As filed with the Securities and Exchange Commission on December 9, 1999
Registration No. 333-90993
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
CFI PROSERVICES, INC.
(Exact name of registrant as specified in its charter)
OREGON
(State or other jurisdiction of incorporation or organization)
7389
(Primary Standard Industrial Classification Code Number)
93-0704365
(I.R.S. Employer Identification No.)
400 S.W. Sixth Avenue
Portland, Oregon 97204
(503) 274-7280
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Matthew W. Chapman
Chief Executive Officer and Chairman
400 S.W. Sixth Avenue, 2nd Floor
Portland, Oregon 97204
(503) 274-7280
(Address, including zip code, and telephone number, including area code,
of agent for service of process)
Copies of all correspondence to:
F. Scott Farleigh
David R. Ludwig
Farleigh, Wada & Witt, P.C.
121 S.W. Morrison Street, Suite 600
Portland, Oregon 97204
(503) 228-6044
Approximate date of commencement or proposed sale to public: from time to time
after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. |X|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
Calculation of Registration Fee
<TABLE>
<CAPTION>
Proposed
Title of Each Class of Maximum Proposed Maximum Amount of
Securities to Amount to Offering Aggregate Registration
be Registered be Registered Price Per Unit Offering Price Fee(1)
<S> <C> <C> <C> <C>
Common Stock, No Par Value 90,000 $ 6.65625 $ 599,062.50 $ 166.54
Common Stock, No Par Value 47,000 $12.00 $ 564,000.00 $ 156.79
Common Stock, No Par Value 1,042,356 $12.34375 $12,866,581.88 $3,576.91
Common Stock, No Par Value 30,000 $15.00 $ 450,000.00 $ 125.10
Common Stock, No Par Value 40,000 $18.00 $ 720,000.00 $ 200.16
------- ----------- -------
Total 1,249,356 $15,199,644.38 $4,225.50
</TABLE>
The registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
1The registrant paid the registration fee at the time of the initial filing
of this registration statement.
<PAGE>
PROSPECTUS
CFI PROSERVICES, INC.
(Doing Business As Concentrex Incorporated)
1,249,356 SHARES OF COMMON STOCK
This Prospectus is part of a registration statement that covers up to
1,249,356 shares of our common stock. Of the 1,249,356 shares, we are
registering for resale 90,000 shares we sold to two of the selling security
holders in May 1999. We are also registering 1,159,356 shares that are or may
become issuable to the other security holders upon:
o The exercise of one Warrant entitling the holder to purchase 17,000
shares at an exercise price of $12.00 per share.
o The exercise of four Warrants entitling the holders or their
assignees to purchase 439,822 shares at an exercise price of
$12.34375 per share.
o The conversion of five 10% Convertible Subordinated Discount Notes
entitling the holders or their assignees to convert those Notes into
602,534 shares at a conversion price of $12.34375 per share.
o The exercise of Options entitling the holder to purchase 30,000
shares at an exercise price of $12.00 per share, 30,000 shares at an
exercise price of $15.00 per share, and 40,000 shares at an exercise
price of $18.00 per share.
The holders of the Options, Warrants, and Notes, and Options identified on page
56 of this Prospectus as the selling security holders may offer and sell from
time to time, following issuance, the registered common stock. For additional
information relating to sales of shares of common stock, you should refer to the
section entitled "Plan of Distribution" on page 59.
The selling security holders will receive all of the proceeds from
the sale of these shares. They may offer and sell the shares on the Nasdaq
National Market at prevailing market prices or in privately negotiated
transactions at prices other than the market price. We will not receive any
portion of those proceeds. However, if any of the selling security holders who
hold an Option or a Warrant exercise it (not taking into account "cashless
exercise" rights), then we will receive the exercise price. If all of the
selling security holders exercise all of the Options and the Warrants, we will
receive in the aggregate $7,163,053. If any of the selling security holders who
hold a Note convert it into our common stock, then the conversion of the Note
will discharge the indebtedness we owe to the selling security holder who held
the Note. As of October 15, 1999, we owe the holders of the Notes a total of
$5,648,667. If the holders of the Notes hold them for at least three years, we
will owe them a total of $7,437,535. We will bear all costs relating to the
registration of these shares.
Our common stock is quoted on the National Market tier of The Nasdaq
Stock Market under the symbol "CCTX." We are doing business as Concentrex
Incorporated. The last reported sale price of our shares of common stock on
November 12, 1999, was $7.625 per share.
THE SHARES OFFERED BY THIS PROSPECTUS INVOLVE A HIGH DEGREE OF RISK. YOU SHOULD
CAREFULLY CONSIDER THE "RISK FACTORS" DESCRIBED BEGINNING ON PAGE 3.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<PAGE>
The date of this Prospectus is December 9, 1999.
You should rely on the information contained or incorporated by
reference in this Prospectus and any accompanying supplements. No one has been
authorized to provide you with any other information in respect to this offering
of shares. You should not assume that the information in this Prospectus or any
supplement is current as of any date other than the date set forth on the
document.
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUMMARY.................................................1
CAUTIONARY STATEMENT...............................................4
RISK FACTORS.......................................................4
USE OF PROCEEDS...................................................14
PRICE RANGE OF COMMON STOCK.......................................14
DIVIDEND POLICY...................................................14
CAPITALIZATION....................................................15
SELECTED FINANCIAL DATA...........................................15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.........................17
BUSINESS..........................................................31
MANAGEMENT........................................................43
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.......................................53
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................56
SELLING SECURITY HOLDERS..........................................56
PLAN OF DISTRIBUTION..............................................59
DESCRIPTION OF SECURITIES.........................................60
SHARES ELIGIBLE FOR FUTURE RESALE.................................62
LEGAL MATTERS.....................................................63
EXPERTS...........................................................63
AVAILABLE INFORMATION.............................................64
INDEX TO FINANCIAL STATEMENTS....................................F-1
i
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in
this prospectus and the documents that are incorporated into this prospectus by
reference. It is not complete and it may not contain all of the information that
is important to you. To understand this offering fully, you should read the
entire prospectus carefully.
CFI ProServices, Inc. (doing business
as Concentrex Incorporated)
Our Address and Telephone Number
CFI ProServices, Inc. (doing business as Concentrex
Incorporated), 400 S.W. Sixth Avenue, Portland, Oregon 97204
((503) 274-7280).
State and Year of Our Incorporation
Oregon, 1978
Our Business
We are 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.
On May 17, 1999, we acquired MECA Software, L.L.C. MECA, which is
located in Trumbull, Connecticut and which develops, markets, and
sells e-commerce software and services for financial service
providers, including fulfillment services, technical support,
training, and marketing.
On August 13, 1999, we acquired ULTRADATA Corporation. ULTRADATA,
which is located in Pleasanton, California and which provides
real-time information and management software and solutions for
relationship-oriented financial institutions.
We began doing business under the name "Concentrex Incorporated"
on July 1, 1999. We previously did business as CFI ProServices,
Inc., which will remain our legal name until our shareholders
change it. We anticipate that our shareholders will formally
approve changing our name to Concentrex Incorporated at our next
regularly scheduled shareholder meeting in May 2000. Our former
Nasdaq trading symbol was "PROI."
Our Nasdaq National Market Trading Symbol
"CCTX"
The Offering
Purpose of this Prospectus
During 1999 we issued to the selling security holders described
in this prospectus shares of our common stock,
1
<PAGE>
Options, Warrants, and 10% Convertible Subordinated Discount
Notes. As a part of the issuance of the shares, Options,
Warrants, and the Notes, we agreed to register with the
Securities and Exchange Commission the shares of common stock we
issued to the selling security holders and the shares of common
stock issuable upon their exercise of the Options or the Warrants
or upon their conversion of the Notes into common stock. This
prospectus relates to the selling security holders' sale of the
common stock that we issued to them and that they will receive
following their exercise of the Options and the Warrants and the
conversion of the Notes.
Use of Proceeds
We will not receive any proceeds from the sale of the common
stock under this prospectus. The selling security holders will
retain all of the proceeds from the sale of the common stock for
their own account. However, if the selling security holders who
hold the Options or the Warrants exercise them, then we will
receive the exercise price from them. If the selling security
holders holding the Notes convert them into common stock, then
the conversion of the Notes will discharge in full or in part the
indebtedness we owe to them to the extent they convert such Notes
into our common stock.
Method of Distribution
The selling security holders may sell the common stock under this
prospectus from time to time at the then prevailing prices on the
Nasdaq National Market or in privately negotiated transactions at
prices other than the market price.
Investment Risks
Your investment in our common stock involves a high degree of
risk. You should carefully consider the risk factors described
below in this prospectus prior to making your investment
decision.
Number of Shares of Our Common Stock Outstanding as of October 15, 1999
5,217,491
The Number of Shares of Common Stock Offered under this Prospectus
1,249,356
Common Stock to be Outstanding After the
Selling Security Holders Sell All of the Shares
Offered Under this Prospectus
6,376,847
Summary Financial Data
The following selected financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto included
elsewhere in this prospectus. The selected financial data concerning Concentrex
set forth below
2
<PAGE>
are as of and for each of its most recent five years ended December 31, 1998, as
of and for the nine months ended September 30, 1999, for the nine months ended
September 30, 1998 and include pro forma information for the year ended December
31, 1998 and for the nine months ended September 30, 1999. The selected
financial data for each of the three years in the period ended December 31,
1998, have been derived from Concentrex's consolidated financial statements for
such periods, which were audited by Arthur Andersen, LLP as indicated in their
report included elsewhere in this prospectus. The selected financial data for
the years ended December 31, 1994 and 1995 have been derived from audited
financial statements not included in this prospectus. The selected financial
data as of September 30, 1999 and for the nine months ended September 30, 1999
and 1998 have been derived from Concentrex's unaudited financial statements
included elsewhere in this prospectus and which, in the opinion of management,
include all significant, normal, and recurring adjustments necessary for a fair
presentation of the financial positions and results of operations for such
unaudited periods. The unaudited pro forma statement of operations data for the
year ended December 31, 1998 and for the nine months ended September 30, 1999
give effect to the acquisitions of MECA Software, L.L.C. and ULTRADATA
Corporation as if these transactions had occurred on January 1, 1998.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31
--------------------------- -------------------------------------------------------
Pro Forma Pro Forma
1999 1999(1) 1998 1998(1) 1998(2) 1997 1996(3) 1995(4) 1994
--------- ------- ------- --------- -------- ------- -------- ------- -------
(in thousands, except for per share data)
Consolidated Statement of Operations Data
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue(5)
Application software products $ 58,158 $58,158 $54,335 $ 75,667 $ 75,667 $64,516 $52,936 $32,242 $29,195
Information management products 21,105 5,551 -- 30,359 -- -- -- -- --
e-Commerce products 12,686 8,678 3,959 17,129 5,822 4,991 4,113 1,869 361
Ancillary products 10,099 5,058 2,945 16,483 4,141 3,142 2,898 2,665 3,060
--------- ------- ------- --------- -------- ------- -------- ------- -------
Total Revenue 102,048 77,445 61,239 139,637 85,630 72,649 59,947 36,776 32,616
Cost of revenue 40,708 29,569 21,688 53,218 29,423 27,041 20,844 11,672 9,646
--------- ------- ------- --------- -------- ------- -------- ------- -------
Gross profit 61,340 47,876 39,551 86,419 56,207 45,608 39,103 25,104 22,970
Operating expenses 62,788 44,123 32,841 84,364 45,357 36,780 29,810 20,552 17,859
Acquired in-process research and
development and other charges 10,521 10,521 -- 2,661 2,661 -- 8,030 4,549 --
--------- ------- ------- --------- -------- ------- -------- ------- -------
Income (loss) from operations (11,969) (6,768) 6,710 (606) 8,189 8,828 1,263 3 5,111
Net income (loss) (17,402) (9,148) 3,592 (9,874) 3,960 4,680 114 323 3,514
Preferred Stock dividend 69 69 72 95 95 95 97 97 97
--------- ------- ------- --------- -------- ------- -------- ------- -------
Net income (loss) applicable to
common shareholders $ (17,471) $(9,217) $ 3,520 $ (9,969) $ 3,865 $ 4,585 $ 17 $ 226 $ 3,417
========= ======= ======= ========= ======== ======= ======== ======= =======
Diluted net income(loss) per share $ (3.41) $ (1.81) $ 0.68 $ (1.97) $ 0.75 $ 0.90 $ -- $ 0.05 $ 0.71
========= ======= ======= ========= ======== ======= ======== ======= =======
Shares used in diluted per share
calculations 5,127 5,102 5,179 5,062 5,167 5,124 5,112 4,877 4,806
Basic net income(loss) per share $ (3.41) $ (1.81) $ 0.70 $ (1.97) $ 0.77 $ 0.93 $ -- $ 0.05 $ 0.87
========= ======= ======= ========= ======== ======= ======== ======= =======
Shares used in basic per share
calculations 5,127 5,102 5,005 5,062 5,012 4,919 4,763 4,369 3,922
</TABLE>
<TABLE>
<CAPTION>
September 30, 1999
------------------
Consolidated Balance Sheet Data
<S> <C> <C> <C> <C> <C> <C>
Cash, cash equivalents, restricted cash,
and short-term investments $ 1,071 $ 3,795 $ 20 $ -- $ 7,670 $ 7,958
Working capital 965 16,972 7,187 2,792 8,759 10,336
Property and equipment, net 8,000 4,534 5,211 4,805 2,968 2,579
Total assets 138,539 56,781 57,542 46,845 36,587 27,487
Short-term debt 8,230 261 5,605 2,896 3,915 --
Long-term debt, less current portion 63,902 5,693 2,232 2,810 423 --
Convertible subordinated notes 5,619 -- -- -- -- --
Mandatory Redeemable Class A Preferred
Stock 731 738 746 754 761 764
Shareholders' equity 26,813 30,632 25,943 20,238 18,169 16,591
</TABLE>
1Results for the nine months ended September 30, 1999, include pretax
charges totaling $10.5 million for the value of in-process research and
development efforts at the date of acquisition pertaining to the acquisitions of
ULTRADATA Corporation in August 1999 ($5.2 million) and MECA Software, L.L.C. in
May 1999 ($3.8 million), other expenses for name change and certain costs
related to acquisitions required to be expensed ($0.6 million) and settlement of
an arbitration proceeding ($0.9 million). Excluding the impact of the $10.5
million charge, net income and diluted net income per share would have been $0.7
million and $0.13, respectively. The results of operations for the nine months
ended September 30, 1999 include the results of the operations of ULTRADATA
Corporation, MECA Software L.L.C. and Modern Computer Systems, Inc. since the
dates of acquisitions in August, May and January 1999, respectively. See notes
to the unaudited consolidated financial statements.
3
<PAGE>
2Results 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 write off of the
goodwill and associated severance charges related to fisCAL products ($0.9
million), the present value of net future lease payments due with respect to
certain office space in Atlanta that Concentrex ceased using ($0.8 million), and
write off of the initial investment of Concentrex 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.
3Results for the year ended December 31, 1996, include a pretax charge of $8.0
million for the value of in-process research and development efforts at the date
of acquisition pertaining to five companies acquired in April 1996. Excluding
the impact of the acquired in-process research and development charges, net
income and net income per share (diluted) would have been $5.2 million and
$1.02, respectively. The results of operations for the year ended December 31,
1996, include the results of these companies' operations since the date of
acquisition in April 1996. See Note 2 of Notes to Consolidated Financial
Statements.
4 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.
5 During the quarter ended September 30, 1999, Concentrex reorganized
itself into four operating product lines: Application Software, Information
Management, e-Commerce and Ancillary Products. Accordingly, Concentrex has
reclassified its revenue data for all periods included above to reflect these
new operating product lines. Total revenue did not change as a result of this
reclassification.
CAUTIONARY STATEMENT
This prospectus and information incorporated by reference into this
prospectus contain forward-looking statements. Forward-looking statements are
statements about the future that contain prospective information. Such
prospective information is subject to change and may be affected by risks and
uncertainties that may cause actual results to differ from future results
implied by the forward-looking statements. In addition, risks and uncertainties
may cause historical results to be a less accurate indicator of future results.
Important risks that could cause actual results to differ from those implied by
the forward-looking statements are described under "Risk Factors" in this
prospectus and in various sections in our other reports filed with the SEC.
Investors are cautioned not to place undue reliance on the forward-looking
statements.
RISK FACTORS
WE EXPERIENCE SIGNIFICANT QUARTERLY FLUCTUATIONS IN OUR OPERATING
RESULTS.
We have experienced, and expect in the future to experience,
significant quarterly fluctuations in our results of operations. Various factors
cause these fluctuations, including, among others:
o The size and timing of product orders and shipments.
o The timing and market acceptance of our and our competitors'
new products and product enhancements.
o Our product mix, including expenses of implementation and
royalties related to certain products.
o The timing of our completion of work under contracts accounted
for under the percentage of completion method.
o Delays in our customers' purchases due to year 2000 concerns.
o Customer order deferrals in anticipation of new products.
o Aspects of our customers' purchasing processes, including the
evaluation, decision-making and acceptance of products within the
customers' organizations.
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o Factors affecting the sale process for our products, including
the complexity of customer implementation of our products.
o Federal and state regulatory events.
o Competitive pricing pressures.
o Technological changes in hardware, platform, networking or
communication technology.
o Changes in our personnel.
o The timing of our operating expenditures.
o Specific economic conditions in the financial services industry
and general economic conditions.
We typically ship or install many of our products within three months
of receipt of an order. As a result, software license fees in any quarter
substantially depend on orders booked in that quarter or the previous quarter.
We also generally recognize a substantial portion of our revenue in the last
month of each quarter, with this revenue concentrated in the last weeks of the
quarter.
Seasonal trends affect our results of operations, including the
tendency of some customers to complete purchases of our products in the quarter
ended December 31 or not to implement new orders in the quarter ended March 31.
Our operating expenses are based on anticipated revenue levels. Since a high
percentage of these expenses are relatively fixed within a quarter, a small
variation in the timing of recognition of specific revenue items can cause
significant variations in our quarterly operating results.
Due to these factors, in some future quarter our operating results
may be below the expectations of public market analysts and investors. In such
event, the price of our common stock would likely be affected adversely.
Accordingly, we believe that quarter-to-quarter comparisons of our results of
operations should not be relied upon as an indication of future performance.
WE ARE HIGHLY LEVERAGED.
As of September 30, 1999 we had borrowed approximately $70 million
from a consortium of lenders. We are highly leveraged. Our loan agreements
contain financial covenants that we must abide by. For example, we are required
to generate specific levels of earnings before interest, taxes, depreciation and
amortization ("EBITDA") measured over four-quarter periods. We may from time to
time fail to comply with the covenants in our loan agreements. Any failure to
comply with these covenants could have a material adverse effect on us unless we
are able to obtain waivers for noncompliance. There can be no assurance that our
lenders would grant waivers for noncompliance, which could lead to an event of
default under the loan agreements.
Our loan agreements also contain significant restrictions on our
activities. For example, we must obtain the consent of our lenders before we
purchase or sell significant assets. Additionally, the terms of our loan
agreements prohibit us from incurring additional indebtedness or issuing new
equity securities without the consent of the lenders. These restrictions may
make it difficult or impossible to raise additional funds if we need to do so.
THE MARKET FOR OUR PRODUCTS IS EVOLVING AND OUR SUCCESS DEPENDS ON
OUR DEVELOPMENT OF THAT MARKET.
The market for software products and services to financial
institutions is evolving. Our success, in large part, depends on the continuing
development of this market. We believe that our existing products compete
effectively with our competitors' products. However, we have licensed some of
our products to a limited number of customers. Some of our customers also use
our products in only a part of their organization. A significant part of our
business strategy depends on financial institutions' adoption of new
technologies in handling functions that they previously performed without the
use of computers or with more rudimentary software applications. We cannot
assure you that banks and other financial institutions will adopt new
technologies required for, or that our products will otherwise achieve, broad
acceptance in this evolving market. In some instances, banks and other financial
institutions may be reluctant to consider transitioning to some of our products
without first making
5
<PAGE>
significant decisions regarding the procurement or upgrade of computer or
operating systems, including technology necessary to access and conduct business
on the Internet. If the market for our software solutions fails to develop or if
our products fail to succeed in this market, then our business, operating
results, and financial condition would be materially adversely affected. Market
acceptance of our products also depends on our ability to ensure that our
products operate together and, when appropriate, are integrated across our
product lines and with the products of other major service providers and vendors
of hardware and software used in the financial services industry. As we move
toward offering certain host processor services, certain other host processor
service providers may be less willing to provide us with information necessary
to assure integration of our products with their products. In addition, we
derive a significant part of our revenues from continued support of our software
after the initial sale and are in some cases based on per-transaction or
per-user pricing. There can be no assurance that our customers will continue to
accept these pricing structures.
THE ELECTRONIC BANKING MARKET IS AT THE EARLY DEVELOPMENT STAGE AND
OUR SUCCESS DEPENDS ON THE DEVELOPMENT OF THAT MARKET.
The electronic banking market, and in particular the home banking and
bill paying portions of the market, is at a very early stage of development and
is rapidly evolving. An increasing number of market entrants who have introduced
or are developing competing products and services characterize that market. As
is typical for a new and evolving industry, demand and market acceptance for
recently introduced products and services are subject to a high level of
uncertainty. While the number of customers using the Internet or private-dial
connection as a vehicle for banking has grown rapidly, it remains limited and it
is not known whether these markets or our products will continue to develop such
that a sufficient demand for our software will emerge and be sustainable. The
use of such electronic delivery channels by the banking community and its
customers will require broad acceptance of new methods of conducting business
and exchanging information. Banks and financial institutions with established
methods of handling funds may be reluctant to accept commercial transactions
over the Internet. Moreover, concerns regarding the security and confidentiality
of Internet transactions may inhibit the growth of Internet commerce generally
and, as a result, impact market acceptance of our products. Our business will
include products and services that have only recently been developed in the
emerging electronic delivery market. The use of our products depends, in part,
on the continued development of an industry and infrastructure for providing
secure Internet access and carrying Internet traffic. The Internet may not prove
to be a viable commercial marketplace because of factors such as under capacity,
a reliable network backbone, or timely development of complementary products.
There can be no assurance that commerce over the Internet will become generally
adopted. If the market fails to develop or develops more slowly than expected,
the infrastructure for the Internet is not adequately developed, or our home
banking products and services do not achieve market acceptance by a significant
number of individuals, businesses and financial institutions, our business,
financial condition, and operating results could be materially and adversely
affected. As our product offerings become more diverse, the ability of banks and
financial institutions to offer these products may depend partly on deregulation
of the banking industry, which deregulation is difficult to predict.
MARKET ACCEPTANCE OF OUR PRODUCTS DEPENDS ON THEIR ABILITY TO
INTEGRATE WITH OUR CUSTOMERS' HOST PROCESSOR SYSTEMS.
Market acceptance of our products depends on our ability to ensure
that each of our products operate with each of our other products and with the
products of other major service providers and vendors of hardware and software
used in the financial services industry (and, in particular, the products of
vendors providing processing services to financial institutions). We have
developed significant expertise with most available host processor systems and
the methods necessary to transfer data to and from such systems. If we and the
provider of a host processor system share information regarding product
technologies, development schedules, and enhancements, then we both can
integrate our products and systems. In some cases, providers of host processor
systems or processing services are or may become our competitors with respect to
one or more of our products. As such, we are not always able to obtain access to
host system technology necessary for developing optimal third-party system
integration. There can be no assurance that we will be able to establish and
maintain adequate
6
<PAGE>
relationships with important providers of host processor systems or processing
services in the future. Failure to do so could have a material adverse effect on
our business, results of operations and financial condition.
THE MARKET FOR OUR CALL CENTER AND ELECTRONIC COMMERCE PRODUCTS MAY
NOT GROW OR MAY NOT GROW AS EXPECTED.
We anticipate that the market for our call center and electronic
commerce products will expand rapidly over the next several years. We also have
expended substantial resources in the development and improvement of our call
center and electronic commerce products. However, there can be no assurance that
our upgraded call center and electronic commerce products will be released on a
timely basis or will achieve market acceptance upon release. If the market fails
to grow or grows more slowly than expected, our business, results of operations,
and financial condition could be adversely affected.
WE MAY HAVE DIFFICULTY INTEGRATING OUR RECENT ACQUISITIONS OF OTHER
BUSINESSES AND VENTURES.
One of our strategies has been to acquire complementary businesses,
products and technologies and to enter into new business ventures, including
minority equity investments and joint ventures. Since 1994, we have acquired 15
businesses or companies. In 1999, we acquired three major businesses:
o Modern Computer Systems, Inc., a company located in Minnesota that
provides back office (host data processing) and related services to
financial institutions.
o MECA Software, L.L.C., a company located in Connecticut that provides
e-commerce technology- powered solutions for the delivery of
financial services.
o ULTRADATA Corporation, a company located in California that provides
real-time information and management software and solutions (host
data processing) for relationship oriented financial institutions.
Our acquisitions of companies, businesses, products, and technologies
have required the dedication of management resources to achieve the strategic
objectives of the acquisitions and business ventures. We cannot give any
assurances (1) that we may overcome the difficulties encountered in integrating
the operations of those acquisitions or business ventures that we previously
acquired or that we may acquire in the future, (2) that we will obtain the
specific benefits expected from integration of any particular acquisition,
including the addition of new products and technologies or increased sales and
growth of our customer base, or (3) that we will realize any anticipated cost
savings. The difficulties of combining the operations of acquired businesses
have been, and the entry into new business ventures in the future can be
expected to be, exacerbated by the necessity of coordinating geographically
separated organizations. The process of integrating operations has to a degree
caused, and may in the future cause, an interruption of, or loss of momentum in,
the activities of our business and operations, including those of the businesses
acquired or new business ventures started. Difficulties encountered in
connection with our acquisition of businesses, products, or technologies, and
the commencement of new business ventures, could have an adverse effect on our
business, results of operations, and financial condition. There can be no
assurance that integration of businesses, products, or technologies previously
acquired, or business ventures entered into in the future, will be accomplished
without having an adverse impact on our business, results of operations and
financial condition or that we will realize the benefits or strategic objectives
expected from those businesses and business ventures.
WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH.
The growth in the size and complexity of our business and the
expansion of our product lines and our customer base have placed and are
expected to continue to place a significant strain on all aspects of our
business. In particular, our emphasis on selling to large institutions has
placed significant additional demands on our installation and implementation
operations. Our growing installed base also has placed additional demands on our
7
<PAGE>
customer support operation. Our intention to actively pursue opportunities in
electronic commerce will provide additional challenges to many aspects of our
operations. Our future operating results will depend on our ability to expand
our support operations and infrastructure commensurate with our expanding base
of installed products and on our ability to attract, hire, and retain skilled
personnel. There can be no assurance that our personnel, systems, procedures,
and controls will be adequate to support our operations. Any failure to
implement and improve our operational, financial, and management systems or to
expand, train, motivate, or manage personnel could have a material adverse
effect on our business, operating results, and financial condition. There can be
no assurance that we will be able to effectively manage any future growth. Our
failure to do so would have a material adverse effect on our business, operating
results, and financial condition. If the anticipated growth fails to
materialize, then our operating results could be adversely affected.
WE DEPEND ON KEY EMPLOYEES AND CONTRACT ENGINEERS.
Our future success will depend to a significant extent upon the
contributions of our executive officers and key sales, engineering, marketing
and technical personnel, including independent contractors used by us primarily
in product development. We do not have "key person" life insurance on any of our
employees. The loss of the services of one or more of our key personnel could
have a material adverse effect on our business, operating results, and financial
condition. We also believe our future success will depend in large part upon our
ability to attract and retain additional highly skilled personnel, particularly
sales personnel, systems integrators, and software engineers. Because of the
sophistication of our products and the technology environments in which we
operate, our sales, engineering, and other personnel generally require advanced
technical knowledge and sufficient training to perform competently. Competition
for such personnel, particularly qualified software development engineers, is
very intense and we have, at times, experienced difficulty in locating personnel
with the requisite level of expertise and experience. There can be no assurance
that we will be successful in retaining the personnel we require in the future.
OUR SUCCESS WILL DEPEND ON OUR ABILITY TO DEVELOP AND SUCCESSFULLY
INTRODUCE NEW PRODUCTS AND PRODUCT ENHANCEMENTS.
Our future success will depend upon our ability, on a timely basis,
to develop or acquire and successfully introduce new products and to maintain
and enhance our current products to meet customers' expanding needs. In
addition, we must (1) identify emerging trends and technological changes in our
target markets, (2) develop and maintain competitive products, (3) enhance our
products by adding innovative features that differentiate our products from our
competitors' products, and (4) develop and bring products to market quickly at
cost-effective prices. In particular, we believe our software-based products
must respond quickly to users' needs for broad functionality and multi-platform
support and to advances in hardware and operating systems. As a result of these
requirements, we will need to make substantial investments in design and product
development. Any failure to anticipate or respond adequately to technological
and regulatory developments and customer requirements, or any significant delays
in product development or introductions, could result in a loss of
competitiveness and could materially adversely affect our business, operating
results, and financial condition. There can be no assurance that we will be
successful in developing and marketing new products or product enhancements that
respond to technological or regulatory changes, evolving standards, or changing
customer requirements.
In the past, we have experienced delays in the introduction of new
products and product enhancements, including the Windows version of our Deposit
Pro and Laser Pro products, and in the achievement of market acceptance for
certain of our products. There can be no assurance that we will successfully
complete on a timely basis products currently under development or that current
or future products will achieve market acceptance. If we are not successful in
developing new products and providing product enhancements in a timely manner,
including those that incorporate regulatory changes into our products, it could
have a material adverse impact on our business, operating results, and financial
condition. The pressures to get products to market are likely to increase as we
move into the electronic commerce market. These pressures could result in an
increase in the number of errors in our products which would require significant
time and effort to correct.
8
<PAGE>
In addition, the introduction or announcement of products embodying
new technologies, changes in industry standards, applicable regulations, or
customer requirements, either by us or by one or more of our competitors, could
render our existing products obsolete or unmarketable. There also can be no
assurance that the introduction or announcement of new product offerings by us
or one or more of our competitors will not cause customers to defer purchases of
existing products. Such deferment of purchases could have a material adverse
effect on our business, operating results, and financial condition.
THE SALES AND IMPLEMENTATION OF OUR PRODUCTS OFTEN INVOLVE A
SUBSTANTIAL LENGTH OF TIME AND THE EXPENDITURE OF SIGNIFICANT RESOURCES.
The license of our software products generally requires that we
educate prospective customers regarding the use and benefits of our products. In
addition, the implementation of our 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. Our product license and other fees are typically only a portion of the
customer's related hardware, software, development, training and integration
costs in implementing a system containing our products. The license of our
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 our product and the ultimate sale and
implementation of our product to the customer can often be lengthy (often
ranging from three months to in excess of one year) and is subject to a number
of significant delays over which we have little or no control. Our actual
receipt of revenues from these projects can be even more protracted. Increases
in the size and complexity of our license transactions and delays in our
customers' implementation or upgrade of the necessary computing environments
could lengthen our sales and implementation cycle.
THE MARKET FOR OUR PRODUCTS IS HIGHLY COMPETITIVE.
The market for our products is intensely competitive and rapidly
changing. A number of companies offer competitive products addressing certain of
our target markets, which include lending, retail delivery, connectivity, and
host processing products. With respect to our software applications products,
our principal competitors include:
o Bankers Systems, Inc.
o FormAtion Technologies, Inc. (a subsidiary of John H. Harland
Company).
o Interlinq Software Corporation.
o Fair Isaac & Company, Inc.
o Affinity Technology Group, Inc.
o Great Lakes Forms, Inc.
o APPRO Systems, Inc.
o JetForm Corp.
With respect to our information management products, our principal
competitors include:
o Olivetti North America
o Broadway & Seymour, Inc.
o Early, Cloud & Company
o Footprint Software, inc. (both subsidiaries of International
Business Machines Corporation ("IBM"))
o Electronica Data Systems Corporation
o Argo & Company
o FIserv, Inc.
o Edify Corporation
o Software Dynamics, Inc.
9
<PAGE>
With respect to our electronic commerce products, our principal
competitors include:
o CheckFree Incorporated
o Visa Interactive
o Edify Corporation
o Online Resources & Communications Corporation
o GOLDPAC Products
o Politzer & Haney
A number of our prospective and existing customers also have the
internal capability to provide alternative solutions to our lending, operations,
or electronic delivery products and may, therefore, be viewed as competitors.
These alternatives may include internally developed software and hardware
solutions or methods of process management that do not involve software
solutions. Some of our competitors have significantly greater financial,
technical, sales, and marketing resources than us. We believe that the primary
competitive factors in this market include product quality, reliability,
performance, features and functions, price, vendor and product reputation,
financial stability, time to market, ease of use, the interoperability with
other applications or systems, and quality of support. Although we believe that
we compete favorably in each of these categories, there can be no assurance that
competitors will not develop products that are superior to our products or that
achieve greater market acceptance. Because of the rapidly evolving nature of the
industry, many of our collaborative partners are current or potential
competitors. Similarly, a number of our current or potential competitors have
established or may establish cooperative relationships among themselves and with
third parties that may present additional competition with products offered by
us. Our competitors may also be able to undertake more extensive marketing
campaigns, adopt more aggressive pricing policies, utilize more extensive
distribution channels, and bundle competing products.
