The following discussion and analysis provides information which
management believes is relevant to an understanding of the
Company's results of operations and financial condition. The
discussion should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in
this annual report.
Overview
Computer Services, Inc. provides information technology
solutions to meet the business needs of community banks
throughout the central United States. The Company derives its
revenues from processing services, maintenance and support fees,
software licensing and installation fees, and equipment and
supply sales. The Company currently serves customers in Kentucky,
Illinois, Indiana, Texas, West Virginia, Missouri, Ohio,
Tennessee, Michigan, Arkansas, Louisiana and Mississippi.
Results of Operations
The following table presents the percentage of revenues
represented by each item in the Company's consolidated statements
of income and the percentage change in those items for the
periods indicated:
Revenues increased $13.5 million, or 33.1%, to $54.2 million in fiscal 1999 from $40.7 million in fiscal 1998. Growth in processing revenues accounted for $7.7 million, or 57%, of the total increase. The increase in processing revenues was primarily due to 36 new customers contracted, additional processing revenues provided from the acquisition of Computer Bank, Inc. on April 30, 1998, volume growth within existing customers, and cross-sales to existing customers. Growth in other revenues accounted for $3.0 million, or 22%, of the total increase. The increase was principally due to strong sales of equipment and software combined with the addition of other revenues provided from the acquisition of Computer Bank, Inc. on April 30, 1998. The remaining $2.7 million increase in total revenues was attributable to non-recurring revenue from early termination fees associated with 18 of the 23 data processing agreements terminated during the fiscal 1999, which totaled $3.2 million compared to early termination fees of $470,000 in fiscal 1998.
Operating expenses increased $11.9 million, or 35.7%, to $45.2 million in fiscal 1999 from $33.3 million in fiscal 1998. The increase in 1999 was associated with greater revenues, increased expenses due to expanded operations and one-time pretax charges totaling $1.7 million. The Company incurred expenses of approximately $840,000 associated with the implementation of its new EFT system. The Company amortized an additional $750,000 of goodwill related to the Computer Bank, Inc. acquisition due to impairment caused by modified estimates of future cash flows. The Company increased its property tax reserve by approximately $134,000 to more appropriately recognize the timing of property tax liabilities on its properties located in Kentucky.
Operating income increased $1.6 million, or 21.6%, to $9.0 million in fiscal 1999 from $7.4 million in fiscal 1998. The increase in fiscal 1999 was principally due to the revenue gains discussed above.
Net interest expense was $143,000 in fiscal 1999 compared to net interest income of $115,000 in fiscal 1998. The $258,000 change was due to minimal interest income during fiscal 1999 combined with interest expense incurred on borrowings under the Company's revolving credit facility in conjunction with the Computer Bank, Inc. acquisition as well as for working capital purposes. As of December 31, 1998, the Company had repaid all borrowings made under the revolving credit facility. Other income increased $24,000, or 21.1%, in fiscal 1999 which included a non-recurring gain of $260,000 on the sale of the Company's former headquarters in Paducah, Kentucky, partially offset by other non-operating adjustments.
The effective income tax rate was 44.4% in fiscal 1999 compared with 39.0% in fiscal 1998. The increase in the tax rate in 1999 was primarily attributable to the non-deductibility of certain expense adjustments including amortization of goodwill and other costs related to the Computer Bank, Inc. acquisition.
Net income for fiscal 1999 increased 7.5% to $5.0 million and diluted earnings per share increased 8.0% to $2.29.
Fiscal 1998 Compared to Fiscal 1997
Revenues increased $3.1 million, or 8.4%, to $40.7 million in fiscal 1998 from $37.6 million in fiscal 1997. The growth in 1998 was derived from new customers contracted, volume growth within existing customers, and cross-sales to existing customers; partially offset by lost business.
Operating expenses increased $2.0 million, or 6.5%, to $33.3 million in fiscal 1998 from $31.3 million in fiscal 1997. The increase in 1998 was associated with greater revenues and also included pretax charges totaling $200,000 in connection with the acquisition of Computer Bank, Inc.
Operating income increased $1.1 million, or 17.8%, to $7.4 million in fiscal 1998 from $6.3 million in fiscal 1997. The increase in fiscal 1998 was principally due to revenue gains and prudent expense management.
Net interest income decreased $132,000, or 53.4%, in fiscal 1998 due to lower average balances of cash and cash equivalents, and borrowings totaling $1.8 million during the third and fourth quarters. Other income decreased $101,000, or 47.0%, in fiscal 1998 due to prior year gains on non-recurring items.
The effective income tax rate was 39.0% in fiscal 1998 compared with 40.0% in fiscal 1997.
Net income for fiscal 1998 increased 15.0% to $4.7 million and diluted earnings per share increased 17.8% to $2.12. The higher percentage increase in earnings per share compared to net income was primarily attributable to a reduction in the number of shares outstanding of the Company's common stock because of the repurchase of approximately 88,000 shares during the year.
Liquidity and Capital Resources
At February 28, 1999, the Company had cash and cash equivalents of $928,000, working capital of $9.4 million and a current ratio of 4.5. This compares to cash and cash equivalents of $1.3 million, working capital of $7.0 million, and a current ratio of 3.8 at February 28, 1998.
For the year ended February 28, 1999, cash provided from operations increased $2.0 million to $7.8 million primarily due to the $3.2 million in liquidated damages received, partially offset by increased working capital requirements. Investing activities used cash of $3.9 million, substantially to acquire Computer Bank, Inc.; complete leasehold improvements for and equip new service centers in Charleston, West Virginia, and Orrville, Ohio; and purchase other equipment and software to provide for the Company's current and future growth.
At February 28, 1998, the Company had cash and cash equivalents of $1.3 million, working capital of $7.0 million and a current ratio of 3.8 compared to cash and cash equivalents of $5.7 million, working capital of $10.4 million, and a current ratio of 5.1 at February 28, 1997.
For the year ended February 28, 1998, cash provided from operations decreased $948,000 to $5.8 million primarily due to improved operating results offset by increased working capital requirements and the non-current portion of the software license fee for a new host processor. Investing activities used cash of $8.9 million, substantially to complete and furnish the new corporate headquarters, acquire a new host processor and purchase a new EFT system. During the fourth quarter of 1998, the Company borrowed $1.8 million under its revolving credit facility at an interest rate of 8.125%, primarily to satisfy working capital requirements. Also during fiscal 1998, the Company repurchased approximately 88,000 shares of common stock at an aggregate cost of $2.0 million.
The Company believes that its current financial position and cash generated from operations will be sufficient to meet its cash requirements during the next fiscal year. The Company has no borrowings and generally uses existing resources and funds generated from operations to meet its capital requirements. The Company's business strategy includes the acquisition of complimentary businesses financed by a combination of internally generated funds, long-term debt and common stock.
Year 2000
The Company has established a Year 2000 ("Y2K") Committee which has developed a documented, systematic approach (the "Y2K Plan") to review all products and internal systems for Y2K compliance. The Company's Board of Directors and the banking regulators have reviewed and approved the Y2K Plan. Following extensive testing, the Company believes all its products and internal systems are Y2K ready.
Forward Looking Statements
All statements except historical statements contained herein constitute "forward-looking statements." These forward-looking statements rely on a number of assumptions concerning future events and are subject to a number of uncertainties and other factors, many of which are outside of the Company's control, which may cause actual results to differ materially from such statements. Such risks and uncertainties include, but are not limited to, economic, competitive, technological and governmental factors affecting the Company's operations, markets, products, services, prices and other factors.
