FISERV, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the years ended December 31, 1994, 1993 and 1992 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. CASH AND CASH EQUIVALENTS Cash and cash equivalents comprise cash and investments with original maturities of 90 days or less and includes approximately $13,500,000 held by a consolidated subsidiary pursuant to regulatory requirements. PREPAID EXPENSES AND OTHER ASSETS Prepaid expenses and other assets at December 31, 1994 and 1993 include $7,723,000 and $4,597,000, respectively, relating to long-term contracts, the profit from which is being recognized ratably over the periods to be benefited. TRUST ACCOUNT DEPOSITS AND INVESTMENT SECURITIES The Company's trust administration subsidiary accepts money market deposits from its trust customers and invests the funds in securities. Such amounts due trust depositors represent the primary source of funds for the Company's investment securities and amounted to $809,324,000 and $663,426,000 in 1994 and 1993, respectively. The related investment securities comprised the following at December 31, 1994 and 1993: Principal Carrying Amount Value Market Value ---------------------------------------- 1994 U. S. Government and government agency obligations $478,711,000 $478,572,000 $460,452,000 Corporate bonds 51,840,000 51,836,000 51,373,000 Repurchase agreements 226,581,000 226,581,000 226,581,000 Other fixed income obligations 53,050,000 50,830,000 50,590,000 ---------------------------------------- Total $810,182,000 $807,819,000 $788,996,000 ======================================== 1993 U. S. Government and government agency obligations $357,975,000 $363,406,000 $364,778,000 Corporate bonds 36,975,000 37,390,000 37,253,000 Repurchase agreements 179,942,000 179,942,000 179,942,000 Other fixed income obligations 116,225,000 116,118,000 116,420,000 Premium amortization, etc. (863,000) 33,000 ---------------------------------------- Total $691,117,000 695,993,000 $698,426,000 ============= ============== Included in: Cash and cash equivalents 20,904,000 Other investments 13,780,000 ------------- Trust account investments $661,309,000 ============= Substantially all of the investments have contractual maturities of one year or less except for government agency obligations which generally contain provisions for interest rate resets. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation and amortization are computed using primarily the straight-line method over the estimated useful lives of the assets, ranging from 3 to 40 years: December 31, 1994 1993 -------------------------- Data processing equipment $119,197,000 $92,266,000 Purchased software 31,522,000 20,509,000 Buildings and leasehold improvements 35,326,000 32,635,000 Furniture and equipment 30,494,000 23,357,000 -------------------------- 216,539,000 168,767,000 Less accumulated depreciation and amortization 103,091,000 72,122,000 -------------------------- Total $113,448,000 $96,645,000 ========================== INTERNALLY GENERATED COMPUTER SOFTWARE Certain costs incurred to develop new software and enhance existing software are capitalized and amortized over the expected useful life of the product, generally five years. At December 31, 1994 and 1993, the unamortized portion of internally generated computer software costs amounted to $67,820,000 and $58,020,000, respectively; amortization of such costs charged to expense amounted to $16,655,000, $13,995,000, and $10,487,000 in 1994, 1993 and 1992, respectively. Routine maintenance of software products, design costs and development costs incurred prior to establishment of a product's technological feasibility are expensed as incurred. INTANGIBLE ASSETS Intangible assets relate to acquisitions and consist of the following at December 31: 1994 1993 -------------------------- Computer software acquired $5,565,000 $5,561,000 Non-competition agreements 19,370,000 25,841,000 Contract rights and other 30,150,000 22,880,000 -------------------------- 55,085,000 54,282,000 Less accumulated amortization 20,995,000 20,991,000 -------------------------- $34,090,000 $33,291,000 ========================== Goodwill $157,830,000 $133,963,000 Less accumulated amortization 10,144,000 6,118,000 -------------------------- $147,686,000 $127,845,000 ========================== The cost allocated to computer software acquired in corporate acquisitions is being amortized on a straight-line basis over its expected useful life (generally five years or less). In connection with certain acquisitions, the Company has entered into non-competition agreements with the sellers. The values assigned are being amortized on the straight-line method over the periods covered by the agreements (generally five years or less). Costs allocated to various customer data processing contracts at the dates of acquisition are being amortized on a straight-line basis over the remaining terms of the contracts (generally six years or less). The excess of the purchase price over the estimated fair value of tangible and identifiable intangible assets acquired has been recorded as goodwill and is being amortized over its estimated useful life of 40 