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EXHIBIT 99.2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the "Selected Financial Data" and the consolidated financial statements and
related notes included elsewhere in this filing.
OVERVIEW
We provide integrated computer systems for in-house and outsourced data
processing to community banks, credit unions and other financial institutions.
We have developed and acquired banking application software systems that we
market, together with compatible computer hardware, to financial institutions
throughout the United States. We also perform data conversion and software
installation for the implementation of our systems and provide continuing
customer maintenance and support services after the systems are installed. For
our customers who prefer not to make an up-front investment in software and
hardware, we provide our full range of products and services on an outsourced
basis through our nine data centers and 14 item processing centers located
across the United States.
We derive revenues from three primary sources:
- sales of software licenses and installation services;
- maintenance, support and outsourcing service fees; and
- hardware sales.
Over the last five fiscal years, our revenues have grown from $67.2 million
in fiscal 1995 to $193.5 million in fiscal 1999. Income from continuing
operations has grown from $9.1 million in fiscal 1995 to $32.7 million in fiscal
1999. This growth has resulted primarily from internal expansion supplemented by
strategic acquisitions, allowing us to develop new products and expand the
number of customers who use our core software systems to approximately 2,400 as
of June 30, 2000.
Since July 1994, we have completed 15 strategic acquisitions. Ten of these
acquisitions were accounted for using the purchase method of accounting and our
consolidated financial statements include the results of operations of the
acquired companies from the dates of their respective acquisitions. The
remaining five acquisitions were accounted for as poolings-of-interests. The
comparisons set forth below reflect the fact that the consolidated financial
statements for fiscal years 1997, 1998 and 1999 have been restated to include
all acquisitions accounted for as poolings-of-interests as if each had occurred
at the beginning of the earliest period reported.
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Software sales and installation revenue includes the licensing of
application software systems and the conversion and installation services
required for the customer's installation of the systems. We license our
proprietary software products under standard license agreements which typically
provide the customer with a non-exclusive, non-transferable right to use the
software for a term of up to 25 years on a single computer and for a single
financial institution location upon payment of the license fee. Generally, 25%
of license fees are payable upon execution of the license agreement, 65% upon
delivery of the software and the balance at the installation of the last
application module. We recognize 100% of software license revenue upon delivery
of the software and documentation. We recognize installation services each month
as services are performed under hourly contracts and at the completion of the
installations under fixed fee contracts.
Maintenance and support fees are generated from ongoing services to assist
the customer in operating the systems and to modify and update the software and
from providing outsourced data processing services. Revenues from software
maintenance are generated pursuant to annual agreements and are recognized
ratably over the life of the agreements. Outsourcing services are performed
through data centers. Revenues from outsourced data processing are derived from
monthly usage fees typically under five-year service contracts with our
customers. We recognize the revenues under these outsourcing contracts as
services are performed.
Cost of services represents direct costs associated with conversion and
installation efforts, ongoing maintenance and support for our in-house customers
and operation of our centers providing services for our outsourced customers.
These costs are recognized as they are incurred.
We have entered into remarketing agreements with several hardware
manufacturers under which we sell computer hardware and related services to our
customers along with our banking software systems. Revenues from hardware sales
are recognized when the manufacturers ship the hardware. Cost of hardware
consists of the direct costs of purchasing the equipment from the manufacturers.
These costs are recognized at the same time as the related revenue.
Selling and marketing expenses are all the expenses required to market and
sell our products and services. The most significant costs are compensation and
benefits and travel costs for our sales force.
Research and development expenses consist of the costs incurred to develop
computer software. These costs generally are expensed as incurred with a major
portion of same being compensation and benefits for our development staff.
Certain of these new product development costs are capitalized from the point at
which technological feasibility has been established through the point at which
customer installation begins.
General and administrative costs are comprised of all operating costs not
included above. Some of the more significant items are costs of our internal
administration costs of being a public company and depreciation and maintenance
of our corporate headquarters.
