UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 001-16427
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CERTEGY INC.
(Exact name of registrant as specified in its charter)
Georgia 58-2606325
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
555 North Point Centre, East,
Suite 300, Alpharetta, Georgia 30022
- ---------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (678) 867-8000
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 last 90 days. Yes [x] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
As of August 8, 2001, 68,618,753 shares of the Corporation's common stock,
$0.01 par value per share, were outstanding.
Page 1
CERTEGY INC.
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INDEX
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Page
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Part I. Financial Information
Item 1. Combined Financial Statements:
Combined Statements of Income (Unaudited) -
Three Months Ended June 30, 2001 and 2000................... 3
Combined Statements of Income (Unaudited) -
Six Months Ended June 30, 2001 and 2000..................... 4
Combined Balance Sheets -
June 30, 2001 (Unaudited) and December 31, 2000............. 5
Combined Statements of Cash Flows (Unaudited) -
Six Months Ended June 30, 2001 and 2000..................... 6
Notes to Combined Financial Statements........................ 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 21
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders........... 22
Item 5. Other Information:
Pro Forma Combined Financial Statements (Unaudited)
presented for information purposes.......................... 22
Pro Forma Combined Statements of Income -
Three Months and Six Months Ended June 30, 2001......... 23
Pro Forma Combined Statements of Income -
Three Months and Six Months Ended June 30, 2000......... 24
Pro Forma Combined Balance Sheet - June 30, 2001.......... 25
Notes to Pro Forma Combined Financial Statements.......... 26
Supplemental Financial Information............................ 27
Item 6. Exhibits and Reports on Form 8-K.............................. 28
Page 2
PART I - FINANCIAL INFORMATION
ITEM 1. COMBINED FINANCIAL STATEMENTS
-----------------------------
COMBINED STATEMENTS OF INCOME
EQUIFAX PAYMENT SERVICES DIVISION
UNAUDITED
(To be reorganized as Certegy Inc. - Note 1)
(In thousands, except per share amounts)
Three Months Ended
June 30,
--------------------------------
2001 2000
---------- ---------
Revenues $205,416 $193,108
-------- --------
Operating expenses:
Costs of services 144,479 131,647
Selling, general and administrative expenses 25,087 24,912
-------- --------
169,566 156,559
-------- --------
Operating income 35,850 36,549
Other income (expense), net (190) (365)
Interest expense (256) (38)
-------- --------
Income before income taxes and minority interests 35,404 36,146
Provision for income taxes (13,808) (14,149)
Minority interests in earnings, net of tax (327) 471
-------- --------
Net income $ 21,269 $ 22,468
======== ========
Basic earnings per share $ 0.31 $ 0.34
======== ========
Basic weighted average shares outstanding 68,268 67,045
======== ========
Pro Forma basic earnings per share $ 0.26 $ 0.27
======== ========
The accompanying notes are an integral part of these Combined
Financial Statements.
Page 3
COMBINED STATEMENTS OF INCOME
EQUIFAX PAYMENT SERVICES DIVISION
UNAUDITED
(To be reorganized as Certegy Inc. - Note 1)
(In thousands, except per share amounts)
Six Months Ended
June 30,
--------------------------------
2001 2000
---------- ---------
Revenues $400,392 $370,669
-------- --------
Operating expenses:
Costs of services 287,923 260,746
Selling, general and administrative expenses 50,129 49,464
-------- --------
338,052 310,210
-------- --------
Operating income 62,340 60,459
Other income (expense), net (506) (536)
Interest expense (435) (184)
-------- --------
Income before income taxes and minority interests 61,399 59,739
Provision for income taxes (23,946) (23,384)
Minority interests in earnings, net of tax (945) 985
-------- --------
Net income $ 36,508 $ 37,340
======== ========
Basic earnings per share $ 0.54 $ 0.56
======== ========
Basic weighted average shares outstanding 68,136 67,002
======== ========
Pro Forma basic earnings per share $ 0.43 $ 0.43
======== ========
The accompanying notes are an integral part of these Combined
Financial Statements.
