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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 0-21980
CFI PROSERVICES, INC.
(Exact name of registrant as specified in its charter)
Oregon 93-0704365
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
400 SW Sixth Avenue, Portland, Oregon 97204
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 503-274-7280
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common stock without par value 5,411,368
(Class) (Outstanding at April 30, 2000)
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<PAGE>
CFI PROSERVICES, INC.
dba CONCENTREX INCORPORATED
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 2000 and
December 31, 1999 2
Consolidated Statements of Operations - Three Months Ended
March 31, 2000 and 1999 3
Consolidated Statements of Cash Flows - Three Months Ended
March 31, 2000 and 1999 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
<PAGE>
CFI PROSERVICES, INC.
dba CONCENTREX INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------------ ------------------
<S> <C> <C>
ASSETS
Current Assets:
Restricted cash $ 1,195 $ 1,289
Receivables, net of allowances of $3,483 and $3,268 32,754 40,938
Inventory 635 583
Deferred tax asset 4,112 2,843
Prepaid expenses and other current assets 4,165 4,342
Income taxes receivable 728 1,653
------------------ ------------------
Total Current Assets 43,589 51,648
Property and equipment, net of accumulated
depreciation of $13,377 and $12,894 8,107 7,532
Software development costs, net of accumulated
amortization of $5,193 and $4,561 4,651 5,283
Purchased software costs, net of accumulated
amortization of $1,158 and $803 7,453 7,808
Goodwill, net of accumulated amortization
of $7,543 and $6,928 58,183 59,133
Deferred tax asset 9,438 9,438
Other assets, net 3,526 3,924
================== ==================
Total Assets $ 134,947 $ 144,766
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Drafts payable $ 1,001 $ 728
Accounts payable 5,366 7,424
Accrued expenses 10,548 15,181
Deferred revenues 15,107 18,026
Customer deposits 5,637 5,823
Line of credit 3,282 3,482
Current portion of long-term debt 6,579 4,570
------------------ ------------------
Total Current Liabilities 47,520 55,234
Commitments and Contingencies
Long-term debt, less current portion and debt discount 57,171 59,036
Other long-term liabilities 1,116 1,399
Convertible Subordinated Notes 5,801 5,647
Mandatory Redeemable Class A Preferred Stock 725 728
Shareholders' Equity:
Series preferred stock, 5,000,000 shares authorized,
none issued and outstanding - -
Common stock, no par value, 10,000,000 shares authorized,
5,365,225 and 5,250,781 shares issued and outstanding 26,615 25,703
Retained earnings (accumulated deficit) (4,001) (2,981)
------------------ ------------------
Total Shareholders' Equity 22,614 22,722
------------------ ------------------
Total Liabilities and Shareholders' Equity $ 134,947 $ 144,766
================== ==================
</TABLE>
The accompanying notes are an integral part of these consolidated balance sheets
2
<PAGE>
CFI PROSERVICES, INC.
dba CONCENTREX INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
----------- -----------
REVENUE
<S> <C> <C>
Software Products and Services Group
License Revenue $ 14,712 $ 8,369
Service and Support Revenue 11,955 8,479
Other Revenue 2,961 1,145
e-Commerce Group
License Revenue 421 495
Service and Support Revenue 2,965 1,565
----------- -----------
Total Revenue 33,014 20,053
COST OF REVENUE 12,584 7,747
----------- -----------
Gross Profit 20,430 12,306
OPERATING EXPENSES
Sales and marketing 5,412 3,732
Product development 8,049 4,279
General and administrative 5,217 2,436
Goodwill amortization 1,048 410
----------- -----------
Total Operating Expenses 19,726 10,857
----------- -----------
Income From Operations 704 1,449
NON-OPERATING INCOME (EXPENSE)
Interest expense (3,131) (104)
Interest income 21 95
Other, net 140 3
----------- -----------
Total Non-operating Income (Expense) (2,970) (6)
----------- -----------
INCOME (LOSS) BEFORE PROVISION FOR (BENEFIT FROM)
INCOME TAXES (2,266) 1,443
PROVISION FOR (BENEFIT FROM) INCOME TAXES (1,269) 621
----------- -----------
NET INCOME (LOSS) (997) 822
PREFERRED STOCK DIVIDEND 23 23
----------- -----------
NET INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS $ (1,020) $ 799
=========== ===========
BASIC NET INCOME (LOSS) PER SHARE $ (0.19) $ 0.16
=========== ===========
DILUTED NET INCOME (LOSS) PER SHARE $ (0.19) $ 0.16
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
3
<PAGE>
CFI PROSERVICES, INC.