WE DERIVE A SIGNIFICANT PORTION OF OUR REVENUE FROM A LIMITED NUMBER
OF PRODUCTS.
A significant portion of our revenue is derived from a limited number
of products. Revenue from our Laser Pro and Deposit Pro products represented
approximately 52 percent of our total revenue for the year ended December 31,
1998. Although we believe that these products will continue to represent a
significant percentage of our revenue for the near term, an important part of
our business strategy depends upon our ability to continue to develop and market
our other products. This percentage also is likely to decrease as we add
products from our recent acquisitions to our product lines. However, there is no
assurance that we will realize the same revenue levels that these products
produced for their former owners. A decline in demand or prices for our Laser
Pro or Deposit Pro products, whether as a result of new product introductions by
our competitors, price competition, technological change, or failure of our
products to address customer requirements, could have a material adverse effect
on our business, results of operations, and financial condition. The failure of
the financial services industry in general to adopt new or modified technologies
to improve and simplify business processes (in particular, the products
developed by us), or our failure to support this industry transition with
products that effectively address customer requirements, would have a material
adverse effect on our business, results of operations, and financial condition.
WE DERIVE SUBSTANTIALLY ALL OF OUR REVENUE FROM FINANCIAL INSTITUTIONS.
We derive substantially all of our revenue from licenses and services
to banks, credit unions, thrifts, and other financial institutions. Our future
growth depends on increased sales to the financial services industry. The
success of our customers is intrinsically linked to economic conditions in the
financial services industry, which in turn are subject to intense competitive
pressures and are affected by overall economic conditions. We also believe that
the license of our products is relatively discretionary and often requires a
significant commitment of capital if accomplished by large-scale hardware
purchases or commitments. As a result, although we believe that our products can
be of substantial assistance to financial institutions in a competitive
environment, instability or
10
<PAGE>
downturns in the financial services environment could disproportionately affect
the demand for our products and services, which may cause existing or potential
customers to exit the industry or delay, cancel, or reduce any planned
expenditures for technology solutions, including those offered by us. The
financial services industry is currently experiencing consolidation that may
affect demand for our products. The financial services industry is highly
regulated and changes in regulations affecting the financial services industry
or our products could have a significant effect on us. These and other factors
adversely affecting the financial services industry and its purchasing
capabilities could have a material adverse effect on our business, results of
operations, and financial condition.
OUR CUSTOMERS MAY DELAY OR DEFER PURCHASES OF OUR PRODUCTS UNTIL
AFTER 1999 IN RESPONSE TO YEAR 2000 CONCERNS.
Our 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 their existing systems, our
customers may delay or defer purchases of our products until after March 2000.
OUR BUSINESS INVOLVES RISKS RELATED TO WARRANTY AND PRODUCT LIABILITY
CLAIMS.
Our 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 or that we discover only after a customer has
installed and used a product. In addition, implementation of our products may
involve a significant amount of customer-specific customization and may involve
integration with systems developed by third parties. Although our business has
not been materially adversely affected by any such errors to date, there can be
no assurances that significant errors will not be found in our products in the
future. Such errors could give rise to warranty or other liability claims
against us, cause delays in product introduction and shipments, require design
modifications, result in loss of or delay in market acceptance of our products
or loss of existing customers, any of which could adversely affect our business,
results of operations, and financial condition.
Our products enable our customers to comply with a variety of complex
and changing federal and state laws and regulations. Should documentation
generated by our products result in a customer's violation of such requirements
due to a product defect, the customer, or possibly the governmental authority
whose requirements were not met, could claim that we are responsible. We provide
a compliance warranty on certain of our products that limits our liability to
$1,000,000 per customer per year and further limits our liability for all of our
customers to an aggregate of $2,500,000 per year per occurrence of a common
defect. There can be no assurance that these contract limits would be
enforceable, or that claims would be covered by or would not exceed the limits
of our insurance policy. Further, there can be no assurance that this policy
will be renewed or will remain priced within our capacity to pay the premiums.
If our contract limits are found to be unenforceable or our insurance policy
does not adequately cover claims, then our results of operations may be
materially and adversely affected. In addition, there can be no assurance that
we will be able to correct claimed or actual product defects in a timely manner
or at all.
PROTECTION OF OUR PROPRIETARY TECHNOLOGY IS LIMITED AND MAY BE COSTLY.
Our success and ability to compete depends in part upon our
proprietary technology, including our software. We rely primarily on a
combination of copyright, trade secret, and trademark laws, confidentiality
procedures, and contractual provisions to protect our proprietary rights. We
also believe that factors such as know-how concerning the financial services
industry and the kinds of software products that we license as well as the
technological and creative skills of our personnel, new product developments,
frequent product enhancements, name recognition, and reliable product service
are essential for us in establishing and maintaining a technology
11
<PAGE>
leadership position. We may from time to time seek patent protection for
innovations related to certain of our software products, although we have not
generally sought patent protections for our software. There has been an increase
in the number of patents related to software that have been issued or applied
for in the United States and, accordingly, the risk of patent infringement for
software companies can be expected to increase. There can be no assurance that
others will not develop technologies that are similar or superior to our
technology. We have, with a small number of customers, provided limited access
and restricted rights to the source code of certain products. Despite our
efforts to protect our proprietary rights, other parties may attempt to reverse
engineer, copy, or otherwise engage in unauthorized use of our proprietary
information. There can be no assurance that such unauthorized use will not
occur. Monitoring unauthorized use of our proprietary information is difficult.
We are unable to determine the extent to which piracy of our software products
exists; in any event, software piracy could occur. If we license software
products in foreign countries (which we have done only on a limited basis to
date), then we may experience greater risks of software piracy because the laws
of certain foreign countries do not provide meaningful protection against piracy
of software. There can be no assurance that our means of protecting our
proprietary rights will be adequate.
Certain technology or proprietary information incorporated in our
products is licensed from third parties, generally on a non-exclusive basis. The
termination of any such licenses, or the failure of the third-party licensors to
adequately maintain or update their products, could result in delay in our
ability to ship certain of our products while we seek to locate alternative
technology. Any required replacement licenses could prove costly. While it may
be necessary or desirable in the future to obtain rights to third party
technology, there can be no assurance that we will be able to do so on
commercially reasonable terms or at all.
In the future, we may receive notices claiming that we are infringing
the proprietary rights of third parties. There can be no assurance that we will
not become the subject of infringement claims or legal proceedings by third
parties with respect to current or future products, services, or technologies.
We expect that software product developers will increasingly be subject to
infringement claims as the number of products and competition in our industry
grows and the functionality and scope of products overlaps. Furthermore, there
can be no assurance that employees or third parties have not improperly
disclosed confidential or proprietary information to us. Any such claims, with
or without merit, could be time consuming and expensive to defend, divert
management's attention and resources, cause product and shipment delays, or
require us to pay money damages or enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on terms
acceptable to us or at all. In the event of a successful claim of product
infringement against us and failure of us or our licensors to license the
infringing or similar technology on reasonable terms, our business, results of
operations, and financial condition could be adversely affected. In addition, we
may initiate claims against third parties for infringement of our proprietary
rights or to establish the validity of our proprietary rights. Any such claim
could be time consuming, result in costly litigation, and have a material
adverse effect on our business, results of operations, and financial condition.
ANTI-TAKEOVER CONSIDERATIONS COULD MAKE AN ACQUISITION BY A THIRD PARTY
DIFFICULT AND REDUCE A SHAREHOLDER'S CHANCES OF OBTAINING A PREMIUM FROM THE
SALE OF THE SHAREHOLDER'S SHARES IN A CHANGE OF CONTROL.
Certain provisions of our Amended and Restated Articles of
Incorporation (the "Articles"), including the classified Board of Directors
currently in effect, could delay the removal of incumbent directors and could
make more difficult a merger, tender offer, or proxy contest involving us, even
if such event would be beneficial to the interests of the shareholders. In
addition, we have 5,000,000 shares of authorized Series Preferred Stock. We may
issue shares of such Series Preferred Stock in the future without further
shareholder approval and upon such terms and conditions, having such rights,
privileges, and preferences, as the Board of Directors may determine. The rights
of the holders of common stock will be subject to, and may be adversely affected
by, the rights of the holders of any Series Preferred Stock that may be issued
in the future. The issuance of Series Preferred Stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from acquiring, a majority of
12
<PAGE>
our outstanding voting stock. The Articles also provide that certain business
combinations must be approved by holders of at least 75 percent of the
outstanding shares of common stock.
SALES OF PRIVATELY HELD SHARES COULD NEGATIVELY AFFECT OUR STOCK PRICE.
Future sales of a substantial number of restricted shares of common
stock in the public market, or the issuance of shares of common stock, upon the
exercise of options or otherwise, could affect adversely the market price of our
common stock. Upon completion of this offering and based upon the number of
shares outstanding as of October 15, 1999, we will have an aggregate of
6,376,847 shares of common stock outstanding, assuming no exercise of
outstanding options we issued to our officers, directors, and employees.
Substantially all of such shares will be freely saleable without restriction or
further registration under the Securities Act of 1933, except that 518,286
shares of common stock held by affiliates are "restricted securities" as that
term is defined in Rule 144 under the Securities Act ("Restricted Shares").
Restricted Shares may be sold in the public market only if registered or if they
qualify for an exemption from registration under Rule 144, 144(k), or 701
promulgated under the Securities Act. In addition, we have filed registration
statements under the Securities Act registering shares of common stock issued
and issuable upon exercise of options granted pursuant to our stock option
plans, stock option agreements, and employee stock purchase plan. As of October
15, 1999, we have reserved 1,839,091 shares of common stock for issuance
pursuant to our stock option plans, stock option agreements, and employee stock
purchase plan. Of this amount, 1,374,801 shares were subject to outstanding
options, 765,818 of which were subject to options that were exercisable as of
October 15, 1999.
OUR STOCK PRICE MAY BE ADVERSELY AFFECTED BY MARKET VOLATILITY.
On November 12, 1999, the last reported sales price for our common
stock on the Nasdaq National Market, was $7.625 per share. There can be no
assurance that the trading price of our common stock will not decline below the
recent trading prices. Future announcements concerning us or our competitors,
technological innovations, new product introductions, government regulations,
market conditions in our industries, or changes in earnings estimates by
analysts may cause the trading price of the common stock to fluctuate
substantially.
The trading price of our common stock on the Nasdaq National Market
has been and may continue to be subject to wide fluctuations in response to our
financial performance, market conditions in the software industry, new product
introductions by us or by our competitors or planned capital raising activities,
as well as factors that may have no relevance to us or our markets including
general economic, political and market conditions, such as recessions. In
addition, historical trading volumes of our common stock on the Nasdaq National
Market have been consistently low, which we believe has amplified, and will
continue to amplify, the volatility in the trading prices of our common stock.
WE DO NOT PLAN TO PAY DIVIDENDS AND DIVIDEND PAYMENTS ARE RESTRICTED.
We do not intend to pay cash dividends in the foreseeable future. We
cannot pay cash dividends without the consent of our lenders.
THE EXERCISE OF OUTSTANDING OPTIONS WILL RESULT IN FURTHER DILUTION.
If holders of outstanding options to purchase our common stock
exercise those options, then there will be further dilution. In connection with
future capital-raising activities or the acquisition of products, technologies,
or businesses, we may issue additional equity or convertible debt securities.
Future issuances of additional equity or convertible debt securities could
result in additional dilution to our shareholders.
13
<PAGE>
USE OF PROCEEDS
This prospectus relates to the shares of common stock that the
selling security holders may offer from time to time. We will not receive any of
the proceeds from the sale of the common stock the selling security holders may
offer.
However, we will receive cash proceeds to the extent that the selling
security holders who hold Options or Warrants exercise them. If they exercise
all of the Options and Warrants, then we will receive $7,163,053. Each Option
and Warrant contains "cashless exercise" rights. If the holders of the Options
and Warrants exercise these rights, we will not receive any cash but will be
required to issue substantially fewer shares of common stock. We will use these
proceeds for general corporate purposes, including for working capital. If all
of the selling security holders who hold Notes convert their Notes into common
stock, then the conversion of the Notes will discharge in full the indebtedness
that we owe to them. As of October 15, 1999, we owe the holders of the Notes a
total of $5,648,667. If the holders of the Notes hold them for at least three
years, we will owe them a total of $7,437,535.
PRICE RANGE OF COMMON STOCK
Our common stock trades publicly on the Nasdaq National Market under
the trading symbol CCTX. The table below sets forth the high and low sales
prices for our common stock for the periods indicated as reported by the Nasdaq
National Market.
High Low
1997
First Quarter $20.88 $14.00
Second Quarter $20.25 $14.25
Third Quarter $18.75 $13.50
Fourth Quarter $16.50 $10.00
1998
First Quarter $16.69 $12.25
Second Quarter $17.88 $14.50
Third Quarter $16.38 $ 9.38
Fourth Quarter $13.13 $10.00
1999
First Quarter $13.69 $11.00
Second Quarter $18.00 $ 9.25
Third Quarter $13.38 $ 9.69
On November 12, 1999, the last reported sales price reported on the
Nasdaq National Market for the common stock was $7.625 per share. On the same
date, there were approximately 295 holders of record of the common stock.
DIVIDEND POLICY
We have not declared or paid any cash dividends on our common stock.
We currently intend to retain any future earnings to finance the growth and
development of our business and, therefore, do not currently anticipate paying
any cash dividends on our common stock in the foreseeable future.
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CAPITALIZATION
The following table sets forth the capitalization of Concentrex as of
September 30, 1999, as adjusted to give effect to the receipt by Concentrex of
the estimated net proceeds from the exercise of the Options and the Warrants and
the conversion of the Notes into common stock. This table should be read in
conjunction with Concentrex's Consolidated Financial Statements and Notes
thereto appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
September 30, 1999
--------------------------
Actual As Adjusted
----------- -----------
(in thousands)
<S> <C> <C>
Current portion of long-term debt and other current liabilities $ 2,834 $ 2,834
Long-term liabilities and debt, less current portion 63,902 63,902
Convertible Subordinated Notes 5,619 --
Mandatory Redeemable Class A Preferred Stock 731 731
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
shares issued and outstanding actual; and 6,229,523 shares issued
and outstanding as adjusted(1) 25,087 37,744
Retained earnings 1,726 1,726
----------- -----------
Total shareholders' equity 26,813 39,470
----------- -----------
Total capitalization $ 99,899 $ 106,937
=========== ===========
<FN>
(1)Excludes 1,374,801 shares of common stock issuable pursuant to exercise
of stock options outstanding at September 30, 1999, at a weighted average
exercise price of $11.34 per share, 765,495 of which were exercisable as of
September 30, 1999.
</FN>
</TABLE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto included
elsewhere in this prospectus. The selected financial data concerning Concentrex
set forth below are as of and for each of its most recent five years ended
December 31, 1998, as of and for the nine months ended September 30, 1999, for
the nine months ended September 30, 1998 and include pro forma information for
the year ended December 31, 1998 and the nine months ended September 30, 1999.
The selected financial data for each of the three years in the period ended
December 31, 1998, have been derived from Concentrex's consolidated financial
statements for such periods, which were audited by Arthur Andersen, LLP as
indicated in their report included elsewhere in this prospectus. The selected
financial data for the years ended December 31, 1994 and 1995 have been derived
from audited financial statements not included in this prospectus. The selected
financial data as of September 30, 1999 and for the nine months ended September
30, 1999 and 1998 have been derived from Concentrex's unaudited financial
statements included elsewhere in this prospectus and which, in the opinion of
management, include all significant, normal, and recurring adjustments necessary
for a fair presentation of the financial positions and results of operations for
such unaudited periods. The unaudited pro forma statement of operations data for
the year ended December 31, 1998 and for the nine months ended September 30,
1999 give effect to the acquisitions of MECA Software, L.L.C. and ULTRADATA
Corporation as if these transactions had occurred on January 1, 1998.
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<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31
--------------------------- -------------------------------------------------------
Pro Forma Pro Forma
1999 1999(1) 1998 1998(1) 1998(2) 1997 1996(3) 1995(4) 1994
--------- ------- ------- --------- -------- ------- -------- ------- -------
(in thousands, except for per share data)
Consolidated Statement of Operations Data
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue(5)
Application software products $ 58,158 $58,158 $54,335 $ 75,667 $ 75,667 $64,516 $52,936 $32,242 $29,195
Information management products 21,105 5,551 -- 30,359 -- -- -- -- --
e-Commerce products 12,686 8,678 3,959 17,129 5,822 4,991 4,113 1,869 361
Ancillary products 10,099 5,058 2,945 16,483 4,141 3,142 2,898 2,665 3,060
--------- ------- ------- --------- -------- ------- -------- ------- -------
Total Revenue 102,048 77,445 61,239 139,637 85,630 72,649 59,947 36,776 32,616
Cost of revenue 40,708 29,569 21,688 53,218 29,423 27,041 20,844 11,672 9,646
--------- ------- ------- --------- -------- ------- -------- ------- -------
Gross profit 61,340 47,876 39,551 86,419 56,207 45,608 39,103 25,104 22,970
Operating expenses 62,788 44,123 32,841 84,364 45,357 36,780 29,810 20,552 17,859
Acquired in-process research and
development and other charges 10,521 10,521 -- 2,661 2,661 -- 8,030 4,549 --
--------- ------- ------- --------- -------- ------- -------- ------- -------
Income (loss) from operations (11,969) (6,768) 6,710 (606) 8,189 8,828 1,263 3 5,111
Net income (loss) (17,402) (9,148) 3,592 (9,874) 3,960 4,680 114 323 3,514
Preferred Stock dividend 69 69 72 95 95 95 97 97 97
--------- ------- ------- --------- -------- ------- -------- ------- -------
Net income (loss) applicable to
common shareholders $ (17,471) $(9,217) $ 3,520 $ (9,969) $ 3,865 $ 4,585 $ 17 $ 226 $ 3,417
========= ======= ======= ========= ======== ======= ======== ======= =======
Diluted net income(loss) per share $ (3.41) $ (1.81) $ 0.68 $ (1.97) $ 0.75 $ 0.90 $ -- $ 0.05 $ 0.71
========= ======= ======= ========= ======== ======= ======== ======= =======
Shares used in diluted per share
calculations 5,127 5,102 5,179 5,062 5,167 5,124 5,112 4,877 4,806
Basic net income(loss) per share $ (3.41) $ (1.81) $ 0.70 $ (1.97) $ 0.77 $ 0.93 $ -- $ 0.05 $ 0.87
========= ======= ======= ========= ======== ======= ======== ======= =======
Shares used in basic per share
calculations 5,127 5,102 5,005 5,062 5,012 4,919 4,763 4,369 3,922
</TABLE>
<TABLE>
<CAPTION>
September 30, 1999
------------------
Consolidated Balance Sheet Data
<S> <C> <C> <C> <C> <C> <C>
Cash, cash equivalents, restricted cash,
and short-term investments $ 1,071 $ 3,795 $ 20 $ -- $ 7,670 $ 7,958
Working capital 965 16,972 7,187 2,792 8,759 10,336
Property and equipment, net 8,000 4,534 5,211 4,805 2,968 2,579
Total assets 138,539 56,781 57,542 46,845 36,587 27,487
Short-term debt 8,230 261 5,605 2,896 3,915 --
Long-term debt, less current portion 63,902 5,693 2,232 2,810 423 --
Convertible subordinated notes 5,619 -- -- -- -- --
Mandatory Redeemable Class A Preferred
Stock 731 738 746 754 761 764
Shareholders' equity 26,813 30,632 25,943 20,238 18,169 16,591
</TABLE>
1Results for the nine months ended September 30, 1999, include pretax
charges totaling $10.5 million for the value of in-process research and
development efforts at the date of acquisition pertaining to the acquisitions of
ULTRADATA Corporation in August 1999 ($5.2 million) and MECA Software, L.L.C. in
May 1999 ($3.8 million), other expenses for name change and certain costs
related to acquisitions required to be expensed ($0.6 million) and settlement of
an arbitration proceeding ($0.9 million). Excluding the impact of the $10.5
million charge, net income and diluted net income per share would have been $0.7
million and $0.13, respectively. The results of operations for the nine months
ended September 30, 1999 include the results of the operations of ULTRADATA
Corporation, MECA Software L.L.C. and Modern Computer Systems, Inc. since the
dates of acquisitions in August, May and January 1999, respectively. See notes
to the unaudited consolidated financial statements.
16
<PAGE>
2Results 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 write off of the
goodwill and associated severance charges related to fisCAL products ($0.9
million), the present value of net future lease payments due with respect to
certain office space in Atlanta that Concentrex ceased using ($0.8 million), and
write off of the initial investment of Concentrex 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.
3Results for the year ended December 31, 1996, include a pretax charge of $8.0
million for the value of in-process research and development efforts at the date
of acquisition pertaining to five companies acquired in April 1996. Excluding
the impact of the acquired in-process research and development charges, net
income and net income per share (diluted) would have been $5.2 million and
$1.02, respectively. The results of operations for the year ended December 31,
1996, include the results of these companies' operations since the date of
acquisition in April 1996. See Note 2 of Notes to Consolidated Financial
Statements.
4 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.
5 During the quarter ended September 30, 1999, Concentrex reorganized
itself into four operating product lines: Application Software, Information
Management, e-Commerce and Ancillary Products. Accordingly, Concentrex has
reclassified its revenue data for all periods included above to reflect these
new operating product lines. Total revenue did not change as a result of this
reclassification.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The consolidated financial statements and notes 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 Concentrex'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 document.
Concentrex'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 document, as well as in Concentrex's other filings
with the Securities and Exchange Commission.
NINE MONTHS ENDED SEPTEMBER 30, 1999,
COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1998
Concentrex completed three acquisitions during the nine months ended
September 30, 1999. Concentrex acquired Modern Computer Systems, Inc. (MCS) as
of January 1, 1999, MECA Software, L.L.C. (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 for the nine months ended September 30, 1999 since their respective
acquisition dates.
Revenue
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 44.5% and 38.1% of Concentrex's total revenue in the nine
months ended September 30, 1999 and 1998, respectively.
17
<PAGE>
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 has
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.
Revenue By Product Line
(in $millions)
Nine Months Ended Sept. 30,
1999 1998
Application Software
Software License Revenue $34.9 $33.8
Service and Support Revenue 23.2 20.5
---- ----
58.1 54.3
Information Management
Software License Revenue 1.6 --
Service and Support Revenue 4.0 --
---- ----
5.6 --
e-Commerce
Software License Revenue 1.4 1.1
Service and Support Revenue 7.2 2.9
---- ----
8.6 4.0
Ancillary Products 5.1 2.9
---- ----
Total Revenue $77.4 $61.2
==== ====
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 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 13.2%, 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. Service and support revenue consists
primarily of recurring software support charges and revenue from training
customers in the use of Concentrex's products. Substantially all of Concentrex's
software customers subscribe to its support services, which provide for the
payment of annual or quarterly maintenance fees.
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 MCS in January 1999.
Concentrex had no Information Management revenue in the nine months ended
September 30, 1998. Revenue for the nine months ended September 30, 1999
consists of revenue from ULTRADATA and MCS since their acquisition dates.
Total revenue in the Information Management product line was $5.6
million in the nine months ended September 30, 1999. License fee revenue was
$1.6 million in the nine months ended September 30, 1999. Service and support
revenue was $4.0 million in the nine months ended September 30, 1999.
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 operating segment 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
18
<PAGE>
acquisition of MECA's technical support operations in May 1999 whose revenues
are included since the acquisition, and to a 96.6% increase in revenue from
Concentrex's on-line bill payment services.
Ancillary Products Product Line. 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. 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 $7.8 million, or 36.3%, to $29.6 million
for the nine months ended September 30, 1999, respectively, compared to $21.7
million in the same period in 1998. The increase is primarily attributable to
the acquisitions of ULTRADATA and MECA in 1999. The increase is 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 Concentrex'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 $0.9 million, to
$2.7 million, for the first nine months of 1999 from $1.9 million for the
comparable period in 1998. Concentrex capitalized no software development costs
in the nine months ended September 30, 1999 as compared to $1.1 million for the
comparable period 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. Concentrex 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,
Concentrex is obligated to pay MicroBilt Corporation a fixed amount per OnLine
Branch Automation customer converted to Concentrex's products. The royalty
obligations generally extend three to five years from the acquisition date.
Gross margin was 61.8% for the nine months ended September 30, 1999
compared to 64.6% in the same period in 1998. Operating margin declined to
(8.9%) for the nine months ended September 30, 1999 compared to 11.0% 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 nine months
ended September 30, 1999 with respect to an arbitration award relating to a
customer dispute. Operating margins, excluding these charges, would have been
4.9% in the nine months ended September 30, 1999.
Operating Expenses
Sales and Marketing. 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 23.0% of revenue, for the nine
19
<PAGE>
months ended September 30, 1998. The percentage decreases resulted primarily
from the ULTRADATA acquisition in August 1999 and 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 $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 Concentrex due to the MECA and ULTRADATA acquisitions.
Concentrex believes that the current development cycle for its
compliance-related products in the Application Software product line, 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. Concentrex will
continue to commit significant resources to product development efforts.
Concentrex 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 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.
Amortization of Goodwill. Amortization of goodwill was $1.5 million
for the nine months ended September 30, 1999 compared to $0.9 million for the
comparable period in 1998. The increase is 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.
Concentrex 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 connection with the ULTRADATA acquisition.
Non-Operating Expenses
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 connection with the financing of the ULTRADATA and refinancing of
the MECA transactions.
Provision For Income Taxes
The effective tax rate for the nine months ended September 30, 1999
was 9.8% compared to 44% for the same period in 1998. The tax provision for 1999
results 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.
20
<PAGE>
1998 Compared to 1997 and 1996
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 revenue accounted for 57.5%, 55.8% and 56.6% of
total revenue, respectively, in 1998, 1997 and 1996. Service and support revenue
accounted for 35.4%, 37.8% and 37.3% of total revenue, respectively, in 1998,
1997 and 1996.
Revenue By Product Line
(in $millions)
1998 1997 1996
---- ---- ----
Application Software
License Revenue $47.6 $38.3 $31.1
Service & Support Revenue 28.1 26.2 21.8
---- ---- ----
75.7 64.5 52.9
Information Management
License Revenue -- -- --
Service & Support Revenue -- -- --
---- ---- ----
-- -- --
e-Commerce
License Revenue 1.6 2.2 2.8
Service & Support Revenue 4.2 2.8 1.3
----- ----- -----
5.8 5.0 4.1
Ancillary Products 4.1 3.1 2.9
----- ----- -----
Total Revenue $85.6 $72.6 $59.9
==== ==== ====
Application Software Product Line. Total revenue in the Application
Software product line increased $11.2 million, or 17.3%, to $75.7 million in
1998 from $64.5 million in 1997.
Application Software license revenue increased $9.3 million, or
24.3%, to $47.6 million in 1998 from $38.3 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
revenue. The increase in lending products license revenue resulted primarily
from sales of Laser Pro Closing (particularly of Concentrex's Windows-based
product), Laser Pro Mortgage and customization. Sales of fisCAL Analyzer and
fisCAL Online declined substantially in 1998. Concentrex was not actively
marketing the fisCAL products in 1998. Concentrex in the fourth quarter of 1998
accrued related severance costs calculated in accordance with pre-existing
employment agreements. See Note 1 of Notes to Consolidated Financial Statements.
Concentrex subsequently redesigned the fisCAL products and re-released them for
sale in the second quarter of 1999.
Branch automation revenue declined in 1998 compared to 1997 and in
1997 compared to 1996. Increased revenues in 1998 from Deposit Pro, Encore!
Desktop and Flextran were offset by decreased revenue from Encore! Teller,
Encore! Platform and OnLine branch automation products. Branch automation
revenue for 1997 also included results from Concentrex's RPxpress! remittance
processing division, which was sold in September 1997.
21
<PAGE>
Application Software license revenue increased $7.1 million, or
23.0%, in 1997 from $31.1 million in 1996. The increase was led by lending
products and Encore! branch automation products, and was offset in part by a
decline in call center product revenue. The increase in lending products license
revenue resulted primarily from sales of Laser Pro Closing (particularly of
Concentrex's Windows-based product to large banks), Laser Pro Mortgage and Laser
Pro Application Manager. The decrease in branch automation revenue resulted from
declines in revenues from OnLine branch automation products, Deposit Pro,
Encore! Call Center and Pro Active CRA, and was offset in part by increased
revenue from Encore! Teller and Encore! Platform.
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
Concentrex's Windows-based Encore! branch automation products. 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.
No significant price changes for software products occurred during
the periods presented.
Service and support revenue in the Application Software operating
segment increased $1.8 million, or 7.0%, to $28.1 million in 1998 from $26.2
million in 1997. Service and support revenue increased $4.4 million, or 20.3%,
in 1997 from $21.8 million in 1996. These increases resulted primarily from
increases in the installed base of Concentrex's products, by Concentrex'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.
Information Management Product Line. Concentrex had no revenues from
the Information Management product line in 1998, 1997 or 1996. All such revenue
resulted from the acquisitions of MCS and ULTRADATA in 1999.
e-Commerce Product Line. Total revenue from the e-Commerce product
line increased $0.8 million, or 16.6%, to $5.8 million in 1998 from $4.9 million
in 1997. The increase was led by service and support revenues, and was offset in
part by lower license revenue.
License revenue from the e-Commerce product line decreased $0.6
million, or 26.5%, to $1.6 million in 1998 from $2.2 million in 1997. License
revenue decreased $0.6 million, or 21.7%, in 1997 from $2.8 million in 1996.
Encore! Personal Branch revenues were adversely affected in 1997 as Concentrex
transitioned the home banking product from a UNIX to a Windows NT environment.
Service and support revenue in the e-Commerce product line increased
$1.4 million, or 50.5%, to $4.2 million in 1998 from $2.8 million in 1997.
Service and support revenue increased $1.5 million, or 113%, in 1997 from $1.3
million in 1996. The increases primarily resulted from an increase in end users
of Concentrex's Encore! Personal Branch home banking software and from increased
on-line bill payment services revenue.
Ancillary Products Product Line. Revenue from the Ancillary Products
product line increased $1.0 million, or 31.8%, to $4.1 million in 1998 from $3.1
million in 1997. Revenue increased $0.2 million, or 8.5% in 1997 from $2.9
million in 1996. The increases were primarily due to higher sales of font
cartridges and modems, offset in part by declines.
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.
22
<PAGE>
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 increased revenues. As the breadth of
Concentrex's product lines have 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, Concentrex
began to amortize certain product development costs that had been capitalized in
prior periods. In addition, Concentrex recorded amortization as a result of
software acquired in connection with the Mortgage Dynamics, Inc. 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. Concentrex is obligated to pay royalties
ranging from 3 percent to 18 percent of revenue related to certain products
acquired in various acquisitions since June 1994. In addition, Concentrex is
obligated to pay MicroBilt Corporation a fixed amount per OnLine customer
converted to Concentrex's products. The royalty obligations generally extend
three to five years from the acquisition date.
Concentrex'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. Concentrex 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 percent 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 Concentrex, additional
costs for integrating acquired products and accelerating development of
Concentrex's home banking products.
Product development expenses in each of 1998, 1997, and 1996 were
offset in part by capitalization of software development efforts. Concentrex
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 December 31, 1998, compared to
$9.9 million as of December 31, 1997. Concentrex 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
23
<PAGE>
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. Concentrex anticipates that its capitalized software development costs
existing as of December 31, 1998, will be fully amortized over the next four
years.
Concentrex will continue to commit significant resources to product
development efforts. Concentrex 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, Concentrex 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, Concentrex also recorded aggregate
other pretax charges of $2.0 million consisting of the present value of the
remaining liability for certain leased office space Concentrex ceased using, the
remaining goodwill associated with the fisCAL credit analysis products and
related severance costs, and Concentrex'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,
Concentrex 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 December 31, 1998, Concentrex 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.
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<PAGE>
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
Concentrex's initial investment in Lori Mae. See Note 1 of Notes to Consolidated
Financial Statements. Interest paid on outstanding balances under Concentrex's
bank line of credit was the principal cause of the net expense in 1997.
In September 1997, Concentrex 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. Concentrex received
10 percent 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, Concentrex recorded a non-operating gain of $0.6 million.
In February 1997 Concentrex's Board of Directors elected not to
proceed with a planned follow-on stock offering of Concentrex's common stock.
Concentrex took a $0.5 million non-operating charge in the first quarter of 1997
as a result of the cancellation. Concentrex's Board of Directors determined that
the stock price at which Concentrex 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
Concentrex's effective tax rates in 1998, 1997, and 1996 results primarily from
increased amortization of nondeductible intangibles related to acquisitions.
Market Risk
Concentrex has not entered into any significant derivative financial
instruments. Concentrex may be exposed to future interest rate changes on its
debt. During 1999, Concentrex has incurred significant indebtedness related to
acquisitions. 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. Concentrex 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% per year.
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 Concentrex 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
Concentrex'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 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, used primarily to the reduction in
capitalization of software development costs in 1998 and offset in part by cash
paid
25
<PAGE>
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 Concentrex'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 Concentrex'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.
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 primarily due to the acquisition of MCS in January
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, 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.
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. Concentrex'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 acquisitions in 1999,
Concentrex substantially increased its outstanding debt. See Note 7 of Notes to
Consolidated Financial Statements for CFI ProServices, Inc. for the nine months
ended September 30, 1999 and 1998. 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 for the nine months ended September 30, 1999 and 1998.
