-----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, I32DVwNdQ/qNFvJYEJ8Xc5y+y4U82uKoig8dyfpc3BXu2wk9LybcOwT+dUkjc/EP 01AaznlTw+xX/X99i7zc3A== 0000908180-99-000005.txt : 19990518 0000908180-99-000005.hdr.sgml : 19990518 ACCESSION NUMBER: 0000908180-99-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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: 99627707 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 ENDING 03/31/99 ========================================================================== 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, 1999 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 4,995,552 (Class) (Outstanding at April 30, 1999) ============================================================================ CFI PROSERVICES, INC. FORM 10-Q INDEX PART I - FINANCIAL INFORMATION Page Item 1. Financial Statements Consolidated Balance Sheets - March 31, 1999 and December 31, 2 1998 Consolidated Statements of Income - Three Months Ended March 31, 1999 and 1998 3 Consolidated Statements of Cash Flows - Three Months Ended March 31, 1999 and 1998 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 18 Signatures 19 1 CFI PROSERVICES, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands) March 31, December 31, 1999 1998 ------------ ----------- ASSETS Current Assets: Cash and cash equivalents $ - $ 3,589 Investments 206 206 Receivables, net of allowances of $2,548 and $2,600 28,123 29,701 Inventory 372 249 Deferred tax asset 1,341 1,341 Prepaid expenses and other current assets 1,709 1,604 ------------ ----------- Total Current Assets 31,751 36,690 Property and equipment, net of accumulated depreciation of $10,618 and $9,947 4,407 4,534 Software development costs, net of accumulated amortization of $4,150 and $3,368 7,495 8,277 Purchased software costs, net of accumulated amortization of $120 and $19 2,391 211 Other intangibles, net of accumulated amortization of $5,356 and $4,763 10,383 6,190 Other assets, including deferred taxes 926 879 ------------ ----------- Total Assets $ 57,353 $ 56,781 ============ =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Drafts payable $ 386 $ - Accounts payable 1,735 1,986 Accrued expenses 3,046 8,017 Deferred revenues 10,795 5,300 Customer deposits 2,875 3,681 Bank line of credit 262 - Current portion of long-term debt 182 261 Income taxes payable 537 473 ------------ ----------- Total Current Liabilities 19,818 19,718 Commitments and Contingencies Long-term Debt, less current portion 5,608 5,693 Other long-term liabilities 254 - ------------ ----------- Total Liabilities 25,680 25,411 Mandatory Redeemable Class A Preferred Stock 735 738 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 5,009,841 and 4,925,423 shares issued and outstanding 19,196 19,689 Retained earnings 11,742 10,943 ------------ ----------- Total Shareholders' Equity 30,938 30,632 ------------ ----------- Total Liabilities and Shareholders' Equity $ 57,353 $ 56,781 ============ =========== 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, --------------------------- 1999 1998 ------------ ------------ REVENUE Software license fees $ 8,865 $ 10,326 Service and support 9,254 7,093 Other 1,934 1,632 ------------ ------------ Total Revenue 20,053 19,051 COST OF REVENUE 7,747 6,748 ------------ ------------ Gross Profit 12,306 12,303 OPERATING EXPENSES Sales and marketing 3,732 4,375 Product development 4,279 3,182 General and administrative 2,436 2,543 Amortization of intangibles 410 296 ------------ ------------ Total Operating Expenses 10,857 10,396 ------------ ------------ Income from Operations 1,449 1,907 NON-OPERATING INCOME (EXPENSE) Interest expense (104) (102) Interest income 95 51 Other, net 3 (28) ------------ ------------ Total Non-operating Income (Expense) (6) (79) ------------ ------------ INCOME BEFORE PROVISION FOR INCOME TAXES 1,443 1,828 PROVISION FOR INCOME TAXES 621 804 ------------ ------------ NET INCOME 822 1,024 PREFERRED STOCK DIVIDEND 23 24 ------------ ------------ NET INCOME APPLICABLE TO COMMON SHAREHOLDERS $ 799 $ 1,000 ============ ============ BASIC NET INCOME PER SHARE $ 0.16 $ 0.20 ============ ============ DILUTED NET INCOME PER SHARE $ 0.16 $ 0.19 ============ ============ 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, --------------------------- 1999 1998 ------------ ------------- Cash flows from operating activities: Net income applicable to common shareholders $ 799 $ 1,000 Adjustments to reconcile net income applicable to common shareholders to cash provided by operating activities: Depreciation and amortization 1,965 1,511 Interest accreted on mandatory redeemable preferred stock 23 24 Interest accreted on note payable 24 23 Equity in losses attributable to joint venture - 82 (Increase) decrease in assets, net of effects from purchase of businesses: Receivables, net 2,301 5,399 Inventories, net 58 (68) Prepaid expenses and other assets (122) (24) Increase (decrease) in liabilities, net of effects from purchase of businesses: Drafts payable 386 - Accounts payable (326) (297) Accrued expenses (4,970) (2,069) Deferred revenues 4,152 (2,278) Customer deposits (945) (274) Income taxes payable 64 (374) ------------ ------------- Net cash provided by operating activities 3,409 2,655 Cash flows from investing activities: Expenditures for property and equipment (449) (319) Software development costs capitalized - (490) Investment in joint venture - (133) Proceeds from long-term note receivable 37 - Cash paid for