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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, 1998
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 Identification No.)
or organization)
400 SW Sixth Avenue, Portland, Oregon 97204
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 503-274-7280
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 $44,109,296 as of February 26, 1999 based upon the last closing
price as reported by the Nasdaq National Market System ($11.00). The number of
shares outstanding of the Registrant's Common Stock as of February 26, 1999 was
5,083,527 shares.
---------------
Documents Incorporated by Reference
The Registrant has incorporated into Part III of Form 10-K by reference
portions of its Proxy Statement for its 1999 Annual Meeting to be filed on or
about April 7, 1999.
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CFI PROSERVICES, INC.
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I Page
Item 1. Business 2
Item 2. Properties 16
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 17
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 17
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 20
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 35
Item 8. Financial Statements and Supplementary Data 35
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure 35
PART III
Item 10. Directors and Executive Officers of the Registrant 35
Item 11. Executive Compensation 35
Item 12. Security Ownership of Certain Beneficial Owners and 35
Management
Item 13. Certain Relationships and Related Transactions 35
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 36
8-K
Signatures 41
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PART I
ITEM 1. BUSINESS
OVERVIEW
CFI is a leading provider of integrated, PC-based software for financial
institutions, including solutions for branch automation, loan origination, new
account opening, call centers, cross selling of products and electronic banking.
Beginning in 1999 with the Company's acquisition of Modern Computer Systems,
Inc. (MCS), the Company will also offer hardware and software solutions for the
back office accounting needs of community banks and credit unions. The Company
combines its technology, banking and legal expertise to deliver knowledge-based
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 6,000 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 four product groups: lending, retail delivery,
connectivity software and host processing. Due to its product diversification
efforts, the Company is now less reliant on the Laser Pro and Deposit Pro
products. In 1998 approximately 48% of the Company's revenue came from products
other than Laser Pro and Deposit Pro.
CFI generates recurring revenue from software maintenance agreements. In 1998
service and support fees, primarily for Laser Pro and Deposit Pro, accounted for
approximately 35% of total revenue. Substantially all CFI 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 financial institutions will constitute
a higher percentage of total revenue in future periods. Transactions with these
larger institutions 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 and deferred payment terms, and also results in increased
collection times for billed accounts receivable. These factors, in turn, result
in higher days sales outstanding (DSOs) in accounts receivable.
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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. The Company believes that
this trend is leading to an increasingly two-tiered market consisting of larger,
multibank holding companies and smaller community banks. Both types of
organizations face unique challenges.
Large banks that have grown through acquisition often must integrate disparate
host processing systems, which often lack the flexibility needed to easily
utilize and deliver information across different systems. Bank customer service
representatives often are limited in their ability to access comprehensive
customer information on one screen, which limits their ability to cross-sell
products and services. Banks must also be able to support customer transactions
in a number of channels, such as electronic banking and telephone call centers.
Accordingly, large banks increasingly find it necessary to centralize data from
several disparate host processing systems. Interstate banking presents these
institutions with additional and costly administrative and legal complexities
relating to compliance with complex and changing regulatory requirements across
states.
Smaller community institutions face similar operational difficulties. Lacking
the economies of scale of larger banks, smaller institutions find it
increasingly necessary to exploit technological solutions that enable them to
reduce operating costs, generate additional revenues from existing customers and
focus on specific market niches. In addition, compliance with regulatory
requirements can be more burdensome to these smaller institutions given their
resource limitations.
NEW DELIVERY CHANNELS. Banks of all sizes are increasingly recognizing that the
value-added role of branch offices lies not in their traditional capacity as a
transaction processor, but as a new sales channel for financial products and
services. A study by a financial services consulting firm estimates that the
average cost of a call center transaction is 35% of a branch transaction, an ATM
transaction is 10% of a branch transaction, and a home banking transaction is 5%
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 with respect to 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
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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.
BACK OFFICE ("HOST") PROCESSING. Financial institutions use back office ("host")
processing software and hardware solutions to perform accounting and general
ledger tasks. Community banks and credit unions require host processing
capabilities that are simple to operate and maintain because these institutions
generally cannot afford highly trained in-house information systems personnel
such as data base administrators. These institutions also require
interconnectivity between their host processing solutions and the software used
in branches and other points of customer contact.
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. Beginning in 1999 CFI also began
offering host processing software and hardware solutions for community banks and
credit unions. CFI's products and services are designed to meet the evolving
needs of financial institutions by addressing a broad range of 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. CFI intends to
begin offering hardware and software solutions that integrate host processing
and application software functions for community banks and credit unions.
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
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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. The Company has established
relationships with numerous service bureaus and turnkey host vendors such as
International Business Machines Corporation ("IBM"). Fiserv, Inc. and The BISYS
Group, Inc. Beginning in 1999 the Company also began offering hardware and
software host processing solutions to community banks and credit unions. 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 a leading provider of technology
solutions for the delivery of financial services, including customer service
software solutions to financial institutions at key points of customer contact
and host processing solutions. 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, electronic banking and, beginning in 1999, host processing. By
providing a broad suite of solutions, the Company believes it can address the
need for consistent processes across delivery channels for an institution's
products (such as loans and new accounts) and services (such as account
inquiries or transfers). The Company's strategy is to establish long-term
relationships with its customers and cross-sell multiple products throughout its
customer base. The Company believes this ability provides an important market
advantage over competitors who are able to address only a limited number of
delivery channels or provide a limited number of products and services.
ADDRESSING EXPANDING HOME BANKING MARKET. The Company is currently a leading
provider of personal computer banking solutions in the United States, with more
than 230 institutions offering private-dial or Internet banking services using
the Company's solutions. The Company has licensed the Internet version of its
home banking product to more than 50 financial institutions and believes that
more than 500,000 bank customers use the Company's home banking products. 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 that provides
financial institutions with an inexpensive method of initiating home banking
services with their customers.
5
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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 75 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 entered into a strategic alliance with the CUNA Mutual Insurance
Group, a key marketer and supplier of technology in the credit union 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 service and support agreements.
MAINTAINING LEADING KNOWLEDGE-BASED SOFTWARE TECHNOLOGY. The Company believes
its proprietary software and service solutions are competitive strengths.
Therefore, the Company intends to continue to invest in product development in
order to maintain and strengthen its technology position and to improve its
compatibility with other major applications. For example, the Company 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 12 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.
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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 workflow management, and risk management, as well as connectivity
for interfaces to credit scoring and reporting systems and remote printing of
loan documents. The Company engineers its lending products to operate with
common user interfaces and databases.
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 introduced a re-engineered call center
product that is integrated more effectively with its branch sales and service
products.
CFI's electronic delivery products provide personal computer private-dial and
Internet access to account inquiry and transaction capabilities, as well as ACH
transaction management and remittance processing. The Company's home banking
products provide over a dozen functions, including account balance, account
history, bill payment and online loan applications. CFI's latest version of
Personal Branch home banking software is a Windows NT 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. CFI has also created a service bureau alternative that provides
financial institutions with an inexpensive method of initiating home banking
services with their customers.
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.
HOST PROCESSING PRODUCTS. Beginning in 1999 with the Company's acquisition of
MCS, the Company began offering hardware and software solutions for the back
office accounting needs of community banks and credit unions.
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<TABLE>
REVENUE BY PRODUCT GROUP
<CAPTION>
Years Ended December 31, 1998 1997 1996
- ------------------------ ---------------- ----------------- ----------------
(Dollars in thousands) Amount Percent Amount Percent Amount Percent
------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Lending Products $ 47,296 55.2% $ 36,820 50.7% $ 29,096 48.5%
Retail Delivery 27,500 32.2 26,970 37.1 22,640 37.8
Products
Connectivity Products 4,485 5.2 3,418 4.7 2,639 4.4
Other (1) 6,349 7.4 5,441 7.5 5,572 9.3
------- ------- ------- -------- ------- -------
Total Revenue $ 85,630 100.0% $ 72,649 100.0% $ 59,947 100.0%
======= ======= ======= ======== ======= =======
<FN>
(1)Other products include bill payment systems processing fees, sales of
preprinted forms and supplies and certain consulting revenues.
</FN>
</TABLE>
Products by Product Group
<TABLE>
Lending Products
<CAPTION>
Date
Introduced/
Product Acquired Description Benefits to Customer
------- ---------- ------------------------------ ------------------------
<S> <C> <C> <C>
Laser Released Integrated, modular loan Standardizes lending
Pro 1986 processing system for consumer, policies and products,
Lending commercial, SBA, real estate streamlines processing,
home equity and agricultural incorporates a national
loans database of regulations
Application Acquired Processes applications for Speeds the loan application
Manager 1996 indirect consumer lending and approval process for
indirect lenders
LP Acquired Provides mortgage origination, Improves consistency of loan
Mortgage 1996 processing and servicing processes, speeds
capabilities origination, increases
capacity
SMarT Acquired Comprehensive risk and pipeline Automates complex analyses
1998 management system that necessary for ensuring
automates secondary mortgage optimal mortgage loan pool
marketing functions from sales
registration through delivery
of loans
DocSMarT Acquired Automates the labor intensive Speeds process of preparing
1998 functions performed after a mortgage loans for sale
mortgage loan is closed faster than manual methods,
allowing lenders to take
advantage of higher near
term delivery prices
LoansPlus Acquired Portfolio and credit risk Balances acceptable credit
1996 analysis system that uses risk and lending
neural network technology and opportunities to recommend
case-based reasoning credit decisions and manage
portfolios
</TABLE>
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<TABLE>
Retail Delivery Products
<CAPTION>
Date
Introduced/
Product Acquired Description Benefits to Customer
- ------- ---------- ------------------------------ ------------------------
<S> <C> <C> <C>
Encore! Acquired Automates the teller station by Improves
Teller 1995 providing comprehensive productivity and
transaction automation, electronic facilitates sales
journaling, store-and-forward referrals
capabilities, simplified
balancing, and access to the
customer database
Encore! Acquired Provides sales and service Opens accounts,
Platform 1995 capabilities, including account enables
opening screens, customer/product cross-selling and
matching, customer contact fulfillment of
histories, letter and fulfillment customer
generation, and institution and information
product information requests
Encore! Acquired Integrates in a common and Enables
Call Center 1994 consistent format customer, cross-selling and
product and internal procedure improves service
information
Deposit Pro Acquired Automates and ensures regulatory Speeds account
1990 compliance in the account opening opening, ensures
and cross-selling processes for compliance with
checking, savings, certificates of regulations,
deposit, and IRA accounts. improves the
consistency of new
account policies
and practices
Encore! Released Windows-based system that Allows customized
Desktop 1996 graphically links each user to CFI arrangements of
software and other business modules and access
applications to customer
information
ProForms Released Generates laser printed forms used Eliminates the
Laser 1994 daily by financial institutions need for costly
inventories of
preprinted forms,
speeds form
processing
Personal Released Server-based system that allows Provides low-cost
Branch 1993 institutions to provide personal service delivery
computer-based home banking channel,
services via private-dial or strengthens
Internet channels customer
relationships,
extends
institution
branding,
increases customer
convenience
Pro Active Released Collects, analyzes, reports and Simplifies the
1994 maps HDMA loan application process of meeting
information, non-real estate loan fair lending and
data, and community demographic community
data reinvestment
requirements
ACH Manager Acquired Originates and receives ACH Cost-effective
1995 electronic payments and collections processes ACH
business, monitors
business for risk
ACH Remote Acquired System licensed by financial Generates new fee
1995 institutions to its corporate income and
customers for transmitting data simplifies
files from the customer personal automated
computer to the financial procedures
institution's ACH system
</TABLE>
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<TABLE>
Connectivity Products
<CAPTION>
Date
Introduced/
Product Acquired Description Benefits to Customer
------- ---------- ------------------------------ ------------------------
<S> <C> <C> <C>
StarGate Acquired Connectivity software system Allows institutions
1995 which transfers or exchanges to integrate data
data between CFI products and from multiple host
other host or client/server systems and present
systems that data through
networks to multiple
front-end systems
StarGate Acquired Connectivity software which Reduces costs,
F/X 1995 enables institutions to print increases
Laser Pro documents remotely transaction speed
through their mainframe networks and productivity;
enables institutions
to centralize loan
document preparation
</TABLE>
<TABLE>
Host Processing Products
<CAPTION>
Date
Introduced/
Product Acquired Description Benefits to Customer
------- ---------- ------------------------------ ------------------------
<S> <C> <C> <C>
BankServ Acquired Back office "host" processing Automates back room
1999 software for community banks accounting and
servicing functions
CuServ Acquired Back office "host" processing Automates back room
1999 software for credit unions accounting and
servicing functions
TeleServ Acquired 24-hour telephone banking module Improves customer
1999 for BankServ and CuServ that service
supports account inquiries, fund
transfers and loan payments
OptiServ Acquired Laser optical disk storage and Improves document
1999 retrieval system storage and retrieval
</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
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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. The Company's future success depends upon its ability to establish
and maintain adequate relationships with important host processor providers. In
1999 the Company purchased a host system for community banks and credit unions.
