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Exhibit 99.2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion is qualified by reference to, and should be read
in conjunction with, our consolidated financial statements and the related notes
and other financial information included elsewhere in this filing. The following
discussion also contains forward-looking statements which are subject to the
risks and uncertainties discussed in the "Risk Factors" section of our
registration statement on Form S-3 (NO. 333-94511) as declared effective by the
SEC on February 15, 2000.
Overview
We derive revenues primarily from the following sources:
. electronic funds transfer, or EFT, processing services;
. core data processing systems, support, maintenance and related
services;
. check imaging systems, support and related services;
. data communications management; and
. ancillary products and services, including maintenance and technical
support services, sales of banking related equipment and complementary
products.
We derive EFT revenues principally from processing ATM and debit card
transactions. We receive a base fee for providing our ATM processing services
and an additional fee for each ATM serviced. Once the number of transactions by
a financial institution exceeds established levels, typically between 2,000 and
3,000 transactions per month, we charge additional fees for the extra
transactions processed. For debit card transactions, we generally receive a
portion of the interchange fees charged by our financial institution customers,
and we charge a monthly fee if our customers do not meet a certain minimum
dollar amount of transactions for a particular month. Most charges due under our
EFT service agreements are paid monthly.
On a service bureau basis, we generate core data processing revenues from
service and processing fees based on the volume of transactions processed. These
revenues are recognized as the services are performed. We also generate core
data processing revenues by licensing PC BancPAC, our proprietary Windows(R) NT
based client/server software system, on an in-house basis. We recognize revenues
for licensing PC BancPAC in accordance with Statement of Position 97-2 on
"Software Revenue Recognition," issued by the American Institute of Certified
Public Accountants. We recognize software license fees when we have signed a
non-cancelable license agreement, shipped the product and satisfied significant
obligations to the customer.
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We license on an in-house basis Renaissance(TM) software, our proprietary
check imaging software that we acquired in August 1999 as a result of our
acquisition of SBS Corp. We have completed a number of acquisitions. See
"Business - Our Acquisitions" section of our registration statement on Form S-3
(NO. 333-94511) as declared effective by the SEC on February 15, 2000 for a
discussion of these acquisitions. See "Business - Our Acquisitions." We generate
revenues from license fees and recurring annual maintenance fees charged for
this system. Revenues from licensing of Renaissance are recognized in accordance
with Statement of Position 97-2, as discussed above. We also provide check
imaging in a service bureau environment. On a service bureau basis, we generate
revenues based on the volume of items processed. This revenue is recognized as
we provide the service.
We generate our data communications management service revenues principally
from network management and data traffic across our frame relay network and from
equipment configuration, installation and sales. We charge a flat monthly fee
for providing telecommunications connectivity and network management as well as
an installation charge.
Our ancillary products and services generate revenues primarily from our
maintenance and technical support services as well as sales of equipment. We
recognize maintenance and technical support service revenues as the service
period elapses. We recognize equipment sales revenues at the time of shipment.
In June 1998, we completed an initial public offering of our common stock.
Since that time, we have completed a number of acquisitions. See "Business - Our
Acquisitions" section of our registration statement on Form S-3 (NO. 333-94511)
as declared effective by the SEC on February 15, 2000 for a discussion of these
acquisitions. We originally accounted for our acquisition of Direct Access in
March 1999 as a pooling of interest. As a result of the transactions described
in "Business - Our Relationship with Netzee," section of our registration
statement on Form S-3 (NO. 333-94511) as declared effective by the SEC on
February 15, 2000 we have changed the accounting for the Direct Access
acquisition to a purchase.
Due to Netzee's issuance of common stock in connection with transactions
that occurred on September 3, 1999, our ownership percentage in Netzee decreased
to approximately 49% as of that date. As a result, we no longer consolidate
Netzee's results of operations with our results of operations. We now account
for our investment in Netzee under the equity method, which requires us to
record the results of operations of Netzee in a single line item in our
statement of operations titled "Equity in Loss of Affiliate." Because we
provided unlimited funding to Netzee until completion of their initial public
offering in November 1999, all of Netzee's losses prior to the completion of the
offering are included in that line item rather than our relative percentage of
those losses. Following the completion of the initial public offering we have
recorded only our relative percentage of Netzee's net losses. As of December 31,
1999 we owned approximately 37% of Netzee's common stock.
