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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------
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 June 30, 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
CONCENTREX INCORPORATED
(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 5,605,651
(Class) (Outstanding at July 31, 2000)
================================================================================
<PAGE>
CONCENTREX INCORPORATED
FORM 10-Q
<TABLE>
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
<S> <C> <C>
Consolidated Balance Sheets - As of June 30, 2000 and December 31, 1999 2
Consolidated Statements of Operations - Three Months and Six Months Ended June 30, 2000 3
and 1999
Consolidated Statements of Cash Flows - Six Months Ended June 30, 2000 and 1999 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
PART II - OTHER INFORMATION
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
<PAGE>
CONCENTREX INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------------- -------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 139 $ -
Restricted cash 1,318 1,289
Receivables, net of allowances of $3,582 and $3,268 32,592 40,938
Inventory 550 583
Deferred tax asset 2,843 2,843
Prepaid expenses and other current assets 3,246 4,342
Income taxes receivable 2,876 1,653
------------------- -------------------
Total Current Assets 43,564 51,648
Property and equipment, net of accumulated
depreciation of $14,144 and $12,894 8,486 7,532
Software development costs, net of accumulated
amortization of $5,825 and $4,561 4,019 5,283
Purchased software costs, net of accumulated
amortization of $1,512 and $803 7,098 7,808
Goodwill, net of accumulated amortization
of $8,707 and $6,928 56,753 59,133
Deferred tax asset 9,438 9,438
Other assets, net 3,029 3,924
=================== ===================
Total Assets $ 132,387 $ 144,766
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Drafts payable $ - $ 728
Accounts payable 6,231 7,424
Accrued expenses 9,521 15,181
Deferred revenues 15,858 18,026
Customer deposits 5,578 5,823
Line of credit 8,149 3,482
Current portion of long-term debt, less debt discount 62,616 4,570
------------------- -------------------
Total Current Liabilities 107,953 55,234
Commitments and Contingencies
Long-term debt, less current portion 194 59,036
Other long-term liabilities 998 1,399
Convertible Subordinated Notes 5,957 5,647
Mandatory Redeemable Class A Preferred Stock 722 728
Shareholders' Equity:
Series preferred stock, 5,000,000 shares authorized,
none issued and outstanding - -
Common stock, no par value, 10,000,000 shares authorized,
5,411,212 and 5,250,781 shares issued and outstanding 26,929 25,703
Accumulated deficit (10,366) (2,981)
------------------- -------------------
Total Shareholders' Equity 16,563 22,722
------------------- -------------------
Total Liabilities and Shareholders' Equity $ 132,387 $ 144,766
=================== ===================
</TABLE>
The accompanying notes are an integral part of these consolidated balance sheets
2
<PAGE>
CONCENTREX INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ -------------------------------
2000 1999 2000 1999
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
REVENUE
Software Products and Services Group
License Revenue $ 12,779 $ 14,795 $ 27,491 $ 23,164
Service and Support Revenue 11,848 8,102 23,803 16,582
Other Revenue 2,580 1,872 5,541 3,017
e-Commerce Group
License Revenue 387 621 808 1,116
Service and Support Revenue 2,629 2,439 5,594 4,003
------------- ------------- ------------- --------------
Total Revenue 30,223 27,829 63,237 47,882
COST OF REVENUE 13,182 10,259 25,766 18,006
------------- ------------- ------------- --------------
Gross Profit 17,041 17,570 37,471 29,876
OPERATING EXPENSES
Sales and marketing 6,153 4,814 11,565 8,546
Product development 8,547 5,988 16,596 10,267
General and administrative 4,992 4,306 10,209 6,742
GOODWILL amortization 956 406 2,004 816
Acquired in-process research and development - 3,800 - 3,800
------------- ------------- ------------- --------------
Total Operating Expenses 20,648 19,314 40,374 30,171
------------- ------------- ------------- --------------
Loss From Operations (3,607) (1,744) (2,903) (295)
NON-OPERATING INCOME (EXPENSE)