The Company believes that it will be able to integrate many of its application
software products into this host processor.
The Company has migrated its Laser Pro lending products to Windows and Windows
NT operating environments. Many of its other lending products and most of its
retail delivery and connectivity products also run on the Windows platform. The
Company is currently supporting both DOS and Windows-based versions of several
products, enabling its customers to upgrade easily and at a reasonable pace.
SERVICE AND SUPPORT
Substantially all of the Company's customers subscribe to maintenance agreements
under which CFI provides periodic product updates reflecting evolving
regulations, product enhancements and toll-free telephone support. Maintenance
fees consist of per-item or per-user charges or are calculated based on a
percentage of the current product list price or of the size of the customer.
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,
1998, such fees were $30.3 million, or 35.4% 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 6,000 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 1998, 1997 or 1996.
The Company's largest accounts include Bank of America (formerly NationsBank),
The BISYS Group, Inc., Union Planters Bank, NCR Corporation, Banc One, PNC Bank,
Citicorp and Central Carolina Bank & Trust.
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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.
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 a relationship with IBM whose sales team
resells a large portion of the Company's product line. Third-party reseller and
co-marketing alliances provide access to institutions with which the Company
would otherwise have no relationship.
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 12 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. Acquisitions of businesses or companies require the
dedication of management resources in order to achieve the strategic objectives
of the acquisitions.
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RISK FACTORS AFFECTING THE COMPANY'S BUSINESS AND PROSPECTS
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS. The Company typically ships or
installs many of its products within three months of receipt of an order. As a
result, software license fees in any quarter are substantially dependent on
orders booked in that quarter or the previous quarter. In addition, the Company
has generally recognized a substantial portion of its revenue in the last month
of each quarter, with this revenue concentrated in the last weeks of the
quarter. The Company's results of operations may also be affected by seasonal
trends, including the tendency of some customers to complete purchases of
products in the quarter ended December 31 or not to implement new orders in the
quarter ended March 31. Because the Company's operating expenses are based on
anticipated revenue levels and a high percentage of these expenses are
relatively fixed, a small variation in the timing of recognition of specific
revenue items can cause significant variations in operating results from quarter
to quarter. Due to all of the foregoing factors, the Company's quarterly
operating results may differ from the expectations of public market analysts and
investors. In such event, the price of the Company's Common Stock would likely
be affected. Accordingly, the Company believes that quarter-to-quarter
comparisons of its results of operations should not be relied upon as an
indication of future performance. See Management's Discussion and Analysis of
Financial Condition and Results of Operations - Quarterly Results.
YEAR 2000. The Company's customers are regulated financial institutions located
in the United States, including banks, credit unions and thrifts. These
financial institutions are experiencing enhanced regulatory oversight with
respect to their preparedness for the Year 2000. In response to pressure from
regulators, or concerns about integration of new products into the institution's
existing systems, the Company's customers may delay or defer purchases of the
Company's products until after 1999. See Management's Discussion and Analysis of
Financial Condition and Results of Operations - Year 2000.
TECHNOLOGICAL AND MARKET CHANGES. The market for the Company's software products
and services is characterized by technological advances and evolving standards.
In addition, changes in banking requirements and new product introductions and
enhancements could render the Company's existing products unmarketable.
Accordingly, the Company's future success depends upon its ability to enhance
its current products in a timely fashion and to develop and introduce new
products that keep pace with technological developments and changes in delivery
channels such as electronic home banking and other changes in the financial
services industry. Further, the Company's future success depends on the
willingness of banks and other financial institutions to adopt new technologies
required for acceptance in this evolving market.
DEPENDENCE ON HOST PROCESSOR RELATIONSHIPS. Market acceptance of the Company's
products depends on the Company's ability to ensure that its products operate
together with other products offered by the Company, and with the products of
other major service providers and vendors of hardware and software used in the
financial services industry; in particular, those of vendors providing
processing services to financial institutions. The Company has developed
significant expertise with most available host processor systems and the methods
necessary to transfer data to and from such systems; however, integration is
optimized where the Company and the provider of a host processor system
cooperatively share information regarding the respective products' technologies,
development schedules and enhancements. CFI has had varying degrees of success
in establishing such relationships with host providers. Furthermore,
13
<PAGE>
providers of host processor systems or processing services have or may become
competitors of the Company with respect to one or more of the Company's
products. In such events the Company may not be able to obtain access to host
system technology necessary for developing optimal third-party system
integration. The Company's acquisition in January 1999 of host processor systems
for community banks and credit unions may cause other host processors to view
the Company as a direct competitor. The Company's future success depends on its
ability to establish and maintain adequate relationships with important
providers of host processor systems or processing services.
POSSIBLE NEED FOR ADDITIONAL FINANCING. The Company believes that the funds
expected to be generated by the Company's operations and its bank credit
facilities will provide the Company with sufficient funds to finance its
operations. However, if additional funds were needed to support working capital
requirements, or to complete acquisitions, the Company would seek to raise such
additional funds through one or more public or private financings of equity or
debt, or from other sources. Additional financing may not be available or, if
available, may not be obtainable on terms favorable to the Company or its
shareholders.
MANAGEMENT OF GROWTH. The growth in the size and complexity of the Company's
business and the expansion of its product lines and its customer base have
placed and are expected to continue to place a significant strain on all aspects
of the Company's business. In particular, the Company's emphasis on selling to
large institutions has placed significant additional demands on its installation
and implementation operations, and the growing installed base and release of new
products has placed additional demands on the customer support operation. To
accommodate growth, the Company will be required to upgrade or implement a
variety of operational and financial systems, procedures and controls. The
Company's future success will depend on its ability to expand its support
organization and infrastructure commensurate with its expanding base of
installed products and on its ability to attract, hire and retain skilled
personnel.
DEPENDENCE ON KEY EMPLOYEES AND SOFTWARE ENGINEERS. The Company believes that
its future success will depend to a significant extent upon the contributions of
its executive officers and key sales, engineering, marketing and technical
personnel. The Company does not have "key person" life insurance on any of its
employees. Competition for highly skilled personnel, particularly qualified
software development engineers and systems implementation experts, is intense
and the Company has, at times, experienced difficulty in locating personnel with
the requisite levels of expertise and experience.
LENGTHY SALES AND IMPLEMENTATION CYCLES. The license of the Company's software
products generally requires the Company to educate prospective customers
regarding the use and benefits of the Company's products. In addition, the
implementation of the Company's products involves a significant commitment of
resources by prospective customers and can be associated with substantial
changes in workflow, processing or the configuration of hardware and other
software. The license of the Company's software products can often require a
board-level or executive decision by prospective customers. For these and other
reasons, the period between initial indications of interest by a customer in the
Company's product and the ultimate sale and implementation of the Company's
product to the customer can be lengthy (often ranging from three months to in
excess of one year) and is subject to a number of significant delays over which
the Company has little or no control. The Company's sales and implementation
cycle could be lengthened by increases in the size and complexity of its license
14
<PAGE>
transactions and by delays in its customers' implementation or upgrade of the
necessary computing environments.
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, which include lending products, retail
delivery products, connectivity products and host processing products. 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. Some of the
Company's competitors have significantly greater financial, technical, sales and
marketing resources than the Company. The Company believes that the primary
competitive factors in this market include product quality, reliability,
performance, price, vendor and product reputation, financial stability, features
and functions, ease of use, interoperability with other applications or systems
and quality of support. The Company believes it competes favorably in each of
these categories. Further, because of the rapidly evolving nature of the
industry, many of the Company's collaborative partners are current or potential
competitors. The Company's entrance in 1999 into the host processing market may
cause some of the Company's partners to view the Company more as a competitor
than as a partner.
PRODUCT CONCENTRATION. A significant portion of the Company's revenue is derived
from a limited number of products. Revenue from the Company's Laser Pro products
and Deposit Pro products represented approximately 52% of the Company's total
revenue for the year ended December 31, 1998. The Company believes that although
these products will continue to represent a significant percentage of the
Company's revenue for the near term, an important part of the Company's business
strategy depends upon the ability of the Company to continue to develop and
market its other products.
DEPENDENCE ON FINANCIAL SERVICES INDUSTRY. Substantially all of the Company's
revenue is derived from licenses and services to banks and other financial
institutions, and its future success is dependent on increased sales to the
financial services industry. Demand for the Company's products and services
could be disproportionately affected by instability or downturns in the
financial services industry, which may cause existing or potential customers to
exit the industry or delay, cancel or reduce planned expenditures for technology
solutions, including those offered by the Company. Further, the financial
services industry is currently experiencing consolidation that may affect demand
for the Company's products. The financial services industry is highly regulated
and changes in regulations affecting the financial services industry or the
Company's products could have a significant effect on the Company.
PRODUCT LIABILITY RISKS; SOFTWARE DEFECTS. The Company's software products are
highly complex and sophisticated and could, from time to time, contain design
defects or software errors that could be difficult to detect and correct. In
addition, implementation of the Company's products may involve a significant
amount of customer-specific customization and may involve integration with
systems developed by third parties. Such errors could give rise to warranty or
other liability of the Company, cause delays in product introduction and
shipments, require design modifications, result in loss of or delay in market
acceptance of the Company's products or loss of existing customers.
DEPENDENCE UPON PROPRIETARY TECHNOLOGY; INTELLECTUAL PROPERTY RIGHTS. The
Company's success and ability to compete are dependent in part upon its
proprietary technology, including its
15
<PAGE>
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. 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.
Certain technology or proprietary information incorporated in the Company's
products is licensed from third parties, generally on a non-exclusive basis. The
termination of any such licenses, or the failure of the third-party licensors to
adequately maintain or update their products, could result in delays in the
Company's ability to ship certain of its products while it seeks to implement
technology offered by alternative sources, and any required replacement licenses
could prove costly. In addition, the integration of the Company's products with
financial institutions' host systems is optimized if the Company has access to
the host system technology. The parties controlling the host processor
technologies may also be current or future competitors of the Company and as
such may restrict access to such technologies. In some instances, the Company
has not been able to obtain sufficient access to host system technology
necessary for developing optimal system interfaces. While it may be necessary or
desirable in the future to obtain rights to third party technology, there can be
no assurance that the Company will be able to do so on commercially reasonable
terms, or at all.
EMPLOYEES
As of December 31, 1998, the Company had 613 full-time employees. Of this
number, 174 were engaged in product groups (primarily product development), 130
in customer service and support, 87 in sales and marketing, 125 in
implementation and training, 28 in technology, research and development and 69
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 79,800 square feet of office space occupied
under leases that expire in 2003. Annual lease payments for the Company's
corporate headquarters are approximately $1.3 million, with provisions for
inflationary increases. The Company also leases office space in Atlanta, Georgia
(52,678 square feet); Dayton, Ohio (15,151 square feet); Burnsville, Minnesota
(18,392 square feet); Englewood Cliffs, New Jersey (6,148 square feet); Houston,
Texas (7,565 square feet); Denver, Colorado (4,470 square feet); Charleston,
South Carolina (2,500 square feet); McLean, Virginia (2,680 square feet); and
Jericho, New York (1,140 square feet). These leases expire in 2000, 2006, 2000,
2002, 2002, 2004, 2003, 2001 and 2002, respectively. Annual lease payments for
these additional facilities, in aggregate, are approximately $1.6 million. The
Company believes the office space currently under lease is adequate to meet its
needs for the next year.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in routine legal matters incidental to its business. The
Company believes that the resolution of any such matters that are currently
outstanding will not have a material effect on its financial condition or
results of operations. However, no assurance can be given that the concurrent
resolution of several of such matters in manners adverse to the
16
<PAGE>
Company would not have a material adverse effect on the Company's 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, 1998.
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, 1998 were as follows:
<TABLE>
<CAPTION>
1998 High Low
------------------------------- ------- ------
<S> <C> <C>
First Quarter $ 16.69 $ 12.25
Second Quarter 17.88 14.50
Third Quarter 16.88 9.38
Fourth Quarter 13.13 10.00
1997 High Low
------------------------------- ------- ------
First Quarter $ 20.88 $ 14.00
Second Quarter 20.25 14.25
Third Quarter 18.75 13.50
Fourth Quarter 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 26, 1999 were 282 and 3,000,
respectively.
