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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-21980
CFI PROSERVICES, INC.
(Exact name of registrant as specified in its charter)
Oregon 93-0704365
(State or other jurisdiction of (I.R.S. Employer
incorporation Identification No.)
or organization)
400 SW Sixth Avenue, Portland, Oregon 97204
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 503-274-7280
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common stock without par value 5,002,508
(Class) (Outstanding at April 24, 1998)
The index to exhibits appears on page 26 of this document.
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<PAGE>
CFI PROSERVICES, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1998 and December 31, 2
1997
Consolidated Statements of Income - Three Months Ended March
31, 1998 and 1997 3
Consolidated Statements of Cash Flows - Three Months Ended
March 31, 1998 and 1997 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
1
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<TABLE>
CFI PROSERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<CAPTION>
March 31, December 31,
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 699 $ 20
Receivables, net of allowances of $2,552 and $2,880 26,660 32,059
Inventory 365 297
Deferred tax asset 1,307 1,307
Prepaid expenses and other current assets 2,073 1,928
------- -------
Total Current Assets 31,104 35,611
Property and Equipment, net of accumulated
depreciation of $8,431 and $7,855 4,954 5,211
Software Development Costs, net of accumulated
amortization of $1,269 and $735 9,812 9,856
Other Intangibles, net of accumulated amortization
of $3,629 and $3,227 5,362 5,689
Other Assets, including Deferred Taxes 1,105 1,175
======= =======
Total Assets $52,337 $57,542
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,822 $ 2,119
Accrued expenses 3,367 5,362
Deferred revenues 10,220 12,498
Customer deposits 1,441 1,715
Current portion of bank line of credit 22 5,310
Current portion of long-term debt 249 295
Income taxes payable 732 1,125
------- -------
Total Current Liabilities 17,853 28,424
Deferred Tax Liability 197 197
Commitments and Contingencies
Long-Term Debt, less current portion 6,055 2,232
------- -------
Total Liabilities 24,105 30,853
Mandatory Redeemable Class A Preferred Stock 744 746
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 5,002,308 and 4,925,423
shares issued and outstanding 19,410 18,865
Retained earnings 8,078 7,078
------- -------
Total Shareholders' Equity 27,488 25,943
------- -------
Total Liabilities and Shareholders' Equity $52,337 $57,542
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
2
<PAGE>
<TABLE>
CFI PROSERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
<CAPTION>
Three Months
Ended March 31,
-------------------
1998 1997
------- -------
<S> <C> <C>
REVENUE
Software license fees $ 10,326 $ 8,257
Service and Support 7,093 6,564
Other 1,632 1,181
-------- --------
Total Revenue 19,051 16,002
COST OF REVENUE 6,748 5,629
-------- --------
Gross Profit 12,303 10,373
OPERATING EXPENSES
Sales and marketing 4,375 3,442
Product development 3,182 2,947
General and administrative 2,543 1,751
Amortization of intangibles 296 313
-------- --------
Total Operating Expenses 10,396 8,453
-------- --------
Income from Operations 1,907 1,920
NON-OPERATING INCOME (EXPENSE)
Interest expense (102) (89)
Interest income 51 70
Cancelled stock offering costs -- (487)
Other, net (28) --
-------- --------
Total Non-operating Expense (79) (506)
-------- --------
INCOME BEFORE PROVISION FOR
INCOME TAXES 1,828 1,414
PROVISION FOR INCOME TAXES 804 622
-------- --------
NET INCOME 1,024 792
PREFERRED STOCK DIVIDEND 24 24
-------- --------
NET INCOME APPLICABLE TO
COMMON SHAREHOLDERS $ 1,000 $ 768
======== ========
BASIC NET INCOME PER SHARE $ 0.20 $ 0.16
======== ========
DILUTED NET INCOME PER SHARE $ 0.19 $ 0.15
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
3
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<TABLE>
CFI PROSERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<CAPTION>
Three Months
Ended March 31,
----------------
1998 1997
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net income applicable to common shareholders $ 1,000 $ 768
Adjustments to reconcile net income applicable to common
shareholders to cash provided by operating activities:
Depreciation and amortization 1,511 1,474
Payments made on mandatory redeemable preferred stock, net (2) (2)
Interest accreted on note payable 23 --
Equity in losses attributable to joint venture 82 --
(Increase) decrease in assets
Receivables, net 5,399 3,142
Income taxes receivable -- (228)
Inventories, net (68) (33)
Prepaid expenses and other assets (24) (243)
Increase (decrease) in liabilities
Drafts payable -- (332)
Accounts payable (297) 42
Accrued expenses (2,069) (2,396)
Deferred revenues (2,278) (1,064)
Customer deposits (274) 134
Income taxes payable (374) (46)
------ ------
Net cash provided by operating activities 2,629 1,216
Cash flows from investing activities:
Expenditures for property and equipment (319) (897)
Software development costs capitalized (490) (1,507)
Investment in joint venture (133) --
------ ------
Net cash used in investing activity (942) (2,404)
Cash flows from financing activities:
Net proceeds from (payments on) line of credit (1,288) 1,974
Payments on notes payable (50) (934)
Payments on long-term debt (196) (122)
Proceeds from issuance of common stock 526 270
------ ------
Net cash provided by (used in) financing activities (1,008) 1,188
------ ------
Increase in cash and cash equivalents 679 --
Cash and cash equivalents:
Beginning of period $ 20 $ --
------ ------
End of period $ 699 $ --
====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE>
CFI PROSERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts
or as otherwise indicated)
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The financial information included herein for the three month periods ended
March 31, 1998 and 1997 is unaudited; however, such information reflects all
adjustments consisting only of normal recurring adjustments which are, in the
opinion of management, necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods. The
financial information as of December 31, 1997 is derived from the audited
financial statements contained in the 1997 Annual Report on Form 10-K as filed
by CFI ProServices, Inc. (the Company). The interim consolidated financial
statements should be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's 1997 Annual Report on
Form 10-K. The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the full year.