Interest expense (3,717) (211) (6,848) (315)
Interest income 21 49 42 144
Other, net 136 24 276 27
------------- ------------- ------------- --------------
Total Non-operating Income (Expense) (3,560) (138) (6,530) (144)
------------- ------------- ------------- --------------
LOSS BEFORE BENEFIT FROM
INCOME TAXES (7,167) (1,882) (9,433) (439)
BENEFIT FROM INCOME TAXES (825) (926) (2,094) (305)
------------- ------------- ------------- --------------
NET LOSS (6,342) (956) (7,339) (134)
PREFERRED STOCK DIVIDEND 23 23 46 46
------------- ------------- ------------- --------------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (6,365) $ (979) $ (7,385) $ (180)
============= ============= ============= ==============
BASIC NET LOSS PER SHARE $ (1.19) $ (0.19) $ (1.39) $ (0.04)
============= ============= ============= ==============
DILUTED NET LOSS PER SHARE $ (1.19) $ (0.19) $ (1.39) $ (0.04)
============= ============= ============= ==============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
3
<PAGE>
CONCENTREX INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------------
2000 1999
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss applicable to common shareholders $ (7,385) $ (180)
Adjustments to reconcile net loss applicable to common
shareholders to cash provided by (used in) operating activities:
Depreciation and amortization 5,946 4,126
Interest accreted on mandatory redeemable preferred stock 46 46
Interest accreted on notes payable 335 48
Write off of in process research and development - 3,800
Amortization of debt discount and deferred loan costs 1,746 -
(Increase) decrease in assets, net of effects from purchase of businesses:
Receivables, net 8,346 1,909
Inventories, net 33 93
Prepaid expenses and other assets 818 (1,675)
Income taxes receivable (1,220) -
Increase (decrease) in liabilities, net of effects from purchase of
businesses:
Drafts payable (728) -
Accounts payable (1,193) 94
Accrued expenses (5,394) (2,768)
Deferred revenues (2,155) 2,063
Customer deposits 226 (1,471)
Income taxes payable - (473)
----------------- -----------------
Net cash (used in) provided by operating activities (579) 5,612
Cash flows from investing activities:
Expenditures for property and equipment (2,491) (1,299)
Investment in Ultradata stock - (2,658)
Proceeds from long-term note receivable 91 76
Cash paid for acquisition of Modern Computer Systems, Inc.,
net of cash received - (5,520)
Cash received in acquisition of MECA Software, LLC - 1,595
----------------- -----------------
Net cash used in investing activity (2,400) (7,806)
Cash flows from financing activities:
Net proceeds from line of credit 4,667 11,093
Payments on long-term debt (1,487) (7,827)
Payments on mandatory redeemable preferred stock (52) (51)
Proceeds from issuance of common stock 19 905
Repurchase of common stock - (1,145)
----------------- -----------------
Net cash provided by financing activities 3,147 2,975
----------------- -----------------
Increase in cash and cash equivalents 168 781
Cash and cash equivalents (including restricted cash):
Beginning of period 1,289 3,589
----------------- -----------------
End of period $ 1,457 $ 4,370
================= =================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE>
CONCENTREX INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
OR AS OTHERWISE INDICATED)
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The financial information included herein for the three and six months ended
June 30, 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 Company formally changed its name to Concentrex Incorporated in
May 2000. 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
<TABLE>
Supplemental disclosure of cash flow information is as follows:
Six Months Ended June 30,
-----------------------------------------
2000 1999
----------------- --------------------
<S> <C> <C>
Cash paid during the period for income taxes $ 75 $ 1,647
Cash paid during the period for interest and dividends 4,453 171
</TABLE>
<TABLE>
Noncash investing and financing activities were as follows:
Six Months Ended June 30,
-----------------------------------------
2000 1999
----------------- --------------------
<S> <C> <C>
Tax benefit from exercise of nonqualified stock
options $ 3 $ --
Reclassification of long-term debt, less debt