There were no cash dividends declared or paid on the Company's Common Stock in
1998 or 1997. The Company does not anticipate declaring cash dividends on its
Common Stock in the foreseeable future.
17
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
IN THOUSANDS:
EXCEPT PER SHARE AMOUNTS 1998(1) 1997 1996(2) 1995(3) 1994
- ------------------------ --------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF INCOME DATA
Revenue:
Software license fees $ 49,202 $ 40,475 $ 33,935 $ 18,918 $ 16,781
Service and support fees 30,352 27,466 22,336 15,060 12,775
Other revenue 6,076 4,708 3,676 2,798 3,060
--------- --------- --------- ---------- ---------
Total revenue 85,630 72,649 59,947 36,776 32,616
Cost of revenue 29,423 27,041 20,844 11,672 9,646
--------- --------- --------- ---------- ---------
Gross profit 56,207 45,608 39,103 25,104 22,970
Operating expenses 45,357 36,780 29,810 20,552 17,859
Acquired in-process
research and development
and other charges 2,661 -- 8,030 4,549 --
========= ========= ========= ========== =========
Income from operations $ 8,189 $ 8,828 $ 1,263 $ 3 $ 5,111
========= ========= ========= ========== =========
Net income $ 3,960 $ 4,680 $ 114 $ 323 $ 3,514
Preferred Stock dividend 95 95 97 97 97
--------- --------- --------- ---------- ---------
Net income applicable to
common shareholders $ 3,865 $ 4,585 $ 17 $ 226 $ 3,417
========= ========= ========= ========== =========
Diluted net income per
share $ 0.75 $ 0.90 $ -- $ 0.05 $ 0.71
========= ========= ========= ========== =========
Shares used in diluted
per share calculations 5,167 5,124 5,112 4,877 4,806
Basic net income per share $ 0.77 $ 0.93 $ -- $ 0.05 $ 0.87
========= ========= ========= ========== =========
Shares used in basic per
share calculations 5,012 4,919 4,763 4,369 3,922
CONSOLIDATED BALANCE SHEET DATA
Cash, cash equivalents and
short-term investments $ 3,795 $ 20 $ -- $ 7,670 $ 7,958
Working capital 16,972 7,187 2,792 8,759 10,336
Property and equipment, net 4,534 5,211 4,805 2,968 2,579
Total assets 56,781 57,542 46,845 36,587 27,487
Short-term debt 261 5,605 2,896 3,951 --
Long-term debt, less
current portion 5,693 2,232 2,880 423 --
Mandatory Redeemable
Class A Preferred Stock 738 746 754 761 764
Shareholders' equity $ 30,632 $ 25,943 $ 20,238 $ 18,169 $ 16,591
<FN>
(1)Results for the year ended December 31, 1998 include pretax charges totaling
$3.0 million for the value of in-process research and development efforts at
the date of acquisition pertaining to the acquisition of the assets of
Mortgage Dynamics, Inc. in October 1998 ($1.0 million), the remaining
goodwill and associated severance charges related to the fisCAL products
($0.9 million), the present value of net future lease payments due with
respect to certain office space in Atlanta that the Company ceased using
($0.8 million), and the initial investment of the Company in a joint venture
($0.3 million). Excluding the impact of these charges, net income and net
income per share (diluted) would have been $5.7 million and $1.11,
respectively. See Notes 1, 2 and 7 of Notes to Consolidated Financial
Statements.
(2)Results for the year ended December 31, 1996 include a pretax charge of $8.0
million for the value of in-process research and development efforts at the
date of acquisition pertaining to five companies acquired in April 1996.
Excluding the impact of the acquired in-process research and development
charges, net income and net income per share (diluted) would have been $5.2
18
<PAGE>
million and $1.02, respectively. The results of operations for the year ended
December 31, 1996 include the results of these companies' operations since
the date of acquisition in April 1996. See Note 2 of Notes to Consolidated
Financial Statements.
(3)Results for the year ended December 31, 1995 include a pretax charge of $4.5
million. The charge consists of $3.7 million for the value of Culverin
Corporation's (Culverin) in-process research and development efforts at the
date of acquisition and $0.8 million for restructuring. Excluding the impact
of the acquired in-process research and development and restructuring
charges, net income and net income per share (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.
</FN>
</TABLE>
19
<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 integrated, PC-based software for financial
institutions, including solutions for branch automation, loan origination, new
account opening, call centers, cross selling of products and electronic banking.
Beginning in 1999 with the Company's acquisition of Modern Computer Systems,
Inc. (MCS), the Company will also offer hardware and software solutions for the
back office accounting needs of community banks and credit unions. The Company
combines its technology, banking and legal expertise to deliver knowledge-based
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 6,000 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 four product groups: lending, retail delivery,
connectivity software and, beginning in 1999, host processing. Due to its
product diversification efforts, the Company is now less reliant on the Laser
Pro and Deposit Pro products. In 1998 approximately 48% of the Company's revenue
came from products other than Laser Pro and Deposit Pro.
CFI generates recurring revenue from software maintenance agreements. In 1998
service and support fees, primarily for Laser Pro and Deposit Pro, accounted for
approximately 35% of total revenue. Substantially all CFI 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 financial institutions will constitute
a higher percentage of total revenue in future periods. Transactions with these
larger institutions 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
20
<PAGE>
accounting and deferred payment terms, and also results in 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, 1998 was $18.3 million, compared to
$15.2 million and $10.0 million at December 31, 1997 and 1996, respectively.
CFI's backlog consists of firm signed orders taken and not yet converted to
revenue, but expected to be converted 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 12 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 Professional Midwestern states for the Company's
Bank Systems, Inc. compliance products
The Genesys Solutions September 1994 Call center software Group, Inc.
Texas/Southwest Technology April 1995 StarGate connectivity products and
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 Systems, Inc. April 1996 Application Manager indirect
lending product
Assets of Input April 1996 LP Mortgage lending product
Creations, Inc.
Assets of Halcyon April 1996 fisCAL loan decision support product
Group, Inc.
Assets of Pathways April 1996 LoansPlus neural net loan decision
Software, Inc. support and portfolio management
product
Vendor Payment Systems, Inc. April 1996 Bill payment services company
Assets of Mortgage October 1998 Secondary mortgage loan processing
Dynamics, Inc. products
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
COMPANY DATE ACQUIRED PRINCIPAL PRODUCTS/MARKETS ACQUIRED
-------------------------- ------------- -----------------------------------
<S> <C> <C>
Assets of Modern Computer January 1999 Host processing software and
Systems, Inc. hardware systems for community
banks and credit unions
</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.
The aggregate purchase price for the foregoing acquisitions was $28.9 million
and 430,967 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 approximately $1.0 million in 1998, $8.0 million in 1996 and $4.5
million in 1995. The terms of certain of the acquisitions provide that, based on
various factors, including the passage of time or certain product revenue, the
Company will be required to pay contingent royalties. 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 was designed to securitize small business loans originated by
community banks. CFI owns 50% of Lori Mae and uses the equity method to account
for this investment. In 1998 the Company wrote off its initial investment in
Lori Mae due to lack of acceptable market demand for Lori Mae's initial product.
See Note 1 of Notes to Consolidated Financial Statements. The Company believes
that Lori Mae will in the future completely redesign its product offerings.
22
<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,
------------------------------------
1998 1997 1996
---------- ---------- -------
<S> <C> <C> <C>
Revenue
Software license fees 57.5 % 55.7 % 56.6 %
Service and support 35.4 37.8 37.3
Other 7.1 6.5 6.1
---------- ---------- ------
Total revenue 100.0 100.0 100.0
Gross profit 65.6 62.8 65.2
Operating expenses
Sales and marketing 22.4 21.6 21.2
Product development 17.5 15.9 17.7
General and administrative 11.7 11.4 9.1
Amortization of intangibles 1.4 1.7 1.7
Acquired in-process research
and development and other charges 3.1 -- 13.4
---------- ---------- ------
Total operating expenses 56.1 50.6 63.1
---------- ---------- ------
Income from operations 9.5 (1) 12.2 2.1 (1)
Non-operating expense (0.9) (0.4) --
---------- ---------- ------
Income before income taxes 8.6 11.8 2.1
Provision for income taxes 4.0 5.4 1.9
Preferred stock dividend 0.1 0.1 0.2
========== ========== ======
Net income applicable to common 4.5 %(1) 6.3 % -- %(1)
shareholders
========== ========== ======
<FN>
(1)Excluding the impact of acquired in-process research and development and
other charges, income from operations as a percentage of revenue in 1998 and
1996 would have been 12.7% and 15.5%, respectively, and net income applicable
to common shareholders in 1998 and 1996 would have been 6.8% and 8.5%,
respectively.
</FN>
</TABLE>
23
<PAGE>
The following table sets forth percentage changes period over period in the
statements of income data of the Company:
<TABLE>
<CAPTION>
1998 Over 1997 Over
1997 1996
----------- -----------
<S> <C> <C>
Revenue
Software license fees 21.6 % 19.3 %
Service and support 10.5 23.0
Other 29.0 28.1
------- -------
Total revenue 17.9 21.2
Gross profit 23.2 16.6
Operating expenses
Sales and marketing 22.2 23.4
Product development 29.1 8.8
General and administrative 21.2 52.3
In-process R&D and other charges 100.0 (100.0)
------- -------
Total operating expenses 30.6 (1) (2.8)(1)
------- -------
Income from operations (7.2)(1) 599.0 (1)
Non-operating expense 211.6 (1,439.0)
------- -------
Income before income taxes (13.3) 570.0
Provision for income taxes (10.9) 235.0
------- -------
Net income applicable to common
shareholders (15.7)%(1) NM %(1)(2)
======= =======
<FN>
(1)Excluding the impact of acquired in-process research and development and
other charges, income from operations would have increased 22.9% in 1998 from
1997 and would have decreased 5.0% in 1997 from 1996, and net income
applicable to common shareholders would have increased 27.5% in 1998 from
1997 and would have decreased 10.1% in 1997 from 1996.
(2) Not meaningful.
</FN>
</TABLE>
REVENUE
Total revenue increased $13.0 million, or 17.9%, to $85.6 million in 1998 from
$72.6 million in 1997. Total revenue increased $12.7 million, or 21.2%, in 1997
from $59.9 million in 1996.
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 $8.7
million, or 21.6%, to $49.2 million in 1998 compared to $40.5 million in 1997.
The increase was led by Laser Pro lending suite products, mortgage products,
connectivity products and Deposit Pro, and was offset in part by declines in
Encore! branch automation and home banking revenues. Revenues from 1997 also
included results from the Company's RPxpress! remittance processing division,
which was sold in September 1997. Software license fees increased $6.6 million,
or 19.3%, in 1997 from $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. No significant price
changes for software products occurred during the periods presented.
24
<PAGE>
PERCENTAGE OF SOFTWARE LICENSE FEES
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Lending Products 63 % 55 % 45 %
Retail Delivery Products 32 42 50
Connectivity Products 5 3 5
=========== =========== ==========
Total 100 % 100 % 100 %
=========== =========== ==========
</TABLE>
LENDING PRODUCTS. Lending products license revenue increased $8.8 million,
or 39.9%, to $31.0 million in 1998 compared to $22.2 million in 1997. The
increase resulted primarily from sales of Laser Pro Closing (particularly of the
Company's Windows-based product), Laser Pro Mortgage and customization. Sales of
fisCAL Analyzer and fisCAL Online declined substantially in 1998. The Company is
not actively marketing the current fisCAL products and wrote off the remaining
goodwill associated with the products in 1998. The Company simultaneously
accrued for related severance costs calculated in accordance with pre-existing
employment agreements. See Note 1 of Notes to Consolidated Financial Statements.
The Company intends to completely redesign the fisCAL products in the future.
Lending products license revenue increased $6.8 million, or 44.3%, in 1997
compared to $15.4 million in 1996. The increase resulted primarily from sales of
Laser Pro Closing (particularly of the Company's Windows-based product to large
banks), Laser Pro Mortgage and Laser Pro Application Manager.
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, Laser Pro Mortgage, Laser Pro SMarT and Laser
Pro DocSMarT.
RETAIL DELIVERY PRODUCTS. Retail delivery product license revenue decreased $1.3
million, or 7.7%, to $15.6 million in 1998 compared to $16.9 million in 1997.
