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, 1999 COMMISSION FILE NUMBER 0-14948
FISERV, INC.
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(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
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (262) 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 ( )
As of October 15, 1999, there were 122,626,000 shares of common stock, $.01 par
value, of the Registrant outstanding.
1
PART I. FINANCIAL INFORMATION
FISERV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
--------------------------------------------------
REVENUES $ 352,663 $ 309,543 $1,033,044 $ 894,592
--------------------------------------------------
Cost of revenues:
Salaries, commissions and payroll
related costs 171,174 143,026 494,339 415,511
Data processing expenses, rentals
and telecommunication costs 27,346 28,729 84,870 84,686
Other operating expenses 67,014 67,769 200,497 189,050
Depreciation and amortization of
property and equipment 16,132 15,131 45,791 43,942
Amortization of intangible assets 5,359 4,005 14,732 11,336
Amortization (capitalization) of internally
generated computer software-net 1,069 (2,051) 5,109 (5,073)
--------------------------------------------------
Total cost of revenues 288,094 256,609 845,338 739,452
--------------------------------------------------
OPERATING INCOME 64,569 52,934 187,706 155,140
Interest expense - net 4,913 3,998 13,213 11,593
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INCOME BEFORE INCOME TAXES 59,656 48,936 174,493 143,547
Income tax provision 24,459 20,063 71,542 58,854
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NET INCOME $ 35,197 $ 28,873 $ 102,951 $ 84,693
==================================================
NET INCOME PER SHARE:
Basic $ 0.29 $ 0.23 $ 0.83 $ 0.69
==================================================
Diluted $ 0.28 $ 0.23 $ 0.81 $ 0.67
==================================================
SHARES USED IN COMPUTING NET INCOME PER SHARE:
Basic 123,226 122,936 123,318 122,826
==================================================
Diluted 125,974 127,407 127,052 127,032
==================================================
See notes to consolidated financial statements.
FISERV, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
SEPTEMBER 30, December 31,
1999 1998
----------------------------
ASSETS
Cash and cash equivalents $ 75,903 $ 71,558
Accounts receivable 233,236 246,851
Securities processing receivables 1,961,293 1,402,650
Prepaid expenses and other assets 78,925 83,453
Trust account investments 1,363,403 1,098,773
Other investments 276,149 180,099
Deferred income taxes -- 14,545
Property and equipment-net 195,743 179,434
Internally generated computer software-net 80,879 85,821
Intangible assets-net 797,756 595,154
--------------------------
TOTAL $ 5,063,287 $ 3,958,338
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 68,201 $ 65,385
Securities processing payables 1,615,611 1,207,838
Short-term borrowings 146,643 38,350
Accrued expenses 169,158 150,519
Accrued income taxes 18,312 14,768
Deferred revenues 107,911 107,286
Trust account deposits 1,360,194 1,098,773
Deferred income taxes 22,131 --
Long-term debt 534,394 389,622
--------------------------
TOTAL LIABILITIES 4,042,555 3,072,541
--------------------------
SHAREHOLDERS' EQUITY:
Common stock issued, 125,393,000 and
124,880,000 shares, respectively 1,254 1,249
Additional paid-in capital 457,969 448,461
Accumulated other comprehensive income 82,363 39,875
Accumulated earnings 541,593 438,642
Treasury stock, at cost; 2,507,000 and
1,800,000 shares, respectively (62,447) (42,430)
--------------------------
TOTAL SHAREHOLDERS' EQUITY 1,020,732 885,797
--------------------------
TOTAL $ 5,063,287 $ 3,958,338
==========================
See notes to consolidated financial statements.
3
FISERV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Nine Months Ended
September 30,
1999 1998
-----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 102,951 $ 84,693
Adjustments to reconcile net income to net cash provided
by operating activities:
Deferred income taxes 7,132 3,152
Depreciation and amortization of property and equipment 45,791 43,942
Amortization of intangible assets 14,732 11,336
Amortization (capitalization) of internally generated computer software-net 5,109 (5,073)
----------------------
175,715 138,050
Cash provided (used) by changes in assets and liabilities,
net of effects from acquisitions of businesses:
Accounts receivable 20,141 (24,522)
Prepaid expenses and other assets 7,809 2,626
Accounts payable and accrued expenses 6,043 17,392
Deferred revenue (6,304) 13,943
Income taxes payable 5,675 15,595
Securities processing receivables and payables - net (54,873) 19,543
----------------------
Net cash provided by operating activities 154,206 182,627
----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (52,663) (52,978)
Other investments (20,916) (11,913)
Payment for acquisition of businesses (200,428) (98,791)
Trust account investments (266,587) (136,622)
----------------------
Net cash provided (used) by investing activities (540,594) (300,304)
----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term obligations - net 30,662 (61,125)
Increase in long-term obligations - net 113,153 81,216
Purchases of common stock (20,103) (42,430)
Issuance of common stock 5,601 6,581
Trust account deposits 261,420 131,860
----------------------
Net cash provided by financing activities 390,733 116,102
----------------------
Change in cash 4,345 (1,575)
Beginning balance 71,558 89,377
----------------------
Ending balance $ 75,903 $ 87,802
======================
See notes to consolidated financial statements.