Concentrex is subject to restrictive covenants under its loan agreements.
See "Risk Factors - We Are Highly Leveraged."
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 Concentrex's operations plus a revolving
line of credit up to $15.0 million, subject to borrowing base restrictions
related to accounts receivable of Concentrex and its subsidiaries.
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<PAGE>
From time to time Concentrex 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 Concentrex's results of operations or financial
position, Concentrex believes that as of the date of this filing no such claims
will have such an effect.
Concentrex believes that funds expected to be generated from existing
operations and borrowings under its revolving line of credit will provide
Concentrex with sufficient funds to finance its current operations for at least
the next 12 months. Concentrex may require additional funds to support its
working capital requirements, future acquisitions or for other purposes and may
seek to raise such additional funds through one or more public or private
financings of debt or equity, or from other sources. No assurance can be given
that additional financing will be available or, that, if available, such
financing will be obtainable on terms favorable to Concentrex or its
shareholders.
Quarterly Results of Operations and Seasonality
The following table presents unaudited quarterly financial
information for each of the 11 quarters beginning March 31, 1997 and ending on
September 30, 1999. The information has been prepared by us on a basis
consistent with our audited financial statements appearing elsewhere in this
prospectus. The information includes all necessary adjustments (consisting only
of normal recurring adjustments) that management considers necessary for a fair
presentation of the unaudited quarterly results when read in conjunction with
the consolidated financial statements and the notes thereto appearing elsewhere
in this prospectus. These operating results are not necessarily indicative of
results that may be expected for any subsequent periods. See "Risk Factors -- We
Experience Significant Quarterly Fluctuations in Our Operating Results."
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------------------------------------------------
Sept. 30 June. 30 Mar. 31 Dec. 31 Sept. 30 Jun. 30 Mar. 31 Dec. 31 Sept. 30 Jun. 30 Mar. 31
1999(1) 1999(2) 1999 1998(3) 1998 1998 1998 1997 1997 1997 1997
---------------------------------------------------------------------------------------------------------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $29,563 $27,829 $20,053 $24,390 $23,186 $19,002 $19,051 $20,875 $17,894 $17,880 $16,002
Gross Profit 18,000 17,570 12,306 16,656 15,413 11,835 12,303 12,459 10,908 11,870 10,373
Operating Expenses 17,752 15,514 10,857 12,517 12,423 10,022 10,396 9,406 9,765 9,156 8,453
Acquired In-Process
Research and Develop-
ment and Other Charges 6,721 3,800 - 2,661 - - - - - - -
---------------------------------------------------------------------------------------------------------
Operating Income (Loss) (6,473) (1,744) 1,449 1,479 2,990 1,813 1,907 3,053 1,143 2,714 1,920
Net Interest Income
(Expense) (1,572) (162) (9) (30) (38) (39) (51) (92) (89) (91) (19)
Income (Loss) Before
Income Tax (7,880) (1,882) 1,443 1,030 2,888 1,698 1,828 2,917 1,672 2,586 1,414
Provision (Benefit) for
Income Taxes 1,134 (926) 621 661 1,271 747 804 1,412 735 1,138 622
---------------------------------------------------------------------------------------------------------
Net Income (Loss) $(9,014) $ (956) $ 822 $ 368 $ 1,617 $ 951 $ 1,024 $ 1,505 $ 937 $ 1,448 $ 792
=========================================================================================================
Net Income (Loss)
Applicable to Common
Shareholders $(9,037) $ (979) $ 799 $ 345 $ 1,593 $ 927 $ 1,000 $ 1,481 $ 913 $ 1,424 $ 768
=========================================================================================================
Net Income (Loss) Per
Share Diluted $ (1.74) $ (0.19) $ 0.16 $ 0.07 $ 0.31 $ 0.18 $ 0.19 $ 0.29 $ 0.18 $ 0.28 $ 0.15
=========================================================================================================
Net Income (Loss) Per
Share Basic $ (1.74) $ (0.19) $ 0.16 $ 0.07 $ 0.32 $ 0.19 $ 0.20 $ 0.30 $ 0.19 $ 0.29 $ 0.16
=========================================================================================================
</TABLE>
27
<PAGE>
1Excluding in-process research and development and other charges of $6.7
million, net loss applicable to common shareholders and diluted net loss per
share would have been $2.9 million and $0.56, respectively.
2Excluding in-process research and development and other charges of $3.8
million, net income applicable to common shareholders and diluted net income per
share would have been $1.1 million and $0.21, respectively.
3Excluding in-process research and development and other charges of $3.0
million, net income applicable to common shareholders and diluted net income per
share would have been $2.2 million and $0.43, respectively.
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 Concentrex's business is based on the
licensing of applications software, Concentrex'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 Concentrex in its operations.
Concentrex has completed its survey of internal computer systems, as
well as critical third party software and systems used by Concentrex, regarding
Year 2000 compliance status. The scope of the Year 2000 readiness effort
included addressing (1) information technology such as software and hardware,
(2) non-information systems or embedded technology contained in various
equipment, safety systems, facilities and utilities and (3) readiness of mission
critical third-party suppliers. Concentrex has communicated with its significant
suppliers and vendors to understand their ability to continue providing services
and products through the millennium change and to determine the extent to which
Concentrex may be vulnerable in the event of a failure by them or their services
and products. With respect to mission critical systems, Concentrex 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
Concentrex require date-sensitive information to accurately and adequately
process information critical to Concentrex's business. Inaccuracies or other
errors in this information could have a material, adverse effect on Concentrex's
business. Furthermore, non-compliance in these programs could cause a system
failure or interruption, either of which could also materially adversely affect
Concentrex. In addition to computer software, some machines and devices used by
Concentrex 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 Concentrex's internal systems is
complete. Concentrex's internal accounting system, including those components
used for Concentrex's invoicing and bill payment, has been evaluated by the
vendor and has been represented to be Year 2000 compliant. Concentrex plans to
routinely backup its financial data through the end of 1999 and has developed a
contingency plan with respect to the accounting system. Concentrex 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.
Concentrex has completed a survey of its software vendors. The bulk
of Concentrex's vendors have already provided compliant versions of their
software. Concentrex continues to monitor all material third party
28
<PAGE>
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.
Concentrex 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, Concentrex has offices located at 12 disparate
geographical locations all served by different local phone service providers and
Concentrex contracts with two long distance carriers. Consequently, Concentrex
can shift telecommunications through any of these locations should any other
location be down. Further, neither Concentrex's base software nor updates are
provided exclusively via downloading. Virtually all of Concentrex's base
software and updates are provided to customers through magnetic media.
Based on information gathered to date, Concentrex is not presently
aware of any Year 2000 issue that could materially affect Concentrex'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
Concentrex will not experience some operating difficulties as a result of Year
2000 issues. If they occur, these difficulties could require Concentrex to incur
unanticipated costs to remedy the problems and, either individually or
collectively, have a material adverse effect on Concentrex's business operations
and financial results. Concentrex 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. Concentrex 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. Concentrex 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. Concentrex'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 Concentrex'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 Concentrex's customers to purchase Concentrex'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
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 Concentrex's software). Year 2000 issues faced by its customers could
materially and adversely affect Concentrex'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,
29
<PAGE>
www.ffiec.gov/y2k. In support of its customers' obligations resulting from the
FFEIC's Statements, Concentrex 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 Concentrex's products.
Concentrex has completed its review of all of its software products
for Year 2000 compliance, and has determined that most of Concentrex's standard
software products are Year 2000 compliant. Concentrex has not undertaken, and
does not intend to undertake, a review of the many customized versions of
software products that it has provided customers. Concentrex 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, Concentrex has developed and executed a plan for
resolving such compliance-related issues. A matrix describing Concentrex's
product compliance (including a comprehensive definition to determine such
compliance) has been communicated to Concentrex's customers and is available for
review on Concentrex's website. The financial impact of making the required
changes to the software programs is not expected to be material to Concentrex's
consolidated financial position, results of operations or cash flows. Concentrex
acquired all of the equity interests in MECA in May 1999 and ULTRADATA in August
1999. The products of both organizations are Year 2000 compliant.
Information on Concentrex's website is provided to customers for the
sole purpose of assisting them in planning for the transition to the Year 2000
and includes Concentrex'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 Concentrex's
customers can access current information on the Year 2000 compliance status of
Concentrex'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 Concentrex's products.
Concentrex 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 Concentrex'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 Concentrex
regarding the operation of its software. The outcome of such disputes and the
impact on Concentrex are not estimable at this time.
Quarterly Results
Concentrex 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 Concentrex and its
competitors; Concentrex's product mix, including expenses of implementation and
royalties related to certain products; the timing of Concentrex's completion of
work under contracts accounted for under the percentage of completion method;
customer order deferrals in anticipation of new products; aspects of the
customers' purchasing process, including the evaluation, decision-making and
acceptance of products within the customers' organizations; the sales process
for Concentrex's products, including the complexity of customer implementation
of Concentrex'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
30
<PAGE>
technology; changes in company personnel; the timing of Concentrex's operating
expenditures; specific economic conditions in the financial services industry
and general economic conditions.
Concentrex's business has experienced, and is expected to continue to
experience, some degree of seasonality due to its customers' budgeting and
buying cycles. Concentrex'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 Concentrex'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, Concentrex'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, Concentrex 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.
BUSINESS
Overview
Concentrex Incorporated is a leading provider of knowledge based
software to the financial services industry. We offer technology solutions in
three key product lines: information management, software applications, and
e-commerce. We also provide a series of ancillary products, which form our
fourth product line. We combine our technology, banking, and legal expertise to
deliver knowledge-based solutions that enable financial institutions to simplify
key business processes, improve productivity, strengthen customer relationships,
and maintain compliance with both internal business policies and external
government regulations. Measured at the holding company level, there are over
5,000 financial institutions using one or more of our products, ranging in size
from the very largest commercial banks to independent community banks, thrifts,
and credit unions.
Information management is the core or "host" processing function that
serves as the software backbone of a financial institution. It includes
functions such as loan accounting, account processing, general ledger, and
similar enterprise-wide systems. The key data of a financial institution resides
within the information management system. Concentrex entered this business in
1999 through two acquisitions. We acquired Modern Computer Systems, Inc. (MCS),
in January 1999, which provided an in-house PC-based solution for small
commercial banks and small credit unions. In August 1999 we completed the
acquisition of ULTRADATA Corporation (ULTRADATA), a public company that produced
real-time information management software for larger credit unions. In addition
to our software, our information management operating unit also redistributes
software and hardware from other providers in order to provide a complete
information management solution.
Software applications, the second key product line, formed the core of
Concentrex when it was known as CFI ProServices. These applications focus on
loan origination and branch automation. We offer Windows(TM)- based solutions
for teller functions, new account opening, cross selling, call centers, and
origination of consumer, commercial, and real estate loans. The three products
within this operating unit consist of lending, sales, and service, and mortgage.
We were an early player in the area of home banking, a key element of our
third product line e- commerce, entering the market in 1992 and enabling the
first Internet transaction between a financial institution and its customer in
1994. We also own a bill payment service, which serves its home banking
customers. In May 1999 we acquired MECA Software L.L.C. (MECA), which had begun
the personal financial management software business with its Managing Your
Money(TM) product and which recently has focused on research and development of
Internet solutions for larger financial institutions. We have combined the MECA
operation with our existing home banking software applications and bill payment
service to form our e-commerce product line. Through this product line, along
with our other areas, we offer home banking software and the ability to host a
bank's website, and are in the process of web-enabling versions of our loan
origination, new account opening and various other software products. Relying on
technology developed by MECA, we also intend to offer a financial Internet
portal
31
<PAGE>
link that will enable financial institutions to offer their customers a variety
of other financial products, such as insurance and brokerage services.
Our ancillary products consist of fonts, preprinted forms, and other
products related to our principal product lines but not themselves a principal
operating focus. This area also includes some older software products that we
have acquired through acquisitions, such as the Windows(TM)-based version of
MECA's Managing Your Money(TM) software.
We generate recurring revenue from software maintenance agreements.
In 1998, prior to the acquisitions described above, service and support fees
accounted for approximately 35% of total revenue. Substantially all of our
customers subscribe to service and support programs, which provide ongoing
product enhancements and updates to facilitate compliance with changing
regulations. We anticipate that the software acquired with our 1999 purchases of
MCS, MECA and ULTRADATA will increase our recurring revenue.
Prior to 1995, the vast majority of our revenues were generated from the
license of standard versions of our loan origination and account opening
software applications. These products were usually not customized except through
a separate contract with the customer. Since that time, we have derived an
increasing percentage of revenue from projects that are of greater scope,
including implementation of projects for new information management customers
and from sales to large financial institutions. We believe that the project
business will continue to contribute a significant percentage of total revenue.
These projects usually involve a greater sales effort over a longer period of
time, and require customization or implementation services, resulting in
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 our billed accounts receivable. These factors, in turn,
result in higher days sales outstanding (DSOs) in the Concentrex accounts
receivables.
The Financial Services Industry
The financial services industry is undergoing a period of rapid
change characterized by consolidation, changing regulations, focus on Internet
delivery of financial services in addition to traditional branch delivery, and a
desire to offer new types of financial services. In response to this rapidly
changing market, commercial banks are consolidating in order to achieve
operational efficiencies and increased revenues. In addition, all types of
financial institutions are embracing technological solutions that enable them to
automate operations, redirect routine transactions to more cost-effective
channels such as electronic banking and call centers, and develop new service
and sales delivery channels with new products. Further, as the consolidation of
large institutions continues, the community bank and credit union sectors have
shown renewed vitality, including an increasing number of new start-up community
banks and thrifts.
Consolidation. Consolidation continues at a rapid pace within the
financial services industry, particularly among large banks. We believe that
this trend is leading to an increasingly two-tiered market consisting of very
large, multi-bank holding companies and smaller community banks, thrifts, and
credit unions.
Both sizes of organizations face unique challenges.
Large banks that have grown through acquisition must integrate
disparate host processing systems, which often lack the flexibility needed to
easily use 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. We believe
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large institutions will increasingly look to outside providers for critical
functions that can be implemented within the overall technology strategy of the
institution, such as the loan origination and branch automation solutions
offered by us.
Smaller community institutions, including both commercial banks and
credit unions, 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. We
believe that these institutions will continue to look toward outside providers
like us to obtain the technology they need.
Changing Regulations. Financial institutions in the United States
remain highly regulated with respect to compliance and other matters. These
regulations exist at the federal, state, and local level, and an institution
must comply with each level. Requirements include complex disclosures for
consumer loans, substantive rules covering the decision making for all loans,
filing and type size requirements for documents, constraints on the
relationships an institution can form with respect to related products like
title insurance on a home mortgage, privacy rules for the use of information and
the ability to provide it even to affiliates, and limitations on interest and
other charges that an institution can impose. Even as commercial banks have
gained greater ability to have offices in multiple states, the new interstate
banking laws have imposed additional constraints on the rules for lending across
state lines. To understand and remain in compliance with the numerous complex
and changing regulations, a regulated financial institution must invest
significant resources in developing a compliance infrastructure. We believe our
long-standing expertise at providing software that incorporates compliance with
various regulatory constraints will continue to set us apart in this market.
Adding Internet Delivery Channels. Financial institutions 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
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 percent of a branch transaction, an ATM transaction is 10
percent of a branch transaction, and a home banking transaction is 5 percent of
a branch transaction. In order to make these new delivery channels attractive
and user-friendly, we believe that consumers require access to consolidated
information and services that are consistent across all delivery channels. To
accomplish this, institutions will need software, such as the middleware we
provide, to connect its products to each other and to the various host systems
they use. Further, we believe the market will require most financial
institutions to add some type of Internet access for their customers, creating a
significant opportunity for us and similar providers of such software.
Because regulatory requirements are often triggered simply by
interaction between a financial institution and its customer, institutions are
still subject to compliance regulations as they migrate their sales efforts to
new delivery channels, such as online banking. Increasingly, these regulations
extend beyond simple disclosure or form content requirements, and 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. We
believe that financial institutions will continue to benefit from our products
and services, especially its newer generation of Internet products and services
because such institutions must still comply with the large regulatory burden
even if a service is delivered online rather than in person. Indeed, we
anticipate that due to privacy and related concerns the regulatory burden may
well increase as financial institutions move services onto the Internet.
New Financial Services Products. Recognizing the profit potential in
expanding their product offerings, financial institutions are no longer content
to offer solely the loan and deposit account products they traditionally have
sold to customers. They also seek to add other types of financial services
products, such as brokerage and insurance. Such combinations of services are no
longer rare among larger institutions. Financial reform recently passed by
Congress may make this even easier for large institutions to provide.
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The products sold by credit unions and thrifts have been less
regulated than those sold by other financial institutions. Credit unions in
particular, have demonstrated an ability to sell a wide variety of financial
services through cooperative efforts. We believe that most community banks will
not have the resources needed to offer such combinations of services and
products on their own. As these products become an increasing focus of community
banks, we believe that a market opportunity for service center offerings to
multiple institutions will exist. We have opened a service center to offer home
banking to its customers including community banks, so that such banks are not
required to maintain such hardware and software in-house. We believe that it can
fulfill the needs of community banks to offer more products to their customers
by adding additional financial service products to our service center. We
believe that this will enhance our recurring revenues.
The Concentrex Solutions
We offer solutions tailored to the various market segments and market
needs of financial institutions. Although regulatory and technology issues
facing financial institutions overlap a great deal, the approach taken by a
particular institution, and therefore the correct solution for that institution,
depends on the size and type of institution.
Each of the solutions offered by us include a significant focus on
the regulatory issues facing financial institutions of all types. Particularly
in the area of loan origination and new account opening, we believe we have a
competitive advantage by virtue of our ability to incorporate regulatory
compliance into the software solution. Further, as lending and new account
opening become more common on the Internet, we believe that this advantage will
increase.
A key aspect to our success has been and will likely continue to be
our ability to build our technology, regulatory and financial institution
expertise into our solutions and to integrate these solutions so that they
function effectively together. We rely on a variety of knowledge-based and
technical core competencies. Our vertical market focus on the financial services
industry has enabled us to develop specialized knowledge and expertise
pertaining to business processes and regulations affecting the industry.
Large Financial Institutions. For large commercial banks, we offer
solutions that fit within the overall strategic technology plan of the
institution. Large banks develop and implement their own technology plans, but
rely on suppliers like us for key elements such as loan origination, branch
automation, call centers, and e- commerce products and services. We offer
solutions in each of these areas and segregate our sales force to address this
market.
Our software applications and e-commerce products enable large
financial institutions to use data among disparate and often incompatible host
processor platforms. Our ability to integrate among and between our suite of
products also allows large institutions to work with fewer vendors, specifically
ones that provide comprehensive software solutions.
Credit Unions. The credit union market, unlike large banks, is
characterized by real-time processing. The August 1999 acquisition of ULTRADATA
with its competitive information management solution and 420 credit union
customers allows us to be a player in this market. We will continue to support
this market, including offering expanded capabilities through our other
solutions for commercial loans. Credit unions are now entering the commercial
loan market, and this expansion presents an opportunity for us to rely on our
other solutions to enhance our presence in the credit union market. Similarly,
we will enhance our home banking product with the expertise of our e-commerce
division.
Community Banks and Thrifts. The community bank and thrift
marketplace offers several opportunities for our solutions. First, we will
continue to sell our traditional software applications to all sizes of banks and
thrifts, including lending, mortgage, sales and service, and e-commerce. For
these solutions we will rely on our ability to connect these products to a
variety of host processing systems used by community banks and thrifts.
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Where possible, we will attempt to form alliances with other host companies to
augment the offerings of those companies with our solutions. We have grown, and
expect to continue to grow, in significant part through the sale of software
applications.
In addition to our traditional software applications, we plan to
offer our real time host processing to community banks and thrifts. We plan to
augment the ULTRADATA solution to meet the needs of commercial banks and
thrifts, and believe that the real-time nature of that system will give it an
advantage over our competitors' batch processing systems offered to community
banks. Further, we will offer this information management solution tightly
coupled with the other software applications already marketed by us, especially
our e- commerce solutions.
Concentrex products provide a number of benefits to financial
institutions by addressing regulatory requirements, system connectivity issues
and internal business process challenges faced by such institutions in their
increasingly competitive business environment. Using Concentrex 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, for example, enables
financial institutions to cross sell their products to customers and to
strengthen relationships with their customers at each point of contact and
across multiple delivery channels.
With respect to each of its solutions, we offer implementation and
training services and customer support. Essentially all customers subscribe to
these services, and we derive a substantial portion of our revenue from the
relationship created when a financial institution selects and installs a
Concentrex product.
The Concentrex Strategy
Our strategic objective is to be the leading full service provider of
innovative technology solutions that enable our customers to succeed. In doing
so, we strive to achieve rapid, predictable, and consistent growth in both
revenues and earnings. We intend to achieve this objective by combining our
expertise in regulatory issues, banking and technology. Primary elements of our
strategy include:
Product Quality. Financial institutions require that their software
and hardware solutions function at very high levels of quality. We have been
able to meet the demands of some of the largest institutions in the country and
believe that a significant focus on product quality is a necessary element of
our success. Further, as systems become more complex and the interrelationship
among systems becomes more critical, we believe our ability to develop and
implement systems with high quality standards will become a competitive
advantage.
Integration of Solutions. Financial institutions are no longer able
to run disparate systems that do not communicate with each other. We have set
about a process of integrating our solutions so that they are able to
communicate effectively among themselves, creating an advantage for financial
institutions that purchase a suite of solutions rather than just one
application. For example, the branch automation and e-commerce solutions contain
modules that will collect the data needed for our loan origination software to
enable it to produce required loan documents in compliance with applicable laws
and regulations. Each of our solutions for loan origination, teller, new account
opening, and home banking rely on the same general system setup, enabling
customers to add new solutions quickly once they have set up any of the key
Concentrex software applications. Our acquisition strategy has not been focused
on a traditional "roll-up" of competing solutions. Instead, we have sought the
best solution we can develop or acquire for each aspect of the market needs, and
then proceeded to integrate that solution with the other software already
acquired or developed. We believe this approach to integration best satisfies a
market's need. Further, we believe this approach enhances our ability to cross
sell additional products into our customer base.
Integration of Concentrex. We do not operate as a series of independent
business units, but as an integrated company. We believe this is a critical
factor in order to enable us to integrate products, and to present
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an integrated image and reality to our customers. Because we believe that
financial institutions are looking for a smaller number of key vendors, we feel
that it is critical not to have competing units, but rather to focus efforts on
integration of solutions for and at our various customers. Further, this allows
us to leverage our various corporate functions, technology research, sales and
marketing efforts.
Legal and Industry Knowledge. We are focused on a very large vertical
market: software solutions for the financial services industry. To serve that
market, we have developed an extensive base of knowledge about the industry and
the forces that shape it. This includes knowledge of the key functions that
software must perform, such as teller transactions, and key areas of extensive
regulation, such as loan origination. Further, through our 1999 acquisitions of
MCS and ULTRADATA, we now have expertise in the back office "host" processing
world of information management, giving us a comprehensive understanding of the
various technology needs of a financial institution. We believe that this
knowledge base, especially in the regulatory area, is a key competitive
advantage over companies that solely focus on the technology aspects of
financial institutions.
Customer Support and Implementation. The license or sale of a
Concentrex product includes customer support services and, in most instances,
implementation services. This creates an ongoing relationship with the customer,
including updates and enhancements of the software. This enables us to achieve a
recurring revenue stream in addition to our revenues from initial sales, and we
believe that a continued focus on this aspect of our business will enable us to
improve our predictability of revenues. Further, the nature of both information
management and e-commerce solutions requires an even tighter relationship with
customers, and we have entered these markets in part to improve that
relationship. Finally, the most critical aspect of our ability to make new sales
is the quality of references from existing customers. We believe our growth in
both revenues and absolute numbers of financial institution customers, to over
5,000 banks, thrifts, and credit unions, reflects a high level of customer
satisfaction. We intend to continue to monitor and improve our customers'
satisfaction.
Strength of the Sales Force. Unlike many of our competitors, we sell
nearly all our products directly, rather than through third party sales
channels. We have invested significantly in the creation of our direct sales
force, which is organized so that field sales personnel cover major accounts and
general accounts and telephone sales personnel cover smaller institution
customers. Further, we have created telephone sales groups and marketing
programs to support our field sales force. We believe that the strength of our
sales force enables us to create direct relationships with customers, and
insulates us from shifting priorities of third party distributors. Further,
since third party distributors may represent other products that compete with
us, use of a direct sales force enables us to increase our success at
cross-selling additional products to our existing customers.
Adherence to Concentrex Values. We have adopted and enforce a values
statement that we use to help manage and unify our various offices and operating
units. Further, we recognize that our markets are fiercely competitive and not
all of our competitors share our positive values. We believe that adherence to
our values including honesty and integrity, continuous improvement, and
embracing change - enables us to maintain and enhance our relationships with
customers and Concentrex partners.
Products
Information Management Products. Beginning in 1999 with our
acquisition of MCS, we began offering hardware and software solutions for the
back office accounting needs of community banks and credit unions, often
referred to as "host" systems. The system runs on Intel-based PCs using SCO
UNIX, which means that the core system for a small bank or credit union can
operate on a standard PC. We have connected our banking system to our loan and
new account opening software, and offer it as a low-cost in-house solution for
smaller community banks. In August 1999, we completed the acquisition of
ULTRADATA, adding host processing solutions for medium to large credit unions.
Information management solutions provide the institution-wide "core"
processing that a financial institution requires in order to operate. It
includes functions such as loan accounting, account processing, general
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ledger, and data retrieval of customer information. The systems connect to other
software applications, such as e- commerce and loan origination. The ULTRADATA
information management system is a scalable solution offered both as an in-house
implementation and as a service bureau in which we operate the system for its
financial institutions customers' use. It operates on either HP 9000 or IBM
RS/6000 UNIX operating systems, and is being ported to Windows (TM)-NT. We also
plan to augment the system to meet the needs of community banks for a real-time
information management system.
Software Applications: Lending Products. Concentrex lending products
automate processes at nearly every step in the lending process for consumer,
commercial, and residential real estate lending lines of business. General
business functions automated by Concentrex lending solutions include loan
application and analysis, loan closing, portfolio analysis and workflow
management, and risk management. We also offer connectivity for interfaces to
credit scoring and reporting systems and remote printing of loan documents. We
engineer our lending products to operate with common user interfaces and
databases.
Software Applications: Mortgage Products. Concentrex mortgage
products improve the consistency of the loan process, speed origination, and
increase capacity for their users. Among their functions, these products
automate the complex analyses necessary for ensuring optimal mortgage loan pool
sales, speed the process of preparing mortgage loans for sale faster than manual
methods, and allow lenders to take advantage of higher near term delivery
prices.
Software Applications: Sales and Service. Concentrex sales and
service products automate the customer service, sales, and account opening
functions for the branch 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.
E-commerce Solutions. We offer online banking through Internet access
to provide account inquiry and transaction capabilities. Our home banking
products provide dozens of functions, including account balance, account
history, bill payment, and online loan applications. We have also created a
service bureau deployment option that provides financial institutions with an
inexpensive method of initiating home banking services with their customers.
This is accomplished by allowing these customers to interface with their
financial institution through a Concentrex maintained and monitored website. We
plan to expand the capabilities of our home banking solution for both our
in-house and service bureau customers with added functionality and access to
financial portals.
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<TABLE>
<CAPTION>
Products by Product Group
Software Applications
Lending Products.
Date Introduced/
Product Acquired Description Benefits to Customer
<S> <C> <C> <C>
Laser Pro Lending Released 1986 Integrated, modular loan Standardizes lending policies
processing systems for and products, streamlines
consumer, commercial, processing, incorporates a
SBA, real estate home equity national database of
and agricultural loans, regulations
including available module
for geocoding to assist in
analyzing fair lending and
CRA compliance
Application Manager Acquired 1996 Processes applications for Speeds the loan application
indirect consumer lending and approval process for
indirect lenders
Mortgage Products.
Date Introduced/
Product Acquired Description Benefits to Customer
LP Mortgage Acquired 1996 Provides mortgage Improves consistency of loan
origination, processing and processes, speeds origination,
servicing capabilities increases capacity
SMarT Acquired 1998 Comprehensive risk and Automates complex analyses
pipeline management system necessary for ensuring
that automates secondary optimal mortgage loan pool
mortgage marketing sales
functions from registration
through delivery of loans
DocSMarT Acquired 1998 Automates the labor Speeds process of preparing
intensive functions mortgage loans for sale faster
performed after a mortgage than manual methods,
loan is closed allowing lenders to take
advantage of higher near term
delivery prices
</TABLE>
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<TABLE>
<CAPTION>
Sales and Service.
Date Introduced/
Product Acquired Description Benefits to Customer
<S> <C> <C> <C>
Encore! Teller Acquired 1995 Automates the teller station Improves productivity and
by providing comprehensive facilitates sales referrals
transaction automation,
electronic journaling,
store-and-forward
capabilities, simplified
balancing, and access to the
customer database
Encore! Platform Acquired 1995 Provides sales and service Opens accounts, enables
capabilities, including cross-selling and customer
account opening screens, information requests
customer/product matching,
customer contact histories,
letter and fulfillment
generation, and institution
and product information
Encore! Call Center Acquired 1994 Integrates in a common and Enables cross-selling and
consistent format customer, improves service
product and internal
procedure information
Deposit Pro Acquired 1990 Automates and ensures Speeds account opening,
regulatory compliance in the ensures compliance with
account opening and regulations, improves the
cross-selling processes for consistency of new account
checking, savings, policies and practices
certificates of deposit, and
IRA accounts
Encore! Desktop Released 1996 Windows-based system that Allows customized
graphically links each user arrangements of modules and
to CFI software and other access to customer
business applications information
e-Commerce
Date Introduced/
Product Acquired Description Benefits to Customer
CCTX On Line Banking Released 1993 System that allows Provides Internet access,
institutions to provide strengthens customer
personal consumer and small relationships, extends
business Internet banking institution branding, increases
with in house or service customer convenience
bureau options
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Date Introduced/
Product Acquired Description Benefits to Customer
<S> <C> <C> <C>
Vendor Payment System Acquired 1993 On-line bill payment and Low-cost Internet bill
bill presentment system payment and presentment
capability
Information Management
Date Introduced/
Product Acquired Description Benefits to Customer
Ultrafis Acquired 1999 Real time enterprise wide Provides easy access to
engine for transaction information and enhances
processing, accounting, customer service, cross-
administration, database selling, transaction efficiency
management and and accounting controls
information access
BankServ Acquired 1999 PC Based --Back office Automates back room
"host" processing software accounting and servicing
for community banks functions
including applications
available for bulk account
storage, voice response and
account inquiry
CuServ Acquired 1999 PC Based Back office "host" Automates back room
processing software for accounting and servicing
credit unions including functions
applications available for
bulk account storage, voice
response and account
inquiry
</TABLE>
Product Development and New Products
We ensure that our products meet customer requirements by conducting
primary research, tracking customer calls and requests for enhancements, doing
competitive analysis, working with industry trade groups, and holding product
user and focus group meetings. We also incorporate knowledge learned during the
sales and installation process into development of new and enhanced products and
processes.
We continue to invest significantly in our product development
efforts. During the past four years we have focused a considerable amount of
that investment on converting our products from the DOS environment to Windows
(TM). That effort is now complete, and essentially all of our products have been
either rewritten or significantly enhanced during that process. We are in the
process of "sunsetting" the DOS versions of our products, and plan to have
completed that task by the end of 2000. At that time we will support only the
Windows (TM) version, or other newer versions of our products, including
browser-based products. The redevelopment effort also has included increased
focus on the use of software components that can be re-used in multiple
products, such as calculation modules and credit bureau communication modules.
We intend to continue enhancement of our products in terms of both added
features and increased use of components, which will enable us to remain
competitive and will enhance our goal of product integration. We also have begun
investments in service centers for customers who do not have the desire or
capacity to install the solutions in-house at the financial institution.
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We have made significant investments in e-commerce technology, both
in terms of internal development and the recent purchase of MECA. We also have
focused on web-enabling our existing product lines, such as loan origination and
new account opening software, and will continue to invest in technology that
enables our suite of solutions to work with and on the Internet.
We believe that market acceptance of our 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. This is particularly true for software
applications that require information from the host or that need to provide
information to the host, including loan origination, new account opening,
account servicing, and home banking. We have developed significant expertise
with most available host processor systems and the methods necessary to transfer
data to and from such systems. However, many of the companies that provide host
software are unwilling to allow connections with software other than the
solution developed or selected by the host. We have been able to overcome this
in many instances through our market presence and pressure on the host system's
vendor from individual customers. We also believe that the market trend is
toward open systems, and we have initiated efforts to focus attention on that
issue, including positioning our own information management division as an open
system alternative.
Service and Support
Substantially all of our customers subscribe to maintenance
agreements under which we provide 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.
We provide training to our customers, and account 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 our total revenue. We anticipate that
our new e- commerce and information management divisions will increase that
percentage over time.
We install, implement and customize our software solutions at
customer sites, particularly at larger institutions, and at the time we sell a
host system for information management. As our sales to larger institutions and
our sales of information management solutions each increase, we anticipate
demand for our customization services to increase. Revenue from these services
is accounted for as software license fees.
