For the quarterly period ended June 30, 2004
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 


 

FORM 10-Q

 


 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the quarterly period ended June 30, 2004

 

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the transition period from              to             

 

Commission file number 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, WI   53045
(Address of principal executive office)   (Zip Code)

 

(262) 879-5000

(Registrant’s telephone number, including area code)

 


 

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

 

As of July 15, 2004, there were 195,281,162 shares of common stock, $.01 par value, of the Registrant outstanding.

 



Table of Contents

FISERV, INC. AND SUBSIDIARIES

 

INDEX

 

                  Page

   

PART I - FINANCIAL INFORMATION

   
        

Item 1.

  

Financial Statements

   
             

Condensed Consolidated Statements of Income

  3
             

Condensed Consolidated Balance Sheets

  4
             

Condensed Consolidated Statements of Cash Flows

  5
             

Notes to Condensed Consolidated Financial Statements

  6
         Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations   7
        

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

  11
        

Item 4.

  

Controls and Procedures

  11
   

PART II - OTHER INFORMATION

   
        

Item 1.

  

Legal Proceedings

  12
        

Item 2.

  

Changes in Securities and Use of Proceeds

  12
        

Item 6.

  

Exhibits and Reports on Form 8-K

  12
        

Signatures

  12
        

Exhibit Index

  13

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS

 

FISERV, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

 

     Three Months Ended
June 30,


   

Six Months Ended

June 30,


 
     2004

    2003

    2004

    2003

 

Revenues:

                                

Processing and services

   $ 855,917     $ 643,888     $ 1,695,903     $ 1,248,150  

Customer reimbursements

     90,103       79,503       187,597       162,234  
    


 


 


 


Total revenues

     946,020       723,391       1,883,500       1,410,384  
    


 


 


 


Cost of revenues:

                                

Salaries, commissions and payroll related costs

     336,207       306,301       677,007       601,130  

Customer reimbursement expenses

     90,103       79,503       187,597       162,234  

Data processing costs and equipment rentals

     56,858       51,614       112,126       103,995  

Other operating expenses

     254,620       113,930       494,720       208,986  

Depreciation and amortization

     47,952       39,983       94,910       77,382  
    


 


 


 


Total cost of revenues

     785,740       591,331       1,566,360       1,153,727  
    


 


 


 


Operating income

     160,280       132,060       317,140       256,657  

Interest expense - net

     (4,486 )     (3,474 )     (9,218 )     (6,451 )
    


 


 


 


Income before income taxes

     155,794       128,586       307,922       250,206  

Income tax provision

     60,760       50,148       120,090       97,580  
    


 


 


 


Net income

   $ 95,034     $ 78,438     $ 187,832     $ 152,626  
    


 


 


 


Net income per share:

                                

Basic

   $ 0.49     $ 0.41     $ 0.96     $ 0.79  
    


 


 


 


Diluted

   $ 0.48     $ 0.40     $ 0.95     $ 0.78  
    


 


 


 


Shares used in computing net income per share:

                                

Basic

     195,051       193,295       194,803       192,716  
    


 


 


 


Diluted

     197,379       195,811       197,221       195,279  
    


 


 


 


 

See notes to condensed consolidated financial statements.

 

3


Table of Contents

FISERV, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

(Unaudited)

 

    

June 30,

2004


  

December 31,

2003


Assets

             

Cash and cash equivalents

   $ 232,732    $ 202,768

Accounts receivable - net

     413,826      417,521

Securities processing receivables

     2,380,746      1,940,414

Prepaid expenses and other assets

     128,301      120,168

Investments

     2,188,878      1,904,161

Property and equipment - net

     201,295      206,076

Intangible assets - net

     537,070      557,822

Goodwill

     1,924,286      1,865,245
    

  

Total

   $ 8,007,134    $ 7,214,175
    

  

Liabilities and Shareholders’ Equity

             

Accounts payable

   $ 205,948    $ 179,184

Securities processing payables

     2,222,558      1,786,763

Short-term borrowings

     158,400      139,000

Accrued expenses

     275,755      303,765

Accrued income taxes

     37,587      23,313

Deferred revenues

     208,530      208,996

Customer funds held and retirement account deposits

     1,865,156      1,582,698

Deferred income taxes

     130,269      91,532

Long-term debt

     485,982      699,116
    

  