NOTE 2. LINE OF CREDIT
Effective March 1, 1998, the Company negotiated to increase the amount of credit
available under its line of credit from the lesser of 50% of accounts receivable
or $9 million to the lesser of 50% of accounts receivable or $10.0 million and
to change the expiration date to May 1, 2000. Total borrowings under the line of
credit at March 31, 1998 were $4.022 million. Of the total borrowings, $4.0
million has been classified as long-term debt as the Company does not intend to
repay this portion within the next 12 months.
NOTE 3. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information is as follows:
Three Months Ended March 31,
-----------------------------
1998 1997
------------ --------------
Cash paid during the period for income
taxes $ 1,179 $ 324
Cash paid during the period for interest
and dividends 113 46
Noncash investing and financing activities were as follows:
Three Months Ended March 31,
-----------------------------
1998 1997
------------ --------------
Tax benefit from exercise of nonqualified
stock options $ 19 $ 412
Increase in goodwill for accrued
acquisition related contingent royalties 74 --
Reclassification of bank line of credit
to long-term debt 4,000 --
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NOTE 4. EARNINGS PER SHARE
Basic earnings per share (EPS) and diluted EPS are computed using the methods
prescribed by Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS 128"). Basic EPS is calculated using the weighted average number
of common shares outstanding for the period and diluted EPS is computed using
the weighted average number of common shares and dilutive common equivalent
shares outstanding. Prior period amounts have been restated to conform with the
presentation requirements of SFAS 128. Following is a reconciliation of basic
EPS and diluted EPS:
Period Ended March 31, 1998 1997
-------------------------- -------------------- --------------------
(in thousands, except per
share data) Per Per
Share Share
Basic EPS Income Shares Amount Income Shares Amount
--------- --------------------- --------------------
Net income applicable to
Common Shareholders $1,000 4,990 $0.20 $768 4,872 $0.16
===== =====
Effect of Dilutive Securities
Stock Options - 165 - 283
------------- ------------
Diluted EPS
-----------
Net income applicable to
Common Shareholders $1,000 5,155 $0.19 $ 768 5,155 $0.15
===== =====
The number of options to purchase shares of common stock that were excluded from
the table above (as the effect would have been anti-dilutive) were 218,000 and
94,000 for the periods ended March 31, 1998 and 1997, respectively.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO SHOULD BE READ IN
CONJUNCTION WITH THE FOLLOWING DISCUSSION. THIS DISCUSSION 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 DISCUSSION SHOULD BE READ AS BEING APPLICABLE
TO ALL RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR IN THIS FILING.
THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HERE.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE
DISCUSSED IN THIS REPORT, AS WELL AS IN THE COMPANY'S REPORT ON FORM 10-K FOR
THE YEAR ENDED DECEMBER 31, 1997 AND OTHER FILINGS BY THE COMPANY WITH THE
SECURITIES AND EXCHANGE COMMISSION.
OVERVIEW
CFI ProServices, Inc. (CFI or the Company) is a leading provider of customer
service software products and services to financial institutions. The Company
combines its technology, banking, and legal expertise to deliver knowledge-based
software solutions that enable institutions to simplify key business processes
such as sales and service, improve productivity, strengthen customer
relationships, and maintain compliance with both internal business policies and
external government regulations. More than 5,500 financial institutions have
licensed one or more of the Company's products.
During 1993 substantially all of the Company's revenue was derived from its
Laser Pro and Deposit Pro products. Today, the Company licenses more than 20
products organized into three product groups: lending, retail delivery and
connectivity software. Due to its product diversification efforts, the Company
is now less reliant on the Laser Pro and Deposit Pro products. For the quarter
ended March 31, 1998, approximately 44% of the Company's revenue came from
products other than Laser Pro and Deposit Pro.
CFI generates recurring revenue from software maintenance agreements. For the
quarter ended March 31, 1998, service and support fees revenue accounted for
approximately 37% of total revenue. Substantially all software customers
subscribe to the Company's service and support programs, which provide ongoing
product enhancements and, where applicable, regulatory compliance updates.
The Company's cost structure is relatively fixed and the cost of generating
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. Conversely, any failure to achieve revenue
targets in a particular period would adversely affect profit margins for that
period.
The Company believes that sales to larger banks will 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. This project oriented business tends to cause growth in
unbilled accounts receivable resulting from the use of percentage of
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completion accounting, deferred payment terms and increased collection times for
billed accounts receivable. These factors, in turn, result in higher days sales
outstanding (DSO) in accounts receivable.
The Company's backlog as of March 31, 1998 was approximately $13.0 million, as
compared to approximately $15.2 million and $10.8 million at December 31, 1997
and March 31, 1997, respectively. CFI's backlog consists of orders taken and not
yet converted to revenue, but expected to be converted to revenue within 12
months. 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 stated backlog is not necessarily indicative of the
Company's revenue for any future period.
RISK FACTORS
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 differ from the
8
<PAGE>
expectations of public market analysts and investors. In such event, the price
of the Company's Common Stock would likely be affected. Accordingly, the Company
believes that quarter-to-quarter comparisons of its results of operations should
not be relied upon as an indication of future performance.
UNCERTAINTY OF MARKET; PRODUCT ACCEPTANCE. The market for software products and
services to financial institutions is evolving and the Company's success is, in
large part, dependent on the continuing development of this market. Although the
Company believes that its existing products compete effectively with
competitors' products, some of the Company's products have been licensed to only
a few customers or, as to any specific customer, may be used only 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. Furthermore, market acceptance of the
Company's products will also depend on the Company's ability to ensure that its
products operate together with other products offered by the Company, 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.