discount, to current liabilities 58,182 --
Decrease in ULTRADATA acquisition goodwill related
to reduction in accrued liabilities 471 --
Increase in goodwill for accrued acquisition related
contingent royalties 494 227
Issuance of common stock in connection with the
acquisition of Modern Computer Systems, Inc. -- 650
Issuance of common stock in connection with the acquisition
of MECA Software, LLC -- 569
Assumption of debt in connection with the acquisition of MECA
Software, LLC -- 7,500
Fair value of common stock issued in connection with the
Company's ESSOP 1,204 --
</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 June 30, 2000 1999
--------------------------------------- ---------- --------- ----------- ---------- -------- ----------
Per Per
Share Share
BASIC EPS Loss Shares Amount Loss Shares Amount
--------- ---------- --------- ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net loss applicable to common
shareholders $ (6,365) 5,365 $ (1.19) $ (979) 5,068 $(0.19)
=========== ==========
Effect of dilutive securities:
Stock options -- --
---------- --------- ---------- --------
DILUTED EPS
-----------
Net loss applicable to common
shareholders $(6,365) 5,365 $ (1.19) $ (979) 5,068 $ (0.19)
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 2000 1999
--------------------------------------- ---------- --------- ----------- ---------- -------- ----------
Per Per
Share Share
BASIC EPS Loss Shares Amount Loss Shares Amount
--------- ---------- --------- ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net loss applicable to common
shareholders $ (7,385) 5,325 $ (1.39) $ (180) 5,054 $(0.04)
=========== ==========
Effect of dilutive securities:
Stock options -- --
---------- --------- ---------- --------
DILUTED EPS
-----------
Net loss applicable to common
shareholders $(7,385) 5,325 $ (1.39) $ (180) 5,054 $ (0.04)
=========== ==========
</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
tables above (as the effect would have been anti-dilutive) were 2,557,411 and
1,103,079 for the three and six months ended June 30, 2000 and 1999,
respectively.
NOTE 4. CLASSIFICATION OF REVENUE
The Company 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.
NOTE 5. LOAN DEFAULT
As of June 30, 2000 the Company was not in compliance with certain financial
covenants under its loan agreements. Because waivers for noncompliance were not
received from the lenders, indebtedness of the Company under the loan agreements
has been classified as current in the accompanying balance sheet. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
6
<PAGE>
NOTE 6. ACQUISITIONS
Effective January 1, 1999 the Company acquired substantially all of the assets
of Modern Computer Systems, Inc. and certain related corporations (collectively,
MCS). MCS offers hardware and software solutions for the back office accounting
needs of community banks and credit unions. The acquisition was accounted for as
a purchase, resulting in approximately $7.0 million of goodwill, intangibles and
purchased software. The purchase price was $6.0 million in cash and $650,000 of
common stock. The operations of MCS have been included in the Company's results
of operations since January 1, 1999.
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 operations of MECA have
been included in the Company's results of operations since May 17, 1999.
Unaudited pro forma results of operations for the three month and six month
periods ended June 30, 1999, assuming the MECA acquisition occurred at the
beginning of 1999 and including the process research and development charge
related to the MECA acquisition in the periods when incurred.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
------------------ ----------------
<S> <C> <C>
Total revenues $ 29,720 $ 56,930
Net loss applicable to common shareholders (798) (153)
Loss per share - Basic (0.16) (0.03)
Loss per share - Diluted $ (0.16) $ (0.03)
</TABLE>
Effective August 13, 1999 Concentrex acquired all of the outstanding common
stock of ULTRADATA Corporation ("ULTRADATA"). ULTRADATA provides information
management software and solutions for relationship-oriented financial
institutions. The acquisition was accounted for as a purchase, resulting in
approximately $53.6 million of goodwill, intangibles and purchased software.
