-----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, I/IWPZwsO7qB/N+8DLFBINbaXV1bTvYw8CApbx0nMdY+DIJFf2lpxV5sbWyiFR+F GPL4ps9H0+7Yf0chVt2s9g== 0000740112-99-000006.txt : 19990817 0000740112-99-000006.hdr.sgml : 19990817 ACCESSION NUMBER: 0000740112-99-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 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: 99692344 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 June 30, 1999 ___________________________ 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 June 30, 1999 was 136,336,236. CONCORD EFS, INC. AND SUBSIDIARIES INDEX Page No. -------- PART 1- Financial Information Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998 1 Condensed Consolidated Statements of Income Three Months and Six Months ended June 30, 1999 and June 30, 1998 3 Condensed Consolidated Statements of Cash Flows Six Months ended June 30, 1999 and June 30, 1998 4 Notes to Condensed Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 16 PART II - Other Information Item 2. Changes in Securities and Use of Proceeds 17 Item 4. Submission of Matters to a Vote of Stockholders 17 Item 6. Exhibits and Reports on Form 8-K 18 Signatures 19 CONCORD EFS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) June 30 December 31 1999 1998 ----------- ----------- ASSETS (In thousands) CURRENT ASSETS Cash and cash equivalents $ 162,019 $ 82,029 Securities available-for-sale 337,992 288,180 Accounts receivable, net 147,686 106,662 Inventories 12,762 11,396 Prepaid expenses and other 10,585 7,863 Deferred income taxes 8,967 5,977 ----------- ----------- TOTAL CURRENT ASSETS 680,011 502,107 OTHER ASSETS 19,373 23,615 PROPERTY AND EQUIPMENT 324,447 302,937 Less accumulated depreciation and amortization (167,077) (148,447) ----------- ----------- 157,370 154,490 INTANGIBLE ASSETS 152,958 146,712 Less accumulated amortization (50,878) (42,806) ----------- ----------- 102,080 103,906 ----------- ----------- TOTAL ASSETS $ 958,834 $ 784,118 =========== =========== See Notes to Condensed Consolidated Financial Statements - Unaudited. -1- CONCORD EFS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) June 30 December 31 1999 1998 ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY (In thousands) CURRENT LIABILITIES Accounts payable and $ 157,399 $ 112,376 other liabilities Accrued liabilities 69,992 47,641 Income taxes payable 12,660 10,148 Short-term borrowings - 21,000 Current maturities of long-term debt - 25,116 ----------- ----------- TOTAL CURRENT LIABILITIES 240,051 216,281 LONG-TERM DEBT, LESS CURRENT MATURITY 80,000 173,000 DEFERRED INCOME TAXES 12,222 21,336 OTHER LIABILITIES 9,806 12,966 STOCKHOLDERS' EQUITY Common Stock-par value $0.33 1/3 per share; authorized 500.0 million shares, issued and outstanding 136.3 million shares at June 30, 1999; issued and outstanding 127.9 million shares at December 31, 1998 45,445 42,646 Other stockholders' equity 571,310 317,889 ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 616,755 360,535 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 958,834 $ 784,118 =========== =========== See Notes to Condensed Consolidated Financial Statements - Unaudited. -2- CONCORD EFS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three Months Ended Six Months Ended June 30 June 30 --------------------- --------------------- 1999 1998 1999 1998 ------- ------- ------- ------- (In thousands, except per share data) Revenue $193,724 $155,258 $363,958 $289,924 Cost of operations 137,296 109,256 258,145 204,285 Selling, general and administrative expenses 12,564 12,581 24,932 25,681 Acquisition expenses and restructuring charges - - 34,810 - ------- ------- ------- ------- OPERATING INCOME 43,864 33,421 46,071 59,958 Other income (expense): Interest income 5,479 3,859 10,744 7,954 Interest expense (3,611) (3,659) (7,144) (7,005) ------- ------- ------- ------- INCOME BEFORE TAXES 45,732 33,621 49,671 60,907 Income taxes 16,466 12,290 23,273 22,227 ------- ------- ------- ------- NET INCOME $29,266 $21,331 $26,398 $38,680 ======= ======= ======= ======= Per share data: Weighted average shares 129,076 127,639 128,545 127,562 ======= ======= ======= ======= Basic earnings per share $0.23 $0.17 $0.21 $0.30 ======= ======= ======= ======= Adjusted weighted average shares and assumed conversions 134,065 131,615 133,586 131,232 ======= ======= ======= ======= Diluted earnings per share $0.22 $0.16 $0.20 $0.29 ======= ======= ======= ======= See Notes to Condensed Consolidated Financial Statements - Unaudited. -3- CONCORD EFS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended June 30 --------------------- 1999 1998 -------- -------- NET CASH PROVIDED BY OPERATING (In thousands) ACTIVITIES $ 91,358 $ 63,215 INVESTING ACTIVITIES: Acquisition of property and equipment (25,021) (37,750) Purchases of securities available-for-sale (101,334) (93,219) Purchase of securities held-to-maturity (9,630) Sale of securities available-for-sale 28,020 27,476 Maturities of securities available-for-sale 11,784 4,844 Maturities of securities held-to-maturity 23,733 Merchants contracts purchased (7,840) (7,069) Other (811) -------- -------- NET CASH USED IN INVESTING ACTIVITIES (94,391) (92,426) FINANCING ACTIVITIES: Proceeds from sale of common stock 222,139 1,675 Proceeds from notes payable 7,000 40,000 Payments under credit agreement, net (21,000) Payments on notes payable (125,116) (12,932) -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 83,023 28,743 -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 79,990 (468) Cash and cash equivalents at beginning of period 82,029 82,592 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $162,019 $ 82,124 ======== ======== 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. -4- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 1999 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 considered necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 1999 are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. 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, 1998. The balance sheet at December 31, 1998 has been derived from the consolidated audited financial statements included in exhibit 99 of the Company's Form 10-K for the year ended December 31, 1998. The balance sheet does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Certain amounts have been reclassified from prior period consolidated financial statements to conform with the current year presentation. Restatement for Poolings The historical financial information presented in this Form 10-Q has been re- stated to include the results of Electronic Payment Services, Inc. ("EPS"). EPS was acquired in a pooling-of-interests transaction, and in accordance with pooling-of-interests method of accounting, no adjustments have been made to the historical carrying amounts of assets and liabilities of EPS. However, the financial information has been restated to include the operating results of EPS for all stated periods prior to the combination. On February 18, 1999, the stockholders approved the Company's issuance of shares in connection with its acquisition of EPS. The Company completed the merger with EPS on February 26, 1999 by exchanging 30,064,835 shares of the Company's common stock for all of the outstanding common stock of EPS. EPS provides transaction processing services to financial institutions and retailers throughout the United States. EPS also owns and operates electronic data processing and data-capture networks that process transactions originating at ATMs and point-of-sale terminals. -5- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED) JUNE 30, 1999 Restatement for Pooling - continued The following table presents selected financial information, in thousands, split between the Company and EPS for the three and six month periods ended June 30, 1999 and 1998, respectively. Three months ended Six months ended June 30 June 30 ----------------------- ----------------------- 1999 1998 1999 1998 -------- -------- -------- -------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) Revenue Concord EFS, Inc. $193,724 $ 90,588 $317,853 $166,855 EPS (1) 64,670 46,105 123,069 -------- -------- -------- -------- $193,724 $155,258 $363,958 $289,924 ======== ======== ======== ======== Net income Concord EFS, Inc. $ 29,266 $ 15,014 $21,484 $ 27,174 EPS (1) 6,317 4,914 11,506 -------- -------- -------- -------- $ 29,266 $ 21,331 $26,398 $ 38,680 ======== ======== ======== ======== (1) The 1999 amounts reflect the results of operations from January 1, 1999 through February 28, 1999. The results of operations from March 1, 1999 to June 30, 1999 are included in Concord EFS, Inc. amounts. Offering of Common Stock During the quarter, the Company filed a registration statement with the Securities and Exchange Commission offering 2,000,000 shares of its common stock, and the selling stockholders named in the registration statement selling 29,659,125 shares of common stock for a total of 31,659,125 shares of common stock. As described in the registration statement, the selling stockholders were the previous owner banks of EPS who received unregistered common stock of the Company in connection with the February 26, 1999 acquisition. The underwriters named in the registration statement