dba CONCENTREX INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------------
2000 1999
----------------- -----------------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) applicable to common shareholders $ (1,020) $ 799
Adjustments to reconcile net income (loss) applicable to common
shareholders to cash provided by operating activities:
Depreciation and amortization 2,990 1,965
Interest accreted on mandatory redeemable preferred stock 23 23
Interest accreted on notes payable 182 24
Amortization of debt discount and deferred loan costs 861 -
Deferred income taxes (1,269) -
(Increase) decrease in assets, net of effects from purchase of businesses:
Receivables, net 8,184 2,301
Inventories, net (52) 58
Prepaid expenses and other assets - (122)
Income taxes receivable 928 -
Increase (decrease) in liabilities, net of effects from purchase of
businesses:
Drafts payable 273 386
Accounts payable (2,058) (326)
Accrued expenses (4,294) (4,970)
Deferred revenues (2,927) 4,152
Customer deposits (186) (945)
Income taxes payable - 64
----------------- -----------------
Net cash provided by operating activities 1,635 3,409
Cash flows from investing activities:
Expenditures for property and equipment (1,352) (449)
Proceeds from long-term note receivable 45 37
Cash paid for acquisition of Modern Computer Systems, Inc.
net of cash received - (5,520)
----------------- -----------------
Net cash used in investing activity (1,307) (5,932)
Cash flows from financing activities:
Net proceeds from (payments on) line of credit (200) 262
Payments on long-term debt (215) (159)
Payments on mandatory redeemable preferred stock (26) (26)
Proceeds from issuance of common stock 19 2
Repurchase of common stock - (1,145)
----------------- -----------------
Net cash used in financing activities (422) (1,066)
----------------- -----------------
Decrease in cash and cash equivalents (94) (3,589)
Cash and cash equivalents (including restricted cash):
Beginning of period 1,289 3,589
----------------- -----------------
End of period $ 1,195 $ -
================= =================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE>
CFI PROSERVICES, INC.
dba CONCENTREX INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
OR AS OTHERWISE INDICATED)
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The financial information included herein for the three months ended March 31,
2000 and 1999 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, 1999 is derived from the audited financial statements
contained in the 1999 Annual Report on Form 10-K as filed by CFI ProServices,
Inc., d/b/a Concentrex Incorporated ("Concentrex" or the "Company"). The interim
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's 1999 Annual Report on Form 10-K. The results of operations for the
interim periods presented are not necessarily indicative of the results to be
expected for the full year. Certain prior period amounts have been reclassified
to conform to the current presentation.
NOTE 2. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information is as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------------
2000 1999
----------------- --------------------
<S> <C> <C>
Cash paid during the period for income taxes $ 28 $ 601
Cash paid during the period for interest and dividends 2,091 76
</TABLE>
Noncash investing and financing activities were as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------------
2000 1999
----------------- --------------------
<S> <C> <C>
Tax benefit from exercise of nonqualified stock options $ 3 $ --
Increase in goodwill for accrued acquisition related
contingent royalties 290 102
Issuance of common stock in connection with
acquisition of Modern Computer Systems, Inc. -- 650
Fair value of common stock issued in connection with the
Company's ESSOP 890 --
</TABLE>
5
<PAGE>
NOTE 3. EARNINGS PER SHARE
Following is a reconciliation of basic earnings per share ("EPS") and diluted
EPS:
<TABLE>
<CAPTION>
Three Months Ended March 31, 2000 1999
--------------------------------------- ---------- --------- ----------- --------- --------- ----------
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 $(1,020) 5,285 $(0.19) $ 799 5,040 $0.16
=========== ==========
Effect of dilutive securities:
Stock options -- 111
---------- --------- --------- ---------
DILUTED EPS
-----------
Net income (loss) applicable to
common shareholders $(1,020) 5,285 $(0.19) $ 799 5,151 $ 0.16
=========== ==========
</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 2,135,073 and
446,363 for the three months ended March 31, 2000 and 1999, respectively.
NOTE 4. CLASSIFICATION OF REVENUE
Concentrex has reorganized itself into two product groups: Software Products and
Services Group and e-Commerce Group. Prior period revenues have been
reclassified for all periods included herein to reflect the new product groups.
