-----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, RRpe4zEbGikcTjk6JOb54830lmTku2K5AJITMLXAKo4p4NY/2ZhbVS9gQgRDuDwG 0WJGj/gok+4moFWmybz/cA== 0000740112-99-000008.txt : 19991117 0000740112-99-000008.hdr.sgml : 19991117 ACCESSION NUMBER: 0000740112-99-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99754995 BUSINESS ADDRESS: STREET 1: 2525 HORIZON LAKE DR STE 120 CITY: MEMPHIS STATE: TN ZIP: 38133 BUSINESS PHONE: 9013718000 MAIL ADDRESS: STREET 1: 2525 HORIZON LAKE DRIVE STREET 2: SUITE 120 CITY: MEMPHIS STATE: TN ZIP: 38133 FORMER COMPANY: FORMER CONFORMED NAME: CONCORD COMPUTING CORP DATE OF NAME CHANGE: 19920515 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended Commission file number 0-13848 September 30, 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 September 30, 1999 was 205,660,135. CONCORD EFS, INC. AND SUBSIDIARIES INDEX Page No. -------- PART 1- Financial Information Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998 1 Condensed Consolidated Statements of Income Three Months and Nine Months ended September 30, 1999 and September 30, 1998 3 Condensed Consolidated Statements of Cash Flows Nine Months ended September 30, 1999 and September 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 17 PART II - Other Information Item 6. Exhibits and Reports on Form 8-K 18 Signatures 19 CONCORD EFS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) September 30 December 31 1999 1998 ----------- ----------- ASSETS (In thousands) CURRENT ASSETS Cash and cash equivalents $ 133,562 $ 82,029 Securities available-for-sale 426,708 288,180 Accounts receivable, net 136,145 106,662 Inventories 14,883 11,396 Prepaid expenses and other 13,803 7,863 Deferred income taxes 8,750 5,977 ----------- ----------- TOTAL CURRENT ASSETS 733,851 502,107 OTHER ASSETS 17,785 23,615 PROPERTY AND EQUIPMENT 334,329 302,937 Less accumulated depreciation and amortization (174,473) (148,447) ----------- ----------- 159,856 154,490 INTANGIBLE ASSETS 160,489 146,712 Less accumulated amortization (54,334) (42,806) ----------- ----------- 106,155 103,906 ----------- ----------- TOTAL ASSETS $ 1,017,647 $ 784,118 =========== =========== See Notes to Condensed Consolidated Financial Statements - Unaudited. -1- CONCORD EFS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) September 30 December 31 1999 1998 ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY (In thousands) CURRENT LIABILITIES Accounts payable and $ 172,963 $ 112,376 other liabilities Accrued liabilities 67,090 47,641 Income taxes payable 15,804 10,148 Short-term borrowings - 21,000 Current maturities of long-term debt - 25,116 ----------- ----------- TOTAL CURRENT LIABILITIES 255,857 216,281 LONG-TERM DEBT, LESS CURRENT MATURITY 80,000 173,000 DEFERRED INCOME TAXES 10,364 21,336 OTHER LIABILITIES 8,227 12,966 STOCKHOLDERS' EQUITY Common Stock-par value $0.33 1/3 per share; authorized 500.0 million shares, issued and outstanding 205.6 million shares at September 30, 1999; issued and outstanding 191.9 million shares at December 31, 1998 68,553 42,646 Other stockholders' equity 594,646 317,889 ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 663,199 360,535 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,017,647 $ 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 Nine Months Ended September 30 September 30 --------------------- --------------------- 1999 1998 1999 1998 ------- ------- ------- ------- (In thousands, except per share data) Revenue $216,147 $167,555 $580,105 $457,479 Cost of operations 152,882 118,033 411,027 322,318 Selling, general and administrative expenses 13,116 12,576 38,048 38,257 Acquisition expenses and restructuring charges - - 34,810 - ------- ------- ------- ------- OPERATING INCOME 50,149 36,946 96,220 96,904 Other income (expense): Interest income 7,005 4,610 17,749 12,564 Interest expense (1,484) (3,767) (8,628) (10,772) ------- ------- ------- ------- INCOME BEFORE TAXES 55,670 37,789 105,341 98,696 Income taxes 20,086 14,024 43,359 36,251 ------- ------- ------- ------- NET INCOME $35,584 $23,765 $61,982 $62,445 ======= ======= ======= ======= Per share data: Weighted average shares 205,159 191,640 196,931 191,443 ======= ======= ======= ======= Basic earnings per share $0.17 $0.12 $0.31 $0.33 ======= ======= ======= ======= Adjusted weighted average shares and assumed conversions 211,935 196,149 204,233 196,681 ======= ======= ======= ======= Diluted earnings per share $0.17 $0.12 $0.30 $0.32 ======= ======= ======= ======= See Notes to Condensed Consolidated Financial Statements - Unaudited. -3- CONCORD EFS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended September 30 --------------------- 1999 1998 -------- -------- NET CASH PROVIDED BY OPERATING (In thousands) ACTIVITIES $169,088 $ 95,024 INVESTING ACTIVITIES: Acquisition of property and equipment (34,903) (51,714) Purchases of securities available-for-sale (225,819) (146,705) Purchase of securities held-to-maturity (9,630) Sale of securities available-for-sale 44,977 67,617 Maturities of securities available-for-sale 22,414 4,844 Maturities of securities held-to-maturity 33,681 Merchants contracts purchased (13,999) (11,851) Other (6,596) -------- -------- NET CASH USED IN INVESTING ACTIVITIES (207,330) (120,354) FINANCING ACTIVITIES: Proceeds from sale of common stock 228,891 2,621 Proceeds from notes payable 7,000 45,000 Payments under credit agreement, net (21,000) Payments on notes payable (125,116) (20,294) -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 89,775 27,327 -------- -------- INCREASE IN CASH AND CASH EQUIVALENTS 51,533 1,997 Cash and cash equivalents at beginning of period 82,029 82,592 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $133,562 $ 84,589 ======== ======== 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) SEPTEMBER 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 September 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) SEPTEMBER 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 nine month periods ended September 30, 1999 and 1998, respectively. Three months ended Nine months ended September 30 September 30 ----------------------- ----------------------- 1999 1998 1999 1998 -------- -------- -------- -------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) Revenue Concord EFS, Inc. $216,147 $ 99,715 $534,000 $266,570 EPS (1) 67,840 46,105 190,909 -------- -------- -------- -------- $216,147 $167,555 $580,105 $457,479 ======== ======== ======== ======== Net income Concord EFS, Inc. $ 35,584 $ 16,709 $57,068 $ 43,883 EPS (1) 7,056 4,914 18,562 -------- -------- -------- -------- $ 35,584 $ 23,765 $61,982 $ 62,445 ======== ======== ======== ======== (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. Stock Split The Board of Directors approved a three-for-two stock split on August 26, 1999. Shareholders of record as of September 15, 1999 were distributed additional shares on September 22, 1999. Earnings per share and per share data have been restated to reflect the stock split. Offering of Common Stock During the previous quarter ended June 30, 1999, 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 -6- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED) Offering of Common Stock - continued 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. Comprehensive Income Total comprehensive income was $32,437 and $25,667 for the three months ended, September 30, 1999 and 1998, respectively. Total comprehensive income, in thousands, was $51,878 and $64,490 for the nine months ended, September 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 Nine Months Ended September 30 September 30 1999 1998 1999 1998 ------- ------- ------- ------- Numerator: Net income $35,584 $23,765 $61,982 $62,445 ======= ======= ======= ======= Denominator: Denominator for basic earnings per share, weighted-average shares 205,159 191,640 196,931 191,443 Effect of dilutive securities, employee stock options 6,776 4,509 7,302 5,238 ------- ------- ------- ------- Denominator for diluted earnings per share adjusted for weighted- average shares and assumed conversions 211,935 196,149 204,233 196,681 ======= ======= ======= ======= Basic earnings per share $0.17 $0.12 $0.31 $0.33 ======= ======= ======= ======= Diluted earnings per share $0.17 $0.12 $0.30 $0.32 ======= ======= ======= ======= -7- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED) SEPTEMBER 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 nine month period ended September 30, 1999 were $0.45 and $0.44, 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) SEPTEMBER 30, 1999 Operations By Industry Segment - continued Industry segment information, in thousands, for the three and nine month periods ended September 30, 1999 and 1998 is presented below: Merchant ATM Services Services Other Total ---------- ---------- ---------- ---------- Three months ended September 30, 1999 