item 14 exhibits financial statement schedules reports form 8k financial statements schedules consolidated financial statements together report thereon arthur andersen llp included pages indicated reports form 8k form 8ka filed securities exchange commission october 27 1999 respect acquisition ultradata corporation registrant exhibits following exhibits filed herewith list intended constitute exhibit index number description 21 stock purchase sale agreement dated november 21 1995 among cfi proservices inc culverin corporation eric wagner john loveless david steffens douglas teets previously filed exhibit 21 current report form 8k dated november 21 1995 filed securities exchange commission december 6 1995 incorporated herein reference 22 stock purchase sale agreement effective april 1 1996 among microbilt corporation first financial management corporation cfi proservices inc previously filed exhibit 21 companys form 8k dated april 1 1996 filed securities exchange commission april 16 1996 incorporated herein reference 23 asset purchase sale agreement effective april 1 1996 among input creations inc shareholders cfi proservices inc previously filed exhibit 21 companys form 8k dated april 17 1996 filed securities exchange commission may 2 1996 incorporated herein reference 24 asset purchase sale agreement effective january 1 1999 among modern computer systems inc affiliated corporations shareholder cfi proservices inc previously filed exhibit 21 companys form 8k dated february 10 1999 filed securities exchange commission february 10 1999 incorporated herein reference 25 purchase sale agreement dated may 17 1999 among meca software llc members meca software llc cfi proservices inc moneyscape holdings inc previously filed exhibit 21 current report form 8k dated june 2 1999 filed securities exchange commission june 7 1999 incorporated herein reference 26 agreement plan merger dated may 17 1999 among company ufo acquisition co ultradata corporation previously filed exhibit 21 current report form 8k dated august 27 1999 filed securities exchange commission august 27 1999 incorporated herein reference 31 registrants amended restated articles incorporation previously filed exhibit 3ia registration statement form s1 3364894 filed securities exchange commission june 23 1993 incorporated herein reference 32 amendments registrants amended restated articles incorporation effective june 28 1993 previously filed exhibit 3ib registration statement form s1 3364894 filed securities exchange commission july 26 1993 incorporated herein reference 33 amendments registrants amended restated articles incorporation effective july 26 1993 previously filed exhibit 3ic registration statement form s1 registration statement 3364894 filed securities exchange commission august 10 1993 incorporated herein reference number description 34 registrants amended restated bylaws previously filed exhibit 3ii registration statement form s1 registration statement 3364894 filed securities exchange commission august 10 1993 incorporated herein reference 101 nonqualified stock option plan dated october 15 1993 previously filed exhibit 9910 registration statement form s8 registration 3370506 filed securities exchange commission october 19 1993 incorporated herein reference 102 registrants restated outside director compensation stock option plan previously filed exhibit 103 companys form 10q quarter ended march 31 1994 incorporated herein reference 103 first amendment registrants restated outside director compensation stock option plan effective may 14 1999 104 registrants standardized regional prototype 401k cash deferred savings plan trust adopted december 1 1994 previously filed exhibit 1012 companys form 10k year ended december 31 1995 filed securities exchange commission april 1 1996 incorporated herein reference 105 legal services agreement state louisiana effective march 13 1986 company mcglinchey stafford mintz cellini lang louisiana professional law corporation confidential treatment requested previously filed exhibit 1025 registration statement form s1 registration 3364894 filed securities exchange commission july 26 1993 incorporated herein reference 106 1995 consolidated restated stock option plan previously filed exhibit 9913 registration statement form s8 filed securities exchange commission march 1 1995 incorporated herein reference 107 first amendment 1995 consolidated restated stock option plan previously filed exhibit 92 companys registration statement form s8 filed securities exchange commission september 4 1996 incorporated herein reference 108 second amendment 1995 consolidated restated stock option plan effective january 21 1999 109 office lease dated march 18 1994 company john hancock mutual life insurance company previously filed exhibit 101 companys form 10q quarter ended march 31 1994 dated may 12 1994 filed securities exchange commission may 13 1994 incorporated herein reference number description 1010 first amendment dated july 8 1996 office lease dated march 18 1994 company john hancock mutual life insurance company previously filed exhibit 1017 companys annual report form 10k year ended december 31 1996 filed securities exchange commission march 27 1997 incorporated herein reference 1011 second amendment dated january 11 1999 office lease dated march 18 1994 company john hancock mutual life insurance company previously filed exhibit 1010 companys annual report form 10k year ended december 31 1998 filed securities exchange commission march 31 1999 incorporated herein reference 1012 third amendment office lease dated august 11 1999 registrant john hancock mutual life insurance company previously filed exhibit 102 current report form 8k dated august 27 1999 filed securities exchange commission august 27 1999 incorporated herein reference 1013 fourth amendment office lease dated december 16 1999 registrant louis dreyfus property group inc 1014 employment noncompetition agreement dated november 21 1995 cfi proservices inc eric wagner previously filed exhibit 101 companys current report form 8k filed securities exchange commission december 6 1995 incorporated herein reference 1015 form executive retention agreementpreviously filed exhibit 101 companys current report form 8k filed securities exchange commission august 22 1994 incorporated herein reference 1016 financing agreement dated august 13 1999 among cfi proservices inc ultradata corporation meca software llc moneyscape holdings inc foothill capital corporation ableco finance llc levine leichtman capital partners ii lp foothill partners iii lp previously filed exhibit 101 companys form 10q dated august 16 1999 filed securities exchange commission august 16 1999 incorporated herein reference 1017 cfi proservices inc employee savings stock ownership plan previously filed exhibit 51 current report form 8k dated august 27 1999 filed securities exchange commission august 27 1999 incorporated herein reference 1018 revolving credit note principal amount 15000000 dated august 13 1999 previously filed exhibit 22 current report form 8k dated august 27 1999 filed securities exchange commission august 27 1999 incorporated herein reference 1019 form term loan b promissory note aggregate principal amount 30000000 dated august 13 1999 previously filed exhibit 24 current report form 8k dated august 27 1999 filed securities exchange commission august 27 1999 incorporated herein reference number description 1020 form warrant issued company lenders purchase aggregate 381822 shares common stock company dated august 13 1999 previously filed exhibit 25 current report form 8k dated august 27 1999 filed securities exchange commission august 27 1999 incorporated herein reference 1021 note purchase agreement among company note holders dated august 13 1999 previously filed exhibit 27 current report form 8k dated august 27 1999 filed securities exchange commission august 27 1999 incorporated herein reference 1022 form 10 convertible subordinated discount notes dated august 13 1999 previously filed exhibit 28 current report form 8k dated august 27 1999 filed securities exchange commission august 27 1999 incorporated herein reference 1023 first amendment note company levine leichtman capital partners ii lp effective december 31 1999 previously filed companys first prospectus supplement dated january 14 2000 filed securities exchange commission january 14 2000 incorporated herein reference 1024 first amendment note company soundshore holdings ltd effective december 31 1999 previously filed companys first prospectus supplement dated january 14 2000 filed securities exchange commission january 14 2000 incorporated herein reference 1025 first amendment note company us bancorp libra effective december 31 1999 previously filed companys first prospectus supplement dated january 14 2000 filed securities exchange commission january 14 2000 1999 incorporated herein reference 1026 form amendment number one warrant among company foothill capital partners iii lp levine leichtman capital partners ii lp abelco finance llc effective december 31 1999 previously filed companys first prospectus supplement dated january 14 2000 filed securities exchange commission january 14 2000 incorporated herein reference 1027 registration rights agreement lender warrants among company lenders dated august 13 1999 previously filed exhibit 26 current report form 8k dated august 27 1999 filed securities exchange commission august 27 1999 incorporated herein reference 1028 registration rights agreement subordinated notes among company note holders dated august 13 1999 previously filed exhibit 29 current report form 8k dated august 27 1999 filed securities exchange commission august 27 1999 incorporated herein reference number description 1029 registration rights agreement libra warrants dated august 13 1999 previously filed exhibit 211 current report form 8k dated august 27 1999 filed securities exchange commission august 27 1999 incorporated herein reference 1030 warrant issued us bancorp libra financial advisor placement agent company purchase 58000 shares companys common stock dated august 13 1999 previously filed exhibit 210 current report form 8k dated august 27 1999 filed securities exchange commission august 27 1999 incorporated herein reference 1031 amendment number one financing agreement among cfi proservices inc ultradata corporation meca software llc moneyscape holdings inc foothill capital corporation ableco finance llc levine leichtman capital partners ii lp foothill partners iii lp previously filed companys first prospectus supplement dated january 14 2000 filed securities exchange commission january 14 2000 incorporated herein reference 1032 interim amendment cfi proservices inc 401k profit sharing plan dated december 31 1999 21 subsidiaries registrant 23 consent independent public accountants 27 financial data schedule management contract compensatory plan arrangement signatures pursuant requirements section 13 15 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date march 30 2000 cfi proservices inc matthew w chapman matthew w chapman chairman chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated march 29 2000 signature title matthew w chapman director chairman chief executive officer principal executive officer matthew w chapman robert p chamness director president chief operating officer robert p chamness kurt w ruttum vice president chief financial officer principal financial accounting officer kurt w ruttum robert jett director executive vice president secretary robert jett j kenneth brody director j kenneth brody lorraine legg director lorraine legg eran ashany director eran ashany frank e brawner director frank e brawner robert b witt director robert b witt l b day director l b day report independent public accountants board directors shareholders cfi proservices inc dba concentrex incorporated audited accompanying consolidated balance sheets cfi proservices inc oregon corporation dba concentrex incorporated subsidiaries december 31 1999 1998 related consolidated statements operations shareholders equity cash flows three years period ended december 31 1999 consolidated financial statements responsibility companys management responsibility express opinion consolidated financial statements based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position cfi proservices inc dba concentrex incorporated subsidiaries december 31 1999 1998 results operations cash flows three years period ended december 31 1999 conformity accounting principles generally accepted united states arthur andersen llp portland oregon january 28 2000 cfi proservices inc dba concentrex incorporated consolidated balance sheets dollars thousands accompanying notes integral part consolidated balance sheets cfi proservices inc dba concentrex incorporated consolidated statements operations dollars thousands except per share data accompanying notes integral part consolidated statements cfi proservices inc dba concentrex incorporated consolidated statements shareholders equity dollars thousands accompanying notes integral part consolidated statements cfi proservices inc dba concentrex incorporated consolidated statements cash flows dollars thousands accompanying notes integral part consolidated statements cfi proservices inc dba concentrex incorporated notes consolidated financial statements 1 nature business summary significant accounting policies nature business cfi proservices inc dba concentrex incorporated subsidiaries company provides technologypowered solutions financial services industry company offers broad range traditional software products services well businesstobusiness ecommerce solutions software financial institution includes back office core processing loan origination new account opening branch automation cross selling company business since 1978 basis consolidation consolidated financial statements include accounts companys wholly owned subsidiaries ultradata corporation ultradata moneyscape holdings inc mshi meca software llc meca company owns 99 membership interest meca mshi owns remaining 1 membership interest intercompany transactions balances eliminated company made certain acquisitions october 1998 january 1999 may 1999 august 1999 see note 2 acquisitions included consolidated financial statements since dates acquisition cash equivalents cash equivalents include cash shortterm investments maturity dates three months less time acquisition inventory consists primarily printed bank forms computer hardware stated lower cost market cost determined firstin firstout fifo method property equipment property equipment stated cost less accumulated depreciation computed straightline basis estimated useful lives individual assets three years computer equipment software five seven years furniture fixtures equipment leasehold improvements amortized shorter estimated useful life term lease expenditures repairs maintenance charged current operations costs related renewals improvements add significantly useful life asset capitalized depreciable properties retired otherwise disposed cost related accumulated depreciation removed accounts resulting gain loss reflected income software costs internally developed software meet criteria sfas 86 accounting costs computer software sold leased otherwise marketed capitalized costs amortized straightline basis estimated economic lives ranging three five years purchased software capitalized cost amortized straightline basis estimated economic life three six years generally contracts purchased software require royalties paid based revenues generated related software 1998 1997 several software development projects reached completion result company began amortize certain product development costs capitalized prior periods addition company recorded amortization result software acquired connection 1999 1998 acquisitions amortization costs 1997 included accelerated amortization certain products replaced new products management concluded longer technologically viable goodwill resulting acquisitions amortized straightline basis estimated lives five 20 years company believes useful lives appropriate based factors influencing acquisition decisions factors include product life profitability general industry outlook company reviews goodwill impairment end quarter frequently events changes circumstances indicate carrying amount assets may recoverable perform review company estimates sum expected future undiscounted cash flows operating activities estimated net cash flows less carrying amount goodwill company recognizes impairment loss amount necessary write assets fair value determined expected discounted future cash flows 1998 company wrote 877000 reflecting remaining goodwill associated fiscal credit analysis products related severance costs calculated accordance preexisting employment contracts charges included acquired inprocess research development charges companys statement operations 1998 investment joint venture november 1997 company made 50 investment lori mae llc lori mae company designed securitize small business loans originated community banks company uses equity method account investment joint venture 1998 company wrote initial investment lori mae amount 352000 due lack acceptable market demand lori maes initial product charge addition losses attributable joint venture included equity losses attributable joint venture companys statement operations 1998 december 31 1998 1999 companys net investment lori mae 0 deferred loan costs debt discount deferred loan costs associated companys debt included assets deferred loan costs net amortization 3602 0 december 31 1999 1998 respectively debt discount recorded reduction carrying value debt deferred loan costs debt discount amortized using effective interest method see note 6 revenue recognition license revenues derived three kinds transactions licenses followon obligations part company recognized upon delivery licenses require installation training company prior use recognized upon completion installation training licenses include significant amounts tailoring occasionally customization recognized percentage completion basis tailoring customization performed estimates efforts complete project used percentage completion calculation due uncertainties inherent estimates actual results could differ estimates license agreement obligates company provide postcontract support additional cost customer revenue related postcontract support recognized ratably support period returns exchanges infrequent recorded reductions license revenue obligation accept return conduct exchange becomes known revenues consulting custom programming training separately contracted recognized related services performed revenues include sales preprinted forms hardware recognized upon delivery amounts received advance service support contracts deferred recognized ratably support period amounts excess invoiced minimums service support charges based usage estimated recognized period usage occurs included receivables december 31 1999 1998 unbilled receivables 73 million 77 million respectively primarily relate percentage completion contracts deferred payment terms 1997 1998 statements position sop 972 989 software revenue recognition released became effective company year ended december 31 1998 sop 972 sop 989 material impact companys financial statements income taxes company accounts income taxes accordance sfas 109 accounting income taxes pronouncement requires deferred tax assets liabilities valued using enacted tax rates expected effect temporary differences recovered settled advertising costs advertising costs expensed incurred costs 18 million 14 million 12 million years ended december 31 1999 1998 1997 respectively use estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting periods actual results could differ estimates fair value financial instruments companys financial instruments consist accounts receivable accounts payable debt instruments december 31 1999 1998 fair value companys accounts receivable accounts payable approximated carrying value due shortterm nature december 31 1999 1998 fair value companys debt excluding debt discount approximated carrying value earnings per share basic earnings per share eps diluted eps computed using methods prescribed sfas 128 earnings per share basic eps calculated using weighted average number common shares outstanding period diluted eps computed using weighted average number common shares dilutive common equivalent shares outstanding following reconciliation basic eps diluted eps number options warrants purchase shares common stock assumed conversion convertible subordinated notes excluded table effect would antidilutive 2112447 year ended december 31 1999 787184 year ended december 30 1998 94500 year ended december 31 1997 respectively supplementary cash flow information noncash investing financing activities follows reclassifications certain reclassifications financial statements notes made prior year financial statements conform current presentation comprehensive income sfas 130 reporting comprehensive income establishes standards reporting display comprehensive income comprehensive income includes charges credits equity result transactions shareholders sfas 130 became effective 1998 net income comprehensive income identical 1999 1998 1997 sfas 130 impact companys financial statements segment reporting sfas 131 disclosures segments enterprise related information requires company report certain information operating segments sfas 131 became effective companys year ended december 31 1998 company provides integrated software financial institutions among things use back office processing branch automation loan origination new account opening electronic banking company classifies products primarily application products ecommerce products constitute companys suite products sold types customer similar distribution channels accordingly company believes operates one segment 1999 revenue reclassified periods software products services group ecommerce group total revenues change result reclassification revenues products associated services separately reported software products services group ecommerce group statement operations virtually companys sales made united states remaining sales made customers located latin america recent pronouncement june 1999 financial accounting standards board issued statement financial accounting standards 137 accounting derivative instruments hedging activities sfas 137 sfas 137 amendment statement financial accounting standards 133 accounting derivative hedging activities sfas 137 establishes accounting reporting standards derivative instruments sfas 137 effective company beginning january 1 2001 company currently derivative instruments accordingly expect adoption sfas 137 impact results operations financial position december 1999 securities exchange commission issued staff accounting bulletin 101 sab 101 revenue recognition sab 101 provides guidance recognition presentation disclosure revenue financial statements sab 101 effective company beginning january 1 2000 company expect adoption sab 101 material impact results operations financial position 2 acquisitions effective january 1 1999 company acquired substantially assets modern computer systems inc certain related corporations collectively mcs offers hardware software solutions back office accounting needs community banks credit unions purchase price approximated 70 million consisted cash paid 60 million common stock issued 650000 acquisition costs purchase price allocated estimated fair value assets acquired included goodwill purchased software acquisition accounted purchase operations mcs included companys results operations since january 1 1999 1998 pro forma results reflecting mcs acquisition materially different companys reported results year ended december 31 1998 effective may 17 1999 company mshi acquired 99 1 respectively equity meca exchange 50000 shares concentrex common stock acquisition accounted purchase net purchase price approximated 123 million consisted common stock issued assumption net liabilities accrued acquisition costs liabilities assumed included 75 million debt owed certain former members meca repaid company proceeds bank borrowings purchase price allocated estimated fair value assets acquired included expensing 38 million inprocess research development recognition 105 million deferred tax asset technological feasibility acquired technology alternative future use established prior purchase excess fair value assets acquired cost negative goodwill allocated reduce acquired noncurrent assets company still obtaining certain data related acquisition accordingly purchase price allocation remains open operations meca included companys results operations since may 17 1999 effective august 13 1999 concentrex acquired outstanding common stock ultradata provides information management software solutions relationshiporiented financial institutions acquisition accounted purchase resulting approximately 564 million goodwill purchased software amounts amortized period six 20 years purchase price 677 million including acquisitionrelated expenses purchase price allocated estimated fair value assets acquired included expensing 52 million inprocess research development technological feasibility acquired technology alternative future use established prior purchase company still obtaining certain data related acquisition accordingly purchase price allocation remains open operations ultradata included companys results operations since august 13 1999 october 1998 company acquired substantially assets mortgage dynamics inc mdi acquisition accounted purchase price 27 million cash plus certain contingent royalties tied future revenue production conjunction acquisition company recorded approximately 15 million goodwill amortized ratably seven years 230000 purchased software amortized ratably three years 991000 acquired inprocess research development determined independent appraisal expensed 1998 technological feasibility acquired technology alternative future use established prior purchase pro forma results reflecting mdi acquisition materially different companys reported results 1998 unaudited pro forma results operations assuming meca ultradata acquisitions occurred january 1 1998 follows pro forma results include writeoff acquired inprocess research development year incurred 3 property equipment major categories property equipment summarized follows depreciation expense follows 4 accrued expenses accrued expenses consist following accrued severance costs recorded connection 1999 acquisitions amounts relate employees terminated prior december 31 1999 result acquisitions accrued pursuant contractual obligations assumed acquisitions 5 employee benefit plans company created profit sharing plan february 1 1989 provisions section 401k internal revenue code effective january 1 1999 plan amended employee savings stock ownership plan essop provides employee profit sharing employer matching 401k contributions made form company common stock employer matching contributions essop made discretion board directors follows years ended december 31 1999 1998 1997 thousands employer contributions 944 856 468 board directors approved officers bonus plan amount timing bonuses profit sharing payments essop boards discretion 1999 profit sharing payment essop made common stock expense associated plans follows december 31 1998 company qualified employee stock purchase plan espp allowed qualified employees direct seven percent monthly base pay purchases stock purchase price shares purchased plan 85 percent lesser fair market value beginning end plan year espp terminated accordance terms 1999 6 financings common stock may 14 1999 company sold 90000 shares common stock one investor gross proceeds 900000 proceeds issuance used repay liabilities acquired meca acquisition january 1999 companys board directors authorized repurchase 50 million companys common stock first quarter 1999 company repurchased 88200 shares common stock 11 million company repurchase shares 1999 debt may 17 1999 company entered two lending agreements usnb lending agreements us bank national association usnb august 13 1999 usnb lending agreements terminated amounts outstanding repaid upon completion financing described following paragraphs first usnb lending agreement revolving line credit amount exceed 50 million revolving line used working capital company drew 40 million revolving line may 17 1999 used proceeds pay amounts owing previous line credit bank america bank america credit facility company simultaneously terminated second usnb lending agreement revolving line credit amount exceed 150 million acquisition line used acquisitions company drew 83 million acquisition line may 17 1999 used proceeds pay certain liabilities assumed connection acquisition meca date company drew additional 27 million acquisition line purchase shares ultradata common stock open market transactions quarter ended june 30 1999 august 13 1999 company subsidiaries entered financing agreement financing agreement foothill capital corporation foothill certain parties collectively lenders three credit facilities aggregating 80 million credit facilities provided financing agreement terminate august 13 2002 first credit facility financing agreement revolving credit facility foothill revolver 15 million subject borrowing base restrictions related accounts receivable company subsidiaries foothill revolver bears interest annual rate equal prime rate plus 10 august 13 1999 company drew 17 million foothill revolver connection ultradata acquisition interest rate foothill revolver 95 december 31 1999 second credit facility financing agreement term loan 35 million term loan bears interest annual rate equal prime rate plus 20 term loan scheduled quarterly prepayments principal beginning second quarter 2000 expected aggregate 19 million term loan expected remaining principal 16 million due august 13 2002 august 13 1999 company drew 35 million term loan connection ultradata acquisition interest rate term loan 105 december 311999 third credit facility financing agreement term loan 30 million term b loan bears interest annual rate equal prime rate plus 50 term b loan scheduled prepayments principal term b loan due full august 13 2002 august 13 1999 company drew 30 million term b loan connection ultradata acquisition interest rate term b loan 135 december 31 1999 connection credit facilities provided financing agreement company issued lenders warrants lender warrants purchase 381822 shares common stock company represented 50 fully diluted common stock company date issuance exercise price lender warrants 1000 per share company registered resale shares common stock issuable upon exercise lender warrants lender warrants exercisable august 13 2004 company also issued warrants purchase 58000 shares common stock debt placement agent connection obtaining credit facilities financing agreement warrants issued debt placement agent terms lender warrants company recorded fair value warrants debt discount deferred loan costs appropriate december 311999 december 311998 longterm debt consisted following payouts longterm debt follows thousands years ending december 31 2000 4570 2001 10021 2002 52055 2003 60 2004 54 66760 august 13 1999 company also issued 10 convertible subordinated discount notes subordinated notes aggregate original face amount 74 million original issue discount 19 million subordinated notes generally noncallable company august 13 2002 interest 10 per annum accretes subordinated notes