==========================================================================
UNITED STATES
==========================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-Q
-------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 5,009,941
(Class) (Outstanding at August 7, 1998)
The index to exhibits appears on page 18 of this document.
============================================================================
<PAGE>
CFI PROSERVICES, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1998 and December 31, 2
1997
Consolidated Statements of Income - Three and Six Months Ended
June 30, 1998 and 1997 3
Consolidated Statements of Cash Flows - Six Months Ended June
30, 1998 and 1997 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
1
<PAGE>
<TABLE>
CFI PROSERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<CAPTION>
June 30, December 31,
1998 1997
------------ -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,623 $ 20
Short-term investments 200 -
Receivables, net of allowances of $2,461 and $2,880 23,113 32,059
Inventory 296 297
Deferred tax asset 1,307 1,307
Prepaid expenses and other current assets 2,072 1,928
------------ -----------
Total Current Assets 29,611 35,611
Property and Equipment, net of accumulated
depreciation of $9,011 and $7,855 5,021 5,211
Software Development Costs, net of accumulated
amortization of $1,803 and $735 9,842 9,856
Other Intangibles, net of accumulated amortization
of $4,062 and $3,227 5,051 5,689
Other Assets 1,055 1,175
============ ===========
Total Assets $ 50,580 $ 57,542
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,236 $ 2,119
Accrued expenses 2,691 5,362
Deferred revenues 8,419 12,498
Customer deposits 1,639 1,715
Current portion of bank line of credit - 5,310
Current portion of long-term debt 203 295
Income taxes payable 102 1,125
------------ -----------
Total Current Liabilities 15,290 28,424
Deferred Tax Liability 197 197
Long-Term Debt, less current portion 5,888 2,232
------------ -----------
Total Liabilities 21,375 30,853
Mandatory Redeemable Class A Preferred Stock 742 746
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 5,009,841 and 4,925,423
shares issued and outstanding 19,458 18,865
Retained earnings 9,005 7,078
------------ -----------
Total Shareholders' Equity 28,463 25,943
------------ -----------
Total Liabilities and Shareholders' Equity 50,580 $ 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 Six Months Ended
June 30, June 30,
1998 1997 1998 1997
--------- --------- ------- -------
<S> <C> <C> <C> <C>
Revenue
Software license fees $ 10,125 $ 10,028 $ 20,451 $ 18,285
Service and support 7,414 6,816 14,507 13,380
Other 1,463 1,036 3,095 2,217
--------- --------- ------- -------
Total Revenue 19,002 17,880 38,053 33,882
Cost of Revenue 7,167 6,010 13,915 11,640
--------- --------- ------- -------
Gross Profit 11,835 11,870 24,138 22,242
Operating Expenses
Sales and marketing 4,476 3,808 8,851 7,250
Product development 3,156 2,994 6,338 5,941
General and administrative 2,093 2,038 4,636 3,789
Amortization of intangibles 297 316 593 629
--------- --------- ------- -------
Total Operating Expenses 10,022 9,156 20,418 17,609
--------- --------- ------- -------
Income From Operations 1,813 2,714 3,720 4,633
Non-operating Income (Expense)
Interest expense (117) (123) (219) (207)
Interest income 78 32 129 102
Cancelled stock offering costs - - - (487)
Other, net (76) (37) (104) (41)
--------- --------- ------- -------
Total Non-operating Expense, net (115) (128) (194) (633)
--------- --------- ------- -------
Income Before Provision For
Income Taxes 1,698 2,586 3,526 4,000
Provision for Income Taxes 747 1,138 1,551 1,760
--------- --------- ------- -------
Net Income 951 1,448 1,975 2,240
Preferred Stock Dividend 24 24 48 48
--------- --------- ------- -------
Net Income Applicable to Common
Shareholders $ 927 $ 1,424 $ 1,927 $ 2,192
========= ========= ======= =======
Basic Net Income Per Share $ 0.19 $ 0.29 $ 0.39 $ 0.44
========= ========= ======= =======
Diluted Net Income Per Share $ 0.18 $ 0.28 $ 0.37 $ 0.43
========= ========= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
3
<PAGE>
<TABLE>
CFI PROSERVICES, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<CAPTION>
Six months ended June 30,
---------------------------
1998 1997
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net income applicable to common shareholders $ 1,927 $ 2,192
Adjustments to reconcile net income applicable to common