Total revenues did not change as a result of this reclassification.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO SHOULD BE READ IN
CONJUNCTION WITH THE FOLLOWING DISCUSSION. THIS DISCUSSION AND CERTAIN OTHER
PARTS OF THIS REPORT CONTAIN 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 REPORT. CONCENTREX'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE DISCUSSED HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO
SUCH DIFFERENCES INCLUDE QUARTERLY FLUCTUATIONS IN ORDERS RECEIVED, CHANGES IN
THE FINANCIAL INSTITUTIONS MARKETPLACE AND TECHNOLOGICAL ADVANCES, CHANGES IN
RELATIONSHIPS WITH KEY CUSTOMERS AND PARTNERS, NEED FOR ADDITIONAL CAPITAL,
MANAGEMENT OF GROWTH, SOFTWARE ERRORS AND ADDITIONAL FACTORS DISCUSSED ELSEWHERE
IN THIS REPORT, AS WELL AS IN CONCENTREX'S FILINGS ON FORM 10-K FOR THE YEAR
ENDED DECEMBER 31, 1999 AND IN OTHER FILINGS BY CONCENTREX WITH THE SECURITIES
AND EXCHANGE COMMISSION.
OVERVIEW
CFI ProServices, Inc. (doing business as Concentrex Incorporated pending a
change in the legal name of the company) is a leading provider of
technology-powered solutions to the financial services industry. During 1999 we
reorganized ourselves into two product groups: the Software Products and
Services group and the e-Commerce group. We offer a broad range of traditional
software products and services, a product group that we are both growing and
using to finance our innovative business-to-business e-commerce solutions. Our
Software Products and Services group supports a financial institution's mission
critical functions including back office "core" processing, loan origination,
new account opening, branch automation and cross selling. We support the key
sales functions a financial institution traditionally relies on to make money,
which are usually delivered face-to-face or over the telephone. We believe that
financial institutions will need to offer those same functions over the
Internet. Thus, we have focused our efforts on both Internet banking software
for account servicing and Internet-enabled versions of our traditional software
for lending and account opening. These integrate with other points of customer
contact and enable a financial institution to serve its customers, both in
person and over the Internet, with consistent, integrated solutions.
Our backlog as of March 31, 2000 was $14.4 million, compared to $16.5 million at
March 31, 1999. Our backlog consists of firm signed orders taken and not yet
converted to revenue, but expected to be converted to revenue within the next 12
months. Orders constituting our backlog are subject to changes in delivery
schedules or to cancellation at the option of the purchaser without significant
penalty. The stated backlog is not necessarily indicative of our revenue for any
future period.
7
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth our statements of operations data expressed as a
percentage of total revenue.
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------------
2000 1999
---------------- --------------
<S> <C> <C>
Software Products and Services Group
License Revenue 44.6 % 41.7 %
Service and Support Revenue 36.2 42.3
Other Revenue 8.9 5.7
e-Commerce Group
License Revenue 1.3 2.5
Service and Support Revenue 9.0 7.8
---------------- --------------
Total revenue 100.0 100.0
Gross profit 61.9 61.4
Operating expenses
Sales and marketing 16.4 18.6
Product development 24.4 21.3
General and administrative 15.8 12.2
Goodwill Amortization 3.2 2.1
---------------- --------------
Total operating expenses 59.8 54.2
---------------- --------------
Income from operations 2.1 7.2
Non-operating expense (8.9) (0.0)
---------------- --------------
Income (loss) before income taxes (6.8) 7.2
Provision (benefit) for income taxes (3.8) 3.1
Preferred stock dividend 0.1 0.1
================ ==============
Net income (loss) applicable to common
shareholders (3.1) % 4.0 %
================ ==============
</TABLE>
REVENUE
Total revenue increased $13.0 million, or 64.6%, to $33.0 million for the three
months ended March 31, 2000 compared to $20.0 million for the comparable period
in 1999. During 1999 we reorganized ourselves into two product groups: the
Software Products and Services group and the e-Commerce group. Accordingly, we
have reclassified our operating revenue data for all periods included in this
report to reflect the new groups. Total revenue did not change as a result of
this reclassification.
