<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 000 - 21980
CFI PROSERVICES, INC.
(Exact name of registrant as specified in its charter)
OREGON 93-0704365
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
400 SW SIXTH AVENUE, PORTLAND, OREGON 97204
(Address of principal executive offices)
Registrant's telephone number, including area code: (503)-274-7280
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, NO PAR VALUE
(Title of Class)
---------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant is $77,236,920 as of February 28, 1997 based upon the last closing
price as reported by the Nasdaq National Market System ($18.25).
The number of shares outstanding of the Registrant's Common Stock as of February
28, 1997 was 4,832,816 shares.
The index to exhibits appears on page 38 of this document.
---------------
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated into Part III of Form 10-K by reference portions
of its Proxy Statement for its 1997 Annual Meeting to be filed on or about April
11, 1997.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CFI PROSERVICES, INC.
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business 2
Item 2. Properties 13
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 14
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 8. Financial Statements and Supplementary Data 35
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure 35
PART III
Item 10. Directors and Executive Officers of the Registrant 36
Item 11. Executive Compensation 36
Item 12. Security Ownership of Certain Beneficial Owners and Management 36
Item 13 Certain Relationships and Related Transactions 36
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 37
Signatures 46
1
<PAGE>
PART I
ITEM 1. 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,
2
<PAGE>
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.
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.
3
<PAGE>
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.
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
4
<PAGE>
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.
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
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.
PROVIDING CONNECTIVITY SOLUTIONS. Financial institutions increasingly seek to
integrate technology systems through networks and other connectivity solutions,
so that operations
5
<PAGE>
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.
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.
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.
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.
6
<PAGE>
REVENUE BY PRODUCT GROUP
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- ----------------------------- ---------------------- ---------------------- ----------------------
(Dollars in thousands) Amount Percent Amount Percent Amount Percent
--------- --------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Lending Products $ 31,034 51.8% $ 23,893 65.0% $ 22,122 67.8%
Operations Products 19,761 33.0 7,564 20.6 7,051 21.6
Electronic Delivery Products 4,653 7.8 2,099 5.7 383 1.2
Connectivity Products 823 1.3 423 1.1 0 0.0
Other (1) 3,676 6.1 2,797 7.6 3,060 9.4
--------- --------- ---------- --------- --------- ---------
Total Revenue $ 59,947 100.0 $ 36,776 100.0% $ 32,616 100.0%
--------- --------- ---------- --------- --------- ---------
--------- --------- ---------- --------- --------- ---------
</TABLE>
(1) Other products include bill payment systems processing fees, sales of
preprinted forms and supplies and certain consulting revenues.
PRODUCTS BY PRODUCT GROUP
LENDING PRODUCTS
<TABLE>
<CAPTION>
DATE
INTRODUCED/
PRODUCT ACQUIRED DESCRIPTION BENEFITS TO CUSTOMER
------- ----------- ------------ --------------------
<S> <C> <C> <C>
Laser Pro Released Integrated, modular loan processing system for Standardizes lending policies
1986 consumer, commercial, SBA, real estate home and products, streamlines
equity and agricultural loans processing, incorporates a
national database of regulations
Application Acquired Processes applications for indirect consumer Speeds the loan application and
Manager 1996 lending approval process for indirect
lenders
LOANscape Acquired Provides mortgage origination, processing and Improves consistency of loan
1996 servicing capabilities processes, 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
1996 evaluates underwriting criteria and performance underwriting policies and
over time practices
fisCAL Plus Released Combines spreadsheet analysis, credit scoring, Increases the quality of credit
1996 and portfolio management technologies to decisions, improves the
provide comprehensive commercial loan consistency of lending
underwriting capabilities for small-to-medium practices, enhances portfolio
sized lenders management, and reduces
underwriting risk
LoansPlus Acquired Portfolio and credit risk analysis system that Balances acceptable credit risk
1996 uses neural network technology and case-based and lending opportunities to
reasoning recommend credit decisions
and manage portfolios
Pro Active Released Collects, analyzes, reports and maps HDMA Simplifies the process of
1994 loan application information, non-real estate meeting fair lending and
loan data, and community demographic data community reinvestment
requirements
</TABLE>
7
<PAGE>
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
Teller 1995 comprehensive transaction automation, electronic facilitates sales referrals
journaling, store-and-forward capabilities,
simplified balancing, and access to the customer
database
Encore! Acquired Provides sales and service capabilities, including Opens accounts,enables
Platform 1995 account opening screens, customer/product cross-selling and fulfillment
Sales & matching, customer contact histories, letter and of customer information
Service fulfillment generation, and institution and product requests
information
Encore! Acquired Integrates in a common and consistent format Enables cross-selling and
Call Center 1994 customer, product and internal procedure improves service
Sales & information
Service
Deposit Pro Acquired Automates and ensures regulatory compliance in Speeds account opening,
1990 the account opening and cross-selling processes ensures compliance with
for checking, savings, certificates of deposit, and regulations, improves the
IRA accounts. A Windows-based version of this consistency of new account
production, Deposit Pro for Windows, was policies and practices
introduced in 1996
Encore! Released Windows-based system that graphically links Allows customized
Desktop 1996 each user to CFI software and other business arrangements of modules
applications and access
ProForms Released Generates laser printed forms used daily Eliminates the need for
Laser 1994 by financial institutions costly inventories of
preprinted forms, speeds
form processing
</TABLE>
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 to Provides low-cost service
Branch 1993 provide personal computer-based home banking delivery channel, strengthens
services via private-dial or Internet channels customer relationships,
extends institution branding,
increases customer
convenience
RPxpress! Acquired Remittance processing system for financial Streamlines processing,
1995 institutions to provide retail lockbox services improves the quality of
encoding, reduces errors
ACH Acquired Originates and receives ACH electronic Cost-effective processes ACH
Manager 1995 payments and collections business, monitors business
for risk
ACH Remote Acquired System licensed by financial institutions to its Generates new fee income
1995 corporate customers for transmitting data files and simplifies automated
from the customer personal computer to the procedures
financial institution's ACH system
Vendor Acquired 1996 Bill payment processing for the Company's Required component of home
Payment Personal Branch customers banking services; generates
Systems new fee income
</TABLE>
8
<PAGE>
CONNECTIVITY PRODUCTS
<TABLE>
<CAPTION>
DATE
INTRODUCED/
PRODUCT ACQUIRED DESCRIPTION BENEFITS TO CUSTOMER
- -------- -------- ----------- --------------------
<S> <C> <C> <C>
StarGate Acquired Connectivity software system which transfers or Allows institutions to integrate
1995 exchanges data between CFI products and other data from multiple host
host or client/server systems systems and present that data
through networks to multiple
front-end systems
StarGate F/X Acquired Connectivity software which enables institutions Reduces costs, increases
1995 to print Laser Pro documents remotely through transaction speed and
the institution's mainframe network productivity; enables
institutions to centralize loan
document preparation
</TABLE>
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.
9
<PAGE>
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.
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.
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.
10
<PAGE>
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.
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., 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
11
<PAGE>
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
12
<PAGE>
products with 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.
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.
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in Portland, Oregon in a leased
facility consisting of approximately 72,000 square feet of office space occupied
under leases that expire in 2001. Annual lease payments for the Company's
current corporate headquarters are approximately $1.1 million, with provisions
for inflationary increases. The Company also leases office space in Dayton,
Ohio (15,151 square feet), in Huntington, New York (5,740 square feet), in
Denver, Colorado (3,357 square feet), in Houston, Texas (3,260 square feet), in
Louisville, Kentucky (1,388 square feet), in Atlanta, Georgia (52,678 square
feet), in New Jersey (2,686 square feet) and in Charleston, South Carolina
(6,000 square feet). These leases expire in 2006, 1999, 1999, 1997, 1996, 2000,
1999, and 1999, respectively. Annual lease payments for these facilities, in
aggregate, are approximately $1.3 million. The Company does not intend to renew
its lease of the Louisville, Kentucky
13
<PAGE>
office space as operations currently conducted at that location are expected to
be moved to the Company's corporate headquarters. The Company believes the
office space currently under lease is adequate to meet its needs for the next
year.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders during the
quarter ended December 31, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on The Nasdaq National Market System under the
symbol PROI. The high and low selling prices for the two years in the period
ended December 31, 1996 were as follows:
1996 High Low
------------------------ -------- --------
Quarter 4 $ 20.00 $ 13.50
Quarter 3 25.63 15.25
Quarter 2 28.25 15.13
Quarter 1 15.75 9.25
1995 High Low
------------------------ -------- --------
Quarter 4 $ 16.25 $ 11.25
Quarter 3 17.50 12.63
Quarter 2 14.75 9.25
Quarter 1 17.75 11.75
The number of shareholders of record on February 28, 1997 was 229.
There were no cash dividends declared or paid on the Company's Common Stock in
1996 or 1995. The Company does not anticipate declaring cash dividends in the
foreseeable future. During 1996, the Company issued 34,026 unregistered shares
of its Common Stock in conjunction with the acquisition of Halcyon, Inc.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
IN THOUSANDS:
EXCEPT PER SHARE AMOUNTS
(reclassified (1)) 1996(2) 1995(3) 1994 1993 1992
- --------------------------------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA
Revenue:
Software license fees $ 33,935 $ 18,918 $ 16,781 $ 14,686 $ 8,307
Service and support fees 22,336 15,060 12,775 9,748 6,626
Other revenue 3,676 2,798 3,060 2,720 2,045
--------- --------- --------- --------- --------
Total revenue 59,947 36,776 32,616 27,154 16,978
Cost of revenue 20,844 11,672 9,646 8,047 4,493
--------- --------- --------- --------- --------
Gross profit 39,103 25,104 22,970 19,107 12,485
Operating expenses 29,810 20,552 17,859 15,670 10,389
Acquired in-process research and
development and restructuring 8,030 4,549 -- -- --
--------- --------- --------- --------- --------
Income from operations 1,263 3 5,111 3,437 2,096
Net income 114 323 3,514 2,264 1,744
Preferred Stock dividend 97 97 97 733 908
--------- --------- --------- --------- --------
Net income applicable to common
shareholders $ 17 $ 226 $ 3,417 $ 1,531 $ 836
--------- --------- --------- --------- --------
--------- --------- --------- --------- --------
Net income per share $ -- $ 0.05 $ 0.71 $ 0.41 $ 0.25
--------- --------- --------- --------- --------
--------- --------- --------- --------- --------
Shares used in per share
calculations 5,112 4,877 4,806 3,775 3,321
CONSOLIDATED BALANCE SHEET DATA
Cash and short-term investments $ -- $ 7,670 $ 7,958 $ 10,509 $ 1,844
Working capital 2,722 8,759 10,336 10,583 1,343
Property and equipment, net 4,805 2,968 2,579 1,516 924
Total assets 46,845 36,587 27,487 23,165 10,041
Short-term debt 2,896 3,951 -- 120 301
Long-term debt, less current
portion 2,810 423 -- 17 103
Mandatory Redeemable Class A
Preferred Stock 754 761 764 757 742
Class C Preferred Stock -- -- -- -- 5,324
Shareholders' equity (deficit) 20,238 18,169 16,591 13,071 (1,998)
</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, 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.
