-----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, DzoWbTD+LovKZFgbp/GfJXOhW+2xlJxUw4B17Q8jeUpFCll+lrVvX5nCxThikSx4 Nuq/NTW8t+R5rljYmxOpMQ== 0000908180-98-000003.txt : 19980508 0000908180-98-000003.hdr.sgml : 19980508 ACCESSION NUMBER: 0000908180-98-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980507 SROS: NASD 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: 98612327 BUSINESS ADDRESS: STREET 1: 400 S W SIXTH AVE STREET 2: SUITE 200 CITY: PORTLAND STATE: OR ZIP: 97204 BUSINESS PHONE: 5037909299 MAIL ADDRESS: STREET 1: 400 S W SIXTH AVE STREET 2: STE 200 CITY: PORTLAND STATE: OR ZIP: 97204 10-Q 1 PERIOD ENDING 03/31/98 ========================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------- FORM 10-Q ------------------------- [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-21980 CFI PROSERVICES, INC. (Exact name of registrant as specified in its charter) Oregon 93-0704365 (State or other jurisdiction of (I.R.S. Employer incorporation Identification No.) or organization) 400 SW Sixth Avenue, Portland, Oregon 97204 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 503-274-7280 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common stock without par value 5,002,508 (Class) (Outstanding at April 24, 1998) The index to exhibits appears on page 26 of this document. ============================================================================ CFI PROSERVICES, INC. FORM 10-Q INDEX PART I - FINANCIAL INFORMATION Page Item 1. Financial Statements Consolidated Balance Sheets - March 31, 1998 and December 31, 2 1997 Consolidated Statements of Income - Three Months Ended March 31, 1998 and 1997 3 Consolidated Statements of Cash Flows - Three Months Ended March 31, 1998 and 1997 4 Notes to Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 24 Signatures 25 1 CFI PROSERVICES, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
March 31, December 31, 1998 1997 --------- --------- ASSETS Current Assets: Cash and cash equivalents $ 699 $ 20 Receivables, net of allowances of $2,552 and $2,880 26,660 32,059 Inventory 365 297 Deferred tax asset 1,307 1,307 Prepaid expenses and other current assets 2,073 1,928 ------- ------- Total Current Assets 31,104 35,611 Property and Equipment, net of accumulated depreciation of $8,431 and $7,855 4,954 5,211 Software Development Costs, net of accumulated amortization of $1,269 and $735 9,812 9,856 Other Intangibles, net of accumulated amortization of $3,629 and $3,227 5,362 5,689 Other Assets, including Deferred Taxes 1,105 1,175 ======= ======= Total Assets $52,337 $57,542 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 1,822 $ 2,119 Accrued expenses 3,367 5,362 Deferred revenues 10,220 12,498 Customer deposits 1,441 1,715 Current portion of bank line of credit 22 5,310 Current portion of long-term debt 249 295 Income taxes payable 732 1,125 ------- ------- Total Current Liabilities 17,853 28,424 Deferred Tax Liability 197 197 Commitments and Contingencies Long-Term Debt, less current portion 6,055 2,232 ------- ------- Total Liabilities 24,105 30,853 Mandatory Redeemable Class A Preferred Stock 744 746 Shareholders' Equity: Series preferred stock, 5,000,000 shares authorized, none issued and outstanding -- -- Common stock, no par value, 10,000,000 shares authorized and 5,002,308 and 4,925,423 shares issued and outstanding 19,410 18,865 Retained earnings 8,078 7,078 ------- ------- Total Shareholders' Equity 27,488 25,943 ------- ------- Total Liabilities and Shareholders' Equity $52,337 $57,542 ======= =======
The accompanying notes are an integral part of these consolidated balance sheets. 2 CFI PROSERVICES, INC. CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share data)
Three Months Ended March 31, ------------------- 1998 1997 ------- ------- REVENUE Software license fees $ 10,326 $ 8,257 Service and Support 7,093 6,564 Other 1,632 1,181 -------- -------- Total Revenue 19,051 16,002 COST OF REVENUE 6,748 5,629 -------- -------- Gross Profit 12,303 10,373 OPERATING EXPENSES Sales and marketing 4,375 3,442 Product development 3,182 2,947 General and administrative 2,543 1,751 Amortization of intangibles 296 313 -------- -------- Total Operating Expenses 10,396 8,453 -------- -------- Income from Operations 1,907 1,920 NON-OPERATING INCOME (EXPENSE) Interest expense (102) (89) Interest income 51 70 Cancelled stock offering costs -- (487) Other, net (28) -- -------- -------- Total Non-operating Expense (79) (506) -------- -------- INCOME BEFORE PROVISION FOR INCOME TAXES 1,828 1,414 PROVISION FOR INCOME TAXES 804 622 -------- -------- NET INCOME 1,024 792 PREFERRED STOCK DIVIDEND 24 24 -------- -------- NET INCOME APPLICABLE TO COMMON SHAREHOLDERS $ 1,000 $ 768 ======== ======== BASIC NET INCOME PER SHARE $ 0.20 $ 0.16 ======== ======== DILUTED NET INCOME PER SHARE $ 0.19 $ 0.15 ======== ========
The accompanying notes are an integral part of these consolidated statements. 3 CFI PROSERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Three Months Ended March 31, ---------------- 1998 1997 ------ ------ Cash flows from operating activities: Net income applicable to common shareholders $ 1,000 $ 768 Adjustments to reconcile net income applicable to common shareholders to cash provided by operating activities: Depreciation and amortization 1,511 1,474 Payments made on mandatory redeemable preferred stock, net (2) (2) Interest accreted on note payable 23 -- Equity in losses attributable to joint venture 82 -- (Increase) decrease in assets Receivables, net 5,399 3,142 Income taxes receivable -- (228) Inventories, net (68) (33) Prepaid expenses and other assets (24) (243) Increase (decrease) in liabilities Drafts payable -- (332) Accounts payable (297) 42 Accrued expenses (2,069) (2,396) Deferred revenues (2,278) (1,064) Customer deposits (274) 134 Income taxes payable (374) (46) ------ ------ Net cash provided by operating activities 2,629 1,216 Cash flows from investing activities: Expenditures for property and equipment (319) (897) Software development costs capitalized (490) (1,507) Investment in joint venture (133) -- ------ ------ Net cash used in investing activity (942) (2,404) Cash flows from financing activities: Net proceeds from (payments on) line of credit (1,288) 1,974 Payments on notes payable (50) (934) Payments on long-term debt (196) (122) Proceeds from issuance of common stock 526 270 ------ ------ Net cash provided by (used in) financing activities (1,008) 1,188 ------ ------ Increase in cash and cash equivalents 679 -- Cash and cash equivalents: Beginning of period $ 20 $ -- ------ ------ End of period $ 699 $ -- ====== ======
The accompanying notes are an integral part of these consolidated statements. 4 CFI PROSERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 month periods ended March 31, 1998 and 1997 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, 1997 is derived from the audited financial statements contained in the 1997 Annual Report on Form 10-K as filed by CFI ProServices, Inc. (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 1997 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. NOTE 2. LINE OF CREDIT Effective March 1, 1998, the Company negotiated to increase the amount of credit available under its line of credit from the lesser of 50% of accounts receivable or $9 million to the lesser of 50% of accounts receivable or $10.0 million and to change the expiration date to May 1, 2000. Total borrowings under the line of credit at March 31, 1998 were $4.022 million. Of the total borrowings, $4.0 million has been classified as long-term debt as the Company does not intend to repay this portion within the next 12 months. NOTE 3. SUPPLEMENTAL CASH FLOW INFORMATION Supplemental disclosure of cash flow information is as follows: Three Months Ended March 31, ----------------------------- 1998 1997 ------------ -------------- Cash paid during the period for income taxes $ 1,179 $ 324 Cash paid during the period for interest and dividends 113 46 Noncash investing and financing activities were as follows: Three Months Ended March 31, ----------------------------- 1998 1997 ------------ -------------- Tax benefit from exercise of nonqualified stock options $ 19 $ 412 Increase in goodwill for accrued acquisition related contingent royalties 74 -- Reclassification of bank line of credit to long-term debt 4,000 -- 5 NOTE 4. EARNINGS PER SHARE Basic earnings per share (EPS) and diluted EPS are computed using the methods prescribed by Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). Basic EPS is calculated using the weighted average number of common shares outstanding for the period and diluted EPS is computed using the weighted average number of common shares and dilutive common equivalent shares outstanding. Prior period amounts have been restated to conform with the presentation requirements of SFAS 128. Following is a reconciliation of basic EPS and diluted EPS: Period Ended March 31, 1998 1997 -------------------------- -------------------- -------------------- (in thousands, except per share data) Per Per Share Share Basic EPS Income Shares Amount Income Shares Amount --------- --------------------- -------------------- Net income applicable to Common Shareholders $1,000 4,990 $0.20 $768 4,872 $0.16 ===== ===== Effect of Dilutive Securities Stock Options - 165 - 283 ------------- ------------ Diluted EPS ----------- Net income applicable to Common Shareholders $1,000 5,155 $0.19 $ 768 5,155 $0.15 ===== ===== The number of options to purchase shares of common stock that were excluded from the table above (as the effect would have been anti-dilutive) were 218,000 and 94,000 for the periods ended March 31, 1998 and 1997, respectively. 