EXHIBIT 13 1999 ANNUAL REPORT FISERV, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data) Year ended December 31, 1999 1998 1997 ----------------------------------------------------- REVENUES $1,407,545 $1,233,670 $974,432 ----------------------------------------------------- COST OF REVENUES: Salaries, commissions and payroll related costs 677,226 573,187 454,850 Data processing expenses, rentals and telecommunication costs 111,163 119,205 100,601 Other operating expenses 272,616 259,126 189,982 Depreciation and amortization of property and equipment 63,713 60,697 49,119 Amortization of intangible assets 22,600 15,754 14,067 Amortization (capitalization) of internally generated computer software-net 7,142 (3,938) 36 ----------------------------------------------------- TOTAL COST OF REVENUES 1,154,460 1,024,031 808,655 ----------------------------------------------------- OPERATING INCOME 253,085 209,639 165,777 Interest expense - net 19,410 15,955 11,878 ----------------------------------------------------- INCOME BEFORE INCOME TAXES 233,675 193,684 153,899 Income tax provision 95,807 79,410 63,099 ----------------------------------------------------- NET INCOME $ 137,868 $ 114,274 $ 90,800 ===================================================== NET INCOME PER SHARE: Basic $1.12 $0.93 $0.78 ===================================================== Diluted $1.09 $0.90 $0.75 ===================================================== SHARES USED IN COMPUTING NET INCOME PER SHARE: Basic 123,143 122,873 117,021 ===================================================== Diluted 126,679 127,154 120,438 =====================================================
See notes to consolidated financial statements. CONSOLIDATED BALANCE SHEETS
(Dollars in thousands) December 31, 1999 1998 ----------------- ----------------- ASSETS Cash and cash equivalents $ 80,554 $ 71,558 Accounts receivable - net 235,350 246,851 Securities processing receivables 2,196,068 1,402,650 Prepaid expenses and other assets 89,378 83,453 Trust account investments 1,298,120 1,098,773 Other investments 335,573 180,099 Deferred income taxes - 14,545 Property and equipment-net 195,333 179,434 Internally generated computer software-net 75,263 85,821 Intangible assets-net 802,071 595,154 ----------------- ----------------- TOTAL $5,307,710 $3,958,338 ================= ================= LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable $ 66,400 $ 65,385 Securities processing payables 1,764,382 1,207,838 Short-term borrowings 234,350 38,350 Accrued expenses 176,443 150,519 Accrued income taxes 12,736 14,768 Deferred revenues 131,476 107,286 Trust account deposits 1,298,120 1,098,773 Deferred income taxes 59,963 - Long-term debt 472,824 389,622 ----------------- ----------------- TOTAL LIABILITIES 4,216,694 3,072,541 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Common stock issued, 125,387,700 and 124,879,500 shares, respectively 1,254 1,249 Additional paid-in capital 458,550 448,461 Accumulated other comprehensive income 125,026 39,875 Accumulated earnings 576,510 438,642 Treasury stock, at cost, 2,804,400 and 1,800,000 shares, respectively (70,324) (42,430) ----------------- ----------------- TOTAL SHAREHOLDERS' EQUITY 1,091,016 885,797 ----------------- ----------------- TOTAL $5,307,710 $3,958,338 ================= =================
See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands) Year ended December 31, 1999 1998 1997 ---------------------- --------------------- -------------------- SHARES ISSUED-300,000,000 AUTHORIZED: Balance at beginning of year 83,253 53,925 51,032 Shares issued under stock plans-net 394 495 585 Shares issued for acquired companies - 1,132 2,308 Three-for-two stock split 41,741 27,701 - ---------- -------- -------- Balance at end of year 125,388 83,253 53,925 ========== ======== ======== COMMON STOCK-PAR VALUE $.01 PER SHARE: Balance at beginning of year $ 833 $ 539 $ 510 Shares issued under stock plans-net 4 5 6 Shares issued for acquired companies - 11 23 Three-for-two stock split 417 278 - ---------- -------- -------- Balance at end of year 1,254 833 539 ---------- -------- -------- ADDITIONAL PAID-IN CAPITAL: Balance at beginning of year 448,877 427,785 352,916 Shares issued under stock plans-net 5,090 5,036 10,034 Income tax reduction arising from the exercise of employee stock options 5,000 8,000 5,000 Shares issued for acquired - 8,334 59,835 Three-for-two stock split (417) (278) - ---------- -------- -------- Balance at end of year 458,550 448,877 427,785 ---------- -------- -------- ACCUMULATED OTHER COMPREHENSIVE INCOME: Balance at beginning of year 39,875 16,563 18,904 Unrealized gain (loss) on investments 85,496 $ 85,496 23,492 $ 23,492 (2,179) $(2,179) Foreign currency translation adjustment (345) (345) (180) (180) (162) (162) ---------- -------- -------- Balance at end of year 125,026 39,875 16,563 ---------- -------- -------- ACCUMULATED EARNINGS: Balance at beginning of year 438,642 324,368 233,568 Net income 137,868 137,868 114,274 114,274 90,800 90,800 ---------- -------- -------- -------- -------- ------- Balance at end of year 576,510 438,642 324,368 ---------- -------- -------- TREASURY STOCK-AT COST: Balance at beginning of year (42,430) - Purchase of treasury stock (28,713) (42,430) Shares issued under stock plans-net 819 - ---------- -------- Balance at end of year (70,324) (42,430) ---------- -------- TOTAL COMPREHENSIVE INCOME $223,019 $137,586 $88,459 ======== ======== ======= TOTAL SHAREHOLDERS' EQUITY $1,091,016 $885,797 $769,255 ========== ======== ========
