FORM 10-K
Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 


 

FORM 10-K

 

Annual Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

 

For the fiscal year ended December 31, 2002

Commission file no. 0-14948

 


 

FISERV, INC.

(Exact name of registrant as specified in its charter)

 

WISCONSIN

 

39-1506125

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

255 FISERV DRIVE, BROOKFIELD, WISCONSIN

 

53045

(Address of principal executive offices)

 

(Zip code)

 

Registrant’s telephone number, including area code: (262) 879-5000

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

 

NONE

(Title of Class)

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

 

Common Stock, $0.01 Par Value

(Title of Class)

 

Preferred Stock Purchase Rights

(Title of Class)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of January 31, 2003: $5,715,000,000

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No ¨

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of June 28, 2002: $6,738,000,000.

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of January 31, 2003: 191,991,614

 

DOCUMENTS INCORPORATED BY REFERENCE:

2002 Annual Report to Shareholders—Parts II, IV

Proxy Statement for April 3, 2003, Annual Meeting of Shareholders—Part III

 


 


Table of Contents

 

Fiserv, Inc. and Subsidiaries

Form 10-K

December 31, 2002

 

PART I

       

Page


Item 1.

  

Business

  

1

Item 2.

  

Properties

  

8

Item 3.

  

Legal Proceedings

  

9

Item 4.

  

Submission of Matters to a Vote of Security Holders

  

9

    

Executive Officers of the Registrant

  

9

PART II

         

Item 5.

  

Market for Registrant’s Common Equity and Related Shareholder Matters

  

10

Item 6.

  

Selected Financial Data

  

11

Item 7.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

11

Item 7a.

  

Quantitative and Qualitative Disclosures about Market Risk

  

11

Item 8.

  

Financial Statements and Supplementary Data

  

11

Item 9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

  

11

PART III

         

Item 10.

  

Directors and Executive Officers of the Registrant

  

11

Item 11.

  

Executive Compensation

  

11

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

  

12

Item 13.

  

Certain Relationships and Related Transactions

  

12

Item 14.

  

Controls and Procedures

  

12

PART IV

         

Item 15.

  

Exhibits, Financial Statement Schedules and Reports on Form 8-K

  

13


Table of Contents

 

PART I

 


 

Special Note Regarding Forward-Looking Statements

 

Certain matters discussed in this Annual Report on Form 10-K are “forward-looking statements” intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statement will include words such as “believes,” “anticipates” or “expects,” or words of similar import. Similarly, statements that describe future plans, objectives or goals of Fiserv, Inc. (“Fiserv” or the “Company”) are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those currently anticipated. Factors that could affect results include, among others, economic, competitive, governmental and technological factors affecting the Company’s operations, markets, services and related products, prices and other factors discussed in the Company’s prior filings with the Securities and Exchange Commission. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements.

 

Item 1. Business

 

Fiserv is a leading provider of integrated data processing and information management systems to the financial industry. The Company was formed in 1984 through the combination of two major regional data processing firms that began as the data processing operations of their parent financial institutions. Historically, these firms expanded operations by developing a range of services for their parent organizations, as well as other financial institutions. Since its organization, Fiserv has grown by developing highly specialized services and product enhancements, adding new clients and acquiring firms complementing the Fiserv organization.

 

As a leading technology resource, Fiserv serves more than 13,000 financial services providers worldwide, including banks, broker-dealers, credit unions, financial planners and investment advisers, insurance companies and agents, leasing companies, mortgage lenders and savings institutions. The Company operates centers nationwide for full-service financial data processing, software system development, item processing and check imaging, technology support and related product businesses. In addition, the Company has business support centers in Argentina, Australia, Canada, Colombia, Indonesia, the Philippines, Puerto Rico, Poland, Singapore and the United Kingdom.

 

Business Strategy

 

The market for products and services offered by financial institutions continues to undergo change. The financial industry is introducing and implementing new alternative lending and investment products with great frequency. The distinctions among financial services traditionally offered by banking and thrift organizations as well as by securities and insurance firms continue to narrow. Financial institutions diversify and consolidate on an ongoing basis in response to market pressures, as well as under the auspices of regulatory agencies.

 

Although such market changes have led to consolidations that have reduced the number of financial institutions in the United States, consolidation has not resulted in a material reduction of the number of customers or financial accounts serviced by the financial industry as a whole. New organizations entering the once limited financial services industry have opened new markets for Fiserv services.

 

To stay competitive in this changing marketplace, financial institutions are providing their customers a broad variety of new products and services that are typically transaction-oriented and fee-

 

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based. The growing volume and types of transactions and accounts have increased the data processing requirements of these institutions. As a consequence, Fiserv believes that the financial services industry is one of the largest users of data processing products and services.

 

Moreover, Fiserv expects that the financial industry will continue to require significant commitments of capital and human resources to the information systems requirements, to require application of more specialized systems and to require development, maintenance and enhancement of applications software. Fiserv believes that economies of scale in data processing operations are essential to justify the required level of expenditures and commitment of human resources.

 

In response to these market dynamics, financial institutions obtain data processing services by different means than in the past. Many smaller, local and regional third-party data processors are leaving the business or consolidating with larger providers. A number of large financial institutions previously providing third-party processing services for other institutions have withdrawn from the business to concentrate on their primary, core businesses. Similarly, an increasing number of financial institutions that previously developed their own software systems and maintained their own data processing operations have outsourced their data processing requirements by licensing their software from a third party or by contracting with third-party processors to reduce costs and enhance their products and services. Outsourcing can involve the licensing of software, which eliminates the costly technical expertise within a financial institution, or the utilization of service bureaus, facilities management or resource management capabilities. Fiserv provides all of these options to the financial industry.

 

To capitalize on these industry trends, Fiserv has implemented a strategy of continuing to develop new products, improving the cost effectiveness of services provided to clients, aggressively soliciting new clients, and making both opportunistic and strategic acquisitions. In 2001, Fiserv acquired 12 businesses, adding combined annual revenues of more than $380 million and approximately 4,000 new employees. In 2002, Fiserv acquired five businesses, with combined annual revenues of more than $210 million and approximately 1,100 employees. The following is a summary of acquisitions made by Fiserv since its organization.

 

Acquisition History

 

Formed

  

Acquired

  

Company

  

Service


1964

  

July 1984

  

First Data Processing, Milwaukee, WI

  

Data processing

1971

  

July 1984

  

Sunshine State Systems, Tampa, FL

  

Data processing

1966

  

Nov. 1984

  

San Antonio, Inc., San Antonio, TX

  

Data processing

1982

  

Oct. 1985

  

Sendero Corporation, Scottsdale, AZ

  

Asset/liability management

1962

  

Oct. 1985

  

First Trust Corporation, Denver, CO

  

Retirement plans

1962

  

Oct. 1985

  

First Retirement Marketing, Denver, CO

  

Retirement plan marketing

1973

  

Jan. 1986

  

On-Line, Inc., Seattle, WA

  

Data processing, forms

1966

  

May 1986

  

First City Financial Systems, Inc., Beaumont, TX

  

Data processing

1962

  

Feb. 1987

  

Pamico, Inc., Milwaukee, WI

  

Specialized forms

1975

  

Apr. 1987

  

Midwest Commerce Data Corp., Elkhart, IN

  

Data processing

1969

  

Apr. 1987

  

Fidelity Financial Services, Inc., Spokane, WA

  

Data processing

1965

  

Oct. 1987

  

Capbanc Computer Corp., Baton Rouge, LA (sold 1991)

  

Data processing

1971

  

Feb. 1988

  

Minnesota On-Line Inc., Minneapolis, MN

  

Data processing

1965

  

May 1988

  

Citizens Financial Corporation, Cleveland, OH

  

Data processing

1980

  

May 1988

  

ZFC Electronic Data Services, Inc., Bowling Green, KY

  

Data processing

1969

  

June 1988

  

GESCO Corporation, Fresno, CA

  

Data processing

1967

  

Nov. 1988

  

Valley Federal Data Services, Los Angeles, CA

  

Data processing

1984

  

Dec. 1988

  

Northeast Savings Data Services, Hartford, CT

  

Data processing

 

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Formed

  

Acquired

  

Company

  

Service


1982

  

May 1989

  

Triad Software Network, Ltd., Chicago, IL (sold 1996)

  

Data processing

1969

  

Aug. 1989

  

Northeast Datacom, Inc., New Haven, CT

  

Data processing

1978

  

Feb. 1990

  

Financial Accounting Services Inc., Pittsburgh, PA

  

Data processing

1974

  

June 1990

  

Accurate Data On Line, Inc., Titusville, FL

  

Data processing

1982

  

June 1990

  

GTE EFT Services Money Network, Fresno, CA

  

EFT networks

1968

  

July 1990

  

First Interstate Management, Milwaukee, WI

  

Data processing

1982

  

Oct. 1990

  

GTE ATM Networks, Fresno, CA

  

EFT networks

1867

  

Nov. 1990

  

Boston Safe Deposit & Trust Co. IP services, MA

  

Item processing

1968

  

Dec. 1990

  

First Bank, N.A. IP services, Milwaukee, WI

  

Item processing

1979

  

Apr. 1991

  

Citicorp Information Resources, Inc., Stamford, CT

  

Data processing

1980

  

Apr. 1991

  

BMS Processing, Inc., Randolph, MA

  

Item processing

1979

  

May 1991

  

FHLB of Dallas IP services, Dallas, TX

  

Item processing

1980

  

Nov. 1991

  

FHLB of Chicago IP services, Chicago, IL

  

Item processing

1977

  

Feb. 1992

  

Data Holdings, Inc., Indianapolis, IN

  

Automated card services

1980

  

Feb. 1992

  

BMS On-Line Services, Inc. (assets), Randolph, MA

  

Data processing

1982

  

Mar. 1992

  

First American Information Services, St. Paul, MN

  

Data processing

1981

  

July 1992

  

Cadre, Inc., Avon, CT (sold 1996)

  

Disaster recovery

1992

  

July 1992

  

Performance Analysis, Inc., Cincinnati, OH

  

Asset/liability management

1986

  

Oct. 1992

  

Chase Manhattan Bank, REALM Software, NY

  

Asset/liability management

1984

  

Dec. 1992

  

Dakota Data Processing, Inc., Fargo, ND

  

Data processing

1983

  

Dec. 1992

  

Banking Group Services, Inc., Somerville, MA

  

Item processing

1968

  

Feb. 1993

  

Basis Information Technologies, Atlanta, GA

  

Data processing, EFT

1986

  

Mar. 1993

  

IPC Service Corporation (assets), Denver, CO

  

Item processing

1973

  

May 1993

  

EDS’ FHLB Seattle (assets), Seattle, WA

  

Item processing

1982

  

June 1993

  

Datatronix Financial Services, San Diego, CA

  

Item processing

1966

  

July 1993

  

Data Line Service, Covina, CA

  

Data processing

1978

  

Nov. 1993

  

Financial Processors, Inc., Miami, FL

  

Data processing

1974

  

Nov. 1993

  

Financial Data Systems, Jacksonville, FL

  

Item processing

1961

  

Nov. 1993

  

Financial Institutions Outsourcing, Pittsburgh, PA

  

Data processing

1972

  

Nov. 1993

  

Data-Link Systems, South Bend, IN

  

Mortgage banking services

1985

  

Apr. 1994

  

National Embossing Company, Inc., Houston, TX

  

Automated card services

1962

  

May 1994

  

Boatmen’s Information Systems of Iowa, Des Moines, IA

  

Data processing

1981

  

Aug. 1994

  

FHLB of Atlanta IP services, Atlanta, GA

  

Item processing

1989

  

Nov. 1994

  

CBIS Imaging Technology Banking Unit, Maitland, FL

  

Imaging technology

1987

  

Dec. 1994

  

RECOM Associates, Inc., Tampa, FL (sold 1998)

  

Network integration

1970

  

Jan. 1995

  

Integrated Business Systems, Glendale, CA

  

Specialized forms

1977

  

Feb. 1995

  

BankLink, Inc., New York, NY

  

Cash management

1976

  

May 1995

  

Information Technology, Inc., Lincoln, NE

  

Software and services

1957

  

Aug. 1995

  

Lincoln Holdings, Inc., Denver, CO

  

DP for retirement planning

1993

  

Sept. 1995

  

SRS, Inc., Austin, TX

  

Data processing

1992

  

Sept. 1995

  

ALLTEL’s Document Management Services, CA, NJ

  

Item processing

1978

  

Nov. 1995

  

Financial Information Trust, Des Moines, IA

  

Data processing

1983

  

Jan. 1996

  

UniFi, Inc., Fort Lauderdale, FL

  

Software and services

1982

  

Nov. 1996

  

Bankers Pension Services, Inc., Tustin, CA

  

DP for retirement planning

1992

  

Apr. 1997

  

AdminaStar Communications, Indianapolis, IN

  

Laser print/mailing services

 

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Formed

  

Acquired

  

Company

  

Service


1982

  

May 1997

  

Interactive Planning Systems, Atlanta, GA

  

PC-based financial systems

1983

  

May 1997

  

BHC Financial, Inc., Philadelphia, PA

  

Securities services

1968

  

Sept. 1997

  

FIS, Inc., Orlando, FL, and Baton Rouge, LA

  

Data processing

n/a

  

Sept. 1997

  

Stephens Inc. clearing business, Little Rock, AR

  

Securities services

1986

  

Oct. 1997

  

Emerald Publications, San Diego, CA

  

Financial seminars and training

1968

  

Oct. 1997

  

Central Service Corp., Greensboro, NC

  

Data and item processing

1993

  

Oct. 1997

  

Savoy Discount Brokerage, Seattle, WA

  

Securities services

1990

  

Dec. 1997

  

Hanifen, Imhoff Holdings, Inc., Denver, CO

  

Securities services

1980

  

Jan. 1998

  

Automated Financial Technology, Inc., Malvern, PA

  

Data processing

1981

  

Feb. 1998

  

The LeMans Group, King of Prussia, PA

  

Automobile leasing software

n/a

  

