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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------
FORM 10-Q
--------------------------------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-21980
CFI PROSERVICES, INC.
(Exact name of registrant as specified in its charter)
Oregon 93-0704365
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 SW Sixth Avenue, Portland, Oregon 97204 (Address of
principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 503-274-7280
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common stock without par value 5,219,592
(Class) (Outstanding at November 10, 1999)
The index to exhibits appears on page 24 of this document.
================================================================================
<PAGE>
CFI PROSERVICES, INC.
dba
CONCENTREX INCORPORATED
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1999
and December 31, 1998 2
Consolidated Statements of Operations - Three Months and
Nine Months Ended September 30, 1999 and 1998 3
Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 1999 and 1998 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
1
<PAGE>
CFI PROSERVICES, INC.
dba CONCENTREX INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------------ -----------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ - $ 3,589
Restricted cash 866 -
Investments 205 206
Receivables, net of allowances of $3,445 and $2,600 34,807 29,701
Inventory 999 249
Deferred tax asset 1,920 1,341
Prepaid expenses and other current assets 3,642 1,604
------------------ -----------------
Total Current Assets 42,439 36,690
Property and equipment, net of accumulated
depreciation of $11,985 and $9,947 8,000 4,534
Software development costs, net of accumulated
amortization of $4,837 and $3,368 5,998 8,277
Purchased software costs, net of accumulated
amortization of $448 and $19 8,163 211
Goodwill, net of accumulated amortization
of $6,621 and $4,763 58,771 6,190
Deferred tax asset 9,862 355
Other assets 5,306 524
================== =================
Total Assets $ 138,539 $ 56,781
================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Drafts payable $ 547 $ -
Accounts payable 4,350 1,986
Accrued expenses 14,344 8,017
Deferred revenues 10,206 5,300
Customer deposits 3,797 3,681
Line of credit 5,396 -
Current portion of long-term debt 2,531 261
Other current liabilities 303
Income taxes payable - 473
------------------ -----------------
Total Current Liabilities 41,474 19,718
Commitments and Contingencies
Long-term Debt, less current portion 63,026 5,693
Other Long-term Liabilities 876 -
Convertible Subordinated Notes 5,619 -
Mandatory Redeemable Class A Preferred Stock 731 738
Shareholders' Equity:
Series preferred stock, 5,000,000 shares authorized,
none issued and outstanding - -
Common stock, no par value, 10,000,000 shares authorized,
5,217,491 and 5,032,977 shares issued and outstanding 25,087 19,689
Retained earnings 1,726 10,943
------------------ -----------------
Total Shareholders' Equity 26,813 30,632
------------------ -----------------
Total Liabilities and Shareholders' Equity $ 138,539 $ 56,781
================== =================
</TABLE>
The accompanying notes are an integral part of these consolidated balance sheets
2
<PAGE>
CFI PROSERVICES, INC.
dba CONCENTREX INCORPORATED
CONSOLIDATED SATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenue
Application Software Product Line
Software license fees $ 11,981 $ 14,239 $ 34,962 $ 33,882
Service and support 7,726 6,801 23,196 20,453
Information Management Product Line
Software license fees 1,396 - 1,578 -
Service and support 2,430 - 3,973 -
e-Commerce Product Line
Software license fees 297 290 1,414 1,097
Service and support 3,261 1,123 7,264 2,862
Ancillary Products 2,472 733 5,058 2,945
------------ ------------- ------------- ------------
Total Revenue 29,563 23,186 77,445 61,239
Cost of Revenue 11,563 7,773 29,569 21,688
------------ ------------- ------------- ------------
Gross Profit 18,000 15,413 47,876 39,551
Operating Expenses
Sales and marketing 4,952 5,203 13,498 14,054
Product development 6,737 4,129 17,004 10,467
General and administrative 5,373 2,794 12,115 7,430
Goodwill amortization 690 297 1,506 890
Acquired in-process research and development and
other charges 6,721 - 10,521 -
------------ ------------- ------------- ------------
Total Operating Expenses 24,473 12,423 54,644 32,841
------------ ------------- ------------- ------------
Income (Loss) from Operations (6,473) 2,990 (6,768) 6,710
Non-operating Income (Expense)
Interest expense (1,642) (118) (1,957) (337)
Interest income 70 80 214 209
Other, net 165 (64) 192 (168)
------------ ------------- ------------- ------------
Total Non-operating Expense (1,407) (102) (1,551) (296)
------------ ------------- ------------- ------------
Income (Loss) before Income Taxes (7,880) 2,888 (8,319) 6,414
Provision for Income Taxes 1,134 1,271 829 2,822
------------ ------------- ------------- ------------
Net Income (Loss) (9,014) 1,617 (9,148) 3,592
Preferred Stock Dividend 23 24 69 72
------------ ------------- ------------- ------------
Net Income (Loss) Applicable to Common Shareholders $ (9,037) $ 1,593 $ (9,217) $ 3,520
============= ============== ============== =============
Basic Net Income (Loss) Per Share $ (1.74) $ 0.32 $ (1.81) $ 0.70
============= ============== ============== =============
Diluted Net Income (Loss) Per Share $ (1.74) $ 0.31 $ (1.81) $ 0.68
============= ============== ============== =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
3
<PAGE>
CFI PROSERVICES, INC.