august 13 2002 becomes payable cash company subordinated notes redeemed converted date subordinated notes initially convertible maximum 743754 shares companys common stock election holders actual number shares subordinated notes convertible depends upon date conversion amount interest accreted subordinated notes date conversion price subordinated notes 1000 per share average closing price companys common stock 10 trading days ending august 12 2000 less 1000 per share conversion price reduced time equal average price conversion price subordinated notes reduced pursuant terms subordinated notes company record additional interest expense subordinated notes due august 13 2004 previously converted date company received gross proceeds 55 million upon issuance subordinated notes used connection ultradata acquisition fourth quarter 1999 amended financing agreements lenders consideration amendments agreed pay fees 2 total loan commitments total 17 million agreed decrease exercise conversion prices certain warrants convertible notes held lenders 1234 per share 10 per share new exercise conversion prices warrants established 24 premium market price common stock december 31 1999 loan fees paid fair value attributed change exercise price warrants held debt holders recorded additional debt discount result 1999 acquisitions company highly leveraged loan agreements contain financial covenants must abide prohibit payment dividends common stock among restrictions example company required generate specific levels earnings interest taxes depreciation amortization ebitda measured fourquarter periods december 31 1999 company compliance financial covenants 7 commitments contingencies operating leases company leases facilities equipment operating leases terms one 10 years payable monthly installments total lease expense follows future minimum lease payments follows thousands years ending december 31 2000 6202 2001 5873 2002 4573 2003 4470 2004 3651 thereafter 3950 28719 1998 company recorded loss 793000 present value net future lease payments due respect certain office space atlanta company ceased using loss included charges statement operationsfor 1998 contingencies company involved routine legal matters incidental business company believes resolution matters currently outstanding material effect financial condition results operations however assurance given concurrent resolution several matters manners adverse company would material adverse effect companys financial condition results operations year ended december 31 1999 company recorded expense 900000 related settlement arbitration proceeding expense included charges statement operations 1999 8 income taxes provision benefit income taxes follows reconciliation statutory federal income tax rate companys effective income tax rate follows deferred tax assets liabilities comprised following components increase decrease valuation allowance follows december 31 1999 federal tax return reporting purposes company approximately 71 million regular alternative minimum tax loss carryovers expire various dates 2019 addition december 31 1999 company 12 million general business credit carryovers expire various dates 2013 general business credit carryovers may used offset taxes payable tax loss carryovers fully utilized 1997 based managements estimate realization company recorded increase deferred tax assets corresponding decrease goodwill 389000 relating net operating losses acquired connection prior acquisition current federal tax law limits net operating loss tax credit carryforwards available used given year event certain circumstances including significant changes ownership interests company limited using approximately 37 million net operating loss carryovers one year 1999 company acquired certain tax loss carryforwards connection acquisitions uncertainty realization tax loss carryforwards company provided valuation allowance related deferred tax assets increase valuation allowance 1999 primarily attributed acquired tax loss carryforwards realization tax loss carryforwards recorded reduction goodwill 9 preferred stock company redeeming 10300 outstanding shares mandatory redeemable class preferred stock 26214 per share 28year period ending year 2018 present value remaining payments due quarterly recorded carrying value december 31 1999 1998 carrying value adjusted payments made dividends accrued shares yet redeemed rate used calculate present value 13 percent per annum approximated companys borrowing rate time redemption commenced december 31 1999 7017 outstanding shares remaining redeemed repayment schedule mandatory redeemable class preferred stock december 31 1999 follows thousands years ending december 31 2000 103 2001 103 2002 103 2003 103 thereafter 1428 total future payments 1840 less amount representing dividends 1112 present value future payments 728 less current portion longterm mandatory redeemable preferred stock 728 10 stock options director compensation december 31 1999 company four stock plans consolidated plan nonqualified stock option plan compensation plan outside directors essop consolidated plan options consist incentive stock options nonqualified stock options generally vest ratably five years generally expire ten years date grant exercise price incentive stock options granted plan set fair market value grant date exercise price nonqualified options may set fair market value grant date options granted exercise price less fair market value grant date nonqualified stock option plan available officers key employees vesting period exercise price may set fair market value date grant determined compensation committee board directors options granted exercise price less fair market value date grant restated outside director compensation stock option plan compensation plan company provides outside directors paid 7000 retainer 1000 board directors meeting attended issuance stock options awarded annually first business day annual meeting shareholders essop 175000 shares common stock initially reserved 104618 issued december 311999 company records compensation expense shares issued essop based fair market value stock table showing activity three stock option plans past three years august 1999 company exchanged 273293 outstanding employee stock options result ultradata acquisition exercise prices options range 366 1532 per share options included table options granted 1999 company recorded part purchase price 17 million relating fair value options exchanged three stock option plans december 31 1999 1478404 shares unissued stock reserved issuance 116901 shares remained available future grants options purchase 767788 437026 361873 shares common stock exercisable december 31 1999 1998 1997 respectively exercisable options weighted average exercise prices 1071 991 827 december 31 1999 1998 1997 respectively financial accounting standards board issued sfas no123 defines fair value based method accounting employee stock option similar equity instrument encourages entities adopt method accounting employee stock compensation plans however also allows entity continue measure compensation cost plans using method accounting prescribed apb 25 entities electing remain accounting apb 25 must make pro forma disclosures net income earnings per share fair value based method accounting defined sfas 123 adopted company elected account stockbased compensation plans apb 25 however company computed pro forma disclosure purposes value options granted 1999 1998 1997 using blackscholes options pricing model prescribed sfas 123 using following weighted average assumptions grants using blackscholes methodology total value options granted 1999 1998 1997 11 million 12 million 13 million respectively would amortized pro forma basis vesting period options typically five years weighted average fair value options granted 1999 1998 1997 752 per share 836 per share 1151 per share respectively 1999 company terminated espp number shares issued espp 1944 22383 20646 years ended december 31 1999 1998 1997 respectively related weighted average purchase price weighted average fair value shares issued 977 519 respectively 1999 1020 583 respectively 1998 1371 655 respectively 1997 company accounted stockbased compensation plans accordance sfas 123 companys net income net income per share would approximate pro forma disclosures effects applying sfas 123 pro forma disclosure indicative future amounts additional awards anticipated future years following table summarizes information stock options outstanding december 31 1999 11 selected quarterly financial data unaudited report independent public accountants financial statement schedule board directors shareholders cfi proservices inc dba concentrex incorporated audited accordance auditing standards generally accepted united states consolidated financial statements included cfi proservices incs dba concentrex incorporated 1999 annual report form 10k issued report thereon dated january 28 2000 audits made purpose forming opinion statements taken whole valuation qualifying accounts schedule responsibility companys management presented purposes complying securities exchange commissions rules part basic consolidated financial statements schedule subjected auditing procedures applied audits basic consolidated financial statements opinion fairly states material respects financial data required set forth therein relation basic consolidated financial statements taken whole arthur andersen llp portland oregon january 28 2000 item 14 exhibits financial statement schedules reports form 8k financial statements schedules consolidated financial statements together report thereon arthur andersen llp included pages indicated exhibits following exhibits filed herewith list intended constitute exhibit index number description 21 stock purchase sale agreement dated november 21 1995 among cfi proservices inc culverin corporation eric wagner john loveless david steffens douglas teets previously filed exhibit 21 current report form 8k dated november 21 1995 filed securities exchange commission december 6 1995 incorporated herein reference 22 stock purchase sale agreement effective april 1 1996 among microbilt corporation first financial management corporation cfi proservices inc previously filed exhibit 21 companys form 8k dated april 1 1996 filed securities exchange commission april 16 1996 incorporated herein reference 23 asset purchase sale agreement effective april 1 1996 among input creations inc shareholders cfi proservices inc previously filed exhibit 21 companys form 8k dated april 17 1996 filed securities exchange commission may 2 1996 incorporated herein reference 31 registrants amended restated articles incorporation previously filed exhibit 3ia registration statement form s1 registration statement 3364894 filed securities exchange commission june 23 1993 incorporated herein reference 32 amendments registrants amended restated articles incorporation effective june 28 1993 previously filed exhibit 3ib registration statement form s1 registration statement 3364894 filed securities exchange commission july 26 1993 incorporated herein reference 33 amendments registrants amended restated articles incorporation effective july 26 1993 previously filed exhibit 3ic registration statement form s1 registration statement 3364894 filed securities exchange commission august 10 1993 incorporated herein reference 34 registrants amended restated bylaws previously filed exhibit 3ii registration statement form s1 registration statement 3364894 filed securities exchange commission august 10 1993 incorporated herein reference 101 nonqualified stock option plan dated october 15 1993 previously filed exhibit 9910 registration statement form s8 registration 3370506 filed securities exchange commission october 19 1993 incorporated herein reference number description 102 registrants outside director compensation stock option plan previously filed exhibit 103 companys form 10q quarter ended march 31 1994 incorporated herein reference 103 registrants standardized regional prototype 401k cash deferred savings plan trust adopted december 1 1994 previously filed exhibit 1012 companys form 10k year ended december 31 1995 filed securities exchange commission april 1 1996 incorporated herein reference 104 registration agreement dated february 4 1991 among registrant certain named investors previously filed exhibit 1011 registration statement form s1 registration statement 3364894 filed securities exchange commission june 23 1993 incorporated herein reference 105 legal services agreement state louisiana effective march 13 1986 company mcglinchey stafford mintz cellini lang louisiana professional law corporation confidential treatment requested previously filed exhibit 1025 registration statement form s1 registration 3364894 filed securities exchange commission july 26 1993 incorporated herein reference 106 1994 employee stock purchase plan previously filed exhibit 102 companys form 10q quarter ended june 30 1994 incorporated herein reference 107 1995 consolidated restated stock option plan previously filed exhibit 9913 registration statement form s8 filed securities exchange commission march 1 1995 incorporated herein reference 108 first amendment 1995 consolidated restated stock option plan previously filed exhibit 92 companys registration statement form s8 filed securities exchange commission september 4 1996 incorporated herein reference 109 office lease dated march 18 1994 company john hancock mutual life insurance company previously filed exhibit 101 companys form 10q quarter ended march 31 1994 incorporated herein reference 1010 first amendment dated july 8 1996 office lease dated march 18 1994 company john hancock mutual life insurance company previously filed exhibit 1017 companys annual report form 10k year ended december 31 1996 filed securities exchange commission march 27 1997 incorporated herein reference number description 1011 form executive retention agreement previously filed exhibit 101 companys current report form 8k filed securities exchange commission august 22 1994 incorporated herein reference 1012 employment noncompetition agreement dated november 21 1995 cfi proservices inc eric wagner previously filed exhibit 101 companys current report form 8k filed securities exchange commission december 6 1995 incorporated herein reference 1013 employment noncompetition agreement dated november 21 1995 cfi proservices inc john loveless previously filed exhibit 102 companys current report form 8k filed securities exchange commission december 6 1995 incorporated herein reference 1014 employment noncompetition agreement dated november 21 1995 cfi proservices inc david steffens previously filed exhibit 103 companys current report form 8k filed securities exchange commission december 6 1995 incorporated herein reference 1015 office lease dated march 2 1994 amended november 14 1994 september 7 1995 company huntington atrium development previously filed exhibit 1033 companys annual report form 10k year ended december 31 1995 filed securities exchange commission april 1 1996 incorporated herein reference 1016 office lease dated april 18 1995 amended june 9 1995 company danis properties co inc previously filed exhibit 1034 companys annual report form 10k year ended december 31 1995 filed securities exchange commission april 1 1996 incorporated herein reference 1017 business loan agreement revolving line credit dated november 8 1995 cfi proservices inc bank america oregon previously filed exhibit 1035 companys annual report form 10k year ended december 31 1995 filed securities exchange commission april 1 1996 incorporated herein reference 1018 amendment 1 dated may 17 1996 business loan agreement dated november 8 1995 previously filed exhibit 107 companys quarterly report form 10q quarter ended june 30 1996 filed securities exchange commission august 13 1996 incorporated herein reference 1019 amendment 2 dated july 1 1996 business loan agreement dated november 8 1995 previously filed exhibit 108 companys quarterly report form 10q quarter ended june 30 1996 filed securities exchange commission august 13 1996 incorporated herein reference number description 1020 amendment 3 dated september 24 1996 business loan agreement dated november 8 1995 previously filed exhibit 10 companys quarterly report form 10q quarter ended september 30 1996 filed securities exchange commission november 14 1996 incorporated herein reference 1021 amendment 4 dated november 21 1996 business loan agreement dated november 8 1995 previously filed exhibit 101 companys registration statement 33315505 form s3 filed securities exchange commission january 27 1997 incorporated herein reference 1022 amendment 5 dated december 31 1996 business loan agreement dated november 8 1995 previously filed exhibit 102 companys registration statement 33315505 form s3 filed securities exchange commission january 27 1997 incorporated herein reference 1023 amendment 6 dated march 1 1997 business loan agreement dated november 8 1995 previously filed exhibit 1041 companys form 10k year ended december 31 1996 filed securities exchange commission march 21 1997 incorporated herein reference 1024 amendment 7 dated june 1 1997 business loan agreement dated november 8 1995 previously filed companys form 10q quarter ended june 30 1997 filed securities exchange commission august 13 1997 incorporated herein reference 1025 promissory note dated april 1 1996 favor microbilt inc previously filed exhibit 101 companys form 8k dated april 1 1996 filed securities exchange commission april 16 1996 incorporated herein reference 1026 promissory note dated april 1 1996 favor first financial management corporation previously filed exhibit 102 companys form 8k dated april 1 1996 filed securities exchange commission april 16 1996 incorporated herein reference 1027 pledge agreement dated april 1 1996 cfi proservices inc microbilt corporation first financial management previously filed exhibit 103 companys form 8k dated april 1 1996 filed securities exchange commission april 16 1996 incorporated herein reference 1028 form employment agreement entered former employees input creations inc previously filed exhibit 101 companys form 8k dated april 17 1996 filed securities exchange commission may 2 1996 incorporated herein reference number description 1029 sublease among input creations inc cfi proservices inc previously filed exhibit 102 companys form 8 k dated april 17 1996 filed securities exchange commission may 2 1996 incorporated herein reference 21 subsidiaries registrant 23 consent arthur andersen llp 27 financial data schedule signatures pursuant requirements section 13 15 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date march 27 1998 cfi proservices inc matthew w chapman matthew w chapman chairman chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated march 27 1998 signature title matthew w chapman chairman chief executive officer matthew w chapman principal executive officer robert p chamness director president chief operating officer robert p chamness kurt w ruttum vice president chief financial officer kurt w ruttum principal financial accounting officer robert jett director executive vice president secretary robert jett j kenneth brody director j kenneth brody lorraine legg director lorraine legg david g golden director david g golden eran ashany director eran ashany report independent public accountants board directors shareholders cfi proservices inc audited accompanying consolidated balance sheets cfi proservices inc oregon corporation subsidiaries december 31 1997 1996 related consolidated statements income shareholders equity cash flows three years period ended december 31 1997 consolidated financial statements responsibility companys management responsibility express opinion consolidated financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position cfi proservices inc subsidiaries december 31 1997 1996 results operations cash flows three years period ended december 31 1997 conformity generally accepted accounting principles arthur andersen llp portland oregon january 21 1998 cfi proservices inc consolidated balance sheets dollars thousands accompanying notes integral part consolidated balance sheets cfi proservices inc consolidated statements income dollars thousands except per share data accompanying notes integral part consolidated balance sheets cfi proservices inc consolidated statements shareholders equity dollars thousands accompanying notes integral part consolidated balance sheets cfi proservices inc consolidated statements cash flows dollars thousands accompanying notes integral part consolidated balance sheets cfi proservices inc notes consolidated financial statements 1 nature business summary significant accounting policies nature business cfi proservices inc subsidiaries company develops sells services customer service software used financial institutions company combines technology banking legal expertise deliver knowledgebased software solutions enable institutions simplify key sales service business processes improve productivity strengthen customer relationships maintain compliance internal business policies external government regulations although sales historically commercial banks within united states today company actively markets products types financial institutions domestically noncompliance oriented software internationally company business since 1978 basis consolidation consolidated financial statements include accounts companys wholly owned subsidiaries genesys solutions group inc texassouthwest technology group inc culverin corporation online financial systems inc coin banking systems inc vendor payment systems inc vps intercompany transactions balances eliminated cash investment vps included assets accounted using equity method april 1996 company purchased remaining outstanding vps common stock company made certain acquisitions april 1996 see note 2 acquisitions included consolidated financial statements since date acquisition effective december 31 1997 companys wholly owned subsidiaries genesys solutions group inc dissolved assets distributed company cash equivalents cash equivalents include cash shortterm investments maturity dates three months less time acquisition investments statement financial accounting standards sfas 115 accounting certain investments debt equity securities requires company classify account security investments trading securities available sale securities held maturity depending companys intent hold trade securities time purchase securities available sale stated balance sheet fair market value approximates cost securities held maturity stated amortized cost unrealized holding gains losses december 31 1997 1996 company sold debt securities help pay acquisitions company uses specific identification method determining cost use computing realized gains losses inventory consists primarily printed bank forms supplies stated lower cost market cost determined firstin firstout fifo method property equipment property equipment stated cost depreciation computed straightline basis estimated useful lives individual assets three years computer equipment software five seven years furniture fixtures equipment expenditures repairs maintenance charged current operations costs related renewals improvements add significantly useful life asset capitalized depreciable properties retired otherwise disposed cost related accumulated depreciation removed accounts resulting gain loss reflected income software costs internally developed software meet criteria sfas 86 accounting costs computer software sold leased otherwise marketed capitalized costs amortized straightline basis estimated economic lives ranging three five years purchased software capitalized cost amortized straightline basis estimated economic lives ranging two five years contracts purchased software require royalties paid based revenues generated related software 1997 1996 several software development projects reached commercial feasibility result company began amortize certain product development costs capitalized prior periods addition company recorded amortization result software acquired connection 1996 acquisitions increase amortization costs 1997 also resulted accelerated amortization certain products replaced new products management concluded longer technologically viable intangibles companys intangibles consist primarily amounts paid goodwill noncompetition agreements customer lists costs amortized straightline basis estimated economic lives five seven years company believes useful lives appropriate based factors influencing acquisition decisions factors include product life profitability general industry outlook company reviews intangible assets asset impairment end quarter frequently events changes circumstances indicate carrying amount intangibles may recoverable perform review company estimate sum expected future undiscounted cash flows operating activities estimated net cash flows less carrying amount intangibles company would recognize impairment loss amount necessary write intangibles fair value determined expected discounted future cash flows company recognized impairment loss date investment joint venture november 1997 company made 50 investment lori mae llc lori mae company securitize small business loans originated community banks company uses equity method account investment joint venture december 31 1997 net investment lori mae totaled 174000 included balance sheet assets revenue recognition license revenues derived three kinds transactions licenses followon obligations part company recognized upon shipment licenses require installation training company prior use recognized upon completion installation training licenses include significant amounts tailoring occasionally customization recognized percentage completion basis tailoring customization performed estimates efforts complete project used percentage completion calculation due uncertainties inherent estimates actual results could differ estimates license agreement obligates company provide postcontract support additional cost customer revenue related postcontract support recognized ratably support period sales companys credit analysis products generally include right return without charge within 60 days sale company provides allowance sales returns based historical experience products returns exchanges infrequent recorded reductions license revenue obligation accept return conduct exchange becomes known revenues consulting custom programming training separately contracted recognized related services performed revenues include sales preprinted forms font cartridges recognized upon shipment amounts received advance service support contracts deferred recognized ratably support period amounts excess invoiced minimums service support charges based usage estimated recognized period usage occurs included receivables december 31 1997 1996 unbilled receivables 3824000 3328000 respectively primarily relate percentage completion contracts deferred payment terms 1997 statement position sop 972 software revenue recognition released effective companys year ending december 31 1998 company believe sop 972 material impact financial statements income taxes company accounts income taxes accordance sfas 109 accounting income taxes pronouncement requires deferred tax assets liabilities valued using enacted tax rates expected effect temporary differences recovered settled advertising cost advertising costs expensed incurred costs 1241000 950000 585000 years ended december 31 1997 1996 1995 respectively use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities date financial statements reported amounts revenues expenses reporting periods actual results could differ estimates earnings per share beginning december 31 1997 basic earnings per share eps diluted eps computed using methods prescribed sfas 128 earnings per share basic eps calculated using weighted average number common shares outstanding period diluted eps computed using weighted average number common shares dilutive common equivalent shares outstanding prior period amounts restated conform presentation requirements sfas 128 following reconciliation basic eps diluted eps number options purchase shares common stock excluded table effect would antidilutive 94500 10000 zero years ended december 31 1997 1996 1995 respectively supplementary cash flow information reclassification certain reclassifications financial statements notes made prior year financial statements conform current presentation recent pronouncements sfas 131 disclosures segments enterprise related information issued june 1997 requires company report certain information operating segments sfas 131 become effective companys year ending december 31 1998 company expects additional disclosures related product lines required due sfas 131 2 acquisitions april 1996 company acquired capital stock online financial communication systems inc online coin banking systems inc coin formerly subsidiaries microbilt corporation substantially assets input creations inc input pathways software inc pathways halcyon group inc halcyon acquisitions accounted purchases combined purchase prices totaled approximately 13600000 plus certain contingent royalties tied future revenue production software conversions 13600000 included 5196000 cash 7385000 notes payable longterm liabilities 266000 common stock approximately 700000 assumed liabilities conjunction acquisitions company recorded approximately 4300000 goodwill amortized ratably seven year period 8030000 acquired inprocess research development determined independent appraisal expensed april 1996 technological feasibility acquired technology alternative future use established prior purchase connection april 1996 acquisitions accordance emerging issues task force issue 967 eitf 967 issued 1996 company provide deferred taxes portion acquired inprocess research development costs underlying tax basis prior issuance eitf 967 company provided deferred taxes acquired inprocess research development costs underlying tax basis november 1995 company acquired outstanding common stock culverin corporation culverin software company headquarters dayton ohio initial purchase price consisted 3888000 cash paid installments november 1996 cash 50000 33341 shares companys common stock valued 1350 per share discounted 40 restrictions trading delivered january 1 1998 expenses 531000 addition company make annual contingent royalty payments 2000 2 14 revenues generated culverin products depending amount revenues year transaction accounted purchase excess initial purchase price value identifiable assets 1969000 recorded intangible asset amortized straightline basis seven years annual contingent royalty payments earned recorded addition intangible assets amortized straight line basis remaining life original sevenyear period 1995 results included financial statements include results culverins operations november december 1995 unaudited pro forma results operations assuming culverin acquisition april 1996 acquisitions occurred january 1 1995 follows pro forma results years ended december 31 1995 1996 include writeoff acquired inprocess research development periods incurred primarily connection culverin acquisition company recorded pretax charge 4549000 fourth quarter 1995 charge 3700000 represented value determined independent appraisal culverins inprocess research development efforts time acquisition technological feasibility acquired technology alternative future uses established prior purchase restructuring costs comprised