See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) Year ended December 31, 1999 1998 1997 -------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 137,868 $ 114,274 $ 90,800 Adjustments to reconcile net income to net cash provided by operating activities: Deferred income taxes 14,183 2,463 4,234 Depreciation and amortization of property and equipment 63,713 60,697 49,119 Amortization of intangible assets 22,600 15,754 14,067 Amortization of internally generated computer software 33,194 26,641 25,047 -------------------------------------------------------- 271,558 219,829 183,267 Changes in assets and liabilities, net of effects from acquisitions of businesses: Accounts receivable 18,853 (22,860) (19,191) Prepaid expenses and other assets (3,299) 9,618 (7,073) Accounts payable and accrued expenses 14,394 32,422 23,681 Deferred revenues 17,210 21,197 17,313 Accrued income taxes (1) 13,109 2,520 Securities processing receivables and payables - net (140,878) 7,080 (5,948) -------------------------------------------------------- Net cash provided by operating activities 177,837 280,395 194,569 -------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (69,697) (77,542) (39,765) Capitalization of internally generated computer software (26,052) (30,579) (25,011) Payment for acquisition of businesses, net of cash acquired (210,587) (217,792) (65,017) Investments (209,011) (30,779) (167,812) -------------------------------------------------------- Net cash used in investing activities (515,347) (356,692) (297,605) -------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from (repayments of) short-term obligations-net 119,226 (56,625) (7,900) Proceeds from borrowings on long-term obligations 103,523 143,245 18,120 Repayment of long-term obligations (52,790) (6,785) (41,316) Issuance of common stock 5,913 5,041 10,040 Purchases of treasury stock (28,713) (42,430) Trust account deposits 199,347 16,032 112,187 -------------------------------------------------------- Net cash provided by financing activities 346,506 58,478 91,131 -------------------------------------------------------- Change in cash and cash equivalents 8,996 (17,819) (11,905) Beginning balance 71,558 89,377 101,282 -------------------------------------------------------- Ending balance $ 80,554 $ 71,558 $ 89,377 ========================================================
See notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 1999, 1998 and 1997 1. Summary of Significant Accounting Policies PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Fiserv, Inc. and subsidiaries (the "Company"). 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. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR VALUES The carrying amounts of cash and cash equivalents, accounts receivable and payable, securities processing receivables and payables, short and long-term borrowings, and derivative instruments approximated fair value as of December 31, 1999 and 1998. DERIVATIVE INSTRUMENTS Interest rate hedge transactions are utilized to manage interest rate exposure. The interest differential on interest rate swap contracts used to hedge underlying debt obligations is reflected as an adjustment to interest expense over the life of the contracts. SECURITIES PROCESSING RECEIVABLES AND PAYABLES The Company's securities processing subsidiaries had receivables from and payables to brokers or dealers and clearing organizations related to the following at December 31: (In thousands) 1999 1998 -------------------------------- RECEIVABLES: Securities failed to deliver $ 41,554 $ 33,918 Securities borrowed 829,573 586,210 Receivables from customers 1,283,326 758,669 Other 41,615 23,853 -------------------------------- TOTAL $2,196,068 $1,402,650 ================================ PAYABLES: Securities failed to receive $ 45,255 $ 20,935 Securities loaned 1,076,235 703,164 Payables to customers 523,275 389,372 Other 119,617 94,367 -------------------------------- TOTAL $1,764,382 $1,207,838 ================================ Securities borrowed and loaned represent deposits made to or received from other broker-dealers. Receivables from and payables to customers represent amounts due on cash and margin transactions. SHORT-TERM BORROWINGS The Company's securities processing subsidiaries had short-term bank loans payable of $234,350,000 and $38,350,000 as of December 31, 1999 and 1998, respectively, which bear interest at the respective banks' call rate (4.9% as of December 31, 1999) and were collateralized by customers' margin account securities. TRUST ACCOUNT INVESTMENTS AND DEPOSITS The Company's trust administration subsidiaries accept money market deposits from trust customers and invest the funds in securities. Such amounts due trust depositors represent the primary source of funds for the Company's investment securities and amounted to $1,298,120,000 and $1,098,773,000 as of December 31, 1999 and 1998, respectively. The related investment securities, including amounts representing Company funds, comprised the following at December 31:
(In thousands) Principal Carrying Market 1999 Amount Value Value ----------------------------------------------------------- U. S. Government and government agency obligations $ 609,304 $ 614,855 $ 606,113 Money market mutual funds 201,600 201,600 201,600 Other fixed income obligations 563,382 562,560 550,931 ----------------------------------------------------------- TOTAL $1,374,286 1,379,015 $1,358,644 ----------------------------------------------------------- Less amounts representing Company funds: Included in cash and cash equivalents 3,329 Included in other investments 77,566 --------------------- Trust account investments $1,298,120 ===================== 1998 U. S. Government and government agency obligations $ 756,928 $ 765,152 $ 766,708 Corporate bonds 5,492 5,494 5,501 Repurchase agreements 41,370 41,370 41,370 Money market mutual funds 21,220 21,220 21,220 Other fixed income obligations 336,010 337,490 339,276 ----------------------------------------------------------- TOTAL $1,161,020 1,170,726 $1,174,075 ----------------------------------------------------------- Less amounts representing Company funds: Included in cash and cash equivalents 756 Included in other investments 71,197 --------------------- Trust account investments $1,098,773 =====================
Substantially all trust account investments at December 31, 1999 have contractual maturities of one year or less, except for government agency and certain fixed income obligations which have an average duration of approximately two years and six months. These investments are held to maturity and stated at cost as the Company has the ability and intent to hold these investments to maturity. Unrealized gains and losses at December 31, 1999 and 1998 were not significant. OTHER INVESTMENTS The Company determines the appropriate classification of investments in securities at the time of the purchase. Marketable securities available-for-sale are carried at market, based upon quoted market prices. Unrealized gains or losses on available-for-sale securities are accumulated as an adjustment to shareholders' equity, net of related deferred income taxes. Realized gains or losses are computed based on specific identification of the securities sold. The Company owns 3,404,930 shares of Knight/Trimark Group, Inc. and 900,000 shares of The BISYS Group, Inc. Common stock of both companies trade on the NASDAQ National Market System. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation and amortization are computed primarily using the straight-line method over the estimated useful lives of the assets, ranging from three to 40 years. Property and equipment consist of the following at December 31: (In thousands) 1999 1998 ---------------------------------- Data processing equipment $ 227,292 $ 227,346 Purchased software 81,239 73,446 Buildings and leasehold improvements 84,763 75,158 Furniture and equipment 99,637 88,915 ---------------------------------- 492,931 464,865 Less accumulated depreciation and amortization 297,598 285,431 ---------------------------------- TOTAL $ 195,333 $ 179,434 ================================== INTERNALLY GENERATED COMPUTER SOFTWARE The Company capitalizes certain costs incurred to develop new software and enhance existing software in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed." Amortization of capitalized costs is computed on a straight-line basis over the expected useful life of the product, generally five years. Activity during the three years ended December 31, 1999 is as follows:
(In thousands) 1999 1998 1997 ----------------------------------------------------- Beginning balance $ 85,821 $ 73,163 $70,487 Capitalized costs 26,052 30,579 25,011 Acquisitions and reclassifications (3,416) 8,720 2,712 ----------------------------------------------------- 108,457 112,462 98,210 Less amortization 33,194 26,641 25,047 ----------------------------------------------------- TOTAL $ 75,263 $ 85,821 $73,163 =====================================================
Routine maintenance of software products, design costs and development costs incurred prior to establishment of a product's technological feasibility are expensed as incurred. In addition, Year 2000 costs were expensed as incurred. INTANGIBLE ASSETS Intangible assets relate to acquisitions and consist of the following at December 31: (In thousands) 1999 1998 --------------------------------- Goodwill $ 793,908 $ 590,684 Other 128,107 96,571 --------------------------------- 922,015 687,255 Less accumulated amortization 119,944 92,101 --------------------------------- TOTAL $ 802,071 $ 595,154 ================================= 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 generally being amortized over 40 years using the straight-line method. Other intangible assets comprise primarily computer software, contract rights, customer bases and trademarks applicable to business acquisitions. These assets are being amortized using the straight-line method over their estimated useful lives, ranging from three to 35 years. IMPAIRMENT OF LONG-LIVED ASSETS The Company periodically assesses the likelihood of recovering the cost of long- lived assets based on current and projected operating results and cash flows of the related business operations using undiscounted cash flow analyses. These factors, along with management's plans with respect to the operations, are considered in assessing the recoverability of property, equipment and intangible assets. Long-lived assets determined to be impaired are written down to fair value. 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 from the sale of data processing services are recognized as the related services are provided. Revenues from securities processing and trust services include net investment income of $88,458,000, $77,457,000 and $63,620,000, net of direct credits to customer accounts of $63,519,000, $50,180,000 and $46,006,000 in 1999, 1998 and 1997, respectively. Revenues from the sales of software are recognized in accordance with the AICPA's Statement of Position No. 97-2, "Software Revenue Recognition." Maintenance fee revenue is recognized ratably over the term of the related support period, generally 12 months. Consulting revenue is recognized as the related services are provided. Deferred revenues consist primarily of advance billings for services and are recognized as revenue when the services are provided. NET INCOME PER SHARE Basic net income per share is computed using the weighted average number of common shares outstanding during the periods. Diluted net income per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the periods. Common equivalent shares consist of stock options and are computed using the treasury stock method. Net income per share for prior years has been restated to reflect three-for-two stock splits effective in April 1999 and May 1998. Amounts utilized in net income per share computations are as follows at December 31:
(In thousands) 1999 1998 1997 ----------------------------------------------------------- Weighted average common shares outstanding - basic 123,143 122,873 117,021 Assumed conversion of common shares issuable under stock option plan 3,536 4,281 3,417 ----------------------------------------------------------- Weighted average common and common equivalent shares outstanding - diluted 126,679 127,154 120,438 =========================================================== SUPPLEMENTAL CASH FLOW INFORMATION (In thousands) 1999 1998 1997 ----------------------------------------------------------- Interest paid $ 26,075 $ 21,111 $ 17,358 Income taxes paid 81,499 66,066 58,643 Liabilities assumed in acquisitions of businesses 246,120 39,816 197,235
ACCOUNTING STANDARDS TO BE ADOPTED In 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Company is currently evaluating the impact of this statement and does not anticipate that the adoption of this statement will have a material impact on the consolidated financial statements. This statement is required to be adopted in 2001. 2. Acquisitions During 1999, 1998 and 1997 the Company completed the following acquisitions:
Month Company Acquired Service Consideration - ----------------------------------------------------------------------------------------------------------------------- 1999: QuestPoint Jan. Item processing Cash for assets Eldridge & Associates Feb. PC-based financial systems Cash for assets RF/Spectrum Decision Science Corp. Feb. Software and services Cash for stock FIPSCO, Inc. Mar. Insurance marketing systems Cash for stock Progressive Data Solutions, Inc./ Apr. Insurance software systems Cash for stock Infinity Software Systems, Inc. JWGenesis Clearing Corporation Jun. Securities services Cash for stock Alliance ADS Jun. Imaging technology Cash for assets Envision Financial Technologies, Inc. Aug. Software and services Cash for stock Pinehurst Analytics, Inc. Oct. PC-based financial systems Cash for assets Humanic Design Corporation Dec. Software and services Cash for stock