Page 4
COMBINED BALANCE SHEETS
EQUIFAX PAYMENT SERVICES DIVISION
(To be reorganized as Certegy Inc. - Note 1)
(In thousands)
June 30, 2001 December 31, 2000
------------- -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 47,443 $ 29,794
Trade accounts receivable, net of allowance for doubtful
accounts of $2,117 and $2,148, respectively 85,367 99,472
Settlement receivables 78,277 48,173
Other receivables 7,966 7,706
Deferred income taxes 4,961 4,827
Other current assets 9,691 9,235
-------- --------
Total current assets 233,705 199,207
Property and equipment, net 31,791 32,806
Intangibles, net 218,135 184,612
Other assets, net 103,174 85,820
-------- --------
Total Assets $586,805 $502,445
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Trade accounts payable $ 13,185 $ 18,465
Settlement payables 82,013 77,213
Notes payable 221 549
Accrued salaries and bonuses 11,249 11,871
Income taxes payable 13,111 8,992
Other current liabilities 39,778 43,161
-------- --------
Total current liabilities 159,557 160,251
Deferred income taxes 10,353 11,390
Other long-term liabilities 4,618 1,280
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Total liabilities 174,528 172,921
-------- --------
Minority interests - 5,906
-------- --------
Shareholder's equity:
Equifax equity investment 488,460 380,906
Cumulative translation adjustment (76,183) (57,288)
-------- --------
Total shareholder's equity 412,277 323,618
-------- --------
Total Liabilities and Shareholder's Equity $586,805 $502,445
======== ========
The accompanying notes are an integral part of these Combined
Financial Statements.
Page 5
COMBINED STATEMENTS OF CASH FLOWS
EQUIFAX PAYMENT SERVICES DIVISION
UNAUDITED
(To be reorganized as Certegy Inc. - Note 1)
(In thousands)
Six Months Ended
June 30,
-----------------------------------
2001 2000
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Cash flows from operating activities:
Net income $ 36,508 $ 37,340
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 21,381 21,660
Minority interests in earnings 945 (985)
Changes in assets and liabilities, excluding effects of acquisitions:
Accounts receivable, net 11,960 1,935
Current liabilities, excluding notes payable and settlement
payables (3,270) (3,984)
Settlement receivables and payables, net (25,303) 986
Other current assets (1,080) 540
Deferred income taxes 226 --
Other long-term liabilities 491 4,602
Other assets (6,829) 206
-------- --------
Net cash provided by operating activities 35,029 62,300
-------- --------
Cash flows from investing activities:
Capital expenditures (26,701) (17,560)
Acquisitions, net of cash acquired (55,504) (12,502)
-------- --------
Net cash used in investing activities (82,205) (30,062)
-------- --------
Cash flows from financing activities:
Net borrowings from (repayments to) Equifax 68,354 (34,525)
Change in notes payable (292) (406)
-------- --------
Net cash provided by (used in) financing activities 68,062 (34,931)
-------- --------
Effect of foreign currency exchange rates on cash (3,237) (1,516)
-------- --------
Net cash provided (used) 17,649 (4,209)
Cash and cash equivalents, beginning of period 29,794 33,617
-------- --------
Cash and cash equivalents, end of period $ 47,443 $ 29,408
======== ========
The accompanying notes are an integral part of these Combined
Financial Statements.
Page 6
NOTES TO COMBINED FINANCIAL STATEMENTS
1. Spin-off and Basis of Presentation
In October 2000, the Board of Directors of Equifax Inc. ("Equifax") announced
its intent to spin-off its Payment Services division, subject to certain
conditions, into a separate publicly traded company with its own management and
Board of Directors (the "Distribution"). In April 2001, the IRS issued a
positive ruling related to the tax-free nature of the Distribution for U.S.
federal income tax purposes. On June 11, 2001, the Distribution was approved by
Equifax's Board of Directors, and on July 7, 2001, the spin-off was accomplished
by transferring the assets, liabilities, and stock of the businesses that
comprise the Payment Services division to Certegy Inc. ("Certegy") and then
distributing all of the shares of Certegy common stock to Equifax's
shareholders. The Equifax shareholders received one share of Certegy common
stock for every two shares of Equifax common stock held. In conjunction with the
Distribution, Certegy made a cash payment to Equifax of $275 million. This cash
payment was funded through the $400 million of unsecured credit facilities
obtained by Certegy in July 2001. Certegy was incorporated on March 2, 2001,
under the name Equifax PS, Inc., as a wholly-owned subsidiary of Equifax.
Certegy did not have any operations, assets, or liabilities until the
contribution by Equifax to Certegy of the Payment Services division prior to the
Distribution.
The combined financial statements presented in this report include the accounts
of the Equifax businesses that comprise its Payment Services division
(collectively referred to as the "Company"). The Company provides credit and
debit card processing and check risk management services to financial
institutions and merchants throughout the world, through two segments, Card
Services and Check Services. Card Services provides card issuer services in the
U.S., the U.K., Brazil, Chile, Australia, New Zealand, Ireland, France, and
Spain. Also, Card Services provides merchant processing services in the U.S. and
card processing software support and consulting services in 27 countries. Check
Services provides check risk management services and related processing services
in the U.S., the U.K., Canada, France, Ireland, Australia, and New Zealand.