acquisition of Modern Computer Systems, Inc. net of cash received (5,520) - ------------ ------------- Net cash used in investing activity (5,932) (942) Cash flows from financing activities: Net proceeds from (payments on) line of credit 262 (1,288) Payments on long-term debt (159) (246) Payments on mandatory redeemable preferred stock (26) (26) Proceeds from issuance of common stock 2 526 Repurchase of common stock (1,145) - ------------ ------------- Net cash provided by (used in) financing activities (1,066) (1,034) ------------ ------------- Increase (decrease) in cash and cash equivalents (3,589) 679 Cash and cash equivalents: Beginning of period 3,589 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 (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 month periods ended March 31, 1999 and 1998 is unaudited; however, such information reflects all adjustments consisting only of normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The financial information as of December 31, 1998 is derived from the audited financial statements contained in the 1998 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 1998 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. SUPPLEMENTAL CASH FLOW INFORMATION Supplemental disclosure of cash flow information is as follows: Three Months Ended March 31, ----------------------------- 1999 1998 ------------ -------------- Cash paid during the period for income taxes $ 601 $ 1,179 Cash paid during the period for interest and dividends 76 113 Noncash investing and financing activities were as follows: Three Months Ended March 31, ----------------------------- 1999 1998 ------------ -------------- Tax benefit from exercise of nonqualified stock options $ -- $ 19 Increase in goodwill for accrued acquisition related contingent royalties 102 74 Reclassification of bank line of credit to long-term debt -- 4,000 Issuance of common stock in connection with acquisition of MCS 650 -- 5 NOTE 3. EARNINGS PER SHARE Following is a reconciliation of basic earnings per share ("EPS") and diluted EPS: Three Months Ended March 31, 1999 1998 --------------------------- -------------------- -------------------- Per Per Share Share Basic EPS Income Shares Amount Income Shares Amount --------- -------------------- -------------------- Net income applicable to common shareholders $ 799 5,040 $ 0.16 $ 1,000 4,990 $ 0.20 ====== ====== Effect of dilutive securities: Stock options 111 165 ------------- -------------- Diluted EPS ----------- Net income applicable to common shareholders $ 799 5,151 $ 0.16 $ 1,000 5,155 $ 0.19 ====== ====== 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 446,363 and 218,000 for the three months ended March 31, 1999 and 1998, respectively. NOTE 4. STOCK REPURCHASE During January 1999 the Company's Board of Directors authorized a repurchase up to $5.0 million of the Company's Common Stock. During the quarter ended March 31, 1999 the Company repurchased 88,200 shares of its Common Stock for $1.1 million. NOTE 5. LICENSE REVENUES License revenues from lending, retail delivery, connectivity and host processing products were $4.9 million, $0.7 million and $0.1 million, respectively, for the quarter ended March 31, 1999 and $7.0 million, $2.9 million, $0.4 million and $0, respectively, for the same period in 1998. NOTE 6. ACQUISITION Effective January 1, 1999 the Company acquired substantially all of the assets of Modern Computer Systems, Inc. and certain related corporations (collectively, MCS). MCS offers hardware and software solutions for the back office accounting needs of community banks and credit unions. The acquisition was accounted for as a purchase, resulting in approximately $7.0 million of goodwill, intangibles and purchased software. The purchase price was $6.0 million in cash and $650,000 of common stock. The Company is still obtaining certain data related to the acquisition, and, accordingly, the purchase price allocation remains open. The operations of MCS have been included in the Company's results of operations since January 1, 1999. The 1998 proforma results reflecting the MCS acquisition are not materially different from the Company's reported results for the three months ended March 31, 1998. 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 FILING, AS WELL AS IN THE COMPANY'S REPORTS ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 AND IN OTHER FILINGS BY THE COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION. OVERVIEW CFI ProServices, Inc., ("CFI" or the "Company") is a leading provider of integrated, PC-based software for financial institutions, including solutions for branch automation, loan origination, new account operations, call centers, cross selling of products and electronic banking. Beginning in January 1999 with the Company's acquisition of Modern Computer Systems, Inc. (MCS), the Company began offering hardware and software solutions for the back office accounting needs of community banks and credit unions. 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 6,000 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 four product groups: lending, retail delivery, connectivity software and host processing. Due to its product diversification efforts, the Company is now less reliant on the Laser Pro and Deposit Pro products. For the year ended 1998 approximately 48% of the Company's revenue came from products other than Laser Pro and Deposit Pro. CFI generates recurring revenue from software maintenance agreements. In 1998 service and support fees, primarily for Laser Pro and Deposit Pro, accounted for approximately 35% of total revenue. Substantially all software customers subscribe to the Company's service and support programs, which provide ongoing product enhancements and, where applicable, updates to facilitate compliance with changing regulations. 