Customers
We have licensed our software to over 5,000 financial institutions in
the United States. Our target customer base includes commercial banks, thrifts
and credit unions. No customer accounted for 10% or more of our total revenues
in 1998, 1997 or 1996.
Our largest accounts include Bank of America (formerly NationsBank),
Union Planters Bank, NCR Corporation, Banc One, PNC Bank, Citicorp Mortgage, and
Central Carolina Bank & Trust.
Sales and Marketing
We sell our products through three experienced, national direct sales
teams. One field sales team is devoted exclusively to the top 200 financial
institutions in the United States. The second team focuses on all other
accounts. The third national team specializes in selling the latest processing
products. All three teams are supported by our marketing group, with sales
people who specialize in the sale of lending, retail, and e-commerce products.
Our product specialists on our 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.
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We have a number of third-party reseller and co-marketing alliances,
including agreements with some of the largest host processors and hardware
vendors. For example, we have a relationship with IBM whose sales team resells a
large portion of our product line. Third-party resellers, such as NCR, and
co-marketing alliances provide access to institutions with which we would
otherwise have no relationship. We also have many endorsement relationships with
the associations that serve the financial institutions. The associations assist
with marketing and promotion of our products. One of our strategic objectives
has been to provide value to the business partners. We have also been a leader
in promoting an open systems environment throughout the industry serving
financial institutions. As part of our commitment, these partnerships are
supported by a team of sales and account relationship managers.
Legal Network
We maintain a network of independent legal counsel in all 50 states,
Puerto Rico, Guam, and the District of Columbia. This network, as well as our
internal legal staff, keeps us 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. Our management believes
that the quality of this information, our ability to effectively manage the
continuous information flow provided by the network participants, and our
capability to integrate this information into our software products provide us
with a significant competitive advantage.
We utilize 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. We have entered into a long-term legal
services agreement with a Louisiana law firm pursuant to which it pays legal
fees based upon sales of our products in Louisiana.
Acquisitions
To remain competitive and to meet the changing needs of our
customers, we pursue acquisitions of products, technologies and businesses as
one part of our growth strategy. We continuously evaluate acquisition candidates
that provide opportunities to expand our customer base, cross-sell products, and
broaden our product offerings with proven solutions in a timely and
cost-effective manner. Since 1994 we have made 16 acquisitions and believe that
to date we have achieved our objectives of growth and broadening our product
offerings through this acquisition program. We intend to continue such activity
in the future, although we do not anticipate material acquisitions in the near
term as we complete the integration of our 1999 acquisitions.
Employees
As of September 30, 1999, we had 1,023 full-time employees. Of this
number, 280 were engaged in product groups (primarily product development), 293
in customer service and support, 106 in sales and marketing, 161 in
implementation and training, 21 in technology, research and development and 162
in general and administrative functions.
Description of Property
Our corporate headquarters are located in Portland, Oregon in a
leased facility consisting of approximately 79,800 feet of office space occupied
under leases that expire in 2003. Annual lease payments for our corporate
headquarters are approximately $1,300,000, with provisions for inflationary
increases. We also lease 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); Pleasanton, California
(60,242 square feet); Jericho, New York (1,140 square feet); and Trumbull,
Connecticut (92,000 square feet). These leases expire in 2000, 2006, 2000, 2002,
2002, 2004, 2003, 2001, 2007,
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2002, and 2003, respectively. Annual lease payments for these additional
facilities, in aggregate, are approximately $2.9 million. We believe the office
space currently under lease is adequate to meet our needs for the next year.
Legal Proceedings
We are involved in routine legal matters incidental to our business.
We believe that the resolution of any such matters that are currently
outstanding will not have a material effect on our financial condition or
results of operation. However, no assurance can be given that the concurrent
resolution of several of such matters in manners adverse to us would not have a
material adverse effect on our financial condition or results of operations.
MANAGEMENT
Directors and Executive Officers
The executive officers and directors of CFI ProServices, Inc., dba
Concentrex Incorporated (the "Company") as of November 15, 1999, are as follows:
Name Age Position
Matthew W. Chapman 49 Chairman, Chief Executive Officer,
and Director
Robert P. Chamness 47 President, Chief Operating Officer,
and Director
Robert T. Jett 55 Executive Vice President, Product
Development Division, Secretary, and
Director
Michael J. Clement 52 Senior Vice President, Customer
Support & Quality Assurance Division
Daniel C. Larlee 47 Senior Vice President, Technology &
Research Division and Chief
Technology Officer
Lois M. Roberts 54 Senior Vice President, Sales,
Marketing & Customer Services
Division
Eric T. Wagner 50 Senior Vice President, Custom
Products Division
Kurt W. Ruttum 40 Vice President, Finance &
Administration Division, Chief
Financial Officer, and Treasurer
Jeffrey P. Strickler 42 Vice President, Legal, Risk
Management & Corporate Development
Division, General Counsel, and
Assistant Secretary
Zenon S. Piotrowski 43 Vice President, Standard Products
Division
Kathleen Bromage 42 Vice President, e-Commerce Division
Eran S. Ashany 36 Director
Frank E. Brawner 66 Director
J. Kenneth Brody 76 Director
43
<PAGE>
L. B. Day 55 Director
Lorraine O. Legg 60 Director
Mr. Chapman has served as the Company's Chief Executive Officer since
February 1988 and as its Chairman since February 1991. Mr. Chapman was President
of the Company from August 1987 to April 1992 and became a director in September
1987. Prior to joining the Company, Mr. Chapman was outside counsel to the
Company, and was a founding partner of the law firm of Farleigh, Wada & Witt,
P.C. Mr. Chapman has previously served as a faculty member of the American
Bankers Association National Graduate Compliance School and the Credit Union
National Association Regulatory Compliance School. Mr. Chapman is a director of
Microchip Technology, Incorporated, a Chandler, Arizona manufacturer and
supplier of programmable microchips. Mr. Chapman is also a Trustee of the
University of Portland.
Mr. Chamness has served as President and Chief Operating Officer of
the Company since July 1995 and served as Executive Vice President and General
Counsel of the Company from April 1993 until he was appointed as President and
Chief Operating Officer. From 1985 to March 1993, Mr. Chamness was a partner
with the law firm of McKenna & Fitting, Los Angeles, California, and its
predecessor. From 1990 to 1994, Mr. Chamness served as the Chair of the Consumer
Financial Services Committee of the American Bar Association. Mr. Chamness has
authored numerous compliance manuals for the American Bankers Association,
including manuals relating to the Truth in Savings Act and consumer lending.
Mr. Jett has served as Executive Vice President and Secretary of the
Company since April 1984. Mr. Jett is responsible for managing the Product
Development Division. Prior to joining the Company, he managed the legal
department of Evans Products Company, a diversified manufacturing company.
Mr. Clement joined the Company in October 1984 and has served as
Senior Vice President, Customer Support & Quality Assurance Division since
January 1998. From January 1993 until October 1995, Mr. Clement served as Senior
Vice President of Customer Service. From October 1995 until May 1996 he served
as Senior Vice President of the Standard Products Group. From June 1996 until
January 1998 he served as Vice President of the Electronic Products Delivery
Group. Prior to joining the Company, Mr. Clement was a Regional Vice President
for Evans Financial Corp., a mortgage banking company.
Mr. Larlee joined the Company in April 1992 as its Director of
Technology and became a Vice President and Chief Technology Officer of the
Company in September 1994. In January 1998, Mr. Larlee was elected Vice
President, Technology & Research Division and Chief Technology Officer and
promoted to Senior Vice President in January 1999. From May 1989 until he joined
the Company, Mr. Larlee was Director of Technology for World Trade Services, a
software and data processing services provider to businesses engaged in
international trade.
Ms. Roberts joined the Company in May 1993 as its Operations Software
Product Manager and was elected Vice President of Marketing and Corporate
Communications in October 1995. In January 1998, Ms. Roberts was elected Senior
Vice President, Sales, Marketing & Customer Services Division. Prior to joining
the Company in 1993, Ms. Roberts served as the President of Quickor Net, Inc., a
privately held data processing company located in Portland, Oregon.
Mr. Wagner joined the Company as Senior Vice President in November
1995 in connection with the Company's acquisition of Culverin Corporation, a
developer and distributor of financial institution sales and service delivery
software products ("Culverin"). In January 1998, Mr. Wagner was elected Senior
Vice President, Product & Corporate Integration Division, with responsibility
for managing CFI's Retail Delivery Products Group and integration of the
Company's products and corporate organization. Mr. Wagner joined Culverin in
1979, and served as its President and Director until its acquisition by the
Company.
44
<PAGE>
Mr. Ruttum joined the Company in November 1997 as Vice President, Finance &
Administration Division and Chief Financial Officer. In January 1999 Mr. Ruttum
was appointed Treasurer of the Company. From October 1996 until November 1997,
Mr. Ruttum was Vice President and General Counsel for Phoenix Gold
International, Inc., a manufacturer of car audio equipment. From February 1997
until November 1997, Mr. Ruttum also served as Secretary of Phoenix Gold
International, Inc. Mr. Ruttum was an attorney with the law firm Tonkon Torp LLP
in Portland, Oregon, where he emphasized corporate finance and securities
matters, from 1986 through August 1996.
Mr. Strickler joined the Company in August 1994 as Corporate Counsel.
He was elected General Counsel and Assistant Secretary in January 1996 and Vice
President, Legal, Risk Management and Corporate Development Division, General
Counsel and Assistant Secretary in January 1998. From January 1991 until joining
the Company, Mr. Strickler served as Corporate Counsel for Cadre Technologies,
Inc., a developer and manufacturer of software development automation products
formerly located in Beaverton, Oregon. Mr. Strickler was an attorney with the
law firm Perkins Coie in Portland, Oregon from 1985 to January 1991.
Mr. Piotrowski joined the Company in March 1995 and has served as Vice
President of the Standard Products Division of the Company since October 1997.
Prior to joining the Company, Mr. Piotrowski was a Senior Consultant in the
Finance Industry Group at Lexmark International, Inc.
Ms. Bromage joined the Company in May 1999 as Vice President of the
Company's newly formed e- Commerce division in connection with the Company's
acquisition of MECA Software, L.L.C. She served as MECA's Executive Vice
President and Chief Financial Officer. Prior to joining MECA, she served as
Senior Vice President and Director of Business Planning, Financial Analysis and
Management Reporting for Shawmut National Bank. She was employed by Price
Waterhouse as an Audit Manager in its Financial Services Industry group prior to
her employment with Shawmut National Bank.
Mr. Ashany has been employed by Allen & Company Incorporated, an
investment banking company, since August 1988, and has been a Vice President and
Director of that firm since September 1990 and February 1995, respectively. Mr.
Ashany is also a director of Eco-Bat Technologies, plc, a lead smelter and
battery recycler with operations in the United Kingdom, Germany, France, Italy,
and Austria.
Mr. Brawner served as the Chief Executive Officer of the Oregon
Bankers Association and the Independent Community Banks of Oregon from 1975
until his retirement in 1998. He became President of the Oregon Bankers
Association in 1992. From 1991 through 1998, Mr. Brawner also served as
Executive Vice President of the Oregon Mortgage Bankers Association. Mr. Brawner
has also served as Secretary of the Northwest Intermediate Banking Schools and
as a member of the Board of Directors of the Pacific Coast Banking School and
the Oregon Society of Association Executives.
Mr. Brody has served as a director of the Company since May 1990 and a
consultant to the Company since 1988. Since 1984, he has been the Chairman of
ComPix Incorporated, a manufacturer of infrared thermal analysis devices. Mr.
Brody is also a Director of the U.S. Navy Memorial Foundation. From 1992 until
December 1996, he served as a consultant to First Portland Corporation and as a
member of the management committee of Intercoastal Manufacturing, Co., a golf
cart parts sales and services company.
Mr. Day has been President and a director of L.B. Day & Company,
Inc., a consulting firm which provides organization development, design and
planning services to clients at senior and executive levels, since 1995. From
1983 to 1994, he served as Vice President and then President of Day-Floren
Associates, Inc., a consulting firm specializing in strategic planning for
high-technology companies. Mr. Day is a director of Microchip Technology,
Incorporated, a Chandler, Arizona manufacturer and supplier of programmable
microchips.
45
<PAGE>
Ms. Legg has served as President and Chief Executive Officer of TIS
Financial Services, Inc., an asset securitization and management company, since
its formation in 1984. Ms. Legg also serves as President, Chief Executive
Officer and a director of TIS Mortgage Investment Company, a real estate
investment trust. Prior to her involvement with TIS, Ms. Legg served as Vice
President and Treasurer of Boise Cascade Corp, a Fortune 500 forest products
manufacturer, and in various management roles with affiliates of Boise Cascade
Corp. From 1967 through 1970, Ms. Legg was Vice President of the Federal
National Mortgage Association, and was a principal architect of the GNMA
mortgage-backed security. Ms. Legg also serves as Chairman of The Planned Giving
Foundation, Inc., a charitable organization.
Board of Directors and Committees
The Company's Amended and Restated Articles of Incorporation provide
that the Board of Directors will be fixed as provided by the Bylaws, but the
number of directors cannot be less than three. The Company's Bylaws provide that
the Board of Directors will consist of not less than three and no more than nine
directors. The Articles and Bylaws also provide that at any time when the Board
of Directors consist of six or more members, in lieu of electing the entire
Board of Directors annually, the board will be divided into three classes, with
the method of classification made by the director then serving as the Chairman
of the Board of Directors. Members of each of the three classes of directors
generally are elected to serve a three year term, with the terms of office of
each class ending in successive years.
The Board of Directors currently consist of eight directors divided
into three classes. Matthew W. Chapman and Frank E. Brawner comprise the Class 1
directors, whose term will continue until the 2000 annual shareholders meeting.
Ron S. Ashany, Robert P. Chamness, and L.B. Day comprise the Class 2 directors,
whose term will continue until the 2001 annual shareholders meeting. J. Kenneth
Brody, Robert T. Jett, and Lorraine O. Legg comprise the Class 3 directors,
whose term will continue until the 2002 annual shareholders meeting.
The Board of Directors has five standing committees: the Audit,
Compensation, Nominating, Executive, and Proxy Committees. The Audit Committee
is comprised of Mr. Ashany (who serves as the Chair), Mr. Brawner, and Ms. Legg.
The Audit Committee reviews the results and scope of the audit and other
services provided by the Company's independent auditors.
The Compensation Committee is comprised of Mr. Brody (who serves as the
Chair), Mr. Ashany, and Ms. Legg. This committee administers the Company's stock
option plans and approves stock option grants and contributions to the Company's
employee benefit plans.
The Nominating Committee is comprised of Ms. Legg (who serves as the
Chair), Mr. Brody, Mr. Chamness, and Mr. Chapman. This committee recommends to
the Board of Directors nominees for election as directors.
The Executive Committee is comprised of Mr. Chapman (who serves as the
Chair), Mr. Brody, and Ms. Legg. This committee is empowered to exercise all of
the authority of the Board of Directors in the management of the Company, except
as otherwise may be provided by law.
The Proxy Committee is comprised of Mr. Chapman (who serves as the Chair),
Mr. Chamness, and Mr. Jett. This committee votes shareholder proxies at the
annual shareholder meetings and at any special shareholder meetings, if
appointed by shareholders in a written proxy.
Board Compensation
In accordance with the terms of the Outside Directors Compensation
and Stock Option Plan, all outside directors receive an annual retainer of
$7,000 for serving as members of the Board of Directors and $1,000 for each
Board of Directors meeting attended. They also receive stock options to purchase
4,000 shares per year,
46
<PAGE>
granted on the first business day following the annual meeting of shareholders,
with an exercise price equal to the fair market value of the Company's common
stock at the close of trading on the last trading day prior to the issuance of
the option. All options granted under the Outside Directors Compensation and
Stock Option Plan are fully vested upon grant. The annual retainer and number of
options granted are pro rated for service during a partial year.
During 1998, the Company paid J. Kenneth Brody the sum of $12,000 for
services as a consultant. Mr. Brody has served the Company as a consultant since
1988. The Company has retained Mr. Brody's services as a consultant in 1999 at
approximately the same level of business for the same level of compensation.
During 1998, the Company paid L.B. Day the sum of $29,770.25 for services
as a consultant. Mr. Day has served the Company as a consultant since 1991. The
Company has not retained, and does not expect to retain, Mr. Day's services as a
consultant in 1999.
Executive Compensation
Compensation Summary. Shown below is information concerning the
annual and long-term compensation for services in all capacities to the Company
for the years ended December 31, 1998, 1997, and 1996, of the following persons:
(i) the chief executive officer of the Company as of December 31, 1998, and (ii)
the other four most highly compensated executive officers of the Company who
were serving in that capacity as of December 31, 1998. The individuals described
in (i) and (ii) above are referred to as the "Named Executive Officers."
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term
Compensation
Annual Compensation Awards
Securities All Other
Underlying Compensation
Name and Principal Position Year Salary ($)1 Bonus ($) Options (#) ($)2
- --------------------------- ---- ----------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Matthew W. Chapman, Chairman 1998 226,000 226,000 30,000 11,180
and Chief Executive Officer 1997 205,000 -- -- 11,180
1996 172,500 172,500 100,000 10,750
Robert P. Chamness, Director, 1998 203,150 192,993 25,000 12,800
President and Chief Operating 1997 184,500 -- -- 12,800
Officer 1996 152,000 121,600 50,000 12,250
Robert T. Jett, Director, Executive 1998 180,000 108,000 15,000 12,800
Vice President and Secretary 1997 162,500 -- -- 12,800
1996 137,000 78,090 50,000 10,939
Lois M. Roberts, Senior Vice 1998 160,000 80,000 16,000 12,800
President 1997 138,750 -- 5,000 3,915
1996 100,000 39,600 10,000 2,468
Eric T. Wagner, Senior Vice 1998 160,000 80,000 -- 3,980
President 1997 150,000 -- -- 3,980
1996 120,000 1,200 -- 2,437
<FN>
1Includes amounts deferred by executive officers under the Company's
401(k) profit sharing plan.
2Stated amounts include Company contributions to the Company's 401(k)
profit sharing plan, life insurance premiums, and parking and automobile
allowance as described in section entitled Description of "All Other
Compensation" Amounts.
</FN>
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
Description of "All Other Compensation" Amounts
Name 1998 1997 1996 Description
---- ---- ---- ---- -----------
<S> <C> <C> <C> <C>
Matthew W. Chapman $3,200 $3,200 $3,000 401(k) Plan contribution
780 780 550 Life insurance premium
7,200 7,200 7,200 Parking and automobile allowance
Robert P. Chamness 3,200 3,200 3,000 401(k) Plan contribution
780 780 550 Life insurance premium
8,820 8,820 8,700 Parking and automobile allowance
Robert T. Jett 3,200 3,200 1,689 401(k) Plan contribution
780 780 550 Life insurance premium
8,820 8,820 8,700 Parking and automobile allowance
Lois M. Roberts 3,200 3,200 2,044 401(k) Plan contribution
780 715 424 Life insurance premium
8,820 -- -- Parking and automobile
allowance
Eric T. Wagner 3,200 3,200 2,437 401(k) Plan contribution
780 780 -- Life insurance premium
</TABLE>
Stock Options Granted. The following table contains information
concerning the grant of stock options under the Company's 1995 Consolidated
Stock Option Plan (the "1995 Plan") to the named executive officers in 1998.
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
Potential Realizable
Value At Assumed Annual
Rates of Stock Price
Appreciation for
Individual
Individual Grants Grants Option Term1
------------------------------------------------------------- -------------------------------
Number of %of Total
Securities Options
Underlying Granted to Exercise
Options Employees in Price Expiration
Name Granted2 Fiscal Year ($/Sh.) Date 5% ($) 10% ($)
- -------------------------- -------------- ----------------- ------------ -------------- ----------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Matthew W. Chapman 30,000 14% $12.25 1/9/08 $231,117 $585,699
Robert P. Chamness 25,000 12% $12.25 1/9/08 $192,597 $488,082
Robert T. Jett 15,000 7% $12.25 1/9/08 $115,558 $292,849
Lois M. Roberts 16,000 7.5% $12.25 1/9/08 $123,262 $312,373
Eric T. Wagner -- -- -- -- -- --
</TABLE>
48
<PAGE>
1These calculations are based on certain assumed annual rates of
appreciation as required by rules adopted by the Securities and Exchange
Commission requiring additional disclosure regarding executive compensation.
Under these rules, an assumption is made that the shares underlying the stock
options shown in this table could appreciate at rates of 5 percent and 10
percent per annum on a compounded basis over the ten-year term of the stock
options. Actual gains, if any, on stock option exercises are dependent on the
future performance of the Company's Common Stock and overall stock market
conditions. There can be no assurance that amounts reflected in this table will
be achieved.
2The option grants listed above all vest 20 percent per year on each of
the five anniversary dates following the date of grant.
Option Exercises and Holdings. The following table provides
information concerning the exercise of options during 1998 and unexercised
options held as of December 31, 1998, with respect to the named executive
officers.
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-end Option Values
Number of
Shares Securities Underlying Value of Unexercised
Acquired Unexercised Options In-The-Money Options
On Value At FY-End (#) At FY-End ($)1
Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
- -------------------------- ------------ ------------ --------------------------------- ---------------------------
<S> <C> <C> <C> <C>
Matthew W. -- -- 40,000 / 90,000 -- / --
Chapman
Robert P. Chamness -- -- 128,000 / 77,000 $173,500 / --
Robert T. Jett -- -- 20,000 / 45,000 -- / --
Lois M. Roberts -- -- 7,625 / 27,600 $1,951 / --
Eric T. Wagner -- -- -- / -- -- / --
<FN>
1Market value of the underlying securities at December 31, 1998, $11.625
per share, minus the exercise price of the unexercised options.
</FN>
</TABLE>
Compensation Committee Interlocks and Insider Participation
During 1998, the Compensation Committee was comprised of Eran S. Ashany, J.
Kenneth Brody (Chair) and Lorraine O. Legg, none of whom was otherwise employed
by the Company.
In 1997, the Company formed Lori Mae, L.L.C., an Oregon limited
liability company ("Lori Mae"), with Pacific Securitization, Inc., a California
corporation involved in asset securitization. The Company and Pacific
Securitization, Inc. each own 50 percent of the Lori Mae. Lori Mae was formed to
acquire and securitize standardized small business loans and credit lines
originated by the Company's client banks and other regulated
49
<PAGE>
financial institutions. Lorraine Legg, a member of the Company's Board of
Directors, owns a 39.25 percent interest in Pacific Securitization, Inc.
Stock Performance Graph
The Securities and Exchange Commission requires that the registrant
include in this registration statement a line-graph presentation comparing
cumulative five-year shareholder returns on an indexed basis, assuming a $100
initial investment and reinvestment of dividends, of (a) the registrant, (b) a
broad-based equity market index and (c) an industry-specific index. The
following graph includes the required information from December 31, 1993,
through the end of the last fiscal year (December 31, 1998). The broad-based
market index used is the Russell 2000 market index ("Russell 2000") and the
industry-specific index used is the Standard & Poors Computer Software &
Services Index. [GRAPHIC OMITTED]
<TABLE>
<CAPTION>
Annual Percentage Return
Years Ended
12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
<S> <C> <C> <C> <C> <C>
Company/Index
CFI ProServices, Inc. (6.09) 10.19 (4.20) (14.04) (5.10)
S&P Software & Services 18.21 40.53 55.46 39.30 81.19
Russell 2000 (1.82) 28.44 16.49 22.36 (2.55)
</TABLE>
<TABLE>
<CAPTION>
Base Indexed Returns
Period Years Ended
Company/Index 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
CFI ProServices, Inc. $100.00 $ 93.91 $103.48 $99.13 $ 85.22 $80.87
S&P Software & Services 100.00 118.21 166.12 258.25 359.75 651.84
Russell 2000 100.00 98.18 126.10 146.90 179.74 175.16
</TABLE>
50
<PAGE>
Employment Contracts, Termination of Employment, and Change-in-Control
Arrangements
The Company entered into an Employment Agreement (the "Agreement")
with Eric T. Wagner on November 21, 1995, when it acquired Culverin Corporation.
The Agreement expires on November 20, 2000. The agreement provided Mr. Wagner
with an initial annual base salary of $120,000, with adjustments made annually
as determined by the Company's President, and incentive compensation based upon
the achievement of certain performance objectives (determined in the manner
described under "Report of the Compensation Committee on Executive Management
Compensation Incentive Compensation"). In the event that the Agreement is
terminated by the Company for convenience or by Mr. Wagner for good reason, then
Mr. Wagner is entitled to severance in an amount not more than the amount he
would have received during the remaining term of the Agreement, but not less
than the lesser of (1) the amount he received during the twelve month period
immediately preceding the termination or (2) the amount he would have received
during the remaining term of the Agreement.
The Company has entered into Executive Retention Agreements with 13
officers of the Company, including the Named Executive Officers. The Executive
Retention Agreements provide favorable severance benefits for the officers
should their positions be diminished or terminated due to a change in control.
Specifically, they authorize, upon the occurrence of a change-in-control, a
severance payment to the officer of a single payment in cash equal to one and
one half times the officer's annual compensation, including base, bonus and
incentive compensation (three times annual compensation for nine executive
officers, including all of the Named Executive Officers), at the rate in effect
immediately prior to termination or at the rate in effect immediately prior to
the change in control of the Company, whichever is greater. The officers may
also receive certain other benefits in the event of a change in control, all of
which are described in the Executive Retention Agreement.
Report of the Compensation Committee on Executive Management Compensation
Executive Compensation Principles. In administering the Company's executive
compensation management program, the Compensation Committee is guided by the
following principles:
1. The principal purpose of the program is to attract, retain and
motivate key employees.
2. The program is based upon the achievement of measurable results,
both short term and long term.
3. The program must, therefore, be composed of short-term and
long-term elements based upon short-term and long-term goals.
4. A principal purpose of the program is to maximize the interest of
the shareholders.
5. Meaningful stock ownership by key employees and stock performance
are important components of the plan.
6. The base elements of the plan should be comparable to compensation
paid by like companies for like responsibilities, but should provide
opportunities for superior rewards based upon exceptional results.
51
<PAGE>
7. Exceeding plan goals should materially increase rewards.
8. The plan should reward not only Company performance, but also
excellent individual performance.
9. The plan should provide internal equity.
Elements of the Program. The primary elements of the compensation
program are the short-term components of base pay and incentive compensation and
the long-term component of stock options.
Base Pay. The Company's executive compensation is based on the annual
Financial Plan prepared by Company management and reviewed and adopted by its
Board of Directors. The Plan provides the benchmark for the measurement of
performance.
Surveys of companies in comparable industries are then used to set
base pay. In establishing 1998 base pay, the Compensation Committee relied upon
a report by Arthur Andersen LLP, which included certain published surveys and
Arthur Andersen LLP internal data. Some of the companies included in such
surveys are also included in the industry specific index used by the Company in
its stock performance graph. This process resulted in increases averaging ten
percent from 1997 to 1998.
Incentive Compensation. A critical principle here is the greater the
responsibility and ability to affect results, the higher the proportion of
salary paid as incentive compensation. For 1998, the incentive compensation for
the Company's Named Executive Officers was based upon the achievement of Plan
Performance Objectives, consisting of Personal Objectives and Financial Plan
Objectives. Personal Objectives for each of the Named Executive Officers other
than the Chief Executive Officer were set by the Chief Executive Officer.
Personal Objectives for the Chief Executive Officer were set by the Compensation
Committee.
For 100 percent achievement of Plan Performance Objectives, each of
the Named Executive Officers was to receive a percentage of his/her base salary
as set forth below (the "Plan Bonus Amount"):
Matthew W. Chapman 100% of base salary
Robert P. Chamness 95% of base salary
Robert T. Jett 60% of base salary
Lois M. Roberts 50% of base salary
Eric T. Wagner 50% of base salary
Entitlement to incentive compensation begins upon achievement of
least 70 percent of Plan Performance Objectives, provided that no incentive
compensation may be awarded unless the Company achieves at least 70 percent of
the Financial Plan Objectives. In the event the Company achieves between 70
percent and 100 percent of the Financial Plan Objectives, the Named Executive
Officers would be entitled to receive a proportional amount of the incentive
compensation they would be entitled to receive for achieving 100 percent of the
Plan Performance Objectives (3-1/3 percent for each one percent increase between
70 percent and 100 percent of the Financial Plan Objectives). In the event that
the Company achieves in excess of 100 percent of the Financial Plan Objectives,
the Named Executive Officers may be awarded an additional bonus in an amount
equal to one percent (two percent for the Named Executive Officers who are also
Directors of the Company) of such officer's Plan Bonus Amount for each one
percent that the Company's financial performance exceeds Financial Plan
Objectives; provided, however, that in no event shall any incentive compensation
be paid with respect to financial performance in excess of 120 percent of the
Company's Financial Plan Objectives.
While the Company's program is intended to provide competitive base
pay for its executives, it is designed to provide higher than competitive
rewards for outstanding performance.
52
<PAGE>
The Company achieved 100 percent of the 1998 Financial Plan
Objectives. As a result, the Board of Directors determined that full bonuses be
paid to the Named Executive Officers under this bonus plan related to 1998
performance.
Stock Option Plans. Stock options provide the long-term element of
the compensation program. The Compensation Committee also administers the
Company's stock option plans. The largest number of stock option shares are
granted to those executive officers of the Company who are in a position to most
significantly advance the Company's long-term goals. Except in the case of
initial hires, such grants are made annually, following annual focal point
reviews and salary adjustments. Most of the Company's option agreements include
a five-year vesting schedule, which furthers retention of key executives. A
stock option grant is intended to encourage substantial stock ownership by
executive officers and to make the risks and rewards of stock ownership a
principal determinant in the motivation and performance of management. Stock
ownership and prospective stock ownership related to the stock ownership program
are intended to insure the unity of the interests of management and the
shareholders.
Since its inception, the Company has followed a policy of extending
stock options to a broad base of employees below the executive management level
for the purpose of strengthening employee loyalty to and identity with the
Company, and motivating employee interest in the Company's success. The Company
has never repriced its stock options.
Company Performance and CEO Compensation. For 1998, Matthew W.
Chapman's base salary, as approved by the Compensation Committee, was $226,000.
The base salary was determined using the same method as for other executive
officers as discussed above under "Base Pay." As discussed under the heading
"Incentive Compensation" above, the Company achieved 100 percent of the 1998
Financial Plan Objectives and Mr. Chapman achieved 100 percent of his personal
objectives (as determined by the Company's Board of Directors). Therefore, Mr.
Chapman received a bonus in the amount of $226,000 related to 1998 performance.
Deductibility Limitations under Section 162(m) of Internal Revenue
Code. The Company has not adopted a policy with respect to executive
compensation in excess of $1,000,000 a year and has not paid such compensation.
The Company will continue to review existing limitations on the tax
deductibility of such compensation.
Compensation Committee:
J. Kenneth Brody (Chair) Eran S. Ashany Lorraine O. Legg
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of October 15, 1999, certain
information furnished to the Company with respect to ownership of the Company's
common stock of (i) each director, (ii) the "Named Executive Officers" (as
defined under "Executive Compensation"), (iii) all persons known by the Company,
based upon review of Schedules 13D and 13G filed with the Securities and
Exchange Commission, to be beneficial owners of more than five of its common
stock, and (iv) all current executive officers and directors as a group. The
Company had 5,217,491 shares issued and outstanding on October 15, 1999.
53
<PAGE>
Common Stock(1) Percent
of Shares
Name and Address of Beneficial Owner Number of Shares Outstanding
- ------------------------------------ ---------------- -----------
Brown Capital Management, Inc.2 673,700 12.9%
809 Cathedral Street
Baltimore, Maryland 21201
Becker Capital Management, Inc.3 474,300 9.1%
1211 S.W. Fifth Avenue, Suite 2185
Portland, Oregon 97204
Brinson Partners, Inc.4 465,600 8.9%
209 South Lasalle Street
Chicago, Illinois 60604
Wellington Management Company, LLC5 420,000 8.0%
75 State Street
Boston, Massachusetts 02109
Levine Leichtman Capital Partners II, L.P.6 344,186 6.6%
355 North Maple Drive
Beverly Hills, California 90210
Matthew W. Chapman7,8 337,190 6.4%
Robert P. Chamness9 170,000 3.2%
Robert T. Jett10 160,180 3.1%
Eran S. Ashany11 78,000 1.5%
J. Kenneth Brody12 27,000 *
Lois M. Roberts13 15,287 *
Eric T. Wagner14 10,704 *
Lorraine O. Legg15 20,868 *
Frank E. Brawner16 5,293 *
L. B. Day17 4,663 *
All directors and executive officers 994,258 17.5%
as a group (16 persons)18
* Less than one percent.
1Applicable percentage of ownership is based on 5,217,491 shares of common
stock outstanding as of October 15, 1999. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission, and
includes voting and investment power with respect to shares. Shares of common
stock subject to options or warrants currently exercisable or exercisable within
60 days after October 15, 1999, are deemed
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<PAGE>
outstanding for computing the percentage ownership of the person holding such
options or warrants, but are not deemed outstanding for computing the percentage
of any other person.