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 CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. THE CAUTIONARY STATEMENTS MADE IN THIS DISCUSSION SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR IN THIS FILING. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED IN THIS REPORT, AS WELL AS IN THE COMPANY'S REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 AND OTHER FILINGS BY THE COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION. OVERVIEW CFI ProServices, Inc. (CFI or the Company) is a leading provider of customer service software products and services to financial institutions. The Company combines its technology, banking, and legal expertise to deliver knowledge-based software solutions that enable institutions to simplify key business processes such as sales and service, improve productivity, strengthen customer relationships, and maintain compliance with both internal business policies and external government regulations. More than 5,500 financial institutions have licensed one or more of the Company's products. During 1993 substantially all of the Company's revenue was derived from its Laser Pro and Deposit Pro products. Today, the Company licenses more than 20 products organized into three product groups: lending, retail delivery and connectivity software. Due to its product diversification efforts, the Company is now less reliant on the Laser Pro and Deposit Pro products. For the quarter ended March 31, 1998, approximately 44% of the Company's revenue came from products other than Laser Pro and Deposit Pro. CFI generates recurring revenue from software maintenance agreements. For the quarter ended March 31, 1998, service and support fees revenue accounted for approximately 37% of total revenue. Substantially all software customers subscribe to the Company's service and support programs, which provide ongoing product enhancements and, where applicable, regulatory compliance updates. The Company's cost structure is relatively fixed and the cost of generating revenue, in aggregate, does not vary significantly with changes in revenue. As a result, the Company typically generates greater profit margins from incremental sales once fixed costs are covered. Conversely, any failure to achieve revenue targets in a particular period would adversely affect profit margins for that period. The Company believes that sales to larger banks will constitute a higher percentage of total revenue in future periods. Transactions with these larger banks are typically of greater scope, usually involve a greater sales effort over a longer period of time, and require more customization and prolonged acceptance testing. This project oriented business tends to cause growth in unbilled accounts receivable resulting from the use of percentage of 7 completion accounting, deferred payment terms and increased collection times for billed accounts receivable. These factors, in turn, result in higher days sales outstanding (DSO) in accounts receivable. The Company's backlog as of March 31, 1998 was approximately $13.0 million, as compared to approximately $15.2 million and $10.8 million at December 31, 1997 and March 31, 1997, respectively. CFI's backlog consists of orders taken and not yet converted to revenue, but expected to be converted to revenue within 12 months. Orders constituting the Company's backlog are subject to changes in delivery schedules or to cancellation at the option of the purchaser without significant penalty. The stated backlog is not necessarily indicative of the Company's revenue for any future period. RISK FACTORS POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS. The Company has experienced, and expects in the future to experience, significant quarterly fluctuations in its results of operations. These fluctuations may be caused by various factors, including, among others: the size and timing of product orders and shipments; the timing and market acceptance of new products and product enhancements introduced by the Company and its competitors; the Company's product mix, including expenses of implementation and royalties related to certain products; the timing of the Company's completion of work under contracts accounted for under the percentage of completion method; customer order deferrals in anticipation of new products; aspects of the customers' purchasing processes, including the evaluation, decision-making and acceptance of products within the customers' organizations; factors affecting the sales process for the Company's products, including the complexity of customer implementation of the Company's products; the number of working days in a quarter; federal and state regulatory events; competitive pricing pressures; technological changes in hardware platform, networking or communication technology; changes in Company personnel; the timing of the Company's operating expenditures; specific economic conditions in the financial services industry and general economic conditions. The Company typically ships or installs many of its products within three months of receipt of an order. As a result, software license fees in any quarter are substantially dependent on orders booked in that quarter or the previous quarter. In addition, the Company has generally recognized a substantial portion of its revenue in the last month of each quarter, with this revenue concentrated in the last weeks of the quarter. The Company's results of operations may also be affected by seasonal trends, including the tendency of some customers to complete purchases of products in the quarter ended December 31 or not to implement new orders in the quarter ended March 31. Furthermore, during typical vacation periods, key decision-making personnel at prospect financial institutions may not be available, which can adversely affect revenue for such periods. Because the Company's operating expenses are based on anticipated revenue levels and a high percentage of these expenses are relatively fixed, a small variation in the timing of recognition of specific revenue items can cause significant variations in operating results from quarter to quarter. Due to all of the foregoing factors, it is possible that in some future quarter the Company's operating results may differ from the 8 expectations of public market analysts and investors. In such event, the price of the Company's Common Stock would likely be affected. Accordingly, the Company believes that quarter-to-quarter comparisons of its results of operations should not be relied upon as an indication of future performance. UNCERTAINTY OF MARKET; PRODUCT ACCEPTANCE. The market for software products and services to financial institutions is evolving and the Company's success is, in large part, dependent on the continuing development of this market. Although the Company believes that its existing products compete effectively with competitors' products, some of the Company's products have been licensed to only a few customers or, as to any specific customer, may be used only in a part of that customer's organization. A significant part of the Company's business strategy depends on financial institutions' adoption of new technologies in handling functions that previously may have been performed without the use of computers or with more rudimentary software applications. There can be no assurance that banks and other financial institutions will adopt new technologies required for, or that the Company's products will otherwise achieve, broad acceptance in this evolving market. In some instances, banks and other financial institutions may be reluctant to consider transitioning to some of the Company's products without first making significant decisions regarding the procurement or upgrade of computer systems or operating systems. In the event that the market for software solutions being offered by the Company should fail to develop, or that the Company's products should fail to succeed in this market, the Company's business, operating results and financial condition would be materially adversely affected. Furthermore, market acceptance of the Company's products will also depend on the Company's ability to ensure that its products operate together with other products offered by the Company, and with the products of other major service providers and vendors of hardware and software used in the financial services industry. In addition, a significant part of the Company's revenues are derived from continued support of the software after the initial sale and are in some cases based on per-transaction or per-user pricing. There can be no assurance that such pricing structures will continue to be accepted by customers of the Company. DEPENDENCE ON HOST PROCESSOR RELATIONSHIPS. The Company believes that market acceptance of its products is based in significant part on the ability of the products to share information with a financial institution's host processor system, or with the host processor systems of vendors providing processing services to such institution. The Company has developed significant expertise with most available host processor systems and the methods necessary to transfer data to and from such systems. Although the Company generally is able to develop interfaces that allow its products to operate effectively with host processor systems, integration is optimized where the Company and the provider of a host processor system cooperatively share information regarding the respective products' technologies, development schedules and enhancements. CFI has had varying degrees of success in establishing such relationships with host providers. In some cases, providers of host processor systems or processing services are or may become competitors of the Company with respect to one or more of the Company's products. As such, the Company is not always able to obtain access to host system