(3) 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.
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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
16
<PAGE>
business from large accounts and multiple product sales. In light of its
increased emphasis on large accounts and multiple product sales, the Company has
taken steps to increase and maintain its backlog. The stated backlog is not
necessarily indicative of the Company's revenue for any future period.
ACQUISITIONS AND NEW BUSINESS VENTURES
The Company continues to pursue opportunities to expand its market presence by
acquiring products, technologies and companies that complement the Company's
product suite or increase its market share. The Company has completed ten
acquisitions since June 1994. See Note 2 of Notes to Consolidated Financial
Statements.
<TABLE>
<CAPTION>
DATE
COMPANY ACQUIRED PRINCIPAL PRODUCTS/MARKETS ACQUIRED
- ------- -------- ------------------------------------
<S> <C> <C>
Assets of the Products Division of June 1994 Access to certain midwestern states
Professional Bank Systems, Inc. for the Company's compliance products
The Genesys Solutions Group, Inc. September Call center software
1994
Texas Southwest Technology Group April 1995 StarGate connectivity products and ACH products
Culverin Corporation November Encore! Platform and teller branch
1995 automation products and Rpxpress!
remittance processing product
OnLine Financial Communications April 1996 Over 1,000 branch automation
Systems, Inc. customers employing DOS-based
technology
COIN Banking Systems, Inc. April 1996 Application Manager indirect lending product
Assets of Input Creations, Inc. April 1996 LOANscape mortgage lending product
Assets of Halcyon Group, Inc. April 1996 fisCAL loan decision support product and TriScore
Assets of Pathways Software, Inc. April 1996 LoansPlus neural net loan decision
support and portfolio management product
Vendor Payment Systems, Inc. April 1996 Bill payment services company
</TABLE>
There can be no assurance that any of these or future acquisitions will have a
favorable impact on the performance of the Company. The Company believes that it
has achieved its objectives of growth and broadening its product offerings
through this acquisition program and intends to continue to pursue acquisitions
in the future; however, the Company's ability to pursue acquisitions in the
future may depend, to a large extent, on the availability of additional
financing. See "Liquidity and Capital Resources" and "Risk Factors." 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
17
<PAGE>
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.
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:
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
------ ------ ------
Revenue
Software license fees 56.6% 51.4% 51.5%
Service and support 37.3 41.0 39.2
Other 6.1 7.6 9.3
------ ------ ------
Total revenue 100.0 100.0 100.0
Gross profit 65.2 68.3 70.4
Operating expenses
Sales and marketing 21.2 26.0 25.1
Product development 17.7 17.3 15.8
General and administrative 9.1 11.7 13.3
Amortization of intangibles 1.7 0.9 0.6
Acquired in-process research and
development and restructuring 13.4 12.4 --
------ ------ ------
Total operating expenses 63.1 68.3 54.8
------ ------ ------
Income from operations 2.1(1) -- (1) 15.6
------ ------ ------
Non-operating income -- 1.4 1.2
Income before income taxes 2.1 1.4 16.8
Provision for income taxes 1.9 0.5 6.0
Preferred stock dividend 0.2 0.3 0.3
------ ------ ------
Net income applicable to common shareholders --%(1) 0.6%(1) 10.5%
------ ------ ------
------ ------ ------
(1) Excluding the impact of the acquired in-process research and development
and restructuring charges, income from operations as a percentage of
revenue in 1996 and 1995 would have been 15.5% and 12.4%, respectively, and
net income applicable to common shareholders in 1996 and 1995 would have
been 8.5% and 8.2%, respectively.
18
<PAGE>
The following table sets forth percentage changes period over period in the
statements of income data of the Company:
FISCAL YEAR FISCAL YEAR
1996 OVER 1995 OVER
FISCAL YEAR FISCAL YEAR
1995 1994
----------- -----------
Revenue
Software license fees 79 % 13 %
Service and support 48 18
Other 31 (9)
Total revenue 63 13
Gross profit 56 9
Operating expenses
Sales and marketing 33 17
Product development 67 23
General and administrative 26 (1)
Total operating expenses (2) 51 (2) 40
Income from operations (1) (2) NM (2) (99)
Non-operating income (96) 29
Income before income taxes 162 (91)
Provision for income taxes 599 (92)
Net income applicable to common shareholders (2) (92)% (2) (93)%
(1) Not meaningful.
(2) Excluding the impact of the acquired in-process research and development
and restructuring charges, income from operations would have increased 104%
in 1996 over 1995 and decreased 11% in 1995 over 1994, and net income
applicable to common shareholders would have increased 70% in 1996 over
1995 and decreased 12% in 1995 over 1994.
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
19
<PAGE>
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
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
----- ----- -----
Lending Products 48 % 66 % 72 %
Operations Products 37 22 26
Electronic Delivery Products 12 10 2
Connectivity Products 3 2 --
----- ----- -----
Total 100 % 100 % 100 %
----- ----- -----
----- ----- -----
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.
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.
20
<PAGE>
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
21
<PAGE>
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 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.
22
<PAGE>
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% 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
23
<PAGE>
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.
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. 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
24
<PAGE>
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 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.
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.
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
25
<PAGE>
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.
In February 1997, the Company withdrew its follow on public offering of
1,550,000 shares of its Common Stock. The Company had incurred offering costs
of approximately $500,000. These costs will be expensed in the first quarter of
1997.
The Company believes that the 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. See "Risk
Factors - Possible Need for Additional Financing."
26
<PAGE>
RISK FACTORS
THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO SHOULD BE READ IN
CONJUNCTION WITH THE FOLLOWING DISCUSSION. THE DISCUSSION IN THIS FORM 10-K
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 FORM 10-K
SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS
WHEREVER THEY APPEAR IN THIS FORM 10-K. 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 FORM 10-K.
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.
27
<PAGE>
UNCERTAINTY OF MARKET; PRODUCT ACCEPTANCE. The market for software products and
services to financial institutions is evolving and the Company's success is, in
large part, dependent on the continuing development of this market. Although
the Company believes that its existing products compete effectively with
competitors' products, some of the Company's products have been licensed to a
limited number of customers or, as to any 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
28
<PAGE>
delivery market. The use of the Company's products is dependent, in part, upon
the continued development of an industry and infrastructure for providing secure
Internet access and carrying Internet traffic. In addition, the Internet may
not prove to be a viable commercial marketplace, because of inadequate
development of the necessary infrastructure, such as undercapacity, a reliable
network backbone or timely development of complementary products, including high
speed modems. There can be no assurance that commerce over the Internet will
become generally adopted. If the market fails to develop or develops more
slowly than expected, the infrastructure for the Internet is not adequately
developed, or the Company's home banking products and services do not achieve
market acceptance by a significant number of individuals, businesses and
financial institutions, the Company's business, financial condition and
operating results could be materially and adversely affected.
EVOLVING MARKET FOR CALL CENTER PRODUCTS. While the Company anticipates that
the market for its call center products will expand rapidly over the next two
years and the Company has expended substantial resources in the development and
improvement of its call center products, including the Company's current efforts
toward reengineering its call center products for an anticipated release of an
upgraded product in 1997, there can be no assurance that the Company's upgraded
call center products will be released on a timely basis or will achieve market
acceptance upon release. If the market fails to grow or grows more slowly than
expected, the Company's business, results of operations and financial condition
could be adversely affected.
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
29
<PAGE>
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.
POSSIBLE NEED FOR ADDITIONAL FINANCING. In the first quarter of 1997, the
Company withdrew a registration statement on file with the U.S. Securities and
Exchange Commission which proposed to generate, through the sale of Common
Stock, net proceeds in excess of $28 million. The net proceeds were to be used
for general corporate purposes, working capital and possible acquisitions. The
Company believes that the funds expected to be generated by the Company's
operations and a $7.5 million (maximum) revolving line of credit will provide
the Company with sufficient funds to finance its operations for at least the
next twelve moths. However, if additional funds were needed to support working
capital requirements, the Company would 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.
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 base of installed products
30
<PAGE>
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.
31
<PAGE>
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 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
32
<PAGE>
expected sales and fluctuations in the recognition of sales revenue which may
adversely affect the Company's business, results of operations and financial
condition.
COMPETITION. The market for the Company's products is intensely competitive and
rapidly changing. A number of companies offer competitive products addressing
certain of the Company's target markets. With respect to the Company's lending
products, the principal competitors include Bankers Systems, Inc., FormAtion
Technologies, Inc. (a subsidiary of John H. Harland Company), Interlinq Software
Corporation, Fair Isaac & Company, Inc., Affinity Technology Group, Inc., Great
Lakes Forms, Inc., APPRO Systems, Inc., and JetForm Corp. With respect to the
Company's operations products, the principal competitors include Olivetti North
America, Broadway & Seymour, Inc., Early, Cloud & Company and Footprint
Software, Inc. (both subsidiaries of International Business Machines Corporation
("IBM")), Electronic Data Systems Corporation, Argo & Company, FIserv, Inc.
("FIserv"), Edify Corporation, and Software Dynamics, Inc. With respect to the
Company's electronic delivery products, the principal competitors include
CheckFree Incorporated, Visa Interactive, Edify Corporation, Online Resources &
Communications Corporation, GOLDPAC Products, and Politzer & Haney. In
addition, a number of prospective and existing customers of the Company have the
internal capability to provide alternative solutions to the Company's lending,
operations, or electronic delivery products and may, therefore, be viewed as
competing with the Company. These alternatives may include internally developed
software and hardware solutions, or methods of process management that do not
involve software solutions. Some of the Company's competitors have
significantly greater financial, technical, sales and marketing resources than
the Company. The Company believes that the primary competitive factors in this
market include product quality, reliability, performance, price, vendor and
product reputation, financial stability, features and functions, ease of use and
quality of support. There can be no assurance that competitors will not develop
products that are superior to the Company's products or that achieve greater
market acceptance. Further, because of the rapidly evolving nature of the
industry, many of the Company's collaborative partners are current or potential
competitors. In addition, a number of current or potential competitors have
established or may establish cooperative relationships among themselves and with
third parties that may present additional competition with products offered by
the Company. The Company's competitors may also be able to undertake more
extensive marketing campaigns, adopt more aggressive pricing policies, utilize
more extensive distribution channels, and bundle competing products.