The Company has prepared these combined financial statements pursuant to the
rules and regulations of the Securities and Exchange Commission. This
information reflects all adjustments, which are, in the opinion of management,
necessary for a fair presentation of the financial position, results of
operations, and cash flows for the interim periods presented. All adjustments
made have been of a normal recurring nature. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the U.S. have been condensed or
omitted, although the Company believes that the disclosures are adequate to make
the information presented not misleading. It is suggested that these combined
financial statements be read in conjunction with the combined financial
statements and the notes to those statements included in the Company's latest
Registration Statement on Form 10 filed on June 11, 2001.
Page 7
2. Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the U.S. requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements as well as reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
3. Earnings Per Share
Basic earnings per share ("EPS") is calculated by dividing net income by the
weighted average number of common shares. Weighted average shares outstanding
is computed by applying the distribution ratio of 0.5 shares of Certegy common
stock to the historical Equifax weighted average shares outstanding for the same
periods presented.
Diluted EPS is calculated to reflect the potential dilution that would occur if
stock options or other contracts to issue common stock were exercised and
resulted in additional common shares outstanding. Diluted EPS is not presented
in these financial statements, as there are no historical market share prices
for Certegy common stock, as regular way public trading did not commence until
July 9, 2001. Accordingly, the dilutive effect of stock options cannot be
determined. At June 30, 2001, the number of shares of Equifax common stock
subject to options held by option holders who became Certegy employees was
approximately 2.6 million. Based upon initial trading values, these Equifax
options have been converted into approximately 3.2 million Certegy options.
Assuming a Certegy market price of $30, $35, and $40, these options generate
approximately an incremental 1.0 million, 1.3 million, and 1.5 million shares,
respectively, for the diluted EPS calculation. Commencing with the third
quarter of 2001, a diluted EPS calculation will be included in the historical
results.
Pro forma EPS is calculated by dividing pro forma net income by the weighted
average number of common shares. Pro forma net income includes adjustments
assuming that the Distribution had taken place at the beginning of 2000. The
full pro forma combined statements of income for the three months and six months
ended June 30, 2001 and 2000, are included in Item 5, "Other Information," of
Part II of this quarterly report.
4. Comprehensive Income
The components of comprehensive income for the six months ended June 30, 2001
and 2000 are as follows:
2001 2000
-------- -------
(In thousands)
Net income................................................................ $ 36,508 $37,340
Change in cumulative foreign currency translation adjustment.............. (18,895) (2,912)
-------- -------
Comprehensive income...................................................... $ 17,613 $34,428
======== =======
Page 8
5. Acquisition
In May 2001, the Company increased its ownership in Unnisa Ltda. ("Unnisa"), a
card processing business in Brazil, from 59.3% to 100% by acquiring the
remaining interest for a purchase price of $55.5 million. This interest was
acquired with cash and accounted for as a purchase. The results of operations
have been included in the combined statements of income from the date of
acquisition and were not material.
6. Transactions with Equifax
There are no material intercompany purchase or sales transactions between
Equifax and the Company. Under Equifax's centralized cash management system,
excess cash sent to Equifax and short-term advances from Equifax are reflected
as intercompany receivables or payables and are included in the Equifax equity
investment in the accompanying combined balance sheets.
The Company was charged with certain Equifax corporate expenses that were
allocated to the Company based on the Company's proportionate amount of
revenues, number of employees, and other relevant factors as compared to related
totals for Equifax. In the opinion of management, these allocations have been
made on a reasonable basis. Management believes that, had the Company been
operating on a stand-alone basis, it would have incurred additional expenses of
approximately $1.6 million and $3.3 million for the three month and six month
periods, respectively, which specifically relate to incremental pension expense,
insurance costs, corporate headquarters rent, and stand-alone public company
costs for audit, director, and stock exchange fees. The increase in pension
expense is a result of the Company no longer benefiting from the over-funded
status of the consolidated Equifax pension plan. Management believes that all
other costs allocated to the Company are a reasonable representation of the
costs that would have been incurred if the Company had performed these functions
as a stand-alone company.
In conjunction with the separation of their businesses, the Company and Equifax
entered into various agreements that address the allocation of assets and
liabilities between them and that define their relationship after the
separation, including the provision of certain transition support services by
each party.