2 Brown Capital Management, Inc. ("Brown") is an investment adviser
registered with the Securities and Exchange Commission under the Investment
Advisers Act of 1940, as amended. As of June 30, 1999, Brown, in its capacity as
investment adviser, may be deemed to have beneficial ownership of 673,700 shares
of common stock of CFI ProServices, Inc. that are owned by numerous investment
advisory clients, none of which is known to have such interest with respect to
more than five percent of the class. As of June 30, 1999, Brown had sole voting
power with respect to 622,900 shares and sole dispositive power with respect to
all 673,700 shares.
3 Becker Capital Management, Inc. ("Becker") is an investment adviser
registered with the Securities and Exchange Commission under the Investment
Advisers Act of 1940, as amended. As of December 31, 1998, Becker, in its
capacity as investment adviser, may be deemed to have beneficial ownership of
474,300 shares of common stock of CFI ProServices, Inc. that are owned by
numerous investment advisory clients, none of which is known to have such
interest with respect to more than five percent of the class. As of December 31,
1998, Becker had sole voting and dispositive power with respect to all 474,300
shares.
4 Brinson Partners Inc. ("Brinson") is an investment adviser registered
with the Securities and Exchange Commission under the Investment Advisers Act of
1940, as amended. As of December 31, 1998, Brinson, in its capacity as
investment adviser, may be deemed to have beneficial ownership of 465,600 shares
of common stock of CFI ProServices, Inc. that are owned by numerous investment
advisory clients, none of which is known to have such interest with respect to
more than five percent of the class. As of December 31, 1998, Brinson had shared
voting and dispositive power with respect to all 465,600 shares.
5 Wellington Management Company, LLP ("WMC") is an investment adviser
registered with the Securities and Exchange Commission under the Investment
Advisers Act of 1940, as amended. As of December 31, 1998, WMC, in its capacity
as investment adviser, may be deemed to have beneficial ownership of 420,000
shares of common stock of CFI ProServices, Inc. that are owned by numerous
investment advisory clients, none of which is known to have such interest with
respect to more than five percent of the class. As of December 31, 1998, WMC had
shared voting power with respect to 97,900 shares and shared dispositive power
with respect to all 420,000 shares.
6Levine Leichtman Capital Partners II, L.P. ("Levine") has shared voting
power and shared dispositive power with respect to all 344,186 shares. Levine
holds a Note entitling it to convert that Note into 216,912 shares (assuming the
full accreted value of the Note). As of October 15, 1999, Levine is entitled to
convert the Note into 164,906 shares based on the Note's accreted value as of
that date. On that basis, Levine is the beneficial owner of 292,180 shares
representing 5.6% of the Company's common stock.
7 The address for such person is 400 S.W. Sixth Avenue, Portland, Oregon
97204.
8 Includes 66,000 shares issuable upon exercise of options exercisable
within 60 days of October 15, 1999. Also includes 287 shares allocated to Mr.
Chapman's account under the CFI ProServices, Inc., Employee Savings and Stock
Ownership Plan (the "ESSOP"). Mr. Chapman has shared voting and dispositive
power with respect to such 287 shares.
9 Includes 155,000 shares issuable upon exercise of options exercisable
within 60 days of October 15, 1999. Also includes 439 shares allocated to Mr.
Chamness's account under the ESSOP. Mr. Chamness has shared voting and
dispositive power with respect to such 439 shares.
10 Includes 33,000 shares issuable upon exercise of options exercisable
within 60 days of October 15, 1999. Also includes 436 shares allocated to Mr.
Jett's account under the ESSOP. Mr. Jett has shared voting and dispositive power
with respect to such 436 shares.
11 Includes 78,419 shares held in the name of Allen Investments III, a
venture capital investment partnership. Mr. Ashany is an officer and director of
Allen & Company Incorporated ("ACI"), and the general partner of Allen
Investments III, but he disclaims beneficial ownership of those 78,419 shares.
Of the remaining 13,500 shares, 3,500 are owned of record by Mr. Ashany and
12,000 are issuable to Mr. Ashany upon exercise of options exercisable within 60
days of October 15, 1999. Does not include shares held of record by other
officers and directors of ACI.
12 Includes 12,000 shares issuable upon exercise of options exercisable
within 60 days of October 15, 1999.
13 Includes 14,625 shares issuable upon exercise of options exercisable
within 60 days of October 15, 1999. Also includes 279 shares allocated to Ms.
Roberts' account under the ESSOP. Ms. Roberts has shared voting and dispositive
power with respect to such 279 shares.
14 Includes 444 shares allocated to Mr. Wagner's account under the ESSOP.
Mr. Wagner has shared voting and dispositive power with respect to such 444
shares.
15 Includes 12,384 shares issuable upon exercise of options exercisable
within 60 days of October 15, 1999.
16 Includes 5,293 shares issuable upon exercise of options exercisable
within 60 days of October 15, 1999.
17 Includes 4,663 shares issuable upon exercise of options exercisable
within 60 days of October 15, 1999.
18 Includes 472,413 shares issuable upon exercise of options exercisable
within 60 days of October 15, 1999. Also includes 3,559 shares allocated to the
executive officers' accounts under the ESSOP. The executive officers have shared
voting and dispositive power with respect to such 3,559 shares.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company engaged the services of Michaels Printing, Inc. for
purposes of printing and related services, for which the Company paid an
aggregate of approximately $130,000 during 1998. Robert T. Jett, Executive Vice
President, Secretary and a member of the Board of Directors of the Company, is
the brother of Michael Jett, an equity owner of Michaels Printing, Inc. The
Company believes that the terms and conditions under which printing orders have
been made with Michaels Printing, Inc. have been based on competitive prices for
similar services available within the Portland metropolitan area. The Company
continued this business relationship in 1999.
Pursuant to a Stock Sale and Purchase Agreement (the "Agreement")
entered into by the Company in connection with its acquisition of all of the
issued and outstanding common stock of Culverin Corporation in November 1995,
Eric Wagner, a former Culverin shareholder and a Named Executive Officer,
received $1,177,877 cash paid in installments through December 31, 1998, and
10,704 shares of the Company's common stock on January 1, 1998. Certain other
contingent payments will be made on an annual basis through December 31, 2000.
The contingent payments will be equal to specified percentages of the Company's
revenues (as such term is defined in the Agreement) attributable to the
licensing of certain products in each fiscal year during such period. Contingent
payments made through December 31, 1998, total $785,203 and were made in cash.
Contingent payments earned in 1999 and 2000 may be made, at the Company's
option, either in cash or in combination of cash and the Company's common stock.
The aggregate payments to be made by the Company pursuant to the Agreement to
all former Culverin shareholders, including Mr. Wagner, cannot exceed
$10,000,000.
The Company has pledged a certificate of deposit in the amount of
$200,000 with a bank, securing a loan by the bank to Robert P. Chamness in
connection with construction of Mr. Chamness' principal residence. The loan is
scheduled to be repaid upon the sale of Mr. Chamness' current residence.
The Company entered into an amendment to an Employment,
Confidentiality and Invention Agreement with Paul Harrison dated May 27, 1999 in
connection with the Company's acquisition of MECA Software, L.L.C. Mr. Harrison
resigned as the Company's Senior Vice President effective as of October 1, 1999.
The amended agreement requires that the Company continue Mr. Harrison's annual
base salary of $300,000 and employment benefits through December 31, 2000 and
pay him lump sum payments of $543,344 by January 31, 2000 and of $1,281,733 by
January 31, 2001.
In connection with the Company's acquisition of MECA, the Company
assumed a Severance, Confidentiality and Invention Agreement with Kathleen
Bromage, the Company's Vice President, e-Commerce Division. That agreement
provides that, if the Company terminates Ms. Bromage's employment for reasons
other than for "cause," then the Company is required to continue Ms. Bromage's
base salary and fringe benefits for 12 months after such termination. "Cause" is
defined generally to include an act of dishonesty, conduct injurious to the
Company, incompetence, gross insubordination, violation of an agreement between
Ms. Bromage and the Company, or conviction of certain crimes. The agreement also
contains provisions regarding non-competition and non-solicitation of employees
and customers.
SELLING SECURITY HOLDERS
The common stock we are registering for sale pursuant to this prospectus
consists of 90,000 shares we issued to two of the selling security holders and
1,159,356 shares issuable to the other security holders upon (1) the exercise of
Options entitling the holder to purchase 30,000 shares at an exercise price of
$12.00 per share, 30,000 shares at an exercise price of $15.00 per share, and
40,000 shares at an exercise price of $18.00 per share, (2) the exercise of the
one Warrant entitling the holders or their assignees to purchase 17,000 shares
at an exercise price of $12.00 per share, (3) the exercise of the four Warrants
entitling the holders or their assignees to purchase 439,822 shares at an
exercise price of $12.34375 per share, and (4) the conversion of the five 10%
Convertible Subordinated Discounted Notes entitling the holders or their
assignees to convert those Notes into 602,539 shares
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at a conversion price of $12.34375 per share (assuming the maximum accreted
value of the Notes). This registration statement also covers an undetermined
number of additional shares as may become issuable as a result of adjustments in
the respective exercise price of the Options and the Warrants and the conversion
price of the Notes to prevent dilution in accordance with Rule 416 under the
Securities Act of 1933. We will not receive any proceeds from the sale of shares
of common stock by the selling security holders.
We do not have a material relationship with any of the selling security
holders within the past three years except U.S. Bancorp Libra, a division of
U.S. Bancorp Investments, Inc. and RCG Capital Markets Group, Inc. On August 13,
1999, we issued to U.S. Bancorp Investments, Inc., in partial consideration for
services as our financial advisor and placement agent in 1999, a Warrant to
purchase 58,000 shares of our common stock. U.S. Bancorp Libra subsequently
transferred a part of its interest in that Warrant to certain of its employees
(or entities controlled by such employees) to purchase up to 34,800 of the
58,000 shares. We also have agreed to issue to U.S. Bancorp Investments, Inc.,
in consideration for investor relations services, a second Warrant to purchase
17,000 shares of our common stock. U.S. Bancorp Investments, Inc. also holds a
Note entitling it to convert that Note into 114,482 shares. On September 15,
1999, we also agreed to issue to RCG Capital Markets Group, Inc., in
consideration for investor relations services, Options to purchase 100,000
shares of our common stock.
The following table sets forth information as of October 15, 1999,
relating to the beneficial ownership of our common stock, without taking into
account any adjustments in the exercise price of the Warrants or the conversion
price of the Notes, by each selling security holder. The numbers and percentages
of shares beneficially owned set forth in the footnotes below are based on
5,217,491 shares outstanding at October 15, 1999, and have been determined in
accordance with Rule 13d-3 under the Securities Exchange Act of 1934. Under this
rule, beneficial ownership includes any shares as to which a person has sole or
shared voting or dispositive power or may, within 60 days of October 15, 1999,
acquire such power.
<TABLE>
<CAPTION>
Common Stock Owned Common Stock Common Stock Owned After
Selling Security Holders Prior to Offering Being Offered the Offering
Number Percentage
<S> <C> <C> <C> <C>
Levine Leichtman Capital 344,186 344,186 -- --
Partners II, L.P.1
Ableco Holdings LLC2 190,911 190,911 -- --
Bay Star Capital, L.P.3 162,684 162,684 -- --
U.S. Bancorp Investments, Inc.4 154,682 154,682 -- --
RCG Capital Markets Group, 100,000 100,000 -- --
Inc.5
David C. Grove 85,000 45,000 40,000 *
Foothill Partners, III, L.P.2 63,637 63,637 -- --
Soundshore Holdings Ltd.3 54,228 54,228 -- --
Soundshore Opportunity Holding 54,228 54,228 -- --
Fund Ltd.3
Ragen Mackenzie Incorporated, 45,000 45,000 -- --
as Custodian for David C. Grove,
IRA
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<PAGE>
Ravich Revocable Trust of 19896 11,600 11,600 -- --
Jeff Benjamin6 4,930 4,930 -- --
Robert Okun6 4,930 4,930 -- --
Upchurch Living Trust U/A/D 4,930 4,930 -- --
December 14, 19906
Alan Schrager6 1,740 1,740 -- --
Tom Koch6 1,160 1,160 -- --
Eben P. Perison6 1,160 1,160 -- --
Caroline Sykes6 1,160 1,160 -- --
Mark Fein6 580 580 -- --
Morrish Community Property 580 580 -- --
Trust6
Jean Smith6 580 580 -- --
Forbes Burtt6 580 580 -- --
Steven F. Mayer6 580 580 -- --
Jeff Kirt6 290 290 -- --
TOTAL 1,289,356 1,249,356 40,000 *
</TABLE>
* Less than one percent.
1Levine Leichtman Capital Partners II, L.P. (Levine) holds a Warrant
entitling it to purchase 127,274 shares. It also holds a Note entitling it to
convert such Note into 216,912 shares (assuming the full accreted value of the
Note). As of October 15, 1999, Levine is entitled to convert the Note into only
164,906 shares based on the Note's accreted value as of that date.
2This selling security holder holds a Warrant entitling it to purchase the
number of shares opposite its name.
3This selling security holder holds a Note entitling it to convert that
Note into the number of shares opposite its name (assuming the full accreted
value of the Note). As of October 15, 1999, Bay Star Capital, L.P., Soundshore
Holdings Ltd., and Soundshore Opportunity Holding Fund Ltd. are entitled to
convert their Notes into only 123,679, 41,226, and 41,226 shares, respectively,
based on the Notes' accreted value as of that date.
4U.S. Bancorp Investments, Inc. (US) holds a Warrant entitling it to
purchase 58,000 shares (34,800 shares of which it transferred to certain of its
employees or entities controlled by such employees), a second Warrant entitling
it to purchase 17,000 shares, and a Note entitling it to convert that Note into
114,482 shares (assuming the full accreted value of the Note). As of October 15,
1999, US is entitled to convert the Note into only 86,576 shares based on the
Note's accreted value as of that date.
5RCG Capital Markets Group, Inc. (RCG) holds Options entitling it to
purchase 100,000 shares. Of such Options, only 30,000 are currently exercisable
and 30,000 and 40,000 become exercisable in 2000 and 2002, respectively,
provided RCG continues to provide services to us.
6US transferred its right under one of its Warrants to this selling
security holder to purchase the number of shares opposite such selling security
holder's name.
Information relating to the selling security holders may change from
time to time in which case new information will be set forth in supplements to
this prospectus. In addition, the per share exercise price of the
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Options and the Warrants and the conversion price of the Notes are subject to
adjustment under certain circumstances. Accordingly, the number of shares of
common stock issuable upon exercise of the Options and the Warrants and the
conversion of the Notes may increase or decrease.
PLAN OF DISTRIBUTION
The selling security holders, following issuance, may sell their
shares of common stock in transactions from time to time while the registration
statement of which this prospectus is a part remains effective. We have agreed
to keep the registration statement effective for seven years (or such shorter
period if all of the shares have been sold or disposed of prior to such time).
The selling security holders may sell shares on the Nasdaq National
Market, in privately negotiated transactions, or otherwise, at any price. They
may sell such shares by one or more of the following methods, without
limitation:
(a) A block trade in which a broker or dealer so engaged will
attempt to sell the shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
(b) Purchases by a broker or dealer as principal and resale by
such broker or dealer for its account pursuant to this prospectus;
(c) Ordinary brokerage transactions and transactions in which
the broker solicits purchasers;
(d) Privately negotiated transactions;
(e) Short sales; and
(f) Face-to-face transactions between sellers and purchasers
without a broker-dealer.
In effecting sales, brokers or dealers engaged by the selling
security holders may arrange for other brokers or dealers to participate. Such
brokers or dealers may receive commissions or discounts from the selling
security holders in amounts to be negotiated that are not expected to exceed
those customary in the types of transactions involved. Broker-dealers may agree
with the selling security holders to sell a specified number of shares at a
stipulated price per share and, to the extent such broker-dealer is unable to do
so acting as agent for the selling security holders, to purchase as principal
any unsold shares at the price required to fulfill the broker- dealer's
commitment to the selling security holders. Broker-dealers who acquire shares as
principal may thereafter resell such shares. The selling security holders may
also sell shares in accordance with Rule 144 under the Securities Act of 1933
rather than pursuant to this prospectus.
In connection with distributions of shares or otherwise, the selling
security holders may enter into hedging transactions with broker-dealers or
other financial institutions. In connection with such transactions,
broker-dealers or other financial institutions may engage in short sales of our
common stock in the course of hedging the positions they assume with the
holders. The selling security holders may sell our common stock short and
deliver shares to close out such short positions. The selling security holders
may enter into options or other transactions with broker-dealers or other
financial institutions that require the delivery to such broker-dealers or other
financial institutions of the shares offered hereby, which shares such
broker-dealers or other financial institutions may resell pursuant to this
prospectus. The selling security holders may pledge shares to a broker-dealer or
other financial institution and, upon default, such broker-dealer or other
financial institution may effect sales of the pledged shares pursuant to this
prospectus. The selling security holders and any brokers and dealers through
whom sales of the shares are made may be deemed to be "underwriters" within the
meaning of the Securities Act of 1933, and the commissions or discounts and
other compensation paid to such persons may regarded as underwriters'
compensation.
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We will pay all expenses of registration (including the fees and
expenses of up to three counsel for the selling security holders) incurred in
connection with this offering. However, the selling security holders will pay
all underwriting discounts, brokerage commissions, and similar expenses incurred
by them.
We have agreed to indemnify certain persons, including the holders,
their directors, officers, partners, legal counsel and accountants, each
underwriter (if any), and controlling persons, against certain liabilities in
connection with this prospectus or the registration statement to which it
relates, including liabilities arising under the Securities Act of 1933.
To comply with certain states' securities laws, if applicable, the
shares may be sold in any such jurisdictions only through registered or licensed
brokers or dealers. The shares may not be sold in certain states unless the
seller meets the applicable state notice and filing requirements.
DESCRIPTION OF SECURITIES
The Registration Statement of which this prospectus is a part
registers up to 1,249,356 shares of common stock. The following description of
the Company's common stock is qualified in all respects by reference to the
Company's Amended and Restated Articles of Incorporation (the "Articles"), which
have been filed as an exhibit to the Registration Statement.
Common Stock
The Articles authorize the issuance of up to 10,000,000 shares of
common stock, no par value. As of October 15, 1999, there were 5,217,491 shares
of common stock outstanding held of record by approximately 295 shareholders.
Holders of the common stock are entitled to receive dividends when and as
declared by the Board of Directors out of any funds lawfully available therefor
and, in the event of liquidation or distribution of assets, are entitled to
participate ratably in the distribution of such assets remaining after payment
of liabilities, in each case subject to any preferential rights granted to any
series of Preferred Stock that may then be outstanding. The common stock does
not have any preemptive rights or redemption or sinking fund provisions. All of
the issued and outstanding shares of common stock are, and all shares of common
stock to be outstanding upon completion of this offering will be, fully paid and
nonassessable. Holders of common stock are entitled to one vote per share on all
matters to be voted upon by the shareholders. The Company does not have
cumulative voting in the election of directors, which means that the holders of
more than 50 percent of the shares voting can elect all directors. The Articles
provide for staggered terms for directors whenever the Board is comprised of six
or more members, meaning that at each election of the Board of Directors,
one-third of the Company's directors will be elected for staggered terms of
three years.
Provisions Affecting Acquisition of the Company
The Articles provide that any Business Combination (as defined below)
must be approved by the vote of at least 75 percent of the outstanding common
stock, with such approving votes to include at least 51 percent of the common
stock held by persons other than the Major Shareholder (as defined below),
unless the proposed Business Combination (a) is approved by a majority of the
directors ("Continuing Directors") who are unaffiliated with such Major
Shareholder and who were directors before such Major Shareholder became a Major
Shareholder or who were designated (before initial election as a director) as a
Continuing Director by a two-thirds vote of the Continuing Directors, or (b) is
solely between the Company and any corporation in which the Company owns 50
percent or more of the voting stock or interest and the shareholders of the
Company retain their proportionate voting and equity interests in the surviving
entity. The Articles define a "Business Combination" as (1) any merger or
consolidation (whether in a single transaction or a series of related
transactions) of the Company or any subsidiary of the Company with or into any
person or entity which, together with affiliates or associates or group of
persons that have agreed to act together, is or becomes the beneficial owner of
five percent or more of the Company's voting stock (a "Major Shareholder"), (2)
any sale, exchange, shareholder distribution, pledge,
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mortgage (or use of other security device to create a lien upon) or lease of all
or substantially all of the assets of the Company or a subsidiary to a Major
Shareholder, whether in a single transaction or a series of related
transactions, (3) any purchase, exchange, lease, or other acquisition by the
Company or any of our subsidiaries of all or substantially all of the assets of
a Major Shareholder, whether in a single transaction or a series of related
transactions, (4) any issuance of any securities of the Company (or warrants,
options or other rights to purchase the same) to, the reclassification or
recapitalization of the securities of the Company owned by, or the exchange of
securities of the Company with, a Major Shareholder, (5) any other transaction
with a Major Shareholder for which approval of the shareholders is required by
law or by any agreement between the Company and any national securities exchange
or rule of any such exchange or Nasdaq, and (6) any contract or other agreement
providing for any of the foregoing.
The determination of whether a proposed business combination is
within the scope of the Articles is made by a two-thirds majority of the
Continuing Directors whose determination is conclusive and binding for all
purposes of the Articles.
The Articles also provide that if and for so long as a Major
Shareholder exists, a resolution to voluntarily dissolve the Company may be
adopted only upon the consent of all shareholders, or the affirmative vote of at
least two-thirds of the total number of the Continuing Directors, and the
affirmative vote of the holders of at least 75 percent of the shares of the
Company entitled to vote thereon.
The Articles also provide that, notwithstanding the foregoing
provisions, the requisite vote necessary to approve a Business Combination with
a Major Shareholder increases to 95 percent unless the terms of the transaction
are such that all of the Company's shareholders are to receive as a result of
the Business Combination the same amount, kind, and composition of cash or
securities payment on a per-share basis in exchange for their shares as was
received by any other former shareholder of the Company whose shares were
acquired during the preceding 12 month period by the Major Shareholder with whom
the Business Combination is to be consummated.
The provisions of the Articles requiring staggered terms for
directors, supermajority approval of the Business Combinations involving Major
Shareholders and providing for supermajority voting to amend such provisions,
may not be amended without approval of the holders of at least 75 percent of the
Company's outstanding common stock.
The foregoing provisions of the Articles, as well as the staggered
terms for directors and the availability of 5,000,000 shares of Series Preferred
Stock for issuance without shareholder approval, may deter any potential hostile
offers or other efforts to obtain control of the Company that are not approved
by the Board of Directors and could thereby deprive the shareholders of
opportunities to realize a premium on their common stock and could make removal
of incumbent management more difficult. At the same time, these provisions may
have the effect of inducing any persons seeking control of the Company or a
business combination with the Company to negotiate terms acceptable to the Board
of Directors.
State Legislation
Oregon law provides that upon authorization of the common stock for
quotation on the Nasdaq National Market, certain "business combinations" between
the Company as an Oregon corporation and an "interested shareholder" are
prohibited for a three-year period following the date that such shareholder
became an interested shareholder, unless (1) the corporation has elected in its
articles of incorporation not to be governed by the Oregon business combination
law (the Company has not made such an election), (2) the business combination
was approved by the Board of Directors of the corporation before the other party
to the business combination became an interested shareholder, (3) upon
consummation of the transaction that made it an interested shareholder, the
interested shareholder owned at least 85 percent of the voting stock of the
corporation outstanding at the commencement of the transaction (excluding voting
stock owned by directors who are also officers or held in employee benefit plans
in which the employees do not have a confidential right to tender or vote stock
held by the
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plan), or (4) the business combination was approved by the Board of Directors of
the corporation and ratified by 66 2/3 percent of the voting stock which the
interested shareholder did not own. The three-year prohibition also does not
apply to certain business combinations proposed by an interested shareholder
following the announcement or notification of certain extraordinary transactions
involving the corporation and a person who has not been an interested
shareholder during the previous three years or who became an interested
shareholder with the approval of a majority of the corporation's directors.
The term "business combination" for purposes of the Oregon law is
defined generally to include mergers or consolidations between an Oregon
corporation and an "interested shareholder," transactions with an "interested
shareholder" involving the assets or stock of the corporation or its
majority-owned subsidiaries and transactions which increase an interested
shareholder's percentage ownership of stock. The term "interested shareholder"
is defined generally as those shareholders who become beneficial owners of 15
percent or more of an Oregon corporation's voting stock.
The Company is subject to the Oregon Control Share Act (the "Control
Share Act"), which generally provides that a person (the "Acquiror") who
acquires voting stock of an Oregon corporation in a transaction which results in
such Acquiror holding more than each of 20 percent, 33 percent, or 50 percent of
the total voting power of such corporation (a "Control Share Acquisition")
cannot vote the shares it acquires in the Control Share Acquisition ("control
shares") unless voting rights are accorded to such control shares by (1) a
majority of each voting group entitled to vote, and (2) the holders of a
majority of the outstanding voting shares, excluding the control shares held by
the Acquiror and shares held by the Company's officers and inside directors. The
term "Acquiror" is broadly defined to include persons acting as a group.
The Acquiror may, but is not required to, submit to the Company an
"Acquiring Person Statement" setting forth certain information about the
Acquiror and its plans with respect to the Company. The Statement may also
request that the Company call a special meeting of shareholders to determine
whether the voting rights will be restored to the control shares. If the
Acquiror does not request a special meeting of shareholders, the issue of voting
rights of control shares will be considered at the next annual or special
meeting of shareholders. If the Acquiror's control shares are accorded voting
rights and represent a majority or more of all voting power, shareholders who do
not vote in favor of the restoration of such voting rights will have the right
to receive the appraised "fair value" of their shares, which may not be less
than the highest price paid per share by the Acquiror for the control shares.
A corporation may provide in its articles of incorporation and bylaws
that the statutory provisions described above do not apply to its shares. The
Articles and Bylaws of the Company do not contain such a provision, and the
statutory provisions described above will apply to acquisitions of shares of the
Company's voting stock.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the common stock is ChaseMellon
Shareholder Services of Seattle, Washington.
SHARES ELIGIBLE FOR FUTURE RESALE
Future sales of substantial amounts of common stock in the public
market could adversely affect the market price of the common stock.
Upon completion of this offering, the Company will have outstanding
an aggregate of 6,376,847 shares of common stock, assuming no exercise of
outstanding options the Company issued to its officers, directors, and employee,
the exercise of the Option and Warrants described in this prospectus, and the
conversion of the Notes also described in this prospectus, based on shares
outstanding as of October 15, 1999. Substantially all of such
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shares will be freely saleable without restriction or further registration under
the Securities Act of 1933 and any shares purchased by "affiliates" of the
Company as that term is defined in Rule 144 under the Securities Act of 1933 are
subject to certain limitations and restrictions described below.
As of October 15, 1999, there were a total of 1,374,801 shares of
common stock subject to outstanding options under the Company's option plans,
765,818 of which were vested and exercisable. Holders of stock options could
exercise these options and sell certain of the shares issued upon exercise.
In general, under Rule 144 as currently in effect, a person (or
persons whose shares are aggregated) who has beneficially owned shares for at
least two years (including the holding period of any prior owner except an
affiliate) is entitled to sell in "broker's transactions" or to market makers,
within any three-month period, a number of shares that does not exceed the
greater of (i) one percent of the number of shares of common stock then
outstanding (approximately 64,668 shares immediately after this offering) or
(ii) generally, the average weekly trading volume in the common stock during the
four calendar weeks preceding the required filing of a Form 144 with respect to
such sale. Sales under Rule 144 are generally subject to the availability of
current public information about the Company. Under Rule 144(k), a person who is
not deemed to have been an affiliate of the Company at any time during the three
months preceding a sale, and who has beneficially owned the shares proposed to
be sold for at least three years, is entitled to sell such shares without having
to comply with the manner of sale, public information, volume limitation or
notice filing provisions of Rule 144. Under Rule 701 of the Securities Act of
1933, persons who purchased shares upon exercise of options granted prior to the
effective date of the Company's public offering are entitled to sell such shares
in reliance on Rule 144, without having to comply with the holding period and
notice filing requirements of Rule 144 and, in the case of non-affiliates,
without having to comply with the public information, volume limitation or
notice filing provisions of Rule 144.
LEGAL MATTERS
The validity of the issuance of the common stock offered hereby has
been passed upon for us by Farleigh, Wada & Witt, P.C., Portland, Oregon.
EXPERTS
The consolidated financial statements of CFI ProServices, Inc. and
subsidiaries as of December 31, 1998 and 1997 and for the three year period
ended December 31, 1998 and the financial statement schedule included in this
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
The financial statements of ULTRADATA Corporation as of and for the year
ended December 31, 1998, included in this registration statement have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein, and have been so included in reliance upon the report
of such firm given upon their authority as experts in accounting and auditing.
The balance sheet of ULTRADATA Corporation as of December 31, 1997,
and the related statements of operations, stockholders' equity, and cash flows
for each of the years in the two year period ended December 31, 1997, have been
included in this registration statement in reliance upon the report of KPMG LLP,
independent auditors, and upon the authority of said firm as experts in
accounting and auditing.
The financial statements of MECA Software, L.L.C. as of December 31,
1997 and 1998 and for each of the two years in the period ended December 31,
1998 included in this Prospectus have been so included in reliance on the report
(which contains explanatory paragraphs relating to the extensive transactions
with related parties as described in Note 8 to the financial statements and to
the Company's ability to continue as a going concern as
63
<PAGE>
described in Note 2 to the financial statements) of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
AVAILABLE INFORMATION
We are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith files reports,
proxy statements, and other information with the Securities and Exchange
Commission. Reports, proxy statements, and other information filed by us may be
inspected and copied at the public reference facilities maintained by the
Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the Securities and Exchange Commission's regional offices located
at 500 W. Madison Street, Suite 1400, Chicago, Illinois 60661, and 7 World Trade
Center, 7th Floor, New York, New York 10048. Copies of such materials may be
obtained from the website that the Securities and Exchange Commission maintains
at http://www.sec.gov.
We have filed with the Securities and Exchange Commission a
registration statement on Form S-1 (herein, together with all amendments and
exhibits, referred to as the "Registration Statement") under the Securities Act
with respect to the common stock offered hereby. This prospectus does not
contain all of the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Securities and Exchange Commission. For further information, reference is hereby
made to the Registration Statement. Any person to whom this prospectus is
delivered may obtain a copy of this Registration Statement, including the
exhibits thereto, without charge upon written or oral request to the Secretary
of Concentrex, at 400 S.W. Sixth Avenue, Portland, Oregon 97204, telephone:
(503) 274-7280.
Our common stock is listed on the Nasdaq National Market. Reports,
proxy statements, and other information concerning Concentrex can be inspected
at the offices of the Nasdaq National Market, 1735 K Street, N.W., Washington,
D.C. 20006-1506.
64
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
PROFORMA FINANCIAL STATEMENTS FOR CFI PROSERVICES, INC., d/b/a CONCENTREX
INCORPORATED FOR THE PERIODS ENDED SEPTEMBER 30, 1999 AND DECEMBER 31, 1998.