1998: Automated Financial Technology, Inc. Jan. Data processing Stock for stock PSI Group (laser printing and Feb. Laser printing Cash for assets custom packing operations) The LeMans Group Feb. Automobile leasing software Cash for stock Network Data Processing Corporation Apr. Insurance data processing Stock for stock CUSA Technologies, Inc. Apr. Software and services Stock for stock Specialty Insurance Service May Insurance data processing Cash for stock Deluxe Card Services, a division of Aug. Automated card services Cash for assets Deluxe Corporation Federal Home Loan Bank of Topeka Oct. Item processing Cash for assets (item processing contracts) Life Instructors, Inc. Oct. Insurance and securities training Cash for stock FICATS Oct. Item processing Cash for assets ASI Financial Services, Inc. Nov. PC-based financial systems Cash for stock The FREEDOM Group, Inc. Dec. Insurance data processing Cash for stock 1997: AdminaStar Communications Apr. Laser print and mailing services Cash for stock Interactive Planning Systems May PC-based financial systems Stock for stock BHC Financial, Inc. May Securities services Stock for stock Florida Infomanagement Services, Inc. (FIS, Inc.) Sep. Data processing and software sales Cash for stock Stephens Inc. (clearing brokerage operations) Sep. Securities services Cash for assets Emerald Publications Oct. Financial seminars and training Stock for stock Central Service Corp. Oct. Data processing Cash for stock Savoy Discount Brokerage Oct. Securities services Cash for stock Hanifen, Imhoff Holdings, Inc. Dec. Securities services Cash and 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. Net cash paid in connection with these acquisitions was $210,587,000, $217,792,000, and $65,017,000 in 1999, 1998 and 1997, respectively, subject to certain adjustments. Pro forma information for acquisitions accounted for as purchases is not presented as the impact was not material. Certain of the acquisitions in 1998 and 1997 were accounted for as poolings of interests, and except for the 1997 acquisition of BHC Financial, Inc., prior year consolidated financial statements were not restated because the aggregate effect was not material. 3. Long-term debt The Company has available a $500,000,000 unsecured line of credit and commercial paper facility with a group of banks, of which $314,000,000 was in use at December 31, 1999 at an average rate of 6.10%. The credit facilities, which expire in May 2004, are comprised of a $250,000,000 five-year revolving credit facility and a $250,000,000 364-day revolving credit facility which is renewable annually through 2004. 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, 1999. In 1998, the Company entered into interest rate swap agreements to fix the interest rate on certain floating rate debt at an average rate approximating 5.90% (based on current bank fees and spreads) for a principal amount of $200,000,000 with remaining lives of four to six years.
Long-term debt outstanding comprised the following at December 31: (In thousands) 1999 1998 --------------------------------- 9.45% senior notes payable, due 2000 $ 4,286 $ 8,571 9.75% senior notes payable, due 2000-2001 5,000 7,500 8.00% senior notes payable, due 2000-2005 77,143 90,000 Bank notes and commercial paper, at short-term rates 386,395 283,551 --------------------------------- TOTAL $ 472,824 $ 389,622 =================================
Annual principal payments required under the terms of the long-term agreements were as follows at December 31, 1999: (In thousands) Year 2000 $ 147,084 2001 17,978 2002 14,714 2003 14,714 2004 264,620 Thereafter 13,714 -------------- TOTAL $ 472,824 ============== Interest expense with respect to long-term debt amounted to $25,111,000, $21,330,000 and $16,964,000 in 1999, 1998 and 1997, respectively. 4. Income taxes A reconciliation of recorded income tax expense with income tax computed at the statutory federal tax rates for the three years ended December 31, 1999 is as follows:
(In thousands) 1999 1998 1997 --------------------------------------------------- Statutory federal tax rate 35% 35% 35% Tax computed at statutory rate $ 81,786 $ 67,789 $ 53,865 State income taxes-net of federal effect 9,375 7,601 5,995 Non-deductible amortization 3,161 2,737 1,408 Other 1,485 1,283 1,831 --------------------------------------------------- TOTAL $ 95,807 $ 79,410 $ 63,099 =================================================== The provision for income taxes consisted of the following: (In thousands) 1999 1998 1997 --------------------------------------------------- Currently payable $ 76,624 $ 68,947 $ 53,865 Tax reduction credited to additional paid-in capital 5,000 8,000 5,000 Deferred 14,183 2,463 4,234 --------------------------------------------------- TOTAL $ 95,807 $ 79,410 $ 63,099 ===================================================
Significant components of the Company's net deferred tax (liability) asset consisted of the following at December 31:
(In thousands) 1999 1998 ------------------------------- Purchased incomplete software technology $ 47,663 $ 52,276 Accrued expenses not currently deductible 25,407 25,329 Deferred revenues 13,693 14,558 Internally generated capitalized software (30,858) (35,188) Excess of tax over book depreciation and amortization (19,438) (9,167) Unrealized gains on investments (87,162) (27,751) Other (9,268) (5,512) ------------------------------- TOTAL $ (59,963) $ 14,545 ===============================
5. Employee Benefit Plans STOCK OPTION PLAN The Company's Stock Option Plan provides for the granting to its employees and directors of either incentive or non-qualified options to purchase shares of the Company's common stock for a price not less than 100% of the fair value of the shares at the date of grant. In general, 20% of the shares awarded under the Plan may be purchased annually and expire 10 years from the date of the award. Changes in stock options outstanding are as follows:
Weighted Number of Price Average Shares Range Exercise Price ---------------------------------------------- Outstanding, December 31, 1996 5,853,173 $2.57 - $16.33 $ 8.84 Assumed from BHC 1,265,139 3.25 - 14.00 7.89 Granted 1,551,156 16.00 - 21.78 16.88 Forfeited (114,827) 2.76 - 16.00 12.78 Exercised (1,440,820) 2.57 - 16.00 8.70 ---------------------------------------------- Outstanding, December 31, 1997 7,113,821 2.76 - 21.78 10.38 Granted 2,677,205 21.83 - 31.59 24.15 Forfeited (147,030) 4.51 - 24.00 19.48 Exercised (1,187,123) 2.76 - 24.00 8.43 ---------------------------------------------- Outstanding, December 31, 1998 8,456,873 2.76 - 31.59 14.57 Granted 1,535,269 28.81 - 39.50 30.94 Forfeited (350,093) 16.00 - 34.29 27.42 Exercised (579,098) 3.25 - 33.02 12.48 ---------------------------------------------- Outstanding, December 31, 1999 9,062,951 $2.76 - $39.50 $ 16.89 ==============================================
The following summarizes information about the Company's stock options outstanding and exercisable at December 31, 1999:
Options Outstanding Options Outstanding and Exercisable ---------------------------------------------------------- ------------------------------- Range of Weighted Weighted Average Weighted Exercise Number of Average Remaining Number of Average Prices Shares Exercise Price Contractual Life Shares Exercise Price - ------------------------------------------------------------------------------------------------------- $ 2.76-$8.00 1,374,353 $ 5.23 1.8 1,304,090 $ 5.51 8.01-10.00 2,050,185 8.91 4.3 2,029,146 8.91 10.01-22.00 2,593,697 16.97 6.2 1,539,671 16.50 22.01-39.50 3,044,716 27.45 8.3 807,648 26.07 - ------------------------------------------------------------------------------------------------------- $2.76-$39.50 9,062,951 $ 16.89 5.8 5,680,555 $ 12.63 =======================================================================================================
At December 31, 1999, options to purchase 2,667,755 shares were available for grant under the Plan. The Company has accounted for its stock-based compensation plans in accordance with the provisions of Accounting Principles Board Opinion 25. Accordingly, the Company did not record any compensation expense in the accompanying consolidated financial statements for its stock-based compensation plans. Had compensation expense been recognized consistent with SFAS No.123, "Accounting for Stock-Based Compensation", the Company's net income and net income per share - diluted would have been changed to the pro forma amounts indicated below: (In thousands, except per share amounts) 1999 1998 1997 ------------- ----------- ------------ Net income: As reported $137,868 $114,274 $90,800 Pro forma 131,868 110,574 88,600 Net income per share-diluted: As reported $ 1.09 $ 0.90 $ 0.75 Pro forma 1.04 0.87 0.74 The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes pricing model with the following assumptions for grants in 1999: 1) expected dividend yield of 0%, 2) risk-free interest rate of 6%, 3) expected volatility of 41.8%, and 4) expected option life of five years. EMPLOYEE STOCK PURCHASE PLAN Effective January 1, 2000, the Company adopted an employee stock purchase plan, subject to shareholder approval, under which 500,000 shares of common stock would be available for issuance in 2000. Eligible employees may purchase a limited number of shares of common stock each quarter through payroll deductions, at a purchase price equal to 85% of the closing price of the Company's common stock on the last business day of each calendar quarter. EMPLOYEE SAVINGS PLAN 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 makes discretionary contributions based upon the attainment of certain profit goals. Company contributions vest ratably at 20% for each year of service. Contributions charged to operations under these plans approximated $23,969,000, $16,948,000 and $14,383,000 in 1999, 1998 and 1997, respectively. 6. Shareholders' Equity SHAREHOLDER RIGHTS PLAN On February 23, 1998, the Company adopted a Shareholder Rights Plan. Under this plan, the shareholders of record as of March 9, 1998 were granted a dividend of one preferred stock purchase right for each outstanding share of Company common stock. The stock purchase rights are not exercisable until certain events occur. The Company filed a Form 8-K with the Securities and Exchange Commission on February 24, 1998 which provides a full description of the Plan. COMPREHENSIVE INCOME Total comprehensive income was $223,019,000 and $137,586,000 in 1999 and 1998, respectively. The increase in comprehensive income was primarily due to unrealized gains on other investments as of December 31, 1999. 7. Leases, other commitments and contingencies LEASES Future minimum rental payments on various operating leases for office facilities and equipment were due as follows as of December 31, 1999: (In thousands) Year 2000 $ 64,931 2001 56,812 2002 47,248 2003 37,318 2004 29,342 Thereafter 41,447 -------------- TOTAL $ 277,098 ============== Rent expense applicable to all operating leases was approximately $78,620,000, $72,172,000 and $55,515,000 in 1999, 1998 and 1997, respectively. OTHER COMMITMENTS AND CONTINGENCIES The Company's trust administration subsidiaries had fiduciary responsibility for the administration of approximately $24 billion in trust funds as of December 31, 1999. With the exception of the trust account investments discussed in Note 1, such amounts are not included in the accompanying consolidated balance sheets. The Company's securities processing subsidiaries are subject to the Uniform Net Capital Rule of the Securities and Exchange Commission. At December 31, 1999, the aggregate net capital of such subsidiaries was $161,943,000, exceeding the net capital requirement by $133,611,000. 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. 8. Business Segment Information The Company is a leading independent provider of data processing systems and related information management services and products to financial institutions and other financial intermediaries. In accordance with SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," the Company's operations have been classified into three business segments: Financial institution outsourcing, systems and services; Securities processing and trust services; and "All other and corporate." The financial institution outsourcing, systems and services segment provides account and transaction processing solutions and services to financial institutions and other financial intermediaries. The securities processing and trust services segment provides securities processing solutions and retirement plan administration services to brokerage firms, financial planners and financial institutions. The "All other and corporate" segment provides plastic card services and document solutions, and includes general corporate expenses. Summarized financial information by business segment for each of the three years ended December 31, 1999 is as follows:
(In thousands) 1999 1998 1997 ------------------------------------------------ Revenues: Financial institution outsourcing, systems and services $ 1,066,514 $ 951,010 $ 753,209 Securities processing and trust services 276,215 234,699 179,217 All other and corporate 64,816 47,961 42,006 ------------------------------------------------ Total $ 1,407,545 $1,233,670 $ 974,432 ------------------------------------------------ Operating income: Financial institution outsourcing, systems and services $ 175,194 $ 148,774 $ 117,467 Securities processing and trust services 80,125 70,074 51,770 All other and corporate (2,234) (9,209) (3,460) ------------------------------------------------ Total $ 253,085 $ 209,639 $ 165,777 ------------------------------------------------ Identifiable assets: Financial institution outsourcing, systems and services $ 1,169,666 $1,018,541 $ 759,437 Securities processing and trust services 3,832,868 2,783,818 2,753,523 All other and corporate 305,176 155,979 123,531 ------------------------------------------------ Total $ 5,307,710 $3,958,338 $3,636,491 ------------------------------------------------ Depreciation expense: Financial institution outsourcing, systems and services $ 48,407 $ 46,880 $ 38,098 Securities processing and trust services 9,510 8,631 7,285 All other and corporate 5,796 5,186 3,736 ------------------------------------------------ Total $ 63,713 $ 60,697 $ 49,119 ------------------------------------------------ Capital expenditures: Financial institution outsourcing, systems and services $ 52,724 $ 60,075 $ 28,627 Securities processing and trust services 12,119 11,255 6,667 All other and corporate 4,854 6,212 4,471 ------------------------------------------------ Total $ 69,697 $ 77,542 $ 39,765 ------------------------------------------------
The revenues of each segment are principally domestic, and no single customer accounted for 10% or more of the consolidated revenues for the years ended December 31, 1999, 1998 and 1997. 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 those items from period to period.
Percentage of Revenues Period to Period Percentage Year Ended December 31, Increase (Decrease) 1999 vs. 1998 vs. 1999 1998 1997 1998 1997 ---------------------------------------------- --------------------------------- Revenues 100.0% 100.0% 100.0% 14.1% 26.6% ---------------------------------------------- Cost of revenues: Salaries, commissions and payroll related costs 48.1 46.4 46.7 18.2 26.0 Data processing expenses, rentals and telecommunication costs 7.9 9.7 10.3 (6.7) 18.5 Other operating expenses 19.4 21.0 19.5 5.2 36.4 Depreciation and amortization of property and equipment 4.5 4.9 5.0 5.0 23.6 Amortization of intangible assets 1.6 1.3 1.5 43.5 12.0 Amortization (capitalization) of internally generated computer software-net 0.5 (0.3) ---------------------------------------------- Total cost of revenues 82.0 83.0 83.0 12.7 26.6 ---------------------------------------------- Operating income 18.0% 17.0% 17.0% 20.7 26.5 ============================================== Income before income taxes 16.6% 15.7% 15.8% 20.6 25.9 ============================================== Net income 9.8% 9.3% 9.3% 20.6 25.9 ==============================================
Revenues increased $173,875,000 in 1999 and $259,238,000 in 1998. Revenue growth in 1999 and 1998 was derived from sales to new clients, cross-sales to existing clients, growth in the transaction volume experienced by existing clients, price increases and revenues from acquired businesses. Revenues from acquired businesses approximated 45% and 60% of total revenue growth in 1999 and 1998, respectively. Cost of revenues increased $130,429,000 in 1999 and $215,376,000 in 1998. The make up of cost of revenues has been affected in all years by business acquisitions and changes in the mix of the Company's business. Amortization of internally generated computer software is stated net of capitalization and increased as a percent of revenues from 1998 to 1999. The increase in 1999 was due to reduced capitalization resulting from Year 2000 activities and accelerated amortization due to the write-down of certain ancillary software products to net realizable value. Operating income increased $43,446,000 in 1999 and $43,862,000 in 1998. The Company's operating margins increased by 1% from 1998 to 1999 and remained unchanged from 1997 to 1998. The effective income tax rate was 41% in all three years, and the effective income tax rate for 2000 is expected to remain at 41%. The Company's growth has been accomplished, to a significant degree, through the acquisition of businesses which are complementary to its operations. Management believes that a number of acquisition candidates are available which would further enhance its competitive position and plans to pursue them vigorously. Management is engaged in an ongoing program to reduce expenses related to acquisitions by eliminating operating redundancies. The Company's approach has been to move slowly in achieving this goal in order to minimize the amount of disruption experienced by its clients and the potential loss of clients due to this program. SEGMENT INFORMATION The following table sets forth revenue and operating income by business segment for the years ended December 31:
(In thousands) 1999 1998 1997 --------------- ---------------- ------------- Revenues: Financial institution outsourcing, systems and services $ 1,066,514 $ 951,010 $ 753,209 Securities processing and trust services 276,215 234,699 179,217 All other and corporate 64,816 47,961 42,006 --------------- --------------- ------------- Total $ 1,407,545 $ 1,233,670 $ 974,432 --------------- --------------- ------------- Operating income: Financial institution outsourcing, systems and services $ 175,194 $ 148,774 $ 117,467 Securities processing and trust services 80,125 70,074 51,770 All other and corporate (2,234) (9,209) (3,460) --------------- ---------------- ------------- Total $ 253,085 $ 209,639 $ 165,777 --------------- ---------------- -------------
