of Marketing and
Corporate Communications
Eric Wagner........................ 47 Senior Vice President
Eran S. Ashany (4)(5).............. 33 Director
J. Kenneth Brody (1)(2)(4)......... 74 Director
David G. Golden (1)(2)............. 38 Director
Lorraine O. Legg (1)(4)(5)......... 57 Director
Brian P. Murphy (2)(5)............. 49 Director
</TABLE>
- ------------------------
(1) Member of the Nominating Committee
(2) Member of the Executive Committee
(3) Member of the Proxy Committee
(4) Member of the Compensation Committee
(5) Member of the Audit Committee
Mr. Chapman has served as the Company's Chief Executive Officer since
February 1988 and as its Chairman since February 1991. Mr. Chapman was President
of the Company from August 1987 to April 1992 and became a director in September
1987. Prior to joining the Company, Mr. Chapman was outside counsel to the
Company and was a founding partner of the law firm of Farleigh, Wada & Witt,
P.C. Mr. Chapman has previously served as a faculty member of the American
Bankers Association National Graduate Compliance School and the Credit Union
National Association Regulatory Compliance School. Mr. Chapman is a director of
both Phoenix Gold International, Inc., a Portland, Oregon designer and
manufacturer for the car audio aftermarket, and First Technology Federal Credit
Union, a Beaverton, Oregon credit union. Mr. Chapman is also a Trustee of the
University of Portland.
Mr. Chamness has served as President and Chief Operating Officer of the
Company since July 1995 and as a director since 1993. Mr. Chamness served as
Executive Vice President and General Counsel of the Company from April 1993
until he was appointed as President and Chief Operating Officer. From 1985 to
March 1993, Mr. Chamness was a partner with the law firm of McKenna & Fitting,
Los Angeles, California, and its predecessor. From 1990 to 1994, Mr. Chamness
served as the Chair of the Consumer Financial Services Committee of the American
Bar Association. Mr. Chamness has authored numerous compliance manuals for the
American Bankers Association, including manuals relating to the Truth in Savings
Act and consumer lending. Effective March 31, 1993, a receiver was appointed by
the Los Angeles County Superior Court for the business and property of McKenna &
Fitting; an involuntary Chapter 11 proceeding against McKenna & Fitting was
dismissed on April 5, 1995.
42
<PAGE>
Mr. Jett has served as Executive Vice President and Secretary of the Company
since April 1984 and as a director since 1987. Mr. Jett is responsible for much
of the design and content of the Company's products. Prior to joining the
Company, he managed the legal department of Evans Products Company, a
diversified manufacturing company.
Mr. Clement joined the Company in October 1984 and has served as Senior Vice
President of the Electronic Products Delivery Group since June 1996. He served
as Senior Vice President of Operations from August 1989 until becoming the
Senior Vice President of Customer Service in January 1993 and served as Senior
Vice President of the Standard Products Group from October 1995 until May 1996.
Prior to joining the Company, Mr. Clement was a Regional Vice President for
Evans Financial Corp., a mortgage banking company.
Mr. Clemons joined the Company in March 1994 as Vice President of Sales and
was named Vice President of Sales and Service of the Company in July 1995. From
July 1991 until he joined the Company, Mr. Clemons was self-employed as a
business development advisor, advising on mergers and acquisitions and
marketing. From August 1989 to June 1991, Mr. Clemons coordinated mergers and
acquisitions for the Hualon Group of Taiwan, a group with holdings in
semiconductors, computer assembly and textiles. From June 1987 to July 1989, Mr.
Clemons was Vice President of International Operations for ISC Systems
Corporation of Spokane, Washington, a supplier of branch automation systems to
financial institutions.
Mr. Hall joined the Company in October 1994 as Vice President and Chief
Financial Officer, Treasurer and Assistant Secretary. From July 1992 until he
joined the Company, Mr. Hall served as Vice President Finance and Chief
Financial Officer and Assistant Secretary of Itronix Corporation, Spokane,
Washington, a manufacturer of hand-held computers. From June 1989 to July 1992,
Mr. Hall was the Controller of Itron, Inc., Spokane, Washington, a manufacturer
of meter reading equipment for utilities. Prior to joining Itron, Mr. Hall was
the Controller of ISC Systems Corporation, a supplier of branch automation
systems to financial institutions. Prior to joining ISC, Mr. Hall was an audit
manager with Deloitte Haskins & Sells.
Mr. Larlee joined the Company in April 1992 as its Director of Technology
and became a Vice President and Chief Technology Officer of the Company in
September 1994. From May 1989 until he joined the Company, Mr. Larlee was
Director of Technology for World Trade Services, a software and data processing
services provider to businesses engaged in international trade. Mr. Larlee was
Manager of Information Systems for Stereo Super Stores, an electronics retailer,
from March 1987 to June 1989.
Mr. Loveless joined the Company in November 1995 in connection with the
Company's acquisition of Culverin Corporation, a developer and distributor of
financial institution sales and service delivery software products. Mr. Loveless
co-founded Culverin in 1978, and served as Vice President and as a director of
Culverin until its acquisition by the Company. Mr. Loveless serves as a Vice
President of the Company and is responsible for managing the Culverin Division.
Mr. Montague joined the Company in September 1994 in connection with the
Company's acquisition of The Genesys Solutions Group, Inc., and serves as
Executive Vice President of that corporation and as a Vice President of the
Company. Mr. Montague joined Genesys upon its formation in 1990 and served as
Senior Vice President, responsible for sales and marketing, at the time Genesys
was acquired by the Company. Prior to joining Genesys, Mr. Montague was
self-employed as a consultant to financial institutions.
Ms. Roberts joined the Company in May 1993 as its Operations Software
Product Manager and became Vice President of Marketing and Corporate
Communications in October 1995. Prior to joining the Company in 1993, Ms.
Roberts served as the President of Quickor Net, Inc., a privately held data
processing company located in Portland, Oregon.
Mr. Wagner joined the Company in November 1995 in connection with the
Company's acquisition of Culverin Corporation, a developer and distributor of
financial institution sales and service delivery software products. Mr. Wagner
joined Culverin in 1979, and served as President and Director until its
acquisition by the Company. Mr. Wagner serves as Senior Vice President and is
responsible for managing CFI's Retail Delivery Products Group.
43
<PAGE>
Mr. Ashany has served as a director of the Company since 1993. Mr. Ashany
has been employed by Allen & Company Incorporated, an investment banking
company, since August 1988, and has been a Vice President and Director of that
firm since September 1990 and February 1995, respectively.
Mr. Brody has served as a director of the Company since May 1990 and a
consultant to the Company since 1988. Since 1984, he has been the Chairman of
ComPix Incorporated, a manufacturer of infrared thermal analysis devices. Mr.
Brody is also a Director of the U.S. Navy Memorial Foundation. Since 1992, he
has been a consultant to First Portland Corporation and has been a member of the
management committee of Intercoastal Manufacturing, Co., a golf car parts sales
and services company.
Mr. Golden has served as a director of the Company since 1991. Since May
1992, Mr. Golden has served as a Managing Director of Hambrecht & Quist LLC,
where he was a Principal from February 1988 until April 1990. Hambrecht & Quist
LLC is an underwriter of this offering. From May 1990 until April 1992, Mr.
Golden was a Vice President of Allen & Company Incorporated.
Ms. Legg has served as a director of the Company since 1995. Ms. Legg has
served as President and Chief Executive Officer of TIS Financial Services, Inc.,
an asset securitization and management company, since its formation in 1984. Ms.
Legg also serves as President, Chief Executive Officer and a director of TIS
Mortgage Investment Company, a real estate investment trust. Prior to her
involvement with TIS, Ms. Legg served as Vice President and Treasurer of Boise
Cascade, a Fortune 500 forest products manufacturer, and in various management
roles with affiliates of Boise Cascade. From 1967 through 1970, Ms. Legg was
Vice President of the Federal National Mortgage Association and was a principal
architect of the GNMA mortgage-backed security. Ms. Legg is also a director of
Meridian Point Realty Trusts "83, VI and VIII, each of which is a fixed-life
real estate investment company.
Mr. Murphy has served as a director of the Company since 1988. Mr. Murphy
has been self-employed as a financial consultant since January 1996. Mr. Murphy
served as President of Agent Financial Services Corporation, a consumer lending
business, from November 1993 until December 1995. Mr. Murphy was a private
business consultant from September 1991 until October 1993. From October 1988
until September 1991, Mr. Murphy served as Chief Executive Officer of the Murphy
Group, a professional services and executive search firm. From July 1969 until
August 1988, Mr. Murphy was employed by Arthur Andersen & Co., where he became a
partner in 1982.
DESCRIPTION OF SECURITIES BEING REGISTERED
The Registration Statement of which this Prospectus is a part registers up
to 1,782,500 shares of Common Stock. The following description of the Company's
Common Stock is qualified in all respects by reference to the Company's Amended
and Restated Articles of Incorporation (the "Articles"), which have been filed
as an exhibit to the Registration Statement.
COMMON STOCK
The Articles authorize the issuance of up to 10,000,000 shares of Common
Stock, no par value. As of December 31, 1996, there were 4,824,973 shares of
Common Stock outstanding held of record by approximately 225 shareholders.
Holders of Common Stock are entitled to receive dividends when and as declared
by the Board of Directors out of any funds lawfully available therefor and, in
the event of liquidation or distribution of assets, are entitled to participate
ratably in the distribution of such assets remaining after payment of
liabilities, in each case subject to any preferential rights granted to any
series of Preferred Stock that may then be outstanding. The Common Stock does
not have any preemptive rights or redemption or sinking fund provisions. All of
the issued and outstanding shares of Common Stock are, and all shares of Common
Stock to be outstanding upon completion of this offering will be, fully paid and
nonassessable. Holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the shareholders. The Company does not have
cumulative voting in the election of directors, which means that the holders of
more than 50% of the shares voting can elect all directors. The Articles provide
for staggered terms for directors whenever the Board is comprised of six or more
members, meaning that at each election of the Board of Directors, one-third of
the Company's directors will be elected for staggered terms of three years.