7. Segment Information
Operating revenues and operating income by segment for the three months and six
months ended June 30, 2001 and 2000 are as follows:
Page 9
Three Months Six Months
Ended June 30 Ended June 30
-------------------- --------------------
2001 2000 2001 2000
-------- --------- -------- ---------
(In thousands)
Operating revenues:
Card Services(1)............................ $138,610 $130,157 $269,847 $249,401
Check Services................................ 66,806 62,951 130,545 121,268
-------- -------- -------- --------
$205,416 $193,108 $400,392 $370,669
======== ======== ======== ========
Operating income:
Card Services(1)............................ $ 27,580 $ 27,916 $ 50,180 $ 45,192
Check Services.............................. 10,482 10,667 16,587 19,352
-------- -------- -------- --------
38,062 38,583 66,767 64,544
General Corporate Expense.................. (2,212) (2,034) (4,427) (4,085)
-------- -------- -------- --------
$ 35,850 $ 36,549 $ 62,340 $ 60,459
======== ======== ======== ========
Pro Forma(2)............................... $ 34,225 $ 34,924 $ 59,090 $ 57,209
======== ======== ======== ========
(1) The three months and six months ended June 30, 2001, include operating
revenues and operating income of approximately $1.1 million from software
license sales. The three months and six months ended June 30, 2000, include
operating revenues and operating income of approximately $4.9 million from
software license sales.
(2) Includes pro forma stand-alone costs (Note 6).
Total assets by segment at June 30, 2001 and December 31, 2000 are as follows:
June 30, December 31,
2001 2000
-------- ------------
(In thousands)
Card Services............................................................. $488,653 $419,270
Check Services............................................................ 79,053 83,175
-------- --------
567,706 502,445
Corporate................................................................. 19,099 -
-------- --------
$586,805 $502,445
======== ========
The Corporate assets at June 30, 2001 represent cash and the Company's
portion of employee benefit program assets transferred from Equifax's corporate
division, as well as deferred financing costs for the Company's new credit
facility.
8. Derivative Instruments and Hedging Activities
Effective January 1, 2001, the Company adopted FASB Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 requires that a company recognize derivatives as assets or liabilities
on its balance sheet, and also requires that the gain or loss related to the
effective portion of derivatives designated as cash flow hedges be recorded as a
component of other comprehensive income. The Company did not have any derivative
instruments at June 30, 2001.
Page 10
9. Recent Accounting Pronouncements
In July 2001, the FASB issued Statement No. 141, "Business Combinations" ("SFAS
141") and Statement No. 142, "Goodwill and Other Intangible Assets" ("SFAS
142"). SFAS 141 eliminates pooling of interest accounting and requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method. SFAS 142 eliminates the amortization of goodwill and
certain other intangible assets and requires that goodwill be evaluated for
impairment by applying a fair value-based test. The Company will adopt the
standard effective January 1, 2002 for previous acquisitions and June 30, 2001
for all acquisitions occurring after June 30, 2001. Amortization of goodwill was
approximately $4.1 million for the six months ended June 30, 2001. Earnings per
share for the six months ended June 30, 2001, would have increased by
approximately $0.04 had SFAS 142 been effective as of the beginning of 2001. The
Company expects to complete its first fair value-based impairment tests by June
30, 2002.
Page 11
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
For an understanding of the significant factors that influenced the Company's
results, the following discussion should be read in conjunction with the
combined financial statements and pro forma combined financial statements of the
Company, including the notes to those statements, included elsewhere in this
report. It is also suggested that this management's discussion and analysis be
read in conjunction with the management's discussion and analysis, combined
financial statements, and pro forma combined financial statements included in
the Company's latest Registration Statement on Form 10 filed on June 11, 2001.
Overview
The Company provides credit and debit card processing and check risk management
services to financial institutions and merchants throughout the world, through
two segments, Card Services and Check Services. Card Services provides card
issuer services in the U.S., the U.K., Brazil, Chile, Australia, New Zealand,
Ireland, France, and Spain. Also, Card Services provides merchant processing
services in the U.S. and card processing software support and consulting
services in 27 countries. Check Services provides check risk management
services and related processing services in the U.S., the U.K., Canada, France,
Ireland, Australia, and New Zealand.
Components of Income Statement
The Company generates revenue from (i) charges based on transaction volume
(U.S.), accounts or cards processed (outside the U.S.), and fees for various
services and products (globally) within Card Services, and (ii) charges based on
transaction volume and fees for various services and products within Check
Services. Revenues depend upon a number of factors, such as demand for and price
of the Company's services, the technological competitiveness of the product
line, the Company's reputation for providing timely and reliable service,
competition within the industry, and general economic conditions.
