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 SEPTEMBER 30, 1998 COMMISSION FILE NUMBER 0-14948
FISERV, INC.
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(Exact name of Registrant as specified in its charter)
WISCONSIN 39-1506125
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(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 September 30, 1998, 81,974,000 shares of common stock of the Registrant were
outstanding.
Exhibit Index appears at page 9.
1
PART I. FINANCIAL INFORMATION
FISERV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
for the Three and Nine-Month Periods Ended September 30, 1998 and 1997
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
(In thousands except per share amounts)
REVENUES $309,543 $238,255 $894,592 $704,960
------------------------------------------------------------------------
Cost of revenues:
Salaries, commissions and payroll
related costs 143,026 109,351 415,511 328,513
Data processing expenses, rentals
and telecommunication costs 28,729 25,134 84,686 74,339
Other operating expenses 67,769 46,619 189,050 135,067
Depreciation and amortization of
property and equipment 15,131 12,264 43,942 36,014
Amortization of intangible assets 4,005 3,437 11,336 10,627
Capitalization of internally generated
computer software-net (2,051) (553) (5,073) (2,038)
------------------------------------------------------------------------
Total cost of revenues 256,609 196,252 739,452 582,522
------------------------------------------------------------------------
OPERATING INCOME 52,934 42,003 155,140 122,438
Interest expense - net 3,998 2,701 11,593 9,529
------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 48,936 39,302 143,547 112,909
Income tax provision 20,063 16,114 58,854 46,293
========================================================================
NET INCOME $28,873 $23,188 $84,693 $66,616
========================================================================
NET INCOME PER SHARE:
Basic $0.35 $0.30 $1.03 $0.86
========================================================================
Diluted $0.34 $0.29 $1.00 $0.83
========================================================================
Shares used in computing net income per share:
Basic 81,957 78,600 81,884 77,789
========================================================================
Diluted 84,938 81,092 84,688 79,898
========================================================================
See notes to consolidated financial statements.
2
FISERV, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, December 31,
1998 1997
------------------------------------
(In thousands)
ASSETS
Cash and cash equivalents $ 87,802 $89,377
Accounts receivable 238,402 197,771
Securities processing receivables 1,554,253 1,386,169
Prepaid expenses and other assets 90,509 91,278
Trust account investments 1,213,199 1,082,740
Other investments 143,955 125,999
Deferred income taxes 29,470 35,233
Property and equipment-net 167,546 149,055
Internally generated computer software-net 83,519 73,163
Identifiable intangible assets relating
to acquisitions-net 46,828 50,426
Goodwill-net 441,750 355,280
-------------------------------------
Total $4,097,233 $3,636,491
=====================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 56,652 $53,828
Securities processing payables 1,371,904 1,184,277
Short-term borrowings 33,850 94,975
Accrued expenses 144,378 123,380
Accrued income taxes 20,776 8,436
Deferred revenues 95,011 67,569
Trust account deposits 1,214,599 1,082,740
Long-term debt 333,632 252,031
-------------------------------------
TOTAL LIABILITIES 3,270,802 2,867,236
-------------------------------------
SHAREHOLDERS' EQUITY:
Common stock issued, 83,174,000 and
80,887,000 shares, respectively 832 809
Additional paid-in capital 442,417 427,515
Accumulated earnings 409,061 324,368
Accumulated other comprehensive income 16,551 16,563
Treasury shares, at cost (1,200,000 shares) (42,430)
-------------------------------------
TOTAL SHAREHOLDERS' EQUITY 826,431 769,255
=====================================
TOTAL $4,097,233 $3,636,491
=====================================
See notes to consolidated financial statements.
