-----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, PA0i6dhOg/bsnodCjtJzP2gLU5fmrTY6974wsgKgylAwGEKuRAY8oB7/ljdBE4hz W7vKRAoA3QDW2zfdHmmPuQ== 0000908180-99-000028.txt : 19991117 0000908180-99-000028.hdr.sgml : 19991117 ACCESSION NUMBER: 0000908180-99-000028 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99756431 BUSINESS ADDRESS: STREET 1: 400 S W SIXTH AVE STREET 2: SUITE 200 CITY: PORTLAND STATE: OR ZIP: 97204 BUSINESS PHONE: 5032747280 MAIL ADDRESS: STREET 1: 400 S W SIXTH AVE STREET 2: STE 200 CITY: PORTLAND STATE: OR ZIP: 97204 10-Q 1 PERIOD ENDED 09/30/99 ================================================================================ 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 September 30, 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 Identification No.) incorporation 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 5,219,592 (Class) (Outstanding at November 10, 1999) The index to exhibits appears on page 24 of this document. ================================================================================ CFI PROSERVICES, INC. dba CONCENTREX INCORPORATED FORM 10-Q INDEX PART I - FINANCIAL INFORMATION Page Item 1. Financial Statements Consolidated Balance Sheets - September 30, 1999 and December 31, 1998 2 Consolidated Statements of Operations - Three Months and Nine Months Ended September 30, 1999 and 1998 3 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 1999 and 1998 4 Notes to Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 24 Signatures 25 1 CFI PROSERVICES, INC. dba CONCENTREX INCORPORATED CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
September 30, December 31, 1999 1998 ------------------ ----------------- ASSETS Current Assets: Cash and cash equivalents $ - $ 3,589 Restricted cash 866 - Investments 205 206 Receivables, net of allowances of $3,445 and $2,600 34,807 29,701 Inventory 999 249 Deferred tax asset 1,920 1,341 Prepaid expenses and other current assets 3,642 1,604 ------------------ ----------------- Total Current Assets 42,439 36,690 Property and equipment, net of accumulated depreciation of $11,985 and $9,947 8,000 4,534 Software development costs, net of accumulated amortization of $4,837 and $3,368 5,998 8,277 Purchased software costs, net of accumulated amortization of $448 and $19 8,163 211 Goodwill, net of accumulated amortization of $6,621 and $4,763 58,771 6,190 Deferred tax asset 9,862 355 Other assets 5,306 524 ================== ================= Total Assets $ 138,539 $ 56,781 ================== ================= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Drafts payable $ 547 $ - Accounts payable 4,350 1,986 Accrued expenses 14,344 8,017 Deferred revenues 10,206 5,300 Customer deposits 3,797 3,681 Line of credit 5,396 - Current portion of long-term debt 2,531 261 Other current liabilities 303 Income taxes payable - 473 ------------------ ----------------- Total Current Liabilities 41,474 19,718 Commitments and Contingencies Long-term Debt, less current portion 63,026 5,693 Other Long-term Liabilities 876 - Convertible Subordinated Notes 5,619 - Mandatory Redeemable Class A Preferred Stock 731 738 Shareholders' Equity: Series preferred stock, 5,000,000 shares authorized, none issued and outstanding - - Common stock, no par value, 10,000,000 shares authorized, 5,217,491 and 5,032,977 shares issued and outstanding 25,087 19,689 Retained earnings 1,726 10,943 ------------------ ----------------- Total Shareholders' Equity 26,813 30,632 ------------------ ----------------- Total Liabilities and Shareholders' Equity $ 138,539 $ 56,781 ================== =================
The accompanying notes are an integral part of these consolidated balance sheets 2 CFI PROSERVICES, INC. dba CONCENTREX INCORPORATED CONSOLIDATED SATEMENTS OF OPERATIONS (Dollars in thousands, except per share data)
Three Months Ended Nine Months Ended September 30, September 30, ---------------------------- ---------------------------- 1999 1998 1999 1998 ------------ ------------- ------------- ------------ Revenue Application Software Product Line Software license fees $ 11,981 $ 14,239 $ 34,962 $ 33,882 Service and support 7,726 6,801 23,196 20,453 Information Management Product Line Software license fees 1,396 - 1,578 - Service and support 2,430 - 3,973 - e-Commerce Product Line Software license fees 297 290 1,414 1,097 Service and support 3,261 1,123 7,264 2,862 Ancillary Products 2,472 733 5,058 2,945 ------------ ------------- ------------- ------------ Total Revenue 29,563 23,186 77,445 61,239 Cost of Revenue 11,563 7,773 29,569 21,688 ------------ ------------- ------------- ------------ Gross Profit 18,000 15,413 47,876 39,551 Operating Expenses Sales and marketing 4,952 5,203 13,498 14,054 Product development 6,737 4,129 17,004 10,467 General and administrative 5,373 2,794 12,115 7,430 Goodwill amortization 690 297 1,506 890 Acquired in-process research and development and other charges 6,721 - 10,521 - ------------ ------------- ------------- ------------ Total Operating Expenses 24,473 12,423 54,644 32,841 ------------ ------------- ------------- ------------ Income (Loss) from Operations (6,473) 2,990 (6,768) 6,710 Non-operating Income (Expense) Interest expense (1,642) (118) (1,957) (337) Interest income 70 80 214 209 Other, net 165 (64) 192 (168) ------------ ------------- ------------- ------------ Total Non-operating Expense (1,407) (102) (1,551) (296) ------------ ------------- ------------- ------------ Income (Loss) before Income Taxes (7,880) 2,888 (8,319) 6,414 Provision for Income Taxes 1,134 1,271 829 2,822 ------------ ------------- ------------- ------------ Net Income (Loss) (9,014) 1,617 (9,148) 3,592 Preferred Stock Dividend 23 24 69 72 ------------ ------------- ------------- ------------ Net Income (Loss) Applicable to Common Shareholders $ (9,037) $ 1,593 $ (9,217) $ 3,520 ============= ============== ============== ============= Basic Net Income (Loss) Per Share $ (1.74) $ 0.32 $ (1.81) $ 0.70 ============= ============== ============== ============= Diluted Net Income (Loss) Per Share $ (1.74) $ 0.31 $ (1.81) $ 0.68 ============= ============== ============== =============
