UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
OR
Commission file number 0-14948
FISERV, INC.
(Exact name of Registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
(262) 879 5000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
As of July 15, 2003, there were 193,563,285 shares of common stock, $.01 par value, of the Registrant outstanding.
PART I. FINANCIAL INFORMATION
FISERV, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended
June 30,
Six Months Ended
Revenues:
Processing and services
Customer reimbursements
Total revenues
Cost of revenues:
Salaries, commissions and payroll related costs
Customer reimbursement expenses
Data processing costs and equipment rentals
Other operating expenses
Depreciation and amortization
Total cost of revenues
Operating income
Interest expense—net
Income before income taxes
Income tax provision
Net income
Net income per share:
Basic
Diluted
Shares used in computing net income per share:
See notes to condensed consolidated financial statements.
2
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31,
2002
ASSETS
Cash and cash equivalents
Accounts receivable—net
Securities processing receivables
Prepaid expenses and other assets
Investments
Property and equipment
Intangible assets
Goodwill
Total
LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable
Securities processing payables
Short-term borrowings
Accrued expenses
Accrued income taxes
Deferred revenues
Customer funds held and retirement account deposits
Deferred income taxes
Long-term debt
Total liabilities
Shareholders’ equity:
Common stock issued, 193,558,000 and 192,450,000 shares, respectively
Additional paid-in capital
Accumulated other comprehensive income
Accumulated earnings
Treasury stock, at cost, 804,775 shares at December 31, 2002
Total shareholders’ equity
3
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Changes in assets and liabilities, net of effects from acquisitions of businesses:
Accounts receivable
Accounts payable and accrued expenses
Securities processing receivables and payables—net
Net cash provided by operating activities
Cash flows from investing activities:
Capital expenditures, including capitalization of software costs for external customers
Payment for acquisitions of businesses, net of cash acquired
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from short-term borrowings—net
Repayment of debt under credit facility
Proceeds from issuance of long-term debt
Issuance of common stock and treasury stock
Net cash provided by financing activities
Change in cash and cash equivalents
Beginning balance
Ending balance
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Principles of Consolidation
The condensed consolidated financial statements for the three and six month periods ended June 30, 2003 and 2002 are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of such condensed consolidated financial statements have been included. Such adjustments consisted only of normal recurring items. Interim results are not necessarily indicative of results for a full year. The financial statements and notes are presented as permitted by Form 10-Q, and do not contain certain information included in the annual consolidated financial statements and notes of Fiserv, Inc. and subsidiaries (the “Company”). Certain amounts reported in prior periods have been reclassified to conform to the 2003 presentation.
2. Acquisitions
During the six month period ended June 30, 2003, the Company completed four acquisitions for total cash consideration of $157.2 million. In addition to cash consideration, the Company issued, in conjunction with one of the acquisitions, approximately 310,000 shares of its common stock valued at $10.9 million. The operations of these acquisitions are included in the consolidated results of operations from the dates of acquisition. Pro forma information for the acquisitions is not presented as the impact was not material.
Also, during the first six months of 2003, as a result of previously acquired entities achieving their operating income targets, the Company paid additional cash consideration of $33.1 million and issued approximately 678,000 shares of its common stock valued at $20.6 million which was treated as additional purchase price. The Company may be required to pay additional cash and common stock consideration for acquisitions, including three acquisitions closed in the first six months of 2003, up to maximum payments of $175.0 million through 2006, if certain of the acquired entities achieve specific escalating operating income targets.
On July 14, 2003, the Company completed its acquisition of the EDS Credit Union Industry Group for cash consideration of $217.6 million. This acquisition was funded through the use of existing cash and available capacity under the Company’s debt facilities.