dba CONCENTREX INCORPORATED
CONSOLIDATED SATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------------
1999 1998
---------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) applicable to common shareholders $ (9,217) $ 3,520
Adjustments to reconcile net income (loss) applicable to common
shareholders to cash provided by operating activities:
Depreciation and amortization 6,549 4,889
Interest accreted on mandatory redeemable preferred stock 71 72
Interest accreted on notes payable 140 70
Amortization of debt discount and deferred loan costs 311 -
Equity in losses attributable to joint venture - 248
Write off of in process research and development 9,000 -
Expense for stock warrants issued 124 -
Expense for ESSOP shares issued 955 -
(Increase) decrease in assets, net of effects from purchase of businesses:
Receivables, net 1,129 4,779
Inventories, net (114) 25
Prepaid expenses and other assets (494) 351
Increase (decrease) in liabilities, net of effects from purchase of
businesses:
Drafts payable 547 -
Accounts payable 850 (415)
Accrued expenses (3,255) (1,593)
Deferred revenues 1,351 (5,560)
Customer deposits (2,710) 69
Other current liabilities 186 -
Income taxes payable (473) (255)
---------------- ------------------
Net cash provided by operating activities 4,950 6,200
Cash flows from investing activities:
Expenditures for property and equipment (2,058) (1,216)
Software development costs capitalized - (1,054)
Investment in joint venture - (510)
Proceeds from long-term note receivable 115 235
Cash paid for acquisition of Modern Computer Systems, Inc.
net of cash received (5,591) -
Cash received in acquisition of MECA Software, LLC 965 -
Cash paid for acquisition of ULTRADATA Corporation, net of (59,940) -
cash received
Cash paid for TDS (98) -
---------------- ------------------
Net cash used in investing activity (66,607) (2,545)
Cash flows from financing activities:
Net proceeds from (payments on) line of credit 1,396 (1,310)
Payments on long-term debt (7,645) (579)
Proceeds from long term debt 65,000 -
Proceeds from issuance of convertible subordinated notes 5,550 -
Payment of deferred loan costs (5,071) -
Payments on mandatory redeemable preferred stock (78) (78)
Proceeds from issuance of common stock 927 767
Repurchase of common stock (1,145) -
---------------- ------------------
Net cash provided by (used in) financing activities 58,934 (1,200)
---------------- ------------------
Increase (decrease) in cash and cash equivalents (2,723) 2,455
Cash and cash equivalents (including restricted cash):
Beginning of period 3,589 20
---------------- ------------------
End of period $ 866 $ 2,475
================ ==================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE>
CFI PROSERVICES, INC.
dba CONCENTREX INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts
or as otherwise indicated)
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The financial information included herein for the three and nine month periods
ended September 30, 1999 and 1998 is unaudited; however, such information
reflects all adjustments consisting only of normal recurring adjustments which
are, in the opinion of management, necessary for a fair presentation of the
financial position, results of operations and cash flows for the interim
periods. The financial information as of December 31, 1998 is derived from the
audited financial statements contained in the 1998 Annual Report on Form 10-K as
filed by CFI ProServices, Inc., d/b/a Concentrex Incorporated ("Concentrex" or
the "Company"). The interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's 1998 Annual Report on Form 10-K. The results of
operations for the interim periods presented are not necessarily indicative of
the results to be expected for the full year. Certain prior period amounts have
been reclassified to conform to the current presentation.
NOTE 2. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information is as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------------
1999 1998
----------------- --------------------
<S> <C> <C>
Cash paid during the period for income taxes $ 1,976 $ 3,076
Cash paid during the period for interest and dividends 2,526 346
</TABLE>
Noncash investing and financing activities were as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------------
1999 1998
----------------- --------------------
<S> <C> <C>
Tax benefit from exercise of nonqualified stock
options $ -- $ 56
Increase in goodwill for accrued acquisition related
contingent royalties 396 481
Reclassification of bank line of credit to long-term debt -- 4,000
Issuance of common stock in connection with
acquisition of Modern Computer Systems, Inc. 650 --
Issuance of common stock in connection with
acquisition of MECA Software, LLC 569 --
Assumption of debt in connection with acquisition of
MECA Software, LLC 7,500 --
Fair value of stock warrants issued in connection with 1,667 --
financings
Fair value of stock options converted in connection with
acquisition of ULTRADATA Corporation 1,651 --
</TABLE>
5
<PAGE>
NOTE 3. EARNINGS PER SHARE
Following is a reconciliation of basic earnings per share ("EPS") and diluted
EPS:
<TABLE>
<CAPTION>
Three Months Ended September 30, 1999 1998
--------------------------------------- ----------------------------- -----------------------------
Per Per
Share Share
Basic EPS Loss Shares Amount Income Shares Amount
--------- --------- -------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) applicable to common
shareholders $ (9,037) 5,197 $ (1.74) $ 1,593 5,017 $ 0.32
========== =========
Effect of dilutive securities:
Stock options -- 117
------------------ -------------------
Diluted EPS
-----------
Net income (loss) applicable to
common shareholders $ (9,037) 5,197 $ (1.74) $ 1,593 5,123 $ 0.31
========== =========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999 1998
--------------------------------------- ----------------------------- -----------------------------
Per Per
Share Share
Basic EPS Loss Shares Amount Income Shares Amount
--------- --------- -------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) applicable to common
shareholders $ (9,217) 5,102 $ (1.81) $ 3,520 5,005 $ 0.70
========== =========
Effect of dilutive securities:
Stock options -- 174
------------------ -------------------
Diluted EPS
-----------
Net income (loss) applicable to
common shareholders $ (9,217) 5,102 $ (1.81) $ 3,520 5,179 $ 0.68
========== =========
</TABLE>
The number of options and warrants to purchase shares of common stock and the
assumed conversion of convertible subordinated notes that were excluded from the
table above (as the effect would have been anti-dilutive) were 2,377,346 and
447,400 for the three months ended September 30, 1999 and 1998, respectively,
and 2,377,346 and 298,700 for the nine months ended September 30, 1999 and 1998,
respectively.
