-----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, DraKoDVNFvtsNo5GcG6w0b9t6iB1CAST3kvnwjyHBaQ0jw4qwr0SsHK5lFw9tD7H 3lGE4r79pdGbl/aDfXNVmg== 0000740112-00-000009.txt : 20000515 0000740112-00-000009.hdr.sgml : 20000515 ACCESSION NUMBER: 0000740112-00-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000512 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: 628944 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 QUARTERLY REPORT ON 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 quarterly period ended Commission file number 0-13848 March 31, 2000 ___________________________ CONCORD EFS, INC. (Exact name of registrant as specified in its charter) Delaware 04-2462252 ______________________________ _____________________ (State or other jurisdiction of (IRS 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, $0.33 1/3 par value, as of May 11, 2000 was 212,300,040. CONCORD EFS, INC. AND SUBSIDIARIES INDEX Page No. -------- PART 1 - Financial Information Item 1. Financial Statements (Unaudited) Condensed Consolidated Statements of Income for Three Months ended March 31, 2000 and March 31, 1999 1 Condensed Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999 2 Condensed Consolidated Statements of Cash Flows Three Months ended March 31, 2000 and March 31, 1999 4 Notes to Condensed Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk 14 PART II - Other Information Item 2: Changes in Securities and Use of Proceeds 15 Item 6. Exhibits and Reports on Form 8-K 15 Signatures 16 CONCORD EFS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three Months Ended March 31 ------------------------- 2000 1999 --------- --------- (in thousands, except per share data) Revenue $257,768 $178,046 Cost of operations 193,263 126,535 Selling, general and administrative expenses 12,524 12,805 Acquisition and restructuring charges 776 34,810 --------- --------- OPERATING INCOME 51,205 3,896 Other income (expense): Interest income 9,145 5,265 Interest expense (2,064) (3,533) --------- --------- INCOME BEFORE INCOME TAXES 58,286 5,628 Income taxes 20,697 6,969 --------- --------- NET INCOME (LOSS) $ 37,589 $ (1,341) ========= ========= Pro forma provision for income taxes 260 519 --------- --------- PRO FORMA NET INCOME (LOSS) $ 37,329 $ (1,860) ========= ========= HISTORICAL AND PRO FORMA PER SHARE DATA: Basic earnings (loss) $ 0.18 $ (0.01) ========= ========= Diluted earnings (loss) $ 0.17 $ (0.01) ========= ========= Average basic shares outstanding 212,165 198,246 ========= ========= Average diluted shares outstanding 217,498 205,850 ========= ========= See notes to condensed consolidated financial statements. -1- CONCORD EFS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) March 31 December 31 2000 1999 ------------- ------------ (in thousands) ASSETS CURRENT ASSETS Cash and cash equivalents $ 96,976 $ 121,001 Securities available for sale 487,263 456,209 Accounts receivable, net 180,504 192,263 Inventories 17,398 18,076 Prepaid expenses and other current assets 16,199 11,376 Deferred income taxes 8,742 9,108 ------------ ------------ TOTAL CURRENT ASSETS 807,082 808,033 PROPERTY AND EQUIPMENT, net 176,548 167,829 GOODWILL, net 55,959 54,046 OTHER INTANGIBLE ASSETS, net 60,825 57,186 OTHER ASSETS 14,098 15,787 ------------ ------------ TOTAL ASSETS $1,114,512 $1,102,881 ============ ============ See notes to condensed consolidated financial statements. -2- CONCORD EFS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) March 31 December 31 2000 1999 ------------- ------------ (in thousands) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and other liabilities $ 91,137 $ 129,217 Deposits 101,947 100,475 Accrued liabilities 50,671 50,435 Income taxes payable 28,032 16,370 ------------ ------------ TOTAL CURRENT LIABILITIES 271,787 296,497 ------------ ------------ LONG-TERM DEBT 75,000 75,000 DEFERRED INCOME TAXES 15,798 16,566 OTHER LIABILITIES 7,167 9,669 ------------ ------------ TOTAL LIABILITIES 369,752 397,732 ------------ ------------ COMMITMENTS AND CONTINGENT LIABILITIES STOCKHOLDERS' EQUITY Common stock 70,744 70,703 Other stockholders' equity 674,016 634,446 ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 744,760 705,149 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,114,512 $1,102,881 ============ ============ See notes to condensed consolidated financial statements. -3- CONCORD EFS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended March 31 ----------------------- 2000 1999 ---------- ---------- (In thousands) NET CASH PROVIDED BY OPERATING ACTIVITIES $ 46,173 $ 25,264 INVESTING ACTIVITIES: Acquisition of securities available for sale (69,538) (48,467) Sale