shareholders to cash provided by operating activities:
Depreciation and amortization 3,065 3,362
Interest accreted on note payable 47 -
Interest accreted on mandatory redeemable preferred sto 48 48
Equity in losses attributable to joint venture 169 -
(Increase) decrease in assets
Receivables, net 8,946 2,694
Inventories, net 1 (14)
Prepaid expenses and other assets (35) (344)
Increase (decrease) in liabilities
Drafts payable - (418)
Accounts payable 117 (688)
Accrued expenses (2,867) (2,347)
Deferred revenues (4,079) (2,688)
Customer deposits (76) 826
Income taxes payable (967) 1,060
---------- ----------
Net cash provided by operating activities 6,296 3,683
Cash flows from investing activities:
Expenditures for property and equipment (973) (1,786)
Software development costs capitalized (1,054) (3,014)
Purchase of short-term investments (200) -
Proceeds from long-term note receivable 100 -
Investment in joint venture (258) -
---------- ----------
Net cash used in investing activity (2,385) (4,800)
Cash flows from financing activities:
Net proceeds from (payments on) line of credit (1,310) 2,159
Payments on other long-term debt (483) (1,345)
Payments on mandatory redeemable preferred stock (52) (52)
Proceeds from issuance of common stock 537 355
---------- ----------
Net cash provided by (used in) financing activity (1,308) 1,117
---------- ----------
Increase in cash and cash equivalents 2,603 -
Cash and cash equivalents:
Beginning of period $ 20 $ -
============ =============
End of period $ 2,623 $ -
============ =============
</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 and six month
periods ended June 30, 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 million and to
change the expiration date to May 1, 2000. Total borrowings under the line of
credit at June 30, 1998 were $4.0 million. The $4.0 million balance 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:
Six Months Ended June 30,
-----------------------------
1998 1997
------------ --------------
Cash paid during the period for income
taxes $ 2,518 $ 698
Cash paid during the period for interest
and dividends 227 253
Noncash investing and financing activities were as follows:
Six Months Ended June 30,
-----------------------------
1998 1997
------------ --------------
Tax benefit from exercise of nonqualified
stock options $ 56 $ 423
Increase in goodwill for accrued
acquisition related contingent royalties 196 155
Reclassification of bank line of credit
to long-term debt 4,000 --
5
<PAGE>
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:
Three Months Ended June 30, 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 $927 5,007 $0.19 $1,424 4,911 $0.29
===== =====
Effect of Dilutive Securities
Stock Options - 241 - 230
------------- -------------
Diluted EPS
-----------
Net income applicable to
Common Shareholders $927 5,248 $0.18 $1,424 5,141 $0.28
===== =====
Six Months Ended June 30, 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 $1,927 4,999 $0.39 $2,192 4,892 $0.44
===== =====
Effect of Dilutive Securities
Stock Options - 202 - 243
------------- -------------
Diluted EPS
-----------
Net income applicable to
Common Shareholders $1.927 5,201 $0.37 $2,192 5,135 $0.43
===== =====
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 99,700 and
105,500 for the three months ended June 30, 1998 and 1997, respectively, and
158,850 and 99,750 for the six months ended June 30, 1998 and 1997,
respectively.
6
<PAGE>
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 Reports on Form 10-Q for
the three months ended March 31, 1998, on Form 10-K for the year ended December
31, 1997 and in 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 six
months ended June 30, 1998, approximately 52% 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
three month and six month periods ended June 30, 1998, service and support fees
revenue accounted for 39% and 38% of total revenue, respectively. 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, as occurred in the three months ended June 30, 1998.
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
7
<PAGE>
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. These factors, in turn, result
in higher days sales outstanding (DSO) in accounts receivable.
The Company's backlog as of June 30, 1998 was approximately $14.0 million, as
compared to approximately $15.2 million and $11.3 million at December 31, 1997
and June 30, 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.