primarily severance costs represent remainder charge april 1995 company acquired outstanding common stock texassouthwest technology group inc tstg software company located houston texas purchase price consisted 259000 cash upon closing 450000 payable next four years contingent royalties payable percentages 6 18 license revenue sales tstg products next three years transaction accounted purchase excess initial purchase price value identifiable assets 625000 recorded intangible asset amortized straightline basis five years 1995 results included financial statements include results tstgs operations nine months ended december 31 1995 results tstgs operations prior acquisition insignificant 3 property equipment major categories property equipment summarized follows depreciation expense follows 4 accrued expenses accrued expenses consist following 5 employee benefit plans company created profit sharing plan february 1 1989 provisions section 401k internal revenue code employer contributions plan made discretion board directors follows board directors approved officers bonus plan employee profit sharing plan amount timing bonus profit sharing payments boards discretion expense associated plans follows company qualified employee stock purchase plan allows qualified employees direct 7 percent monthly base pay purchases stock purchase price shares purchased plan 85 percent lesser fair market value beginning end plan year 6 line credit longterm debt line credit company may borrow lesser 9000000 50 percent accounts receivable defined terms committed unsecured revolving bank line credit agreement companys option interest outstanding borrowings may banks published reference rate alternative rates specified agreement interest rate effect december 31 1997 85 percent line credit expires may 1 1998 agreement contains covenants require company maintain certain financial ratios prohibits company incurring debts liens outside ordinary course business company compliance covenants december 31 1997 company pays annual commitment fee 02 percent average unused balance borrowings line totaled 5310000 december 31 1997 1591000 december 31 1996 longterm debt december 31 1997 1996 longterm debt consisted following payouts longterm debt follows thousands 7 commitments contingencies operating leases company leases facilities equipment operating leases terms one 10 years payable monthly installments total lease expense follows future minimum lease payments follows thousands contingencies company subsidiaries involved routine legal matters incidental respective businesses opinion company resolution matters currently outstanding material effect financial condition results operation second quarter 1997 one companys customers cancelled 800000 project company requested partial refund moneys paid cancellation unpaid invoices company believes met contractual obligations customer intends enforce terms agreement 8 income taxes provision income taxes follows reconciliation statutory federal income tax rate companys effective income tax rate follows deferred tax assets liabilities comprised following components increase decrease valuation allowance follows december 31 1997 federal tax return reporting purposes company approximately 1755000 regular alternative minimum tax loss carryovers expire various dates 2010 addition december 31 1997 company 225000 general business credit carryovers expire various dates 2007 general business credit carryovers may used offset taxes payable tax loss carryovers fully utilized 1997 based managements estimate realization company recorded increase deferred tax assets corresponding decrease goodwill 389000 relating net operating losses acquired connection prior acquisition current federal tax law limits net operating loss tax credit carryovers available used given year event certain circumstances including significant changes ownership interests company limited using approximately 430000 net operating loss carryovers one year 9 preferred stock company redeeming 10300 outstanding shares mandatory redeemable class preferred stock 26214 per share 28year period ending year 2018 present value remaining payments due quarterly recorded carrying value december 31 1997 1996 carrying value adjusted payments made dividends accrued shares yet redeemed rate used calculate present value 13 percent per annum approximated companys borrowing rate time redemption commenced december 31 1997 7804 outstanding shares remaining redeemed repayment schedule mandatory redeemable class preferred stock december 31 1997 follows thousands 10 stock options director compensation december 31 1997 company four stock option plans consolidated plan nonqualified stock option plan two plans outside directors consolidated plan options consist incentive stock options nonqualified stock options vest ratably five years generally expire ten years date grant beginning year 2001 exercise price incentive stock options granted plan set fair market value grant date exercise price nonqualified options may set fair market value grant date options granted exercise price less fair market value grant date nonqualified stock option plan available officers key employees vesting period exercise price may set fair market value date grant determined compensation committee board directors options granted exercise price less fair market value date grant restated outside director restricted stock plan restricted plan 40000 shares common stock reserved issuance outside directors december 31 1997 24600 shares issued restricted plan longer restricted leaving 15400 shares available future grants may 1994 shareholders approved restated outside director compensation stock option plan compensation plan provides outside directors paid 5000 per year allows issuance 50000 shares comprised 15400 shares restricted plan 34600 shares consolidated plan stock options table showing activity aforementioned stock option plans past three years four plans december 31 1997 1061654 shares unissued stock reserved issuance plans 25038 shares reserved employee stock purchase plan espp options purchase 253313 shares remained available future grants options purchase 361873 250990 shares common stock exercisable december 31 1997 1996 respectively exercisable options weighted average exercise prices 991 827 december 31 1997 1996 respectively 1995 financial accounting standards board issued sfas no123 defines fair value based method accounting employee stock option similar equity instrument encourages entities adopt method accounting employee stock compensation plans however also allows entity continue measure compensation cost plans using method accounting prescribed apb 25 entities electing remain accounting apb 25 must make pro forma disclosures net income earnings per share fair value based method accounting defined sfas 123 adopted company elected account stockbased compensation plans apb 25 however company computed pro forma disclosure purposes value options granted 1997 1996 1995 using blackscholes options pricing model prescribed sfas 123 using following weighted average assumptions grants using blackscholes methodology total value options granted 1997 1996 1995 1286000 1854000 794000 respectively would amortized pro forma basis vesting period options typically five years weighted average fair value options granted 1997 1996 1995 1151 per share 739 per share 662 per share respectively number shares issued espp 20646 11338 9978 years ended december 31 1997 1996 1995 respectively related weighted average purchase price weighted average fair value shares issued 1371 655 respectively 1997 1371 661 respectively 1996 1129 492 respectively 1995 company accounted stockbased compensation plans accordance sfas 123 companys net income net income per share would approximate pro forma disclosures effects applying sfas 123 pro forma disclosure indicative future amounts sfas 123 apply awards prior january 1 1995 additional awards anticipated future years following table summarizes information stock options outstanding december 31 1997 11 selected quarterly financial data unaudited 1 earnings per share restated conform statement financial accounting standards 128 earnings per share periods presented 2 loss second quarter 1996 results pretax charge 8030000 value inprocess research development efforts date acquisition pertaining companies acquired april 1996 see note 2 report independent public accountants financial statement schedule board directors shareholders cfi proservices inc audited accordance generally accepted auditing standards consolidated financial statements included cfi proservices incs 1997 annual report form 10k issued report thereon dated january 21 1998 audits made purpose forming opinion statements taken whole valuation qualifying accounts schedule responsibility companys management presented purposes complying securities exchange commissions rules part basic consolidated financial statements schedule subjected auditing procedures applied audits basic consolidated financial statements opinion fairly states material respects financial data required set forth therein relation basic consolidated financial statements taken whole arthur andersen llp portland oregon january 21 1998 schedule ii cfi proservices inc valuation qualifying accounts years ended december 31 1995 1996 1997 represents writeoff receivables fully amortized intangibles also includes reduction fasb 109 valuation account credited income tax expense b includes allowance doubtful accounts recorded part acquisition microbilt financial products division april 1996 item 14 exhibits financial statement schedules reports form 8k 1 financial statements financial statements together report thereon arthur andersen llp included pages indicated page report independent public accountants consolidated balance sheets december 31 1996 1995 consolidated statements income years ended december 31 19961995 1994 consolidated statements shareholders equity years ended december 31 1996 1995 1994 consolidated statements cash flows years ended december 31 1996 1995 1994 notes consolidated financial statements financial statement schedules following schedule report thereon filed herewith page report independent public accountants financial statement schedule valuation qualifying accounts 3 exhibits included herein number description 21 stock purchase sale agreement dated november 21 1995 among cfi proservices inc culverin corporation eric wagner john loveless david steffens douglas teets previously filed exhibit 21 current report form 8k dated november 21 1995 filed securities exchange commission december 6 1995 incorporated herein reference 22 stock purchase sale agreement effective april 1 1996 among microbilt corporation first financial management corporation cfi proservices inc previously filed exhibit 21 companys form 8k dated april 1 1996 filed securities exchange commission april 16 1996 incorporated herein reference 23 asset purchase sale agreement effective april 1 1996 among input creations inc shareholders cfi proservices inc previously filed exhibit 21 companys form 8k dated april 17 1996 filed securities exchange commission may 2 1996 incorporated herein reference 31 registrants amended restated articles incorporation previously filed exhibit 3ia registration statement form s1 registration statement 3364894 filed securities exchange commission june 23 1993 incorporated herein reference 32 amendments registrants amended restated articles incorporation effective june 28 1993 previously filed exhibit 3ib registration statement form s1 registration statement 3364894 filed securities exchange commission july 26 1993 incorporated herein reference number description 33 amendments registrants amended restated articles incorporation effective july 26 1993 previously filed exhibit 3ic registration statement form s1 registration statement 3364894 filed securities exchange commission august 10 1993 incorporated herein reference 34 registrants amended restated bylaws previously filed exhibit 3ii registration statement form s1 registration statement 3364894 filed securities exchange commission august 10 1993 incorporated herein reference 101 nonqualified stock option plan dated october 15 1993 previously filed exhibit 9910 registration statement form s8 registration 3370506 filed securities exchange commission october 19 1993 incorporated herein reference 102 registrants amended restated outside director restricted stock plan previously filed exhibit 995 registration statement form s8 registration 3370506 filed securities exchange commission october 19 1993 incorporated herein reference 103 registrants outside director compensation stock option plan previously filed exhibit 103 companys form 10q quarter ended march 31 1994 incorporated herein reference 104 registrants standardized regional prototype 401k cash deferred savings plan trust adopted december 1 1994 previously filed exhibit 1012 companys form 10k year ended december 31 1995 filed securities exchange commission april 1 1996 incorporated herein reference number description 105 registration agreement dated february 4 1991 among registrant certain named investors previously filed exhibit 1011 registration statement form s1 registration statement 3364894 filed securities exchange commission june 23 1993 incorporated herein reference 106 form software license agreement relating deposit pro previously filed exhibit 1020a registration statement form s1 registration 3364894 filed securities exchange commission june 23 1993 incorporated herein reference 107 form compliance warranty relating deposit pro previously filed exhibit 1020b registration statement form s1 registration 3364894 filed securities exchange commission june 23 1993 incorporated herein reference 108 form maintenance service agreement relating deposit pro previously filed exhibit 1020c registration statement form s1 registration 3364894 filed securities exchange commission june 23 1994 incorporated herein reference 109 form software license agreement relating laser pro previously filed exhibit 1021a registration statement form s1 registration 3364894 filed securities exchange commission june 23 1993 incorporated herein reference 1010 form compliance warranty relating laser pro previously filed exhibit 1021b registration statement form s1 registration 3364894 filed securities exchange commission june 23 1993 incorporated herein reference number description 1011 form maintenance service agreement relating laser pro previously filed exhibit 1021c registration statement form s1 registration 3364894 filed securities exchange commission june 23 1993 incorporated herein reference 1012 legal services agreement state louisiana effective march 13 1986 company mcglinchey stafford mintz cellini lang louisiana professional law corporation confidential treatment requested previously filed exhibit 1025 registration statement form s1 registration 3364894 filed securities exchange commission july 26 1993 incorporated herein reference 1013 1994 employee stock purchase plan previously filed exhibit 102 companys form 10q quarter ended june 30 1994 incorporated herein reference 1014 1995 consolidated restated stock option plan previously filed exhibit 9913 registration statement form s8 filed securities exchange commission march 1 1995 incorporated herein reference 1015 first amendment 1995 consolidated restated stock option plan previously filed exhibit 92 companys registration statement form s8 filed securities exchange commission september 4 1996 incorporated herein reference 1016 office lease dated march 18 1994 company john hancock mutual life insurance company previously filed exhibit 101 companys form 10q quarter ended march 31 1994 incorporated herein reference 1017 first amendment dated july 8 1996 office lease dated march 18 1994 company john hancock mutual life insurance company number description 1018 employment agreement release dated april 14 1994 company george l harrison previously filed exhibit 102 companys form 10q quarter ended march 31 1994 incorporated herein reference 1019 employment agreement james montague previously filed exhibit 102 companys current report form 8k filed securities exchange commission october 13 1994 incorporated herein reference 1020 employment agreement michael loewenberg previously filed exhibit 103 companys current report form 8k filed securities exchange commission october 13 1994 incorporated herein reference 1021 registration rights agreement company former genesys shareholders previously filed exhibit 104 companys current report form 8k filed securities exchange commission october 13 1994 incorporated herein reference 1022 form executive retention agreement previously filed exhibit 101 companys current report form 8k filed securities exchange commission august 22 1994 incorporated herein reference 1023 employee transition agreement release entered july 17 1995 cfi proservices inc kenneth olsen previously filed exhibit 101 companys quarterly report form 10q fiscal quarter ended september 30 1995 incorporated herein reference 1024 employment transition agreement release entered effective october 31 1995 cfi proservices inc clifford w potenza previously filed exhibit 102 companys quarterly report form 10q fiscal quarter ended september 30 1995 incorporated herein reference number description 1025 employment noncompetition agreement dated november 21 1995 cfi proservices inc eric wagner previously filed exhibit 101 companys current report form 8k filed securities exchange commission december 6 1995 1026 employment noncompetition agreement dated november 21 1995 cfi proservices inc john loveless previously filed exhibit 102 companys current report form 8k filed securities exchange commission december 6 1995 1027 employment noncompetition agreement dated november 21 1995 cfi proservices inc david steffens previously filed exhibit 103 companys current report form 8k filed securities exchange commission december 6 1995 1028 office lease dated march 2 1994 amended november 14 1994 september 7 1995 company huntington atrium development previously filed exhibit 1033 companys annual report form 10k year ended december 31 1995 filed securities exchange commission april 1 1996 incorporated herein reference 1029 office lease dated april 18 1995 amended june 9 1995 company danis properties co inc previously filed exhibit 1034 companys annual report form 10k year ended december 31 1995 filed securities exchange commission april 1 1996 incorporated herein reference number description 1030 business loan agreement revolving line credit dated november 8 1995 cfi proservices inc bank america oregon previously filed exhibit 1035 companys annual report form 10k year ended december 31 1995 filed securities exchange commission april 1 1996 incorporated herein reference 1031 amendment 1 dated may 17 1996 business loan agreement dated november 8 1995 previously filed exhibit 107 companys quarterly report form 10q quarter ended june 30 1996 filed securities exchange commission august 13 1996 incorporated herein reference 1032 amendment 2 dated july 1 1996 business loan agreement dated november 8 1995 previously filed exhibit 108 companys quarterly report form 10q quarter ended june 30 1996 filed securities exchange commission august 13 1996 incorporated herein reference 1033 amendment 3 dated september 24 1996 business loan agreement dated november 8 1995 previously filed exhibit 10 companys quarterly report form 10q quarter ended september 30 1996 filed securities exchange commission november 14 1996 incorporated herein reference 1034 amendment 4 dated november 21 1996 business loan agreement dated november 8 1995 previously filed exhibit 101 companys registration statement 33315505 form s3 filed securities exchange commission january 27 1997 incorporated herein reference 1035 amendment 5 dated december 31 1996 business loan agreement dated november 8 1995 previously filed exhibit 102 companys registration statement 33315505 form s3 filed securities exchange commission january 27 1997 incorporated herein reference number description 1036 promissory note dated april 1 1996 favor microbilt inc previously filed exhibit 101 companys form 8k dated april 1 1996 filed securities exchange commission april 16 1996 incorporated herein reference 1037 promissory note dated april 1 1996 favor first financial management corporation previously filed exhibit 102 companys form 8k dated april 1 1996 filed securities exchange commission april 16 1996 incorporated herein reference 1038 pledge agreement dated april 1 1996 cfi proservices inc microbilt corporation first financial management previously filed exhibit 103 companys form 8k dated april 1 1996 filed securities exchange commission april 16 1996 incorporated herein reference 1039 form employment agreement entered former employees input creations inc previously filed exhibit 101 companys form 8k dated april 17 1996 filed securities exchange commission may 2 1996 incorporated herein reference 1040 sublease among input creations inc cfi proservices inc previously filed exhibit 102 companys form 8k dated april 17 1996 filed securities exchange commission may 2 1996 incorporated herein reference 1041 amendment 6 dated march 1 1997 business loan agreement dated november 8 1995 filed herewith 11 statement computation per share earnings 21 subsidiaries registrant 23 consent arthur andersen llp b reports form 8k reports form 8k filed quarter ended december 31 1996 signatures pursuant requirements section 13 15 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date march 11 1997 cfi proservices inc matthew w chapman matthew w chapman chairman chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities march 11 1997 signature title matthew w chapman chairman chief executive officer principal executive officer matthew w chapman fred hall vice president chief financial officer principal financial accounting officer fred hall robert p chamness director president chief operating officer robert p chamness robert jett director executive vice president secretary robert jett j kenneth brody director j kenneth brody brian p murphy director brian p murphy lorraine legg director lorraine legg david g golden director david g golden eran ashany director eran ashany item 14 exhibits financial statement schedules reports form 8k financial statements schedules consolidated financial statements together report thereon arthur andersen llp included pages indicated page report independent public accountants consolidated balance sheets december 31 1998 1997 consolidated statements income years ended december 31 1998 1997 1996 consolidated statements shareholders equity years ended december 31 1998 1997 1996 consolidated statements cash flows years ended december 31 1998 1997 1996 notes consolidated financial statements following schedule report thereon filed herewith report independent public accountants financial statement schedule ii valuation qualifying accounts reports form 8k reports form 8k filed quarter ended december 31 1998 exhibits following exhibits filed herewith list intended constitute exhibit index number description 21 stock purchase sale agreement dated november 21 1995 among cfi proservices inc culverin corporation eric wagner john loveless david steffens douglas teets previously filed exhibit 21 current report form 8k dated november 21 1995 filed securities exchange commission december 6 1995 incorporated herein reference 22 stock purchase sale agreement effective april 1 1996 among microbilt corporation first financial management corporation cfi proservices inc previously filed exhibit 21 companys form 8k dated april 1 1996 filed securities exchange commission april 16 1996 incorporated herein reference 23 asset purchase sale agreement effective april 1 1996 among input creations inc shareholders cfi proservices inc previously filed exhibit 21 companys form 8k dated april 17 1996 filed securities exchange commission may 2 1996 incorporated herein reference 24 asset purchase sale agreement effective january 1 1999 among modern computer systems inc affiliated corporations shareholder cfi proservices inc previously filed exhibit 21 companys form 8k dated february 10 1999 filed securities exchange commission february 10 1999 incorporated herein reference 31 registrants amended restated articles incorporation previously filed exhibit 3ia registration statement form s1 registration statement 3364894 filed securities exchange commission june 23 1993 incorporated herein reference 32 amendments registrants amended restated articles incorporation effective june 28 1993 previously filed exhibit 3ib registration statement form s1 registration statement 3364894 filed securities exchange commission july 26 1993 incorporated herein reference 33 amendments registrants amended restated articles incorporation effective july 26 1993 previously filed exhibit 3ic registration statement form s1 registration statement 3364894 filed securities exchange commission august 10 1993 incorporated herein reference 34 registrants amended restated bylaws previously filed exhibit 3ii registration statement form s1 registration statement 3364894 filed securities exchange commission august 10 1993 incorporated herein reference number description 101 nonqualified stock option plan dated october 15 1993 previously filed exhibit 9910 registration statement form s8 registration 3370506 filed securities exchange commission october 19 1993 incorporated herein reference 102 registrants outside director compensation stock option plan previously filed exhibit 103 companys form 10q quarter ended march 31 1994 incorporated herein reference 103 registrants standardized regional prototype 401k cash deferred savings plan trust adopted december 1 1994 previously filed exhibit 1012 companys form 10k year ended december 31 1995 filed securities exchange commission april 1 1996 incorporated herein reference 104 legal services agreement state louisiana effective march 13 1986 company mcglinchey stafford mintz cellini lang louisiana professional law corporation confidential treatment requested previously filed exhibit 1025 registration statement form s1 registration 3364894 filed securities exchange commission july 26 1993 incorporated herein reference 105 1994 employee stock purchase plan previously filed exhibit 102 companys form 10q quarter ended june 30 1994 incorporated herein reference 106 1995 consolidated restated stock option plan previously filed exhibit 9913 registration statement form s8 filed securities exchange commission march 1 1995 incorporated herein reference 107 first amendment 1995 consolidated restated stock option plan previously filed exhibit 92 companys registration statement form s8 filed securities exchange commission september 4 1996 incorporated herein reference 108 office lease dated march 18 1994 company john hancock mutual life insurance company previously filed exhibit 101 companys form 10q quarter ended march 31 1994 incorporated herein reference 109 first amendment dated july 8 1996 office lease dated march 18 1994 company john hancock mutual life insurance company previously filed exhibit 1017 companys annual report form 10k year ended december 31 1996 filed securities exchange commission march 27 1997 incorporated herein reference 1010 second amendment dated january 11 1999 office lease dated march 18 1994 company john hancock mutual life insurance company number description 1011 employment noncompetition agreement dated november 21 1995 cfi proservices inc eric wagner previously filed exhibit 101 companys current report form 8k filed securities exchange commission december 6 1995 incorporated herein reference 1012 business loan agreement revolving line credit dated november 8 1995 cfi proservices inc bank america oregon previously filed exhibit 1035 companys annual report form 10k year ended december 31 1995 filed securities exchange commission april 1 1996 incorporated herein reference 1013 amendment 1 dated may 17 1996 business loan agreement dated november 8 1995 previously filed exhibit 107 companys quarterly report form 10q quarter ended june 30 1996 filed securities exchange commission august 13 1996 incorporated herein reference 1014 amendment 2 dated july 1 1996 business loan agreement dated november 8 1995 previously filed exhibit 108 companys quarterly report form 10q quarter ended june 30 1996 filed securities exchange commission august 13 1996 incorporated herein reference 1015 amendment 3 dated september 24 1996 business loan agreement dated november 8 1995 previously filed exhibit 10 companys quarterly report form 10q quarter ended september 30 1996 filed securities exchange commission november 14 1996 incorporated herein reference 1016 amendment 4 dated november 21 1996 business loan agreement dated november 8 1995 previously filed exhibit 101 companys registration statement 33315505 form s3 filed securities exchange commission january 27 1997 incorporated herein reference 1017 amendment 5 dated december 31 1996 business loan agreement dated november 8 1995 previously filed exhibit 102 companys registration statement 33315505 form s3 filed securities exchange commission january 27 1997 incorporated herein reference 1018 amendment 6 dated march 1 1997 business loan agreement dated november 8 1995 previously filed exhibit 1041 companys form 10k year ended december 31 1996 filed securities exchange commission march 21 1997 incorporated herein reference 1019 amendment 7 dated june 1 1997 business loan agreement dated november 8 1995 previously filed companys form 10q quarter ended june 30 1997 filed securities exchange commission august 13 1997 incorporated herein reference number description 1020 amendment 8 dated march 31 1998 business loan agreement dated november 8 1995 previously filed companys form 10q quarter ended march 31 1998 filed securities exchange commission may 5 1998 incorporated herein reference 1021 amendment 9 dated april 30 1998 business loan agreement dated november 8 1995 previously filed companys form 10q quarter ended march 31 1998 filed securities exchange commission may 51998 incorporated herein reference 1022 form executive retention agreement previously filed exhibit 101 companys current report form 8k filed securities exchange commission august 22 1994 incorporated herein reference 21 subsidiaries registrant 23 consent arthur andersen llp 27 financial data schedule mangement contract compensatory plan arrangement signatures pursuant requirements section 13 15 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date march 30 1999 cfi proservices inc matthew w chapman matthew w chapman chairman chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated march 30 1999 signature title matthew w chapman chairman chief executive officer principal executive officer matthew w chapman robert p chamness director president chief operating officer robert p chamness kurt w ruttum vice president chief financial officer principal financial accounting officer kurt w ruttum robert jett director executive vice president secretary robert jett j kenneth brody director j kenneth brody lorraine legg director lorraine legg eran ashany director eran ashany frank e brawner director frank e brawner l b day director l b day report independent public accountants board directors shareholders cfi proservices inc audited accompanying consolidated balance sheets cfi proservices inc oregon corporation subsidiaries december 31 1998 1997 related consolidated statements income shareholders equity cash flows three years period ended december 31 1998 consolidated