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. 7 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 completion contracts and deferred payment terms, and also results in increased collection times for billed accounts receivable. These factors, in turn, result in higher days sales outstanding (DSO's) in accounts receivable. The Company's backlog as of March 31, 1999, was approximately $16.5 million, as compared to approximately $13.0 million as of March 31, 1998. CFI's 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 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. 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, -------------------------- 1999 1998 ----------- ----------- Revenue Software license fees 44.2 % 54.2 % Service and support 46.1 37.2 Other 9.7 8.6 ----------- ----------- Total revenue 100.0 100.0 Gross profit 61.4 64.6 Operating expenses Sales and marketing 18.6 23.0 Product development 21.3 16.7 General and administrative 12.2 13.3 Amortization of intangibles 2.1 1.6 ----------- ----------- Total operating expenses 54.2 54.6 ----------- ----------- Income from operations 7.2 10.0 Non-operating expense (0.0) (0.4) ----------- ----------- Income before income taxes 7.2 9.6 Provision for income taxes 3.1 4.3 Preferred stock dividend 0.1 0.1 =========== =========== Net income applicable to common shareholders 4.0 % 5.2 % =========== =========== 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, 1999 Over March 31, 1998 ------------------ Revenue Software license fees (14.2)% Service and support 30.5 Other 18.5 ------------------ Total revenue 5.3 Gross profit 0.0 Operating expenses Sales and marketing (14.7) Product development 34.5 General and administrative (4.2) Amortization of intangibles (38.5) ------------------ Total operating expenses 4.4 ------------------ Income from operations (24.0) Non-operating expense (92.4) ------------------ Income before income taxes (21.0) Provision for income taxes (22.8) Preferred stock dividend (4.2) ================== Net income applicable to common shareholders (20.1) ================== REVENUE Total revenue increased $1.0 million, or 5.3%, to $20.1 million for the three months ended March 31, 1999 compared to $19.1 million in the comparable period in 1998. 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 decreased $1.5 million, or 14.2%, to $8.9 million for the three month period ended March 31, 1999 compared to the same period in 1998. The decrease resulted from lower revenue in Laser Pro Lending products, primarily due to timing issues, and was partially offset by increases in Retail Delivery and Connectivity product revenues. The Company also recorded revenue of $0.1 million from its Host Processing products in the first quarter of 1999. 9 PERCENTAGE OF SOFTWARE LICENSE FEES Three Months Ended March 31, ----------------------------- 1999 1998 ----------- ------------ Lending Products 56 % 68 % Retail Delivery Products 36 28 Connectivity Products 7 4 Host Processing Products 1 N/A ----------- ------------ Total 100 % 100 % LENDING PRODUCTS. Lending products license revenue decreased $2.1 million, or 29.6%, to $4.9 million for the three months ended March 31, 1999 from the comparable period in 1998. The decrease resulted primarily from timing issues related to products in the Laser Pro lending suite. Lending products license fee revenues in the first quarter of 1998 also reflected the introduction of Laser Pro Lending in Windows, which resulted in higher revenues in the 1998 period. As a percentage of total license revenues, lending products decreased to 56% for the first quarter of 1999 compared to 68% for the same period in 1998. As previously announced, the Company has been re-developing its fisCAL credit analysis products. That effort was substantially completed in April 1999, at which time the products were re-introduced into the market. 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, Laser Pro Mortgage, Laser Pro SMarT and Laser Pro DocSMarT. RETAIL DELIVERY PRODUCTS. Retail delivery product license revenue increased $0.3 million, or 9.3%, to $3.1 million for the three months ended March 31, 1999 from the comparable period in 1998. Increased revenues from OnLine Branch Automation and Encore! Personal Branch were offset in part by decreased revenues from Encore! Teller, Encore! Call Center and Deposit Pro. As a percentage of total license revenue, retail delivery products revenue increased to 35% in the first quarter of 1999 compared to 28% for the same period in 1998. 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. Connectivity products license fee revenue increased $0.2 million, or 52.9%, to $0.7 million for the three month period ended March 31, 1999 from the first quarter of 1998. As a percentage of total license revenue, connectivity products accounted for 7% in the first quarter of 1999 compared to 4% in the first quarter of 1998. Connectivity products include StarGate middleware, Laser Pro interfaces and Deposit Pro interfaces. 