technology necessary for developing optimal third-party system integration. There can be 9 no assurance that the Company will be able to establish and maintain adequate relationships with important providers of host processor systems or processing services in the future. Failure to do so could have a material adverse effect on the business, results of operations and financial condition of the Company. UNCERTAINTIES ASSOCIATED WITH THE INTEGRATION OF ACQUISITIONS AND RISKS OF NEW BUSINESS VENTURES. One of the Company's strategies is to continue to acquire complementary businesses, products and technologies, as well as to enter into new business ventures, including minority equity investments and joint ventures. Acquisitions of companies, businesses, products, or technologies, as well as entry into new business ventures, require the dedication of management resources in order to achieve the strategic objectives of the acquisitions and ventures. No assurance can be given that difficulties encountered in integrating the operations of businesses previously acquired or in the future acquired or entered into by the Company will be overcome, or that the specific benefits expected from integration of any particular acquisition or any new business venture, including the addition of new products and technologies, or increased sales and growth of the Company's customer base, will be achieved or that any anticipated cost savings will be realized. The difficulties of combining acquired operations into the Company have been, and, along with any entry into new business ventures in the future, can be expected to be exacerbated by the necessity of coordinating geographically separated organizations. The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of the Company's business and operations, including those of the businesses acquired or new business ventures. Difficulties encountered in connection with the Company's acquisition of businesses, products or technologies, and new business ventures, including those previously acquired, could have an adverse effect on the business, results of operations and financial condition of the Company. There can be no assurance that integration of businesses, products or technologies previously acquired by the Company, or acquired or entered into in the future, will be accomplished without having an adverse impact on the business, results of operations and financial condition of the Company or that the benefits or strategic objectives expected from any such integration or new business venture will be realized. EARLY STAGE MARKET FOR ELECTRONIC DELIVERY PRODUCTS. The electronic banking market, and in particular the home banking portion of the market, is at a very early stage of development, is rapidly evolving, and is characterized by an increasing number of market entrants who have introduced or are developing competing products and services. As is typical for a new and evolving industry, demand and market acceptance for recently introduced products and services are subject to a high level of uncertainty. In particular, while the number of customers utilizing the Internet or private-dial connection as a vehicle for banking has grown rapidly, it remains limited and it is not known whether these markets will continue to develop such that a sufficient demand for the Company's software will emerge and be sustainable. The use of such electronic delivery channels by the banking community and its customers will require broad acceptance of new methods of conducting business and exchanging information. In particular, bankers and financial institutions with established methods of handling funds may be reluctant to accept commercial transactions over the Internet. Moreover, concerns regarding the security 10 and confidentiality of Internet transactions may inhibit the growth of Internet commerce generally and as a result impact market acceptance of the Company's products. The Company's business will include procedures and services that have only recently been developed in the emerging electronic delivery market. The use of the Company's products is dependent, in part, upon the continued development of an industry and infrastructure for providing secure Internet access and carrying Internet traffic. In addition, the Internet may not prove to be a viable commercial marketplace, because of inadequate development of the necessary infrastructure, such as undercapacity, a reliable network backbone or timely development of complementary products, including high speed modems. There can be no assurance that commerce over the Internet will become generally adopted. If the market fails to develop or develops more slowly than expected, the infrastructure for the Internet is not adequately developed, or the Company's home banking products and services do not achieve market acceptance by a significant number of individuals, businesses and financial institutions, the Company's business, financial condition and operating results could be materially and adversely affected. POSSIBLE NEED FOR ADDITIONAL FINANCING. The Company believes that the funds expected to be generated by the Company's operations and a $10 million (maximum) revolving line of credit will provide the Company with sufficient funds to finance its operations. However, if additional funds were needed to support working capital requirements, or to complete acquisitions, the Company would seek to raise such additional funds through one or more public or private financings of equity or debt, 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 the Company or its shareholders. MANAGEMENT OF GROWTH. The growth in the size and complexity of the Company's business and the expansion of its product lines and its customer base have placed and are expected to continue to place a significant strain on all aspects of the Company's business. In particular, the Company's emphasis on selling to large institutions has placed significant additional demands on its installation and implementation operations, and the growing installed base has placed additional demands on the customer support operation. The number of employees in the Company has grown more than 70% since December 31, 1995, and the Company currently plans to continue to expand its staff. To accommodate growth, the Company will be required to upgrade or implement a variety of operational and financial systems, procedures and controls. There can be no assurance that the Company will be able to do so successfully. The Company's future operating results will depend on its ability to expand its support organization and infrastructure commensurate with its expanding base of installed products and on its ability to attract, hire and retain skilled personnel. There can be no assurance that the Company's personnel, systems, procedures and controls will be adequate to support the Company's operations. Any failure to implement and improve the Company's operational, financial and management systems or to expand, train, motivate or manage personnel could have a material adverse effect on the Company's business, operating results and financial condition. There can be no assurance that the Company will be able to effectively manage any future growth and any failure to do so would have a material adverse effect on the Company's business, operating results and financial condition. To the extent the 11 anticipated growth fails to materialize, the Company's operating results could be adversely affected. DEPENDENCE ON KEY EMPLOYEES AND SOFTWARE ENGINEERS. The Company believes that its future success will depend to a significant extent upon the contributions of its executive officers and key sales, engineering, marketing and technical personnel. The Company does not have "key person" life insurance on any of its employees. The loss of the services of one or more of the Company's key personnel could have a material adverse effect on the Company's business, operating results and financial condition. The Company also believes its future success will depend in large part upon its ability to attract and retain additional highly skilled personnel, particularly sales personnel and software engineers. Because of the sophistication of the Company's products and the technology environments in which they operate, the Company's sales, engineering and other personnel generally require advanced technical knowledge and significant training to perform competently. Competition for such personnel, particularly qualified software development engineers, is intense and the Company has, at times, experienced difficulty in locating personnel with the requisite level of expertise and experience. There can be no assurance that the Company will be successful in retaining its existing key personnel or in attracting and retaining the personnel it requires in the future. DELAYS IN INTRODUCTION OF NEW PRODUCTS AND PRODUCT ENHANCEMENTS. The Company's future success will depend upon its ability, on a timely basis, to develop or acquire and successfully introduce new products and to maintain and enhance its current products to meet customers' expanding needs. In addition, the Company must identify emerging trends and technological changes in its target markets, develop and maintain competitive products, enhance its products by adding innovative features that differentiate its products from those of its competitors, and develop and bring products to market quickly at cost-effective prices. In particular, the Company believes its software-based products must respond quickly to users' needs for broad functionality and multi-platform support and to advances in hardware and operating systems. As a result of these requirements, the Company will need to make substantial investments in design and product development. Any failure by the Company to anticipate or respond adequately to technological and regulatory developments and customer requirements, or any significant delays in product development or introductions, could result in a loss of competitiveness and could materially adversely affect the Company's business, operating results and financial condition. There can be no assurance that the Company will be successful in developing and marketing new products or product enhancements that respond to technological or regulatory changes, evolving standards or changing customer requirements. In the past, the Company has experienced delays in the introduction of new products and product enhancements and in achieving market acceptance for certain of its products. There can be no assurance that the Company will successfully complete on a timely basis products currently under development or that current or future products will achieve market acceptance. If the Company is not successful in developing new products and providing product enhancements in a timely manner, including those that incorporate regulatory changes into its products, it could have a material adverse impact on the Company's business, results of operations and financial condition. 