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
9
<PAGE>
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.
Acquisitions of companies, businesses, products, or technologies, as well as
entry into new business ventures, require the dedication of management resources
in order to achieve the strategic objectives of the acquisitions and ventures.
No assurance can be given that difficulties encountered in integrating the
operations of businesses previously acquired or in the future acquired or
entered into by the Company will be overcome, or that the specific benefits
expected from integration of any particular acquisition or any new business
venture, including the addition of new products and technologies, or increased
sales and growth of the Company's customer base, will be achieved or that any
anticipated cost savings will be realized. The difficulties of combining
acquired operations into the Company have been, and, along with any entry into
new business ventures in the future, can be expected to be exacerbated by the
necessity of coordinating geographically separated organizations. The process of
integrating operations could cause an interruption of, or loss of momentum in,
the activities of the Company's business and operations, including those of the
businesses acquired or new business ventures. Difficulties encountered in
connection with the Company's acquisition of businesses, products or
technologies, and new business ventures, including those previously acquired,
could have an adverse effect on the business, results of operations and
financial condition of the Company. There can be no assurance that integration
of businesses, products or technologies previously acquired by the Company, or
acquired or entered into in the future, will be accomplished without having an
adverse impact on the business, results of operations and financial condition of
the Company or that the benefits or strategic objectives expected from any such
integration or new business venture will be realized.
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
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and confidentiality of Internet transactions may inhibit the growth of Internet
commerce generally and as a result impact market acceptance of the Company's
products. The Company's business will include procedures and services that have
only recently been developed in the emerging electronic delivery market. The use
of the Company's products is dependent, in part, upon the continued development
of an industry and infrastructure for providing secure Internet access and
carrying Internet traffic. In addition, the Internet may not prove to be a
viable commercial marketplace, because of inadequate development of the
necessary infrastructure, such as undercapacity, a reliable network backbone or
timely development of complementary products, including high speed modems. There
can be no assurance that commerce over the Internet will become generally
adopted. If the market fails to develop or develops more slowly than expected,
the infrastructure for the Internet is not adequately developed, or the
Company's home banking products and services do not achieve market acceptance by
a significant number of individuals, businesses and financial institutions, the
Company's business, financial condition and operating results could be
materially and adversely affected.
POSSIBLE NEED FOR ADDITIONAL FINANCING. The Company believes that the funds
expected to be generated by the Company's operations and a $10 million (maximum)
revolving line of credit will provide the Company with sufficient funds to
finance its operations. However, if additional funds were needed to support
working capital requirements, or to complete acquisitions, 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 number of employees in
the Company has grown more than 70% since December 31, 1995, and the Company
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. There can be no assurance that the
Company will be able to do so successfully. The Company's future operating
results will depend on its ability to expand its support organization and
infrastructure commensurate with its expanding base of installed products and on
its ability to attract, hire and retain skilled personnel. There can be no
assurance that the Company's personnel, systems, procedures and controls will be
adequate to support the Company's operations. Any failure to implement and
improve the Company's operational, financial and management systems or to
expand, train, motivate or manage personnel could have a material adverse effect
on the 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
11
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anticipated growth fails to materialize, the Company's operating results could
be adversely affected.
DEPENDENCE ON KEY EMPLOYEES AND SOFTWARE 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. The Company does not have "key person" life insurance on any of its
employees. The loss of the services of one or more of the Company's key
personnel could have a material adverse effect on the Company's business,
operating results and financial condition. The Company also believes its future
success will depend in large part upon its ability to attract and retain
additional highly skilled personnel, particularly sales personnel and software
engineers. Because of the sophistication of the Company's products and the
technology environments in which they operate, the Company's sales, engineering
and other personnel generally require advanced technical knowledge and
significant training to perform competently. Competition for such personnel,
particularly qualified software development engineers, is intense and the
Company has, at times, experienced difficulty in locating personnel with the
requisite level of expertise and experience. There can be no assurance that the
Company will be successful in retaining its existing key personnel or in
attracting and retaining the personnel it requires in the future.
DELAYS IN INTRODUCTION OF NEW PRODUCTS AND PRODUCT ENHANCEMENTS. The Company's
future success will depend upon its ability, on a timely basis, to develop or
acquire and successfully introduce new products and to maintain and enhance its
current products to meet customers' expanding needs. In addition, the Company
must identify emerging trends and technological changes in its target markets,
develop and maintain competitive products, enhance its products by adding
innovative features that differentiate its products from those of its
competitors, and develop and bring products to market quickly at cost-effective
prices. In particular, the Company believes its software-based products must
respond quickly to users' needs for broad functionality and multi-platform
support and to advances in hardware and operating systems. As a result of these
requirements, the Company will need to make substantial investments in design
and product development. Any failure by the Company to anticipate or respond
adequately to technological and regulatory developments and customer
requirements, or any significant delays in product development or introductions,
could result in a loss of competitiveness and could materially adversely affect
the Company's business, operating results and financial condition. There can be
no assurance that the Company will be successful in developing and marketing new
products or product enhancements that respond to technological or regulatory
changes, evolving standards or changing customer requirements.
In the past, the Company has experienced delays in the introduction of new
products and product enhancements and in achieving market acceptance for certain
of its products. There can be no assurance that the Company will successfully
complete on a timely basis products currently under development 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.
12
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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. There 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 be lengthy (often ranging from three
months to in excess of one year) and is subject to a number of significant
delays over which the Company has little or no control. The Company's sales and
implementation cycle could be lengthened by increases in the size and complexity
of its license transactions and by delays in its customers' implementation or
upgrade of the necessary computing environments.
