EXHIBIT 13 1997 ANNUAL REPORT FISERV, INC. AND SUBSIDIARIES - --------- FINANCIAL - --------- CONTENTS/97/ - ------------------------------------------------------------------------------- Consolidated Statements of Operations 24 .................................................................... Consolidated Balance Sheets 25 .................................................................... Consolidated Statements of Changes in Shareholders' Equity 26 .................................................................... Consolidated Statements of Cash Flows 27 .................................................................... Notes to Consolidated Financial Statements 28 .................................................................... Management's Discussion and Analysis 35 .................................................................... Quarterly Financial Information 39 .................................................................... Independent Auditors' Report 40 .................................................................... Management's Statement of Responsibility 40 .................................................................... 23 CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data) Year ended December 31, 1997 1996 1995 - ----------------------------------------------------------------------------------------- REVENUES $974,432 $879,449 $769,104 - ----------------------------------------------------------------------------------------- COST OF REVENUES: Salaries, commissions and payroll related costs 454,850 394,932 351,180 Data processing expenses, rentals and telecommunication costs 100,601 97,721 100,908 Other operating expenses 189,982 164,003 141,100 Depreciation and amortization of property and equipment 49,119 44,120 40,486 Purchased incomplete software technology 172,970 Amortization of intangible assets 14,067 21,391 26,166 Amortization (capitalization) of internally generated computer software -- net 36 3,732 (6,382) - ----------------------------------------------------------------------------------------- TOTAL 808,655 725,899 826,428 - ----------------------------------------------------------------------------------------- OPERATING INCOME (LOSS) 165,777 153,550 (57,324) Interest expense -- net 11,878 19,088 18,822 - ----------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES 153,899 134,462 (76,146) Income tax provision (credit) 63,099 54,754 (30,220) - ----------------------------------------------------------------------------------------- NET INCOME (LOSS) $ 90,800 $ 79,708 $(45,926) - ----------------------------------------------------------------------------------------- NET INCOME (LOSS) PER SHARE: Basic $ 1.75 $ 1.56 $ (0.93) - ----------------------------------------------------------------------------------------- Diluted $ 1.70 $ 1.53 $ (0.93) - ----------------------------------------------------------------------------------------- SHARES USED IN COMPUTING NET INCOME PER SHARE: Basic 52,009 50,993 49,348 - ----------------------------------------------------------------------------------------- Diluted 53,528 52,046 49,348 - -----------------------------------------------------------------------------------------
See notes to consolidated financial statement. 24 CONSOLIDATED BALANCE SHEETS
(In thousands) December 31, 1997 1996 - -------------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $ 89,377 $ 101,282 Accounts receivable 197,771 160,747 Securities processing receivables 1,386,169 729,354 Prepaid expenses and other assets 91,278 64,410 Trust account investments 1,082,740 970,553 Other investments 125,999 72,952 Deferred income taxes 35,233 34,144 Property and equipment--Net 149,055 148,413 Internally generated computer software--Net 73,163 70,487 Identifiable intangible assets relating to acquisitions--Net 50,426 54,548 Goodwill--Net 355,280 292,089 - -------------------------------------------------------------------------------------------------- TOTAL $3,636,491 $2,698,979 - -------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable $ 53,828 $ 43,486 Securities processing payables 1,184,277 636,215 Short-term borrowings 94,975 33,200 Accrued expenses 123,380 80,866 Accrued income taxes 8,436 9,808 Deferred revenues 67,569 46,089 Trust account deposits 1,082,740 970,553 Long-term debt 252,031 272,864 - -------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 2,867,236 2,093,081 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Common stock outstanding, 53,925,000 and 51,032,000 shares, respectively 539 510 Additional paid-in capital 427,785 352,916 Unrealized gain on investments 16,442 18,621 Accumulated earnings 324,489 233,851 - -------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 769,255 605,898 - -------------------------------------------------------------------------------------------------- TOTAL $3,636,491 $2,698,979 - -------------------------------------------------------------------------------------------------- See notes to consolidated financial statements.