Total liabilities

     5,590,185      5,014,367
    

  

Shareholders’ equity:

             

Common stock issued, 195,272,000 and 194,260,000 shares, respectively

     1,953      1,943

Additional paid-in capital

     664,121      637,623

Accumulated other comprehensive income

     20,146      17,345

Accumulated earnings

     1,730,729      1,542,897
    

  

Total shareholders’ equity

     2,416,949      2,199,808
    

  

Total

   $ 8,007,134    $ 7,214,175
    

  

 

See notes to condensed consolidated financial statements.

 

4


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FISERV, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

    

Six Months Ended

June 30,


 
     2004

    2003

 

Cash flows from operating activities:

                

Net income

   $ 187,832     $ 152,626  

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

                

Deferred income taxes

     36,959       25,958  

Depreciation and amortization

     94,910       77,382  

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

                

Accounts receivable

     843       27,322  

Prepaid expenses and other assets

     (8,905 )     4,061  

Accounts payable and accrued expenses

     (12,347 )     (51,219 )

Deferred revenues

     466       (1,819 )

Accrued income taxes

     21,765       26,007  

Securities processing receivables and payables - net

     (4,537 )     (78,989 )
    


 


Net cash provided by operating activities

     316,986       181,329  
    


 


Cash flows from investing activities:

                

Capital expenditures, including capitalization of software costs for external customers

     (69,914 )     (80,888 )

Payment for acquisitions of businesses, net of cash acquired

     (40,918 )     (190,331 )

Investments

     (287,985 )     121,077  
    


 


Net cash used in investing activities

     (398,817 )     (150,142 )
    


 


Cash flows from financing activities:

                

Proceeds from short-term borrowings - net

     19,400       106,000  

Repayment of long-term debt - net

     (210,571 )     (234,499 )

Proceeds from issuance of long-term debt

     —         248,268  

Issuance of common stock

     20,508       10,583  

Customer funds held and retirement account deposits

     282,458       (97,629 )
    


 


Net cash provided by financing activities

     111,795       32,723  
    


 


Change in cash and cash equivalents

     29,964       63,910  

Beginning balance

     202,768       227,239  
    


 


Ending balance

   $ 232,732     $ 291,149  
    


 


 

See notes to condensed consolidated financial statements.

 

5


Table of Contents

FISERV, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Principles of Consolidation

 

The condensed consolidated financial statements for the three and six month periods ended June 30, 2004 and 2003 are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of such condensed consolidated financial statements have been included. Such adjustments consisted only of normal recurring items. Interim results are not necessarily indicative of results for a full year. The financial statements and notes are presented as permitted by Form 10-Q, and do not contain certain information included in the annual consolidated financial statements and notes of Fiserv, Inc. and subsidiaries (the “Company”). See the Company’s results by business segment in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

2. Stock-Based Compensation

 

The Company has accounted for its stock-based compensation plans in accordance with the intrinsic value provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Accordingly, the Company did not record any compensation expense in the condensed consolidated financial statements for its stock-based compensation plans. The following table illustrates the effect on net income and net income per share had compensation expense been recognized consistent with the fair value provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation”. The fair value of each option issued prior to January 1, 2004 was estimated on the date of grant using a Black-Scholes option-pricing model. For options issued on or after January 1, 2004, the fair value of each option was estimated on the date of grant using a binomial option-pricing model. Stock options are typically granted in the first quarter of the year, generally vest 20% on the date of grant and 20% each year thereafter and expire 10 years from the date of the award. As a result, the expense that would be recognized under SFAS No. 123 during the first quarter is higher than the expense for the remaining quarters.