3. Long-Term Debt
During the second quarter, the Company issued $250.0 million five-year notes due in 2008. The first note offering was for $150.0 million at a 4% fixed interest rate. The Company entered into fixed to floating interest rate swap agreements on the $150.0 million notes to manage its total ratio of fixed to floating rate long-term debt over the period of these notes. The second offering of five-year notes was for $100.0 million at a 3% fixed interest rate. The Company used the net proceeds from the offerings primarily to repay existing credit facilities and for general corporate purposes including the funding of acquisitions. The notes were offered to qualified institutional buyers under Rule 144A under the Securities Act of 1933.
4. Stock-Based Compensation
The Company has accounted for its stock-based compensation plans in accordance with the intrinsic value provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Accordingly, the Company did not record any compensation expense in the condensed consolidated financial statements for its stock-based compensation plans. The following table illustrates the effect on net income and net income per share had compensation expense been recognized consistent with the fair value provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation.” Stock options are typically granted in the first quarter of the year and generally vest 20% on the date of grant. As a result, the expense that would be recognized under SFAS No. 123 during the first quarter is significantly higher than the expense for the remaining quarters, representing approximately 35-40% of the full year's expense.
Three months ended
Six months ended
Net income:
As reported
Less: stock compensation expense—net of tax
Pro forma
Reported net income per share:
Pro forma net income per share:
5
5. Shares Used in Computing Net Income Per Share
The computation of the number of shares used in calculating basic and diluted net income per common share is as follows:
Weighted-average common shares outstanding used for calculation of basic net income per share
Employee stock options
Total shares used for calculation of diluted net income per share
6. Comprehensive Income
Comprehensive income is comprised of net income, unrealized gains and losses on available-for-sale investment securities, foreign currency translation and fair market value adjustments on cash flow hedges. Comprehensive income for the three month periods ended June 30, 2003 and 2002 was $81.4 million and $56.4 million and for the six month periods ended June 30, 2003 and 2002 was $146.0 million and $122.5 million, respectively.
Results of Operations
The Company is an independent provider of financial data processing systems and related information management services and products to financial institutions and other financial intermediaries. Due to the recent growth of the health plan management services of the Company, the Company changed its reportable business segments in the second quarter of 2003 to add the Health plan management services segment. The Health plan management services segment provides services to employers who self-fund their health plan, including services such as handling payments to health care providers, assisting with cost controls, plan design services, medical provider administration and other related services. The Company’s segments are the following: Financial institution outsourcing, systems and services (“FIS”); Health plan management services; Securities processing and trust services; and All other and corporate.
The table below and the following discussion exclude the revenues and expenses associated with customer reimbursements as management believes that it is not appropriate to include the customer reimbursements in analyzing the current performance of the Company. Customer reimbursements primarily consist of pass through expenses such as postage and data communication costs. Management excludes the customer reimbursements in analyzing the businesses as these balances offset in revenues and expenses with no impact on operating income and these amounts are not an indicator of current or future business trends.
Percentage
Increase
(Decrease)
Processing and services revenues:
Financial institution outsourcing, systems and services
Health plan management services
Securities processing and trust services
All other and corporate
Operating income:
All other and corporate (1)
6
Cost of revenues as a percentage of total processing and services revenues:
Operating margin:
Financial institution outsourcing, systems and services (2)
Health plan management services (2)
Securities processing and trust services (2)
Processing and Services Revenues
Processing and services revenues increased $95.5 million, or 17%, in the second quarter of 2003 compared to 2002 and $159.5 million, or 14%, in the first six months of 2003 compared to 2002. Year-to-date revenue growth was positively impacted in 2003 by continued strong revenue growth of $111.6 million, or 13%, in our FIS segment and $47.0 million, or 45%, in our expanding Health plan management services segment. Internal revenue growth of approximately 3% for the first six months of 2003 was derived from sales to new clients, cross-sales to existing clients, increases in transaction volumes from existing clients and price increases. The remaining 11% in revenue growth came from acquired businesses. In addition, the year-to-date internal revenue growth percentage was negatively impacted by 1% due to the weak, but improving U.S. retail securities financial market trading environment which impacts the Securities division and lower interest rates which negatively impacts both our Securities and Trust divisions. During the first quarter of 2003, the Securities processing and trust services segment recognized an increase in revenues of $15.8 million from the sale of available-for-sale investment securities and incurred a decrease in revenues of $17.0 million that resulted from an apparently fraudulent trading scheme at one of its broker-dealer clients. The Company has insurance that may cover part or all of this loss; however, no recovery amount is being recorded pending resolution of a claim. The Company also intends to pursue all recovery methods from the broker-dealer and its principals.