44
<PAGE>
PROVISIONS AFFECTING ACQUISITION OF THE COMPANY
The Articles provide that any Business Combination (as defined below) must
be approved by the vote of at least 75% of the outstanding Common Stock, with
such approving votes to include at least 51% of the Common Stock held by persons
other than the Major Shareholder (as defined below), unless the proposed
Business Combination (a) is approved by a majority of the directors ("Continuing
Directors") who are unaffiliated with such Major Shareholder and who were
directors before such Major Shareholder became a Major Shareholder or who were
designated (before initial election as a director) as a Continuing Director by a
two-thirds vote of the Continuing Directors, or (b) is solely between the
Company and any corporation in which the Company owns 50% or more of the voting
stock or interest and the shareholders of the Company retain their proportionate
voting and equity interests in the surviving entity. The Articles define a
"Business Combination" as (i) any merger or consolidation (whether in a single
transaction or a series of related transactions) of the Company or any
subsidiary of the Company with or into any person or entity which, together with
affiliates or associates or group of persons that have agreed to act together,
is or becomes the beneficial owner of 5% or more of the Company's voting stock
(a "Major Shareholder"), (ii) any sale, exchange, shareholder distribution,
pledge, mortgage (or use of other security device to create a lien upon) or
lease of all or substantially all of the assets of the Company or a subsidiary
to a Major Shareholder, whether in a single transaction or a series of related
transactions, (iii) any purchase, exchange, lease or other acquisition by the
Company or any of its subsidiaries of all or substantially all of the assets of
a Major Shareholder, whether in a single transaction or a series of related
transactions, (iv) any issuance of any securities of the Company (or warrants,
options or other rights to purchase the same) to, the reclassification or
recapitalization of the securities of the Company owned by, or the exchange of
securities of the Company with, a Major Shareholder, (v) any other transaction
with a Major Shareholder for which approval of the shareholders is required by
law or by any agreement between the Company and any national securities exchange
or rule of any such exchange or Nasdaq, and (vi) any contract or other agreement
providing for any of the foregoing.
The determination of whether a proposed business combination is within the
scope of the Articles is made by a two-thirds majority of the Continuing
Directors whose determination is conclusive and binding for all purposes of the
Articles.
The Articles also provide that if and for so long as a Major Shareholder
exists, a resolution to voluntarily dissolve the Company may be adopted only
upon the consent of all shareholders, or the affirmative vote of at least
two-thirds of the total number of the Continuing Directors, and the affirmative
vote of the holders of at least 75% of the shares of the Company entitled to
vote thereon.
The Articles also provide that, notwithstanding the foregoing provisions,
the requisite vote necessary to approve a Business Combination with a Major
Shareholder increases to 95% unless the terms of the transaction are such that
all of the Company's shareholders are to receive as a result of the Business
Combination the same amount, kind and composition of cash or securities payment
on a per-share basis in exchange for their shares as was received by any other
former shareholder of the Company whose shares were acquired during the
preceding 12-month period by the Major Shareholder with whom the Business
Combination is to be consummated.
The provisions of the Articles requiring staggered terms for directors,
supermajority approval of the Business Combinations involving Major Shareholders
and providing for supermajority voting to amend such provisions, may not be
amended without approval of the holders of at least 75% of the Company's
outstanding Common Stock.
The foregoing provisions of the Articles, as well as the staggered terms for
directors and the availability of 5,000,000 shares of Series Preferred Stock for
issuance without shareholder approval, may deter any potential hostile offers or
other efforts to obtain control of the Company that are not approved by the
Board of Directors and could thereby deprive the shareholders of opportunities
to realize a premium on their Common Stock and could make removal of incumbent
management more difficult. At the same time, these provisions may have the
effect of inducing any persons seeking control of the Company or a business
combination with the Company to negotiate terms acceptable to the Board of
Directors.
45
<PAGE>
STATE LEGISLATION
Oregon law provides that upon authorization of the Common Stock for
quotation on the Nasdaq National Market, certain "business combinations" between
the Company as an Oregon corporation and an "interested shareholder" are
prohibited for a three-year period following the date that such shareholder
became an interested shareholder, unless (i) the corporation has elected in its
articles of incorporation not to be governed by the Oregon business combination
law (the Company has not made such an election), (ii) the business combination
was approved by the Board of Directors of the corporation before the other party
to the business combination became an interested shareholder, (iii) upon
consummation of the transaction that made it an interested shareholder, the
interested shareholder owned at least 85% of the voting stock of the corporation
outstanding at the commencement of the transaction (excluding voting stock owned
by directors who are also officers or held in employee benefit plans in which
the employees do not have a confidential right to tender or vote stock held by
the plan), or (iv) the business combination was approved by the Board of
Directors of the corporation and ratified by 66 2/3% of the voting stock which
the interested shareholder did not own. The three-year prohibition also does not
apply to certain business combinations proposed by an interested shareholder
following the announcement or notification of certain extraordinary transactions
involving the corporation and a person who has not been an interested
shareholder during the previous three years or who became an interested
shareholder with the approval of a majority of the corporation's directors.
The term "business combination" for purposes of the Oregon law is defined
generally to include mergers or consolidations between an Oregon corporation and
an "interested shareholder," transactions with an "interested shareholder"
involving the assets or stock of the corporation or its majority-owned
subsidiaries and transactions which increase an interested shareholder's
percentage ownership of stock. The term "interested shareholder" is defined
generally as those shareholders who become beneficial owners of 15% or more of
an Oregon corporation's voting stock.
The Company is subject to the Oregon Control Share Act (the "Control Share
Act"), which generally provides that a person (the "Acquiror") who acquires
voting stock of an Oregon corporation in a transaction which results in such
Acquiror holding more than each of 20%, 33% or 50% of the total voting power of
such corporation (a "Control Share Acquisition") cannot vote the shares it
acquires in the Control Share Acquisition ("control shares") unless voting
rights are accorded to such control shares by (i) a majority of each voting
group entitled to vote, and (ii) the holders of a majority of the outstanding
voting shares, excluding the control shares held by the Acquiror and shares held
by the Company's officers and inside directors. The term "Acquiror" is broadly
defined to include persons acting as a group.
The Acquiror may, but is not required to, submit to the Company an
"Acquiring Person Statement" setting forth certain information about the
Acquiror and its plans with respect to the Company. The Statement may also
request that the Company call a special meeting of shareholders to determine
whether the voting rights will be restored to the control shares. If the
Acquiror does not request a special meeting of shareholders, the issue of voting
rights of control shares will be considered at the next annual or special
meeting of shareholders. If the Acquiror's control shares are accorded voting
rights and represent a majority or more of all voting power, shareholders who do
not vote in favor of the restoration of such voting rights will have the right
to receive the appraised "fair value" of their shares, which may not be less
than the highest price paid per share by the Acquiror for the control shares.
A corporation may provide in its articles of incorporation and bylaws that
the statutory provisions described above do not apply to its shares. The
Articles and Bylaws of the Company do not contain such a provision, and the
statutory provisions described above will apply to acquisitions of shares of the
Company's voting stock.
REGISTRATION RIGHTS
In connection with the Company's acquisition of The Genesys Solutions Group,
Inc. in September 1994, Genesys' shareholders were issued in the aggregate
313,600 shares of Common Stock. The Company granted certain registration rights
to these shareholders with respect to those shares ("Registrable Securities").
The Company's obligations to register the Registrable Securities terminate on
the date that all the Registrable Securities may be sold without registration in
reliance on Rule 144 under the Securities Act. As of September 29,
46
<PAGE>
1996 the Registrable Securities became eligible for sale under Rule 144;
however, since the shares held by two former Genesys shareholders may be subject
to volume limitations under Rule 144, the Company believes that these two
individuals may have the right to participate in this offering. Both of these
individuals have elected to waive any rights to participate in this offering.
Following the completion of this offering, the Company believes all registration
rights will be extinguished.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is ChaseMellon
Shareholder Services of Seattle, Washington.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of Common Stock in the public market
could adversely affect the market price of the Common Stock.
Upon completion of this offering, the Company will have outstanding an
aggregate of 6,374,973 shares of Common Stock, assuming the issuance of
1,550,000 shares of Common Stock offered hereby, no exercise of the
Underwriter's over-allotment option, and no exercise of outstanding options,
based on shares outstanding as of December 31, 1996. Substantially all of such
shares will be freely saleable without restriction or further registration under
the Securities Act, except that 34,026 shares will be held in escrow until April
1998 and any shares purchased by "affiliates" of the Company as that term is
defined in Rule 144 under the Securities Act are subject to certain limitations
and restrictions described below.
The Company is obligated to issue 33,341 shares of Common Stock in
connection with an acquisition which shares will be eligible for sale under Rule
144 in January 1998. Furthermore, the Company may elect to issue additional
shares in lieu of cash royalty obligations arising from prior acquisitions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
As of December 31, 1996, there were a total of 831,820 shares of Common
Stock subject to outstanding options under the Company's option plans, 250,990
of which were vested and exercisable. Holders of stock options could exercise
these options and sell certain of the shares issued upon exercise.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least two
years (including the holding period of any prior owner except an affiliate) is
entitled to sell in "broker's transactions" or to market makers, within any
three-month period, a number of shares that does not exceed the greater of (i)
one percent of the number of shares of Common Stock then outstanding
(approximately 63,750 shares immediately after this offering) or (ii) generally,
the average weekly trading volume in the Common Stock during the four calendar
weeks preceding the required filing of a Form 144 with respect to such sale.