NOTE 4. STOCK REPURCHASE
During January 1999 the Company's Board of Directors authorized a repurchase of
up to $5.0 million of the Company's Common Stock. During the quarter ended March
31, 1999 the Company repurchased 88,200 shares of its Common Stock for $1.1
million. The Company did not repurchase any shares during subsequent quarters.
NOTE 5. CLASSIFICATION OF REVENUE
During the three months ended September 30, 1999, Concentrex reorganized itself
into four product lines: Application Software, Information Management,
e-Commerce and Ancillary Products. Prior period revenues have been reclassified
for all periods included herein to reflect the new product lines. Total revenues
did not change as a result of this reclassification.
6
<PAGE>
NOTE 6. ACQUISITIONS
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, resulting in approximately $7.0 million of goodwill, intangibles and
purchased software. The purchase price was $6.0 million in cash and $650,000 of
common stock. The Company is still obtaining certain data related to the
acquisition, and, accordingly, the purchase price allocation remains open. The
operations of MCS have been included in the Company's results of operations
since January 1, 1999. The 1998 pro forma results reflecting the MCS acquisition
are not materially different from the Company's reported results for the nine
months ended September 30, 1998.
Effective May 17, 1999 the Company and Moneyscape Holdings, Inc. (a wholly owned
subsidiary of Concentrex) acquired 99% and 1%, respectively, of the equity in
MECA Software, L.L.C. ("MECA") in exchange for 50,000 shares of Concentrex
common stock. The acquisition was accounted for as a purchase. The net purchase
price approximated $12.3 million and consisted of the common stock issued,
assumption of net liabilities and accrued acquisition costs. The liabilities
assumed included $7.5 million of debt owed to certain former members of MECA and
was repaid by the Company from proceeds from bank borrowings. The purchase price
was allocated to the estimated fair value of the assets acquired, which included
the expensing of $3.8 million of in-process research and development and the
recognition of approximately a $9.9 million deferred tax asset. The excess of
the fair value of the assets acquired over cost (negative goodwill) was
allocated to reduce acquired non-current assets. The Company is still obtaining
certain data related to the acquisition, and accordingly, the purchase price
allocation remains open. The operations of MECA have been included in the
Company's results of operations since May 17, 1999.
Effective August 13, 1999 Concentrex acquired all of the outstanding common
stock of ULTRADATA Corporation ("ULTRADATA"). ULTRADATA provides information
management software and solutions for relationship-oriented financial
institutions. The acquisition was accounted for as a purchase, resulting in
approximately $53.6 million of goodwill, intangibles and purchased software.
These amounts are being amortized over a period of 6 to 20 years. The purchase
price was $66.3 million, including acquisition-related expenses. The purchase
price was allocated to the estimated fair value of the assets acquired, which
included the expensing of $5.2 million of in-process research and development.
The Company is still obtaining certain data related to the acquisition, and,
accordingly, the purchase price allocation remains open. The operations of
ULTRADATA have been included in the Company's results of operations since August
13, 1999.
Unaudited pro forma results of operations, including results of ULTRADATA and
MECA (MCS results are not considered significant and are therefore, to the
extent that they are not already included in the actual results, not included in
the unaudited pro forma information) for the three month and nine month periods
ended September 30, 1999 and 1998, assuming such acquisitions occurred at the
beginning of 1998 and includes in process research and development charge
related to the ULTRADATA and MECA acquisitions in the periods when incurred.
7
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- --------------------------------
1999 1998 1999 1998
------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C>
Total revenues $ 31,537 $ 37,836 $ 102,048 $ 102,041
Net loss applicable to common
Shareholders $ (9,808) $ (1,167) $ (17,471) $ (5,585)
Loss per share - Basic $ (1.89) $ (0.23) $ (3.41) $ (1.10)
Loss per share - Diluted $ (1.89) $ (0.23) $ (3.41) $ (1.10)
</TABLE>
NOTE 7. FINANCING EVENTS
On May 14, 1999 the Company sold 90,000 shares of its common stock to one
investor for gross proceeds of $900,000. The proceeds of the issuance were used
to repay liabilities acquired in the MECA acquisition.
On May 17, 1999 the Company entered into two lending agreements (the "USNB
Lending Agreements") with U.S. Bank National Association ("USNB"). On August 13,
1999 the USNB Lending Agreements were terminated, and all amounts outstanding
were repaid, upon completion of the financing described in the following
paragraphs. The first USNB Lending Agreement was for a revolving line of credit
in an amount not to exceed $5.0 million (the "Revolving Line") to be used for
working capital. The Company drew $4.0 million on the Revolving Line on May 17,
1999 and used the proceeds to pay off all amounts owing on a previous line of
credit with Bank of America; the Bank of America credit facility with the
Company was simultaneously terminated. The second USNB Lending Agreement was for
a revolving line of credit in an amount not to exceed $15.0 million (the
"Acquisition Line") to be used for acquisitions. The Company drew $8.3 million
on the Acquisition Line on May 17, 1999 and used the proceeds to pay off certain
liabilities assumed in connection with the acquisition of MECA on that date. The
Company drew an additional $2.7 million on the Acquisition Line to purchase
shares of Ultradata common stock in open market transactions during the quarter
ended June 30, 1999.
On August 13, 1999 the Company and its subsidiaries entered into a financing
agreement (the "Financing Agreement") with Foothill Capital Corporation
("Foothill") and certain other parties (collectively, the "Lenders") for three
credit facilities aggregating $80 million.