of securities available for sale 29,325 13,575 Maturities of securities available for sale 9,763 5,564 Acquisition of property and equipment (17,896) (11,654) Loan participations purchased (15,072) Merchants contracts purchased (6,661) (4,896) Other, net (1,042) (2,769) ---------- ---------- NET CASH USED IN INVESTING ACTIVITIES (71,121) (48,647) FINANCING ACTIVITIES: Net increase in deposits 1,472 18,564 Proceeds from sale of common stock 420 3,350 Proceeds from notes payable 6,000 7,000 Payments under credit agreement, net - (4,000) Payments on notes payable (6,969) (6,366) ---------- ---------- NET CASH PROVIDED BY FINANCING ACTIVITIES 923 18,548 ---------- ---------- DECREASE IN CASH AND CASH EQUIVALENTS (24,025) (4,835) Cash and cash equivalents at beginning of period 121,001 82,890 ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 96,976 $ 78,055 ========== ========== See notes to condensed consolidated financial statements. -4- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 2000 Note A - 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 month period ended March 31, 2000 are not necessarily indicative of the results that may be expected for the year ended December 31, 2000. For further information, refer to the consolidated financial statements and footnotes thereto included in the Concord EFS, Inc. and Subsidiaries (Company) annual report on Form 10-K for the year ended December 31, 1999. Restatement of Historical Financial Information The historical financial information presented herein has been restated in accordance with pooling of interests method of accounting for business combinations. The financial information reflects the financial position, operating results and cash flows of the respective companies as though the companies were combined for all periods presented. Certain amounts have been reclassified from prior period consolidated financial statements to conform with the current year presentation. Note B - Recent Acquisitions On February 1, 2000, the Company acquired Card Payment Systems (CPS), a New York-based reseller of payment processing services. The acquisition was accounted for as a pooling of interests transaction in which Concord issued 6.2 million shares of its common stock. CPS provides card-based payment processing services to independent sales organizations (ISOs), which in turn sell those services to retailers. CPS was an S-Corporation for tax purposes prior to its merger with Concord. As such, the former owners of CPS were responsible for income taxes for the periods prior to the merger rather than the Company. The results of operations include pro forma income taxes that would have been required if CPS had been a C-Corporation. -5- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED) MARCH 31, 2000 Note B - Recent Acquisitions - continued The following table represents selected unaudited financial information, in thousands, split between the Company and CPS: Three months ended March 31 --------------------------- 2000 1999 ------------ ------------ (Unaudited) (Unaudited) Pro forma revenue Concord EFS, Inc. $253,721 $170,234 CPS (1) 4,047 7,812 ---------- ---------- Combined $257,768 $178,046 ========== ========== Pro forma net income (loss) Concord EFS, Inc. $ 36,939 $ (2,868) CPS (1) 650 1,527 Pro forma provision for CPS income taxes (2) 260 519 ---------- ---------- Combined $ 37,329 $ (1,860) ========== ========== Pro forma basic earnings per share combined $0.18 ($0.01) ========== ========== Pro forma diluted earnings per share combined $0.17 ($0.01) ========== ========== (1) The 2000 amounts reflect the results of operations from January 1, 2000 through January 31, 2000 (unaudited). The results of operations from February 1, 2000 to March 31, 2000 are included in Concord EFS, Inc. amounts. (2) CPS terminated its S-Corporation election at the time of the merger with the Company. The Company completed the merger with Electronic Payment Services (EPS) on February 26, 1999 by issuing 45.1 million shares of the Company's common stock for all of the outstanding common stock of EPS. The acquisition was accounted for using the pooling of interests method of accounting. -6- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED) MARCH 31, 2000 Note B - Recent Acquisitions - continued On February 7, 2000 the Company announced completion of its acquisition of Virtual Cyber Systems (VCS), an internet software development company. The acquisition of VCS, for which the Company paid approximately $1.7 million in common stock, was accounted for as a purchase transaction and is immaterial to the Company's financial statements. Note C - Comprehensive