Revenue $146,818 $ 64,758 $ 4,571 $ 216,147 Cost of operations (93,731) (38,812) (20,339) (152,882) Selling, general, & administrative expenses (13,116) (13,116) Taxes & interest, net (14,565) (14,565) ---------- ---------- ---------- ---------- Net income (loss) $ 53,087 $ 25,946 $ (43,449) $ 35,584 ========== ========== ========== ========== Three months ended September 30, 1998 Revenue $112,334 $ 51,996 $ 3,225 $ 167,555 Cost of operations (68,016) (31,432) (18,585) (118,033) Selling, general, & administrative expenses (12,576) (12,576) Taxes & interest, net (13,181) (13,181) ---------- ---------- ---------- ---------- Net income (loss) $ 44,318 $ 20,564 $ (41,117) $ 23,765 ========== ========== ========== ========== -9- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED) SEPTEMBER 30, 1999 Operations By Industry Segment - continued Merchant ATM Services Services Other Total ---------- ---------- ---------- ---------- Nine months ended September 30, 1999 Revenue $392,259 $173,911 $ 13,935 $ 580,105 Cost of operations (248,101) (101,490) (61,436) (411,027) Acquisition costs and restructuring charges (34,810) (34,810) Selling, general, & administrative expenses (38,048) (38,048) Taxes & interest, net (34,238) (34,238) ---------- ---------- ---------- ---------- Net income (loss) $144,158 $ 72,421 $(154,597) $ 61,982 ========== ========== ========== ========== Nine months ended September 30, 1998 Revenue $302,626 $146,351 $ 8,502 $ 457,479 Cost of operations (180,696) (88,341) (53,281) (322,318) Selling, general, & administrative expenses (38,257) (38,257) Taxes & interest, net (34,459) (34,459) ---------- ---------- ---------- ---------- Net income (loss) $121,930 $ 58,010 $(117,495) $ 62,445 ========== ========== ========== ========== -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 (67.9% in the third quarter of 1999 and 67.0% in the third 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 30.0% in the third quarter of 1999 and 31.0% in the third quarter of 1998). ATM Services revenue consists of fee income and other surcharges charged for proprietary ATMs, processing fees for third party ATMs and terminals, and other access, switching and card processing fees. The remaining 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 -12- CONCORD EFS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued Overview - continued 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). Results of Operations Revenue increased 29.0% to $216.1 million in the third quarter of 1999 from $167.6 million in the third quarter of 1998. Of 1999 revenue, merchant services, ATM services and other services accounted for 67.9%, 30.0% and 2.1%, respectively of revenue. Revenue from merchant services, increased 30.7%, 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 24.5%; the placement of new ATMs, new ATM processing customers and increases in transactional volumes and the conversion to in house processing of offline debit transactions accounted for the increase. Other revenue increased 41.7% due to increased terminal sales primarily to our new merchants. Cost of operations increased in the third quarter of 1999 to 70.7% 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 third 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 16.5% and 14.2% in the third 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 improved as a percentage of revenue. Selling, general and administrative expenses increased to $13.1 million in the third quarter of 1999 from $12.6 million in 1998 as increased salaries and wages were offset by lower legal costs. Net interest income increased to $5.5 million in the third quarter of 1999 from $0.8 million in the third quarter of 1998 as net proceeds a common stock offering in June 1999 of approximately $208 million was used to repay approximately $146 million -13- CONCORD EFS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued Results of Operations - continued in long term debt. The balance of the offering along with available cash from operations was invested in securities available for sale resulting in an increase in net interest income. The effective tax rate dropped from 37.1% in the third quarter of 1998 to 36.1% in the third quarter of 1999 which also improved net income as a percentage of revenue. For the nine months ended September 30, 1999, revenue increased 26.8% to $580.1 million from $457.5 million. Of 1999 revenue, merchant services, ATM services