-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KnP9AafgYu4u/Edc9qLwsGPdRep7pKcSn7mqFIKd4rY05NPVSzrI8hUIGQuHwCN3 rA1esyZh8lK0QsuJ1yD6UA== 0000740112-98-000019.txt : 19981118 0000740112-98-000019.hdr.sgml : 19981118 ACCESSION NUMBER: 0000740112-98-000019 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONCORD EFS INC CENTRAL INDEX KEY: 0000740112 STANDARD INDUSTRIAL CLASSIFICATION: FUNCTIONS RELATED TO DEPOSITORY BANKING, NEC [6099] IRS NUMBER: 042462252 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-13848 FILM NUMBER: 98750134 BUSINESS ADDRESS: STREET 1: 2525 HORIZON LAKE DR STE 120 CITY: MEMPHIS STATE: TN ZIP: 38133 BUSINESS PHONE: 9013718000 MAIL ADDRESS: STREET 1: 2525 HORIZON LAKE DRIVE STREET 2: SUITE 120 CITY: MEMPHIS STATE: TN ZIP: 38133 FORMER COMPANY: FORMER CONFORMED NAME: CONCORD COMPUTING CORP DATE OF NAME CHANGE: 19920515 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended Commission file number 0-13848 September 30, 1998 ___________________________ CONCORD EFS, INC. (Exact name of registrant as specified in its charter) Delaware 04-2462252 ______________________________ _____________________ (State or other jurisdiction of (I.R.S. Employer Incorporation of Organization) Identification Number) 2525 Horizon Lake Drive, Suite 120, Memphis, Tennessee 38133 (Address of Principal Executive Offices) (901) 371-8000 (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[ ] The number of shares of the registrant's Common Stock, $.33 1/3 par value, as of September 30, 1998 was 97,797,141. CONCORD EFS, INC. AND SUBSIDIARIES INDEX Page No. -------- PART 1- Financial Information Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets September 30, 1998 and December 31, 1997 1 Condensed Consolidated Statements of Income Three and Nine Months ended September 30, 1998 and September 30, 1997 2 Condensed Consolidated Statements of Cash Flows Nine Months ended September 30, 1998 and September 30, 1997 3 Notes to Condensed Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 PART II - Other Information Item 6. Exhibits and Reports on Form 8-K 10 Signatures 11 CONCORD EFS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) September 30 December 31 1998 1997 ------------ ----------- (Restated) ASSETS (In thousands) CURRENT ASSETS Cash and cash equivalents $ 68,164 $ 63,795 Securities available-for-sale 246,079 140,199 Accounts receivable, net 77,632 54,166 Inventories 7,554 5,259 Prepaid expenses and other 6,227 5,765 -------- -------- TOTAL CURRENT ASSETS 405,656 269,184 SECURITIES HELD-TO-MATURITY 52,508 OTHER ASSETS 23,358 14,478 PROPERTY AND EQUIPMENT 109,629 89,520 Less accumulated depreciation and amortization (65,950) (57,251) -------- -------- 43,679 32,269 -------- -------- TOTAL ASSETS $472,693 $368,439 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and other liabilities $ 61,062 $ 51,701 Accrued liabilities 7,883 10,453 Income taxes payable 990 Current maturities of long-term debt 230 445 -------- -------- TOTAL CURRENT LIABILITIES 69,175 63,589 LONG-TERM DEBT, LESS CURRENT MATURITY 73,000 28,329 DEFERRED INCOME TAXES 3,877 2,591 STOCKHOLDERS' EQUITY: Common Stock-par value $.33 1/3 per share; authorized 200,000 shares, issued and outstanding 97,657 shares at June 30, 1998; authorized 100,000 shares, issued and outstanding 66,404 shares at December 31, 1997 32,599 22,135 Other stockholders' equity 294,042 251,795 -------- -------- TOTAL STOCKHOLDERS' EQUITY 326,641 273,930 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS'EQUITY $472,693 $368,439 ======== ======== See Notes to Condensed Consolidated Financial Statements - Unaudited. -1- CONCORD EFS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three Months Ended Nine Months Ended September 30 September 30 -------------------- --------------------- 1998 1997 1998 1997 ------- ------- -------- -------- (Restated) (Restated) (In thousands, except earnings per share) Revenue $99,715 $71,306 $266,570 $189,719 Cost of operations 73,490 52,360 197,042 141,825 Selling, general and administrative expenses 3,987 4,090 12,373 11,596 ------- ------- -------- -------- OPERATING INCOME 22,238 14,856 57,155 36,298 Other income (expense): Interest income 4,442 3,299 12,209 8,162 Interest expense (1,063) (299) (2,692) (496) ------- ------- -------- -------- INCOME BEFORE INCOME TAXES 25,617 17,856 66,672 43,964 Income taxes 8,908 6,264 22,789 16,234 ------- ------- -------- -------- NET INCOME $16,709 $11,592 $ 43,883 $ 27,730 ======= ======= ======== ======== Per share data: Weighted average shares 97,695 96,662 97,563 96,137 ====== ====== ====== ====== Basic earnings per share $0.17 $0.12 $0.45 $0.29 ===== ===== ===== ===== Adjusted weighted average shares and assumed conversions 100,750 99,848 100,168 99,090 ======= ====== ======= ====== Diluted earnings per share $0.17 $0.12 $0.44 $0.28 ===== ===== ===== ===== See Notes to Condensed Consolidated Financial Statements - Unaudited. -2- CONCORD EFS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended September 30 --------------------- 1998 1997 -------- ------- (Restated) (In thousands) NET CASH PROVIDED BY OPERATING ACTIVITIES $39,445 $ 6,921 INVESTING ACTIVITIES: Acquisition of property and equipment (20,109) (9,739) Purchases of securities available-for-sale (146,705) (98,444) Purchase of securities held-to-maturity (9,630) (13,138) Sale of securities available-for-sale 67,617 40,722 Maturities of securities available-for-sale 4,844 18,513 Maturities of securities held-to-maturity 33,681 14,713 Merchant contracts purchased (11,851) (9,033) ------- ------- NET CASH USED IN INVESTING ACTIVITIES (82,153) (56,406) FINANCING ACTIVITIES: Proceeds from exercise of stock options 2,621 5,377 Proceeds from notes payable 45,000 18,000 Payments on notes payable (544) (311) ------- ------- NET CASH PROVIDED BY FINANCING ACTIVITIES 47,077 23,066 ------- ------- (DECREASE)INCREASE IN CASH AND CASH EQUIVALENTS 4,369 (26,419) Cash and cash equivalents at beginning of period 63,795 99,976 ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $68,164 $73,557 ======= ======= For purposes of these statements, the Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. See Notes to Condensed Consolidated Financial Statements - Unaudited. -3- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1998 Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulations S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 1998 are not necessarily indicative of the results that may be expected for the year ended December 31, 1998. For further information, refer to the consolidated financial statements and footnotes thereto included in the Registrant's annual report on Form 10-K for the year ended December 31, 1997. The balance sheet at December 31, 1997 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Recently Issued Accounting Pronouncements In June 1997, the Financial Accounting Standards Board (FASB) issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information," which is effective for annual and interim periods beginning after December 15, 1997. The Company will adopt the new requirements retroactively in fiscal 1999. This statement established standards for the method that public entities use to report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to stockholders. It also establishes standards for related disclosures about products and services, geographical areas and major customers. Management has not completed its review of the statement, but does not anticipate its adoption will have a significant effect on the Company's annual or interim reporting. The FASB issued in June 1998 its new standard on derivatives - Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities". The new Statement resolves the inconsistencies that existed wiht respect to derivative accounting, and dramatically changes the way that many derivative transactions and hedged items are reported. The Statement is effective for years beginning after June 15, 1999, however, the Company adopted the statement early on July 1, 1998. The Company has determined that the effect of Statement 133 will not be material to the earnings and financial condition of the Company. Under provisions of the Statement, the Company has reclassified all securities held-to-maturity to securities available-for-sale on July 1, 1998. Restatement for Pooling The historical financial information presented in this Form 10-Q has been restated to include the results of Digital Merchant Systems(DMS). DMS was acquired in a pooling-of-interests transaction completed on June 30, 1998. In accordance with pooling-of-interests method of accounting, no adjustments have been made to the historical carrying amounts of assets and liabilities of DMS. However, the financial information has been restated to include the operating results of DMS for all periods prior to the combination. -4- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1998 Restatement for Pooling - continued The results of operations reported by the separate enterprises and the combined amounts are summarized as follows: (in thousands) Three months ended Nine months ended September 30 September 30 ---------------------------- ---------------------------- 1998 1997 1998 1997 ------------- ------------- ------------- ------------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) Revenue Concord EFS $91,195 $64,716 $243,917 $168,521 DMS 8,520 6,590 22,653 21,198 ------- ------- -------- -------- Combined $99,715 $71,306 $266,570 $189,719 ======= ======= ======== ======== Net income (loss) Concord EFS $15,681 $11,422 $40,941 $ 29,485 DMS 1,028 170 2,942 (1,755) ------- ------- -------- -------- Combined $16,709 $11,592 $43,883 $ 27,730 ======= ======= ======== ======== Stock Split The Board of Directors approved a three-for-two stock split on May 14, 1998. Shareholders of record as of June 1, 1998 were distributed additional shares on June 8, 1998. Securities Below is a summary of the net unrealized gains on securities available-for-sale, in thousands: September 30 December 31 1998 1997 ------------ ----------- Increase in securities available-for-sale $3,306 $161 Decrease in deferred taxes (1,161) (62) Increase in equity 2,145 99 -5- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1998 Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share (in thousands, except earnings per share): Three Months Ended Nine Months Ended September 30 September 30 1998 1997 1998 1997 ------- ------- ------- ------- Numerator: Net income $16,709 $11,592 $43,883 $27,730 ======= ======= ======= ======= Denominator: Denominator for basic earnings per share, weighted-average shares 97,695 96,662 97,563 96,137 Effect of dilutive securities, employee stock options 3,055 3,186 2,605 2,953 ------- ------ ------- ------ Denominator for diluted earnings per share adjusted for weighted-average shares and assumed conversions 100,750 99,848 100,168 99,090 ======= ====== ======= ====== Basic earnings per share $0.17 $0.12 $0.45 $0.29 ===== ===== ===== ===== Diluted earnings per share $0.17 $0.12 $0.44 $0.28 ===== ===== ===== ===== Earnings per share and related per share data have been restated to reflect all stock splits. Comprehensive Income As of January 1, 1998, the Company adopted Financial Accounting Standards Board (FASB) Statement 130, "Reporting Comprehensive Income". Statement 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the Company's net income or stockholders' equity. Statement 130 requires unrealized gains or losses on the Company's available-for-sale securities, which prior to adoption were reported separately in stockholders' equity to be included in other comprehensive income. Prior year financial statements have been reclassified to conform to the requirements of Statement 130. During the third quarter of 1998 and 1997, total comprehensive income, in thousands, amounted to $18,612 and $11,911, respectively. During the nine months ended September 30, 1998 and 1997, total comprehensive income, in thousands, amounted to $45,929 and $28,191, respectively. -6- CONCORD EFS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Form 10-Q may contain or incorporate by reference statements which may constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Prospective investors are cautioned that any such statements are not guarantees for future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include significant fluctuations in interest rates, inflation, economic recession, significant changes in the federal and state legal and regulatory environment, successful implementation of the Company's Year 2000 compliance project, and competition in the Company's markets. The Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future results over time. Restatement for Pooling The historical financial information presented in this Form 10-Q has been restated to include the results of Digital Merchant Systems(DMS). DMS was acquired in a pooling-of-interests transaction completed on June 30, 1998. In accordance with pooling-of-interests method of accounting, no adjustments have been made to the historical carrying amounts of assets and liabilities of DMS. However, the financial information has been restated to include the operating results of DMS for all periods prior to the combination. Acquisition On June 30, 1998, the Company issued 4.425 million shares of its common stock in exchange for all the outstanding stock of DMS, an independent sales organization in the credit card processing industry. This business combination has been accounted for as a pooling-of-interests combination and, accordingly, the consolidated financial statements for periods prior to the combination have been restated to include the accounts and results of operations of DMS. Additionally, the Company filed a registration statment under Form S-3 during the third quarter. The filing registered the shares issued in the DMS pooling, allowing the resale of the shares. The registration was declared effective September 17, 1998. Impact of Year 2000 The Company has completed an assessment and will have to modify portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The total Year 2000 project cost is not expected to be material to the Company's financial position or operating results and will be expensed as incurred. To date, the Company has expensed all cost associated with its Year 2000 assessment and related modifications of its software. The Company established a Year 2000 committee in November 1997 in response to the Year 2000 concerns. Mission critical systems have been identified and reviewed by the Company and are currently being tested. Internal mission critical system testing is estimated to be completed by December 31, 1998. The Company's processing systems also require testing for Year 2000 compliance with external entities such as credit and debit networks and telephone companies. External testing is estimated to be completed by March 31, 1999. The entire Year 2000 project is estimated to be completed not later than June 30, 1999, which is prior to any anticipated impact on its operating systems. -7- CONCORD EFS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued Impact of Year 2000 - continued The Year 2000 committee is also developing a contigency plan to respond to the worst case scenarios of the the Year 2000 issue. The Company anticpates completion of the contigency plan by March 31, 1999. The Company believes that with modifications to existing software, the Year 2000 Issue will not pose significant operational problems for its computer systems. However, if such modifications and conversions are not made, or are not completed timely, the Year 2000 Issue could have a material impact on the operations of the Company. The Company has initiated formal communications with all of its significant suppliers, networks and