had the option to purchase up to 4,748,000 additional shares of common stock from the Company. This option was exercised for a total of 36,407,125 shares of common stock sold in the offering. Net of the underwriting discount and estimated other expenses of the offering, the Company received $207.8 million for the 6,748,000 shares of common stock issued. The Company did not receive any proceeds from the sale of shares by the selling stockholders. -6- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED) JUNE 30, 1999 Comprehensive Income As of January 1, 1998, the Company adopted Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 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. SFAS No. 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 SFAS No. 130. Total comprehensive income was $23,188 and $21,338 for the three months ended, June 30, 1999 and 1998, respectively. Total comprehensive income, in thousands, was $19,441 and $38,823 for the six months ended, June 30, 1999 and 1998, respectively. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data): Three Months Ended Six Months Ended June 30 June 30 1999 1998 1999 1998 ------- ------- ------- ------- Numerator: Net income $29,266 $21,331 $26,398 $38,680 ======= ======= ======= ======= Denominator: Denominator for basic earnings per share, weighted-average shares 129,076 127,639 128,545 127,562 Effect of dilutive securities, employee stock options 4,989 3,976 5,041 3,670 ------- ------- ------- ------- Denominator for diluted earnings per share adjusted for weighted- average shares and assumed conversions 134,065 131,615 133,586 131,232 ======= ======= ======= ======= Basic earnings per share $0.23 $0.17 $0.21 $0.30 ======= ======= ======= ======= Diluted earnings per share $0.22 $0.16 $0.20 $0.29 ======= ======= ======= ======= -7- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED) JUNE 30, 1999 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 and diluted earnings per share for the six month period ended June 30, 1999 were $0.41 and $0.40, respectively. Earnings per share and related per share data have been restated to reflect all stock splits. Operations By Industry Segment In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which establishes standards for reporting financial information about operating segments in annual and interim financial statements. SFAS No. 131 requires that financial information be reported on the same basis that is reported internally for evaluating segment performance and allocating resources to segments. SFAS No. 131 addresses how supplemental financial information is disclosed in annual and interim reports; therefore, its adoption in 1998 had no impact on the financial condition or operating results of the Company. Concord has two reportable segments: Merchant Services and ATM Services. Merchant Services results from processing credit card transactions for all major credit card brands including VISA, MasterCard, American Express, Discover and Diners Club; the processing of debit card transactions for financial institutions issuing these and similar cards; 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. ATM Services include transactional fee income and surcharge revenue from ATMs owned by the Company as well as ATM transaction processing for ATMs owned by the Company's merchants. The Company evaluates performance and allocates resources based on profit or loss from operations. Items classified as "Other" include revenue not identifiable with the two reportable segments described above and costs of operations and selling, general and administrative expenses which are not allocated to the reportable segments. No single customer of the Company accounts for a material portion of the Company's revenues. Certain amounts have been reclassified from prior period consolidated financial information to conform with the current year presentation. -8- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED) JUNE 30, 1999 Operations By Industry Segment - continued Industry segment information, in thousands, for the three and six month periods ended June 30, 1999 and 1998 is presented below: Merchant ATM Services Services Other Total ---------- ---------- ---------- ---------- Three months ended June 30, 1999 Revenue $133,116 $ 56,704 $ 3,904 $ 193,724 Cost of operations (85,470) (31,717) (20,109) (137,296) Selling, general, & administrative expenses (12,564) (12,564) Taxes & interest, net (14,598) (14,598) ---------- ---------- ---------- ---------- Net income (loss) $ 47,646 $ 24,987 $ (43,367) $ 29,266 ========== ========== ========== ========== Three months ended June 