<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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 or organization) Identification No.)
400 SW SIXTH AVENUE, PORTLAND, OREGON 97204
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 503-274-7280
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, NO PAR VALUE
(Title of Class)
----------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant is $62,518,974 as of February 27, 1998 based upon the last closing
price as reported by the Nasdaq National Market System ($14.00). The number of
shares outstanding of the Registrant's Common Stock as of February 27, 1998 was
5,001,837 shares.
The index to exhibits appears on Page 32 of this document.
----------------
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated into Part III of Form 10-K by reference portions
of its Proxy Statement for its 1998 Annual Meeting to be filed on or about April
7, 1998.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CFI PROSERVICES, INC.
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I
Item 1. Business 2
Item 2. Properties 13
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 15
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 29
Item 8. Financial Statements and Supplementary Data 29
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 29
PART III
Item 10. Directors and Executive Officers of the Registrant 30
Item 11. Executive Compensation 30
Item 12. Security Ownership of Certain Beneficial Owners and 30
Management
Item 13. Certain Relationships and Related Transactions 30
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on 31
Form 8-K
Signatures 37
</TABLE>
1
<PAGE>
PART I
ITEM 1. BUSINESS
OVERVIEW
CFI is a leading provider of customer service software products and services to
financial institutions. The Company combines its technology, banking, and legal
expertise to deliver knowledge-based software solutions that enable institutions
to simplify key business processes such as sales and service, improve
productivity, strengthen customer relationships, and maintain compliance with
both internal business policies and external government regulations. 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. In
1997 approximately 55% of the Company's revenue came from products other than
Laser Pro and Deposit Pro.
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 completion
accounting, deferred payment terms and increased collection times for billed
accounts receivable. These factors, in turn, result in higher days sales
outstanding (DSOs) in accounts receivable.
THE FINANCIAL SERVICES INDUSTRY
The financial services industry is undergoing a period of rapid change
characterized by increased competition. In response to this rapidly changing
and increasingly competitive market, commercial banks are consolidating in order
to achieve operational efficiencies and increased revenues. Financial
institutions are embracing technological solutions that enable them to automate
operations, redirect routine transactions to more cost-effective solutions such
as electronic banking, and develop new service and sales delivery channels.
CONSOLIDATION. Consolidation continues at a rapid pace within the financial
services industry, particularly among larger banks. At the current pace of
consolidation, some banking analysts believe that by the year 2000 there will be
fewer than 100 major U.S. banks. The Company believes that this trend is
leading to an increasingly two-tiered market consisting of larger, multibank
holding companies and smaller community banks. Both types of organizations face
unique challenges.
Large banks that have grown through acquisition often must integrate disparate
host processing systems, which often lack the flexibility needed to easily
utilize and deliver information across different systems. Bank customer service
representatives often are limited
2
<PAGE>
in their ability to access comprehensive customer information on one screen,
which limits their ability to cross-sell products and services. Banks must
also be able to support customer transactions in a number of channels, such
as electronic banking and telephone call centers. Accordingly, large banks
increasingly find it necessary to centralize data from several disparate host
processing systems. Interstate banking presents these institutions with
additional and costly administrative and legal complexities relating to
compliance with complex and changing regulatory requirements across states.
Smaller community institutions face similar operational difficulties. Lacking
the economies of scale of larger banks, smaller institutions find it
increasingly necessary to exploit technological solutions that enable them to
reduce operating costs, generate additional revenues from existing customers and
focus on specific market niches. In addition, compliance with regulatory
requirements can be more burdensome to these smaller institutions given their
resource limitations.
NEW DELIVERY CHANNELS. Banks of all sizes are increasingly recognizing that the
value-added role of branch offices lies not in their traditional capacity as a
transaction processor, but as a new sales channel for financial products and
services. A study by a financial services consulting firm estimates that the
average cost of a call center transaction is 61% of a branch transaction, an ATM
transaction is 36% of a branch transaction, and a home banking transaction is
30% of a branch transaction. In order to make these new delivery channels
attractive and user-friendly, the Company believes that consumers require access
to consolidated information and services that are consistent across all delivery
channels.
CHANGING REGULATIONS. Financial institutions in the United States remain highly
regulated and in recent years have been subjected to heightened scrutiny by
regulatory agencies for compliance and other matters. To understand and remain
in compliance with the numerous complex and changing interstate banking
regulations, a regulated financial institution must invest significant resources
in developing a compliance infrastructure.
Because regulatory requirements are often triggered simply by the interaction
between a financial institution and its customer, institutions are increasingly
subject to compliance issues as they migrate their sales efforts to new forms of
delivery channels, such as telephone and online banking. Increasingly, these
regulations extend beyond simple disclosure or form content requirements, and
financial institutions must also focus on customer data collection and analysis
as well as internal business procedures. This collection and analysis must be
obtained from, and available to, multiple delivery channels. Data collection
and analysis is complicated by the emergence of new channels for interacting
with customers and potential customers.
EVOLVING NETWORK TECHNOLOGY. Personal computer network technology is becoming
increasingly integrated into all facets of the financial services business.
Financial institutions are transitioning from mainframe-based systems to
client/server computing for customer service applications, with continued
reliance on mainframe technology for back-office functions. The growth of the
Internet is expected to have a substantial impact on the banking industry. Not
only are institutions themselves connected through local and wide area networks,
but their customers are increasingly using the Internet to gain access to these
institutions and financial data. The Company believes the rapidly growing
network banking environment is demanding compatible software applications and
connectivity.
3
<PAGE>
THE CFI SOLUTION
The Company relies on a variety of knowledge-based and technical core
competencies. The Company's vertical market focus on the financial services
industry has enabled it to develop specialized knowledge and expertise
pertaining to business processes and regulations affecting the industry. The
Company incorporates this knowledge into its software solutions to automate
lending, retail delivery and connectivity. CFI's products and services are
designed to meet the evolving needs of financial institutions by addressing a
broad range of these banking, technology and regulatory requirements.
CFI's products provide a number of benefits to financial institutions by
addressing regulatory requirements, system connectivity issues and internal
business processes faced by institutions in the increasingly competitive
financial services industry. Using CFI's solutions, these institutions are able
to simplify sales and service processes and improve productivity through reduced
operating costs and expanded capacity. The ability to view an entire customer
account relationship on-screen enables financial institutions to strengthen
relationships with their customers at each point of contact and across multiple
delivery channels. CFI's products also enable institutions to comply with both
internal business processes and external government regulations.
The Company's products provide support and service solutions to both large and
small financial institutions. CFI's products enable larger financial
institutions to utilize data among disparate and often incompatible host
processor platforms. The Company's suite of products also addresses the
preference of larger institutions to work with fewer vendors that provide
comprehensive software solutions. Smaller institutions benefit through
streamlined operations and enhanced cross-selling abilities, while ensuring
cost-effective regulatory compliance.
The Company has also developed substantial technological capabilities necessary
to meet the evolving requirements of financial institutions. The Company has
established substantial knowledge of host processing systems commonly used in
the financial services industry. Through its StarGate connectivity software and
other applications, the Company has developed the capability to retrieve, view
and update data stored on these systems. To date, the Company has established
relationships with numerous service bureaus and turnkey host vendors such as
IBM, GTE Internetworking, FIserv and The BISYS Group, Inc. The Company intends
to establish additional relationships with other leading service bureaus and
turnkey host vendors.
THE CFI STRATEGY
The Company's strategic objective is to be the leading provider of customer
service software solutions to financial institutions at key points of customer
contact. The Company intends to achieve this objective by combining its
expertise in regulatory issues, banking and technology. Primary elements of the
Company's strategy include:
OFFERING A BROAD SUITE OF DELIVERY CHANNEL SOLUTIONS. The Company believes it
is unique in its ability to offer solutions enabling financial institutions to
perform transactions across multiple delivery channels, including branches, call
centers and electronic banking. By providing a broad suite of solutions, the
Company believes it can address the need for consistent
4
<PAGE>
processes across delivery channels for an institution's products (such as
loans and new accounts) and services (such as account inquiries or transfers).
The Company's strategy is to establish long-term relationships with its
customers and cross-sell multiple products throughout its customer base. The
Company believes this ability provides an important market advantage over
competitors who are able to address only a limited number of delivery channels
or provide a limited number of products and services.
ADDRESSING EXPANDING HOME BANKING MARKET. The Company is currently a leading
provider of personal computer banking solutions in the United States, with more
than 200 institutions offering private-dial or Internet banking services using
the Company's solutions. The Company offers its home banking solutions on a
private label basis, running on a server controlled by the financial
institution. This approach permits the financial institution to retain its
proprietary customer relationship and brand name identity. The Company's home
banking solution also supports the financial institution's customers who use
personal finance software such as Microsoft Money. The Company believes it was
the first to support a consumer banking transaction through the Internet and to
connect a home banking solution to Microsoft Money through Microsoft's Open
Financial Connectivity specification. The Company has also created a service
bureau alternative with GTE Internetworking that provides financial institutions
with an inexpensive method of initiating home banking services with their
customers.
EXPANDING CUSTOMER BASE. Over 50% of U.S. commercial banks have licensed at
least one of the Company's solutions. The Company believes its brand name and
reputation as a provider of high-quality solutions are widely recognized in the
financial institution community. The Company intends to expand its customer
base through its direct sales force of more than 50 professionals. CFI seeks to
enter into formal and informal arrangements whereby it makes its solutions
compatible with the software and hardware solutions offered by leading
technology vendors to the financial institutions, enabling those vendors to act
as joint marketers of the Company's solutions. The Company has entered into
such arrangements with more than 60 technology vendors, including IBM. In
particular, the Company will continue its focus on expanding its market share
with large banks through its own major account sales force and through formal
and informal partnerships. The Company has launched an initiative in the credit
union market through a strategic alliance with the CUNA Mutual Insurance Group,
a key marketer and supplier of technology in that market. The Company intends
to increase its marketing and sales efforts to further penetrate the mortgage
banking and thrift markets.
LEVERAGING CUSTOMER RELATIONSHIPS. The Company builds long-term customer
relationships by employing relationship selling techniques and through long-term
service and support agreements. These techniques and such service and support
relationships keep the Company in frequent contact with the customer, enabling
the Company to sell additional products to its customers as they grow,
cross-sell additional products and sell product upgrades. Substantially all of
the Company's customers enter into long-term service and support agreements.
MAINTAINING LEADING KNOWLEDGE-BASED SOFTWARE TECHNOLOGY. The Company believes
its proprietary software and service solutions are competitive strengths.
Therefore, the Company intends to continue to invest in product development in
order to maintain and strengthen its technology position and to improve its
compatibility with other major applications. For
5
<PAGE>
example, the Company has migrated many of its software solutions to the
Windows and Windows NT platforms.
PROVIDING CONNECTIVITY SOLUTIONS. Financial institutions increasingly seek to
integrate technology systems through networks and other connectivity solutions,
so that operations at multiple locations and through multiple distribution
channels can access common customer account and transaction data and processes.
CFI entered the connectivity solutions market through its April 1995 acquisition
of Texas/Southwest Technology Group, Inc. and is increasingly offering
integrated connectivity solutions to its customer base.
GROWING THROUGH STRATEGIC ACQUISITIONS. The Company has acquired 10 businesses
or companies since June 1994. These transactions have enabled the Company to
expand its product suite and customer base, leverage product cross-selling
opportunities and add engineering expertise. The Company intends to continue to
selectively pursue acquisitions of businesses, products or technologies that
enhance its competitive position.
PRODUCTS
LENDING PRODUCTS. CFI's lending products automate processes at nearly every
step in the lending process for consumer, commercial, indirect and real estate
lending lines of business. General business functions automated by CFI lending
solutions include loan application and analysis, loan closing, portfolio
analysis and risk management, as well as connectivity for interfaces to credit
scoring and reporting systems and remote printing of loan documents. In the
fourth quarter of 1996, CFI released a Windows version of its Laser Pro
Application product, and released a Windows version of its Laser Pro Closing
product in the fourth quarter of 1997. The Company is engineering its lending
products to operate with common user interfaces and databases. CFI has also
developed a shrink-wrapped version of its mortgage origination software.
RETAIL DELIVERY PRODUCTS. CFI's retail delivery products automate the customer
service, sales, and account opening functions for the branch office platform,
teller station and telephone call center. These products provide a common view
of the entire customer relationship, enabling service personnel to leverage
selling opportunities. In 1998 CFI plans to introduce a re-engineered call
center product that will integrate more effectively with its branch sales and
service products. The Company has released Deposit Pro for Windows, its account
opening product.
CFI's electronic delivery products provide personal computer private-dial and
Internet access to account inquiry and transaction capabilities, as well as
ACH transaction management and remittance processing. The Company's home
banking products provide over a dozen functions, including account balance,
account history, bill payment and online loan applications. CFI's latest
version of Personal Branch home banking software is a client/server-based
system that allows financial institutions to provide personal computer-based
home banking services via private-dial or the Internet. This version is
designed to improve performance and provide additional functionality and
connectivity capabilities. In 1997 CFI also created a service bureau
alternative with GTE Internetworking that provides financial institutions
with an inexpensive method of initiating home banking services with their
customers.
6
<PAGE>
CONNECTIVITY PRODUCTS. Connectivity products and services enable institutions
to transfer or exchange data between CFI software and host systems and across
incompatible host systems. The Company's software connects back-office systems
to front-end delivery systems, such as the home personal computer, branch office
platform or telephone call center.
REVENUE BY PRODUCT GROUP
<TABLE>
<CAPTION>
Years Ended December 31, 1997 1996 1995
- -------------------------- ----------------------- -------------------------- -------------------------
(Dollars in thousands) Amount Percent Amount Percent Amount Percent
------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Lending Products $ 36,820 50.7 % $ 29,096 48.5 % $ 22,237 60.5 %
Retail Delivery Products 26,970 37.1 22,640 37.8 8,623 23.4
Connectivity Products 3,418 4.7 2,639 4.4 2,349 6.4
Other (1) 5,441 7.5 5,572 9.3 3,567 9.7
------- ------- ---------- ------- ---------- -------
Total Revenue $ 72,649 100.0 % $ 59,947 100.0 % $ 36,776 100.0 %
------- ------- ---------- ------- ---------- -------
------- ------- ---------- ------- ---------- -------
</TABLE>
(1) Other products include bill payment systems processing fees, sales of
preprinted forms and supplies and certain consulting revenues.