25
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (in thousands) Year ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------------- SHARES ISSUED--150,000,000 AUTHORIZED: Balance at beginning of year 51,032 50,571 45,722 Shares issued under stock plans--net 585 327 274 Shares issued for acquired companies 2,308 134 4,575 ...................................................................................... Balance at end of year 53,925 51,032 50,571 - -------------------------------------------------------------------------------------- COMMON STOCK--PAR VALUE $.01 PER SHARE: Balance at beginning of year $ 510 $ 506 $ 457 Shares issued under stock plans--net 6 3 3 Shares issued for acquired companies 23 1 46 ...................................................................................... Balance at end of year 539 510 506 ...................................................................................... CAPITAL IN EXCESS OF PAR VALUE: Balance at beginning of year 352,916 345,448 214,396 Shares issued under stock plans--net 10,034 4,893 670 Income tax reduction arising from the exercise of employee stock options 5,000 2,000 2,400 Shares issued for acquired companies 59,835 575 127,982 ...................................................................................... Balance at end of year 427,785 352,916 345,448 ...................................................................................... UNREALIZED GAIN ON INVESTMENTS 16,442 18,621 15,268 ...................................................................................... ACCUMULATED EARNINGS: Balance at beginning of year 233,851 153,644 199,482 Net income (loss) 90,800 79,708 (45,926) Foreign currency translation adjustment (162) 499 88 ...................................................................................... Balance at end of year 324,489 233,851 153,644 ...................................................................................... TOTAL SHAREHOLDERS' EQUITY $769,255 $605,898 $514,866 - -------------------------------------------------------------------------------------- See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 90,800 $ 79,708 $ (45,926) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Deferred income taxes 4,234 2,225 (59,085) Depreciation and amortization of property and equipment 49,119 44,120 40,486 Amortization of intangible assets 14,067 21,391 26,166 Charge for incomplete software technology 172,970 Amortization (capitalization) of internally generated computer software -- net 36 3,732 (6,382) ..................................................................................... 158,256 151,176 128,229 Cash provided (used) by changes in assets and liabilities, net of effects from acquisitions of businesses: Accounts receivable (19,191) (4,881) (10,014) Securities processing receivables/payables -- net (5,948) (3,660) 29,935 Prepaid expenses and other assets (7,073) 8,252 (26,616) Accounts payable and accrued expenses 23,681 8,034 399 Deferred revenues 17,313 5,232 9,283 Accrued income taxes 2,520 5,961 5,756 ..................................................................................... Net cash provided by operating activities 169,558 170,114 136,972 ..................................................................................... CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (39,765) (39,450) (46,322) Payment for acquisition of businesses, net of cash acquired (65,017) (8,025) (261,417) Investments (167,812) (133,979) 225,728 Due on sale of investments 97,446 (97,446) ..................................................................................... Net cash used by investing activities (272,594) (84,008) (179,457) ..................................................................................... CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of short-term obligations -- net (7,900) (8,700) (50,600) Proceeds from borrowings on long-term obligations 18,120 6,000 252,977 Repayment of long-term obligations (41,316) (116,940) (21,733) Issuance of common stock 10,040 4,896 638 Trust account deposits 112,187 53,364 (118,028) ..................................................................................... Net cash provided (used) by financing activities 91,131 (61,380) 63,254 ..................................................................................... Change in cash and cash equivalents (11,905) 24,726 20,769 Beginning balance 101,282 76,556 55,787 ..................................................................................... Ending balance $ 89,377 $ 101,282 $ 76,556 - ------------------------------------------------------------------------------------- See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ending December 31, 1997, 1996 and 1995 NOTE 1. Summary of Significant Accounting Policies DESCRIPTION OF THE BUSINESS The Company is a leading independent provider of financial data processing systems and related information management services and products to banks, credit unions, mortgage banks, savings institutions and other financial intermediaries. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. In connection with the acquisition of Hanifen, Imhoff Holdings, Inc., referred to in Note 2, the Company filed a Form 8-K, dated October 24, 1997, with the Securities and Exchange Commission in which financial statements and other financial information previously presented in its 1996 Annual Report to Shareholders were restated to include, on a pooling of interests basis, the financial position and results of operations of BHC Financial, Inc. acquired in May 1997 for approximately 5,684,000 shares. The accompanying financial statements for 1996 and 1995 have been similarly restated. CASH AND CASH EQUIVALENTS Cash and cash equivalents comprise cash and investments with original maturities of 90 days or less. PREPAID EXPENSES AND OTHER ASSETS Prepaid expenses and other assets at December 31, 1997 and 1996 include $10,526,000 and $12,013,000, respectively, relating to long-term contracts, the profit from which is being recognized ratably over the periods to be benefited. 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 approximated fair value as of December 31, 1997 and 1996. SECURITIES PROCESSING RECEIVABLES AND PAYABLES The Company's security processing subsidiaries had receivables from and payables to brokers or dealers and clearing organizations related to the following at December 31, 1997 and 1996 (in thousands):