30, 1998 Revenue $103,291 $ 49,153 $ 2,814 $ 155,258 Cost of operations (61,942) (29,649) (17,620) (109,256) Selling, general, & administrative expenses (12,581) (12,581) Taxes & interest, net (12,090) (12,090) ---------- ---------- ---------- ---------- Net income (loss) $ 41,349 $ 19,459 $ (39,477) $ 21,331 ========== ========== ========== ========== -9- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED) JUNE 30, 1999 Operations By Industry Segment - continued Merchant ATM Services Services Other Total ---------- ---------- ---------- ---------- Six months ended June 30, 1999 Revenue $245,441 $109,153 $ 9,364 $ 363,958 Cost of operations (154,370) (62,678) (41,097) (258,145) Acquisition costs and restructuring charges (34,810) (34,810) Selling, general, & administrative expenses (24,932) (24,932) Taxes & interest, net (19,673) (19,673) ---------- ---------- ---------- ---------- Net income (loss) $ 91,071 $ 46,475 $(111,148) $ 26,398 ========== ========== ========== ========== Six months ended June 30, 1998 Revenue $190,292 $ 94,355 $ 5,277 $ 289,924 Cost of operations (112,680) (56,909) (34,696) (204,285) Selling, general, & administrative expenses (25,681) (25,681) Taxes & interest, net (21,278) (21,278) ---------- ---------- ---------- ---------- Net income (loss) $ 77,612 $ 37,446 $ (76,378) $ 38,680 ========== ========== ========== ========== -10- 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) the failure to fully integrate the operations of Electronic Payment Services, (iii) changes in card association rules, (iv) changes in card association fees, (v) restrictions on surcharging or a decline in the deployment of automated teller machines, (vi) dependence on VISA and MasterCard registrations, (vii) the credit risk of merchant customers, (viii) susceptibility to fraud at the merchant level, (ix) the failure of the Company, its vendors or its customers to appropriately manage Year 2000 code problems, (x) increasing competition, (xi) the success of a new VISA debit card product, (xii) the loss of key customers, (xiii) continued consolidation in the banking and retail industries, (xiv) risks related to acquisitions, (xv) changes in rules and regulations governing financial institutions, (xvi) the inability to remain current with rapid technological change, (xvii) dependence on third-party vendors, (xviii) the imposition of additional state taxes, (xix) volatility of the Company's common stock price and (xx) 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. Recent Acquisitions On February 26, 1999 the Company completed its acquisition of EPS, a company which provides transaction processing services to financial institutions and retailers throughout the United States. The acquisition was accounted for as a pooling of interests in which the Company exchanged 30.1 million of its shares for all of the outstanding common stock of EPS. The Company incurred $34.8 million of expenses related to the acquisition in the first quarter of 1999. These expenses included communication conversion costs, advisory fees and asset write-offs. Management continues to review potential operational synergies from the acquisition, such as duplicate facilities, computer hardware and software and other contractual relationships. Restatement for Pooling The historical financial information presented in this Form 10-Q has been restated to include the results of EPS. In accordance with pooling-of- interests method of accounting, no adjustments have been made to the historical carrying amounts of assets and liabilities of EPS. However, the financial information has been restated to include the operating results of EPS for all stated periods prior to the combination. -11- CONCORD EFS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued Overview Concord EFS, Inc. (the "Company") is a fully integrated leading provider of electronic transaction authorization, processing, settlement and funds transfer services on a nationwide basis. The Company focus 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 35,000 ATMs nationwide, of which it owns approximately 1,000. The substantial majority of the Company's revenue (68.7% in the second quarter of 1999 and 66.5% in the second quarter of 1998) 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 for financial institutions issuing these and similar cards; 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 includes primarily discount fees charged to merchants, which are a percentage of the dollar amount of each credit card transaction the Company processes, as well as 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. The other principal component of the Company's revenue derives from ATM Services (approximately 29.3% in the second quarter of 1999 and 31.7% in the second quarter of 1998). ATM Services revenue consists of fee income and other surcharges charged for proprietary ATMs and processing fees for third party ATMs. The balance of the Company's revenue is derived principally from check verification and authorization services, sales of point-of-sale terminals and payroll processing services. 