The accompanying notes are an integral part of these consolidated statements. 3 CFI PROSERVICES, INC. dba CONCENTREX INCORPORATED CONSOLIDATED SATEMENTS OF CASH FLOWS (Dollars in thousands)
Nine months ended September 30, ------------------------------------- 1999 1998 ---------------- ------------------ Cash flows from operating activities: Net income (loss) applicable to common shareholders $ (9,217) $ 3,520 Adjustments to reconcile net income (loss) applicable to common shareholders to cash provided by operating activities: Depreciation and amortization 6,549 4,889 Interest accreted on mandatory redeemable preferred stock 71 72 Interest accreted on notes payable 140 70 Amortization of debt discount and deferred loan costs 311 - Equity in losses attributable to joint venture - 248 Write off of in process research and development 9,000 - Expense for stock warrants issued 124 - Expense for ESSOP shares issued 955 - (Increase) decrease in assets, net of effects from purchase of businesses: Receivables, net 1,129 4,779 Inventories, net (114) 25 Prepaid expenses and other assets (494) 351 Increase (decrease) in liabilities, net of effects from purchase of businesses: Drafts payable 547 - Accounts payable 850 (415) Accrued expenses (3,255) (1,593) Deferred revenues 1,351 (5,560) Customer deposits (2,710) 69 Other current liabilities 186 - Income taxes payable (473) (255) ---------------- ------------------ Net cash provided by operating activities 4,950 6,200 Cash flows from investing activities: Expenditures for property and equipment (2,058) (1,216) Software development costs capitalized - (1,054) Investment in joint venture - (510) Proceeds from long-term note receivable 115 235 Cash paid for acquisition of Modern Computer Systems, Inc. net of cash received (5,591) - Cash received in acquisition of MECA Software, LLC 965 - Cash paid for acquisition of ULTRADATA Corporation, net of (59,940) - cash received Cash paid for TDS (98) - ---------------- ------------------ Net cash used in investing activity (66,607) (2,545) Cash flows from financing activities: Net proceeds from (payments on) line of credit 1,396 (1,310) Payments on long-term debt (7,645) (579) Proceeds from long term debt 65,000 - Proceeds from issuance of convertible subordinated notes 5,550 - Payment of deferred loan costs (5,071) - Payments on mandatory redeemable preferred stock (78) (78) Proceeds from issuance of common stock 927 767 Repurchase of common stock (1,145) - ---------------- ------------------ Net cash provided by (used in) financing activities 58,934 (1,200) ---------------- ------------------ Increase (decrease) in cash and cash equivalents (2,723) 2,455 Cash and cash equivalents (including restricted cash): Beginning of period 3,589 20 ---------------- ------------------ End of period $ 866 $ 2,475 ================ ==================
The accompanying notes are an integral part of these consolidated statements. 4 CFI PROSERVICES, INC. dba CONCENTREX INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular amounts in thousands, except per share amounts or as otherwise indicated) (Unaudited) NOTE 1. BASIS OF PRESENTATION The financial information included herein for the three and nine month periods ended September 30, 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., d/b/a Concentrex Incorporated ("Concentrex" or the "Company"). The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's 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. Certain prior period amounts have been reclassified to conform to the current presentation. NOTE 2. SUPPLEMENTAL CASH FLOW INFORMATION Supplemental disclosure of cash flow information is as follows:
Nine Months Ended September 30, ----------------------------------------- 1999 1998 ----------------- -------------------- Cash paid during the period for income taxes $ 1,976 $ 3,076 Cash paid during the period for interest and dividends 2,526 346
Noncash investing and financing activities were as follows:
Nine Months Ended September 30, ----------------------------------------- 1999 1998 ----------------- -------------------- Tax benefit from exercise of nonqualified stock options $ -- $ 56 Increase in goodwill for accrued acquisition related contingent royalties 396 481 Reclassification of bank line of credit to long-term debt -- 4,000 Issuance of common stock in connection with acquisition of Modern Computer Systems, Inc. 650 -- Issuance of common stock in connection with acquisition of MECA Software, LLC 569 -- Assumption of debt in connection with acquisition of MECA Software, LLC 7,500 -- Fair value of stock warrants issued in connection with 1,667 -- financings Fair value of stock options converted in connection with acquisition of ULTRADATA Corporation 1,651 --
5 NOTE 3. EARNINGS PER SHARE Following is a reconciliation of basic earnings per share ("EPS") and diluted EPS:
Three Months Ended September 30, 1999 1998 --------------------------------------- ----------------------------- ----------------------------- Per Per Share Share Basic EPS Loss Shares Amount Income Shares Amount --------- --------- -------- ---------- --------- --------- --------- Net income (loss) applicable to common shareholders $ (9,037) 5,197 $ (1.74) $ 1,593 5,017 $ 0.32 ========== ========= Effect of dilutive securities: Stock options -- 117 ------------------ ------------------- Diluted EPS ----------- Net income (loss) applicable to common shareholders $ (9,037) 5,197 $ (1.74) $ 1,593 5,123 $ 0.31 ========== =========
Nine Months Ended September 30, 1999 1998 --------------------------------------- ----------------------------- ----------------------------- Per Per Share Share Basic EPS Loss Shares Amount Income Shares Amount --------- --------- -------- ---------- --------- --------- --------- Net income (loss) applicable to common shareholders $ (9,217) 5,102 $ (1.81) $ 3,520 5,005 $ 0.70 ========== ========= Effect of dilutive securities: Stock options -- 174 ------------------ ------------------- Diluted EPS ----------- Net income (loss) applicable to common shareholders $ (9,217) 5,102 $ (1.81) $ 3,520 5,179 $ 0.68 ========== =========
The number of options and warrants to purchase shares of common stock and the assumed conversion of convertible subordinated notes that were excluded from the table above (as the effect would have been anti-dilutive) were 2,377,346 and 447,400 for the three months ended September 30, 1999 and 1998, respectively, and 2,377,346 and 298,700 for the nine months ended September 30, 1999 and 1998, respectively. NOTE 4. STOCK REPURCHASE During January 1999 the Company's Board of Directors authorized a repurchase of 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. The Company did not repurchase any shares during subsequent quarters. NOTE 5. CLASSIFICATION OF REVENUE During the three months ended September 30, 1999, Concentrex reorganized itself into four product lines: Application Software, Information Management, e-Commerce and Ancillary Products. Prior period revenues have been reclassified for all periods included herein to reflect the new product lines. Total revenues did not change as a result of this reclassification. 6 NOTE 6. ACQUISITIONS Effective January 1, 1999 the Company acquired substantially all of the assets of Modern Computer Systems, Inc. and certain related corporations (collectively, MCS). MCS offers hardware and software solutions for the back office accounting needs of community banks and credit unions. The acquisition was accounted for as a purchase, resulting in approximately $7.0 million of goodwill, intangibles and purchased software. The purchase price was $6.0 million in cash and $650,000 of common stock. The 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 pro forma results reflecting the MCS acquisition are not materially different from the Company's reported results for the nine months ended September 30, 1998. Effective May 17, 1999 the Company and Moneyscape Holdings, Inc. (a wholly owned subsidiary of Concentrex) acquired 99% and 1%, respectively, of the equity in MECA Software, L.L.C. ("MECA") in exchange for 50,000 shares of Concentrex common stock. The acquisition was accounted for as a purchase. The net purchase price approximated $12.3 million and consisted of the common stock issued, assumption of net liabilities and accrued acquisition costs. The liabilities assumed included $7.5 million of debt owed to certain former members of MECA and was repaid by the Company from proceeds from bank borrowings. The purchase price was allocated to the estimated fair value of the assets acquired, which included the expensing of $3.8 million of in-process research and development and the recognition of approximately a $9.9 million deferred tax asset. The excess of the fair value of the assets acquired over cost (negative goodwill) was allocated to reduce acquired non-current assets. The Company is still obtaining certain data related to the acquisition, and accordingly, the purchase price allocation remains open. The operations of MECA have been included in the Company's results of operations since May 17, 1999. Effective August 13, 1999 Concentrex acquired all of the outstanding common stock of ULTRADATA Corporation ("ULTRADATA"). ULTRADATA provides information management software and solutions for relationship-oriented financial institutions. The acquisition was accounted for as a purchase, resulting in approximately $53.6 million of goodwill, intangibles and purchased software. These amounts are being amortized over a period of 6 to 20 years. The purchase price was $66.3 million, including acquisition-related expenses. The purchase price was allocated to the estimated fair value of the assets acquired, which included the expensing of $5.2 million of in-process research and development. The Company is still obtaining certain data related to the acquisition, and, accordingly, the purchase price allocation remains open. The operations of ULTRADATA have been included in the Company's results of operations since August 13, 1999. Unaudited pro forma results of operations, including results of ULTRADATA and MECA (MCS results are not considered significant and are therefore, to the extent that they are not already included in the actual results, not included in the unaudited pro forma information) for the three month and nine month periods ended September 30, 1999 and 1998, assuming such acquisitions occurred at the beginning of 1998 and includes in process research and development charge related to the ULTRADATA and MECA acquisitions in the periods when incurred. 7