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RESULTS OF OPERATIONS
FISCAL 1999 COMPARED TO FISCAL 1998
REVENUES. Revenues increased by 30.6% from $148.2 million in fiscal 1998 to
$193.5 million in fiscal 1999. Above average demand for our core software
products and related hardware resulting from the preparation for Y2K was a major
factor driving revenue growth in fiscal 1999. Each line item of revenues grew in
fiscal 1999 compared with the previous fiscal year, with the largest increase in
maintenance/support and service. Sales of complementary products and services,
which are primarily provided to customers utilizing our core software products,
provided a significant amount of revenue during 1999. Acquisitions, electronic
transaction fees, outsourcing fees, Internet banking, form sales and customer
support fees also contributed to the significant growth in total revenues during
that year.
COST OF SALES. Cost of sales increased by 32.4% from $81.0 million in fiscal
1998 to $107.2 million in fiscal 1999, compared to a 30.6% increase in revenues
in fiscal 1999 compared to the previous year. Cost of hardware increased 26.1%
compared to the 21.2% increase in hardware revenue due to product mix of
hardware sold. Cost of services increased 39.6% compared to a 37.2% increase its
related components of revenue in fiscal 1999.
GROSS PROFIT. Gross profit increased 28.3% from $67.2 million in fiscal 1998 to
$86.3 million in fiscal 1999. The gross margin percentage for fiscal 1999 was
44.6%, a small decrease from the gross margin in fiscal 1998.
OPERATING EXPENSES. Operating expenses increased 18.1% from $31.0 million in
fiscal 1998 to $36.6 million in fiscal 1999, compared to a 28.3% increase in
gross profit in fiscal 1999 compared with fiscal 1998. The increase in
operating expenses reflects efficiencies realized as part of our overall
growth. Selling and marketing expense decreased 7.2% from $15.1 million in
fiscal 1998 to $14.0 million in fiscal 1999. This decrease reflects the change
in product mix, with a higher percentage of revenues being generated by
non-commission sources, such as customer support fees. Research and development
expense increased 24.5% from $4.2 million in fiscal 1998 to $5.2 million in
fiscal 1999, directly related to continued development and refinement of new
and existing products, particularly Internet products. General and
administrative expense increased 48.6% from $11.7 million in fiscal 1998 to
$17.3 million in fiscal 1999, principally due to increased requirements caused
by our overall growth. Excluding the one-time acquisition costs for the
Peerless transaction of $2.2 million, general and administrative expense
increased 29.7% in fiscal 1999 compared with fiscal 1998, while gross profits
increased 28.3%.
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OTHER INCOME (EXPENSE). Other income increased 15.7% from $1.6 million in
fiscal 1998 to $1.9 million in fiscal 1999, primarily due to the increased
amount of cash and interest-bearing investments in fiscal 1999 compared to
fiscal 1998.
PROVISION FOR INCOME TAXES. The provision for income taxes increased 37.9% from
$13.7 million in fiscal 1998 to $18.9 million in fiscal 1999. The overall tax
rate of 36.6% in fiscal 1999 was relatively unchanged from that in 1998.
INCOME FROM CONTINUING OPERATIONS. Income from continuing operations increased
35.2% from $24.2 million, or $.58 per diluted share, in fiscal 1998 to $32.7
million, or $.77 per diluted share, in fiscal 1999.
DISCONTINUED OPERATIONS. We incurred a $758,000 loss from discontinued
operations in fiscal 1999, compared to a $668,000 loss from discontinued
operations in fiscal 1998. We continued to honor prior commitments to existing
customers while anticipating final resolution regarding our discontinued
operation which was realized in the first quarter of fiscal 2000.
FISCAL 1998 COMPARED TO FISCAL 1997
REVENUES. Revenues increased 17.4% from $126.3 million in fiscal 1997 to $148.2
million in fiscal 1998, particularly due to increased demand for our core
software products. Acquisitions, electronic transaction fees, outsourcing fees,
forms sales and customer support fees also contributed to our growth in
revenues.
COST OF SALES. Cost of sales increased 10.9% from $73.0 million in fiscal 1997
to $81.0 million in fiscal 1998, compared to an increase of 17.4% in revenues.
Cost of hardware increased 5.7% and cost of services increased 17.7% in fiscal
1998 compared to fiscal 1997, as a result of the increased demand for our
products and services.