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 June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
Revenue
Software license fees 53.3 % 56.1 % 53.8 % 54.0 %
Service and support 39.0 38.1 38.1 39.5
Other 7.7 5.8 8.1 6.5
---------- --------- --------- --------
Total revenue 100.0 100.0 100.0 100.0
Gross profit 62.3 66.4 63.4 65.6
Operating expenses
Sales and marketing 23.6 21.3 23.2 21.4
Product development 16.6 16.7 16.6 17.5
General and administrative 11.0 11.4 12.2 11.2
Amortization of intangibles 1.6 1.8 1.6 1.8
---------- --------- --------- --------
Total operating expenses 52.8 51.2 53.6 51.9
---------- --------- --------- --------
Income from operations 9.5 15.2 9.8 13.7
Non-operating expense (0.6) (0.7) (0.5) (1.9)
---------- --------- --------- --------
Income before income taxes 8.9 14.5 9.3 11.8
Provision for income taxes 3.9 6.4 4.1 5.2
Preferred stock dividend 0.1 0.1 0.1 0.1
---------- --------- --------- --------
Net income applicable to
common shareholders 4.9 % 8.0 % 5.1 % 6.5 %
========== ========= ========= ========
8
<PAGE>
The following table sets forth percentage changes period over period in the
statements of income data of the Company:
Three Months Ended Six Months Ended
June 30,1998 over June 30, 1998 over
June 30, 1997 June 30, 1997
------------- -------------
Revenue
Software license fees 1.0 % 11.8 %
Service and support 8.8 8.4
Other 41.3 39.7
--------- ---------
Total revenue 6.3 12.3
Gross profit (0.3) 8.5
Operating expenses
Sales and marketing 17.6 22.1
Product development 5.4 6.7
General and administrative 2.7 22.3
Amortization of intangibles (6.1) (5.8)
--------- ---------
Total operating expenses 9.4 15.9
--------- ---------
Income from operations (33.2) (19.7)
Non-operating expense (10.2) (69.5)(1)
--------- ---------
Income before income taxes (34.3) (11.8)(1)
Provision for income taxes (34.3) (11.8)(1)
Preferred stock dividend -- --
========= =========
Net income applicable to
common shareholders (34.9)% (12.1)%(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 32.9%, (21.4%), (21.4%) and
(21.8%), respectively.
9
<PAGE>
REVENUE
Total revenue increased $1.1 million, or 6%, to $19.0 million for the three
months ended June 30, 1998 compared to $17.9 million in the comparable period in
1997. Total revenue increased $4.2 million, or 12%, to $38.1 million for the six
months ended June 30, 1998 compared to $33.9 million in 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 $0.1
million, or 1%, to $10.1 million and increased $2.2 milion, or 12%, to $20.5
million for the three month and six month periods ended June 30, 1998,
respectively, from $10.0 million and $18.3 million for the respective comparable
periods in 1997. The increases were led by lending products, offset in part by
lower retail delivery product revenues. The Company expects declines in Online
branch automation revenues as it decreases its emphasis on the older DOS-based
product and transitions to its Windows-based Encore! branch automation products.
Revenues from the 1997 periods also included results from the Company's
RPxpress! remittance processing division, which was sold in September 1997.
PERCENTAGE OF SOFTWARE LICENSE FEES
Three Months Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
Lending Products 57 % 52 % 62 % 52 %
Retail Delivery Products 40 44 34 44
Connectivity Products 3 4 4 4
--------- --------- --------- ---------
Total 100 100 100 100
LENDING PRODUCTS. Lending products license revenue increased $0.5 million,
or 9%, to $5.7 million for the three months ended June 30, 1998, and increased
$3.3 million, or 35%, to $12.7 million for the six months ended June 30, 1998
over the respective comparable periods in 1997. The increases 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 were offset in part
by decreased revenues from Laser Pro Application Manager and the Company's two
fisCAL products. As a percentage of total license fee revenues, lending products
increased to 57% for the second quarter of 1998 and to 62% year-to-date,
compared to 52% for the same periods 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 $0.4 million, or 9%, to $4.0 million for the three months ended June
30, 1998, and decreased $1.2 million, or 15%, to $6.9 million for the six months
ended June 30, 1998, from the respective comparable periods in 1997. Increased
revenues from Deposit Pro, Encore! Desktop and Encore! Call Center were offset
by decreased revenues from Encore! Branch Automation,
10
<PAGE>
OnLine Branch Automation products and Encore! Personal Branch. As a percentage
of total license revenue, retail delivery products revenue declined to 40% in
the second quarter of 1998 and to 34% for the first six months of 1998 compared
to 44% for both periods in 1997.
Retail delivery products include Encore! Teller, Encore! Platform, Flextran,
OnLine Branch Automation, Deposit Pro, Encore! Desktop, Encore! Call Center,
Encore! Personal Branch and Pro Active CRA.