8
<PAGE>
REVENUE BY GROUP
(IN $MILLIONS)
THREE MONTHS ENDED
MARCH 31,
------------------------
2000 1999
------------ -----------
SOFTWARE PRODUCTS AND SERVICES GROUP
License Revenue $14.7 $8.4
Service & Support Revenue 12.0 8.5
Other Revenue 2.9 1.1
------------ -----------
Group Total 29.6 18.0
E-COMMERCE GROUP
License Revenue 0.4 0.5
Service & Support Revenue 3.0 1.5
------------ -----------
Group Total 3.4 2.0
TOTAL REVENUE $33.0 $20.0
===== =====
SOFTWARE PRODUCTS AND SERVICES GROUP
Software Products and Services license revenue increased $6.3 million, or 75.8%,
to $14.7 million for the three months ended March 31, 2000 from $8.4 million for
the comparable period in 1999. The increase was due primarily to our acquisition
of ULTRADATA Corporation ("ULTRADATA") in August 1999. We also recognized $2.4
million of license revenue in the first quarter of 2000 relating to additional
implementations of our teller software by a customer. The additional
implementations occurred without payments we believe are owed to us. The amount
of revenue we recognized was calculated by multiplying the number of
implementations, as provided to us by personnel of the customer, by our current
per unit list price for such implementations. We are actively pursuing
collection of this amount, and believe we will be successful in those efforts.
Service and support revenue in the Software Products and Services group
increased $3.5 million, or 41.0%, to $11.9 million for the three months ended
March 31, 2000 from $8.5 million for the comparable period in 1999. The increase
resulted primarily from the ULTRADATA acquisition and from an increase in the
installed base of our products. Service and support revenue consists primarily
of recurring software support charges and revenue from training customers in the
use of our products. Substantially all of our software customers subscribe to
support services, which provide for the payment of annual or quarterly
maintenance fees.
Other revenue in the Software Products and Services group increased $1.8
million, or 158.6%, to $3.0 million for the three months ended March 31, 2000
from $1.1 million for the comparable period in 1999. The increase resulted
primarily from the acquisition in May 1999 of MECA Software, LLC ("MECA"), which
added revenue from its legacy personal financial management product and from its
fulfillment operations. We anticipate that revenue from the personal financial
management product will decline in future periods.
9
<PAGE>
E-COMMERCE GROUP
Total revenue in the e-Commerce group increased $1.4 million, or 64.4%, to $3.4
million for the three months ended March 31, 2000 from $2.0 million for the
comparable period in 1999. The increase was principally due to the acquisition
of MECA.
License revenue in the e-Commerce group decreased $0.1 million, or 14.9%, to
$0.4 million for the three months ended March 31, 2000 from $0.5 million for the
comparable period in 1999. The decline resulted principally from the new version
of our home banking product being in beta during the first quarter of 2000 with
no associated revenue. Upon the general release of the product, which we
anticipate will occur in the second quarter of 2000, we will recognize license
revenue associated with implementations of the beta version of the product.
Service and support revenue in the e-Commerce group increased $1.5 million, or
89.5%, to $3.0 million for the three months ended March 31, 2000 from $1.5
million for the comparable period in 1999. The increase resulted primarily from
the acquisition of MECA's technical support operations, and from increased
online bill payment services revenue.
COST OF REVENUE
Cost of revenue increased to $12.6 million, or 38.1% of revenue, for the three
months ended March 31, 2000 compared to the same period in 1999. Gross margin
was 61.9% and 61.4% for the three months ended March 31, 2000 and 1999,
respectively. 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.
Software amortization was $1.0 million for the three months ended March 31, 2000
compared to $0.9 million for the comparable period in 1999. The increase in
amortization is a result of software acquired in connection with acquisitions.
Capitalized software costs net of accumulated amortization were $12.1 million at
March 31, 2000.
As a result of acquisitions, costs associated with royalty payments will
increase in future periods. We are obligated to pay royalties ranging from 3% to
18% of revenue related to certain products acquired in various acquisitions. In
addition, we are obligated to pay MicroBilt Corporation a fixed amount for each
OnLine Branch Automation product customer that converts to our branch automation
products. The royalty obligations generally extend three to five years from the
acquisition date.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses increased to $5.4 million, or
16.4% of revenue for the three months ended March 31, 2000 from $3.7 million, or
18.6% of revenue, for the comparable period in 1999. The percentage decrease in
2000 resulted primarily from the MECA acquisition, which contributed revenue
without commensurate sales and marketing costs. The increases in dollar amount
in 2000 resulted from increased commissions associated with increased revenues,
salary increases, additional personnel and higher advertising costs.