The credit facilities provided under the Financing Agreement terminate on August
13, 2002.
The first credit facility under the Financing Agreement is a revolving credit
facility (the "Foothill Revolver") for up to $15 million, subject to borrowing
base restrictions related to accounts receivable of the Company and its
subsidiaries. The Foothill Revolver bears interest at an annual rate equal to
the prime rate plus 1.0%. On August 13, 1999 the Company drew $1.7 million under
the Foothill Revolver in connection with the Ultradata acquisition. The interest
rate on the Foothill Revolver at August 13, 1999 was 9.0% and was 9.25% at
September 30, 1999.
The second credit facility under the Financing Agreement is a term loan for $35
million (the "Term A Loan") that bears interest at an annual rate equal to the
prime rate plus 2.0%. The Term A Loan has scheduled quarterly prepayments of
principal beginning in the second quarter of 2000 that are expected to aggregate
$19 million over the term of the loan; the
8
<PAGE>
expected remaining principal of $16 million is due on August 13, 2002. On August
13, 1999 the Company drew $35 million under the Term A Loan in connection with
the Ultradata acquisition. The interest rate on the Term A Loan at August 13,
1999 was 10.0% and was 10.25% at September 30,1999.
The third credit facility under the Financing Agreement is a term loan for $30
million (the "Term B Loan") that bears interest at an annual rate equal to the
prime rate plus 5.0%. The Term B Loan has no scheduled prepayments of principal.
The Term B Loan is due in full on August 13, 2002. On August 13, 1999 the
Company drew $30 million under the Term B Loan in connection with the Ultradata
acquisition. The interest rate on the Term B Loan at August 13, 1999 was 13.0%
and was 13.25% at September 30, 1999.
In connection with the credit facilities provided under the Financing Agreement,
the Company issued to the Lenders warrants (the "Lender Warrants") to purchase
up to 381,822 shares of the common stock of the Company, which represents 5.0%
of the fully diluted common stock of the Company. The exercise price of the
Lender Warrants is $12.34 per share. The Company has agreed to register for
resale the shares of common stock issuable upon exercise of the Lender Warrants.
The Lender Warrants are exercisable through August 13, 2004. The Company also
issued warrants to purchase 58,000 shares of common stock to the debt placement
agent in connection with obtaining the credit facilities under the Financing
Agreement. The warrants issued to the debt placement agent have the same terms
as the Lender Warrants. The Company recorded the fair value of the warrants as
debt discount and deferred loan costs as appropriate.
On August 13, 1999 the Company also issued 10% Convertible Subordinated Discount
Notes (the "Subordinated Notes") in the aggregate original face amount of $7.4
million (with original issue discount of $1.9 million). The Subordinated Notes
are generally non-callable by the Company through August 13, 2002. Interest at
10% per annum accretes on the Subordinated Notes through August 13, 2002 and
then becomes payable in cash by the Company if the Subordinated Notes are not
redeemed or converted by that date. The Subordinated Notes are initially
convertible into a maximum of 602,534 shares of the Company's common stock at
the election of the holders. The actual number of shares into which the
Subordinated Notes are convertible depends upon the date of conversion and the
amount of interest accreted on the Subordinated Notes through the date of
conversion. The conversion price of the Subordinated Notes is initially $12.34
per share. If the average closing price of the Company's common stock for the 10
trading days ending on August 12, 2000 is less than $12.34 per share, the
conversion price will be reduced at that time to equal such average price. The
Subordinated Notes are due on August 13, 2004 if not previously converted by
that date. The Company received gross proceeds of $5.5 million upon issuance of
the Subordinated Notes, all of which was used in connection the Ultradata
acquisition.
At September 30,1999 and December 31,1998, long-term debt consisted of the
following:
9
<PAGE>
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------------ ------------------
<S> <C> <C>
Term A Loan $ 35,000 $ --
Term B Loan 30,000 --
Debt discount related to fair value of warrants (1,387) --
Note payable, in relation to Halcyon acquisition, with imputed interest at
8.0%, due in quarterly installments of $50, including interest, payable
through 2001 299 449
Note payable, assumed in the Halcyon acquisition, in monthly installments of $6,
including interest imputed at 8.5%, with final payment due October
2004 276 307
Guaranteed royalties to be paid in relation to Input acquisition, with
imputed interest at 6.0%, payable through March 2001 913 1,148
TSTG non-compete payments through April 1999 -- 50
Note payable, assumed in the ULTRADATA acquisition, due in monthly 456 --
installments of $29, including interest at the rate of 10.0%
Long-term portion of line of credit -- 4,000
------------------ ------------------
65,557 5,954
Less current portion of long-term debt (2,531) (261)
================== ==================
Long-term debt $ 63,026 $ 5,693
================== ==================
</TABLE>
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO SHOULD BE READ IN
CONJUNCTION WITH THE FOLLOWING DISCUSSION. THIS DISCUSSION CONTAINS CERTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS
STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. THE
CAUTIONARY STATEMENTS MADE IN THIS DISCUSSION SHOULD BE READ AS BEING APPLICABLE
TO ALL RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR IN THIS FILING.
THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HERE.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE
DISCUSSED IN THIS FILING, AS WELL AS IN THE COMPANY'S REPORTS ON FORM 10-K FOR
THE YEAR ENDED DECEMBER 31, 1998 AND IN OTHER FILINGS BY THE COMPANY WITH THE
SECURITIES AND EXCHANGE COMMISSION.