10 HOST PROCESSING PRODUCTS. In January 1999 CFI acquired substantially all of the assets of Modern Computer Systems, Inc. and certain related corporations (collectively, MCS). MCS provides back office ("host") data processing and related services to community banks and credit unions. Host Processing products license revenues were $0.1 for the three month period ended March 31, 1999. No revenues from host processor products are attributable to 1998. 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 $2.2 million, or 30.5%, to $9.3 million for the three month period ended March 31, 1999 compared to the same period in 1998. The increase is primarily attributable to higher maintenance revenue from a larger base of installed products, including revenue of $0.2 million from Host Processing products acquired in January 1999 from MCS, and by an increase in the fourth quarter of 1998 in service and support pricing for certain lending products. Service and support fees accounted for 46.1% and 37.2% of total revenue in the three months ended March 31, 1999 and 1998, respectively. OTHER REVENUE. Other revenue includes Vendor Payment Systems (VPS) processing fees, sales of MCS hardware, preprinted forms and supplies and certain consulting revenue. Other revenue increased $0.3 million, or 18.5%, to $1.9 million for the three month period ended March 31, 1999 compared to the same period in 1998. The increase was led by sales of MCS hardware of $0.2 million and higher VPS processing fees, offset in part by lower font sales. Other revenue was 9.7% of total revenue for the three month period ended March 31, 1999 compared to 8.6% for the same period in 1998. 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 $1.0 million, or 14.8%, to $7.7 million for the three month period ended March 31, 1999 compared to the same period in 1998. The increase is primarily attributable to increased amortization of software development costs and to additional personnel required to support the increased installed base of customers, higher implementation costs associated with the increased number of large financial institution projects, and increased royalties and materials costs associated with increased revenues. As the breadth of the Company's product offerings has expanded, the complexity and cost of providing high quality customer service and support has increased. Amortization of software development costs increased $0.2 million, to $0.8 million, for the first quarter of 1999 compared to the same period in 1998. The Company capitalized $0 and $0.5 million of software development costs in the three months ended March 31, 1999 and 1998 11 respectively. Capitalized software development costs net of accumulated amortization were $7.5 million at March 31, 1999. As a result of CFI's acquisitions, costs resulting from royalty payments are expected to increase in future periods. The Company is obligated to pay royalties ranging from 3% to 18% of revenue related to certain products acquired in various acquisitions since June 1994. In addition, the Company is obligated to pay MicroBilt Corporation a fixed amount per OnLine Branch Automation customer converted to the Company's products. The royalty obligations generally extend three to five years from the acquisition date. Gross margin was 61.4% for the three month period ended March 31, 1999 compared to 64.6% in the same period in 1998. Operating margin was 7.2% for the three month period ended March 31, 1999 compared to 10.0% for the same period in 1998. The decreases in gross and operating margins are primarily due to lower than projected revenue in the first quarter of 1999. OPERATING EXPENSES SALES AND MARKETING. Sales and marketing expenses decreased to $3.7 million, or 18.6% of revenue, for the three month period ended March 31, 1999 compared to $4.4 million, or 23.0% of revenue in the same period of 1998. The decrease in dollar amount resulted principally from decreased commissions associated with decreased software license revenues. PRODUCT DEVELOPMENT. Product development expenses include costs of maintaining and enhancing existing products and developing new products. Product development expenses increased to $4.3 million, or 21.3% of revenue, for the three month period ending March 31, 1999 compared to $3.2 million, or 16.7% of revenue, in the same period in 1998 which was principally the result of not capitalizing software development costs in the 1999 period and of increased staffing in the development areas of the Company. The Company believes that the current development cycle for its compliance-related products, which typically have relatively long lives, was completed in the second quarter of 1998 and, accordingly, there should be a significant reduction in the capitalization of software development costs in future periods. The Company will continue to commit significant resources to product development efforts. 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 costs 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 12.4% of revenue, for the three month period ended March 31, 1999 compared to $2.5 million, or 13.3% of revenue, for the same period in 1998. 12 AMORTIZATION OF INTANGIBLES. Intangibles include acquisition payments assigned to goodwill, noncompetition agreements and customer lists. Amortization of intangibles was $0.4 million for the three month period ended March 31, 1999 compared to $0.3 million for the same period in 1998. PROVISION FOR INCOME TAXES The effective tax rate for the three month period ended March 31, 1999 was 43% compared to 44% for the same period in 1998. 