12 In addition, the introduction or announcement of products embodying new technologies, changes in industry standards, applicable regulations, or customer requirements, either by the Company or one or more of its competitors, could render the Company's existing products obsolete or unmarketable. There can be no assurance that the introduction or announcement of new product offerings by the Company or one or more of its competitors will not cause customers to defer purchases of existing Company products. Such deferment of purchases could have a material adverse effect on the Company's business, operating results and financial condition. LENGTHY SALES AND IMPLEMENTATION CYCLES. The license of the Company's software products generally requires the Company to educate prospective customers regarding the use and benefits of the Company's products. In addition, the implementation of the Company's products involves a significant commitment of resources by prospective customers and can be associated with substantial changes in workflow, processing or the configuration of hardware and other software. The product license and other fees charged by the Company are typically only a portion of the customer's related hardware, software, development, training and integration costs in implementing a system containing the Company's products. The license of the Company's software products can often require a board-level or executive decision by prospective customers. For these and other reasons, the period between initial indications of interest by a customer in the Company's product and the ultimate sale and implementation of the Company's product to the customer can be lengthy (often ranging from three months to in excess of one year) and is subject to a number of significant delays over which the Company has little or no control. The Company's sales and implementation cycle could be lengthened by increases in the size and complexity of its license transactions and by delays in its customers' implementation or upgrade of the necessary computing environments. In addition, as the Company increases its emphasis on obtaining orders from larger financial institutions, particularly very large multistate institutions, the Company's overall mix of product licenses may involve an increased reliance on orders that have a longer sales and implementation cycle. Reliance on sales with a lengthy lead time for completion of the order and implementation of the product can result in delays in completion of expected sales and fluctuations in the recognition of sales revenue which may adversely affect the Company's business, results of operations and financial condition. COMPETITION. The market for the Company's products is intensely competitive and rapidly changing. A number of companies offer competitive products addressing certain of the Company's target markets. With respect to the Company's lending products, the principal competitors include Bankers Systems, Inc., FormAtion Technologies Inc., Interlinq Software Corporation, Fair, Isaac & Company, Inc., APPRO Systems, Inc., Credit Management Systems, Inc., Baker Hill Corporation and ALLTEL Corporation. With respect to the Company's retail delivery products, the principal competitors include Olivetti North America, Broadway & Seymour, Inc., Early, Cloud & Company and Footprint Software, Inc. (both subsidiaries of IBM), Electronic Data Systems Corporation, Argo & Company, FIserv, Inc., Edify Corporation, CheckFree Incorporated, Online Resources & Communications 13 Corporation, PegaSystems, Inc. and Digital Insight. In addition, a number of prospective and existing customers of the Company have the internal capability to provide alternative solutions to the Company's products and may, therefore, be viewed as competing with the Company. These alternatives may include internally developed software and hardware solutions, or methods of process management that do not involve software solutions. Some of the Company's competitors have significantly greater financial, technical, sales and marketing resources than the Company. The Company believes that the primary competitive factors in this market include product quality, reliability, performance, price, vendor and product reputation, financial stability, features and functions, ease of use, interoperability with other applications or systems and quality of support. There can be no assurance that competitors will not develop products that are superior to the Company's products or that achieve greater market acceptance. Further, because of the rapidly evolving nature of the industry, many of the Company's collaborative partners are current or potential competitors. In addition, a number of current or potential competitors have established or may establish cooperative relationships among themselves and with third parties that may present additional competition with products offered by the Company. The Company's competitors may also be able to undertake more extensive marketing campaigns, adopt more aggressive pricing policies, utilize more extensive distribution channels and bundle competing products. The Company's future success will depend significantly upon its ability to increase its share of the large bank market and to license additional products and product enhancements to existing customers. As the Company develops new products or enters new markets, it expects to encounter additional competitors, some of which may have significantly greater financial, technical, sales and marketing resources than the Company. There can be no assurance that the Company will be able to compete successfully in the future, or that competition will not have a material adverse effect on the Company. PRODUCT CONCENTRATION. A significant portion of the Company's revenue is derived from a limited number of products. Revenue from the Company's Laser Pro products and Deposit Pro products represented approximately 45% of the Company's total revenue for the year ended December 31, 1997, and over 82%, 79% and 53% for the years ended December 31, 1994, 1995 and 1996, respectively. Although the Company believes that these products will continue to represent a significant percentage of the Company's revenue for the near term, an important part of the Company's business strategy depends upon the ability of the Company to continue to develop and market its call center, branch automation, electronic banking and other new products. A decline in demand or prices for the Company's Laser Pro products or Deposit Pro products, whether as a result of new product introductions by the Company or its competitors, price competition, technological change, or failure of the Company's products to address customer requirements, could have a material adverse effect on the Company's business, results of operations and financial condition. The failure of the financial services industry in general to adopt new or modified technologies to improve and simplify business processes (in particular the products developed by the Company), or the failure of the Company to support this industry transition with products that effectively address customer requirements, would have a material adverse effect on the Company's business, results of operations and financial condition. 