Feb. 1998

  

PSI Group, Seattle, WA

  

Laser printing

1956

  

Apr. 1998

  

Network Data Processing Corporation, Cedar Rapids, IA

  

Insurance data processing

1977

  

Apr. 1998

  

CUSA Technologies, Inc., Salt Lake City, UT

  

Software and services

1982

  

May 1998

  

Specialty Insurance Service, Orange, CA

  

Insurance data processing

1985

  

Aug. 1998

  

Deluxe Card Services, St. Paul, MN

  

Automated card services

1981

  

Oct. 1998

  

FHLB of Topeka IP services, Topeka, KS

  

Item processing

n/a

  

Oct. 1998

  

FiCATS, Norristown, PA

  

Item processing

1984

  

Oct. 1998

  

Life Instructors, Inc., New Providence, NJ

  

Insurance/securities training

1994

  

Nov. 1998

  

ASI Financial, Inc., New Jersey and New York

  

PC-based financial systems

1986

  

Dec. 1998

  

The FREEDOM Group, Inc., Cedar Rapids, IA

  

Insurance data processing

1994

  

Jan. 1999

  

QuestPoint, Philadelphia, PA

  

Item processing

1981

  

Feb. 1999

  

Eldridge & Associates, Lafayette, CA

  

PC-based financial systems

1984

  

Feb. 1999

  

RF/Spectrum Decision Science Corporation, Oakland, CA

  

Software and services

1978

  

Mar. 1999

  

FIPSCO, Inc., Des Plaines, IL

  

Insurance marketing systems

1987

  

Apr. 1999

  

Progressive Data Solutions, Inc./Infinity Software

Systems, Inc., Orlando, FL

  

Insurance software systems

1973

  

June 1999

  

JWGenesis Clearing Corporation, Boca Raton, FL

  

Securities services

1987

  

June 1999

  

Alliance ADS, Redwood Shores, CA

  

Imaging technology

1962

  

Aug. 1999

  

Envision Financial Technologies, Inc., Chicago, IL

  

Data processing

1995

  

Oct. 1999

  

Pinehurst Analytics, Inc., Chapel Hill, NC

  

PC-based financial systems

1982

  

Dec. 1999

  

Humanic Design Corporation, Mahwah, NJ (sold 2001)

  

Software and services

1983

  

Jan. 2000

  

Patterson Press, Inc., Nashville, TN

  

Card services

1982

  

May 2000

  

Resources Trust Company, Denver, CO

  

DP for retirement planning

1986

  

Sept. 2000

  

National Flood Services, Inc., Kalispell, MT

  

Insurance data processing

1982

  

Jan. 2001

  

Benefit Planners, Boerne, TX

  

Insurance data processing

n/a

  

Feb. 2001

  

Marshall & Ilsley IP services, IA, MN, MO

  

Item processing

1972

  

Mar. 2001

  

Facilities and Services Corp., Agoura Hills, Novato, CA

  

Insurance software systems

1991

  

Mar. 2001

  

Remarketing Services of America, Inc., Amherst, NY

  

Automobile leasing services

1982

  

July 2001

  

EPSIIA Corporation, Austin, TX

  

Data processing

1996

  

July 2001

  

Catapult Technology Limited, London, England

  

Software and services

1985

  

Sept. 2001

  

FHLB of Pittsburgh IP services, Pittsburgh, PA

  

Item processing

1959

  

Nov. 2001

  

NCR bank processing operations, Dayton, OH

  

Data and item processing

1972

  

Nov. 2001

  

NCSI, Rockville, MD

  

Insurance data processing

1940

  

Nov. 2001

  

Integrated Loan Services, Rocky Hill, CT

  

Lending services

1954

  

Nov. 2001

  

Trewit Inc., Minneapolis, MN

  

Insurance data processing

n/a

  

Nov. 2001

  

FACT 400 credit card solution, Bogotá, Colombia

  

Software and services

 

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Formed

  

Acquired

  

Company

  

Service


1991

  

May 2002

  

Case Shiller Weiss, Inc., Cambridge, MA

  

Lending services

1974

  

Aug. 2002

  

Investec Ernst & Company’s clearing operations, NY

  

Securities clearing services

n/a

  

Nov. 2002

  

Willis Group’s TPA operations, Nashville, Wichita

  

Insurance data processing

1989

  

Nov. 2002

  

EDS Corporation’s Consumer Network Services

  

EFT data processing

         

business, New Jersey

    

1979

  

Dec. 2002

  

Lenders Financial Services, Agoura Hills, CA

  

Lending services

1989

  

Jan. 2003

  

AVIDYN, Inc., Dallas, TX

  

Insurance data processing

 

Principal Services

 

The Company’s core business is serving the needs of banking, lending, insurance, financial planners and securities providers. With its wide array of industry-specific products, Fiserv believes its clients can satisfy their customers’ growing desire for anywhere, anytime financial services. The Company’s operations have been classified into two primary business segments. The Financial institution outsourcing, systems and services business segment provides account and transaction processing solutions and services to financial institutions and other financial intermediaries. The Securities processing and trust services business segment provides securities processing solutions and retirement plan administration services to brokerage firms, investment advisers and financial institutions. Fiserv also provides plastic card issuance, design, personalization and mailing services, and document solutions.

 

Financial Institution Outsourcing, Systems and Services. Fiserv provides financial solutions that are focused on technology needs to over 8,100 financial institutions, including banks, credit unions, leasing companies, mortgage lenders and savings institutions. The Company provides comprehensive solutions designed to meet the information processing requirements of financial institutions, including account and transactions processing services, item processing, loan servicing and lending systems. Fiserv also offers its clients service bureau and in-house processing systems, e-commerce solutions and complementary products. These complementary products and back-office solutions include treasury and investment management, decision support and performance measurement solutions, electronic funds transfer services, imaging systems, call center systems, loan origination and tracking, auto leasing software, data warehousing and data mining, and credit services. Fiserv provides a wide range of information processing solutions through multiple delivery channels primarily in the United States. In addition, many of the Company’s systems have applications designed for the unique requirements of financial institutions located outside North America where the Company provides services in over 65 countries.

 

The insurance industry, like other financial industries, has requirements for basic administration services and information processing systems. Fiserv provides comprehensive insurance processing services and products to the insurance and related industries. Fiserv insurance solutions include administration services, systems and software for life, annuity, health, property and casualty, flood and workers compensation insurance companies. The Company also provides claims workstation software, financial accounting systems, computer-based training for insurance and securities, administrative services for employee benefit programs and electronic sales platforms that can be delivered over the Internet.

 

Securities Processing and Trust Services. Fiserv provides high-quality, integrated securities clearing, execution and facilitation of traditional and Internet brokerage services through advanced technology that makes executing trades faster, easier and more economical, focused customer service and economies of scale. The Company’s clients include over 400 broker-dealers and financial institutions, including full-service and discount broker-dealers, registered investment advisers, municipal bond dealers, underwriters, retail brokerage operations of financial institutions, insurance firms and mutual fund companies.

 

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Fiserv is a leading provider of retirement plan products and back-office services to financial advisers and is the largest independent trust company in the United States. The Company’s clients to whom it provides self-directed retirement plan administration services and mutual fund custody and trading services include financial institutions, financial intermediaries, financial planners, investment advisers, third-party pension administrators and individual investors.

 

Financial information concerning the Company’s industry segments is included in Note 8 to the Consolidated Financial Statements contained in the Company’s Annual Report to Shareholders included in this Annual Report on Form 10-K as Exhibit 13 and such information is incorporated herein by reference.

 

Servicing the Market

 

The market for Fiserv account and transaction processing services and products has specific needs and requirements, with strong emphasis placed by clients on software flexibility, product quality, reliability of service, comprehensiveness and integration of product lines, timely introduction of new products and features, cost effectiveness and service excellence. Through its multiple product offerings, the Company believes it successfully services these market needs and requirements for clients ranging in size from start-ups to some of the largest financial services providers in the world.

 

Fiserv believes that the position it holds as an independent, growth-oriented company dedicated to its business is an advantage to its clients as compared to many of its competitors that are regional or local cooperatively owned organizations, data processing subsidiaries or affiliates of financial institutions or hardware vendors. Due to the economies of scale gained through its broad market presence, Fiserv offers clients a selection of information management and data processing solutions designed to meet the specific needs of the ever-changing financial services industry. The Company believes this independence and primary focus on the financial services industry helps its business development, client service and product support teams remain responsive to the technology needs of its market.

 

“The Client Comes First” is one of the Company’s founding principles. It is a belief backed by a dedication to providing ongoing client service and support—no matter the client size.

 

The Company believes its commitment of substantial resources to training and technical support helps it retain clients. Fiserv conducts the majority of its new and ongoing client training in its technology centers, where the Company maintains fully equipped demonstration and training facilities containing equipment used in the delivery of Fiserv services. Fiserv also provides local and on-site training services to its clients.

 

Fiserv has been an international company since 1985, when its banking products were first launched throughout Europe, Asia and Latin America. Since then, the Company has developed an infrastructure for supporting clients in international markets. Fiserv currently maintains international support staffs in Argentina, Australia, Colombia, Indonesia, the Philippines, Puerto Rico, Poland, Singapore and the United Kingdom, and operates a joint venture in Canada.

 

Product Development

 

To meet the changing technology needs of the clients Fiserv serves the Company continually develops, maintains and enhances its systems. In 2002, product development expenses represented approximately 8% of the Company’s processing and services revenues.

 

The Fiserv network of development and financial information technology centers applies the shared expertise of multiple Fiserv teams to design, develop and maintain specialized processing systems around its leading technology platforms. The applications of its account processing systems meet the preferences and diverse requirements of the various international, national, regional or local market-specific financial service environments of the Company’s many clients.

 

Although multiple Fiserv development and financial technology centers share the Company’s variety of nationally developed and supported software, each center has specialized capabilities that enable it to offer system application features and functions specialized to its client base. If the client’s

 

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requirements warrant, Fiserv purchases software programs from third parties that are interfaced with existing Fiserv systems. In developing its products, Fiserv stresses interaction with and responsiveness to the needs of its clients.

 

Fiserv provides a dedicated solution that is designed, developed, maintained and enhanced according to each client’s goals for service quality, business development, asset and liability mix, local market positioning and other user-defined parameters.

 

Fiserv regards its software as proprietary and utilizes a combination of trade secrecy laws, internal security practices and employee non-disclosure agreements for protection. The Company believes that legal protection of its software, while important, is less significant than the knowledge and experience of the Company’s management and personnel and their ability to develop, enhance and market new products and services. The Company believes that it holds all proprietary rights necessary for the conduct of its business.

 

Competition

 

The market for information technology products and services within the financial industry is highly competitive. The Company’s principal competitors include internal data processing departments, data processing affiliates of large companies or large computer hardware manufacturers, independent computer service firms and processing centers owned and operated as user cooperatives. Some of these competitors possess substantially greater financial, sales and marketing resources than the Company. Competition for in-house data processing and software departments is intensified by the efforts of computer hardware vendors who encourage the growth of internal data centers.

 

Competitive factors for processing services include product quality, reliability of service, comprehensiveness and integration of product lines, timely introduction of new products and features, and price. The Company believes that it competes favorably in each of these categories. In addition, the Company believes that its position as an independent vendor, rather than as a cooperative, an affiliate of a larger corporation or a hardware vendor, is a competitive advantage.

 

We compete with vendors that offer similar transaction processing products and services to financial institutions and other financial intermediaries, including ALLTEL Information Services, Inc., Bisys, Inc., Jack Henry and Associates, Inc. and Metavante Corporation. There has been significant consolidation among providers of information technology products and services to financial institutions, and we believe this consolidation will continue in the future.

 

Government Regulation

 

The Company’s data processing subsidiaries are not directly subject to federal or state regulations specifically applicable to financial institutions such as banks, thrifts and credit unions. However, as a provider of services to these financial institutions, the Company’s data processing operations are examined on a regular basis by the Federal Deposit Insurance Corporation, the National Credit Union Association, the Office of Thrift Supervision, the Office of the Comptroller of the Currency and various state regulatory authorities. In addition, independent auditors annually review several of the Company’s operations to provide internal control evaluations for its clients’ auditors and regulators.

 

As trust companies under Colorado law, First Trust Corporation, Lincoln Trust Company and Trust Industrial Bank, subsidiaries of the Company, are subject to the regulations of the Colorado Division of Banking. In 1991, First Trust Corporation received approval of its application for Federal Deposit Insurance Corporation coverage of its customer deposits.

 

The Company’s securities processing business, Fiserv Securities, Inc., is subject to the broker-dealer rules of the Securities and Exchange Commission and the New York Stock Exchange, as well as the National Association of Securities Dealers and other stock exchanges of which it is a member.

 

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Table of Contents

 

Employees

 

Fiserv employs approximately 19,400 specialists in its information management centers and related product and service companies. This service support network includes employees with backgrounds in computer science and the financial industry, often complemented by management and other direct experience in banks, credit unions, insurance companies and agencies, mortgage firms, savings and other financial services business environments.

 

Fiserv employees provide expertise in sales and marketing; account management and client services; computer operations, network control and technical support; programming, software development, modification and maintenance; conversions and client training; financial planning and related support services.

 

In supporting international markets, Fiserv works closely with its clients to help ensure their continued success. Fiserv employees speak the same language as their clients and also understand the differences in the style of doing business, as well as the financial products requirements and regulations unique to each client and its specific market.

 

Fiserv employees are not represented by a union, and there have been no work stoppages, strikes or organizational attempts. The service nature of the Fiserv business makes its employees an important corporate asset, and while the market for qualified personnel is competitive, the Company does not experience significant difficulty with hiring or retaining its staff of top industry professionals. In assessing companies to acquire, the quality and stability of the prospective company’s staff are emphasized.

 

Fiserv attributes its ability to attract and keep quality employees to, among other things, the Company’s growth and dedication to state-of-the-art software development tools and hardware technologies.