CONNECTIVITY PRODUCTS. License fees from the sale of connectivity products
were $0.4 million and $0.8 million for the three and six month periods,
respectively, ended June 30, 1998. These revenues were substantially unchanged
from the comparable 1997 periods. As a percentage of Company license fee
revenue, connectivity products accounted for 3% in the second quarter of 1998
and 4% year-to-date, compared to 4% for the same periods 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 $0.6
million, or 9%, to $7.4 million and $1.1 million, or 8%, to $14.5 million for
the three month and six month periods ended June 30, 1998, respectively,
compared to the same periods in 1997.
OTHER REVENUE. Other revenue includes Vendor Payment Systems processing fees,
sales of preprinted forms and supplies and certain consulting revenue. Other
revenue increased $0.4 million, or 41%, to $1.5 million and $0.9 million, or
40%, to $3.1 million for the three month and six month periods ended June 30,
1998, respectively, compared to the same periods in 1997. The increases in other
revenue were led by sales of Laser Pro font cartridges. Other revenue increased
to 8% of total revenue for the three and six month periods of 1998, compared to
6% and 7%, respectively, for the comparable periods 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 $1.2 million, or 19%, to $7.2 million and $2.3
million, or 20%, to $13.9 million for the three and six month perids ended June
30, 1998, respectively, compared to $6.0 million and $11.6 million in the same
periods in 1997. The increases are 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
11
<PAGE>
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 development costs decreased $0.2 million, to $0.5
million, for the second quarter of 1998 and decreased $0.2 million, to $1.1
million, for the first six months of 1998 from $0.7 million and $1.3 million for
the respective comparable periods in 1997. Amortization of software development
costs will increase in future periods as certain product development projects
that had been capitalized in past periods were completed during the second
quarter of 1998. Amortization of the capitalized software costs associated with
those products will commence in the third quarter of 1998.
As a result of CFI's acquisitions, costs resulting from royalty payments 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.
Gross margin was 62% and 63% for the three and six month periods ending June 30,
1998, respectively, compared to 66% in each of the same periods in 1997.
Operating margin declined to 10% for both periods in 1998 compared to 15% and
14%, respectively, in 1997. The decreases in gross margin and in operating
margin were due primarily to lower than expected revenue in the second quarter
and to lower capitalization of software development costs in 1998 as the
Company's current product development cycle ended. The Company capitalized $0.6
million and $1.1 million in software development costs in the three and six
month periods ended June 30, 1998, respectively, compared to $1.5 million and
$3.0 million in the same periods of 1997. Capitalized software development costs
net of accumulated amortization were $9.8 million as of June 30, 1998. Increases
in selling, general and administrative expenses also contributed to the lower
operating margins in the 1998 periods.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses increased to $4.5 million, or
24% of revenue, for the three month period and to $8.9 million, or 23% of
revenue, for the six month period ended June 30, 1998 compared to $3.8 million,
or 21% of revenue, and $7.3 million, or 21% of revenue, in the respective
comparable periods of 1997. The increases in dollar amount 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 17% of revenue, or $3.2 million and $6.3 million, respectively,
for the three month and six month periods ended June 30, 1998, compared to $3.0
million and $5.9 million, or 17% and 18% of revenue, respectively, in the same
periods in 1997. The increases in dollar amount were principally the result of
reduced capitalization of software development costs in the 1998 periods and
increased staffing in the development areas of the Company.
12
<PAGE>
With the completion of the current product development cycle in the quarter
ended June 30, 1998, the Company does not presently anticipate needing to
capitalize additional software development costs. Consequently, the Company
anticipates that the dollar amount of product development expenses in future
periods may be higher than in their respective comparable prior periods when
certain product development expenses were being capitalized.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $2.1
million, or 11% of revenue, for the quarter ended June 30, 1998 and $4.6
million, or 12% of revenue, for the first six months of 1998 compared to 11% of
revenue, or $2.0 million and $3.8 million, respectively, for the same periods in
1997. The increases in dollar amount primarily resulted from an increased
allowance for bad debts associated with increased revenues, higher salaries and
increased personnel.
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 and $0.6 million, respectively, for the three month
and six month periods ended June 30 for both 1998 and 1997.
NON-OPERATING EXPENSE
Non-operating expense decreased $0.4 million in the first six months 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.
Other net non-operating expense, which consists primarily of interest income and
expense, was $0.1 million and $0.2 million for the three month and six month
periods ended June 30, 1998, respectively, compared to $0.1 million and $0.6
million for each of the same periods in 1997.