In addition, as the Company increases its emphasis on obtaining orders from
larger financial institutions, particularly very large multistate institutions,
the Company's overall mix of product licenses may involve an increased reliance
on orders that have a longer sales and implementation cycle. Reliance on sales
with a lengthy lead time for completion of the order and implementation of the
product can result in delays in completion of expected sales and fluctuations in
the recognition of sales revenue which may adversely affect the Company's
business, results of operations and financial condition.
COMPETITION. The market for the Company's products is intensely competitive and
rapidly changing. A number of companies offer competitive products addressing
certain of the Company's target markets. With respect to the Company's lending
products, the principal competitors include Bankers Systems, Inc., FormAtion
Technologies Inc., Interlinq Software Corporation, Fair, Isaac & Company, Inc.,
APPRO Systems, Inc., Credit Management Systems, Inc., Baker Hill Corporation and
ALLTEL Corporation. With respect to the Company's retail delivery 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, Inc., Edify
Corporation, CheckFree Incorporated, Online Resources & Communications
13
<PAGE>
Corporation, PegaSystems, Inc. and Digital Insight. In addition, a number of
prospective and existing customers of the Company have the internal capability
to provide alternative solutions to the Company's products and may, therefore,
be viewed as competing with the Company. These alternatives may include
internally developed software and hardware solutions, or methods of process
management that do not involve software solutions. Some of the Company's
competitors have significantly greater financial, technical, sales and marketing
resources than the Company. The Company believes that the primary competitive
factors in this market include product quality, reliability, performance, price,
vendor and product reputation, financial stability, features and functions, ease
of use, interoperability with other applications or systems 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.
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 approximately 45% of the Company's total
revenue for the year ended December 31, 1997, and over 82%, 79% and 53% for the
years ended December 31, 1994, 1995 and 1996, respectively. Although the Company
believes that these products will continue to represent a significant percentage
of the Company's revenue for the near term, an important part of the Company's
business strategy depends upon the ability of the Company to continue to develop
and market its call center, branch automation, electronic banking and other new
products. A decline in demand or prices for the Company's Laser Pro products or
Deposit Pro products, whether as a result of new product introductions by the
Company or its competitors, price competition, technological change, or failure
of the Company's products to address customer requirements, could have a
material adverse effect on the Company's business, results of operations and
financial condition. The failure of the financial services industry in general
to adopt new or modified technologies to improve and simplify business processes
(in particular the products developed by the Company), or the failure of the
Company to support this industry transition with products that effectively
address customer requirements, would have a material adverse effect on the
Company's business, results of operations and financial condition.
14
<PAGE>
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
testing by the Company, are discovered only after a product has been installed
and used by customers. 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.
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 Company's indemnity insurance limits.
Further, there
15
<PAGE>
can be no assurance that this indemnity policy will be renewed or will remain
priced within the Company's capacity to pay the premiums. In the event that the
Company's contract limits are found to be unenforceable or that its insurance
policy does not adequately cover claims, the Company's results of operations may
be materially and adversely affected. In addition, there can be no assurance
that the Company will be able to correct claimed or actual product defects in a
timely manner, or at all.
DEPENDENCE UPON PROPRIETARY TECHNOLOGY; INTELLECTUAL PROPERTY RIGHTS. The
Company's success and ability to compete 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 delays in the
Company's ability to ship certain of its products while it seeks to implement
technology offered by alternative sources, and any required replacement licenses
could prove costly. In addition, the integration of the Company's products with
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
16
<PAGE>
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.
17
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth statements of income data of the Company
expressed as a percentage of total revenue for the periods indicated:
Three Months Ended
March 31,
---------------------------
1998 1997
------------ -----------
Revenue
Software license fees 54.2 % 51.6 %
Service and support 37.2 41.0
Other 8.6 7.4
------------ -----------
Total revenue 100.0 100.0
Gross profit 64.6 64.8
Operating expenses
Sales and marketing 23.0 21.5
Product development 16.7 18.4
General and administrative 13.3 10.9
Amortization of intangibles 1.6 2.0
------------ -----------
Total operating expenses 54.6 52.8
------------ -----------
Income from operations 10.0 12.0
Non-operating expense (0.4) (3.2)
------------ -----------
Income before income taxes 9.6 8.8
Provision for income taxes 4.3 3.9
Preferred stock dividend 0.1 0.1
------------ -----------
Net income applicable to common
shareholders 5.2 % 4.8 %
============ ===========
The following table sets forth percentage changes period over period in the
statements of income data of the Company:
Three Months
Ended March 31,
1998 Over
March 31, 1997
------------------
Revenue
Software license fees 25.0 %
Service and support 8.1
Other 38.2
------------------
Total revenue 19.1
Gross profit 18.6
Operating expenses
Sales and marketing 27.1
Product development 8.0
General and administrative 45.2
Amortization of intangibles (5.4)
------------------
Total operating expenses 23.0
------------------
Income from operations (0.7)
Non-operating expense 84.4 (1)
------------------
Income before income taxes 29.2 (1)
Provision for income taxes 29.2 (1)
Preferred stock dividend --
------------------
Net income applicable to common
shareholders 30.2 (1)
==================
1) Without the $0.5 million charge due to cancellation of a follow-on stock
offering in the first quarter of 1997, the change for non-operating expense,
income before income taxes, provision for income taxes and net income
applicable to common shareholders would have been (316%), (4%), (4%) and
(4%), respectively.
18
<PAGE>
REVENUE
Total revenue increased $3.1 million, or 19%, to $19.1 million for the quarter
ended March 31, 1998 compared to $16.0 million for the comparable period in
1997.
SOFTWARE LICENSE FEES. Software license fees include sales of software to
customers, fees for software customization and fees related to implementing
software and systems at customer sites. Software license fees increased $2.1
million, or 25%, to $10.3 million for the quarter ended March 31, 1998 from $8.3
million for the comparable period in 1997. The increase was led by lending
products, Deposit Pro and Encore! branch automation products, and was offset in
part by declines in OnLine branch automation products and Encore! Personal
Branch revenue. In addition RPxpress! was sold in September 1997. The decline in
OnLine branch automation sales reflects a decreased emphasis on the older
DOS-based product and a transition to the Company's Windows-based Encore! branch
automation products.