<S> <C>
Proforma Unaudited Statement of Operations for the Year Ended December 31, 1998................................F-3
Proforma Unaudited Statement of Operations for the Nine Months Ended September 30, 1999........................F-5
Notes to Proforma Unaudited Financial Statements...............................................................F-7
CONSOLIDATED FINANCIAL STATEMENTS FOR CFI PROSERVICES, INC. AND SUBSIDIARIES AS OF
DECEMBER 31, 1998 AND 1997 AND FOR THE THREE YEARS ENDED DECEMBER 31, 1998, 1997, AND
1996:
Report of Independent Public Accountants.......................................................................F-10
Consolidated Balance Sheets as of December 31, 1998 and 1997...................................................F-11
Consolidated Statements of Income for the Three Years Ended December 31, 1998, 1997, and 1996..................F-12
Consolidated Statements of Shareholders' Equity for the Three Years Ended December 31, 1998, 1997,
and 1996.................................................................................................F-13
Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1998, 1997, and 1996..............F-14
Notes to Consolidated Financial Statements.....................................................................F-16
Report of Independent Public Accountants on Financial Statement Schedule.......................................F-31
Valuation and Qualifying Accounts for the Years Ended December 31, 1998, 1997, and 1996........................F-32
CONSOLIDATED FINANCIAL STATEMENTS FOR CFI PROSERVICES, INC. AND SUBSIDIARIES AS OF
SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998:
Consolidated Balance Sheets as of September 30, 1999 (Unaudited), and December 31, 1998........................F-34
Unaudited Consolidated Statements of Operations for the Nine Months Ended September 30, 1999 and 1998..........F-36
Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1999 and 1998..........F-37
Notes to Unaudited Financial Statements........................................................................F-39
FINANCIAL STATEMENTS FOR ULTRADATA CORPORATION AS OF DECEMBER 31, 1998 AND 1997
AND FOR THE THREE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996:
Independent Auditors' Report...................................................................................F-45
Independent Auditors' Report...................................................................................F-46
Balance Sheets as of December 31, 1998 and 1997................................................................F-47
Statements of Operations for the Three Years Ended December 31, 1998, 1997, and 1996...........................F-48
Statements of Stockholders' Equity for the Three Years Ended December 31, 1998, 1997, and 1996.................F-49
Statements of Cash Flows for the Three Years Ended December 31, 1998, 1997, and 1996...........................F-50
Notes to Financial Statements..................................................................................F-51
FINANCIAL STATEMENTS FOR ULTRADATA CORPORATION AS OF JUNE 30, 1999 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1999 AND 1998:
Balance Sheet as of June 30, 1999 (Unaudited) and December 31, 1998............................................F-61
Unaudited Statements of Operations for the Six Months Ended June 30, 1999 and 1998.............................F-62
Unaudited Statement of Cash Flows for the Six Months Ended June 30, 1999 and 1998..............................F-63
Notes to Unaudited Financial Statements........................................................................F-64
F-1
<PAGE>
FINANCIAL STATEMENTS FOR MECA SOFTWARE, L.L.C. AS OF DECEMBER 31, 1997 AND 1998 AND
FOR THE TWO YEARS ENDED DECEMBER 31, 1997 AND 1998:
Report of Independent Accountants..............................................................................F-66
Balance Sheet as of December 31, 1997 and 1998.................................................................F-67
Statement of Operations for the Years Ended December 31, 1997 and 1998.........................................F-68
Statement of Changes in Members' Equity (Deficit) for the Years Ended December 31, 1997 and 1998...............F-69
Statement of Cash Flows for the Years Ended December 31, 1997 and 1998.........................................F-70
Notes to Financial Statements, December 31, 1997 and 1998 .....................................................F-71
FINANCIAL STATEMENTS FOR MECA SOFTWARE, L.L.C. AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998:
Balance Sheet as of March 31, 1999 (Unaudited) and December 31, 1998...........................................F-79
Unaudited Statements of Operations for the Three Months Ended March 31, 1999 and 1998..........................F-80
Unaudited Statement of Cash Flows for the Three Months Ended March 31, 1999 and 1998...........................F-81
Notes to Unaudited Interim Financial Statements................................................................F-82
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
CFI PROSERVICES, INC.,
dba CONCENTREX INCORPORATED
PROFORMA UNAUDITED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(in thousands, except per share data)
Pro Forma
Concentrex MECA LLC ULTRADATA Adjustments Pro Forma
<S> <C> <C> <C> <C> <C>
Revenue
Application software $75,667 $ -- $ -- $ -- $ 75,667
Information management -- -- 30,359 -- 30,359
e-Commerce 5,821 11,307 -- -- 17,129
Ancillary products 4,142 12,341 -- -- 16,483
--------- ----------- --------- ---------- ---------
Total Revenue 85,630 23,648 30,359 -- 139,637
Cost of Revenue 29,423 10,648 12,725 422 (a)(b) 53,218
--------- ----------- --------- ---------- ---------
Gross Profit 56,207 13,000 17,634 (422) 86,419
Operating Expenses
Sales and marketing 19,204 513 4,853 (3) (a) 24,567
Product development 14,913 9,257 6,024 (56) (a) 30,138
General and administrative 10,012 10,803 5,908 (823) (a) 25,900
Amortization of goodwill 1,228 17,333 -- (14,802) (c) 3,759
Acquired in-process research
and development and other
charges 2,661 -- -- -- 2,661
--------- ----------- --------- ---------- ---------
Total Operating Expenses 48,018 37,906 16,785 (15,684) 87,025
--------- ----------- --------- ---------- ---------
Income (loss) from
Operations 8,189 (24,906) 849 15,262 (606)
Non-operating Income (Expense)
Interest expense (454) (613) (312) (10,714) (d) (12,093)
Interest income 295 131 40 -- 466
Equity in losses attributable to
joint venture (670) -- -- -- (670)
Other, net 83 -- 664 -- 747
--------- ----------- --------- ---------- ---------
Total Non-operating
Income (Expense) (746) (482) 392 (10,714) (11,550)
--------- ----------- --------- ---------- ---------
Income (loss) before Income Taxes 7,443 (25,388) 1,241 4,548 (12,156)
Provision (Benefit) for Income Taxes 3,483 -- 22 (5,787) (e) (2,282)
--------- ----------- --------- ---------- ---------
Net Income (Loss) 3,960 (25,388) 1,219 10,335 (9,874)
Preferred Stock Dividend 95 -- -- -- 95
--------- ----------- --------- ---------- ---------
Net Income (Loss) Applicable to
Common Shareholders $ 3,865 $(25,388) $ 1,219 $ 10,335 $ (9,969)
======= ====== ======= ======= =======
F-3
<PAGE>
Basic Net Income (Loss) Per Share $ 0.77 $ (1.97)
======== ========
Shares Used in Calculating Basic
Net Income (Loss) Per Share 5,012 5,062 (f)
======= =======
Diluted Net Income (Loss) Per Share $ 0.75 $ (1.97)
======== =======
Shares Used in Calculating Diluted
Net Income (Loss) Per Share 5,167 5,062 (f)
======= =======
</TABLE>
The accompanying notes are an integral part of this pro forma statement.
F-4
<PAGE>
<TABLE>
<CAPTION>
CFI PROSERVICES, INC.,
dba CONCENTREX INCORPORATED
PROFORMA UNAUDITED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(in thousands, except per share data)
Pro Forma Pro Forma
Concentrex MECA LLC ULTRADATA Adjustments Pro Forma
<S> <C> <C> <C> <C> <C>
Revenue
Application software $ 58,158 $ -- $ -- $ -- $ 58,158
Information management 5,551 -- 15,554 -- 21,105
e-Commerce 8,678 4,008 -- -- 12,686
Ancillary products 5,059 5,041 -- -- 10,099
------- ------ ---------- ----------- ---------
Total Revenue 77,445 9,049 15,554 -- 102,048
Cost of Revenue 29,569 4,076 6,557 506 (a)(b) 40,708
------ ------ ------- --------- --------
Gross Profit 47,876 4,973 8,997 (506) 61,340
Operating Expenses
Sales and marketing 13,498 631 2,757 (2) (a) 16,884
Product development 17,004 1,918 2,588 (21) (a) 21,489
General and administrative 12,115 2,427 6,862 (77) (a) 21,327
Amortization of goodwill 1,506 -- -- 1,582 (c) 3,088
Acquired in-process research and
development and other charges 10,521 -- -- -- 10,521
------- ---------- ---------- ----------- --------
Total Operating Expenses 54,644 4,976 12,207 1,482 73,309
------ ------ ------- ------- --------
Loss from Operations (6,768) (3) (3,210) (1,988) (11,969)
Non-operating Income (Expense)
Interest expense (1,957) (217) (99) (6,697) (d) (8,970)
Interest income 214 48 30 -- 292
Other, net 192 -- 321 -- 513
--------- ----------- ------- ----------- ------
Total Non-operating
Income (Expense) (1,551) (169) 252 (6,697) (8,165)
--------- -------- ------- ------- -----
Loss before Income Taxes (8,319) (172) (2,958) (8,685) (20,134)
Provision (Benefit) for Income Taxes 829 -- -- (3,561) (e) (2,732)
---------- ----------- -------- -------- -------
Net Loss (9,148) (172) (2,958) (5,124) (17,402)
Preferred Stock Dividend 69 -- -- -- 69
----------- ----------- --------- ---------- ---------
Net loss Applicable to Common
Shareholders $ (9,217) $ (172) $ (2,958) $(5,124) $(17,471)
========= ========= ========= ====== =======
Basic Net Loss Per Share $ (1.81) $ (3.41)
========== =========
F-5
<PAGE>
Shares Used in Calculating Basic
Net Loss Per Share 5,102 5,127 (f)
========= ========
Diluted Net Loss Per Share $ (1.81) $ (3.41)
========== =========
Shares Used in Calculating Diluted
Net Loss Per Share 5,102 5,127 (f)
========== =========
</TABLE>
The accompanying notes are an integral part of this pro forma statement.
F-6
<PAGE>
CFI PROSERVICES, INC.,
d/b/a Concentrex Incorporated
NOTES TO PROFORMA UNAUDITED FINANCIAL STATEMENTS
(In Thousands)
The accompanying unaudited pro forma financial statements for the
periods ended September 30, 1999, and December 31, 1998, have been prepared to
present the effect of the purchase by CFI ProServices, Inc., d/b/a Concentrex
Incorporated ("Concentrex") and MoneyScape Holdings, Inc. of 99% and 1%,
respectively, of all the Members' equity in MECA Software, L.L.C. ("MECA") on
May 17, 1999, and 100% of the common stock of ULTRADATA Corporation
("ULTRADATA") on August 13, 1999. Both acquisitions have been accounted for
using the purchase accounting method.
The pro forma statements assume that both purchases were effective at
the beginning of 1998 for the Pro Forma Statements of Operations. Concentrex's
September 30, 1999 historical balance sheet reflects the purchases of both MECA
and ULTRADATA.
The proforma financial statements have been prepared based on the
historical financial statements of Concentrex adjusted to reflect the purchase
of MECA and ULTRADATA. In addition, certain historical amounts of MECA and
ULTRADATA have been reclassified to conform to Concentrex's presentation. The
pro forma financial statements may not be indicative of the results of the
operations that actually would have occurred if the transactions had been in
effect as of the beginning of the respective periods nor do they purport to
indicate the results of the future operations of Concentrex. The pro forma
financial statements should be read in conjunction with the audited financial
statements and notes thereto of MECA and ULTRADATA.
Statements of Operations. The pro forma adjustments to the Pro Forma
Unaudited Statements of Operations for the nine months ended September 30, 1999
and the year ended December 31, 1998, consist of the following:
a. Depreciation expense and loss on disposal of fixed assets was
reduced in the amounts shown below as a result of the reduction in the carrying
value of MECA's fixed assets acquired:
<TABLE>
<CAPTION>
Nine months ended Year ended
September 30, 1999 December 31, 1998
<S> <C> <C>
Depreciation Expense $ (204) $ (989)
Loss on disposal of fixed assets (25) (488)
------- ---------
$ (229) $ (1,477)
====== =========
Classification on Statement of Operations:
Cost of Revenue $ (129) $ (595)
Sales and Marketing (2) (3)
Product Development (21) (56)
General and Administrative (77) (823)
------- --------
$ (229) $ (1,477)
======= =======
</TABLE>
b. Cost of Revenue. Cost of Revenue was adjusted as follows:
<TABLE>
<CAPTION>
Nine months ended Year ended
September 30, 1999 December 31, 1998
<S> <C> <C>
To record purchased software amortization
related to ULTRADATA $635 $1,017
=== =====
</TABLE>
F-7
<PAGE>
c. Amortization. Amortization of goodwill was adjusted as follows:
<TABLE>
<CAPTION>
Nine months ended Year ended
September 30, 1999 December 31, 1998
<S> <C> <C>
To record goodwill amortization related
to ULTRADATA $1,582 $2,531
To record reversal of a write off of
existing goodwill by MECA during 1998 -- (17,333)
-------- ------
$1,582 $(14,802)
===== ======
</TABLE>
d. Interest Expense. Interest expense was adjusted to reflect the increase
in debt to finance the ULTRADATA acquisition and refinance the MECA acquisition
as follows:
<TABLE>
<CAPTION>
Nine months ended Year ended
September 30, 1999 December 31, 1998
<S> <C> <C>
To record interest expense related to term
loans at 10% to 13% $4,625 $ 7,400
To record interest expense related to the
revolving credit facility 96 153
To record interest accreted on convertible
subordinated notes at 10% 347 555
To record amortization of deferred loan
costs and debt discount 1,629 2,606
----- -----
$6,697 $10,714
===== ======
</TABLE>
e. Pro Forma. The pro forma adjustments to provision (benefit) for
income taxes were made to bring the total tax benefit to the amount that would
have been recorded based on an effective rate for the year calculated using the
combined pro forma loss.
f. Share Calculation. Shares used in the calculation of pro forma net
income (loss) per share have been adjusted to reflect the 50,000 shares of
common stock issued in the purchase of MECA.
F-8
<PAGE>
F-9
<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, d/b/a Concentrex Incorporated) 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-10
<PAGE>
<TABLE>
<CAPTION>
CFI PROSERVICES, INC.,
d/b/a Concentrex Incorporated
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31,
1998 1997
ASSETS
Current Assets:
<S> <C> <C>
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-11
<PAGE>
<TABLE>
<CAPTION>
CFI PROSERVICES, INC.,
d/b/a Concentrex Incorporated
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
Years Ended December 31,
1998 1997 1996
REVENUE
<S> <C> <C> <C>
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-12
<PAGE>
<TABLE>
<CAPTION>
CFI PROSERVICES, INC.,
d/b/a Concentrex Incorporated
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
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-13
<PAGE>
<TABLE>
<CAPTION>
CFI PROSERVICES, INC.,
d/b/a Concentrex Incorporated
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
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) -- --
</TABLE>
F-14
<PAGE>
<TABLE>
<CAPTION>
CFI PROSERVICES, INC.,
d/b/a Concentrex Incorporated
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in thousands)
<S> <C> <C> <C>
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-15
<PAGE>
CFI PROSERVICES, INC.,
d/b/a Concentrex Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
CFI ProServices, Inc., dba Concentrex Incorporated, 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-16
<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.
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
F-17
<PAGE>
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.
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.
F-18
<PAGE>
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:
<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.
F-19
<PAGE>
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:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
(in thousands)
<S> <C> <C> <C>
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 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 related to -- 389 --
acquired net operating losses
Reclassification of bank line of credit to long term debt 4,000 -- --
</TABLE>
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
F-20
<PAGE>
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, 2001.
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 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.
F-21
<PAGE>
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
======= =======
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:
F-22
<PAGE>
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 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:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997
(in thousands)
<S> <C> <C>
Note payable, in relation to Culverin acquisition, payment of $3,690 in 1996 with the
balance due January 1998 $ - $50
Note payable, in relation to Halcyon acquisition, with imputed interest at 8 percent, due
in quarterly installments of $50, including interest, payable through 2001 449 605
Note payable, assumed in the Halcyon acquisition, in monthly installments of $6,
including interest imputed at 8.5 percent, with final payment due October 2004 307 346
Guaranteed royalties to be paid in relation to Input acquisition, with imputed interest at
6 percent, payable through March 2001 1,148 1,426
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
===== =====
</TABLE>
F-23
<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.
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.
F-24
<PAGE>
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:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Federal statutory rate 34.0% 34.0% 34.0%
State income taxes net of Federal benefit 4.8 4.2 6.8
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%
==== ==== ====
</TABLE>
Deferred tax assets and (liabilities) are comprised of the following
components:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997
(in thousands)
<S> <C> <C>
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)
======= =======
</TABLE>
F-25
<PAGE>
The increase (decrease) in the valuation allowance was as follows (in
thousands):
Years Ended December 31,
1998 1997 1996
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.
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 Ended 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
=======
F-26
<PAGE>
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 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:
<TABLE>
<CAPTION>
Weighted
Average Total
Shares Exercise Exercise
Subject to Price Per Price
Options Share
(in thousands)
<S> <C> <C> <C>
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
======= ===== ======
</TABLE>
F-27
<PAGE>
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.
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 - basic $ 0.77 $ 0.68 $ 0.93 $ 0.72 $ 0.00 $(0.21)
Net income(loss) per share - diluted $ 0.75 $ 0.66 $ 0.90 $ 0.71 $ 0.00 $(0.21)
</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-28
<PAGE>
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted
Number Average Weighted Number of Weighted
Range of Outstanding 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> <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>
<CAPTION>
11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER ENDED1 March 31, June 30, September 30, December 31,
(In thousands, except per share data) 1998 1998 1998 1998
- ------------------------------------- ------------ ---------- ------------ ----------
<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
QUARTER ENDED March 31, June 30, September 30, December 31,
(In thousands, except per share data) 1997 1997 1997 1997
- ------------------------------------- ------------ ---------- ------------ ----------
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
</TABLE>
1The 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).
12. SUBSEQUENT EVENTS, INCLUDING EVENTS SUBSEQUENT TO DATE OF AUDITORS'
REPORT
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.
F-29
<PAGE>
Events Subsequent to Date of Auditors' Report (unaudited)
---------------------------------------------------------
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.
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 $55.6 million goodwill, intangibles and purchased software. The
purchase price was $66.3 million, including acquisition-related expenses. The
Company also incurred significant debt in connection with the financing of the
ULTRADATA acquisition and refinancing of the MECA acquisition.
F-30
<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 of CFI ProServices, Inc., d/b/a Concentrex
Incorporated, included in this registration statement 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-31
<PAGE>
<TABLE>
<CAPTION>
CFI PROSERVICES, INC.,
dba CONCENTREX INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Additions
Balance at Charged to Balance
Beginning Costs and at End
of Year Expenses Deductions1 Other2 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>
1Represents 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.
2Includes allowance for doubtful accounts recorded as part of the
acquisition of Microbilt Financial Products Division in April 1996.
</FN>
</TABLE>
F-32
<PAGE>
F-33
<PAGE>
<TABLE>
<CAPTION>
CFI PROSERVICES, INC.,
dba CONCENTREX INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 30, 1999 December 31, 1998
(Unaudited)
<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
F-34
<PAGE>
CFI PROSERVICES, INC.,
dba CONCENTREX INCORPORATED
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Dollars in thousands)
Shareholders' Equity:
Series preferred stock, 5,000,000 shares authorized, none
issued and outstanding -- --
Common stock, no par value, 10,000,000 shares authorized,
5,135,552 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.
F-35
<PAGE>
<TABLE>
<CAPTION>
CFI PROSERVICES, INC.,
dba CONCENTREX INCORPORATED
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Nine Months Ended
September 30,
1999 1998
<S> <C> <C>
Revenue
Application software products $58,158 $54,335
Information management products 5,551 --
e-Commerce products 8,678 3,959
Ancillary products 5,058 2,945
------- -------
Total Revenue 77,445 61,239
Cost of Revenue 29,569 21,688
------ ------
Gross Profit 47,876 39,551
Operating Expenses
Sales and marketing 13,498 14,054
Product development 17,004 10,467
General and administrative 12,115 7,430
Goodwill amortization 1,506 890
Acquired in-process research and development and other charges 10,521 --
------ -------
Total Operating Expenses 54,644 32,841
------ ------
Income (Loss) from Operations (6,768) 6,710
Non-operating Income (Expense)
Interest expense (1,957) (337)
Interest income 214 209
Other, net 192 (168)
------- -------
Total Non-operating Expense (1,551) (296)
------ -------
Income (Loss) before Income Taxes (8,319) 6,414
Provision for Income Taxes 829 2,822
------- -------
Net Income (Loss) (9,148) 3,592
Preferred Stock Dividend 69 72
------- -------
Net Income (Loss) Applicable to Common Shareholders $(9,217) $ 3,520
====== =======
Basic Net Income (Loss) Per Share $ (1.81) $ 0.70
====== ======
Diluted Net Income (Loss) Per Share $ (1.81) $ 0.68
====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
F-36
<PAGE>
<TABLE>
<CAPTION>
CFI PROSERVICES, INC.,
dba CONCENTREX INCORPORATED
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
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, L.L.C. 965 --
Cash paid for acquisition of ULTRADATA Corporation, net
of cash received (59,940) --
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 --
F-37
<PAGE>
CFI PROSERVICES, INC.,
dba CONCENTREX INCORPORATED
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in thousands)
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.
F-38
<PAGE>
CFI PROSERVICES, INC.
d/b/a CONCENTREX INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts or as
otherwise indicated)
(Unaudited)
1. BASIS OF PRESENTATION
The financial information included herein for the 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 of 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 this registration statement. 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 current presentation.
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 396 461
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, L.L.C. 569 --
Assumption of debt in connection with acquisition of
MECA Software, L.L.C. 7,500 --
Fair value of stock warrants issued in connection with financings 1,667 --
Fair value of stock options converted in connection with
acquisition of ULTRADATA Corporation 1,651 --
</TABLE>
3. EARNINGS PER SHARE
Following is a reconciliation of basic earnings per share ("EPS") and
diluted EPS:
F-39
<PAGE>
<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
298,700 for the nine months ended September 30, 1999 and 1998, respectively.
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.
5. CLASSIFICATION OF REVENUE
During the three months ended September 30, 1999, the Company 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 classification.
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
F-40
<PAGE>
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. 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 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.
Nine Months Ended
September 30,
------------------------------
1999 1998
-------------- -------------
Total revenues $ 102,048 $ 102,041
Net loss applicable to common
shareholders $ (17,471) $ (5,585)
Loss per share - Basic $ (3.41) $ (1.10)
Loss per share - Diluted $ (3.41) $ (1.10)
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")
F-41
<PAGE>
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 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 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:
<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) --
F-42
<PAGE>
Note payable, in relation to Halcyon acquisition, with imputed
interest at 8%, 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%, 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 installments of $29, including interest at the rate of
10.0% percent 456 --
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>
F-43
<PAGE>
F-44
<PAGE>
Independent Auditors' Report
To the Board of Directors and Stockholders of ULTRADATA Corporation:
We have audited the accompanying balance sheet of ULTRADATA Corporation (the
"Company") as of December 31, 1998, and the related statements of operations,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1998 financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1998, and the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
February 5, 1999
F-45
<PAGE>
Independent Auditors' Report
Board of Directors
ULTRADATA Corporation:
We have audited the accompanying balance sheet of ULTRADATA Corporation as of
December 31, 1997, and the related statements of operations, stockholders'
equity and cash flows for each of the years in the two year period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
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 financial statements referred to above present fairly, in
all material respects, the financial position of ULTRADATA Corporation as of
December 31, 1997, and the results of its operations and its cash flows for each
of the years in the two year period ended December 31, 1997, in conformity with
generally accepted accounting principles.
KPMG LLP
Mountain View, California
February 12, 1998
F-46
<PAGE>
<TABLE>
<CAPTION>
ULTRADATA CORPORATION
Balance Sheets
(In thousands, except share data and par value amounts)
December 31,
1998 1997
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,418 $ 486
Short term investments -- 303
Restricted cash 321 536
Trade accounts receivable, net 6,523 6,387
Inventories, including third-party product licenses 1,932 815
Prepaid expenses and other current assets 383 456
Income tax receivable -- 53
-------- ---------
Total current assets 11,577 9,036
Property and equipment, net 3,312 4,533
------- -------
Total assets $14,889 $13,569
====== ======
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of capital lease and debt obligations $ 481 $ 663
Current portion, third-party product licenses 594 --
Accounts payable 1,545 2,284
Accrued expenses 1,646 1,239
Deferred revenue and customer advances 1,479 1,852
------- -------
Total current liabilities 5,745 6,038
Deferred revenue and customer advances 682 1,113
Capital lease and debt obligations 7 120
Long-term portion, third-party product licenses 625 --
-------- ---------
Total liabilities 7,059 7,271
------- -------
Commitments and contingencies (Notes 4 and 8)
Stockholders' equity:
Preferred stock; par value $.001; 2,000,000 shares authorized; -- --
none outstanding Common stock; par value $.001; 23,000,000 shares
authorized; 7,725,674 and 7,607,133 shares outstanding in 1998
and 1997, respectively 8 8
Additional paid in capital 15,515 15,202
Accumulated deficit (7,693) (8,912)
------ ------
Total stockholders' equity 7,830 6,298
------- -------
Total liabilities and stockholders' equity $ 14,889 $ 13,569
====== ======
</TABLE>
See accompanying notes to financial statements.
F-47
<PAGE>
<TABLE>
<CAPTION>
ULTRADATA CORPORATION
Statements of Operations
(In thousands, except per share amounts)
Years Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Revenue
Software $ 11,063 $ 7,062 $ 9,452
Services 16,501 16,548 16,741
------ ------ ------
Subtotal 27,564 23,610 26,193
Hardware 3,197 5,493 14,251
------- ------- ------
Total revenue 30,761 29,103 40,444
------ ------ ------
Cost of goods sold
Software 1,979 1,034 2,202
Services 10,889 11,770 13,502
------ ------ ------
Subtotal 12,868 12,804 15,704
Hardware 2,844 4,115 10,331
------- ------- ------
Total cost of goods sold 15,712 16,919 26,035
------ ------ ------
Gross margin 15,049 12,184 14,409
------ ------ ------
Product development 4,689 4,608 6,180
Selling, general, and administrative 9,201 11,964 15,518
Gain on transfer of service bureau contracts (162) (558) --
------- ------- ----------
Total operating expenses 13,728 16,014 21,698
------ ------ ------
Operating income (loss) 1,321 (3,830) (7,289)
Interest income 40 120 365
Interest expense (179) (102) (36)
Other income 59 352 --
------- -------- ----------
Income (loss) before income taxes 1,241 (3,460) (6,960)
Income tax expense 22 -- --
------- -------- --------
Net income (loss) $ 1,219 $ (3,460) $ (6,960)
======= ======= =======
Net income (loss) per share information:
Basic net income (loss) per share $ 0.16 $ (0.46) $ (0.97)
Diluted net income (loss) per share 0.15 (0.46) (0.97)
Shares used to compute basic net income (loss) per share 7,687 7,585 7,195
Shares used to compute dilutive net income (loss) per share 7,924 7,585 7,195
</TABLE>
See accompanying notes to financial statements.
F-48
<PAGE>
<TABLE>
<CAPTION>
ULTRADATA CORPORATION
Statements of Stockholders' Equity
(In thousands)
Retained
Common Stock Additional Earnings Total
Shares Paid-In (Accumulated Stockholders'
Outstanding Amount Capital Deficit) Equity
<S> <C> <C> <C> <C> <C>
Balances as of January 1, 1996 5,742,000 $6 $4 $1,508 $1,518
Net proceeds from initial public
offering 1,650,000 1 14,241 -- 14,242
Net proceeds from issuance of
common stock 133,864 -- 696 -- 696
Net loss -- -- -- (6,960) (6,960)
----------- -- --------- ------ ------
Balances as of December 31, 1996 7,525,864 7 14,941 (5,452) 9,496
Net proceeds from issuance of
common stock 81,269 1 261 -- 262
Net loss -- -- -- (3,460) (3,460)
----------- -- --------- ------ ------
Balances as of December 31, 1997 7,607,133 8 15,202 (8,912) 6,298
Net proceeds from issuance of
common stock 118,541 -- 313 -- 313
Net income -- -- -- 1,219 1,219
----------- -- --------- ------ ------
Balances as of December 31, 1998 7,725,674 $8 $15,515 $(7,693) $7,830
========= = ====== ====== =====
</TABLE>
See accompanying notes to financial statements.
F-49
<PAGE>
<TABLE>
<CAPTION>
ULTRADATA CORPORATION
Statements of Cash Flows
(In thousands)
Years ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,219 $ (3,460) $ (6,960)
Adjustments to reconcile net income (loss) to net cash provided
by (used for) operating activities:
Depreciation and amortization 1,528 1,436 864
Deferred income taxes -- -- 907
Gain on sale of joint venture -- (238) --
Equity in earnings of unconsolidated subsidiary -- (16) (62)
Loss on disposition of property and equipment 67 -- 250
Changes in operating assets and liabilities:
Trade accounts receivable, net (136) 4,069 (3,962)
Inventories 365 358 78
Prepaid expenses and other assets 73 579 (253)
Income taxes receivable 53 1,023 (958)
Accounts payable (739) (1,375) (1,560)
Accrued expenses 158 (887) 166
Deferred revenue and customer advances (804) (1,856) (458)
----- ------ -------
Net cash provided by (used for) operating activities 1,784 (367) (11,948)
----- ------- ------
Cash flows from investing activities:
Capital expenditures (353) (2,997) (1,706)
Proceeds from disposition of service bureau assets -- 192 --
Proceeds from disposition of other assets -- 368 --
Sale of joint venture -- 500 --
Purchases of short-term investments -- -- (4,276)
Sale of short-term investments 303 1,117 2,856
Repayment of stockholder notes receivable -- -- 1,453
-------- --------- -------
Net cash used for investing activities (50) (820) (1,673)
------ ------ ------
Cash flows from financing activities:
Bank borrowings and long term obligations, net -- 474 (1,000)
Proceeds from debt -- 250 388
Decrease (increase) in restricted cash 215 (536) --
Repayment of debt (330) (360) (246)
Net proceeds from initial public offering -- -- 14,242
Net proceeds from issuance of common stock 313 262 696
------ ------ --------
Net cash provided by financing activities 198 90 14,080
------ ------- ------
Net increase (decrease) in cash and cash equivalents 1,932 (1,097) 459
Cash and cash equivalents at beginning of year 486 1,583 1,124
------ ----- -------
Cash and cash equivalents at end of year $ 2,418 $ 486 $ 1,583
===== ====== =======
Non cash operating, investing and financing activities:
Property and equipment acquired under capital leases $ 21 $ -- $ --
======= ========= ==========
Remaining obligation on third party product licenses $1,482 $ -- $ --
===== ========= ==========
Supplemental disclosure of cash flow information:
Cash paid for taxes $ 22 $ 1 $ 87
Cash paid for interest $ 179 $ 102 $ 36
</TABLE>
See accompanying notes to financial statements.
F-50
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
ULTRADATA Corporation (the "Company") provides information management
software and solutions for relationship-oriented financial institutions. These
solutions allow the Company's customers to provide, among other things,
financial services such as checking, savings and investment accounts, home
banking, credit and debit cards, ATM access and consumer lending. The Company's
products are primarily targeted at large and mid-sized credit unions for use as
an in-house installation and to value-added resellers ("VARs") for distribution
to small-sized credit unions that operate in service bureau environments.
Revenue Recognition
The Company recognizes revenues from licenses of computer software
provided that a noncancelable license agreement has been signed, the software
and related documentation have been shipped, there are no material uncertainties
regarding customer acceptance, and collection of the resulting receivable is
deemed probable. Maintenance revenues are deferred and recognized over the
related contract period, generally three months to five years. Services and
other revenues generated from professional consulting and training services and
software customization services are recognized as the services are performed.
Hardware revenues are recognized upon shipment.
Software cost of revenues includes direct costs of software purchased from
third parties and royalties. Services and other cost of revenues include
maintenance, the direct and indirect costs of providing training and
installation, and consulting services relating to customer contracts. Hardware
cost of revenues includes the costs of the hardware and freight.
Statement of Position (SOP) 97-2 "Software Revenue Recognition," which was
issued October 27, 1997, supersedes SOP 91-1 and became effective for the
Company in 1998.
Concentration of Credit Risk and Fair Value of Financial Instruments
Financial instruments that potentially expose the Company to a
concentration of credit risk principally consist of cash and cash equivalents,
restricted cash, trade accounts receivable and short term investments. The
carrying value of the Company's financial instruments approximates fair market
value.
The Company's current customers are primarily comprised of credit unions
throughout the United States. Although the Company is directly affected by the
financial cycles of the credit union industry, management does not believe that
significant credit risks existed as of December 31, 1998. The Company maintains
a reserve for potential bad debts aggregating $521,000 and $1,094,000 as of
December 31, 1998 and 1997, respectively.
No customer accounted for more than 10% of the Company's total revenues in
1998, 1997 or 1996. No customer accounted for more than 10% of the Company's
accounts receivables in 1998. One customer accounted for 13% of total trade
accounts receivable at December 31, 1997.
Financial Statement 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 and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Such estimates include allowances for potentially
uncollectible accounts receivable, sales returns and a valuation allowance for
deferred tax assets. Actual results could differ from those estimates.
F-51
<PAGE>
Cash and Cash Equivalents
Cash equivalents consist of short-term financial instruments with original
maturities of three months or less that are carried at cost, which approximates
market.
Short-Term Investments
Short-term investments as of December 31, 1997 consisted of municipal
obligations with amortized cost approximating fair market value.
Inventories
Inventories consist of hardware and software purchased from third parties
pending shipment to customers recorded at the lower of cost or market, on a
first in, first out basis.
Software Development Costs
Capitalization of computer software costs, when material, begins upon the
establishment of technological feasibility. Such costs are amortized over
periods not exceeding three years. To date, software development costs incurred
subsequent to the establishment of technological feasibility have not been
material.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the shorter of the estimated useful life (three to
five years for computer equipment and software and five to ten years for
furniture and fixtures) or the lease term.
Income Taxes
The Company utilizes the asset and liability method of accounting for
income taxes. Deferred tax assets and liabilities are established to recognize
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. The measurement of deferred tax assets is reduced, if
necessary, by a valuation allowance for any tax benefits of which future
realization is uncertain.
Net Income (Loss) Per Share
Basic income (loss) per share excludes dilution and is computed by
dividing net income (loss) by the weighted-average number of common shares
outstanding, less shares subject to repurchase by the Company, for the period.
Diluted income (loss) per share reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock. Common share equivalents are excluded from the
computation in loss periods as their effect would be antidilutive.
Stock-Based Compensation
The Company accounts for its stock-based compensation plans in accordance
with the provisions of Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations.
F-52
<PAGE>
Impairment of Long-Lived Assets and Long-Lived Assets To Be Disposed Of
The Company evaluates its long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to the future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
carrying amount or fair value less costs to sell.
Reclassifications
Certain amounts in the accompanying 1997 and 1996 financial statements
have been reclassified to conform with the 1998 presentation.
Recently Issued Accounting Standards
In 1998, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income," which requires an enterprise
to report, by major components and as a single total, the change in net assets
during the period from nonowner sources. Adoption of this standard did not have
an impact on the Company's financial position, results of operations or cash
flows. During 1998, 1997 and 1996 the Company's sole source of comprehensive
income is its net income (loss).
The Financial Accounting Standards Board issued SFAS No. 131, "Disclosure
about Segments of an Enterprise and Related Information." SFAS No. 131
establishes annual and interim reporting standards for an enterprise's business
segments and related disclosures about its products, services, geographic areas
and major customers. The Company has determined that it operates in three
segments: software, services and hardware. Management reviews the operating
results of these segments only at the gross margin level and assets are not
allocated by operating segment.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This statement requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. SFAS No. 133 will be effective for the Company's
year ending December 31, 2000. Management believes that this statement will not
have a significant impact on the Company's financial position, results of
operations or cash flows.
