SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR QUARTER ENDED JUNE 30, 1998 COMMISSION FILE NUMBER 0-14948 FISERV, INC. ------------------------------------------------------- (Exact name of Registrant as specified in its charter) WISCONSIN 39-1506125 - ------------------------------- ----------------------------- (State or other jurisdiction of (I. R. S. Employer incorporation or organization) Identification No.) 255 FISERV DRIVE, BROOKFIELD, WI. 53045 - --------------------------------------- ------------ (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (414) 879 5000 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 ( ) At June 30, 1998, 81,936,000 shares of common stock of the Registrant were outstanding. Exhibit Index appears at page 8. 1 PART I. FINANCIAL INFORMATION FISERV, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME for the Three and Six-Month Periods Ended June 30, 1998 and 1997
Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 (In thousands except per share amounts) REVENUES $ 311,220 $ 238,386 $ 585,049 $ 466,705 ------------------------------------------------------ Cost of revenues: Salaries, commissions and payroll related costs 144,302 113,404 272,485 219,162 Data processing expenses, rentals and telecommunication costs 28,561 24,439 55,957 49,205 Other operating expenses 68,908 47,137 121,281 88,448 Depreciation and amortization of property and equipment 14,613 12,187 28,811 23,750 Amortization of intangible assets 3,867 3,545 7,331 7,190 Capitalization of internally generated computer software-net (1,853) (964) (3,022) (1,485) ------------------------------------------------------ Total cost of revenues 258,398 199,748 482,843 386,270 ------------------------------------------------------ OPERATING INCOME 52,822 38,638 102,206 80,435 Interest expense - net 4,228 3,341 7,595 6,828 ------------------------------------------------------ INCOME BEFORE INCOME TAXES 48,594 35,297 94,611 73,607 Income tax provision 19,924 14,472 38,791 30,179 ====================================================== NET INCOME $ 28,670 $ 20,825 $ 55,820 $ 43,428 ====================================================== NET INCOME PER SHARE: Basic $ 0.34 $ 0.27 $ 0.68 $ 0.56 ====================================================== Diluted $ 0.33 $ 0.26 $ 0.66 $ 0.55 ====================================================== Shares used in computing net income per share: Basic 83,124 77,781 81,848 77,199 ====================================================== Diluted 85,930 80,043 84,564 79,299 ======================================================
See notes to consolidated financial statements. 2 FISERV, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
JUNE 30, December 31, 1998 1997 --------------------------------- (In thousands) ASSETS Cash and cash equivalents 65,677 $ 89,377 Accounts receivable 214,904 197,771 Securities processing receivables 1,594,884 1,386,169 Prepaid expenses and other assets 92,390 91,278 Trust account investments 1,072,415 1,082,740 Other investments 135,642 125,999 Deferred income taxes 29,006 35,233 Property and equipment-net 158,779 149,055 Internally generated computer software-net 81,826 73,163 Identifiable intangible assets relating to acquisitions-net 48,392 50,426 Goodwill-net 436,806 355,280 ------------------------------- Total 3,930,721 $3,636,491 =============================== LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable 56,673 $ 53,828 Securities processing payables 1,363,737 1,184,277 Short-term borrowings 104,600 94,975 Accrued expenses 125,568 123,380 Accrued income taxes 9,329 8,436 Deferred revenues 97,333 67,569 Trust account deposits 1,073,781 1,082,740 Long-term debt 302,156 252,031 ------------------------------- TOTAL LIABILITIES 3,133,177 2,867,236 ------------------------------- SHAREHOLDERS' EQUITY: Common stock issued, 83,136,000 and 80,887,000 shares, respectively 831 809 Additional paid-in capital 442,493 427,515 Accumulated other comprehensive income: Unrealized gain on investments 16,394 16,442 Foreign currency translation adjustment 68 121 Accumulated earnings 380,188 324,368 Treasury shares, at cost (1,200,000 shares in 1998) (42,430) ------------------------------- TOTAL SHAREHOLDERS' EQUITY 797,544 769,255 ------------------------------- TOTAL 3,930,721 $3,636,491 ===============================
See notes to consolidated financial statements. 3 FISERV, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS for the Six-Month Periods Ended June 30, 1998 and 1997
