FISERV, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1994, 1993 and 1992
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents comprise cash and investments with original maturities
of 90 days or less and includes approximately $13,500,000 held by a
consolidated subsidiary pursuant to regulatory requirements.
PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets at December 31, 1994 and 1993 include
$7,723,000 and $4,597,000, respectively, relating to long-term contracts, the
profit from which is being recognized ratably over the periods to be benefited.
TRUST ACCOUNT DEPOSITS AND INVESTMENT SECURITIES
The Company's trust administration subsidiary accepts money market deposits from
its trust customers and invests the funds in securities. Such amounts due trust
depositors represent the primary source of funds for the Company's investment
securities and amounted to $809,324,000 and $663,426,000 in 1994 and 1993,
respectively. The related investment securities comprised the following at
December 31, 1994 and 1993:
Principal Carrying
Amount Value Market Value
----------------------------------------
1994
U. S. Government and government
agency obligations $478,711,000 $478,572,000 $460,452,000
Corporate bonds 51,840,000 51,836,000 51,373,000
Repurchase agreements 226,581,000 226,581,000 226,581,000
Other fixed income obligations 53,050,000 50,830,000 50,590,000
----------------------------------------
Total $810,182,000 $807,819,000 $788,996,000
========================================
1993
U. S. Government and government
agency obligations $357,975,000 $363,406,000 $364,778,000
Corporate bonds 36,975,000 37,390,000 37,253,000
Repurchase agreements 179,942,000 179,942,000 179,942,000
Other fixed income obligations 116,225,000 116,118,000 116,420,000
Premium amortization, etc. (863,000) 33,000
----------------------------------------
Total $691,117,000 695,993,000 $698,426,000
============= ==============
Included in: Cash and cash equivalents 20,904,000
Other investments 13,780,000
-------------
Trust account investments $661,309,000
=============
Substantially all of the investments have contractual maturities of one year or
less except for government agency obligations which generally contain provisions
for interest rate resets.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
computed using primarily the straight-line method over the estimated useful
lives of the assets, ranging from 3 to 40 years:
December 31,
1994 1993
--------------------------
Data processing equipment $119,197,000 $92,266,000
Purchased software 31,522,000 20,509,000
Buildings and leasehold improvements 35,326,000 32,635,000
Furniture and equipment 30,494,000 23,357,000
--------------------------
216,539,000 168,767,000
Less accumulated depreciation and amortization 103,091,000 72,122,000
--------------------------
Total $113,448,000 $96,645,000
==========================
INTERNALLY GENERATED COMPUTER SOFTWARE
Certain costs incurred to develop new software and enhance existing software are
capitalized and amortized over the expected useful life of the product,
generally five years. At December 31, 1994 and 1993, the unamortized portion of
internally generated computer software costs amounted to $67,820,000 and
$58,020,000, respectively; amortization of such costs charged to expense
amounted to $16,655,000, $13,995,000, and $10,487,000 in 1994, 1993 and 1992,
respectively. Routine maintenance of software products, design costs and
development costs incurred prior to establishment of a product's technological
feasibility are expensed as incurred.
INTANGIBLE ASSETS
Intangible assets relate to acquisitions and consist of the following at
December 31:
1994 1993
--------------------------
Computer software acquired $5,565,000 $5,561,000
Non-competition agreements 19,370,000 25,841,000
Contract rights and other 30,150,000 22,880,000
--------------------------
55,085,000 54,282,000
Less accumulated amortization 20,995,000 20,991,000
--------------------------
$34,090,000 $33,291,000
==========================
Goodwill $157,830,000 $133,963,000
Less accumulated amortization 10,144,000 6,118,000
--------------------------
$147,686,000 $127,845,000
==========================
The cost allocated to computer software acquired in corporate acquisitions is
being amortized on a straight-line basis over its expected useful life
(generally five years or less). In connection with certain acquisitions, the
Company has entered into non-competition agreements with the sellers. The
values assigned are being amortized on the straight-line method over the periods
covered by the agreements (generally five years or less). Costs allocated to
various customer data processing contracts at the dates of acquisition are being
amortized on a straight-line basis over the remaining terms of the contracts
(generally six years or less). The excess of the purchase price over the
estimated fair value of tangible and identifiable intangible assets acquired has
been recorded as goodwill and is being amortized over its estimated useful life
of 40 years.
INCOME TAXES
The consolidated financial statements are prepared on the accrual method of
accounting. Deferred income taxes are provided for temporary differences
between the Company's income for accounting and tax purposes.
REVENUE RECOGNITION
Revenues result primarily from the sale of data processing services to financial
institutions, software sales, and administration of self-directed retirement
plans. Such revenues are recognized as the related services are provided.
Revenues include investment income of $21,216,000, $12,286,000, and $10,308,000,
net of direct credits to depositors accounts of $17,446,000, $13,216,000, and
$16,576,000 in 1994, 1993 and 1992, respectively. Deferred revenues consist
primarily of advance billings for services and are recognized as revenue when
the services are provided.