Sales under Rule 144 are generally subject to the availability of current public
information about the Company. Under Rule 144(k), a person who is not deemed to
have been an affiliate of the Company at any time during the three months
preceding a sale, and who has beneficially owned the shares proposed to be sold
for at least three years, is entitled to sell such shares without having to
comply with the manner of sale, public information, volume limitation or notice
filing provisions of Rule 144. Under Rule 701 of the Securities Act, persons who
purchased shares upon exercise of options granted prior to the effective date of
the Company's public offering are entitled to sell such shares in reliance on
Rule 144, without having to comply with the holding period and notice filing
requirements of Rule 144 and, in the case of non-affiliates, without having to
comply with the public information, volume limitation or notice filing
provisions of Rule 144.
The Company's executive officers and directors, who as of December 31, 1996
own in the aggregate 497,578 shares of Common Stock, have agreed that they will
not, subject to certain limited exceptions, directly or indirectly, sell, offer,
contract to sell, grant any option to sell, transfer the economic risk of
ownership in, make any short sale, pledge or otherwise dispose of, any shares of
Common Stock or any securities convertible into or exchangeable or exercisable
for or any other rights to purchase or acquire any such shares owned by them,
for 90 days from the date of this Prospectus without the prior written consent
of Hambrecht & Quist LLC, which consent generally may be given or withheld in
the discretion of Hambrecht & Quist LLC.
47
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Hambrecht & Quist LLC, Dain Bosworth Incorporated and Pacific Crest Securities
Inc., have severally agreed to purchase from the Company the following
respective number of shares of Common Stock.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ------------------------------------------------------------ ----------
<S> <C>
Hambrecht & Quist LLC.......................................
Dain Bosworth Incorporated..................................
Pacific Crest Securities Inc................................
----------
Total..................................................... 1,550,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and its counsel. The nature
of the Underwriters' obligation is such that they are committed to purchase all
shares of Common Stock offered hereby if any of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the offering price set forth on the cover page of this Prospectus and
to certain dealers at such price less a concession not in excess of $ per
share. The Underwriters may allow and such dealers may reallow a concession not
in excess of $ per share to certain other dealers. After the public offering
of the shares, the offering price and other selling terms may be changed by the
Underwriters.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 10,000
additional shares of Common Stock at the public offering price, less the
underwriting discount, set forth on the cover page of this Prospectus. To the
extent that the Underwriters exercise this option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage thereof
which the number of shares of Common Stock to be purchased by it shown in the
above table bears to the total number of shares of Common Stock offered hereby.
The Company will be obligated, pursuant to the option, to sell such shares to
the Underwriters to the extent the option is exercised. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of shares of Common Stock offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the Offering without notice. The Underwriters reserve the right
to reject an order for the purchase of the shares in whole or in part.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
The Company's executive officers and directors, who as of December 31, 1996
own in the aggregate 497,578 shares of Common Stock, have agreed that they will
not, directly or indirectly, sell, offer, contract to sell, grant any option to
sell, transfer the economic risk of ownership in, make any short sale, pledge or
otherwise dispose of, any shares of Common Stock or any securities convertible
into or exchangeable or exercisable for or any other rights to purchase or
acquire Common Stock owned by them, without the prior written consent of
Hambrecht & Quist LLC, during the 90-day period following the date of this
Prospectus.
The Company has agreed that it will not, directly or indirectly, sell,
offer, contract to sell, grant any option to sell, transfer the economic risk of
ownership in, make any short sale, pledge or otherwise dispose of, any shares
48
<PAGE>
of Common Stock or any securities convertible into or exchangeable or
exercisable for or any other rights to purchase or acquire Common Stock, without
the prior written consent of Hambrecht & Quist LLC during the 90-day period
following the date of this Prospectus, except that the Company may issue, and
grant options to purchase, shares of Common Stock under its stock and employee
stock purchase plans and under currently outstanding options. Sales of such
shares in the future could adversely affect the market price of the Common
Stock.
In general, the rules of the Commission will prohibit the Underwriters from
making a market in the Company's Common Stock during the "cooling off" period
immediately preceding the commencement of sales in the offering. The Commission
has, however, adopted exemptions from these rules that permit passive market
making under certain conditions. These rules permit an underwriter to continue
to make a market subject to the conditions, among others, that its bid not
exceed the highest bid by a market maker not connected with the offering and
that its net purchases on any one trading day not exceed prescribed limits.
Pursuant to these exemptions, certain Underwriters, selling group members (if
any) or their respective affiliates intend to engage in passive market making in
the Company's Common Stock during the cooling off period.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Farleigh, Wada & Witt, P.C., Portland, Oregon. Certain
legal matters will be passed upon for the Underwriters by Morrison & Foerster
LLP, San Francisco, California. From time to time Morrison & Foerster LLP
provides advice to the Company regarding certain regulatory matters.
EXPERTS
The consolidated financial statements and related schedule of the Company
and its subsidiaries as of December 31, 1995 and 1996 and for each of the three
years in the period ended December 31, 1996 included in this Prospectus and
elsewhere in the Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
The financial statements of Culverin Corporation as of and for the year
ended December 31, 1994 and the financial statements of Input Creations Inc. as
of and for the year ended December 31, 1995 incorporated by reference in this
Prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are
incorporated herein by reference in reliance upon the authority of said firm as
experts in accounting and auditing in giving said reports.
The combined financial statements of OnLine Financial Communication Systems,
Inc. and COIN Banking Systems, Inc. (collectively, MicroBilt Financial Products
Division) incorporated in this Prospectus by reference from the Company's
Current Report on Form 8-K for an April 1, 1996 event, as amended by Amendment
No. 1 on Form 8-K/A, as of and for the year ended December 31, 1995 have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report, which is incorporated herein by reference, and have been so incorporated
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents filed by the Company with the Securities and
Exchange Commission (the "Commission") are hereby incorporated by reference into
this Prospectus except as superseded or modified herein: (1) the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1995; (2) the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
1996; (3) the Company's Current Report on Form 8-K for a November 21, 1995
event, as amended by Amendment No. 1 on Form 8-K/A; (4) the Company's Current
Report on Form 8-K for an April 1, 1996 event, as amended by Amendment No. 1 on
Form 8-K/A; (5) the Company's Current Report on Form 8-K for an April 17, 1996
event, as amended by Amendment No. 1 on Form 8-K/A; (6) the Company's Quarterly
Report on Form 10-Q for the fiscal quarter
49
<PAGE>
ended June 30, 1996, (7) the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended September 30, 1996, and (8) the Company's Registration
Statement on Form 8-A filed June 28, 1993. All information included in any such
documents filed by the Company under the captions "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business--General,"
"--The Financial Services Industry," "--Products" and "--Services and Support"
are hereby excluded from such incorporation by reference.
All documents filed by the Company with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), after the date of this Prospectus and prior to the
termination of the offering of the shares offered hereby shall be deemed to be
incorporated by reference into this Prospectus and to be a part hereof from the
date of filing of such documents.
Any statement contained in any document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document that also is or is deemed to be
incorporated by reference herein modified or superseded such statement. Any such
statement so modified or superseded shall not be deemed, except as modified or
superseded, to constitute part of this Prospectus. The Company will provide
without charge to each person, including any beneficial owner, to whom this
Prospectus is delivered, upon written or oral request of such person, a copy of
any and all of the documents that have been or may be incorporated by reference
herein (other than exhibits to such documents which are not specifically
incorporated by reference into such documents). Such requests should be directed
to Investor Relations, CFI ProServices, Inc., 400 S.W. Sixth Avenue, Portland,
Oregon 97204. The Company's telephone number at that location is (503) 274-7280.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange Act
and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at the offices of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices: Northwest Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511 and Seven World Trade Center, New York,
New York 10048. Copies of such materials can be obtained at prescribed rates
from the Public Reference Section of the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549. The Company commenced filing its
reports, proxy and information statements and other information electronically
with the Commission in May 1996. The Commission maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding the Company and other registrants that file
electronically with the Commission. The Company's Common Stock is quoted for
trading on the Nasdaq National Market and reports, proxy statements and other
information concerning the Company may also be inspected at the offices of the
National Association of Securities Dealers, 1735 K Street, N.W., Washington,
D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
S-3 (referred to herein, together with all amendments and exhibits, as the
"Registration Statement") under the Securities Act with respect to the
securities offered by this Prospectus. This Prospectus does not contain all of
the information set forth in the Registration Statement. Certain parts have been
omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and the securities offered
hereby, reference is made to the Registration Statement. Statements made in this
Prospectus as to the contents of any contract or other document referred to
herein are not necessarily complete, and in each instance, reference is made to
such copy, and each such statement shall be deemed qualified in all respects by
such reference. Copies of the Registration Statement may be inspected, without
charge, at the offices of the Commission, or obtained at prescribed rates from
the Public Reference Section at the address set forth above.
50
<PAGE>
INDEX TO FINANCIAL STATEMENTS
The financial statements included herein are as follows:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CFI PROSERVICES, INC.
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets, December 31, 1995 and 1996................... F-3
Consolidated Statements of Income, Years Ended December 31, 1994, 1995 and
1996..................................................................... F-4
Consolidated Statements of Shareholders' Equity, Years Ended December 31,
1994, 1995 and 1996...................................................... F-5
Consolidated Statements of Cash Flows, Years Ended December 31, 1994, 1995
and 1996................................................................. F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders of
CFI ProServices, Inc.