Three Months Ended Nine Months Ended September 30, September 30, ------------------------------- -------------------------------- 1999 1998 1999 1998 ------------- -------------- ------------- --------------- Total revenues $ 31,537 $ 37,836 $ 102,048 $ 102,041 Net loss applicable to common Shareholders $ (9,808) $ (1,167) $ (17,471) $ (5,585) Loss per share - Basic $ (1.89) $ (0.23) $ (3.41) $ (1.10) Loss per share - Diluted $ (1.89) $ (0.23) $ (3.41) $ (1.10)
NOTE 7. FINANCING EVENTS On May 14, 1999 the Company sold 90,000 shares of its common stock to one investor for gross proceeds of $900,000. The proceeds of the issuance were used to repay liabilities acquired in the MECA acquisition. On May 17, 1999 the Company entered into two lending agreements (the "USNB Lending Agreements") with U.S. Bank National Association ("USNB"). On August 13, 1999 the USNB Lending Agreements were terminated, and all amounts outstanding were repaid, upon completion of the financing described in the following paragraphs. The first USNB Lending Agreement was for a revolving line of credit in an amount not to exceed $5.0 million (the "Revolving Line") to be used for working capital. The Company drew $4.0 million on the Revolving Line on May 17, 1999 and used the proceeds to pay off all amounts owing on a previous line of credit with Bank of America; the Bank of America credit facility with the Company was simultaneously terminated. The second USNB Lending Agreement was for a revolving line of credit in an amount not to exceed $15.0 million (the "Acquisition Line") to be used for acquisitions. The Company drew $8.3 million on the Acquisition Line on May 17, 1999 and used the proceeds to pay off certain liabilities assumed in connection with the acquisition of MECA on that date. The Company drew an additional $2.7 million on the Acquisition Line to purchase shares of Ultradata common stock in open market transactions during the quarter ended June 30, 1999. On August 13, 1999 the Company and its subsidiaries entered into a financing agreement (the "Financing Agreement") with Foothill Capital Corporation ("Foothill") and certain other parties (collectively, the "Lenders") for three credit facilities aggregating $80 million. The credit facilities provided under the Financing Agreement terminate on August 13, 2002. The first credit facility under the Financing Agreement is a revolving credit facility (the "Foothill Revolver") for up to $15 million, subject to borrowing base restrictions related to accounts receivable of the Company and its subsidiaries. The Foothill Revolver bears interest at an annual rate equal to the prime rate plus 1.0%. On August 13, 1999 the Company drew $1.7 million under the Foothill Revolver in connection with the Ultradata acquisition. The interest rate on the Foothill Revolver at August 13, 1999 was 9.0% and was 9.25% at September 30, 1999. The second credit facility under the Financing Agreement is a term loan for $35 million (the "Term A Loan") that bears interest at an annual rate equal to the prime rate plus 2.0%. The Term A Loan has scheduled quarterly prepayments of principal beginning in the second quarter of 2000 that are expected to aggregate $19 million over the term of the loan; the 8 expected remaining principal of $16 million is due on August 13, 2002. On August 13, 1999 the Company drew $35 million under the Term A Loan in connection with the Ultradata acquisition. The interest rate on the Term A Loan at August 13, 1999 was 10.0% and was 10.25% at September 30,1999. The third credit facility under the Financing Agreement is a term loan for $30 million (the "Term B Loan") that bears interest at an annual rate equal to the prime rate plus 5.0%. The Term B Loan has no scheduled prepayments of principal. The Term B Loan is due in full on August 13, 2002. On August 13, 1999 the Company drew $30 million under the Term B Loan in connection with the Ultradata acquisition. The interest rate on the Term B Loan at August 13, 1999 was 13.0% and was 13.25% at September 30, 1999. In connection with the credit facilities provided under the Financing Agreement, the Company issued to the Lenders warrants (the "Lender Warrants") to purchase up to 381,822 shares of the common stock of the Company, which represents 5.0% of the fully diluted common stock of the Company. The exercise price of the Lender Warrants is $12.34 per share. The Company has agreed to register for resale the shares of common stock issuable upon exercise of the Lender Warrants. The Lender Warrants are exercisable through August 13, 2004. The Company also issued warrants to purchase 58,000 shares of common stock to the debt placement agent in connection with obtaining the credit facilities under the Financing Agreement. The warrants issued to the debt placement agent have the same terms as the Lender Warrants. The Company recorded the fair value of the warrants as debt discount and deferred loan costs as appropriate. On August 13, 1999 the Company also issued 10% Convertible Subordinated Discount Notes (the "Subordinated Notes") in the aggregate original face amount of $7.4 million (with original issue discount of $1.9 million). The Subordinated Notes are generally non-callable by the Company through August 13, 2002. Interest at 10% per annum accretes on the Subordinated Notes through August 13, 2002 and then becomes payable in cash by the Company if the Subordinated Notes are not redeemed or converted by that date. The Subordinated Notes are initially convertible into a maximum of 602,534 shares of the Company's common stock at the