PRODUCTS BY PRODUCT GROUP
LENDING PRODUCTS
<TABLE>
<CAPTION>
DATE
INTRODUCED/
PRODUCT ACQUIRED DESCRIPTION BENEFITS TO CUSTOMER
------- -------- ----------- --------------------
<S> <C> <C> <C>
Laser Pro Released Integrated, modular loan processing system for Standardizes lending policies and products,
1986 consumer, commercial, SBA, real estate home equity streamlines processing, incorporates a
and agricultural loans national database of regulations
Application Acquired Processes applications for indirect consumer Speeds the loan application and approval
Manager 1996 lending process for indirect lenders
LP Mortgage Acquired Provides mortgage origination, processing and Improves consistency of loan processes,
1996 servicing capabilities speeds origination, increases capacity
TriScore Acquired Commercial loan scoring and underwriting system Reduces underwriting risks
1996
FisCAL Analyzer Acquired Analyzes commercial loan applicants and evaluates Standardizes and streamlines underwriting
1996 underwriting criteria and performance over time policies and practices
FisCAL Online Released Combines spreadsheet analysis, credit scoring, and Increases the quality of credit decisions,
1996 portfolio management technologies to provide improves the consistency of lending
comprehensive commercial loan underwriting practices, enhances portfolio management,
capabilities for small-to-medium sized lenders and reduces underwriting risk
LoansPlus Acquired Portfolio and credit risk analysis system that uses Balances acceptable credit risk and lending
1996 neural network technology and case-based reasoning opportunities to recommend credit decisions
and manage portfolios
</TABLE>
7
<PAGE>
RETAIL DELIVERY PRODUCTS
<TABLE>
<CAPTION>
DATE
INTRODUCED/
PRODUCT ACQUIRED DESCRIPTION BENEFITS TO CUSTOMER
------- -------- ----------- --------------------
<S> <C> <C> <C>
Encore! Acquired Automates the teller station by providing comprehensive Improves productivity and
Teller 1995 transaction automation, electronic journaling, facilitates sales referrals
store-and-forward capabilities, simplified balancing, and
access to the customer database
Encore! Acquired Provides sales and service capabilities, including account Opens accounts, enables
Platform 1995 opening screens, customer/product matching, customer cross-selling and fulfillment of
contact histories, letter and fulfillment generation, and customer information requests
institution and product information
Encore! Acquired Integrates in a common and consistent format customer, Enables cross-selling and improves
Call Center 1994 product and internal procedure information service
Deposit Pro Acquired Automates and ensures regulatory compliance in the account Speeds account opening, ensures
1990 opening and cross-selling processes for checking, savings, compliance with regulations,
certificates of deposit, and IRA accounts. improves the consistency of new
account policies and practices
Encore! Released Windows-based system that graphically links each user to Allows customized arrangements of
Desktop 1996 CFI software and other business applications modules and access
ProForms Laser Released Generates laser printed forms used daily by financial Eliminates the need for costly
1994 institutions inventories of preprinted forms,
speeds form processing
Personal Released Server-based system that allows institutions to provide Provides low-cost service delivery
Branch 1993 personal computer-based home banking services via channel, strengthens customer
private-dial or Internet channels relationships, extends institution
branding, increases customer
convenience
Pro Active Released Collects, analyzes, reports and maps HDMA loan application Simplifies the process of meeting
1994 information, non-real estate loan data, and community fair lending and community
demographic data reinvestment requirements
ACH Manager Acquired Originates and receives ACH electronic payments and Cost-effective processes ACH
1995 collections business, monitors business for
risk
ACH Remote Acquired System licensed by financial institutions to its corporate Generates new fee income and
1995 customers for transmitting data files from the customer simplifies automated procedures
personal computer to the financial institution's ACH system
</TABLE>
8
<PAGE>
CONNECTIVITY PRODUCTS
<TABLE>
<CAPTION>
DATE
INTRODUCED/
PRODUCT ACQUIRED DESCRIPTION BENEFITS TO CUSTOMER
------- -------- ----------- --------------------
<S> <C> <C> <C>
StarGate Acquired Connectivity software system which transfers or exchanges Allows institutions to integrate
1995 data between CFI products and other host or client/server data from multiple host systems and
systems present that data through networks
to multiple front-end systems
StarGate F/X Acquired Connectivity software which enables institutions to print Reduces costs, increases
1995 Laser Pro documents remotely through their mainframe transaction speed and productivity;
networks enables institutions to centralize
loan document preparation
</TABLE>
PRODUCT DEVELOPMENT AND NEW PRODUCTS
The Company's products enable institutions to increase sales capabilities,
improve productivity, and remain in compliance with internal policies and
government regulations. CFI ensures that its products meet customer requirements
by conducting primary research and holding product user and focus group
meetings. The Company also incorporates knowledge learned during the sales and
installation process into development of new and enhanced products. CFI
continues to invest significantly in its product development efforts. The
Company intends to increase the ability of its products to operate in networked
environments throughout the entire banking enterprise. Its integration strategy
addresses the movement in the industry toward common user interfaces and
databases driving consistent information to all points of customer contact. In
addition to offering products that operate in the growing network-centric
banking environment, CFI will continue developing the Internet capabilities of
its product suite where appropriate.
The Company believes that market acceptance of its products is based in
significant part on the ability of the products to share information with a
financial institution's host processor system or with the vendor providing
processing services to such institution. The Company has developed significant
expertise with most available host processor systems and the methods necessary
to transfer data to and from such systems. Although the Company generally is
able to develop interfaces that allow its products to operate effectively with
its customers' host systems, integration is optimized where the Company and the
host processor provider cooperatively share information regarding the respective
products' technologies, development schedules and enhancements. There can be no
assurance that the Company will be able to establish and maintain adequate
relationships with important host processor providers in the future.
The Company has migrated its Laser Pro lending products to Windows and Windows
NT operating environments. In the fourth quarter of 1996, CFI released a Windows
version of its Laser Pro Application product, and released a Windows version of
Laser Pro Closing in the fourth quarter of 1997. Many of its other lending
products and most of its retail delivery and connectivity products already run
on the Windows platform. The Company supports both DOS and Windows-based
versions of several products, enabling its customers to upgrade easily and at a
reasonable pace.
9
<PAGE>
SERVICE AND SUPPORT
The Company licenses substantially all its products with mandatory annual
maintenance agreements under which CFI provides periodic product updates
reflecting evolving regulations, product enhancements and toll-free telephone
support. Annual support fees consist of per-item or per-user charges or are
calculated based on a percentage of the current product list price.
Furthermore, CFI provides training to its customers. The Company accounts for
this revenue as service and support fees. Software service and support fees have
grown significantly over the last three years. For the year ended December 31,
1997, such fees represented 38% of the Company's total revenue.
The Company installs, implements and customizes its software solutions at
certain customer sites, particularly at larger institutions. As the Company's
sales to larger institutions increase, the Company anticipates demand for these
services to increase. Revenue from these services is accounted for as software
license fees.
CUSTOMERS
CFI has licensed its software to over 5,500 financial institutions in the United
States. In addition, the Company's acquisitions have opened limited
opportunities in non-financial service industries and have added a small number
of international institutions to CFI's customer base. CFI's target customer base
includes commercial banks, thrifts and credit unions. No customer accounted for
10% or more of the Company's total revenues in 1995, 1996 or 1997.
The Company's largest accounts include the following: NationsBank, The BISYS
Group Inc., Magna Group, Inc, NCR Corporation, Commerce Bancorp, Union Planters
Bank, Marquette Bank, Amsouth Bank, Sumitomo Bank of California and Bank United.
SALES AND MARKETING
CFI sells its products through two experienced, national direct field sales
teams; one team is devoted exclusively to large financial institutions, and the
other team focuses on all other accounts. Both teams are supported by a
marketing group, product specialists and a telemarketing team. Telemarketing
personnel contact institutions for lead generation and qualification, and sales
support personnel are responsible for direct sales campaigns, trade media
support and advertisements. Sales of the Company's products, particularly to
large institutions, generally require a lengthy sales and implementation
process.
The Company has a number of third-party reseller and co-marketing alliances,
including agreements with some of the largest host processors and hardware
vendors. For example, the Company has relationships with IBM whose sales team
resells a large portion of the Company's product line. These third-party
reseller and co-marketing alliances provide access to institutions with which
the Company would otherwise have no relationship.
10
<PAGE>
LEGAL NETWORK
The Company maintains a network of independent legal counsel in all 50 states
and the District of Columbia. This network, as well as the Company's internal
legal staff, keeps the Company informed of changes in state and federal laws,
changes in state and local documentation requirements, pending legislation and
court actions affecting financial institution practices, as well as other
information required to maintain regulatory compliance. The Company's
management believes that the quality of this information, the Company's ability
to effectively manage the continuous information flow provided by the network
participants, and the capability of the Company to integrate this information
into its software products provide the Company with a significant competitive
advantage.
The Company utilizes legal counsel in all jurisdictions, other than Louisiana,
under agreements that are terminable at will by either party and that provide
for compensation based on an hourly rate. The Company has entered into a
long-term legal services agreement with a Louisiana law firm pursuant to which
it pays legal fees based upon sales of the Company's products in Louisiana.
ACQUISITIONS
To remain competitive and to meet the changing needs of its customers, CFI
pursues acquisitions of products, technologies and businesses as one part of its
growth strategy. The Company continuously evaluates acquisition candidates that
provide opportunities to expand its customer base, cross-sell products, and
broaden its product offerings with proven solutions in a timely and
cost-effective manner. Since 1994 the Company has made 10 acquisitions and
believes that to date it has achieved its objectives of growth and broadening
its product offerings through this acquisition program and intends to continue
such activity in the future. However, the Company currently has no
understandings, commitments or agreements with respect to any material
acquisition of other businesses, products or technologies. Acquisitions of
businesses or companies require the dedication of management resources in order
to achieve the strategic objectives of the acquisitions.
COMPETITION
The market for the Company's products is intensely competitive and rapidly
changing. A number of companies offer competitive products addressing
certain of the Company's target markets. With respect to the Company's
lending products, the principal competitors include Bankers Systems, Inc.,
FormAtion Technologies Inc., Interlinq Software Corporation, Fair, Isaac &
Company, Inc., 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 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
11
<PAGE>
competitors have significantly greater financial, technical, sales and marketing
resources than the Company. The Company believes that the primary competitive
factors in this market include product quality, reliability, performance, price,
vendor and product reputation, financial stability, features and functions, ease
of use and quality of support. There can be no assurance that competitors will
not develop products that are superior to the Company's products or that achieve
greater market acceptance. Further, because of the rapidly evolving nature of
the industry, many of the Company's collaborative partners are current or
potential competitors. In addition, a number of current or potential
competitors have established or may establish cooperative relationships among
themselves and with third parties that may present additional competition with
products offered by the Company. The Company's competitors may also be able to
undertake more extensive marketing campaigns, adopt more aggressive pricing
policies, utilize more extensive distribution channels and bundle competing
products.
The Company's future success will depend significantly upon its ability to
increase its share of the large bank market and to license additional products
and product enhancements to existing customers. As the Company develops new
products or enters new markets, it expects to encounter additional competitors,
some of which may have significantly greater financial, technical, sales and
marketing resources than the Company. There can be no assurance that the
Company will be able to compete successfully in the future, or that competition
will not have a material adverse effect on the Company.
INTELLECTUAL PROPERTY
The Company's success and ability to compete are dependent in part upon its
proprietary technology, including its software. The Company relies primarily on
a combination of copyright, trade secret and trademark laws, confidentiality
procedures and contractual provisions to protect its proprietary rights. The
Company also believes that factors such as know-how concerning the financial
services industry and the kinds of software products that the Company licenses
as well as the technological and creative skills of its personnel, new product
developments, frequent product enhancements, name recognition and reliable
product service are essential to establishing and maintaining a technology
leadership position. The Company may from time to time seek patent protection
for innovations related to certain of its software products, but has not
generally sought patent protections for its software. There has been an
increase in the number of patents related to software that have been issued or
applied for in the United States and, accordingly, the risk of patent
infringement for software companies can be expected to increase. There can be
no assurance that others will not develop technologies that are similar or
superior to the Company's technology. The Company has, with a small number of
customers, provided limited access and restricted rights to the source code of
certain products. Despite the Company's efforts to protect its proprietary
rights, other parties may attempt to reverse engineer, copy or otherwise engage
in unauthorized use of the Company's proprietary information. There can be no
assurance that the Company's means of protecting its proprietary rights will be
adequate.
Certain technology or proprietary information incorporated in the Company's
products is licensed from third parties, generally on a non-exclusive basis.
The termination of any such licenses, or the failure of the third-party
licensors to adequately maintain or update their products, could result in delay
in the Company's ability to ship certain of its products while it seeks to
implement technology offered by alternative sources, and any required
replacement licenses could prove costly. In addition, the integration of the
Company's products with
12
<PAGE>
financial institutions' host systems is optimized if the Company has access
to the host system technology. The parties controlling the host processor
technologies may also be current or future competitors of the Company and as
such may restrict access to such technologies. In some instances, the
Company has not been able to obtain sufficient access to host system
technology necessary for developing optimal system interfaces. While it may
be necessary or desirable in the future to obtain rights to third party
technology, there can be no assurance that the Company will be able to do so
on commercially reasonable terms, or at all.
In the future, the Company may receive notices claiming that it is infringing
the proprietary rights of third parties, and there can be no assurance that the
Company will not become the subject of infringement claims or legal proceedings
by third parties. The Company expects that software product developers will
increasingly be subject to infringement claims as the number of products and
competition in the Company's industry grows and the functionality and scope of
products overlap. Furthermore, there can be no assurance that employees or third
parties have not improperly disclosed confidential or proprietary information to
the Company. Any such claims, with or without merit, could be time consuming
and expensive to defend, divert management's attention and resources, cause
product shipment delays or require the Company to pay money damages or enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company, or at all.
In the event of a successful claim of product infringement against the Company
and failure of the Company or its licensors to license the infringing or similar
technology on reasonable terms, the Company's business, operating results and
financial condition could be adversely affected. In addition, the Company may
initiate claims against third parties for infringement of the Company's
proprietary rights or to establish the validity of the Company's proprietary
rights. Any such claim could be time consuming, result in costly litigation,
and have a material adverse effect on the Company's business, operating results
and financial condition.
EMPLOYEES
As of December 31, 1997, the Company had 530 full-time employees. Of this
number, 174 were engaged in product groups (primarily product development), 114
in customer service and support, 75 in sales and marketing, 99 in implementation
and training, and 68 in general and administrative functions.
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in Portland, Oregon in a leased
facility consisting of approximately 72,000 square feet of office space occupied
under leases that expire in 2003. Annual lease payments for the Company's
current corporate headquarters are approximately $1.2 million, with provisions
for inflationary increases. The Company also leases office space in Dayton,
Ohio (15,151 square feet), in Huntington, New York (2,873 square feet), in
Denver, Colorado (3,357 square feet), in Houston, Texas (4,380 square feet), in
Atlanta, Georgia (52,678 square feet), in New Jersey (6,148 square feet) and in
Charleston, South Carolina (2,500 square feet). These leases expire in 2006,
1999, 1999, 1998, 2000, 2002, and 1999, respectively. Annual lease payments for
these additional facilities, in aggregate, are approximately $1.4 million. The
Company believes the office space currently under lease is adequate to meet its
needs for the next year.
13
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are from time to time involved in routine legal
matters incidental to their respective businesses. In the opinion of the
Company, the resolution of any such matters that are currently outstanding will
not have a material effect on its financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders during the
quarter ended December 31, 1997.