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 -12- CONCORD EFS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued Overview - continued 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, 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, other general administrative expenses (including certain amortization costs). Results of Operations Revenue increased 24.7% to $193.7 million in the second quarter of 1999 from $155.3 million in the second quarter of 1998. Of 1999 revenue, merchant services, ATM services and other services accounted for 68.7%, 29.3% and 2.0%, respectively of revenue. Revenue from merchant services, increased 28.9%, due primarily to increased transactional volumes. Increased volumes resulted from the addition of new merchants, the widening acceptance of debit and EBT card transactions at new and existing merchants and higher credit card transaction processing fees. The increase in fees was a pass through to customers of higher interchange processing fees that were assessed by the credit card associations in April 1998 and April 1999. ATM services revenue increased 15.4%; the placement of new ATMs, new ATM processing customers and increases in transactional volumes accounted for the increase. Other revenue increased 38.7% due to increased terminal sales primarily to our new merchants. Cost of operations increased in the second quarter of 1999 to 70.9% of revenue compared to 70.4% in the prior year. Credit card association interchange fees and certain other transactional related costs were higher as a percentage of revenue in the second quarter of 1999 than in the same period of 1998. This was largely offset by a decrease, as a percentage of revenue, in payroll expenses and other operating expenses. Net income as a percentage of revenue was 15.1% and 13.7% in the second quarter of 1999 and 1998, respectively. The increase in cost of operations as a percentage of revenue described above, was offset by selling, general and administrative expenses, net interest income and income taxes improvements as a percentage of revenue. Selling, general and administrative expenses were unchanged at $12.6 million in the second quarter of 1999 and 1998 as increased salaries and wages were offset by lower legal costs. Net interest income improved from $0.2 million in the second quarter of 1998 to $1.9 million in the second quarter of 1999 as available cash from operations was invested in securities available for sale and debt was repaid. The effective tax rate dropped from 36.6% in the second quarter of 1998 to 36.0% in the second quarter of 1999 which also improved net 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 Results of Operations - continued For the six months ended June 30, 1999, revenue increased 25.5% to $364.0 million from $289.9 million. Of 1999 revenue, merchant services, ATM services and other services accounted for 67.4%, 30.0% and 2.6%, respectively of revenue. Revenue from merchant card services, increased 29.0%, due primarily to increased transactional volumes. Increased volumes resulted from the addition of new merchants, the widening acceptance of debit and EBT card transactions at new and existing merchants and higher credit card transaction processing fees. The increase in fees was a pass through to customers of higher interchange processing fees that were assessed by the credit card associations in April 1998 and April 1999. ATM services revenue increased 15.7%; the placement of new ATMs, new ATM processing customers and increases in transactional volumes accounted for the increase. Other revenue increased 77.4% due to increased terminal sales primarily to our new merchants. Net income as a percentage of revenue was 7.3% and 13.3% in the six months ended of 1999 and 1998, respectively. 