14 DEPENDENCE ON FINANCIAL SERVICES INDUSTRY. Substantially all of the Company's revenue is derived from licenses and services to banks and other financial institutions, and its future growth is dependent on increased sales to the financial services industry. The success of the Company's customers is intrinsically linked to economic conditions in the financial services industry, which in turn are subject to intense competitive pressures and are affected by overall economic conditions. In addition, the Company believes that the license of its products is relatively discretionary and often requires a significant commitment of capital if accompanied by large-scale hardware purchases or commitments. As a result, although the Company believes that its products can be of substantial assistance to financial institutions in a competitive environment, demand for the Company's products and services could be disproportionately affected by instability or downturns in the financial services industry, which may cause existing or potential customers to exit the industry or delay, cancel or reduce any planned expenditures for technology solutions, including those offered by the Company. The financial services industry is currently experiencing consolidation that may affect demand for the Company's products. The financial services industry is highly regulated and changes in regulations affecting the financial services industry or the Company's products could have a significant effect on the Company. These and other factors adversely affecting the financial services industry and its purchasing capabilities could have a material adverse effect on the Company's business, results of operations and financial condition. PRODUCT LIABILITY RISKS; SOFTWARE DEFECTS. The Company's software products are highly complex and sophisticated and could, from time to time, contain design defects or software errors that could be difficult to detect and correct. In addition, implementation of the Company's products may involve a significant amount of customer-specific customization and may involve integration with systems developed by third parties. Software products offered by the Company are highly complex and normally contain undetected errors or failures that, despite testing by the Company, are discovered only after a product has been installed and used by customers. There can be no assurance that significant errors will not be found in the Company's products in the future. Such errors could give rise to warranty or other liability of the Company, cause delays in product introduction and shipments, require design modifications, result in loss of or delay in market acceptance of the Company's products or loss of existing customers, any of which could adversely affect the Company's business, operating results and financial condition. The Company's products enable its customers to comply with a variety of complex and changing federal and state laws and regulations. Should documentation generated by the Company's products result in a customer's violation of such requirements due to a product defect, the customer, or possibly the governmental authority whose requirements were not met, could claim that the Company is responsible. The Company provides a compliance warranty on certain of its products that limits its liability to $1.0 million per customer per year and further limits the Company's liability for all of its customers to an aggregate of $2.5 million per year per occurrence of a common defect. There can be no assurance that these contract limits would be enforceable, or that claims would be covered by or would not exceed the Company's indemnity insurance limits. Further, there 15 can be no assurance that this indemnity policy will be renewed or will remain priced within the Company's capacity to pay the premiums. In the event that the Company's contract limits are found to be unenforceable or that its insurance policy does not adequately cover claims, the Company's results of operations may be materially and adversely affected. In addition, there can be no assurance that the Company will be able to correct claimed or actual product defects in a timely manner, or at all. DEPENDENCE UPON PROPRIETARY TECHNOLOGY; INTELLECTUAL PROPERTY RIGHTS. The Company's success and ability to compete are dependent in part upon its proprietary technology, including its software. The Company relies primarily on a combination of copyright, trade secret and trademark laws, confidentiality procedures and contractual provisions to protect its proprietary rights. The Company also believes that factors such as know-how concerning the financial services industry and the kinds of software products that the Company licenses as well as the technological and creative skills of its personnel, new product developments, frequent product enhancements, name recognition and reliable product service are essential to establishing and maintaining a technology leadership position. The Company may from time to time seek patent protection for innovations related to certain of its software products, but has not generally sought patent protections for its software. There has been an increase in the number of patents related to software that have been issued or applied for in the United States and, accordingly, the risk of patent infringement for software companies can be expected to increase. There can be no assurance that others will not develop technologies that are similar or superior to the Company's technology. The Company has, with a small number of customers, provided limited access and restricted rights to the source code of certain products. Despite the Company's efforts to protect its proprietary rights, other parties may attempt to reverse engineer, copy or otherwise engage in unauthorized use of the Company's proprietary information. There can be no assurance that the Company's means of protecting its proprietary rights will be adequate. Certain technology or proprietary information incorporated in the Company's products is licensed from third parties, generally on a non-exclusive basis. The termination of any such licenses, or the failure of the third-party licensors to adequately maintain or update their products, could result in delays in the Company's ability to ship certain of its products while it seeks to implement technology offered by alternative sources, and any required replacement licenses could prove costly. In addition, the integration of the Company's products with financial institutions' host systems is optimized if the Company has access to the host system technology. The parties controlling the host processor technologies may also be current or future competitors of the Company and as such may restrict access to such technologies. In some instances, the Company has not been able to obtain sufficient access to host system technology necessary for developing optimal system interfaces. While it may be necessary or desirable in the future to obtain rights to third party technology, there can be no assurance that the Company will be able to do so on commercially reasonable terms, or at all. In the future, the Company may receive notices claiming that it is infringing the proprietary rights of third parties, and there can be no assurance that the Company will not become the subject of infringement claims or legal proceedings by third parties. The Company expects that software product developers will increasingly be subject to infringement claims as the 16 number of products and competition in the Company's industry grows and the functionality and scope of products overlap. Furthermore, there can be no assurance that employees or third parties have not improperly disclosed confidential or proprietary information to the Company. Any such claims, with or without merit, could be time consuming and expensive to defend, divert management's attention and resources, cause product shipment delays or require the Company to pay money damages or enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company, or at all. In the event of a successful claim of product infringement against the Company and failure of the Company or its licensors to license the infringing or similar technology on reasonable terms, the Company's business, operating results and financial condition could be adversely affected. In addition, the Company may initiate claims against third parties for infringement of the Company's proprietary rights or to establish the validity of the Company's proprietary rights. Any such claim could be time consuming, result in costly litigation, and have a material adverse effect on the Company's business, operating results and financial condition. 17 RESULTS OF OPERATIONS The following table sets forth statements of income data of the Company expressed as a percentage of total revenue for the periods indicated: Three Months Ended March 31, --------------------------- 1998 1997 ------------ ----------- Revenue Software license fees 54.2 % 51.6 % Service and support 37.2 41.0 Other 8.6 7.4 ------------ ----------- Total revenue 100.0 100.0 Gross profit 64.6 64.8 Operating expenses Sales and marketing 23.0 21.5 Product development 16.7 18.4 General and administrative 13.3 10.9 Amortization of intangibles 1.6 2.0 ------------ ----------- Total operating expenses 54.6 52.8 ------------ ----------- Income from operations 10.0 12.0 Non-operating expense (0.4) (3.2) ------------ ----------- Income before income taxes 9.6 8.8 Provision for income taxes 4.3 3.9 Preferred stock dividend 0.1 0.1 ------------ ----------- Net income applicable to common shareholders 5.2 % 4.8 % ============ =========== The following table sets forth percentage changes period over period in the statements of income data of the Company: Three Months Ended March 31, 1998 Over March 31, 1997 ------------------ Revenue Software license fees 25.0 % Service and support 8.1 Other 38.2 ------------------ Total revenue 19.1 Gross profit 18.6 Operating expenses Sales and marketing 27.1 Product development 8.0 General and administrative 45.2 Amortization of intangibles (5.4) ------------------ Total operating expenses 23.0 ------------------ Income from operations (0.7) Non-operating expense 84.4 (1) ------------------ Income before income taxes 29.2 (1) Provision for income taxes 29.2 (1) Preferred stock dividend -- ------------------ Net income applicable to common shareholders 30.2 (1) ================== 1) Without the $0.5 million charge due to cancellation of a follow-on stock offering in the first quarter of 1997, the change for non-operating expense, income before income taxes, provision for income taxes and net income applicable to common shareholders would have been (316%), (4%), (4%) and (4%), respectively. 