Cost of Revenues
Total cost of revenues increased $74.9 million, or 17%, in the second quarter of 2003 compared to 2002 and $123.7 million, or 14%, in the first six months of 2003 compared to 2002. As a percent of processing and services revenues, cost of revenues were 80% in 2003 and 2002. The make up of cost of revenues each quarter has been affected by business acquisitions and changes in the mix of the Company’s business. The Company completed the acquisition of EDS Corporation’s Consumer Network Services in December 2002, which has higher data processing costs and equipment rentals and lower salaries costs. This acquisition has resulted in an increase in data processing costs and equipment rentals and a decrease in salary costs as a percentage of revenues in 2003 compared to 2002.
Operating Income
Operating income increased $20.6 million, or 19%, in the second quarter of 2003 compared to 2002 and $35.8 million, or 16%, in the first six months of 2003 compared to 2002. The operating income increase was primarily derived from the FIS segment which increased $18.2 million, or 18%, in the second quarter of 2003 compared to 2002 and $32.2 million, or 17% in the first six months of 2003 compared to 2002. Operating income in the Health plan management services segment increased $2.4 million, or 29%, in the second quarter of 2003 compared to 2002 and $6.2 million, or 37%, in the first six months of 2003 compared to 2002. The increase in operating income was due to a number of factors including revenue growth and acquisitions.
Income Tax Provision
The effective income tax rate was 39% in 2003 and 2002.
Net Income
Net income for the second quarter increased 18% from $66.6 million in 2002 to $78.4 million in 2003. Net income for the first six months increased 16% from $131.8 million in 2002 to $152.6 million in 2003. Net income per share-diluted for the second quarter was $0.40 in 2003 compared to $0.34 in 2002. Net income per share-diluted for the first six months of 2003 was $0.78 compared to $0.67 in the comparable 2002 period.
7
Liquidity and Capital Resources
Changes in assets and liabilities excluding Securities processing receivables and payables-net
Cash flow from operations was $181.3 million in the first six months of 2003, which included negative cash flow from changes in securities processing receivables and payables of $79.0 million. As the changes in securities processing receivables and payables, retirement account deposits, investments and short-term borrowings generally offset, management believes it is more meaningful to analyze changes in operating cash flows before the change in securities processing receivables and payables. Cash flow from operations before securities processing receivables and payables increased 6% in the first six months of 2003 compared to 2002, reaching $260.3 million. The Company’s operating cash flow was negatively impacted in 2003 by a decrease in working capital changes compared to 2002 due to a number of factors, including: lower income tax benefits from the exercise of stock options; the timing of vendor payments primarily related to hardware shipments; and higher 401k profit sharing employer contributions. The Company has historically used a significant portion of its cash flow from operations for acquisitions and capital expenditures with any remainder used to reduce long-term debt. At June 30, 2003, the Company had $499.3 million of long-term debt, while shareholders’ equity exceeded $2.0 billion.
Long-term debt includes $195.2 million borrowed under the Company’s $510.0 million credit and commercial paper facility, which is payable in May 2004 or earlier at the Company’s option. The Company has available $295.7 million under its credit facility at June 30, 2003. The Company must, among other requirements, maintain a minimum net worth of $935.5 million as of June 30, 2003, maintain a fixed charge coverage ratio of 1.35 to one, and limit its total debt to no more than three and one-half times the Company’s earnings before interest, taxes, depreciation and amortization. The Company was in compliance with all debt covenants as of June 30, 2003.