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
33
<PAGE>
will continue to represent a significant percentage of the Company's revenue for
the near term, an important part of the Company's business strategy depends upon
the ability of the Company to continue to develop and market its call center,
branch automation, electronic banking and other new products. A decline in
demand or prices for the Company's Laser Pro products or Deposit Pro products,
whether as a result of new product introductions by the Company or its
competitors, price competition, technological change, or failure of the
Company's products to address customer requirements, could have a material
adverse effect on the Company's business, results of operations and financial
condition. The failure of the financial services industry in general to adopt
new or modified technologies to improve and simplify business processes (in
particular the products developed by the Company), or the failure of the Company
to support this industry transition with products that effectively address
customer requirements, would have a material adverse effect on the Company's
business, results of operations and financial condition.
DEPENDENCE ON FINANCIAL SERVICES INDUSTRY. Substantially all of the Company's
revenue is derived from licenses and services to banks and other financial
institutions, and its future growth is dependent on increased sales to the
financial services industry. The success of the Company's customers is
intrinsically linked to economic conditions in the financial services industry,
which in turn are subject to intense competitive pressures and are affected by
overall economic conditions. In addition, the Company believes that the license
of its products is relatively discretionary and often requires a significant
commitment of capital if accompanied by large-scale hardware purchases or
commitments. As a result, although the Company believes that its products can
be of substantial assistance to financial institutions in a competitive
environment, demand for the Company's products and services could be
disproportionately affected by instability or downturns in the financial
services industry, which may cause existing or potential customers to exit the
industry or delay, cancel or reduce any planned expenditures for technology
solutions, including those offered by the Company. The financial services
industry is currently experiencing consolidation that may affect demand for the
Company's products. The financial services industry is highly regulated and
changes in regulations affecting the financial services industry or the
Company's products could have a significant effect on the Company. These and
other factors adversely affecting the financial services industry and its
purchasing capabilities could have a material adverse effect on the Company's
business, results of operations and financial condition.
PRODUCT LIABILITY RISKS; SOFTWARE DEFECTS. The Company's software products are
highly complex and sophisticated and could, from time to time, contain design
defects or software errors that could be difficult to detect and correct. In
addition, implementation of the Company's products may involve a significant
amount of customer-specific customization and may involve integration with
systems developed by third parties. Software products offered by the Company
are highly complex and normally contain undetected errors or failures that,
despite significant testing by the Company, are discovered only after a product
has been installed and used by customers. Although the Company's business has
not been adversely affected by any such errors to date, there can be no
assurance that significant errors will not be found in the Company's products in
the future. Such errors could give rise to warranty or other liability of the
Company, cause delays in product introduction and shipments, require design
modifications, result in loss of or delay in market acceptance of the Company's
products or loss of existing customers, any of which could adversely affect the
Company's business, operating results and financial condition.
34
<PAGE>
The Company's products enable its customers to comply with a variety of complex
and changing federal and state laws and regulations. Should documentation
generated by the Company's products result in a customer's violation of such
requirements due to a product defect, the customer, or possibly the governmental
authority whose requirements were not met, could claim that the Company is
responsible. The Company provides a compliance warranty on certain of its
products that limits its liability to $1.0 million per customer per year and
further limits the Company's liability for all of its customers to an aggregate
of $2.5 million per year per occurrence of a common defect. There can be no
assurance that these contract limits would be enforceable, or that claims would
be covered by or would not exceed the limits of the Company's indemnity
insurance policy issued by Lloyds of London. Further, there can be no assurance
that this indemnity policy will be renewed or will remain priced within the
Company's capacity to pay the premiums. In the event that the Company's
contract limits are found to be unenforceable or that its insurance policy does
not adequately cover claims, the Company's results of operations may be
materially and adversely affected. In addition, there can be no assurance that
the Company will be able to correct claimed or actual product defects in a
timely manner, or at all.
DEPENDENCE UPON PROPRIETARY TECHNOLOGY; INTELLECTUAL PROPERTY RIGHTS. See
"Business - Intellectual Property."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements, notes thereto and supplementary data required by this
item are included on pages F-1 through F-18 as listed in Item 14 of Part IV of
this document.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
35
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item is included under the captions Item (1)
ELECTION OF DIRECTORS, NOMINEES FOR ELECTION TO BOARD OF DIRECTORS, MEMBERS OF
THE BOARD OF DIRECTORS CONTINUING IN OFFICE, NON-DIRECTOR EXECUTIVE OFFICERS AND
SIGNIFICANT EMPLOYEES AND SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING
COMPLIANCE, respectively, in the Company's Proxy Statement for its 1997 Annual
Meeting of Shareholders and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is included under the caption EXECUTIVE
COMPENSATION, EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE OF
CONTROL ARRANGEMENTS AND BOARD COMPENSATION in the Company's Proxy Statement for
its 1997 Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under the caption SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT in the Company's Proxy
Statement for its 1997 Annual Meeting of Shareholders and is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under the caption CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS in the Company's Proxy Statement for its
1997 Annual Meeting of Shareholders and is incorporated herein by reference.
36
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
The Financial Statements, together with the report thereon of Arthur Andersen
LLP, are included on the pages indicated below :
Page
----
Report of Independent Public Accountants F-1
Consolidated Balance Sheets - December 31, 1996 and 1995 F-2
Consolidated Statements of Income for the years ended
December 31, 1996,1995 and 1994 F-3
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 F-5
Notes to Consolidated Financial Statements F-6
FINANCIAL STATEMENT SCHEDULES
The following schedule and report thereon is filed herewith:
Page
----
Report of Independent Public Accountants on Financial
Statement Schedule F-19
Schedule I Valuation and Qualifying Accounts F-20
37
<PAGE>
(a) (3) EXHIBITS INCLUDED HEREIN:
Number Description
- ------ ---------------------------------------------------------------
2.1 Stock Purchase and Sale Agreement dated November 21, 1995,
among CFI ProServices, Inc., Culverin Corporation, Eric T.
Wagner, John M. Loveless, David Steffens and Douglas Teets -
previously filed as Exhibit 2.1 to the Current Report on
Form 8-K dated November 21, 1995 and as filed with the
Securities and Exchange Commission on December 6, 1995 and
incorporated herein by reference. --
2.2 Stock Purchase and Sale Agreement effective April 1, 1996, by
and among MicroBilt Corporation, First Financial Management
Corporation and CFI ProServices, Inc. - previously filed as
Exhibit 2.1 with the Company's Form 8-K dated April 1, 1996 and
as filed with the Securities and Exchange Commission on April 16,
1996 and incorporated herein by reference. --
2.3 Asset Purchase and Sale Agreement, effective April 1, 1996,
by and among Input Creations, Inc., its shareholders and CFI
ProServices, Inc. - previously filed as Exhibit 2.1 with the
Company's Form 8-K dated April 17, 1996 and as filed with the
Securities and Exchange Commission on May 2, 1996 and
incorporated herein by reference. --
3.1 Registrant's Amended and Restated Articles of Incorporation -
previously filed as Exhibit 3(i)(a) to the Registration
Statement of Form S-1, Registration Statement No. 33-64894,
as 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) - previously filed as
Exhibit 3(i)(b) to the Registration Statement of Form S-1
Registration Statement No. 33-64894, as filed with the Securities
and Exchange Commission on July 26, 1993 and incorporated herein
by reference. --
38
<PAGE>
Number Description
- ------ ---------------------------------------------------------------
3.3 Amendments to Registrant's Amended and Restated Articles of
Incorporation (effective July 26, 1993) - previously filed
as Exhibit 3(i)(c) to the Registration Statement of Form S-1
Registration Statement No. 33-64894, as filed with the
Securities and Exchange Commission on August 10, 1993 and
incorporated herein by reference. --
3.4 Registrant's Amended and Restated Bylaws - previously filed as
Exhibit 3(ii) to the Registration Statement of Form S-1
Registration Statement No. 33-64894, as filed with the Securities
and Exchange Commission on August 10, 1993 and incorporated
herein by reference. --
10.1 Nonqualified Stock Option Plan dated October 15, 1993 -
previously filed as Exhibit 99.10 to the Registration
Statement of Form S-8 (Registration No. 33-70506), as filed
with the Securities and Exchange Commission on October 19,
1993 and incorporated herein by reference. --
10.2 Registrant's Amended and Restated Outside Director Restricted
Stock Plan - previously filed as Exhibit 99.5 to the Registration
Statement of Form S-8 (Registration No. 33-70506), as filed with
the Securities and Exchange Commission on October 19, 1993 and
incorporated herein by reference. --
10.3 Registrant's Outside Director Compensation and Stock Option
Plan - previously filed as Exhibit 10.3 to the Company's Form
10-Q for the quarter ended March 31, 1994 and incorporated
herein by reference. --
10.4 Registrant's Standardized Regional Prototype 401(k) Cash or
Deferred Savings Plan and Trust, adopted December 1, 1994 -
previously filed as Exhibit 10.12 to the Company's Form 10-K
for the year ended December 31, 1995 and as filed with the
Securities and Exchange Commission on April 1, 1996 and
incorporated herein by reference. --
39
<PAGE>
Number Description
- ------ ---------------------------------------------------------------
10.5 Registration Agreement dated February 4, 1991 by and among
Registrant and certain named investors - previously filed as
Exhibit 10.11 to the Registration Statement of Form S-1,
Registration Statement No. 33-64894, as filed with the