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 process, including the evaluation, decision-making and acceptance of products within the customers' organizations; 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, including regulatory requirements for financial institutions with respect to the Year 2000; 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's business has experienced, and is expected to continue to experience, some degree of seasonality due to its customers' budgeting and buying cycles. The Company's strongest revenue quarter in any year is typically its fourth quarter and its weakest revenue quarter is typically its first quarter. Customers' purchases are tied closely to their internal budget processes. For some of the Company's customers, budgets are approved at the beginning of the year and budgeted amounts often must be utilized by the end of the year. In addition, the Company's incentive sales compensation plan provides for increases in commission percentages as sales people approach or exceed their annual sales quotas. As a result of these two factors, the Company usually experiences increased sales orders in the last quarter. This pattern may be altered in 1999 as Year 2000 issues, including regulatory requirements and internal business process decisions, affect customers' buying decisions. 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 13 or reserving only two digits in date fields (rather than four digits) to identify the century, without considering the ability of the program to properly distinguish the upcoming century change in the Year 2000. In addition, the Year 2000 is a special-case leap year, and some programs may drop February 29th from their internal calendars. Likewise, other dates may present problems because of the way the digits are interpreted. Because the Company's business is based on the licensing of applications software, the Company's business would be impacted if its products or its internal systems experience problems associated with the century change. This issue also potentially affects the internal software systems used by the Company in its operations. The Company has completed its survey of internal computer systems, as well as critical third party software and systems used by the Company, regarding Year 2000 compliance status. The scope of the Year 2000 readiness effort included addressing (i) information technology such as software and hardware, (ii) non-information systems or embedded technology contained in various equipment, safety systems, facilities and utilities and (iii) readiness of mission critical third-party suppliers. The Company has communicated with its significant suppliers and vendors to understand their ability to continue providing services and products through the millenium change and to determine the extent to which the Company may be vulnerable in the event of a failure by them or their services and products. With respect to mission critical systems, the Company sought statements of compliance from each vendor either through direct response or by reference to information posted on an electronic bulletin board or in a government database. INTERNAL SYSTEMS. Some of the computer programs and systems used by the Company require date-sensitive information to accurately and adequately process information critical to the Company's business. Inaccuracies or other errors in this information could have a material, adverse effect on the Company's business. Furthermore, non-compliance in these programs could cause a system failure or interruption, either of which could also materially adversely affect the Company. In addition to computer software, some machines and devices used by the Company and others may contain embedded technology that is not Year 2000 compliant, which could result in a malfunction or failure of such devices. The review and assessment of the Company's internal systems is complete. The Company's internal accounting system, including those components used for the Company's invoicing and bill payment, has been evaluated by the vendor and has been represented to be Year 2000 compliant. Nevertheless, the Company will conduct its own tests in the first half of 1999. Furthermore, the Company plans to routinely backup its financial data through the end of 1999 and will develop a contingency plan with respect to the accounting system in the second half of 1999. The Company anticipates that its customer support and call tracking system will be Year 2000 compliant after installation of an update scheduled to occur in the second quarter of 1999. The cost of the update is estimated to be immaterial. The Company completed the survey of its software vendors in the fourth quarter of 1998. The bulk of the Company's vendors have already provided compliant versions of their software. The Company continues to monitor all material third party software not indicated to be Year 2000 compliant and believes that few vendors, if any, will not provide compliant versions by the middle of 1999. 