GROSS PROFIT. Gross profit increased 26.3% from $53.2 million in fiscal 1997 to
$67.2 million in fiscal 1998. The gross margin percentage increased from 42.2%
in fiscal 1997 to 45.4% in fiscal 1998, primarily due to shifts in the product
mix to our more profitable software products and related services from hardware
sales, which are lower margin products.
OPERATING EXPENSES. Total operating expenses increased 22.0% from $25.4 million
in fiscal 1997 to $31.0 million in fiscal 1998, compared to an increase of 26.3%
in gross profit in the same period. Selling and marketing expense increased
18.6%, research and development expense increased 38.2%, and general and
administrative expenses increased 21.5% during the same period. These increases
resulted from the continued growth in our business.
OTHER INCOME (EXPENSE). Other income doubled from $807,000 in fiscal 1997 to
approximately $1.6 million in fiscal 1998, primarily due to the increased amount
of cash and interest-bearing investments in fiscal 1998 compared with the prior
year.
PROVISION FOR INCOME TAXES. The provision for income taxes increased 34.4% from
$10.2 million in fiscal 1997 to $13.7 million in fiscal 1998. The overall tax
rate remained relatively unchanged from fiscal 1997 to fiscal 1998.
INCOME FROM CONTINUING OPERATIONS. Income from continuing operations increased
30.9% from $18.5 million, or $.46 per diluted share, in fiscal 1997, to $24.2
million, or $.58 per diluted share, in fiscal 1998.
DISCONTINUED OPERATIONS. We incurred a $668,000 loss from discontinued
operations in fiscal 1998, compared to a $450,000 loss from discontinued
operations in fiscal 1997. Although a planned sale did not close within the
expected time frame, we continued to honor commitments to customers by
providing support and maintenance.
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SUPPLEMENTAL QUARTERLY INFORMATION
The following table sets forth quarterly unaudited financial data for the
quarters of fiscal 1998 and 1999. In our opinion, such unaudited financial
information includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the information for the
periods. The operating results for any quarter are not necessarily indicative of
results for any future periods. The amounts in the tables below, except per
share data, are in thousands. Per share data have been adjusted to reflect the
March 2, 2000 two for one stock split effected as a stock dividend.
QUARTERLY FINANCIAL INFORMATION
FISCAL 1999 QUARTERS
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FIRST SECOND THIRD FOURTH
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Total revenues.................................... $52,094 $49,948 $46,513 $44,972
Cost of sales..................................... 29,297 27,918 25,927 24,101
Income from continuing operations before income
taxes........................................... 14,599 11,707 12,940 12,367
Income from continuing operations................. 9,025 7,197 8,402 8,102
Income (loss) from discontinued operations........ 24 (251) (531) --
Net income........................................ $ 9,049 $ 6,946 $ 7,871 $ 8,102
Diluted earnings per share:
Income from continuing operations............... $ .21 $ .17 $ .20 $ .19
Net income...................................... $ .21 $ .16 $ .18 $ .19
FISCAL 1998 QUARTERS
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FIRST SECOND THIRD FOURTH
------- ------- ------- -------
Total revenues.................................... $27,120 $36,691 $36,738 $47,686
Cost of sales..................................... 13,972 20,829 19,555 26,653
Income from continuing operations before income
taxes........................................... 7,211 8,690 9,467 12,529
Income from continuing operations................. 4,870 5,511 5,929 7,895
Income (loss) from discontinued operations........ (261) 54 (191) (270)
Net income........................................ $ 4,609 $ 5,565 $ 5,738 $ 7,625
Diluted earnings per share:
Income from continuing operations............... $ .12 $ .13 $ .14 $ .19
Net income...................................... $ .11 $ .13 $ .14 $ .18
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Forward Looking Statements
The Mangagement's Discussion and Analysis of Financial Condition and Results of
Operations contain forward-looking statements within the meaning of federal
securities laws. Actual results are subject to risks and uncertainties,
including both those specific to the Company and those specific to the
industry, which could cause results to differ materially from those
contemplated. The risks and uncertainties include, but are not limited to,
third-party or Company failures to achieve timely, effective remediation of the
Year 2000 issues, general economic conditions, actions of competitors,
regulatory actions, changes in legislation and technology changes. Undue
reliance should not be placed on the forward-looking statements. The Company
does not undertake any obligation to publicly update any forward-look
statements.