financial statements responsibility companys management responsibility express opinion consolidated financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position cfi proservices inc subsidiaries december 31 1998 1997 results operations cash flows three years period ended december 31 1998 conformity generally accepted accounting principles arthur andersen llp portland oregon january 22 1999 accompanying notes integral part consolidated balance sheets accompanying notes integral part consolidated statements cfi proservices inc consolidated statements shareholderss equity dollars thousands accompanying notes integral part consolidated statements cfi proservices inc consolidated statements cash flows dollars thousands accompanying notes integral part consolidated statements cfi proservices inc notes consolidated financial statements 1 nature business summary significant accounting policies nature business cfi proservices inc subsidiaries company develops sells services customer service software used financial institutions company combines technology banking legal expertise deliver knowledgebased software solutions enable institutions simplify key sales service business processes improve productivity strengthen customer relationships maintain compliance internal business policies external government regulations although sales historically commercial banks within united states today company actively markets products types financial institutions domestically noncompliance oriented software internationally company business since 1978 basis consolidation effective december 31 1997 companys wholly owned subsidiaries genesys solutions group inc genesys vendor payment systems inc vps dissolved assets distributed company genesys inactive subsidiary assets distributed company effective december 31 1997 genesys dissolved 1998 consolidated financial statements include accounts companys wholly owned subsidiaries genesys texassouthwest technology group inc culverin corporation online financial systems inc coin banking systems inc vps intercompany transactions balances eliminated cash investment vps included assets accounted using equity method april 1996 company purchased remaining outstanding vps common stock company made certain acquisitions april 1996 october 1998 see note 2 acquisitions included consolidated financial statements since date acquisition cash equivalents cash equivalents include cash shortterm investments maturity dates three months less time acquisition investments statement financial accounting standards sfas 115 accounting certain investments debt equity securities requires company classify account security investments trading securities available sale securities held maturity depending companys intent hold trade securities time purchase securities available sale stated balance sheet fair market value approximates cost securities held maturity stated amortized cost unrealized holding gains losses december 31 1998 1997 company uses specific identification method determining cost use computing realized gains losses years ended december 31 1998 1997 1996 thousands proceeds sale debt securities 2982 realized gains sales debt securities 156 inventory consists primarily printed bank forms supplies stated lower cost market cost determined firstin firstout fifo method property equipment property equipment stated cost depreciation computed straightline basis estimated useful lives individual assets three years computer equipment software five seven years furniture fixtures equipment expenditures repairs maintenance charged current operations costs related renewals improvements add significantly useful life asset capitalized depreciable properties retired otherwise disposed cost related accumulated depreciation removed accounts resulting gain loss reflected income software costs internally developed software meet criteria sfas 86 accounting costs computer software sold leased otherwise marketed capitalized costs amortized straightline basis estimated economic lives ranging three five years purchased software capitalized cost amortized straightline basis estimated economic life three years generally contracts purchased software require royalties paid based revenues generated related software years ended december 31 1998 1997 1996 thousands amortization internally developed software 2633 3465 1194 amortization purchased software 19 1079 693 1998 1997 1996 several software development projects reached commercial feasibility result company began amortize certain product development costs capitalized prior periods addition company recorded amortization result software acquired connection 1998 1996 acquisitions increase amortization costs 1997 also resulted accelerated amortization certain products replaced new products management concluded longer technologically viable intangibles companys intangibles consist primarily amounts paid goodwill noncompetition agreements customer lists costs amortized straightline basis estimated economic lives five seven years company believes useful lives appropriate based factors influencing acquisition decisions factors include product life profitability general industry outlook company reviews intangible assets asset impairment end quarter frequently events changes circumstances indicate carrying amount intangibles may recoverable perform review company estimates sum expected future undiscounted cash flows operating activities estimated net cash flows less carrying amount intangibles company recognizes impairment loss amount necessary write intangibles fair value determined expected discounted future cash flows 1998 company wrote 877000 reflecting remaining goodwill associated fiscal credit analysis products related severance costs calculated accordance preexisting employment contracts charges included acquired inprocess research development charges companys statement income 1998 investment joint venture november 1997 company made 50 investment lori mae llc lori mae company designed securitize small business loans originated community banks company uses equity method account investment joint venture 1998 company wrote initial investment lori mae amount 352000 due lack acceptable market demand lori maes initial product charge addition losses attributable joint venture included equity losses attributable joint venture companys statement income 1998 december 31 1998 net investment lori mae 0 revenue recognition license revenues derived three kinds transactions licenses followon obligations part company recognized upon shipment licenses require installation training company prior use recognized upon completion installation training licenses include significant amounts tailoring occasionally customization recognized percentage completion basis tailoring customization performed estimates efforts complete project used percentage completion calculation due uncertainties inherent estimates actual results could differ estimates license agreement obligates company provide postcontract support additional cost customer revenue related postcontract support recognized ratably support period returns exchanges infrequent recorded reductions license revenue obligation accept return conduct exchange becomes known revenues consulting custom programming training separately contracted recognized related services performed revenues include sales preprinted forms font cartridges recognized upon shipment amounts received advance service support contracts deferred recognized ratably support period amounts excess invoiced minimums service support charges based usage estimated recognized period usage occurs included receivables december 31 1998 1997 unbilled receivables 7697000 3824000 respectively primarily relate percentage completion contracts deferred payment terms 1997 1998 statements position sop 972 989 software revenue recognition released became effective company year ended december 31 1998 sop 972 sop 989 material impact companys financial statements income taxes company accounts income taxes accordance sfas 109 accounting income taxes pronouncement requires deferred tax assets liabilities valued using enacted tax rates expected effect temporary differences recovered settled advertising cost advertising costs expensed incurred costs 1406000 1241000 950000 years ended december 31 1998 1997 1996 respectively use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities date financial statements reported amounts revenues expenses reporting periods actual results could differ estimates earnings per share basic earnings per share eps diluted eps computed using methods prescribed sfas 128 earnings per share basic eps calculated using weighted average number common shares outstanding period diluted eps computed using weighted average number common shares dilutive common equivalent shares outstanding following reconciliation basic eps diluted eps number options purchase shares common stock excluded table effect would antidilutive 787184 94500 10000 years ended december 31 1998 1997 1996 respectively supplementary cash flow information company made following cash payments years ended december 31 1998 1997 1996 thousands interest preferred dividends 554 517 148 income taxes 4751 2294 1597 noncash investing financing activities follows years ended december 31 1998 1997 1996 thousands tax benefit exercise nonqualified stock options 56 396 632 microbilt financial services division acquisition note 2 issuance note payable 3500 input creations inc acquisition note 2 issuance long term debt 1533 acquisitions note 2 issuance long term debt 1182 issuance notes payable 1170 issuance common stock 266 note receivable received connection sale remittance processing division 788 increase goodwill accrued acquisition related contingent royalties 1085 1140 decrease goodwill increase deferred tax asset 389 related acquired net operating losses reclassification bank line credit long 4000 term debt reclassifications certain reclassifications financial statements notes made prior year financial statements conform current presentation comprehensive income sfas 130 reporting comprehensive income establishes standards reporting display comprehensive income comprehensive income includes charges credits equity result transactions shareholders sfas 130 became effective 1998 net income comprehensive income identical 1998 1997 1996 sfas 130 impact companys financial statements segment reporting sfas 131 disclosures segments enterprise related information requires company report certain information operating segments sfas 131 became effective companys year ended december 31 1998 company provides integrated pcbased software financial institutions among things use branch automation loan origination new account opening electronic banking company classifies products primarily lending retail delivery connectivity products constitute companys suite products sold types customer similar distribution channels accordingly company believes operates one segment license revenues lending retail delivery connectivity products 310 million 156 million 25 million respectively 1998 222 million 169 million 14 million respectively 1997 154 million 171 million 14 million respectively 1996 virtually companys sales made united states remaining sales made customers located latin america recent pronouncement sfas 133 accounting derivative instruments hedging activities becomes effective companys year ending december 31 2000 company believe sfas 133 material impact financial statements 2 acquisitions october 1998 company acquired substantially assets mortgage dynamics inc mdi acquisition accounted purchase price 2668000 cash plus certain contingent royalties tied future revenue production conjunction acquisition company recorded approximately 1518000 goodwill amortized ratably seven year period 230000 purchased software amortized ratably three year period 991000 acquired inprocess research development determined independent appraisal expensed 1998 technological feasibility acquired technology alternative future use established prior purchase pro forma results 1998 1997 reflecting mdi acquisition materially different companys reported results years april 1996 company acquired capital stock online financial communication systems inc online coin banking systems inc coin formerly subsidiaries microbilt corporation substantially assets input creations inc input pathways software inc pathways halcyon group inc halcyon acquisitions accounted purchases combined purchase prices totaled approximately 13600000 plus certain contingent royalties tied future revenue production software conversions 13600000 included 5196000 cash 7385000 notes payable longterm liabilities 266000 common stock approximately 700000 assumed liabilities conjunction acquisitions company recorded approximately 4300000 goodwill amortized ratably seven year period 8030000 acquired inprocess research development determined independent appraisal expensed 1996 technological feasibility acquired technology alternative future use established prior purchase november 1995 company acquired outstanding common stock culverin corporation culverin software company headquarters dayton ohio initial purchase price consisted 3888000 cash paid installments november 1996 cash 50000 33341 shares companys common stock valued 1350 per share discounted 40 restrictions trading delivered january 1 1998 expenses 531000 addition company make annual contingent royalty payments 2000 2 14 revenues generated culverin products depending amount revenues year transaction accounted purchase excess initial purchase price value identifiable assets 1969000 recorded intangible asset amortized straightline basis seven years annual contingent royalty payments earned recorded addition intangible assets amortized straight line basis remaining life original sevenyear period 3 property equipment major categories property equipment summarized follows years ended december 31 1998 1997 thousands computer hardware software 10630 9546 furniture fixtures 3293 3008 leasehold improvements 558 512 14481 13066 less accumulated depreciation 9947 7855 4534 5211 depreciation expense follows years ended december 31 1998 1997 1996 thousands depreciation expense 2381 2230 1799 4 accrued expenses accrued expenses consist following years ended december 31 1998 1997 thousands accrued royalties 1766 1958 accrued commissions 960 1080 accrued bonuses profit sharing 2095 392 3196 1932 8017 5362 5 employee benefit plans company created profit sharing plan february 1 1989 provisions section 401k internal revenue code employer contributions plan made discretion board directors follows years ended december 31 1998 1997 1996 thousands employer contributions 856 468 327 board directors approved officers bonus plan employee profit sharing plan amount timing bonus profit sharing payments boards discretion expense associated plans follows years ended december 31 1998 1997 1996 thousands bonus profit sharing expense 2735 850 2298 december 31 1998 company qualified employee stock purchase plan espp allowed qualified employees direct seven percent monthly base pay purchases stock purchase price shares purchased plan 85 percent lesser fair market value beginning end plan year espp terminate accordance terms 1999 6 line credit longterm debt line credit company may borrow lesser 10000000 50 percent accounts receivable defined terms committed unsecured revolving bank line credit agreement companys option interest outstanding borrowings may banks published reference rate alternative rates specified agreement interest rate effect december 31 1998 67 percent line credit expires may 1 2000 agreement contains covenants require company maintain certain financial ratios prohibits company incurring debts liens outside ordinary course business company compliance covenants december 31 1998 company pays annual commitment fee 02 percent average unused balance borrowings line totaled 4000000 december 31 1998 5310000 december 31 1997 longterm debt december 31 1998 1997 longterm debt consisted following 1998 1997 thousands note payable relation culverin acquisition payment 3690 1996 balance due 50 january 1998 note payable relation halcyon acquisition imputed interest 8 percent due quarterly installments 50 including interest payable 449 605 2001 note payable assumed halcyon acquisition monthly installments 6 including interest imputed 85 percent final payment due october 307 346 guaranteed royalties paid relation input acquisition imputed interest 6 percent 1148 1426 payable march 2001 tstg noncompete payments april 1999 50 100 longterm portion line credit 4000 5954 2527 less current portion longterm debt 261 295 longterm debt 5693 2232 payouts longterm debt follows thousands years ending december 31 1999 261 2000 4230 2001 1295 2002 55 2003 59 thereafter 54 5954 7 commitments contingencies operating leases company leases facilities equipment operating leases terms one 10 years payable monthly installments total lease expense follows years ended december 31 1998 1997 1996 thousands lease expense 2980 2786 2131 future minimum lease payments follows thousands years ending december 31 1999 2833 2000 2863 2001 1838 2002 1749 2003 1293 thereafter 506 11082 1998 company recorded loss 793000 present value net future lease payments due respect certain office space atlanta company ceased using loss included charges statement income 1998 contingencies company involved routine legal matters incidental business company believes resolution matters currently outstanding material effect financial condition results operations however assurance given concurrent resolution several matters manners adverse company would material adverse effect companys financial condition results operations 8 income taxes provision benefit income taxes follows years ended december 31 1998 1997 1996 thousands current tax provision federal 3667 3443 2223 state 402 377 272 4069 3820 2495 deferred tax provision benefit 586 87 1328 total provision 3483 3907 1167 reconciliation statutory federal income tax rate companys effective income tax rate follows years ended december 31 1998 1997 1996 federal statutory rate 340 state income taxes net federal 48 42 68 benefit disallowance meals entertainment expenses 14 11 60 purchase accounting adjustments including amortization intangibles 55 57 476 change valuation allowance 01 02 109 12 07 141 468 455 912 deferred tax assets liabilities comprised following components december 31 1998 1997 thousands current deferred tax asset allowance doubtful accounts 844 950 current portion net operating loss carryforwards 164 177 severance accruals 281 20 52 160 total current deferred tax asset 1341 1307 longterm deferred tax asset liability inprocess technology acquired 2660 2477 depreciation 160 154 intangibles amortization 702 651 capitalized software 3145 3746 net operating loss credit carryforwards 475 714 77 33 gross longterm deferred tax asset liability 455 25 valuation allowance 100 172 total longterm deferred tax asset liability 355 197 increase decrease valuation allowance follows years ended december 31 1998 1997 1996 thousands increase decrease valuation allowance 72 17 140 december 31 1998 federal tax return reporting purposes company approximately 1272000 regular alternative minimum tax loss carryovers expire various dates 2010 addition december 31 1998 company 152000 general business credit carryovers expire various dates 2007 general business credit carryovers may used offset taxes payable tax loss carryovers fully utilized 1997 based managements estimate realization company recorded increase deferred tax assets corresponding decrease goodwill 389000 relating net operating losses acquired connection prior acquisition current federal tax law limits net operating loss tax credit carryovers available used given year event certain circumstances including significant changes ownership interests company limited using approximately 430000 net operating loss carryovers one year 9 preferred stock company redeeming 10300 outstanding shares mandatory redeemable class preferred stock 26214 per share 28year period ending year 2018 present value remaining payments due quarterly recorded carrying value december 31 1998 1997 carrying value adjusted payments made dividends accrued shares yet redeemed rate used calculate present value 13 percent per annum approximated companys borrowing rate time redemption commenced december 31 1998 7410 outstanding shares remaining redeemed repayment schedule mandatory redeemable class preferred stock december 31 1998 follows thousands years ending december 31 1999 103 2000 103 2001 103 2002 103 2003 103 thereafter 1428 total future payments 1943 less amount representing dividends 1205 present value future payments 738 less current portion longterm mandatory redeemable preferred stock 738 10 stock options director compensation december 31 1998 company five stock option plans consolidated plan nonqualified stock option plan two plans outside directors espp consolidated plan options consist incentive stock options nonqualified stock options generally vest ratably five years generally expire ten years date grant exercise price incentive stock options granted plan set fair market value grant date exercise price nonqualified options may set fair market value grant date options granted exercise price less fair market value grant date nonqualified stock option plan available officers key employees vesting period exercise price may set fair market value date grant determined compensation committee board directors options granted exercise price less fair market value date grant company two stock option plans outside directors restated outside director restricted stock plan restricted plan restated outside director compensation stock option plan compensation plan compensation plan approved shareholders company may 1994 provides outside directors paid 5000 per year allows issuance stock options total 50000 shares common stock reserved issuance restricted plan compensation plan 15400 shares reserved restricted plan 34600 reserved consolidated plan december 31 1998 28600 shares issued restricted plan longer restricted espp 67000 shares common stock reserved 64354 shares issued december 31 1998 table showing activity aforementioned stock option plans past three years weighted total shares average exercise subject exercise price options price per share thousands balances december 31 1995 824682 723 5962 options granted 290500 1452 4219 options exercised 273183 363 991 options lapsed 10179 992 101 balances december 31 1996 831820 1093 9089 options granted 118000 1840 2172 options exercised 79804 552 441 options lapsed 86713 1345 1167 balances december 31 1997 783303 1232 9653 options granted 214293 1239 2655 options exercised 51680 1043 539 options lapsed 30490 1374 419 balances december 31 1998 915426 1240 11350 five plans december 31 1998 987591 shares unissued stock reserved issuance plans 2655 shares reserved espp options purchase 69510 shares remained available future grants options purchase 437026 361873 250990 shares common stock exercisable december 31 1998 1997 1996 respectively exercisable options weighted average exercise prices 1071 991 827 december 31 1998 1997 1996 respectively financial accounting standards board issued sfas no123 defines fair value based method accounting employee stock option similar equity instrument encourages entities adopt method accounting employee stock compensation plans however also allows entity continue measure compensation cost plans using method accounting prescribed apb 25 entities electing remain accounting apb 25 must make pro forma disclosures net income earnings per share fair value based method accounting defined sfas 123 adopted company elected account stockbased compensation plans apb 25 however company computed pro forma disclosure purposes value options granted 1998 1997 1996 using blackscholes options pricing model prescribed sfas 123 using following weighted average assumptions grants years ended december 31 1998 1997 1996 riskfree interest rate 60 63 60 expected dividend yield 00 expected lives years 75 69 47 expected volatility 594 607 628 using blackscholes methodology total value options granted 1998 1997 1996 1215000 1286000 1854000 respectively would amortized pro forma basis vesting period options typically five years weighted average fair value options granted 1998 1997 1996 836 per share 1151 per share 739 per share respectively number shares issued espp 22383 20646 11338 years ended december 31 1998 1997 1996 respectively related weighted average purchase price weighted average fair value shares issued 1020 583 respectively 1998 1371 655 respectively 1997 1371 661 respectively 1996 company accounted stockbased compensation plans accordance sfas 123 companys net income net income per share would approximate pro forma disclosures effects applying sfas 123 pro forma disclosure indicative future amounts additional awards anticipated future years following table summarizes information stock options outstanding december 31 1998 12 subsequent event effective january 1 1999 company acquired substantially assets modern computer systems inc certain related corporations collectively mcs offers hardware software solutions back office accounting needs community banks credit unions acquisition accounted purchase price 60 million cash 650000 common stock company believes likely write first quarter 1999 portion purchase price allocated acquired inprocess research development determined independent appraisal report independent public accountants financial statement schedule board directors shareholders cfi proservices inc audited accordance generally accepted auditing standards consolidated financial statements included cfi proservices incs 1998 annual report form 10k issued report thereon dated january 22 1999 audits made purpose forming opinion statements taken whole valuation qualifying accounts schedule responsibility companys management presented purposes complying securities exchange commissions rules part basic consolidated financial statements schedule subjected auditing procedures applied audits basic consolidated financial statements opinion fairly states material respects financial data required set forth therein relation basic consolidated financial statements taken whole arthur andersen llp portland oregon january 22 1999 cfi proservices inc valuation qualifying accounts years ended december 31 1996 1997 1998 item 7 managements discussion analysis financial condition results operations consolidated financial statements notes thereto read conjunction following discussion certain parts report contain forwardlooking statements involve risks uncertainties statements concentrexs plans objectives expectations intentions cautionary statements made discussion read applicable related forwardlooking statements wherever appear report concentrexs actual results could differ materially discussed factors could cause contribute differences include quarterly fluctuations orders received changes financial institutions marketplace technological advances changes relationships key customers partners need additional capital management growth software errors additional factors discussed elsewhere report well companys filings securities exchange commission overview cfi proservices inc business concentrex incorporated pending change legal name company leading provider technologypowered solutions financial services industry 1999 reorganized two product groups software products services group ecommerce group offer broad range traditional software products services product group growing using finance innovative businesstobusiness ecommerce solutions software products services group supports financial institutions mission critical functions including back office core processing loan origination new account opening branch automation cross selling support key sales functions financial institution traditionally relies make money usually delivered facetoface telephone believe financial institutions need offer functions internet thus focused efforts internet banking software account servicing internetenabled versions traditional software lending account opening integrate points customer contact enable financial institution serve customers person internet consistent integrated solutions cost structure relatively fixed within short time frame cost generating revenue aggregate vary significantly changes revenue result typically generate significantly greater profit margins incremental sales fixed costs covered addition failure achieve revenue targets particular period would adversely affect profit margins period backlog december 31 1999 155 million compared 183 million 152 million december 31 1998 1997 respectively decline backlog 1998 1999 resulted primarily decisions customers delay purchases months prior december 31 1999 due concerns year 2000 issue backlog consists firm signed orders taken yet converted revenue expected converted revenue within next 12 months orders constituting backlog subject changes delivery schedules cancellation option purchaser without significant penalty stated backlog necessarily indicative revenue future period acquisitions new business ventures expanded market presence acquiring products technologies companies complement product suite increase market share completed 15 acquisitions since 1994 completed four acquisitions 1999 consisting modern computer systems mcs january 1 1999 meca software llc meca may 17 1999 ultradata corporation ultradata august 13 1999 certain assets total direct services llc tds september 27 1999 four acquisitions accounted purchases reflected results operations presented since respective acquisition dates terms certain acquisitions provide based various factors including passage time certain product revenue required pay contingent royalties amortization certain intangible assets primarily goodwill arising acquisition activity deductible federal income tax purposes certain amortization expense effect increasing effective tax rate financial reporting purposes currently understandings commitments agreements respect material acquisition businesses products technologies additionally covenants lenders may limit ability engage acquisitions near term nevertheless time may evaluate establishing new business operations making investments new business ventures including joint ventures results operations following table sets forth statements operations data expressed percentage total revenue past three years revenue total revenue increased 215 million 251 1071 million 1999 856 million 1998 total revenue increased 130 million 179 856 million 1998 726 million 1997 increased percentage service support revenue 1999 believe service support revenue predictable recurring software license revenue service support revenue accounted 451 377 400 total revenue respectively 1999 1998 1997 license revenue accounted 472 575 557 total revenue respectively 1999 1998 1997 revenue group millions 1999 1998 1997 software products services group license revenue 487 476 383 service support revenue 383 281 262 revenue 83 41 31 group total 953 798 676 ecommerce group license revenue 18 16 22 service support revenue 100 42 28 group total 118 58 50 total revenue 1071 856 726 1999 reorganized two product groups software products services group ecommerce group accordingly reclassified operating revenue data periods included report reflect new groups total revenue change result reclassification software products services group software products services group includes traditional