1997 1996 - -------------------------------------------------------------------------- RECEIVABLES: Securities failed to deliver $ 22,280 $ 10,679 Securities borrowed 495,834 207,173 Receivable from customers 833,348 493,635 Other 34,707 17,867 .......................................................................... Total $1,386,169 $ 729,354 ========================================================================== PAYABLES: Securities failed to receive $ 32,091 $ 5,923 Securities loaned 567,253 219,530 Payable to customers 488,404 366,421 Other 96,529 44,341 .......................................................................... Total $1,184,277 $ 636,215 ==========================================================================
Securities borrowed and loaned represent deposits made to or received from other broker-dealers. Receivable from and payable to customers represent amounts due on cash and margin transactions. SHORT-TERM BORROWINGS The Company's security processing subsidiaries had short-term bank loans payable of $94,975,000 and $33,200,000 as of December 31, 1997 and 1996, respectively, which bear interest at the respective bank's call rate and were collateralized by customers' margin account securities. TRUST ACCOUNT DEPOSITS AND INVESTMENT SECURITIES 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 $1,082,740,000 and $970,553,000 in 1997 and 1996, respectively. The related investment securities, including amounts representing Company funds, comprised the following at December 31, 1997 and 1996: 28 Fiserv. Inc. and subsidiaries (In thousands) Principal Carrying Market 1997 Amount Value Value - ---------------------------------------------------------------------------------------------------------------------- U. S. Government and government agency obligations $ 671,384 $ 682,218 $ 686,765 Corporate bonds 18,326 18,371 18,364 Repurchase agreements 95,227 95,227 95,227 Other fixed income obligations 371,514 370,714 371,840 ...................................................................................................................... TOTAL $1,156,451 1,166,530 $1,172,196 ...................................................................................................................... Less amounts representing Company funds: Included in cash and cash equivalents 22,985 Included in other investments 60,805 ...................................................................................................................... Trust account investments $1,082,740 - ---------------------------------------------------------------------------------------------------------------------- 1996 - ---------------------------------------------------------------------------------------------------------------------- U. S. Government and government agency obligations $ 684,963 $ 695,955 $ 695,048 Corporate bonds 31,172 31,337 31,374 Repurchase agreements 41,888 41,888 41,888 Other fixed income obligations 263,878 262,293 261,939 ...................................................................................................................... TOTAL $1,021,901 1,031,473 $1,030,249 ...................................................................................................................... Less amounts representing Company funds: Included in cash and cash equivalents 41,888 Included in other investments 19,032 ...................................................................................................................... Trust account investments $ 970,553 ...................................................................................................................... Substantially all of the investments 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 four months. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation and amortization are computed using primarily the straight-line method over the estimated useful lives of the assets, ranging from three to 40 years: (In thousands) December 31, 1997 1996 - ---------------------------------------------------------------------------------------------------------------------- Data processing equipment $ 197,422 $ 167,974 Purchased software 58,161 47,833 Buildings and leasehold improvements 56,307 52,329 Furniture and equipment 58,279 49,526 ...................................................................................................................... 370,169 317,662 Less accumulated depreciation and amortization 221,114 169,249 ...................................................................................................................... TOTAL $ 149,055 $ 148,413 - ----------------------------------------------------------------------------------------------------------------------
Fiserv, Inc. and subsidiaries 29 Internally Generated Computer Software Certain costs incurred to develop new software and enhance existing software are capitalized and amortized over the expected useful life of the product, generally five years. Activity during the three years ended December 31, 1997 was as follows: (In thousands) 1997 1996 1995 ================================================================= Beginning balance $70,487 $ 73,863 $67,820 Capitalized costs 25,011 26,366 26,041 Acquisitions--net 2,712 356 - ----------------------------------------------------------------- 98,210 100,585 93,861 Less amortization 25,047 30,098 19,998 - ----------------------------------------------------------------- Ending balance $73,163 $ 70,487 $73,863 ================================================================= During the fourth quarters of 1997 and 1996, the Company recorded charges of $3,207,000 and $5,443,000, respectively, relating to the accelerated amortization of software resulting from the planned consolidation of certain product lines. Routine maintenance of software products, design costs, Year 2000 costs and development costs incurred prior to establishment of a product's technological feasibility are expensed as incurred. INTANGIBLE ASSETS Intangible assets relate to acquisitions and consist of the following at December 31: (In thousands) 1997 1996 ================================================================= Computer software acquired $ 30,205 $ 29,326 Other 65,035 71,155 - ----------------------------------------------------------------- 95,240 100,481 Less accumulated amortization 44,814 45,933 - ----------------------------------------------------------------- TOTAL $ 50,426 $ 54,548 ================================================================= Goodwill $387,750 $317,077 Less accumulated amortization 32,470 24,988 - ----------------------------------------------------------------- TOTAL $355,280 $292,089 ================================================================= Except as noted below, the cost