-----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, SBuv32LTXwCbWHVIQw7CnPPkfR/2cEt32+zx7yd10azcY8C9urP7UAL00ETM85Lk m238IPJ0n5DRiuQMDiB6rg== /in/edgar/work/20000811/0000740112-00-000011/0000740112-00-000011.txt : 20000921 0000740112-00-000011.hdr.sgml : 20000921 ACCESSION NUMBER: 0000740112-00-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONCORD EFS INC CENTRAL INDEX KEY: 0000740112 STANDARD INDUSTRIAL CLASSIFICATION: [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: 695251 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 0001.txt 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 June 30, 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 August 11, 2000 was 212,680,489. CONCORD EFS, INC. AND SUBSIDIARIES INDEX Page No. -------- PART 1 - Financial Information Item 1. Financial Statements (Unaudited) Condensed Consolidated Statements of Income Three Months and Six Months ended June 30, 2000 and June 30, 1999 1 Condensed Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999 3 Condensed Consolidated Statements of Cash Flows Six Months ended June 30, 2000 and June 30, 1999 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk 17 PART II - Other Information Item 2: Changes in Securities and Use of Proceeds 18 Item 6. Exhibits and Reports on Form 8-K 18 Signatures 19 CONCORD EFS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three Months Ended Six Months Ended June 30 June 30 ----------------------- ----------------------- 2000 1999 2000 1999 --------- --------- --------- --------- (In thousands, except per share data) Revenue $290,123 $203,556 $547,891 $381,602 Cost of operations 214,337 144,850 407,600 271,385 Selling, general and administrative expenses 12,261 13,102 24,785 25,907 Acquisition expenses and restructuring charges - - 776 34,810 --------- --------- --------- --------- OPERATING INCOME 63,525 45,604 114,730 49,500 Other income (expense): Interest income 10,182 5,481 19,327 10,746 Interest expense (2,236) (3,611) (4,300) (7,144) --------- --------- --------- --------- INCOME BEFORE TAXES 71,471 47,474 129,757 53,102 Income taxes 25,484 16,632 46,181 23,601 --------- --------- --------- --------- NET INCOME $ 45,987 $ 30,842 $ 83,576 $ 29,501 ========= ========= ========= ========= Pro forma provision for income taxes 536 260 1,055 --------- --------- --------- --------- PRO FORMA NET INCOME $ 45,987 $ 30,306 $ 83,316 $ 28,446 ========= ========= ========= ========= -1- CONCORD EFS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME - CONTINUED (UNAUDITED) Three Months Ended Six Months Ended June 30 June 30 ----------------------- ----------------------- 2000 1999 2000 1999 --------- --------- --------- --------- HISTORICAL AND PRO FORMA PER SHARE DATA: Basic earnings $ 0.22 $ 0.15 $ 0.39 $ 0.15 ========= ========= ========= ========= Diluted earnings $ 0.21 $ 0.15 $ 0.38 $ 0.14 ========= ========= ========= ========= Average basic shares outstanding 212,311 199,839 212,238 199,043 ========= ========= ========= ========= Average diluted shares outstanding 219,070 207,323 218,284 206,604 ========= ========= ========= ========= See Notes to Condensed Consolidated Financial Statements - Unaudited. -2- CONCORD EFS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) June 30 December 31 2000 1999 ------------- ------------ (in thousands) ASSETS CURRENT ASSETS Cash and cash equivalents $ 122,226 $ 121,001 Securities available for sale 505,029 456,209 Accounts receivable, net 137,834 161,872 Inventories 18,198 18,076 Prepaid expenses and other current assets 17,189 11,376 Deferred income taxes 10,440 9,108 ------------ ------------ TOTAL CURRENT ASSETS 810,916 777,642 LOANS, net 67,842 30,391 PROPERTY AND EQUIPMENT, net 181,330 167,829 GOODWILL, net 55,039 54,046 OTHER INTANGIBLE ASSETS, net 63,398 57,186 OTHER ASSETS 9,604 15,787 ------------ ------------ TOTAL ASSETS $1,188,129 $1,102,881 ============ ============ See notes to condensed consolidated financial statements. -3- CONCORD EFS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED (UNAUDITED) June 30 December 31 2000 1999 ------------- ------------ (in thousands) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and other liabilities $ 115,032 $ 129,217 Deposits 115,037 100,475 Accrued