1997 revenues included $0.7 million of RPxpress! sales that were not repeated in
1998. Increased revenues from Deposit Pro, Encore! Desktop and Flextran in 1998
were offset by decreased revenues from Encore! Teller, Encore! Platform, OnLine
branch automation, Encore! Personal Branch and RPxpress!
Retail delivery product license revenue decreased $0.2 million, or 1.2%,
in 1997 compared to $17.1 million in 1996. Increased revenues from Encore!
Teller and Encore! Platform products were offset by declines in revenues from
OnLine branch automation products, Encore! Personal Branch, Deposit Pro, Encore!
Call Center and Pro Active CRA. The declines in OnLine branch automation
revenues in 1998 and 1997 reflect 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 revenues were adversely affected in
1997 as the Company transitioned the product from a UNIX to a Windows NT
environment. The decrease in Deposit Pro revenues in 1997 reflects the one-time
spike in demand when the Windows version of the product was released in
mid-1996. Encore! Call Center revenues 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
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revenues in 1997 was also caused by the sale of the Company's RPxpress!
remittance processing division in September 1997.
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 revenues increased
$1.1 million, or 75.8%, to $2.5 million in 1998 from $1.4 million in each of
1997 and 1996. 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.
HOST PROCESSOR PRODUCTS. In January 1999 CFI acquired substantially all of
the assets of Modern Computer Systems, Inc. and certain related corporations
(collectively, MCS). MCS provides back office ("host") data processing and
related services to community banks and credit unions. No revenues from host
processor products are attributable to 1998, 1997 or 1996.
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 customers
subscribe to its support services, which require the payment of annual or
quarterly maintenance fees. Service and support fees increased $2.9 million, or
10.5%, to $30.4 million in 1998 compared to $27.5 million in 1997. Service and
support fees increased $5.1 million, or 22.8%, in 1997 compared to $22.4 million
in 1996. These increases resulted primarily from increases in the installed base
of the Company's products, by the Company's acquisition of new products and by
an increase, effective in the fourth quarter of 1998, in service and support
pricing for certain lending products.
OTHER REVENUE. Other revenue includes Vendor Payment Systems (VPS) processing
fees, sales of preprinted forms and supplies and certain consulting revenue.
Other revenue increased $1.4 million, or 29.0%, to $6.1 million in 1998 compared
to $4.7 million in 1997. Other revenue increased $1.0 million, or 27.8%, in 1997
compared to 1996. The acquisition of VPS in April 1996 was the primary cause for
the increase in dollars in 1997.
COST OF REVENUE
Cost of revenue primarily consists of amortization of internally developed and
purchased software, royalty payments, compliance warranty insurance premiums,
software production costs, costs of product support, training and
implementation, costs of software customization, materials costs for forms and
supplies, and bill payment processing costs.
Cost of revenue increased $2.4 million, or 8.9%, to $29.4 million in 1998
compared to 1997. Cost of revenue increased $6.2 million, or 29.8%, to $27.0
million for 1997 compared to $20.8 million in 1996. Of the 1997 increase, $2.6
million resulted from additional amortization of software development costs. The
remainder of the increase in 1997 and the increase in 1998 are 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
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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.
Software amortization was $2.6 million in 1998, $4.5 million in 1997 and $1.9
million in 1996. During 1998, 1997 and 1996 several software development
projects reached commercial feasibility. As a result, the Company began to
amortize certain product development costs that had been capitalized in prior
periods. In addition, the Company recorded amortization as a result of software
acquired in connection with the MDI acquisition in October 1998 and 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 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 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 was 65.6%, 62.8% and 65.2% in 1998, 1997 and 1996,
respectively. The increase in 1998 is primarily attributable to lower software
amortization than in 1997 and from improved implementation efficiencies. The
decline in gross margin from 1996 to 1997 is 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. In particular,
software amortization is expected to increase in 1999 compared to 1998.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses increased to $19.2 million, or
22.4% of revenue, in 1998 compared to 1997. Sales and marketing expenses
increased to $15.7 million, or 21.6% of revenue, in 1997 compared to $12.7
million, or 21.2% of revenue, in 1996. The increases in dollar amount in 1998
and 1997 resulted from increased commissions associated with increased revenues,
salary increases, additional personnel and higher advertising costs.
PRODUCT DEVELOPMENT. Product development expenses include costs of enhancing
existing products and developing new products. Product development expenses were
$14.9 million, or 17.4% of revenue, in 1998, $11.5 million, or 15.9% of revenue,
in 1997 and $10.6 million, or 17.7% of revenue, in 1996. Increases in dollar
amount of product development expenses were largely the result of increased
staffing in the development areas of the Company, additional costs for
integrating acquired products and accelerating development of the Company's home
banking products.
Product development expenses in each of 1998, 1997 and 1996 were offset in part
by capitalization of software development efforts. The company capitalized $1.0
million of software development costs in 1998, $5.0 million in 1997 and $5.2
million in 1996. Capitalized software development costs, net of accumulated
amortization, were $8.3 million as of
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December 31, 1998 compared to $9.9 million as of December 31, 1997. The Company
believes that the current development cycle for its compliance-related products,
which typically have relatively long lives, was completed in the second quarter
of 1998 and, accordingly, there should be a significant reduction in the
capitalization of software development costs in future periods. No software
development costs were capitalized in the third or fourth quarters of 1998. The
Company anticipates that its capitalized software development costs existing as
of December 31, 1998 will be fully amortized over the next four 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 $10.0
million, or 11.7% of revenue in 1998, $8.3 million, or 11.4% of revenue in 1997,
and $5.4 million, or 9.0% of revenue, in 1996. The increases in dollar amounts
in 1998 and 1997 are due principally to additional systems and infrastructure
costs necessary to accommodate revenue growth. The increase in dollar amount in
1997 was also due 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 relatively low level of these expenses as a percentage
of revenue in 1996.
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. Amortization of intangibles was $1.2 million, $1.3
million and $1.0 million in 1998, 1997 and 1996, respectively.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT AND OTHER CHARGES
In connection with its acquisition of the assets of Mortgage Dynamics, Inc. in
October 1998, the Company recorded a pretax charge of $1.0 million for research
and development efforts in process at the date of the acquisition. In the fourth
quarter of 1998 the Company also recorded aggregate other pretax charges of $2.0
million consisting of the present value of the remaining liability for certain
leased office space the Company ceased using, the remaining goodwill associated
with the fisCAL credit analysis products and related severance costs, and the
Company's initial investment in Lori Mae. See Notes 1, 2 and 7 of Notes to
Consolidated Financial Statements.
In connection with its acquisitions of six companies in April 1996, the Company
recorded pretax charges of $8.0 million in the second quarter of 1996 for
research and development efforts in process at the date of acquisition.
The values assigned to the in-process research and development efforts were
determined by independent appraisals and represent those efforts in process at
the dates 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. At
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December 31, 1998 the Company believes that acquired in-process research and
development efforts related to the acquisitions will result in commercially
viable products during 1999 at an additional cost of approximately $350,000.
INCOME FROM OPERATIONS
Income from operations in 1998 was $8.2 million, or 9.6% of revenue, compared to
$8.8 million, or 12.2% of revenue, in 1997 and $1.3 million, or 2.1% of revenue,
in 1996. Excluding the impact of the $2.6 million charge in the fourth quarter
of 1998 and of the $8.0 million charge in the second quarter of 1996, operating
income would have been $10.8 million, or 12.7% of revenue, in 1998 and $9.3
million, or 15.5% of revenue, in 1996.
NON-OPERATING INCOME (EXPENSE)
Non-operating income (expense), which consists primarily of interest income and
expense, was a net expense of $0.7 million in 1998 compared to a net expense of
$0.3 million in 1997 and net non-operating income of $18,000 in 1996.
Non-operating expense in 1998 included a $0.4 million charge representing CFI's
initial investment in Lori Mae. See Note 1 of Notes to Consolidated Financial
Statements. Interest paid on outstanding balances under the Company's bank line
of credit was the principal cause of the net expense in 1997.
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.
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.
PROVISION FOR INCOME TAXES
The effective tax rate for 1998 was 44.3% compared to 45.5% in 1997 and 43.0% in
1996, excluding the effect of $3.0 million in pretax charges in 1998 and $8.0
million in pretax charges resulting from the April 1996 acquisitions. The
difference between federal and state statutory tax rates and the Company's
effective tax rates in 1998, 1997 and 1996 results primarily from increased
amortization of nondeductible intangibles related to acquisitions.
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
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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, including regulatory requirements for financial institutions with
respect to the Year 2000; 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 Year 2000 issue identifies problems that may arise in computer equipment and
software, as well as embedded electronic systems, because of the way these
systems are programmed to interpret certain dates that will occur around the
change in century. In the computer industry this is primarily the result of
computer programs being designed and developed using or reserving only two
digits in date fields (rather than four digits) to identify the century, without
considering the ability of the program to properly distinguish the upcoming
century change in the Year 2000. In addition, the Year 2000 is a special-case
leap year, and some programs may drop February 29th from their internal
calendars. Likewise, other dates may present problems because of the way the
digits are interpreted. Because the Company's business is based on the licensing
of applications software, the Company's business would be impacted if its
products or its internal systems experience problems associated with the century
change. This issue also potentially affects the internal software systems used
by the Company in its operations.
The Company has completed its survey of internal computer systems, as well as
critical third party software and systems used by the Company, regarding Year
2000 compliance status. The scope of the Year 2000 readiness effort included
addressing (i) information technology such as software and hardware, (ii)
non-information systems or embedded technology contained in various equipment,
safety systems, facilities and utilities and (iii) readiness of mission critical
third-party suppliers. The Company has communicated with its significant
suppliers and vendors to understand their ability to continue providing services
and products through the millenium change and to determine the extent to which
the Company may be vulnerable in the event of a failure by them or their
services and products. With respect to mission critical systems, the Company
sought statements of compliance from each vendor either through direct response
or by reference to information posted on an electronic bulletin board or in a
government database.
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INTERNAL SYSTEMS. Some of the computer programs and systems used by the Company
require date-sensitive information to accurately and adequately process
information critical to the Company's business. Inaccuracies or other errors in
this information could have a material, adverse effect on the Company's
business. Furthermore, non-compliance in these programs could cause a system
failure or interruption, either of which could also materially adversely affect
the Company. In addition to computer software, some machines and devices used by
the Company and others may contain embedded technology that is not Year 2000
compliant, which could result in a malfunction or failure of such devices.
The review and assessment of the Company's internal systems is complete. The
Company's internal accounting system, including those components used for the
Company's invoicing and bill payment, has been evaluated by the vendor and has
been represented to be Year 2000 compliant. Nevertheless, the Company will
conduct its own tests in the first half of 1999. Furthermore, the Company plans
to routinely backup its financial data through the end of 1999 and will develop
a contingency plan with respect to the accounting system in the second half of
1999. The Company anticipates that its customer support and call tracking system
will be Year 2000 compliant after installation of an update scheduled to occur
in the second quarter of 1999. The cost of the update is estimated to be
immaterial.
The Company completed the survey of its software vendors in the fourth quarter
of 1998. The bulk of the Company's vendors have already provided compliant
versions of their software. The Company continues to monitor all material third
party software not indicated to be Year 2000 compliant and believes that few
vendors, if any, will not provide compliant versions by the middle of 1999.
The Company has received representations that its phone and voice mail systems
became Year 2000 compliant through upgrades completed during the first quarter
of 1999. As to its phone service providers, the Company has offices located at
10 disparate geographical locations all served by different local phone service
providers and the Company contracts with two long distance carriers.
Consequently, the Company can shift telecommunications through any of these
locations should any other location be down. Further, neither the Company's base
software nor updates are provided exclusively via downloading. Virtually all of
the Company's base software and updates are provided to customers through
magnetic media.
Based on information gathered to date, the Company is not presently aware of any
Year 2000 issue that could materially affect the Company's operations, either
self-originated or caused by third-party service vendors or providers.
Management believes that all mission critical systems will be compliant by the
Year 2000. Nevertheless, there can be no assurance that the Company will not
experience some operating difficulties as a result of Year 2000 issues. If they
occur, these difficulties could require the Company to incur unanticipated costs
to remedy the problems and, either individually or collectively, have a material
adverse effect on the Company's business operations and financial results. The
Company has not yet determined the cost of completing its investigation or the
cost of any modification or remediation that may be required to correct Year
2000 issues. Costs incurred to date to assess Year 2000 issues have not been
significant and have been funded through operating cash flows. The Company
intends to develop contingency plans for its significant systems that can be
implemented on or after January 1, 2000 in the event of a system failure
resulting from the century change.