PERCENTAGE OF SOFTWARE LICENSE FEES
Three Months Ended
March 31,
-----------------------------
1998 1997
----------- ------------
Lending Products 68 % 51 %
Retail Delivery Products 28 44
Connectivity Products 4 5
----------- ------------
Total 100 % 100 %
=========== ============
LENDING PRODUCTS. Lending products license revenue increased $2.8 million,
or 68%, to $7.0 million for the quarter ended March 31, 1998 over the comparable
period in 1997. The increase resulted primarily from sales of Laser Pro Closing
(particularly of the Company's new Windows-based product), Laser Pro Credit Line
and Laser Pro Mortgage, and was offset in part by decreased revenues from Laser
Pro Application Manager and fisCAL Analyzer. As a percentage of total license
fee revenues, lending products increased to 68% for the first quarter of 1998,
compared to 51% for the same period in 1997.
Lending products include Laser Pro Closing, Laser Pro Application, Laser Pro
SBA, Laser Pro Credit Line, Laser Pro Application Manager, Laser Pro fisCAL
Analyzer, Laser Pro fisCAL Online and Laser Pro Mortgage.
RETAIL DELIVERY PRODUCTS. Retail delivery product license revenue decreased
$0.8 million, or 22%, to $2.9 million for the quarter ended March 31, 1998,
compared to the first quarter in 1997. Increased revenues from Encore! Branch
Automation, Deposit Pro, Encore! Desktop and Encore! Call Center were offset by
decreased revenues from OnLine Branch Automation products and Encore! Personal
Branch. As a percentage of total license revenue, first quarter retail delivery
products revenue declined from 44% in 1997 to 28% in 1998.
19
<PAGE>
Retail delivery products include Encore! Teller, Encore! Platform, Flextran,
OnLine branch automation, Deposit Pro, Encore! Desktop, Encore! Call Center,
Encore! Personal Branch, Pro Active CRA and ACH.
CONNECTIVITY PRODUCTS. License fees from the sale of connectivity products
increased $0.1 million, or 26%, to $0.4 million for the quarter ended March 31,
1998, compared to the same period a year ago. As a percentage of Company license
fee revenue, connectivity products accounted for 4% in the first quarter of
1998, compared to 5% for the same period a year ago. Connectivity products
include StarGate middleware, Laser Pro interfaces and Deposit Pro interfaces.
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 $0.5
million, or 8%, to $7.1 million for the quarter ended March 31, 1998 compared to
the comparable period in 1997 due to increases in the installed base of the
Company's products.
OTHER REVENUE. Other revenue includes Vendor Payment Systems processing fees,
sales of preprinted forms and supplies, and certain consulting revenue. Other
revenue increased $0.5 million, or 38%, to $1.6 million for the quarter ended
March 31, 1998 compared to the first quarter in 1997. The increase in Other
revenue was led by sales of Laser Pro font cartridges. Other revenue increased
to 9% of total revenue for the first quarter of 1998, compared to 7% for the
comparable period in 1997.
COST OF REVENUE
Cost of revenue primarily consists of amortization of software development
costs, 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 $1.1 million, or 20%, to $6.7 million for the quarter
ended March 31, 1998 compared to $5.6 million in the comparable period in 1997.
The increase is primarily attributable to additional personnel required to
support the increased installed base of customers, higher implementation costs
associated with the increased number of large financial institution projects,
and increased royalties and materials costs associated with increased revenues.
As the breadth of the Company's product offerings 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.
Amortization of software developments costs decreased $0.1 million to $0.5
million for the first quarter of 1998 compared to the first quarter of 1997.
As a result of CFI's acquisitions, costs resulting from royalty payments may
increase in future periods. The Company is obligated to pay royalties ranging
from 3% to 18% of revenue
20
<PAGE>
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.
Gross margin for the first quarters of both 1998 and 1997 was 65%. Operating
margin declined to 10% from 12%, quarter to quarter. The decrease in operating
margin was due primarily to lower capitalization of software development costs
in the first quarter of 1998 as the Company's current product development cycle
is ending, and to increases in general and administrative expenses and in sales
and marketing expenses. The Company capitalized $0.5 million in software
development costs in the quarter ended March 31, 1998 compared to $1.5 million
in first quarter of 1997. Capitalized software development costs net of
accumulated amortization were $9.8 million as of March 31, 1998.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses increased to $4.3 million, or
23% of revenue, for the quarter ended March 31, 1998, compared to $3.4 million,
or 22% of revenue, in the comparable period of 1997. The increase in dollar
amount and as a percentage of revenue resulted principally from salary
increases, additional personnel and increased commissions associated with
increased revenues.
PRODUCT DEVELOPMENT. Product development expenses include costs of maintaining
and enhancing existing products and developing new products. Product development
expenses were $3.2 million, or 17% of revenue, in the first quarter of 1998
compared to $2.9 million, or 18% of revenue, in the same period of 1997. The
increase in dollar amount was primarily the result of increased staffing in the
development areas of the Company, migrating the Company's DOS-based products to
Windows-based products and accelerating development of the Company's
connectivity products.
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. The Company anticipates that with the completion of the
current development cycle of its compliance-related products, and the consequent
reduction in capitalization of costs, product development cost will have a
material adverse effect in future periods on operating margin and net income.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $2.5
million, or 13% of revenue, for the quarter ended March 31, 1998, compared to
$1.8 million, or 11% of revenue, for the same period in 1997. The increases in
dollar amount and as a percentage of revenue primarily resulted from an
increased provision for bad debts associated with increased revenues, higher
salaries and increased personnel.