These amounts are being amortized over a period of 6 to 20 years. The purchase
price was $66.3 million, including acquisition-related expenses. The purchase
price was allocated to the estimated fair value of the assets acquired, which
included the expensing of $5.2 million of in-process research and development.
The Company is still obtaining certain data related to the acquisition, and,
accordingly, the purchase price allocation remains open. The operations of
ULTRADATA have been included in the Company's results of operations since August
13, 1999.
NOTE 7. SUBSEQUENT EVENT
On July 17, 2000 the Company and John H. Harland Company ("Harland") reached an
agreement for Harland to purchase all of the outstanding common stock of the
Company and assume all of its obligations. The transaction is in the form of a
tender offer. The tender offer price is $7.00 per share. The transaction is
expected to close in late August 2000.
7
<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
Concentrex Incorporated 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. 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 June 30, 2000 was $15.6 million, compared to $15.9 million at
June 30, 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.
8
<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 JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- -------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Software Products and Services Group
License Revenue 42.3 % 53.2 % 43.5 % 48.4 %
Service and Support Revenue 39.2 29.1 37.6 34.6
Other 8.5 6.7 8.8 6.3
e-Commerce Group
License Revenue 1.3 2.2 1.3 2.3
Other 8.7 8.8 8.8 8.4
--------- --------- --------- ---------
Total revenue 100.0 100.0 100.0 100.0
Gross profit 56.4 63.1 59.3 62.4
Operating expenses
Sales and marketing 20.4 17.3 18.3 17.8
Product development 28.3 21.5 26.2 21.4
General and administrative 16.5 15.5 16.1 14.2
Amortization of intangibles 3.2 1.5 3.2 1.7
In process research and
development 0.0 13.6 0.0 7.9
--------- --------- --------- ---------
Total operating expenses 68.3 69.4 63.8 63.0
--------- --------- --------- ---------
Loss from operations (11.9) (6.3) (4.6) (0.6)
Non-operating expense (11.8) (0.5) (10.3) (0.3)
--------- --------- --------- ---------
Loss before income taxes (23.7) (6.8) (14.9) (0.9)
Benefit from income taxes (2.7) (3.4) (3.3) (0.6)
Preferred stock dividend 0.1 0.1 0.1 0.1
--------- --------- --------- ---------
Net loss applicable to common
shareholders (21.1)% (3.5) % (11.7) % (0.4) %
========= ========= ========= =========
</TABLE>
REVENUE
Total revenue increased $2.4 million, or 8.6%, to $30.2 million for the three
months ended June 30, 2000 compared to $27.8 million for the comparable period
in 1999. Total revenue increased $15.3 million, or 32.1%, to $63.2 million for
the six months ended June 30, 2000 compared to $47.9 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.
9
<PAGE>
REVENUE BY GROUP
(IN $MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------- ----------------------
2000 1999 2000 1999
------------ ---------- --------- ----------
<S> <C> <C> <C> <C>
SOFTWARE PRODUCTS AND SERVICES GROUP
License Revenue $12.8 $14.8 $27.5 $23.2
Service & Support Revenue 11.8 8.1 23.8 16.6
Other Revenue 2.6 1.9 5.5 3.0
------------ ---------- --------- ----------
Group Total 27.2 24.8 56.8 42.8
E-COMMERCE GROUP
License Revenue 0.4 0.6 0.8 1.1
Service & Support Revenue 2.6 2.4 5.6 4.0
------------ ---------- --------- ----------
Group Total 3.0 3.0 6.4 5.1
TOTAL REVENUE $30.2 $27.8 $63.2 $47.9
===== ===== ===== =====
</TABLE>
SOFTWARE PRODUCTS AND SERVICES GROUP
Software Products and Services license revenue decreased $2.0 million, or 13.6%,
to $12.8 for the three month period ended June 30, 2000 from $14.8 million in
the comparable period in 1999. For the six month period ended June 30, 2000
license revenue in the Software Products and Services group increased $4.3
million, or 18.7%, to $27.5 million from $23.2 million for the respective
comparable period in 1999. The increases were due primarily to our acquisition
of ULTRADATA Corporation ("ULTRADATA") in August 1999.