We have audited the accompanying consolidated balance sheets of CFI
ProServices, Inc. (an Oregon corporation) and subsidiaries as of December 31,
1996 and 1995 and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CFI
ProServices, Inc. and subsidiaries as of December 31, 1996 and 1995 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon
January 23, 1997
F-2
<PAGE>
CFI PROSERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................................... $ 4,844 $ --
Short-term investments............................................................ 2,826 --
Receivables, net of allowances of $290 and $1,303................................. 15,165 23,307
Income taxes receivable........................................................... 229 --
Inventory......................................................................... 215 156
Deferred tax asset................................................................ 445 643
Prepaid expenses and other current assets......................................... 1,304 1,659
------------- -------------
Total current assets............................................................ 25,028 25,765
Property and equipment, net of accumulated depreciation of $3,875 and $5,596........ 2,968 4,805
Software development costs, net of accumulated amortization of $2,514 and $2,585.... 4,317 8,327
Purchased software costs, net of accumulated amortization of $1,176 and $1,229...... 849 1,079
Other intangibles, net of accumulated amortization of $410 and $1,455............... 3,079 6,704
Deferred tax asset.................................................................. -- 165
Other assets........................................................................ 346 --
------------- -------------
Total assets.................................................................... $ 36,587 $ 46,845
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Drafts payable.................................................................... $ -- $ 425
Accounts payable.................................................................. 1,443 2,884
Accrued expenses.................................................................. 3,317 5,478
Deferred revenue.................................................................. 6,860 10,445
Customer deposits................................................................. 698 869
Notes payable..................................................................... 3,915 2,896
Income taxes payable.............................................................. -- 46
Other current liabilities......................................................... 36 --
------------- -------------
Total current liabilities....................................................... 16,269 23,043
Deferred tax liability.............................................................. 965 --
Long term debt, less current portion................................................ 423 2,810
------------- -------------
Total liabilities............................................................... 17,657 25,853
Mandatory redeemable Class A Preferred Stock........................................ 761 754
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 4,496,136 and
4,824,973 shares issued and outstanding.......................................... 15,693 17,745
Retained earnings................................................................. 2,476 2,493
------------- -------------
Total shareholders' equity...................................................... 18,169 20,238
------------- -------------
Total liabilities and shareholders' equity...................................... $ 36,587 $ 46,845
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
CFI PROSERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenue
Software license fees.......................................................... $ 16,781 $ 18,918 $ 33,935
Service and support............................................................ 12,775 15,060 22,336
Other.......................................................................... 3,060 2,798 3,676
--------- --------- ---------
Total revenue................................................................ 32,616 36,776 59,947
Cost of revenue.................................................................. 9,646 11,672 20,844
--------- --------- ---------
Gross profit................................................................. 22,970 25,104 39,103
--------- --------- ---------
Operating expenses
Sales and marketing............................................................ 8,194 9,558 12,725
Product development............................................................ 5,153 6,356 10,615
General and administrative..................................................... 4,352 4,295 5,425
Amortization of intangibles.................................................... 160 343 1,045
Acquired in-process research and development and restructuring................. -- 4,549 8,030
--------- --------- ---------
Total operating expenses..................................................... 17,859 25,101 37,840
--------- --------- ---------
Income from operations........................................................... 5,111 3 1,263
--------- --------- ---------
Non-operating income (expense)
Interest expense............................................................... (8) (3) (251)
Interest income................................................................ 385 490 271
Other, net..................................................................... -- -- (2)
--------- --------- ---------
Total non-operating income................................................... 377 487 18
--------- --------- ---------
Income before income taxes....................................................... 5,488 490 1,281
Provision for income taxes....................................................... 1,974 167 1,167
--------- --------- ---------
Net income....................................................................... 3,514 323 114
Preferred stock dividend......................................................... 97 97 97
--------- --------- ---------
Net income applicable to common shareholders..................................... $ 3,417 $ 226 $ 17
--------- --------- ---------
--------- --------- ---------
Net income per share............................................................. $ 0.71 $ 0.05 $ --
--------- --------- ---------
--------- --------- ---------
Shares used in per share calculations............................................ 4,806 4,877 5,112
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
CFI PROSERVICES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK (ACCUMULATED
--------------------- DEFICIT)/RETAINED
SHARES AMOUNT EARNINGS TOTAL
---------- --------- --------------- ---------
<S> <C> <C> <C> <C>
BALANCES, December 31, 1993................................... 3,877,402 $ 14,238 $ (1,167) $ 13,071
Issuance of Common Stock.................................... 51,575 103 -- 103
Net income applicable to common shareholders................ -- -- 3,417 3,417
---------- --------- ------ ---------
BALANCES, December 31, 1994................................... 3,928,977 14,341 2,250 16,591
Issuance of Common Stock.................................... 567,159 1,061 -- 1,061
Tax benefits from stock transactions........................ -- 291 -- 291
Net income applicable to common shareholders................ -- -- 226 226
---------- --------- ------ ---------
BALANCES, December 31, 1995................................... 4,496,136 15,693 2,476 18,169
Issuance of Common Stock.................................... 328,837 1,420 -- 1,420
Tax benefits from stock transactions........................ -- 632 -- 632
Net income applicable to common shareholders................ -- -- 17 17
---------- --------- ------ ---------
BALANCES, December 31, 1996................................... 4,824,973 $ 17,745 $ 2,493 $ 20,238
---------- --------- ------ ---------
---------- --------- ------ ---------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
CFI PROSERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income applicable to common shareholders.............. $ 3,417 $ 226 $ 17
Adjustments to reconcile net income applicable to common
shareholders to cash provided by operating activities:
Depreciation and amortization........................... 1,702 3,029 4,731
Gain on sale of property and equipment.................. -- -- (10)
Write-off of in-process research and development........ -- 3,700 8,030
Deferred income taxes................................... -- (900) (1,328)
Interest accreted (payments made) on mandatory
redeemable preferred stock, net........................ 7 (3) (7)
(Gain) loss on sale of equity/debt investments.......... -- 31 (156)
Equity in Vendor Payment Systems, Inc. loss............. -- 88 --
(Increase) decrease in assets, net of effects from
purchase of businesses:
Receivables net....................................... (2,634) (3,734) (6,580)
Income taxes receivable............................... (63) 125 229
Inventory............................................. (188) 206 59
Prepaid expenses and other current assets............. (19) (302) (325)
Increase (decrease) in liabilities, net of effects from
purchase of businesses:
Drafts payable........................................ -- -- 425
Accounts payable...................................... 595 (166) 1,167
Accrued expenses...................................... 580 (144) 2,079
Deferred revenue...................................... 87 1,129 2,069
Customer deposits..................................... (818) 243 (609)
Income taxes payable.................................. -- -- 678
Other current liabilities............................. (71) (67) (338)
----------- ----------- -----------
Net cash provided by operating activities........... 2,595 3,461 10,131
Cash flows from investing activities:
Expenditures for property and equipment................... (1,995) (1,232) (2,721)
Software development costs capitalized.................... (1,102) (2,720) (5,204)
Expenditures for purchased software....................... (1,285) -- --
Purchase of investments................................... (13,612) (8,128) --
Proceeds from sale/maturity of investments................ 14,601 11,715 2,982
Proceeds from sale of property and equipment.............. -- -- 19
Cash paid for acquisition of Products Division of PBS..... (715) -- --
Investment in Vendor Payment Systems, Inc................. (225) (230) --
Cash paid for acquisition of Texas Southwest Technology
Group.................................................... -- (259) --
Cash paid for acquisition of Culverin Corporation, net of
cash received............................................ -- (62) --
Cash paid for acquisition of MicroBilt Financial Services
Division, net of cash received.......................... -- -- (2,277)
Cash paid for acquisition of Input Creations, Inc......... -- -- (2,107)
Cash paid for other acquisitions.......................... -- -- (812)
Other assets.............................................. -- -- 8
----------- ----------- -----------
Net cash used in investing activities............... (4,333) (916) (10,112)
Cash flows from financing activities:
Net proceeds from line of credit.......................... -- -- 1,591
Payments on capital leases................................ (104) -- --
Payments on notes payable................................. -- -- (7,280)
Payments on long-term debt................................ -- (6) (328)
Proceeds from issuance of common stock.................... 103 791 1,154
----------- ----------- -----------
Net cash provided by (used in) financing
activities........................................... (1) 785 (4,863)
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents............ (1,739) 3,330 (4,844)
Cash and cash equivalents:
Beginning of year......................................... 3,253 1,514 4,844
----------- ----------- -----------
End of year............................................... $ 1,514 $ 4,844 $ --
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
CFI PROSERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS
CFI ProServices, Inc. and its subsidiaries (the "Company") develops, sells,
and services customer service software used by financial institutions. The
Company combines its technology, banking and legal expertise to deliver
knowledge-based software solutions that enable institutions to simplify key
sales and service business processes, improve productivity, strengthen customer
relationships, and maintain compliance with both internal business policies and
external government relations. Although most sales historically have been to
commercial banks within the United States, today the Company actively markets
its products to most types of financial institutions domestically and, for the
non-compliance oriented software, internationally. The Company has been in
business since 1978.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of its wholly
owned subsidiaries, The Genesys Solutions Group, Inc., Texas Southwest
Technology Group, Culverin Corporation, Online Financial Systems, Inc., COIN
Banking Systems, Inc., and Vendor Payment Systems, Inc. (VPS). All intercompany
transactions and balances have been eliminated. A cash investment in VPS was
included in other assets and was accounted for using the equity method until
April 1996 when the Company purchased the remaining outstanding VPS common
stock. The Company made certain acquisitions in April 1996 (see Note 2). These
acquisitions have been included in the consolidated financial statements since
the date of acquisition.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and short-term investments with
original maturity dates of three months or less at the time of acquisition.