Six Months Ended June 30, 1998 1997 ----------------------------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 55,820 $ 43,428 Adjustments to reconcile income to net cash provided by operating activities: Deferred income taxes 5,170 2,183 Depreciation and amortization of property and equipment 28,811 23,750 Amortization of intangible assets 7,331 7,190 Capitalization of internally generated computer software-net (3,022) (1,485) ----------------------------- 94,110 75,066 Cash provided (used) by changes in assets and liabilities, net of effects from acquisitions of businesses: Accounts receivable (563) (4,882) Prepaid expenses and other assets (1,227) (5,898) Accounts payable and accrued expenses (2,099) 6,639 Deferred revenue 16,245 7,821 Income taxes payable 4,013 (7,532) Securities processing receivables and payables - net (29,255) 24,459 ----------------------------- Net cash provided by operating activities 81,224 95,673 ----------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (31,391) (19,486) Investments and other assets (3,583) (67,550) Payment for acquisition of businesses (87,842) (10,715) Trust account investments 4,173 25,848 ----------------------------- Net cash provided (used) by investing activities (118,643) (71,903) ----------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase (decrease) in short-term obligations - net 9,625 (13,200) Increase (decrease) in long-term obligations - net 49,577 (19,522) Issuance of common stock 5,906 6,483 Purchases of treasury stock (42,430) Trust account deposits (8,959) (27,050) ----------------------------- Net cash provided (used) by financing activities 13,719 (53,289) ----------------------------- Change in cash (23,700) (29,519) Beginning balance 89,377 101,282 ----------------------------- Ending balance $ 65,677 $ 71,763 =============================
See notes to consolidated financial statements. 4 FISERV, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS 1. PRINCIPLES OF CONSOLIDATION The consolidated balance sheet as of June 30, 1998 and the related consolidated statements of income and cash flows for the three and six-month periods ended June 30, 1998 and 1997 are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of such 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 financial statements and notes of Fiserv, Inc. and subsidiaries (the Company). 2. ACQUISITIONS During the three months ended June 30, 1998, the Company completed three acquisitions including CUSA Technologies, Inc. and Network Data Processing Corporation which were accounted for as poolings of interests. Financial statements for prior periods have not been restated to include the operations of these two companies due to lack of materiality. 3. SHARES USED IN COMPUTING NET INCOME PER SHARE
Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 -------------------------------------- (In thousands) Weighted average number of common shares outstanding 83,124 77,781 81,848 77,199 Shares issuable upon exercise of options reduced by the number of shares which could have been purchased with the proceeds of such exercise 2,806 2,262 2,716 2,100 ------------------------------------- Shares used in computing diluted net income per share 85,930 80,043 84,564 79,299 =====================================
Basic income per share is computed using the weighted average number of shares outstanding during the periods. Diluted income per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the periods. 1997 shares outstanding have been restated to give affect to a three for two stock split issued May 29, 1998. 4. ACCOUNTING FOR INCOME TAXES Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating and tax credit carryforwards. Significant components of the Company's net deferred tax asset as of June 30, 1998 and December 31, 1997 are as follows:
JUNE 30, December 31, 1998 1997 --------------------------------- (in thousands) Allowance for doubtful accounts $2,027 $2,027 Accrued expenses not currently deductible 17,274 16,835 Deferred revenue 8,059 8,688 Other 1,876 230 Net operating loss and credit carryforwards 2,420 2,295 Purchased incomplete software technology 54,582 56,888 Deferred costs (4,588) (4,314) Internally generated capitalized software (33,549) (29,999) Excess of tax over book depreciation and amortization (7,702) (5,992) Unrealized gain on investments (11,393) (11,425) --------------------------------- Total deferred income taxes $29,006 $35,233 =================================
5 5. SUPPLEMENTAL CASH FLOW INFORMATION
Six Months Ended June 30, 1998 1997 ------------------------------------- (In thousands) Income taxes paid $31,003 $35,709 Interest paid 11,215 9,531 Liabilities assumed in acquisitions of businesses 30,273 8,639
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the relative percentage which certain items in the Company's consolidated statements of income bear to revenues and the percentage change in these items.
Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 ---------------------------------------------------------------------- (Percent of Revenues) Revenues 100.00% 100.00% 100.00% 100.00% ----------------------------------------------------------------------- Salaries and related costs 46.37 47.57 46.58 46.96 Data processing costs 9.18 10.25 9.56 10.54 Other operating expenses 22.14 19.77 20.73 18.95 Depreciation and amortization 4.70 5.11 4.93 5.09 Amortization of intangible assets 1.24 1.49 1.25 1.54 Capitalization of software-net (0.60) (0.40) (0.52) (0.32) ------------------------------- --------------------------------- Total cost of revenues 83.03 83.79 82.53 82.76 ------------------------------- --------------------------------- Operating income 16.97 16.21 17.47 17.24 =============================== =================================
REVENUES Revenues increased 30.6% from $238.4 million in the second quarter of 1997 to $311.2 million in the current second quarter and 25.4% from $466.7 million in the first six months of 1997 to $585.0 million in the comparable current period. Approximately 65% of the year to date growth resulted from the inclusion of revenues from the date of purchase of acquired companies and approximately 35% from increases in revenue from the addition of new clients, growth in the transaction volume experienced by existing clients and price increases. COST OF REVENUES Cost of revenues increased 29.4% from $199.7 million in the second quarter of 1997 to $258.4 million in the current second quarter, and 25.0% from $386.3 million in the first six months of 1997 to $482.8 million in the first six months of 1998. These increases were in line with increases in revenues during the periods. OPERATING INCOME Operating income increased 36.7% from $38.6 million in the second quarter of 1997 to $52.8 million in the current second quarter, and increased 27.1% from $80.4 million in the first six months of 1997 to $102.2 million in the first six months of 1998. As a percentage of revenues, operating margins were slightly higher during both the second quarter and first six months of 1998 when compared to the comparable prior year periods. 6 INTEREST EXPENSE - NET As a result of increased borrowings, interest expense increased $.9 million in the second quarter of 1998 and $.8 million for the first six months of 1998 when compared to amounts incurred for the comparable 1997 periods. INCOME TAX PROVISION Income taxes were computed at 41% in both 1998 and 1997. The 41% rate is expected to apply throughout the current year. NET INCOME Net income for the second quarter increased 38% from $20.8 million in 1997 to $28.7 million in 1998. Net income for the first six months increased 29% from $43.4 million in 1997 to $55.8 million in 1998. Net income per share-diluted for the second quarter was $.33 in 1998 compared to $.26 in 1997. Net income per share-diluted for the first six months of 1998 was $.66 compared to $.55 in the comparable 1997 period. The increases in net income per share-diluted for the second quarter and first six months of 1998 over the comparable 1997 periods amounted to $.07 and $.11, respectively. YEAR 2000 ISSUES The Company believes that its plan to address year 2000 issues is proceeding satisfactorily and continues to expect to incur charges approximating $15 million a year in 1998 and 1999 related to this issue. It is not anticipated that operating income as a percentage of revenues will be materially impacted by these charges. LIQUIDITY AND CAPITAL RESOURCES The following table summarizes the Company's primary sources of funds for the six months ended June 30, 1998 and 1997:
1998 1997 -------------------------------- (In thousands) Cash provided by operating activities before changes in securities processing receivables and payables - net 110,479 71,214 Securities processing receivables and payables - net (29,255) 24,459 --------------------------------- Cash provided by operating activities 81,224 95,673 Issuance (purchases) of common stock - net (36,524) 6,483 Decrease (increase) in investments (8,369) (68,752) Increase (decrease) in net borrowings 59,202 (32,722) --------------------------------- TOTAL 95,533 682 =================================
Long-term obligations amounted to $302.2 million at June 30, 1998. The majority of this debt comprises $106.1 million of senior notes due 1998 to 2005 and $171.8 million advanced under a $280 million unsecured line of credit and commercial paper facility expiring May 17, 2000. A facility fee of .1% to .2% per annum is required on the entire bank line regardless of usage. The Company has historically applied a significant portion of its cash flow from operating activities and proceeds of its common stock offerings and long-term borrowings to acquisitions. The Company believes that its cash flow from operating activities together with other available sources of funds will be adequate to meet its funding requirements. However, in the event that the Company makes significant future acquisitions, it may raise funds through additional borrowings or issuance of securities. 7 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Index to exhibits (11) Statement regarding computation of per share earnings (included on page 5, Part 1). (b) Reports on Form 8-K During the quarter ended June 30, 1998, the Registrant filed a report on Form 8-K dated May 8, 1998, regarding the exchange ratio applicable to the acquisition of CUSA Technologies, Inc., as of April 30, 1998. 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, 1998 by /s/ Edward P. Alberts -------------- ----------------------------------------- EDWARD P. ALBERTS Senior Vice President, Finance and Controller 8