Securities and Exchange Commission on June 23, 1993 and
incorporated herein by reference. --
10.6 Form of Software License Agreement relating to Deposit Pro -
previously filed as Exhibit 10.20(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. --
10.7 Form of Compliance Warranty relating to Deposit Pro -
previously filed as Exhibit 10.20(b) 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. --
10.8 Form of Maintenance and Service Agreement relating to Deposit
Pro - previously filed as Exhibit 10.20(c) to the Registration
Statement on Form S-1 (Registration No. 33-64894) filed with the
Securities and Exchange Commission on June 23, 1994 and
incorporated herein by reference. --
10.9 Form of Software License Agreement relating to Laser Pro -
previously filed as Exhibit 10.21(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. --
10.10 Form of Compliance Warranty relating to Laser Pro - previously
filed as Exhibit 10.21(b) 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. --
40
<PAGE>
Number Description
- ------ ---------------------------------------------------------------
10.11 Form of Maintenance and Service Agreement relating to Laser
Pro - previously filed as Exhibit 10.21(c) 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. --
10.12 Legal Services Agreement for the State of Louisiana effective
March 13, 1986 between the Company and McGlinchey, Stafford,
Mintz, Cellini & Lang, a Louisiana professional law corporation
(confidential treatment requested) - previously filed as Exhibit
10.25 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. --
10.13 1994 Employee Stock Purchase Plan - previously filed as Exhibit
10.2 to the Company's Form 10-Q for the quarter ended June 30,
1994 and incorporated herein by reference. --
10.14 1995 Consolidated and Restated Stock Option Plan - previously
filed as Exhibit 99.13 to the Registration Statement on Form
S-8 filed with the Securities and Exchange Commission on
March 1, 1995 and incorporated herein by reference. --
10.15 First Amendment to 1995 Consolidated and Restated Stock Option
Plan - previously filed as Exhibit 9.2 to the Company's
Registration Statement on Form S-8 filed with the Securities
and Exchange Commission on or about September 4, 1996 and
incorporated herein by reference. --
10.16 Office Lease dated March 18, 1994 between the Company and John
Hancock Mutual Life Insurance Company - previously filed as
Exhibit 10.1 to the Company's Form 10-Q for the quarter ended
March 31, 1994 and incorporated herein by reference. --
10.17 First amendment, dated July 8, 1996, to office lease dated
March 18, 1994 between the Company and John Hancock Mutual
Life Insurance Company
41
<PAGE>
Number Description
- ------ ---------------------------------------------------------------
10.18 Employment Agreement and Release dated April 14, 1994
between the Company and George L. Harrison - previously
filed as Exhibit 10.2 to the Company's Form 10-Q for the
quarter ended March 31, 1994 and incorporated herein by
reference. --
10.19 Employment Agreement with James Montague - previously filed
as Exhibit 10.2 to the Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission on October
13, 1994 and incorporated herein by reference. --
10.20 Employment Agreement with Michael Loewenberg - previously
filed as Exhibit 10.3 to the Company's Current Report on
Form 8-K filed with the Securities and Exchange Commission
on October 13, 1994 and incorporated herein by reference. --
10.21 Registration Rights Agreement between the Company and Former
Genesys Shareholders - previously filed as Exhibit 10.4 to
the Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on October 13, 1994 and
incorporated herein by reference. --
10.22 Form of Executive Retention Agreement - previously filed as
Exhibit 10.1 to the Company's Current Report on Form 8-K filed
with the Securities and Exchange Commission on August 22, 1994
and incorporated herein by reference. --
10.23 Employee Transition Agreement and Release entered into on
July 17, 1995 between CFI ProServices, Inc. and Kenneth M.
Olsen - previously filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 1995 and incorporated herein by reference. --
10.24 Employment Transition Agreement and Release entered into
effective October 31, 1995 between CFI ProServices, Inc. and
Clifford W. Potenza - previously filed as Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 1995 and incorporated herein by reference. --
42
<PAGE>
Number Description
- ------ ---------------------------------------------------------------
10.25 Employment and Noncompetition Agreement dated
November 21, 1995 between CFI ProServices, Inc. and
Eric T. Wagner - previously filed as Exhibit 10.1 to
the Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on December 6, 1995. --
10.26 Employment and Noncompetition Agreement dated November 21,
1995 between CFI ProServices, Inc. and John M. Loveless -
previously filed as Exhibit 10.2 to the Company's Current
Report on Form 8-K filed with the Securities and Exchange
Commission on December 6, 1995. --
10.27 Employment and Noncompetition Agreement dated November 21,
1995 between CFI ProServices, Inc. and David A. Steffens -
previously filed as Exhibit 10.3 to the Company's Current
Report on Form 8-K filed with the Securities and Exchange
Commission on December 6, 1995. --
10.28 Office Lease dated March 2, 1994, as amended on November
14, 1994 and on September 7, 1995, between the Company and
Huntington Atrium Development - previously filed as Exhibit
10.33 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995 as filed with the Securities
and Exchange Commission on April 1, 1996 and incorporated
herein by reference. --
10.29 Office Lease dated April 18, 1995, as amended on June 9,
1995, between the Company and Danis Properties Co., Inc. -
previously filed as Exhibit 10.34 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995 as
filed with the Securities and Exchange Commission on April 1,
1996 and incorporated herein by reference. --
43
<PAGE>
Number Description
- ------ ---------------------------------------------------------------
10.30 Business Loan Agreement (Revolving Line of Credit) dated
November 8, 1995 between CFI ProServices, Inc. and Bank
of America, Oregon - previously filed as Exhibit 10.35 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1995 as filed with the Securities and Exchange
Commission on April 1, 1996 and incorporated herein by
reference. --
10.31 Amendment No. 1, dated May 17, 1996, to Business Loan Agreement
dated November 8, 1995 - previously filed as Exhibit 10.7 to the
Company's quarterly report of Form 10-Q for the quarter ended
June 30, 1996 as filed with the Securities and Exchange Commission
on August 13, 1996 and incorporated herein by reference. --
10.32 Amendment No. 2, dated July 1, 1996, to Business Loan Agreement
dated November 8, 1995 - previously filed as Exhibit 10.8 to the
Company's quarterly report of Form 10-Q for the quarter ended
June 30, 1996 as filed with the Securities and Exchange Commission
on August 13, 1996 and incorporated herein by reference. --
10.33 Amendment No. 3, dated September 24, 1996, to Business
Loan Agreement dated November 8, 1995 - previously filed as
Exhibit 10 to the Company's quarterly report of Form 10-Q for the
quarter ended September 30, 1996 as filed with the Securities and
Exchange Commission on November 14, 1996 and incorporated herein
by reference. --
10.34 Amendment No. 4, dated November 21, 1996, to Business Loan
Agreement dated November 8, 1995 - previously filed as Exhibit
10.1 to the Company's Registration Statement No. 333-15505 on
Form S-3 as filed with the Securities and Exchange Commission on
January 27, 1997 and incorporated herein by reference. --
10.35 Amendment No. 5, dated December 31, 1996, to Business Loan
Agreement dated November 8, 1995 - previously filed as Exhibit
10.2 to the Company's Registration Statement No. 333-15505 on
Form S-3 as filed with the Securities and Exchange Commission on
January 27, 1997 and incorporated herein by reference. --
44
<PAGE>
Number Description
- ------ ---------------------------------------------------------------
10.36 Promissory Note, dated April 1, 1996, in favor of MicroBilt,
Inc. - previously filed as Exhibit 10.1 with the Company's
Form 8-K dated April 1, 1996 and as filed with the Securities
and Exchange Commission on April 16, 1996 and incorporated
herein by reference. --
10.37 Promissory Note, dated April 1, 1996, in favor of First
Financial Management Corporation - previously filed as
Exhibit 10.2 with the Company's Form 8-K dated April 1,
1996 and as filed with the Securities and Exchange Commission
on April 16, 1996 and incorporated herein by reference. --
10.38 Pledge Agreement, dated April 1, 1996, by and between CFI
ProServices, Inc. And MicroBilt Corporation and First
Financial Management - previously filed as Exhibit 10.3
with the Company's Form 8-K dated April 1, 1996 and as
filed with the Securities and Exchange Commission on
April 16, 1996 and incorporated herein by reference. --
10.39 Form of Employment Agreement entered into with former
employees of Input Creations, Inc. - previously filed
as Exhibit 10.1 with the Company's Form 8-K dated April 17,
1996 and as filed with the Securities and Exchange Commission
on May 2, 1996 and incorporated herein by reference. --
10.40 Sublease by and among Input Creations, Inc. and CFI
ProServices, Inc. - previously filed as Exhibit 10.2
with the Company's Form 8-K dated April 17, 1996 and
as filed with the Securities and Exchange Commission
on May 2, 1996 and incorporated herein by reference. --
10.41 Amendment No. 6, dated March 1, 1997, to Business Loan
Agreement dated November 8, 1995 - filed herewith.
11 Statement re computation of per share earnings.
21 Subsidiaries of the Registrant
23 Consent of Arthur Andersen LLP
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the quarter ended December 31,
1996.
45
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 11, 1997
--------------- CFI PROSERVICES, INC.
By: /s/ MATTHEW W. CHAPMAN
------------------------------------
Matthew W. Chapman
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities on March 11, 1997.
Signature Title
- --------- -----
/s/ MATTHEW W. CHAPMAN Chairman and Chief Executive Officer
- ---------------------- (Principal Executive Officer)
Matthew W. Chapman
/s/ FRED HALL Vice President and Chief Financial Officer
- ---------------------- (Principal Financial and Accounting Officer)
Fred Hall
/s/ ROBERT P. CHAMNESS Director, President and Chief Operating Officer
- ----------------------
Robert P. Chamness
/s/ ROBERT T. JETT Director, Executive Vice President and Secretary
- ----------------------
Robert T. Jett
/s/ J. KENNETH BRODY Director
- -----------------------
J. Kenneth Brody
/s/ BRIAN P. MURPHY Director
- -----------------------
Brian P. Murphy
/s/ LORRAINE O. LEGG Director
- -----------------------
Lorraine O. Legg
/s/ DAVID G. GOLDEN Director
- -----------------------
David G. Golden
/s/ ERAN S. ASHANY Director
- -----------------------
Eran S. Ashany
46
<PAGE>
EXHIBIT 10.17
400 SIXTH AVENUE BUILDING
FIRST AMENDMENT TO LEASE
By and Between
John Hancock Mutual Life Insurance Company ("Landlord")
and
CFI ProServices, Inc., an Oregon Corporation ("Tenant")
Dated July 8, 1996
RECITALS:
1. Landlord and Tenant are parties to a Lease Agreement dated March 18, 1994
(the "Agreement").
2. Pursuant to the Lease, Tenant leases from Landlord approximately 53,112
rentable square feet ("rsf.") on the second, third and fourth floors of the
400 Sixth Avenue Building known as Suites 200, 300 and 400 ("Original
Area").