4
FISERV, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements for the three and nine-month periods ended
September 30, 1999 and 1998 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. SHARES USED IN COMPUTING NET INCOME PER SHARE
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
-----------------------------------------
Weighted average number of common (In thousands)
shares outstanding 123,226 122,936 123,318 122,826
Common stock equivalents 2,748 4,471 3,734 4,206
-----------------------------------------
Shares used in computing diluted
net income per share 125,974 127,407 127,052 127,032
=========================================
Basic income per share is computed using the weighted average number of common
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. The Company declared a 3-for-2 common
stock split to shareholders of record as of April 16, 1999, payable on April 30,
1999. The financial and share information presented herein for all periods has
been adjusted to reflect the stock split.
3. 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
(liability) asset as of September 30, 1999 and December 31, 1998 are as follows:
SEPTEMBER 30, December 31,
1999 1998
----------------------------------------
(In thousands)
Purchased incomplete software technology $50,037 $52,276
Accrued expenses not currently deductible 24,948 25,329
Deferred revenues 14,005 14,558
Other (7,441) (5,512)
Internally generated capitalized software (33,160) (35,188)
Excess of tax over book depreciation and
amortization (12,983) (9,167)
Unrealized gain on investments (57,537) (27,751)
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Total deferred income taxes ($22,131) $14,545
========================================
4. SUPPLEMENTAL CASH FLOW INFORMATION
Nine Months Ended
September 30,
1999 1998
----------------------------------------
(In thousands)
Income taxes paid $55,627 $45,313
Interest paid 16,630 14,372
Liabilities assumed in acquisitions of
businesses 250,391 30,273
5
5. BUSINESS COMBINATIONS
During the first nine months of 1999, the Company completed eight acquisitions
accounted for by the purchase method for total cash consideration of
approximately $200.4 million. The operations of these acquisitions are included
in the consolidated results of operations from the dates of acquisition. Pro
forma information has not been presented due to lack of materiality.
6. SHAREHOLDERS' EQUITY
Total comprehensive income for the nine months ended September 30, 1999 and 1998
was $145.4 million and $84.7 million, respectively. The increase in
comprehensive income during the nine months ended September 30, 1999 is
primarily due to unrealized gains on investments since December 31, 1998. The
Company owns 3,404,930 shares of common stock of Knight/Trimark Group, Inc. and
900,000 shares of common stock of The BISYS Group, Inc. Common stock of both
companies trade on the NASDAQ National Market System.
In August 1999, the Company's Board of Directors authorized a stock buy-back
program of up to 3.25 million shares of its outstanding common stock. Shares
purchased under the authorization will be made through open market transactions
or otherwise that may occur from time to time as market conditions warrant.
Shares acquired will be held for issuance in connection with acquisitions and in
conjunction with employee option plans.
7. BUSINESS SEGMENT INFORMATION
The Company is a leading independent provider of financial data processing
systems and related information management services and products to financial
institutions and other financial intermediaries. The Company's operations have
been classified into three business segments: financial institution data
processing and software services, securities processing and trust services and
other (including corporate). Summarized financial information by business
segment is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
-------------------------- ---------------------------
(In thousands)
REVENUES:
Financial institution data processing and
software services $ 270,264 $ 240,911 $ 793,073 $ 691,665
Securities processing and trust services 66,428 58,485 193,558 171,863
Other 15,971 10,147 46,413 31,064
----------- ----------- ----------- -----------
TOTAL $ 352,663 $ 309,543 $ 1,033,044 $ 894,592
----------- ----------- ----------- -----------
OPERATING INCOME:
Financial institution data processing and
software services $ 48,203 $ 38,948 $ 137,618 $ 111,610
Securities processing and trust services 16,980 16,762 52,980 52,888
Other (614) (2,776) (2,892) (9,358)
----------- ----------- ----------- -----------
TOTAL $ 64,569 $ 52,934 $ 187,706 $ 155,140
----------- ----------- ----------- -----------
6
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,
1999 1998 1999 1998
--------------------------------------------
(Percent of Revenues)
Revenues 100.0% 100.0% 100.0% 100.0%
--------------------------------------------
Salaries and related costs 48.5 46.2 47.9 46.5
Data processing costs 7.8 9.3 8.2 9.5
Other operating expenses 19.0 21.9 19.4 21.1
Depreciation and amortization 4.6 4.9 4.4 4.9
Amortization of intangible assets 1.5 1.3 1.4 1.3
Amortization (capitalization) of software-net 0.3 (0.7) 0.5 (0.6)
--------------------- ---------------------
Total cost of revenues 81.7 82.9 81.8 82.7
--------------------- ---------------------
Operating income 18.3 17.1 18.2 17.3
=================== =====================
REVENUES
Revenues increased 13.9% from $309.5 million in the third quarter of 1998 to
$352.7 million in the current third quarter and 15.5% from $894.6 million in the
first nine months of 1998 to $1,033.0 million in the comparable current period.