14
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on The Nasdaq National Market System under the
symbol PROI. The high and low selling prices for the two years in the period
ended December 31, 1997 were as follows:
<TABLE>
<CAPTION>
1996 High Low
--------------------- ----- -----
<S> <C> <C>
Quarter 1 $ 15.75 $ 9.25
Quarter 2 28.25 15.13
Quarter 3 25.63 15.25
Quarter 4 20.00 13.50
1997 High Low
--------------------- ----- -----
Quarter 1 $ 20.88 $ 14.00
Quarter 2 20.25 14.25
Quarter 3 18.75 13.50
Quarter 4 16.50 10.00
</TABLE>
The number of shareholders of record and the approximate number of beneficial
holders of the Company's Common Stock on February 27, 1998 were 282 and 3,000,
respectively.
There were no cash dividends declared or paid on the Company's Common Stock in
1997 or 1996. The Company does not anticipate declaring cash dividends on its
Common Stock in the foreseeable future.
15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
IN THOUSANDS:
EXCEPT PER SHARE AMOUNTS 1997 1996(1) 1995(2) 1994 1993
- -------------------------------------- -------------- ---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME DATA
Revenue:
Software license fees $ 40,475 $ 33,935 $ 18,918 $ 16,781 $ 14,686
Service and support fees 27,466 22,336 15,060 12,775 9,748
Other revenue 4,708 3,676 2,798 3,060 2,720
-------------- ---------------- ---------------- ---------------- ---------------
Total revenue 72,649 59,947 36,776 32,616 27,154
Cost of revenue 27,041 20,844 11,672 9,646 8,047
-------------- ---------------- ---------------- ---------------- ---------------
Gross profit 45,608 39,103 25,104 22,970 19,107
Operating expenses 36,780 29,810 20,552 17,859 15,670
Acquired in-process research and
development and restructuring -- 8,030 4,549 -- --
-------------- ---------------- ---------------- ---------------- ---------------
Income from operations $ 8,828 $ 1,263 $ 3 $ 5,111 $ 3,437
-------------- ---------------- ---------------- ---------------- ---------------
-------------- ---------------- ---------------- ---------------- ---------------
Net income $ 4,680 $ 114 $ 323 $ 3,514 $ 2,264
Preferred Stock dividend 95 97 97 97 733
-------------- ---------------- ---------------- ---------------- ---------------
Net income applicable to common
shareholders $ 4,585 $ 17 $ 226 $ 3,417 $ 1,531
-------------- ---------------- ---------------- ---------------- ---------------
-------------- ---------------- ---------------- ---------------- ---------------
Diluted net income per share(3) $ 0.90 $ -- $ 0.05 $ 0.71 $ 0.41
-------------- ---------------- ---------------- ---------------- ---------------
-------------- ---------------- ---------------- ---------------- ---------------
Shares used in diluted per share
calculations 5,124 5,112 4,877 4,806 3,775
Basic net income per share(3) $ 0.93 $ -- $ 0.05 $ 0.87 $ 0.51
-------------- ---------------- ---------------- ---------------- ---------------
-------------- ---------------- ---------------- ---------------- ---------------
Shares used in basic per share
calculations 4,919 4,763 4,369 3,922 2,983
CONSOLIDATED BALANCE SHEET DATA
Cash and short-term investments $ 20 $ -- $ 7,670 $ 7,958 $ 10,509
Working capital 7,187 2,792 8,759 10,336 10,583
Property and equipment, net 5,211 4,805 2,968 2,579 1,516
Total assets 57,542 46,845 36,587 27,487 23,165
Short-term debt 5,605 2,896 3,951 -- 120
Long-term debt, less current portion 2,232 2,880 423 -- 17
Mandatory Redeemable Class A Preferred
Stock 746 754 761 764 757
Shareholders' equity $ 25,943 $ 20,238 $ 18,169 $ 16,591 $ 13,071
</TABLE>
(1) Results for the year ended December 31, 1996 include a pretax charge of
$8.0 million for the value of in-process research and development efforts
at the date of acquisition pertaining to five companies acquired in April
1996. Excluding the impact of the acquired in-process research and
development charges, net income and net income per share (diluted) would
have been $5.2 million and $1.02, respectively. The results of operations
for the year ended December 31, 1996 include the results of these
companies' operations since the date of acquisition in April 1996. See
Note 2 of Notes to Consolidated Financial Statements.
(2) Results for the year ended December 31, 1995 include a pretax charge of
$4.5 million. The charge consists of $3.7 million for the value of
Culverin Corporation's (Culverin) in-process research and development
efforts at the date of acquisition and $0.8 million for restructuring.
Excluding the impact of the acquired in-process research and development
and restructuring charges, net income and net income per share (diluted)
would have been $3.1 million and $0.64, respectively. The year ended
December 31, 1995 statement of income includes the results of Culverin's
operations since the date of acquisition in November 1995. See Note 2 of
Notes to Consolidated Financial Statements.
(3) Earnings per share have been restated to conform with Statement of
Financial Accounting Standards No. 128, EARNINGS PER SHARE, for all periods
presented.
16
<PAGE>
ITEM 7. 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 REPORT.
THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HERE.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE
DISCUSSED ELSEWHERE IN THIS REPORT, AS WELL AS IN THE COMPANY'S OTHER FILINGS
WITH THE SECURITIES AND EXCHANGE COMMISSION.
OVERVIEW
CFI is a leading provider of customer service software products and services to
financial institutions. The Company combines its technology, banking and legal
expertise to deliver knowledge-based software solutions that enable institutions
to simplify key business processes such as sales and service, improve
productivity, strengthen customer relationships, and maintain compliance with
both internal business policies and external government regulations. 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. In 1997
approximately 55% of the Company's revenue came from products other than Laser
Pro and Deposit Pro.
CFI generates recurring revenue from software maintenance agreements. In 1997
service and support fees, primarily for Laser Pro and Deposit Pro, accounted for
approximately 38% of total revenue. Substantially all CFI software customers
subscribe to the Company's service and support programs, which provide ongoing
product enhancements and, where applicable, updates to facilitate compliance
with changing regulations.
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 significantly greater profit margins
from incremental sales once fixed costs are covered. In addition, any failure
to achieve revenue targets in a particular period would adversely affect 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 completion
accounting, deferred payment terms and increased collection times for billed
accounts receivable. These factors, in turn, result in higher days sales
outstanding (DSOs) in accounts receivable.
The Company's backlog as of December 31, 1997 was $15.2 million, compared to
$10.0 million and $6.1 million at December 31, 1996 and 1995, respectively.
CFI's backlog consists of firm signed
17
<PAGE>
orders taken and not yet converted to revenue, but expected to convert to
revenue within the next 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.
ACQUISITIONS AND NEW BUSINESS VENTURES
The Company has expanded its market presence by acquiring products, technologies
and companies that complement the Company's product suite or increase its market
share. The Company has completed the following 10 acquisitions since June 1994.
See Note 2 of Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
COMPANY DATE ACQUIRED PRINCIPAL PRODUCTS/MARKETS ACQUIRED
------- ------------- -----------------------------------
<S> <C> <C>
Assets of the Products June 1994 Access to customers in certain
Division of Midwestern states for the Company's
Professional Bank compliance products
Systems, Inc.
The Genesys Solutions September 1994 Call center software
Group, Inc.
Texas/Southwest April 1995 StarGate connectivity products and
Technology Group, Inc. ACH products
Culverin Corporation November 1995 Encore! Platform and Encore! Teller
branch automation products
OnLine Financial April 1996 Over 1,000 branch automation
Communications customers employing DOS-based
Systems, Inc. technology
COIN Banking April 1996 Application Manager indirect lending
Systems, Inc. product
Assets of Input April 1996 Laser Pro Mortgage lending product
Creations, Inc.
Assets of Halcyon April 1996 fisCAL loan decision support product
Group, Inc. and TriScore
Assets of Pathways April 1996 LoansPlus neural net loan decision
Software, Inc. support and portfolio management
product
Vendor Payment April 1996 Bill payment services company
Systems, Inc.
</TABLE>
There can be no assurance that any of these or future acquisitions will have a
favorable impact on the performance of the Company. The Company believes that it
has achieved its objectives of growth and broadening its product offerings and
customer base through this acquisition program and intends to continue to pursue
acquisitions. However, the Company currently has no understandings, commitments
or agreements with respect to any material acquisition of other businesses,
products or technologies.
18
<PAGE>
The aggregate purchase price for the foregoing acquisitions was $20.2 million
and 380,967 shares of Common Stock, plus contingent royalties. In connection
with such acquisitions, the Company incurred non-cash charges primarily relating
to the write-off of acquired in-process research and development efforts
totaling $4.5 million in November 1995 and $8.0 million in April 1996. The terms
of certain of the acquisitions provide that, based on various factors, including
the passage of time, certain product revenue or product development, the Company
will be required to pay contingent royalties, some of which obligations the
Company may satisfy through the issuance of shares of its Common Stock. Because
amortization of certain intangible assets arising from the Company's acquisition
activity is not deductible for federal income tax purposes, certain amortization
expense incurred by the Company has the effect of increasing the Company's
effective tax rate for financial reporting purposes.
From time to time, the Company may also evaluate establishing new business
operations or making investments in new business ventures, including joint
ventures.
In March 1997 CFI announced the creation of Lori Mae, L.L.C. (Lori Mae), a
company that will securitize small business loans originated by community banks.
The Company expects to invest up to $1.5 million for a 50% ownership in the
venture. The Company will use the equity method to account for this investment.
Lori Mae leverages the strength of the Company's Laser Pro Closing and Laser Pro
fisCAL Online products, which provide the standardized loan documentation and
decision criteria required for financial institutions participating in this
securitization opportunity. The Company believes that this venture will not
only contribute commissions from the securitization transactions but, by giving
CFI's lending suite of products another competitive edge, will serve to further
strengthen and expand the Company's leadership in the market for lending
products. Lori Mae did not materially affect the Company's financial results in
1997 and is not expected to materially affect the Company's financial results in
1998.
19
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth statements of income data of the Company
expressed as a percentage of total revenue for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Revenue
Software license fees 55.7 % 56.6 % 51.4 %
Service and support 37.8 37.3 41.0
Other 6.5 6.1 7.6
------ ------ ------
Total revenue 100.0 100.0 100.0
Gross profit 62.8 65.2 68.3
Operating expenses
Sales and marketing 21.6 21.2 26.0
Product development 15.9 17.7 17.3
General and administrative 11.4 9.1 11.7
Amortization of intangibles 1.7 1.7 0.9
Acquired in-process research and
development and restructuring -- 13.4 12.4
------ ------ ------
Total operating expenses 50.6 63.1 68.3
------ ------ ------
Income from operations 12.2 2.1 (1) -- (1)
Non-operating income (expense) (0.4) -- 1.4
------ ------ ------
Income before income taxes 11.8 2.1 1.4
Provision for income taxes 5.4 1.9 0.5
Preferred stock dividend 0.1 0.2 0.3
------ ------ ------
Net income applicable to common
shareholders 6.3 % -- %(1) 0.6 %(1)
------ ------ ------
</TABLE>
(1) Excluding the impact of the acquired in-process research and development
and restructuring charges, income from operations as a percentage of
revenue in 1996 and 1995 would have been 15.5% and 12.4%, respectively,
and net income applicable to common shareholders in 1996 and 1995 would
have been 8.5% and 8.2%, respectively.
20
<PAGE>
The following table sets forth percentage changes period over period in the
statements of income data of the Company:
<TABLE>
<CAPTION>
1997 1996
Over 1996 Over 1995
--------- ---------
<S> <C> <C>
Revenue
Software license fees 19 % 79 %
Service and support 23 48
Other 28 31
------ ------
Total revenue 21 63
Gross profit 17 56
Operating expenses
Sales and marketing 23 33
Product development 9 67
General and administrative 52 26
------ ------
Total operating expenses (3) (1) 51 (1)
------ ------
Income from operations 599 (1) NM (1)(2)
Non-operating income (expense) (1,439) (96)
------ ------
Income before income taxes 570 162
Provision for income taxes 235 599
------ ------
Net income applicable to common shareholders NM %(1)(2) (93) %(1)
------ ------
</TABLE>
(1) Excluding the impact of the acquired in-process research and development
and restructuring charges, income from operations would have decreased 5%
in 1997 from 1996 and would have increased 104% in 1996 over 1995, and net
income applicable to common shareholders would have decreased 10% in 1997
from 1996 and would have increased 70% in 1996 over 1995.
(2) Not meaningful.
REVENUE
Total revenue increased $12.7 million, or 21%, to $72.6 million in 1997 compared
to $59.9 million in 1996. Total revenue increased $23.1 million, or 63%, in
1996 from $36.8 million in 1995. Revenue attributable to the companies acquired
in April 1996 accounted for $12.5 million of the 1996 increase, and the Culverin
Corporation (Culverin) products acquired in November 1995 accounted for an
additional $5.8 million of the 1996 increase.
SOFTWARE LICENSE FEES. Software license fees include sales of software to
customers, fees for software customization and fees related to implementing
software and systems at customer sites. Software license fees increased $6.6
million, or 19%, to $40.5 million in 1997 compared to $33.9 million in 1996.
The increase was led by lending products and Encore! branch automation products,
and was offset in part by declines in home banking and call center product
revenues. Software license fees increased $15.0 million, or 79%, in 1996 from
$18.9 million in 1995. Of the increase in 1996, $7.0 million was contributed by
the companies
21
<PAGE>
acquired in April 1996, $5.1 million was attributable to the Culverin
products acquired in November 1995 and $1.8 million was from internal growth,
principally from Deposit Pro and Personal Branch. Of the $7.0 million
increased revenue in 1996 attributable to the April 1996 acquisitions, sales
of the COIN Banking Systems, Inc. (COIN) indirect lending and OnLine
Financial Communications Systems, Inc. (OnLine) branch automation products
acquired from MicroBilt Corporation accounted for $5.1 million. The Company
expects sales of the OnLine products to decrease in future periods because
the Company is not actively selling the OnLine DOS-based branch automation
products.
Percentage of Software License Fees
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Lending Products 55 % 45 % 60 %
Retail Delivery Products 42 50 33
Connectivity Products 3 5 7
--------- --------- ---------
Total 100 % 100 % 100 %
--------- --------- ---------
--------- --------- ---------
</TABLE>
LENDING PRODUCTS. Lending products license revenue increased $6.8 million,
or 44%, in 1997 compared to 1996. The increase resulted primarily from sales of
Laser Pro Closing (particularly of the Company's new Windows-based product to
large banks), Laser Pro Mortgage and Laser Pro Application Manager. Lending
products license revenue increased $4.1 million, or 34%, in 1996 compared to
1995. Substantially all of the increase in 1996 came from sales of Laser Pro
Application Manager, Laser Pro fisCAL Analyzer and Laser Pro Mortgage (formerly
named LOANscape), all products from April 1996 acquisitions. As a percentage of
total license revenue, Laser Pro products declined from 55% in 1995 to 36% in
1997, reflecting the Company's efforts to broaden its product offerings.