3. The term of the lease is July 1, 1994 through June 30, 2001 ("Original
Term").
4. Tenant desires to lease an additional 18,999 rentable square feet as shown
on the plan attached hereto as Exhibit A, known as the tenth floor, Suite
1000. ("Expansion Area")
5. The terms used in this First Amendment, which are defined in the Lease
Agreement, shall have the meanings given to them in the Lease Agreement,
except as otherwise expressly provided in this First Amendment.
AGREEMENT:
NOW THEREFORE, the parties agree as follows:
1. PREMISES: The demised Premises shall be increased to a total square
footage as follows:
CFI Original Area: 53,112 rsf.
CFI Expansion Area: 18,999 rsf.
------
Total CFI Premises: 72,111 rsf.
<PAGE>
First Amendment to Lease/CFI
Page 2
2. RENT: The monthly base rent for the combined Premises shall be as follows:
<TABLE>
<CAPTION>
Term Monthly Base 1996 Monthly Base Total Monthly
Rent-Original Expense Rent-Expansion Base Rent*
Area Increase Area
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Oct. 1, 1996-June 30, 1997 $65,283.50 $1,913.00 $16,500.00 $ 83,696.50
July 1, 1997-Sept. 30, 1997 $70,816.00 $1,913.00 $16,500.00 $ 89,229.00
Oct.. 1, 1997-March 28, 1998 $70,816.00 $1,913.00 $20,625.00 $ 93,354.00
April 1, 1998-June 30, 1999 $70,816.00 $1,913.00 $26,124.00 $ 98,853.00
July 1, 1999 - July 31, 1999 $76,348.50 $1,913.00 $26,124.00 $104,385.50
Aug. 1, 1999-July 31, 2001 $76,348.00 $1,913.00 $27,707.00 $105,968.50
Aug. 1, 2001-Sept. 30, 2003 $85,200.00 $1,913.00 $30,478.00 $117,591.00
</TABLE>
*Total Monthly Base Rent is subject to the 1996-97 reconciliation of real
estate taxes as outlined in Section 4 below.
3. TENANT'S PERCENTAGE: Under Sections 24.2 of the Lease Agreement, Tenant's
Percentage of the Building shall be amended to be 39.53% effective as of
the Expansion Area Commencement Date. Tenant's Percentage of the Building
reflects Tenant's rentable area of Premises (72,111 rsf) divided by total
rentable area of the Building in which the Premises are located (183,051
rsf).
4. BASE YEAR: Under Section 19.4, Additional Rent: Operating Expense
Adjustment, Tenant's Base Year for the Original Area was 1994. In order to
consolidate all of Tenant's Premises under one Base Year, the 1996
operating expense monthly payment was added to the base rent for the
Original Area (see schedule above). As of this Amendment, Tenant's Base
Year will be amended to 1996 for their entire Premises. Under Section 19.1
Tenant's Base Year for real property taxes will be 1996-97, subject to the
pass through of any increase of real estate taxes for the Original Area
over the Original Area's base year of 1994-95.
5. TENANT IMPROVEMENTS: Landlord shall provide to Tenant a tenant improvement
allowance equal to $18.00 per rsf. or $341,982.00 (the "TI Allowance").
The TI Allowance shall be used to pay for all costs and expenses incurred
in connection with remodeling the Expansion Area, including, without
limitation, all costs for heating, ventilation and air conditioning
modifications made to the existing condition as of the signature date of
the First Amendment to Lease, electrical distribution, plumbing,
partitions, lighting distribution, floor coverings and wall preparation, as
well as the cost of demolition, if any, construction, space planning,
working drawings, construction documents, design services, supervision and
permits.
It is agreed and understood that the Tenant will be responsible for payment
of the entire cost of other improvements in excess of the TI Allowance. If
Tenant exceeds the TI Allowance, any
<PAGE>
First Amendment to Lease/CFI
Page 3
change orders requested by Tenant shall promptly be paid by Tenant in a
single lump sum within 15 days after receipt of invoice from the Landlord.
Landlord will act as construction manager and administer a contract on the
Tenant's behalf for the entire scope of the work outlined above and
Landlord shall have no liability to Tenant whatsoever for any claims or
damages arising in connection with Landlord's services as construction
manager or its administration of the construction contract, except as may
be caused by Landlord's gross negligence, willful misconduct or delay,
except for causes beyond the Landlords control.
The plans for the remodeling work, the remodeling work itself, and all
contractors and subcontractors used in the remodeling work shall be subject
to Landlord's prior written approval, which approval shall not unreasonable
be withheld. All remodeling work shall be done in compliance with all
applicable laws and regulations as of the date of this Amendment,
including, without limitation, the Americans with Disabilities Act.
6. PARKING: Section 26.1 of the Lease Agreement shall be amended to provide
Tenant a total of 27 parking spaces in the building parking garage.
Parking will be available upon execution of this First Amendment to Lease.
In the event Tenant chooses not to use its' entire parking allocation
Tenant shall give Landlord at least 60 days prior written notice of the
number of parking spaces it will give up. Tenant can reinstate stalls up
to its allowance with at lease 60 days prior written notice to Landlord.
All other provisions as outlined in Section 26.1 shall remain in effect.
7. OPTION TO EXPAND: Section 32.1 of the Lease Agreement shall be replaced in
its entirety with the following:
Landlord hereby grants Tenant an option to expand the Premises by no less
than 3,500 rsf or more than 5,000 rsf on JULY 1, 1998 (the "Fourth
Anniversary of the lease") and on JULY 1, 1999 (the "Fifth Anniversary of
the lease"), provided (i) Tenant gives written notice to Landlord of
Tenant's election to exercise such expansion option and specifies the
requested size of the expansion space ("Expansion Notice") no later than
two hundred ten (210) days prior to the anniversary date of the Lease as
stated above; (ii) an uncured event of default at the time of Tenant's
notice to Landlord does not exist under this Lease, and no event has
occurred which with the passage of time or the giving of notice (or both)
would be deemed an event of default if not cured within the applicable cure
period, if any; and (iii) Tenant has not assigned its interest in this
Lease or sublet more than fifty percent (50%) of the Premises, except to an
affiliate defined in Section 10.1 of the Lease Agreement. Tenant's failure
to exercise an option in any one year neither increases nor decreases the
amount of expansion space available to Tenant in subsequent years.
<PAGE>
First Amendment to Lease/CFI
Page 4
The actual location and size of each annual expansion space, and the date
on which such space becomes a part of the Premises, shall be at Landlord's
discretion provided such space is above grade and is suitable for general
office use. Following receipt of Tenant's Expansion Notice, Landlord shall
have up to one hundred eighty (180) days to notify Tenant in writing of the
location, size and commencement date for the expansion space. The
commencement date for all such expansion space may be any time during the
period commencing ninety (90) days before and ending one hundred eighty
(180) days after the annual anniversary of the commencement date. From and
after each such commencement date, the expansion space shall become part of
the Premises, and Tenant's proportionate share of additional rent shall be
increased.
A new base year for operating expenses and real estate taxes shall be
established for the expansion space as follows:
Fourth Anniversary Expansion: Base Year Operating Expenses - 1998
Base Year Real Estate Taxes - 1998-1999
Fifth Anniversary Expansion Base Year Operating Expenses - 1999
Base Year Real Estate Taxes - 1999-2000
The annual Base Rent for the expansion space shall be equal to one hundred
percent (100%) of the Current Fair Market Rental Rate. If the parties
cannot agree on the Current Market Rental Rate, the Base rent shall be
determined by three (3) licensed real estate brokers in accordance with the
procedures set forth in Section 31.1(c) of the Lease Agreement, but in no
event shall the rent be less than the rent for the Tenant's existing space
at the time of expansion. For each exercise of Tenant's expansion option,
Tenant's obligation to pay rent to Landlord shall begin on the earlier of
the date on which Tenant takes possession of the expansion space or the
date of substantial completion of the tenant improvement work for the
expansion space.
Tenant shall provide to Landlord the schematic plans for Tenant's expansion
space no later than sixty (60) days following receipt of Landlord's notice.
The plans shall be subject to Landlord's written approval, which shall not
be unreasonably withheld. Final plans and construction documents shall be
prepared by Landlord's architect.
<PAGE>
First Amendment to Lease/CFI
Page 5
Landlord shall provide a tenant improvement allowance, including space
planning services (consisting of one scheme and one revision thereof) and
construction documents for building standard improvements equal to
On the Fourth Anniversary (July 1, 1998) the tenant improvement allowance
shall be $12.50 per rsf.
On the Fifth Anniversary (July 1, 1999)the tenant improvement allowance
shall be $10.00 per rsf.
8. RIGHT OF FIRST OFFER:
In the event that Suite 610 and Suite 700, (currently occupied by GSA-US
Department of Housing and Urban Development), and approximately 22,785
rsf., becomes or is reasonably anticipated by Landlord to become vacant
during the Term, except as provided below, Landlord shall notify Tenant in
writing of the availability of such Space (the "Available Space").
Landlord may deliver such notice prior to such space becoming vacant.
Provided that (i) no event of Default then exists under this Lease; (ii) no
event exists at the time of the exercise of such right or arises subsequent
thereto, which event by notice and/or the passage of time would constitute
an Event of Default if not cured within the applicable cure period, if any,
unless cured within the applicable cure period permitted under the Lease;
(iii) Tenant has not assigned the Lease or sublet more than twenty percent
(20%) of the Premises except to an affiliate as defined in Section 10.1 of
the Lease Agreement, and (iv) Tenant provides Landlord written notice,
within ten (10) business days after receipt of Landlord's notice, of
Tenant's desire to expand the Premises into the Available Space described
in Landlord's notice, time being of the essence, Tenant shall have the
first right to negotiate to lease all of such Available Space for a period
of ten (10) business days after receipt of Landlord's notice (the
"Negotiation Period"). The basis for negotiation shall be 100% of the
Current Fair Market Rental Rate for the Available Space and both parties
agree to negotiate with one another on an ongoing basis during the
Negotiation Period regarding the other terms for Tenant's leasing,
including without limitation any tenant improvements or tenant improvement
allowance proposed to be provided by Landlord. If the parties do not agree
upon the Current Fair Market Rental Rate during the negotiation Period but
otherwise agree upon the terms of Tenant's leasing of Available Space, the
Base Rent for the Available Space shall be determined by the process stated
in Section 31.1 (c) of the Lease, but in no event shall such rent be less
than the then current rental (on a blended per-square foot basis) for the
Premises. If less than thirty-six (36) months remain in the term of the
Lease, as of the date of the commencement of the Available Space, then the
expiration date of the Lease of the entire Premises (including the
Available Space) shall be extended so that the length of the remaining term
of the Lease for the Premises and the Available Space shall be at least
thirty-six (36) months from the Available Space commencement date.