We base our expenses to a significant extent on our expectations of future
revenues. Most of our expenses are fixed in the short term, and we may not be
able to quickly reduce spending if our revenues are lower than we expect. In an
attempt to enhance our long term competitive position, we may also make
decisions regarding pricing, marketing, services and technology that could have
an adverse near-term effect on our financial condition and operating results. In
addition, our EFT revenues are based in large part on various interchange and
transaction fees set by Visa and MasterCard. Any changes in these fees, whether
as a result of a pending dispute or otherwise, could negatively impact our
revenues.
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Due to the foregoing factors and other risks discussed in our SEC filings,
we believe that quarter to quarter comparisons of our operating results are not
a good indication of our future performance. It is likely that our operating
results will fall below the expectations of securities analysts or investors in
some future quarter. In such event, the trading price of our common stock would
likely decline, perhaps significantly.
Results of Operations
The following table sets forth the percentage of revenues represented by certain
items in our consolidated statements of operations for the indicated periods.
All amounts have been restated to reflect the August 2000 acquisition of
Advanced Computer Enterprises, Incorporated, which was accounted for as a
pooling-of -interests transaction.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1997 1998 1999
----------- ---------- -----------
<S> <C> <C> <C>
Revenues............................................ 100.0% 100.0% 100.0%
Costs of services................................... 43.0 40.8 39.1
Selling, general and administrative expenses........ 45.4 40.8 40.1
Depreciation and amortization....................... 5.3 4.7 8.5
Loss on impairment of intangibles................... 2.6 0.0 0.0
-------- ------- --------
Total operating expenses............................ 96.3 86.4 87.7
-------- ------- --------
Operating income ................................... 3.7 13.6 12.3
Other income (expense), net......................... (2.2) (0.6) 74.8
-------- -------- --------
Income (loss) before minority interest and
provision for income taxes....................... 1.5 12.9 87.1
Equity in loss of affiliate......................... 0.0 0.0 (29.3)
Minority interest (income) loss..................... 0.1 (0.3) (0.2)
Provision for income taxes.......................... 2.6 4.9 38.6
-------- -------- -------
Net income.......................................... (1.0)% 7.7% 19.0%
======== ======== =======
</TABLE>
Year Ended December 31, 1999 Compared To Year Ended December 31, 1998
Revenues. Revenues increased 57.4%, to $52.4 million for the year ended
December 31, 1999 from $33.3 million for the year ended December 31, 1998. The
$19.1 million increase was primarily related to (a) $14.4 million generated by
an increase in service fee income, (b) $3.3 million generated by additional
hardware sales and (c) $1.4 million generated by an increase in data
communications management income. These increases are attributable to both
internal growth and acquisitions.
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Costs of Services. Costs of services increased 50.5% to $20.5 million for
the year ended December 31, 1999 from $13.6 million for the year ended December
31, 1998. The $6.9 million increase was primarily attributable to (a) an
increase of $3.7 million related to service fee income (b) $2.2 million
generated by additional hardware sales, and (c) $1.0 million related to data
communications management.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 54.5% to $21.0 million for the year ended
December 31, 1999 from $13.6 million for the year ended December 31, 1998. The
$7.4 million increase was primarily due to additional personnel to support our
growth and acquisitions and other miscellaneous expenses.
Depreciation and Amortization. Depreciation and amortization increased
182.6% to $4.5 million for the year ended December 31, 1999 from $1.6 million
for the year ended December 31, 1998. The $2.9 million increase was primarily
attributable to (a) $700,000 associated with depreciation expense related to
fixed asset additions and (b) $2.2 million related to additional amortization
expense, $1.9 million of which related to acquisitions completed in 1999.
Operating Income. For the foregoing reasons, operating income increased
$2.0 million to $6.5 million for the year ended December 31, 1999 from $4.5
million for the year ended December 31, 1998.
Interest and Other Income (Expense), net. Interest and other income
increased $39.4 million to $39.2 million for the year ended December 31, 1999
from expense of $220,000 for the year ended December 31, 1998. The increase was
due primarily to a $38.9 million gain associated with the issuance of common
stock of Netzee, Inc. For an explanation of this gain see Note 3 to our
Financial Statements.
Provision (Benefit) For Income Taxes. Provision for income taxes increased
$18.6 million to $20.2 million for the year ended December 31, 1999 from $1.6
million for the year ended December 31, 1998. The increase was attributable to
the pre-tax $38.9 million gain associated with the issuance of common stock of
Netzee and increased pre-tax profits.
Equity in Loss of Affiliate. Equity in loss of affiliate was $15.4 million
for the year ended December 31, 1999. This amount is our share of Netzee's
losses. There was no equity in loss of affiliate for the year ended December 31,
1998.