INCOME PER SHARE
Income per common and common equivalent share is computed using the weighted
average number of common and dilutive common equivalent shares outstanding
during the periods, after giving effect to stock splits.
SUPPLEMENTAL CASH FLOW INFORMATION
1994 1993 1992
-----------------------------------
Interest paid $ 8,387,000 $ 5,412,000 $5,003,000
Income taxes paid 10,073,000 6,544,000 7,466,000
Liabilities assumed in acquisitions
of businesses 3,416,000 47,000,000 2,243,000
NOTE 2. ACQUISITIONS AND CAPITAL TRANSACTIONS
ACQUISITIONS
During 1994, 1993 and 1992 the Company completed the following acquisitions:
Date
Company Acquired Type of Business Consideration
- - - - - -----------------------------------------------------------------------------------------------
1994:
National Embossing Company, Inc. Apr. 19 Automated card services Cash for stock
Boatmen's Information Systems May 2 Data processing Cash for assets
data processing business
Federal Home Loan Bank of Atlanta Aug. 19 Item processing Cash for assets
item processing contracts
Cincinnati Bell Information Systems Nov. 30 Image and document Cash for assets
banking business management services
RECOM Associates, Inc. Dec. 30 Network integration services Stock for stock
1993:
Tomahawk Holding, Inc. and Feb. 10 Data processing for banks, Cash and stock
its wholly-owned subsidiary thrifts and credit unions for stock
Basis Information
Technologies, Inc.
IPC Service Corporation Mar. 2 Item processing Cash for assets
EDS item processing May 17 Item processing Cash for assets
contracts
Datatronix Financial Services Jun. 25 Item processing Stock for stock
Data Line Service Company Jul. 13 Data processing for thrifts Cash for stock
Financial Processors, Inc. Nov. 8 Data processing for banks Cash for stock
and Financial Data Systems Item processing Cash for assets
Financial Institution Outsourcing Nov. 30 Data processing for banks Cash for assets
and Data-Link Systems, Inc. Mortgage banking services Cash for stock
1992:
Data Holdings, Inc. Feb. 10 Automated card services Cash for stock
BMS On-Line Services, Inc., Feb. 28 Data processing Cash for assets
selected assets
First American Information Mar. 2 Data processing and item Cash for stock
Services, Inc. processing
Cadre, Inc. Jul. 1 Disaster recovery services Cash for stock
Performance Analysis, Inc. Jul. 1 Software for banks Cash for stock
Chase Manhattan Bank, Oct. 22 Software for banks Cash for assets
REALM Software
Dakota Data Processing, Inc. Dec. 1 Data processing Cash for stock
Banking Group Services, Inc. Dec. 31 Item processing Stock for stock
Generally, the acquisitions were accounted for as purchases and, accordingly,
the operations of the acquired companies are included in the consolidated
financial statements since their respective dates of acquisition as set forth
above. Certain of the acquisition agreements provide for additional cash
payments contingent upon the attainment of specified revenue goals.
STOCK PURCHASE AND STOCK OPTION PLANS
The Company has a Restricted Stock Purchase Plan, a qualified Incentive Stock
Option Plan and a Non- Qualified Stock Option Plan, each of which provide for
grants of common stock to employees for a price not less than 100% of the fair
value of the shares at the date of grant. There has been no recent activity in
the Restricted Stock Purchase Plan. In general, 20% of the option shares
awarded under the Incentive and Non-Qualified Stock Option Plans may be
purchased annually and expire, generally, five to ten years from the date of the
award. Plan activity during 1992, 1993 and 1994, adjusted for 3-for-2 splits
effective in May 1993 and June 1992, is summarized as follows:
Shares
--------------------
Non- Price
Incentive Qualified Range
--------------------
Outstanding, December 31, 1991 1,750,887 5.04-12.45
Granted 751,747 15.22-16.00
Forfeited (85,392)
Exercised (537,126) 5.04-10.37
--------------------
Outstanding, December 31, 1992 1,880,116 5.56-16.00
Granted 589,850 18.50-20.17
Assumed from Datatronix 76,895 66,415 1.63-7.10
Forfeited (32,550)
Exercised (23,590) (277,027) 1.63-15.56
--------------------
Outstanding, December 31, 1993 53,305 2,226,804 1.63-20.17
Granted 559,497 20.00-22.50
Forfeited (3,380) (102,945)
Exercised (19,505) (211,529) 1.63-18.50
--------------------
Outstanding, December 31, 1994 30,420 2,471,827 1.63-22.50
====================
Shares exercisable,
December 31, 1994 6,253 1,184,876
====================
Options outstanding include 76,370 and 188,918 shares granted in 1993 and 1994
at $20.17 and $20.00 a share, respectively, under a stock purchase plan
requiring exercise within 30 days after a two-year period beginning on the date
of grant.