10
<PAGE>
PRODUCT DEVELOPMENT. Product development expenses include costs of enhancing
existing products and developing new products. Product development expenses
increased to $8.0 million, or 24.4% of revenue, for the three months ended March
31, 2000 compared to $4.3 million, or 21.3% of revenue for the comparable period
in 1999. Increases in dollar amount of product development expenses resulted
primarily from increased personnel retained in connection with the 1999 MECA and
ULTRADATA acquisitions, additional costs for integrating acquired products and
accelerating development of our online banking products. We will continue to
commit significant resources to product development efforts.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $5.2
million, or 15.8% of revenue, for the three months ended March 31, 2000 compared
to $2.4 million, or 12.2% of revenue, for the comparable period in 1999. The
increase in dollar amount in 2000 is due mainly to the acquisitions of MECA and
ULTRADATA.
GOODWILL AMORTIZATION
Goodwill acquired in acquisitions is amortized over periods ranging from five to
20 years. Goodwill amortization was $1.2 million and $0.6 million for the three
months ended March 31, 2000 and 1999, respectively. The increase in 2000 is due
principally to the goodwill resulting from the ULTRADATA acquisition. We
recorded approximately $49 million of goodwill in the ULTRADATA acquisition,
which is being amortized over 20 years. Goodwill, net of accumulated
amortization, was $58.2 million and $10.4 million at March 31, 2000 and 1999,
respectively.
INCOME FROM OPERATIONS
Income from operations for the three months ended March 31, 2000 was $0.7
million, or 2.1% of revenue, compared to $1.4 million, or 7.2% of revenue, for
the comparable period in 1999.
NON-OPERATING INCOME (EXPENSE)
Non-operating income (expense), which consists primarily of interest income and
expense, was a net expense of ($3.0) million for the three months ended March
31, 2000 compared to a net expense of $0 for the comparable period in 1999. The
increase in net interest expense in 2000 is attributable to the debt we incurred
to finance the ULTRADATA and MECA transactions.
PROVISION (BENEFIT) FOR INCOME TAXES
Our effective tax rate for the three months ended March 31, 2000 was a benefit
of 56% compared to a provision of 43% for the comparable period in 1999. The
difference between federal and state statutory tax rates and our effective tax
rates results primarily from amortization of nondeductible intangibles
(primarily goodwill) related to acquisitions.
MARKET RISK
We have not entered into any derivative financial instruments for speculative
purposes. We may be exposed to future interest rate changes on our debt. During
1999 we incurred significant indebtedness related to acquisitions. A
hypothetical 10% increase in interest rates on our level of debt existing at
March 31, 2000 would increase cash interest expense by approximately $0.6
million per year. We have purchased an interest rate cap for a substantial
portion of our long-term debt. The interest rate cap will become effective if
the prime rate of interest exceeds 10% per year.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations was $1.6 million for the three months ended
March 31, 2000 compared to $3.4 million for the comparable period in 1999.
Working capital decreased to a deficit of ($3.9) million at March 31, 2000 from
$11.9 million at March 31, 1999. The decrease in working capital 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 for the three months ended March 31, 2000
was $1.3 million compared to $5.9 million for the comparable period in 1999. The
principal use of cash in the 1999 period was the acquisition of certain assets
of Modern Computer Systems, Inc. Expenditures for property and equipment of $1.4
million in the first three months of 2000 were primarily attributable to
investments in infrastructure necessary to accommodate our growth.
Net cash used in financing activities of $0.4 million for the three months ended
March 31, 2000 was principally for payments on long term debt and on our line of
credit.
Days sales outstanding (DSO's) in accounts receivable, including both billed and
unbilled accounts receivable, was 89 days at March 31, 2000 compared to 126 days
at March 31, 1999. The decrease in DSO's in 2000 is principally due to increased
collections efforts. Our project-oriented business often requires unbilled
accounts receivable and milestone billings, both of which often have longer
collection cycles. Unbilled accounts receivable were $6.7 million, or 20.4% of
total accounts receivable, at March 31, 2000 compared to $5.4 million, or 19.4%
of total accounts receivable, at March 31, 1999.