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 $0.2 million, or 1.2%, to $16.9 million in 1997 compared with $17.1
million in 1996. Increased sales of Encore! Teller and Encore! Platform
products were offset by declines in sales of OnLine branch automation products,
Encore! Personal Branch, Deposit Pro, Encore! Call Center and Pro Active CRA.
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. Encore! Personal Branch sales were
adversely affected in 1997 as the Company transitioned the product from a UNIX
to a Windows NT environment. The decrease in Deposit Pro sales reflects the
one-time spike in demand when the Windows version of the product was released in
mid-1996. Encore! Call Center sales were adversely affected in 1997 when the
product was substantially rewritten, and from the lack of an installed reference
site. The decrease in retail delivery product license revenue in 1997 was also
caused by the sale of the Company's RPxpress! remittance processing division in
September 1997.
22
<PAGE>
Retail delivery product license revenue increased $10.9 million, or 176%, to
$17.1 million in 1996 compared to $6.2 million in 1995. Sales of the Encore!
products acquired in November 1995 and the OnLine branch automation products
acquired in April 1996 accounted for $8.2 million of the increase. Increased
Deposit Pro sales, attributable to the release of the Windows version of that
product, accounted for $0.6 million of the increase. Encore! Personal Branch
home banking products accounted for $1.2 million of the increase, and the
remainder of the increase resulted primarily from sales of the Culverin
remittance processing products.
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. Connectivity products license revenue was
approximately $1.4 million in each of 1997, 1996 and 1995. Revenues for these
products are tied closely to the Company's sales of its various products to
larger institutions and through third party host software providers.
Connectivity products include StarGate middleware, Laser Pro interfaces and
Deposit Pro interfaces.
Laser Pro and Deposit Pro interfaces were formerly reported as lending products
and operations products, respectively. They are now reported as connectivity
products. Encore! Personal Branch was formerly reported as an electronic
delivery product and is now reported as a retail delivery product. Encore!
Desktop, Pro Active CRA and ACH were formerly reported as marketing products
and are now reported as retail delivery products. The information in this
report has been restated for all periods to reflect these changes.
No significant price changes for software products occurred during the periods
presented.
SERVICE AND SUPPORT FEES. Service and support fees consist primarily of
recurring software support charges and revenue from training customers in the
use of the Company's products. Substantially all of the Company's software
customers subscribe to its support services, which require the payment of annual
or quarterly maintenance fees. Service and support fees increased $5.1 million,
or 23%, to $27.5 million in 1997 compared to $22.4 million in 1996. Service and
support fees increased $7.3 million, or 48%, in 1996 from $15.1 million in 1995.
These increases resulted primarily from increases in the installed base of the
Company's products, and in part by the Company's acquisition of new products.
No significant changes in service and support pricing occurred during the
periods presented.
OTHER REVENUE. Other revenue includes Vendor Payment Systems (VPS) processing
fees, sales of preprinted forms and supplies and certain consulting revenue.
Other revenue increased $1.0 million, or 28%, in 1997 compared to 1996. Other
revenue increased $0.9 million, or 31%, from 1995 to 1996. The acquisition of
VPS in April 1996 was the primary cause for the increase in dollars in 1997 and
1996.
COST OF REVENUE
Cost of revenue primarily consists of amortization of internally developed and
purchased software, royalty payments, compliance warranty insurance premiums,
software production costs, costs of product support, training and
implementation, costs of software customization, materials costs for forms and
supplies, and bill payment processing costs.
23
<PAGE>
Cost of revenue increased $6.2 million, or 30%, to $27.0 million for 1997
compared to $20.8 million in 1996. Of this increase, $2.6 million resulted from
additional amortization of software development costs. The remainder of the
increase is primarily attributable to higher implementation costs associated
with the growing number of large financial institution projects, additional
personnel required to support the increased installed base of customers and
increased royalties and materials costs associated with increased revenues. As
the breadth of the Company's product line has expanded, the complexity and cost
of providing high quality customer service and support has increased both in
absolute dollars and as a percentage of revenue.
Cost of revenue increased $9.2 million, or 79%, to $20.8 million in 1996
compared to $11.6 million in 1995. Of this increase, $1.9 million resulted from
the November 1995 acquisition of Culverin, $5.6 million resulted from the
companies acquired in April 1996, and the remainder is attributable to higher
implementation costs on projects, additional support personnel and increased
software amortization.
Software amortization was $4.5 million in 1997, $1.9 million in 1996 and $1.4
million in 1995. During 1997 and 1996 several software development projects
reached commercial feasibility. As a result, the Company began to amortize
certain product development costs which had been capitalized in prior periods.
In addition, the Company recorded amortization as a result of software acquired
in connection with the 1996 acquisitions. The increase in amortization costs in
1997 also resulted from accelerated amortization for certain products being
replaced by new products or which management concluded were no longer
technologically viable.
As a result of recent acquisitions, costs associated with 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.
The Company's gross margin declined to 63% in 1997 from 65% in 1996 and from 68%
in 1995. These declines are primarily attributable to three factors: increased
software amortization, a shift in product mix to more projects and increased
royalty expenses for products acquired through acquisitions. The Company
expects all three factors to continue in future periods, which may continue to
adversely affect gross margin.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses increased to $15.7 million,
or 22% of revenue, in 1997 compared to $12.7 million, or 21% of revenue, in
1996. Sales and marketing expenses were $9.6 million, or 26% of revenue, in
1995. The increase in dollar amount in 1997 compared to 1996 resulted
principally from increased commissions associated with increased revenues,
salary increases, additional personnel and higher advertising costs.
A total of $1.4 million of the increase in sales and marketing expenses in 1996
compared to 1995 was attributable to the companies acquired in April 1996, and
an additional $0.4 million of the increase was attributable to the November 1995
acquisition of Culverin. None of these
24
<PAGE>
acquired organizations had significant sales and marketing operations prior
to CFI's acquisition. The remainder of the increase resulted from increased
commissions on higher sales volumes, continued growth in the major accounts
sales force and a more than twofold increase in the size of the Personal
Branch sales force. The decrease in expenses as a percentage of revenue in
1996 from 1995 is primarily a result of revenue from acquired companies and
new products sold through the Company's existing national direct sales and
telemarketing operations.
PRODUCT DEVELOPMENT. Product development expenses include costs of enhancing
existing products and developing new products. Product development expenses were
$11.5 million, or 16% of revenue, in 1997, $10.6 million, or 18% of revenue, in
1996 and $6.4 million, or 17% of revenue, in 1995. Increases in dollar amount of
product development expenses were largely the result of increased staffing in
the development areas of the Company, and additional costs for integrating
acquired products, migrating the Company's DOS-based products to Windows-based
products and accelerating development of the Company's home banking products
from UNIX to the Windows NT operating environment. The companies acquired in
April 1996 accounted for $1.7 million of the increase for 1996 compared to 1995,
and the Culverin acquisition in November 1995 accounted for an additional $2.2
million of such increase.
Product development expenses in each of 1997, 1996 and 1995 were offset in part
by capitalization of software development efforts. The company capitalized $5.0
million of software development costs in 1997, $5.2 million in 1996 and $2.7
million in 1995. Capitalized software development costs, net of accumulated
amortization, were $9.9 million as of December 31, 1997 compared to $8.3 million
as of December 31, 1996. The Company expects that the development cycle for its
compliance-related products, which typically have relatively long lives, should
be completed after the second quarter of 1998 and, accordingly, there should be
a significant reduction in the capitalization of software development costs in
future periods. The Company anticipates that its current capitalized software
development costs will be fully amortized over the next five years.
The Company will continue to commit significant resources to product development
efforts. 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 $8.3
million, or 11% of revenue in 1997, $5.4 million, or 9% of revenue, in 1996 and
$4.3 million, or 12% of revenue, in 1995. The increase in dollar amount in 1997
is due principally to additional systems and infrastructure costs necessary to
accommodate revenue growth, and to increased bad debt expense. Consolidation
of the general and administrative functions of the companies acquired in April
1996 was the principal reason for the decrease of these expenses as a percentage
of revenue in 1996. The Company merged the following wholly-owned subsidiaries
into the Company effective December 31, 1997 in order to reduce further its
administrative expenses: Texas/Southwest Technology Group, Inc., Culverin
Corporation, OnLine Financial Systems, Inc., COIN Banking Systems, Inc. and
Vendor Payment Systems, Inc.
25
<PAGE>
AMORTIZATION OF INTANGIBLES
Intangibles include acquisition payments assigned to goodwill, noncompetition
agreements and customer lists. These costs are amortized over periods ranging
from five to seven years. The increases to $1.3 million in 1997 from $1.0
million and $0.3 million in 1996 and 1995, respectively, were directly
attributable to the acquisition in November 1995 of Culverin and to the
acquisitions in April 1996 of six companies.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES
In connection with its acquisitions of Culverin in November 1995 and of six
companies in April 1996, the Company recorded non-cash, pretax charges of
$3.7 million in the fourth quarter of 1995 and $8.0 million in the second
quarter of 1996 for research and development efforts in process at the date
of acquisition. In addition, in the fourth quarter of 1995 the Company also
recorded a restructuring charge of $0.8 million consisting primarily of
severance costs. The values assigned to the in-process research and
development efforts were determined by independent appraisal and represent
those efforts in process at the date of acquisition that had not reached the
point where technological feasibility had been established and that had no
alternative future uses. Accounting rules require that these costs be
expensed as incurred. The Company believes that these research and
development efforts will result in commercially viable products within the
next year at an additional cost of approximately $4.5 million.
INCOME FROM OPERATIONS
Income from operations in 1997 was $8.8 million, or 12% of revenue, compared to
$1.3 million, or 2% of revenue, in 1996 and $3,000, or 0% of revenue, in 1995.
Excluding the impact of the $8.0 million non-cash charge for acquired in-process
research and development efforts for the April 1996 acquisitions, and a similar
$4.5 million charge for the November 1995 Culverin acquisition, operating income
would have been $9.3 million, or 16% of revenue, in 1996 compared with $4.5
million, or 12% of revenue, in 1995.
NON-OPERATING INCOME (EXPENSE)
In February 1997 the Company's Board of Directors elected not to proceed with a
planned follow-on stock offering of the Company's common stock. The Company
took a $0.5 million non-operating charge in the first quarter as a result of the
cancellation. The Company's Board of Directors determined that the stock price
at which the Company would be required to offer the shares was too low and would
unfairly dilute the investment of existing shareholders.
In September 1997 the Company completed the sale of its RPxpress! remittance
processing division. On an annual basis, the remittance processing revenues and
expenses were both approximately $1.0 million. The Company received 10% of the
sales price in cash with the remainder to be paid in yearly installments with
interest at 8.5% per annum over four years. In connection with the sale, the
Company recorded a non-operating gain of $0.6 million.
Other non-operating income (expense), which consists primarily of interest
income and expense, was a net expense of $0.3 million in 1997, compared to net
non-operating income of $18,000 in 1996 and $0.5 million in 1995. Cash paid for
acquisitions combined with interest on
26
<PAGE>
acquisition-related debt caused the decline in 1996. Interest paid on
outstanding balances under the Company's bank line of credit was the principal
cause of the net expense in 1997.
PROVISION FOR INCOME TAXES
The effective tax rate for 1997 was 45% compared to 43% in 1996, excluding the
effect of an $8.0 million acquired in-process research and development write-off
resulting from the April 1996 acquisitions, and 34% in 1995, excluding the
impact of a $3.7 million acquired in-process research and development write-off.
The increased effective tax rates in 1997 and 1996 primarily result from
increased amortization of nondeductible intangibles related to acquisitions and
a substantial reduction in tax-free interest income.
QUARTERLY RESULTS
The Company has experienced, and expects in the future to experience,
significant quarterly fluctuations in its results of operations. These
fluctuations may be caused by various factors, including, among others: the size
and timing of product orders and shipments; the timing and market acceptance of
new products and product enhancements introduced by the Company and its
competitors; the Company's product mix, including expenses of implementation and
royalties related to certain products; the timing of the Company's completion of
work under contracts accounted for under the percentage of completion method;
customer order deferrals in anticipation of new products; aspects of the
customers' purchasing process, including the evaluation, decision-making and
acceptance of products within the customers' organizations; the sales process
for the Company's products, including the complexity of customer implementation
of the Company's products; the number of working days in a quarter; federal and
state regulatory events; competitive pricing pressures; technological changes in
hardware platform, networking or communication technology; changes in Company
personnel; the timing of the Company's operating expenditures; specific economic
conditions in the financial services industry and general economic conditions.
The Company's business has experienced, and is expected to continue to
experience, some degree of seasonality due to its customers' budgeting and
buying cycles. The Company's strongest revenue quarter in any year is typically
its fourth quarter and its weakest revenue quarter is typically its first
quarter. Customers' purchases are tied closely to their internal budget
processes. For some of the Company's customers, budgets are approved at the
beginning of the year and budgeted amounts often must be utilized by the end of
the year. In addition, the Company's incentive sales compensation plan provides
for increases in commission percentages as sales people approach or exceed their
annual sales quotas. As a result of these two factors, the Company usually
experiences increased sales orders in the last quarter.
YEAR 2000
The Company has evaluated all of its products to determine their operation in
the year 2000. Certain of the Company's software products will require some
adjustment to satisfy issues arising from the use of those products in and after
the year 2000, and the Company intends to provide such adjusted software to its
customer base consistent with the time frames and other requirements of its
customers' regulatory agencies. Notwithstanding the foregoing, the Company has
also determined that a few of its products do not merit unilateral correction,
and is advising the affected customers of such decision and suggesting solutions
(generally
27
<PAGE>
identification of the incorrect output, transition to an alternate CFI or
third party product or customized corrections at the customer's expense). The
Company expects no material impact to its financial position as a result of
any pending year 2000 issues related to its products.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased $4.4 million to $7.2 million at December 31, 1997 from
$2.8 million at December 31, 1996. The increase resulted primarily from
increased net accounts receivable, offset in part by increased deferred revenue,
customer deposits and income taxes payable. Receivables growth, net of deferred
maintenance revenues, outpaced working capital growth and, as a result,
borrowings on the Company's bank line of credit increased to $5.3 million at
December 31, 1997, from $1.6 million at December 31, 1996. The significant
increase in large project-oriented business during 1997 accounts for most of the
receivables growth. Project-oriented business often requires unbilled accounts
receivable and milestone billings, both of which often have longer collection
cycles. Unbilled accounts receivable at December 31, 1997, were $3.8 million,
or 12% of total accounts receivable, compared with $3.3 million, or 14% of total
accounts receivable, at December 31, 1996. Days sales outstanding in accounts
receivable, including both billed and unbilled accounts receivable, increased to
106 days at December 31, 1997, from 90 days at December 30, 1996 (excluding the
distorting impact of annual maintenance invoices).