lending branch automation connectivity software products support services previously provided cfi proservices inc core host processing products acquired ultradata august 1999 mcs january 1999 preprinted forms font cartridges modems previously sold us license revenue personal financial management software product acquired meca may 1999 fulfillment services acquired meca products included revenue within software products services group software products services license revenue increased 11 million 24 487 million 1999 476 million 1998 increase due acquisition ultradata mcs 1999 offset part declines revenue lending branch automation software core processing revenues 1998 1997 decline revenue 1999 compared 1998 lending branch automation software products primarily due year 2000 pressures caused financial institution customers postpone decisions new software purchases delay defer implementation projects software products services license revenue increased 93 million 243 476 million 1998 383 million 1997 increase led windowsbased laser pro lending suite loan origination products new mortgage products connectivity products new account opening products offset part decline branch automation revenue branch automation revenue 1997 included results rpxpress remittance processing division sold september 1997 service support revenue software products services group increased 102 million 364 383 million 1999 281 million 1998 increase resulted primarily ultradata mcs meca acquisitions 1999 increase installed base products service support revenue increased 18 million 70 1998 262 million 1997 due primarily increase installed base products increase effective fourth quarter 1998 service support pricing certain lending products service support revenue consists primarily recurring software support charges revenue training customers use products substantially software customers subscribe support services provide payment annual quarterly maintenance fees revenue software products services group increased 42 million 100 83 million 1999 41 million 1998 increase resulted primarily meca acquisition added revenue legacy personal financial management product fulfillment operations anticipate revenue personal financial management product decline future periods revenue increased 10 million 318 1998 31 million 1997 significant price changes software products occurred periods presented ecommerce group ecommerce group includes home banking bill payment products previously sold cfi proservices inc professional services technical support services acquired meca total revenue ecommerce segment increased 60 million 1022 118 million 1999 58 million 1998 increased 08 million 166 1998 50 million 1997 1999 increase principally due acquisition meca may 1999 license revenue ecommerce group increased 02 million 108 18 million 1999 16 million 1998 license revenue decreased 06 million 265 16 million 1998 22 million 1997 service support revenue ecommerce group increased 58 million 1372 100 million 1999 42 million 1998 increase resulted primarily acquisition mecas technical support operations increase end users online banking software increased online bill payment services revenue service support revenue increased 14 million 505 42 million 1998 28 million 1997 due primarily increase end users home banking software increased online bill payment services revenue cost revenue cost revenue primarily consists amortization internally developed purchased software royalty payments compliance warranty insurance premiums software production costs product support training implementation costs software customization materials costs forms supplies bill payment processing costs cost revenue increased 132 million 449 426 million 1999 compared 1998 cost revenue increased 24 million 89 294 million 1998 compared 1997 increase 1999 principally attributable acquisitions ultradata meca higher implementation costs associated growing number large financial institution projects additional personnel required support increased installed base customers increased royalties materials costs associated increased revenues breadth product lines expanded complexity cost providing high quality customer service support increased software amortization 38 million 1999 26 million 1998 45 million 1997 1998 1997 several software development projects reached completion result began amortize certain product development costs capitalized prior periods addition recorded amortization result software acquired connection acquisitions increase amortization costs 1997 also resulted accelerated amortization certain products replaced new products management concluded longer technologically viable result acquisitions costs associated royalty payments increase future periods obligated pay royalties ranging 3 18 revenue related certain products acquired various acquisitions addition obligated pay microbilt corporation fixed amount online branch automation product customer converts branch automation products royalty obligations generally extend three five years acquisition date gross margin 602 656 628 1999 1998 1997 respectively decrease 1999 primarily due year 2000 pressures caused financial institution customers postpone decisions new software purchases delay defer implementation projects since costs relatively fixed shortterm postponement revenue significantly reduced gross margin second half 1999 increase gross margin 1998 primarily attributable lower software amortization 1997 improved implementation efficiencies operating expenses sales marketing sales marketing expenses decreased 187 million 174 revenue 1999 192 million 224 revenue 1998 increased 157 million 216 revenue 1997 percentage decrease 1999 resulted primarily meca acquisition may 1999 contributed revenue without commensurate increases sales marketing costs increase dollar amount 1998 1997 resulted increased commissions associated increased revenues salary increases additional personnel higher advertising costs product development product development expenses include costs enhancing existing products developing new products product development expenses 245 million 229 revenue 1999 149 million 174 revenue 1998 115 million 159 revenue 1997 increases dollar amount product development expenses largely result increased personnel primarily resulting meca ultradata acquisitions additional costs integrating acquired products accelerating development online banking products continue commit significant resources product development efforts product development expenses 1998 1997 offset part capitalization software development efforts capitalized 10 million software development costs 1998 50 million 1997 software development costs capitalized 1999 capitalized software development costs net accumulated amortization 53 million december 31 1999 83 million december 31 1998 99 million december 31 1997 believe current development cycle compliancerelated products typically relatively long lives completed second quarter 1998 accordingly significant reduction capitalization software development costs future periods general administrative general administrative expenses 187 million 175 revenue 1999 100 million 117 revenue 1998 83 million 114 revenue 1997 increase 1999 due principally acquisitions meca ultradata increase 1998 due principally additional systems infrastructure costs necessary accommodate revenue growth goodwill amortization goodwill acquired acquisitions amortized periods ranging five 20 years goodwill amortization included operations 25 million 12 million 13 million goodwill amortization included cost revenue 06 million 09 million 05 million 1999 1998 1997 respectively increase 1999 due principally goodwill resulting ultradata acquisition recorded approximately 49 million goodwill ultradata acquisition amortized 20 years goodwill net accumulated amortization 591 million 62 million respectively december 31 1999 1998 acquired inprocess research development charges connection acquisition meca may 1999 ultradata august 1999 recorded expenses 38 million 52 million respectively inprocess research development efforts process dates acquisition values assigned inprocess research development efforts determined independent appraisal represent efforts process dates acquisition yet reached point technological feasibility established alternative future uses accounting rules require costs expensed incurred research development efforts resulted products released first quarter 2000 connection acquisition assets mortgage dynamics inc october 1998 recorded pretax charge 10 million research development efforts process date acquisition values assigned inprocess research development efforts determined independent appraisals represent efforts process dates acquisition reached point technological feasibility established alternative future uses accounting rules require costs expensed incurred research development efforts resulted products released 1999 third quarter 1999 also expensed name change costs certain costs related acquisitions required expensed 03 million settlement arbitration proceeding 09 million fourth quarter 1998 recorded aggregate pretax charges 17 million consisting present value remaining liability certain leased office space concentrex ceased using remaining goodwill associated fiscal credit analysis products related severance costs see notes 1 2 7 notes consolidated financial statements income operations income loss operations 1999 102 million 95 revenue compared 82 million 96 revenue 1998 88 million 122 revenue 1997 excluding impact 102 million unusual items 1999 26 million unusual items 1998 operating income would 0 1999 108 million 127 revenue 1998 nonoperating income expense nonoperating income expense consists primarily interest income expense net expense 45 million 1999 compared net expense 07 million 1998 net nonoperating income 03 million 1997 increase net interest expense 1999 attributable debt incurred finance ultradata meca transactions nonoperating expense 1998 included 03 million charge representing initial investment joint venture see note 1 notes consolidated financial statements september 1997 completed sale rpxpress remittance processing division annual basis remittance processing revenues expenses approximately 10 million received 10 sales price cash remainder payable yearly installments interest 85 per annum four years connection sale recorded nonoperating gain 06 million february 1997 board directors elected proceed planned followon stock offering common stock took 05 million nonoperating charge first quarter 1997 result cancellation board directors determined stock price would required offer shares low would unfairly dilute investment existing shareholders provision benefit income taxes effective tax rate benefit expense 1999 60 compared 468 1998 455 1997 difference federal state statutory tax rates effective tax rates 1999 1998 1997 results primarily nondeductible charges inprocess research development increased amortization nondeductible intangibles primarily goodwill related acquisitions market risk entered derivative financial instruments speculative purposes may exposed future interest rate changes debt 1999 incurred significant indebtedness related acquisitions hypothetical 10 increase interest rates level debt existing december 31 1999 would increase cash interest expense approximately 06 million per year purchased interest rate cap substantial portion longterm debt interest rate cap become effective prime rate interest exceeds 10 per year liquidity capital resources net cash provided operations 84 million 1999 compared 110 million 1998 working capital decreased deficit 36 million december 31 1999 170 million december 31 1998 decrease occurred primarily liabilities assumed meca ultradata acquisitions additional debt incurred finance acquisitions net cash used investing activities 1999 673 million compared 61 million 1998 increase 1999 primarily caused acquisitions mcs ultradata expenditures property equipment 27 million 1999 primarily attributable investments infrastructure necessary accommodate growth net cash financing activities 566 million 1999 principally proceeds long term debt financing activities related acquisitions including issuance convertible subordinated notes partially offset payments long term debt deferred loan costs days sales outstanding dsos accounts receivable including billed unbilled accounts receivable 124 days december 311999 compared 109 days december 31 1998 increase dsos 1999 principally due year 2000 pressures caused customers delay payments us perceived need liquidity year end decision issue annual quarterly maintenance invoices december rather january 1998 also caused corresponding increase deferred revenues projectoriented business often requires unbilled accounts receivable milestone billings often longer collection cycles unbilled accounts receivable 73 million 180 total accounts receivable december 31 1999 compared 76 million 258 total accounts receivable december 31 1998 connection meca ultradata acquisitions 1999 substantially increased outstanding debt see note 6 notes consolidated financial statements december 31 1999 following debt loan agreements connection ultradata acquisition also issued convertible subordinated notes original face amount 74 million original issue discount 19 million received gross proceeds 55 million upon issuance notes see note 6 notes consolidated financial statements result 1999 acquisitions highly leveraged loan agreements contain financial covenants must abide example required generate specific levels earnings interest taxes depreciation amortization ebitda measured fourquarter periods may time fail comply covenants loan agreements failure comply covenants could material adverse effect us unless able obtain waivers noncompliance assurance lenders would grant waivers noncompliance could lead event default loan agreements waivers would conditioned terms conditions acceptable us fourth quarter 1999 amended financing agreements lenders consideration amendments agreed pay fees 2 total loan commitments total 17 million agreed decrease exercise conversion prices certain warrants convertible notes held lenders 1234 per share 10 per share new exercise conversion prices warrants established 24 premium market price common stock december 31 1999 loan fees paid fair value attributed change exercise price warrants held debt holders recorded additional debt discount conversion price convertible notes reduced pursuant terms notes record additional interest expense see note 6 notes consolidated financial statements loan agreements also contain significant restrictions activities example must obtain consent lenders purchase sell significant assets additionally terms loan agreements prohibit us incurring additional indebtedness issuing new equity securities without consent lenders restrictions may make difficult impossible raise additional funds need future cash requirements could include among things purchases companies products technologies expenditures internal software development capital expenditures necessary expansion business installment payments debt related acquisitions available cash resources include cash generated operations plus revolving line credit 150 million subject borrowing base restrictions related accounts receivable time receive contract claims customers parties including requests full partial refunds moneys paid although assurance claims either alone aggregate material adverse effect results operations financial position believe date filing claims effect time initiate contract claims customers parties including claims payment unpaid invoices believe funds expected generated existing operations borrowings revolving line credit provide us sufficient funds finance current operations least next 12 months may require additional funds support working capital requirements future acquisitions purposes may seek raise additional funds one public private financings debt equity sources assurance given additional financing available financing obtainable terms favorable us shareholders year 2000 year 2000 issue identifies problems may arise computer equipment software well embedded electronic systems way systems programmed interpret certain dates occur around change century computer industry primarily result computer programs designed developed using reserving two digits date fields rather four digits identify century without considering ability program properly distinguish year 2000 century change likewise dates may present problems way digits interpreted experienced material year 2000 problems products century change costs incurred december 31 1999 assess year 2000 issues significant funded operating cash flows based information gathered date presently aware year 2000 issue could materially affect operations either selforiginated caused thirdparty service vendors providers nevertheless assurance experience operating difficulties result year 2000 issues going forward occur difficulties could require us incur unanticipated costs remedy problems either individually collectively material adverse effect business operations financial results quarterly results experienced expect future experience significant quarterly fluctuations results operations fluctuations may caused various factors including among others size timing product orders shipments timing market acceptance new products product enhancements introduced us competitors product mix including expenses implementation royalties related certain products timing completion work contracts accounted percentage completion method customer order deferrals anticipation new products aspects customers purchasing process including evaluation decisionmaking acceptance products within customers organizations sales process products including complexity customer implementation products number working days quarter federal state regulatory events competitive pricing pressures technological changes hardware platform networking communication technology changes company personnel timing operating expenditures specific economic conditions financial services industry general economic conditions business experienced expected continue experience degree seasonality due customers budgeting buying cycles strongest revenue quarter year typically fourth quarter weakest revenue quarter typically second quarter customers purchases tied closely internal budget processes customers budgets approved beginning year budgeted amounts often must utilized end year addition incentive sales compensation plan provides increases commission percentages sales people approach exceed annual sales quotas result two factors usually experiences increased sales orders last quarter pattern altered 1999 year 2000 issues including regulatory requirements internal business process decisions affected customers buying decisions item 7a item 7 managements discussion analysis financial condition results operations consolidated financial statements notes thereto read conjunction following discussion contains certain forwardlooking statements involve risks uncertainties statements companys plans objectives expectations intentions cautionary statements made discussion read applicable related forwardlooking statements wherever appear report companys actual results could differ materially discussed factors could cause contribute differences include discussed elsewhere report well companys filings securities exchange commission overview cfi leading provider customer service software products services financial institutions company combines technology banking legal expertise deliver knowledgebased software solutions enable institutions simplify key business processes sales service improve productivity strengthen customer relationships maintain compliance internal business policies external government regulations 5500 financial institutions licensed one companys products 1993 substantially companys revenue derived laser pro deposit pro products today company licenses 20 products organized three product groups lending retail delivery connectivity software due product diversification efforts company less reliant laser pro deposit pro products 1997 approximately 55 companys revenue came products laser pro deposit pro cfi generates recurring revenue software maintenance agreements 1997 service support fees primarily laser pro deposit pro accounted approximately 38 total revenue substantially cfi software customers subscribe companys service support programs provide ongoing product enhancements applicable updates facilitate compliance changing regulations companys cost structure relatively fixed cost generating revenue aggregate vary significantly changes revenue result company typically generates significantly greater profit margins incremental sales fixed costs covered addition failure achieve revenue targets particular period would adversely affect profit margins period company believes sales larger banks constitute higher percentage total revenue future periods transactions larger banks typically greater scope usually involve greater sales effort longer period time require customization prolonged acceptance testing project oriented business tends cause growth unbilled accounts receivable resulting use percentage completion accounting deferred payment terms increased collection times billed accounts receivable factors turn result higher days sales outstanding dsos accounts receivable companys backlog december 31 1997 152 million compared 100 million 61 million december 31 1996 1995 respectively cfis backlog consists firm signed orders taken yet converted revenue expected convert revenue within next 12 months orders constituting companys backlog subject changes delivery schedules cancellation option purchaser without significant penalty stated backlog necessarily indicative companys revenue future period acquisitions new business ventures company expanded market presence acquiring products technologies companies complement companys product suite increase market share company completed following 10 acquisitions since june 1994 see note 2 notes consolidated financial statements assurance future acquisitions favorable impact performance company believes achieved objectives growth broadening product offerings customer base acquisition program intends continue pursue acquisitions however company currently understandings commitments agreements respect material acquisition businesses products technologies aggregate purchase price foregoing acquisitions 202 million 380967 shares common stock plus contingent royalties connection acquisitions company incurred noncash charges primarily relating writeoff acquired inprocess research development efforts totaling 45 million november 1995 80 million april 1996 terms certain acquisitions provide based various factors including passage time certain product revenue product development company required pay contingent royalties obligations company may satisfy issuance shares common stock amortization certain intangible assets arising companys acquisition activity deductible federal income tax purposes certain amortization expense incurred company effect increasing companys effective tax rate financial reporting purposes time company may also evaluate establishing new business operations making investments new business ventures including joint ventures march 1997 cfi announced creation lori mae llc lori mae company securitize small business loans originated community banks company expects invest 15 million 50 ownership venture company use equity method account investment lori mae leverages strength companys laser pro closing laser pro fiscal online products provide standardized loan documentation decision criteria required financial institutions participating securitization opportunity company believes venture contribute commissions securitization transactions giving cfis lending suite products another competitive edge serve strengthen expand companys leadership market lending products lori mae materially affect companys financial results 1997 expected materially affect companys financial results 1998 results operations following table sets forth statements income data company expressed percentage total revenue periods indicated 1 excluding impact acquired inprocess research development restructuring charges income operations percentage revenue 1996 1995 would 155 124 respectively net income applicable common shareholders 1996 1995 would 85 82 respectively following table sets forth percentage changes period statements income data company 1 excluding impact acquired inprocess research development restructuring charges income operations would decreased 5 1997 1996 would increased 104 1996 1995 net income applicable common shareholders would decreased 10 1997 1996 would increased 70 1996 1995 2 meaningful revenue total revenue increased 127 million 21 726 million 1997 compared 599 million 1996 total revenue increased 231 million 63 1996 368 million 1995 revenue attributable companies acquired april 1996 accounted 125 million 1996 increase culverin corporation culverin products acquired november 1995 accounted additional 58 million 1996 increase software license fees software license fees include sales software customers fees software customization fees related implementing software systems customer sites software license fees increased 66 million 19 405 million 1997 compared 339 million 1996 increase led lending products encore branch automation products offset part declines home banking call center product revenues software license fees increased 150 million 79 1996 189 million 1995 increase 1996 70 million contributed companies acquired april 1996 51 million attributable culverin products acquired november 1995 18 million internal growth principally deposit pro personal branch 70 million increased revenue 1996 attributable april 1996 acquisitions sales coin banking systems inc coin indirect lending online financial communications systems inc online branch automation products acquired microbilt corporation accounted 51 million company expects sales online products decrease future periods company actively selling online dosbased branch automation products percentage software license fees lending products lending products license revenue increased 68 million 44 1997 compared 1996 increase resulted primarily sales laser pro closing particularly companys new windowsbased product large banks laser pro mortgage laser pro application manager lending products license revenue increased 41 million 34 1996 compared 1995 substantially increase 1996 came sales laser pro application manager laser pro fiscal analyzer laser pro mortgage formerly named loanscape products april 1996 acquisitions percentage total license revenue laser pro products declined 55 1995 36 1997 reflecting companys efforts broaden product offerings 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 retail delivery products retail delivery product license revenue decreased 02 million 12 169 million 1997 compared 171 million 1996 increased sales encore teller encore platform products offset declines sales online branch automation products encore personal branch deposit pro encore call center pro active cra decline online branch automation sales reflects decreased emphasis older dosbased product transition companys windowsbased encore branch automation products encore personal branch sales adversely affected 1997 company transitioned product unix windows nt environment decrease deposit pro sales reflects onetime spike demand windows version product released mid1996 encore call center sales adversely affected 1997 product substantially rewritten lack installed reference site decrease retail delivery product license revenue 1997 also caused sale companys rpxpress remittance processing division september 1997 retail delivery product license revenue increased 109 million 176 171 million 1996 compared 62 million 1995 sales encore products acquired november 1995 online branch automation products acquired april 1996 accounted 82 million increase increased deposit pro sales attributable release windows version product accounted 06 million increase encore personal branch home banking products accounted 12 million increase remainder increase resulted primarily sales culverin remittance processing products 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 ach connectivity products connectivity products license revenue approximately 14 million 1997 1996 1995 revenues products tied closely companys sales various products larger institutions third party host software providers connectivity products include stargate middleware laser pro interfaces deposit pro interfaces laser pro deposit pro interfaces formerly reported lending products operations products respectively reported connectivity products encore personal branch formerly reported electronic delivery product reported retail delivery product encore desktop pro active cra ach formerly reported marketing products reported retail delivery products information report restated periods reflect changes significant price changes software products occurred periods presented service support fees service support fees consist primarily recurring software support charges revenue training customers use companys products substantially companys software customers subscribe support services require payment annual quarterly maintenance fees service support fees increased 51 million 23 275 million 1997 compared 224 million 1996 service support fees increased 73 million 48 1996 151 million 1995 increases resulted primarily increases installed base companys products part companys acquisition new products significant changes service support pricing occurred periods presented revenue includes vendor payment systems vps processing fees sales preprinted forms supplies certain consulting revenue increased 10 million 28 1997 compared 1996 revenue increased 09 million 31 1995 1996 acquisition vps april 1996 primary cause increase dollars 1997 1996 cost revenue cost revenue primarily consists amortization internally developed purchased software royalty payments compliance warranty insurance premiums software production costs product support training implementation costs software customization materials costs forms supplies bill payment processing costs cost revenue increased 62 million 30 270 million 1997 compared 208 million 1996 increase 26 million resulted additional amortization software development costs remainder increase primarily attributable higher implementation costs associated growing number large financial institution projects additional personnel required support increased installed base customers increased royalties materials costs associated increased revenues breadth companys product line expanded complexity cost providing high quality customer service support increased absolute dollars percentage revenue cost revenue increased 92 million 79 208 million 1996 compared 116 million 1995 increase 19 million resulted november 1995 acquisition culverin 56 million resulted companies acquired april 1996 remainder attributable higher implementation costs projects additional support personnel increased software amortization software amortization 45 million 1997 19 million 1996 14 million 1995 1997 1996 several software development projects reached commercial feasibility result company began amortize certain product development costs capitalized prior periods addition company recorded amortization result software acquired connection 1996 acquisitions increase amortization costs 1997 also resulted accelerated