Page 12
Costs of services consist primarily of the costs of transaction processing
systems, personnel to develop and maintain applications and operate computer
networks and to provide customer support, losses on check guarantee services,
interchange and other fees on merchant processing, and depreciation and
occupancy costs associated with the facilities performing these functions.
Selling, general, and administrative expenses consist primarily of salaries,
wages, and related expenses paid to sales, non-revenue customer support
functions and administrative employees and management, and certain Equifax
corporate costs that have been allocated to the Company.
Results of Operations
The following table summarizes the Company's combined results for the three
months and six months ended June 30, 2001 and 2000:
Three Months Six Months
Ended June 30 Ended June 30
------------------- -------------------
2001 2000 2001 2000
------- ------- ------- ------
(In millions, except per share amounts)
Revenue....................................... $205.4 $193.1 $400.4 $370.7
Operating income.............................. $ 35.9 $ 36.5 $ 62.3 $ 60.5
Other income (expense), net................... $ (0.2) $ (0.4) $ (0.5) $ (0.5)
Interest expense.............................. $ (0.3) $ (0.0) $ (0.4) $ (0.2)
Net income.................................... $ 21.3 $ 22.5 $ 36.5 $ 37.3
Basic earnings per share...................... $ 0.31 $ 0.34 $ 0.54 $ 0.56
Revenue
Second Quarter 2001 compared with Second Quarter 2000
Revenue in the second quarter of 2001 of $205.4 million increased by $12.3
million, or 6.4%, over the second quarter of 2000. Card Services revenue grew
6.5% and Check Services experienced revenue growth of 6.1%.
The growth in revenue was driven by increased volumes and was partially offset
by changes in foreign exchange rates and software license sales. The second
quarters include operating revenue of $1.1 million in 2001 and $4.9 million in
2000 from software license sales. The strengthening of the U.S. dollar against
foreign currencies, particularly the British pound and the Brazilian real,
reduced U.S. dollar equivalent revenue growth by $5.9 million, resulting in U.S.
dollar revenue growth being 300 basis points below local currency revenue growth
rates.
First Six Months 2001 compared with First Six Months 2000
Revenue in the first six months of 2001 of $400.4 million increased by $29.7
million, or 8.0%, over the first six months of 2000. Card Services revenue grew
8.2% and Check Services experienced revenue growth of 7.6%.
The growth in revenue was driven by increased volumes and was partially offset
by changes in foreign exchange rates and software license sales. The six-month
periods include operating revenue of $1.1 million in 2001 and $4.9 million in
2000 from software license sales. The strengthening of the U.S. dollar against
foreign currencies, particularly the British pound and the Brazilian real,
reduced U.S. dollar equivalent revenue growth by $10.2 million, resulting in
U.S. dollar revenue growth being 275 basis points below local currency revenue
growth rates.
Page 13
Operating Expenses
Second Quarter 2001 compared with Second Quarter 2000
Total operating expenses in the second quarter of 2001 of $169.6 million
increased $13.0 million, or 8.3%, over the second quarter of 2000. Card
Services' operating expenses grew $8.8 million, or 8.6%, Check Services'
operating expenses grew $4.0 million, or 7.7%, and Corporate expense of $2.2
million grew $0.2 million, or 8.8%.
Costs of services in the second quarter of 2001 increased by $12.8 million, or
9.7%, over the second quarter of 2000, principally driven by increased volumes
in both business segments, including higher guarantee loss rates in Check
Services. An increase in card merchant and issuing volume added $9.1 million of
cost and higher check volume and loss rates added $3.7 million of cost.
Selling, general, and administrative expense in the second quarter of 2001
increased $0.2 million, or 0.7%, over the second quarter of 2000.
First Six Months 2001 compared with First Six Months 2000
Total operating expenses in the first six months of 2001 of $338.1 million
increased $27.8 million, or 9.0%, over the first six months of 2000. Card
Services' operating expenses grew $15.5 million, or 7.6%, Check Services'
operating expenses grew $12.0 million, or 11.8%, and Corporate expense of $4.4
million grew $0.3 million, or 8.4%.
Costs of services in the first six months of 2001 increased by $27.2 million, or
10.4%, over the first six months of 2000, principally driven by increased
volumes in both business segments, including higher guarantee loss rates in
Check Services. An increase in card merchant and issuing volume added $15.7
million of cost and higher check volume and loss rates added $11.5 million of
cost.
Selling, general, and administrative expense in the first six months of 2001
increased $0.7 million, or 1.3%, over the first six months of 2000.