OVERVIEW
CFI ProServices, Inc., dba Concentrex Incorporated ("Concentrex" or the
"Company") is a leading provider of technology powered solutions to deliver
financial services, including solutions for real-time back office accounting,
branch automation, loan origination, new account opening, call centers,
cross-selling products, and electronic commerce.
The Company began doing business under the name "Concentrex Incorporated" on
July 1, 1999. It previously did business as CFI ProServices, Inc., which will
remain its legal name until its shareholders change it. The Company anticipates
that its shareholders will formally approve changing the name to Concentrex
Incorporated at the next regularly scheduled shareholder meeting in May 2000.
The Company's new Nasdaq trading symbol is "CCTX".
Concentrex made three acquisitions during the nine months ended September 30,
1999. Concentrex acquired Modern Computer Systems (MCS) as of January 1, 1999,
MECA Software LLC (MECA) as of May 17, 1999 and ULTRADATA Corporation
(ULTRADATA) as of August 13, 1999. All three acquisitions were accounted for as
purchases and have been reflected in the results of operations presented herein
since their respective acquisition dates.
During the third quarter ended September 30, 1999, Concentrex reorganized itself
into four product lines: Application Software, Information Management,
e-Commerce and Ancillary Products. Accordingly, Concentrex reclassified its
operating revenue data for all periods included herein to reflect the new
product lines. Total revenue did not change as a result of this
reclassification.
The Company's backlog as of September 30, 1999, was $17.3 million compared to
$12.0 million as of September 30, 1998. Concentrex'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.
11
<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>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
-------------------------------- -----------------------------
1999 1998 1999 1998
---------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenue
Application Software 66.7 % 90.7 % 75.1 % 88.7 %
Information Management 12.9 -- 7.2 --
e-Commerce 12.0 6.1 11.2 6.5
Ancillary Products 8.4 3.2 6.5 4.8
---------------- ------------- ------------- ------------
Total revenue 100.0 100.0 100.0 100.0
Gross profit 60.9 66.5 61.8 64.6
Operating expenses
Sales and marketing 16.8 22.4 17.4 22.9
Product development 22.8 17.8 22.0 17.1
General and administrative 18.2 12.1 15.6 12.1
Amortization of intangibles 2.3 1.3 1.9 1.5
In process research and development
and other charges 22.7 -- 13.6 --
---------------- ------------- ------------- ------------
Total operating expenses 82.8 53.6 70.6 53.6
---------------- ------------- ------------- ------------
Income (loss) from operations* (21.9) 12.9 (8.7) 11.0
Non-operating expense (4.8) (0.4) (2.0) (0.5)
---------------- ------------- ------------- ------------
Income (loss) before income taxes (26.7) 12.5 (10.7) 10.5
Provision for (benefit from) income
taxes 3.8 5.5 1.1 4.6
Preferred stock dividend 0.1 0.1 0.1 0.1
---------------- ------------- ------------- ------------
Net income (loss) applicable to
common shareholders* (30.6) % 6.9 % (11.9) % 5.7 %
================ ============= ============= ============
<FN>
* Excluding the impact of acquired in-process research and development and other
charges, income (loss) from operations as a percentage of revenue for the three
and nine month periods ending September 30, 1999 would have been 0.8% and 4.8%,
respectively, and net income (loss) applicable to common shareholders would have
been (9.8)% and 0.9% for the same respective periods.
</FN>
</TABLE>
REVENUE
Total revenue increased $6.4 million, or 27.5%, to $29.6 million for the three
months ended September 30, 1999 compared to $23.2 million in the comparable
period in 1998. Total revenue increased $16.2 million, or 26.5%, to $77.4
million for the nine months ended September 30, 1999 compared to $61.2 million
in the comparable period in 1998.
Concentrex has increased the percentage of its service and support revenue.
Concentrex believes that service and support revenue is more predictable and
recurring than is software license revenue. Service and support revenue
accounted for 45.4% and 34.2% of Concentrex's total revenue in the three months
ended September 30, 1999 and 1998, respectively, and accounted for 44.5% and
38.1% of Concentrex's total revenue in the nine months ended September 30, 1999
and 1998.
12
<PAGE>
<TABLE>
<CAPTION>
Revenue By Product Line
(in $millions)
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
1999 1998 1999 1998
------------ ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Application Software
Software License Revenue $ 12.0 $ 14.3 $ 34.9 $ 33.8
Service & Support Revenue 7.7 6.8 23.2 20.5
------------ ---------------- ----------------- ----------------
Subtotal 19.7 21.1 58.1 54.3
Information Management
Software License Revenue 1.4 -- 1.6 --
Service & Support Revenue 2.4 -- 4.0 --
------------ ---------------- ----------------- ----------------
Subtotal 3.8 -- 5.6 --
e-Commerce
Software License Revenue 0.3 0.3 1.4 1.1
Service & Support Revenue 3.3 1.1 7.2 2.9
------------ ---------------- ----------------- ----------------
3.6 1.4 8.6 4.0
Ancillary Products 2.5 0.7 5.1 2.9
------------ ---------------- ----------------- ----------------
Total Revenue $ 29.6 $23.2 $77.4 $61.2
============ ================ ================= ================
</TABLE>
APPLICATION SOFTWARE PRODUCT LINE. The Application Software product line
includes the lending, branch automation and connectivity software products and
support services previously provided by CFI ProServices, Inc. Total revenue in
the Application Software product line decreased $1.4 million, or 6.3%, to $19.7
million in the three months ended September 30, 1999 from $21.1 million in the
three months ended September 30, 1998. The decline in revenue resulted
principally from lower software license revenue due to Year 2000 pressures that
caused Concentrex's financial institution customers to postpone their decisions
on new software purchases and to slow or temporarily suspend implementation
projects, offset in part by higher service and support revenue. Application
Software license revenue decreased $2.3 million, or 15.9%, to $12.0 million in
the three months ended September 30, 1999 from $14.2 million in the three months
ended September 30, 1998.