allocated to computer software acquired in business acquisitions is being amortized on a straight-line basis over its expected useful life (generally five years or less). Other intangible assets comprise primarily contract rights, customer bases, trademarks and non- competition agreements applicable to business acquisitions. These assets are being amortized using the straight-line method over their estimated useful lives, ranging from five to 35 years. The excess of the purchase price over the estimated fair value of tangible and identifiable intangible assets acquired has been recorded as goodwill and is being amortized over 40 years. The Company periodically reviews goodwill and other long-lived assets to assess recoverability, and impairments would be recognized in operating results if a permanent diminution in value were to occur. In connection with the acquisition in 1995 of Information Technology, Inc. (ITI) referred to in Note 2 below, the allocation of the purchase price to the various classes of assets was determined on the basis of an opinion expressed by a nationally recognized independent appraisal firm. Values determined for incomplete software have been expensed and values for completed software have been amortized utilizing accelerated methods. INCOME TAXES The consolidated financial statements are prepared on the accrual method of accounting. Deferred income taxes are provided for temporary differences between the Company's income for accounting and tax purposes. REVENUE RECOGNITION Revenues result primarily from the sale of data processing services to financial institutions, software sales and administration of self-directed retirement plans. Such revenues are recognized as the related services are provided. Revenues include investment income of $63,620,000, $49,237,000, and $45,648,000, net of direct credits to customer accounts of $46,006,000, $40,686,000, and $43,191,000 in 1997, 1996 and 1995, respectively. Deferred revenues consist primarily of advance billings for services and are recognized as revenue when the services are provided. INCOME PER SHARE 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. Income per share for 1996 and 1995 has been restated to comply with Statement of Financial Accounting Standards No. 128, "Earnings per Share". SUPPLEMENTAL CASH FLOW INFORMATION (In thousands) 1997 1996 1995 ================================================================= Interest paid $ 17,358 $22,942 $21,184 Income taxes paid 58,643 45,308 19,556 Liabilities assumed in acquisitions of businesses 197,235 1,596 49,279 ================================================================= 30 Fiserv, Inc. and subsidiaries
NOTE 2 Acquisitions and Capital Transactions Acquisitions During 1997, 1996 and 1995 the Company completed the following acquisitions: Month Company Acquired Type of Business Consideration - ---------------------------------------------------------------------------------------------------------------- 1997: AdminaStar Communications Apr. Laser print and mailing services Cash for stock Interactive Planning Systems May Financial processing systems Stock for stock BHC Financial, Inc. May Securities processing and Stock for stock support services Florida Infomanagement Services, Inc. (FIS, Inc.) Sep. Data processing and software Cash for stock sales Stephens Inc., clearing brokerage operations Sep. Securities processing 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 processing services Cash for stock Hanifen, Imhoff Holdings, Inc. Dec. Clearing services Cash and stock for stock ................................................................................................................ 1996: UniFi, Inc. Jan. Software and services Cash for stock Bankers Pension Services, Inc. Nov. Retirement plan administrators Stock for stock ................................................................................................................ 1995: Integrated Business Systems Jan. Forms Cash for stock BankLink, Inc. Feb. Cash management Cash for stock Information Technology, Inc. May Financial processing systems Cash and stock for stock Lincoln Holdings, Inc. Aug. Retirement plan administrators Stock for stock SRS, Inc. Sep. Data processing Cash for stock Document Management Services Sep. Item processing Cash for assets Division of ALLTEL Financial Information Services, Inc. Financial Information Trust Nov. Data processing Cash for stock Outsource Technology L. C. Nov. Data processing Cash for stock - ----------------------------------------------------------------------------------------------------------------
Generally, the acquisitions were accounted for as purchases and, accordingly, the operations of the acquired companies are included in the consolidated financial statements since their respective dates of acquisition as set forth above. Certain of the acquisitions were accounted for as poolings of interests. However, except for the acquisitions of Lincoln Holdings, Inc. (LHI) and BHC Financial, Inc. (BHC), prior year financial statements were not restated due to immateriality. Results of operations of BHC and LHI have been included with those of the Company for all periods presented. The clearing operations of Hanifen, Imhoff Holdings, Inc. (HIH) were acquired as of the close of business December 31, 1997 and, accordingly, the accompanying financial statements include the balance sheet accounts of HIH as of that date but no operations for the year then ended. Pro forma information including the results of operations of HIH has not been presented due to lack of materiality. The acquisition of HIH was consummated for a consideration of approximately $110 million comprising approximately 1,185,000 shares of common stock of the Company and $52 million cash. In connection with certain acquisitions consummated during 1997, the Company issued approximately 1,123,000 unregistered shares of its common stock. The Company relied upon the exemption provided in Section 4(2) of the Securities Act of 1933 and Rule 505 of Regulation D, based upon the number of shareholders of the respective companies and the aggregate value of the transactions. No underwriter was involved in the transactions and no commission was paid. Fiserv, Inc. and subsidiaries 31 The acquisition of ITI was consummated for a consideration of approximately $377 million comprising approximately 4,574,000 shares of common stock of the Company and $249 million cash, including acquisition costs. Approximately 903,000 shares of common stock of the Company were issued in the acquisition of LHI. Net income of the Company for 1995 was determined after a pretax charge of $182.9 million relating to the writeoff of incomplete software technology and accelerated amortization of completed software relating to the acquisition of ITI. Accordingly, net income was reduced in 1995 by $109.6 million. 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, generally, five to 10 years from the date of the award. Activity under the current and prior plans during 1995, 1996 and 1997 is summarized as follows:
SHARES ----------------------- WEIGHTED NON- PRICE AVERAGE INCENTIVE QUALIFIED RANGE EXERCISE PRICE - ---------------------------------------------------------------------------------------------------- Outstanding, December 31, 1994 30,420 2,471,827 $ 1.63-22.50 $15.02 Granted 440,434 21.50-27.50 21.99 Forfeited (115,493) 1.63-27.50 19.81 Exercised (10,140) (413,588) 1.63-21.81 9.95 - ------------------------------------------------------------------ Outstanding, December 31, 1995 20,280 2,383,180 1.63-27.50 16.87 Granted 617,354 26.50-36.75 29.45 Forfeited (89,147) 11.48-30.50 20.12 Exercised (18,590) (309,977) 1.63-30.50 15.56 - ------------------------------------------------------------------ Outstanding, December 31, 1996 1,690 2,601,410 5.77-36.75 19.89 Assumed from BHC 562,284 7.30-31.50 17.75 Granted 689,403 36.00-49.00 37.98 Forfeited (51,034) 6.21-36.00 28.75 Exercised (1,690) (640,365) 5.77-36.00 19.57 - ------------------------------------------------------------------ Outstanding, December 31, 1997 0 3,161,698 6.21-49.00 23.35 - ------------------------------------------------------------------ Shares exercisable, December 31, 1997 0 2,246,186 - ----------------------------------------------------------------------------------------------------
Options outstanding include 113,482 and 64,845 shares granted in 1996 and 1997 at $29.88 and $36.44 a share, respectively, under a stock purchase plan requiring exercise within 30 days after a two-year period beginning on the date of grant. At December 31, 1997, options to purchase 3,190,000 shares were available for grant under the Plan. The Company has accounted for its stock-based compensation plans in accordance with the provisions of APB Opinion 25. Accordingly, the Company did not record any compensation expense in the accompanying financial statements for its stock-based compensation plans. Had compensation expense been recognized consistent with FASB Statement 123 ("Accounting for Stock-Based Compensation"), the Company's net income would have been reduced by approximately $2,200,000 and $981,000 in 1997 and 1996, respectively. Earnings per share-diluted would have been reduced by $.04 and $.02 in 1997 and 1996, respectively. The assumptions used to estimate compensation expense were: expected volatility of 18.3%, risk-free interest rate of 6.5% and expected option lives of five years. 32 Fiserv, Inc. and subsidiaries NOTE 3 Long-Term Debt The Company has available a $225,000,000 unsecured line of credit and commercial paper facility with a group of banks, maturing in 2000, of which $113,572,000 was in use at December 31, 1997 at an average rate of 6.26%. 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, 1997. A facility fee ranging from .1% to .2% per annum is required on the entire bank line regardless of usage. The facility is reduced to $210,000,000 and $150,000,000, respectively, on May 17, 1998 and 1999 and expires on May 17, 2000. Long-term debt outstanding at the respective year-ends comprised the following:
(In thousands) December 31, 1997 1996 - -------------------------------------------------------------------------------- 9.45% senior notes payable, due 1998-2000 $12,857 $17,143 9.75% senior notes payable, due 1998-2001 10,000 12,500 8.00% senior notes payable, due 1999-2005 90,000 90,000 Bank notes and commercial paper 136,585 151,859 Other obligations 2,589 1,362 ................................................................................ TOTAL $252,031 $272,864 - --------------------------------------------------------------------------------
Annual principal payments required under the terms of the long-term agreements were as follows at December 31, 1997:
(In thousands) Year - ------------------------------------------- 1998 $ 8,783 1999 21,414 2000 149,668 2001 16,308 2002 13,714 Thereafter 42,144 ........................................... TOTAL $252,031 - -------------------------------------------
Interest expense with respect to long-term debt amounted to $16,964,000, $22,431,000 and $22,006,000 in 1997, 1996 and 1995, respectively. NOTE 4 Income Taxes A reconciliation of recorded income tax expense with income tax computed at the statutory federal tax rates follows:
(In thousands) 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------- Statutory federal tax rate 35% 35% 35% Tax computed at statutory rate $53,865 $47,062 $(26,651) State income taxes net of federal effect 5,995 5,093 (4,877) Non-deductible amortization 1,408 1,504 1,239 Other 1,831 1,095 69 ....................................................................................................................... TOTAL $63,099 $54,754 $(30,220) - -----------------------------------------------------------------------------------------------------------------------
The provision for income taxes consisted of the following:
(In thousands) 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------- Currently payable $53,865 $50,068 $26,551 Tax reduction credited to capital in excess of par value 5,000 2,000 2,400 Deferred 4,234 2,686 (59,171) ...................................................................................................................... TOTAL $63,099 $54,754 $(30,220) - ----------------------------------------------------------------------------------------------------------------------
The approximate tax effects of temporary differences at December 31, 1997 and 1996 were as follows:
(In thousands) 1997 1996 - ------------------------------------------------------------------------------------------------------------------------ Allowance for doubtful accounts $ 2,027 $ 1,529 Accrued expenses not currently deductible 16,835 7,649 Deferred revenues 8,688 9,815 Other 230 (232) Net operating loss and credit carryforwards 2,295 3,871 Deferred costs (4,314) (4,963) Internally generated capitalized software (29,999) (28,900) Excess of tax over book depreciation and amortization (5,992) (3,185) Purchased incomplete software technology 56,888 61,500 Unrealized gain on investments (11,425) (12,940) ...................................................................................................................... TOTAL $35,233 $34,144 - ----------------------------------------------------------------------------------------------------------------------