3
FISERV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Nine-Month Periods Ended September 30, 1998 and 1997
Nine Months Ended
September 30,
1998 1997
-----------------------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $84,693 $66,616
Adjustments to reconcile income to net cash provided
by operating activities:
Deferred income taxes 3,152 2,465
Depreciation and amortization of property and equipment 43,942 36,014
Amortization of intangible assets 11,336 10,627
Capitalization of internally generated computer software-net (5,073) (2,038)
-----------------------------------
138,050 113,684
Cash provided (used) by changes in assets and liabilities,
net of effects from acquisitions of businesses:
Accounts receivable (24,522) 3,793
Prepaid expenses and other assets 2,626 (2,486)
Accounts payable and accrued expenses 17,392 7,453
Deferred revenue 13,943 7,462
Income taxes payable 15,595 513
Securities processing receivables and payables - net 19,543 27,075
-----------------------------------
Net cash provided by operating activities 182,627 157,494
-----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (52,978) (29,712)
Investments and other assets (11,913) (80,627)
Payment for acquisition of businesses (98,791) (22,106)
Trust account investments (136,622) (3,226)
-----------------------------------
Net cash provided (used) by investing activities (300,304) (135,671)
-----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term obligations - net (61,125) (10,000)
Increase (decrease) in long-term obligations - net 81,216 (51,588)
Issuance of common stock 6,581 8,592
Purchases of treasury stock (42,430)
Trust account deposits 131,860 2,127
-----------------------------------
Net cash provided (used) by financing activities 116,102 (50,869)
-----------------------------------
Change in cash (1,575) (29,046)
Beginning balance 89,377 101,282
===================================
Ending balance $87,802 $72,236
===================================
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 September 30, 1998 and the related
consolidated statements of income and cash flows for the three and nine-month
periods ended September 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 nine months ended September 30, 1998, the Company completed seven
acquisitions including three which were accounted for as poolings of interests.
Financial statements for prior periods have not been restated to include the
operations of these three pooled companies due to lack of materiality.
3. SHARES USED IN COMPUTING NET INCOME PER SHARE
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
----------------------------------------------------------------------
(In thousands)
Weighted average number of common
shares outstanding 81,957 78,600 81,884 77,789
Shares issuable upon exercise of
options reduced by the number of
shares which could have been
purchased with the proceeds of such
exercise 2,981 2,492 2,804 2,109
======================================================================
Shares used in computing diluted
net income per share 84,938 81,092 84,688 79,898
======================================================================
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. Shares outstanding have been restated for
periods ending prior to April 1, 1998 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 September 30, 1998 and December 31, 1997 are as follows:
SEPTEMBER 30, December 31,
1998 1997
---------------------------------
(in thousands)
Allowance for doubtful accounts $3,091 $2,027
Accrued expenses not currently deductible 19,157 16,835
Deferred revenue 8,578 8,688
Other 4,885 230
Net operating loss and credit carryforwards 1,388 2,295
Purchased incomplete software technology 53,429 56,888
Deferred costs (4,863) (4,314)
Internally generated capitalized software (34,243) (29,999)
Excess of tax over book depreciation and
amortization (10,563) (5,992)
Unrealized gain on investments (11,389) (11,425)
=================================
Total deferred income taxes $29,470 $35,233
=================================
5
5. SUPPLEMENTAL CASH FLOW INFORMATION
Nine Months Ended
September 30,
1998 1997
---------------------------------
(In thousands)
Income taxes paid $45,313 $42,950
Interest paid 14,372 11,119
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 Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
----------------------------------------------------------------------
(Percent of Revenues)
Revenues 100.00% 100.00% 100.00% 100.00%
----------------------------------------------------------------------
Salaries and related costs 46.21 45.90 46.45 46.60
Data processing costs 9.28 10.55 9.47 10.55
Other operating expenses 21.89 19.57 21.13 19.16
Depreciation and amortization 4.89 5.15 4.91 5.11
Amortization of intangible assets 1.29 1.44 1.27 1.51
Capitalization of software-net (0.66) (0.23) (0.57) (0.29)
------------------------------- ---------------------------------
Total cost of revenues 82.90 82.38 82.66 82.64
------------------------------- ---------------------------------
Operating income 17.10 17.62 17.34 17.36
=============================== =================================
REVENUES
Revenues increased 30% from $238.3 million in the third quarter of 1997 to
$309.5 million in the current third quarter and 27% from $705.0 million in the
first nine months of 1997 to $894.6 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 31% from $196.3 million in the third quarter of 1997
to $256.6 million in the current third quarter, and 27% from $582.5 million in
the first nine months of 1997 to $739.5 million in the first nine months of
1998. These increases were in line with increases in revenues during the
periods.