<PAGE>
First Amendment to Lease/CFI
Page 6
Tenant's obligation to pay rent to Landlord for the Available Space shall
begin on the date on which Landlord makes available to Tenant possession of
the Available Space (which shall be the date of substantial completion of
any tenant improvements Landlord is to make to the Available Space, if
Landlord agrees during the Negotiation Period to make such improvements).
In the event that Landlord and Tenant do not agree in writing for any
reason, on the terms for the lease of the Available Space within such
Negotiation Period, Tenant's first right to negotiate pursuant to this
Section 8 shall terminate, and Landlord shall have the right to lease the
Available Space to any other person or entity upon any terms and conditions
which Landlord desires, in its sole discretion. As used herein, the term
"Leased Space" shall mean the office space shown on Exhibit A hereto.
In the event that Landlord and Tenant agree on lease terms for such
Available Space pursuant to this Section 8, Tenant agrees to execute an
amendment modifying this Lease within fifteen (15) business days after
landlord delivers such amendment to Tenant, which amendment shall set forth
(I) the amount of rentable square feet of space constituting the Premises
after the addition of the Available Space; (ii) the exact location of the
Available Space; (iii) the amount of Annual Base Rent and the Monthly Base
Rent for the Premises after the addition of the Available Space; (iv) the
adjustments to Tenant's Pro Rata Share of Operating Expenses and Tenant's
Pro Rata Share of Real Estate Taxes caused by the addition of the Available
Space and (v) the adjustments to the number of parking spaces to be
provided to Tenant; (vi) the commencement date of the Available Space term.
The base year for Operating Expenses and Real Estate Taxes for the
"Available Space" shall be that calendar year or tax year for which the
Landlord has most recent actual costs established. Should Tenant fail or
refuse to execute such amendment within the fifteen (15) business day
period, time being of the essence, Landlord shall, at Landlord's option,
either (i) treat the written agreement signed by Landlord and Tenant during
the Negotiation Period as binding upon the parties, in which case Tenant
shall be deemed to have leased the Available Space on the terms of such
writing, or (ii) be free to lease the Available Space in question to any
other person or entity upon any terms and conditions that Landlord desires
in its sole discretion. In the event that Landlord and Tenant agree upon
the lease terms for the Available Space pursuant to this Section, and
Landlord is unable to deliver possession of such space to Tenant for any
reason or condition beyond Landlord's reasonable control, including without
limitation the failure of an existing tenant to vacate such space,
Landlord, its agents and employees, shall not be liable or responsible for
any claims, damages, or liabilities in connection therewith or by reason
thereof. In such event, Landlord shall use reasonable efforts to make the
Leased Space available to Tenant as soon as reasonably practicable.
<PAGE>
First Amendment to Lease/CFI
Page 7
This Right of First Offer is personal to CFI ProServices, Inc., and shall
not inure to the benefit of any assignee or sublessee of Tenant.
9. Except as amended by this First Amendment, all other terms and conditions
of the Lease Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this First Amendment as of the
date first set forth above.
cfi.ad1
AGREED AND ACCEPTED: AGREED AND ACCEPTED:
JOHN HANCOCK MUTUAL LIFE CFI PROSERVICES, INC.
INSURANCE COMPANY, LANDLORD
BY: BY:
--------------------------------- ---------------------------------
ANNE W. COMSTOCK
TITLE: INVESTMENT OFFICER TITLE:
------------------------------- --------------------------------
DATE: DATE:
------------------------------ --------------------------------
<PAGE>
EXHIBIT 10.41
SIXTH AMENDMENT TO BUSINESS LOAN AGREEMENT
BETWEEN
CFI PROSERVICES, INC.
AND
BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION
MARCH 1, 1997
<PAGE>
SIXTH AMENDMENT TO BUSINESS LOAN AGREEMENT
THIS SIXTH AMENDMENT TO BUSINESS LOAN AGREEMENT ("Amendment") is made
between CFI ProServices, Inc., an Oregon corporation ("Borrower"), and Bank of
America National Trust & Savings Association, successor by merger to Bank of
America Oregon (including its successors and/or assigns, "Bank").
BACKGROUND
----------
A. On November 8, 1995, Bank and Borrower executed that certain Business
Loan Agreement ("Original Agreement"), in which Bank agreed to lend, and
Borrower agreed to borrow, a revolving line of credit in the maximum original
principal sum of $5,000,000.00. Since the date of the Original Agreement, Bank
and Borrower have entered into the following amendments that have changed
certain terms and conditions of the Original Agreement, including but without
limitation (i) increasing the maximum amount of the revolving line of credit to
$7,500,000 ("Loan") and (ii) extending the maturity date of the Loan to December
31, 1997: Amendment No. 1 to Business Loan Agreement, dated as of May 17, 1996
("First Amendment"); Amendment No. 2 to Business Loan Agreement, dated as of
July 1, 1996 ("Second Amendment"); Amendment No. 3 to Business Loan Agreement,
dated as of September 24, 1996 ("Third Amendment"); Amendment No. 4 to Business
Loan Agreement, dated as of November 21, 1996 ("Fourth Amendment"); and
Amendment No. 5 to Business Loan Agreement, dated as of December 31, 1996
("Fifth Amendment"). The Original Agreement, as modified by the First
Amendment, Second Amendment, Third Amendment, Fourth Amendment and Fifth
Amendment, is hereinafter called the "Agreement".
B. Recently, Borrower and Bank discussed extending the time period to
April 1, 1997 in which the Borrower may deliver the customer borrowing plan
required by the Fifth Amendment.
C. Bank and Borrower desire to enter into this Amendment to set forth the
terms and conditions on which the Loan shall be extended.
AGREEMENTS
----------
For valuable consideration, the receipt and sufficiency of which is hereby
acknowledged by Bank and Borrower, the parties agree to amend the Agreement as
follows:
I. LINE OF CREDIT AMOUNT AND TERMS
-1-
<PAGE>
1. COMMITMENT. Subsection 1.1(a) of the Agreement is hereby deleted
in its entirety, and the following Subsection 1.1(a) is inserted in its place:
(a) During the availability period described below, the Bank will provide
a line of credit to the Borrower. The "Commitment" shall be as
follows: (1) for the period covering January 1, 1997 through the end
of March, 1997, the amount of the line of credit shall be Seven
Million Five Hundred Thousand and No/100 Dollars ($7,500,000.00); and
(2) for the period commencing April 1, 1997 and continuing through the
Expiration Date, and subject to Borrower's satisfaction of the
conditions precedent set forth in that certain Fifth Amendment to
Business Loan Agreement, dated as of December 31, 1996 and executed by
and between Bank and Borrower ("Fifth Amendment"), the amount of the
line of credit shall be Seven Million Five Hundred Thousand and No/100
Dollars ($7,500,000.00), subject to the Borrowing Base (as defined in
the Fifth Amendment).
2. MAXIMUM AMOUNT OF THE LINE OF CREDIT. Subsection 1.1(c) of the
Agreement is hereby deleted in its entirety, and the following Subsection 1.1(c)
is inserted in its place:
(c) Borrower shall not permit the outstanding principal balance of the
line of credit to exceed (1) for the period covering January 1, 1997
through the end of March, 1997, Seven Million Five Hundred Thousand
and No/100 Dollars ($7,500,000.00), and (2) for the period commencing
April 1, 1997 and continuing through the Expiration Date, the lesser
of (i) Seven Million Five Hundred Thousand and No/100 Dollars
($7,500,000.00), or (ii) the amount of the Borrowing Base.
II. REPAYMENT TERMS
1. BORROWING BASE. The following new Subsection 1.4(d) is hereby
inserted into the Agreement:
(d) If at anytime on or after April 1, 1997, the principal amount
outstanding under the line of credit exceeds the amount of the
Borrowing Base, Borrower shall immediately repay, without notice from
Bank, the line of credit in an amount that equals the difference
between the principal amount outstanding under the line of credit,
less the amount of the Borrowing Base.
III. DISBURSEMENTS
1. REQUESTS FOR CREDIT. Subsection 3.1 of the Agreement is hereby
deleted in its entirety, and the following Subsection 3.1 is inserted in its
place:
3.1 REQUESTS FOR CREDIT. Each request for an extension of credit will be
made in writing in a manner acceptable to the Bank, or by another
means acceptable to the Bank, and on and after
-2-
<PAGE>
April 1, 1997 shall include the current Borrowing Base Certificate (as
defined in the Fifth Amendment).
IV. CONDITIONS
1. CUSTOMER BORROWING PLAN. Subsection 4.2 of the Agreement is
hereby deleted in its entirety, and the following Subsection 4.2 is inserted in
its place:
4.2 CUSTOMER BORROWING PLAN. Notwithstanding the generality of the
foregoing or anything to the contrary in this Agreement, Bank shall
have no obligation to extend, or to continue to extend, any credit to
Borrower under this Agreement on or after April 1, 1997 if Borrower
has not executed and delivered to Bank the Customer Borrowing Plan, in
conformity with the Fifth Amendment.
V. CONDITIONS PRECEDENT.
1. PAYMENT OF FEES AND DELIVERY OF DOCUMENTS. Unless waived in
writing by Bank, this Amendment shall be of no force or effect for the period
commencing March 1, 1997 and extending through the end of March, 1997 until
Borrower delivers to Bank a fully executed copy of this Amendment. Unless
waived in writing by Bank, this Amendment shall be of no force or effect for the
period commencing April 1, 1997 and continuing through the Expiration Date until
Borrower delivers to Bank a fully executed copy of this Amendment and the
customer borrowing plan, substantially in the form of EXHIBIT A, attached to and
incorporated into the Fifth Amendment, which document shall constitute the
"Customer Borrowing Plan". Bank and Borrower further agree that, between the
date of this Amendment and April 1, 1997: (a) Bank, at Borrower's expense up to
$5,000 in any twelve month period, shall audit Borrower's Accounts (as defined
in EXHIBIT A of the Fifth Amendment); and (b) Bank and Borrower shall negotiate
in good faith to set the amount of the margin used to determine the Borrowing
Base (as defined in EXHIBIT A of the Fifth Amendment), but in no event shall the
margin exceed 60% of Borrower's Accounts.