 

     Three months ended
June 30,


   

Six months ended

June 30,


 
(In thousands, except per share data)    2004

    2003

    2004

    2003

 

Net income:

                                

As reported

   $ 95,034     $ 78,438     $ 187,832     $ 152,626  

Less: stock compensation expense — net of tax

     (4,200 )     (3,600 )     (9,700 )     (9,800 )
    


 


 


 


Pro forma

   $ 90,834     $ 74,838     $ 178,132     $ 142,826  
    


 


 


 


Reported net income per share:

                                

Basic

   $ 0.49     $ 0.41     $ 0.96     $ 0.79  

Diluted

     0.48       0.40       0.95       0.78  

Pro forma net income per share:

                                

Basic

   $ 0.47     $ 0.39     $ 0.91     $ 0.74  

Diluted

     0.46       0.38       0.90       0.73  

 

3. Shares Used in Computing Net Income Per Share

 

The computation of the number of shares used in calculating basic and diluted net income per share is as follows:

 

     Three months ended
June 30,


  

Six months ended

June 30,


(In thousands)    2004

   2003

   2004

   2003

Weighted-average common shares outstanding used for calculation of basic net income per share

   195,051    193,295    194,803    192,716

Employee stock options

   2,328    2,516    2,418    2,563
    
  
  
  

Total shares used for calculation of diluted net income per share

   197,379    195,811    197,221    195,279
    
  
  
  

Weighted-average shares under stock options excluded from the calculation of common equivalent shares as the impact was anti-dilutive

   4,300    3,400    2,200    3,500
    
  
  
  

 

6


Table of Contents

4. Comprehensive Income

 

Comprehensive income is comprised of net income, unrealized gains and losses on available-for-sale investment securities, foreign currency translation and fair market value adjustments on cash flow hedges and is as follows:

 

    

Three months ended

June 30,


  

Six months ended

June 30,


 
(In thousands)    2004

    2003

   2004

   2003

 

Net income

   $ 95,034     $ 78,438    $ 187,832    $ 152,626  

Components of comprehensive income - net

     (181 )     2,916      2,801      (6,650 )
    


 

  

  


Comprehensive income

   $ 94,853     $ 81,354    $ 190,633    $ 145,976  
    


 

  

  


 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Results of Operations

 

The Company is an independent provider of information management systems and services to the financial industry including transaction processing, business process outsourcing and software and systems solutions. The Company’s operations have been classified into four business segments: Financial outsourcing, systems and services (“Financial”); Health plan management services (“Health”); Investment support and securities processing services (“Investment Services”); and All other and corporate (“Other”).

 

The following tables and discussion exclude the revenues and expenses associated with customer reimbursements because management believes that it is not appropriate to include customer reimbursements in analyzing the current performance of the Company as these balances offset in revenues and expenses with no impact on operating income and these amounts are not an indicator of current or future business trends. Customer reimbursements, which primarily consist of pass-through expenses such as postage and data communication costs, were $90.1 million and $79.5 million for the three month periods ended June 30, 2004 and 2003 and $187.6 million and $162.2 million for the six month periods ended June 30, 2004 and 2003, respectively.

 

    

Three months ended

June 30,


   

Six months ended

June 30,


 
     (In millions)

   

Percentage

Increase
(Decrease)


    (In millions)

   

Percentage

Increase
(Decrease)


 
     2004

   2003

      2004

   2003

   

Processing and services revenues by segment:

                                          

Financial

   $ 551.1    $ 472.3     17 %   $ 1,096.1    $ 929.3     18 %

Health

     218.3      93.2     134 %     424.9      162.3     162 %

Investment Services

     57.5      55.1     4 %     116.5      110.2     6 %

Other

     29.0      23.3     25 %     58.5      46.3     26 %
    

  


 

 

  


 

Total

   $ 855.9    $ 643.9     33 %   $ 1,695.9    $ 1,248.2     36 %
    

  


 

 

  


 

Cost of revenues:

                                          

Salaries and payroll related costs

   $ 336.2    $ 306.3     10 %   $ 677.0    $ 601.1     13 %

Data processing costs

     56.9      51.6     10 %     112.1      104.0     8 %

Other operating expenses

     254.6      113.9     123 %     494.7      209.0     137 %

Depreciation and amortization

     48.0      40.0     20 %     94.9      77.4     23 %
    

  


 

 

  


 

Total

   $ 695.6    $ 511.8     36 %   $ 1,378.8    $ 991.5     39 %
    

  


 

 

  


 

Operating income by segment:

                                          

Financial

   $ 137.3    $ 117.4     17 %   $ 274.3    $ 224.9     22 %

Health

     18.7      10.9     71 %     38.1      23.0     65 %

Investment Services

     3.6      6.5     (45 )%     3.5      13.8     (75 )%

Other (1)

     0.7      (2.8 )           1.3      (5.0 )      
    

  


 

 

  


 

Total

   $ 160.3    $ 132.1     21 %   $ 317.1    $ 256.7     24 %
    

  


 

 

  


 


(1) Percents are not meaningful, amounts include corporate expenses.