INVESTMENTS
Statement of Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities (SFAS 115)" requires the Company to
classify and account for its security investments as trading securities,
securities available for sale or securities held to maturity depending on the
Company's intent to hold or trade the securities at time of purchase. Securities
available for sale are stated on the balance sheet at their fair market value
which approximates cost. Securities held to maturity are stated at amortized
cost. There were no unrealized holding gains or losses at December 31, 1995 and
1996. During 1996, the Company sold its debt securities to help pay for
acquisitions. The Company uses the specific identification method for
determining the cost to use in computing realized gains and losses.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Proceeds from sale of available for sale securities.................. $ -- $ 185 $ --
Proceeds from sale of debt securities................................ -- -- 2,982
Realized losses on sales of equity securities........................ -- 31 --
Realized gains on sales of debt securities........................... -- -- 156
</TABLE>
INVENTORY
Inventory consists primarily of printed bank forms and supplies, and is
stated at the lower of cost or market, with cost determined on the first-in,
first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost; depreciation is computed on a
straight-line basis over the estimated useful lives of the individual assets,
which are three years for computer equipment and software, and
F-7
<PAGE>
CFI PROSERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
five to seven years for furniture, fixtures and other equipment. Expenditures
for repairs and maintenance are charged to current operations, and costs related
to renewals and improvements that add significantly to the useful life of an
asset are capitalized. When depreciable properties are retired or otherwise
disposed of, the cost and related accumulated depreciation are removed from the
accounts and the resulting gain or loss is reflected in income.
SOFTWARE
The costs of internally developed software which meet the criteria in
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software To Be Sold, Leased or Otherwise Marketed," are capitalized.
These costs are amortized on a straight-line basis over estimated economic lives
ranging from three to five years.
Purchased software is capitalized at cost and amortized on a straight-line
basis over estimated economic lives ranging from two to five years. Most of the
contracts for purchased software require royalties to be paid based on revenues
generated by the related software.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Amortization of internally developed software........................ $ 518 $ 787 $ 1,194
Amortization of purchased software................................... 92 632 693
</TABLE>
INTANGIBLES
The intangibles consist primarily of amounts paid for goodwill,
noncompetition agreements and customer lists. These costs are amortized on a
straight-line basis over estimated economic lives of five to seven years. The
Company believes these useful lives are appropriate based on the factors
influencing acquisition decisions. These factors include product life,
profitability and general industry outlook. The Company reviews its intangible
assets for asset impairment at the end of each quarter, or more frequently when
events or changes in circumstances indicate that the carrying amount of
intangibles may not be recoverable. To perform that review, the Company will
estimate the sum of expected future undiscounted cash flows from operating
activities. If the estimated net cash flows are less than the carrying amount of
intangibles, the Company would recognize an impairment loss in an amount
necessary to write the intangibles down to fair value as determined by the
expected discounted future cash flows. The Company has not recognized an
impairment loss to date. Amortization of intangibles is as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Amortization of intangibles.......................................... $ 160 $ 343 $ 1,045
</TABLE>
REVENUE RECOGNITION
License revenues are derived from three kinds of transactions:
- Licenses with no follow-on obligations on the part of the Company are
recognized upon shipment.
- Licenses which require installation and training by the Company prior to
use are recognized upon completion of the installation and training.
F-8
<PAGE>
CFI PROSERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
- Licenses which include significant amounts of tailoring and, occasionally,
customization are recognized on a percentage of completion basis as the
tailoring and customization are performed. Estimates of efforts to
complete a project are used in the percentage of completion calculation.
Due to the uncertainties inherent in these estimates, actual results could
differ from those estimates.
If the license agreement obligates the Company to provide post-contract
support at no additional cost to the customer, the revenue related to the
post-contract support is recognized ratably over the support period. Sales of
the Company's credit analysis products generally include a right of return,
without charge, within 30 days of the sale. The Company provides an allowance
for sales returns, based on historical experience, for these products. For all
other products, returns and exchanges are rare and are recorded as reductions in
license revenue when the obligation to accept the return or conduct the exchange
becomes known.
Revenues for consulting, custom programming and training, where separately
contracted for, are recognized as the related services are performed. Other
revenues include sales of preprinted forms and font cartridges which are
recognized upon shipment.
Amounts received in advance for service and support contracts are deferred
and recognized ratably over the support period. Amounts in excess of invoiced
minimums for service and support charges based on usage are estimated and
recognized in the period in which usage occurs.
Included in receivables at December 31, 1995 and 1996 are unbilled
receivables of $1,612,000 and $3,328,000, respectively. These primarily relate
to percentage of completion contracts and deferred payment terms.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting For Income Taxes" (SFAS No.
109). This pronouncement requires deferred tax assets and liabilities to be
valued using the enacted tax rates expected to be in effect when the temporary
differences are recovered or settled.
ADVERTISING COST
Advertising costs are expensed as incurred. These costs were $570,000,
$585,000 and $950,000 for the years ended December 31, 1994, 1995, and 1996,
respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
EARNINGS PER SHARE
Earnings per share is computed based on the weighted average number of
common and dilutive common equivalent shares outstanding, using the treasury
stock method. Common stock equivalents include shares issuable for acquisitions
and upon exercise of outstanding stock options and warrants.
F-9
<PAGE>
CFI PROSERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
SUPPLEMENTARY CASH FLOW INFORMATION
The Company made the following cash payments:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest and preferred dividends........................................... $ 101 $ 103 $ 148
Income taxes............................................................... 2,075 1,005 1,597
</TABLE>
Noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax benefit from exercise of nonqualified stock options...................... $ -- $ 291 $ 632
Culverin Corporation acquisition (Note 2):
Issuance of notes payable.................................................. -- 3,740 --
Stock commitment........................................................... -- 270 --
Texas Southwest Technology Group acquisition (Note 2):
Issuance of notes payable and long-term debt............................... -- 450 --
MicroBilt Financial Services Division acquisition (Note 2):
Issuance of notes payable.................................................. -- -- 3,500
Input Creations, Inc. acquisition (Note 2):
Issuance of long term debt................................................. -- -- 1,533
Other acquisitions (Note 2):
Issuance of long term debt................................................. -- -- 1,182
Issuance of notes payable.................................................. -- -- 1,170
Issuance of Common Stock................................................... -- -- 266
</TABLE>
RECLASSIFICATION
Certain reclassifications in the financial statements and notes have been
made to all periods prior to 1996 to conform with the current presentation.
2. ACQUISITIONS:
In April 1996, the Company acquired all of the capital stock of OnLine
Financial Communication Systems, Inc. ("OnLine") and COIN Banking Systems, Inc.
("COIN") (formerly subsidiaries of Microbilt Corporation), and substantially all
of the assets of 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
approximately $13,600,000 plus certain contingent royalties tied to future
revenue production or to software conversions. The $13,600,000 included
$5,196,000 of cash, $7,385,000 in notes payable and other long-term liabilities,
$266,000 of common stock and approximately $700,000 of other assumed
liabilities. In conjunction with these acquisitions, the Company recorded
approximately $4,300,000 of goodwill which is being amortized ratably over a
seven year period and $8,030,000 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
F-10
<PAGE>
CFI PROSERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS: (CONTINUED)
Force issue 96-7 (EITF 96-7) issued in 1996, the Company did not provide
deferred taxes on 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 acquisitions has
arisen between the Company 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.
In November 1995, the Company acquired all of the outstanding common stock
of Culverin Corporation (Culverin), a software company with headquarters in
Dayton, Ohio. The initial purchase price consisted of $3,888,000 in cash payable
in installments through November 1996; cash of $50,000 and 33,341 shares of the
Company's common stock, valued at $13.50 per share and discounted 40% for
restrictions on trading, to be delivered on January 1, 1998; and expenses of
$531,000. In addition, the Company will make annual contingent royalty payments
over the next five years of between 3% and 15% of revenues generated by Culverin
products, depending on the amount of such revenues in each year. The transaction
has been accounted for as a purchase and the excess of the initial purchase
price over the value of the identifiable assets, $1,969,000, has been recorded
as an intangible asset, amortized on a straight-line basis over seven years. The
1995 financial statements herein include the results of Culverin's operations
for November and December, 1995.
Unaudited pro forma results of operations assuming the Culverin acquisition
occurred at January 1, 1994 and the April 1996 acquisitions occurred at January
1, 1995 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Total revenue................................................ $ 37,923 $ 54,497 $ 63,223
Net income (loss) applicable to common stock................. 2,967 (699) 33
Earnings (loss) per share.................................... 0.61 (0.16) 0.01
</TABLE>
Pro forma results for the years ended December 31, 1995 and 1996 include the
write-off of acquired in-process research and development in the periods when
incurred.
Primarily in connection with the Culverin acquisition, the Company recorded
a pretax charge of $4,549,000 in the fourth quarter of 1995. Of this charge,
$3,700,000 represented the value, determined by independent appraisal, of
Culverin's in-process research and development efforts at the time of
acquisition. Technological feasibility of the acquired technology, which has no
alternative future uses, had not been established prior to the purchase.
Restructuring costs, comprised primarily of severance costs, represent the
remainder of the charge.
In April 1995, the Company acquired all of the outstanding common stock of
Texas Southwest Technology Group (TSTG), a software company located in Houston,
Texas. The purchase price consisted of $259,000 cash upon closing, $450,000
payable over the next four years, and contingent royalties payable at
percentages between 6% and 18% on license revenue from sales of TSTG products
over the next three years. The transaction has been accounted for as a purchase
and the excess of the initial purchase price over the value of the identifiable
assets, $625,000, has been recorded as an intangible asset, amortized on a
straight-line basis over five years. The financial statements herein include the
results of TSTG's operations for the nine months ended December 31, 1995. The
results of TSTG's operations prior to the acquisition, both for 1994 and 1995,
were insignificant.
F-11
<PAGE>
CFI PROSERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS: (CONTINUED)
In September 1994, the Company issued 313,600 shares of its common stock for
all of the outstanding shares of The Genesys Solutions Group, Inc. (Genesys).
Genesys, located in Huntington, New York, develops and licenses software that
automates call center service and support functions for financial institutions.