21
<PAGE>
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. Amortization of
intangibles was $0.3 million for the first quarters for both 1998 and 1997.
NON-OPERATING EXPENSE
Non-operating expense decreased $0.4 million in the first quarter of 1998
compared to the comparable period in the prior year. In February 1997 the
Company's Board of Directors elected not to proceed with a planned follow-on
offering of the Company's Common Stock. The Company took a $0.5 million
non-operating charge in the first quarter of 1997 as a result of the
cancellation.
PROVISION FOR INCOME TAXES
The effective tax rate for the three months ended March 31, 1998 and 1997 was
44%.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased $6.1 million to $13.3 million at March 31, 1998 from
$7.2 million at December 31, 1997. The increase resulted primarily from a
reduction in short-term debt and an increase in long-term debt of $4.0 million
in connection with a renegotiation of the Company's bank line of credit
facility.
Net cash provided by operations was $2.6 million for the quarter ended March 31,
1998 compared to $1.2 million in the first quarter of 1997. Net income,
excluding non-cash items, provided $2.5 million during the quarter, with another
$5.4 million attributable to the seasonal decline in accounts receivable
resulting from the Company's annual maintenance billing cycle. The major
operating uses of funds during the period included $2.1 million attributable to
a decline in accrued expenses due primarily to the payment of bonus and
commission amounts for 1997 and an additional $2.3 million related to the
decline in deferred revenue, another result of the annual maintenance billing
pattern. An additional $1.0 million was used for income taxes, and decreases in
accounts payable, customer deposits and prepaid expenses.
Net cash used in investing activities was $0.9 million for the quarter ended
March 31, 1998 compared to $2.4 million in the first quarter of 1997. The
decrease in cash used in investing activities is due principally to lower
capitalization of software development costs and lower expenditures for property
and equipment.
Net cash used by financing activities of $1.0 million during the quarter ended
March 31, 1998 resulted from payments of $1.3 million on the Company's bank line
of credit facility and $0.2 million on acquisition related debt, offset by $0.5
million provided from the issuance of common stock upon exercise of options.
Days sales outstanding (DSO) in accounts receivable, including both billed and
unbilled accounts receivable, increased to 124 days at March 31, 1998 from 106
days at December 31, 1997 (excluding the distorting impact of annual maintenance
invoices). The increase in
22
<PAGE>
DSO during the first quarter of 1998 resulted principally from cash collections
that were delayed until after the end of the quarter and from increased
project-oriented business. Project-oriented business tends to cause growth in
unbilled accounts receivable resulting from the use of percentage of completion
accounting, deferred payment terms and increased collection times for billed
accounts receivable. Unbilled accounts receivable at March 31, 1998 were $5.7
million, or 21% of total accounts receivable, compared with $4.4 million, or 22%
of total accounts receivable, at March 31, 1997.
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 up to the lesser of $10.0 million or 50% of accounts receivable,
of which $6.0 million was available at March 31, 1998. Long-term debt, less
current portion, of $6.0 million at March 31, 1998 includes $4.0 million drawn
on the line of credit. Interest on the borrowings was equal to the bank's prime
lending rate (8.5% at March 31, 1998). The line of credit expires May 1, 2000.
The Company believes that funds expected to be generated from existing
operations and borrowings under its revolving line of credit will provide the
Company with sufficient funds to finance its operations. 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 debt or equity, 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.
From time to time the Company receives contract claims from its customers and
other parties, including requests for full or partial refunds of moneys paid,
and initiates contract claims against its customers and other parties, including
claims for prompt payment of unpaid invoices. Although there can be no assurance
that such claims, either alone or in the aggregate, will not have a material
adverse effect on the Company's results of operations or financial position, the
Company believes that as of the date of this filing no such claims will have
such an effect.
23
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits filed as part of this report are listed below:
EXHIBIT NUMBER AND DESCRIPTION
10.1 Amendment No. 8, dated March 31, 1998, to Business Loan Agreement
(Revolving Line of Credit) dated November 8, 1995 between the
Company and Bank of America National Trust & Savings Association
10.2 Amendment No. 9, dated April 30, 1998, to Business Loan Agreement
(Revolving Line of Credit) dated November 8, 1995 between the
Company and Bank of America National Trust & Savings Association
27.1 Financial Data Schedule for quarter ended March 31, 1998
27.2 Restated Financial Data Schedules for fiscal year 1996 and quarters
ended March 31, 1996, June 30, 1996 and September 30, 1996
27.3 Restated Financial Data Schedules for quarters ended March 31, 1997,
June 30, 1997 and September 30, 1997
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended March 31, 1998.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 7, 1998 CFI PROSERVICES, INC.
By: /s/ MATTHEW W. CHAPMAN
-----------------------
Matthew W. Chapman
Chairman and Chief Executive Officer
(Principal Executive Officer)
By: /s/ KURT W. RUTTUM
-----------------------
Kurt W. Ruttum
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
25
<PAGE>
Exhibit Index
10.1 Amendment No. 8, dated March 31, 1998, to Business Loan Agreement
(Revolving Line of Credit) dated November 8, 1995 between the
Company and Bank of America National Trust & Savings Association
10.2 Amendment No. 9, dated April 30, 1998, to Business Loan Agreement
(Revolving Line of Credit) dated November 8, 1995 between the
Company and Bank of America National Trust & Savings Association
27.1 Financial Data Schedule for quarter ended March 31, 1998
27.2 Restated Financial Data Schedules for fiscal year 1996 and quarters
ended March 31, 1996, June 30, 1996 and September 30, 1996
27.3 Restated Financial Data Schedules for quarters ended March 31, 1997,
June 30, 1997 and September 30, 1997
Exhibit 10.1
EIGHTH AMENDMENT TO BUSINESS LOAN AGREEMENT
Between
CFI PROSERVICES, INC.
and
BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION
March 31, 1998
<PAGE>
EIGHTH AMENDMENT TO BUSINESS LOAN AGREEMENT
THIS EIGHTH 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
$9,000,000 ("Loan") and (ii) extending the maturity date of the Loan to May 1,
1998: 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"); Amendment
No. 5 to Business Loan Agreement, dated as of December 31, 1996 ("Fifth
Amendment"); Sixth Amendment to Business Loan Agreement, dated as of March 1,
1997; and Seventh Amendment to Loan Agreement, dated as of June 1, 1997
("Seventh Amendment"). The Original Agreement, as modified by the First
Amendment, Second Amendment, Third Amendment, Fourth Amendment, Fifth Amendment,
Sixth Amendment and Seventh Amendment, is hereinafter called the "Agreement".