The net operating loss and tax credit carryforwards have expiration dates ranging from 1998 through 2010. Fiserv, Inc. and subsidiaries 33 NOTE 5. Employee Benefit Programs The Company and its subsidiaries have contributory savings plans covering substantially all employees, under which eligible participants may elect to contribute a specified percentage of their salaries, subject to certain limitations. The Company makes matching contributions, subject to certain limitations, and also makes discretionary contributions based upon the attainment of certain profit goals. Company contributions vest at the rate of 20% for each year of service. Contributions charged to operations under these plans approximated $14,383,000, $10,074,000 and $8,144,000 in 1997, 1996 and 1995, respectively. NOTE 6. Leases, Other Commitments and Contingencies LEASES Future minimum rental payments, as of December 31, 1997, on various operating leases for office facilities and equipment were due as follows:
(In thousands) Year - -------------------------------------------------------------------------------- 1998 $47,509 1999 36,817 2000 29,436 2001 20,789 2002 14,957 Thereafter 23,311 ................................................................................ TOTAL $172,819 - --------------------------------------------------------------------------------
Rent expense applicable to all operating leases was approximately $55,515,000, $52,638,000 and $51,144,000 in 1997, 1996 and 1995, respectively. OTHER COMMITMENTS AND CONTINGENCIES The Company's trust administration subsidiaries had fiduciary responsibility for the administration of approximately $20 billion in trust funds as of December 31, 1997. With the exception of the trust account investments discussed in Note 1, such amounts are not included in the accompanying 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, 1997, the aggregate net capital of such subsidiaries was $100,847,000, exceeding the net capital requirement by $83,180,000. 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. 34 Fiserv, Inc. and subsidiaries MANAGEMENT'S DISCUSSION & 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. The table is based upon the accompanying supplemental schedule which excludes certain charges to 1995 operations associated with the acquisition of Information Technology, Inc.
PERCENTAGE OF REVENUES PERIOD TO PERIOD PERCENTAGE YEAR ENDED DECEMBER 31, INCREASE (DECREASE) ----------------------------------------------------------- 1997 vs. 1996 vs. 1997 1996 1995 1996 1995 ----------------------------------------------------------- Revenues 100.0% 100.0% 100.0% 10.8% 14.3% - ------------------------------------------------------------------------------------------------- Cost of revenues: Salaries, commissions and payroll related costs 46.7 44.9 45.7 15.2 12.5 Data processing expenses, rentals and telecommunication costs 10.3 11.1 13.1 2.9 (3.2) Other operating costs 19.5 18.6 18.3 15.8 16.2 Depreciation and amortization of equipment and improvements 5.0 5.0 5.3 11.3 9.0 Amortization of intangible assets 1.5 2.4 2.1 (34.2) 31.7 Amortization (capitalization) of internally generated software--net 0.4 (0.8) (99.0) (158.5) ................................................................................................. Total cost of revenues 83.0 82.4 83.7 11.4 12.8 - ------------------------------------------------------------------------------------------------- Operating income 17.0% 17.6% 16.3% 8.0 22.3 - ------------------------------------------------------------------------------------------------- Income before income taxes 15.8% 15.3% 13.9% 14.5 26.0 - ------------------------------------------------------------------------------------------------- Net income 9.3% 9.1% 8.3% 13.9 25.1 - ------------------------------------------------------------------------------------------------------------------------------
The following discussion is based upon the accompanying supplemental schedule which excludes certain charges to 1995 operations associated with the acquisition of Information Technology, Inc. aggregating $182.9 million. Revenues increased $94,983,000 in 1997 and $110,345,000 in 1996. In both years, approximately half of the growth resulted from the inclusion of revenues from the date of purchase of acquired businesses as set forth in Note 2 to the financial statements and the balance in each year from the net addition of new clients, growth in the transaction volume experienced by existing clients and price increases. The Company provides item processing services in the Canadian market through a joint venture with Canadian Imperial Bank of Commerce, the revenues from which are recorded on a fee basis. If the gross revenues from this activity were recognized, revenues for the current year would have increased by approximately $205,000,000 or 23%. Cost of revenues increased $82,756,000 in 1997 and $82,359,000 in 1996. As a percentage of revenues, cost of revenues increased .6% from 1996 to 1997 and decreased 1.3% from 1995 to 1996. 1996 revenues included a significant amount of termination fees with no related costs incurred. The make up of cost of revenues has also been significantly affected in both years by business acquisitions and by changes in the mix of the Company's business as sales of software and related support activities, securities processing, item processing and electronic funds transfer operations have enjoyed an increasing percentage of total revenues. A significant portion of the purchase price of the Company's acquisitions has been allocated to intangible assets, such as client contracts, computer software, non-competition agreements and goodwill, which are being amortized over time, generally three to 40 years. Amortization of these costs decreased $7,324,000 from 1996 to 1997 and increased $5,143,000 from 1995 to 1996. The change from an increase in 1996 to a decrease in 1997 resulted primarily from accelerated amortization applied to completed software acquired in the acquisition of ITI. Capitalization of internally generated computer software is stated net of amortization and decreased $3,696,000 in 1997 and $10,114,000 in 1996. Net software capitalized approximated related amortization in 1997 and was more than offset by amortization in 1996 due primarily to the accelerated amortization of software in both years resulting from the planned consolidation of certain product lines. Operating income increased $12,227,000 in 1997 and $27,986,000 in 1996. As a percentage of revenues, operating income decreased .6% in 1997 and increased 1.3% in 1996. Fiserv, Inc. and subsidiaries 35 The effective income tax rate was 41% in 1997 and 1996 and 40% in 1995 (after the restatement for BHC). The effective income tax rate for 1998 is expected to remain at 41%. The Company believes that it has an effective plan to address the Year 2000 issue and expects to incur charges approximating $15 million a year in each of the next two years related to this issue. It is not anticipated that operating income as a percentage of revenues will be materially impacted by these charges. The Company's growth has been largely accomplished through the acquisition of entities engaged in 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. CONSOLIDATED STATEMENTS OF INCOME SUPPLEMENTAL SCHEDULE (Unaudited)