Income (Loss) Total comprehensive income (loss) was $37,743 and ($2,220) for the three months ended, March 31, 2000 and 1999, respectively. Note D - Earnings Per Share The following table sets forth the computation of basic and diluted earnings (loss) per share (in thousands, except per share data): Three Months Ended March 31 --------------------------- 2000 1999 ---------- ---------- Numerator: Net income (loss) $ 37,589 $ (1,341) ========== ========== Denominator: Denominator for basic earnings per share, weighted-average shares 212,165 198,246 Effect of dilutive securities, employee stock options 5,333 7,604 ---------- ---------- Denominator for diluted earnings per share adjusted for weighted-average shares and assumed conversions 217,498 205,850 ========== ========== Basic earnings (loss) per share $0.18 ($0.01) ========== ========== Diluted earnings (loss) per share $0.17 ($0.01) ========== ========== -7- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED) MARCH 31, 2000 Note D - Earnings Per Share - continued Excluding acquisition costs and restructuring charges described in management's discussion and analysis of financial condition and results of operations, basic earnings per share for the three month periods ended March 31, 2000 and 1999 were $0.18 and $0.13, respectively, and diluted earnings per share for the three month periods ended March 31, 2000 and 1999 were $0.18 and $0.12, respectively. Earnings per share and related per share data have been restated to reflect all stock splits. -8- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED) MARCH 31, 2000 Note E - Segment Information The operating segments for the three months ended March 31, 2000 are the same as for the prior year. However, the Company changed its internal reporting mechanism to more closely match expenses with the revenues generated by each subsidiary according to the segment allocations noted above. Accordingly, 1999 segment information has been adjusted to reflect the current method of management reporting for all periods presented. Industry segment information, in thousands, for the three months ended March 31, 2000 and 1999 is presented below: Merchant ATM Services Services Other Total ---------- ---------- ---------- ----------- Three months ended March 31, 2000 Revenue $184,111 $ 70,979 $ 2,678 $ 257,768 Cost of operations (147,401) (44,948) (914) (193,263) Selling, general, & administrative expenses (12,524) (12,524) Acquisition & restructuring charges (776) (776) Taxes & interest, net (13,616) (13,616) ---------- ---------- ---------- ----------- Net income (loss) $ 35,934 $ 26,031 $ (24,376) $ 37,589 ========== ========== ========== =========== Assets by Segment $ 546,423 $ 334,622 $ 233,467 $1,114,512 ========== ========== ========== =========== Three months ended March 31, 1999 Revenue $120,138 $ 52,449 $ 5,459 $ 178,046 Cost of operations (91,583) (31,713) (3,239) (126,535) Selling, general, & administrative expenses (12,805) (12,805) Acquisition & restructuring charges (34,810) (34,810) Taxes & interest, net (5,237) (5,237) ---------- ---------- ---------- ----------- Net income (loss) $ 28,555 $ 20,736 $ (50,632) $ (1,341) ========== ========== ========== =========== Assets by Segment $ 442,644 $ 283,277 $ 95,178 $ 821,099 ========== ========== ========== =========== -9- 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" information, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended. Any such statements are not guarantees for future performance and involve risks and uncertainties, and actual results may differ materially from those contemplated by such forward-looking statements. Important factors that could cause actual results to differ materially from those in forward-looking statements include (i) the loss of key personnel or inability to attract additional qualified personnel, (ii) changes in card association rules, (iii) changes in card association fees, (iv) restrictions on surcharging or a decline in the deployment of automated teller machines, (v) dependence on VISA and MasterCard registrations, (vi) the credit risk of merchant customers, (vii) susceptibility to fraud at the merchant level, (viii) receiving lower price margins from higher volume merchants, (ix) increasing competition, (x) the success of a new VISA debit card product, (xi) the loss of key customers, (xii) continued consolidation in the banking and retail industries, (xiii) risks related to acquisitions, (xiv) changes in rules and regulations governing financial institutions, (xv) the inability to remain current with rapid technological change, (xvi) dependence on third-party vendors, (xvii) the imposition of additional state taxes, (xviii) volatility of the Company's common stock price and (xix) changes in interest rates. 