Service and support revenue in the Software Products and Services group
increased $3.7 million, or 46.2%, to $11.8 million for the three months ended
June 30, 2000 from $8.1 million for the comparable period in 1999. Service and
support revenue in the Software Products and Services group increased $7.2
million, or 43.6%, to $23.8 million for the six months ended June 30, 2000 from
$16.6 million for the comparable period in 1999. The increases 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 $0.7
million, or 37.8%, to $2.6 million for the three months ended June 30, 2000 from
$1.9 million for the comparable period in 1999. For the six months ended June
30, 1999, other revenue in the Software Products and Services group increased
$2.5 million, or 83.6%, to $5.5 million from $3.0 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.
10
<PAGE>
E-COMMERCE GROUP
Total revenue in the e-Commerce group was unchanged at $3.0 million for the
three months ended June 30, 2000 compared to the comparable period in 1999.
Total revenue increased $1.3 million, or 25.0%, to $6.4 million for the six
months ended June 30, 2000 compared to $5.1 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 $0.2 million, or 37.7%, to
$0.4 million for the three months ended June 30, 2000 from $0.6 million for the
comparable period in 1999. License revenue in the e-Commerce group decreased
$0.3 million, or 27.6%, to $0.8 million for the six months ended June 30, 2000
from $1.1 million for the comparable period in 1999. Service and support revenue
in the e-Commerce group increased $0.2 million, or 7.8%, to $2.6 million for the
three months ended June 30, 2000 from $2.4 million for the comparable period in
1999. Service and support revenue in the e-Commerce group increased $1.6
million, or 39.7%, to $5.6 million for the six months ended June 30, 2000 from
$4.0 million for the comparable period in 1999. The increases resulted primarily
from the acquisition of MECA's technical support operations.
COST OF REVENUE
Cost of revenue increased to $13.2 million, or 43.6% of revenue and $25.8
million, or 40.7% of revenue for the three and six month periods respectively,
ended June 30, 2000 compared to the same periods in 1999. Gross profit was 56.4%
and 63.1% for the three months ended June 30, 2000 and 1999, respectively and
59.3% and 62.4% for the six months ended June 30, 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 and $2.0 million for the three and six
month periods ended June 30, 2000 respectively, compared to $0.8 million and
$1.6 million for the respective comparable periods in 1999. The increase in
amortization is a result of software acquired in connection with acquisitions.
Capitalized software costs, net of accumulated amortization, were $11.1 million
at June 30, 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 $6.2 million, or
20.4% of revenue, for the three month period and to $11.6 million, or 18.3% of
revenue, for the six month period ended June 30, 2000 compared to $4.8 million,
or 17.3% of revenue, and $8.5 million, or 17.8% of revenue, in the respective
comparable periods of 1999. The increases in dollar amount in 2000 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
$8.5 million, or 28.3% of revenue, and $16.6 million, or 26.2% of revenue,
respectively, for the three month and six month periods ended June 30, 2000,
compared to $6.0 million, or 21.5% of revenue, and $10.3 million, or 21.4% of
revenue, respectively, in the same periods in 1999. Increases in dollar amount
of product development expenses resulted primarily from increased personnel
retained in connection with the 1999 MECA and
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ULTRADATA acquisitions, additional costs for integrating acquired products and
accelerating development of our online banking products. We plan to continue to
commit significant resources to product development efforts.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $5.0
million, or 16.5% of revenue, for the quarter ended June 30, 2000 and $10.2
million, or 16.1% of revenue, for the first six months of 1999 compared to $4.3
million, or 15.5% of revenue, and $6.8 million, or 14.2% of revenue,
respectively, for the same periods in 1999. The increase in dollar amount in
2000 is due mainly to the acquisitions of MECA and ULTRADATA. Results for the
three and six month periods ending June 30, 2000 include the reversal of
approximately $1.0 million in previously accrued bonuses. It was determined in
the quarter ended June 30, 2000 that these amounts would not be paid.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. In connection with the acquisition
of MECA in May of 1999, the Company recorded expense of $3.8 million in the
second quarter of 1999 for in-process 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 appraisal and
represent those efforts in process at the date 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.