liabilities 45,753 50,435 Income taxes payable 16,833 16,370 ------------ ------------ TOTAL CURRENT LIABILITIES 292,655 296,497 ------------ ------------ LONG-TERM DEBT 76,000 75,000 DEFERRED INCOME TAXES 18,899 16,566 OTHER LIABILITIES 4,962 9,669 ------------ ------------ TOTAL LIABILITIES 392,516 397,732 ------------ ------------ COMMITMENTS AND CONTINGENT LIABILITIES STOCKHOLDERS' EQUITY Common stock 70,810 70,703 Other stockholders' equity 724,803 634,446 ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 795,613 705,149 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,188,129 $1,102,881 ============ ============ See notes to condensed consolidated financial statements. -4- CONCORD EFS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended June 30 ----------------------- 2000 1999 ---------- ---------- (In thousands) NET CASH PROVIDED BY OPERATING ACTIVITIES $117,444 $ 67,248 INVESTING ACTIVITIES: Acquisition of securities available for sale (97,328) (101,334) Sale of securities available for sale 30,280 28,020 Maturities of securities available for sale 14,644 11,784 Acquisition of property and equipment (33,453) (25,102) Loans purchased (42,134) (9,187) Loan principal payments received 4,398 357 Merchants contracts purchased (12,569) (7,933) Other, net (2,106) - ---------- ---------- NET CASH USED IN INVESTING ACTIVITIES (134,056) (103,395) FINANCING ACTIVITIES: Net increase in deposits 14,562 33,692 Proceeds from sale of common stock 3,244 222,139 Proceeds from notes payable 19,000 7,000 Payments under credit agreement, net - (21,000) Payments on notes payable (18,969) (125,116) ---------- ---------- NET CASH PROVIDED BY FINANCING ACTIVITIES 17,837 116,715 ---------- ---------- INCREASE IN CASH AND CASH EQUIVALENTS 1,225 80,568 Cash and cash equivalents at beginning of period 121,001 82,890 ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $122,226 $163,458 ========== ========== See notes to condensed consolidated financial statements. -5- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 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 six month period ended June 30, 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. -6- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED) JUNE 30, 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 Six months ended June 30 June 30 --------------------- --------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (Unaudited) (Unaudited) Pro forma revenue Concord EFS, Inc. $290,123 $193,724 $543,844 $363,958 CPS (1) 9,832 4,047 17,644 -------- -------- -------- -------- Combined $290,123 $203,556 $547,891 $381,602 ======== ======== ======== ======== Pro forma net income Concord EFS, Inc. $ 45,987 $ 29,266 $82,926 $ 26,398 CPS (1) 1,576 650 3,103 Pro forma provision for CPS income taxes (2) 536 260 1,055 -------- -------- -------- -------- Combined $ 45,987 $ 30,306 $83,316 $ 28,446 ======== ======== ======== ======== Pro forma basic earnings per share combined $0.22 $0.15 $0.39 $0.14 ======== ======== ======== ======== Pro forma diluted earnings per share combined $0.21 $0.15 $0.38 $0.14 ======== ======== ======== ======== (1) The six months ended June 30, 2000 amounts reflect the results of CPS operations from January 1, 2000 through January 31, 2000 (unaudited). The CPS results of operations from February 1, 2000 to June 30, 2000 are included in Concord EFS, Inc. amounts. (2) CPS terminated its S-Corporation election at the time of the merger with the Company. -7- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED) JUNE 30, 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. On April 13, 2000, Concord EFS announced an agreement to acquire Cash Station Inc., an electronic funds transfer network based in Chicago, Illinois. The acquisition is to be accounted for as a pooling of interests transaction. The acquisition is expected to close by October 1, 2000, subject to regulatory approval and other customary closing conditions. The acquisition will have an immaterial impact on the financial statements of Concord EFS. Note C - Offering of Common Stock Previous owners of Electronic Payment Systems, Inc. (EPS) and VCS who had received unregistered common stock of the Company in connection with their respective acquisitions sold 