election of the holders. The actual number of shares into which the Subordinated Notes are convertible depends upon the date of conversion and the amount of interest accreted on the Subordinated Notes through the date of conversion. The conversion price of the Subordinated Notes is initially $12.34 per share. If the average closing price of the Company's common stock for the 10 trading days ending on August 12, 2000 is less than $12.34 per share, the conversion price will be reduced at that time to equal such average price. The Subordinated Notes are due on August 13, 2004 if not previously converted by that date. The Company received gross proceeds of $5.5 million upon issuance of the Subordinated Notes, all of which was used in connection the Ultradata acquisition. At September 30,1999 and December 31,1998, long-term debt consisted of the following: 9
September 30, December 31, 1999 1998 ------------------ ------------------ Term A Loan $ 35,000 $ -- Term B Loan 30,000 -- Debt discount related to fair value of warrants (1,387) -- Note payable, in relation to Halcyon acquisition, with imputed interest at 8.0%, due in quarterly installments of $50, including interest, payable through 2001 299 449 Note payable, assumed in the Halcyon acquisition, in monthly installments of $6, including interest imputed at 8.5%, with final payment due October 2004 276 307 Guaranteed royalties to be paid in relation to Input acquisition, with imputed interest at 6.0%, payable through March 2001 913 1,148 TSTG non-compete payments through April 1999 -- 50 Note payable, assumed in the ULTRADATA acquisition, due in monthly 456 -- installments of $29, including interest at the rate of 10.0% Long-term portion of line of credit -- 4,000 ------------------ ------------------ 65,557 5,954 Less current portion of long-term debt (2,531) (261) ================== ================== Long-term debt $ 63,026 $ 5,693 ================== ==================
10 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., dba Concentrex Incorporated ("Concentrex" or the "Company") is a leading provider of technology powered solutions to deliver financial services, including solutions for real-time back office accounting, branch automation, loan origination, new account opening, call centers, cross-selling products, and electronic commerce. The Company began doing business under the name "Concentrex Incorporated" on July 1, 1999. It previously did business as CFI ProServices, Inc., which will remain its legal name until its shareholders change it. The Company anticipates that its shareholders will formally approve changing the name to Concentrex Incorporated at the next regularly scheduled shareholder meeting in May 2000. The Company's new Nasdaq trading symbol is "CCTX". Concentrex made three acquisitions during the nine months ended September 30, 1999. Concentrex acquired Modern Computer Systems (MCS) as of January 1, 1999, MECA Software LLC (MECA) as of May 17, 1999 and ULTRADATA Corporation (ULTRADATA) as of August 13, 1999. All three acquisitions were accounted for as purchases and have been reflected in the results of operations presented herein since their respective acquisition dates. During the third quarter ended September 30, 1999, Concentrex reorganized itself into four product lines: Application Software, Information Management, e-Commerce and Ancillary Products. Accordingly, Concentrex reclassified its operating revenue data for all periods included herein to reflect the new product lines. Total revenue did not change as a result of this reclassification. The Company's backlog as of September 30, 1999, was $17.3 million compared to $12.0 million as of September 30, 1998. Concentrex'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. 11 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 Sept. 30, Nine Months Ended Sept. 30, -------------------------------- ----------------------------- 1999 1998 1999 1998 ---------------- ------------- ------------- ------------ Revenue Application Software 66.7 % 90.7 % 75.1 % 88.7 % Information Management 12.9 -- 7.2 -- e-Commerce 12.0 6.1 11.2 6.5 Ancillary Products 8.4 3.2 6.5 4.8 ---------------- ------------- ------------- ------------ Total revenue 100.0 100.0 100.0 100.0 Gross profit 60.9 66.5 61.8 64.6 Operating expenses Sales and marketing 16.8 22.4 17.4 22.9 Product development 22.8 17.8 22.0 17.1 General and administrative 18.2 12.1 15.6 12.1 Amortization of intangibles 2.3 1.3 1.9 1.5 In process research and development and other charges 22.7 -- 13.6 -- ---------------- ------------- ------------- ------------ Total operating expenses 82.8 53.6 70.6 53.6 ---------------- ------------- ------------- ------------ Income (loss) from operations* (21.9) 12.9 (8.7) 11.0 Non-operating expense (4.8) (0.4) (2.0) (0.5) ---------------- ------------- ------------- ------------ Income (loss) before income taxes (26.7) 12.5 (10.7) 10.5 Provision for (benefit from) income taxes 3.8 5.5 1.1 4.6 Preferred stock dividend 0.1 0.1 0.1 0.1 ---------------- ------------- ------------- ------------ Net income (loss) applicable to common shareholders* (30.6) % 6.9 % (11.9) % 5.7 % ================ ============= ============= ============ * Excluding the impact of acquired in-process research and development and other charges, income (loss) from operations as a percentage of revenue for the three and nine month periods ending September 30, 1999 would have been 0.8% and 4.8%, respectively, and net income (loss) applicable to common shareholders would have been (9.8)% and 0.9% for the same respective periods.