NOTE 2. ACCOUNTS RECEIVABLE
Accounts receivable consists of (in thousands):
December 31,
1998 1997
Trade accounts receivable $3,998 $4,520
Unbilled revenues 3,046 2,961
----- -----
Accounts receivable, gross 7,044 7,481
Allowance for bad debts (521) (1,094)
------ -----
Accounts receivable, net $6,523 $6,387
===== =====
F-53
<PAGE>
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consists of (in thousands):
December 31,
1998 1997
Computer equipment $4,073 $3,958
Furniture and fixtures 2,841 2,687
Software 1,432 1,424
----- -----
Property and equipment, gross 8,346 8,069
Accumulated depreciation and amortization (5,034) (3,536)
----- -----
Property and equipment, net $3,312 $4,533
===== =====
NOTE 4. ACCRUED EXPENSES
Accrued expenses consists of (in thousands):
December 31,
1998 1997
Accrued royalties and loss contract accrual $ 314 $ 305
Accrued vacation 613 598
Other 719 336
------ ------
Total accrued expenses $1,646 $1,239
===== =====
NOTE 5. BANK BORROWINGS AND DEBT
Bank Borrowings
In 1997, the Company entered into a factoring agreement which provides for
borrowing by the Company of up to $1.5 million, to be effected by the bank's
purchase of eligible accounts receivable and payment to the Company of an amount
equal to 80% of the purchased accounts receivable. Purchases of receivables and
corresponding advances to the Company are at the discretion of the bank. There
is a 0.5% administrative fee for each receivable purchased and a 1.75% monthly
finance charge for as long as each purchased receivable remains outstanding. The
agreement also provides that the borrowings under the factoring agreement are
secured by all tangible and intangible assets of the Company. To date, no
amounts have been borrowed under the factoring agreement. In addition, as of
December 31, 1998 and 1997, the outstanding balance on a capital equipment
facility was $321,000 and $539,000, respectively. The capital equipment facility
bears interest at a rate equal to 0.25% above the prime rate and will be due in
June of 2000. This facility was secured by cash collateral, and was retired in
January 1999.
Other Debt
In the second quarter of 1997, the Company entered into an agreement to
distribute certain products developed by a third party. As a part of this
agreement, the Company purchased certain products with payments due through 2001
with interest imputed at 12.5%. Future principal payments under this agreement
as of December 31, 1998 are as follows:
F-54
<PAGE>
Year Ending Principal
December 31, Payments
(in thousands)
1999 $ 741
2000 323
2001 302
------
Total Payments $ 1,366
In addition, the Company entered into a non-cancelable maintenance
agreement related to the purchased licenses with an annual expense of $204,000
in 1998 and $326,000 each year thereafter through 2004.
Interest expense incurred during the years ended December 31, 1998, 1997
and 1996 was $179,000, $102,000 and $36,000, respectively.
NOTE 6. INCOME TAXES
The components of income tax expense (benefit) for the years ended
December 31, 1998, 1997, and 1996 consisted of the following (in thousands):
Current Deferred Total
1998:
Federal $ 15 $ -- $ 15
State 7 -- 7
------- ---- ------
Total income tax expense $ 22 $ -- $ 22
====== ==== =====
1997:
Federal $ (25) $ -- $ (25)
State 25 -- 25
------ ---- -----
Total income tax expense $ -- $ -- $ --
======= ==== ======
1996:
Federal $(932) $ 621 $ (311)
State 25 286 311
----- --- ---
Total income tax expense $(907) $ 907 $ --
==== === ======
The difference between the "expected" income tax expense (benefit) computed at
the 35% statutory federal income tax rate and the Company's actual income tax
expense for the years ended December 31, 1998, 1997 and 1996 was as follows (in
thousands):
<TABLE>
<CAPTION>
For the years ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Computed "expected" tax expense (benefit) $ 434 $ (1,176) $ (2,366)
State income taxes, before valuation allowance adjustment, net of
federal income tax effect 72 25 25
Change in the beginning of the year valuation allowance on deferred
tax assets (672) -- 907
Current year losses and temporary differences for which no benefit
was recognized 185 1,134 1,329
Nondeductible expenses 3 39 37
Other, net -- (22) 68
----- ------- -------
Actual income tax expense $ 22 $ 0 $ 0
==== ======== =======
</TABLE>
F-55
<PAGE>
The tax effects of significant temporary differences that comprise
deferred tax assets are as follows (in thousands):
December 31,
1998 1997
Deferred tax assets:
Accounts receivable reserves $ 223 $ 628
Vacation accrual 208 244
Deferred revenue 915 787
Net operating loss carryforwards 1,199 1,867
Tax credit carryforwards 922 894
Other 242 12
------ -------
Gross deferred tax assets 3,709 4,432
Less valuation allowance (3,609) (4,281)
----- -----
Deferred tax assets, net of valuation allowance 100 151
------ ------
Deferred tax liabilities - accumulated depreciation (100) (151)
----- -----
Net deferred tax assets $ -- $ --
======== ========
The net change in the valuation allowance for the year ended December 31,
1998 and 1997 was a decrease of approximately $672,000 and an increase of
approximately $1,277,000. Management believes that sufficient uncertainty exists
as to whether the deferred tax assets will be realized, and accordingly, a
valuation allowance is required.
The Company has net operating loss carryforwards for federal and
California income tax purposes of approximately $3,200,000 and $1,000,000,
respectively. The federal net operating loss carryforward will expire if it is
not utilized by the year 2011 through 2012. The California net operating loss
carryforward will expire if it is not utilized by the year 2001 through 2002.
The Company has research credit carryforwards for federal and California income
tax purposes of approximately $540,000 and $320,000, respectively. The federal
research credit carryforward will expire if not utilized beginning in the year
2008 through 2011. The California research credit carries forward indefinitely
until utilized. The Company also has minimum tax credit carryforwards for
federal income tax purposes of approximately $62,000, which will carry forward
indefinitely until utilized.
The Tax Reform Act of 1986 and the California Conformity Act of 1987
impose restrictions on the utilization of net operating loss and tax credit
carryforwards in the event of an "ownership change" as defined by the Internal
Revenue Code. If an "ownership change," as defined by the Internal Revenue Code,
has occurred, the Company's ability to utilize its net operating loss and tax
credit carryforwards may be subject to restriction pursuant to these provisions.
NOTE 7. STOCKHOLDERS' EQUITY.
The following is a reconciliation of the denominators used in computing
diluted net income (loss) per share (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Shares used to compute basic net income (loss) per share- weighted average
<S> <C> <C> <C>
number of common shares outstanding 7,687 7,585 7,195
Effect of dilutive common equivalent shares - stock options outstanding 237 -- --
----- ------ ------
Shares used to compute diluted net income (loss) per share 7,924 7,585 7,195
===== ===== =====
</TABLE>
For the above mentioned periods, the Company had options outstanding of
1,910,587, 1,911,740 and 1,820,149 as of the end of 1998, 1997, and 1996,
respectively which could potentially dilute basic and diluted net
F-56
<PAGE>
income (loss) per share in the future but were excluded in the computation of
diluted net income (loss) per share in the periods presented as their effect
would have been antidilutive.
Employee Stock Option and Purchase Plans
1994 Equity Incentive Plan
The 1994 Equity Incentive Plan (the "1994 Plan") was adopted in March
1994. The 1994 Plan provides for the grant of incentive stock options and stock
bonuses and the issuance of restricted stock by the Company to its employees,
officers, directors, consultants, independent contractors, and advisors. There
are 1,300,000 shares of the Company's common stock reserved for issuance under
the 1994 plan, of which 318,243 are available for grant as of December 31, 1998.
These options vest 25% after one year and ratably over thirty-six months
thereafter, and expire ten years from the date of grant.
1995 Directors Stock Option Plan
The 1995 Directors Stock Option Plan (the "Directors Plan") was adopted in
July 1996. The Directors Plan provides non-qualified stock options to
non-employee directors of the Company. There are 150,000 shares of the Company's
common stock reserved for issuance, of which 55,000 are available for grant as
of December 31, 1998. Members of the Board of Directors who are not employees,
consultants or independent contractors of the Company, or any parent, subsidiary
or affiliate of the Company are eligible to participate in the Directors Plan.
These options vest 25% in each of four consecutive years. As of December 31,
1998, 95,000 options have been granted under the Directors Plan.
Nonqualified Stock Option Grants
On July 31, 1995, the Company granted to the Company's then Chief
Executive Officer, who is currently a director of the Company, outside of the
1994 Plan, nonqualified options to purchase 600,000 shares of common stock at
$6.00 per share all of which were vested by December 31, 1998. On October 17,
1996, the Company granted to the Company's current President, outside of the
1994 Plan, nonqualified options to purchase 600,000 shares of common stock at
$3.50 per share. Options for 25% of this grant vested on October 17, 1997, and
the remaining shares vest in equal monthly increments over the following 36
months.
1995 Employee Stock Purchase Plan
In September 1995, the Board of Directors adopted the 1995 Employee
Purchase Plan (the "Purchase Plan") and reserved 250,000 shares of the Company's
common stock for issuance thereunder. The Purchase Plan permits eligible
employees to acquire shares of the Company's common stock through payroll
deductions. Each offering under the Purchase Plan will be for a period of six
months commencing on February 1 and August 1 of each year. Eligible employees
may select a rate of payroll deduction between 2% and 10% of their compensation,
up to an aggregate total payroll deduction not to exceed $21,250 in any calendar
year.
The purchase price for the Company's common stock purchased under the
Purchase Plan is 85% of the lesser of the fair market value of the Company's
common stock on the first day of the applicable offering period or the last day
of that offering period.
Accounting for Stock-Based Compensation
A summary of the status of the Company's fixed option plans and nonplan
grants is presented below:
F-57
<PAGE>
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997 December 31, 1996
----------------- ----------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year 1,911,740 $4.71 1,820,149 $5.16 1,209,663 $5.64
Granted 334,050 $4.87 475,600 $3.91 918,600 $4.76
Exercised (25,609) $4.12 -- $ -- (103,747) $5.00
Canceled (72,331) $4.54 (384,009) $5.83 (204,367) $6.27
---------- ---- --------- ---- --------- ----
Outstanding at end of year 2,147,850 $4.75 1,911,740 $4.71 1,820,149 $5.16
========= ==== ========= ==== ========= ====
Exercisable at end of year 1,255,490 $5.13 952,142 $5.47 561,119 $5.67
========= ==== ====== ==== ======= ====
Weighted-average fair value
of options granted during the
year at exercise price equal
to fair value at grant date $1.94 $1.97 $2.39
</TABLE>
The Company has elected to use the intrinsic value-based method to account
for all of its employee stock-based compensation plans. Under APB Opinion No.
25, Accounting for Stock Issued to Employees, the Company has recorded no
compensation costs related to its stock options granted to employees for the
years ended December 31, 1998, 1997 and 1996 because the exercise price of each
option equaled or exceeded the fair value of the underlying common stock as of
its grant date.
Pursuant to SFAS No. 123, Accounting for Stock-Based Compensation, the
Company is required to disclose the pro forma effects on net income (loss) and
net income (loss) per basic and diluted share as if the Company had elected to
use the fair value approach to account for all of its employee stock-based
compensation plans. Had compensation cost for the Company's plans been
determined consistent with the fair value approach described in SFAS No. 123,
the Company's net income (loss) and net income (loss) per basic and diluted
share for the years ended December 31, 1998, 1997 and 1996 would have been as
indicated below (in thousands, except per share data):
Years Ended December 31,
1998 1997 1996
Net income (loss):
As reported $ 1,219 $(3,460) $(6,960)
Pro forma $ 502 $(4,261) $(7,623)
Basic net income (loss) per share:
As reported $ 0.16 $ (0.46) $ (0.97)
Pro forma $ 0.07 $ (0.56) $ (1.06)
Diluted net income (loss) per share:
As reported $ 0.15 $ (0.46) $ (0.97)
Pro forma $ 0.06 $ (0.56) $ (1.06)
The Company's fair value calculations on stock-based awards were made
using the Black-Scholes option pricing model with the following weighted average
assumptions: expected life, 3.5 years from the date of grant in 1996 and 1997,
and 4.25 years in 1998; stock volatility, 63% in 1996 and 1997 and 51% in 1998;
risk-free interest rate, 6.08% in 1996 and 1997 and 5% in 1998; and no dividends
during the expected term. The Company's calculations are based on a single
option award valuation approach, and forfeitures are recognized as they occur.
The Company's fair value calculations on stock-based awards under the Purchase
Plan for all years presented were also made using the Black-Scholes option
pricing model with the following weighted average assumptions: expected life, 6
months; stock volatility, 51%; risk-free interest rate, 5%; and no dividends
during the expected term.
F-58
<PAGE>
The following table summarizes information about fixed stock options
outstanding as of December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Vested
Weighted Options Weighted
Options Average Weighted Vested at Average
Range of Outstanding at Remaining Average December 31, Exercise
Exercise Prices December 31, 1998 Contractual Life Exercise Price 1998 Price
--------------- ----------------- ---------------- -------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
$2.63 - 3.50 785,550 7.7 $3.46 368,341 $3.48
$4.00 - 6.00 1,254,900 7.1 $5.32 817,268 $5.65
$6.25 - 11.00 107,400 7.1 $7.52 69,881 $7.69
---------- -----------
$2.63 - 11.00 2,147,850 7.4 $4.75 1,255,490 $5.13
========= =========
</TABLE>
NOTE 7. EMPLOYEE BENEFIT PLAN
In 1987, the Company adopted a defined contribution retirement plan (the
"Retirement Plan"), which has been determined by the Internal Revenue Service to
be qualified under Section 401(k) of the Internal Revenue Code of 1986. The
Retirement Plan covers essentially all full-time employees. Eligible employees
may make voluntary contributions to the Retirement Plan up to 15% of their
annual compensation. The Company contributed $187,000, $177,000 and $0 to the
plan during the years ended December 31, 1998, 1997, and 1996, respectively.
NOTE 8. COMMITMENTS
Leases
The Company leases its principal facility under a noncancelable operating
lease through January 2007. The Company is also party to a lease for its prior
office space which has been subleased through July 2002. The Company has an
office in Carrollton, Texas, which houses the corporate and customer disaster
recovery center. The Company signed a new lease for this facility for 36 months
beginning January 1, 1999. Rental expense for operating leases for the years
ended December 31, 1998, 1997, and 1996 amounted to $746,000, $1,070,000 and
$1,060,000, respectively, net of 1998 and 1997 rental income of $310,000 and
$124,000, respectively, under the sublease.
The Company leases its facilities and certain equipment under
noncancelable capital and operating leases. Future minimum lease payments under
the Company's capital and operating leases and the present value of minimum
lease payments under capital leases as of December 31, 1998 are as follows (in
thousands):
Year Ending December 31, Capital Leases Operating Leases
1999 $16 $ 739
2000 9 739
2001 -- 783
2002 -- 902
2003 -- 1,116
Thereafter -- 3,784
---- -----
Future minimum lease payments $25 $8,063
=====
Amounts representing interest (5)
Present value of future minimum
lease payments $20
===
Future payments under operating leases are net of sub-lease payments
totaling approximately $276,000 for each of the years 1999 through 2001 and
approximately $161,000 for 2002.
F-59
<PAGE>
F-60
<PAGE>
<TABLE>
<CAPTION>
ULTRADATA CORPORATION
BALANCE SHEET
(In thousands)
June 30, December 31,
1999 1998
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,716 $ 2,418
Restricted cash 700 321
Trade accounts receivable, net 3,905 6,523
Inventory 491 1,932
Prepaid expenses and other current assets 667 383
-------- ----------
Total Current Assets 8,479 11,577
Property and equipment, net 3,001 3,312
------- ---------
Total Assets $11,480 $14,889
====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities:
Bank borrowings and current portion of
long-term obligations $ 290 $ 1,075
Accounts payables 794 1,545
Accrued expenses 1,594 1,646
Deferred revenue and customer advances - current portion 880 1,479
-------- ---------
Total Current Liabilities 3,558 5,745
Deferred revenue and customer advances 477 682
Long-term obligations 252 632
-------- ----------
Total Liabilities 4,287 7,059
------- ---------
Stockholders' Equity:
Common stock 8 8
Additional paid in capital 15,709 15,515
Accumulated deficit (8,524) (7,693)
------ ----------
Total Stockholders' Equity 7,193 7,830
------- ---------
Total Liabilities and Stockholders' Equity $11,480 $14,889
====== =======
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-61
<PAGE>
<TABLE>
<CAPTION>
ULTRADATA CORPORATION
UNAUDITED STATEMENTS OF OPERATIONS
(In thousands)
Six Months Ended Six Months Ended
June 30, 1999 June 30, 1998
<S> <C> <C>
Revenues:
Software $ 4,186 $ 5,406
Services and other 9,456 7,650
----- -----
13,642 13,056
Hardware 244 1,756
------- -----
Total revenues 13,886 14,812
------ ------
Cost of revenues:
Software 948 490
Services and other 4,460 5,471
Hardware 310 1,441
-------- -------
Total cost of revenues 5,718 7,402
------- -------
Gross margin 8,168 7,410
------- -------
Operating expenses:
Product development 1,996 2,402
Selling, general and administrative 6,991 4,759
------- -------
Total operating expenses 8,987 7,161
------- -------
Operating income (loss) (819) 249
Interest Expense, net (59) (50)
Other income 47 54
======= ========
Net (loss) income $ (831) $ 253
======== =======
Earnings (loss) per share information:
Basic net income (loss) per share $ (0.11) $ 0.03
Diluted net income (loss) per share $ (0.11) $ 0.03
Shares used to compute basic net income (loss) per share 7,745 7,657
Shares used to compute diluted net income (loss) per share 7,745 7,885
</TABLE>
The accompanying notes are an integral part of these statements.
F-62
<PAGE>
<TABLE>
<CAPTION>
ULTRADATA CORPORATION
UNAUDITED STATEMENT OF CASH FLOWS
(In thousands)
Six Months Ended Six Months Ended
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (831) $ 253
Adjustments to reconcile net (loss) income to net cash provided
by operating activities:
Depreciation and amortization 647 928
Write off related to renegotiation of agreement 149 --
Changes in operating assets and liabilities:
Trade accounts receivable, net 2,618 (1,169)
Inventory 664 (1,404)
Prepaid expenses and other current assets (284) 70
Income taxes receivable -- 25
Accounts payable (333) 390
Accrued expenses (52) 293
Deferred revenue and customer advances (804) (67)
LT Obligations - 1,268
--------- -------
Net cash provided by operating activities 1,774 587
----- ---
Cash flows from investing activities:
Capital expenditures (336) (368)
Sale of short-term investments -- 303
---------- ---
Net cash used for investing activities (336) (65)
----- ----
Cash flows from financing activities:
Restricted cash (379) 103
Repayment of debt (955) (133)
Net proceeds from issuance of common stock 194 200
------- -------
Net cash provided by (used for) financing activities (1,140) 170
------- -------
Net increase in cash and equivalents 298 692
Cash and equivalents at beginning of period 2,418 486
----- -------
Cash and equivalents at end of period $ 2,716 $ 1,178
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-63
<PAGE>
ULTRADATA CORPORATION
Notes to Unaudited Financial Statements
(In Thousands)
1. UNAUDITED INTERIM FINANCIAL DATA
The interim financial data as of June 30, 1999 and for the six months
ended June 30, 1999 and June 30, 1998 is unaudited; however, in the opinion of
the Company, the interim data includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of results for the
interim periods. Certain information and note disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted from the unaudited financial statements. The
results of operations for the six-month period ended June 30, 1999 are not
necessarily indicative of the operating results for the full year or for future
periods. For further information, refer to the financial statements and
footnotes thereto for the year ended December 31, 1998 included as an exhibit to
this Form 8-K/A.
2. SHORT-TERM OBLIGATIONS
In 1997, the Company entered into an agreement ("License Agreement") to
distribute certain products developed by a third party. In the first quarter of
1999, the Company renegotiated this agreement which effectively reduced the
number of licenses purchased (which had been recorded as inventory), long-term
debt obligations and the related maintenance commitments. Under the revised
License Agreement, payments totaling $1,200 are due through April 2001 and
include payments of $400 for maintenance. This revision resulted in a charge of
$149 during the six months ended June 30, 1999, which is included in software
costs of revenues in the accompanying income statement.
3. COMPUTATION OF EARNINGS (LOSS) PER SHARE
In accordance with Statement of Financial Accounting Standards No. 128,
Earnings Per Share ("SFAS No. 128"), basic earnings per share is computed using
the weighted average number of common shares outstanding during the period.
Diluted earnings per share is computed using the weighted average number of
common and dilutive common equivalent shares outstanding during the period,
using the treasury stock method for options. The following is a reconciliation
of the denominator in the computation of diluted earnings per share (the
numerator equals the net income (loss)):
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1999 June 30, 1998
--------------------- ---------------------
<S> <C> <C>
Weighted average outstanding shares 7,745 7,657
Common stock equivalents -- 228
----- -----
Shares used to compute diluted net income (loss) per share 7,745 7,885
===== =====
Antidilutive common stock equivalents excluded 2,163 897
===== =====
</TABLE>
4. SUBSEQUENT EVENT.
On August 13, 1999, CFI ProServices, Inc., d/b/a Concentrex Incorporated,
purchased all of the Company's common stock and certain outstanding vested
options for approximately $63.3 million in cash, including previously acquired
common stock. The acquisition was accounted for as a purchase.
F-64
<PAGE>
F-65
<PAGE>
Report of Independent Accountants
To the Board of Managers of MECA Software, L.L.C.
In our opinion, the accompanying balance sheets and the related statements
of operations and changes in members' equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of MECA Software,
L.L.C. at December 31, 1997 and 1998, and the results of their operations and
their cash flows for the years then ended in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
The Company is a member of a group of affiliated companies, and, as
disclosed in the financial statements, has extensive transactions and
relationships with members of the group. Because of these relationships, it is
possible that the terms of these transactions are not the same as those that
would result from transactions among wholly unrelated parties.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
Stamford, Connecticut
March 5, 1999
F-66
<PAGE>
<TABLE>
<CAPTION>
MECA Software, L.L.C.
Balance Sheet
December 31,
1997 1998
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,326,539 $ 1,677,599
Accounts receivable, less allowance for doubtful
accounts of $131,721 and $390,319, respectively 3,753,149 3,287,800
Inventory 224,247 160,689
Other current assets 296,817 588,696
Costs and estimated profits in excess of billings on
uncompleted contracts (Note 3) 1,450,659 --
---------- -----------
Total current assets 11,051,411 5,714,784
Restricted cash (Note 3) 283,997 210,000
Fixed assets, net (Notes 3 and 9) 2,199,622 1,430,847
Goodwill, net of accumulated amortization of $19,126,379 at
December 31, 1997 (Notes 3 and 7) 17,332,526 --
Other assets 66,825 66,825
---------- -----------
$30,934,381 $ 7,422,456
========== ===========
LIABILITIES AND MEMBERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 3,703,534 $ 7,773,389
Deferred revenue (Note 3) 2,022,695 100,000
Notes payable - related party (Note 8) 7,500,000 7,500,000
Accrued interest - related party (Note 8) 321,370 630,674
Accrued restructuring costs (Note 11) 768,076 190,000
Estimated loss on uncompleted contracts (Note 3) 646,128 --
---------- -----------
Total current liabilities 14,961,803 16,194,063
Deferred compensation (Note 12) 848,186 1,491,629
---------- -----------
Total liabilities 15,809,989 17,685,692
Commitments (Note 12)
Members' equity (deficit) 15,124,392 (10,263,236)
---------- -----------
Total liabilities and members' equity (deficit) $30,934,381 $ 7,422,456
========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-67
<PAGE>
<TABLE>
<CAPTION>
MECA Software, L.L.C.
Statement of Operations
For the years ended
December 31,
1997 1998
<S> <C> <C>
Revenue
Software license fees $ 4,045,219 $ 8,882,992
Custom development services 7,255,466 2,431,011
Technical support services 8,638,433 8,876,411
Manufacturing and fulfillment 3,074,574 2,964,887
Retail 1,211,611 492,731
----------- -----------
24,225,303 23,648,032
Costs and expenses
Cost of custom development services 6,278,988 2,730,393
Cost of technical support services 6,709,212 5,686,333
Cost of manufacturing and fulfillment 2,499,231 2,125,791
Cost of retail 727,635 105,130
Research and development (Note 6) 6,161,286 10,385,755
Sales and marketing 1,841,117 1,676,784
General and administrative 5,581,549 8,510,537
Amortization of goodwill (Note 7) 7,549,993 17,332,526
Restructuring charge (Note 11) 1,000,000 --
----------- -----------
38,349,011 48,553,249
Loss from operations (14,123,708) (24,905,217)
Interest income 321,755 130,573
Interest expense - related party (Note 8) (633,185) (612,984)
------------ -----------
Net loss $(14,435,138) $(25,387,628)
=========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-68
<PAGE>
MECA Software, L.L.C.
Statement of Changes in Members' Equity (Deficit)
For the years ended December 31, 1997 and 1998
<TABLE>
<CAPTION>
New
Bank of Fleet U.S. Royal Bank England
America Bank Bank of Canada Financial Citibank Total
------------- ----------- ----------- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ (3,926,684) $ 6,789,659 $ 6,789,659 $ 6,966,784 $ 9,958,821 $ - $ 26,578,239
Capital contributions - - - - - 3,000,000 3,000,000
Legal and investment
banking costs (Note 5) (6,236) (3,118) (3,118) (3,118) (3,119) - (18,709)
Net loss for the year (4,739,894) (2,369,947) (2,369,947) (2,369,947) (2,369,947) (215,456) (14,435,138)
------------- ----------- ----------- ------------ ----------- ----------- -------------
Balance, December 31, 1997 (8,672,814) 4,416,594 4,416,594 4,593,719 7,585,755 2,784,544 15,124,392
Net loss for the year (8,124,042) (4,062,021) (4,062,021) (4,062,021) (4,062,021) (1,015,502) (25,387,628)
------------- ----------- ----------- ------------ ----------- ----------- -------------
-
Balance, December 31, 1998 $(16,796,856) $ 354,573 $ 354,573 $ 531,698 $ 3,523,734 $ 1,769,042 $ (10,263,236)
============= =========== =========== ============ =========== =========== =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-69
<PAGE>
<TABLE>
<CAPTION>
MECA Software, L.L.C.
Statement of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
For the years ended
December 31,
1997 1998
<S> <C> <C>
Cash flows from operating activities:
Net loss $(14,435,138) $(25,387,628)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 8,740,815 18,447,619
Loss on the disposal of fixed assets -- 487,773
Changes in assets and liabilities:
Accounts receivables, net (1,423,866) 465,349
Inventories 260,051 63,558
Costs in excess of billings on uncompleted contracts (1,105,185) 1,450,659
Other assets, current (208,012) (291,879)
Accounts payable and accrued expenses (392,141) 4,069,855
Deferred revenue 440,627 (1,922,695)
Accrued restructuring costs 768,076 (578,076)
Estimated loss on uncompleted contracts 530,628 (646,128)
Deferred compensation (26,718) 643,443
----------- -----------
Net cash used in operating activities (6,850,863) (3,198,150)
----------- -----------
Cash flows from investing activities:
Additions to furniture, fixtures and equipment (1,046,811) (834,091)
Restricted cash -- 73,997
----------- -----------
Net cash used in investing activities (1,046,811) (760,094)
----------- -----------
Cash flows from financing activities:
Capital contributions, net of issuance costs 2,981,291 --
Accrued interest - related party (Note 8) (163,824) 309,304
----------- -----------
Net cash provided by financing activities 2,817,467 309,304
----------- -----------
Net decrease in cash and cash equivalents (5,080,207) (3,648,940)
Cash and cash equivalents:
Beginning of year 10,406,746 5,326,539
---------- ----------
End of year $ 5,326,539 $ 1,677,599
=========== ==========
Supplemental disclosure of cash flow information:
Interest paid $ 795,432 $ 303,679
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-70
<PAGE>
MECA SOFTWARE, L.L.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
1. BUSINESS AND ORGANIZATION
MECA Software, L.L.C. (the "Company" or "MECA") is a limited liability
company which was formed by operating subsidiaries of Bank of America NT & SA
("Bank of America") and NationsBank, N.A. ("NationsBank") to acquire MECA
Software, Inc. from H&R Block, effective June 29, 1995. Bank of America and
NationsBank merged in the fourth quarter of 1998. As a result of the merger, all
capital from NationsBank was transferred to Bank of America. Additional
shareholders purchased interests in MECA in 1996 and 1997. The Company develops
and executes custom software and service solutions which enable financial
institutions to provide to their customers electronic remote access to financial
products and services on their terms. The Company also offers a comprehensive
array of on-line banking support services including technical support,
manufacturing, fulfillment, training and marketing.
2. BASIS OF PREPARATION
Since inception, the Company has suffered recurring losses and net cash
outflows from operations and expects to incur additional losses from operations.
The Company has funded its operating losses through capital contributions from
its Class A and Class B Members. It is management's intention to continue to
fund the Company's operating loss through new or existing additional member
capital contributions in order to meet its strategic objectives. Management is
actively pursuing various options which include obtaining funding from a new
Class A or Class B Member or obtaining additional funding from its current Class
A or Class B Members. The Company believes that sufficient funding will be
available to meet its planned business objectives, including anticipated cash
needs for working capital for a reasonable period of time. However, there can be
no assurance the Company will be able to obtain sufficient funds to continue
operations. As a result of the foregoing, there exists substantial doubt about
the Company's ability to continue as a going concern. See unaudited subsequent
event Note 13. These financial statements do not include any adjustments
relating to the recoverability of the carrying amount of recorded assets or the
amounts of liabilities that might result from the outcome of this uncertainty.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments with original
maturities of three months or less from the date of acquisition to be cash
equivalents. The Company invests its excess cash in an overnight money market
account or in AAA rated corporate bonds. Accordingly, the investments are
subject to minimal credit and market risk. At December 31, 1997 and 1998, the
Company had $871,000 and $1,320,000, respectively, in a money market account. At
December 31, 1997 and 1998, the Company had $4,349,294 and $640,604,
respectively, invested in AAA rated corporate bonds.
In accordance with certain operating lease agreements with two third
parties, the Company must maintain a minimum cash deposit at the Company's bank
of $150,000 and $133,997, and $100,000 and $110,000, at December 31, 1997 and
1998, respectively, for the duration of the leases which expire on April 30,
1999 and October 31, 2001, respectively.
Revenue Recognition
The Company's revenue recognition policies for the period are presented in
conformity with Statement of Position 97-2, "Software Revenue Recognition,"
promulgated by the American Institute of Certified Public Accountants. The
following is a summary of MECA's revenue recognition policies for each of their
various sources of revenue:
F-71
<PAGE>
Software License Fees Revenue - The Company generates revenues from
licensing the rights to use its software product to certain financial
institutions and their customers. Revenue is recognized upon shipment of the
product to the financial institution or its customer. Amounts received prior to
the shipment of the product are initially recorded as deferred revenue. It is
management's preference to bill license fees separately. Materials and other
direct costs that result from software license activities are billed separately
and the corresponding revenues and costs are included in manufacturing and
fulfillment on the statement of operations.
Custom Development Services Revenue - Revenue generated from certain
custom development contracts is recognized as the services are performed and
delivered.
From time to time, certain other fixed fee contracts have been
entered into involving significant modifications or customizations to the basic
software delivered under the contract. The completed contract method is used
under such contracts when the fees are fixed and the contract is expected to be
completed within one year. A contract is considered complete when the software
is delivered, and the Company has substantially completed its service
obligations under the contract. Amounts received prior to the completion of the
contract are recorded as deferred revenue until the contract has been completed.
At December 31, 1997, costs and estimated profits in excess of billings on
uncompleted contracts was $1,450,659.
A provision for loss under these contracts, principally with Class A
Members, was computed on the basis of total estimated costs to complete the
contract, which includes contract costs incurred to date plus estimated costs to
complete. At December 31, 1997, there were accrued losses on uncompleted
contracts of $646,128 which has been charged to the statement of operations.
Technical Support Services Revenue - The Company provides technical
support services to the financial institutions' customers. Revenue from
technical support is recognized as the services are provided.
Manufacturing and Fulfillment Revenues - Revenues from manufacturing
and fulfillment services are generated under separate contracts from the copying
of discs or CD-ROMs, packaging and shipment of the Company's software products
and third party software products to licensed users. Revenue from such services
is recognized upon shipment.
Retail Revenue - Revenue is generated from sales of the Company's
products to retail stores. Revenue is recognized upon shipment, net of an
allowance for returns. Also included within retail sales is royalty income
earned on the services and supplies utilized to support the Company's product.
Inventory
Inventory consists principally of raw materials and is valued at the lower
of cost or market, determined on the weighted average basis.
Fixed Assets
Fixed assets are recorded at cost and are depreciated using the
straight-line method over their estimated useful lives which range from three to
five years. Leasehold improvements are amortized over the shorter of their
economic life or their life of the lease. The Company periodically reviews the
recoverability of long lived assets based upon anticipated cash flows generated
from such assets. During 1998, the Company incurred a loss on the disposal of
fixed assets of $487,773.