 

Available Information

 

The Company maintains a Website with the address www.fiserv.com. The Company is not including the information contained on the Company’s Website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K. The Company makes available free of charge (other than an investor’s own Internet access charges) through its Website its Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after the Company electronically files such material with, or furnishes such material to, the Securities and Exchange Commission.

 

Item 2. Properties

 

Fiserv currently operates full-service data centers, software system development centers, and item processing and back-office support centers in 165 cities (154 in the United States).

 

The Company owns 12 facilities; all other buildings in which centers are located are subject to leases expiring through 2003 and beyond. The Company owns or leases approximately 161 mainframe computers (Amdahl, Compaq Alpha, Data General, Hewlett Packard, IBM, NCR, Tandem and Unisys). In addition, the Company maintains its own national data communication network consisting of communications processors and leased lines.

 

Fiserv believes its facilities and equipment are generally well maintained and are in good operating condition. The Company believes that the computer equipment it owns and its various facilities are adequate for its present and foreseeable business. Fiserv periodically upgrades its mainframe capability as needed. Fiserv contracts with multiple sites to provide processing back-up in the event of a disaster and maintains duplicate tapes of data collected and software used in its business in locations away from the Company’s facilities.

 

8


Table of Contents

 

Item 3. Legal Proceedings

 

In the normal course of business, the Company and its subsidiaries are named as defendants in various lawsuits in which claims are asserted against the Company. On October 4, 2001, the Company initiated legal action in the United States District Court for the Eastern District of Pennsylvania against E*TRADE Securities, Inc. (“E*TRADE”) as the result of E*TRADE refusing to accept delivery of a bond (with a carrying value of $27.0 million as of December 31, 2002) in violation of the terms of a contract between E*TRADE and a subsidiary of the Company. The Company intends to vigorously enforce its rights under the terms of its agreement with E*TRADE and expects to prevail and recover the carrying value of the bond. The Company expects that the liabilities, if any, which may ultimately result from such lawsuits will not have a material adverse effect on the consolidated financial statements of the Company.

 

Item 4. Submission of Matters to a Vote of Security Holders

 

During the fourth quarter of the fiscal year covered by this report, no matter was submitted to a vote of security holders of the Company.

 

Executive Officers of the Registrant

 

The executive officers of the Company as of February 28, 2003, together with their ages, positions and business experience are described below:

 

Name

  

Age

  

Position

Leslie M. Muma

  

58

  

President and Chief Executive Officer

Donald F. Dillon

  

62

  

Chairman of the Board and Chairman of Information Technology, Inc.

Kenneth R. Jensen

  

59

  

Senior Executive Vice President, Chief Financial Officer and Treasurer

Norman J. Balthasar

  

56

  

Senior Executive Vice President and Chief Operating Officer

Kenneth R. Acheson

  

54

  

Group President, Item Processing

Robert H. Beriault

  

51

  

Group President, Securities & Trust Services

Douglas J. Craft

  

49

  

Senior Vice President, Operating Group Chief Financial Officer

Patrick C. Foy

  

48

  

Group President, Bank Servicing

Thomas A. Neill

  

53

  

Group President, Credit Union & Industry Products

Rodney D. Poskochil

  

50

  

Group President, Bank Systems & eProducts

James C. Puzniak

  

56

  

Group President, Lending Systems & Services

Dean C. Schmelzer

  

52

  

Group President, Marketing & Sales

Charles W. Sprague

  

53

  

Executive Vice President, General Counsel, Chief Administrative Officer and Secretary

 

Mr. Muma has been President and Chief Executive Officer since 1999 and a Director of the Company since it was established in 1984. He was President and Chief Operating Officer of the Company from 1984 to 1999.

 

Mr. Dillon was named Chairman of the Board of Directors in July 2000. He served as Vice Chairman from 1995 to 2000. From 1976 to 1995, Mr. Dillon was co-founder and President of Information Technology, Inc. (“ITI”), a software and services organization that the Company acquired in 1995. Mr. Dillon also serves as Chairman of ITI.

 

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Table of Contents

 

Mr. Jensen was named Senior Executive Vice President in 1986 and has been Chief Financial Officer, Treasurer, Assistant Secretary and a Director of the Company since it was established in 1984. He was an Executive Vice President of the Company from 1984 to 1986.

 

Mr. Balthasar was named Senior Executive Vice President and Chief Operating Officer of the Company in October 2002. He was President and Chief Operating Officer of the Fiserv Financial Institution Group from 2000 to 2002. He served as Corporate Executive Vice President and President–Savings and Community Bank Group from 1996 to 1999, when he was named President and Chief Operating Officer of the Fiserv Financial Institution Outsourcing Group. Mr. Balthasar has been with Fiserv and a predecessor company since 1974.

 

Mr. Acheson was named Group President, Item Processing in October 2002. He served as President of the Item Processing Division from 2000 to 2002. He was President of Fiserv Solutions of Canada and President of INTRIA Items Inc. from 1996 to 2000.

 

Mr. Beriault was named Group President, Securities & Trust Services in April 2002. He was President and Chief Operating Officer of the Fiserv Securities Group from 1999 to 2002. He served as Corporate Executive Vice President and President–Securities Processing Group from 1998 to 1999. From 1986 to 1998, Mr. Beriault was President of Lincoln Trust Company, which the Company acquired in 1995.

 

Mr. Craft was named Senior Vice President and Operating Group Chief Financial Officer of the Company in October 2002. He was Senior Vice President of Finance of the Fiserv Financial Institution Group from 2000 to 2002. He served as Senior Vice President of Finance of the Savings and Community Bank Group from 1996 to 1999. Mr. Craft has been with Fiserv since 1985.

 

Mr. Foy was named Group President, Bank Servicing in October 2002. He joined Fiserv in 2001 as President of the Direct Banking Division. Previously he was founder and CEO of Login & Learn, Inc. From 1978 to 1999, he was with M&I Data Services (Metavante) in a number of management positions, serving as President of the Outsourcing Business Group from 1995 to 1999.

 

Mr. Neill was named Group President, Credit Union & Industry Products in October 2002. He served as President and Chief Operating Officer of the group from 2001 to 2002. He was President of the Products & Services Division and Group President of the Industry Products & Services Group from 1993 to 2001.

 

Mr. Poskochil was named Group President, Bank Systems & eProducts in October 2002. He served as President of the Bank Systems and eProducts Division from 1999 to 2002. He joined Information Technology, Inc. (“ITI”) in 1978 and served in a number of capacities. In 1998 he was named President and Chief Executive Officer of ITI, which the Company acquired in 1995.

 

Mr. Puzniak was named Group President, Lending Systems & Services in October 2002. He served as President Bank Servicing Division II from 1999 to 2002, and was President of the Outsourcing and Information Services Division from 1998 to 1999. He was President of the Fiserv Pittsburgh division from 1995 to 1998.

 

Mr. Schmelzer was named Group President, Marketing & Sales in February 2002. He served as Corporate Executive Vice President, Marketing & Sales for the Company from 1992 to 2002. Prior to joining Fiserv, he was Director of Commercial Analysis for IBM.

 

Mr. Sprague has been Corporate Executive Vice President, General Counsel and Secretary since 1994, and Chief Administrative Officer of the Company since 1999. He has been involved with the Company’s corporate and legal concerns since it was formed in 1984.

 


 

PART II

 


 

Item 5. Market for Registrant’s Common Equity and Related Shareholder Matters

 

The information required by this item is incorporated by reference to the information pertaining thereto set forth under the captions “Management’s Discussion and Analysis of Financial Condition and

 

10


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Results of Operations – Liquidity and Capital Resources” and “Market Price Information” in the Company’s 2002 Annual Report to Shareholders (the “Annual Report”).

 

Item 6. Selected Financial Data

 

The information required by this item is incorporated by reference to the information set forth under the caption “Selected Financial Data” in the Annual Report.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation

 

The information required by this item is incorporated by reference to the information set forth under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report.

 

Item 7a. Quantitative and Qualitative Disclosures About Market Risk

 

The information required by this item is incorporated by reference to the information set forth under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Market Risk” in the Annual Report.

 

Item 8. Financial Statements and Supplementary Data

 

The information required by this item is incorporated by reference to the information set forth under the captions “Consolidated Statements of Income,” “Consolidated Balance Sheets,” “Consolidated Statements of Shareholders’ Equity,” “Consolidated Statements of Cash Flows,” “Notes to Consolidated Financial Statements,” “Quarterly Financial Information” and “Independent Auditors’ Report” in the Annual Report.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

Not applicable.

 


PART III


 

Item 10. Directors and Executive Officers of the Registrant

 

The information required by this item with respect to directors is incorporated by reference to the information set forth under the captions “Matter 1. Election of Directors” and “Information with Respect to Continuing Directors” in the definitive Proxy Statement for the Company’s 2003 annual meeting of shareholders (the “Proxy Statement”). The information required by this item with respect to executive officers appears at the end of Part I of this Form 10-K. The information required by this item with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934 by directors and officers is incorporated by reference to the information set forth under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement.

 

Item 11. Executive Compensation

 

The information required by this item is incorporated herein by reference to the information set forth under the captions “Compensation of Directors,” “Compensation of Executive Officers,” “Agreements with Executive Officers” and “Stock Price Performance Graph” in the Proxy Statement.

 

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Table of Contents

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The information required by this item is incorporated herein by reference to the information set forth under the caption “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement.

 

In addition, the following table sets forth, as of December 31, 2002, information with respect to compensation plans under which equity securities of the Company are authorized for issuance (in thousands, except per share data):

 

Equity Compensation Plan Information

 

    

(a)

    

(b)

    

(c)

 

Plan Category


  

Number of shares to be issued upon exercise of outstanding options


    

Weighted-average exercise price of outstanding options


    

Number of shares remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))


 

Equity compensation plans approved by the Company’s shareholders:

                      

Stock Option Plan

  

11,610

    

$

21.77

    

8,540

 

Employee Stock Purchase Plan

  

—  

    

 

N/A

    

422

(1)

Equity compensation plans not approved by the Company’s shareholders

  

—  

    

 

—  

    

—  

 

    
    

    

Total

  

11,610

    

$

21.77

    

8,962

 

    
    

    

 

(1) The number of shares remaining available for future issuance under the Employee Stock Purchase Plan is subject to an annual increase on the first day of each fiscal year equal to the least of (i) 600,000 shares, (ii) 1% of the shares of Fiserv common stock outstanding on such date or (iii) a lesser amount determined by the Fiserv Board of Directors.

 

Item 13. Certain Relationships and Related Transactions

 

Not applicable.

 

Item 14. Controls and Procedures

 

(a) Evaluation of disclosure controls and procedures:

In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), within 90 days prior to the filing date of this annual report on Form 10-K, an evaluation was carried out under the supervision and with the participation of the Company’s management, including the

 

 

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Company’s President and Chief Executive Officer and Senior Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-14(c) and 15d-14(c) under the Exchange Act). Based upon their evaluation of these disclosures controls and procedures, the President and Chief Executive Officer and the Senior Executive Vice President and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the date of such evaluation to ensure that material information relating to the Company, including its consolidated subsidiaries, was made known to them by others within those entities, particularly during the period in which this Annual Report on Form 10-K was being prepared.

 

(b) Changes in internal controls:

There were not any significant changes in the Company’s internal controls or other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


PART IV


 

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

 

(a) (1) Financial Statements:

The consolidated financial statements of the Company as of December 31, 2002 and 2001 and for each of the three years in the period ended December 31, 2002, together with the report thereon of Deloitte & Touche LLP, dated January 24, 2003, appear on pages 15 through 40 of the Company’s Annual Report to Shareholders and Exhibit 13 to this Form 10-K Annual Report, and are incorporated herein by reference.

 

(a) (2) Financial Statement Schedule:

The following financial statement schedule of the Company and related independent auditors’ report are included in this Report on Form 10-K:

 

    

Page


Independent Auditors’ Report

  

17

Schedule II–Valuation and Qualifying Accounts

  

17

 

All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.

 

(b) Reports on Form 8-K:

No reports on Form 8-K were filed during the quarter ended December 31, 2002.

 

(c) Exhibits:

The exhibits listed in the accompanying exhibit index are filed as part of this Annual Report on Form 10-K.

 

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Table of Contents

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Dated: February 28, 2003

FISERV, INC.

 

By:

 

/S/    Leslie M. Muma        


   

Leslie M. Muma

President and Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the registrant and in the capacities indicated on February 28, 2003.

 

Signature

  

Capacity

/S/    Donald F. Dillon


Donald F. Dillon

  

Chairman of the Board,

    

Chairman–Information Technology, Inc.