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COMPANY DEVELOPED SOFTWARE. The Company develops software programs for use by
financial institutions to automate various transactions and processes. These
programs often are highly dependent upon historical or dynamic financial and
other data that, if the programs are not able to distinguish between the Year
2000 and other century-end years, could be misreported or misinterpreted and
cause significant resulting calculation errors. This data is often acquired from
other systems that may or may not be Year 2000 compliant, further exacerbating
the problem. The Company's financial institution customers are subject to
regulatory scrutiny; any such errors could subject them to civil or regulatory
action, or both, resulting in large fines, penalties or other costs.
Additional consequences of the Year 2000 issue for the Company's financial
institution customers may include systems failures and business process
interruption, including, among other things, a temporary inability to process
transactions, satisfy regulatory obligations, or engage in similar normal
business activities. In addition, the impact of Year 2000 issues may severely
impair the ability of the Company's customers to purchase the Company's
products, or to make payments on software or services previously purchased.
Concern over Year 2000 issues is permeating the financial services industry, and
management expects that the resolution of these concerns will likely absorb a
substantial portion of financial institution information technology budgets and
attention in the near term (with an associated decreased focus on other business
initiatives, including purchase decisions with respect to the Company's
software). Year 2000 issues faced by its customers could materially and
adversely affect the Company's operations and financial results through the Year
2000.
The Federal Financial Institutions Examination Council (the "FFIEC") has issued
a series of Statements beginning in June 1996 requiring that the various
financial institutions regulated by FFIEC member agencies provide assurance that
they will be capable of conducting business as usual in 2000 and into the 21st
century. To this end, and among other obligations, each institution is required
to survey its systems and operations (including software and vendor supplied
services), determine any deficiencies, remediate to correct deficiencies, test
mission critical third party software and services to confirm their Year 2000
readiness after remediation, and develop contingency plans against the event
that a mission critical item, service or process fails to be Year 2000
compliant. Further information on the FFIEC mandate and related matters can be
found at the FFIEC's website, www.ffiec.gov/y2k. In support of its customers'
obligations resulting from the FFEIC's Statements, the Company has made the Year
2000 issue a significant priority and assigned a task force with responsibility
for an ongoing effort to minimize Year 2000-related risks relative to the
Company's products.
The Company has completed its review of all of its software products for Year
2000 compliance, and has determined that most of the Company's standard software
products are Year 2000 compliant. The Company has not undertaken, and does not
intend to undertake, a review of the many customized versions of software
products that it has provided customers. The Company has developed a plan to
discontinue some of its standard products prior to December 31, 1999, and the
Year 2000 issue has been one of the factors considered in those decisions. For
those products that will not continue to be offered, generally a Year 2000
compliant replacement product currently exists.
For standard products that will continue to be offered, but are not currently
Year 2000 compliant, the Company has developed and executed a plan for resolving
such compliance-related issues.
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Remediation was substantially completed during 1998. A matrix describing the
Company's product compliance (including a comprehensive definition to determine
such compliance) has been communicated to the Company's customers and is
available for review on the Company's website. The financial impact of making
the required changes to the software programs is not expected to be material to
the Company's consolidated financial position, results of operations or cash
flows. The Company acquired substantially all of the assets of MCS in January
1999. Although MCS's BankServ product has been certified as Year 2000 compliant,
none of the products of MCS are included in the foregoing discussion. The
Company intends to complete its Year 2000 review of the MCS products during the
first quarter of 1999 consistent with the standards established for the
Company's other products.
Information on the Company's website is provided to customers for the sole
purpose of assisting them in planning for the transition to the Year 2000 and
includes the Company's definition of Year 2000 compliance, product compliance
status, and, in the case of the Laser Pro Closing/Lending product, includes test
guides. This information is updated at least quarterly so that the Company's
customers can access current information on the Year 2000 compliance status of
the Company's products. The matrix does not provide certification of Year 2000
compliance and customers are cautioned that they should independently confirm
Year 2000 compliance of the Company's products.
The Company has developed a standard Year 2000 compliance warranty and is
offering it to customers with respect to those products that will continue to be
offered into the next century. This warranty is consistent with the Company's
standard product warranties, extends no indeminities, and maintains the
liability cap applying otherwise in its licenses.
Financial institutions, financial institution regulators, and the many vendors
supplying the financial services industry have not developed a consistent and
comprehensive definition of what constitutes "compliance" with the Year 2000.
This, coupled with the different combinations of software, firmware, and
hardware used by customers may lead to disputes against the Company regarding
the operation of its software. The outcome of such disputes and the impact on
the Company are not estimable at this time.
MARKET RISK
The Company has not entered into derivative financial instruments. The Company
may be exposed to future interest rate changes on its debt. The Company does not
believe that a hypothetical 10 percent change in interest rates would have a
material effect on the Company's cashflow.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased $9.8 million to $17.0 million at December 31, 1998
from $7.2 million at December 31, 1997. The increase resulted principally from
enhanced efforts by the Company to improve cash collections, and from a net
reduction in short-term debt of $5.3 million and an increase in long-term debt
of $4.0 million in connection with a renegotiation of the Company's bank line of
credit facility.
Net cash provided by operations was $11.0 million in 1998 compared to $5.4
million in 1997. The increase was principally due to a charge for acquired
research and development efforts
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and other charges taken in 1998, decreased net accounts receivable and prepaid
expenses, and increased customer deposits. These changes were offset in part by
decreases in deferred revenues, depreciation and amortization, deferred income
taxes and income taxes payable.
Net cash used in investing activities in 1998 was $6.1 million compared to $7.9
million in 1997, due primarily to the reduction in capitalization of software
development costs in 1998 and offset in part by cash paid for the MDI
acquisition. Expenditures for property and equipment of $1.7 million in 1998
were primarily attributable to investments in infrastructure necessary to
accommodate the Company's growth.
Net cash used in financing activities of $1.3 million in 1998 resulted
principally from a total of $2.0 million of repayment on the Company's bank line
of credit facility and on acquisition-related debt. These payments were offset
in part by $0.8 million in proceeds from issuance of common stock, primarily
upon exercise of stock options.
The Company's 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, 1998 were $7.6 million, or
25.8% of total accounts receivable, compared to $3.8 million, or 11.9% of total
accounts receivable, at December 31, 1997. Days sales outstanding (DSOs) in
accounts receivable, including both billed and unbilled accounts receivable,
decreased to 108 days at December 31, 1998, from 136 days at December 31, 1997,
primarily because the Company issued certain annual maintenance invoices in
January 1999 instead of December 1998. Historically, the Company had issued such
invoices in late December each year. DSOs at December 31, 1997, excluding the
distorting impact of annual maintenance invoices, were 106 days. The shift in
the timing of issuing annual maintenance invoices is also primarily responsible
for the decreases in accounts receivable and deferred revenues at December 31,
1998 compared to December 31, 1997.
Future cash requirements could include, among other things, purchases of
companies, products or technologies, expenditures for internal software
development, capital expenditures necessary to the expansion of the business,
and installment payments on debt related to acquisitions. Available cash
resources include cash generated by the Company's operations and a revolving
bank line of credit of up to the lesser of $10.0 million or 50% of accounts
receivable, of which $6.0 million was available at December 31, 1998. The line
of credit expires May 1, 2000.
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.
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
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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
SEE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - MARKET RISK.
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.
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, 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
1999 Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is included under the captions Board
Compensation, Executive Compensation, Employment Contracts, Termination of
Employment and Change-in-Control Arrangements and Report of the Compensation
Committee in the Company's Proxy Statement for its 1999 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 1999 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
1999 Annual Meeting of Shareholders and is incorporated herein by reference.
35
<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:
Page
Report of Independent Public Accountants F-1
Consolidated Balance Sheets - December 31, 1998 and 1997 F-2
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996 F-3
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 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, 1998.
36
<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.
2.4 Asset Purchase and Sale Agreement, effective January 1, 1999, by
and among Modern Computer Systems, Inc., other affiliated
corporations, their shareholder and CFI ProServices, Inc.
previously filed as Exhibit 2.1 with the Company's Form 8-K dated
February 10, 1999 and as filed with the Securities and Exchange
Commission on February 10, 1999 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
on 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 on 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 on 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 on 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.
37
<PAGE>
Number Description
- ---------- -------------------------------------------------------------------
10.1* Nonqualified Stock Option Plan dated October 15, 1993 previously
filed as Exhibit 99.10 to the Registration Statement on Form S-8
(Registration No. 33-70506), as filed with the Securities and
Exchange Commission on October 19, 1993 and incorporated herein by
reference.
10.2* Registrant's 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 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.
10.5 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.
10.6* 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.
10.7* 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.
10.8 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.
10.9 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.
10.10 Second amendment, dated January 11, 1999, to office lease dated
March 18, 1994 between the Company and John Hancock Mutual Life
Insurance Company.
38
<PAGE>
Number Description
- ---------- ---------------------------------------------------------------
10.11* 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.
10.12 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.
10.13 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.
10.14 Amendment No. 2, dated July 1, 1996, to Business Loan Agreement
dated November 8, 1995 - previously filed as Exhibit 10.8 to the
Company's quarterly report of Form 10-Q for the quarter ended June
30, 1996 as filed with the Securities and Exchange Commission on
August 13, 1996 and
incorporated herein by reference.
10.15 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.
10.16 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.
10.17 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.
10.18 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.
10.19 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.
39
<PAGE>
Number Description
- ---------- ---------------------------------------------------------------
10.20 Amendment No. 8 dated March 31, 1998, to business loan agreement
dated November 8, 1995 - previously filed with the Company's Form
10-Q for the quarter ended March 31, 1998, as filed with the
Securities and Exchange Commission on May 5, 1998, and is
incorporated herein by reference.
10.21 Amendment No. 9 dated April 30, 1998, to business loan agreement
dated November 8, 1995 - previously filed with the Company's Form
10-Q for the quarter ended March 31, 1998, as filed with the
Securities and Exchange Commission on May 5,1998, and is
incorporated herein by reference.
10.22* Form of Executive Retention Agreement - previously filed as Exhibit
10.1 to the Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on August 22, 1994 and
incorporated herein by reference.
21 Subsidiaries of the Registrant
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
- ------------------
*Mangement contract or compensatory plan or arrangement.
40
<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 30, 1999
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 30, 1999.
Signature Title
- --------- -----
/s/ MATTHEW W. CHAPMAN Chairman and Chief Executive Officer
- ---------------------- (Principal Executive Officer)
Matthew W. Chapman
/s/ ROBERT P. CHAMNESS Director, President and Chief
- ---------------------- Operating Officer
Robert P. Chamness
/s/ KURT W. RUTTUM Vice President and Chief Financial Officer
- ---------------------- (Principal Financial and Accounting Officer)
Kurt W. Ruttum
/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/ ERAN S. ASHANY Director
- ----------------------
Eran S. Ashany
/s/ FRANK E. BRAWNER Director
- ----------------------
Frank E. Brawner
/s/ L. B. DAY Director
- ----------------------
L. B. Day
41
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 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, 1998 and 1997
and the related consolidated statements of income, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1998.