OPERATING INCOME
Operating income increased 26% from $42.0 million in the third quarter of 1997
to $52.9 million in the current third quarter, and increased 27% from $122.4
million in the first nine months of 1997 to $155.1 million in the first nine
months of 1998. As a percentage of revenues, operating margins did not vary
significantly during the third quarter and first nine months of 1998 when
compared to the comparable prior year periods.
6
INTEREST EXPENSE - NET
As a result of increased borrowings, interest expense increased $1.3 million in
the third quarter of 1998 and $2.1 million for the first nine months of 1998
when compared to amounts incurred for the comparable 1997 periods. Acquisitions
and the purchase of treasury stock were partly funded by the increased
borrowings.
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 third quarter increased 25% from $23.2 million in 1997 to
$28.9 million in 1998. Net income for the first nine months increased 27% from
$66.6 million in 1997 to $84.7 million in 1998. Net income per share-diluted for
the third quarter was $.34 in 1998 compared to $.29 in 1997. Net income per
share-diluted for the first nine months of 1998 was $1.00 compared to $.83 in
the comparable 1997 period. The increases in net income per share-diluted for
the third quarter and first nine months of 1998 over the comparable 1997 periods
amounted to $.05 and $.17, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes the Company's primary sources of funds for the
nine months ended September 30, 1998 and 1997:
1998 1997
---------------------------------
(In thousands)
Cash provided by operating activities before changes
in securities processing receivables and payables - net 163,084 130,419
Securities processing receivables and payables - net 19,543 27,075
---------------------------------
Cash provided by operating activities 182,627 157,494
Issuance (purchases) of common stock - net (35,849) 8,592
Decrease (increase) in investments (16,675) (81,726)
Increase (decrease) in net borrowings 20,091 (61,588)
=================================
TOTAL 150,194 22,772
=================================
Long-term obligations amounted to $333.6 million at September 30, 1998. The
majority of this debt comprises $106.1 million of senior notes due 1999 to 2005
and $204.7 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
YEAR 2000 SYSTEMS EVALUATION
The Company provides data processing and other related services to financial
institutions of all kinds. Failure by the Company in making its proprietary
software systems Year 2000 compliant would have a material adverse effect on its
business. The Company believes, however, that its remediation process started in
1996 will be successful and anticipates no material processing problems.
The Company has completed its assessment of its proprietary systems and has
largely completed upgrading and revising the software it will continue to use in
providing service to its clients. The Company anticipates that all of its
proprietary systems will be completely upgraded to Year 2000 compliance, tested
(including client testing) and implemented by March 31, 1999. The Company's
contingency plans provide for a variety of actions in the event that a business
unit has not progressed sufficiently to meet its remediation goals, including
adding necessary resources, and/or migration of clients to other Company
software that is Year 2000 compliant. The Company does not anticipate the need
for these contingency plans based on the current system remediation status.
Testing and implementation of the remaining non-mission critical systems, which
are not material to the Company's business, are expected to be completed by
mid-1999.
The Company has reviewed Year 2000 disclosures prepared by its principal vendors
indicating that the embedded systems in the equipment which they supply to the
Company or the software systems necessary to maintain their networks adequately,
in the case of telephone service vendors, will be Year 2000 compliant in all
material respects. Similarly, the Company has no reason to believe that its
clients will not be Year 2000 compliant in all material respects.
The Company believes that it will meet its Year 2000 compliance commitments
using existing resources, without incurring significant incremental expenses.
The disclosure set forth above contains forward-looking statements.
Specifically, such statements are contained in sentences including the words
"expect" or "anticipate" or "could" or "should". Such forward-looking statements
are subject to inherent risks and uncertainties that may cause actual results to
differ materially from those contemplated by such forward-looking statements.
The factors that may cause actual results to differ materially from those
contemplated by the forward-looking statements include the failure by third
parties adequately to remediate Year 2000 issues or the inability of the Company
to complete writing and/or testing software changes on the time schedules
currently expected. Nevertheless, the Company expects that its Year 2000
compliance efforts will be successful without any adverse effects on its
business.
8
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 September 30, 1998, the Registrant did not file
any reports on Form 8-K.
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.
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(Registrant)
Date October 19, 1998 by /s/ Edward P. Alberts
----------------- -----------------------------------
EDWARD P. ALBERTS
Senior Vice President, Finance
and Controller
9