(In thousands, except per share data) Year ended December 31, 1997 1996 1995 - ---------------------------------------------------------------------------------------- REVENUES $ 974,432 $ 879,449 $ 769,104 ........................................................................................ COST OF REVENUES: Salaries, commissions and payroll related costs 454,850 394,932 351,180 Data processing expenses, rentals and telecommunication costs 100,601 97,721 100,908 Other operating expenses 189,982 164,003 141,100 Depreciation and amortization of property and equipment 49,119 44,120 40,486 Amortization of intangible assets 14,067 21,391 16,248 Amortization (capitalization) of internally generated computer software -- net 36 3,732 (6,382) ........................................................................................ TOTAL 808,655 725,899 643,540 ........................................................................................ OPERATING INCOME 165,777 153,550 125,564 Interest expense -- net 11,878 19,088 18,822 ........................................................................................ INCOME BEFORE INCOME TAXES 153,899 134,462 106,742 Income tax provision 63,099 54,754 43,034 ........................................................................................ NET INCOME $ 90,800 $ 79,708 $ 63,708 - ---------------------------------------------------------------------------------------- Net income per common share: Diluted $ 1.70 $ 1.53 $ 1.27 - ---------------------------------------------------------------------------------------- Shares used in computing net income per share: Diluted 53,528 52,046 50,298 - ----------------------------------------------------------------------------------------
Note: Supplemental information provided for comparative purposes. 1995 excludes certain charges associated with the acquisition of Information Technology, Inc. The charges related to the acquisition of Information Technology, Inc. (ITI) in 1995 are a pre-tax special, one-time, non-cash charge of $173 million to expense the purchased ITI Premier II research and development and a pre-tax charge of $9.9 million for the accelerated amortization of the completed ITI Premier I software. The combined after-tax charge was $109.6 million ($2.18 per share- diluted). 36 Fiserv. Inc. and subsidiaries The following supplemental schedule presents the results of operations of the Company for the periods presented as originally reported before restatement of 1996 and 1995 for BHC Financial, Inc. and before certain charges related to the acquisition in 1995 of Information Technology, Inc.
(In thousands, except per share data) Year ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------- REVENUES $974,432 $798,268 $703,380 ............................................................................................................. COST OF REVENUES: Salaries, commissions and payroll related costs 454,850 371,526 330,845 Data processing expenses, rentals and telecommunication costs 100,601 90,919 95,798 Other operating expenses 189,982 145,230 125,498 Depreciation and amortization of property and equipment 49,119 42,241 38,480 Amortization of intangible assets 14,067 20,983 15,962 Amortization (capitalization) of internally generated computer software--net 36 3,732 (6,382) ............................................................................................................. TOTAL 808,655 674,631 600,201 ............................................................................................................. OPERATING INCOME 165,777 123,637 103,179 Interest expense--net 11,878 19,088 18,822 ............................................................................................................. INCOME BEFORE INCOME TAXES 153,899 104,549 84,357 Income tax provision 63,099 42,865 34,586 ............................................................................................................. NET INCOME $ 90,800 $ 61,684 $ 49,771 - ------------------------------------------------------------------------------------------------------------- Net income per common share: Diluted $ 1.70 $ 1.34 $ 1.13 - ------------------------------------------------------------------------------------------------------------- Shares used in computing net income per share: Diluted 53,528 46,198 44,008 - ------------------------------------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES The following table summarizes the Company's primary sources of funds: (In thousands) Year Ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------- Cash provided by operating activities before changes in securities processing receivables and payables--net $175,506 $173,774 $107,037 Securities processing receivables and payables--net (5,948) (3,660) 29,935 ............................................................................................................. Cash provided by operating activities 169,558 170,114 136,972 Issuance of common stock--net 10,040 4,896 638 Decrease (increase) in investments (55,625) 16,831 10,254 Increase (decrease) in net borrowings (31,096) (119,640) 180,644 ............................................................................................................. TOTAL $ 92,877 $72,201 $328,508 - -------------------------------------------------------------------------------------------------------------