and other services accounted for 67.6%, 30.0% and 2.4%, respectively of revenue. Revenue from merchant card services increased 29.6% 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 18.8%; the placement of new ATMs, new ATM processing customers, increases in transactional volumes and the conversion to in house processing of offline debit transactions accounted for the increase. Other revenue increased 63.9% due to increased terminal sales primarily to our new merchants. Net income as a percentage of revenue was 10.7% and 13.6% in the nine 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 third 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. -14- CONCORD EFS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued Results of Operations - continued 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 9/30/99 -------------------- -------- ------------- -------- ---------- Acquisition expenses cash $10.5 $10.5 $ - Communication conversion costs cash 12.4 0.3 12.1 Asset write-offs non-cash 8.2 8.2 - Off-line debit conversion cash 2.8 2.8 - Severance and other cash 0.9 0.9 - ----- ----- ----- $34.8 $22.7 $12.1 ===== ===== ===== Due to the year 2000 preparedness efforts of the Company and our customers, the communication conversion project is not expected to begin in force until after January 15, 2000. The project is expected to be substantially complete by the end of the year 2000. 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 nine months ended September 30, 1999. Excluding the $34.8 million in restructuring charges and acquisition expenses described above, cost of operations increased in the nine 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 nine months ended September 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 certain amortization and other operating expenses. -15- CONCORD EFS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued Results of Operations - continued Excluding the restructuring charges and acquisition expenses, net income as a percentage of revenue increased to 15.3% for the nine months ended September 30, 1999 from 13.6% in the same period of the prior year. The primary factors for the improvement were selling, general and administrative expenses declining to $38.0 million for the nine months ended September 30, 1999 from $38.3 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 nine months ended September 30 1999, the Company generated $169.1 million from operating activities. The Company also received $7.0 million in proceeds from notes payable, $207.8 million from an offering of stock, and $21.1 million from stock issued from exercises of options under the Company's stock option plans. From cash provided from operating and financing activities, $158.4 million was invested in securities, net of sales and maturities, $34.9 million was disbursed on capital additions, $14.0 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. 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. -16- CONCORD EFS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued Impact of Year 2000 - continued 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. -17- CONCORD EFS, INC. AND SUBSIDIARIES PART II OTHER INFORMATION Item 6: Exhibits and Reports on Form 8-K. (a) Exhibits none (b) Reports on Form 8-K none -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: November 15, 1999 By: /s/ Dan M. Palmer --------------------------- Dan M. Palmer Chairman of the Board and Chief Executive Officer Date: November 15, 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 9-MOS DEC-31-1999 DEC-31-1999 SEP-30-1999 SEP-30-1999 133562 133562 426708 426708 139170 139170 3025 3025 14883 14883 733851 733851 334329 334329 174473 174473 1017647 1017647 255857 255857 0 0 0 0 0 0 68553 68553 594646 594646 1017647 1017647 216147 580105 216147 580105 152882 411027 165998 483885 0 0 355 1160 1484 8628 55670 105341 20086 43359 35584 61982 0 0 0 0 0 0 35584 61982 0.17 0.31 0.17 0.30
EX-27 3 FINANCIAL DATA SCHEDULE
5 1000 3-MOS 9-MOS DEC-31-1998 DEC-31-1998 SEP-30-1998 SEP-30-1998 82029 82029 288180 288180 108986 108986 2324 2324 11396 11396 502107 502107 302937 302937 148447 148447 784118 784118 216281 216281 0 0 0 0 0 0 42646 42646 317889 259840 784118 784118 167555 457479 167555 457479 118033 322318 130609 360575 0 0 588 954 3767 10772 37789 98696 14024 36251 23765 62445 0 0 0 0 0 0 23765 62445 0.12 0.33 0.12 0.32
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