Service and support revenue consists primarily of recurring software support
charges and revenue from training customers in the use of the Company's
products. Substantially all of the Company's software customers subscribe to its
support services, which provide for the payment of annual or quarterly
maintenance fees. Service and support revenue in the Application Software
product line increased $0.9 million, or 13.6%, to $7.7 million in the three
months ended September 30, 1999 from $6.8 million in the three months ended
September 30, 1998. The increase is primarily due to higher maintenance revenue
from a larger base of installed products.
13
<PAGE>
Total revenue in the Application Software product line increased $3.8 million,
or 7.0%, to $58.1 million in the nine months ended September 30, 1999 from $54.3
million in the nine months ended September 30, 1998. Application Software
license revenue increased $1.1 million, or 3.3%, to $34.9 million in the nine
months ended September 30, 1999 from $33.8 million in the nine months ended
September 30, 1998. The increase was primarily due to higher revenues from
Concentrex's mortgage origination products, offset in part by lower branch
automation license revenue. Service and support revenue in the Application
Software product line increased $2.7 million, or 13.4%, to $23.2 million in the
nine months ended September 30, 1999 from $20.5 million in the nine months ended
September 30, 1998. The increase is primarily due to higher maintenance revenue
from a larger base of installed products.
INFORMATION MANAGEMENT PRODUCT LINE. The Information Management product line
includes the core ("host") processing products acquired by Concentrex from
ULTRADATA in August 1999 and from Modern Computer Systems, Inc. ("MCS") in
January 1999. Concentrex had no Information Management revenue in the three or
nine months ended September 30, 1998. Revenue for the three and nine months
ended September 30, 1999 consists of revenue from MCS and ULTRADATA since their
acquisition dates.
Total revenue in the Information Management product line was $3.8 million and
$5.6 million in the three and nine months ended September 30, 1999,
respectively. License fee revenue was $1.4 million and $1.6 million in the three
and nine months ended September 30, 1999, respectively. Service and support
revenue was $2.4 million and $4.0 million in the three and nine months ended
September 30, 1999, respectively.
E-COMMERCE PRODUCT LINE. The e-Commerce product line includes the home banking
and bill payment products previously sold by CFI ProServices, Inc. and the
professional services and technical support services acquired from MECA in May
1999.
Total revenue in the e-Commerce product line increased $2.2 million, or 152%, to
$3.6 million in the three months ended September 30, 1999 from $1.4 million in
the three months ended September 30, 1998. e-Commerce license revenue remained
unchanged in the three months ended September 30, 1999 and 1998 at $0.3 million.
Service and support revenue in the e-Commerce product line increased $2.2
million, or 190%, to $3.3 million in the three months ended September 30, 1999
from $1.1 million in the three months ended September 30, 1998. The increase was
primarily due to the acquisition of MECA's technical support operations in May
1999, and to a 98.2% increase in revenue from Concentrex's on-line bill payment
services.
Total revenue in the e-Commerce product line increased $4.6 million, or 119%, to
$8.6 million in the nine months ended September 30, 1999 from $4.0 million in
the nine months ended September 30, 1998. e-Commerce license revenue increased
$0.3 million, or 28.9%, to $1.4 million in the nine months ended September 30,
1999 from $1.1 million in the nine months ended September 30, 1998. Service and
support revenue in the e-Commerce product line increased $4.3 million, or 154%,
to $7.2 million in the nine months ended September 30, 1999 from $2.9 million in
the nine months ended September 30, 1998. The increase was primarily due to the
acquisition of MECA's technical support operations in May 1999, and to a 96.6%
increase in revenue from Concentrex's on-line bill payment services.
14
<PAGE>
ANCILLARY PRODUCTS. The Ancillary Products product line includes preprinted
forms, font cartridges and modems previously sold by CFI ProServices, Inc.,
license revenue from a personal financial management software product acquired
from MECA in May 1999 and fulfillment services acquired from MECA. Concentrex
anticipates that revenue from MECA's legacy personal financial management
software product will decline in future periods because it is no longer being
actively marketed.
Revenue in the Ancillary Products product line increased $1.8 million, or 237%,
to $2.5 million in the three months ended September 30, 1999 from $0.7 million
in the three months ended September 30, 1998. Total revenue in the Ancillary
Products product line increased $2.2 million, or 71.7% to $5.1 million in the
nine months ended September 30, 1999 from $2.9 million in the nine months ended
September 30, 1998. The increases were primarily due to the acquisition of
MECA's operations in May 1999.
COST OF REVENUE
Cost of revenue primarily consists of amortization of software development
costs, royalty payments, compliance warranty insurance premiums, software
production costs, costs of product support, training and implementation, costs
of software customization, materials costs for forms and supplies and bill
payment processing costs.
Cost of revenue increased $3.8 million, or 48.8%, to $11.6 million and $7.8
million, or 36.3%, to $29.6 million for the three and nine months ended
September 30, 1999, respectively, compared to $7.8 million and $21.7 million in
the same periods in 1998. The increases are primarily attributable to the
acquisitions of ULTRADATA and MECA in 1999. The increases are also attributable
to higher amortization of software development costs and to additional personnel
required to support the increased installed base of customers, higher
implementation costs associated with the increased number of large financial
institution projects, and increased royalties and materials costs associated
with increased revenues. As the breadth of the Company's product offerings has
expanded, the complexity and cost of providing high quality customer service and
support has increased.