The transaction was accounted for as a pooling-of-interests and, accordingly,
the consolidated financial statements for all periods presented reflect the
accounts of Genesys as though the acquisition occurred on the first day of the
first year presented.
In June 1994, the Company acquired the Products Division of Professional
Bank Services, Inc. (PBS) for $715,000 in cash and, in addition, assumed service
liabilities of $455,000. The excess of the purchase price over the fair market
value of the identifiable assets, $895,000, has been recorded as intangibles and
is being amortized on a straight-line basis over five years. The results of PBS'
operations prior to the acquisition were insignificant.
In April 1994, the Company purchased from Cardinal Technologies Incorporated
the rights to certain fair lending software for $950,000, which has been
recorded as purchased software and is being amortized on a straight-line basis
over three years.
3. SHORT-TERM INVESTMENTS:
Short-term investments consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Equity securities available for sale....................................... $ -- $ --
Debt securities held to maturity (due within one year):
U.S. government obligations.............................................. 1,300 --
U.S. municipal obligations............................................... 1,526 --
--------- ---------
Total.................................................................. $ 2,826 $ --
--------- ---------
--------- ---------
</TABLE>
4. PROPERTY AND EQUIPMENT:
The major categories of property and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Computer hardware and software............................................ $ 4,663 $ 7,090
Furniture and fixtures.................................................... 1,943 2,879
Leasehold improvements.................................................... 237 432
--------- ---------
6,843 10,401
Less--Accumulated depreciation............................................ 3,875 5,596
--------- ---------
$ 2,968 $ 4,805
--------- ---------
--------- ---------
</TABLE>
Depreciation expense was as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Depreciation expense............................................... $ 932 $ 1,267 $ 1,799
--- --------- ---------
--- --------- ---------
</TABLE>
F-12
<PAGE>
CFI PROSERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ACCRUED EXPENSES:
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Accrued vacation pay....................................................... $ 190 $ 265
Accrued commissions........................................................ 480 870
Accrued bonuses and profit sharing......................................... 648 1,639
Other...................................................................... 1,999 2,704
--------- ---------
$ 3,317 $ 5,478
--------- ---------
--------- ---------
</TABLE>
6. EMPLOYEE BENEFIT PLANS:
The Company created a profit sharing plan (the "Plan") on February 1, 1989
under the provisions of Section 401(k) of the Internal Revenue Code. Employer
contributions to the Plan are made at the discretion of the Board of Directors
and were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Employer contributions............................................. $156 $ 220 $327
--------- --- ---------
--------- --- ---------
</TABLE>
The Board of Directors has approved an officers' bonus plan and employee
profit sharing plan. The amount and timing of the bonus and profit sharing
payments are at the Board's discretion. The expense associated with these plans
was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Bonus and profit sharing expense................................... $ 1,198 $ 771 $ 2,298
--------- --- ---------
--------- --- ---------
</TABLE>
The Company has a qualified employee stock purchase plan which allows
qualified employees to direct up to 7 percent of monthly base pay for purchases
of stock. The purchase price for shares purchased under the plan is 85 percent
of the lesser of the fair market value at the beginning or end of the plan year.
7. LINE OF CREDIT AND LONG-TERM DEBT:
LINE OF CREDIT
The Company may borrow up to the lesser of $7,500,000 or 60 percent of the
accounts, as defined under the terms of a committed, unsecured, revolving bank
line of credit agreement. 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, 1997. The
agreement contains covenants which require the Company to maintain certain
financial ratios and prohibits the Company from incurring other debts or liens
outside the ordinary course of business. The Company is in compliance with the
covenants at December 31, 1996. The Company pays an annual commitment fee of .2
percent on the average unused balance. At December 31, 1996, borrowings under
the line totaled $1,591,000 and are included in notes payable. There were no
borrowings under the line at December 31, 1995.
F-13
<PAGE>
CFI PROSERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LINE OF CREDIT AND LONG-TERM DEBT: (CONTINUED)
LONG-TERM DEBT
At December 31, 1995 and 1996, long-term debt consists of the following (in
thousands):
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Note payable, in relation to Culverin acquisition, payment of $3,690 in 1996 with
the balance due January 1998....................................................... $ 3,740 $ 50
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............................................................................... -- 750
Note payable, in relation to Halcyon acquisition, due upon completion of the
development of a new specified product............................................. -- 225
Note payable, assumed in the Halcyon acquisition, in monthly installments of $6,
including interest imputed at 8.5 percent, with final payment due October 2004..... -- 382
Guaranteed royalties to be paid in relation to Input acquisition, with imputed
interest at 6 percent, payable through March 2001.................................. -- 1,533
TSTG non-compete payments through April 1999........................................ 450 275
Other 148 --
--------- ---------
4,338 4,115
Less current installment of long-term debt, included in notes payable............... (3,915) (1,305)
--------- ---------
Long-term debt, excluding current installment....................................... $ 423 $ 2,810
--------- ---------
--------- ---------
</TABLE>
Payouts under long-term debt are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- ------------------------------
<S> <C>
1997.......................... $ 1,305
1998.......................... 296
1999.......................... 212
2000.......................... 230
2001.......................... 1,682
Thereafter.................... 390
---------
$ 4,115
---------
---------
</TABLE>
8. OPERATING LEASES:
The Company leases facilities and equipment under operating leases, with
terms from one to ten years, payable in monthly installments. Total lease
expense was as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Lease expense................. $ 906 $ 999 $ 2,131
--- --- ---------
--- --- ---------
</TABLE>
F-14
<PAGE>
CFI PROSERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. OPERATING LEASES: (CONTINUED)
Future minimum lease payments are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- ------------------------------
<S> <C>
1997...................... $ 2,514
1998...................... 2,621
1999...................... 2,524
2000...................... 2,377
2001...................... 1,626
Thereafter................ 3,468
---------
$ 15,130
---------
---------
</TABLE>
9. INCOME TAXES:
The provision (benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current tax provision:
Federal....................................................... $ 1,630 $ 944 $ 2,223
State......................................................... 344 123 272
--------- --------- ---------
1,974 1,067 2,495
Deferred tax (benefit).......................................... -- (900) (1,328)
--------- --------- ---------
Total provision................................................. $ 1,974 $ 167 $ 1,167
--------- --------- ---------
--------- --------- ---------
</TABLE>
The reconciliation of the statutory Federal income tax rate to the Company's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Federal statutory rate............................................. 34.0% 34.0% 34.0%
State income taxes net of Federal benefit.......................... 4.1 5.4 6.8
Disallowance of meals and entertainment expenses................... 0.7 11.5 6.0
Purchase accounting adjustments.................................... -- .5 47.6
Tax free interest.................................................. (1.5) (9.7) --
Change in valuation allowance...................................... (3.0) 2.1 10.9
Other.............................................................. 1.7 (9.7) (14.1)
--- --- ---------
36.0% 34.1% 91.2%
--- --- ---------
--- --- ---------
</TABLE>
F-15
<PAGE>
CFI PROSERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES: (CONTINUED)
Deferred tax assets and (liabilities) are comprised of the following
components:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Current deferred tax asset:
Allowance for doubtful accounts......................................... $ 110 $ 371
Accrued vacation liability.............................................. 72 101
Current portion of net operating loss carryforwards..................... 88 88
Severance and other accruals............................................ 135 36
Other................................................................... 40 47
--------- ---------
Total current deferred tax asset...................................... $ 445 $ 643
--------- ---------
--------- ---------
Long-term deferred tax asset (liability):
In-process technology acquired amortized for tax purposes............... $ -- $ 2,663
Intangibles amortization................................................ 123 223
Capitalized software.................................................... (1,641) (3,164)
Net operating loss and credit carryforwards............................. 594 599
Other................................................................... 8 33
--------- ---------
Gross long-term deferred tax asset (liability)............................ (916) 354
Valuation allowance..................................................... (49) (189)
--------- ---------
Total long-term deferred tax asset (liability)........................ $ (965) $ 165
--------- ---------
--------- ---------
</TABLE>
The increase (decrease) in the valuation allowance was as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------
1994 1995 1996
----- ----- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Increase (decrease) in valuation allowance............................. $(162) $ 10 $140
----- ----- ----
----- ----- ----
</TABLE>
At December 31, 1996, for Federal tax return reporting purposes, the Company
had approximately $1,156,000 of regular and alternative minimum tax loss
carryovers that expire at various dates through 2010. In addition, at December
31, 1996, the Company has $152,000 of general business credit carryovers and
$96,000 of research and development credits available that expire at various
dates through 2003 and 2009, respectively. The general business credit
carryovers may not be used to offset taxes payable until the tax loss carryovers
are fully utilized.
The Tax Reform Act of 1986 contains provisions which limit the net operating
loss and tax credit carryovers available to be used in any given year in the
event of certain circumstances including significant changes in ownership
interests. The Company is limited to using approximately $230,000 of net
operating loss carryovers in any one year.
10. PREFERRED STOCK:
The Company is redeeming the 10,300 outstanding shares of mandatory
redeemable Class A preferred stock at $262.14 per share over a 28-year period
ending in the year 2018. The present value of the remaining payments, which are
due quarterly, has been recorded as the carrying value at December 31, 1995 and
1996.
F-16
<PAGE>
CFI PROSERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. PREFERRED STOCK: (CONTINUED)
The carrying value is adjusted as payments are made and dividends are accrued on
the shares yet to be redeemed. The rate used to calculate the present value was
13 percent per annum, which approximated the Company's borrowing rate at the
time redemption commenced.