years. INCOME TAXES The consolidated financial statements are prepared on the accrual method of accounting. Deferred income taxes are provided for temporary differences between the Company's income for accounting and tax purposes. REVENUE RECOGNITION Revenues result primarily from the sale of data processing services to financial institutions, software sales, and administration of self-directed retirement plans. Such revenues are recognized as the related services are provided. Revenues include investment income of $21,216,000, $12,286,000, and $10,308,000, net of direct credits to depositors accounts of $17,446,000, $13,216,000, and $16,576,000 in 1994, 1993 and 1992, respectively. Deferred revenues consist primarily of advance billings for services and are recognized as revenue when the services are provided. INCOME PER SHARE Income per common and common equivalent share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the periods, after giving effect to stock splits. SUPPLEMENTAL CASH FLOW INFORMATION 1994 1993 1992 ----------------------------------- Interest paid $ 8,387,000 $ 5,412,000 $5,003,000 Income taxes paid 10,073,000 6,544,000 7,466,000 Liabilities assumed in acquisitions of businesses 3,416,000 47,000,000 2,243,000 NOTE 2. ACQUISITIONS AND CAPITAL TRANSACTIONS ACQUISITIONS During 1994, 1993 and 1992 the Company completed the following acquisitions:
Date Company Acquired Type of Business Consideration - - - - - ----------------------------------------------------------------------------------------------- 1994: National Embossing Company, Inc. Apr. 19 Automated card services Cash for stock Boatmen's Information Systems May 2 Data processing Cash for assets data processing business Federal Home Loan Bank of Atlanta Aug. 19 Item processing Cash for assets item processing contracts Cincinnati Bell Information Systems Nov. 30 Image and document Cash for assets banking business management services RECOM Associates, Inc. Dec. 30 Network integration services Stock for stock 1993: Tomahawk Holding, Inc. and Feb. 10 Data processing for banks, Cash and stock its wholly-owned subsidiary thrifts and credit unions for stock Basis Information Technologies, Inc. IPC Service Corporation Mar. 2 Item processing Cash for assets EDS item processing May 17 Item processing Cash for assets contracts Datatronix Financial Services Jun. 25 Item processing Stock for stock Data Line Service Company Jul. 13 Data processing for thrifts Cash for stock Financial Processors, Inc. Nov. 8 Data processing for banks Cash for stock and Financial Data Systems Item processing Cash for assets Financial Institution Outsourcing Nov. 30 Data processing for banks Cash for assets and Data-Link Systems, Inc. Mortgage banking services Cash for stock 1992: Data Holdings, Inc. Feb. 10 Automated card services Cash for stock BMS On-Line Services, Inc., Feb. 28 Data processing Cash for assets selected assets First American Information Mar. 2 Data processing and item Cash for stock Services, Inc. processing Cadre, Inc. Jul. 1 Disaster recovery services Cash for stock Performance Analysis, Inc. Jul. 1 Software for banks Cash for stock Chase Manhattan Bank, Oct. 22 Software for banks Cash for assets REALM Software Dakota Data Processing, Inc. Dec. 1 Data processing Cash for stock Banking Group Services, Inc. Dec. 31 Item processing Stock for stock
Generally, the acquisitions were accounted for as purchases and, accordingly, the operations of the acquired companies are included in the consolidated financial statements since their respective dates of acquisition as set forth above. Certain of the acquisition agreements provide for additional cash payments contingent upon the attainment of specified revenue goals. STOCK PURCHASE AND STOCK OPTION PLANS The Company has a Restricted Stock Purchase Plan, a qualified Incentive Stock Option Plan and a Non- Qualified Stock Option Plan, each of which provide for grants of common stock to employees for a price not less than 100% of the fair value of the shares at the date of grant. There has been no recent activity in the Restricted Stock Purchase Plan. In general, 20% of the option shares awarded under the Incentive and Non-Qualified Stock Option Plans may be purchased annually and expire, generally, five to ten years from the date of the award. Plan activity during 1992, 1993 and 1994, adjusted for 3-for-2 splits effective in May 1993 and June 1992, is summarized as follows: Shares -------------------- Non- Price Incentive Qualified Range -------------------- Outstanding, December 31, 1991 1,750,887 5.04-12.45 Granted 751,747 15.22-16.00 Forfeited (85,392) Exercised (537,126) 5.04-10.37 -------------------- Outstanding, December 31, 1992 1,880,116 5.56-16.00 Granted 589,850 18.50-20.17 Assumed from Datatronix 76,895 66,415 1.63-7.10 Forfeited (32,550) Exercised (23,590) (277,027) 1.63-15.56 -------------------- Outstanding, December 31, 1993 53,305 2,226,804 1.63-20.17 Granted 559,497 20.00-22.50 Forfeited (3,380) (102,945) Exercised (19,505) (211,529) 1.63-18.50 -------------------- Outstanding, December 31, 1994 30,420 2,471,827 1.63-22.50 ==================== Shares exercisable, December 31, 1994 6,253 