At June 30, 2003, cash and cash equivalents were $291.1 million, an increase of $63.9 million from December 31, 2002, after spending $190.3 million on acquired businesses and $55.3 million on capital expenditures in the first six months of 2003. In addition, gross software development costs for external customers capitalized in the first six months of 2003 were $25.6 million, offset by associated amortization of $20.5 million.
The Company believes that its cash flow from operations together with other available sources of funds will be adequate to meet its operating requirements, debt repayments, contingent payments in connection with business acquisitions and ordinary capital spending needs.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
Except for the historical information contained herein, the matters discussed in this Form 10-Q are forward-looking statements that 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 this Form 10-Q and the Company’s prior filings with the Securities and Exchange Commission. Since these statements are subject to risks and uncertainties and are subject to changes at any time, actual results could differ materially from expected results. Therefore, there can be no assurance that the forward-looking statements included in this Form 10-Q 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.
The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference to Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 and have not materially changed since that report was filed.
8
Evaluation of disclosure controls and procedures.
In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), an evaluation was carried out with the participation of the Company’s management, including the Company’s President and Chief Executive Officer and Senior Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-14(c) and 15d-14(c) under the Exchange Act) as of the end of the quarter ended June 30, 2003. Based upon their evaluation of these disclosure controls and procedures, the President and Chief Executive Officer and the Senior Executive Vice President and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the quarter ended June 30, 2003 to ensure that material information relating to the Company, including its consolidated subsidiaries, was made known to them by others within those entities, particularly during the period in which this quarterly report on Form 10-Q was being prepared.
Changes in internal controls over financial reporting.
There was not any change in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2003 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
During the second quarter the Company settled its legal action against E*TRADE Securities, Inc. (E*TRADE). Under the terms of the settlement, E*TRADE paid the Company approximately $23.0 million. Prior to settlement the net carrying value of the bond on the Company’s balance sheet was $23.9 million ($27.0 million carrying value of the bond as previously disclosed by the Company in its footnotes, less a payment received from the issuer of $3.1 million).
The exhibits listed in the accompanying exhibit index are filed as part of this Quarterly Report on Form 10-Q.
The Company filed a report on Form 8-K under Items 7 and 9 dated April 22, 2003, reporting the announcement of the Company’s earnings for the first quarter of 2003.
The Company filed a report on Form 8-K under Items 5 and 7 dated May 12, 2003, reporting the announcement of the Company’s settlement of its legal action against E*TRADE Securities, Inc.
The Company filed a report on Form 8-K under Item 5 dated May 22, 2003, announcing that Thomas C. Wertheimer, a retired Senior Partner for PricewaterhouseCoopers LLP, was named to serve on the Company’s Board of Directors.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
Date July 22, 2003
/s/ KENNETH R. JENSEN
KENNETH R. JENSEN
Senior Executive Vice President,
Chief Financial Officer,
Treasurer and Assistant Secretary
9
EXHIBIT INDEX
Exhibit
Number
Exhibit Description
Certification of the Chief Executive Officer, dated July 22, 2003
(This certification required as Exhibit 31 under Item 601(a) of Regulation S-K is filed as Exhibit 99.1 pursuant to SEC interim filing guidance.)
Certification of the Chief Financial Officer, dated July 22, 2003
(This certification required as Exhibit 31 under Item 601(a) of Regulation S-K is filed as Exhibit 99.2 pursuant to SEC interim filing guidance.)
Written Statement of the Chief Executive Officer, dated July 22, 2003
(This certification required as Exhibit 32 under Item 601(a) of Regulation S-K is furnished in accordance with Item 601(b)(32)(iii) of Reguation S-K as Exhibit 99.3 pursuant to SEC interim filing guidance.)
Written Statement of the Chief Financial Officer, dated July 22, 2003
(This certification required as Exhibit 32 under Item 601(a) of Regulation S-K is furnished in accordance with Item 601(b)(32)(iii) of Reguation S-K as Exhibit 99.4 pursuant to SEC interim filing guidance.)