Revenues in the financial institution outsourcing, systems and services business segment increased $115,504,000 in 1999 and $197,801,000 in 1998. Revenue growth in 1999 and 1998 was derived from sales to new clients, cross-sales to existing clients, growth in the transaction volume experienced by existing clients, price increases and revenues from acquired businesses. Operating income in the financial institution outsourcing, systems and services business segment increased $26,420,000 and $31,307,000 in 1999 and 1998, respectively, while operating margins were consistent year to year. Revenues in the securities processing and trust services business segment increased $41,516,000 in 1999 and $55,482,000 in 1998. Revenue growth in 1999 and 1998 was derived primarily from sales to new clients, increased transaction volume from existing clients and revenues from acquired businesses. Operating income in the securities processing and trust services business segment increased $10,051,000 and $18,304,000 in 1999 and 1998, respectively, while operating margins were relatively consistent year to year. Revenues in the "All other and corporate" segment increased $16,855,000 in 1999 and $5,955,000 in 1998. The increase in revenues in 1999 over 1998 resulted primarily from sales to new clients and the full year 1999 impact of an acquisition which was completed in August 1998. Operating income in this business segment increased $6,975,000 in 1999 and decreased $5,749,000 in 1998. The increase in operating income in 1999 over 1998 was due to an acquisition and increased profitability in the Company's plastic card operations. LIQUIDITY AND CAPITAL RESOURCES The following table summarizes the Company's primary sources of funds for the years ended December 31:
(In thousands) 1999 1998 1997 ------------ ------------- ------------- Cash provided by operating activities before changes in securities processing receivables and payables-net $ 318,715 $ 273,315 $ 200,517 Securities processing receivables and payables-net (140,878) 7,080 (5,948) ------------ ------------- ------------ Cash provided by operating activities 177,837 280,395 194,569 Increase (decrease) in net borrowings 169,959 79,835 (31,096) ------------ ------------- ------------ TOTAL $ 347,796 $ 360,230 $ 163,473 ------------ ------------- ------------
The Company has used a significant portion of its cash flow from operations for acquisitions and capital expenditures with any remainder used to reduce long- term debt. The Company believes that its cash flow from operations together with other available sources of funds will be adequate to meet its funding requirements. In the event that the Company makes significant future acquisitions, however, it may raise funds through additional borrowings or issuance of securities. STOCK BUYBACK PLAN During 1999, the Company's Board of Directors authorized the repurchase of up to 3,250,000 shares of the Company's common stock. Shares purchased under the authorization will be made through open market transactions that may occur from time to time as market conditions warrant. Shares acquired will be held for issuance in connection with acquisitions and/or in conjunction with employee stock option plans. 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 of its systems. The Company has met 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 associated costs with its Year 2000 activities, it has estimated that commencing with 1996, such costs have approximated $15 million annually. The Company does not expect to incur any significant costs in 2000 related to Year 2000 activities. MARKET RISK FACTORS Market risk refers to the risk that a change in the level of one or more market prices, interest rates, indices, correlations or other market factors, such as liquidity, will result in losses for a certain financial instrument or group of financial instruments. The Company is exposed primarily to interest rate risk on investments and borrowings. The Company actively monitors these risks through a variety of control procedures involving senior management. The Company's trust administration subsidiaries accept money market account deposits from trust customers and invest those funds in marketable securities. Substantially all of the investments are rated within the highest investment grade categories for securities. The Company's trust administration subsidiaries utilize simulation models for measuring and monitoring interest rate risk and market value of portfolio equities. A formal Asset Liability Committee of the Company meets quarterly to review interest rate risks, capital ratios, liquidity levels, portfolio diversification, credit risk ratings and adherence to investment policies and guidelines. Substantially all of the investments at December 31, 1999 have contractual maturities of one year or less except for government agency and certain fixed income mortgage backed obligations, which have an average duration of approximately two years and six months. The Company manages its debt structure and interest rate risk through the use of fixed- and floating-rate debt and through the use of derivatives. The Company uses interest rate swaps to hedge its exposure to interest rate changes, and to lower its financing costs. Generally, under these swaps, the Company agrees with a counterparty to exchange the difference between fixed-rate and floating-rate interest amounts based on an agreed principal amount. As of December 31, 1999, unrealized gains related to interest rate swap agreements are not material. Based on the controls in place, management believes the risk associated with these instruments at December 31, 1999 will not have a material effect on the Company's consolidated financial position or results of operations. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Except for the historical information contained herein, the matters discussed in this annual report are forward-looking statements which involve risks and uncertainties, including but not limited to economic, competitive, governmental 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. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate. Therefore, there can be no assurance that the forward-looking statements included in this annual report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved. Selected Financial Data The following data, which has been materially affected by acquisitions, should be read in conjunction with the financial statements and related notes thereto included elsewhere in this Annual Report.