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, 1998 and 1997 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon
January 22, 1999
F-1
<PAGE>
<TABLE>
CFI PROSERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<CAPTION>
December 31,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 3,589 $ 20
Investments 206 -
Receivables, net of allowances of $2,600 and $2,880 29,701 32,059
Inventory 249 297
Deferred tax asset 1,341 1,307
Prepaid expenses and other current assets 1,604 1,928
-------- --------
Total Current Assets 36,690 35,611
Property and Equipment, net of accumulated
depreciation of $9,947 and $7,855 4,534 5,211
Software Development Costs, net of accumulated
amortization of $3,368 and $735 8,277 9,856
Purchased Software Costs, net of accumulated
amortization of $19 211 -
Other Intangibles, net of accumulated amortization
of $4,763 and $3,227 6,190 5,689
Other Assets, including deferred taxes 879 1,175
-------- --------
Total Assets $ 56,781 $ 57,542
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,986 $ 2,119
Accrued expenses 8,017 5,362
Deferred revenues 5,300 12,498
Customer deposits 3,681 1,715
Bank line of credit - 5,310
Current portion of long-term debt 261 295
Income taxes payable 473 1,125
-------- --------
Total Current Liabilities 19,718 28,424
Deferred Tax Liability - 197
Commitments and Contingencies
Long-Term Debt, less current portion 5,693 2,232
-------- --------
Total Liabilities 25,411 30,853
Mandatory Redeemable Class A Preferred Stock 738 746
Shareholders' Equity:
Series preferred stock, 5,000,000 shares
authorized, none issued and outstanding - -
Common stock, no par value, 10,000,000
shares authorized and 5,032,977 and 4,925,423
shares issued and outstanding 19,689 18,865
Retained earnings 10,943 7,078
-------- --------
Total Shareholders' Equity 30,632 25,943
-------- --------
Total Liabilities and Shareholders' Equity $ 56,781 $ 57,542
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
F-2
<PAGE>
<TABLE>
CFI PROSERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
<CAPTION>
Years Ended December 31,
---------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
REVENUE
Software license fees $ 49,202 $ 40,475 $ 33,935
Service and Support 30,352 27,466 22,336
Other 6,076 4,708 3,676
------ ------ ------
Total Revenue 85,630 72,649 59,947
COST OF REVENUE 29,423 27,041 20,844
------ ------ ------
Gross Profit 56,207 45,608 39,103
OPERATING EXPENSES
Sales and marketing 19,204 15,709 12,725
Product development 14,913 11,549 10,615
General and administrative 10,012 8,263 5,425
Amortization of intangibles 1,228 1,259 1,045
Acquired in-process research and
development and other charges 2,661 - 8,030
------ ------ ------
Total Operating Expenses 48,018 36,780 37,840
------ ------ ------
Income From Operations 8,189 8,828 1,263
NON-OPERATING INCOME (EXPENSE)
Interest expense (454) (456) (251)
Interest income 295 170 271
Canceled stock offering costs - (487) -
Gain on sale of operating division - 628 -
Equity in losses attributable to joint
venture (670) (148) -
Other, net 83 52 (2)
------ ------ ------
Total Non-operating Income
(Expense) (746) (241) 18
------ ------ ------
INCOME BEFORE PROVISION FOR INCOME TAXES 7,443 8,587 1,281
PROVISION FOR INCOME TAXES 3,483 3,907 1,167
------ ------ ------
NET INCOME 3,960 4,680 114
PREFERRED STOCK DIVIDEND 95 95 97
------ ------ ------
NET INCOME APPLICABLE TO
COMMON SHAREHOLDERS $ 3,865 $ 4,585 $ 17
====== ====== ======
BASIC NET INCOME PER SHARE $ 0.77 $ 0.93 $ -
====== ====== ======
DILUTED NET INCOME PER SHARE $ 0.75 $ 0.90 $ -
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE>
CFI PROSERVICES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS'S EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Common Stock
------------------- Retained
Shares Amount Earnings Total
--------- -------- -------- -------
<S> <C> <C> <C> <C>
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
Issuance of Common Stock 107,554 768 - 768
Tax benefits from stock
transactions - 56 - 56
Net income applicable to common
shareholders - - 3,865 3,865
--------- -------- -------- -------
BALANCES, DECEMBER 31, 1998 $ 5,032,977 $ 19,689 $ 10,943 $ 30,632
========= ======= ======= ======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
CFI PROSERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income applicable to common shareholders $ 3,865 $ 4,585 $ 17
Adjustments to reconcile net income applicable to
common shareholders to cash provided by operating
activities:
Depreciation and amortization 6,805 8,540 4,731
Write-off of in-process research and
development and other charges 2,661 - 8,030
Gain on sale of property and equipment - - (10)
Gain on sale of operating division - (628) -
Deferred income taxes (586) 87 (1,328)
Interest accreted on mandatory redeemable
preferred stock 95 95 97
Interest accreted on note payable 93 93 -
Gain on sale of equity/debt investments - - (156)
Equity in losses attributable to joint venture 670 148 -
(Increase) decrease in assets, net of effects from
purchase of businesses:
Receivables, net 2,749 (9,135) ( 6,580)
Income taxes receivable - - 229
Inventories, net 48 (141) 59
Prepaid expenses and other assets 612 (269) (325)
Increase(decrease) in liabilities, net of effects from purchase of
businesses:
Drafts payable - (425) 425
Accounts payable (133) (765) 1,167
Accrued expenses 52 (1,186) 2,079
Deferred revenues (7,307) 2,053 2,069
Customer deposits 1,966 846 (609)
Other current liabilities - - (338)
Income taxes payable (596) 1,475 678
------ ------ ------
Net cash provided by operating
activities 10,994 5,373 10,235
Cash flows from investing activities:
Expenditures for property and equipment (1,680) (2,713) (2,721)
Software development costs capitalized (1,054) (4,994 (5,204)
Investment in joint venture (304) (322) -
Purchase of investments (206) - -
Proceeds from sale/maturity of investments - - 2,982
Issuance of note receivable (391) - -
Proceeds from long-term note receivable 189 - -
Proceeds from sale of operating division - 87 -
Proceeds from sale of property and equipment - - 19
Cash paid for acquisition of Mortgage Dynamics, Inc. (2,668) - -
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 (6,114) (7,942) (10,112)
Cash flows from financing activities:
Net proceeds from (payments on) line of credit (1,310) 3,719 1,591
Payments on notes payable - - (7,280)
Payments on long-term debt (666) (1,751) (328)
Payments on mandatory redeemable preferred stock (103) (103) (104)
Proceeds from issuance of common stock 768 724 1,154
------ ------ ------
Net cash provided by (used in)
financing activities (1,311) 2,589 (4,967)
------ ------ ------
Increase (decrease) in cash and cash equivalents 3,569 20 (4,844)
Cash and cash equivalents:
Beginning of period 20 - 4,844
------ ------ ------
End of period $ 3,589 $ 20 $ -
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
CFI PROSERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
CFI ProServices, Inc. and its subsidiaries (the Company) develops, sells, and
services customer service software used by financial institutions. The Company
combines its technology, banking and legal expertise to deliver knowledge-based
software solutions that enable institutions to simplify key sales and service
business processes, improve productivity, strengthen customer relationships, and
maintain compliance with both internal business policies and external government
regulations. Although most sales historically have been to commercial banks
within the United States, today the Company actively markets its products to
most types of financial institutions domestically and, for the non-compliance
oriented software, internationally. The Company has been in business since 1978.
BASIS OF CONSOLIDATION
Effective December 31, 1997, the Company's wholly owned subsidiaries (other than
The Genesys Solutions Group, Inc. (Genesys) and Vendor Payment Systems, Inc.
(VPS)) were dissolved and their assets were distributed to the Company. Genesys
is an inactive subsidiary and its assets were distributed to the Company
effective December 31, 1997. Genesys was dissolved in 1998.
The consolidated financial statements include the accounts of the Company's
wholly owned subsidiaries: Genesys, Texas/Southwest Technology Group, Inc.,
Culverin Corporation, OnLine Financial Systems, Inc., COIN Banking Systems,
Inc., and 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 and October 1998 (see Note 2). These acquisitions have been included
in the consolidated financial statements since the date of acquisition.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and short-term investments with 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, 1998 and
1997. The Company uses the specific identification method for determining the
cost to use in computing realized gains and losses.
F-6
<PAGE>
Years Ended December 31,
--------------------------------
1998 1997 1996
-------- --------- ---------
(In thousands)
Proceeds from sale of debt securities $ -- $ -- $ 2,982
Realized gains on sales of debt securities -- -- 156
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 the estimated economic life of three years. Generally, contracts for
purchased software require royalties to be paid based on revenues generated by
the related software.
Years Ended December 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
(In thousands)
Amortization of internally developed
software $ 2,633 $ 3,465 $ 1,194
Amortization of purchased software 19 1,079 693
During 1998, 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 1998 and 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
estimates 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 recognizes an impairment loss in an amount necessary to
write the intangibles down to fair value as determined by the expected
discounted future cash flows. In 1998 the Company wrote off $877,000, reflecting
the remaining goodwill associated with its fisCAL credit analysis products and
related severance costs calculated in accordance with pre-existing employment
contracts. These charges are included in the acquired in-process research and
development and other charges in the Company's Statement of Income for 1998.
INVESTMENT IN JOINT VENTURE
In November 1997 the Company made a 50% investment in Lori Mae, L.L.C. (Lori
Mae), a company designed to securitize small business loans originated by
community banks. The Company uses the equity method to account for its
investment in this joint venture. In 1998 the Company wrote off its initial
investment in Lori Mae in the amount of $352,000 due to lack of acceptable
market demand for Lori Mae's initial product. This charge, in addition to losses
attributable to the joint venture, are included in equity in losses attributable
to joint venture in the Company's Statement of Income for 1998. At December 31,
1998, the net investment in Lori Mae was $0.
REVENUE RECOGNITION
License revenues are derived from three kinds of transactions:
o Licenses with no follow-on obligations on the part of the Company
are recognized upon shipment.
o Licenses which require installation and training by the Company
prior to use are recognized upon completion of the installation and
training.
o 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. 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.
F-8
<PAGE>
Revenues for consulting, custom programming and training, where separately
contracted for, are recognized as the related services are performed. Other
revenues include sales of preprinted forms and font cartridges, which are
recognized upon shipment. Amounts received in advance for service and support
contracts are deferred and recognized ratably over the support period. Amounts
in excess of invoiced minimums for service and support charges based on usage
are estimated and recognized in the period in which usage occurs. Included in
receivables at December 31, 1998 and 1997 are unbilled receivables of $7,697,000
and $3,824,000, respectively. These primarily relate to percentage of completion
contracts and contracts with deferred payment terms.
During 1997 and 1998 Statements of Position (SOP) 97-2 and 98-9, "Software
Revenue Recognition," were released and became effective for the Company for the
year ended December 31, 1998. SOP 97-2 and SOP 98-9 did not have a material
impact on the Company's 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 $1,406,000,
$1,241,000 and $950,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates.
EARNINGS PER SHARE
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. Following is a reconciliation of
basic EPS and diluted EPS:
F-9
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
- ----------------------- -------------------- -------------------- --------------------
(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 $3,865 5,012 $ 0.77 $4,585 4,919 $ 0.93 $ 17 4,763 $ 0.00
===== ===== =====
Effect of Dilutive
Securities
Stock Options - 155 - 205 - 349
-------------- ------------- -------------
Diluted EPS
- -----------
Income available to
common shareholders $3,865 5,167 $ 0.75 $4,585 5,124 $ 0.90 $ 17 5,112 $ 0.00
===== ===== =====
</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 787,184,
94,500 and 10,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
SUPPLEMENTARY CASH FLOW INFORMATION The Company made the following cash
payments:
Years Ended December 31,
------------------------
1998 1997 1996
------ ------- ------
(In thousands)
Interest and preferred dividends $ 554 $ 517 $ 148
Income taxes 4,751 2,294 1,597
Noncash investing and financing activities were as follows:
Years Ended December 31,
------------------------
1998 1997 1996
------ ------ ------
(In thousands)
Tax benefit from exercise of nonqualified stock
options $ 56 $ 396 $ 632
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 division -- 788 --
Increase in goodwill for accrued acquisition
related contingent royalties 1,085 1,140 --
Decrease in goodwill and increase in deferred
tax asset -- 389 --
related to acquired net operating losses
Reclassification of bank line of credit to long 4,000 -- --
term debt
F-10
<PAGE>
RECLASSIFICATIONS
Certain reclassifications in the financial statements and notes have been made
to prior year financial statements to conform with the current presentation.
COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
reporting and display of comprehensive income. Comprehensive income includes
charges or credits to equity that did not result from transactions with
shareholders. SFAS No. 130 became effective during 1998. As net income and
comprehensive income were identical in 1998, 1997 and 1996 SFAS No. 130 did not
have an impact on the Company's financial statements.
SEGMENT REPORTING
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," requires the Company to report certain information about operating
segments. SFAS No. 131 became effective for the Company's year ended December
31, 1998. The Company provides integrated PC-based software to financial
institutions for, among other things, use in branch automation, loan
origination, new account opening and electronic banking. The Company classifies
its products primarily as lending, retail delivery and connectivity. These
products constitute the Company's suite of products and are sold to the same
types of customer through similar distribution channels. Accordingly, the
Company believes it operates in one segment. License revenues from lending,
retail delivery and connectivity products were $31.0 million, $15.6 million and
$2.5 million, respectively, in 1998, $22.2 million, $16.9 million and $1.4
million, respectively, in 1997, and $15.4 million, $17.1 million and $1.4
million, respectively, in 1996.
Virtually all of the Company's sales are made in the United States. The
remaining sales are made to customers located in Latin America.
RECENT PRONOUNCEMENT
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
becomes effective for the Company's year ending December 31, 2000. The Company
does not believe that SFAS No. 133 will have a material impact on its financial
statements.