/S/    Leslie M. Muma


Leslie M. Muma

  

Director, President and Chief Executive Officer

/S/    Kenneth R. Jensen


Kenneth R. Jensen

  

Director, Senior Executive Vice President,

    

Chief Financial Officer, Treasurer

/S/    Daniel P. Kearney


Daniel P. Kearney

  

Director

/S/    Gerald J. Levy


Gerald J. Levy

  

Director

/S/    Glenn M. Renwick


Glenn M. Renwick

  

Director

/S/    L. William Seidman


L. William Seidman

  

Director

/S/    Thekla R. Shackelford


Thekla R. Shackelford

  

Director

 

14


Table of Contents

 

CERTIFICATIONS

 

I, Leslie M. Muma, certify that:

 

  1.   I have reviewed this Annual Report on Form 10-K of Fiserv, Inc.;

 

  2.   Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report;

 

  3.   Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Annual Report;

 

  4.   The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

 

  a.   designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Annual Report is being prepared;

 

  b.   evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this Annual Report (the “Evaluation Date”); and

 

  c.   presented in this Annual Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

  5.   The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s Board of Directors (or persons performing the equivalent functions):

 

  a.   all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

  b.   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls;

 

  6.   The registrant’s other certifying officers and I have indicated in this Annual Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date: February 28, 2003

     

By:

 

/S/    Leslie M. Muma


               

Leslie M. Muma

President and Chief Executive Officer

 

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Table of Contents

 

CERTIFICATIONS

 

I, Kenneth R. Jensen, certify that:

 

  1.   I have reviewed this Annual Report on Form 10-K of Fiserv, Inc.;

 

  2.   Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report;

 

  3.   Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Annual Report;

 

  4.   The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

 

  a.   designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Annual Report is being prepared;

 

  b.   evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this Annual Report (the “Evaluation Date”); and

 

  c.   presented in this Annual Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

  5.   The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s Board of Directors (or persons performing the equivalent functions):

 

  a.   all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

  b.   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls;

 

  6.   The registrant’s other certifying officers and I have indicated in this Annual Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date: February 28, 2003

     

By:

 

/S/    Kenneth R. Jensen


               

Kenneth R. Jensen

Senior Executive Vice President, Chief

Financial Officer, Treasurer and Assistant

Secretary

 

16


Table of Contents

 

INDEPENDENT AUDITORS’ REPORT

 

To the Board of Directors and Shareholders of Fiserv, Inc.:

 

We have audited the consolidated financial statements of Fiserv, Inc. and subsidiaries as of December 31, 2002 and 2001, and for each of the three years in the period ended December 31, 2002, and have issued our report thereon dated January 24, 2003, which report includes an explanatory paragraph as to the adoption in 2002 of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.” Such consolidated financial statements and report are included in your 2002 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the consolidated financial statement schedule of Fiserv, Inc., listed in Item 15. This consolidated financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

 

/S/    DELOITTE & TOUCHE LLP

Deloitte & Touche LLP

Milwaukee, Wisconsin

January 24, 2003

 

SCHEDULE II

Valuation and Qualifying Accounts

 

Allowance for Doubtful Accounts

Year Ended

December 31,


  

Beginning

Balance


  

Charged

to Expense


  

Write-offs


    

Balance


2002

  

$

14,703,000

  

$

2,713,000

  

$

(4,248,000

)

  

$

13,168,000

2001

  

 

16,001,000

  

 

2,013,000

  

 

(3,311,000

)

  

 

14,703,000

2000

  

 

11,606,000

  

 

6,803,000

  

 

(2,408,000

)

  

 

16,001,000

 

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Table of Contents

 

EXHIBIT INDEX

 

Exhibit

Number


  

Exhibit Description


 3.1

  

Restated Articles of Incorporation, as amended (filed as Exhibit 3.1 to the Company’s Annual Report on Form 10-K dated February 28, 2000, and incorporated herein by reference (File No. 0-14948)).

 3.2

  

By-laws, as amended (filed as Exhibit 3.2 to the Company’s Annual Report on Form 10-K dated February 28, 2000, and incorporated herein by reference (File No. 0-14948)).

 4.1

  

Shareholder Rights Agreement (filed as Exhibit 4 to the Company’s Current Report on Form 8-K dated February 23, 1998, and incorporated herein by reference (File No. 0-14948)).

 4.2

  

First Amendment to the Shareholder Rights Agreement (filed as Exhibit 4.3 to the Company’s Form S-8 dated April 7, 2000, and incorporated herein by reference (File No. 333-34310)).

 4.3

  

Second Amendment to the Shareholder Rights Agreement (filed as Exhibit 4.6 to the Company’s Form 10-K dated February 27, 2001, and incorporated herein by reference (File No. 0-14948)).

    

Pursuant to Item 601(b)(4)(iii) of Regulation S-K, the Company agrees to furnish to the Securities and Exchange Commission, upon request, any instrument defining the rights of holders of long-term debt that is not filed as an exhibit to this Form 10-K.

10.1

  

Fiserv, Inc. Stock Option Plan, as amended (filed as Exhibit 4.1 to the Company’s Form S-8 Registration Statement dated April 7, 2000, and incorporated herein by reference (File No. 333-34310)).

10.2

  

Fiserv, Inc. Executive Incentive Compensation Plan (filed as Exhibit A to the Company’s Proxy Statement for the 2001 Annual Meeting of Shareholders).

10.3

  

Form of Key Executive Employment and Severance Agreement, between Fiserv, Inc. and each of Donald F. Dillon, Leslie M. Muma, Kenneth R. Jensen and Norman J. Balthasar (filed as Exhibit 10.3 to the Company’s Form 10-K dated February 27, 2002, and incorporated herein by reference (File No. 0-14948)).

10.4

  

Form of Key Executive Employment and Severance Agreement, between Fiserv, Inc. and each of Kenneth R. Acheson, Robert H. Beriault, Douglas J. Craft, Patrick C. Foy, Thomas A. Neill, Rodney D. Poskochil, James C. Puzniak, Dean C. Schmelzer and Charles W. Sprague (filed as Exhibit 10.4 to the Company’s Form 10-K dated February 27, 2002, and incorporated herein by reference (File No. 0-14948)).

13  

  

2002 Annual Report to Shareholders (to the extent incorporated by reference herein).

21  

  

List of Subsidiaries of the Registrant.

23  

  

Independent Auditors’ Consent.

99.1

  

Written Statement of the Chief Executive Officer, dated February 28, 2003.

99.2

  

Written Statement of the Chief Financial Officer, dated February 28, 2003.

 

18

2002 ANNUAL REPORT

EXHIBIT 13

 

2002 ANNUAL REPORT

FISERV, INC. AND SUBSIDIARIES

 

 

19


CONSOLIDATED STATEMENTS OF INCOME

 

    

Years ended December 31,


 
    

2002


    

2001


    

2000


 
    

(In thousands, except per share data)

 

REVENUES:

                          

Processing and services

  

$

2,277,642

 

  

$

1,927,030

 

  

$

1,685,783

 

Customer reimbursements

  

 

291,245

 

  

 

262,151

 

  

 

243,438

 

    


  


  


TOTAL REVENUES

  

 

2,568,887

 

  

 

2,189,181

 

  

 

1,929,221

 

    


  


  


COST OF REVENUES:

                          

Salaries, commissions and payroll related costs

  

 

1,090,315

 

  

 

936,233

 

  

 

807,547

 

Customer reimbursement expenses

  

 

291,245

 

  

 

262,151

 

  

 

243,438

 

Data processing costs and equipment rentals

  

 

165,283

 

  

 

148,469

 

  

 

132,458

 

Other operating expenses

  

 

437,891

 

  

 

340,935

 

  

 

282,630

 

Depreciation and amortization

  

 

141,114

 

  

 

147,696

 

  

 

148,842

 

    


  


  


TOTAL COST OF REVENUES

  

 

2,125,848

 

  

 

1,835,484

 

  

 

1,614,915

 

    


  


  


OPERATING INCOME

  

 

443,039

 

  

 

353,697

 

  

 

314,306

 

Interest expense

  

 

(17,758

)

  

 

(20,159

)

  

 

(28,823

)

Interest income

  

 

8,589

 

  

 

8,086

 

  

 

6,734

 

Realized gain from sale of investment

  

 

2,420

 

  

 

5,404

 

  

 

7,818

 

    


  


  


INCOME BEFORE INCOME TAXES

  

 

436,290

 

  

 

347,028

 

  

 

300,035

 

Income tax provision

  

 

170,153

 

  

 

138,811

 

  

 

123,014

 

    


  


  


NET INCOME

  

$

266,137

 

  

$

208,217

 

  

$

177,021

 

    


  


  


NET INCOME PER SHARE:

                          

Basic

  

$

1.39

 

  

$

1.11

 

  

$

0.96

 

    


  


  


Diluted

  

$

1.37

 

  

$

1.09

 

  

$

0.93

 

    


  


  


SHARES USED IN COMPUTING NET INCOME PER SHARE:

                          

Basic

  

 

191,386

 

  

 

186,929

 

  

 

184,788

 

    


  


  


Diluted

  

 

194,951

 

  

 

191,584

 

  

 

189,804

 

    


  


  


 

See notes to consolidated financial statements.

 


CONSOLIDATED BALANCE SHEETS

 

    

December 31,


    

2002


    

2001


    

(Dollars in thousands)

ASSETS

               

Cash and cash equivalents

  

$

227,239

 

  

$

136,088

Accounts receivable, less allowance for doubtful accounts of $13,168 and $14,703

  

 

339,737

 

  

 

311,217

Securities processing receivables

  

 

1,740,512

 

  

 

1,427,051

Prepaid expenses and other assets

  

 

119,882

 

  

 

108,003

Investments

  

 

2,115,778

 

  

 

1,885,063

Property and equipment

  

 

223,070

 

  

 

200,973

Intangible assets

  

 

342,614

 

  

 

231,713

Goodwill

  

 

1,329,873

 

  

 

1,022,134

    


  

TOTAL

  

$

6,438,705

 

  

$

5,322,242

    


  

LIABILITIES AND SHAREHOLDERS’ EQUITY

               

Accounts payable

  

$

122,266

 

  

$

83,303

Securities processing payables

  

 

1,666,863

 

  

 

1,289,479

Short-term borrowings

  

 

100,000

 

  

 

112,800

Accrued expenses

  

 

280,614

 

  

 

241,904

Accrued income taxes

  

 

23,711

 

  

 

15,373

Deferred revenues

  

 

181,173

 

  

 

171,101

Customer funds held and retirement account deposits

  

 

1,707,458

 

  

 

1,420,956

Deferred income taxes

  

 

46,127

 

  

 

39,407

Long-term debt

  

 

482,824

 

  

 

343,093

    


  

TOTAL LIABILITIES

  

 

4,611,036

 

  

 

3,717,416

COMMITMENTS AND CONTINGENCIES

               

SHAREHOLDERS’ EQUITY

               

Preferred stock, no par value: 25,000,000 shares authorized; none issued

  

 

—  

 

  

 

—  

Common stock, $0.01 par value: 300,000,000 shares authorized; 192,450,000 and 190,281,000 shares issued

  

 

1,924

 

  

 

1,903

Additional paid-in capital

  

 

599,700

 

  

 

564,959

Accumulated other comprehensive income

  

 

23,882

 

  

 

76,216

Accumulated earnings

  

 

1,227,885

 

  

 

961,748

Treasury stock, at cost, 804,775 shares

  

 

(25,722

)

  

 

—  

    


  

TOTAL SHAREHOLDERS’ EQUITY

  

 

1,827,669

 

  

 

1,604,826

    


  

TOTAL

  

$

6,438,705

 

  

$

5,322,242

    


  

 

See notes to consolidated financial statements.

 


 

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

 

   

Common Stock


 

Additional

Paid-In

Capital


    

Comprehensive

Income


    

Accumulated

Other

Comprehensive

Income


   

Accumulated

Earnings


 

Treasury

Stock


 
   

Shares


 

Amount


           
   

(In thousands)

 

Balance at January 1, 2000

 

125,388

 

$

1,254

 

$

458,550

 

           

$

125,026

 

 

$

576,510

 

$

(70,324

)

Net income

 

—  

 

 

—  

 

 

—  

 

  

$

177,021

 

  

 

—  

 

 

 

177,021

 

 

—  

 

Foreign currency translation

                    

 

(1,310

)

  

 

(1,310

)

             

Change in unrealized gains on available-for-sale investments—net of tax of $30,705

                    

 

(39,765

)

  

 

(39,765

)

             

Reclassification adjustment for realized gains included in net income

                    

 

(5,082

)

  

 

(5,082

)

             
                      


                      

Comprehensive income

                    

$

130,864

 

                      
                      


                      

Shares issued under stock plans, including income tax benefits

 

—  

 

 

—  

 

 

(3,106

)

                   

 

—  

 

 

43,182

 

Purchase of treasury stock

 

—  

 

 

—  

 

 

—  

 

                   

 

—  

 

 

(9,884

)


Balance at December 31, 2000

 

125,388

 

 

1,254

 

 

455,444

 

           

 

78,869

 

 

 

753,531

 

 

(37,026

)

Net income

 

—  

 

 

—  

 

 

—  

 

  

$

208,217

 

  

 

—  

 

 

 

208,217

 

 

—  

 

Foreign currency translation

                    

 

(881

)

  

 

(881

)

             

Change in unrealized gains on available-for-sale investments—net of tax of $3,652

                    

 

9,710

 

  

 

9,710

 

             

Reclassification adjustment for realized gains included in net income

                    

 

(3,513

)

  

 

(3,513

)

             

Fair market value adjustment on cash flow hedges—net of tax

                    

 

(5,272

)

  

 

(5,272

)

             

Other

                             

 

(2,697

)

             
                      


                      

Comprehensive income

                    

$

208,261

 

                      
                      


                      

Shares issued under stock plans, including income tax benefits

 

248

 

 

2

 

 

9,442

 

                   

 

—  

 

 

20,655

 

Shares issued for acquired companies

 

1,955

 

 

20

 

 

100,700

 

                   

 

—  

 

 

16,371

 

Three-for-two stock split

 

62,690

 

 

627

 

 

(627

)

                   

 

—  

 

 

—  

 


Balance at December 31, 2001

 

190,281

 

 

1,903

 

 

564,959

 

           

 

76,216

 

 

 

961,748

 

 

—  

 

Net income

 

—  

 

 

—  

 

 

—  

 

  

$

266,137

 

  

 

—  

 

 

 

266,137

 

 

—  

 

Foreign currency translation

                    

 

1,166

 

  

 

1,166

 

             

Change in unrealized gains on available-for-sale investments—net of tax of $29,047

                    

 

(45,184

)

  

 

(45,184

)

             

Reclassification adjustment for realized gains included in net income

                    

 

(1,573

)

  

 

(1,573

)

             

Fair market value adjustment on cash flow hedges—net of tax

                    

 

(6,743

)

  

 

(6,743

)

             
                      


                      

Comprehensive income

                    

$

213,803

 

                      
                      


                      

Shares issued under stock plans, including income tax benefits

 

2,169

 

 

21

 

 

34,741

 

                   

 

—  

 

 

7,856

 

Purchase of treasury stock

 

—  

 

 

—  

 

 

—  

 

                   

 

—  

 

 

(33,578

)


Balance at December 31, 2002

 

192,450

 

$

1,924

 

$

599,700

 

           

$

23,882

 

 

$

1,227,885

 

$

(25,722

)

   

 

See notes to consolidated financial statements.