VI. MISCELLANEOUS.
a. Except as expressly amended by this Amendment, the
Agreement remains in full force and effect and is hereby ratified and
confirmed.
b. This Amendment shall be governed by the laws of the State of
Oregon.
c. If any provision or clause of this Amendment conflicts with
applicable law, such conflict shall not affect other provisions or
-3-
<PAGE>
clauses hereof which can be given effect without the conflicting provision,
and to this end the provisions hereof are declared to be severable.
d. The captions and headings of the sections of this Amendment
are for convenience only and shall not be used to interpret or define the
provisions hereof.
e. This Amendment may be signed in any number of counterparts
and shall constitute an enforceable agreement when all signed counterparts
are assembled together in one Amendment that is signed by all parties.
WRITTEN AGREEMENTS: UNDER OREGON LAW, MOST AGREEMENTS, PROMISES AND COMMITMENTS
MADE BY THE BANK AFTER OCTOBER 3, 1989, CONCERNING LOANS AND OTHER CREDIT
EXTENSIONS WHICH ARE NOT FOR PERSONAL, FAMILY OR HOUSEHOLD PURPOSES OR SECURED
SOLELY BY THE BORROWER'S RESIDENCE MUST BE IN WRITING, EXPRESS CONSIDERATION AND
BE SIGNED BY THAT BANK TO BE ENFORCEABLE.
BORROWER: BANK:
CFI PROSERVICES, INC. BANK OF AMERICA NATIONAL TRUST &
SAVINGS ASSOCIATION
By: /s/ Fred Hall By:
------------------------------- ------------------------------
Name: Fred Hall Name:
------------------------------- ------------------------------
Its: Vice President and CFO Its:
------------------------------- ------------------------------
-4-
<PAGE>
EXHIBIT 11
CFI PROSERVICES, INC.
CALCULATIONS OF NET INCOME PER SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------
1996 1995 1994
---------------------- ---------------------- ----------------------
Primary Fully Diluted Primary Fully Diluted Primary Fully Diluted
---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted Average Shares Outstanding
For The Period 4,763 4,763 4,369 4,369 3,922 3,922
Dilutive Common Stock Options Using The
Treasury Stock Method 349 351 508 524 884 886
---------------------- ---------------------- ----------------------
Total Shares Used For Per Share Calculations 5,112 5,114 4,877 4,893 4,806 4,808
Net Income Applicable to Common Stock 17 17 226 226 3,417 3,417
---------------------- ---------------------- ----------------------
Net Income Per Common Share $ - $ - $ 0.05 $ 0.05 $ 0.71 $ 0.71
---------------------- ---------------------- ----------------------
---------------------- ---------------------- ----------------------
</TABLE>
<PAGE>
Exhibit 21
LIST OF REGISTRANT'S SUBSIDIARIES
1. The Genesys Solutions Group, Inc.
2. Culverin Corporation
3. Vendor Payment Systems, Inc.
4. Texas/Southwest Technology Group, Inc.
5. OnLine Financial Systems, Inc.
6. COIN Banking Systems, Inc.
<PAGE>
Exhibit 23
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation of
our report dated January 23, 1997 included in this Form 10-K into the
Company's previously filed Registration Statements File No. 33-70506, No.
33-89872 and No. 333-11351 on Form S-8.
ARTHUR ANDERSEN LLP
Portland, Oregon,
March 17, 1997
<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-1
<PAGE>
CFI PROSERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ - $ 4,844
Short-term investments - 2,826
Accounts receivable, net of allowances of $1,303 and $290 23,307 15,165
Income taxes receivable - 229
Inventory 156 215
Deferred tax asset 643 445
Prepaid expenses and other current assets 1,659 1,304
---------- ----------
Total Current Assets 25,765 25,028
Property and Equipment, net of accumulated
depreciation of $5,596 and $3,875 4,805 2,968
Software Development Costs, net of accumulated
amortization of $2,585 and $2,514 8,327 4,317
Purchased Software Costs, net of accumulated
amortization of $1,229 and $1,176 1,079 849
Other Intangibles, net of accumulated amortization
of $1,455 and $410 6,704 3,079
Deferred Tax Asset 165 -
Other Assets - 346
---------- ----------
Total Assets $ 46,845 $ 36,587
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Drafts payable $ 425 $ -
Accounts payable 2,884 1,443
Accrued expenses 5,478 3,317
Deferred revenues 10,445 6,860
Customer deposits 869 698
Notes payable 2,896 3,915
Income taxes payable 46 -
Other current liabilities - 36
---------- ----------
Total Current Liabilities 23,043 16,269
Deferred Tax Liability - 965
Long Term Debt, less current portion 2,810 423
---------- ----------
Total Liabilities 25,853 17,657
Mandatorily Redeemable Class A Preferred Stock 754 761
Shareholders' Equity:
Series Preferred Stock, 5,000,000 shares authorized,
none issued and outstanding - -
Common Stock, no par value, 10,000,000
shares authorized and 4,824,973 and 4,496,136
shares issued and outstanding 17,745 15,693
Retained earnings 2,493 2,476
---------- ----------
Total Shareholders' Equity 20,238 18,169
---------- ----------
Total Liabilities and Shareholders' Equity $ 46,845 $ 36,587
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-2
<PAGE>
CFI PROSERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Years Ended December 31,
-------------------------------
1996 1995 1994
------ ------ ------
REVENUE
Software license fees $ 33,935 $ 18,918 $ 16,781
Service and Support 22,336 15,060 12,775
Other 3,676 2,798 3,060
------ ------ ------
Total Revenue 59,947 36,776 32,616
COST OF REVENUE 20,844 11,672 9,646
------ ------ ------
Gross Profit 39,103 25,104 22,970
------ ------ ------
OPERATING EXPENSES
Sales and marketing 12,725 9,558 8,194
Product development 10,615 6,356 5,153
General and administrative 5,425 4,295 4,352
Amortization of intangibles 1,045 343 160
Acquired in-process research and development
and restructuring 8,030 4,549 -
------ ------ ------
Total Operating Expenses 37,840 25,101 17,859
------ ------ ------
Income From Operations 1,263 3 5,111
------ ------ ------
NON-OPERATING INCOME (EXPENSE)
Interest expense (251) (3) (8)
Interest income 271 490 385
Other, net (2) - -
------ ------ ------
Total Non-operating Income 18 487 377
------ ------ ------
INCOME BEFORE INCOME TAXES 1,281 490 5,488
PROVISION FOR INCOME TAXES 1,167 167 1,974
------ ------ ------
NET INCOME 114 323 3,514
PREFERRED STOCK DIVIDEND 97 97 97
------ ------ ------
NET INCOME APPLICABLE TO COMMON
SHAREHOLDERS $ 17 $ 226 $ 3,417
------ ------ ------
------ ------ ------
NET INCOME PER SHARE $ - $ 0.05 $ 0.71
------ ------ ------
------ ------ ------
SHARES USED IN PER SHARE CALCULATIONS 5,112 4,877 4,806
------ ------ ------
------ ------ ------
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE>
CFI PROSERVICES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the three years ended December 31, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
(Accumulated
COMMON STOCK 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-4
<PAGE>
CFI PROSERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income applicable to common shareholders $ 17 $ 226 $ 3,417
Adjustments to reconcile net income applicable to common
shareholders to cash provided by operating activities:
Depreciation and amortization 4,731 3,029 1,702
Gain on sale of property and equipment (10) - -
Write-off of in-process research and development 8,030 3,700 -
Deferred income taxes (1,328) (900) -
Interest accreted (payments made) on mandatory
redeemable preferred stock, net (7) (3) 7
(Gain) loss on sale of equity/debt investments (156) 31 -
Equity in Vendor Payment Systems, Inc. loss - 88 -
(Increase) decrease in assets, net of effects from
purchase of businesses:
Accounts receivable, net (6,580) (3,734) (2,634)
Income taxes receivable 229 125 (63)
Inventory, net 59 206 (188)
Prepaid expenses and other current assets (325) (302) (19)
Increase (decrease) in liabilities, net of effects from
purchase of businesses:
Drafts payable 425 - -
Accounts payable 1,167 (166) 595
Accrued expenses 2,079 (144) 580
Deferred revenues 2,069 1,129 87
Customer deposits (609) 243 (818)
Income taxes payable 678 - -
Other current liabilities (338) (67) (71)
------- ------- -------
Net cash provided by operating activities 10,131 3,461 2,595
Cash flows from investing activities:
Expenditures for property and equipment (2,721) (1,232) (1,995)
Software development costs capitalized (5,204) (2,720) (1,102)
Expenditures for purchased software - - (1,285)
Purchase of investments - (8,128) (13,612)
Proceeds from sale/maturity of investments 2,982 11,715 14,601
Procees from sale of property and equipment 19 - -
Cash paid for acquisition of Products Division of PBS - - (715)
Investment in Vendor Payment Systems, Inc. - (230) (225)
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 (10,112) (916) (4,333)
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 (328) (6) -
Proceeds from issuance of common stock 1,154 791 103
------- ------- -------
Net cash provided by (used in) financing activities (4,863) 785 (1)
------- ------- -------
Increase (decrease) in cash and cash equivalents (4,844) 3,330 (1,739)
Cash and cash equivalents:
Beginning of year 4,844 1,514 3,253
------- ------- -------
End of year $ - $ 4,844 $ 1,514
------- ------- -------
------- ------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<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
regulations. 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, 1996 and
1995. 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.
Years Ended December 31,
-------------------------
1996 1995 1994
----- ----- -----
(In thousands)
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 -- --
F-6
<PAGE>
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 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.
Years Ended December 31,
----------------------------
1996 1995 1994
-------- ------- -------
(In thousands)
Amortization of internally developed software $ 1,194 $ 787 $ 518
Amortization of purchased software 693 632 92
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:
Years Ended December 31,
1996 1995 1994
------- ------- -------
(In thousands)
Amortization of intangibles $ 1,045 $ 343 $ 160
F-7
<PAGE>
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.