(In thousands, except per share data) Year ended December 31, 1999 1998 1997 1996 1995 -------------------------------------------------------------------------------- Revenues $1,407,545 $1,233,670 $ 974,432 $ 879,449 $ 769,104 Income (loss) before income taxes 233,675 193,684 153,899 134,462 (76,146) Income taxes (credit) 95,807 79,410 63,099 54,754 (30,220) Net income (loss) 137,868 114,274 90,800 79,708 (45,926) Net income (loss) per share: Basic $ 1.12 $ 0.93 $ 0.78 $ 0.69 ($0.41) -------------------------------------------------------------------------------- Diluted $ 1.09 $ 0.90 $ 0.75 $ 0.68 ($0.41) -------------------------------------------------------------------------------- As originally reported-diluted $ 1.09 $ 0.90 $ 0.75 $ 0.59 $ 0.50 -------------------------------------------------------------------------------- Total assets $5,307,710 $3,958,338 $3,636,491 $2,698,979 $2,514,597 Long-term debt 472,824 389,622 252,031 272,864 383,416 Shareholders' equity 1,091,016 885,797 769,255 605,898 514,866
Note: The above information has been restated to recognize (1) three-for-two stock splits effective in April 1999 and May 1998 and (2) the acquisition of BHC Financial, Inc. (BHC) in 1997, accounted for as a pooling of interest. The net income (loss) per share as originally reported - diluted is before the restatement due to the BHC pooling of interest and excludes the one-time after-tax charges of $1.11 per share related to the acquisition of Information Technology, Inc. in 1995. QUARTERLY FINANCIAL INFORMATION (Unaudited)
(In thousands, except per share data) Quarters ------------------------------------------ First Second Third Fourth Total 1999 Revenues $ 337,129 $ 343,252 $ 352,663 $ 374,501 $1,407,545 Cost of revenues 276,506 280,738 288,094 309,122 1,154,460 ------------------------------------------------------ Operating income 60,623 62,514 64,569 65,379 253,085 ------------------------------------------------------ Income before income taxes 56,638 58,199 59,656 59,182 233,675 Income taxes 23,222 23,861 24,459 24,265 95,807 ------------------------------------------------------ Net income $ 33,416 $ 34,338 $ 35,197 $ 34,917 $ 137,868 ------------------------------------------------------ Net income per share: Basic $ 0.27 $ 0.28 $ 0.29 $ 0.28 $ 1.12 ====================================================== Diluted $ 0.26 $ 0.27 $ 0.28 $ 0.28 $ 1.09 ====================================================== 1998 Revenues $ 273,829 $ 311,220 $ 309,543 $ 339,078 $1,233,670 Cost of revenues 224,445 258,398 256,609 284,579 1,024,031 ------------------------------------------------------ Operating income 49,384 52,822 52,934 54,499 209,639 ------------------------------------------------------ Income before income taxes 46,017 48,594 48,936 50,137 193,684 Income taxes 18,867 19,924 20,063 20,556 79,410 ------------------------------------------------------ Net income $ 27,150 $ 28,670 $ 28,873 $ 29,581 $ 114,274 ------------------------------------------------------ Net income per share: Basic $ 0.22 $ 0.23 $ 0.23 $ 0.24 $ 0.93 ====================================================== Diluted $ 0.22 $ 0.22 $ 0.23 $ 0.23 $ 0.90 ======================================================
Market Price Information The following information relates to the closing price of the Company's $.01 par value common stock, which is traded on the NASDAQ National Market tier of the NASDAQ Stock Market under the symbol FISV. Information for all periods has been adjusted (to the nearest 1/32) to recognize the three-for-two stock splits effective April 1999 and May 1998.
1999 1998 - ------------------------------------------------------------------------------------ Quarter Ended High Low High Low - ------------------------------------------------------------------------------------ March 31 37 19/32 30 28 5/32 20 21/32 June 30 40 31 5/16 30 25 11/32 September 30 34 1/8 27 1/4 32 21/32 26 December 31 39 3/16 24 3/4 35 13/32 25 1/2
At December 31, 1999, the Company's common stock was held by 2,590 shareholders of record. It is estimated that an additional 38,000 shareholders own the Company's stock through nominee or street name accounts with brokers. The closing sale price for the Company's stock on January 20, 2000 was $36.75 per share. The Company's present policy is to retain earnings to support future business opportunities, rather than to pay dividends. MANAGEMENT'S STATEMENT OF RESPONSIBILITY The management of Fiserv, Inc. assumes responsibility for the integrity and objectivity of the information appearing in the 1999 Annual Report. This information was prepared in conformity with generally accepted accounting principles and necessarily reflects the best estimates and judgment of management. To provide reasonable assurance that transactions authorized by management are recorded and reported properly and that assets are safeguarded, the Company maintains a system of internal controls. The concept of reasonable assurance implies that the cost of such a system is weighed against the benefits to be derived therefrom. Deloitte & Touche LLP, certified public accountants, audit the financial statements of the Company in accordance with generally accepted auditing standards. Their audit includes a review of the internal control system, and improvements are made to the system based upon their recommendations. The Audit Committee ensures that management and the independent auditors are properly discharging their financial reporting responsibilities. In performing this function, the Committee meets with management and the independent auditors throughout the year. Additional access to the Committee is provided to Deloitte & Touche LLP on an unrestricted basis, allowing discussion of audit results and opinions on the adequacy of internal accounting controls and the quality of financial reporting. /s/ Leslie M. Muma LESLIE M. MUMA Vice Chairman and Chief Executive Officer INDEPENDENT AUDITORS' REPORT SHAREHOLDERS AND DIRECTORS OF FISERV, INC. We have audited the accompanying consolidated balance sheets of Fiserv, Inc. and subsidiaries as of December 31, 1999 and 1998 and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Fiserv, Inc. and subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Deloitte & Touche LLP Milwaukee, Wisconsin January 28, 2000