665,275 shares of common stock in a registration statement filed May 15, 2000. The Company did not receive any proceeds from the sale of shares by the previous owners of EPS or VCS. Note D - Comprehensive Income Total comprehensive income was $47,443 and $24,764, in thousands, for the three months ended, June 30, 2000 and 1999, respectively. Total comprehensive income was $85,186 and $22,544, in thousands, for the six months ended, June 30, 2000 and 1999, respectively. -8- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED) JUNE 30, 2000 Note E - 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 Six Months Ended June 30 June 30 2000 1999 2000 1999 ------- ------- ------- ------- Numerator: Net income $45,987 $30,842 $83,576 $29,501 ======= ======= ======= ======= Denominator: Denominator for basic earnings per share, weighted-average shares 212,311 199,839 212,238 199,043 Effect of dilutive securities, employee stock options 6,759 7,484 6,046 7,561 ------- ------- ------- ------- Denominator for diluted earnings per share adjusted for weighted- average shares and assumed conversions 219,070 207,323 218,284 206,604 ======= ======= ======= ======= Basic earnings per share $0.22 $0.15 $0.39 $0.15 ======= ======= ======= ======= Diluted earnings per share $0.21 $0.15 $0.38 $0.14 ======= ======= ======= ======= 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 six month periods ended June 30, 2000 and 1999 were $0.40 and $0.28, respectively, and diluted earnings per share for the six month periods ended June 30, 2000 and 1999 were $0.39 and $0.27, respectively. Earnings per share and related per share data have been restated to reflect all stock splits. -9- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED) JUNE 30, 2000 Note F - Segment Information Industry segment information, in thousands, for the three and six months ended June 30, 2000 and 1999 is presented below. Merchant Services and ATM Services segments are described in the Overview section to Management's Discussion and Analysis of Financial Condition and Results of Operations included in this filing. Merchant ATM Services Services Other Total ---------- ---------- ---------- ---------- Three months ended June 30, 2000 Revenue $208,658 $ 78,524 $ 2,941 $ 290,123 Cost of operations (168,729) (44,511) (1,097) (214,337) Selling, general, & administrative expenses (12,261) (12,261) Taxes & interest, net (17,538) (17,538) ---------- ---------- ---------- ---------- Net income (loss) $ 39,929 $ 34,013 $ (27,955) $ 45,987 ========== ========== ========== ========== Three months ended June 30, 1999 Revenue $142,948 $ 56,704 $ 3,904 $ 203,556 Cost of operations (111,980) (32,398) (472) (144,850) Selling, general, & administrative expenses (13,102) (13,102) Taxes & interest, net (14,762) (14,762) ---------- ---------- ---------- ---------- Net income (loss) $ 30,968 $ 24,306 $ (24,432) $ 30,842 ========== ========== ========== ========== -10- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED) JUNE 30, 2000 Note F - Segment Information - continued Industry segment information, in thousands, for the six months ended June 30, 2000 and 1999 is presented below: Merchant ATM Services Services Other Total ---------- ---------- ---------- ---------- Six months ended June 30, 2000 Revenue $392,769 $149,503 $ 5,619 $ 547,891 Cost of operations (316,130) (89,459) (2,011) (407,600) Selling, general, & administrative expenses (24,785) (24,785) Acquisition & restructuring charges (776) (776) Taxes & interest, net (31,154) (31,154) ---------- ---------- ---------- ---------- Net income (loss) $ 75,863 $ 60,044 $ (52,331) $ 83,576 ========== ========== ========== ========== Six months ended June 30, 1999 Revenue $263,085 $109,153 $ 9,364 $ 381,602 Cost of operations (203,563) (64,111) (3,711) (271,385) Selling, general, & administrative expenses (25,907) (25,907) Acquisition & restructuring charges (34,810) (34,810) Taxes & interest, net (19,999) (19,999) ---------- ---------- ---------- ---------- Net income (loss) $ 59,522 $ 45,042 $ (75,063) $ 29,501 ========== ========== ========== ========== -11- 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 loss of key customers, (xii) continued consolidation in the banking and retail industries, (xii) risks