Amortization of software development costs increased $0.2 million, to $0.9
million, for the three months ended September 30, 1999 and $0.8 million, to $2.7
million, for the first nine months of 1999 from $0.7 million and $1.9 million
for the respective comparable periods in 1998. The Company capitalized no
software development costs in the three and nine month periods ended September
30, 1999 as compared to none and $1.1 million for the comparable periods in
1998. Capitalized software development costs net of accumulated amortization
were $6.0 million at September 30, 1999.
As a result of Concentrex's acquisitions, costs resulting from royalty payments
are expected to 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 Branch Automation
customer converted to the Company's products. The royalty obligations generally
extend three to five years from the acquisition date.
15
<PAGE>
Gross margin was 60.9% and 61.8%, respectively, for the three and nine months
ended September 30, 1999 compared to 66.5% and 64.6% in the same periods in
1998. Operating margin declined to (22.3%) and (8.9%) for the three and nine
months ended September 30, 1999 compared to 12.9% and 11.0%, respectively, in
1998. The decreases in operating margin are primarily due to the in-process
research and development and other acquisition-related charges incurred during
the second and third quarters of 1999 in connection with the MECA and ULTRADATA
acquisition. Concentrex also recorded a $0.9 million charge in the three months
ended September 30, 1999 with respect to an arbitration award relating to a
customer dispute. Operating margins, excluding these charges, would have been
0.8% and 4.9%, respectively, in the three and nine months ended September 30,
1999.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses decreased to $4.9 million, or
16.8% of revenue, for the three months ended September 30, 1999 compared to $5.2
million, or 22.4% of revenue, for the three months ended September 30, 1998.
Sales and marketing expenses decreased to $13.5 million, or 17.4% of revenue,
for the nine months ended September 30, 1999 compared to $14.1 million, or 22.9%
of revenue, for the nine months ended September 30, 1998. The percentage
decreases resulted primarily from the MECA acquisition in May 1999, which
contributed revenue without commensurate sales and marketing costs.
PRODUCT DEVELOPMENT. Product development expenses include costs of maintaining
and enhancing existing products and developing new products. Product development
expenses were $6.7 million, or 22.8% of revenue, for the three months ended
September 30, 1999 compared to $4.1 million, or 17.8% of revenue, in the
comparable 1998 period. Product development expenses were $17.0 million, or
22.0% of revenue, for the nine months ended September 30, 1999 compared to $10.5
million, or 17.1% of revenue, for the nine months ended September 30, 1998. The
increases in dollar amount and percentage of revenue were principally the result
of increased staffing in the development areas of the Company due to the MECA
and ULTRADATA acquisitions.
The Company believes that the current development cycle for its
compliance-related products in the Application Software operating segment, 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. 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 costs will have a material adverse effect in
future periods on operating margin and net income.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $5.4
million, or 18.2% of revenue, for the three months ended September 30, 1999
compared to $2.8 million, or 12.1% of revenue, for the three months ended
September 30, 1998. General and administrative costs were $12.1 million, or
15.6% of revenue, for the first nine months of 1999 compared to $7.4 million, or
12.1% of revenue for the same period in 1998. The increases in dollar amount and
in percentages are principally due to the MECA and ULTRADATA acquisitions.
16
<PAGE>
AMORTIZATION OF GOODWILL. Amortization of goodwill was $0.7 million and $1.5
million, respectively, for the three and nine months ended September 30, 1999
compared to $0.3 million and $0.9 million for the comparable periods in 1998.
The increases are due principally to the goodwill resulting from the ULTRADATA
acquisition.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT AND OTHER ACQUISITION-RELATED
COSTS. In connection with the acquisition of MECA in May of 1999 and of
ULTRADATA in August 1999, Concentrex recorded expense of $3.8 million in the
second quarter of 1999 and of $5.2 million in the third quarter of 1999 for
in-process research and development efforts in process at the dates of
acquisition. The values assigned to the in-process research and development
efforts were determined by independent appraisal and represent those efforts in
process at the dates of acquisition that had not yet reached the point where
technological feasibility had been established and that had no alternative
future uses. Accounting rules require these costs be expensed as incurred. The
Company believes these research and development efforts will result in
commercially viable products within the next nine months, at an additional cost
of approximately $1.2 million.
Concentrex also expensed $0.6 million of other costs, primarily accrued bonus
costs, in the three months ended September 30, 1999 in connection with the
ULTRADATA acquisition.
NON-OPERATING EXPENSES
Net interest expense was $1.6 million for the three months ended September 30,
1999 compared to $0.0 in the comparable 1998 period. Net interest expense was
$1.7 million for the nine months ended September 30, 1999 compared to $0.1
million in the comparable 1998 period. The increases in net interest expense are
attributable to the debt incurred by Concentrex in August 1999 in connection
with the financing of the ULTRADATA transaction and the refinancing of the MECA
transaction. See Note 7 of Notes to Consolidated Financial Statements.
PROVISION FOR INCOME TAXES
The effective tax rates for the three and nine months ended September 30, 1999
were 14.2% and 9.8%, respectively, compared to 44% for the same periods in 1998.
The provisions for the 1999 periods resulted from the effects of non-deductible
in-process research and development charges incurred in the second and third
quarters of 1999, and from the significant increase in the non-deductible
amortization of goodwill from the ULTRADATA acquisition.