GOODWILL AMORTIZATION
Goodwill acquired in acquisitions is amortized over periods ranging from five to
20 years. Goodwill amortization was $1.0 million and $2.0 million, respectively,
for the three and six month periods ended June 30, 2000 compared to $0.4 million
and $0.8 million for the comparable periods in 1999. 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 $56.8 million and $10.2 million at June 30, 2000 and 1999,
respectively.
LOSS FROM OPERATIONS
Loss from operations for the three and six month periods ended June 30, 2000 was
($3.6) million, or 11.9% of revenue and ($2.9) million, or 4.6% of revenue
respectively, compared to ($1.7) million, or 6.3% of revenue, and ($0.3)
million, or 0.6% of revenue for the comparable periods in 1999.
NON-OPERATING INCOME (EXPENSE)
Non-operating income (expense), which consists primarily of interest expense,
was a net expense of ($3.6) million and ($6.5) million for the three and six
month periods ended June 30, 2000 compared to a net expense of ($0.1) for the
comparable periods in 1999. The increase in net interest expense in 2000 is
attributable to the debt we incurred to finance the ULTRADATA and MECA
transactions.
BENEFIT FOR INCOME TAXES
Our effective tax rate for the three and six month periods ended June 30, 2000
was a benefit of 11.5% and 22.2% respectively, compared to a benefit of 49.2%
and 69.6% for the comparable periods 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
June 30, 2000 would increase cash interest expense by approximately $0.9 million
per year. We have
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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.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operations was $0.6 million for the six months ended June 30,
2000 compared to net cash provided by operations of $5.6 million for the
comparable period in 1999. The decrease was primarily due to the increased loss
in 2000. Working capital decreased to a deficit of ($64.4) million at June 30,
2000 from a deficit of ($3.6) million at December 31, 1999. The decrease in
working capital occurred principally because the debt incurred to finance the
MECA and ULTRADATA acquisitions has been classified as current liabilities as of
June 30, 2000 due to the occurrence of defaults under certain financial
covenants in our loan agreements. See Note 5 of Notes to Consolidated Financial
Statements.
Net cash used in investing activities for the six months ended June 30, 2000 was
$2.4 million compared to $7.8 million for the comparable period in 1999.
Expenditures for property and equipment of $2.5 million in the first six months
of 2000 were primarily attributable to investments in infrastructure necessary
to accommodate our growth.
Net cash provided in financing activities of $3.1 million for the six months
ended June 30, 2000 was principally proceeds on our line of credit of $4.7
million offset by payments on long-term debt of ($1.5) million.
Days sales outstanding (DSO's) in accounts receivable, including both billed and
unbilled accounts receivable, was 97 days at June 30, 2000 compared to 100 days
at June 30, 1999. Our project-oriented business often requires unbilled accounts
receivable and milestone billings, both of which often have longer collection
cycles. Unbilled accounts receivable were $6.3 million, or 19.4% of total
accounts receivable, at June 30, 2000 compared to $7.1 million, or 22.9% of
total accounts receivable, at June 30, 1999.
In connection with the MECA and ULTRADATA acquisitions in 1999, we substantially
increased our outstanding debt. At June 30, 2000, we had the following debt
under our loan agreements:
Gross Stated Interest Rate At
Amount June 30, 2000
---------------- -----------------------
Revolving Line of Credit $ 8.1 million 10.5%
3-year Term A Loan 34.0 million 11.5%
3-year Term B Loan 30.0 million 14.5%
Debt Discount (2.5) million
---------------
Total $ 69.6 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. As of June 30, 2000, we were not in compliance with certain
financial covenants. As a result, our lenders have communicated to us that they
believe we are in default under our loan agreements and that they have elected,
for the time being, to charge us a default rate of interest beginning July 1,
2000. The default rate of interest is 4 percentage points higher than the
interest rate would otherwise be. As a result, the stated rate of interest for
our debt, including the default rate provisions, is now 14.5% for the Revolving
Line of Credit, 15.5% for the Term A Loan and 19.5% for the Term B Loan.