2. ACQUISITIONS
In October 1998 the Company acquired substantially all of the assets of Mortgage
Dynamics, Inc. (MDI). The acquisition was accounted for as a purchase. The
purchase price was $2,668,000 in cash plus certain contingent royalties tied to
future revenue production. In conjunction with this acquisition, the Company
recorded approximately $1,518,000 of goodwill, which is being amortized ratably
over a seven year period; $230,000 of purchased software, which is being
amortized ratably over a three year period; and $991,000 of acquired in-process
research and development, determined by independent appraisal, all of which was
expensed in 1998. The technological feasibility of the acquired technology,
which has no alternative future use, had not been established prior to the
purchase. Pro forma results for 1998 and 1997 reflecting the MDI acquisition are
not materially different from the Company's reported results for such years.
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
F-11
<PAGE>
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 1996. The technological feasibility of the acquired
technology, which has no alternative future use, had not been established prior
to the purchase.
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.
3. PROPERTY AND EQUIPMENT
The major categories of property and equipment are summarized as follows:
Years Ended December 31,
-----------------------------
1998 1997
------------ ------------
(In thousands)
Computer hardware and software $ 10,630 $ 9,546
Furniture and fixtures 3,293 3,008
Leasehold improvements 558 512
------------ ------------
14,481 13,066
Less- accumulated depreciation 9,947 7,855
============ ============
$ 4,534 $ 5,211
============ ============
F-12
<PAGE>
Depreciation expense was as follows:
Years Ended December 31,
-----------------------------------
1998 1997 1996
---------- ---------- ----------
(In thousands)
Depreciation expense $ 2,381 $ 2,230 $ 1,799
========== ========== ==========
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
Years Ended December 31,
-------------------------
1998 1997
---------- -----------
(In thousands)
Accrued royalties $ 1,766 $ 1,958
Accrued commissions 960 1,080
Accrued bonuses and profit sharing 2,095 392
Other 3,196 1,932
========== ===========
$ 8,017 $ 5,362
========== ===========
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:
Years Ended December 31,
------------------------------------
1998 1997 1996
---------- ---------- -----------
(In thousands)
Employer contributions $ 856 $ 468 $ 327
========== ========== ===========
The Board of Directors has approved an officers' bonus plan and employee profit
sharing plan. The amount and timing of the bonus and profit sharing payments are
at the Board's discretion. The expense associated with these plans was as
follows:
Years Ended December 31,
------------------------------------
1998 1997 1996
---------- ---------- -----------
(In thousands)
Bonus and profit sharing expense $ 2,735 $ 850 $ 2,298
========== ========== ===========
Through December 31, 1998 the Company had a qualified employee stock purchase
plan (ESPP) which allowed qualified employees to direct up to seven percent of
monthly base pay for purchases of stock. The purchase price for shares purchased
under the plan was 85
F-13
<PAGE>
percent of the lesser of the fair market value at the beginning or end of the
plan year. The ESPP will terminate in accordance with its terms during 1999.
6. LINE OF CREDIT AND LONG-TERM DEBT
Line of Credit
The Company may borrow up to the lesser of $10,000,000 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, 1998 was
6.7 percent. The line of credit expires on May 1, 2000. 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, 1998. The Company pays an annual commitment fee of 0.2 percent on the
average unused balance. Borrowings under the line totaled $4,000,000 at December
31, 1998 and $5,310,000 at December 31, 1997.
Long-Term Debt
At December 31, 1998 and 1997, long-term debt consisted of the following:
1998 1997
------- -------
(In thousands)
Note payable, in relation to Culverin acquisition,
payment of $3,690 in 1996 with the balance due $ -- $ 50
January 1998
Note payable, in relation to Halcyon acquisition, with
imputed interest at 8 percent, due in quarterly
installments of $50, including interest, payable 449 605
through 2001
Note payable, assumed in the Halcyon acquisition,
in monthly installments of $6, including interest
imputed at 8.5 percent, with final payment due October 307 346
2004
Guaranteed royalties to be paid in relation to Input
acquisition, with imputed interest at 6 percent, 1,148 1,426
payable through March 2001
TSTG non-compete payments through April 1999 50 100
Long-term portion of line of credit 4,000 --
------- -------
5,954 2,527
Less current portion of long-term debt (261) (295)
------- -------
Long-term debt $ 5,693 $ 2,232
======= =======
F-14
<PAGE>
Payouts under long-term debt are as follows (in thousands):
Years Ending December 31,
- -------------------------
1999 $ 261
2000 4,230
2001 1,295
2002 55
2003 59
Thereafter 54
----------
$ 5,954
==========
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:
Years Ended December 31,
-------------------------------------------
1998 1997 1996
------------ ----------- ------------
(In thousands)
Lease expense $ 2,980 $ 2,786 $ 2,131
============ =========== ============
Future minimum lease payments are as follows (in thousands):
Years Ending December 31,
- -------------------------
1999 $ 2,833
2000 2,863
2001 1,838
2002 1,749
2003 1,293
Thereafter 506
----------
$ 11,082
==========
In 1998 the Company recorded a loss of $793,000 for the present value of net
future lease payments due with respect to certain office space in Atlanta that
the Company ceased using. The loss was included in other charges on the
Statement of Income for 1998.
F-15
<PAGE>
CONTINGENCIES
The Company is involved in routine legal matters incidental to its business. The
Company believes that the resolution of any such matters that are currently
outstanding will not have a material effect on its financial condition or
results of operations. However, no assurance can be given that the concurrent
resolution of several of such matters in manners adverse to the Company would
not have a material adverse effect on the Company's financial condition or
results of operations.
8. INCOME TAXES
The provision (benefit) for income taxes is as follows:
Years Ended December 31,
-------------------------------------------
1998 1997 1996
------------ ----------- ------------
(In thousands)
Current tax provision:
Federal $ 3,667 $ 3,443 $ 2,223
State 402 377 272
------------ ----------- ------------
4,069 3,820 2,495
Deferred tax provision (benefit) (586) 87 (1,328)
------------ ----------- ------------
Total provision $ 3,483 $ 3,907 $ 1,167
============ =========== ============
The reconciliation of the statutory Federal income tax rate to the Company's
effective income tax rate is as follows:
Years Ended December 31,
-------------------------------
1998 1997 1996
--------- -------- --------
Federal statutory rate 34.0 % 34.0 % 34.0 %
State income taxes net of Federal 4.8 4.2 6.8
benefit
Disallowance of meals and entertainment
expenses 1.4 1.1 6.0
Purchase accounting adjustments,
including amortization of intangibles 5.5 5.7 47.6
Change in valuation allowance (0.1) (0.2) 10.9
Other 1.2 0.7 (14.1)
--------- -------- --------
46.8 % 45.5 % 91.2 %
========= ======== ========
F-16
<PAGE>
Deferred tax assets and (liabilities) are comprised of the following components:
December 31,
------------------------
1998 1997
---------- ---------
(In thousands)
Current deferred tax asset:
Allowance for doubtful accounts $ 844 $ 950
Current portion of net operating loss
carryforwards 164 177
Severance and other accruals 281 20
Other 52 160
---------- ---------
Total current deferred tax asset $ 1,341 $ 1,307
========== =========
Long-term deferred tax asset (liability):
In-process technology acquired $ 2,660 $ 2,477
Depreciation (160) (154)
Intangibles amortization 702 651
Capitalized software (3,145) (3,746)
Net operating loss and credit carryforwards 475 714
Other (77) 33
---------- ---------
Gross long-term deferred tax asset (liability) 455 (25)
Valuation allowance (100) (172)
---------- ---------
Total long-term deferred tax asset (liability) $ 355 $ (197)
========== =========
The increase (decrease) in the valuation allowance was as follows:
Years Ended December 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
(In thousands)
Increase (decrease) in valuation
allowance $ (72) $ (17) $ 140
========= ========= =========
At December 31, 1998, for Federal tax return reporting purposes, the Company had
approximately $1,272,000 of regular and alternative minimum tax loss carryovers
that expire at various dates through 2010. In addition, at December 31, 1998,
the Company had $152,000 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, 1998 and 1997. 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, 1998 there were 7,410 outstanding shares
remaining to be redeemed.
The repayment schedule for the mandatory redeemable Class A preferred stock at
December 31, 1998 is as follows (in thousands):
Years Ending December 31,
- -------------------------
1999 $ 103
2000 103
2001 103
2002 103
2003 103
Thereafter 1,428
---------
Total future payments 1,943
Less- Amount representing dividends 1,205
---------
Present value of future payments 738
Less- Current portion --
---------
Long-term mandatory redeemable preferred stock $ 738
=========
10. STOCK OPTIONS AND DIRECTOR COMPENSATION
At December 31, 1998, the Company had five stock option plans: a Consolidated
Plan, a nonqualified stock option plan, two plans for outside directors and the
ESPP.
Under the Consolidated Plan, options, which consist of incentive stock options
and nonqualified stock options, generally vest ratably over five years and
generally expire ten years from the date of grant. 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.
The Company has two stock option plans for outside directors: the Restated
Outside Director Restricted Stock Plan (the Restricted Plan) and the Restated
Outside Director Compensation
F-18
<PAGE>
and Stock Option Plan (the Compensation Plan). The Compensation Plan was
approved by the shareholders of the Company in May 1994 and provides for outside
directors to be paid $5,000 per year and allows for the issuance of stock
options. A total of 50,000 shares of Common Stock were reserved for issuance
under the Restricted Plan and the Compensation Plan, of which 15,400 shares were
reserved under the Restricted Plan and 34,600 were reserved under the
Consolidated Plan. As of December 31, 1998, 28,600 shares had been issued under
the Restricted Plan and are no longer restricted.
Under the ESPP 67,000 shares of Common Stock were reserved, of which 64,354
shares had been issued as of December 31, 1998.
Below is a table showing the activity for the aforementioned stock option plans
for the past three years:
Weighted Total
Shares Average Exercise
Subject to Exercise Price
Options Price Per (in
Share thousands)
------------ ------------ --------------
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
Options granted 214,293 12.39 2,655
Options exercised (51,680) 10.43 (539)
Options lapsed (30,490) 13.74 (419)
------------ ------------ --------------
Balances, December 31, 1998 915,426 $ 12.40 $ 11,350
============ ============ ==============
For all five plans at December 31, 1998, there were 987,591 shares of unissued
stock reserved for issuance under the plans, of which 2,655 shares are reserved
under the ESPP and options for the purchase of 69,510 shares remained available
for future grants. Options to purchase 437,026, 361,873 and 250,990 shares of
common stock were exercisable at December 31, 1998, 1997 and 1996, respectively.
These exercisable options had weighted average exercise prices of $10.71, $9.91
and $8.27 at December 31, 1998, 1997 and 1996, respectively.
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.
F-19
<PAGE>
The Company has elected to account for its stock-based compensation plans under
APB 25; however, the Company has computed, for pro forma disclosure purposes,
the value of all options granted during 1998, 1997 and 1996 using the
Black-Scholes options pricing model as prescribed by SFAS 123 using the
following weighted average assumptions for grants:
For the Years Ended December 31,
-----------------------------------------
1998 1997 1996
---------- ------------ ------------
Risk-free interest rate 6.0% 6.3% 6.0%
Expected dividend yield 0.0% 0.0% 0.0%
Expected lives (years) 7.5 6.9 4.7
Expected volatility 59.4% 60.7% 62.8%
Using the Black-Scholes methodology, the total value of options granted during
1998, 1997 and 1996 was $1,215,000, $1,286,000 and $1,854,000, 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 1998, 1997 and 1996 was $8.36 per share, $11.51 per share and
$7.39 per share, respectively. The number of shares issued under the ESPP was
22,383, 20,646 and 11,338 for the years ended December 31, 1998, 1997 and 1996,
respectively, and the related weighted average purchase price and weighted
average fair value of shares issued were $10.20 and $5.83, respectively, for
1998, $13.71 and $6.55, respectively, for 1997, and $13.71 and $6.61,
respectively, for 1996.
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 Years Ended December 31,
(in thousands, except per share data)
------------------------------------------------------------------
1998 1997 1996
-------------------- --------------------- ---------------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
---------- -------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $3,865 $3,363 $4,585 $3,563 $ 17 $ (979)
Net income (loss)
per share - $ 0.77 $ 0.68 $ 0.93 $ 0.72 $ 0.00 $ (0.21)
basic
Net income(loss)
per share - $ 0.75 $ 0.66 $ 0.90 $ 0.71 $ 0.00 $ (0.21)
diluted
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not indicative
of future amounts. Additional awards are anticipated in future years.