18 REVENUE Total revenue increased $3.1 million, or 19%, to $19.1 million for the quarter ended March 31, 1998 compared to $16.0 million for the comparable period in 1997. SOFTWARE LICENSE FEES. Software license fees include sales of software to customers, fees for software customization and fees related to implementing software and systems at customer sites. Software license fees increased $2.1 million, or 25%, to $10.3 million for the quarter ended March 31, 1998 from $8.3 million for the comparable period in 1997. The increase was led by lending products, Deposit Pro and Encore! branch automation products, and was offset in part by declines in OnLine branch automation products and Encore! Personal Branch revenue. In addition RPxpress! was sold in September 1997. The decline in OnLine branch automation sales reflects a decreased emphasis on the older DOS-based product and a transition to the Company's Windows-based Encore! branch automation products. PERCENTAGE OF SOFTWARE LICENSE FEES Three Months Ended March 31, ----------------------------- 1998 1997 ----------- ------------ Lending Products 68 % 51 % Retail Delivery Products 28 44 Connectivity Products 4 5 ----------- ------------ Total 100 % 100 % =========== ============ LENDING PRODUCTS. Lending products license revenue increased $2.8 million, or 68%, to $7.0 million for the quarter ended March 31, 1998 over the comparable period in 1997. The increase resulted primarily from sales of Laser Pro Closing (particularly of the Company's new Windows-based product), Laser Pro Credit Line and Laser Pro Mortgage, and was offset in part by decreased revenues from Laser Pro Application Manager and fisCAL Analyzer. As a percentage of total license fee revenues, lending products increased to 68% for the first quarter of 1998, compared to 51% for the same period in 1997. Lending products include Laser Pro Closing, Laser Pro Application, Laser Pro SBA, Laser Pro Credit Line, Laser Pro Application Manager, Laser Pro fisCAL Analyzer, Laser Pro fisCAL Online and Laser Pro Mortgage. RETAIL DELIVERY PRODUCTS. Retail delivery product license revenue decreased $0.8 million, or 22%, to $2.9 million for the quarter ended March 31, 1998, compared to the first quarter in 1997. Increased revenues from Encore! Branch Automation, Deposit Pro, Encore! Desktop and Encore! Call Center were offset by decreased revenues from OnLine Branch Automation products and Encore! Personal Branch. As a percentage of total license revenue, first quarter retail delivery products revenue declined from 44% in 1997 to 28% in 1998. 19 Retail delivery products include Encore! Teller, Encore! Platform, Flextran, OnLine branch automation, Deposit Pro, Encore! Desktop, Encore! Call Center, Encore! Personal Branch, Pro Active CRA and ACH. CONNECTIVITY PRODUCTS. License fees from the sale of connectivity products increased $0.1 million, or 26%, to $0.4 million for the quarter ended March 31, 1998, compared to the same period a year ago. As a percentage of Company license fee revenue, connectivity products accounted for 4% in the first quarter of 1998, compared to 5% for the same period a year ago. Connectivity products include StarGate middleware, Laser Pro interfaces and Deposit Pro interfaces. SERVICE AND SUPPORT FEES. Service and support fees consist primarily of recurring software support charges and revenue from training customers in the use of the Company's products. Substantially all of the Company's software customers subscribe to its support services, which provide for the payment of annual or quarterly maintenance fees. Service and support fees increased $0.5 million, or 8%, to $7.1 million for the quarter ended March 31, 1998 compared to the comparable period in 1997 due to increases in the installed base of the Company's products. OTHER REVENUE. Other revenue includes Vendor Payment Systems processing fees, sales of preprinted forms and supplies, and certain consulting revenue. Other revenue increased $0.5 million, or 38%, to $1.6 million for the quarter ended March 31, 1998 compared to the first quarter in 1997. The increase in Other revenue was led by sales of Laser Pro font cartridges. Other revenue increased to 9% of total revenue for the first quarter of 1998, compared to 7% for the comparable period in 1997. COST OF REVENUE Cost of revenue primarily consists of amortization of software development costs, royalty payments, compliance warranty insurance premiums, software production costs, costs of product support, training and implementation, costs of software customization, materials costs for forms and supplies, and bill payment processing costs. Cost of revenue increased $1.1 million, or 20%, to $6.7 million for the quarter ended March 31, 1998 compared to $5.6 million in the comparable period in 1997. The increase is primarily attributable to additional personnel required to support the increased installed base of customers, higher implementation costs associated with the increased number of large financial institution projects, and increased royalties and materials costs associated with increased revenues. As the breadth of the Company's product offerings has expanded, the complexity and cost of providing high quality customer service and support has increased both in absolute dollars and as a percentage of revenue. Amortization of software developments costs decreased $0.1 million to $0.5 million for the first quarter of 1998 compared to the first quarter of 1997. As a result of CFI's acquisitions, costs resulting from royalty payments may increase in future periods. The Company is obligated to pay royalties ranging from 3% to 18% of revenue 20 related to certain products acquired in the various acquisitions since June 1994. In addition, the Company is obligated to pay MicroBilt Corporation a fixed amount per OnLine customer converted to the Company's products. The royalty obligations generally extend three to five years from the acquisition date. Gross margin for the first quarters of both 1998 and 1997 was 65%. Operating margin declined to 10% from 12%, quarter to quarter. The decrease in operating margin was due primarily to lower capitalization of software development costs in the first quarter of 1998 as the Company's current product development cycle is ending, and to increases in general and administrative expenses and in sales and marketing expenses. The Company capitalized $0.5 million in software development costs in the quarter ended March 31, 1998 compared to $1.5 million in first quarter of 1997. Capitalized software development costs net of accumulated amortization were $9.8 million as of March 31, 1998. OPERATING EXPENSES SALES AND MARKETING. Sales and marketing expenses increased to $4.3 million, or 23% of revenue, for the quarter ended March 31, 1998, compared to $3.4 million, or 22% of revenue, in the comparable period of 1997. The increase in dollar amount and as a percentage of revenue resulted principally from salary increases, additional personnel and increased commissions associated with increased revenues. PRODUCT DEVELOPMENT. Product development expenses include costs of maintaining and enhancing existing products and developing new products. Product development expenses were $3.2 million, or 17% of revenue, in the first quarter of 1998 compared to $2.9 million, or 18% of revenue, in the same period of 1997. The increase in dollar amount was primarily the result of increased staffing in the development areas of the Company, migrating the Company's DOS-based products to Windows-based products and accelerating development of the Company's connectivity products. The Company will continue to commit significant resources to product development efforts, although such expenses are not expected to vary significantly as a percentage of revenue. The Company anticipates that with the completion of the current development cycle of its compliance-related products, and the consequent reduction in capitalization of costs, product development cost will have a material adverse effect in future periods on operating margin and net income. GENERAL AND ADMINISTRATIVE. General and administrative expenses were $2.5 million, or 13% of revenue, for the quarter ended March 31, 1998, compared to $1.8 million, or 11% of revenue, for the same period in 1997. The increases in dollar amount and as a percentage of revenue primarily resulted from an increased provision for bad debts associated with increased revenues, higher salaries and increased personnel. 21 AMORTIZATION OF INTANGIBLES. Intangibles include acquisition payments assigned to goodwill, noncompetition agreements, and customer lists. These costs are amortized over lives ranging from five to seven years. Amortization of intangibles was $0.3 million for the first quarters for both 1998 and 1997. NON-OPERATING EXPENSE Non-operating expense decreased $0.4 million in the first quarter of 1998 compared to the comparable period in the prior year. In February 1997 the Company's Board of Directors elected not to proceed with a planned follow-on offering of the Company's Common Stock. The Company took a $0.5 million non-operating charge in the first quarter of 1997 as a result of the cancellation. PROVISION FOR INCOME TAXES The effective tax rate for the three months ended March 31, 1998 and 1997 was 44%. LIQUIDITY AND CAPITAL RESOURCES Working capital increased $6.1 million to $13.3 million at March 31, 1998 from $7.2 million at December 31, 1997. The increase resulted primarily from a reduction in short-term debt and an increase in long-term debt of $4.0 million in connection with a renegotiation of the Company's bank line of credit facility. Net cash provided by operations was $2.6 million for the quarter ended March 31, 1998 compared to $1.2 million in the first quarter of 1997. Net income, excluding non-cash items, provided $2.5 million during the quarter, with another $5.4 million attributable to the seasonal decline in accounts receivable resulting from the Company's annual maintenance billing cycle. The major operating