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On July 17, 2000 the Company and John H. Harland Company ("Harland") reached an
agreement for Harland to purchase all of the outstanding common stock of the
Company and assume all of its obligations. The transaction is in the form of a
tender offer. The tender offer price is $7.00 per share.
We anticipate that the transaction will close in late August 2000. We anticipate
that Harland will pay off all outstanding indebtedness under our loan agreements
soon after closing, and we have provided notice of early payment to the lenders
in anticipation of that event. However, if for any reason the transaction with
Harland does not close, the lenders may exercise additional remedies they have
under the loan agreements, including without limitation, acceleration of all
outstanding indebtedness. In such an event, our options would include attempting
to renegotiate the terms of our loans with the lenders, attempting to
renegotiate our transaction with Harland, and filing for protection under
federal bankruptcy law. The Company has been advised by its independent public
accountants that if these uncertainties are not resolved prior to completion of
their audit of the Company's financial statements for the year ending December
31, 2000, their auditors' report on those financial statements would be modified
for a going concern uncertainty.
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 will 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 financing 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 June 30, 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 product related Year 2000 issue that would materially affect our operations,
either self-originated or caused by third-party service vendors or providers.
We do believe that concerns over Y2K have caused customers to materially suspend
purchases of software beginning in September 1999, and that this effect has
resulted in the major shortfalls of revenues that the Company has faced since
then.
There can be no assurance that we will not experience product related Year 2000
problems or further Year 2000 impact on sales going forward. If they occur,
these difficulties could cause us
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to incur unanticipated costs to remedy the problems or suffer reduced revenues,
and, either individually or collectively, have a material adverse effect on us.
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 3. DEFAULTS UPON SENIOR SECURITIES
As of June 30, 2000, the Company was not in compliance with certain financial
covenants under its loan agreements. See Note 5 of Notes to Consolidated
Financial Statements and "Management's Discussion and Analysis of Financial
Condition and Operations -- Liquidity and Capital Resources."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of the shareholders of the Company was held on May 19, 2000
at which the following actions were taken:
1. The shareholders elected three nominees for Class 1 Director to the Board of
Directors of the Company. The three Class 1 Directors elected, along with the
voting results, are as follows:
<TABLE>
<CAPTION>
Name Voting No. of Shares Voting For No. of Shares Witheld
----------- ------------------------ ---------------------
<S> <C> <C>
Matthew W. Chapman 3,571,318 499,651
Frank E. Brawner 3,947,708 123,261
Robert B. Witt 3,949,798 121,171
</TABLE>
2. The shareholders approved an amendment to the Company's Amended and Restated
Articles of Incorporation changing the Company's name to Concentrex Incorporated
(4,037,730 shares were voted affirmatively, 30,134 shares were voted negatively,
3,105 shares abstained from voting and there were no broker non-votes).
3. The shareholders approved the appointment of Arthur Anderson LLP as the
independent accountants of the Company for the year ending December 31, 2000
(4,029,033 shares were voted affirmatively, 40,392 shares were voted negatively
and 1,544 shares abstained from voting).
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
Concentrex filed a report on Form 8-K with the Securities and Exchange
Commission on July 17, 2000 relating to the execution of an Agreement and Plan
of Merger with John H. Harland Company ("Harland") and a tender offer from
Harland to Concentrex's shareholders.
Concentrex filed a report on Form 8-K with the Securities and Exchange
Commission on July 27, 2000 relating to the commencement of Harland's tender
offer.
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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: August 14, 2000 CONCENTREX INCORPORATED
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)
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