related to acquisitions, (xiii) changes in rules and regulations governing financial institutions, (xiv) the inability to remain current with rapid technological change, (xv) dependence on third-party vendors, (xvi) the imposition of additional state taxes, (xvii) volatility of the Company's common stock price and (xviii) 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 42,000 ATMs nationwide, of which it owns approximately 1,000. -12- 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 (71.9% in 2000 and 70.2% 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). -13- CONCORD EFS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued Results of Operations Revenue increased 42.5% to $290.1 million in the second quarter of 2000 from $203.6 million in the second quarter of 1999. Of 2000 revenue, Merchant Services, ATM Services and Other Services accounted for 71.9%, 27.1% and 1.0%, respectively of revenue. Revenue from merchant card services, increased 46.0%, 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 38.5%. Increased transactional volumes and in-house processing of the EPS off-line debit product were the primary factors for the increase. Other revenues decreased 24.7% due primarily to lower terminal sales. Net income as a percentage of revenue was 15.9% in the second quarter of 2000 compared to 15.2% in the second quarter of 1999. 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 and net interest income. These improvements were partially offset by an increase in the cost of operations as a percentage of revenue. Cost of operations increased in the second quarter of 2000 to 73.9% of revenue compared to 71.2% 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 $13.1 million in the second quarter of 1999 to $12.3 million in 2000. These expenses were down slightly as higher salaries and wages were offset by lower legal and other expenses. As a result, selling, general and administrative expenses were 4.2% of revenue in the second quarter of 2000 versus 6.4% in the second quarter of 1999, a decrease of 2.2% as a percentage of revenue. Net interest income improved as a percentage of total revenue to 2.7% in the second quarter of 2000 compared to 0.9% 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 -14- CONCORD EFS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued Results of Operations - continued investments. These factors increased interest income by 85.8% in the second 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 38.1% in the second 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. In the six month period ended June 30, 2000, revenue increased 43.6% to $547.9 million from $381.6 million in 1999. Of 2000 revenue, Merchant Services, ATM Services and Other Services accounted for 71.7%, 27.3% and 1.0%, respectively of revenue. Revenue from merchant card services, increased 49.3%, 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 37.0%. Increased transactional volumes and in-house processing of the EPS off-line debit product were the primary factors for the increase. Other revenues decreased 40.0% due primarily to lower terminal sales. Net income as a percentage of revenue was 15.3% for the six month period ended June 30, 2000 compared to 7.7% in 1999. The margin improvement was the result of a combination of factors. 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 were related to the acquisition of EPS. Excluding the pre-tax charges and tax component write-off, the tax rate decreased to 35.4% in the six month period ended June 30, 2000 compared to 35.8% in the same period for the prior year. Acquisition expenses and restructuring charges were $0.8 million for the six month period ended June 30, 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 June 30, 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. -15- CONCORD EFS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued Results of Operations - continued 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 June 30 Description Non-cash 1999 Activity 2000 - ------------------ -------- ----------- -------- ----------- Communication conversion costs Cash $11.3 $6.5 $4.8 Severance and other Cash 1.4 1.1 0.3 ----- ---- ---- $12.7 $7.6 $5.1 ===== ==== ==== Excluding the pre-tax charges and tax component write-off, net income as a percentage of revenue improved to 15.4% for the six month period ended June 30, 2000 compared to 14.8% in the same period of the prior year. 