amortization certain products replaced new products management concluded longer technologically viable result recent acquisitions costs associated royalty payments increase future periods company obligated pay royalties ranging 3 18 revenue related certain products acquired various acquisitions since june 1994 addition company obligated pay microbilt corporation fixed amount per online customer converted companys products royalty obligations generally extend three five years acquisition date companys gross margin declined 63 1997 65 1996 68 1995 declines primarily attributable three factors increased software amortization shift product mix projects increased royalty expenses products acquired acquisitions company expects three factors continue future periods may continue adversely affect gross margin operating expenses sales marketing sales marketing expenses increased 157 million 22 revenue 1997 compared 127 million 21 revenue 1996 sales marketing expenses 96 million 26 revenue 1995 increase dollar amount 1997 compared 1996 resulted principally increased commissions associated increased revenues salary increases additional personnel higher advertising costs total 14 million increase sales marketing expenses 1996 compared 1995 attributable companies acquired april 1996 additional 04 million increase attributable november 1995 acquisition culverin none acquired organizations significant sales marketing operations prior cfis acquisition remainder increase resulted increased commissions higher sales volumes continued growth major accounts sales force twofold increase size personal branch sales force decrease expenses percentage revenue 1996 1995 primarily result revenue acquired companies new products sold companys existing national direct sales telemarketing operations product development product development expenses include costs enhancing existing products developing new products product development expenses 115 million 16 revenue 1997 106 million 18 revenue 1996 64 million 17 revenue 1995 increases dollar amount product development expenses largely result increased staffing development areas company additional costs integrating acquired products migrating companys dosbased products windowsbased products accelerating development companys home banking products unix windows nt operating environment companies acquired april 1996 accounted 17 million increase 1996 compared 1995 culverin acquisition november 1995 accounted additional 22 million increase product development expenses 1997 1996 1995 offset part capitalization software development efforts company capitalized 50 million software development costs 1997 52 million 1996 27 million 1995 capitalized software development costs net accumulated amortization 99 million december 31 1997 compared 83 million december 31 1996 company expects development cycle compliancerelated products typically relatively long lives completed second quarter 1998 accordingly significant reduction capitalization software development costs future periods company anticipates current capitalized software development costs fully amortized next five years company continue commit significant resources product development efforts company anticipates completion current development cycle compliancerelated products consequent reduction capitalization costs product development cost material adverse effect future periods operating margin net income general administrative general administrative expenses 83 million 11 revenue 1997 54 million 9 revenue 1996 43 million 12 revenue 1995 increase dollar amount 1997 due principally additional systems infrastructure costs necessary accommodate revenue growth increased bad debt expense consolidation general administrative functions companies acquired april 1996 principal reason decrease expenses percentage revenue 1996 company merged following whollyowned subsidiaries company effective december 31 1997 order reduce administrative expenses texassouthwest technology group inc culverin corporation online financial systems inc coin banking systems inc vendor payment systems inc amortization intangibles include acquisition payments assigned goodwill noncompetition agreements customer lists costs amortized periods ranging five seven years increases 13 million 1997 10 million 03 million 1996 1995 respectively directly attributable acquisition november 1995 culverin acquisitions april 1996 six companies acquired inprocess research development charges connection acquisitions culverin november 1995 six companies april 1996 company recorded noncash pretax charges 37 million fourth quarter 1995 80 million second quarter 1996 research development efforts process date acquisition addition fourth quarter 1995 company also recorded restructuring charge 08 million consisting primarily severance costs values assigned inprocess research development efforts determined independent appraisal represent efforts process date acquisition reached point technological feasibility established alternative future uses accounting rules require costs expensed incurred company believes research development efforts result commercially viable products within next year additional cost approximately 45 million income operations income operations 1997 88 million 12 revenue compared 13 million 2 revenue 1996 3000 0 revenue 1995 excluding impact 80 million noncash charge acquired inprocess research development efforts april 1996 acquisitions similar 45 million charge november 1995 culverin acquisition operating income would 93 million 16 revenue 1996 compared 45 million 12 revenue 1995 nonoperating income expense february 1997 companys board directors elected proceed planned followon stock offering companys common stock company took 05 million nonoperating charge first quarter result cancellation companys board directors determined stock price company would required offer shares low would unfairly dilute investment existing shareholders september 1997 company completed sale rpxpress remittance processing division annual basis remittance processing revenues expenses approximately 10 million company received 10 sales price cash remainder paid yearly installments interest 85 per annum four years connection sale company recorded nonoperating gain 06 million nonoperating income expense consists primarily interest income expense net expense 03 million 1997 compared net nonoperating income 18000 1996 05 million 1995 cash paid acquisitions combined interest acquisitionrelated debt caused decline 1996 interest paid outstanding balances companys bank line credit principal cause net expense 1997 provision income taxes effective tax rate 1997 45 compared 43 1996 excluding effect 80 million acquired inprocess research development writeoff resulting april 1996 acquisitions 34 1995 excluding impact 37 million acquired inprocess research development writeoff increased effective tax rates 1997 1996 primarily result increased amortization nondeductible intangibles related acquisitions substantial reduction taxfree interest income quarterly results company experienced expects future experience significant quarterly fluctuations results operations fluctuations may caused various factors including among others size timing product orders shipments timing market acceptance new products product enhancements introduced company competitors companys product mix including expenses implementation royalties related certain products timing companys completion work contracts accounted percentage completion method customer order deferrals anticipation new products aspects customers purchasing process including evaluation decisionmaking acceptance products within customers organizations sales process companys products including complexity customer implementation companys products number working days quarter federal state regulatory events competitive pricing pressures technological changes hardware platform networking communication technology changes company personnel timing companys operating expenditures specific economic conditions financial services industry general economic conditions companys business experienced expected continue experience degree seasonality due customers budgeting buying cycles companys strongest revenue quarter year typically fourth quarter weakest revenue quarter typically first quarter customers purchases tied closely internal budget processes companys customers budgets approved beginning year budgeted amounts often must utilized end year addition companys incentive sales compensation plan provides increases commission percentages sales people approach exceed annual sales quotas result two factors company usually experiences increased sales orders last quarter year 2000 company evaluated products determine operation year 2000 certain companys software products require adjustment satisfy issues arising use products year 2000 company intends provide adjusted software customer base consistent time frames requirements customers regulatory agencies notwithstanding foregoing company also determined products merit unilateral correction advising affected customers decision suggesting solutions generally identification incorrect output transition alternate cfi third party product customized corrections customers expense company expects material impact financial position result pending year 2000 issues related products liquidity capital resources working capital increased 44 million 72 million december 31 1997 28 million december 31 1996 increase resulted primarily increased net accounts receivable offset part increased deferred revenue customer deposits income taxes payable receivables growth net deferred maintenance revenues outpaced working capital growth result borrowings companys bank line credit increased 53 million december 31 1997 16 million december 31 1996 significant increase large projectoriented business 1997 accounts receivables growth projectoriented business often requires unbilled accounts receivable milestone billings often longer collection cycles unbilled accounts receivable december 31 1997 38 million 12 total accounts receivable compared 33 million 14 total accounts receivable december 31 1996 days sales outstanding accounts receivable including billed unbilled accounts receivable increased 106 days december 31 1997 90 days december 30 1996 excluding distorting impact annual maintenance invoices operations provided 53 million cash 1997 compared 101 million 1996 decrease cash operations compared 1996 primarily due 80 million noncash charge acquired research development efforts taken 1996 increased net accounts receivable 1997 offset part increased depreciation amortization net cash used investing activities 1997 79 million compared 101 million 1996 reflecting absence acquisitions 1997 expenditures property equipment 27 million 1997 primarily attributable investments infrastructure necessary accommodate companys growth net cash provided financing activities 27 million 1997 primarily resulted 37 million net borrowings companys bank line credit facility 07 million provided primarily upon exercise stock options offset part payments 18 million acquisition related debt future cash requirements could include among things purchases companies products technologies expenditures internal software development capital expenditures necessary expansion business installment payments debt related acquisitions available cash resources include cash generated companys operations revolving bank line credit lesser 90 million 50 accounts receivable 37 million available december 31 1997 line credit expires may 1 1998 time company receives contract claims customers second quarter 1997 one companys customers canceled 08 million project company requested partial refund moneys paid cancellation unpaid invoices company believes met contractual obligations customer intends enforce terms agreement company believes funds expected generated existing operations borrowings revolving line credit provide company sufficient funds finance current operations least next 12 months company may require additional funds support working capital requirements future acquisitions purposes may seek raise additional funds one public private financings debt equity sources assurance given additional financing available financing obtainable terms favorable company shareholders item 7a item 7 managements discussion analysis financial condition results operations overview cfi leading provider customer service software products services financial institutions company combines technology banking legal expertise deliver knowledgebased software solutions enable institutions simplify key business processes sales service improve productivity strengthen customer relationships maintain compliance internal business policies external government regulations 4700 financial institutions licensed one companys products addition approximately 150 institutions offering privatedial personal computerbased home banking services customers using cfis personal branch products 1993 substantially companys revenue derived companys laser pro lending products deposit pro operations products today company licenses 20 products organized four product groups lending operations electronic delivery connectivity software due product diversification efforts company less reliant laser pro deposit pro product lines year ended december 31 1996 revenue product lines decreased 51 companys total revenue cfi generates recurring revenue software maintenance agreements year ended december 31 1996 service support fees revenue primarily laser pro deposit pro accounted approximately 37 consolidated revenue substantially software customers subscribe companys service support programs provide ongoing product enhancements applicable updates facilitate compliance changing banking regulations companys cost structure relatively fixed cost revenue aggregate vary significantly changes revenue result company typically generates greater profit margins incremental sales fixed costs covered addition failure achieve revenue targets particular period would adversely affect profits period sales larger banks expected constitute higher percentage total revenue future periods transactions larger banks typically greater scope usually involve greater sales effort longer period time require customization prolonged acceptance testing accordingly predictability revenue particular period may diminished extent company increases sales larger banks companys backlog december 31 1996 approximately 100 million compared approximately 61 million 20 million end 1995 1994 respectively cfis backlog consists orders taken yet booked revenue indicative future operating results orders constituting companys backlog subject changes delivery schedules cancellation option purchaser without significant penalty timing companys orders revenue become less predictable 1995 1996 cfi increased focus generating business large accounts multiple product sales light increased emphasis large accounts multiple product sales company taken steps increase maintain backlog stated backlog necessarily indicative companys revenue future period acquisitions new business ventures company continues pursue opportunities expand market presence acquiring products technologies companies complement companys product suite increase market share company completed ten acquisitions since june 1994 see note 2 notes consolidated financial statements assurance future acquisitions favorable impact performance company believes achieved objectives growth broadening product offerings acquisition program intends continue pursue acquisitions future however companys ability pursue acquisitions future may depend large extent availability additional financing see liquidity capital resources risk factors company currently understandings commitments agreements respect material acquisition businesses products technologies aggregate purchase price ten acquisitions 202 million 380967 shares common stock plus contingent royalties connection acquisitions company incurred noncash charges primarily relating writeoff acquired inprocess research development efforts totaling 80 million april 1996 45 million november 1995 terms certain acquisitions provide based various factors including passage time certain product revenue product development company required pay contingent royalties obligations company may satisfy issuance shares common stock see cost revenue amortization certain intangible assets arising companys acquisition activity deductible federal income tax purposes certain amortization expense incurred company effect increasing companys effective tax rate financial reporting purposes company may also evaluate time establishing new business operations making minority investments new business ventures including joint ventures results operations following table sets forth statements income data company expressed percentage total revenue periods indicated year ended december 31 1996 1995 1994 revenue software license fees 566 514 515 service support 373 410 392 61 76 93 total revenue 1000 gross profit 652 683 704 operating expenses sales marketing 212 260 251 product development 177 173 158 general administrative 91 117 133 amortization intangibles 17 09 06 acquired inprocess research development restructuring 134 124 total operating expenses 631 683 548 income operations 211 1 156 nonoperating income 14 12 income taxes 21 14 168 provision income taxes 19 05 60 preferred stock dividend 02 03 net income applicable common shareholders 1 061 105 1 excluding impact acquired inprocess research development restructuring charges income operations percentage revenue 1996 1995 would 155 124 respectively net income applicable common shareholders 1996 1995 would 85 82 respectively following table sets forth percentage changes period statements income data company fiscal year fiscal year 1996 1995 fiscal year fiscal year 1995 1994 revenue software license fees 79 13 service support 48 18 31 9 total revenue 63 13 gross profit 56 9 operating expenses sales marketing 33 17 product development 67 23 general administrative 26 1 total operating expenses 2 51 2 40 income operations 1 2 nm 2 99 nonoperating income 96 29 income taxes 162 91 provision income taxes 599 92 net income applicable common shareholders 2 92 2 93 1 meaningful 2 excluding impact acquired inprocess research development restructuring charges income operations would increased 104 1996 1995 decreased 11 1995 1994 net income applicable common shareholders would increased 70 1996 1995 decreased 12 1995 1994 revenue total revenue increased 63 599 million year ended december 31 1996 compared 368 million comparable period 1995 revenue attributable companies acquired april 1996 accounted 125 million 231 million increase culverin products acquired november 1995 accounted additional 58 million total revenue increased 13 368 million 20 326 million years ended december 31 1995 1994 respectively revenue attributable culverin products accounted 11 million increase 1995 software license fees software license fees include sales software customers fees software customization fees related implementing software systems customer sites software license fees increased 150 million 79 339 million year ended december 31 1996 189 million comparable period 1995 increase 70 million contributed companies acquired april 1996 51 million attributable culverin products acquired november 1995 18 million internal growth principally deposit pro personal branch 70 million increased revenue attributable april 1996 acquisitions sales coin banking systems inc coin indirect lending online financial communications systems inc online branch automation products acquired microbilt corporation accounted 51 million company expects sales online coin products decrease future quarters company actively selling online dosbased branch automation products initial phases converting dosbased coin indirect lending product windows platform percentage software license fees year ended december 31 1996 1995 1994 lending products 48 66 72 operations products 37 22 26 electronic delivery products 12 10 2 connectivity products 3 2 total 100 lending products license revenue grew 41 million 34 year ended december 31 1996 comparable period 1995 substantially increase came sales application manager fiscal loanscape products april 1996 acquisitions percentage total license revenue lending products declined 66 1995 48 1996 reflecting companys successful efforts broaden product offerings operations products increased 84 million 197 year ended december 31 1996 comparable period 1995 percentage total license revenue operations products revenue increased 22 1995 37 1996 sales encore products acquired november 1995 online branch automation products acquired april 1996 accounted nearly 74 million increase increased deposit pro sales attributable release windows version product accounted remainder increase license fees sale electronic delivery products increased 21 million 103 year ended december 31 1996 compared period year ago personal branch home banking products license revenue grew 71 1996 1995 accounted 12 million increase year remainder increase attributable sales culverin remittance processing products percentage license revenue electronic delivery products revenue grew 10 1995 12 1996 personal branch licensed approximately 150 financial institutions stargate connectivity products grew 110 08 million year ended 1996 compared period year ago volumes products tied closely companys sales various products larger institutions third party host software providers extent sales larger institutions increase license revenue stargate connectivity products would expected increase software license revenue increased 21 million 13 1995 1994 higher sales personal branch along revenue newly acquired culverin products primary causes increase sales laser pro deposit pro companys core historical product lines essentially flat 1995 compared 1994 consequently increased sales personal branch culverin products revenue laser pro deposit pro declined percentage total software fees 85 1994 76 1995 pricing personal branch restructured make product appealing market initial sale price generally fixed previously varied size institution annual support fees based number endusers utilizing customers system management believes pricing structure addresses concerns many prospective customers making significant investments electronic banking arena thereby improving marketability personal branch significant price changes product lines occurred periods presented service support fees service support fees consist primarily recurring software support charges revenue training customers use companys products substantially companys software customers subscribe support services provide payment annual quarterly maintenance fees service support fees increased 73 million 48 year ended december 31 1996 comparable period 1995 service support fees products acquired april 1996 accounted 48 million increase service support fees grew 18 23 million 1995 1994 increases resulted primarily increases installed base companys products part driven 1993 truth savings legislation part companys acquisition new products aside changes personal branch pricing 1995 significant changes service support pricing occurred periods presented revenue includes vendor payment systems processing fees sales preprinted forms supplies certain consulting revenue increased 09 million 31 year ended december 31 1996 comparable period 1995 revenue declined 6 total revenue 1996 compared 8 comparable period 1995 acquisition vendor payment systems april 1996 primary cause increase absolute dollars revenue category 1996 company expect revenue grow significantly future cost revenue cost revenue primarily consists amortization internally developed purchased software royalty payments compliance warranty insurance premiums software production costs product support training implementation costs software customization materials costs forms supplies bill payment processing costs cost revenue increased 92 million 79 208 million year ended december 31 1996 comparable period 1995 increase 19 million resulted november 1995 acquisition culverin 56 million resulted companies acquired april 1996 remainder increase attributable higher implementation costs associated growing number large financial institution projects additional personnel required support increased installed base customers increased software amortization breadth companys product line expanded complexity cost providing high quality customer service support increased absolute dollars percentage revenue software amortization 19 million year ended december 31 1996 compared 14 million 06 million 1995 1994 respectively cost revenue increased 21 1995 1994 32 total revenue 1995 compared 30 1994 increase 1995 1994 largely result increased amortization internally developed purchased software along increased implementation cost necessary support companys entry market larger financial institutions addition increased staffing customer service department occurred mostly middle 1994 meet greater support training needs larger customer base contributed increase result recent acquisitions product development efforts costs resulting royalty payments amortization internally developed purchased software increase future periods company obligated pay royalties ranging 3 18 revenue related certain products acquired various acquisitions since june 1994 addition company obligated pay microbilt corporation fixed amount per online customer converted companys products royalty obligations generally extend three five years acquisition date companys gross margin 1996 declined 65 68 1995 decline primarily attributable three factors increased software amortization shift product mix increased royalty expenses products acquired acquisitions 1996 several software development projects reached commercial feasibility result company began amortize certain product development costs capitalized prior periods addition company recorded amortization result software acquired connection 1996 acquisitions 1996 company amortized 12 million 07 million internally developed purchased software development costs respectively represented increase prior period 04 million amortized internally developed software costs 01 million amortized purchased software costs company anticipates amount software amortization 1997 could materially exceed amount amortized 1996 company capitalized 52 million software development costs 1996 capitalized software development costs net accumulated amortization 83 million december 31 1996 43 million december 31 1995 company anticipates amount software development costs capitalize 1997 less 1996 finally companys product mix comprised increased portion products higher implementation costs acquired products associated royalty expenses company expects shift product mix continue future periods may continue adversely affect companys gross margin operating expenses sales marketing sales marketing expenses increased 127 million 21 revenue year ended december 31 1996 compared 96 million 26 revenue 1995 total 14 million increase year ended december 31 1996 attributable companies acquired april 1996 additional 04 million increase attributable november 1995 acquisition culverin none acquired organizations significant sales marketing operations prior acquisition remainder increase resulted increased commissions higher sales continued growth major accounts sales force increase twofold size personal branch sales force decrease expenses percentage revenue primarily result revenue acquired companies new products sold companys existing national direct sales telemarketing operations sales marketing expenses increased 14 million 1995 compared 04 million 1994 26 total revenue 1995 compared 25 1994 increase expenses resulted largely higher commissions bonuses associated increased revenue along additional costs associated development major accounts group targeted exclusively larger financial institutions increase expenses percentage revenue primarily consequence lower expected new product sales larger banks particularly first quarter 1995 product development product development expenses include costs maintaining enhancing existing products developing new products product development expenses increased 106 million 18 revenue year ended december 31 1996 compared 64 million 17 revenue 52 million 16 revenue 1995 1994 respectively companies acquired april 1996 accounted 17 million increase year ended december 31 1996 culverin acquisition november 1995 accounted additional 22 million increase addition acquisitions increases product development expenses largely result increased staffing development areas company additional costs integrating acquired products migrating companys dosbased products windowsbased products accelerating development companys electronic delivery products expenses associated activities partially offset increased capitalization software development efforts software development costs capitalized 52 million 27 million 11 million 1996 1995 1994 respectively company continue commit significant resources product development efforts although expenses expected vary significantly percentage revenue general administrative general administrative expenses 54 million year ended december 31 1996 compared 43 million 44 million 1995 1994 respectively growth expenses directly attributable growth company consolidation general administrative functions acquired companies principal reason decrease expenses percentage revenue general administrative expenses decreased 1 43 million 44 million 1995 1994 partially due reduced incentive compensation resulting operating income incentive compensation plan targets percentage total revenue general administrative expenses 9 12 13 1996 1995 1994 respectively amortization intangibles include acquisition payments assigned goodwill noncompetition agreements customer lists costs amortized lives ranging five seven years increase 10 million year ended december 31 1996 03 million 1995 directly attributable november 1995 acquisition culverin april 1996 acquisitions five companies amortization amounts increased 1995 03 million 02 million 1994 1995 acquisitions texas southwest technology group culverin acquired inprocess research development restructuring charges connection acquisitions culverin november 1995 five companies april 1996 company recorded noncash pretax charges 37 million fourth quarter 1995 80 million second quarter 1996 inprocess research development efforts process date acquisition addition fourth quarter 1995 company also recorded restructuring charge 08 million consisting primarily severance costs values assigned inprocess research development efforts determined independent appraisal represent efforts process date acquisition reached point technological feasibility established alternative future uses accounting rules require costs expensed incurred company believes research development efforts result commercially viable products within next two years additional cost approximately 100 million income operations income operations year ended december 31 1996 13 million 2 revenue compared 3000 0 revenue year ended december 31 1995 due higher revenue levels improved efficiencies operating costs excluding impact 80 million noncash charge acquired inprocess research development efforts april 1996 acquisitions similar 45 million charge november 1995 culverin acquisition operating income would 93 million 16 revenue year ended december 31 1996 compared 45 million 12 revenue comparable period 