Operating Income
Second Quarter 2001 compared with Second Quarter 2000
Operating income of $35.9 million in the second quarter of 2001 decreased $0.7
million, or 1.9%, below the second quarter of 2000. Combined operating margins
were 17.5% in the 2001 quarter and 18.9% in the 2000 quarter. The decline in
operating margin was driven principally by the higher levels of low-margin
merchant processing revenues of Card Services, decreased profits of Check
Services caused by higher comparative check guarantee loss rates, and declines
in software license sales. The second quarters include operating income of $1.1
million in 2001 and $4.9 million in 2000 from software license sales.
Page 14
First Six Months 2001 compared with First Six Months 2000
Operating income of $62.3 million in the first six months of 2001 increased $1.9
million, or 3.1%, over the first six months of 2000. Combined operating margins
were 15.6% and 16.3% in the first six months of 2001 and 2000, respectively.
The increased operating income was driven principally by revenue growth and
improved profits of Card Services primarily in the first quarter of 2001, but
has been negatively impacted by decreased profits of Check Services, caused by
higher comparative check guarantee loss rates, and declines in software license
sales. The six-month periods include operating income of $1.1 million in 2001
and $4.9 million in 2000 from software license sales.
Other Income (Expense), Net
Other income (expense) principally consists of net foreign exchange losses.
Interest Expense
Interest expense principally consists of interest paid on a line of credit held
by Unnisa, the Company's card processing operation in Brazil, and interest
charged by Equifax on overnight funds borrowed on the Company's behalf. The
Company has not been allocated any Equifax corporate debt or related interest
expense as these amounts have not historically been allocated to the operating
divisions by Equifax. Based on current rates, interest expense is expected to
increase by approximately $14.5 million, representing the annual interest at a
rate of LIBOR plus 100 basis points on the $275 million of debt used to fund the
cash payment to Equifax in conjunction with the Distribution on July 7, 2001.
Effective Tax Rate
The Company is included in the consolidated federal income tax return of
Equifax. Federal and certain state tax provisions are settled through the
intercompany accounts, and Equifax makes income tax payments on the Company's
behalf. The provision for income taxes in the Company's combined statements of
income reflects federal, state, and foreign taxes calculated using the separate
return basis. The effective tax rate in the first six months of 2001 was 39.0%,
which is the expected rate for the entire year. The effective tax rate in 2000
was 39.1%.
Net Income and Basic Earnings per Share
Second Quarter 2001 compared with Second Quarter 2000
Net income in the second quarter of 2001 of $21.3 million decreased $1.2
million, or 5.3%, below the second quarter of 2000, driven primarily by the
decline in operating income and a $0.8 million change in minority interest in
earnings, net of tax, of international card operations. The 2001 quarter
includes $0.3 million of earnings reduction related to minority ownership in the
profits of Unnisa, the Company's Brazilian card processing operation. The 2000
quarter includes $0.5 million of earnings increase related to minority
ownerships in the net loss of Unnisa and the U.K. card operations. The Company
acquired full ownership of the U.K. card operation in September 2000 and Unnisa
in May 2001.
Page 15
First Six Months 2001 compared with First Six Months 2000
Net income in the first six months of 2001 of $36.5 million decreased $0.8
million, or 2.2%, below the first six months of 2000, driven primarily by a $1.9
million change in minority interest in earnings, net of tax, of international
card operations. The first six months of 2001 includes $0.9 million of earnings
reduction related to minority ownership in the profits of Unnisa. The 2000
quarter includes $1.0 million of earnings increase related to minority
ownerships in the net loss of Unnisa and the U.K. card operations. The Company
acquired full ownership of the U.K. card operation in September 2000 and Unnisa
in May 2001.
Basic earnings per share ("EPS") is calculated by dividing net income by the
weighted average number of common shares. Weighted average shares outstanding
is computed by applying the distribution ratio of 0.5 shares of Certegy common
stock to the historical Equifax weighted average shares outstanding for the same
periods presented.
Diluted EPS is calculated to reflect the potential dilution that would occur if
stock options or other contracts to issue common stock were exercised and
resulted in additional common shares outstanding. Diluted EPS is not presented
in the combined financial statements, as there are no historical market share
prices for Certegy common stock, as regular way public trading did not commence
until July 9, 2001. Accordingly, the dilutive effect of stock options cannot be
determined. At June 30, 2001, the number of shares of Equifax common stock
subject to options held by option holders who became Certegy employees was
approximately 2.6 million. Based upon initial trading values, these Equifax
options have been converted into approximately 3.2 million Certegy options.