Operations provided $5.3 million in cash in 1997 compared to $10.1 million in
1996. The decrease in cash from operations compared to 1996 was primarily due
to an $8.0 million non-cash charge for acquired research and development efforts
taken in 1996 and increased net accounts receivable in 1997, offset in part by
increased depreciation and amortization.
Net cash used in investing activities in 1997 was $7.9 million compared to $10.1
million in 1996, reflecting the absence of acquisitions in 1997. Expenditures
for property and equipment of $2.7 million in 1997 was primarily attributable to
investments in infrastructure necessary to accommodate the Company's growth.
Net cash provided by financing activities of $2.7 million in 1997 primarily
resulted from $3.7 million of net borrowings on the Company's bank line of
credit facility and $0.7 million provided primarily upon exercise of stock
options, offset in part by payments of $1.8 million on acquisition related
debt.
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
bank line of credit of up to the lesser of $9.0 million or 50% of accounts
receivable, of which $3.7 million was available at December 31, 1997. The line
of credit expires May 1, 1998.
From time to time, the Company receives contract claims from its customers. In
the second quarter of 1997, one of the Company's customers canceled a $0.8
million project with the Company and requested a partial refund of moneys paid
and cancellation of unpaid invoices. The Company believes that it has met all
of its contractual obligations to this customer and intends to enforce the terms
of the agreement.
28
<PAGE>
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 current operations for at least the
next 12 months. The Company may require additional funds to support its working
capital requirements, future acquisitions or for other purposes and may seek to
raise such additional funds through one or more public or private financings of
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements, notes thereto and supplementary data required by this
item begin on page F-1 as listed in Item 14 of Part IV of this document.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
29
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item is included under the captions PROPOSAL 1.
ELECTION OF DIRECTORS, NOMINEES FOR ELECTION TO BOARD OF DIRECTORS, MEMBERS OF
THE BOARD OF DIRECTORS CONTINUING IN OFFICE, NON-DIRECTOR EXECUTIVE OFFICERS AND
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE, respectively, in the
Company's Proxy Statement for its 1998 Annual Meeting of Shareholders and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is included under the captions EXECUTIVE
COMPENSATION, EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE IN
CONTROL ARRANGEMENTS and BOARD COMPENSATION in the Company's Proxy Statement
for its 1998 Annual Meeting of Shareholders and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under the caption SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT in the Company's Proxy
Statement for its 1998 Annual Meeting of Shareholders and is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under the caption CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS in the Company's Proxy Statement for its
1998 Annual Meeting of Shareholders and is incorporated herein by reference.
30
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS AND SCHEDULES
The Consolidated Financial Statements, together with the report thereon of
Arthur Andersen LLP, are included on the pages indicated below:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants F-1
Consolidated Balance Sheets - December 31, 1997 and 1996 F-2
Consolidated Statements of Income for the years ended December
31, 1997, 1996 and 1995 F-3
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 F-5
Notes to Consolidated Financial Statements F-6
The following schedule and report thereon is filed herewith:
Report of Independent Public Accountants on Financial Statement
Schedule F-23
Schedule II Valuation and Qualifying Accounts F-24
REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 1997.
</TABLE>
31
<PAGE>
EXHIBITS
The following exhibits are filed herewith and this list is intended to
constitute the exhibit index:
Number Description
- -------- -----------------------------------------------------------------
2.1 Stock Purchase and Sale Agreement dated November 21, 1995, among
CFI ProServices, Inc., Culverin Corporation, Eric T. Wagner, John
M. Loveless, David Steffens and Douglas Teets - previously filed
as Exhibit 2.1 to the Current Report on Form 8-K dated November
21, 1995 and as filed with the Securities and Exchange Commission
on December 6, 1995 and incorporated herein by reference.
2.2 Stock Purchase and Sale Agreement effective April 1, 1996, by and
among MicroBilt Corporation, First Financial Management
Corporation and CFI ProServices, Inc. - previously filed as
Exhibit 2.1 with the Company's Form 8-K dated April 1, 1996 and as
filed with the Securities and Exchange Commission on April 16,
1996 and incorporated herein by reference.
2.3 Asset Purchase and Sale Agreement, effective April 1, 1996, by and
among Input Creations, Inc., its shareholders and CFI ProServices,
Inc. - previously filed as Exhibit 2.1 with the Company's Form 8-K
dated April 17, 1996 and as filed with the Securities and Exchange
Commission on May 2, 1996 and incorporated herein by reference.
3.1 Registrant's Amended and Restated Articles of Incorporation -
previously filed as Exhibit 3(i)(a) to the Registration Statement
of Form S-1, Registration Statement No. 33-64894, as filed with
the Securities and Exchange Commission on June 23, 1993 and
incorporated herein by reference.
3.2 Amendments to Registrant's Amended and Restated Articles of
Incorporation (effective June 28, 1993) - previously filed as
Exhibit 3(i)(b) to the Registration Statement of Form S-1
Registration Statement No. 33-64894, as filed with the Securities
and Exchange Commission on July 26, 1993 and incorporated herein
by reference.
3.3 Amendments to Registrant's Amended and Restated Articles of
Incorporation (effective July 26, 1993) - previously filed as
Exhibit 3(i)(c) to the Registration Statement of Form S-1
Registration Statement No. 33-64894, as filed with the Securities
and Exchange Commission on August 10, 1993 and incorporated herein
by reference.
3.4 Registrant's Amended and Restated Bylaws - previously filed as
Exhibit 3(ii) to the Registration Statement of Form S-1
Registration Statement No. 33-64894, as filed with the Securities
and Exchange Commission on August 10, 1993 and incorporated herein
by reference.
10.1 Nonqualified Stock Option Plan dated October 15, 1993 - previously
filed as Exhibit 99.10 to the Registration Statement of Form S-8
(Registration No. 33-70506), as filed with the Securities and
Exchange Commission on October 19, 1993 and incorporated herein by
reference.
32
<PAGE>
Number Description
- -------- -----------------------------------------------------------------
10.2 Registrant's Outside Director Compensation and Stock Option Plan -
previously filed as Exhibit 10.3 to the Company's Form 10-Q for
the quarter ended March 31, 1994 and incorporated herein by
reference.
10.3 Registrant's Standardized Regional Prototype 401(k) Cash or
Deferred Savings Plan and Trust, adopted December 1, 1994 -
previously filed as Exhibit 10.12 to the Company's Form 10-K for
the year ended December 31, 1995 and as filed with the Securities
and Exchange Commission on April 1, 1996 and incorporated herein
by reference.
10.4 Registration Agreement dated February 4, 1991 by and among
Registrant and certain named investors - previously filed as
Exhibit 10.11 to the Registration Statement of Form S-1,
Registration Statement No. 33-64894, as filed with the Securities
and Exchange Commission on June 23, 1993 and incorporated herein
by reference.
10.5 Legal Services Agreement for the State of Louisiana effective
March 13, 1986 between the Company and McGlinchey, Stafford,
Mintz, Cellini & Lang, a Louisiana professional law corporation
(confidential treatment requested) - previously filed as Exhibit
10.25 to the Registration Statement on Form S-1 (Registration No.
33-64894) filed with the Securities and Exchange Commission on
July 26, 1993 and incorporated herein by reference.
10.6 1994 Employee Stock Purchase Plan - previously filed as Exhibit
10.2 to the Company's Form 10-Q for the quarter ended June 30,
1994 and incorporated herein by reference.
10.7 1995 Consolidated and Restated Stock Option Plan - previously
filed as Exhibit 99.13 to the Registration Statement on Form S-8
filed with the Securities and Exchange Commission on March 1, 1995
and incorporated herein by reference.
10.8 First Amendment to 1995 Consolidated and Restated Stock Option
Plan - previously filed as Exhibit 9.2 to the Company's
Registration Statement on Form S-8 filed with the Securities and
Exchange Commission on or about September 4, 1996 and incorporated
herein by reference.
10.9 Office Lease dated March 18, 1994 between the Company and John
Hancock Mutual Life Insurance Company - previously filed as
Exhibit 10.1 to the Company's Form 10-Q for the quarter ended
March 31, 1994 and incorporated herein by reference.
10.10 First amendment, dated July 8, 1996, to office lease dated March
18, 1994 between the Company and John Hancock Mutual Life
Insurance Company - previously filed as Exhibit 10.17 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1996 as filed with the Securities and Exchange Commission on
March 27, 1997 and is incorporated herein by reference.
33
<PAGE>
Number Description
- -------- -----------------------------------------------------------------
10.11 Form of Executive Retention Agreement - previously filed as
Exhibit 10.1 to the Company's Current Report on Form 8-K filed
with the Securities and Exchange Commission on August 22, 1994 and
incorporated herein by reference.
10.12 Employment and Noncompetition Agreement dated November 21, 1995
between CFI ProServices, Inc. and Eric T. Wagner - previously
filed as Exhibit 10.1 to the Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission on December 6,
1995 and incorporated herein by reference.
10.13 Employment and Noncompetition Agreement dated November 21, 1995
between CFI ProServices, Inc. and John M. Loveless - previously
filed as Exhibit 10.2 to the Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission on December 6,
1995 and incorporated herein by reference.
10.14 Employment and Noncompetition Agreement dated November 21, 1995
between CFI ProServices, Inc. and David A. Steffens - previously
filed as Exhibit 10.3 to the Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission on December 6,
1995 and incorporated herein by reference.
10.15 Office Lease dated March 2, 1994, as amended on November 14, 1994
and on September 7, 1995, between the Company and Huntington
Atrium Development - previously filed as Exhibit 10.33 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1995 as filed with the Securities and Exchange Commission on
April 1, 1996 and incorporated herein by reference.
10.16 Office Lease dated April 18, 1995, as amended on June 9, 1995,
between the Company and Danis Properties Co., Inc. - previously
filed as Exhibit 10.34 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995 as filed with the Securities
and Exchange Commission on April 1, 1996 and incorporated herein
by reference.
10.17 Business Loan Agreement (Revolving Line of Credit) dated November
8, 1995 between CFI ProServices, Inc. and Bank of America, Oregon
- previously filed as Exhibit 10.35 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995 as filed with
the Securities and Exchange Commission on April 1, 1996 and
incorporated herein by reference.
10.18 Amendment No. 1, dated May 17, 1996, to Business Loan Agreement
dated November 8, 1995 - previously filed as Exhibit 10.7 to the
Company's quarterly report of Form 10-Q for the quarter ended June
30, 1996 as filed with the Securities and Exchange Commission on
August 13, 1996 and incorporated herein by reference.
10.19 Amendment No. 2, dated July 1, 1996, to Business Loan Agreement
dated November 8, 1995 - previously filed as Exhibit 10.8 to the
Company's quarterly report of Form 10-Q for the quarter ended June
30, 1996 as filed with the Securities and Exchange Commission on
August 13, 1996 and incorporated herein by reference.
34
<PAGE>
Number Description
- -------- -----------------------------------------------------------------
10.20 Amendment No. 3, dated September 24, 1996, to Business Loan
Agreement dated November 8, 1995 - previously filed as Exhibit 10
to the Company's quarterly report of Form 10-Q for the quarter
ended September 30, 1996 as filed with the Securities and Exchange
Commission on November 14, 1996 and incorporated herein by
reference.
10.21 Amendment No. 4, dated November 21, 1996, to Business Loan
Agreement dated November 8, 1995 - previously filed as Exhibit
10.1 to the Company's Registration Statement No. 333-15505 on Form
S-3 as filed with the Securities and Exchange Commission on
January 27, 1997 and incorporated herein by reference.
10.22 Amendment No. 5, dated December 31, 1996, to Business Loan
Agreement dated November 8, 1995 - previously filed as Exhibit
10.2 to the Company's Registration Statement No. 333-15505 on Form
S-3 as filed with the Securities and Exchange Commission on
January 27, 1997 and incorporated herein by reference.
10.23 Amendment No. 6, dated March 1, 1997, to Business Loan Agreement
dated November 8, 1995 - previously filed as exhibit 10.41 with
the Company's Form 10-K for the year ended December 31, 1996 and
as filed with the Securities and Exchange Commission on March 21,
1997 and incorporated herein by reference.
10.24 Amendment No. 7 dated June 1, 1997, to business loan agreement
dated November 8, 1995 - previously filed with the Company's Form
10-Q for the quarter ended June 30, 1997, as filed with the
Securities and Exchange Commission on August 13, 1997, and is
incorporated herein by reference.
10.25 Promissory Note, dated April 1, 1996, in favor of MicroBilt, Inc.
- previously filed as Exhibit 10.1 with the Company's Form 8-K
dated April 1, 1996 and as filed with the Securities and Exchange
Commission on April 16, 1996 and incorporated herein by reference.
10.26 Promissory Note, dated April 1, 1996, in favor of First Financial
Management Corporation - previously filed as Exhibit 10.2 with the
Company's Form 8-K dated April 1, 1996 and as filed with the
Securities and Exchange Commission on April 16, 1996 and
incorporated herein by reference.
10.27 Pledge Agreement, dated April 1, 1996, by and between CFI
ProServices, Inc. And MicroBilt Corporation and First Financial
Management - previously filed as Exhibit 10.3 with the Company's
Form 8-K dated April 1, 1996 and as filed with the Securities and
Exchange Commission on April 16, 1996 and incorporated herein by
reference.
10.28 Form of Employment Agreement entered into with former employees of
Input Creations, Inc. - previously filed as Exhibit 10.1 with the
Company's Form 8-K dated April 17, 1996 and as filed with the
Securities and Exchange Commission on May 2, 1996 and incorporated
herein by reference.
35
<PAGE>
Number Description
- -------- -----------------------------------------------------------------
10.29 Sublease by and among Input Creations, Inc. and CFI ProServices,
Inc. - previously filed as Exhibit 10.2 with the Company's Form 8-
K dated April 17, 1996 and as filed with the Securities and
Exchange Commission on May 2, 1996 and incorporated herein by
reference.
21 Subsidiaries of the Registrant
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 27, 1998
CFI PROSERVICES, INC.
By: /s/ MATTHEW W. CHAPMAN
----------------------
Matthew W. Chapman
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 27, 1998.
Signature Title
- --------- -----
/s/ MATTHEW W. CHAPMAN Chairman and Chief Executive Officer
- ------------------------------
Matthew W. Chapman (Principal Executive Officer)
/s/ ROBERT P. CHAMNESS Director, President and Chief Operating
- ------------------------------ Officer
Robert P. Chamness
/s/ KURT W. RUTTUM Vice President and Chief Financial Officer
- ------------------------------
Kurt W. Ruttum (Principal Financial and Accounting Officer)
/s/ ROBERT T. JETT Director, Executive Vice President and
- ------------------------------ Secretary
Robert T. Jett
/s/ J. KENNETH BRODY Director
- ------------------------------
J. Kenneth Brody
/s/ LORRAINE O. LEGG Director
- ------------------------------
Lorraine O. Legg
/s/ DAVID G. GOLDEN Director
- ------------------------------
David G. Golden
/s/ ERAN S. ASHANY Director
- ------------------------------
Eran S. Ashany
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders of
CFI ProServices, Inc.