14 The Company has received representations that its phone and voice mail systems became Year 2000 compliant through upgrades completed during the first quarter of 1999. As to its phone service providers, the Company has offices located at 10 disparate geographical locations all served by different local phone service providers and the Company contracts with two long distance carriers. Consequently, the Company can shift telecommunications through any of these locations should any other location be down. Further, neither the Company's base software nor updates are provided exclusively via downloading. Virtually all of the Company's base software and updates are provided to customers through magnetic media. Based on information gathered to date, the Company is not presently aware of any Year 2000 issue that could materially affect the Company's operations, either self-originated or caused by third-party service vendors or providers. Management believes that all mission critical systems will be compliant by the Year 2000. Nevertheless, there can be no assurance that the Company will not experience some operating difficulties as a result of Year 2000 issues. If they occur, these difficulties could require the Company to incur unanticipated costs to remedy the problems and, either individually or collectively, have a material adverse effect on the Company's business operations and financial results. The Company has not yet determined the cost of completing its investigation or the cost of any modification or remediation that may be required to correct Year 2000 issues. Costs incurred to date to assess Year 2000 issues have not been significant and have been funded through operating cash flows. The Company intends to develop contingency plans for its significant systems that can be implemented on or after January 1, 2000 in the event of a system failure resulting from the century change. COMPANY DEVELOPED SOFTWARE. The Company develops software programs for use by financial institutions to automate various transactions and processes. These programs often are highly dependent upon historical or dynamic financial and other data that, if the programs are not able to distinguish between the Year 2000 and other century-end years, could be misreported or misinterpreted and cause significant resulting calculation errors. This data is often acquired from other systems that may or may not be Year 2000 compliant, further exacerbating the problem. The Company's financial institution customers are subject to regulatory scrutiny; any such errors could subject them to civil or regulatory action, or both, resulting in large fines, penalties or other costs. Additional consequences of the Year 2000 issue for the Company's financial institution customers may include systems failures and business process interruption, including, among other things, a temporary inability to process transactions, satisfy regulatory obligations, or engage in similar normal business activities. In addition, the impact of Year 2000 issues may severely impair the ability of the Company's customers to purchase the Company's products, or to make payments on software or services previously purchased. Concern over Year 2000 issues is permeating the financial services industry, and management expects that the resolution of these concerns will likely absorb a substantial portion of financial institution information technology budgets and attention in the near term (with an associated decreased focus on other business initiatives, including purchase 15 decisions with respect to the Company's software). Year 2000 issues faced by its customers could materially and adversely affect the Company's operations and financial results through the Year 2000. The Federal Financial Institutions Examination Council (the "FFIEC") has issued a series of Statements beginning in June 1996 requiring that the various financial institutions regulated by FFIEC member agencies provide assurance that they will be capable of conducting business as usual in 2000 and into the 21st century. To this end, and among other obligations, each institution is required to survey its systems and operations (including software and vendor supplied services), determine any deficiencies, remediate to correct deficiencies, test mission critical third party software and services to confirm their Year 2000 readiness after remediation, and develop contingency plans against the event that a mission critical item, service or process fails to be Year 2000 compliant. Further information on the FFIEC mandate and related matters can be found at the FFIEC's website, www.ffiec.gov/y2k. In support of its customers' obligations resulting from the FFEIC's Statements, the Company has made the Year 2000 issue a significant priority and assigned a task force with responsibility for an ongoing effort to minimize Year 2000-related risks relative to the Company's products. The Company has completed its review of all of its software products for Year 2000 compliance, and has determined that most of the Company's standard software products are Year 2000 compliant. The Company has not undertaken, and does not intend to undertake, a review of the many customized versions of software products that it has provided customers. The Company has developed a plan to discontinue some of its standard products prior to December 31, 1999, and the Year 2000 issue has been one of the factors considered in those decisions. For those products that will not continue to be offered, generally a Year 2000 compliant replacement product currently exists. For standard products that will continue to be offered, but are not currently Year 2000 compliant, the Company has developed and executed a plan for resolving such compliance-related issues. Remediation was substantially completed during 1998. A matrix describing the Company's product compliance (including a comprehensive definition to determine such compliance) has