 


 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    

Years ended December 31,


 
    

2002


    

2001


    

2000


 
    

(In thousands)

 

CASH FLOWS FROM OPERATING ACTIVITIES:

                          

Net income

  

$

266,137

 

  

$

208,217

 

  

$

177,021

 

Adjustments to reconcile net income to net cash provided by operating activities:

                          

Realized gain from sale of investment

  

 

(2,420

)

  

 

(5,404

)

  

 

(7,818

)

Deferred income taxes

  

 

30,805

 

  

 

11,700

 

  

 

4,813

 

Depreciation and amortization

  

 

141,114

 

  

 

147,696

 

  

 

148,842

 

    


  


  


    

 

435,636

 

  

 

362,209

 

  

 

322,858

 

Changes in assets and liabilities, net of effects from acquisitions of businesses:

                          

Accounts receivable

  

 

6,022

 

  

 

(1,656

)

  

 

(21,153

)

Prepaid expenses and other assets

  

 

(7,899

)

  

 

(10,694

)

  

 

(179

)

Accounts payable and accrued expenses

  

 

30,302

 

  

 

(7,669

)

  

 

9,706

 

Deferred revenues

  

 

10,072

 

  

 

6,422

 

  

 

24,844

 

Accrued income taxes

  

 

38,762

 

  

 

15,127

 

  

 

32,674

 

Securities processing receivables and payables—net

  

 

63,923

 

  

 

78,396

 

  

 

215,718

 

    


  


  


Net cash provided by operating activities

  

 

576,818

 

  

 

442,135

 

  

 

584,468

 

    


  


  


CASH FLOWS FROM INVESTING ACTIVITIES:

                          

Capital expenditures, including capitalization of software costs for external customers

  

 

(141,880

)

  

 

(104,609

)

  

 

(106,987

)

Payment for acquisitions of businesses, net of cash acquired

  

 

(406,578

)

  

 

(224,842

)

  

 

(88,764

)

Investments

  

 

(303,222

)

  

 

(72,571

)

  

 

136,726

 

    


  


  


Net cash used in investing activities

  

 

(851,680

)

  

 

(402,022

)

  

 

(59,025

)

    


  


  


CASH FLOWS FROM FINANCING ACTIVITIES:

                          

(Repayments of) proceeds from short-term borrowings—net

  

 

(12,286

)

  

 

93,075

 

  

 

(214,625

)

Proceeds from long-term debt

  

 

156,481

 

  

 

1,800

 

  

 

5,004

 

Repayments of long-term debt

  

 

(16,908

)

  

 

(8,113

)

  

 

(143,899

)

Issuance of common stock and treasury stock

  

 

11,420

 

  

 

15,053

 

  

 

20,576

 

Purchases of treasury stock

  

 

(33,578

)

  

 

—  

 

  

 

(9,884

)

Customer funds held and retirement account deposits

  

 

260,884

 

  

 

(104,696

)

  

 

(164,313

)

    


  


  


Net cash provided by (used in) financing activities

  

 

366,013

 

  

 

(2,881

)

  

 

(507,141

)

    


  


  


Change in cash and cash equivalents

  

 

91,151

 

  

 

37,232

 

  

 

18,302

 

Beginning balance

  

 

136,088

 

  

 

98,856

 

  

 

80,554

 

    


  


  


Ending balance

  

$

227,239

 

  

$

136,088

 

  

$

98,856

 

    


  


  


 

See notes to consolidated financial statements.

 


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

For the years ended December 31, 2002, 2001 and 2000

 

1.    Summary of Significant Accounting Policies

 

PRINCIPLES OF CONSOLIDATION

 

The consolidated financial statements include the accounts of Fiserv, Inc. and all majority owned subsidiaries (the “Company”). All significant intercompany transactions and balances have been eliminated in consolidation. Certain amounts reported in prior periods have been reclassified to conform to the 2002 presentation.

 

 

USE OF ESTIMATES

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

 

FAIR VALUES

 

The fair values of cash equivalents, accounts receivable, accounts payable, securities processing receivables and payables, customer funds held and retirement account deposits, short-term borrowings and accrued expenses approximate the carrying values due to the short period of time to maturity. The fair value of investments is determined based on quoted market prices. The fair value of long-term debt is estimated using discounted cash flows based on the Company’s current incremental borrowing rates and the fair value of derivative instruments is determined based on dealer quotes (see Note 3).

 

 

DERIVATIVE INSTRUMENTS

 

The Company uses interest rate swaps to hedge its exposure to interest rate changes. The Company’s accounting method for derivative financial instruments is based upon the designation of such instruments as cash flow hedges under accounting principles generally accepted in the United States of America and changes in the fair value are recognized in other comprehensive income until the hedged item is recognized in net income. It is the policy of the Company to execute such instruments with creditworthy banks and not to enter into derivative financial instruments for speculative purposes.

 

 

REVENUE RECOGNITION

 

Revenues from the sale of data processing services, plastic card services, document solutions, consulting and administration fees on trust accounts are recognized as the related services are provided or when the product is shipped. Revenues from the sale of securities processing services are recognized as securities transactions are processed on a trade-date basis. Revenues from securities processing and trust services include net investment income of $95.4 million, $101.6 million and $124.3 million, net of direct credits to customer accounts of $20.0 million, $45.2 million and $94.1 million in 2002, 2001 and 2000, respectively. Revenues from software license fees (representing approximately 6%, 8% and 8% of 2002, 2001 and 2000 processing and services revenues) are recognized when written contracts are signed, delivery of the product has occurred, the fee is fixed or determinable and collection is probable. Maintenance fee revenues are recognized ratably over the term of the related support period, generally 12 months.

 

 

CASH AND CASH EQUIVALENTS

 

Cash and cash equivalents consist of cash and investments with original maturities of 90 days or less.

 

 

SECURITIES PROCESSING RECEIVABLES AND PAYABLES

 

The Company’s securities processing subsidiaries had receivables from and payables to brokers or dealers and clearing organizations related to the following at December 31:

 

    

2002


  

2001


    

(In thousands)

RECEIVABLES:

             

Securities failed to deliver

  

$

90,965

  

$

39,611

Securities borrowed

  

 

904,045

  

 

706,918

Receivables from customers

  

 

683,854

  

 

649,252

Other

  

 

61,648

  

 

31,270

    

  

TOTAL

  

$

1,740,512

  

$

1,427,051

    

  

PAYABLES:

             

Securities failed to receive

  

$

79,259

  

$

50,563

Securities loaned

  

 

824,369

  

 

797,619

Payables to customers

  

 

624,099

  

 

354,515

Other

  

 

139,136

  

 

86,782

    

  

TOTAL

  

$

1,666,863

  

$

1,289,479

    

  

 

Securities failed to deliver and failed to receive represent the contract value of securities that have not been delivered or received as of the settlement date. Securities borrowed and loaned represent deposits made to or received from other broker-dealers. Receivables from and payables to customers represent amounts due or payable on cash and margin transactions.

 


 

INVESTMENTS

 

The Company’s trust administration subsidiaries accept money market deposits from trust customers and invest the funds in securities. Such amounts due trust depositors represent the primary source of funds for the Company’s investment securities and amounted to $1.7 billion and $1.4 billion as of December 31, 2002 and 2001, respectively. Investments in government agency and certain fixed income obligations had an average duration of approximately one year and six months at December 31, 2002. These investments are accounted for as held to maturity and are carried at amortized cost as the Company has the ability and intent to hold these investments to maturity.

 

Available for sale investments are carried at market, based upon quoted market prices. Unrealized gains or losses on available for sale investments are accumulated in shareholders’ equity as accumulated other comprehensive income, net of related deferred income taxes. Related gross unrealized gains were $65.6 million and $142.2 million as of December 31, 2002 and 2001, respectively. Realized gains or losses are computed based on specific identification of the investments sold.

 

The following summarizes the Company’s investments at December 31:

 

    

2002


  

2001


    

Carrying Value


  

Estimated Fair Value


  

Carrying Value


  

Estimated Fair Value


    

(In thousands)

U.S. Government and government agency obligations

  

$

1,488,361

  

$

1,512,466

  

$

986,531

  

$

998,026

Other fixed income obligations

  

 

232,334

  

 

242,498

  

 

600,156

  

 

613,621

    

  

  

  

Total held to maturity investments

  

 

1,720,695

  

 

1,754,964

  

 

1,586,687

  

 

1,611,647

Available for sale investments

  

 

95,723

  

 

95,723

  

 

145,417

  

 

145,417

Money market mutual funds

  

 

249,830

  

 

249,830

  

 

115,901

  

 

115,901

Other investments

  

 

49,530

  

 

49,530

  

 

37,058

  

 

37,058

    

  

  

  

TOTAL

  

$

2,115,778

  

$

2,150,047

  

$

1,885,063

  

$

1,910,023

    

  

  

  

 

 

PROPERTY AND EQUIPMENT

 

Property and equipment are stated at cost. Depreciation and amortization are computed primarily using the straight-line method over the estimated useful lives of the assets, ranging from three to 40 years. Property and equipment consist of the following at December 31:

 

    

2002


  

2001


    

(In thousands)

Data processing equipment

  

$

299,263

  

$

269,490

Buildings and leasehold improvements

  

 

123,553

  

 

104,309

Furniture and equipment

  

 

127,860

  

 

129,167

    

  

    

 

550,676

  

 

502,966

Less accumulated depreciation and amortization

  

 

327,606

  

 

301,993

    

  

TOTAL

  

$

223,070

  

$

200,973

    

  

 

 

INTANGIBLE ASSETS

 

Intangible assets consist of the following at December 31:

 

    

Gross Carrying Amount


  

Accumulated Amortization


  

Net Book Value


    

(In thousands)

2002

                    

Software development costs for external customers

  

$

362,558

  

$

245,981

  

$

116,577

Purchased software

  

 

145,486

  

 

90,333

  

 

55,153

Customer base

  

 

211,738

  

 

63,954

  

 

147,784

Other

  

 

27,288

  

 

4,188

  

 

23,100

    

  

  

TOTAL

  

$

747,070

  

$

404,456

  

$

342,614

    

  

  

    

Gross Carrying Amount


  

Accumulated Amortization


  

Net Book Value


    

(In thousands)

2001

                    

Software development costs for external customers

  

$

318,349

  

$

213,358

  

$

104,991

Purchased software

  

 

113,205

  

 

66,430

  

 

46,775

Customer base

  

 

116,531

  

 

55,267

  

 

61,264

Other

  

 

22,570

  

 

3,887

  

 

18,683

    

  

  

TOTAL

  

$

570,655

  

$

338,942

  

$

231,713

    

  

  

 


 

Software development costs for external customers include internally generated computer software for external customers and software acquired in conjunction with acquisitions of businesses. The Company capitalizes certain costs incurred to develop new software or enhance existing software which is marketed externally or utilized by the Company to process customer transactions in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed." Costs are capitalized commencing when the technological feasibility of the software has been established. Routine maintenance of software products, design costs and development costs incurred prior to establishment of a product's technological feasibility are expensed as incurred. Amortization of all software is computed on a straight-line basis over the expected useful life of the product, generally three to five years.

 

Gross software development costs for external customers capitalized for new products and enhancements to existing products totaled $44.9 million, $36.6 million and $34.0 million in 2002, 2001 and 2000, respectively. Amortization of previously capitalized development costs, included in depreciation and amortization, was $38.3 million, $35.5 million and $35.9 million in 2002, 2001 and 2000, resulting in net capitalized (amortized) development costs of $6.6 million, $1.1 million and $(1.9 million) in 2002, 2001 and 2000, respectively.

 

Customer base intangible assets represent customer contracts and relationships obtained as part of acquired businesses and are amortized using the straight-line method over their estimated useful lives, ranging from five to 20 years. Other intangible assets consist primarily of non-compete agreements, which are generally amortized over their estimated useful lives, and trade names that have been determined to have indefinite lives and therefore, as of January 1, 2002, are no longer amortized in accordance with the provisions of SFAS No. 142 "Goodwill and Other Intangible Assets."

 

Amortization expense for intangible assets was $74.8 million, $58.0 million and $65.9 million for the years ended December 31, 2002, 2001 and 2000, respectively. Aggregate amortization expense with respect to existing intangible assets with finite lives resulting from acquisitions of businesses should approximate $20.0 million annually.

 

 

GOODWILL

 

On January 1, 2002, the Company adopted SFAS No. 142, which requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. Accordingly, effective January 1, 2002, the Company discontinued the amortization of goodwill and intangible assets with indefinite lives. The Company completed its transitional impairment test for goodwill and intangible assets with indefinite lives and determined that no impairment exists. Pro forma net income and net income per share for the years ended December 31, 2001 and 2000, adjusted to eliminate historical amortization of goodwill and related tax effects, are as follows:

 

    

2001


  

2000


    

(In thousands, except per share data)

Reported net income

  

$208,217

  

$177,021

Add: goodwill amortization, net of tax

  

18,439

  

16,595

    
  

Pro forma net income

  

$226,656

  

$193,616

    
  

Reported net income per share:

         

Basic

  

$1.11

  

$0.96

Diluted

  

1.09

  

0.93

Pro forma net income per share:

         

Basic

  

$1.21

  

$1.05

Diluted

  

1.18

  

1.02

 

The excess of the purchase price over the estimated fair value of tangible and identifiable intangible assets acquired is recorded as goodwill. The changes in the carrying amount of goodwill by business segment during the year ended December 31, 2002 are as follows:

 

      

Financial Institution

Outsourcing,

Systems

and Services


  

Securities Processing and

Trust Services


  

All Other and Corporate


  

Total


      

(In thousands)

Balance, January 1, 2002

    

$884,417

  

$107,887

  

$29,830

  

$1,022,134

Goodwill additions

    

267,373

  

37,629

  

2,737

  

307,739

      
  
  
  

Balance, December 31, 2002

    

$1,151,790

  

$145,516

  

$32,567

  

$1,329,873

      
  
  
  

 

 

IMPAIRMENT OF LONG-LIVED ASSETS

 

The Company periodically assesses the likelihood of recovering the cost of long-lived assets based on current and projected operating results and cash flows of the related business operations using undiscounted cash flow analyses. These factors, along with management's plans with respect to the operations, are considered in assessing the recoverability of property and equipment and intangible assets subject to amortization. Measurement of any impairment loss is based on discounted operating cash flows. During 2000, the Company recorded a charge of $11.0 million for impairment of goodwill associated with

 


the consolidation of certain ancillary product lines in the Company’s software businesses. This charge was recorded in the Financial institution outsourcing, systems and services segment as additional amortization of intangible assets.