We have audited the accompanying consolidated balance sheets of CFI ProServices,
Inc. (an Oregon corporation) and subsidiaries as of December 31, 1997 and 1996
and the related consolidated statements of income, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CFI ProServices,
Inc. and subsidiaries as of December 31, 1997 and 1996 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon
January 21, 1998
F-1
<PAGE>
CFI PROSERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 20 $ -
Receivables, net of allowances of $2,880 and $1,303 32,059 23,307
Inventory 297 156
Deferred tax asset 1,307 643
Prepaid expenses and other current assets 1,928 1,659
--------- ---------
Total Current Assets 35,611 25,765
Property and Equipment, net of accumulated
depreciation of $7,855 and $5,596 5,211 4,805
Software Development Costs, net of accumulated
amortization of $735 and $2,585 9,856 8,327
Purchased Software Costs, net of accumulated
amortization of $0 and $1,229 - 1,079
Other Intangibles, net of accumulated amortization
of $3,227 and $1,455 5,689 6,704
Other Assets, including Deferred Taxes 1,175 165
--------- ---------
Total Assets $ 57,542 $ 46,845
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Drafts payable $ - $ 425
Accounts payable 2,119 2,884
Accrued expenses 5,362 5,408
Deferred revenues 12,498 10,445
Customer deposits 1,715 869
Bank line of credit 5,310 1,591
Current portion of long-term debt 295 1,305
Income taxes payable 1,125 46
--------- ---------
Total Current Liabilities 28,424 22,973
Deferred Tax Liability 197 -
Commitments and Contingencies
Long-Term Debt, less current portion 2,232 2,880
--------- ---------
Total Liabilities 30,853 25,853
Mandatory Redeemable Class A Preferred Stock 746 754
Shareholders' Equity:
Series preferred stock, 5,000,000 shares authorized,
none issued and outstanding - -
Common stock, no par value, 10,000,000
shares authorized and 4,925,423 and 4,824,973
shares issued and outstanding 18,865 17,745
Retained earnings 7,078 2,493
--------- ---------
Total Shareholders' Equity 25,943 20,238
--------- ---------
Total Liabilities and Shareholders' Equity $ 57,542 $ 46,845
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated
balance sheets.
F-2
<PAGE>
CFI PROSERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
REVENUE
Software license fees $ 40,475 $ 33,935 $ 18,918
Service and Support 27,466 22,336 15,060
Other 4,708 3,676 2,798
--------- --------- ---------
Total Revenue 72,649 59,947 36,776
COST OF REVENUE 27,041 20,844 11,672
--------- --------- ---------
Gross Profit 45,608 39,103 25,104
OPERATING EXPENSES
Sales and marketing 15,709 12,725 9,558
Product development 11,549 10,615 6,356
General and administrative 8,263 5,425 4,295
Amortization of intangibles 1,259 1,045 343
Acquired in-process research and development
and restructuring - 8,030 4,549
--------- --------- ---------
Total Operating Expenses 36,780 37,840 25,101
--------- --------- ---------
Income From Operations 8,828 1,263 3
NON-OPERATING INCOME (EXPENSE)
Interest expense (456) (251) (3)
Interest income 170 271 490
Cancelled stock offering costs (487) - -
Gain on sale of operating division 628 - -
Other, net (96) (2) -
--------- --------- ---------
Total Non-operating Income (Expense) (241) 18 487
--------- --------- ---------
INCOME BEFORE PROVISION FOR
INCOME TAXES 8,587 1,281 490
PROVISION FOR INCOME TAXES 3,907 1,167 167
--------- --------- ---------
NET INCOME 4,680 114 323
PREFERRED STOCK DIVIDEND 95 97 97
--------- --------- ---------
NET INCOME APPLICABLE TO COMMON SHAREHOLDERS $ 4,585 $ 17 $ 226
--------- --------- ---------
--------- --------- ---------
BASIC NET INCOME PER SHARE $ 0.93 $ - $ 0.05
--------- --------- ---------
--------- --------- ---------
DILUTED NET INCOME PER SHARE $ 0.90 $ - $ 0.05
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated
balance sheets.
F-3
<PAGE>
CFI PROSERVICES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Common Stock
--------------------------
Shares Amount Retained Earnings Total
----------- --------- ----------------- ---------
<S> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1994 3,928,977 $ 14,341 $ 2,250 $ 16,591
Issuance of Common Stock 567,159 1,061 - 1,061
Tax benefits from stock transactions - 291 - 291
Net income applicable to common shareholders - - 226 226
----------- --------- ----------------- ---------
BALANCES, DECEMBER 31, 1995 4,496,136 15,693 2,476 18,169
Issuance of Common Stock 328,837 1,420 - 1,420
Tax benefits from stock transactions - 632 - 632
Net income applicable to common shareholders - - 17 17
----------- --------- ----------------- ---------
BALANCES, DECEMBER 31, 1996 4,824,973 17,745 2,493 20,238
Issuance of Common Stock 100,450 724 - 724
Tax benefits from stock transactions - 396 - 396
Net income applicable to common shareholders - - 4,585 4,585
----------- --------- ----------------- ---------
BALANCES, DECEMBER 31, 1997 4,925,423 $ 18,865 $ 7,078 $ 25,943
----------- --------- ----------------- ---------
----------- --------- ----------------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated
balance sheets.
F-4
<PAGE>
CFI PROSERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income applicable to common shareholders $ 4,585 $ 17 $ 226
Adjustments to reconcile net income applicable to common
shareholders to cash provided by operating activities:
Depreciation and amortization 8,540 4,731 3,029
Write-off of in-process research and development - 8,030 3,700
Gain on sale of property and equipment - (10) -
Gain on sale of operating division (628) - -
Deferred income taxes 87 (1,328) (900)
Payments made on mandatory redeemable preferred stock, net (8) (7) (3)
Interest accreted on note payable 93 - -
(Gain) loss on sale of equity/debt investments - (156) 31
Equity in losses attributable to subsidiary and joint venture 148 - 88
(Increase) decrease in assets, net of effects from
purchase of businesses:
Receivables, net (9,135) (6,580) (3,734)
Income taxes receivable - 229 125
Inventories, net (141) 59 206
Prepaid expenses and other current assets (269) (325) (302)
Increase (decrease) in liabilities, net of effects from
purchase of businesses:
Drafts payable (425) 425 -
Accounts payable (765) 1,167 (166)
Accrued expenses (1,186) 2,079 (144)
Deferred revenues 2,053 2,069 1,129
Customer deposits 846 (609) 243
Other current liabilities - (338) (67)
Income taxes payable 1,475 678 -
-------- -------- --------
Net cash provided by operating activities 5,270 10,131 3,461
Cash flows from investing activities:
Expenditures for property and equipment (2,713) (2,721) (1,232)
Software development costs capitalized (4,994) (5,204) (2,720)
Investment in joint venture (322) - -
Purchase of investments - - (8,128)
Proceeds from sale/maturity of investments - 2,982 11,715
Proceeds from sale of operating division 87 - -
Proceeds from sale of property and equipment - 19 -
Investment in Vendor Payment Systems, Inc. - - (230)
Cash paid for acquisition of Texas/Southwest Technology
Group, Inc. - - (259)
Cash paid for acquisition of Culverin Corporation, net of
cash received - - (62)
Cash paid for acquisition of OnLine and COIN
Division, net of cash received - (2,277) -
Cash paid for acquisition of Input Creations, Inc. - (2,107) -
Cash paid for other acquisitions - (812) -
Other assets - 8 -
-------- -------- --------
Net cash used in investing activities (7,942) (10,112) (916)
Cash flows from financing activities:
Net proceeds from line of credit 3,719 1,591 -
Payments on notes payable - (7,280) -
Payments on long-term debt (1,751) (328) (6)
Proceeds from issuance of common stock 724 1,154 791
-------- -------- --------
Net cash provided by (used in) financing activities 2,692 (4,863) 785
-------- -------- --------
Increase (decrease) in cash and cash equivalents 20 (4,844) 3,330
Cash and cash equivalents:
Beginning of period - 4,844 1,514
-------- -------- --------
End of period $ 20 $ - $ 4,844
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated
balance sheets.
F-5
<PAGE>
CFI PROSERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS
CFI ProServices, Inc. and its subsidiaries (the Company) develops, sells, and
services customer service software used by financial institutions. The Company
combines its technology, banking and legal expertise to deliver knowledge-based
software solutions that enable institutions to simplify key sales and service
business processes, improve productivity, strengthen customer relationships, and
maintain compliance with both internal business policies and external government
regulations. Although most sales historically have been to commercial banks
within the United States, today the Company actively markets its products to
most types of financial institutions domestically and, for the non-compliance
oriented software, internationally. The Company has been in business since
1978.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company's
wholly owned subsidiaries: The Genesys Solutions Group, Inc., Texas/Southwest
Technology Group, Inc., Culverin Corporation, OnLine Financial Systems, Inc.,
COIN Banking Systems, Inc., and Vendor Payment Systems, Inc. (VPS). All
intercompany transactions and balances have been eliminated. A cash investment
in VPS was included in other assets and was accounted for using the equity
method until April 1996 when the Company purchased the remaining outstanding VPS
common stock. The Company made certain acquisitions in April 1996 (see Note 2).
These acquisitions have been included in the consolidated financial statements
since the date of acquisition.
Effective December 31, 1997, all of the Company's wholly owned subsidiaries
(other than The Genesys Solutions Group, Inc.) were dissolved and their assets
were distributed to the Company.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and short-term investments with maturity
dates of three months or less at the time of acquisition.
INVESTMENTS
Statement of Financial Accounting Standards (SFAS) No. 115 "Accounting for
Certain Investments in Debt and Equity Securities" requires the Company to
classify and account for its security investments as trading securities,
securities available for sale or securities held to maturity depending on the
Company's intent to hold or trade the securities at time of purchase. Securities
available for sale are stated on the balance sheet at their fair market value,
which approximates cost. Securities held to maturity are stated at amortized
cost. There were no unrealized holding gains or losses at December 31, 1997 and
1996. During 1996, the Company sold its debt securities to help pay for
acquisitions. The Company uses the specific identification method for
determining the cost to use in computing realized gains and losses.
F-6
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1997 1996 1995
--------- --------- --------
(In thousands)
<S> <C> <C> <C>
Proceeds from sale of available for sale $ -- $ -- $ 185
securities
Proceeds from sale of debt securities -- 2,982 --
Realized losses on sales of equity -- -- 31
securities
Realized gains on sales of debt -- 156 --
securities
</TABLE>
INVENTORY
Inventory consists primarily of printed bank forms and supplies, and is stated
at the lower of cost or market, with cost determined on the first-in, first-out
(FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost; depreciation is computed on a
straight-line basis over the estimated useful lives of the individual assets,
which are three years for computer equipment and software, and five to seven
years for furniture, fixtures and other equipment. Expenditures for repairs and
maintenance are charged to current operations, and costs related to renewals and
improvements that add significantly to the useful life of an asset are
capitalized. When depreciable properties are retired or otherwise disposed of,
the cost and related accumulated depreciation are removed from the accounts and
the resulting gain or loss is reflected in income.
SOFTWARE
The costs of internally developed software which meet the criteria in SFAS No.
86, "Accounting for the Costs of Computer Software To Be Sold, Leased or
Otherwise Marketed," are capitalized. These costs are amortized on a
straight-line basis over estimated economic lives ranging from three to five
years.
Purchased software is capitalized at cost and amortized on a straight-line basis
over estimated economic lives ranging from two to five years. Most of the
contracts for purchased software require royalties to be paid based on revenues
generated by the related software.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1997 1996 1995
--------- ---------- ---------
(In thousands)
<S> <C> <C> <C>
Amortization of internally developed $ 3,465 $ 1,194 $ 787
software
Amortization of purchased software 1,079 693 632
</TABLE>
During 1997 and 1996 several software development projects reached commercial
feasibility. As a result, the Company began to amortize certain product
development costs which had been capitalized in prior periods. In addition, the
Company recorded amortization as a result of software acquired in connection
with the 1996 acquisitions. The increase in amortization costs in 1997 also
resulted from accelerated amortization for certain products being replaced by
new products or which management concluded were no longer technologically
viable.
F-7
<PAGE>
INTANGIBLES
The Company's intangibles consist primarily of amounts paid for goodwill,
noncompetition agreements and customer lists. These costs are amortized on a
straight-line basis over estimated economic lives of five to seven years. The
Company believes these useful lives are appropriate based on the factors
influencing acquisition decisions. These factors include product life,
profitability and general industry outlook. The Company reviews its intangible
assets for asset impairment at the end of each quarter, or more frequently when
events or changes in circumstances indicate that the carrying amount of
intangibles may not be recoverable. To perform that review, the Company will
estimate the sum of expected future undiscounted cash flows from operating
activities. If the estimated net cash flows are less than the carrying amount of
intangibles, the Company would recognize an impairment loss in an amount
necessary to write the intangibles down to fair value as determined by the
expected discounted future cash flows. The Company has not recognized an
impairment loss to date.
INVESTMENT IN JOINT VENTURE
In November 1997, the Company made a 50% investment in Lori Mae, L.L.C. (Lori
Mae), a company that will securitize small business loans originated by
community banks. The Company uses the equity method to account for its
investment in this joint venture. At December 31, 1997, the net investment in
Lori Mae totaled $174,000 and was included on the Balance Sheet in Other Assets.
REVENUE RECOGNITION
License revenues are derived from three kinds of transactions:
- Licenses with no follow-on obligations on the part of the Company are
recognized upon shipment.
- Licenses which require installation and training by the Company prior
to use are recognized upon completion of the installation and
training.
- Licenses which include significant amounts of tailoring and,
occasionally, customization are recognized on a percentage of
completion basis as the tailoring and customization are performed.
Estimates of efforts to complete a project are used in the percentage
of completion calculation. Due to the uncertainties inherent in these
estimates, actual results could differ from those estimates.
If the license agreement obligates the Company to provide post-contract support
at no additional cost to the customer, the revenue related to the post-contract
support is recognized ratably over the support period. Sales of the Company's
credit analysis products generally include a right of return, without charge,
within 60 days of the sale. The Company provides an allowance for sales returns,
based on historical experience, for these products. For all other products,
returns and exchanges are infrequent and are recorded as reductions in license
revenue when the obligation to accept the return or conduct the exchange becomes
known.
Revenues for consulting, custom programming and training, where separately
contracted for, are recognized as the related services are performed. Other
revenues include sales of preprinted forms and font cartridges, which are
recognized upon shipment. Amounts received in advance for service and support
contracts are deferred and recognized ratably over the support period. Amounts
in excess of invoiced minimums for service and support charges based on usage
are estimated and recognized in the period in which usage occurs.
F-8
<PAGE>
Included in receivables at December 31, 1997 and 1996 are unbilled receivables
of $3,824,000 and $3,328,000, respectively. These primarily relate to percentage
of completion contracts and contracts with deferred payment terms.