Approximately 45% of the year to date growth resulted from the inclusion of
revenues from the date of purchase of acquired companies and approximately 55%
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 12.3% from $256.6 million in the third quarter of
1998 to $288.1 million in the current third quarter, and 14.3% from $739.5
million in the first nine months of 1998 to $845.3 million in the first nine
months of 1999. The make up of cost of revenues has been affected predominantly
by changes in the mix of the Company's business.
OPERATING INCOME
Operating income increased 22.0% from $52.9 million in the third quarter of 1998
to $64.6 million in the current third quarter, and increased 21.0% from $155.1
million in the first nine months of 1998 to $187.7 million in the first nine
months of 1999. As a percentage of revenues, operating margins were higher
during both the third quarter and first nine months of 1999 when compared to
1998 due primarily to cost reductions associated with, among other items, the
consolidation and elimination of certain product lines in the Company's data
processing businesses.
INCOME TAX PROVISION
Income taxes were computed at 41% in both 1999 and 1998. The 41% rate is
expected to apply throughout the current year.
NET INCOME
Net income for the third quarter increased 21.9% from $28.9 million in 1998 to
$35.2 million in 1999. Net income for the first nine months increased 21.6% from
$84.7 million in 1998 to $103.0 million in 1999. Net income per share-diluted
for the third quarter was $0.28 in 1999 compared to $0.23 in 1998. Net income
per share-diluted for the first nine months of 1999 was $0.81 compared to $0.67
in the comparable 1998 period. The increases in net income per share-diluted for
the third quarter and first nine months of 1999 over the comparable 1998 periods
amounted to $0.05 and $0.14, respectively.
7
YEAR 2000 SYSTEMS EVALUATION
The Company provides data processing and other related services to financial
institutions of all kinds. The Company has completed the Year 2000 renovation,
testing and implementation of its mission critical proprietary systems used in
providing service to its clients. Testing and implementation of the remaining
non-mission critical systems, which are not material to the Company's business,
are substantially complete as of September 1999.
The Company has received Year 2000 disclosures prepared by its principal vendors
indicating that they will be Year 2000 compliant in all material respects. The
Company's contingency plans include actions required should any vendor
experience Year 2000-related problems. In addition, the Company has no reason to
believe that its clients will not be Year 2000 compliant in all material
respects, and in many cases has assisted its clients in their Year 2000 efforts.
The Company has met and believes it will continue to meet its Year 2000
compliance commitments using existing resources, without incurring significant
incremental expenses. Although the Company does not maintain accounting records
that separately identify all of the costs associated with its Year 2000
activities, it has estimated that commencing with 1996 such costs have
approximated $15 million annually. Estimated costs for 1999 when the entire
project is scheduled for completion are approximately $10 to $12 million.
The disclosure set forth above contains forward-looking statements.
Specifically, such statements are contained in sentences including the words
"will" or "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 to adequately remediate Year 2000 issues and the inability of the
Company to test and implement remaining non-mission critical systems. Failure by
the Company in making its proprietary systems Year 2000 compliant would have a
material adverse effect on its business. However, the Company expects that its
Year 2000 compliance efforts will be successful without any material adverse
effects on its business.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes the Company's primary sources of funds for the
nine months ended September 30, 1999 and 1998:
1999 1998
-------------------- ----------------------
(In thousands)
Cash provided by operating activities before changes
in securities processing receivables and payables - net $209,079 $163,084
Securities processing receivables and payables - net (54,873) 19,543
-------------------- ----------------------
Cash provided by operating activities 154,206 182,627
Increase in net borrowings 143,815 20,091
-------------------- ----------------------
TOTAL $298,021 $202,718
==================== ======================
Long-term obligations amounted to $534.4 million at September 30, 1999. Included
in long-term obligations is $354.4 million advanced under an aggregate of $500.0
million in revolving credit facilities. The credit facilities which expire in
May 2004 are comprised of a $250.0 million five year revolving credit facility
and a $250.0 million 364-day revolving credit facility. In addition, the Company
has a $75.0 million unsecured line of credit and commercial paper facility of
which $70.0 million was outstanding as of September 30, 1999.
The Company has historically applied a significant portion of its cash flow from
operating activities 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 debt or equity
securities.
8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(11) Statement regarding computation of per share earnings (included on
page 5, Part 1).
(27) Financial data schedule.
(b) Reports on Form 8-K
Form 8-K filed on August 11, 1999, relating to the authorization of the
Company's stock buy-back plan.
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, 1999 by /s/ Kenneth R. Jensen
---------------- -----------------------------------------------
KENNETH R. JENSEN
Senior Executive Vice President, Chief
Financial Officer, Treasurer and Assistant
Secretary
9