large customers to determine the extent to which the Company's interface systems are vulnerable to those third parties' failure to remediate their own Year 2000 issues. There is no guarantee that the systems of other companies on which the Company's systems rely will be timely converted and would not have an adverse effect on the Company's systems. The cost of the project and the date on which the Company believes it will complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. Results of Operations For the third quarter of 1998, revenue increased 40% when compared to the same quarter of the prior year. Transaction processing revenue from Card Services (84% of total revenue) increased 49% as new merchants were added and usage at existing merchants increased. Transaction processing for Trucking Services (13% of total revenue) increased 15%, driven by surcharge revenue at cash dispensing machines (ATMs), ATM transaction fees, ATM processing fees and additional trucking companies using the Company's fuel and cash advance services. Check and Terminal Services (3% of total revenue) decreased 24% due primarily to higher terminal sales experienced in the third quarter of 1997. For the third quarter of 1998, net income as a percentage of revenue increased to 16.8% from 16.3% in the same quarter of the prior year. The primary factor for this improvement was selling, general and administrative costs decreased $103,000 from $4,090,000 to $3,987,000 in the current year quarter. For the nine months ended September 30, 1998, revenue increased 41% when compared to the same period of the prior year. Transaction processing revenue from Card Services (83% of total revenue) increased 47% as new merchants were added and usage at existing merchants increased. Transaction processing for Trucking Services (14% of total revenue) increased 21%, driven by surcharge revenue at cash dispensing machines (ATMs), ATM transaction fees, ATM processing fees and additional trucking companies using the Company's fuel and cash advance services. Check and Terminal Services (3% of total revenue) increased 6%. For the nine months ended September 30, 1998, net income as a percentage of revenue increased to 16.5% from 14.6% in the same period of the prior year. The primary factors were operating, selling, general and administrative expenses growing less rapidly than transaction processing revenue. -8- CONCORD EFS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued Liquidity and Capital Resources In the nine months ended September 30, 1998, the Company generated $39.4 million from operating activities, received $45.0 million in proceeds from notes payable, and received $2.6 million from stock issued from exercises of options under the Company's Incentive Stock Option Plan. Investment securities purchases were $50.2 million, net of sales and maturities, $11.9 million was spent to purchase merchant contracts, and $20.1 million was disbursed on capital additions. The capital additions were primarily new computer equipment. With little debt, adequate available credit and strong cash generation, the Company is in sound financial condition and expects to fund continued growth from currently available resources. EFS National Bank and EFS Federal Savings Bank, wholly-owned subsidiaries of the Company, exceed required regulatory capital ratios. -9- PART II OTHER INFORMATION Item 3: Quantitative and Qualitative Disclosures About Market Risk. The Company has determined that there has been no significant changes since December 31, 1997. For futher discussion, refer to "Interest Rate Risk Management" on page 7 of the Company's 1997 Annual Report. Item 6: Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit 21 - Subsidiaries of the Registrant: Jurisdiction of Company Organization Ownership - ------------------------------- ---------------------------- --------- Concord Computing Corporation Delaware 100% EFS National Bank National Bank Charter 100% Concord Equipment Sales Tennessee 100% EFS Federal Savings Bank Federal Savings Bank Charter 100% Pay Systems of America, Inc. Tennessee 100% American Bankcard, Inc. Illinios 100% Digital Merchants Systems, Inc. Illinios 100% (b) Reports on Form 8-K There were no reports on Form 8-K filed during the third quarter. -10- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CONCORD EFS, INC. Date: November 16, 1998 By: /s/ Dan M. Palmer --------------------------- Dan M. Palmer Chairman of the Board and Chief Executive Officer Date: November 16, 1998 By: /s/ Thomas J. Dowling --------------------------- Thomas J. Dowling Vice President & Controller -11- EX-27 2 FINANCIAL DATA SCHEDULE
5 1000 3-MOS 3-MOS 9-MOS DEC-31-1998 DEC-31-1997 DEC-31-1997 SEP-30-1998 SEP-30-1997 SEP-30-1997 68164 73557 73557 246079 158404 158404 78850 45628 45628 1218 1206 1206 7554 5404 5404 405656 231143 231143 109629 83681 83681 65950 54114 54114 472693 327099 327099 69175 48343 48343 0 0 0 0 0 0 0 0 0 32599 22045 22045 294042 236118 236118 472693 327099 327099 99715 71306 189719 99715 71306 189719 73490 52360 141825 77477 56450 153421 0 0 0 588 310 925 1063 299 496 25617 17856 43964 8908 6264 16234 16709 11592 27730 0 0 0 0 0 0 0 0 0 16709 11592 27730 0.17 0.12 0.29 0.17 0.12 0.28
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