QUARTERLY RESULTS
The Company has experienced, and expects in the future to experience,
significant quarterly fluctuations in its results of operations. These
fluctuations may be caused by various factors, including, among others: the size
and timing of product orders and shipments; the timing and market acceptance of
new products and product enhancements introduced by the Company and its
competitors; the Company's product mix, including expenses of implementation and
royalties related to certain products; the timing of the Company's completion of
work under contracts accounted for under the percentage of completion method;
customer order deferrals in anticipation of new products; aspects of the
customers' purchasing process, including the
17
<PAGE>
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 second
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. This pattern may be
altered in 1999 as Year 2000 issues, including regulatory requirements and
internal business process decisions, affect customers' buying decisions.
18
<PAGE>
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.
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. The Company plans to routinely
backup its financial data through the end of 1999 and has developed a
contingency plan with respect to the accounting system. 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 fourth quarter of
1999. The cost of the update is estimated to be immaterial.
19
<PAGE>
The Company has completed a survey of its software vendors. 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 end of 1999.
The Company has received representations that its phone and voice mail systems
became Year 2000 compliant through upgrades completed during 1999. As to its
phone service providers, the Company has offices located at 12 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 has
developed 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.
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.
20
<PAGE>
Concern over Year 2000 issues is permeating the financial services industry, and
management expects that the resolution of these concerns will continue to 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. 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 all of the equity interests in MECA in May 1999 and in
Ultradata in August 1999. The products of both organizations are year 2000
compliant.
21
<PAGE>
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 indemnities, 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 any significant derivative financial
instruments. The Company may be exposed to future interest rate changes on its
debt. During the three months ended September 30, 1999, the Company incurred
significant indebtedness. A hypothetical 10% increase in interest rates on
Concentrex's current level of debt would increase cash interest expense by
approximately $0.6 million per year. The Company has purchased an interest rate
cap for a substantial portion of its long-term debt. The interest rate cap will
become effective if the prime rate of interest exceeds 10.0% per year.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations was $5.0 million for the nine months ended
September 30, 1999 compared to $6.2 million for the same period in 1998. Working
capital decreased to $1.0 million at September 30, 1999 from $17.0 million at
December 31, 1998. The decrease occurred because of liabilities assumed in the
MECA and ULTRADATA acquisitions and because of additional debt incurred to
finance those acquisitions.
Net cash used in investing activities was $66.6 million for the nine months
ended September 30, 1999 compared to $2.5 million used in the same period in
1998. The increase was due to the acquisition of MCS in January 1999, of MECA in
May 1999 and of ULTRADATA in August 1999.
Net cash provided by financing activities was $58.9 million for the nine months
ended September 30, 1999 compared to net use of $1.2 million in the same period
in 1998. Net cash provided by financing activities in 1999 resulted from the
sale of 90,000 shares of common stock in May 1999 and the incurrence of debt to
finance the Ultradata acquisition in August 1999, and the refinance of debt in
connection with the MECA acquisition in May 1999.
22
<PAGE>
Days sales outstanding (DSO's) in accounts receivable, including both billed and
unbilled accounts receivable, was 105 days at each of September 30, 1999 and
1998. 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 were $8.7 million, or 25.0% of total
accounts receivable, at September 30, 1999 compared to $6.9 million, or 25.0% of
total accounts receivable, at September 30, 1998.
In connection with the MECA and ULTRADATA transactions, Concentrex substantially
increased its outstanding debt. See Note 7 of Notes to Consolidated Financial
Statements for a description of Concentrex's loan agreements and credit
facilities. At September 30, 1999, Concentrex had the following debt under its
Financing Agreement:
Gross Stated Interest Rate At
Amount September 30, 1999
-------------- -----------------------
Revolving Line of Credit $ 5.4 million 9.25%
3-year Term A Loan $ 35.0 million 10.25%
3-year Term B Loan $ 30.0 million 13.25%
--------------
Total $ 70.4 million
In connection with the ULTRADATA acquisition, the Company also issued
convertible subordinated notes. See Note 7 of Notes to Consolidated Financial
Statements.
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 plus a revolving
line of credit up to $15.0 million, subject to borrowing base restrictions
related to accounts receivable of the Company and its subsidiaries.
The Company may require additional funds to support its working capital
requirements, future acquisitions or for other purposes and may seek to raise
such additional funds through one or more public or private financings of debt
or equity, or from other sources. No assurance can be given that additional
financing will be available or, if available, that such financing will be
obtainable on terms favorable to the Company or its shareholders.
From time to time the Company receives contract claims from its customers and
other parties, including requests for full or partial refunds of moneys paid,
and initiates contract claims against its customers and other parties, including
claims for payment of unpaid invoices. Although there can be no assurance that
such claims, either alone or in the aggregate, will not have a material adverse
effect on the Company's results of operations or financial position, the Company
believes that as of the date of this filing no such claims will have such an
effect.
23
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits filed as part of this report are listed below:
Exhibit Number and Description
27 Financial Data Schedule
(b) Reports on Form 8-K
A Form 8-K/A was filed with the Securities and Exchange Commission on August 4,
1999 with respect to the acquisition of MECA Software, L.L.C. by the Registrant.
A Form 8-K was filed with the Securities and Exchange Commission on August 27,
1999 with respect to the acquisition of ULTRADATA Corporation by the Registrant.
A Form 8-K/A was filed with the Securities and Exchange Commission on October
27, 1999 with respect to the acquisition of ULTRADATA Corporation by the
Registrant.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 15, 1999 CFI PROSERVICES, INC.
By: /s/ MATTHEW W. CHAPMAN
----------------------
Matthew W. Chapman
Chairman and Chief Executive Officer
(Principal Executive Officer)
By: /s/ KURT W. RUTTUM
------------------
Kurt W. Ruttum
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
25
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