During 1997, Statement of Position (SOP) 97-2, "Software Revenue Recognition,"
was released and will be effective for the Company's year ending December 31,
1998. The Company does not believe SOP 97-2 will have a material impact on its
financial statements.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting For Income Taxes." This pronouncement requires deferred tax assets
and liabilities to be valued using the enacted tax rates expected to be in
effect when the temporary differences are recovered or settled.
ADVERTISING COST
Advertising costs are expensed as incurred. These costs were $1,241,000,
$950,000 and $585,000 for the years ended December 31, 1997, 1996, and 1995,
respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates.
EARNINGS PER SHARE
Beginning December 31, 1997, basic earnings per share (EPS) and diluted EPS are
computed using the methods prescribed by SFAS No. 128, "Earnings per Share."
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:
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- ---------------------------- --------------------------- ------------------------------ --------------------------
(In thousands, except per
share data) Per Per Per
Share Share Share
Basic EPS Income Shares Amount Income Shares Amount Income Shares Amount
--------- --------------------------- ------------------------------ ---------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income available to Common
Shareholders $ 4,585 4,919 $ 0.93 $ 17 4,763 $ 0.00 $ 226 4,369 $ 0.05
------ ------ ------
------ ------ ------
Effect of Dilutive
Stock Options - 205 - 349 - 508
--------------- ---------------- ------------
Diluted EPS
-----------
Income available to Common
Shareholders $ 4,585 5,124 $ 0.90 $ 17 5,112 $ 0.00 $ 226 4,877 $ 0.05
------ ------ ------
------ ------ ------
</TABLE>
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 94,500,
10,000 and zero for the years ended December 31, 1997, 1996 and 1995,
respectively.
F-9
<PAGE>
SUPPLEMENTARY CASH FLOW INFORMATION
<TABLE>
<CAPTION>
The Company made the following cash payments: Years Ended December 31,
---------------------------------------------
1997 1996 1995
-------------- ------------ ------------
(In thousands)
<S> <C> <C> <C>
Interest and preferred dividends $ 517 $ 148 $ 103
Income taxes 2,294 1,597 1,005
Noncash investing and financing activities were as follows:
Years Ended December 31,
---------------------------------------------
1997 1996 1995
-------------- ------------ ------------
(In thousands)
Tax benefit from exercise of nonqualified stock options $ 396 $ 632 $ 291
Culverin Corporation acquisition (Note 2):
Issuance of notes payable -- -- 3,740
Stock commitment -- -- 270
Texas/Southwest Technology Group, Inc. acquisition (Note 2):
Issuance of notes payable and long-term debt -- -- 450
MicroBilt Financial Services Division acquisition (Note 2):
Issuance of note payable -- 3,500 --
Input Creations, Inc. acquisition (Note 2):
Issuance of long term debt -- 1,533 --
Other acquisitions (Note 2):
Issuance of long term debt -- 1,182 --
Issuance of notes payable -- 1,170 --
Issuance of Common Stock -- 266 --
Note receivable received in connection with the sale of of remittance
processing 788 -- --
Increase in goodwill for accrued acquisition related contingent royalties 1,140 -- --
Decrease in goodwill and increase in deferred tax asset
related to acquired net operating losses 389 -- --
</TABLE>
RECLASSIFICATION
Certain reclassifications in the financial statements and notes have been made
to prior year financial statements to conform with the current presentation.
RECENT PRONOUNCEMENTS
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which was issued in June 1997, requires the Company to report
certain information about operating segments. SFAS 131 will become effective
for the Company's year ending December 31, 1998. The Company expects that
additional disclosures related to its product lines will be required due to SFAS
131.
F-10
<PAGE>
2. ACQUISITIONS:
In April 1996, the Company acquired all of the capital stock of OnLine Financial
Communication Systems, Inc. (OnLine) and COIN Banking Systems, Inc. (COIN)
(formerly subsidiaries of MicroBilt Corporation), and substantially all of the
assets of Input Creations, Inc. (Input), Pathways Software, Inc. (Pathways) and
The Halcyon Group, Inc. (Halcyon). All of these acquisitions were accounted for
as purchases. The combined purchase prices totaled approximately $13,600,000
plus certain contingent royalties tied to future revenue production or to
software conversions. The $13,600,000 included $5,196,000 of cash, $7,385,000 in
notes payable and other long-term liabilities, $266,000 of common stock and
approximately $700,000 of other assumed liabilities. In conjunction with these
acquisitions, the Company recorded approximately $4,300,000 of goodwill which is
being amortized ratably over a seven year period and $8,030,000 of acquired
in-process research and development, determined by independent appraisal, all of
which was expensed in April 1996. The technological feasibility of the acquired
technology, which has no alternative future use, had not been established prior
to the purchase. In connection with the April 1996 acquisitions and in
accordance with the Emerging Issues Task Force issue 96-7 (EITF 96-7) issued in
1996, the Company did not provide deferred taxes on the portion of the acquired
in-process research and development costs which had no underlying tax basis.
Prior to the issuance of EITF 96-7, the Company provided deferred taxes on
acquired in-process research and development costs which had no underlying tax
basis.
In November 1995, the Company acquired all of the outstanding common stock of
Culverin Corporation (Culverin), a software company with headquarters in Dayton,
Ohio. The initial purchase price consisted of $3,888,000 in cash paid in
installments through November 1996; cash of $50,000 and 33,341 shares of the
Company's common stock, valued at $13.50 per share and discounted 40% for
restrictions on trading, which were delivered on January 1, 1998; and expenses
of $531,000. In addition, the Company will make annual contingent royalty
payments through 2000 of between 2% and 14% of revenues generated by Culverin
products, depending on the amount of such revenues in each year. The transaction
has been accounted for as a purchase and the excess of the initial purchase
price over the value of the identifiable assets, $1,969,000, has been recorded
as an intangible asset, amortized on a straight-line basis over seven years.
Annual contingent royalty payments earned are recorded as an addition to
intangible assets and amortized on a straight line basis over the remaining life
of the original seven-year period. The 1995 results included in these financial
statements include the results of Culverin's operations for November and
December 1995. Unaudited pro forma results of operations assuming the Culverin
acquisition and the April 1996 acquisitions occurred at January 1, 1995 are as
follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
----------------------
1996 1995
---------- ---------
(In thousands,
except per share
data)
<S> <C> <C>
Total revenues $ 63,223 $ 54,497
Net income (loss) applicable to common shareholders 33 (699)
Earnings (loss) per share -- basic and diluted 0.01 (0.16)
</TABLE>
F-11
<PAGE>
Pro forma results for the years ended December 31, 1995 and 1996 include the
write-off of acquired in-process research and development in the periods when
incurred.
Primarily in connection with the Culverin acquisition, the Company recorded a
pretax charge of $4,549,000 in the fourth quarter of 1995. Of this charge,
$3,700,000 represented the value, determined by independent appraisal, of
Culverin's in-process research and development efforts at the time of
acquisition. Technological feasibility of the acquired technology, which has no
alternative future uses, had not been established prior to the purchase.
Restructuring costs, comprised primarily of severance costs, represent the
remainder of the charge.
In April 1995, the Company acquired all of the outstanding common stock of
Texas/Southwest Technology Group, Inc. (TSTG), a software company located in
Houston, Texas. The purchase price consisted of $259,000 cash upon closing,
$450,000 payable over the next four years, and contingent royalties payable
at percentages between 6% and 18% on license revenue from sales of TSTG products
over the next three years. The transaction has been accounted for as a purchase
and the excess of the initial purchase price over the value of the identifiable
assets, $625,000, has been recorded as an intangible asset and is being
amortized on a straight-line basis over five years. The 1995 results included in
these financial statements include the results of TSTG's operations for the
nine months ended December 31, 1995. The results of TSTG's operations prior to
the acquisition were insignificant.
3. PROPERTY AND EQUIPMENT:
The major categories of property and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1996
--------------- -------------
(In thousands)
<S> <C> <C>
Computer hardware and software $ 9,546 $ 7,090
Furniture and fixtures 3,008 2,879
Leasehold improvements 512 432
-------------- ------------
13,066 10,401
Less-- accumulated depreciation 7,855 5,596
-------------- ------------
$ 5,211 $ 4,805
-------------- ------------
-------------- ------------
</TABLE>
Depreciation expense was as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1997 1996 1995
---------- ---------- ------------
(In thousands)
<S> <C> <C> <C>
Depreciation expense $ 2,230 $ 1,799 $ 1,267
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
F-12
<PAGE>
4. ACCRUED EXPENSES:
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
---------- ----------
(In thousands)
<S> <C> <C>
Accrued vacation pay $ 238 $ 265
Accrued commissions 1,080 870
Accrued bonuses and profit sharing 392 1,639
Other 3,652 2,634
---------- ----------
$ 5,362 $ 5,408
---------- ----------
---------- ----------
</TABLE>
5. EMPLOYEE BENEFIT PLANS:
The Company created a profit sharing plan (the Plan) on February 1, 1989 under
the provisions of Section 401(k) of the Internal Revenue Code. Employer
contributions to the Plan are made at the discretion of the Board of Directors
and were as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1997 1996 1995
---------- ---------- -----------
(In thousands)
<S> <C> <C> <C>
Employer contributions $ 468 $ 327 $ 220
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
The Board of Directors has approved an officers' bonus plan and employee profit
sharing plan. The amount and timing of the bonus and profit sharing payments are
at the Board's discretion. The expense associated with these plans was as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1997 1996 1995
---------- ---------- ------------
(In thousands)
<S> <C> <C> <C>
Bonus and profit sharing expense $ 850 $ 2,298 $ 771
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
The Company has a qualified employee stock purchase plan which allows qualified
employees to direct up to 7 percent of monthly base pay for purchases of stock.
The purchase price for shares purchased under the plan is 85 percent of the
lesser of the fair market value at the beginning or end of the plan year.
F-13
<PAGE>
6. LINE OF CREDIT AND LONG-TERM DEBT:
LINE OF CREDIT
The Company may borrow up to the lesser of $9,000,000 or 50 percent of accounts
receivable, as defined under the terms of a committed, unsecured, revolving bank
line of credit agreement. At the Company's option, interest on outstanding
borrowings may be at the bank's published reference rate or alternative rates
specified in the agreement. The interest rate in effect at December 31, 1997
was 8.5 percent. The line of credit expires on May 1, 1998. The agreement
contains covenants which require the Company to maintain certain financial
ratios and prohibits the Company from incurring other debts or liens outside the
ordinary course of business. The Company is in compliance with the covenants at
December 31, 1997. The Company pays an annual commitment fee of 0.2 percent on
the average unused balance. Borrowings under the line totaled $5,310,000 at
December 31, 1997, and $1,591,000 at December 31, 1996.
LONG-TERM DEBT
At December 31, 1997 and 1996, long-term debt consisted of the following :
<TABLE>
<CAPTION>
1997 1996
------------ ------------
(In thousands)
<S> <C> <C>
Note payable, in relation to Culverin acquisition, payment of $3,690
in 1996 with the balance due January 1998 $ 50 $ 50
Note payable, in relation to Pathways acquisition, final payment due January 1997 -- 900
Note payable, in relation to Halcyon acquisition, with imputed interest at
8 percent, due in quarterly installments of $50, including interest,
payable through 2001 605 750
Note payable, in relation to Halcyon acquisition, due upon completion
of the development of a new specified product -- 225
Note payable, assumed in the Halcyon acquisition, in monthly installments
of $6, including interest imputed at 8.5 percent, with final payment due
October 2004 346 382
Guaranteed royalties to be paid in relation to Input acquisition,
with imputed interest at 6 percent, payable through March 2001 1,426 1,533
TSTG non-compete payments through April 1999 100 345
------------ ------------
2,527 4,185
Less current portion of long-term debt (295) (1,305)
------------ ------------
Long-term debt $ 2,232 $ 2,880
------------ ------------
------------ ------------
</TABLE>
F-14
<PAGE>
Payouts under long-term debt are as follows (in thousands):
<TABLE>
<CAPTION>
Years Ending December 31,
-------------------------
<S> <C>
1998 $ 295
1999 262
2000 229
2001 1,573
2002 55
---------
Thereafter 113
$ 2,527
---------
---------
</TABLE>
7. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company leases facilities and equipment under operating leases, with terms
from one to 10 years, payable in monthly installments. Total lease expense was
as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1997 1996 1995
------------ ------------ -------------
(In thousands)
<S> <C> <C> <C>
Lease expense $ 2,786 $ 2,131 $ 999
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
Future minimum lease payments are as follows (in thousands):
<TABLE>
<CAPTION>
Years Ending December 31,
-------------------------
<S> <C>
1998 $ 2,620
1999 2,608
2000 2,514
2001 1,683
2002 1,685
Thereafter 1,800
---------
$ 12,910
---------
---------
</TABLE>
CONTINGENCIES
The Company and its subsidiaries are involved in routine legal matters
incidental to their respective businesses. In the opinion of the Company, the
resolution of any such matters that are currently outstanding will not have a
material effect on its financial condition or results of operation.
In the second quarter of 1997, one of the Company's customers cancelled an
$800,000 project with the Company and requested a partial refund of moneys paid
and cancellation of unpaid invoices. The Company believes that it has met all
of its contractual obligations to this customer and intends to enforce the terms
of the agreement.
F-15
<PAGE>
8. INCOME TAXES:
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1997 1996 1995
------------ ------------ -------------
(In thousands)
<S> <C> <C> <C>
Current tax provision:
Federal $ 3,443 $ 2,223 $ 944
State 377 272 123
------------ ------------ -------------
3,820 2,495 1,067
Deferred tax provision
(benefit) 87 (1,328) (900)
------------ ------------ -------------
Total provision $ 3,907 $ 1,167 $ 167
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
The reconciliation of the statutory Federal income tax rate to the Company's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Federal statutory rate 34.0 % 34.0 % 34.0 %
State income taxes net of Federal 4.2 6.8 5.4
benefit
Disallowance of meals and
entertainment expenses 1.1 6.0 11.5
Purchase accounting adjustments,
including amortization of 5.7 47.6 0.5
intangibles
Tax free interest -- -- (9.7)
Change in valuation allowance (0.2) 10.9 2.1
Other 0.7 (14.1) (9.7)
------ ------ ------
45.5 % 91.2 % 34.1 %
------ ------ ------
------ ------ ------
</TABLE>
F-16
<PAGE>
Deferred tax assets and (liabilities) are comprised of the following components:
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
---------- ---------
(In thousands)
<S> <C> <C>
Current deferred tax asset:
Allowance for doubtful accounts $ 950 $ 371
Accrued vacation liability 92 101
Current portion of net operating loss
carryforwards 177 88
Severance and other accruals 20 36
Other 68 47
---------- ---------
Total current deferred tax asset $ 1,307 $ 643
---------- ---------
---------- ---------
Long-term deferred tax asset (liability):
In-process technology acquired $ 2,477 $ 2,663
Depreciation (154) --
Intangibles amortization 651 223
Capitalized software (3,746) (3,164)
Net operating loss and credit carryforwards 714 599
Other 33 33
---------- ---------
Gross long-term deferred tax asset (liability) (25) 354
Valuation allowance (172) (189)
---------- ---------
Total long-term deferred tax asset (liability) $ (197) $ 165
---------- ---------
---------- ---------
</TABLE>
The increase (decrease) in the valuation allowance was as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1997 1996 1995
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Increase (decrease) in valuation
allowance $ (17) $ 140 $ 10
--------- --------- ---------
--------- --------- ---------
</TABLE>
At December 31, 1997, for Federal tax return reporting purposes, the Company had
approximately $1,755,000 of regular and alternative minimum tax loss carryovers
that expire at various dates through 2010. In addition, at December 31, 1997,
the Company had $225,000 of general business credit carryovers that expire at
various dates through 2007. The general business credit carryovers may not be
used to offset taxes payable until the tax loss carryovers are fully utilized.