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 of Historical Financial Information The historical financial information presented herein has been restated in accordance with pooling of interests method of accounting for business combinations. The financial information reflects the financial position, operating results and cash flows of the respective companies as though the companies were combined for all periods presented. Overview The Company is a fully integrated leading provider of electronic transaction authorization, processing, settlement and funds transfer services on a nationwide basis. The Company focuses on marketing its services to supermarket chains and multiple lane retailers, financial institutions, petroleum and convenience stores, grocery stores, the trucking industry and other retailers. The Company's primary activity is Merchant Services, in which it provides integrated electronic transaction services for credit card, debit card and electronic benefits transfer (EBT) card transactions. These transaction services include data capture, authorization and settlement services for over 400,000 point-of-sale terminals. The Company also provides automated teller machine (ATM) Services, consisting of owning and operating the MAC-branded electronic funds transfer network and processing for approximately 39,000 ATMs nationwide, of which it owns approximately 1,000. -10- CONCORD EFS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued Overview - continued The substantial majority of the Company's revenue (71.4% in 2000 and 67.5% in 1999) is generated from fee income related to Merchant Services. These services include: - -- the processing of credit card transactions for all major credit card brands including VISA, MasterCard, American Express, Discover and Diners Club; - -- the processing of debit card transactions occurring at point of sale terminals at our merchants' businesses; and - -- the provision of electronic payment services to supermarket chains and multiple lane retailers, financial institutions, petroleum and convenience stores, grocery stores, trucking companies and other retailers. Revenue from Merchant Services consists primarily of discount fees charged to merchants, which are a percentage of the dollar amount of each credit card transaction the Company processes, and may also include a flat fee per transaction. The discount fee is negotiated with each merchant and typically constitutes a bundled rate for the transaction authorization, processing, settlement and funds transfer services we provide. This revenue and fees from other transactions are recognized at the time the merchants' transactions are processed. ATM Services revenue consists of processing fees for third party ATMs and terminals, and other access, switching and card processing fees, and fee income and other surcharges charged for proprietary ATMs. ATM Services revenue is recognized at the time of the transaction. The remaining balance of the Company's revenue is derived principally from check verification and authorization services and sales of point-of-sale terminals. Cost of operations includes all costs directly attributable to the provision of services to the Company's customers. The most significant component of cost of operations includes interchange and assessment fees, which are amounts charged by the credit and debit card associations. Interchange and assessment fees are billed primarily as a percentage of dollar volume processed and, to a lesser extent, as a per-transaction fee. Cost of operations also includes telecommunications costs, occupancy costs, depreciation, the cost of equipment leased and sold, operating salaries and wages, amortization of merchant contracts and other intangibles, the cost of operating the Company's MAC network and other miscellaneous merchant supplies and services expenses. The Company's selling, general and administrative expenses include salaries and wages and other general administrative expenses (including certain amortization costs). -11- CONCORD EFS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued Results of Operations Revenue increased 44.8% to $257.8 million in the first quarter of 2000 from $178.0 million in the first quarter of 1999. Of 2000 revenue, Merchant Services, ATM Services and Other Services accounted for 71.4%, 27.6% and 1.0%, respectively of revenue. Revenue from merchant card services, increased 53.2%, due primarily to increased transactional volumes. Increased volumes resulted from adding new merchants, increasing