- 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, 1996 and 1995 are unbilled receivables
of $3,328,000 and $1,612,000, 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 $950,000, $585,000
and $570,000 for the years ended December 31, 1996, 1995, and 1994,
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-8
<PAGE>
SUPPLEMENTARY CASH FLOW INFORMATION
The Company made the following cash payments:
Years Ended December 31,
---------------------------
1996 1995 1994
------- ------- -------
(In thousands)
Interest and preferred dividends $ 148 $ 103 $ 101
Income taxes 1,597 1,005 2,075
Noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1996 1995 1994
------- -------- --------
(In thousands)
<S> <C> <C> <C>
Tax benefit from exercise of nonqualified stock options
$ 632 $ 291 $ --
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 note 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 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.
F-9
<PAGE>
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:
Years Ended December 31,
------------------------------
1996 1995 1994
-------- -------- --------
(In thousands)
Total revenues $ 63,223 $ 54,497 $ 37,923
Net income (loss) applicable to common stock 33 (699) 2,967
Earnings (loss) per share 0.01 (0.16) 0.61
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-10
<PAGE>
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: December 31,
---------------------
1996 1995
-------- --------
(In thousands)
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
-------- --------
-------- --------
4. PROPERTY AND EQUIPMENT:
The major categories of property and equipment are summarized as follows:
December 31,
---------------------
1996 1995
-------- --------
(In thousands)
Computer hardware and software $ 7,090 $ 4,663
Furniture and fixtures 2,879 1,943
Leasehold improvements 432 237
-------- --------
10,401 6,843
Less- accumulated depreciation 5,596 3,875
-------- --------
$ 4,805 $ 2,968
-------- --------
-------- --------
Depreciation expense was as follows: Years Ended December 31,
------------------------------------
1996 1995 1994
-------- -------- --------
(In thousands)
Depreciation Expense $ 1,799 $ 1,267 $ 932
-------- ------- --------
-------- ------- --------
F-11
<PAGE>
5. ACCRUED EXPENSES:
Accrued expenses consist of the following:
December 31,
----------------------
1996 1995
-------- --------
(In thousands)
Accrued vacation pay $ 265 $ 190
Accrued commissions 870 480
Accrued bonuses and profit sharing 1,639 648
Other 2,704 1,999
-------- --------
$ 5,478 $ 3,317
-------- --------
-------- --------
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:
Years Ended December 31,
------------------------------------
1996 1995 1994
------ ------ ------
(In thousands)
Employer contributions $ 327 $ 220 $ 156
------ ------ ------
------ ------ ------
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:
Years Ended December 31,
------------------------------------
1996 1995 1994
-------- -------- --------
(In thousands)
Bonus and profit sharing expense $ 2,298 $ 771 $ 1,198
-------- -------- --------
-------- -------- --------
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-12
<PAGE>
LONG-TERM DEBT
At December 31, 1996 and 1995, long-term debt consists of the following (in
thousands):
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Note payable, in relation to Culverin acquisition, payment of $3,690 in 1996
with the balance due January 1998 $ 50 $ 3,740
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 275 450
Other -- 148
----------- -----------
4,115 4,338
Less current installment of long-term debt, included in notes payable (1,305) (3,915)
----------- -----------
Long-term debt, excluding current installment $ 2,810 $ 423
----------- -----------
----------- -----------
</TABLE>
Payouts under long-term debt are as follows (in thousands):
Years Ending December 31,
- -------------------------
1997 $ 1,305
1998 296
1999 212
2000 230
2001 1,682
Thereafter 390
--------
$ 4,115
--------
--------
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:
Years Ended December 31,
1996 1995 1994
-------- -------- --------
(In thousands)
Lease expense $ 2,131 999 $ 906
-------- -------- --------
-------- -------- --------
Future minimum lease payments are as follows (in thousands):
Years Ending December 31,
- -------------------------
1997 $ 2,514
1998 2,621
1999 2,524
2000 2,377
2001 1,626
Thereafter 3,468
---------
$ 15,130
---------
---------
F-13
<PAGE>
9. INCOME TAXES:
The provision (benefit) for income taxes is as follows:
Years Ended December 31,
-----------------------------
1996 1995 1994
-------- -------- --------
(In thousands)
Current tax provision:
Federal $ 2,223 $ 944 $ 1,630
State 272 123 344
-------- -------- --------
2,495 1,067 1,974
Deferred tax (benefit) (1,328) (900) --
-------- -------- --------
Total provision $ 1,167 $ 167 $ 1,974
-------- -------- --------
-------- -------- --------
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,
-----------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate 34.0 % 34.0 % 34.0 %
State income taxes net of Federal benefit 6.8 5.4 4.1
Disallowance of meals and entertainment expenses 6.0 11.5 0.7
Purchase accounting adjustments 47.6 .5 -
Tax free interest -- (9.7) (1.5)
Change in valuation allowance 10.9 2.1 (3.0)
Other (14.1) (9.7) 1.7
---- ---- ----
91.2 % 34.1 % 36.0 %
---- ---- ----
---- ---- ----
</TABLE>
Deferred tax assets and (liabilities) are comprised of the following components:
December 31,
-------------------
1996 1995
-------- --------
(In thousands)
Current deferred tax asset:
Allowance for doubtful accounts $ 371 $ 110
Accrued vacation liability 101 72
Current portion of net operating loss carryforwards 88 88
Severance and other accruals 36 135
Other 47 40
-------- --------
Total current deferred tax asset $ 643 $ 445
-------- --------
-------- --------
Long-term deferred tax asset (liability):
In-process technology acquired amortized for tax purposes $ 2,663 $ --
Intangibles amortization 223 123
Capitalized software (3,164) (1,641)
Net operating loss and credit carryforwards 599 594
Other 33 8
-------- --------
Gross long-term deferred tax asset (liability) 354 (916)
Valuation allowance (189) (49)
-------- --------
Total long-term deferred tax asset (liability) $ 165 $ (965)
-------- --------
-------- --------
F-14
<PAGE>
The increase (decrease) in the valuation allowance was as follows:
Years Ended December 31,
-------------------------
1996 1995 1994
------ ------ ------
(In thousands)
Increase (decrease) in valuation allowance $ 140 10 $ (162)
------ ------ ------
------ ------ ------
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. 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):
Years Ending December 31,
- -------------------------
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
-------
-------
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.
F-15
<PAGE>
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.
Below is a table showing the activity for the aforementioned stock option plans
for the past three years:
Weighted
Average Total Exercise
Shares Subject Exercise Price Price
to Options Per Share (In thousands)
-------------- -------------- -------------
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
-------------- -------------- -------------
-------------- -------------- -------------
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 ("ESPP") and options for the purchase of
284,600 shares remained available for future grants. Options to purchase 250,990
and 245,180 shares of common stock were exercisable at December 31, 1996 and
1995, respectively. These exercisable options had weighted average exercise
prices of $8.27 and $6.61 at December 31, 1996 and 1995, 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.
F-16
<PAGE>
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:
For the Year Ended December 31,
1996 1995
------- -------
Risk-free interest rate 6.0% 6.0%
Expected dividend yield 0.0% 0.0%
Expected lives (years) 4.7 4.2
Expected volatility 62.8% 57.7%
Using the Black-Scholes methodology, the total value of options granted during
1996 and 1995 was $1,854,000 and $794,000, 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 1996 and
1995 was $7.39 per share and $6.62 per share, respectively. The shares issued
under the ESPP were 11,338 and 9,978 for the years ended December 31, 1996 and
1995, respectively, and the related weighted average purchase price and weighted
average fair value of shares issued were $13.71 and $6.61, respectively for 1996
and $11.29 and $4.92, respectively for 1995.
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:
For the Year Ended December 31, 1996 1995
---------------------- ----------------------
As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- ---------
Net income (loss) (in thousands) $ 17 $ (979) $ 226 $ (3)
Net income (loss) per share $ -- $ (0.19) $ 0.05 $ --
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:
Options Outstanding Options Exercisable
- ---------------------------------------------------- -------------------------
Weighted
Range of Average Weighted Number of Weighted
Exercise Number Remaining Average Shares Average
Prices Per Outstanding Contractual Exercise Exercisable Exercise
Share at 12/31/96 Life (years) Price at 12/31/96 Price
- ------------ ----------- ----------- ---------- ----------- -----------
$ 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
F-17
<PAGE>
12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
1996 (1) (2)
- ---------------------------------------------------
Revenue $ 11,008 $ 15,399 $ 16,262 $ 17,278
Gross profit 7,363 10,249 10,646 10,845
Net income (loss) applicable to common shareholders 869 (4,059) 1,468 1,739
Net income (loss) per share $ 0.18 $ (0.84) $ 0.28 $ 0.34
1995 (1) (3)
- ---------------------------------------------------
Revenue $ 7,320 $ 8,756 $ 9,363 $ 11,337
Gross profit 4,675 5,905 6,514 8,010
Net income (loss) applicable to common shareholders 220 786 959 (1,739)
Net income (loss) per share $ 0.05 $ 0.16 $ 0.19 $ (0.35)
1994 (1)
- ---------------------------------------------------
Revenue $ 7,168 $ 7,894 $ 8,255 $ 9,299
Gross profit 5,182 5,502 5,696 6,590
Net income applicable to common shareholders 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).
13. EVENT SUBSEQUENT TO DATE OF AUDITORS' REPORT
In February 1997, the Company withdrew its follow on public offering of
1,550,000 shares of its Common Stock. The Company had incurred offering costs
of approximately $500,000. These costs will be expensed in the first quarter of
1997.
F-18
<PAGE>
Report of Independent Public Accountants
on Financial Statement Schedule
To the Board of Directors and Shareholders of
CFI ProServices, Inc.
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in CFI ProServices, Inc.'s 1996
Annual Report on Form 10-K, and have issued our report thereon dated January 23,
1997. Our audits were made for the purpose of forming an opinion on those
statements taken as a whole. The Valuation and Qualifying Accounts schedule is
the responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected
to the auditing procedures applied in our audits of the basic consolidated
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 consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Portland, Oregon,
January 23, 1997
F-19
<PAGE>
SCHEDULE II
CFI PROSERVICES, INC.
VALUATION AND QUALIFYING ACCOUNTS
December 31, 1994, 1995, 1996
<TABLE>
<CAPTION>
Additions
Balance Charged Balance
at Beginning to Costs and at End
Description of Year Expenses Deductions (a) Other (b) 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>
(a) Represents write-off of receivables and fully amortized intangibles. Also
includes reduction in FASB 109 valuation account credited to income tax
expense.
(b) Includes allowance for doubtful accounts recorded as part of the
acquisition of MicroBilt Financial Products Division in April 1996.
F-20