 

7


Table of Contents
     Three months ended
June 30,


    Six months ended
June 30,


 
     2004

    2003

    2004

    2003

 

Cost of revenues as a percentage of total processing and services revenues:

                        

Salaries and payroll related costs

   39 %   48 %   40 %   48 %

Data processing costs

   7 %   8 %   7 %   8 %

Other operating expenses

   30 %   18 %   29 %   17 %

Depreciation and amortization

   6 %   6 %   6 %   6 %
    

 

 

 

Total

   81 %   79 %   81 %   79 %
    

 

 

 

Operating margin by segment:

                        

Financial (1)

   25 %   25 %   25 %   24 %

Health (1)

   9 %   12 %   9 %   14 %

Investment services (1)

   6 %   12 %   3 %   12 %
    

 

 

 

Total

   19 %   21 %   19 %   21 %
    

 

 

 


(1) Percent of segment processing and services revenues is calculated as a percentage of Financial revenues, Health revenues and Investment Services revenues.

 

Internal Revenue Growth

 

Internal revenue growth percentages are measured as the increase or decrease in total processing and services revenues for the current period less “acquired revenue from acquisitions” divided by total processing and services revenues from the prior year period plus “acquired revenue from acquisitions.” “Acquired revenue from acquisitions” represents pre-acquisition normalized revenue of acquired companies for the comparable prior year period. Internal revenue growth percentage is a non-GAAP financial measure that the Company believes is useful to investors because it provides an alternative to measure revenue growth excluding the impact of acquired revenues. The following tables set forth the calculation of internal revenue growth for the three and six month periods ended June 30, 2004:

 

     Three months ended June 30,

 
     (In millions)

   

2004

Internal
Growth %


   

2003

Internal
Growth %


 
     2004

   2003

   Increase
(Decrease)


     

Total Company

                                  

Processing and services revenues

   $ 855.9    $ 643.9    $ 212.0              

Acquired revenue from acquisitions

            129.9      (129.9 )            
    

  

  


 

 

Adjusted revenues

   $ 855.9    $ 773.7    $ 82.2     11 %   5 %
    

  

  


 

 

By Segment:

                                  

Financial

                                  

Processing and services revenues

   $ 551.1    $ 472.3    $ 78.8              

Acquired revenue from acquisitions

            77.8      (77.8 )            
    

  

  


 

 

Adjusted revenues

   $ 551.1    $ 550.1    $ 1.0     0 %   2 %
    

  

  


 

 

Health

                                  

Processing and services revenues

   $ 218.3    $ 93.2    $ 125.1              

Acquired revenue from acquisitions

            52.0      (52.0 )            
    

  

  


 

 

Adjusted revenues

   $ 218.3    $ 145.2    $ 73.1     50 %   27 %
    

  

  


 

 

Investment Services

                                  

Processing and services revenues

   $ 57.5    $ 55.1    $ 2.4     4 %   (8 )%
    

  

  


 

 

Other

                                  

Processing and services revenues

   $ 29.0    $ 23.3    $ 5.7     25 %   9 %
    

  

  


 

 

 

8


Table of Contents
     Six months ended June 30,

 
     (In millions)

   

2004

Internal
Growth %


   

2003

Internal
Growth %


 
     2004

   2003

   Increase
(Decrease)


     

Total Company

                                  

Processing and services revenues

   $ 1,695.9    $ 1,248.2    $ 447.8              

Acquired revenue from acquisitions

            288.4      (288.4 )            
    

  

  


 

 

Adjusted revenues

   $ 1,695.9    $ 1,536.6    $ 159.4     10 %   3 %
    

  

  


 

 

By Segment:

                                  

Financial

                                  

Processing and services revenues

   $ 1,096.1    $ 929.3    $ 166.8              

Acquired revenue from acquisitions

            158.9      (158.9 )            
    

  

  


 

 