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 six month period ended June 30, 2000 to 74.4% 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 $25.9 million in the six months ended June 30, 1999 to $24.8 million in the same period of the current year. These expenses were down slightly as higher salaries and wages were offset by lower legal and other expenses. As a result, selling, general and administrative expenses were 4.5% of revenue in the six months ended June 30, 2000 versus 6.8% in the same period of the prior year, a decrease of 2.3% as a percentage of revenue. -16- CONCORD EFS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued Results of Operations - continued Net interest income improved as a percentage of total revenue to 2.7% in the six month period ended June 30, 2000 compared to 0.9% 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 79.9% in the six month period ended June 30, 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 39.8% in the six month period ended June 30, 2000 over the same period of the prior year. The combination of these factors increased net interest income as a percentage of revenue. Liquidity and Capital Resources In the six months ended June 30, 2000, the Company generated cashflow of $117.4 million from operating activities. The Company also received $19.0 million in proceeds from Federal Home Loan Bank (FHLB) advances and $3.2 million from stock issued for exercises of options under the Company's stock option plan. Deposits increased $14.6 million. From cash provided from operating and financing activities, $52.4 million was invested in securities, net of sales and maturities, $37.7 million was invested through the Company's banking subsidiaries in loans, net of repayments, $33.5 million was disbursed on capital additions, and $12.6 million was spent to purchase merchant contracts. Long-term debt was reduced by $19.0 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 capital ratios required by their respective regulatory agencies. 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. -17- CONCORD EFS, INC. AND SUBSIDIARIES PART II OTHER INFORMATION Item 2: Changes in Securities and Use of Proceeds Previous owners of EPS and VCS had received unregistered common stock of the Company in connection with their respective acquisitions in reliance on the exemption under Section 4(2) the Securities Act of 1933 registered 665,275 shares of common stock in a registration statement filed May 15, 2000 in accordance with the requirements of the Securities Act of 1933. The Company did not receive any proceeds from the subsequent sale of shares by the previous owners of EPS or VCS. Item 6: Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K No reports were filed on Form 8-K for the six month period ended June 30, 2000. -18- 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: August 11, 2000 By: /s/ Dan M. Palmer --------------------------- Dan M. Palmer Chairman of the Board and Chief Executive Officer Date: August 11, 2000 By: /s/ Edward T. Haslam --------------------------- Edward T. Haslam Chief Financial Officer -19- EX-27 2 0002.txt FINANCIAL DATA SCHEDULE
5 1000 3-MOS 6-MOS DEC-31-2000 DEC-31-2000 JUN-30-2000 JUN-30-2000 122226 122226 505029 505029 138970 138970 1136 1136 18198 18198 810916 810916 338724 338724 157394 157394 1188129 1188129 292655 292655 0 0 0 0 0 0 70810 70810 724803 724803 1188129 1188129 290123 547891 290123 547891 214337 407600 214337 407600 0 0 1757 2435 2236 4300 71471 129757 25484 46181 45987 83576 0 0 0 0 0 0 45987 83576 0.22 0.39 0.21 0.38
EX-27 3 0003.txt FINANCIAL DATA SCHEDULE
5 1000 3-MOS 6-MOS DEC-31-1999 DEC-31-1999 JUN-30-1999 JUN-30-1999 163458 163458 337992 337992 127793 127793 2912 2912 12762 12762 658671 658671 324663 324663 167077 167077 961992 961992 241762 241762 0 0 0 0 0 0 70242 70242 547960 547960 961992 961992 203556 381602 203556 381602 144850 271385 144850 271385 0 0 1042 1277 3611 7144 47474 53102 16632 23601 30842 29501 0 0 0 0 0 0 30842 29501 0.15 0.15 0.15 0.14
-----END PRIVACY-ENHANCED MESSAGE-----