1995 nonoperating income nonoperating income consists primarily interest income expense declined 96 18000 year ended december 31 1996 comparable period 1995 cash paid acquisitions combined interest acquisitionrelated debt caused decline nonoperating income years ended december 31 1995 1994 05 million 04 million respectively provision income taxes effective tax rate 1996 excluding impact 8 million acquired inprocess research development writeoff 43 compared 34 1995 excluding impact 37 million acquired inprocess research development writeoff compared 36 1994 increase 1995 primarily result increased amortization nondeductible intangibles related acquisitions substantial reduction taxfree interest income impact taxfree interest income favorable permanent differences much lower income taxes caused decline 1994 1995 quarterly results company experienced expects future experience significant quarterly fluctuations results operations fluctuations may caused various factors including among others size timing product orders shipments timing market acceptance new products product enhancements introduced company competitors companys product mix including expenses implementation royalties related certain products timing companys completion work contracts accounted percentage completion method customer order deferrals anticipation new products aspects customers purchasing process including evaluation decisionmaking acceptance products within customers organizations factors affecting sales process companys products including complexity customer implementation companys products number working days quarter federal state regulatory events competitive pricing pressures technological changes hardware platform networking communication technology changes company personnel timing companys operating expenditures specific economic conditions financial services industry general economic conditions companys business experienced expected continue experience degree seasonality due customers budgeting buying cycles companys strongest revenue quarter year typically fourth quarter weakest revenue quarter typically first quarter customer purchases tied closely internal budget processes companys customers budgets approved beginning year budgeted amounts often must utilized end year addition companys incentive sales compensation plan provides increases commission percentages sales people approach exceed annual sales quotas result two factors company usually experiences increased sales orders last quarter liquidity capital resources payments companies acquired april 1996 substantially reduced working capital cash december 31 1995 136 million paid acquisitions including expenses 52 million paid closing 43 million paid subsequently december 31 1996 12 million carried current liabilities primarily acquisition payments working capital decreased december 31 1995 61 million 27 million december 31 1996 operations provided 101 million cash year ended december 31 1996 compared 35 million 1995 increase cash operations compared 1995 primarily due improved earnings excluding noncash charges acquired inprocess research development efforts depreciation amortization net cash used investing activities 101 million year ended december 31 1996 represented increase year ended december 31 1995 92 million net cash payments 52 million acquisitions made april 1996 comprised largest portion investments additionally software development costs 52 million capitalized year ended december 31 1996 compared 27 million 1995 increase result ongoing work related companys migration laser pro deposit pro products windows platform conversion call center product compatible companys branch platform product enhancements electronic banking product spending property equipment 27 million year ended december 31 1996 primarily attributable expansion companys wide area network accommodate recent acquisitions computing infrastructure companys electronic delivery group information systems upgrades facilitate greater productivity expansion office space accommodate higher staffing levels proceeds sale shortterm investments amount 30 million used make acquisitionrelated payments cash used financing activities 49 million year ended december 31 1996 primarily resulted 76 million payments acquisitionrelated notes payable longterm debt less net borrowings 16 million line credit less proceeds 12 million exercise stock options stock issuances companys employee stock purchase plan future cash requirements could include among things purchases companies products technologies expenditures internal software development capital expenditures necessary expansion business installment payments debt related acquisitions available cash resources include cash generated companys operations revolving line credit companys principal bank 16 million used december 31 1996 revolving line credit limited lesser 75 million 60 companys accounts defined revolving bank line credit agreement expires december 1 1997 february 1997 company withdrew follow public offering 1550000 shares common stock company incurred offering costs approximately 500000 costs expensed first quarter 1997 company believes funds expected generated operations borrowings revolving line credit provide company sufficient funds finance operations least next 12 months company may require additional funds support working capital requirements future acquisitions purposes may seek raise additional funds one public private financings equity debt sources assurance given additional financing available financing obtainable terms favorable company shareholders see risk factors possible need additional financing risk factors consolidated financial statements notes thereto read conjunction following discussion form 10k contains certain forwardlooking statements involve risks uncertainties statements companys plans objectives expectations intentions cautionary statements made form 10k read applicable related forwardlooking statements wherever appear form 10k companys actual results could differ materially discussed factors could cause contribute differences include discussed risk factors well discussed elsewhere form 10k potential fluctuations quarterly results company experienced expects future experience significant quarterly fluctuations results operations fluctuations may caused various factors including among others size timing product orders shipments timing market acceptance new products product enhancements introduced company competitors companys product mix including expenses implementation royalties related certain products timing companys completion work contracts accounted percentage completion method customer order deferrals anticipation new products aspects customers purchasing processes including evaluation decisionmaking acceptance products within customers organizations factors affecting sales process companys products including complexity customer implementation companys products number working days quarter federal state regulatory events competitive pricing pressures technological changes hardware platform networking communication technology changes company personnel timing companys operating expenditures specific economic conditions financial services industry general economic conditions company typically ships installs many products within three months receipt order result software license fees quarter substantially dependent orders booked quarter previous quarter addition company generally recognized substantial portion revenue last month quarter revenue concentrated last weeks quarter companys results operations may also affected seasonal trends including tendency customers complete purchases products quarter ended december 31 implement new orders quarter ended march 31 furthermore typical vacation periods key decisionmaking personnel prospect financial institutions may available adversely affect revenue periods companys operating expenses based anticipated revenue levels high percentage expenses relatively fixed small variation timing recognition specific revenue items cause significant variations operating results quarter due foregoing factors possible future quarter companys operating results may expectations public market analysts investors event price companys common stock would likely adversely affected accordingly company believes quartertoquarter comparisons results operations relied upon indication future performance uncertainty market product acceptance market software products services financial institutions evolving companys success large part dependent continuing development market although company believes existing products compete effectively competitors products companys products licensed limited number customers specific customer may used part customers organization significant part companys business strategy depends financial institutions adoption new technologies handling functions previously may performed without use computers rudimentary software applications assurance banks financial institutions adopt new technologies required companys products otherwise achieve broad acceptance evolving market instances banks financial institutions may reluctant consider transitioning companys products without first making significant decisions regarding procurement upgrade computer systems operating systems event market software solutions offered company fail develop companys products fail succeed market companys business operating results financial condition would materially adversely affected example one companys competitors introduced windowsbased loan documentation product although competing product recently released company believes windowsbased laser pro products compete effectively product introduction assurance sales companys laser pro products adversely affected competitors introduction product furthermore market acceptance companys products also depend companys ability ensure products operate together appropriate integrated across companys product lines products major service providers vendors hardware software used financial services industry addition significant part companys revenues derived continued support software initial sale cases based pertransaction peruser pricing assurance pricing structures continue accepted customers company early stage market electronic delivery products electronic banking market particular home banking portion market early stage development rapidly evolving characterized increasing number market entrants introduced developing competing products services typical new evolving industry demand market acceptance recently introduced products services subject high level uncertainty particular number customers utilizing internet privatedial connection vehicle banking grown rapidly remains limited known whether markets continue develop sufficient demand companys software emerge sustainable use electronic delivery channels banking community customers require broad acceptance new methods conducting business exchanging information particular bankers financial institutions established methods handling funds may reluctant accept commercial transactions internet moreover concerns regarding security confidentiality internet transactions may inhibit growth internet commerce generally result impact market acceptance companys products companys business include procedures services recently developed emerging electronic delivery market use companys products dependent part upon continued development industry infrastructure providing secure internet access carrying internet traffic addition internet may prove viable commercial marketplace inadequate development necessary infrastructure undercapacity reliable network backbone timely development complementary products including high speed modems assurance commerce internet become generally adopted market fails develop develops slowly expected infrastructure internet adequately developed companys home banking products services achieve market acceptance significant number individuals businesses financial institutions companys business financial condition operating results could materially adversely affected evolving market call center products company anticipates market call center products expand rapidly next two years company expended substantial resources development improvement call center products including companys current efforts toward reengineering call center products anticipated release upgraded product 1997 assurance companys upgraded call center products released timely basis achieve market acceptance upon release market fails grow grows slowly expected companys business results operations financial condition could adversely affected dependence host processor relationships company believes market acceptance products based significant part ability products share information financial institutions host processor system host processor systems vendors providing processing services institution company developed significant expertise available host processor systems methods necessary transfer data systems although company generally able develop interfaces allow products operate effectively host processor systems integration optimized company provider host processor system cooperatively share information regarding respective products technologies development schedules enhancements cfi varying degrees success establishing relationships host providers cases providers host processor systems processing services may become competitors company respect one companys products company always able obtain access host system technology necessary developing optimal thirdparty system integration assurance company able establish maintain adequate relationships important providers host processor systems processing services future failure could material adverse effect business results operations financial condition company uncertainties associated integration acquisitions risks new business ventures one companys strategies continue acquire complementary businesses products technologies well enter new business ventures including minority equity investments joint ventures since 1994 company acquired ten businesses companies acquisitions companies businesses products technologies well entry new business ventures require dedication management resources order achieve strategic objectives acquisitions ventures assurance given difficulties encountered integrating operations businesses previously acquired future acquired entered company overcome specific benefits expected integration particular acquisition new business venture including addition new products technologies increased sales growth companys customer base achieved anticipated cost savings realized difficulties combining acquired operations company along entry new business ventures future expected exacerbated necessity coordinating geographically separated organizations process integrating operations could cause interruption loss momentum activities companys business operations including businesses acquired new business ventures difficulties encountered connection companys acquisition businesses products technologies new business ventures including previously acquired could adverse effect business results operations financial condition company assurance integration businesses products technologies previously acquired company acquired entered future accomplished without adverse impact business results operations financial condition company benefits strategic objectives expected integration new business venture realized possible need additional financing first quarter 1997 company withdrew registration statement file us securities exchange commission proposed generate sale common stock net proceeds excess 28 million net proceeds used general corporate purposes working capital possible acquisitions company believes funds expected generated companys operations 75 million maximum revolving line credit provide company sufficient funds finance operations least next twelve moths however additional funds needed support working capital requirements company would seek raise additional funds one public private financings equity debt sources assurance given additional financing available financing obtainable terms favorable company shareholders management growth size complexity companys business expansion product lines customer base placed expected continue place significant strain aspects companys business particular companys emphasis selling large institutions placed significant additional demands installation implementation operations growing installed base placed additional demands customer support operation company grown approximately 330 employees december 31 1995 approximately 489 employees december 31 1996 currently plans continue expand staff accommodate growth company required upgrade implement variety operational financial systems procedures controls including improvement accounting internal management systems assurance company able successfully companys future operating results depend ability expand support organization infrastructure commensurate expanding base installed products ability attract hire retain skilled personnel assurance companys personnel systems procedures controls adequate support companys operations failure implement improve companys operational financial management systems expand train motivate manage personnel could material adverse effect companys business operating results financial condition assurance company able effectively manage future growth failure would material adverse effect companys business operating results financial condition extent anticipated growth fails materialize companys operating results could adversely affected dependence key employees contract engineers company believes future success depend significant extent upon contributions executive officers key sales engineering marketing technical personnel including independent contractors used company primarily product development company key person life insurance employees loss services one companys key personnel could material adverse effect companys business operating results financial condition company also believes future success depend large part upon ability attract retain additional highly skilled personnel particularly sales personnel software engineers sophistication companys products technology environments operate companys sales engineering personnel generally require advanced technical knowledge significant training perform competently competition personnel particularly qualified software development engineers intense company times experienced difficulty locating personnel requisite level expertise experience assurance company successful retaining existing key personnel attracting retaining personnel requires future delays introduction new products product enhancements companys future success depend upon ability timely basis develop acquire successfully introduce new products maintain enhance current products meet customers expanding needs addition company must identify emerging trends technological changes target markets develop maintain competitive products enhance products adding innovative features differentiate products competitors develop bring products market quickly costeffective prices particular company believes softwarebased products must respond quickly users needs broad functionality multiplatform support advances hardware operating systems result requirements company need make substantial investments design product development failure company anticipate respond adequately technological regulatory developments customer requirements significant delays product development introductions could result loss competitiveness could materially adversely affect companys business operating results financial condition assurance company successful developing marketing new products product enhancements respond technological regulatory changes evolving standards changing customer requirements past company experienced delays introduction new products product enhancements including windows versions deposit pro laser pro products achieving market acceptance certain products including pro active product assurance company successfully complete timely basis products currently development including windows version laser pro closing product current future products achieve market acceptance company successful developing new products providing product enhancements timely manner including incorporate regulatory changes products could material adverse impact companys business results operations financial condition addition introduction announcement products embodying new technologies changes industry standards applicable regulations customer requirements either company one competitors could render companys existing products obsolete unmarketable example one companys competitors introduced windowsbased loan documentation product although competing product recently released company believes windows products compete effectively product introduction assurance sales companys laser pro windows products adversely affected competitors introduction product also assurance introduction announcement new product offerings company one competitors cause customers defer purchases existing company products deferment purchases could material adverse effect companys business operating results financial condition lengthy sales implementation cycles license companys software products generally requires company educate prospective customers regarding use benefits companys products addition implementation companys products involves significant commitment resources prospective customers associated substantial changes workflow processing configuration hardware software product license fees charged company typically portion customers related hardware software development training integration costs implementing system containing companys products license companys software products often require boardlevel executive decision prospective customers reasons period initial indications interest customer companys product ultimate sale implementation companys product customer often lengthy often ranging three months excess one year subject number significant delays company little control companys sales implementation cycle could lengthened increases size complexity license transactions delays customers implementation upgrade necessary computing environments addition company increases emphasis obtaining orders larger financial institutions particularly large multistate institutions companys overall mix product licenses may involve increased reliance orders longer sales implementation cycle reliance sales lengthy lead time completion order implementation product result delays completion expected sales fluctuations recognition sales revenue may adversely affect companys business results operations financial condition competition market companys products intensely competitive rapidly changing number companies offer competitive products addressing certain companys target markets respect companys lending products principal competitors include bankers systems inc formation technologies inc subsidiary john h harland company interlinq software corporation fair isaac company inc affinity technology group inc great lakes forms inc appro systems inc jetform corp respect companys operations products principal competitors include olivetti north america broadway seymour inc early cloud company footprint software inc subsidiaries international business machines corporation ibm electronic data systems corporation argo company fiserv inc fiserv edify corporation software dynamics inc respect companys electronic delivery products principal competitors include checkfree incorporated visa interactive edify corporation online resources communications corporation goldpac products politzer haney addition number prospective existing customers company internal capability provide alternative solutions companys lending operations electronic delivery products may therefore viewed competing company alternatives may include internally developed software hardware solutions methods process management involve software solutions companys competitors significantly greater financial technical sales marketing resources company believes primary competitive factors market include product quality reliability performance price vendor product reputation financial stability features functions ease use quality support assurance competitors develop products superior companys products achieve greater market acceptance rapidly evolving nature industry many companys collaborative partners current potential competitors addition number current potential competitors established may establish cooperative relationships among third parties may present additional competition products offered company companys competitors may also able undertake extensive marketing campaigns adopt aggressive pricing policies utilize extensive distribution channels bundle competing products companys future success depend significantly upon ability increase share large bank market license additional products product enhancements existing customers company develops new products enters new markets expects encounter additional competitors may significantly greater financial technical sales marketing resources company assurance company able compete successfully future competition material adverse effect companys results operations product concentration significant portion companys revenue derived limited number products revenue companys laser pro products deposit pro products represented 51 companys total revenue year ended december 31 1996 91 82 79 years ended december 31 1993 1994 1995 respectively although company believes products continue represent significant percentage companys revenue near term important part companys business strategy depends upon ability company continue develop market call center branch automation electronic banking new products decline demand prices companys laser pro products deposit pro products whether result new product introductions company competitors price competition technological change failure companys products address customer requirements could material adverse effect companys business results operations financial condition failure financial services industry general adopt new modified technologies improve simplify business processes particular products developed company failure company support industry transition products effectively address customer requirements would material adverse effect companys business results operations financial condition dependence financial services industry substantially companys revenue derived licenses services banks financial institutions future growth dependent increased sales financial services industry success companys customers intrinsically linked economic conditions financial services industry turn subject intense competitive pressures affected overall economic conditions addition company believes license products relatively discretionary often requires significant commitment capital accompanied largescale hardware purchases commitments result although company believes products substantial assistance financial institutions competitive environment demand companys products services could disproportionately affected instability downturns financial services industry may cause existing potential customers exit industry delay cancel reduce planned expenditures technology solutions including offered company financial services industry currently experiencing consolidation may affect demand companys products financial services industry highly regulated changes regulations affecting financial services industry companys products could significant effect company factors adversely affecting financial services industry purchasing capabilities could material adverse effect companys business results operations financial condition product liability risks software defects companys software products highly complex sophisticated could time contain design defects software errors could difficult detect correct addition implementation companys products may involve significant amount customerspecific customization may involve integration systems developed third parties software products offered company highly complex normally contain undetected errors failures despite significant testing company discovered product installed used customers although companys business adversely affected errors date assurance significant errors found companys products future errors could give rise warranty liability company cause delays product introduction shipments require design modifications result loss delay market acceptance companys products loss existing customers could adversely affect companys business operating results financial condition companys products enable customers comply variety complex changing federal state laws regulations documentation generated companys products result customers violation requirements due product defect customer possibly governmental authority whose requirements met could claim company responsible company provides compliance warranty certain products limits liability 10 million per customer per year limits companys liability customers aggregate 25 million per year per occurrence common defect assurance contract limits would enforceable claims would covered would exceed limits companys indemnity insurance policy issued lloyds london assurance indemnity policy renewed remain priced within companys capacity pay premiums event companys contract limits found unenforceable insurance policy adequately cover claims companys results operations may materially adversely affected addition assurance company able correct claimed actual product defects timely manner dependence upon proprietary technology intellectual property rights see business intellectual property item 8 item 7 managements discussion analysis financial condition results operations consolidated financial statements notes thereto read conjunction following discussion contains certain forwardlooking statements involve risks uncertainties statements companys plans objectives expectations intentions cautionary statements made discussion read applicable related forwardlooking statements wherever appear report companys actual results could differ materially discussed factors could cause contribute differences include discussed elsewhere report well companys filings securities exchange commission overview cfi leading provider integrated pcbased software financial institutions including solutions branch automation loan origination new account opening call centers cross selling products electronic banking beginning 1999 companys acquisition modern computer systems inc mcs company also offer hardware software solutions back office accounting needs community banks credit unions company combines technology banking legal expertise deliver knowledgebased solutions enable institutions simplify key business processes sales service improve productivity strengthen customer relationships maintain compliance internal business policies external government regulations 6000 financial institutions licensed one companys products 1993 substantially companys revenue derived laser pro deposit pro products today company licenses 20 products organized four product groups lending retail delivery connectivity software beginning 1999 host processing due product diversification efforts company less reliant laser pro deposit pro products 1998 approximately 48 companys revenue came