Adjusted revenues

   $ 1,096.1    $ 1,088.2    $ 7.9     1 %   2 %
    

  

  


 

 

Health

                                  

Processing and services revenues

   $ 424.9    $ 162.3    $ 262.6              

Acquired revenue from acquisitions

            129.5      (129.5 )            
    

  

  


 

 

Adjusted revenues

   $ 424.9    $ 291.8    $ 133.0     46 %   23 %
    

  

  


 

 

Investment Services

                                  

Processing and services revenues

   $ 116.5    $ 110.2    $ 6.3     6 %   (9 )%
    

  

  


 

 

Other

                                  

Processing and services revenues

   $ 58.5    $ 46.3    $ 12.1     26 %   3 %
    

  

  


 

 

 

Processing and Services Revenues

 

Total processing and services revenues increased $212.0 million, or 33%, in the second quarter of 2004 compared to 2003 and $447.8 million, or 36%, in the first six months of 2004 compared to 2003. Internal revenue growth for the second quarter of 2004 was 11% and for the first six months of 2004 was 10% with the remaining growth resulting from acquisitions. Overall internal revenue growth was primarily derived from sales to new clients, cross-sales to existing clients and increases in transaction volumes from existing clients. The 2004 internal revenue growth rate was primarily driven by accelerating internal revenue growth in the Health segment’s pharmacy services businesses.

 

The Financial segment had positive revenue growth of $78.8 million, or 17%, in the second quarter of 2004 compared to 2003 and $166.8 million, or 18%, in the first six months of 2004 compared to 2003 primarily resulting from acquisitions. This segment’s 2004 second quarter internal revenue growth rate was negatively impacted by approximately 2% due to the combination of the loss of an item processing customer announced in 2003 and a decline in mortgage loan origination volumes in 2004 compared to 2003 in the Company’s Lending division.

 

The Health segment had positive revenue growth of $125.1 million, or 134%, in the second quarter of 2004 compared to 2003 and $262.6 million, or 162%, in the first six months of 2004 compared to 2003. $192.2 million of the total revenue growth for the first six months of 2004 for this segment was due to the inclusion in revenues and cost of revenues of the prescription ingredient cost related to the pharmacy services businesses. The Company entered the pharmacy services business in the second quarter of 2003 and the average operating margins of these businesses are in the mid single digits. The internal revenue growth rate in this segment for the second quarter of 2004 was 50% and for the first six months of 2004 was 46% and the remaining growth resulted from acquisitions.

 

Revenues in the Investment Services segment increased by $2.4 million, or 4%, in the second quarter of 2004 compared to 2003 and $6.3 million, or 6%, in the first six months of 2004 compared to 2003.

 

Revenues in the Other segment increased by $5.7 million, or 25%, in the second quarter of 2004 compared to 2003 and $12.1 million, or 26%, in the first six months of 2004 compared to 2003 due to strong internal revenue growth in the Company’s plastic card service operation through a combination of new sales and cross sales to existing customers.

 

Cost of Revenues

 

Total cost of revenues increased $183.8 million, or 36%, in the second quarter of 2004 compared to 2003 and $387.3 million, or 39%, in the first six months of 2004 compared to 2003. As a percent of processing and services revenues, cost of revenues were 81% for the first six months of 2004 compared to 79% in 2003. The components of cost of revenues each year has been affected by business acquisitions and changes in the mix of the Company’s business, including the significant impact of the pharmacy services businesses.

 

As a percentage of revenues, salaries and payroll related costs and data processing costs decreased, and other operating expenses increased in 2004 compared to the prior year due primarily to growth in the Health segment’s pharmacy services businesses. The pharmacy services businesses have a very high proportion of costs related to the ingredient cost of the prescription approximating $204.4 million and $12.2 million for the six months ended June 30, 2004 and 2003, respectively, which is included in revenues and other operating expenses.

 

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Operating income

 

Operating income increased $28.2 million, or 21%, in the second quarter of 2004 compared to 2003 and $60.5 million, or 24%, in the first six months of 2004 compared to 2003. The operating income increases were primarily derived from the Financial and Health segments.