uses of funds during the period included $2.1 million attributable to a decline in accrued expenses due primarily to the payment of bonus and commission amounts for 1997 and an additional $2.3 million related to the decline in deferred revenue, another result of the annual maintenance billing pattern. An additional $1.0 million was used for income taxes, and decreases in accounts payable, customer deposits and prepaid expenses. Net cash used in investing activities was $0.9 million for the quarter ended March 31, 1998 compared to $2.4 million in the first quarter of 1997. The decrease in cash used in investing activities is due principally to lower capitalization of software development costs and lower expenditures for property and equipment. Net cash used by financing activities of $1.0 million during the quarter ended March 31, 1998 resulted from payments of $1.3 million on the Company's bank line of credit facility and $0.2 million on acquisition related debt, offset by $0.5 million provided from the issuance of common stock upon exercise of options. Days sales outstanding (DSO) in accounts receivable, including both billed and unbilled accounts receivable, increased to 124 days at March 31, 1998 from 106 days at December 31, 1997 (excluding the distorting impact of annual maintenance invoices). The increase in 22 DSO during the first quarter of 1998 resulted principally from cash collections that were delayed until after the end of the quarter and from increased project-oriented business. Project-oriented business tends to cause growth in unbilled accounts receivable resulting from the use of percentage of completion accounting, deferred payment terms and increased collection times for billed accounts receivable. Unbilled accounts receivable at March 31, 1998 were $5.7 million, or 21% of total accounts receivable, compared with $4.4 million, or 22% of total accounts receivable, at March 31, 1997. Future cash requirements could include, among other things, purchases of companies, products or technologies, expenditures for internal software development, capital expenditures necessary to the expansion of the business, and installment payments on debt related to acquisitions. Available cash resources include cash generated by the Company's operations and a revolving line of credit up to the lesser of $10.0 million or 50% of accounts receivable, of which $6.0 million was available at March 31, 1998. Long-term debt, less current portion, of $6.0 million at March 31, 1998 includes $4.0 million drawn on the line of credit. Interest on the borrowings was equal to the bank's prime lending rate (8.5% at March 31, 1998). The line of credit expires May 1, 2000. The Company believes that funds expected to be generated from existing operations and borrowings under its revolving line of credit will provide the Company with sufficient funds to finance its operations. The Company may require additional funds to support its working capital requirements, future acquisitions or for other purposes and may seek to raise such additional funds through one or more public or private financings of debt or equity, or from other sources. No assurance can be given that additional financing will be available or that, if available, such financing will be obtainable on terms favorable to the Company or its shareholders. From time to time the Company receives contract claims from its customers and other parties, including requests for full or partial refunds of moneys paid, and initiates contract claims against its customers and other parties, including claims for prompt payment of unpaid invoices. Although there can be no assurance that such claims, either alone or in the aggregate, will not have a material adverse effect on the Company's results of operations or financial position, the Company believes that as of the date of this filing no such claims will have such an effect. 23 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 10.1 Amendment No. 8, dated March 31, 1998, to Business Loan Agreement (Revolving Line of Credit) dated November 8, 1995 between the Company and Bank of America National Trust & Savings Association 10.2 Amendment No. 9, dated April 30, 1998, to Business Loan Agreement (Revolving Line of Credit) dated November 8, 1995 between the Company and Bank of America National Trust & Savings Association 27.1 Financial Data Schedule for quarter ended March 31, 1998 27.2 Restated Financial Data Schedules for fiscal year 1996 and quarters ended March 31, 1996, June 30, 1996 and September 30, 1996 27.3 Restated Financial Data Schedules for quarters ended March 31, 1997, June 30, 1997 and September 30, 1997 (b) Reports on Form 8-K There were no reports on Form 8-K filed during the quarter ended March 31, 1998. 24 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 7, 1998 CFI PROSERVICES, INC. By: /s/ MATTHEW W. CHAPMAN ----------------------- Matthew W. Chapman Chairman and Chief Executive Officer (Principal Executive Officer) By: /s/ KURT W. RUTTUM ----------------------- Kurt W. Ruttum Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 25 Exhibit Index 10.1 Amendment No. 8, dated March 31, 1998, to Business Loan Agreement (Revolving Line of Credit) dated November 8, 1995 between the Company and Bank of America National Trust & Savings Association 10.2 Amendment No. 9, dated April 30, 1998, to Business Loan Agreement (Revolving Line of Credit) dated November 8, 1995 between the Company and Bank of America National Trust & Savings Association 27.1 Financial Data Schedule for quarter ended March 31, 1998 27.2 Restated Financial Data Schedules for fiscal year 1996 and quarters ended March 31, 1996, June 30, 1996 and September 30, 1996 27.3 Restated Financial Data Schedules for quarters ended March 31, 1997, June 30, 1997 and September 30, 1997 EX-10.1 2 AMENDMENT TO LOAN AGREEMENT Exhibit 10.1 EIGHTH AMENDMENT TO BUSINESS LOAN AGREEMENT Between CFI PROSERVICES, INC. and BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION March 31, 1998 EIGHTH AMENDMENT TO BUSINESS LOAN AGREEMENT THIS EIGHTH AMENDMENT TO BUSINESS LOAN AGREEMENT ("Amendment") is made between CFI ProServices, Inc., an Oregon corporation ("Borrower"), and Bank of America National Trust & Savings Association, successor by merger to Bank of America Oregon (including its successors and/or assigns, "Bank"). BACKGROUND A. On November 8, 1995, Bank and Borrower executed that certain Business Loan Agreement ("Original Agreement"), in which Bank agreed to lend, and Borrower agreed to borrow, a revolving line of credit in the maximum original principal sum of $5,000,000.00. Since the date of the Original Agreement, Bank and Borrower have entered into the following amendments that have changed certain terms and conditions of the Original Agreement, including but without limitation (i) increasing the maximum amount of the revolving line of credit to $9,000,000 ("Loan") and (ii) extending the maturity date of the Loan to May 1, 1998: Amendment No. 1 to Business Loan Agreement, dated as of May 17, 1996 ("First Amendment"); Amendment No. 2 to Business Loan Agreement, dated as of July 1, 1996 ("Second Amendment"); Amendment No. 3 to Business Loan Agreement, dated as of September 24, 1996 ("Third Amendment"); Amendment No. 4 to Business Loan Agreement, dated as of November 21, 1996 ("Fourth Amendment"); Amendment No. 5 to Business Loan Agreement, dated as of December 31, 1996 ("Fifth Amendment"); Sixth Amendment to Business Loan Agreement, dated as of March 1, 1997; and Seventh Amendment to Loan Agreement, dated as of June 1, 1997 ("Seventh Amendment"). The Original Agreement, as modified by the First Amendment, Second Amendment, Third Amendment, Fourth Amendment, Fifth Amendment, Sixth Amendment and Seventh Amendment, is hereinafter called the "Agreement". B. Bank and Borrower desire to enter into this Amendment to set forth the terms and conditions on which the Loan shall be extended. AGREEMENTS For valuable consideration, the receipt and sufficiency of which is hereby acknowledged by Bank and Borrower, the parties agree to amend the Agreement as follows: I. LINE OF CREDIT AMOUNT AND TERMS 1. COMMITMENT. Subsection 1.1(a) of the Agreement is hereby deleted in its entirety, and the following Subsection 1.1(a) is inserted in its place: (a) During the availability period described below, the Bank will provide a line of credit to the Borrower. The "Commitment" shall be as follows: for the period commencing March 31, 1998 and continuing through the Expiration Date, the amount of the line of credit shall be Ten Million and No/100 Dollars ($10,000,000.00), subject to the Borrowing Base (as defined in the Seventh Amendment to the Agreement, dated on or about June 1, 1997). 2. MAXIMUM AMOUNT OF THE LINE OF CREDIT. Subsection 1.1(c) of the Agreement is hereby deleted in its entirety, and the following Subsection 1.1(c) is inserted in its place: (c) Borrower shall not permit the outstanding principal balance of the line of credit to exceed the lesser of (i) Ten Million and No/100 Dollars ($10,000,000.00), or (ii) the amount of the Borrowing Base. 3. AVAILABILITY PERIOD. Section 1.2 of the Agreement is hereby deleted in its entirety, and the following Section 1.2 is inserted in its place: 1.2 AVAILABILITY PERIOD. The line of credit is available between the date of this Agreement and May 1, 2000 ("Expiration Date"). II. CURRENT RATIO. Subsection 6.3 of the Agreement is hereby deleted in its entirety, and the following Subsection 6.3 is inserted in its place: 6.3 CURRENT RATIO. To maintain a ratio of current assets to the sum of current liabilities plus any debt owing to Bank equal to at least the amounts indicated below for each date specified below; provided that Borrower shall not be in default of this covenant if noncompliance with the ratios indicated below is cured within 45 days of the applicable dates noted below and such cure is documented on a month-end financial statement acceptable to the Bank: Date Ratio ---- ----- 12/31/97, 3/31/98, 6/30/98 1.20 9/30/98, 12/31/98 1.25 3/31/99, 6/30/99 1.30 9/30/99, 12/31/99 1.40 3/31/00 1.50 III. REPRESENTATIONS AND WARRANTIES. As of the date of this Amendment, Borrower makes the following representations and warranties to Bank, on which Bank is relying in entering into this Amendment: 1. EXISTENCE. Borrower is licensed as a corporation under the laws of the State of Oregon and has the power, authority and legal right to own or lease and operate property and conduct business. 