In 1997, based on management's estimate of realization, the Company recorded an
increase in deferred tax assets and a corresponding decrease in goodwill of
$389,000 relating to net operating losses acquired in connection with a prior
acquisition.
Current Federal tax law limits the net operating loss and tax credit carryovers
available to be used in any given year in the event of certain circumstances
including significant changes in ownership interests. The Company is limited to
using approximately $430,000 of net operating loss carryovers in any one year.
F-17
<PAGE>
9. PREFERRED STOCK:
The Company is redeeming the 10,300 outstanding shares of mandatory redeemable
Class A preferred stock at $262.14 per share over a 28-year period ending in the
year 2018. The present value of the remaining payments, which are due quarterly,
has been recorded as the carrying value at December 31, 1997 and 1996. The
carrying value is adjusted as payments are made and dividends are accrued on the
shares yet to be redeemed. The rate used to calculate the present value was 13
percent per annum, which approximated the Company's borrowing rate at the time
redemption commenced. At December 31, 1997 there were 7,804 outstanding shares
remaining to be redeemed.
The repayment schedule for the mandatory redeemable Class A preferred stock at
December 31, 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
Years Ending December 31,
-------------------------
<S> <C>
1998 $ 103
1999 103
2000 103
2001 103
2002 103
Thereafter 1,530
--------
Total future payments 2,045
Less- Amount representing dividends 1,299
--------
Present value of future payments 746
Less- Current portion --
--------
Long-term mandatory redeemable preferred stock $ 746
--------
--------
</TABLE>
F-18
<PAGE>
10. STOCK OPTIONS AND DIRECTOR COMPENSATION:
At December 31, 1997, the Company had four stock option plans: a Consolidated
Plan, a nonqualified stock option plan, and two plans for outside directors.
Under the Consolidated Plan, options, which consist of incentive stock options
and nonqualified stock options, vest ratably over five years and generally
expire ten years from the date of grant, beginning in the year 2001. The
exercise price for incentive stock options granted under the plan is set at the
fair market value at the grant date. The exercise price for nonqualified options
may be set below the fair market value at the grant date, but, to this date, no
options have been granted with an exercise price less than fair market value at
the grant date.
Under the nonqualified stock option plan, available to officers and key
employees, the vesting period and exercise price, which may be set below the
fair market value at the date of grant, are determined by the Compensation
Committee of the Board of Directors. No options have been granted with an
exercise price less than fair market value at the date of grant.
Under the Restated Outside Director Restricted Stock Plan (the Restricted Plan),
40,000 shares of common stock were reserved for issuance to outside directors.
As of December 31, 1997, 24,600 shares had been issued under the Restricted Plan
and were no longer restricted, leaving 15,400 shares available for future
grants. In May 1994, the shareholders approved the Restated Outside Director
Compensation and Stock Option Plan (the Compensation Plan), which provides for
outside directors to be paid $5,000 per year and allows for the issuance of
50,000 shares, comprised of 15,400 shares under the Restricted Plan and 34,600
shares under the Consolidated Plan, as stock options.
Below is a table showing the activity for the aforementioned stock option plans
for the past three years:
<TABLE>
<CAPTION>
Weighted Total
Shares Average Exercise
Subject to Exercise Price Price
Options Per Share (in thousands)
----------- -------------- --------------
<S> <C> <C> <C>
Balances, December 31, 1994 1,278,591 $ 4.17 $ 5,336
Options granted 140,384 12.75 1,790
Options exercised (547,381) 1.22 (668)
Options lapsed (46,912) 10.57 (496)
----------- -------------- -------------
Balances, December 31, 1995 824,682 7.23 5,962
Options granted 290,500 14.52 4,219
Options exercised (273,183) 3.63 (991)
Options lapsed (10,179) 9.92 (101)
----------- -------------- -------------
Balances, December 31, 1996 831,820 10.93 9,089
Options granted 118,000 18.40 2,172
Options exercised (79,804) 5.52 (441)
Options lapsed (86,713) 13.45 (1,167)
----------- -------------- -------------
Balances, December 31, 1997 783,303 $ 12.32 $ 9,653
----------- -------------- -------------
----------- -------------- -------------
</TABLE>
F-19
<PAGE>
For all four plans at December 31, 1997, there were 1,061,654 shares of unissued
stock reserved for issuance under the plans, of which 25,038 shares are reserved
under the Employee Stock Purchase Plan (ESPP) and options for the purchase of
253,313 shares remained available for future grants. Options to purchase 361,873
and 250,990 shares of common stock were exercisable at December 31, 1997 and
1996, respectively. These exercisable options had weighted average exercise
prices of $9.91 and $8.27 at December 31, 1997 and 1996, respectively.
During 1995, the Financial Accounting Standards Board issued SFAS No.123 which
defines a fair value based method of accounting for an employee stock option and
similar equity instrument and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. However, it also
allows an entity to continue to measure compensation cost for those plans using
the method of accounting prescribed by APB 25. Entities electing to remain with
the accounting in APB 25 must make pro forma disclosures of net income and
earnings per share, as if the fair value based method of accounting defined in
SFAS 123 had been adopted.
The Company has elected to account for its stock-based compensation plans under
APB 25; however, the Company has computed, for pro forma disclosure purposes,
the value of all options granted during 1997, 1996 and 1995 using the
Black-Scholes options pricing model as prescribed by SFAS 123 using the
following weighted average assumptions for grants:
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Risk-free interest rate 6.3% 6.0% 6.0%
Expected dividend yield 0.0% 0.0% 0.0%
Expected lives (years) 6.9 4.7 4.2
Expected volatility 60.7% 62.8% 57.7%
</TABLE>
Using the Black-Scholes methodology, the total value of options granted during
1997, 1996 and 1995 was $1,286,000, $1,854,000 and $794,000, respectively, which
would be amortized on a pro forma basis over the vesting period of the options
(typically five years). The weighted average fair value of options granted
during 1997, 1996 and 1995 was $11.51 per share, $7.39 per share and $6.62 per
share, respectively. The number of shares issued under the ESPP were 20,646,
11,338 and 9,978 for the years ended December 31, 1997, 1996 and 1995,
respectively, and the related weighted average purchase price and weighted
average fair value of shares issued were $13.71 and $6.55, respectively for
1997, $13.71 and $6.61, respectively for 1996, and $11.29 and $4.92,
respectively for 1995.
F-20
<PAGE>
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS 123, the Company's net income and net income per share
would approximate the pro forma disclosures below:
<TABLE>
<CAPTION>
For the Year Ended December 31,
(in thousands, except per share data)
---------------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- ----------------------------- ----------------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
------------ ----------- ------------ ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $ 4,585 $ 3,563 $ 17 $ (979) $ 226 $ (3)
Net income (loss) per
share - basic $ 0.93 $ 0.72 $ 0.00 $ (0.21) $ 0.05 $ 0.00
Net income (loss) per
share - diluted $ 0.90 $ 0.71 $ 0.00 $ (0.21) $ 0.05 $ 0.00
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not indicative
of future amounts. SFAS 123 does not apply to awards prior to January 1, 1995,
and additional awards are anticipated in future years.
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------------- --------------------------------------
Weighted Average
Number Remaining Weighted Number of Shares
Range of Exercise Outstanding Contractual Life Average Exercisable at Weighted Average
Prices Per Share at 12/31/97 (years) Exercise Price 12/31/97 Exercise Price
- --------------------- ------------- ----------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 1.00 - 4.99 128,619 4.0 $ 1.62 110,089 $ 1.46
10.00 - 14.99 360,184 6.8 12.61 193,784 12.66
15.00 - 15.00 200,000 8.1 15.00 40,000 15.00
16.13 - 20.00 84,500 9.0 19.63 8,000 16.13
24.25 - 24.25 10,000 3.3 24.25 10,000 24.25
</TABLE>
F-21
<PAGE>
11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED (1), (2) March 31, June 30, September 30, December 31,
(In thousands, except per share data) 1997 1997 1997 1997
- --------------------------------------- ----------------- ---------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Revenue $ 16,002 $ 17,880 $ 17,894 $ 20,873
Gross profit 10,374 11,870 10,907 12,457
Net income applicable to common
shareholders 768 1,424 912 1,481
Net income per share - basic $ 0.16 $ 0.29 $ 0.19 $ 0.30
Net income per share - diluted $ 0.15 $ 0.28 $ 0.18 $ 0.29
<CAPTION>
QUARTER ENDED (1), (2) March 31, June 30, September 30, December 31,
(In thousands, except per share data) 1996 1996 1996 1996
- --------------------------------------- ----------------- ---------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Revenue $ 11,008 $ 15,399 $ 16,262 $ 17,278
Gross profit 7,363 10,249 10,646 10,845
Net income (loss) applicable to common
shareholders 869 (4,059) 1,468 1,739
Net income (loss) per share - basic $ 0.19 $ (0.84) $ 0.30 $ 0.36
Net income (loss) per share - diluted $ 0.18 $ (0.84) $ 0.28 $ 0.34
</TABLE>
(1) Earnings per share have been restated to conform with Statement of
Financial Accounting Standards No. 128, EARNINGS PER SHARE, for all
periods presented.
(2) The loss in the second quarter of 1996 results from a pretax charge of
$8,030,000 for the value of in-process research and development
efforts at the date of acquisition pertaining to companies acquired in
April 1996 (see Note 2).
F-22
<PAGE>
Report of Independent Public Accountants
on Financial Statement Schedule
To the Board of Directors and Shareholders of
CFI ProServices, Inc.
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in CFI ProServices, Inc.'s 1997
Annual Report on Form 10-K, and have issued our report thereon dated January 21,
1998. Our audits were made for the purpose of forming an opinion on those
statements taken as a whole. The Valuation and Qualifying Accounts schedule is
the responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected
to the auditing procedures applied in our audits of the basic consolidated
financial statements and, in our opinion, fairly states, in all material
respects, the financial data required to be set forth therein in relation to the
basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Portland, Oregon
January 21, 1998
F-23
<PAGE>
SCHEDULE II
CFI ProServices, Inc.
Valuation and Qualifying Accounts
Years Ended December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
Additions
Balance Charged Balance
at Beginning to Costs and at End
Description of Year Expenses Deductions (a) Other (b) of Year
- ----------------------------------------- ------------ ------------ -------------- --------- --------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1995:
Allowance for doubtful accounts and sales
returns $ 200 $ 259 $ (169) $ - $ 290
----------- ------------ ------------- --------- --------
----------- ------------ ------------- --------- --------
FASB 109 valuation $ 39 $ 10 $ - $ - $ 49
----------- ------------ ------------- --------- --------
----------- ------------ ------------- --------- --------
Amortization of intangibles:
Purchased software $ 544 $ 632 $ - $ - $ 1,176
Software development costs 1,727 787 - - 2,514
Intangibles 417 343 (350) - 410
----------- ------------ ------------- --------- --------
----------- ------------ ------------- --------- --------
$ 2,688 $ 1,762 $ (350) $ - $ 4,100
----------- ------------ ------------- --------- --------
----------- ------------ ------------- --------- --------
Year Ended December 31, 1996:
Allowance for doubtful accounts and sales
returns $ 290 $ 2,147 $ (1,514) $ 380 $ 1,303
----------- ------------ ------------- --------- --------
----------- ------------ ------------- --------- --------
FASB 109 valuation $ 49 $ 140 $ - $ - $ 189
----------- ------------ ------------- --------- --------
----------- ------------ ------------- --------- --------
Amortization of intangibles:
Purchased software $ 1,176 $ 693 $ (640) $ - $ 1,229
Software development costs 2,514 1,194 (1,123) - 2,585
Intangibles 410 1,045 - - 1,455
----------- ------------ ------------- --------- --------
$ 4,100 $ 2,932 $ (1,763) $ - $ 5,269
----------- ------------ ------------- --------- --------
----------- ------------ ------------- --------- --------
Year Ended December 31, 1997:
Allowance for doubtful accounts and sales
returns $ 1,303 $ 4,808 $ (3,231) $ - $ 2,880
----------- ------------ ------------- --------- --------
----------- ------------ ------------- --------- --------
FASB 109 valuation $ 189 $ - $ (17) $ - $ 172
----------- ------------ ------------- --------- --------
----------- ------------ ------------- --------- --------
Amortization of intangibles:
Purchased software $ 1,229 $ 1,079 $ (2,308) $ - $ -
Software development costs 2,585 3,465 (5,315) - 735
Intangibles 1,455 1,772 - - 3,227
----------- ------------ ------------- --------- --------
----------- ------------ ------------- --------- --------
$ 5,269 $ 6,316 $ (7,623) $ - $ 3,962
----------- ------------ ------------- --------- --------
----------- ------------ ------------- --------- --------
</TABLE>
(a) Represents write-off of receivables and fully amortized intangibles.
Also includes reduction in FASB 109 valuation account credited to income
tax expense.
(b) Includes allowance for doubtful accounts recorded as part of the
acquisition of MicroBilt Financial Products Division in April 1996.
F-24
<PAGE>
Exhibit 21
CFI ProServices, Inc.
Subsidiaries
The Genesys Solutions Group, Inc.
<PAGE>
Exhibit 23
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation of our
reports dated January 21, 1998 included in this Form 10-K into the Company's
previously filed Registration Statements File No. 33-70506, No. 33-89872 and No.
333-11351 on Form S-8.
ARTHUR ANDERSEN LLP
Portland, Oregon
March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 32,059
<SECURITIES> 0
<RECEIVABLES> 3,177
<ALLOWANCES> 2,880
<INVENTORY> 1,928
<CURRENT-ASSETS> 0
<PP&E> 13,066
<DEPRECIATION> 7,855
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 197
<BONDS> 29,549
0
0
<COMMON> 25,943
<OTHER-SE> 57,542
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 3,387
<TOTAL-REVENUES> 72,649
<CGS> 2,169
<TOTAL-COSTS> 27,041
<OTHER-EXPENSES> 36,780
<LOSS-PROVISION> 1,731
<INTEREST-EXPENSE> (456)
<INCOME-PRETAX> 8,587
<INCOME-TAX> 3,907
<INCOME-CONTINUING> 4,585
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,585
<EPS-PRIMARY> 0.93
<EPS-DILUTED> 0.90
</TABLE>