 

 

SHORT-TERM BORROWINGS

 

The Company’s securities and trust processing subsidiaries had short-term loans payable of $100.0 million and $112.8 million as of December 31, 2002 and 2001, respectively, with interest at an average rate of 1.9% and 1.8% as of December 31, 2002 and 2001, respectively, and were collateralized by investments and customers’ margin account securities.

 

 

INCOME TAXES

 

Deferred income taxes are provided for temporary differences between the Company’s income for accounting and tax purposes.

 

 

NET INCOME PER SHARE

 

Basic net income per share is computed using the weighted average number of common shares outstanding during the periods. Diluted net income per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the periods. Common equivalent shares consist of stock options and are computed using the treasury stock method. During the year ended December 31, 2002, the Company excluded 1.3 million shares under stock options from the calculation of common equivalent shares as the impact was anti-dilutive.

 

 

STOCK BASED COMPENSATION

 

The Company has accounted for its stock based compensation plans in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (see Note 5).

 

 

SHAREHOLDER RIGHTS PLAN

 

The Company has a shareholder rights plan. Under this plan, each shareholder holds one preferred stock purchase right for each outstanding share of the Company’s common stock held. The stock purchase rights are not exercisable until certain events occur.

 

 

ACCUMULATED OTHER COMPREHENSIVE INCOME

 

Accumulated other comprehensive income consisted of the following at December 31:

 

    

2002


    

2001


 
    

(In thousands)

 

Unrealized gains on investments

  

$  40,023

 

  

$86,780

 

Unrealized losses on cash flow hedges

  

(14,712

)

  

(7,969

)

Foreign currency translation adjustments

  

(1,429

)

  

(2,595

)

    

  

TOTAL

  

$  23,882

 

  

$76,216

 

    

  

 

 

SUPPLEMENTAL CASH FLOW INFORMATION

 

    

2002


  

2001


  

2000


    

(In thousands)

Interest paid

  

$

17,724

  

$

19,469

  

$

29,346

Income taxes paid

  

 

97,808

  

 

117,443

  

 

87,633

Liabilities assumed in acquisitions of businesses

  

 

29,033

  

 

68,833

  

 

401,129

 

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

Effective January 1, 2002, the Company adopted Emerging Issues Task Force (“EITF”) Issue No. 01-14, “Income Statement Characterization of Reimbursements Received for ‘Out of Pocket’ Expenses Incurred,” which requires that customer reimbursements received for direct costs paid to third parties and related expenses be characterized as revenue. Comparative financial statements for 2001 and 2000 have been reclassified to provide consistent presentation. In accordance with EITF No. 01-14, the Company has presented customer reimbursement revenue and expenses of $291.2 million, $262.2 million and $243.4 million for the years ended December 31, 2002, 2001 and 2000, respectively. Customer reimbursements represent direct costs paid to third parties primarily for postage and data communication costs. The adoption of EITF No. 01-14 did not impact the Company’s financial position, operating income or net income.

 

Effective January 1, 2002, the Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. The impact of adopting this statement did not have a material impact on the consolidated financial statements.

 


In June 2002, the Financial Accounting Standards Board issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes EITF No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The Company will adopt SFAS No. 146 on January 1, 2003 and does not anticipate that the adoption of this statement will have a material impact on the consolidated financial statements.

 

 

2.    Acquisitions

 

During 2002, 2001 and 2000 the Company completed the following acquisitions of businesses. The results of operations of all of these acquired businesses have been included in the accompanying consolidated statements of income from the dates of acquisition.

 

Company    


  

Month Acquired


  

Service


  

Consideration


2002:

              

Case Shiller Weiss, Inc.

  

May

  

Lending services

  

Cash for stock

Investec Ernst & Company’s clearing operations

  

Aug.

  

Securities clearing services

  

Cash for assets

Willis Group’s TPA operations

  

Nov.

  

Insurance data processing

  

Cash for assets

EDS Corporation’s Consumer Network Services business

  

Dec.

  

EFT data processing

  

Cash for assets

Lenders Financial Services

  

Dec.

  

Lending services

  

Cash for stock

2001:

              

Benefit Planners

  

Jan.

  

Insurance data processing

  

Cash and stock for stock

Marshall & Ilsley IP services

  

Feb.

  

Item processing

  

Cash for assets

Facilities and Services Corp.

  

Mar.

  

Insurance software systems

  

Cash for stock

Remarketing Services of America, Inc.

  

Mar.

  

Automobile leasing services

  

Cash for stock

EPSIIA Corporation

  

July

  

Data processing

  

Cash for stock

Catapult Technology Limited

  

July

  

Software and services

  

Cash for stock

FHLB of Pittsburgh IP services

  

Sept.

  

Item processing

  

Cash for assets

NCR bank processing operations

  

Nov.

  

Data and item processing

  

Cash for assets

NCSI

  

Nov.

  

Insurance data processing

  

Cash for stock

Integrated Loan Services

  

Nov.

  

Lending services

  

Cash for assets

Trewit Inc.

  

Nov.

  

Insurance data processing

  

Cash and stock for stock

FACT 400 credit card solution

  

Nov.

  

Software and services

  

Cash for assets

2000:

              

Patterson Press, Inc.

  

Jan.

  

Card services

  

Cash for stock

Resources Trust Company

  

May

  

Data processing for retirement planning

  

Cash for assets

National Flood Services, Inc.

  

Sept.

  

Insurance data processing

  

Cash for stock

 

During 2002, the Company completed five acquisitions accounted for as purchases. Net cash paid for these acquisitions was $366.9 million, subject to certain adjustments. Goodwill recorded in conjunction with all of these acquisitions was $290.6 million. Pro forma combined results of operations are not presented, other than in connection with the acquisition of EDS Corporation’s Consumer Network Services (“CNS”) business as shown below, since the results of operations as reported in the accompanying consolidated statements of income would not be materially different.

 

On December 5, 2002, the Company acquired CNS for $305.8 million, net of $17.4 million of cash acquired, subject to certain adjustments. The following unaudited pro forma combined information is provided for illustrative purposes only and should not be relied upon as necessarily being indicative of the historical results that would have been obtained if this acquisition had actually occurred during those periods, or the results that may be obtained in the future.

 

    

2002


  

2001


    

(In thousands, except per share data)

           

Processing and services revenues

  

$

2,417,542

  

$

2,105,061

Net income

  

 

268,756

  

 

214,504

Diluted net income per share—as reported

  

 

1.37

  

 

1.09

Pro forma diluted net income per share

  

 

1.38

  

 

1.12

 


 

At December 31, 2002, the preliminary purchase price allocation for the CNS acquisition resulted in goodwill of $218.2 million, other intangible assets of $55.9 million, tangible assets of $68.0 million and assumed liabilities of $18.9 million. The amounts allocated to intangible assets are based on preliminary conclusions resulting from an independent appraisal, which includes an analysis of the business and expected future cash flows.

 

During 2001, the Company completed 12 acquisitions accounted for as purchases. Net cash paid for these acquisitions was $224.8 million, subject to certain adjustments. In addition to cash consideration, the Company issued, in conjunction with two of the acquisitions, approximately 3.1 million unregistered shares of its common stock, valued at approximately $117.0 million. Goodwill recorded in conjunction with the 2001 acquisitions was $285.7 million.

 

During 2000, the Company completed three acquisitions accounted for as purchases. Net cash paid for these acquisitions was $88.8 million, subject to certain adjustments. Goodwill recorded in conjunction with the 2000 acquisitions was $52.0 million.

 

The Company may be required to pay additional cash and common stock consideration for acquisitions up to maximum payments of $243.2 million through 2006, if certain of the acquired entities achieve specific escalating operating income targets. During 2002, cash paid as a result of acquired entities achieving their targets was $39.7 million. Any additional consideration paid will be treated as additional purchase price.

 


 

3.    Long-term debt

 

The Company has available a $437.0 million unsecured line of credit and commercial paper facility with a group of banks, of which $393.3 million was in use at December 31, 2002, with a weighted average variable interest rate of 2.0%. The credit facilities, which expire in May 2004, consist of a $250.0 million five-year revolving credit facility and a $187.0 million 364-day revolving credit facility which is renewable annually through 2004. There were no significant commitment fees or compensating balance requirements under these facilities. The Company must, among other requirements, maintain a minimum net worth of $662.0 million as of December 31, 2002, maintain a fixed charge coverage ratio of 1.35 to one, and limit its total debt to no more than three and one-half times the Company’s earnings before interest, taxes, depreciation and amortization. The Company was in compliance with all debt covenants throughout 2002. As of December 31, 2002, the Company had interest rate swap agreements to fix the interest rates on certain floating rate debt at an average rate approximating 6.75% (based on current bank fees and spreads) for a principal amount of $200.0 million until 2005. The estimated fair value of the interest rate swap agreements is included on the accompanying consolidated balance sheets in accrued expenses.

 

As of December 31, 2002, the Company has available $35.0 million in additional unsecured lines of credit, of which $25.0 million was in use at an average variable rate of 1.7%.

 

The carrying value and estimated fair values of the Company’s long-term debt and interest rate swap agreements at December 31 are as follows:

 

    

2002


  

2001


    

Carrying Value


  

Estimated Fair Value


  

Carrying Value


  

Estimated Fair Value


    

(In thousands)

8.00% senior notes payable, due 2003–2005

  

$

38,571

  

$

42,068

  

$

51,428

  

$

56,871

Bank notes and commercial paper, at short-term rates

  

 

444,253

  

 

444,253

  

 

291,665

  

 

291,665

    

  

  

  

Total long-term debt

  

$

482,824

  

$

486,321

  

$

343,093

  

$

348,536

    

  

  

  

Interest rate swap agreements

  

$

24,116

  

$

24,116

  

$

13,062

  

$

13,062

    

  

  

  

 

Annual principal payments required under the terms of the long-term debt agreements were as follows at December 31, 2002:

 

      

Years ending December 31,


      

(In thousands)

2003

    

$204,087

2004

    

264,782

2005

    

13,893

2006

    

62

      

TOTAL

    

$482,824

      

 

 

4.    Income taxes

 

A reconciliation of recorded income tax expense with income tax computed at the statutory federal tax rates for the three years ended December 31 is as follows:

 

    

2002


    

2001


    

2000


 
    

(In thousands)

 

Statutory federal tax rate

  

 

35

%

  

 

35

%

  

 

35

%

Tax computed at statutory rate

  

$

152,702

 

  

$

121,460

 

  

$

105,012

 

State income taxes, net of federal effect

  

 

15,712

 

  

 

12,033

 

  

 

11,156

 

Non-deductible amortization expense

  

 

—  

 

  

 

4,219

 

  

 

3,887

 

Other—net

  

 

1,739

 

  

 

1,099

 

  

 

2,959

 

    


  


  


TOTAL

  

$

170,153

 

  

$

138,811

 

  

$

123,014

 

    


  


  


 

The provision for income taxes consisted of the following:

 

    

2002


    

2001


    

2000


 
    

(In thousands)

 

Current:

                          

Federal

  

$

116,021

 

  

$

105,081

 

  

$

98,630

 

State

  

 

21,564

 

  

 

18,118

 

  

 

16,295

 

Foreign

  

 

1,763

 

  

 

3,912

 

  

 

3,276

 

    


  


  


    

 

139,348

 

  

 

127,111

 

  

 

118,201

 

    


  


  


Deferred:

                          

Federal

  

 

29,386

 

  

 

11,067

 

  

 

5,090

 

State

  

 

2,226

 

  

 

948

 

  

 

388

 

Foreign

  

 

(807

)

  

 

(315

)

  

 

(665

)

    


  


  


    

 

30,805

 

  

 

11,700

 

  

 

4,813

 

    


  


  


TOTAL

  

$

170,153

 

  

$

138,811

 

  

$

123,014

 

    


  


  


 


Significant components of the Company’s deferred tax assets and liabilities consisted of the following at December 31:

 

    

2002


    

2001


 
    

(In thousands)

 

Purchased incomplete software technology

  

$

32,980

 

  

$

37,477

 

Accrued expenses not currently deductible

  

 

28,721

 

  

 

33,671

 

Deferred revenues

  

 

12,218

 

  

 

11,916

 

Unrealized losses on cash flow hedges

  

 

9,405

 

  

 

5,094

 

Net operating loss carryforwards

  

 

6,034

 

  

 

4,323

 

Other

  

 

5,202

 

  

 

5,519

 

    


  


Total deferred tax assets

  

 

94,560

 

  

 

98,000

 

    


  


Software development costs for external customers

  

 

(36,095

)

  

 

(31,641

)

Excess of tax over book depreciation and amortization

  

 

(60,665

)

  

 

(29,739

)

Unrealized gains on investments

  

 

(25,573

)

  

 

(55,467

)

Other

  

 

(18,354

)

  

 

(20,560

)

    


  


Total deferred tax liabilities

  

 

(140,687

)

  

 

(137,407

)

    


  


TOTAL

  

$

(46,127

)

  

$

(39,407

)

    


  


 

Tax benefits associated with the exercise of non-qualified employee stock options were credited directly to additional paid-in capital and amounted to $31.2 million, $15.0 million and $19.5 million in 2002, 2001 and 2000, respectively.

 

At December 31, 2002, the Company has state net operating loss carryforwards of $73.4 million, with expiration dates ranging from 2005 through 2022 and foreign net operating loss carryforwards of $4.2 million, with no expiration dates.