been communicated to the Company's customers and is available for review on the Company's website. The financial impact of making the required changes to the software programs is not expected to be material to the Company's consolidated financial position, results of operations or cash flows. The Company acquired substantially all of the assets of MCS in January 1999. Although MCS's BankServ product has been certified as Year 2000 compliant, none of the products of MCS are included in the foregoing discussion. The Company intends to complete its Year 2000 review of the MCS products during the second quarter of 1999 consistent with the standards established for the Company's other products. Information on the Company's website is provided to customers for the sole purpose of assisting them in planning for the transition to the Year 2000 and includes the Company's definition of Year 2000 compliance, product compliance status, and, in the case of the Laser Pro Closing/Lending product, includes test guides. This information is updated at least quarterly so that the Company's customers can access current information on the Year 2000 16 compliance status of the Company's products. The matrix does not provide certification of Year 2000 compliance and customers are cautioned that they should independently confirm Year 2000 compliance of the Company's products. The Company has developed a standard Year 2000 compliance warranty and is offering it to customers with respect to those products that will continue to be offered into the next century. This warranty is consistent with the Company's standard product warranties, extends no indeminities, and maintains the liability cap applying otherwise in its licenses. Financial institutions, financial institution regulators, and the many vendors supplying the financial services industry have not developed a consistent and comprehensive definition of what constitutes "compliance" with the Year 2000. This, coupled with the different combinations of software, firmware, and hardware used by customers may lead to disputes against the Company regarding the operation of its software. The outcome of such disputes and the impact on the Company are not estimable at this time. MARKET RISK The Company has not entered into derivative financial instruments. The Company may be exposed to future interest rate changes on its debt. The Company does not believe that a hypothetical 10 percent change in interest rates would have a material effect on the Company's cashflow. LIQUIDITY AND CAPITAL RESOURCES Working capital decreased $5.0 million to $11.9 million at March 31, 1999 from $17.0 million at December 31, 1998. The decrease resulted principally from a decrease in cash due to the purchase of the assets of MCS in January 1999 and to the repurchase by the Company of $1.1 million of its common stock in open market transactions during the first quarter of 1999. Net cash provided by operations was $3.4 million for the three month period ended March 31, 1999 compared to $2.6 million in 1998. The increase was principally the result of increased deferred revenues due to annual maintenance billings and decreased net accounts recievable. These changes were offset in part by decreases in accrued expenses and in customer deposits. Net cash used in investing activities was $5.9 million for the three months ended March 31, 1999 compared to $0.9 million for the same period in 1998. The increase in cash used in investing activities is due principally to cash used in the MCS acquisition. Net cash used in financing activities of $1.1 million during the three months ended March 31, 1999 was principally attributable to cash used for the repurchase of common stock. Net cash used in financing activities of $1.0 million for the same period in 1998 was primarily attributable to payments on the line of credit. Days sales outstanding (DSO's) in accounts receivable, including both billed and unbilled accounts receivable, was 126 days at March 31, 1999 compared to 124 days March 31, 1998. The Company's project-oriented business often requires unbilled accounts receivable and 17 milestone billings, both of which often have longer collection cycles. Unbilled accounts receivable were $5.4 million, or 19.4% of total accounts receivable, at March 31, 1999 compared to $5.7 million, or 21.4% of total accounts receivable, at March 31, 1998. 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 $5.7 million was available at March 31, 1999. Long-term debt, less current portion, of $5.6 million at March 31, 1999 includes $4.0 million drawn on the line of credit. The interest rate on the line of credit borrowings was 7.75% at March 31, 1999. The line of credit expires May 1, 2000. 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, if available, that 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 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. 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 A Form 8-K was filed with the Securities and Exchange Commission on February 10, 1999 with respect to the MCS acquisition. 18 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 14, 1999 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) 19 EX-27 2 EXHIBIT 27
5 1,000 Jan-01-1999 3-MOS Dec-31-1999 Mar-31-1999 0 206 30,671 2,548 372 31,751 15,026 10,618 57,353 19,818 6,052 735 0 19,196 11,742 57,353 1,934 20,053 677 7,747 10,857 250 104 1,449 621 799 0 0 0 799 0.16 0.16
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