Minority Interest in Loss (Income) of Consolidated Subsidiary. Minority
interest in income increased $30,000 to $120,000 for the year ended December 31,
1999 from $90,000 for the year ended December 31, 1998. The increase was
primarily due to profits in ProImage's operations.
Year Ended December 31, 1998 Compared To Year Ended December 31, 1997
Revenues. Revenues increased 18.0% to $33.3 million for the year ended
December 31, 1998 from $28.2 million for the year ended December 31, 1997. The
$5.1 million increase was primarily related to (a) $2.5 million generated by an
increase in EFT processing services, (b) $1.4 million
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generated by additional core data processing (c) $650,000 generated by an
increase in data communications management services, (d) $380,000 generated by
an increase in merchant portfolio management and (e) other increases of
$170,000.
Costs of Services. Costs of services increased 12.1% to $13.6 million for
the year ended December 31, 1998 from $12.1 million for the year ended December
31, 1997. The $1.5 million increase was primarily attributable to (a) $1.0
million generated by an increase in core data processing sales, (b) an increase
of $230,000 related to equipment sales and maintenance services and (c) other
costs of $270,000.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 6.2% to $13.6 million for the year ended
December 31, 1998 from $12.8 million for the year ended December 31, 1997. The
$800,000 increase was primarily due to additional personnel to support our
growth.
Depreciation and Amortization. Depreciation and amortization increased 5.5%
to $1.6 million for the year ended December 31, 1998 from $1.5 million for the
year ended December 31, 1997. The $100,000 increase was due to $440,000 in
depreciation expense related to fixed asset additions offset by $340,000 reduced
amortization due to fully amortized contracts related to acquisitions which
occurred in 1996 and 1997.
Loss on Impairment of Intangibles. There was no loss on impairment of
intangibles for the year ended December 31, 1998. The 1997 loss was due to (a)
the writeoff of $540,000 of goodwill assumed in the acquisition of FiNet, Inc.
and (b) the writeoff of $190,000 in purchased software assumed in the
acquisition of ProVesa. These writeoffs were due to permanent impairment in the
related long term assets.
Operating Income. For the foregoing reasons, operating income increased
$3.5 million to $4.5 million for the year ended December 31, 1998 from $1.0
million for the year ended December 31, 1997. Exclusive of the nonrecurring loss
on impairment of intangibles in 1997, operating income would have been $1.7
million in 1997.
Interest and Other Income (Expense). Other expense decreased $410,000 to
$220,000 for the year ended December 31, 1998 from $630,000 for the year ended
December 31, 1997. The decrease was due primarily to a decrease in interest
expense resulting from the payment of long-term debt with the proceeds from our
initial public offering which was completed in June 1998.
Minority Interest in Income (Loss). Minority interest in income increased
$130,000 to $90,000 for the year ended December 31, 1998 from a loss of $40,000
for the year ended December 31, 1997. The increase was primarily due to profits
in ProImage's operations partially offset by our acquisition of an additional
33% stake in ProImage in August 1998.
Provision (Benefit) For Income Taxes. Provision for income taxes increased
$910,000 to $1.6 million for the year ended December 31, 1998 from $720,000 for
the year ended December 31, 1997. The increase was primarily due to increased
profits partially offset by a reduction in nondeductible amortization.
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Liquidity and Capital Resources
Since our incorporation, we have financed our operations and capital
expenditures through cash from operations, borrowings from banks and sales of
our common stock, including our initial public offering in June 1998, which
resulted in net proceeds to us of $14.4 million, and our public offering in
February 2000, which resulted in net proceeds to us of $66.0 million.
Cash and cash equivalents were $2.1 million at December 31, 1999. Net cash
provided by operating activities was $4.6 million, $3.0 million and $2.4 million
for the years ended December 31, 1999, 1998 and 1997, respectively. The increase
in the net cash provided by operating activities in 1999 as compared to 1998 was
primarily attributable to an increase in earnings. The increase in net cash
provided by operating activities in 1998 as compared to 1997 was attributable
primarily to an increase in net income partially offset by an increase in
accounts receivable and other assets.
Net cash used in investing activities was $18.0 million, $8.6 million and
$1.1 million in 1999, 1998 and 1997, respectively. The increase in net cash used
in investing activities in 1999 as compared to 1998 was primarily due to a
receivable created from the funding of Netzee's operations and acquisitions
during the 1999 period. The increase in net cash used in investing activities in
1998 as compared to 1997 was attributable to increased capital expenditures and
acquisitions during 1998.