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. The total pretax charges were $34.8 million. No additional acquisition expenses or restructuring charges were incurred in the second quarter of 1999. For a detailed explanation of the pretax expenses and charges please see the Company's Form 10-Q for the quarter ended March 31, 1999. The pretax expenses and charges incurred in the first quarter and remaining reserve balances, in millions, are summarized as follows: Acquisition Expenses and Reserve Cash or Restructuring Balance Description Non-cash Charges Activity at 6/30/99 -------------------- -------- ------------- -------- ---------- Acquisition expenses cash $10.5 $10.5 $ - Communication conversion costs cash 12.4 0.2 12.2 Asset write-offs non-cash 8.2 8.2 - Off-line debit conversion cash 2.8 0.7 2.1 Severance and other cash 0.9 0.7 0.2 ----- ----- ----- $34.8 $20.3 $14.5 ===== ===== ===== -14- CONCORD EFS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued Results of Operations - continued In addition to the pre-tax charges, a tax component write off of $1.3 million for impaired state tax net operating losses of EPS was incurred. Combined with the non-tax deductibility of certain acquisition costs, these items increased income taxes as a percentage of revenue for the six months ended June 30, 1999. Excluding the $34.8 million in restructuring charges and acquisition expenses described above, cost of operations increased in the six months ended of 1999 from 70.9% of revenue compared to 70.5% in the same period of the prior year. Credit card association interchange fees and certain other transactional related costs were higher as a percentage of revenue during the six months ended June 30, 1999 than in the same period of 1998. This was largely offset by a decrease, as a percentage of revenue, in payroll expenses, depreciation and amortization and other operating expenses. Excluding the restructuring charges and acquisition expenses, net income as a percentage of revenue increased to 14.6% for the six months ended June 30, 1999 from 13.3% in the same period of the prior year. The primary factors for the improvement were selling, general and administrative expenses declining to $24.9 million for the six months ended June 30, 1999 from $25.7 million in the same period of the prior year offset by the increase in cost of operations as a percentage of revenue, described above. Liquidity and Capital Resources In the six months ended June 30 1999, the Company generated $91.4 million from operating activities. The Company also received $7.0 million in proceeds from notes payable, $207.8 from an offering of stock, and $14.3 million from stock issued from exercises of options under the Company's stock option plans. From cash provided from operating and financing activities, $61.5 million was invested in securities, net of sales and maturities, $25.0 million was disbursed on capital additions, $7.8 million was spent to purchase merchant contracts, long-term debt was reduced by $125.1 million, and short-term borrowings of $21.0 million were paid off. 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. -15- CONCORD EFS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued Impact of Year 2000 The Year 2000 preparedness efforts of the Company cover both information technologies ("IT") and non-IT systems. Non-IT systems include those systems used in the daily operations of buildings and facilities. IT systems include computer hardware, software and related applications. The Company has instituted a five-phase plan with the goal of having its IT and non-IT systems function properly with respect to dates in the year 2000 and beyond. These five phases are: awareness, assessment, renovation, validation and implementation. Based on progress to date, the Company has completed all five phases for all systems. There is no guarantee that the systems of other companies on which the Company's systems rely will be converted in a timely manner. However, contingency plans have been created for all mission critical vendor products and services. The contingency plans have been further enhanced and expanded to include business resumption planning. These plans include both the Company's internal mission critical systems and third-party exposures, based on the evaluation of progress at that time. Additional testing of new or remediated systems and applications will continue as needed. Any new system must be tested and approved by the Year 2000 Committee for necessity and Year 2000 impact before development and implementation begins. 