F-72
<PAGE>
Goodwill
The excess purchase price over the fair value of net assets acquired was
being amortized using the straight-line method over five years. The Company's
policy is to make an annual evaluation of the remaining goodwill for potential
impairment of value at each balance sheet date. During 1998, the Company
expensed the full amount of remaining goodwill as more fully described in Note
7.
Internally Developed Software Costs
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," the Company evaluates the establishment of technological feasibility
of its various products during the development stage. The time period during
which costs could be capitalized from the point of reaching technological
feasibility until the time of general product release is tentatively short and,
consequently, the amounts that could be capitalized are not material to the
Company's financial position or results of operations. Therefore, the Company
charges all product development expenses to operations in the period incurred.
Concentration of Credit Risk
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of trade accounts receivable.
The Company maintains allowances for potential credit losses. At December 31,
1997 and 1998, the Company had approximately 92% of the total accounts
receivable balance concentrated within the top ten customers.
Financial Instruments
The carrying amounts of the Company's financial instruments, which include
cash and cash equivalents, accounts receivable, accounts payable and accrued
expenses, and notes payable, approximate their fair market values at December
31, 1997 and 1998.
Advertising and Promotional Expenses
Advertising and promotional expenses are charged to operations during the
periods in which they are incurred. Total advertising and promotional expenses
were $687,000 and $607,313 for the years ended December 31, 1997 and 1998,
respectively, and are included in sales and marketing expenses in the
accompanying statement of operations.
Income Taxes
Income taxes have not been provided for in the accompanying financial
statements as the limited liability company is a partnership for income tax
purposes. Members are responsible for reporting their allocable share of
membership income, gains, deductions, losses and credits in their own tax
returns.
Reclassifications
Certain prior year amounts have been reclassified to conform to current
year's presentation.
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, including goodwill and
other intangibles, and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
F-73
<PAGE>
4. RECLASSIFICATIONS
Effective December 31, 1998, the Company elected to reclassify certain
revenues, costs and expenses in its statement of operations to further detail
certain revenues and expenses. For financial statement presentation purposes,
the Company has expanded the presentation of revenues and cost of revenues
according to the business activities to which it relates (e.g. custom
development, technical support, etc.). In addition, the Company now groups the
corresponding departmental indirect costs, as well as the above mentioned direct
costs, within costs of revenues according to the business activity to which the
costs relate. The effect of this presentation is to reclassify certain prior
year amounts, previously reported within research and development and general
administrative expenses, to cost of revenues. The effect of these
reclassifications is as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1997:
Reclassified Previously Effects of
Amount Reported Reclassification
<S> <C> <C> <C>
Revenues:
Software license fees $4,045,219 $ -- $ (4,045,219)
Custom development services 7,255,466 -- (7,255,466)
Technical support services 8,638,433 -- (8,638,433)
Manufacturing and fulfillment 3,074,574 -- (3,074,574)
Retail 1,211,611 -- (1,211,611)
Net revenues -- 24,225,303 24,225,303
Costs and Expenses:
Cost of custom development services 6,278,988 -- (6,278,988)
Cost of technical support services 6,709,212 -- (6,709,212)
Cost of manufacturing and fulfillment 2,499,231 -- (2,499,231)
Cost of retail 727,635 -- (727,635)
Total cost of revenue -- 1,474,302 1,474,302
Research and development 6,161,286 12,157,451 5,996,165
General and administrative 5,581,549 14,326,148 8,744,599
-----------
--
===========
</TABLE>
5. LIMITED LIABILITY COMPANY AGREEMENT
The Company has been organized as a limited liability company ("LLC"). The
owners of an interest in a limited liability company are called "Members" and
are not individually liable for obligations and liabilities of the entity.
Pursuant to the LLC Agreement, the Class A Members of the LLC have equal
economic and voting interest in the Company. Each Class A Member has the right
to elect one manager to the Board of Managers. Membership interests are
transferable only with the written approval of the majority interest, as
defined. Each Class A Member is required to sign a licensing and distribution
agreement with respect to the Company's products and services.
On September 10, 1997, Citibank became a Class B Member with a $3 million
capital contribution. Class B Members do not have voting rights. In connection
with making Citibank a Class B Member, the Company incurred costs of $18,709,
which were paid by the other Members in a pro rata share.
The LLC shall continue until dissolved and liquidated in accordance with
the Agreement. The Company will not make any distribution to its Members, unless
determined by the Board of Managers. Allocations to members' capital accounts
for items of income, gain, loss, deduction and credit of the Company shall be
allocated to the members in accordance with their respective percentage
ownership and period of ownership; provided, however,
F-74
<PAGE>
that if any loss, deduction, expense or credit attributable to any capital
contribution made by a Member can be specifically allocated to such Member.
6. RESEARCH AND DEVELOPMENT
Research and development expense was $6,161,286 and $10,385,755 for the
years ended December 31, 1997 and 1998, respectively. Included in the 1998
research and development expense was a transaction with New England Financial
(NEF). In connection with NEF's purchase of a Class A (voting) interest in MECA,
NEF entered into a Development, License and Marketing Agreement with MECA. This
agreement stated that a pro rata portion (1/6 which is equal to the NEF interest
in MECA) of MECA's annual product spending would be directed to projects
specified by NEF. The total costs incurred during 1998 related to the NEF
project during 1998 were $1,128,000. The Company terminated the agreement in
1998 for a payment of $600,000, which is included in the above Research and
Development expense amount.
7. GOODWILL IMPAIRMENT
In accordance with Statement of Financial Accounting Standards (SFAS) No.
121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of," the
Company periodically evaluates the carrying value of long-lived assets to be
held and used, including goodwill, when events and circumstances warrant such a
review. During the latter part of 1998, through analyzing operating results and
related cash flows, trends and prospects as well as competitive and economic
factors surrounding the Company, management concluded that the remaining
goodwill was permanently impaired. Accordingly, the remaining unamortized
goodwill balance of $17,332,526 was expensed and has been included in
amortization of goodwill in the Company's statement of operations.
8. RELATED PARTY TRANSACTIONS
Principal revenue sources for the Company are the development contracts
with the Class A and B Members and license fees earned on customized software
products for the Class A and B Members. Aggregate revenues recognized during
1997 and 1998 from these sources were approximately $20,822,159 and $20,316,883,
respectively. Aggregate receivable balances were $3,033,866 and $1,702,622 at
December 31, 1997 and 1998, respectively.
At December 31, 1998, the Company had outstanding notes payable in the
amount of $7,500,000 to certain Class A Members. This balance represents the
original amounts loaned to the Company upon the formation of the LLC by certain
Class A Members. These promissory notes accrue interest at a rate per annum
equal to the average of the prime rate (8.25% at December 31, 1997 and 1998) and
is payable quarterly. These notes are payable on demand. For the years ended
December 31, 1997 and 1998, interest of $633,185 and $612,984, respectively, was
incurred. Additionally, accrued interest at December 31, 1997 and 1998, was
$321,370 and $630,674, respectively.
F-75
<PAGE>
9. FIXED ASSETS
Fixed assets consist of the following:
1997 1998
---- ----
Computer equipment and software $5,134,610 $1,570,509
Machinery and equipment 835,084 712,376
Furniture and fixtures 716,680 518,831
Leasehold improvements 426,628 241,856
---------- ----------
7,113,002 3,043,572
Less - accumulated depreciation (4,913,380) (1,612,725)
---------- ----------
$2,199,622 $1,430,847
========= =========
Depreciation expense for the years ended December 31, 1997 and 1998 was
$1,190,822 and $1,115,093, respectively. Fixed assets no longer in use of
$4,903,522 were written off during 1998.
10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses include the following:
December 31,
1997 1998
Accounts payable $ 710,529 $2,116,176
Accrued employee costs 1,347,200 1,525,192
Lease termination costs -- 885,000
Development, License and Marketing
Agreement termination costs -- 600,000
Other accrued expenses 1,645,805 2,647,021
---------- ---------
$3,703,534 $7,773,389
11. RESTRUCTURING PLAN
The Company approved certain restructuring plans to reduce costs through
job eliminations and, as a result, recorded a restructuring charge of $1,000,000
in 1997 and certain other minor charges in 1998, principally for severance
costs. Approximately 55 employees were terminated under these programs. The
Company has paid severance costs of $231,924 and $633,587 as of December 31,
1997 and 1998, respectively. At December 31, 1998, approximately $190,000
remains to be paid to former employees under these programs.
12. COMMITMENTS
The Company has employment agreements with certain officers and key
employees. The terms of these employment agreements are generally three years
and can be terminated by the Company under certain circumstances. The agreements
include a component of deferred compensation. Benefits accrued under this
arrangement, including accrued interest, totaled $1,004,865 and $2,006,629 at
December 31, 1997 and 1998, respectively, which are being paid over the course
of three years in accordance to their respective agreements.
F-76
<PAGE>
Lease Commitments
The Company leases office space and machinery under noncancelable
operating leases. The lease for the office space is guaranteed by the Class A
Members. Future minimum rental payments under the operating leases are as
follows:
1999 $1,403,824
2000 1,374,606
2001 1,296,094
2002 1,087,631
2003 988,562
----------
$6,150,717
Rent expense totaled $1,440,048 and $1,402,779, respectively, for the
years ended December 31, 1997 and 1998.
Employee Benefit Plans
The Company has a voluntary 401(k) Plan that is available to all eligible
employees after 90 days of service. Beginning January 1, 1998, the Company made
contributions equal to 75% of the employees' pretax contributions up to a
maximum of 6% of participants' total eligible compensation. From January 1, 1997
to December 31, 1997, the Company made contributions in an amount equal to 50%
of employees' pretax contributions, up to a maximum of 6% of participants' total
eligible compensation. Prior to January 1, 1997, the Company made contributions
in an amount equal to 25% of employees' pretax contributions, up to a maximum of
6% of participants' total eligible compensation. The Company contributed $99,996
and $215,160 to the 401(k) Plan during the years ended December 31, 1997 and
1998, respectively.
13. SUBSEQUENT EVENT -- UNAUDITED
On May 17, 1999, CFI ProServices, Inc., d/b/a Concentrex Incorporated
("Concentrex") and MoneyScape Holdings, Inc. (a wholly owned subsidiary of
Concentrex), acquired 99% and 1%, respectively, of the Members' equity in MECA
in exchange for 50,000 shares of Concentrex common stock.
F-77
<PAGE>
F-78
<PAGE>
<TABLE>
<CAPTION>
MECA Software, L.L.C.
Balance Sheet
(In Thousands)
December 31, March 31,
1998 1999
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,678 $ 3,527
Receivables, net of allowances of $409 and $309, respectively 3,288 3,063
Inventory 161 62
Other current assets 589 334
----------- --------
Total current assets 5,715 6,986
Restricted cash 210 210
Fixed assets, net 1,431 1,356
Other assets 66
----------- --------
Total assets $ 7,423 $ 8,552
======== =======
LIABILITIES AND MEMBERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 8,594 $ 6,601
Deferred revenue 100 2,677
Notes payable 7,500 7,500
-------- -------
Total current liabilities 16,194 16,778
Deferred compensation 1,492 1,451
-------- -------
Total liabilities 17,686 18,229
Commitments
Members' deficit (10,263) (9,677)
----------- --------
Total liabilities and members' deficit $ 7,423 $ 8,552
========= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-79
<PAGE>
MECA Software, L.L.C.
Unaudited Statements of Operations
(In Thousands)
For the three months ended
March 31,
1998 1999
Revenue
Software license fees $ 2,303 $3,556
Custom development services 666 804
Technical support services 2,060 2,207
Manufacturing and fulfillment 456 495
Retail 161 95
------ -------
Total revenue 5,646 7,157
Costs and expenses
Cost of software license fees -- 123
Cost of custom development services 815 787
Cost of technical support services 1,442 1,544
Cost of manufacturing and fulfillment 373 440
Cost of retail 61 --
Research and development 1,439 1,453
Sales and marketing 318 427
General and administrative 2,322 1,682
Goodwill amortization 1,878 --
----- ------
Total operating expenses 8,648 6,456
----- -----
Income (loss) from operations (3,002) 701
Interest expense, net (97) (115)
------- ------
Net income (loss) $(3,099) $ 586
====== ======
The accompanying notes are an integral part of these statements.
F-80
<PAGE>
<TABLE>
<CAPTION>
MECA Software, L.L.C.
Unaudited Statement of Cash Flows
(In Thousands)
For the three months ended
March 31,
1998 1999
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (3,099) $ 586
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 2,130 169
Loss on the disposal of fixed assets -- 25
Changes in assets and liabilities:
Accounts receivables, net (674) 223
Inventory (79) 98
Other assets (144) 355
Accounts payable and accrued expenses (204) (1,592)
Deferred revenue (400) 2,577
Accrued restructuring costs -- (137)
Estimated loss on uncompleted contracts (135) (440)
Deferred compensation 32 (41)
-------- -------
Net cash provided by (used in) operating activities (2,573) 1,823
----- ------
Cash flows from investing activities:
Additions to furniture, fixtures, and equipment (96) (119)
Restricted cash (1) --
-------- ---------
Net cash used in investing activities (97) (119)
------- ------
Cash flows from financing activities:
Accrued interest - related party (164) 145
------ -------
Net cash provided by (used in) financing activities (164) 145
------ -------
Net increase (decrease) in cash and cash equivalents (2,834) 1,849
Cash and cash equivalents:
Beginning of period 5,327 1,678
----- ------
End of period $2,493 $3,527
===== =====
</TABLE>
The accompanying notes are an integral part of these statements.
F-81
<PAGE>
MECA SOFTWARE, L.L.C.
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
1. UNAUDITED INTERIM FINANCIAL DATA
The interim financial data as of March 31, 1999, and for the three months
ended March 31, 1999 and March 31, 1998 is unaudited; however, in the opinion of
the Company, the interim data includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of results for the
interim periods. Certain information and note disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted from the unaudited financial statements. The
results of operations for the three month period ended March 31, 1999 are not
necessarily indicative of the operating results for the full year or for future
periods. For further information, refer to the financial statements and
footnotes thereto for the year ended December 31, 1998 included elsewhere in
this registration statement.
2. SUBSEQUENT EVENT -- UNAUDITED
On May 17, 1999, CFI ProServices, Inc., d/b/a Concentrex Incorporated
("Concentrex") and MoneyScape Holdings, Inc. (a wholly owned subsidiary of
Concentrex), acquired 99% and 1%, respectively, of the Members' equity in MECA
in exchange for 50,000 shares of Concentrex common stock.
F-82
<PAGE>
1,249,356 SHARES
CFI PROSERVICES, INC.
COMMON STOCK
----------------------------------------------
PROSPECTUS
December 9, 1999
----------------------------------------------
DEALER PROSPECTUS DELIVERY REQUIREMENTS
UNTIL JANUARY 13, 2000, ALL DEALERS SELLING SHARES OF THE COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses in connection with the issuance and distribution of the
securities being registered hereby will be borne by us and are estimated to be
as follows:
SEC Registration Fee $ 4,223
NASD Filing Fee $ 7,500
Blue Sky Fees and Expenses $ 7,500
Legal Fees and Expenses(1) $ 50,000
Accounting Fees and Expenses(1) $ 50,000
Printing Expenses(1) $ 5,000
Miscellaneous(1) $ 777
----------
Total(1) $ 125,000
(1)Estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
ORS 60.367, a section of the Oregon Business Corporation Act (the
"Act"), provides that any director held liable for an unlawful distribution in
violation of ORS 60.367 is entitled to contribution from (1) every other
director who voted for or assented to the distribution without complying with
the applicable statutory standards of conduct and (2) each shareholder for the
amount the shareholder accepted knowing the distribution was made in violation
of the Act or the corporation's Articles of Incorporation.
Under Sections 60.387 to 60.414 of the Act, a person who is made a
party to a proceeding because such person is or was an officer or director of a
corporation (an "Indemnitee") shall be indemnified by the corporation (unless
the corporation's Articles of Incorporation provide otherwise) against
reasonable expenses incurred by the Indemnitee in connection with the proceeding
if the Indemnitee is wholly successful, on the merits or otherwise, or if
ordered by a court of competent jurisdiction. In addition, under such sections a
corporation is permitted to indemnify an Indemnitee against liability incurred
in a proceeding if (1) the Indemnitee's conduct was in good faith and in a
manner he or she reasonably believed was in the corporation's best interests or
at least not opposed to its best interests, (2) the Indemnitee had no reasonable
cause to believe his or her conduct was unlawful if the proceeding was a
criminal proceeding, (3) the Indemnitee was not adjudged liable to the
corporation if the proceeding was by or in the right of the corporation, and (4)
the Indemnitee was not adjudged liable on the basis that he or she improperly
received a personal benefit. Indemnification in connection with a proceeding by
or in the right of the corporation is limited to reasonable expenses incurred in
connection with the proceeding.
Article VII of the registrant's Amended and Restated Articles of
Incorporation, as amended, provides that the registrant will indemnify its
directors and officers to the fullest extent permissible by law. Article V of
the Amended and Restated Bylaws provides that the registrant will indemnify its
directors and officers as set forth in the Amended and Restated Articles of
Incorporation.
The registrant's Amended and Restated Articles of Incorporation
provide for the elimination of personal liability of directors to the registrant
or its shareholders for monetary damages for conduct as a director to the
fullest extent permitted by the Act. Under Section 60.047 of the Act, a
corporation may not eliminate or limit the liability of a director for: (1) any
breach of the director's duty of loyalty to the corporation or its shareholders;
(2) acts of omissions not in good faith or which involve intentional misconduct
or a knowing violation of law; (3) any unlawful distribution under Section
60.367 of the Act; or (4) any transaction from which the director derived an
improper personal benefit.
II-1
<PAGE>
The registrant maintains directors' and officers' liability insurance
under which the registrants' directors and officers are insured against loss (as
defined) as a result of claims brought against them for their wrongful acts in
such capacities.
ITEM 16. RECENT SALES OF UNREGISTERED SECURITIES.
In the three years preceding the filing of this Registration
Statement, the Company has issued securities in the following transactions, each
of which was intended to be exempt from the registration requirements of the
Securities Act of 1933 by virtue of Section 4(2) thereunder:
1. On January 1, 1998, the Company delivered stock certificates for
33,341 shares of common stock to Eric T. Wagner, John M. Loveless, David A.
Steffens, and Douglas Teets pursuant to the Stock Purchase and Sale Agreement
dated November 21, 1995, among the Company, Culverin Corporation, Eric T.
Wagner, John M. Loveless, David Steffens, and Douglas Teets (such shares of
common stock were issued as of January 1, 1995, and had an aggregate market
value as of that date equal to $450,103.50 ($13.50 per share)).
2. On January 1, 1999, the Company issued 50,000 shares of common
stock to Modern Computer Systems, Inc., pursuant to an Asset Purchase and Sale
Agreement dated effective January 1, 1999, among the Company, Modern Computer
Systems, Inc., BankServ, Inc., Inasyst, Inc., Dealer Computer Systems, Inc., and
Ronald L. Ingersoll (the shares of common stock had an aggregate value equal to
approximately $650,000).
3. On May 14, 1999, the Company issued 45,000 shares of common stock
to David E. Grove and 45,000 to Regan MacKenzie Incorporated, as Custodian for
David C. Grove, IRA, for $900,000 in cash.
4. On August 13, 1999, the Company issued Warrants to Ableco Holdings
LLC, Levine Leichtman Capital Partners II, L.P., Foothill Partners III, L.P.,
and U.S. Bancorp Libra, a division of U.S. Bancorp Investments, Inc., entitling
them to purchase up to 439,822 shares of common stock at an exercise price of
$12.34375 per share and 10% Convertible Subordinated Discount Notes to Levine
Leichtman Capital Partners II, L.P., U.S. Bancorp Libra, a division of U.S.
Bancorp Investments, Inc., Bay Star Capital, L.P., Soundshore Holdings Ltd., and
Soundshore Opportunity Holding Fund Ltd. entitling them to purchase up to
602,534 shares of common stock at a conversion price of $12.34375 per share.
5. On September 15, 1999, the Company agreed to issue to RCG
Capital Markets Group, Inc. options to purchase up to 100,000 shares of common
stock at exercise prices of $12.00, $15.00, or $18.00 per share.
6. The Company has agreed to issue a Warrant to U.S. Bancorp
Investments, Inc., entitling it to purchase up to 17,000 shares of common stock
at an exercise price of $12.00 per share.
ITEM 17. EXHIBITS AND EXHIBIT INDEX.
Exhibit
Number Description of Exhibits
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, 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, as filed with the Securities
and Exchange Commission on April 16, 1996, and incorporated herein by
reference.
II-2
<PAGE>
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, as filed with the Securities and Exchange
Commission on May 2, 1996, and incorporated herein by reference.
2.4 Asset Purchase and Sale Agreement, dated effective January 1, 1999,
among CFI ProServices, Inc., Modern Computer Systems, Inc., BankServ,
Inc., Inasyst, Inc., Dealer Computer Systems, Inc., and Ronald L.
Ingersoll - previously filed as Exhibit 2.1 to the Current Report on
Form 8-K dated February 10, 1999, as filed with the Securities and
Exchange Commission on February 10, 1999, and incorporated herein by
reference.
2.5 Purchase and Sale Agreement dated May 17, 1999, among MECA Software,
L.L.C., the members of MECA Software, L.L.C., CFI ProServices, Inc.,
and MoneyScape Holdings, Inc. - previously filed as Exhibit 2.1 to
the Current Report on Form 8-K dated June 2, 1999, as filed with the
Securities and Exchange Commission on June 7, 1999, and incorporated
herein by reference.
2.6 Agreement and Plan of Merger dated as of May 17, 1999, among the
Company, UFO Acquisition Co., and ULTRADATA Corporation - previously
filed as Exhibit 2.1 to the Current Report on Form 8-K dated August
27, 1999, as filed with the Securities and Exchange Commission on
August 27, 1999, and incorporated herein by reference.
2.7 Revolving Credit Note in the principal amount of up to $15,000,000
dated as of August 13, 1999 previously filed as Exhibit 2.2 to the
Current Report on Form 8-K dated August 27, 1999, as filed with the
Securities and Exchange Commission on August 27, 1999, and
incorporated herein by reference.
2.8 Form of Term Loan A Promissory Note in the aggregate principal amount
of $35,000,000 dated as of August 13, 1999 - previously filed as
Exhibit 2.3 to the Current Report on Form 8-K dated August 27, 1999,
as filed with the Securities and Exchange Commission on August 27,
1999, and incorporated herein by reference.
2.9 Form of Term Loan B Promissory Note in the aggregate principal amount
of $30,000,000 dated as of August 13, 1999 - previously filed as
Exhibit 2.4 to the Current Report on Form 8-K dated August 27, 1999,
as filed with the Securities and Exchange Commission on August 27,
1999, and incorporated herein by reference.
2.10 Form of Warrant issued by the Company to the Lenders to purchase up
to an aggregate of 381,822 shares of the common stock of the Company
dated as of August 13, 1999 - previously filed as Exhibit 2.5 to the
Current Report on Form 8-K dated August 27, 1999, as filed with the
Securities and Exchange Commission on August 27, 1999, and
incorporated herein by reference.
2.11 Registration Rights Agreement for the Lender Warrants among the
Company and the Lenders dated as of August 13, 1999 - previously
filed as Exhibit 2.6 to the Current Report on Form 8-K dated August
27, 1999, as filed with the Securities and Exchange Commission on
August 27, 1999, and incorporated herein by reference.
2.12 Note Purchase Agreement among the Company and the Note Holders dated
as of August 13, 1999 previously filed as Exhibit 2.7 to the Current
Report on Form 8-K dated August 27, 1999, as filed with the
Securities and Exchange Commission on August 27, 1999, and
incorporated herein by reference.
2.13 Form of 10% Convertible Subordinated Discount Notes dated as of
August 13, 1999 - previously filed as Exhibit 2.8 to the Current
Report on Form 8-K dated August 27, 1999, as filed with the
Securities and Exchange Commission on August 27, 1999, and
incorporated herein by reference.
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<PAGE>
2.14 Registration Rights Agreement for the Subordinated Notes among the
Company and the Note Holders dated as of August 13, 1999 - previously
filed as Exhibit 2.9 to the Current Report on Form 8-K dated August
27, 1999, as filed with the Securities and Exchange Commission on
August 27, 1999, and incorporated herein by reference.
2.15 Warrant issued to U.S. Bancorp Libra, financial advisor and placement
agent for the Company, to purchase 58,000 shares of the Company's
common stock, dated as of August 13, 1999 - previously filed as
Exhibit 2.10 to the Current Report on Form 8-K dated August 27, 1999,
as filed with the Securities and Exchange Commission on August 27,
1999, and incorporated herein by reference.
2.16 Registration Rights Agreement for the Libra Warrants dated as of
August 13, 1999 - previously filed as Exhibit 2.11 to the Current
Report on Form 8-K dated August 27, 1999, as filed with the
Securities and Exchange Commission on August 27, 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 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.
5.1 CFI ProServices, Inc. Employee Savings and Stock Ownership Plan -
previously filed as Exhibit 5.1 to the Current Report on Form 8-K
dated August 27, 1999, as filed with the Securities and Exchange
Commission on August 27, 1999, and incorporated herein by reference.
5.2 ULTRADATA Employment Agreement with Robert J. Majteles dated October
22, 1996 - previously filed as Exhibit 5.2 to the Current Report on
Form 8-K dated August 27, 1999, as filed with the Securities and
Exchange Commission on August 27, 1999, and incorporated herein by
reference.
5.3 ULTRADATA Employment Agreement with Cindy Cooper dated November 6,
1999 - previously filed as Exhibit 5.3 to the Current Report on Form
8-K dated August 27, 1999, as filed with the Securities and Exchange
Commission on August 27, 1999, and incorporated herein by reference.
5.4 ULTRADATA Employment Agreement with David J. Robbins dated November
6, 1999 - previously filed as Exhibit 5.4 to the Current Report on
Form 8-K dated August 27, 1999, as filed with the Securities and
Exchange Commission on August 27, 1999, and incorporated herein by
reference.
5.5 ULTRADATA Employment Agreement with James R. Berthelson dated
November 6, 1998 - previously filed as Exhibit 5.5 to the Current
Report on Form 8-K dated August 27, 1999, as filed with the
Securities and Exchange Commission on August 27, 1999, and
incorporated herein by reference.
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<PAGE>
5.6 ULTRADATA Employment Agreement with Ronald H. Bissinger dated
November 6, 1998 - previously filed as Exhibit 5.6 to the Current
Report on Form 8-K dated August 27, 1999, as filed with the
Securities and Exchange Commission on August 27, 1999, and
incorporated herein by reference.
5.7 Opinion of Farleigh, Wada & Witt, P.C.
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.
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
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<PAGE>
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.
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.
10.23 Financing Agreement dated as of August 13, 1999, by and among CFI
ProServices, Inc., ULTRADATA Corporation, MECA Software, L.L.C.,
MoneyScape Holdings, Inc., Foothill Capital Corporation, Ableco
Finance L.L.C., Levine Leichtman Capital Partners II, L.P., and
Foothill Partners III, L.P. - previously filed as Exhibit 10.1 to the
Company's Form 10-Q dated August 16, 1999, filed with the Securities
and Exchange Commission on August 16, 1999, and incorporated herein
by reference.
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<PAGE>
10.24 Third Amendment to Office Lease dated August 11, 1999, between
Registrant and John Hancock Mutual Life Insurance Company -
previously filed as Exhibit 10.2 to the Current Report on Form 8-K
dated August 27, 1999, as filed with the Securities and Exchange
Commission on August 27, 1999, and incorporated herein by reference.
10.25** Employment, Confidentiality, and Invention Agreement dated December
12, 1997, as amended May 27, 1999, among Registrant, MECA Software,
L.L.C., and Paul D. Harrison.
21** Subsidiaries of the Registrant.
23.1** Consent of Arthur Andersen LLP.
23.2** Consent of Deloitte & Touche LLP.
23.3** Consent of KPMG LLP.
23.4** Consent of PricewaterhouseCoopers LLP.
23.5** Consent of Farleigh, Wada & Witt, P.C. (included in Exhibit 5.7).
27** Financial Data Schedule.
*Management contract or compensatory plan or arrangement.
**Previously filed.
ITEM 18. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
a. To file, during any period in which offers or sales are made,
a post-effective amendment to this Registration Statement:
i. To include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933, unless the information required to be included in such
post-effective amendment is contained in a periodic report filed by the
registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange
Act of 1934 (the "Exchange Act") that is incorporated herein by reference;
ii. To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration Statement,
unless the
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<PAGE>
information required to be included in such post-effective amendment is
contained in a periodic report filed by the registrant pursuant to Section 13 or
Section 15(d) of the Exchange Act that is incorporated herein by reference;
iii. To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
b. That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
c. To remove from registration by means of a post-effective
amendment any of the securities being registered that remain unsold at the
termination of the offering.
d. That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the registrant's annual report pursuant
to Section 13(a) or Section 15(d) of the Exchange Act that is incorporated by
reference in the Registration Statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the provisions described in Item 15 above,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act of 1933 as is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer, or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Portland,
State of Oregon, on December 7, 1999.
CFI PROSERVICES, INC.
By: /s/ Matthew W. Chapman
----------------------
Matthew W. Chapman, Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed below by the following
persons in the capacities indicated as of the 7th day of December, 1999.
Signature Title Dated
/s/ Matthew W. Chapman Chairman, Chief Executive
- ---------------------- Officer, and Director December 7, 1999
Matthew W. Chapman
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<PAGE>
/s/ Robert P. Chamness President, Chief Operating December 7, 1999
- ---------------------- Officer, and Director
Robert P. Chamness
/s/ Kurt W. Ruttum Vice President and Chief December 7, 1999
- ------------------ Financial Officer
Kurt W. Ruttum (Principal Financial and Accounting Officer)
/s/ Robert T. Jett Executive Vice President, December 7, 1999
- ------------------ Secretary, and Director
Robert T. Jett
/s/ J. Kenneth Brody Director December 7, 1999
- ----------------------
J. Kenneth Brody
/s/ L. B. Day Director December 7, 1999
- ----------------------
L. B. Day
II-9
Exhibit 5.7
Farleigh, Wada & Witt, P.C.
121 S.W. Morrison Street, Suite 600
Portland, Oregon 97204
(503) 228-6044
(503) 228-1741 fax
November 12, 1999
CFI ProServices, Inc., dba
Concentrex Incorporated
400 S.W. Sixth Avenue
Portland, Oregon 97204
Gentlemen:
We have acted as counsel to CFI ProServices, Inc., dba Concentrex
Incorporated (the "Company"), in connection with the registration by the Company
of up to 1,249,356 shares of its common stock, no par value (the "Common
Stock"), which the Company issued to certain security holders and which are or
may become issuable to certain other security holders upon the exercise and
conversion of currently outstanding Options, Warrants, and Notes (collectively,
the "Convertible Securities"), together with any additional shares of Common
Stock that may become issuable upon the exercise and conversion of the
Convertible Securities as a result of adjustment of the respective exercise and
conversion prices of the Convertible Securities to anti-dilution provisions. The
shares of Common Stock issued to certain security holders and issuable to
certain other security holders upon exercise of the Options and Warrants and the
conversion of the Notes at any time hereafter are herein referred to as the
"Shares." This opinion is being rendered in connection with a Registration
Statement on Form S-1 covering resales of the Shares with the Securities and
Exchange Commission pursuant to the Securities Act of 1933, as amended (the
"Securities Act").
In connection herewith, we have examined and relied as to matters of
fact upon such certificates of public officials, certificates or copies
certified to our satisfaction of the Articles of Incorporation and Bylaws of the
Company (each amended through the date hereof), proceedings of the Board of
Directors of the Company and other corporate records, documents, certificates,
and instruments as we have deemed necessary or appropriate in order to enable us
to render the opinion expressed below.
In rendering the following opinion, we have assumed the genuineness
of all signatures on all documents examined by us, the authenticity of all
documents submitted to us as originals and the conformity to the originals of
all documents submitted to us as copies, and we have relied as to matters of
fact upon statements and certifications of officers of the Company.
<PAGE>
CFI ProServices, Inc., dba
Concentrex Incorporated
November 12, 1999
Page Two
Based on the foregoing, we are of the opinion that the Shares are
duly and validly authorized, that the Shares issued to the selling security
holders identified in the Registration Statement have been validly issued and
are fully paid and nonassessable, and when the Shares have been issued upon the
exercise of the Options and Warrants and the conversion of the Notes at the
respective exercise and conversion prices in effect at the time of such issuance
and otherwise in accordance with their terms, the Shares will be validly issued,
fully paid and nonassessable.
For purposes of the opinion above, we have assumed that all necessary
approvals have been received for the issuance of the Shares, including the
issuance of the Shares upon exercise of the Options and Warrants and the
conversion of the Notes and including approval by the Company's shareholders, if
required, and any regulatory approvals required by rules of the Nasdaq Stock
Market.
We hereby consent to the filing of this opinion as an exhibit to the
aforesaid Registration Statement on Form S-1 and to the use of our name under
the caption "Legal Matters" in the prospectus filed as a part thereof. In giving
this consent, we do not thereby admit that we are in the category of persons
whose consent is required under Section 7 of the Securities Act.
Very truly yours,
FARLEIGH, WADA & WITT, P.C.