The repayment schedule for the mandatory redeemable Class A preferred stock
at December 31, 1996 is as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- -------------------------------------------------------------------------------------
<S> <C>
1997............................................................................. $ 103
1998............................................................................. 103
1999............................................................................. 103
2000............................................................................. 103
2001............................................................................. 103
Thereafter....................................................................... 1,633
---------
Total future payments............................................................ 2,148
Less--amount representing dividends.............................................. 1,394
---------
Present value of future payments................................................. 754
Less--current portion............................................................ --
---------
Long-term mandatory redeemable preferred stock................................... $ 754
---------
---------
</TABLE>
11. STOCK OPTIONS AND DIRECTOR COMPENSATION:
At December 31, 1996, the Company had four stock option plans: a
Consolidated Plan, a nonqualified stock option plan, and two plans for outside
directors.
Under the Consolidated Plan, options, which consist of incentive stock
options and nonqualified stock options, vest ratably over five years and
generally expire ten years from the date of grant, beginning in the year 2001.
The exercise price for incentive stock options granted under the plan is set at
the fair market value at the grant date. The exercise price for nonqualified
options may be set below the fair market value at the grant date, but, to this
date, no options have been granted with an exercise price less than fair market
value at the grant date.
Under the nonqualified stock option plan, available to officers and key
employees, the vesting period and exercise price, which may be set below the
fair market value at the date of grant, are determined by the Compensation
Committee of the Board of Directors. To this date, no options have been granted
with an exercise price less than fair market value at the date of grant.
Under the Restated Outside Director Restricted Stock Plan (the "Restricted
Plan"), 40,000 shares of common stock were reserved for issuance to outside
directors. As of December 31, 1996, 24,600 shares had been issued under the plan
and were no longer restricted, leaving 15,400 shares available for future
grants. In May 1994, the shareholders approved the Restated Outside Director
Compensation and Stock Option Plan (the "Compensation Plan"), which provides for
outside directors to be paid $5,000 per year and allows for the issuance of
50,000 shares, comprised of 15,400 shares under the Restricted Plan and 34,600
shares under the Consolidated Plan, as stock options.
F-17
<PAGE>
CFI PROSERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCK OPTIONS AND DIRECTOR COMPENSATION: (CONTINUED)
Below is a table showing the activity for the aforementioned stock option
plans for the past three years:
<TABLE>
<CAPTION>
WEIGHTED TOTAL
AVERAGE EXERCISE
SHARES EXERCISE PRICE
SUBJECT TO PRICE PER (IN
OPTIONS SHARE THOUSANDS)
------------- ------------- -------------
<S> <C> <C> <C>
Balances, December 31, 1993............................... 1,198,352 $ 3.10 $ 3,711
Options granted......................................... 152,500 13.12 2,001
Options exercised....................................... (31,975) 1.34 (43)
Options lapsed.......................................... (40,286) 8.27 (333)
------------- ------ ------
Balances, December 31, 1994............................... 1,278,591 4.17 5,336
Options granted......................................... 140,384 12.75 1,790
Options exercised....................................... (547,381) 1.22 (668)
Options lapsed.......................................... (46,912) 10.57 (496)
------------- ------ ------
Balances, December 31, 1995............................... 824,682 7.23 5,962
Options granted......................................... 290,500 14.52 4,219
Options exercised....................................... (273,183) 3.63 (991)
Options lapsed.......................................... (10,179) 9.92 (101)
------------- ------ ------
Balances, December 31, 1996............................... 831,820 $ 10.93 $ 9,089
------------- ------ ------
------------- ------ ------
</TABLE>
For all four plans at December 31, 1996 there were 1,162,104 shares of
unissued stock reserved for issuance under the plans, of which 45,684 shares are
reserved under the Employee Stock Purchase Plan and options for the purchase of
284,600 shares remained available for future grants. Options to purchase 245,180
and 250,990 shares of common stock were exercisable at December 31, 1995 and
1996, respectively. These exercisable options had weighted average exercise
prices of $6.61 and $8.27 at December 31, 1995 and 1996, respectively.
During 1995, the Financial Accounting Standards Board issued SFAS 123 which
defines a fair value based method of accounting for an employee stock option and
similar equity instrument and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. However, it also
allows an entity to continue to measure compensation cost for those plans using
the method of accounting prescribed by APB 25. Entities electing to remain with
the accounting in APB 25 must make pro forma disclosures of net income and, if
presented, earnings per share, as if the fair value based method of accounting
defined in SFAS 123 had been adopted.
The Company has elected to account for its stock-based compensation plans
under APB 25; however, the Company has computed, for pro forma disclosure
purposes, the value of all options granted during 1996 and 1995 using the
Black-Scholes options pricing model as prescribed by SFAS 123 using the
following weighted average assumptions for grants:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
----------------------
1995 1996
---------- ----------
<S> <C> <C>
Risk-free interest rate............................................................... 6.0% 6.0%
Expected dividend yield............................................................... 0.0% 0.0%
Exected lives (Years)................................................................. 4.2 4.7
Expected volatility................................................................... 57.7% 62.8%
</TABLE>
F-18
<PAGE>
CFI PROSERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCK OPTIONS AND DIRECTOR COMPENSATION: (CONTINUED)
Using the Black-Scholes methodology, the total value of options granted
during 1995 and 1996 was $794,000 and $1,854,000, respectively, which would be
amortized on a pro forma basis over the vesting period of the options (typically
four years). The weighted average fair value of options granted during 1995 and
1996 was $6.62 per share and $7.39 per share, respectively. If the Company had
accounted for its stock-based compensation plans in accordance with SFAS 123,
the Company's net income and net income per share would approximate the pro
forma disclosures below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1995 1996
---------------------- ----------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net income (loss)................................................ $ 226 $ 46 $ 17 $ (906)
Net income (loss) per share...................................... $ 0.05 $ 0.01 -- $ (0.18)
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to January
1, 1995, and additional awards are anticipated in future years.
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- --------------------------------------------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE NUMBER OF AVERAGE
EXERCISE NUMBER REMAINING EXERCISE SHARES EXERCISE
PRICES PER OUTSTANDING CONTRACTUAL PRICE PER EXERCISABLE PRICE PER
SHARE AT 12/31/96 LIFE (YEARS) SHARE AT 12/31/96 SHARE
- -------------- ----------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 1.00-4.99 181,436 5.3 $ 1.69 109,406 $ 1.52
10.00-14.99 440,384 8.5 12.58 131,584 12.66
15.00-15.00 200,000 9.1 15.00 -- --
24.25-24.25 10,000 4.3 24.25 10,000 24.25
</TABLE>
F-19
<PAGE>
CFI PROSERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
QUARTER ENDED(1)
----------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996(2) 1996 1996
----------- --------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue............................................................ $ 11,008 $ 15,399 $ 16,262 $ 17,278
Gross profits...................................................... 7,363 10,249 10,646 10,845
Net income (loss).................................................. 869 (4,059) 1,468 1,739
Net income (loss) per share........................................ $ 0.18 $ (0.84) $ 0.28 $ 0.34
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED(1)
----------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1995 1995 1995 1995(3)
----------- --------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue............................................................ $ 7,320 $ 8,756 $ 9,363 $ 11,337
Gross profits...................................................... 4,675 5,905 6,514 8,010
Net income (loss).................................................. 220 786 959 (1,739)
Net income (loss) per share........................................ $ 0.05 $ 0.16 $ 0.19 $ (0.35)
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED(1)
----------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1994 1994 1994 1994
----------- --------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue............................................................ $ 7,168 $ 7,894 $ 8,255 $ 9,299
Gross profits...................................................... 5,182 5,502 5,696 6,590
Net income......................................................... 736 780 900 1,001
Net income per share............................................... $ 0.15 $ 0.16 $ 0.19 $ 0.21
</TABLE>
- ------------------------
(1) Certain amounts for all periods prior to June 30, 1996 have been
reclassified to conform to the current presentation.
(2) The loss in the second quarter of 1996 results from a pretax charge of
$8,030,000 for the value of in-process research and development efforts at
the date of acquisition pertaining to five companies acquired in April 1996
(see Note 2).
(3) The loss in the fourth quarter of 1995 results from a pretax charge of
$4,549,000. The charge consists of $3,700,000 for the value of Culverin's
in-process research and development efforts at the date of acquisition, and
$849,000 for restructuring (see Note 2).
F-20
<PAGE>
CFI'S KNOWLEDGE ADVANTAGE
CFI Knowledge Set CFI Moment Banking Deliverables
[Diagram with a stack of three books labeled Banking, Technology and Legal with
arrows from each book to icons labeled Branch Customer, Call Center Customer and
PC Customer with arrows from each such icon pointing to a box containing a
description of the Company's banking deliverables (listed below).]
Loan Disclosures
Loan Documentation
New Account Setup and Documentation
Cross-Selling Other Bank Products
Account Inquiry
Compliance Tracking, Analysis and Reporting
CFI incorporates banking, technology, and legal knowledge into its intelligent
software solutions. Its expertise comes together at key points of contact
between a financial institution and its customers. The CFI moment of contact
allows the institution to more effectively deliver and cross-sell products,
service accounts, generate documentation and track business performance on an
ongoing basis.
<PAGE>
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 16
Dividend Policy........................................................... 16
Price Range of Common Stock............................................... 16
Capitalization............................................................ 17
Selected Consolidated Financial Data...................................... 18
Pro Forma Consolidated Financial Statements............................... 20
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 22
Business.................................................................. 32
Management................................................................ 42
Description of Securities Being Registered................................ 44
Shares Eligible for Future Sale........................................... 47
Underwriting.............................................................. 48
Legal Matters............................................................. 49
Experts................................................................... 49
Documents Incorporated By Reference....................................... 49
Available Information..................................................... 50
Index to Financial Statements............................................. F-1
</TABLE>
1,550,000 SHARES
[LOGO]
COMMON STOCK
--------------
PROSPECTUS
--------------
HAMBRECHT & QUIST
DAIN BOSWORTH
INCORPORATED
PACIFIC CREST SECURITIES INC.