 

The increase in operating income in the Financial segment was $19.9 million, or 17%, in the second quarter of 2004 compared to 2003 and $49.4 million, or 22%, in the first six months of 2004 compared to 2003. In 2004, the Financial segment’s year to date operating results continued to benefit from strong revenue growth of 18% and an operating margin of 25%.

 

The increase in the Health segment’s operating income was $7.8 million, or 71%, in the second quarter of 2004 compared to 2003 and $15.1 million, or 65%, in the first six months of 2004 compared to 2003 due to strong revenue growth, partially offset by a decrease in operating margins. Operating margins decreased from 14% in the first six months of 2003 to 9% in 2004 due primarily to lower operating margins associated with the pharmacy services businesses discussed previously.

 

The Investment Services segment’s operating income decreased by $2.9 million in the second quarter of 2004 compared to 2003 and decreased $10.3 million in the first six months of 2004 compared to 2003. The 2004 year to date decrease compared to 2003 was primarily due to a $6.0 million charge in the first quarter of 2004 and additional expenses in the second quarter, primarily outside legal fees, associated with the Company’s broker-dealer subsidiary, Fiserv Securities, Inc. (“FSI”). FSI has been responding to inquiries from the Securities and Exchange Commission (“SEC”) as part of its industry-wide review of mutual fund trading practices, including market timing and late trading. FSI estimates cumulative revenues associated with such practices at approximately $4.6 million. Although the Company is unable to predict the ultimate outcome of these matters, if the SEC were to assert a violation of securities laws with respect to these matters, then FSI may be subject to fines and penalties and other administrative remedies which could have a material adverse impact on the Company’s quarterly operating results.

 

Income Tax Provision

 

The effective income tax rate was 39% in 2004 and 2003.

 

Net Income Per Share - Diluted

 

Net income per share-diluted for the second quarter was $0.48 in 2004 compared to $0.40 in 2003. Net income per share-diluted for the first six months of 2004 was $0.95 compared to $0.78 in the comparable 2003 period.

 

Liquidity and Capital Resources

 

Free cash flow is measured as net cash provided by operating activities before changes in securities processing receivables and payables less capital expenditures including capitalization of software costs for external customers, as reported in the Company’s condensed consolidated statements of cash flows. As the changes in securities processing receivables and payables are generally offset by changes in short-term borrowings and investments, which are included in financing and investing activities, management believes it is more meaningful to analyze changes in operating cash flows before the changes in securities processing receivables and payables. Free cash flow is a non-GAAP financial measure that the Company believes is useful to investors because it provides another measure of available cash flow after the Company has satisfied the capital requirements of its operations. The following table summarizes free cash flow for the Company:

 

     Six months ended
June 30,


 
(In millions)    2004

    2003

 

Net cash provided by operating activities

   $ 317.0     $ 181.3  

Changes in securities processing receivables and payables-net

     4.5       79.0  
    


 


Net cash provided by operating activities before changes in securities processing receivables and payables-net

     321.5       260.3  

Capital expenditures, including capitalization of software costs for external customers

     (69.9 )     (80.9 )
    


 


Free cash flow

   $ 251.6     $ 179.4  
    


 


 

Free cash flow increased by $72.2 million, or 40%, in the first six months of 2004 compared to 2003 primarily due to an increase in net income of $35.2 million, an increase of $17.5 million in depreciation and amortization, and a decrease in capital expenditures of $11.0 million. The Company’s working capital changes, excluding securities processing receivables and payables, had a positive impact on free cash flow of $1.8 million in 2004 compared to $4.4 million in 2003. In 2004, the Company primarily used its free cash flow of $251.6 million to repay long-term debt of $210.6 million. In addition, gross software development costs for external customers capitalized in the first six months of 2004 were $24.1 million, offset by associated amortization of $30.3 million.

 

Effective March 31, 2004, the Company entered into a new credit facility to replace its existing credit facility that was due in May of 2004. The new credit facility totaling $700.0 million is comprised of a $465.3 million five-year revolving credit facility due in 2009 and a $234.7 million 364-day revolving credit facility which is renewable annually through 2009. Long-term debt includes $189.8 million borrowed under the credit facility at June 30, 2004. The Company must, among other requirements, maintain a minimum net worth of $1.8 billion as of June 30, 2004 and limit its total debt to no more than three and one-half times the Company’s earnings before interest, taxes, depreciation and amortization. At June 30, 2004, the Company had $486.0 million of long-term debt, while shareholders’ equity was $2.4 billion. The Company was in compliance with all covenants as of June 30, 2004.