Net cash provided by (used in) financing activities was $12.1 million, $6.8
million and $(620,000) for the years ended December 31, 1999, 1998 and 1997,
respectively. The increase in net cash provided by financing activities for 1999
compared to 1998 was primarily due to increased borrowings under our credit
facility due to the funding of Netzee's operations and acquisitions during the
1999 period. The increase for 1998 as compared to 1997 was due to the completion
of our initial public offering partially offset by the paydown of $5.3 million
of long-term debt and $1.8 million of deferred compensation.
During 1998, we entered into a credit facility with First Union National
Bank. Under this facility, as amended, we may borrow up to $35.0 million for
working capital and to fund acquisitions and pay expenses related to
acquisitions. During 1999, we extended the term of the facility from April 28,
2001 to June 30, 2002. The First Union credit facility contains provisions which
require us to maintain certain financial ratios and minimum net worth amounts
and which restrict our ability to incur additional debt, make certain capital
expenditures, enter into agreements for mergers, acquisitions or the sale of
substantial assets and pay cash dividends. Interest is payable monthly, and
outstanding principal amounts accrue interest at an annual rate equal to either
(a) a floating rate equal to the lender's prime rate minus 0.25% or (b) a
floating rate equal to the LIBOR Market Index Rate. On December 31, 1999, the
interest rate under this facility was approximately 7.38%.
In connection with our acquisition of SBS Corp. and SBS Data Services,
Inc., we borrowed $21.6 million from First Union and loaned that amount to our
subsidiary, Direct Access, to pay a portion of the purchase price for SBS Corp.
and to pay some outstanding liabilities of SBS Corp. In September 1999, we
borrowed an additional $7.3 million under the First Union credit facility and
loaned that amount to Netzee to pay a portion of the purchase price for
acquisitions of other companies.
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Netzee repaid these loans with some of the net proceeds from its initial public
offering, which was completed November 1999.
Netzee has borrowed additional monies from us and we have committed,
subject to some conditions, to provide to Netzee a $15.0 million line of credit
for its working capital needs. Pending the completion of the line of credit, we
entered into a promissory note with Netzee, Inc. on March 24, 2000. As of March
24, 2000, a total of $7.8 million was due from Netzee under this promissory
note. We plan to finance this line of credit with cash on hand and additional
borrowings under our credit facility with First Union. As of May 31, 2000, we
have committed, subject to some conditions, to provide to Netzee a $15.0 million
line of credit for its working capital needs. As of December 13, 2000, a total
of $15.0 million was due from Netzee under this promissory note. Netzee may
require additional funds to support its operations. Netzee may seek to raise
such funds through public or private offering of debt or equity, the sale of
assets, or from other sources. No assurance can be given that additional funds
will be available, such funds will be available on terms favorable to Netzee or
their shareholders. Their ability to continue as a going concern and to meet
their obligations as they come due may be dependent upon their ability to raise
additional capital funds.
We no longer consolidate Netzee's results of operations with our results of
operations. We now account for our investment in Netzee under the equity method,
which requires us to record the results of operations of Netzee in a single line
item in our statement of operations titled "Equity in Loss of Affiliate."
Because we provided unlimited funding to Netzee until completion of its initial
public offering in November 1999, all of Netzee's losses prior to the completion
of the offering are included in that line item rather than our relative
percentage of those losses. Following the completion of Netzee's offering we
have recorded only our relative percentage of Netzee's net losses. As of
December 31, 1999 we owned approximately 37% of Netzee's common stock. In
addition, Netzee has a history of losses and may never become profitable. The
impact of Netzee's results of operations on our financial condition, including
our shareholders' equity, is uncertain, and we cannot guarantee we will benefit
from our ownership in Netzee.
While there can be no assurance, we believe that the net proceeds to us
from our recently completed secondary offering, together with funds currently on
hand, funds to be provided by operations and funds available for working capital
purposes under the First Union credit facility, will be sufficient to meet our
anticipated capital expenditures and liquidity requirements for at least the
next 12 months. We intend to grow, in part, through strategic acquisitions and
expect to make additional expenditures to negotiate and consummate acquisition
transactions and integrate the acquired companies. No assurance can be made with
respect to the actual timing and amount of the expenditures and acquisitions. In
addition, no assurance can be given that we will complete any acquisitions on
terms favorable to us, if at all, or that additional sources of financing will
not be required.
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