-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ERBrnk/oTHRO+V6XrbG/1yM/UdtLDPTbMJRQ6OZAEij1U564+WCCn+DDqxsm0dKB Yy9+sBA8rg1yJ27HmSYzog== 0000908180-00-000011.txt : 20000516 0000908180-00-000011.hdr.sgml : 20000516 ACCESSION NUMBER: 0000908180-00-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CFI PROSERVICES INC CENTRAL INDEX KEY: 0000908180 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 930704365 STATE OF INCORPORATION: OR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21980 FILM NUMBER: 634644 BUSINESS ADDRESS: STREET 1: 400 S W SIXTH AVE STREET 2: SUITE 200 CITY: PORTLAND STATE: OR ZIP: 97204 BUSINESS PHONE: 5032747280 MAIL ADDRESS: STREET 1: 400 S W SIXTH AVE STREET 2: STE 200 CITY: PORTLAND STATE: OR ZIP: 97204 10-Q 1 PERIOD ENDED 03/31/00 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------------------- FORM 10-Q -------------------------------------- (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended 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) ================================================================================ 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 CFI PROSERVICES, INC. dba CONCENTREX INCORPORATED CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
March 31, December 31, 2000 1999 ------------------ ------------------ 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 ================== ==================
The accompanying notes are an integral part of these consolidated balance sheets 2 CFI PROSERVICES, INC. dba CONCENTREX INCORPORATED CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share data)
Three Months Ended March 31, 2000 1999 ----------- ----------- REVENUE 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 =========== ===========
The accompanying notes are an integral part of these consolidated statements. 3 CFI PROSERVICES, INC. dba CONCENTREX INCORPORATED CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in thousands)
Three Months Ended March 31, ------------------------------------- 2000 1999 ----------------- ----------------- Cash flows from operating activities: 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 $ - ================= =================
The accompanying notes are an integral part of these consolidated statements. 4 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:
Three Months Ended March 31, ----------------------------------------- 2000 1999 ----------------- -------------------- Cash paid during the period for income taxes $ 28 $ 601 Cash paid during the period for interest and dividends 2,091 76
Noncash investing and financing activities were as follows:
Three Months Ended March 31, ----------------------------------------- 2000 1999 ----------------- -------------------- 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 --
5 NOTE 3. EARNINGS PER SHARE Following is a reconciliation of basic earnings per share ("EPS") and diluted EPS:
Three Months Ended March 31, 2000 1999 --------------------------------------- ---------- --------- ----------- --------- --------- ---------- Per Per Share Share BASIC EPS Loss Shares Amount Income Shares Amount --------- ---------- --------- ----------- --------- --------- ---------- 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 =========== ==========
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 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 RESULTS OF OPERATIONS The following table sets forth our statements of operations data expressed as a percentage of total revenue.
Three Months Ended March 31, ------------------------------------- 2000 1999 ---------------- -------------- 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 % ================ ==============
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 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 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 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 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 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 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 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 EX-27 2 EXHIBIT 27
5 1,000 Jan-01-2000 3-MOS Dec-31-2000 Mar-31-2000 1,195 0 36,237 3,483 635 43,589 21,484 13,377 134,947 47,520 62,972 725 0 26,615 (4,001) 134,947 2,961 33,014 1,028 12,584 19,726 67 (3,131) (2,266) (1,269) (1,020) 0 0 0 (1,020) (0.19) (0.19)
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