 

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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. In the event the Company makes significant future acquisitions, however, it may raise funds through additional borrowings or the issuance of securities.

 

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

 

Certain matters discussed herein are “forward-looking statements” intended to qualify for the safe harbor 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 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, regulatory 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. The Company assumes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference to Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 and have not materially changed since that report was filed.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of disclosure controls and procedures.

 

In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), the Company’s management evaluated, with the participation of the Company’s management, including the 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) as of June 30, 2004. Based upon their evaluation of these disclosure 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 June 30, 2004 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 quarterly report on Form 10-Q was being prepared.

 

Changes in internal controls over financial reporting.

 

There was no change in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2004 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

See Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of inquiries from the Securities and Exchange Commission regarding Fiserv Securities, Inc.

 

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

 

In 1999, the Company’s Board of Directors authorized the repurchase of up to 4,875,000 shares of the Company’s common stock. The Company did not repurchase any shares under the authorization during the quarter ended June 30, 2004. As of June 30, 2004, the Company had authority to repurchase 1,676,000 shares under that program. The repurchase authorization does not expire.

 

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

 

  (a) Exhibits

 

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

 

  (b) Reports on Form 8-K

 

The Company filed a report on Form 8-K under Items 7 and 12, dated April 21, 2004, reporting the announcement of the Company’s earnings for the quarter ended March 31, 2004.

 

SIGNATURES

 

Pursuant to the requirements 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.

 

    Fiserv, Inc.
    (Registrant)
Date: July 21, 2004   By:  

/s/ Kenneth R. Jensen


        KENNETH R. JENSEN
        Senior Executive Vice President, Chief
        Financial Officer, Treasurer and Assistant
        Secretary

 

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EXHIBIT INDEX

 

Exhibit

Number


 

Exhibit Description


31.1   Certification of the Chief Executive Officer, dated July 21, 2004
31.2   Certification of the Chief Financial Officer, dated July 21, 2004
32.1   Written Statement of the Chief Executive Officer, dated July 21, 2004
32.2   Written Statement of the Chief Financial Officer, dated July 21, 2004

 

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Section 302 CEO Certification

EXHIBIT 31.1

 

CERTIFICATIONS

 

I, Leslie M. Muma, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Fiserv, Inc.;

 

2. Based on my knowledge, this 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 quarterly report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this 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 quarterly report;

 

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

 

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 quarterly report is being prepared;

 

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: July 21, 2004   By:  

/s/ Leslie M. Muma


        LESLIE M. MUMA
        President and Chief Executive Officer
Section 302 CFO Certification

EXHIBIT 31.2

 

CERTIFICATIONS

 

I, Kenneth R. Jensen, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Fiserv, Inc.;

 

2. Based on my knowledge, this 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 quarterly report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this 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 quarterly report;

 

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

 

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 quarterly report is being prepared;

 

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: July 21, 2004   By:  

/s/ Kenneth R. Jensen


        KENNETH R. JENSEN
        Senior Executive Vice President, Chief
        Financial Officer, Treasurer and Assistant
        Secretary
Section 906 CEO Certification

EXHIBIT 32.1

 

Written Statement of the Chief Executive Officer

Pursuant to 18 U.S.C. Section 1350

 

Solely for the purposes of complying with 18 U.S.C. Section 1350, I, the undersigned President and Chief Executive Officer of Fiserv, Inc. (the “Company”), hereby certify that the Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2004 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

By:  

/s/ Leslie M. Muma


    LESLIE M. MUMA
    July 21, 2004
Section 906 CFO Certification

EXHIBIT 32.2

 

Written Statement of the Chief Financial Officer

Pursuant to 18 U.S.C. Section 1350

 

Solely for the purposes of complying with 18 U.S.C. Section 1350, I, the undersigned Senior Executive Vice President, Chief Financial Officer, Treasurer and Assistant Secretary of Fiserv, Inc. (the “Company”), hereby certify that the Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2004 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

By:  

/s/ Kenneth R. Jensen


    KENNETH R. JENSEN
    July 21, 2004