REVENUE Total revenue increased $6.4 million, or 27.5%, to $29.6 million for the three months ended September 30, 1999 compared to $23.2 million in the comparable period in 1998. Total revenue increased $16.2 million, or 26.5%, to $77.4 million for the nine months ended September 30, 1999 compared to $61.2 million in the comparable period in 1998. Concentrex has increased the percentage of its service and support revenue. Concentrex believes that service and support revenue is more predictable and recurring than is software license revenue. Service and support revenue accounted for 45.4% and 34.2% of Concentrex's total revenue in the three months ended September 30, 1999 and 1998, respectively, and accounted for 44.5% and 38.1% of Concentrex's total revenue in the nine months ended September 30, 1999 and 1998. 12
Revenue By Product Line (in $millions) Three Months Ended Sept. 30, Nine Months Ended Sept. 30, 1999 1998 1999 1998 ------------ ---------------- ----------------- ---------------- Application Software Software License Revenue $ 12.0 $ 14.3 $ 34.9 $ 33.8 Service & Support Revenue 7.7 6.8 23.2 20.5 ------------ ---------------- ----------------- ---------------- Subtotal 19.7 21.1 58.1 54.3 Information Management Software License Revenue 1.4 -- 1.6 -- Service & Support Revenue 2.4 -- 4.0 -- ------------ ---------------- ----------------- ---------------- Subtotal 3.8 -- 5.6 -- e-Commerce Software License Revenue 0.3 0.3 1.4 1.1 Service & Support Revenue 3.3 1.1 7.2 2.9 ------------ ---------------- ----------------- ---------------- 3.6 1.4 8.6 4.0 Ancillary Products 2.5 0.7 5.1 2.9 ------------ ---------------- ----------------- ---------------- Total Revenue $ 29.6 $23.2 $77.4 $61.2 ============ ================ ================= ================
APPLICATION SOFTWARE PRODUCT LINE. The Application Software product line includes the lending, branch automation and connectivity software products and support services previously provided by CFI ProServices, Inc. Total revenue in the Application Software product line decreased $1.4 million, or 6.3%, to $19.7 million in the three months ended September 30, 1999 from $21.1 million in the three months ended September 30, 1998. The decline in revenue resulted principally from lower software license revenue due to Year 2000 pressures that caused Concentrex's financial institution customers to postpone their decisions on new software purchases and to slow or temporarily suspend implementation projects, offset in part by higher service and support revenue. Application Software license revenue decreased $2.3 million, or 15.9%, to $12.0 million in the three months ended September 30, 1999 from $14.2 million in the three months ended September 30, 1998. Service and support revenue consists 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 revenue in the Application Software product line increased $0.9 million, or 13.6%, to $7.7 million in the three months ended September 30, 1999 from $6.8 million in the three months ended September 30, 1998. The increase is primarily due to higher maintenance revenue from a larger base of installed products. 13 Total revenue in the Application Software product line increased $3.8 million, or 7.0%, to $58.1 million in the nine months ended September 30, 1999 from $54.3 million in the nine months ended September 30, 1998. Application Software license revenue increased $1.1 million, or 3.3%, to $34.9 million in the nine months ended September 30, 1999 from $33.8 million in the nine months ended September 30, 1998. The increase was primarily due to higher revenues from Concentrex's mortgage origination products, offset in part by lower branch automation license revenue. Service and support revenue in the Application Software product line increased $2.7 million, or 13.4%, to $23.2 million in the nine months ended September 30, 1999 from $20.5 million in the nine months ended September 30, 1998. The increase is primarily due to higher maintenance revenue from a larger base of installed products. INFORMATION MANAGEMENT PRODUCT LINE. The Information Management product line includes the core ("host") processing products acquired by Concentrex from ULTRADATA in August 1999 and from Modern Computer Systems, Inc. ("MCS") in January 1999. Concentrex had no Information Management revenue in the three or nine months ended September 30, 1998. Revenue for the three and nine months ended September 30, 1999 consists of revenue from MCS and ULTRADATA since their acquisition dates. Total revenue in the Information Management product line was $3.8 million and $5.6 million in the three and nine months ended September 30, 1999, respectively. License fee revenue was $1.4 million and $1.6 million in the three and nine months ended September 30, 1999, respectively. Service and support revenue was $2.4 million and $4.0 million in the three and nine months ended September 30, 1999, respectively. E-COMMERCE PRODUCT LINE. The e-Commerce product line includes the home banking and bill payment products previously sold by CFI ProServices, Inc. and the professional services and technical support services acquired from MECA in May 1999. Total revenue in the e-Commerce product line increased $2.2 million, or 152%, to $3.6 million in the three months ended September 30, 1999 from $1.4 million in the three months ended September 30, 1998. e-Commerce license revenue remained unchanged in the three months ended September 30, 1999 and 1998 at $0.3 million. Service and support revenue in the e-Commerce product line increased $2.2 million, or 190%, to $3.3 million in the three months ended September 30, 1999 from $1.1 million in the three months ended September 30, 1998. The increase was primarily due to the acquisition of MECA's technical support operations in May 1999, and to a 98.2% increase in revenue from Concentrex's on-line bill payment services. Total revenue in the e-Commerce product line increased $4.6 million, or 119%, to $8.6 million in the nine months ended September 30, 1999 from $4.0 million in the nine months ended September 30, 1998. e-Commerce license revenue increased $0.3 million, or 28.9%, to $1.4 million in the nine months ended September 30, 1999 from $1.1 million in the nine months ended September 30, 1998. Service and support revenue in the e-Commerce product line increased $4.3 million, or 154%, to $7.2 million in the nine months ended September 30, 1999 from $2.9 million in the nine months ended September 30, 1998. The increase was primarily due to the acquisition of MECA's technical support operations in May 1999, and to a 96.6% increase in revenue from Concentrex's on-line bill payment services. 