Assuming a Certegy market price of $30, $35, and $40, these options generate
approximately an incremental 1.0 million, 1.3 million, and 1.5 million shares,
respectively, for the diluted EPS calculation. Commencing with the third
quarter of 2001, a diluted EPS calculation will be included in the historical
results.
Segment Results
The following table summarizes the segment results for the three months and
six months ended June 30, 2001 and 2000:
Three Months Ended June 30 Six Months Ended June 30
-------------------------------------- -------------------------------------
Operating Operating
Revenue Income Revenue Income
--------------- ------------- -------------- --------------
2001 2000 2001 2000 2001 2000 2001 2000
------ ------- ----- ----- ------ ------ ------- ------
(In millions)
Card Services.................. $138.6 $130.1 $27.6 $27.9 $269.9 $249.4 $50.1 $45.2
Check Services................. 66.8 63.0 10.5 10.6 130.5 121.3 16.6 19.4
------ ------ ----- ----- ------ ------ ----- -----
205.4 193.1 38.1 38.5 400.4 370.7 66.7 64.6
General Corporate Expense....... - - (2.2) (2.0) - - (4.4) (4.1)
------ ------ ----- ----- ------ ------ ----- -----
$205.4 $193.1 $35.9 $36.5 $400.4 $370.7 $62.3 $60.5
====== ====== ===== ===== ====== ====== ===== =====
Pro Forma....................... $34.2 $34.9 $59.1 $57.2
===== ===== ===== =====
Page 16
Based upon current forecasts, management expects that the future relative
contribution to revenue and profits, and capital requirements of these segments,
will remain consistent with historical percentages.
Card Services
Second Quarter 2001 compared with Second Quarter 2000
Card Services' revenue in the second quarter of 2001 increased $8.5 million, a
6.5% growth over the second quarter of 2000. Revenue in the U.S. of $109.9
million in the 2001 quarter was an increase of $9.5 million, or 9.5%, over the
2000 quarter, driven by increases in merchant processing, which contributed
approximately $9.4 million of the U.S. revenue growth in the second quarter of
2001.
International revenue of $28.8 million in the 2001 quarter decreased $1.1
million, or 3.5%, below the 2000 quarter. International revenue includes
software licensing revenue, which has declined from $6.4 million in the 2000
quarter to $4.4 million in the 2001 quarter, as the Company has de-emphasized
software licensing as it grows its global processing operations. Also
contributing to the international revenue decline was the strengthening of the
U.S. dollar. Exchange rate changes of the Brazilian real and the British pound
reduced revenue growth by approximately $5.0 million. On a local currency
basis, international revenue increased by approximately 25.1%.
Card Services' operating income in the second quarter of 2001 decreased $0.3
million, or 1.2%, below the second quarter of 2000. Operating margins were
19.9% in the 2001 quarter and 21.4% in the 2000 quarter. Reduction in card
software licensing and higher levels of low-margin merchant processing revenues
have had a negative impact on overall operating margins in the second quarter of
2001.
First Six Months 2001 compared with First Six Months 2000
Card Services' revenue in the first six months of 2001 increased $20.4 million,
an 8.2% growth over the first six months of 2000. Revenue in the U.S. of $214.6
million in the first six months of 2001 was an increase of $20.8 million, or
10.7%, over the first six months of 2000, driven by increases in card issuing
transactions and merchant volumes. Merchant processing contributed
approximately $17.9 million of the U.S. revenue growth in the first six months
of 2001.
International revenue of $55.3 million in the first six months of 2001 decreased
$0.3 million, or 0.6%, below the first six months of 2000. International
revenue includes software licensing revenue, which has declined from $9.1
million in the first six months of 2000 to $6.1 million in the first six months
of 2001, as the Company has de-emphasized software licensing as it grows its
global processing operations. Also contributing to the international revenue
decline was the strengthening of the U.S. dollar. Exchange rate changes of the
Brazilian real and the British pound reduced revenue growth by approximately
$8.1 million. On a local currency basis, international revenue increased by
approximately 23.1%.
Page 17
Card Services' operating income in the first six months of 2001 increased $5.0
million, or 11.0%, over the first six months of 2000. Operating margins were
18.6% and 18.1% in the first six months of 2001 and 2000, respectively.
Operating margins have benefited from revenue increasing at a higher rate than
costs primarily in U.S. card operations.
Check Services
Second Quarter 2001 compared with Second Quarter 2000
Check Services' revenue in the second quarter of 2001 increased $3.9 million, a
6.1% growth over the second quarter of 2000. Revenue in the U.S. of $54.7
million in the 2001 quarter was an increase of $4.3 million, or 8.6%, over the
2000 quarter, driven by increased volume largely resulting from the addition of
new customers. The face amount of checks authorized in the U.S. totaled $6.8
billion in the 2001 quarter and $6.2 billion in the 2000 quarter.