B. 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. 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: for the period commencing
March 31, 1998 and continuing through the Expiration Date,
the amount of the line of credit shall be Ten Million and
No/100 Dollars ($10,000,000.00), subject to the Borrowing
Base (as defined in the Seventh Amendment to the Agreement,
dated on or about June 1, 1997).
<PAGE>
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 the lesser of (i) Ten
Million and No/100 Dollars ($10,000,000.00), or (ii) the
amount of the Borrowing Base.
3. AVAILABILITY PERIOD. Section 1.2 of the Agreement is
hereby deleted in its entirety, and the following Section 1.2 is inserted in
its place:
1.2 AVAILABILITY PERIOD. The line of credit is available between
the date of this Agreement and May 1, 2000 ("Expiration
Date").
II. CURRENT RATIO. Subsection 6.3 of the Agreement is hereby deleted in its
entirety, and the following Subsection 6.3 is inserted in its place:
6.3 CURRENT RATIO. To maintain a ratio of current assets to
the sum of current liabilities plus any debt owing to
Bank equal to at least the amounts indicated below for
each date specified below; provided that Borrower shall
not be in default of this covenant if noncompliance
with the ratios indicated below is cured within 45 days
of the applicable dates noted below and such cure is
documented on a month-end financial statement
acceptable to the Bank:
Date Ratio
---- -----
12/31/97, 3/31/98, 6/30/98 1.20
9/30/98, 12/31/98 1.25
3/31/99, 6/30/99 1.30
9/30/99, 12/31/99 1.40
3/31/00 1.50
III. REPRESENTATIONS AND WARRANTIES. As of the date of this Amendment, Borrower
makes the following representations and warranties to Bank, on which Bank is
relying in entering into this Amendment:
1. EXISTENCE. Borrower is licensed as a corporation under the laws
of the State of Oregon and has the power, authority and legal right to own
or lease and operate property and conduct business.
2. ENFORCEABILITY. The execution, delivery and performance of this
Amendment has been duly authorized and is not in conflict with the terms
of any agreement of Borrower, and this Amendment is enforceable against
Borrower according to its terms.
3. NO LEGAL BAR. The execution, delivery and performance of this
Amendment does not violate any (i) existing law or regulation applicable
to Borrower; (ii) ruling applicable to Borrower of any court, arbitration
or governmental agency or
<PAGE>
similar body; or (iii) mortgage, indenture, lease, contract, undertaking or
other agreement to which Borrower is a party.
4. YEAR 2000. Borrower has conducted a comprehensive review and
assessment of Borrower's computer applications and made inquiry of
Borrower's key suppliers, vendors and customers with respect to the `year
2000 problem" (that is , the risk that computer applications may not be
able to properly perform date-sensitive functions after December 31, 1999)
and, based on that review and inquiry, Borrower does not believe the year
2000 problem will result in a material adverse change in Borrower's
business condition (financial or otherwise), operations, properties, or
prospects, or ability to repay the Obligations.
IV. CONDITIONS PRECEDENT. Payment of Fees and Delivery of Documents. Unless
waived in writing by Bank, this Amendment shall be of no force or effect until
Borrower delivers to Bank a fully executed copy of this Amendment and pays the
Bank's attorney's fees for the preparation of this Amendment.
V. MISCELLANEOUS. Except as expressly amended by this Amendment, the Agreement
remains in full force and effect and is hereby ratified and confirmed. This
Amendment shall be governed by the laws of the State of Oregon. If any provision
or clause of this Amendment conflicts with applicable law, such conflict shall
not affect other provisions or clauses hereof which can be given effect without
the conflicting provision, and to this end the provisions hereof are declared to
be severable. 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. 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/ Kurt W. Ruttum By: /S/ R. E. McCall
------------------ ----------------
Name: Kurt W. Ruttum Name: R. E. McCall
Its: VP & CFO Its: VP & Relationship Manager
Exhibit 10.2
NINTH AMENDMENT TO BUSINESS LOAN AGREEMENT
Between
CFI PROSERVICES, INC.
and
BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION
April 30, 1998
<PAGE>
NINTH AMENDMENT TO BUSINESS LOAN AGREEMENT
THIS NINTH 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
$10,000,000 ("Loan") and (ii) extending the maturity date of the Loan to May 1,
2000: 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"); Amendment
No. 5 to Business Loan Agreement, dated as of December 31, 1996 ("Fifth
Amendment"); Sixth Amendment to Business Loan Agreement, dated as of March 1,
1997; and Seventh Amendment to Loan Agreement, dated as of June 1, 1997
("Seventh Amendment"); and Eighth Amendment to Business Loan Agreement, dated as
of March 31, 1998 ("Eighth Amendment"). The Original Agreement, as modified by
the First Amendment, Second Amendment, Third Amendment, Fourth Amendment, Fifth
Amendment, Sixth Amendment, Seventh Amendment, and Eighth Amendment is
hereinafter called the "Agreement".