products laser pro deposit pro cfi generates recurring revenue software maintenance agreements 1998 service support fees primarily laser pro deposit pro accounted approximately 35 total revenue substantially cfi customers subscribe companys service support programs provide ongoing product enhancements applicable updates facilitate compliance changing regulations companys cost structure relatively fixed cost generating revenue aggregate vary significantly changes revenue result company typically generates significantly greater profit margins incremental sales fixed costs covered addition failure achieve revenue targets particular period would adversely affect profit margins period company believes sales larger financial institutions constitute higher percentage total revenue future periods transactions larger institutions typically greater scope usually involve greater sales effort longer period time require customization prolonged acceptance testing project oriented business tends cause growth unbilled accounts receivable resulting use percentage completion accounting deferred payment terms also results increased collection times billed accounts receivable factors turn result higher days sales outstanding dsos accounts receivable companys backlog december 31 1998 183 million compared 152 million 100 million december 31 1997 1996 respectively cfis backlog consists firm signed orders taken yet converted revenue expected converted revenue within next 12 months orders constituting companys backlog subject changes delivery schedules cancellation option purchaser without significant penalty stated backlog necessarily indicative companys revenue future period acquisitions new business ventures company expanded market presence acquiring products technologies companies complement companys product suite increase market share company completed following 12 acquisitions since june 1994 see note 2 notes consolidated financial statements assurance future acquisitions favorable impact performance company believes achieved objectives growth broadening product offerings customer base acquisition program intends continue pursue acquisitions however company currently understandings commitments agreements respect material acquisition businesses products technologies aggregate purchase price foregoing acquisitions 289 million 430967 shares common stock plus contingent royalties connection acquisitions company incurred noncash charges primarily relating writeoff acquired inprocess research development efforts totaling approximately 10 million 1998 80 million 1996 45 million 1995 terms certain acquisitions provide based various factors including passage time certain product revenue company required pay contingent royalties amortization certain intangible assets arising companys acquisition activity deductible federal income tax purposes certain amortization expense incurred company effect increasing companys effective tax rate financial reporting purposes time company may also evaluate establishing new business operations making investments new business ventures including joint ventures march 1997 cfi announced creation lori mae llc lori mae company designed securitize small business loans originated community banks cfi owns 50 lori mae uses equity method account investment 1998 company wrote initial investment lori mae due lack acceptable market demand lori maes initial product see note 1 notes consolidated financial statements company believes lori mae future completely redesign product offerings results operations following table sets forth statements income data company expressed percentage total revenue periods indicated following table sets forth percentage changes period statements income data company revenue total revenue increased 130 million 179 856 million 1998 726 million 1997 total revenue increased 127 million 212 1997 599 million 1996 software license fees software license fees include sales software customers fees software customization fees related implementing software systems customer sites software license fees increased 87 million 216 492 million 1998 compared 405 million 1997 increase led laser pro lending suite products mortgage products connectivity products deposit pro offset part declines encore branch automation home banking revenues 1997 also included results companys rpxpress remittance processing division sold september 1997 software license fees increased 66 million 193 1997 339 million 1996 increase led lending products encore branch automation products offset part declines home banking call center product revenues significant price changes software products occurred periods presented percentage software license fees lending products lending products license revenue increased 88 million 399 310 million 1998 compared 222 million 1997 increase resulted primarily sales laser pro closing particularly companys windowsbased product laser pro mortgage customization sales fiscal analyzer fiscal online declined substantially 1998 company actively marketing current fiscal products wrote remaining goodwill associated products 1998 company simultaneously accrued related severance costs calculated accordance preexisting employment agreements see note 1 notes consolidated financial statements company intends completely redesign fiscal products future lending products license revenue increased 68 million 443 1997 compared 154 million 1996 increase resulted primarily sales laser pro closing particularly companys windowsbased product large banks laser pro mortgage laser pro application manager 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 laser pro docsmart retail delivery products retail delivery product license revenue decreased 13 million 77 156 million 1998 compared 169 million 1997 revenues included 07 million rpxpress sales repeated 1998 increased revenues deposit pro encore desktop flextran 1998 offset decreased revenues encore teller encore platform online branch automation encore personal branch rpxpress retail delivery product license revenue decreased 02 million 12 1997 compared 171 million 1996 increased revenues encore teller encore platform products offset declines revenues online branch automation products encore personal branch deposit pro encore call center pro active cra declines online branch automation revenues 1998 1997 reflect decreased emphasis older dosbased product transition companys windowsbased encore branch automation products encore personal branch revenues adversely affected 1997 company transitioned product unix windows nt environment decrease deposit pro revenues 1997 reflects onetime spike demand windows version product released mid1996 encore call center revenues adversely affected 1997 product substantially rewritten lack installed reference site decrease retail delivery product license revenues 1997 also caused sale companys rpxpress remittance processing division september 1997 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 ach connectivity products connectivity products license revenues increased 11 million 758 25 million 1998 14 million 1997 1996 revenues products tied closely companys sales various products larger institutions third party host software providers connectivity products include stargate middleware laser pro interfaces deposit pro interfaces host processor products january 1999 cfi acquired substantially assets modern computer systems inc certain related corporations collectively mcs provides back office host data processing related services community banks credit unions revenues host processor products attributable 1998 1997 1996 service support fees service support fees consist primarily recurring software support charges revenue training customers use companys products substantially companys customers subscribe support services require payment annual quarterly maintenance fees service support fees increased 29 million 105 304 million 1998 compared 275 million 1997 service support fees increased 51 million 228 1997 compared 224 million 1996 increases resulted primarily increases installed base companys products companys acquisition new products increase effective fourth quarter 1998 service support pricing certain lending products revenue includes vendor payment systems vps processing fees sales preprinted forms supplies certain consulting revenue increased 14 million 290 61 million 1998 compared 47 million 1997 revenue increased 10 million 278 1997 compared 1996 acquisition vps april 1996 primary cause increase dollars 1997 cost revenue cost revenue primarily consists amortization internally developed purchased software royalty payments compliance warranty insurance premiums software production costs product support training implementation costs software customization materials costs forms supplies bill payment processing costs cost revenue increased 24 million 89 294 million 1998 compared 1997 cost revenue increased 62 million 298 270 million 1997 compared 208 million 1996 1997 increase 26 million resulted additional amortization software development costs remainder increase 1997 increase 1998 primarily attributable higher implementation costs associated growing number large financial institution projects additional personnel required support increased installed base customers increased royalties materials costs associated increased revenues breadth companys product line expanded complexity cost providing high quality customer service support increased absolute dollars percentage revenue software amortization 26 million 1998 45 million 1997 19 million 1996 1998 1997 1996 several software development projects reached commercial feasibility result company began amortize certain product development costs capitalized prior periods addition company recorded amortization result software acquired connection mdi acquisition october 1998 1996 acquisitions increase amortization costs 1997 also resulted accelerated amortization certain products replaced new products management concluded longer technologically viable result acquisitions costs associated royalty payments increase future periods company obligated pay royalties ranging 3 18 revenue related certain products acquired various acquisitions since june 1994 addition company obligated pay microbilt corporation fixed amount per online customer converted companys products royalty obligations generally extend three five years acquisition date companys gross margin 656 628 652 1998 1997 1996 respectively increase 1998 primarily attributable lower software amortization 1997 improved implementation efficiencies decline gross margin 1996 1997 primarily attributable three factors increased software amortization shift product mix projects increased royalty expenses products acquired acquisitions company expects three factors continue future periods may continue adversely affect gross margin particular software amortization expected increase 1999 compared 1998 operating expenses sales marketing sales marketing expenses increased 192 million 224 revenue 1998 compared 1997 sales marketing expenses increased 157 million 216 revenue 1997 compared 127 million 212 revenue 1996 increases dollar amount 1998 1997 resulted increased commissions associated increased revenues salary increases additional personnel higher advertising costs product development product development expenses include costs enhancing existing products developing new products product development expenses 149 million 174 revenue 1998 115 million 159 revenue 1997 106 million 177 revenue 1996 increases dollar amount product development expenses largely result increased staffing development areas company additional costs integrating acquired products accelerating development companys home banking products product development expenses 1998 1997 1996 offset part capitalization software development efforts company capitalized 10 million software development costs 1998 50 million 1997 52 million 1996 capitalized software development costs net accumulated amortization 83 million december 31 1998 compared 99 million december 31 1997 company believes current development cycle compliancerelated products typically relatively long lives completed second quarter 1998 accordingly significant reduction capitalization software development costs future periods software development costs capitalized third fourth quarters 1998 company anticipates capitalized software development costs existing december 31 1998 fully amortized next four years company continue commit significant resources product development efforts company anticipates completion current development cycle compliancerelated products consequent reduction capitalization costs product development cost material adverse effect future periods operating margin net income general administrative general administrative expenses 100 million 117 revenue 1998 83 million 114 revenue 1997 54 million 90 revenue 1996 increases dollar amounts 1998 1997 due principally additional systems infrastructure costs necessary accommodate revenue growth increase dollar amount 1997 also due increased bad debt expense consolidation general administrative functions companies acquired april 1996 principal reason relatively low level expenses percentage revenue 1996 amortization intangibles include acquisition payments assigned goodwill noncompetition agreements customer lists costs amortized periods ranging five seven years amortization intangibles 12 million 13 million 10 million 1998 1997 1996 respectively acquired inprocess research development charges connection acquisition assets mortgage dynamics inc october 1998 company recorded pretax charge 10 million research development efforts process date acquisition fourth quarter 1998 company also recorded aggregate pretax charges 20 million consisting present value remaining liability certain leased office space company ceased using remaining goodwill associated fiscal credit analysis products related severance costs companys initial investment lori mae see notes 1 2 7 notes consolidated financial statements connection acquisitions six companies april 1996 company recorded pretax charges 80 million second quarter 1996 research development efforts process date acquisition values assigned inprocess research development efforts determined independent appraisals represent efforts process dates acquisition reached point technological feasibility established alternative future uses accounting rules require costs expensed incurred december 31 1998 company believes acquired inprocess research development efforts related acquisitions result commercially viable products 1999 additional cost approximately 350000 income operations income operations 1998 82 million 96 revenue compared 88 million 122 revenue 1997 13 million 21 revenue 1996 excluding impact 26 million charge fourth quarter 1998 80 million charge second quarter 1996 operating income would 108 million 127 revenue 1998 93 million 155 revenue 1996 nonoperating income expense nonoperating income expense consists primarily interest income expense net expense 07 million 1998 compared net expense 03 million 1997 net nonoperating income 18000 1996 nonoperating expense 1998 included 04 million charge representing cfis initial investment lori mae see note 1 notes consolidated financial statements interest paid outstanding balances companys bank line credit principal cause net expense 1997 september 1997 company completed sale rpxpress remittance processing division annual basis remittance processing revenues expenses approximately 10 million company received 10 sales price cash remainder paid yearly installments interest 85 per annum four years connection sale company recorded nonoperating gain 06 million february 1997 companys board directors elected proceed planned followon stock offering companys common stock company took 05 million nonoperating charge first quarter result cancellation companys board directors determined stock price company would required offer shares low would unfairly dilute investment existing shareholders provision income taxes effective tax rate 1998 443 compared 455 1997 430 1996 excluding effect 30 million pretax charges 1998 80 million pretax charges resulting april 1996 acquisitions difference federal state statutory tax rates companys effective tax rates 1998 1997 1996 results primarily increased amortization nondeductible intangibles related acquisitions quarterly results company experienced expects future experience significant quarterly fluctuations results operations fluctuations may caused various factors including among others size timing product orders shipments timing market acceptance new products product enhancements introduced company competitors companys product mix including expenses implementation royalties related certain products timing companys completion work contracts accounted percentage completion method customer order deferrals anticipation new products aspects customers purchasing process including evaluation decisionmaking acceptance products within customers organizations sales process companys products including complexity customer implementation companys products number working days quarter federal state regulatory events including regulatory requirements financial institutions respect year 2000 competitive pricing pressures technological changes hardware platform networking communication technology changes company personnel timing companys operating expenditures specific economic conditions financial services industry general economic conditions companys business experienced expected continue experience degree seasonality due customers budgeting buying cycles companys strongest revenue quarter year typically fourth quarter weakest revenue quarter typically first quarter customers purchases tied closely internal budget processes companys customers budgets approved beginning year budgeted amounts often must utilized end year addition companys incentive sales compensation plan provides increases commission percentages sales people approach exceed annual sales quotas result two factors company usually experiences increased sales orders last quarter year 2000 year 2000 issue identifies problems may arise computer equipment software well embedded electronic systems way systems programmed interpret certain dates occur around change century computer industry primarily result computer programs designed developed using reserving two digits date fields rather four digits identify century without considering ability program properly distinguish upcoming century change year 2000 addition year 2000 specialcase leap year programs may drop february 29th internal calendars likewise dates may present problems way digits interpreted companys business based licensing applications software companys business would impacted products internal systems experience problems associated century change issue also potentially affects internal software systems used company operations company completed survey internal computer systems well critical third party software systems used company regarding year 2000 compliance status scope year 2000 readiness effort included addressing information technology software hardware ii noninformation systems embedded technology contained various equipment safety systems facilities utilities iii readiness mission critical thirdparty suppliers company communicated significant suppliers vendors understand ability continue providing services products millenium change determine extent company may vulnerable event failure services products respect mission critical systems company sought statements compliance vendor either direct response reference information posted electronic bulletin board government database internal systems computer programs systems used company require datesensitive information accurately adequately process information critical companys business inaccuracies errors information could material adverse effect companys business furthermore noncompliance programs could cause system failure interruption either could also materially adversely affect company addition computer software machines devices used company others may contain embedded technology year 2000 compliant could result malfunction failure devices review assessment companys internal systems complete companys internal accounting system including components used companys invoicing bill payment evaluated vendor represented year 2000 compliant nevertheless company conduct tests first half 1999 furthermore company plans routinely backup financial data end 1999 develop contingency plan respect accounting system second half 1999 company anticipates customer support call tracking system year 2000 compliant installation update scheduled occur second quarter 1999 cost update estimated immaterial company completed survey software vendors fourth quarter 1998 bulk companys vendors already provided compliant versions software company continues monitor material third party software indicated year 2000 compliant believes vendors provide compliant versions middle 1999 company received representations phone voice mail systems became year 2000 compliant upgrades completed first quarter 1999 phone service providers company offices located 10 disparate geographical locations served different local phone service providers company contracts two long distance carriers consequently company shift telecommunications locations location neither companys base software updates provided exclusively via downloading virtually companys base software updates provided customers magnetic media based information gathered date company presently aware year 2000 issue could materially affect companys operations either selforiginated caused thirdparty service vendors providers management believes mission critical systems compliant year 2000 nevertheless assurance company experience operating difficulties result year 2000 issues occur difficulties could require company incur unanticipated costs remedy problems either individually collectively material adverse effect companys business operations financial results company yet determined cost completing investigation cost modification remediation may required correct year 2000 issues costs incurred date assess year 2000 issues significant funded operating cash flows company intends develop contingency plans significant systems implemented january 1 2000 event system failure resulting century change company developed software company develops software programs use financial institutions automate various transactions processes programs often highly dependent upon historical dynamic financial data programs able distinguish year 2000 centuryend years could misreported misinterpreted cause significant resulting calculation errors data often acquired systems may year 2000 compliant exacerbating problem companys financial institution customers subject regulatory scrutiny errors could subject civil regulatory action resulting large fines penalties costs additional consequences year 2000 issue companys financial institution customers may include systems failures business process interruption including among things temporary inability process transactions satisfy regulatory obligations engage similar normal business activities addition impact year 2000 issues may severely impair ability companys customers purchase companys products make payments software services previously purchased concern year 2000 issues permeating financial services industry management expects resolution concerns likely absorb substantial portion financial institution information technology budgets attention near term associated decreased focus business initiatives including purchase decisions respect companys software year 2000 issues faced customers could materially adversely affect companys operations financial results year 2000 federal financial institutions examination council ffiec issued series statements beginning june 1996 requiring various financial institutions regulated ffiec member agencies provide assurance capable conducting business usual 2000 21st century end among obligations institution required survey systems operations including software vendor supplied services determine deficiencies remediate correct deficiencies test mission critical third party software services confirm year 2000 readiness remediation develop contingency plans event mission critical item service process fails year 2000 compliant information ffiec mandate related matters found ffiecs website wwwffiecgovy2k support customers obligations resulting ffeics statements company made year 2000 issue significant priority assigned task force responsibility ongoing effort minimize year 2000related risks relative companys products company completed review software products year 2000 compliance determined companys standard software products year 2000 compliant company undertaken intend undertake review many customized versions software products provided customers company developed plan discontinue standard products prior december 31 1999 year 2000 issue one factors considered decisions products continue offered generally year 2000 compliant replacement product currently exists standard products continue offered currently year 2000 compliant company developed executed plan resolving compliancerelated issues remediation substantially completed 1998 matrix describing companys product compliance including comprehensive definition determine compliance communicated companys customers available review companys website financial impact making required changes software programs expected material companys consolidated financial position results operations cash flows company acquired substantially assets mcs january 1999 although mcss bankserv product certified year 2000 compliant none products mcs included foregoing discussion company intends complete year 2000 review mcs products first quarter 1999 consistent standards established companys products information companys website provided customers sole purpose assisting planning transition year 2000 includes companys definition year 2000 compliance product compliance status case laser pro closinglending product includes test guides information updated least quarterly companys customers access current information year 2000 compliance status companys products matrix provide certification year 2000 compliance customers cautioned independently confirm year 2000 compliance companys products company developed standard year 2000 compliance warranty offering customers respect products continue offered next century warranty consistent companys standard product warranties extends indeminities maintains liability cap applying otherwise licenses financial institutions financial institution regulators many vendors supplying financial services industry developed consistent comprehensive definition constitutes compliance year 2000 coupled different combinations software firmware hardware used customers may lead disputes company regarding operation software outcome disputes impact company estimable time market risk company entered derivative financial instruments company may exposed future interest rate changes debt company believe hypothetical 10 percent change interest rates would material effect companys cashflow liquidity capital resources working capital increased 98 million 170 million december 31 1998 72 million december 31 1997 increase resulted principally enhanced efforts company improve cash collections net reduction shortterm debt 53 million increase longterm debt 40 million connection renegotiation companys bank line credit facility net cash provided operations 110 million 1998 compared 54 million 1997 increase principally due charge acquired research development efforts charges taken 1998 decreased net accounts receivable prepaid expenses increased customer deposits changes offset part decreases deferred revenues depreciation amortization deferred income taxes income taxes payable net cash used investing activities 1998 61 million compared 79 million 1997 due primarily reduction capitalization software development costs 1998 offset part cash paid mdi acquisition expenditures property equipment 17 million 1998 primarily attributable investments infrastructure necessary accommodate companys growth net cash used financing activities 13 million 1998 resulted principally total 20 million repayment companys bank line credit facility acquisitionrelated debt payments offset part 08 million proceeds issuance common stock primarily upon exercise stock options companys projectoriented business often requires unbilled accounts receivable milestone billings often longer collection cycles unbilled accounts receivable december 31 1998 76 million 258 total accounts receivable compared 38 million 119 total accounts receivable december 31 1997 days sales outstanding dsos accounts receivable including billed unbilled accounts receivable decreased 108 days december 31 1998 136 days december 31 1997 primarily company issued certain annual maintenance invoices january 1999 instead december 1998 historically company issued invoices late december year dsos december 31 1997 excluding distorting impact annual maintenance invoices 106 days shift timing issuing annual maintenance invoices also primarily responsible decreases accounts receivable deferred revenues december 31 1998 compared december 31 1997 future cash requirements could include among things purchases companies products technologies expenditures internal software development capital expenditures necessary expansion business installment payments debt related acquisitions available cash resources include cash generated companys operations revolving bank line credit lesser 100 million 50 accounts receivable 60 million available december 31 1998 line credit expires may 1 2000 time company receives contract claims customers second quarter 1997 one companys customers canceled 08 million project company requested partial refund moneys paid cancellation unpaid invoices company believes met contractual obligations customer intends enforce terms agreement company believes funds expected generated existing operations borrowings revolving line credit provide company sufficient funds finance current operations least next 12 months company may require additional funds support working capital requirements future acquisitions purposes may seek raise additional funds one public private financings debt equity sources assurance given additional financing available financing obtainable terms favorable company shareholders item 7a item 7a quantitative qualitative disclosures market risk see managements discussion analysis financial condition results operations market risk item 8 item 7a quantitative qualitative disclosures market risk none item 8 item 7a quantitative qualitative disclosures market risk see managements discussion analysis financial condition results operations market risk item 8 item 8 financial statements supplementary data financial statements notes thereto supplementary data required item begin page listed item 14 part iv document item 9 item 8 financial statements supplementary data financial statements notes thereto supplementary data required item begin page listed item 14 part iv document item 9 item 8 financial statements supplementary data financial statements notes thereto supplementary data required item included pages listed item 14 part iv document item 9 item 8 financial statements supplementary data financial statements notes thereto supplementary data required item begin page listed item 14 part iv document item 9 