14 ANCILLARY PRODUCTS. The Ancillary Products product line includes preprinted forms, font cartridges and modems previously sold by CFI ProServices, Inc., license revenue from a personal financial management software product acquired from MECA in May 1999 and fulfillment services acquired from MECA. Concentrex anticipates that revenue from MECA's legacy personal financial management software product will decline in future periods because it is no longer being actively marketed. Revenue in the Ancillary Products product line increased $1.8 million, or 237%, to $2.5 million in the three months ended September 30, 1999 from $0.7 million in the three months ended September 30, 1998. Total revenue in the Ancillary Products product line increased $2.2 million, or 71.7% to $5.1 million in the nine months ended September 30, 1999 from $2.9 million in the nine months ended September 30, 1998. The increases were primarily due to the acquisition of MECA's operations in May 1999. 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 $3.8 million, or 48.8%, to $11.6 million and $7.8 million, or 36.3%, to $29.6 million for the three and nine months ended September 30, 1999, respectively, compared to $7.8 million and $21.7 million in the same periods in 1998. The increases are primarily attributable to the acquisitions of ULTRADATA and MECA in 1999. The increases are also attributable to higher 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 $0.9 million, for the three months ended September 30, 1999 and $0.8 million, to $2.7 million, for the first nine months of 1999 from $0.7 million and $1.9 million for the respective comparable periods in 1998. The Company capitalized no software development costs in the three and nine month periods ended September 30, 1999 as compared to none and $1.1 million for the comparable periods in 1998. Capitalized software development costs net of accumulated amortization were $6.0 million at September 30, 1999. As a result of Concentrex'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. 15 Gross margin was 60.9% and 61.8%, respectively, for the three and nine months ended September 30, 1999 compared to 66.5% and 64.6% in the same periods in 1998. Operating margin declined to (22.3%) and (8.9%) for the three and nine months ended September 30, 1999 compared to 12.9% and 11.0%, respectively, in 1998. The decreases in operating margin are primarily due to the in-process research and development and other acquisition-related charges incurred during the second and third quarters of 1999 in connection with the MECA and ULTRADATA acquisition. Concentrex also recorded a $0.9 million charge in the three months ended September 30, 1999 with respect to an arbitration award relating to a customer dispute. Operating margins, excluding these charges, would have been 0.8% and 4.9%, respectively, in the three and nine months ended September 30, 1999. OPERATING EXPENSES Sales and Marketing. Sales and marketing expenses decreased to $4.9 million, or 16.8% of revenue, for the three months ended September 30, 1999 compared to $5.2 million, or 22.4% of revenue, for the three months ended September 30, 1998. Sales and marketing expenses decreased to $13.5 million, or 17.4% of revenue, for the nine months ended September 30, 1999 compared to $14.1 million, or 22.9% of revenue, for the nine months ended September 30, 1998. The percentage decreases resulted primarily from the MECA acquisition in May 1999, which contributed revenue without commensurate sales and marketing costs. PRODUCT DEVELOPMENT. Product development expenses include costs of maintaining and enhancing existing products and developing new products. Product development expenses were $6.7 million, or 22.8% of revenue, for the three months ended September 30, 1999 compared to $4.1 million, or 17.8% of revenue, in the comparable 1998 period. Product development expenses were $17.0 million, or 22.0% of revenue, for the nine months ended September 30, 1999 compared to $10.5 million, or 17.1% of revenue, for the nine months ended September 30, 1998. The increases in dollar amount and percentage of revenue were principally the result of increased staffing in the development areas of the Company due to the MECA and ULTRADATA acquisitions. The Company believes that the current development cycle for its compliance-related products in the Application Software operating segment, 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 $5.4 million, or 18.2% of revenue, for the three months ended September 30, 1999 compared to $2.8 million, or 12.1% of revenue, for the three months ended September 30, 1998. General and administrative costs were $12.1 million, or 15.6% of revenue, for the first nine months of 1999 compared to $7.4 million, or 12.1% of revenue for the same period in 1998. The increases in dollar amount and in percentages are principally due to the MECA and ULTRADATA acquisitions. 16 AMORTIZATION OF GOODWILL. Amortization of goodwill was $0.7 million and $1.5 million, respectively, for the three and nine months ended September 30, 1999 compared to $0.3 million and $0.9 million for the comparable periods in 1998. The increases are due principally to the goodwill resulting from the ULTRADATA acquisition. ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT AND OTHER ACQUISITION-RELATED COSTS. In connection with the acquisition of MECA in May of 1999 and of ULTRADATA in August 1999, Concentrex recorded expense of $3.8 million in the second quarter of 1999 and of $5.2 million in the third quarter of 1999 for in-process research and development efforts in process at the dates of acquisition. The values assigned to the in-process research and development efforts were determined by independent appraisal and represent those efforts in process at the dates of acquisition that had not yet reached the point where technological feasibility had been established and that had no alternative future uses. Accounting rules require these costs be expensed as incurred. The Company believes these research and development efforts will result in commercially viable products within the next nine months, at an additional cost of approximately $1.2 million. Concentrex also expensed $0.6 million of other costs, primarily accrued bonus costs, in the three months ended September 30, 1999 in connection with the ULTRADATA acquisition. NON-OPERATING EXPENSES Net interest expense was $1.6 million for the three months ended September 30, 1999 compared to $0.0 in the comparable 1998 period. Net interest expense was $1.7 million for the nine months ended September 30, 1999 compared to $0.1 million in the comparable 1998 period. The increases in net interest expense are attributable to the debt incurred by Concentrex in August 1999 in connection with the financing of the ULTRADATA transaction and the refinancing of the MECA transaction. See Note 7 of Notes to Consolidated Financial Statements. PROVISION FOR INCOME TAXES The effective tax rates for the three and nine months ended September 30, 1999 were 14.2% and 9.8%, respectively, compared to 44% for the same periods in 1998. The provisions for the 1999 periods resulted from the effects of non-deductible in-process research and development charges incurred in the second and third quarters of 1999, and from the significant increase in the non-deductible amortization of goodwill from the ULTRADATA acquisition. 