In connection with the MECA and ULTRADATA acquisitions in 1999, we substantially
increased our outstanding debt. At March 31, 2000, we had the following debt
under our loan agreements:
Gross Stated Interest Rate At
Amount March 31, 2000
------ -----------------------
Revolving Line of Credit $ 3.3 million 10.0%
3-year Term A Loan 35.0 million 11.0%
3-year Term B Loan 30.0 million 14.0%
Debt Discount (3.2) million
---------------
Total $ 65.2 million
In connection with the ULTRADATA acquisition, we also issued convertible
subordinated notes with an original face amount of $7.4 million with original
issue discount of $1.9 million. We received gross proceeds of $5.5 million upon
issuance of the notes.
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. As of March 31, 2000, we were in compliance with all
financial covenants. If we do not achieve sufficient revenue in the second
quarter of 2000, we would not remain in compliance with certain of these
financial covenants. Based upon preliminary indications from our lenders, we
believe that we can obtain waivers for such noncompliance if needed. However,
there can be no assurance that such waivers would be provided or, if provided,
would be on terms acceptable to us or our shareholders. Any failure to obtain
any
12
<PAGE>
needed waivers for noncompliance with financial covenants would likely lead to
an event of default under our loan agreements, which could have a material
adverse effect on us. If an event of default occurs, our lenders have several
remedies available including, without limitation, acceleration of all
outstanding indebtedness 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.
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 operations plus a revolving line of credit
up to $15.0 million, subject to borrowing base restrictions related to our
accounts receivable.
From time to time we receive contract claims from our customers and other
parties, including requests for full or partial refunds of moneys paid. Although
there can be no assurance that such claims, either alone or in the aggregate,
will not have a material adverse effect on our results of operations or
financial position, we believe that as of the date of this filing no such claims
will have such an effect. From time to time, we initiate contract claims against
our customers and other parties, including claims for payment of unpaid
invoices.
We may require additional funds to support our 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 us or our shareholders.
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 Year 2000
century change. Likewise, other dates may present problems because of the way
the digits are interpreted. We experienced no material Year 2000 problems with
our products at the century change. Costs incurred through March 31, 2000 to
assess Year 2000 issues were not significant and were funded through operating
cash flows.
Based on information gathered to date, we are not presently aware of any Year
2000 issue that would materially affect our operations, either self-originated
or caused by third-party service vendors or providers. Nevertheless, there can
be no assurance that we will not experience some operating difficulties as a
result of Year 2000 issues going forward. If they occur, these difficulties
could require us to incur unanticipated costs to remedy the problems and, either
individually or collectively, have a material adverse effect on us.
13
<PAGE>
QUARTERLY RESULTS
We have experienced, and expect in the future to experience, significant
quarterly fluctuations in our 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 us and our competitors; our product mix,
including expenses of implementation and royalties related to certain products;
the timing of our 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 our products, including the complexity of
customer implementation of our products; the number of working days in a
quarter; federal and state regulatory events; competitive pricing pressures;
technological changes in hardware platform, networking or communication
technology; changes in company personnel; the timing of our operating
expenditures; specific economic conditions in the financial services industry
and general economic conditions.
Our business has experienced, and is expected to continue to experience, some
degree of seasonality due to our customers' budgeting and buying cycles. Our
strongest revenue quarter in any year is typically our fourth quarter and our
weakest revenue quarter is typically our first quarter. Customers' purchases are
tied closely to their internal budget processes. For some of our 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, our 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, we usually experience increased sales orders in the fourth quarter.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits filed as part of this report are listed below:
EXHIBIT NUMBER AND DESCRIPTION
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 15, 2000 CFI PROSERVICES, INC.
BY: /S/ MATTHEW W. CHAPMAN
----------------------
Matthew W. Chapman
Chairman and Chief Executive Officer
(Principal Executive Officer)
BY: /S/ KURT W. RUTTUM
------------------
Kurt W. Ruttum
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
15
<PAGE>
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-START> Jan-01-2000
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-2000
<PERIOD-END> Mar-31-2000
<CASH> 1,195
<SECURITIES> 0
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<PP&E> 21,484
<DEPRECIATION> 13,377
<TOTAL-ASSETS> 134,947
<CURRENT-LIABILITIES> 47,520
<BONDS> 62,972
725
0
<COMMON> 26,615
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<SALES> 2,961
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<OTHER-EXPENSES> 19,726
<LOSS-PROVISION> 67
<INTEREST-EXPENSE> (3,131)
<INCOME-PRETAX> (2,266)
<INCOME-TAX> (1,269)
<INCOME-CONTINUING> (1,020)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,020)
<EPS-BASIC> (0.19)
<EPS-DILUTED> (0.19)
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