1,184,876 ==================== Options outstanding include 76,370 and 188,918 shares granted in 1993 and 1994 at $20.17 and $20.00 a share, respectively, under a stock purchase plan requiring exercise within 30 days after a two-year period beginning on the date of grant. NOTE 3. LONG-TERM DEBT AND OTHER OBLIGATIONS The Company has available a $125,000,000 unsecured line of credit and commercial paper facility with a group of banks maturing in 1999 of which $85,568,000 was in use at December 31, 1994 at an average rate of 6.17%. The loan agreements covering the Company's long-term borrowings contain certain restrictive covenants including, among other things, the maintenance of minimum net worth and various operating ratios with which the Company was in compliance at December 31, 1994. A facility fee ranging from .175% to .325% per annum is required on the entire bank line regardless of usage. The facility is reduced to $112,500,000 on September 30, 1997 and to $100,000,000 on September 30, 1998. Long-term debt and other obligations outstanding at the respective year-ends comprised the following: December 31, 1994 1993 -------------------------- 9.45% senior notes payable, due 1995-2000 $25,714,000 $30,000,000 9.75% senior notes payable, due 1995-2001 17,500,000 20,000,000 Bank notes and commercial paper 96,650,000 61,099,000 Other obligations 2,314,000 2,308,000 -------------------------- $142,178,000 $113,407,000 ========================== Other obligations relate to balances due under capital leases. Annual principal payments required under the terms of the long-term agreements were as follows at December 31, 1994: Year - - - - - ---------------------- 1995 $10,671,000 1996 9,992,000 1997 8,916,000 1998 7,302,000 1999 95,878,000 Thereafter 9,419,000 ------------ $142,178,000 ============ Interest expense with respect to long-term debt and other obligations amounted to $8,710,000, $5,737,000 and $5,018,000 in 1994, 1993 and 1992, respectively. NOTE 4. INCOME TAXES A reconciliation of recorded income tax expense with income tax computed at the statutory federal tax rates follows: 1994 1993 1992 ------------------------------------ Statutory federal tax rate 35% 35% 34% Tax computed at statutory rate $21,971,000 $17,509,000 $12,607,000 State income taxes net of federal effect 2,600,000 2,489,000 1,483,000 Tax exempt income (470,000) (326,000) (311,000) Other 1,009,000 (339,000) 311,000 ------------------------------------ Recorded income tax expense $25,110,000 $19,333,000 $14,090,000 ==================================== The provision for income taxes consisted of the following: 1994 1993 1992 ------------------------------------ Currently payable $11,937,000 $6,240,000 $6,990,000 Tax reduction credited to capital in excess of par value 800,000 1,300,000 1,700,000 Deferred 12,373,000 11,793,000 5,400,000 ------------------------------------ Total $25,110,000 $19,333,000 $14,090,000 ==================================== The approximate tax effects of temporary differences at December 31, 1994 and 1993 were as follows: 1994 1993 ---------------------------- Allowance for doubtful accounts $ 1,571,000 $ 595,000 Accrued expenses not currently deductible 11,392,000 10,362,000 Other 1,931,000 2,958,000 Net operating loss and tax credit carryforwards 5,901,000 4,597,000 Deferred costs (4,911,000) (2,762,000) Internally generated capitalized software (27,120,000) (22,064,000) Excess of tax over book depreciation and amortization (4,069,000) (2,933,000) Unrealized gain on investments (7,495,000) (6,153,000) ---------------------------- Total $(22,800,000) $(15,400,000) ============================ The net operating loss and tax credit carryforwards have expiration dates ranging from 1995 through 2009. NOTE 5. EMPLOYEE BENEFIT PROGRAMS The Company and its subsidiaries have contributory 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 also makes discretionary contributions based upon the attainment of certain profit goals. Company contributions vest at the rate of 20% for each year of service. Contributions charged to operations under these plans approximated $8,900,000, $6,346,000 and $5,381,000 in 1994, 1993 and 1992, respectively. NOTE 6. LEASES, OTHER COMMITMENTS AND CONTINGENCIES LEASES Future minimum rental payments, as of December 31, 1994, on various operating leases for office facilities and equipment were due as follows: 1995 $34,779,000 1996 29,138,000 1997 22,351,000 1998 17,402,000 1999 11,043,000 Thereafter 14,990,000 ------------ Total minimum payments $129,703,000 ============ Rent expense applicable to all operating leases was approximately $42,586,000, $45,224,000 and $33,859,000 in 1994, 1993 and 1992, respectively. OTHER COMMITMENTS AND CONTINGENCIES The Company's trust administration subsidiary had fiduciary responsibility for the administration of approximately $12.6 billion in trust funds as of December 31, 1994. With the exception of the trust account investments discussed in Note 1, such amounts are not included in the accompanying balance sheets. 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. 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 financial statements of the Company.