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, 1998. For additional information, refer to Exhibit 99 - Supplemental Consolidated Financial Statements in our Form 10-K for the year ended December 31, 1998. -16- CONCORD EFS, INC. AND SUBSIDIARIES PART II OTHER INFORMATION Item 2: Changes in Securities and Use of Proceeds During the quarter, the Company filed a registration statement with the Securities and Exchange Commission offering 2,000,000 shares of its common stock, and the selling stockholders named in the registration statement selling 29,659,125 shares of common stock for a total of 31,659,125 shares of common stock. As described in the registration statement, the selling stockholders were the previous owner banks of EPS who received unregistered common stock of the Company in connection with the February 26, 1999 acquisition. The underwriters named in the registration statement had the option to purchase up to 4,748,000 additional shares of common stock from the Company. This option was exercised for a total of 36,407,125 shares of common stock sold in the offering. Net of the underwriting discount and estimated other expenses of the offering, the Company received $207.8 million for the 6,748,000 shares of common stock issued. The Company did not receive any proceeds from the sale of shares by the selling stockholders. From the $207.8 million proceeds, $139.8 million was used to pay off long-term debt of $118.8 million and short-term borrowings of $21.0 million. Item 4: Submission of Matters to a Vote of Security Holders The annual meeting of stockholders of the Company was held on May 20, 1999. At that meeting, the stockholders voted on the following matters: (1) A proposal to elect directors to serve for the ensuing year was approved. Officers were nominated and elected to serve as directors of the Company until the next annual meeting and until their respective successors have been elected or until their earlier resignation, death or removal. All nominees were elected receiving more than 115,000,000 votes cast for their election. (2) A proposal to approve a proposed amendment to the Company's Certificate of Incorporation to increase the number of authorized shares of common stock to 500,000,000 was approved. There were a total of 108,102,949 votes were cast for, 7,386,181 votes were cast against or withheld, and 369,106 abstentions and broker non-votes on this proposal. (3) A proposal to approve a proposed amendment to the Company's 1993 Incentive Stock Option Plan to permit optionees to transfer options to family members and to increase options granted annually to non-employee directors was approved. There were a total of 88,759,122 votes were cast for, 26,682,288 votes were cast against or withheld, and 416,826 abstentions and broker non-votes on this proposal. -17- PART II OTHER INFORMATION - Continued Item 6: Exhibits and Reports on Form 8-K. (a) Exhibits none (b) Reports on Form 8-K On May 6, 1999, the Company filed a Report on Form 8-K to report, under Item 5 of that form, the Company's filing of a registration statement on Form S-3 with the Securities and Exchange Commission to register a total of 35,603,125 shares of its common stock for sale to the public. Of the 35,603,125 shares, 28,963,125 were offered by the selling stockholders who acquired their shares in connection with the acquisition by the Company of Electronic Payment Services, Inc. on February 26, 1999 and 2,000,000 shares were offered by the Company. Upon completion of the registration statement and subsequent offering, the number of shares offered was 31,659,125. Of the total shares offered, 29,659,125 were offered by the selling shareholders named in the registration statement, 2,000,000 shares were offered by the Company and an additional 4,748,000 shares were allotted to underwriters. -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 16, 1999 By: /s/ Dan M. Palmer --------------------------- Dan M. Palmer Chairman of the Board and Chief Executive Officer Date: August 16, 1999 By: /s/ Thomas J. Dowling --------------------------- Thomas J. Dowling Vice President and Chief Financial Officer -19- EX-27 2 FINANCIAL DATA SCHEDULE
5 1000 3-MOS 6-MOS DEC-31-1999 DEC-31-1999 JUN-30-1999 JUN-30-1999 162019 162019 337992 337992 150915 150915 3229 3229 12762 12762 680011 680011 324447 324447 167077 167077 958834 958834 240051 240051 0 0 0 0 0 0 45445 45445 571310 571310 958834 958834 193724 363958 193724 363958 137296 258145 283062 317887 0 0 235 805 3611 7144 45732 49671 16466 23273 29266 26398 0 0 0 0 0 0 29266 26398 0.23 0.21 0.22 0.20
EX-27 3 FINANCIAL DATA SCHEDULE
5 1000 3-MOS 6-MOS DEC-31-1998 DEC-31-1998 JUN-30-1998 JUN-30-1998 82124 82124 182319 182319 93780 93780 3641 3641 8022 8022 380539 380539 276575 276575 130159 130159 700738 700738 184610 184610 0 0 0 0 0 0 42574 42574 259840 259840 700738 700738 155258 289924 155258 289924 109256 204285 121837 229966 0 0 192 366 3659 7005 33621 60907 12290 22227 21331 38680 0 0 0 0 0 0 21331 38680 0.17 0.30 0.16 0.29
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