, 1997
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 16. EXHIBITS
The following Exhibits are filed as part of the Registration Statement.
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT
- --------- --------------------------------------------------------------------------------
<C> <S>
*1.1 Form of Underwriting Agreement.
3.1 Registrant's Amended and Restated Articles of Incorporation (filed as Exhibit
3(i)(a) to the Registration Statement on Form S-1 (Registration No. 33-64894)
filed with the Securities and Exchange Commission on June 23, 1993 and
incorporated herein by reference).
3.2 Amendments to Registrant's Amended and Restated Articles of Incorporation
(effective June 28, 1993) (filed as Exhibit 3(i)(b) to the Registration
Statement on Form S-1 (Registration No. 33-64894) filed with the Securities and
Exchange Commission on July 26, 1993 and incorporated herein by reference).
3.3 Amendments to Registrant's Amended and Restated Articles of Incorporation
(effective July 26, 1993) (filed as Exhibit 3(i)(c) to the Registration
Statement on Form S-1 (Registration No. 33-64894) filed with the Securities and
Exchange Commission on August 10, 1993 and incorporated herein by reference).
*5.1 Opinion of Farleigh, Wada & Witt, P.C. as to legality of Common Stock.
*10.1 Amendment No. 4 to Business Loan Agreement, dated as of November 21, 1996,
between Registrant and Bank of America NT & SA.
*10.2 Amendment No. 5 to Business Loan Agreement, dated as of December 31, 1996,
between Registrant and Bank of America NT & SA.
*11.1 Calculations of net income per share
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Deloitte & Touche LLP.
*23.3 Consent of Farleigh, Wada & Witt, P.C. (included in Exhibit 5.1).
*24.1 Power of Attorney (see II-4).
*27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* Previously filed.
II-1
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
hereby certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Portland, Oregon, on this 12th day of February, 1997.
CFI PROSERVICES, INC.
By: /s/ MATTHEW W. CHAPMAN
-----------------------------------------
Matthew W. Chapman,
CHIEF EXECUTIVE OFFICER AND CHAIRMAN
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------------------------------- -------------------------- -------------------
<C> <S> <C>
Chairman and Chief
/s/ MATTHEW W. CHAPMAN Executive Officer and
------------------------------------------- Director (Principal February 12, 1997
Matthew W. Chapman Executive Officer)
* President, Chief Operating
------------------------------------------- Officer and Director February 12, 1997
Robert P. Chamness
* Executive Vice President,
------------------------------------------- Secretary and Director February 12, 1997
Robert T. Jett
*
------------------------------------------- Director February 12, 1997
J. Kenneth Brody
*
------------------------------------------- Director February 12, 1997
Brian P. Murphy
*
------------------------------------------- Director February 12, 1997
Lorraine O. Legg
*
------------------------------------------- Director February 12, 1997
David G. Golden
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------------------------------- -------------------------- -------------------
<C> <S> <C>
*
------------------------------------------- Director February 12, 1997
Eran S. Ashany
Vice President, Treasurer,
* and Chief Financial
------------------------------------------- Officer (Principal February 12, 1997
Fred Hall Accounting and Financial
Officer)
By: /s/ MATTHEW W. CHAPMAN
---------------------------------------
Matthew W. Chapman
ATTORNEY-IN-FACT
</TABLE>
II-3
<PAGE>
CFI PROSERVICES, INC.
VALUATION AND QUALIFYING ACCOUNTS SCHEDULE
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING COSTS AND DEDUCTIONS BALANCE AT
OF YEAR EXPENSES (1) OTHER (2) END OF YEAR
----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994
Allowance for doubtful accounts and sales
returns........................................ $ 42 $ 187 $ (29) $ -- $ 200
----------- ----------- ------------- ----------- -----------
----------- ----------- ------------- ----------- -----------
FASB 109 Valuation.............................. $ 201 $ -- $ (162) $ -- $ 39
----------- ----------- ------------- ----------- -----------
----------- ----------- ------------- ----------- -----------
Amortization Of Intangibles:
Purchased software............................ $ 452 $ 92 $ -- $ -- $ 544
Software development costs.................... 1,209 518 -- -- 1,727
Intangibles................................... 257 160 -- -- 417
----------- ----------- ------------- ----------- -----------
$ 1,918 $ 770 $ -- $ -- $ 2,688
----------- ----------- ------------- ----------- -----------
----------- ----------- ------------- ----------- -----------
Year ended December 31, 1995
Allowance for doubtful accounts and sales
returns........................................ $ 200 $ 259 $ (169) $ -- 290
----------- ----------- ------------- ----------- -----------
----------- ----------- ------------- ----------- -----------
FASB 109 Valuation.............................. $ 39 $ 10 $ -- $ -- $ 49
----------- ----------- ------------- ----------- -----------
----------- ----------- ------------- ----------- -----------
Amortization Of Intangibles:
Purchased software............................ $ 544 $ 632 $ -- $ -- $ 1,176
Software development costs.................... 1,727 787 -- -- 2,514
Intangibles................................... 417 343 (350) -- 410
----------- ----------- ------------- ----------- -----------
$ 2,688 $ 1,762 $ (350) $ -- $ 4,100
----------- ----------- ------------- ----------- -----------
----------- ----------- ------------- ----------- -----------
Year ended December 31, 1996
Allowance for doubtful accounts and sales
returns........................................ $ 290 $ 2,147 $ (1,514) $ 380 $ 1,303
----------- ----------- ------------- ----------- -----------
----------- ----------- ------------- ----------- -----------
FASB 109 Valuation.............................. $ 49 $ 140 $ -- $ -- $ 189
----------- ----------- ------------- ----------- -----------
----------- ----------- ------------- ----------- -----------
Amortization Of Intangibles:
Purchased software............................ $ 1,176 $ 693 $ (640) $ -- $ 1,229
Software development costs.................... 2,514 1,194 (1,123) -- 2,585
Intangibles................................... 410 1,045 -- -- 1,455
----------- ----------- ------------- ----------- -----------
$ 4,100 $ 2,932 $ (1,763) $ -- $ 5,269
----------- ----------- ------------- ----------- -----------
----------- ----------- ------------- ----------- -----------
</TABLE>
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(1) Represents write-off of receivables and fully amortized intangibles. Also
includes reduction in FASB 109 valuation account credited to income tax
expense.
(2) Includes allowance for doubtful accounts recorded as part of the acquisition
of MicroBilt Financial Products Division in April 1996.
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT PAGE
- --------- ---------------------------------------------------------------------- ---------
<C> <S> <C>
*1.1 Form of Underwriting Agreement
3.1 Registrant's Amended and Restated Articles of Incorporation (filed as
Exhibit 3(i)(a) to the Registration Statement on Form S-1
(Registration No. 33-64894) filed with the Securities and Exchange
Commission on June 23, 1993 and incorporated herein by reference).
3.2 Amendments to Registrant's Amended and Restated Articles of
Incorporation (effective June 28, 1993) (filed as Exhibit 3(i)(b) to
the Registration Statement on Form S-1 (Registration No. 33-64894)
filed with the Securities and Exchange Commission on July 26, 1993 and
incorporated herein by reference).
3.3 Amendments to Registrant's Amended and Restated Articles of
Incorporation (effective July 26, 1993) (filed as Exhibit 3(i)(c) to
the Registration Statement on Form S-1 (Registration No. 33-64894)
filed with the Securities and Exchange Commission on August 10, 1993
and incorporated herein by reference).
*5.1 Opinion of Farleigh, Wada & Witt, P.C. as to legality of Common Stock.
*10.1 Amendment No. 4 to Business Loan Agreement, dated November 21, 1996,
between Registrant and Bank of America NT & SA.
*10.2 Amendment No. 5 to Business Loan Agreement, dated as of December 31,
1996, between Registrant and Bank of America NT & SA..................
*11.1 Calculations of net income per share..................................
23.1 Consent of Arthur Andersen LLP........................................
23.2 Consent of Deloitte & Touche LLP......................................
*23.3 Consent of Farleigh, Wada & Witt, P.C. (included in Exhibit 5.1).
*24.1 Power of Attorney (see II-4).
*27.1 Financial Data Schedule.
</TABLE>
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* Previously filed.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion in
this Amendment No. 3 to Registration Statement on Form S-3 (No. 333-15505) of
our reports dated January 23, 1997 included in this Registration Statement and
to the incorporation by reference into this Registration Statement of (1) our
report dated December 15, 1995 relating to the financial statements of Culverin
Corporation included in CFI ProServices, Inc. Form 8-K/A dated November 21, 1995
and (2) our report dated June 1, 1996 relating to the financial statements of
Input Creations, Inc. included in CFI ProServices, Inc. Form 8-K/A-1 dated April
1, 1996 and to all references to our Firm included in this Registration
Statement.
ARTHUR ANDERSEN LLP
Portland, Oregon
February 12, 1997
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Director and Shareholders of
CFI ProServices, Inc.:
We have audited, in accordance with generally accepted auditing standards,
the financial statements of CFI ProServices, Inc. included in this registration
statement and have issued our report thereon dated January 23, 1997. Our audits
were made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The Valuation and Qualifying accounts schedule is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Portland, Oregon
January 23, 1997
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Amendment No. 3 to
Registration Statement No. 333-15505 of CFI ProServices, Inc. on Form S-3 of our
report dated May 31, 1996 (relating to the financial statements of MicroBilt
Financial Products Division), appearing in the CFI ProServices, Inc. Form
8-K/A-1 dated April 1, 1996 and to the reference to us under the heading
"Experts" in such Prospectus, which is part of this Registration Statement.
/s/ DELOITTE & TOUCHE LLP
- --------------------------------------
DELOITTE & TOUCHE LLP
Atlanta, Georgia
February 12, 1997