B. Bank and Borrower desire to enter into this Amendment to set forth the
terms and conditions on which the interest rate on the Loan shall be reduced.
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. LIBOR RATE. Section 1.7 of the Agreement is amended to delete the figure
"1.50" and to replace it with the figure "1.40".
II. CONDITIONS PRECEDENT. Unless waived in writing by Bank, this Amendment shall
be of no force or effect until Borrower delivers to Bank a fully executed copy
of this Amendment and pays the Bank its attorneys' fees in the amount of $100.00
for the preparation of this Amendment.
III. MISCELLANEOUS. Except as expressly amended by this Amendment, the Agreement
remains in full force and effect and is hereby ratified and confirmed. This
Amendment shall be governed by the laws of the State of Oregon. If any provision
or clause of this Amendment conflicts with applicable law, such conflict shall
not affect other provisions or clauses hereof
<PAGE>
which can be given effect without the conflicting provision, and to this end the
provisions hereof are declared to be severable. 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. 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/ Kurt W. Ruttum By: /S/ R. E. McCall
------------------ ----------------
Name: Kurt W. Ruttum Name: R. E. McCall
Its: VP & CFO Its: VP & Relationship Manager
<TABLE> <S> <C>
<ARTICLE> 5
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<S> <C>
<PERIOD-START> Jan-01-1998
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Mar-31-1998
<CASH> 699
<SECURITIES> 0
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<ALLOWANCES> 2,552
<INVENTORY> 365
<CURRENT-ASSETS> 31,104
<PP&E> 13,385
<DEPRECIATION> 8,431
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<CURRENT-LIABILITIES> 17,853
<BONDS> 6,326
744
0
<COMMON> 19,410
<OTHER-SE> 8,078
<TOTAL-LIABILITY-AND-EQUITY> 52,337
<SALES> 1,214
<TOTAL-REVENUES> 19,051
<CGS> 504
<TOTAL-COSTS> 6,749
<OTHER-EXPENSES> 10,396
<LOSS-PROVISION> 890
<INTEREST-EXPENSE> (102)
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<EPS-PRIMARY> 0.20
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-START> Jan-01-1996 Jan-01-1996 Jan-01-1996 Jan-01-1996
<PERIOD-TYPE> YEAR 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> Dec-31-1996 Dec-31-1996 Dec-31-1996 Dec-31-1996
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<CASH> 0 7,053 3,339 186
<SECURITIES> 0 1,762 0 0
<RECEIVABLES> 24,610 10,859 15,245 16,250
<ALLOWANCES> 1,303 396 680 1,356
<INVENTORY> 156 198 198 155
<CURRENT-ASSETS> 25,765 21,215 21,569 17,110
<PP&E> 10,401 7,309 10,381 11,395
<DEPRECIATION> 5,596 4,242 4,699 5,096
<TOTAL-ASSETS> 46,845 33,364 40,736 37,721
<CURRENT-LIABILITIES> 23,043 12,189 20,621 16,143
<BONDS> 5,776 0 8,402 6,297
754 734 757 756
0 0 0 0
<COMMON> 17,745 15,856 17,076 17,253
<OTHER-SE> 2,493 3,345 (713) 754
<TOTAL-LIABILITY-AND-EQUITY> 46,845 33,364 40,736 37,721
<SALES> 3,033 835 1,555 2,234
<TOTAL-REVENUES> 59,947 11,008 26,407 42,669
<CGS> 1,485 337 628 902
<TOTAL-COSTS> 20,844 3,715 8,795 14,411
<OTHER-EXPENSES> 37,841 5,890 22,202 30,183
<LOSS-PROVISION> 576 90 306 60
<INTEREST-EXPENSE> 251 7 46 91
<INCOME-PRETAX> 1,280 1,515 (4,429) (1,813)
<INCOME-TAX> 1,167 622 (1,288) (163)
<INCOME-CONTINUING> 17 869 (3,189) (1,722)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 17 869 (3,189) (1,722)
<EPS-PRIMARY> 0.00 0.19 (0.66) (0.36)
<EPS-DILUTED> 0.00 0.18 (0.66) (0.36)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-START> Jan-01-1997 Jan-01-1997 Jan-01-1997
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> Dec-31-1997 Dec-31-1997 Dec-31-1997
<PERIOD-END> Mar-31-1997 Jun-30-1997 Sep-30-1997
<CASH> 0 0 99
<SECURITIES> 0 0 0
<RECEIVABLES> 21,526 22,062 23,403
<ALLOWANCES> 1,361 1,792 2,447
<INVENTORY> 189 170 171
<CURRENT-ASSETS> 23,539 23,086 23,573
<PP&E> 11,297 12,187 12,610
<DEPRECIATION> 6,142 6,766 7,284
<TOTAL-ASSETS> 45,549 46,102 46,747
<CURRENT-LIABILITIES> 20,421 19,541 19,238
<BONDS> 6,624 6,590 7,354
752 750 748
0 0 0
<COMMON> 18,427 18,523 18,819
<OTHER-SE> 3,261 4,685 5,597
<TOTAL-LIABILITY-AND-EQUITY> 45,549 46,102 46,747
<SALES> 876 1,610 2,631
<TOTAL-REVENUES> 16,002 33,882 51,776
<CGS> 517 1,162 1,763
<TOTAL-COSTS> 5,629 11,640 18,626
<OTHER-EXPENSES> 8,453 17,609 27,374
<LOSS-PROVISION> 209 681 1,356
<INTEREST-EXPENSE> 89 207 329
<INCOME-PRETAX> 1,414 4,000 5,671
<INCOME-TAX> 622 1,760 2,495
<INCOME-CONTINUING> 792 2,192 3,104
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<EXTRAORDINARY> 0 0 0
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<NET-INCOME> 768 2,192 3,104
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<EPS-DILUTED> 0.15 0.43 0.61
</TABLE>