NOTE 3. LONG-TERM DEBT AND OTHER OBLIGATIONS
The Company has available a $125,000,000 unsecured line of credit and commercial
paper facility with a group of banks maturing in 1999 of which $85,568,000 was
in use at December 31, 1994 at an average rate of 6.17%. The loan agreements
covering the Company's long-term borrowings contain certain restrictive
covenants including, among other things, the maintenance of minimum net worth
and various operating ratios with which the Company was in compliance at
December 31, 1994. A facility fee ranging from .175% to .325% per annum is
required on the entire bank line regardless of usage. The facility is reduced to
$112,500,000 on September 30, 1997 and to $100,000,000 on September 30, 1998.
Long-term debt and other obligations outstanding at the respective year-ends
comprised the following:
December 31,
1994 1993
--------------------------
9.45% senior notes payable, due 1995-2000 $25,714,000 $30,000,000
9.75% senior notes payable, due 1995-2001 17,500,000 20,000,000
Bank notes and commercial paper 96,650,000 61,099,000
Other obligations 2,314,000 2,308,000
--------------------------
$142,178,000 $113,407,000
==========================
Other obligations relate to balances due under capital leases. Annual principal
payments required under the terms of the long-term agreements were as follows at
December 31, 1994:
Year
- - - - - ----------------------
1995 $10,671,000
1996 9,992,000
1997 8,916,000
1998 7,302,000
1999 95,878,000
Thereafter 9,419,000
------------
$142,178,000
============
Interest expense with respect to long-term debt and other obligations amounted
to $8,710,000, $5,737,000 and $5,018,000 in 1994, 1993 and 1992, respectively.
NOTE 4. INCOME TAXES
A reconciliation of recorded income tax expense with income tax computed at the
statutory federal tax rates follows:
1994 1993 1992
------------------------------------
Statutory federal tax rate 35% 35% 34%
Tax computed at statutory rate $21,971,000 $17,509,000 $12,607,000
State income taxes net of federal effect 2,600,000 2,489,000 1,483,000
Tax exempt income (470,000) (326,000) (311,000)
Other 1,009,000 (339,000) 311,000
------------------------------------
Recorded income tax expense $25,110,000 $19,333,000 $14,090,000
====================================
The provision for income taxes consisted of the following:
1994 1993 1992
------------------------------------
Currently payable $11,937,000 $6,240,000 $6,990,000
Tax reduction credited to capital
in excess of par value 800,000 1,300,000 1,700,000
Deferred 12,373,000 11,793,000 5,400,000
------------------------------------
Total $25,110,000 $19,333,000 $14,090,000
====================================
The approximate tax effects of temporary differences at December 31, 1994 and
1993 were as follows:
1994 1993
----------------------------
Allowance for doubtful accounts $ 1,571,000 $ 595,000
Accrued expenses not currently deductible 11,392,000 10,362,000
Other 1,931,000 2,958,000
Net operating loss and tax credit carryforwards 5,901,000 4,597,000
Deferred costs (4,911,000) (2,762,000)
Internally generated capitalized software (27,120,000) (22,064,000)
Excess of tax over book depreciation
and amortization (4,069,000) (2,933,000)
Unrealized gain on investments (7,495,000) (6,153,000)
----------------------------
Total $(22,800,000) $(15,400,000)
============================
The net operating loss and tax credit carryforwards have expiration dates
ranging from 1995 through 2009.
NOTE 5. EMPLOYEE BENEFIT PROGRAMS
The Company and its subsidiaries have contributory savings plans covering
substantially all employees, under which eligible participants may elect to
contribute a specified percentage of their salaries, subject to certain
limitations. The Company makes matching contributions, subject to certain
limitations, and also makes discretionary contributions based upon the
attainment of certain profit goals. Company contributions vest at the rate of
20% for each year of service. Contributions charged to operations under these
plans approximated $8,900,000, $6,346,000 and $5,381,000 in 1994, 1993 and 1992,
respectively.
NOTE 6. LEASES, OTHER COMMITMENTS AND CONTINGENCIES
LEASES
Future minimum rental payments, as of December 31, 1994, on various operating
leases for office facilities
and equipment were due as follows:
1995 $34,779,000
1996 29,138,000
1997 22,351,000
1998 17,402,000
1999 11,043,000
Thereafter 14,990,000
------------
Total minimum payments $129,703,000
============
Rent expense applicable to all operating leases was approximately $42,586,000,
$45,224,000 and $33,859,000 in 1994, 1993 and 1992, respectively.
OTHER COMMITMENTS AND CONTINGENCIES
The Company's trust administration subsidiary had fiduciary responsibility for
the administration of approximately $12.6 billion in trust funds as of December
31, 1994. With the exception of the trust account investments discussed in Note
1, such amounts are not included in the accompanying balance sheets.
In the normal course of business, the Company and its subsidiaries are named as
defendants in various lawsuits in which claims are asserted against the Company.
In the opinion of management, the liabilities, if any, which may ultimately
result from such lawsuits are not expected to have a material adverse effect on
the financial statements of the Company.