 

 

5.    Employee Benefit Plans

 

STOCK OPTION PLAN

 

The Company's Stock Option Plan (the “Plan”) provides for the granting to its employees and directors of either incentive or non-qualified options to purchase shares of the Company's common stock for a price not less than 100% of the fair value of the shares at the date of grant. In general, 20% of the options awarded under the Plan vest annually and expire 10 years from the date of the award. Changes in stock options outstanding are as follows:

 

      

Number of Shares (In thousands)


      

Weighted Average Exercise Price


Outstanding, December 31, 1999

    

13,594

 

    

$

11.26

Granted

    

1,792

 

    

 

21.48

Forfeited

    

(625

)

    

 

19.18

Exercised

    

(2,303

)

    

 

8.85

      

    

Outstanding, December 31, 2000

    

12,458

 

    

 

12.76

Granted

    

2,277

 

    

 

36.99

Forfeited

    

(387

)

    

 

18.18

Exercised

    

(1,345

)

    

 

8.68

      

    

Outstanding, December 31, 2001

    

13,003

 

    

 

17.18

Granted

    

1,519

 

    

 

41.21

Forfeited

    

(116

)

    

 

24.49

Exercised

    

(2,796

)

    

 

10.70

      

    

Outstanding, December 31, 2002

    

11,610

 

    

$

21.77

      

    

 

The number of shares under option that were exercisable at December 31, 2002, 2001 and 2000 were 8.1 million, 9.0 million and 8.2 million, at weighted average exercise prices of $16.69, $12.80 and $9.93, respectively. The following summarizes information about the Company's stock options outstanding and exercisable at December 31, 2002:

 

      

Options Outstanding


    

Options Outstanding

and Exercisable


Range of Exercise Prices

    

Number of Shares (In thousands)

    

Weighted Average Exercise Price

    

Weighted Average Remaining Contractual Life (in years)

    

Number of Shares (In thousands)

    

Weighted Average Exercise Price

      
    

    
    
    

$3.01—$10.67

    

3,347

    

$

7.86

    

2.6

    

3,347

    

$

7.86

10.89—20.14

    

3,185

    

 

17.30

    

5.5

    

2,784

    

 

17.13

20.38—37.04

    

3,591

    

 

30.50

    

7.7

    

1,659

    

 

29.19

37.21—45.99

    

1,487

    

 

41.59

    

9.1

    

303

    

 

41.56


    
    

    
    
    

$3.01—$45.99

    

11,610

    

$

21.77

    

5.8

    

8,093

    

$

16.69


    
    

    
    
    

 


 

At December 31, 2002, options to purchase 8.5 million shares were available for grant under the Plan. The Company has accounted for its stock-based compensation plans in accordance with the intrinsic value provisions of APB Opinion No. 25. Accordingly, the Company did not record any compensation expense in the accompanying consolidated financial statements for its stock-based compensation plans. Had compensation expense been recognized consistent with the fair value provisions of SFAS No.123, “Accounting for Stock-Based Compensation,” the Company’s net income and net income per share—basic and diluted would have been changed to the pro forma amounts indicated below for the years ended December 31:

 

    

2002


    

2001


    

2000


 
    

(In thousands, except per share data)

 

Net income:

                          

As reported

  

$

266,137

 

  

$

208,217

 

  

$

177,021

 

Less: stock compensation expense—net of tax

  

 

(18,200

)

  

 

(13,400

)

  

 

(9,700

)

    


  


  


Pro forma

  

$

247,937

 

  

$

194,817

 

  

$

167,321

 

    


  


  


Reported net income per share:

                          

Basic

  

$

1.39

 

  

$

1.11

 

  

$

0.96

 

Diluted

  

 

1.37

 

  

 

1.09

 

  

 

0.93

 

Pro forma net income per share:

                          

Basic

  

$

1.30

 

  

$

1.04

 

  

$

0.91

 

Diluted

  

 

1.27

 

  

 

1.02

 

  

 

0.88

 

 

The fair value of each stock option granted in 2002, 2001 and 2000 was estimated on the date of grant using the Black-Scholes pricing model with the following weighted average assumptions:

 

    

2002


      

2001


      

2000


 

Expected life (in years)

  

5.0

 

    

5.0

 

    

5.0

 

Risk-free interest rate

  

4.4

%

    

4.6

%

    

5.0

%

Volatility

  

50.0

%

    

49.8

%

    

48.6

%

Dividend yield

  

0.0

%

    

0.0

%

    

0.0

%

 

The weighted-average estimated fair value of stock options granted during the years ended December 31, 2002, 2001 and 2000 was $20.24, $18.02 and $10.72 per share, respectively.

 

 

EMPLOYEE STOCK PURCHASE PLAN

 

The Company’s employee stock purchase plan provides that eligible employees may purchase a limited number of shares of common stock each quarter through payroll deductions, at a purchase price equal to 85% of the closing price of the Company's common stock on the last business day of each calendar quarter. As of January 1, 2003, there were 1.0 million shares available for grant under this plan.

 

 

EMPLOYEE SAVINGS PLAN

 

The Company and its subsidiaries have defined contribution savings plans covering substantially all employees, under which eligible participants may elect to contribute a specified percentage of their salaries, subject to certain limitations. The Company makes matching contributions, subject to certain limitations, and makes discretionary contributions based upon the attainment of certain profit goals. Company contributions vest ratably at 20% for each year of service. Company contributions charged to operations under these plans approximated $41.5 million, $35.3 million and $30.4 million in 2002, 2001 and 2000, respectively.

 

 

6.    Restructuring and Other Charges

 

In the second quarter of 2001, the Company recorded $12.3 million of pre-tax charges consisting of severance and related termination benefits ($3.8 million), future lease and other contractual obligations ($6.2 million), and the disposal and write-down of assets ($2.3 million). These charges related to management’s plan to improve overall business efficiencies by consolidating the Company’s securities processing operations and eliminating duplicate operational functions. At December 31, 2002 and 2001, approximately $3.4 million and $6.2 million, respectively, of future lease and other obligations were yet to be incurred.

 


 

7.    Leases, other commitments and contingencies

 

LEASES

 

The Company leases certain office facilities and equipment under operating leases. Future minimum rental payments on operating leases with initial noncancellable lease terms in excess of one year were due as follows as of December 31, 2002:

 

    

Years Ending December 31,


    

(In thousands)

2003

  

$

86,304

2004

  

 

74,617

2005

  

 

61,214

2006

  

 

47,852

2007

  

 

33,958

Thereafter

  

 

69,263

    

TOTAL

  

$

373,208

    

 

Rent expense applicable to all operating leases was approximately $99.7 million, $87.1 million and $83.1 million during the years ended December 31, 2002, 2001 and 2000, respectively.

 

 

OTHER COMMITMENTS AND CONTINGENCIES

 

The Company's trust administration subsidiaries had fiduciary responsibility for the administration of approximately $26.0 billion in trust funds as of December 31, 2002. The Company’s securities processing subsidiaries are subject to the Uniform Net Capital Rule of the Securities and Exchange Commission. At December 31, 2002, the aggregate net capital of such subsidiaries was $86.7 million, exceeding the net capital requirement by $68.3 million.

 

In the normal course of business, the Company and its subsidiaries are named as defendants in various lawsuits in which claims are asserted against the Company. The Company has initiated legal action against E*TRADE Securities, Inc. (“E*TRADE”) as the result of E*TRADE refusing to accept delivery of a bond (with a carrying value of $27.0 million as of December 31, 2002) in violation of the terms of a contract between E*TRADE and a subsidiary of the Company. The Company intends to vigorously enforce its rights under the terms of its agreement with E*TRADE and expects to prevail and recover the carrying value of the bond. In the opinion of management, the liabilities, if any, which may ultimately result from such lawsuits are not expected to have a material adverse effect on the consolidated financial statements of the Company.

 


 

8.    Business Segment Information

 

The Company is a leading independent provider of data processing systems and related information management services and products to financial institutions and other financial intermediaries. The Company has three business segments based on the services provided by each: Financial institution outsourcing, systems and services; Securities processing and trust services; and All other and corporate. The Financial institution outsourcing, systems and services segment provides account and transaction processing solutions and services to financial institutions and other financial intermediaries. The Securities processing and trust services segment provides securities processing solutions and retirement plan administration services to brokerage firms, financial planners and financial institutions. The All other and corporate segment provides plastic card services and document solutions, and includes general corporate expenses. The plastic card and document solutions businesses provide plastic card issuance services, card design, personalization and mailing, along with electronic document delivery and print-related solutions.

 

Summarized financial information by business segment for each of the three years ended December 31 is as follows:

 

      

Financial Institution

Outsourcing,

Systems

and Services


  

Securities

Processing and

Trust Services


  

All Other

and Corporate


    

Total


      

(In thousands)

2002

                               

Processing and services revenues

    

$

1,956,449

  

$

228,201

  

$

92,992

 

  

$

2,277,642

Operating income

    

 

418,824

  

 

28,839

  

 

(4,624

)

  

 

443,039

Identifiable assets

    

 

2,100,894

  

 

4,071,403

  

 

266,408

 

  

 

6,438,705

Capital expenditures, including capitalization of software development costs for external customers

    

 

125,637

  

 

12,306

  

 

3,937

 

  

 

141,880

Depreciation and amortization expense

    

 

113,658

  

 

22,127

  

 

5,329

 

  

 

141,114

2001

                               

Processing and services revenues

    

$

1,581,216

  

$

259,437

  

$

86,377

 

  

$

1,927,030

Operating income

    

 

322,073

  

 

34,793

  

 

(3,169

)

  

 

353,697

Identifiable assets

    

 

1,655,071

  

 

3,410,914

  

 

256,257

 

  

 

5,322,242

Capital expenditures, including capitalization of software development costs for external customers

    

 

91,034

  

 

10,092

  

 

3,483

 

  

 

104,609

Depreciation and amortization expense

    

 

115,829

  

 

25,004

  

 

6,863

 

  

 

147,696

2000

                               

Processing and services revenues

    

$

1,276,254

  

$

325,839

  

$

83,690

 

  

$

1,685,783

Operating income

    

 

220,619

  

 

95,441

  

 

(1,754

)

  

 

314,306

Identifiable assets

    

 

1,185,819

  

 

4,160,939

  

 

239,562

 

  

 

5,586,320

Capital expenditures, including capitalization of software development costs for external customers

    

 

89,235

  

 

13,628

  

 

4,124

 

  

 

106,987

Depreciation and amortization expense

    

 

120,050

  

 

21,370

  

 

7,422

 

  

 

148,842

 

The Company’s domestic operations comprised approximately 95%, 92% and 93% of processing and services revenues for the years ended December 31, 2002, 2001 and 2000, respectively. No single customer accounted for more than 3% of consolidated processing and services revenues during the years ended December 31, 2002, 2001 and 2000.

 


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

 

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

 

Except for the historical information contained herein, the matters discussed in this Annual Report are forward-looking statements which involve risks and uncertainties, including but not limited to economic, competitive, governmental and technological factors affecting the Company’s operations, markets, services and related products, prices and other factors discussed in the Company’s prior filings with the Securities and Exchange Commission. Since these statements are subject to risks and uncertainties and are subject to change at any time, actual results could differ materially from expected results. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved.

 

 

CRITICAL ACCOUNTING POLICIES

 

The Company’s consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company’s management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The Company continually evaluates the accounting policies and estimates it uses to prepare the consolidated financial statements. The Company bases its estimates on historical experience and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates made by management.

 

The Company has identified that its accounting policy regarding intangible assets and goodwill is critical to the Company’s results of operations and financial position. The Company has reviewed the carrying value of goodwill and other intangible assets in connection with the implementation of SFAS No. 142 by comparing such amounts to their fair values. The Company determined that the carrying amounts of goodwill and other intangible assets did not exceed their respective fair values. The Company is required to perform this comparison at least annually or more frequently if circumstances indicate possible impairment. When determining fair value, the Company uses various assumptions, including projections of future cash flows. Given the significance of goodwill and other intangible asset balances, an adverse change to the fair value could result in an impairment charge, which could be material to the Company’s financial statements.

 

The Company does not participate in, nor has it created, any off-balance sheet special purpose entities or other off-balance sheet financing, other than operating leases. In addition, the Company does not enter into any derivative financial instruments for speculative purposes and uses derivative financial instruments primarily for managing its exposure to changes in interest rates.

 

 

MARKET RISK

 

Market risk refers to the risk that a change in the level of one or more market prices, interest rates, indices, correlations or other market factors, such as liquidity, will result in losses for a certain financial instrument or group of financial instruments. The Company is exposed primarily to interest rate risk and market price risk on investments and borrowings. The Company actively monitors these risks through a variety of control procedures involving senior management.

 

The Company’s trust administration subsidiaries accept money market account deposits from trust customers and invest those funds in marketable securities. Substantially all of the investments are rated within the highest investment grade categories for securities. The Company’s trust administration subsidiaries utilize simulation models for measuring and monitoring interest rate risk and market value of portfolio equities. A formal Asset Liability Committee of the Company meets quarterly to review interest rate risks, capital ratios, liquidity levels, portfolio diversification, credit risk ratings and adherence to investment policies and guidelines. Substantially all of the investments at December 31, 2002, have contractual maturities of one year or less except for government agency and certain fixed income mortgage backed obligations, which have an average duration of approximately one year and six months. The Company does not believe any significant change in interest rates would have a material impact on the consolidated financial statements.

 

The Company manages its debt structure and interest rate risk through the use of fixed and floating-rate debt and through the use of interest rate swaps. The Company uses interest rate swaps to partially hedge its exposure to interest rate changes, and to control its financing costs. Generally, under these swaps, the Company agrees with a counterparty to exchange the difference between fixed-rate and floating-rate interest amounts based on an agreed principal amount. While changes in interest rates could decrease the Company’s interest income or increase its interest expense, the Company does not believe that it has a material exposure to changes in interest rates, primarily due to $200.0 million of fixed interest rate swap agreements in place at December 31, 2002. Based on the Company’s current borrowings under its credit and commercial paper facility of $393.3 million, a 1% increase in the Company’s borrowing rate would increase annual interest expense related to the credit facility by $1.9 million. Based on the controls in place, management believes the risks associated with financial instruments at December 31, 2002, will not have a material effect on the Company’s consolidated financial position or results of operations.