The Company has applied a significant portion of its cash flow from operations to acquisitions and the reduction of long-term debt and invests the remainder in short-term obligations until it is needed for further acquisitions or operating purposes. 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. Fiserv, Inc. and subsidiaries 37 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, 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------------------------- Revenues $ 974,432 $ 879,449 $ 769,104 $ 635,297 $ 519,996 Income (loss) before income taxes 153,899 134,462 (76,146) 84,098 70,832 Income taxes (credit) 63,099 54,754 (30,220) 33,067 27,107 Net income (loss) 90,800 79,708 (45,926) 51,031 43,725 Net income (loss) per share: Basic $1.75 $1.56 $(0.93) $1.10 $0.98 .................................................................................................. Diluted $1.70 $1.53 $(0.93) $1.08 $0.96 .................................................................................................. As originally reported $1.70 $1.34 $1.13 $0.95 $0.80 .................................................................................................. Total assets $3,636,491 $2,698,979 $2,514,597 $2,204,832 $1,874,939 Long-term debt 252,031 272,864 383,416 150,599 124,624 Shareholders' equity 769,255 605,898 514,866 425,389 370,740 - --------------------------------------------------------------------------------------------------
Note: The above information has been restated to recognize (1) a 3-for-2 stock split effective in May 1993 and (2) the acquisitions of Lincoln Holdings, Inc. in 1995 and of BHC Financial, Inc. in 1997 accounted for as poolings of interests. The net income (loss) per share as originally reported is before restatements due to poolings of interests and excludes the one-time after-tax charges of $2.49 per share related to the acquisition in 1995 of Information Technology, Inc. QUARTERLY FINANCIAL INFORMATION (Unaudited)
(In thousands, except per share data) Quarters -------------------------------------------- 1997 First Second Third Fourth Total - ---------------------------------------------------------------------------------------------- Revenues $228,319 $238,386 $238,255 $269,472 $974,432 .............................................................................................. Cost of revenues 186,522 199,748 196,252 226,133 808,655 .............................................................................................. Operating income 41,797 38,638 42,003 43,339 165,777 .............................................................................................. Income before income taxes 38,310 35,297 39,302 40,990 153,899 .............................................................................................. Income taxes 15,707 14,472 16,114 16,806 63,099 .............................................................................................. Net income $ 22,603 $ 20,825 $ 23,188 $ 24,184 $ 90,800 .............................................................................................. Net income per share: .............................................................................................. Basic $0.44 $0.40 $0.44 $0.46 $1.75 .............................................................................................. Diluted $0.43 $0.39 $0.43 $0.45 $1.70 - ----------------------------------------------------------------------------------------------
1996 - ---------------------------------------------------------------------------------------------- Revenues $215,059 $217,516 $215,332 $231,542 $879,449 .............................................................................................. Cost of revenues 176,326 178,285 178,234 193,054 725,899 .............................................................................................. Operating income 38,733 39,231 37,098 38,488 153,550 .............................................................................................. Income before income taxes 33,078 34,155 32,804 34,425 134,462 .............................................................................................. Income taxes 13,445 13,957 13,335 14,017 54,754 .............................................................................................. Net income $ 19,633 $ 20,198 $ 19,469 $ 20,408 $ 79,708 .............................................................................................. Net income per share: .............................................................................................. Basic $0.38 $0.40 $0.38 $0.40 $1.56 .............................................................................................. Diluted $0.38 $0.39 $0.37 $0.39 $1.53 - ----------------------------------------------------------------------------------------------
The above information has been restated to recognize the acquisition in 1997 of BHC Financial, Inc. accounted for on a pooling of interests basis. 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.
1997 1996 Quarter Ended High Low High Low - ----------------------------------------------------------------- March 31 39 32 3/4 32 25 3/8 June 30 44 5/8 36 3/4 33 3/8 28 1/16 September 30 49 1/2 43 7/8 38 11/16 28 5/8 December 31 50 1/8 39 3/4 39 5/8 34 - -----------------------------------------------------------------
At December 31, 1997, the Company's common stock was held by 1,960 shareholders of record. It is estimated that an additional 28,000 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 16, 1998 was $51.00 per share. The Company's present policy is to retain earnings to support future business opportunities, rather than to pay dividends. Fiserv, Inc. and subsidiaries 39 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, 1997 and 1996 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. 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 did not audit the financial statements of BHC Financial, Inc. and subsidiaries as of December 31, 1996 and for the two years ended December 31, 1996, and 1995, which statements reflect total assets of $785,229,000 as of December 31, 1996 and revenues of $81,181,000 and $65,724,000 for the respective years ended December 31, 1996 and 1995. Those financial statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for BHC Financial, Inc. and subsidiaries for such periods, is based solely on the report of such other auditors. 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 and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, such consolidated financial statements present fairly, in all material respects, the financial position of Fiserv, Inc. and subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Deloitte & Touche LLP Milwaukee, Wisconsin January 30, 1998 MANAGEMENT'S STATEMENT OF RESPONSIBILITY The management of Fiserv, Inc. assumes responsibility for the integrity and objectivity of the information appearing in the 1997 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/ George D. Dalton George D. Dalton Chairman and Chief Executive Officer 40 Fiserv, Inc. and subsidiaries