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 17 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 second 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. 18 YEAR 2000 The Year 2000 issue identifies problems that may arise in computer equipment and software, as well as embedded electronic systems, because of the way these systems are programmed to interpret certain dates that will occur around the change in century. In the computer industry this is primarily the result of computer programs being designed and developed using or reserving only two digits in date fields (rather than four digits) to identify the century, without considering the ability of the program to properly distinguish the 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. The Company plans to routinely backup its financial data through the end of 1999 and has developed a contingency plan with respect to the accounting system. 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 fourth quarter of 1999. The cost of the update is estimated to be immaterial. 19 The Company has completed a survey of its software vendors. 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 end of 1999. The Company has received representations that its phone and voice mail systems became Year 2000 compliant through upgrades completed during 1999. As to its phone service providers, the Company has offices located at 12 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 has developed 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. 20 Concern over Year 2000 issues is permeating the financial services industry, and management expects that the resolution of these concerns will continue to 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 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. 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 all of the equity interests in MECA in May 1999 and in Ultradata in August 1999. The products of both organizations are year 2000 compliant. 21 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 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 indemnities, 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 any significant derivative financial instruments. The Company may be exposed to future interest rate changes on its debt. During the three months ended September 30, 1999, the Company incurred significant indebtedness. A hypothetical 10% increase in interest rates on Concentrex's current level of debt would increase cash interest expense by approximately $0.6 million per year. The Company has purchased an interest rate cap for a substantial portion of its long-term debt. The interest rate cap will become effective if the prime rate of interest exceeds 10.0% per year. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operations was $5.0 million for the nine months ended September 30, 1999 compared to $6.2 million for the same period in 1998. Working capital decreased to $1.0 million at September 30, 1999 from $17.0 million at December 31, 1998. The decrease occurred because of liabilities assumed in the MECA and ULTRADATA acquisitions and because of additional debt incurred to finance those acquisitions. Net cash used in investing activities was $66.6 million for the nine months ended September 30, 1999 compared to $2.5 million used in the same period in 1998. The increase was due to the acquisition of MCS in January 1999, of MECA in May 1999 and of ULTRADATA in August 1999. Net cash provided by financing activities was $58.9 million for the nine months ended September 30, 1999 compared to net use of $1.2 million in the same period in 1998. Net cash provided by financing activities in 1999 resulted from the sale of 90,000 shares of common stock in May 1999 and the incurrence of debt to finance the Ultradata acquisition in August 1999, and the refinance of debt in connection with the MECA acquisition in May 1999. 22 Days sales outstanding (DSO's) in accounts receivable, including both billed and unbilled accounts receivable, was 105 days at each of September 30, 1999 and 1998. The Company's project-oriented business often requires unbilled accounts receivable and milestone billings, both of which often have longer collection cycles. Unbilled accounts receivable were $8.7 million, or 25.0% of total accounts receivable, at September 30, 1999 compared to $6.9 million, or 25.0% of total accounts receivable, at September 30, 1998. In connection with the MECA and ULTRADATA transactions, Concentrex substantially increased its outstanding debt. See Note 7 of Notes to Consolidated Financial Statements for a description of Concentrex's loan agreements and credit facilities. At September 30, 1999, Concentrex had the following debt under its Financing Agreement: Gross Stated Interest Rate At Amount September 30, 1999 -------------- ----------------------- Revolving Line of Credit $ 5.4 million 9.25% 3-year Term A Loan $ 35.0 million 10.25% 3-year Term B Loan $ 30.0 million 13.25% -------------- Total $ 70.4 million In connection with the ULTRADATA acquisition, the Company also issued convertible subordinated notes. See Note 7 of Notes to Consolidated Financial Statements. 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 plus a revolving line of credit up to $15.0 million, subject to borrowing base restrictions related to accounts receivable of the Company and its subsidiaries. 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. 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 27 Financial Data Schedule (b) Reports on Form 8-K A Form 8-K/A was filed with the Securities and Exchange Commission on August 4, 1999 with respect to the acquisition of MECA Software, L.L.C. by the Registrant. A Form 8-K was filed with the Securities and Exchange Commission on August 27, 1999 with respect to the acquisition of ULTRADATA Corporation by the Registrant. A Form 8-K/A was filed with the Securities and Exchange Commission on October 27, 1999 with respect to the acquisition of ULTRADATA Corporation by the Registrant. 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: November 15, 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) 25 EX-27 2 EXHIBIT 27
5 1,000 Jan-01-1999 9-MOS Dec-31-1999 Sep-30-1999 866 205 38,252 3,445 999 42,439 19,985 11,985 138,539 41,474 68,645 731 0 25,087 1,726 138,539 6,517 77,445 2,229 29,569 54,644 (6,768) 1,957 (8,319) 829 (9,217) 0 0 0 (9,217) (1.81) (1.81)
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