acceptance of electronic payment cards and the cross-selling of settlement processing to several EPS higher volume merchants. ATM Services revenue increased 35.3%. Increased transactional volumes and in-house processing of the EPS off-line debit product were the primary factors for the increase. Other revenues decreased 50.9% due primarily to lower terminal sales. Net income as a percentage of revenue was 14.6% in the first quarter of 2000 as opposed to a net loss of 0.8%. The primary factor in the change was the acquisition expenses and restructuring charges incurred in the first quarter of 1999 in connection with the acquisition of EPS. Further impacting this comparison was related to certain nondeductible acquisition costs and a tax component write-off of $1.3 million for impaired state tax net operating losses. These items were incurred in the first quarter of 1999 and was also related to the acquisition of EPS. Excluding the pre-tax charges and tax component write-off, the tax rate decreased to 35.2% in the first quarter of 2000 compared to 36.8% in the same period of the prior year. Excluding the pre-tax charges and tax component write-off, net income as a percentage of revenue improved to 14.9% in the first quarter of 2000 compared to 14.4% in the same period of the prior year. The margin improvement was the result of a combination of factors. Improvements, as a percentage of revenue, were made in selling, general and administrative expenses, net interest income and income taxes. These improvements were offset by an increase in the cost of operations as a percentage of revenue. Cost of operations increased in the first quarter of 2000 to 75.0% of revenue compared to 71.1% in the same period of the prior year. The increase in cost of operations, as a percentage of revenue, was primarily due to lower margin revenue which was principally from larger, higher volume merchants who command and deserve lower transactional pricing. This lower margin revenue was primarily from the cross-selling of settlement processing to several higher volume EPS merchants and from bringing our off-line debit product in-house. The new lower margin revenue was partially offset by other operating costs such as payroll, depreciation and amortization and other certain operating costs, decreasing as a percentage of revenue. Selling, general and administrative expenses decreased from $12.8 million in the first quarter of 1999 to $12.5 million in the first quarter of 2000, a decrease of $0.3 million. These expenses were down slightly as higher salaries and wages -12- CONCORD EFS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued Results of Operations - continued were offset by lower legal and other expenses. As a result, selling, general and administrative expenses were 4.9% of revenue in the first quarter of 2000 versus 7.2% in the first quarter of 1999. Acquisition expenses and restructuring charges decreased to $0.8 million in the first quarter of 2000 compared to $34.8 million in the same period of the prior year. The current year expenses were primarily advisory, legal and accounting fees incurred in the acquisition of CPS. As of March 31, 2000, approximately $0.1 million of these expenses were accrued but unpaid. The acquisition and restructuring charges for the first quarter of 1999 were a result of the Company's merger with EPS. As explained in detail in the annual report section of the Company's Form 10-K for the year ended December 31, 1999, the pre-tax expenses and charges were for acquisition expenses, communication conversion costs, asset write-offs, off-line debit conversion and severance and other. The following table brings forward from December 31, 1999 the remaining reserve balance, in millions, from the EPS acquisition expenses and charges: Balance at Balance at Cash or December 31 March 31 Description Non-cash 1999 Activity 2000 - ------------------ -------- ----------- -------- ----------- Communication conversion costs Cash $11.3 $4.4 $6.9 Severance and other Cash 1.4 0.9 0.5 ----- ---- ---- $12.7 $5.3 $7.4 ===== ==== ==== Net interest income improved as a percentage of total revenue to 2.7% in the first quarter of 2000 compared to 1.0% in the same period of the prior year. A principal source of additional interest income each year is the investment of available cash flow from operations in securities available for sale. Also approximately $61.7 million from the June 1999 offering of the Company's common stock was invested in securities available for sale. Increased transaction settlement volumes contributed to interest earned from overnight and short-term investments. These factors increased