 


 

RESULTS OF OPERATIONS

 

The Company is a leading independent provider of financial data processing systems and related information management services and products to financial institutions and other financial intermediaries. The Company’s operations have been classified into three business segments: Financial institution outsourcing, systems and services (“FIS”); Securities processing and trust services; and All other and corporate. The following table sets forth, for the period indicated, certain amounts included in the Company’s consolidated statements of income, the relative percentage that those amounts represent to processing and services revenues, and the percentage change in those amounts from period to period. This information should be read along with the Consolidated Financial Statements and Notes thereto. The following table and discussion exclude the revenues and expenses associated with customer reimbursements recorded in accordance with EITF No. 01-14 as explained in Note 1 of the accompanying consolidated financial statements.

 

    

Year ended December 31,

(In millions)


    

Percent of revenue

Year ended December 31,


  

Percent

Increase (Decrease)


 
    

2002


    

2001


    

2000


    

2002


  

2001


  

2000


  

2002 vs. 2001


    

2001 vs. 2000


 

Processing and services revenues:

                                                       

Financial institution outsourcing, systems
and services

  

$

1,956.4

 

  

$

1,581.2

 

  

$

1,276.3

 

  

86%

  

82%

  

76%

  

24%

 

  

24%

 

Securities processing and trust services

  

 

228.2

 

  

 

259.4

 

  

 

325.8

 

  

10%

  

13%

  

19%

  

(12%

)

  

(20%

)

All other and corporate

  

 

93.0

 

  

 

86.4

 

  

 

83.7

 

  

4%

  

5%

  

5%

  

8%

 

  

3%

 

    


  


  


  
  
  
  

  

TOTAL

  

$

2,277.6

 

  

$

1,927.0

 

  

$

1,685.8

 

  

100%

  

100%

  

100%

  

18%

 

  

14%

 

    


  


  


  
  
  
  

  

Cost of revenues:

                                                       

Salaries, commissions and payroll related costs

  

$

1,090.3

 

  

$

936.2

 

  

$

807.6

 

  

48%

  

49%

  

48%

  

16%

 

  

16%

 

Data processing costs and equipment rentals

  

 

165.3

 

  

 

148.5

 

  

 

132.5

 

  

7%

  

8%

  

8%

  

11%

 

  

12%

 

Other operating expenses

  

 

437.9

 

  

 

340.9

 

  

 

282.6

 

  

19%

  

18%

  

17%

  

28%

 

  

21%

 

Depreciation and amortization

  

 

141.1

 

  

 

147.7

 

  

 

148.8

 

  

6%

  

8%

  

9%

  

(4%

)

  

(1%

)

    


  


  


  
  
  
  

  

TOTAL

  

$

1,834.6

 

  

$

1,573.3

 

  

$

1,371.5

 

  

81%

  

82%

  

81%

  

17%

 

  

15%

 

    


  


  


  
  
  
  

  

Operating income:

                                                       

Financial institution outsourcing, systems

                                                       

and services (1)

  

$

418.8

 

  

$

322.1

 

  

$

220.6

 

  

21%

  

20%

  

17%

  

30%

 

  

46%

 

Securities processing and trust services (1)

  

 

28.8

 

  

 

34.8

 

  

 

95.4

 

  

13%

  

13%

  

29%

  

(17%

)

  

(64%

)

All other and corporate (2)

  

 

(4.6

)

  

 

(3.2

)

  

 

(1.8

)

                            
    


  


  


  
  
  
  

  

TOTAL

  

$

443.0

 

  

$

353.7

 

  

$

314.3

 

  

19%

  

18%

  

19%

  

25%

 

  

13%

 

    


  


  


  
  
  
  

  


(1)   Percent of segment revenues is calculated as a percent of FIS revenues and Securities processing and trust services revenues.
(2)   Percents not meaningful, amounts include corporate expenses.

 

 

PROCESSING AND SERVICES REVENUES

 

Total processing and services revenues increased $350.6 million, or 18%, in 2002 and $241.2 million, or 14%, in 2001. Revenue growth was derived from sales to new clients, existing client growth, cross-sales to existing clients, price increases and revenues from acquired companies. Revenue growth was positively impacted by revenue growth of $375.2 million in 2002 and $305.0 million in 2001 in the FIS segment. The FIS segment’s revenue growth in 2002 was negatively impacted by a decrease in European revenue of $36.0 million in 2002 compared to 2001 related to the Company’s international banking system primarily due to reduced customer spending on professional services. In addition, total revenue growth was negatively impacted by a decline in revenues of $31.2 million in 2002 and $66.4 million in 2001 in the Securities processing and trust services segment due to continued weakness in the United States retail financial markets. The internal revenue growth rate for the Company was approximately 4% in 2002 (excluding a business disposition and a $12.0 million customer termination fee in 2001).

 

 

COST OF REVENUES

 

Total cost of revenues increased $261.3 million, or 17%, in 2002 and $201.9 million, or 15%, in 2001. As a percent of processing and services revenues, cost of revenues were 81% in 2002, 82% in 2001 and 81% in 2000.

 

Cost of revenues, excluding depreciation and amortization, increased $267.9 million, or 19%, in 2002 and $203.0 million, or 17% in 2001. The increases in these cost of revenues is due primarily to acquired businesses and continued growth in the FIS segment. The make up of cost of revenues each year has been affected by business acquisitions and changes in the mix of the Company’s business. In 2001, the Company recorded charges of $12.3 million, as explained in Note 6 of the accompanying consolidated financial statements.

 

Depreciation and amortization expense decreased $6.6 million in 2002 and $1.1 million in 2001. The decrease in 2002 was primarily attributable to the adoption of SFAS No. 142 that resulted in a reduction of goodwill amortization expense of approximately $24.0 million in 2002, offset primarily by incremental depreciation and amortization expense from capital expenditures and other intangible assets subject to amortization. The decrease in 2001 was primarily due to an impairment charge of $11.0 million recorded in the FIS segment in 2000, offset by amortization associated with acquisitions and incremental depreciation expense on capital expenditures.

 


OPERATING INCOME

 

Operating income increased $89.3 million, or 25%, in 2002 and $39.4 million, or 13%, in 2001. Operating income in the FIS segment increased $96.8 million in 2002 and $101.5 million in 2001. The increase in operating income in 2002 compared to 2001 in the FIS segment was due to a number of factors, including revenue growth across its business lines, acquisitions and the elimination of goodwill amortization of approximately $20.0 million. Operating income in the Securities processing and trust services segment decreased $6.0 million in 2002 and $60.6 million in 2001, primarily due to continued weakness in the United States retail financial markets.

 

REALIZED GAIN FROM SALE OF INVESTMENT

 

During 2002, 2001 and 2000, the Company recorded a pre-tax realized gain from sale of investment of $2.4 milion, $5.4 million and $7.8 million, respectively.

 

INCOME TAX PROVISION

 

The effective income tax rate was 39% in 2002, 40% in 2001 and 41% in 2000. The effective income tax rate for 2002 declined from 2001 due to the impact of adopting SFAS No. 142. The income tax rate for 2003 is expected to remain at 39%.

 

NET INCOME

 

Net income for 2002 increased $57.9 million, or 28%, in 2002 and $31.2 million, or 18%, in 2001. Net income per share-diluted (excluding realized gain from sale of investment) for 2002 was $1.36 compared to $1.07 in 2001 and $0.91 in 2000. The impact of adopting SFAS No. 142 would have increased 2001 and 2000 net income per share-diluted (excluding realized gain from sale of investment) by approximately $0.09 per share each year due to the elimination of goodwill amortization.

 

The Company’s growth has been accomplished, to a significant degree, through the acquisition of businesses which are complementary to its operations. Management believes that a number of acquisition candidates are available which would further enhance the Company’s competitive position and plans to pursue them vigorously. Management is engaged in an ongoing program to reduce expenses related to acquisitions by eliminating operating redundancies. The Company’s approach has been to move slowly in achieving this goal in order to minimize the amount of disruption experienced by its clients and the potential loss of clients due to this program.

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

The following table summarizes the Company’s primary sources (uses) of funds during the years ended December 31:

 

    

2002


    

2001


    

2000


 
    

(In millions)

 

Cash provided by operating activities before changes in securities processing receivables and payables—net

  

$

512.9

 

  

$

363.7

 

  

$

368.8

 

Securities processing receivables and payables—net

  

 

63.9

 

  

 

78.4

 

  

 

215.7

 

    


  


  


Cash provided by operating activities

  

 

576.8

 

  

 

442.1

 

  

 

584.5

 

Capital expenditures

  

 

(141.9

)

  

 

(104.6

)

  

 

(107.0

)

Payment for acquisitions of businesses

  

 

(406.6

)

  

 

(224.8

)

  

 

(88.8

)

(Repayments of) proceeds from short-term borrowings—net

  

 

(12.3

)

  

 

93.1

 

  

 

(214.6

)

Proceeds from (repayments of) long-term debt—net

  

 

139.6

 

  

 

(6.3

)

  

 

(138.9

)

    


  


  


TOTAL

  

$

155.6

 

  

$

199.4

 

  

$

35.2

 

    


  


  


 

Cash flow from operations before securities processing receivables and payables increased 41% in 2002, reaching $512.9 million. At December 31, 2002, the Company had $482.8 million of long-term debt, while shareholders’ equity exceeded $1.8 billion. Long-term debt includes $393.3 million borrowed under the Company’s credit and commercial paper facility of which $143.3 million is payable under a 364-day agreement in 2003 and $250.0 million is payable in 2004 or earlier at the Company’s option. The Company expects to renew its 364-day agreement prior to expiration in the second quarter of 2003. At December 31, 2002, cash and cash equivalents were $227.2 million, an increase of $91.2 million from December 31, 2001, after spending $406.6 million on acquired businesses in 2002.

 

        At December 31, 2002, the Company’s remaining commitments consist primarily of operating leases for office facilities and equipment aggregating $373.2 million, of which $86.3 million will be incurred in 2003. The Company believes that its cash flow from operations together with other available sources of funds will be adequate to meet its operating requirements, debt repayments, contingent payments in connection with business acquisitions and ordinary capital spending needs. At December 31, 2002, the Company had $53.7 million available for borrowing and $227.2 million in cash and cash equivalents. In the event that the Company makes significant future acquisitions, however, it may raise funds through additional borrowings or the issuance of securities.

 

The Company’s current policy is to retain earnings to support future business opportunities, rather than to pay dividends. During 1999, the Company’s Board of Directors authorized the repurchase of up to 4.9 million shares of the Company’s common stock. Shares purchased under the authorization will be made through open market transactions that may occur from time to time as market conditions warrant. Shares acquired will be held for issuance in connection with acquisitions and employee stock option and purchase plans. As of December 31, 2002, approximately 1.7 million shares remained available under the repurchase authorization.

 


 

Selected Financial Data

 

The following data, which has been affected by acquisitions, should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this Annual Report.

 

    

Years ended December 31,


    

2002


  

2001


  

2000


  

1999


  

1998


    

(In thousands, except per share data)

Processing and services revenues

  

$

2,277,642

  

$

1,927,030

  

$

1,685,783

  

$

1,407,545

  

$

1,233,670

Income before income taxes

  

 

436,290

  

 

347,028

  

 

300,035

  

 

233,675

  

 

193,684

Income tax provision

  

 

170,153

  

 

138,811

  

 

123,014

  

 

95,807

  

 

79,410

Net income

  

 

266,137

  

 

208,217

  

 

177,021

  

 

137,868

  

 

114,274

Net income per share:

                                  

Basic

  

 

1.39

  

 

1.11

  

 

0.96

  

 

0.75

  

 

0.62

Diluted

  

 

1.37

  

 

1.09

  

 

0.93

  

 

0.73

  

 

0.60

Diluted (excluding realized gain from sale of investment)

  

 

1.36

  

 

1.07

  

 

0.91

  

 

0.73

  

 

0.60

Total assets

  

$

6,438,705

  

$

5,322,242

  

$

5,586,320

  

$

5,307,710

  

$

3,958,338

Long-term debt

  

 

482,824

  

 

343,093

  

 

334,958

  

 

472,824

  

 

389,622

Shareholders’ equity

  

 

1,827,669

  

 

1,604,826

  

 

1,252,072

  

 

1,091,016

  

 

885,797

 

 

MARKET PRICE INFORMATION

 

The following information relates to the closing price of the Company’s common stock, which is traded on the Nasdaq Stock Market under the symbol FISV. Information has been adjusted to recognize the three-for-two stock split effective August 2001.

 

    

2002


  

2001


Quarter Ended


  

High


  

Low


  

High


  

Low


March 31

  

$

46.60

  

$

39.88

  

$

38.00

  

$

29.58

June 30

  

 

46.08

  

 

35.16

  

 

42.65

  

 

30.29

September 30

  

 

39.25

  

 

28.08

  

 

42.12

  

 

32.72

December 31

  

 

35.04

  

 

22.60

  

 

44.39

  

 

31.93

 

At December 31, 2002, the Company’s common stock was held by 9,729 shareholders of record. It is estimated that an additional 38,000 shareholders own the Company’s stock through nominee or street name accounts with brokers. The closing sale price for the Company’s stock on January 23, 2003, was $32.68 per share.

 


 

QUARTERLY FINANCIAL INFORMATION (Unaudited)

 

    

Quarters


        
    

First


    

Second


    

Third


    

Fourth


    

Total


 
    

(In thousands, except per share data)

 

2002

      

Processing and services revenues

  

$

559,824

 

  

$

563,032

 

  

$

563,663

 

  

$

591,123

 

  

$

2,277,642

 

Cost of revenues

  

 

451,310

 

  

 

452,167

 

  

 

453,840

 

  

 

477,286

 

  

 

1,834,603