F-20
<PAGE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -------------------------------------------------------- --------------------------
Number Weighted
Out- Average Weighted Number of Weighted
Range of standing Remaining Average Shares Average
Exercise Prices at Contractual Exercise Exercisable Exercise
Per Share 12/31/98 Life (years) Price at 12/31/98 Price
- ---------------- ---------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
$1.00 - 4.99 118,449 3.0 $ 1.63 118,449 $ 1.63
10.00 - 14.99 499,877 7.1 $ 12.44 199,877 $ 12.61
15.00 - 15.00 200,000 7.1 $ 15.00 80,000 $ 15.00
16.13 - 20.00 87,100 8.1 $ 19.49 28,700 $ 18.46
24.25 - 24.25 10,000 2.3 $ 24.25 10,000 $ 24.25
</TABLE>
<TABLE>
11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<CAPTION>
QUARTER ENDED (1) March 31, June 30, September December
(In thousands, except per 1998 1998 30, 1998 31, 1998
share data)
- ------------------------------- ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue $ 19,051 $ 19,002 $ 23,186 $ 24,391
Gross profit 12,303 11,835 15,413 16,656
Net income applicable to
common shareholders 1,000 927 1,593 345
Net income per share - basic $ 0.20 $ 0.19 $ 0.32 $ 0.07
Net income per share - diluted $ 0.19 $ 0.18 $ 0.31 $ 0.07
<CAPTION>
QUARTER ENDED March 31, June 30, September December
(In thousands, except per 1997 1997 30, 1997 31, 1997
share data)
- ------------------------------- ---------- ----------- ------------- -------------
<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
<FN>
(1) The results in the fourth quarter of 1998 reflect pretax charges totaling
$3,013,000 for the value of in-process research and development efforts at
the date of acquisition pertaining to MDI (see Note 2) and other charges (see
Note 1 and Note 7).
</FN>
</TABLE>
F-21
<PAGE>
12. SUBSEQUENT EVENT
Effective January 1, 1999 the Company acquired substantially all of the assets
of Modern Computer Systems, Inc. and certain related corporations (collectively,
MCS). MCS offers hardware and software solutions for the back office accounting
needs of community banks and credit unions. The acquisition was accounted for as
a purchase. The purchase price was $6.0 million in cash and $650,000 of common
stock. The Company believes it will likely write off in the first quarter of
1999 that portion of the purchase price allocated to acquired in-process
research and development, as determined by independent appraisal.
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 1998
Annual Report on Form 10-K, and have issued our report thereon dated January 22,
1999. 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 22, 1999
F-23
<PAGE>
CFI PROSERVICES, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
Additions
Balance At Charged To Balance
Beginning Costs And Deductions At End
Of Year Expenses (a) Other(b) Of Year
--------- ---------- ---------- -------- -------
<S> <C> <C> <C> <C> <C>
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
=====================================================
Year ended December 31, 1998
Allowance for doubtful
accounts and
sales returns $ 2,880 $ 2,005 $ (2,285) $ - $ 2,600
=====================================================
FASB 109 Valuation $ 172 $ - $ (72) $ - $ 100
=====================================================
Lease Loss Accrual $ - $ 793 $ - $ - $ 793
=====================================================
Amortization Of
Intangibles:
Purchased software $ - $ 19 $ - $ - $ 19
Software development
costs 735 2,633 - - 3,368
Intangibles 3,227 2,102 (566) - 4,763
=====================================================
$ 3,962 $ 4,754 $ (566) $ - $ 8,150
=====================================================
<FN>
(a) Represents write-off of receivables, fully amortized intangibles, and, in
1998, goodwill associated with a 1996 acquisition. 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.
</FN>
</TABLE>
F-24
Exhibit 10.10
400 SIXTH AVENUE BUILDING
SECOND AMENDMENT TO LEASE
By and Between
John Hancock Mutual Life Insurance Company ("Landlord")
and
CFI ProServices, Inc., an Oregon Corporation ("Tenant")
Dated January 11, 1999
Recitals
1. Landlord and Tenant are parties to a lease Amendment dated March 18, 1994,
and to a First Amendment to Lease, dated July 8, 1996 (collectively, the
"Agreement").
2. Pursuant to the Agreement, Tenant leases from Landlord approximately 72,111
rentable square feet ("rsf") on the second, third, fourth and tenth floors
of the 400 Sixth Avenue Building known as Suites 200, 300, 400 and 1000.
3. The term of the Agreement is through September 30, 2003.
4. Tenant desires to lease an additional 7,721 rentable square feet as shown
on the plan attached hereto as Exhibit A, known as the ninth floor, Suite
905 and 906 ("Expansion Area").
5. The terms used in this Second Amendment, which are defined in the
Agreement, shall have the meanings given to them in the Agreement, except
as otherwise expressly provided in this Second Amendment.
Agreement
NOW, THEREFORE, the parties agree as follows:
1. Premises: The demised Premises shall be increased to a total square footage
as follows:
CFI Existing Area: 72,111 rsf
CFI Expansion Area: 7,721 rsf
Total CFI Premises: 79,832 rsf
2. Commencement and Expiration Date: The commencement date of the term of the
agreement for the expansion area (Expansion Area Commencement Date) shall
be in two stages. April 1, 1999, Tenant will occupy approximately 2,909 rsf
known as Suite 905. August 1, 1999, Tenant will occupy 4,812 rsf known as
Suite 906. The Agreement will expire as to the entirety of the Premises on
September 30, 2003.
3. Upon Tenant's occupancy of Suite 906 on August 1, 1999, Suites 905 and 906
will be known collectively hereafter as Suite 905.
<PAGE>
4. Rent: The monthly base rent for the Expansion Area shall be as follows:
Months SF Rate ($/SF) Monthly Rent
-------- ---- ----------- ------------
April 1, 1999 - July 31, 1999 2,909 $20.00 $4,848.33
August 1, 1999 - March 31, 2000 7,721 $20.00 $12,868.33
April 1, 2000 - March 31, 2002 7,721 $21.00 $13,511.75
April 1, 2002 - March 31, 2003 7,721 $22.00 $14,155.17
April 1, 2003 - September 30, 7,721 $23.00 $14,798.58
2003
5. Base Rent Schedule:
Original Tenth Suites Total
Lease Term Lease Floor 905 & 906 Base Rent
---------------- ---------- ---------- ---------- -----------
4/1/99 - 6/30/99 $72,729.00 $26,124.00 $4,848.33 $103,701.33
7/1/99 - 7/31/99 $78,261.50 $26,124.00 $4,848.33 $109,233.83
8/1/99 - 3/31/00 $78,261.50 $27,707.00 $12,868.33 $118,836.83
4/1/00 - 7/31/01 $78,261.50 $27,707.00 $13,511.75 $119,480.25
8/1/01 - 3/31/02 $87,113.00 $30,478.00 $13,511.75 $131,102.75
4/1/02 - 3/31/03 $87,113.00 $30,478.00 $14,155.17 $131,746.17
4/1/03 - 9/30/03 $87,113.00 $30,478.00 $14,798.58 $132,389.58
6. Tenant's Percentage: Under section 24.2 of the Lease Agreement, Tenant's
percentage of the Building will be based upon two calculations:
(a) Tenant's existing square footage divided by the total building
square footage as determined by old BOMA measurements 72,111 divided
by 183,0501 equals 39.3% pro rata share).
(b) Tenant's percentage for expansion area will be determined by
dividing expansion square footage by building square footage
determined by new BOMA measurements (7,721 divided by 188,917 equals
4.09% expansion space pro rate share).
7. Base Year: Under Section 19.4, Additional Rent: Operating Expense
Adjustment, Tenant's Base Year for floors two, three, four and ten will be
1996; Tenant's Base Year for the Expansion Area (ninth floor) will be 1999.
Under Section 19.1, Tenant's Base Year for real property taxes shall be
1994-1995 for floors two, three and four; 1996-1997 for the tenth floor;
and 1998-1999 for the Expansion Area (Suites 905 and 906).
8. Tenant Improvements: Landlord shall provide Tenant a tenant improvement
allowance up to and not to exceed $108,094.00 (the "TI Allowance"). The TI
Allowance shall be used to pay for all costs and expenses incurred in
connection with remodeling the Expansion Area, including, without
limitation, all costs for heating, ventilation and air conditioning
modifications made to the existing condition as of the signature date of
the Second Amendment to Lease, electrical distribution, plumbing,
partitions, working drawings, construction documents, design services,
supervision and permits, but not furniture and furnishings.
<PAGE>
It is agreed and understood that Tenant will be responsible for payment of
the entire cost of other improvements in excess of the TI Allowance. If
Tenant exceeds the TI Allowance, any such excess costs shall promptly be
paid by Tenant in a single lump sum within 15 days after receipt of invoice
from the Landlord. Tenant shall not be entitled to a credit for any unused
portion of the TI Allowance.
Landlord will act as construction manager and administer a contract on the
Tenant's behalf for the entire scope of the work outlined above and
Landlord shall have no liability to tenant whatsoever for any claims or
damages arising in connection with Landlord's services as construction
manger or its administration of the construction contract, except as may be
caused by Landlord's gross negligence, willful misconduct or delay, except
for causes beyond the Landlord's control. Landlord shall not charge Tenant
or the TI Allowance for any construction supervisory fee of landlord or its
building manager.
The plans for the remodeling work itself, and all contractors and
subcontractors used in the remodeling work, shall be subject to Landlord's
prior written approval, which approval shall not unreasonably be withheld.
All remodeling work shall be in compliance with all applicable laws and
regulations as of the date of this Amendment, including, without
limitation, the Americans with Disabilities Act.
9. Parking: Section 26.1 of the Lease Agreement shall be amended to provide
three additional parking spaces for a total of 30 parking spaces in the
building parking garage at prevailing market rates which change form time
to time. In the event Tenant chooses not to use its entire parking
allocation, Tenant shall give Landlord at least 60 days' prior written
notice of the number of parking spaces it will give up, and Landlord may
use such given up spaces for its own account. Tenant can reinstate stalls
up to its allowance with at least 60 days' prior written notice to
Landlord. All other provisions stated in Section 26.1 of the Agreement
shall remain in effect. Tenant acknowledges that this Section 9 complies
with Landlord's obligations under the last sentence of Section 26.1 of the
Agreement.
10. Option to Expand: The option to expand provision contained in the First
Amendment to Agreement as paragraph 7, page 3, is hereby deleted in its
entirety.
11. Early Possession: Landlord shall provide Tenant with early access to the
Premises at least 21 days prior to the April 1, 1999 (Suite 905) and August
1, 1999 (Suite 906). Expansion Space Commencement Date in order for Tenant
to ready the Premises for occupancy. Within this period, Tenant shall have
access for its vendors to complete the necessary cabling for Tenant's
equipment, and to install equipment and office furnishings. Tenant shall
coordinate its activities with those of Landlord's contractor to avoid any
delay in completion of the work. Tenant's access during such period shall
be on all the terms and conditions of the Agreement, other than payment of
rent.
Except as amended by this Second Amendment, all other terms and conditions of
the Lease Agreement shall remain in full force and effect.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Second Amendment as of the
date first set forth above.
AGREED AND ACCEPTED AGREED AND ACCEPTED
John Hancock Mutual Life Insurance CFI ProServices, Inc.
Company, Landlord
By: /s/ Maryrose Sykes By: /s/ Kurt W. Ruttum
Title: Associate Investment Officer Title: Vice President & CFO
Date: 1/20/99 Date: 1/15/99
<PAGE>
Exhibit 23
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation of our
reports dated January 22, 1999 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 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-START> Jan-01-1998
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Dec-31-1998
<CASH> 3,589
<SECURITIES> 206
<RECEIVABLES> 32,301
<ALLOWANCES> 2,600
<INVENTORY> 249
<CURRENT-ASSETS> 36,690
<PP&E> 14,481
<DEPRECIATION> 9,947
<TOTAL-ASSETS> 56,781
<CURRENT-LIABILITIES> 19,718
<BONDS> 5,954
738
0
<COMMON> 19,689
<OTHER-SE> 10,943
<TOTAL-LIABILITY-AND-EQUITY> 56,781
<SALES> 6,076
<TOTAL-REVENUES> 85,630
<CGS> 2,132
<TOTAL-COSTS> 29,423
<OTHER-EXPENSES> 48,018
<LOSS-PROVISION> 1,980
<INTEREST-EXPENSE> 454
<INCOME-PRETAX> 7,443
<INCOME-TAX> 3,483
<INCOME-CONTINUING> 3,865
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,865
<EPS-PRIMARY> 0.77
<EPS-DILUTED> 0.75
</TABLE>