interest income by 74% in the first quarter of 2000 over the same period of the prior year. Total long and short-term debt was reduced approximately $146 million in June 1999 from the proceeds of the June 1999 common stock offering. As a result, interest expense decreased 42% in the first quarter of 2000 over the same period of the prior year. The combination of these factors increased net interest income as a percentage of revenue. -13- CONCORD EFS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued Liquidity and Capital Resources In the three months ended March 31 2000, the Company generated $46.2 million from operating activities. The Company also received $6.0 million in proceeds from Federal Home Loan Bank (FHLB) advances and $0.4 million from stock issued for exercises of options under the Company's stock option plan. Deposits increased $1.5 million. From cash provided from operating and financing activities, $30.5 million was invested in securities, net of sales and maturities, $17.9 million was disbursed on capital additions, and $6.7 million was spent to purchase merchant contracts. Long-term debt was reduced by $7.0 million. The capital additions were primarily for communications equipment, point-of-sale terminals, new computer equipment and capitalized software. The Company believes that available credit and cash generated from operations are adequate to meet the Company's capital needs. EFS National Bank and EFS Federal Savings Bank, wholly-owned subsidiaries of the Company, exceed required regulatory capital ratios. Quantitative and Qualitative Disclosures About Market Risk There have been no significant changes to our disclosures on quantitative and qualitative disclosures about market risk since December 31, 1999. For additional information, refer to Exhibit 13 - Annual Report to Stockholders in our Form 10-K for the year ended December 31, 1999. -14- CONCORD EFS, INC. AND SUBSIDIARIES PART II OTHER INFORMATION Item 2: Changes in Securities and Use of Proceeds On February 1, 2000, the Company issued 6,225,000 shares of its common stock in connection with the Company's acquisition of all of the outstanding common stock Card Payment Systems, Inc.(CPS). In the acquisition, CPS merged as a wholly owned subsidiary of the Company, and the shares of common stock of CPS outstanding at the time of the merger were converted into shares of common stock of the Company. On February 7, 2000, the Company issued 84,889 shares of its common stock in connection with the Company's purchase of all of the outstanding common stock Virtual Cyber Systems, Inc.(VCS). In the acquisition, VCS merged as a wholly owned subsidiary of the Company, and the shares of common stock of VCS outstanding at the time of the merger were converted into shares of common stock of the Company. The 6,225,000 shares issued to the 2 shareholders of CPS who held all of the outstanding shares of CPS common stock at the time of the merger and the 84,889 shares issued to the shareholder of VCS who held all of the outstanding shares of VCS common stock at the time of the merger were issued without registration under the Securities Act of 1933 in reliance on the exemption under Section 4(2) of that Act. The Company believes that each of these shareholders was either an accredited investor or had such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of the investment in shares of the Company; was afforded access to material information about the Company, understood that the shares of the Company acquired in the merger were "restricted securities" and agreed not to transfer those shares except pursuant to an effective registration statement under the Securities Act of 1933 or an exemption from registration under that act. Item 6: Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K none -15- 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: May 12, 2000 By: /s/ Dan M. Palmer --------------------------- Dan M. Palmer Chairman of the Board and Chief Executive Officer Date: May 12, 2000 By: /s/ Edward T. Haslam --------------------------- Edward T. Haslam Chief Financial Officer -16- EX-27 2 FINANCIAL DATA SCHEDULE
5 1000 3-MOS 3-MOS DEC-31-2000 DEC-31-1999 MAR-31-2000 MAR-31-1999 96,976 78,055 487,263 315,776 183,587 127,935 3,083 2,760 17,398 11,324 807,082 549,818 321,405 311,255 144,857 157,246 1,114,512 821,099 271,787 259,582 0 0 0 0 0 0 70,744 44,852 674,016 318,405 1,114,512 821,099 257,768 178,046 257,768 178,046 193,263 126,535 206,563 174,150 0 0 678 1,312 2,064 3,533 58,286 5,628 20,697 6,969 37,589 (1,341) 0 0 0 0 0 0 37,589 (1,341) 0.18 (0.01) 0.17 (0.01)
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