PROVISION FOR INCOME TAXES
The effective tax rate for the three month and six month periods ended June 30,
1998 and 1997 was 44%.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased $7.1 million to $14.3 million at June 30, 1998 from
$7.2 million at December 31, 1997. The increase resulted primarily from a net
reduction in short-term debt of $5.3 million 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. Enhanced efforts by the Company to increase cash collections
also contributed to the increase in working capital.
13
<PAGE>
Net cash provided by operations was $6.3 million for the six month period ended
June 30, 1998 compared to $3.7 million in 1997. The principal contributors to
cash in the first six months of 1998 were a decline in accounts receivable of
$8.9 milion and net income, excluding depreciation and amortization, of $5.0
million. The major operating uses of funds during the first six months of 1998
included $2.9 million attributable to a decline in accrued expenses due
primarily to the payment of bonus and commission amounts for 1997 and an
additional $4.1 million related to the seasonal decline in deferred revenue that
results from the Company's annual maintenance billing pattern for certain
products.
Net cash used in investing activities was $2.4 million for the six month period
ended June 30, 1998 compared to $4.8 million for the same period in 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 $1.3 million during the six months
ended June 30, 1998 was primarily attributable to net payments of $1.3 million
on the Company's bank line of credit facility. In addition, $0.5 million was
used for payments on acquisition related debt, offset by $0.5 million in cash
provided by issuance of common stock upon exercise of stock options.
Days sales outstanding (DSO) in accounts receivable, including both billed and
unbilled accounts receivable, was 108 days at June 30, 1998 compared to 124 days
at March 31, 1998 and 106 days at December 31, 1997 (excluding the distorting
impact of annual maintenance invoices). The increase in 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 often requires unbilled accounts receivable and
milestone billings, both of which often have longer collection cycles. The
subsequent decrease in DSO during the second quarter primarily resulted from
increased collection activities. Unbilled accounts receivable were $5.2 million,
or 22% of total accounts receivable, at June 30, 1998 and $5.7 million, or 21%
of total accounts receivable, at March 31, 1998 compared to $5.6 million, or 26%
of total accounts receivable, and $4.4 million, or 22% of total accounts
receivable, at the respective comparable dates in 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 June 30, 1998. Long-term debt, less
current portion, of $6.0 million at June 30, 1998 includes $4.0 million drawn on
the line of credit. Interest on the line of credit borrowings was equal to 1.4%
over LIBOR (7.2% at June 30, 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
14
<PAGE>
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 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.
15
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders The annual meeting
of the shareholders of the Company was held on May 15, 1998 at which the
following actions were taken:
1. The shareholders elected two nominees for Class 2 Director to the Board of
Directors of the Company. The two Class 2 Directors elected, along with the
voting results, are as follows:
No. of Shares
No. of No. of Shares Abstaining or
Shares No. of Shares Withheld Broker
Name Voting For Voting Against Voting Non-Votes
- ---- ---------- -------------- ------ ---------
Eran S. Ashany 3,666,207 -- 6,155 --
Robert P. Chamness 3,667,207 -- 5,155 --
2. The shareholders approved the appointment of Arthur Andersen LLP as the
independent accountants of the Company for the year ending December 31, 1998
(3,641,425 shares were voted affirmatively, 25,944 shares were voted
negatively and 4,993 shares abstained from voting).
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
27 Financial Data Schedule for six months ended June 30, 1998
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended June 30, 1998.
16
<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: August 13, 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)
17
<PAGE>
Exhibit Index
27 Financial Data Schedule for six months ended June 30, 1998
18
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-START> Jan-01-1998
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Jun-30-1998
<CASH> 2,623
<SECURITIES> 200
<RECEIVABLES> 25,574
<ALLOWANCES> 2,461
<INVENTORY> 296
<CURRENT-ASSETS> 29,611
<PP&E> 14,032
<DEPRECIATION> 9,011
<TOTAL-ASSETS> 50,580
<CURRENT-LIABILITIES> 15,290
<BONDS> 6,091
742
0
<COMMON> 19,458
<OTHER-SE> 9,005
<TOTAL-LIABILITY-AND-EQUITY> 50,580
<SALES> 2,220
<TOTAL-REVENUES> 38,053
<CGS> 1,120
<TOTAL-COSTS> 13,915
<OTHER-EXPENSES> 20,418
<LOSS-PROVISION> 1,220
<INTEREST-EXPENSE> (219)
<INCOME-PRETAX> 3,526
<INCOME-TAX> 1,551
<INCOME-CONTINUING> 1,927
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,927
<EPS-PRIMARY> 0.39
<EPS-DILUTED> 0.37
</TABLE>