2. ENFORCEABILITY. The execution, delivery and performance of this Amendment has been duly authorized and is not in conflict with the terms of any agreement of Borrower, and this Amendment is enforceable against Borrower according to its terms. 3. NO LEGAL BAR. The execution, delivery and performance of this Amendment does not violate any (i) existing law or regulation applicable to Borrower; (ii) ruling applicable to Borrower of any court, arbitration or governmental agency or similar body; or (iii) mortgage, indenture, lease, contract, undertaking or other agreement to which Borrower is a party. 4. YEAR 2000. Borrower has conducted a comprehensive review and assessment of Borrower's computer applications and made inquiry of Borrower's key suppliers, vendors and customers with respect to the `year 2000 problem" (that is , the risk that computer applications may not be able to properly perform date-sensitive functions after December 31, 1999) and, based on that review and inquiry, Borrower does not believe the year 2000 problem will result in a material adverse change in Borrower's business condition (financial or otherwise), operations, properties, or prospects, or ability to repay the Obligations. IV. CONDITIONS PRECEDENT. Payment of Fees and Delivery of Documents. Unless waived in writing by Bank, this Amendment shall be of no force or effect until Borrower delivers to Bank a fully executed copy of this Amendment and pays the Bank's attorney's fees for the preparation of this Amendment. V. MISCELLANEOUS. Except as expressly amended by this Amendment, the Agreement remains in full force and effect and is hereby ratified and confirmed. This Amendment shall be governed by the laws of the State of Oregon. If any provision or clause of this Amendment conflicts with applicable law, such conflict shall not affect other provisions or clauses hereof which can be given effect without the conflicting provision, and to this end the provisions hereof are declared to be severable. The captions and headings of the sections of this Amendment are for convenience only and shall not be used to interpret or define the provisions hereof. This Amendment may be signed in any number of counterparts and shall constitute an enforceable agreement when all signed counterparts are assembled together in one Amendment that is signed by all parties. WRITTEN AGREEMENTS: UNDER OREGON LAW, MOST AGREEMENTS, PROMISES AND COMMITMENTS MADE BY THE BANK AFTER OCTOBER 3, 1989, CONCERNING LOANS AND OTHER CREDIT EXTENSIONS WHICH ARE NOT FOR PERSONAL, FAMILY OR HOUSEHOLD PURPOSES OR SECURED SOLELY BY THE BORROWER'S RESIDENCE MUST BE IN WRITING, EXPRESS CONSIDERATION AND BE SIGNED BY THAT BANK TO BE ENFORCEABLE. Borrower: Bank: CFI PROSERVICES, INC. BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION By: /S/ Kurt W. Ruttum By: /S/ R. E. McCall ------------------ ---------------- Name: Kurt W. Ruttum Name: R. E. McCall Its: VP & CFO Its: VP & Relationship Manager EX-10.2 3 AMENDMENT TO LOAN AGREEMENT Exhibit 10.2 NINTH AMENDMENT TO BUSINESS LOAN AGREEMENT Between CFI PROSERVICES, INC. and BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION April 30, 1998 NINTH AMENDMENT TO BUSINESS LOAN AGREEMENT THIS NINTH AMENDMENT TO BUSINESS LOAN AGREEMENT ("Amendment") is made between CFI ProServices, Inc., an Oregon corporation ("Borrower"), and Bank of America National Trust & Savings Association, successor by merger to Bank of America Oregon (including its successors and/or assigns, "Bank"). BACKGROUND A. On November 8, 1995, Bank and Borrower executed that certain Business Loan Agreement ("Original Agreement"), in which Bank agreed to lend, and Borrower agreed to borrow, a revolving line of credit in the maximum original principal sum of $5,000,000.00. Since the date of the Original Agreement, Bank and Borrower have entered into the following amendments that have changed certain terms and conditions of the Original Agreement, including but without limitation (i) increasing the maximum amount of the revolving line of credit to $10,000,000 ("Loan") and (ii) extending the maturity date of the Loan to May 1, 2000: Amendment No. 1 to Business Loan Agreement, dated as of May 17, 1996 ("First Amendment"); Amendment No. 2 to Business Loan Agreement, dated as of July 1, 1996 ("Second Amendment"); Amendment No. 3 to Business Loan Agreement, dated as of September 24, 1996 ("Third Amendment"); Amendment No. 4 to Business Loan Agreement, dated as of November 21, 1996 ("Fourth Amendment"); Amendment No. 5 to Business Loan Agreement, dated as of December 31, 1996 ("Fifth Amendment"); Sixth Amendment to Business Loan Agreement, dated as of March 1, 1997; and Seventh Amendment to Loan Agreement, dated as of June 1, 1997 ("Seventh Amendment"); and Eighth Amendment to Business Loan Agreement, dated as of March 31, 1998 ("Eighth Amendment"). The Original Agreement, as modified by the First Amendment, Second Amendment, Third Amendment, Fourth Amendment, Fifth Amendment, Sixth Amendment, Seventh Amendment, and Eighth Amendment is hereinafter called the "Agreement". B. Bank and Borrower desire to enter into this Amendment to set forth the terms and conditions on which the interest rate on the Loan shall be reduced. AGREEMENTS For valuable consideration, the receipt and sufficiency of which is hereby acknowledged by Bank and Borrower, the parties agree to amend the Agreement as follows: I. LIBOR RATE. Section 1.7 of the Agreement is amended to delete the figure "1.50" and to replace it with the figure "1.40". II. CONDITIONS PRECEDENT. Unless waived in writing by Bank, this Amendment shall be of no force or effect until Borrower delivers to Bank a fully executed copy of this Amendment and pays the Bank its attorneys' fees in the amount of $100.00 for the preparation of this Amendment. III. MISCELLANEOUS. Except as expressly amended by this Amendment, the Agreement remains in full force and effect and is hereby ratified and confirmed. This Amendment shall be governed by the laws of the State of Oregon. If any provision or clause of this Amendment conflicts with applicable law, such conflict shall not affect other provisions or clauses hereof which can be given effect without the conflicting provision, and to this end the provisions hereof are declared to be severable. The captions and headings of the sections of this Amendment are for convenience only and shall not be used to interpret or define the provisions hereof. This Amendment may be signed in any number of counterparts and shall constitute an enforceable agreement when all signed counterparts are assembled together in one Amendment that is signed by all parties. WRITTEN AGREEMENTS: UNDER OREGON LAW, MOST AGREEMENTS, PROMISES AND COMMITMENTS MADE BY THE BANK AFTER OCTOBER 3, 1989, CONCERNING LOANS AND OTHER CREDIT EXTENSIONS WHICH ARE NOT FOR PERSONAL, FAMILY OR HOUSEHOLD PURPOSES OR SECURED SOLELY BY THE BORROWER'S RESIDENCE MUST BE IN WRITING, EXPRESS CONSIDERATION AND BE SIGNED BY THAT BANK TO BE ENFORCEABLE. Borrower: Bank: CFI PROSERVICES, INC. BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION By: /S/ Kurt W. Ruttum By: /S/ R. E. McCall ------------------ ---------------- Name: Kurt W. Ruttum Name: R. E. McCall Its: VP & CFO Its: VP & Relationship Manager EX-27.1 4 EXHIBIT 27.1
5 1,000 Jan-01-1998 3-MOS Dec-31-1998 Mar-31-1998 699 0 29,212 2,552 365 31,104 13,385 8,431 52,337 17,853 6,326 744 0 19,410 8,078 52,337 1,214 19,051 504 6,749 10,396 890 (102) 1,828 804 1,000 0 0 0 1,000 0.20 0.19
EX-27.2 5 EXHIBIT 27.2
5 1,000 Jan-01-1996 Jan-01-1996 Jan-01-1996 Jan-01-1996 YEAR 3-MOS 6-MOS 9-MOS Dec-31-1996 Dec-31-1996 Dec-31-1996 Dec-31-1996 Dec-31-1996 Mar-31-1996 Jun-30-1996 Sep-30-1996 0 7,053 3,339 186 0 1,762 0 0 24,610 10,859 15,245 16,250 1,303 396 680 1,356 156 198 198 155 25,765 21,215 21,569 17,110 10,401 7,309 10,381 11,395 5,596 4,242 4,699 5,096 46,845 33,364 40,736 37,721 23,043 12,189 20,621 16,143 5,776 0 8,402 6,297 754 734 757 756 0 0 0 0 17,745 15,856 17,076 17,253 2,493 3,345 (713) 754 46,845 33,364 40,736 37,721 3,033 835 1,555 2,234 59,947 11,008 26,407 42,669 1,485 337 628 902 20,844 3,715 8,795 14,411 37,841 5,890 22,202 30,183 576 90 306 60 251 7 46 91 1,280 1,515 (4,429) (1,813) 1,167 622 (1,288) (163) 17 869 (3,189) (1,722) 0 0 0 0 0 0 0 0 0 0 0 0 17 869 (3,189) (1,722) 0.00 0.19 (0.66) (0.36) 0.00 0.18 (0.66) (0.36)
EX-27.3 6 EXHIBIT 27.3
5 1,000 Jan-01-1997 Jan-01-1997 Jan-01-1997 3-MOS 6-MOS 9-MOS Dec-31-1997 Dec-31-1997 Dec-31-1997 Mar-31-1997 Jun-30-1997 Sep-30-1997 0 0 99 0 0 0 21,526 22,062 23,403 1,361 1,792 2,447 189 170 171 23,539 23,086 23,573 11,297 12,187 12,610 6,142 6,766 7,284 45,549 46,102 46,747 20,421 19,541 19,238 6,624 6,590 7,354 752 750 748 0 0 0 18,427 18,523 18,819 3,261 4,685 5,597 45,549 46,102 46,747 876 1,610 2,631 16,002 33,882 51,776 517 1,162 1,763 5,629 11,640 18,626 8,453 17,609 27,374 209 681 1,356 89 207 329 1,414 4,000 5,671 622 1,760 2,495 792 2,192 3,104 0 0 0 0 0 0 0 0 0 768 2,192 3,104 0.16 0.44 0.63 0.15 0.43 0.61
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