International revenue of $12.2 million in the 2001 quarter decreased $0.5
million, or 3.7%, below the 2000 quarter. The strengthening of the U.S. dollar
against the British pound reduced international check revenue growth by $0.9
million. The face amount of checks authorized in the international operations
total $0.8 billion in both the 2001 and 2000 quarters. On a local currency
basis, international revenue increased approximately 3.5%
Check Services' operating income in the second quarter of 2001 decreased $0.2
million, or 1.7%, below the second quarter of 2000. Operating margins were 15.7%
in the 2001 quarter and 16.9% in the 2000 quarter. The decline in profitability
is attributed to higher check guarantee loss rates in the 2001 quarter.
First Six Months 2001 compared with First Six Months 2000
Check Services' revenue in the first six months of 2001 increased $9.3 million,
a 7.6% growth over the first six months of 2000. Revenue in the U.S. of $106.3
million in the first six months of 2001 was an increase of $10.0 million, or
10.4%, over the first six months of 2000, driven by increased volume largely
resulting from the addition of new customers. The face amount of checks
authorized in the U.S. totaled $12.9 billion and $11.8 billion in the first six
months of 2001 and 2000, respectively.
International revenue of $24.2 million in the first six months of 2001 decreased
$0.7 million, or 2.8%, below the first six months of 2000. The strengthening of
the U.S. dollar against the British pound reduced international check revenue
growth by $2.1 million. The face amount of checks authorized in the
international operations total $1.6 billion in both the 2001 and 2000 periods.
On a local currency basis, international revenue increased approximately 5.5%.
Check Services' operating income in the first six months of 2001 decreased $2.8
million, or 14.3%, below the first six months of 2000. Operating margins were
12.7% and 16.0% in the first six months of 2001 and 2000, respectively. The
decline in profitability is attributed to higher check guarantee loss rates in
2001.
Page 18
General Corporate
General corporate expense of $2.2 million and $2.0 million in the second
quarters of 2001 and 2000, respectively, and $4.4 million and $4.1 million in
the first six months of 2001 and 2000, respectively, represent certain Equifax
corporate expenses that were allocated to the Company based on the Company's
proportionate amount of revenues, number of employees, and other relevant
factors as compared to related totals for Equifax. In the opinion of management,
these allocations have been made on a reasonable basis. Management believes
that, had the Company been operating on a stand-alone basis, it would have
incurred additional expenses of approximately $1.6 million and $3.3 million for
the second quarter and six month periods, respectively, which specifically
relate to incremental pension expense, insurance costs, corporate headquarters
rent, and stand-alone public company costs for audit, director, and stock
exchange fees. The increase in pension expense is a result of the Company no
longer benefiting from the over-funded status of the consolidated Equifax
pension plan. Management believes that all other costs allocated to the Company
are a reasonable representation of the costs that would have been incurred if
the Company had performed these functions as a stand-alone company.
Liquidity and Capital Resources
First Six Months 2001 compared with First Six Months 2000
Net cash provided by operating activities amounted to $35.0 million in the first
six months of 2001 as compared with $62.3 million in the first six months of
2000. The 2001 amount was reduced by $25.3 million related to the timing of
settlements in the card and merchant processing clearing system. Operating
activities provided cash of $60.3 million and $61.3 million in the first six
months of 2001 and 2000, respectively, before the effect of this settlement
activity. Operating cash flow has been sufficient to fund capital expenditures.
Net cash used in investing activities amounted to $82.2 million in the first six
months of 2001 and $30.1 million in the first six months of 2000. Capital
expenditures, exclusive of acquisitions, amounted to $26.7 million and $17.6
million in the first six months of 2001 and 2000, respectively. Acquisitions,
net of cash acquired, totaled $55.5 million and $12.5 million in the first six
months of 2001 and 2000, respectively. The Company expects total capital
expenditures, exclusive of acquisitions, to approximate $45 million in 2001.
Net cash provided by (used in) financing activities amounted to $68.1 million in
the first six months of 2001 and $(34.9) million in the first six months of
2000. Net borrowings from (repayments to) Equifax amounted to $68.4 million and
$(34.5) million in the first six months of 2001 and 2000, respectively.
In July 2001, the Company obtained $400 million of unsecured credit facilities,
a portion of which was used to fund the cash payment to Equifax of $275 million
on July 7, 2001. Management believes that the current level of cash and cash
equivalents, $47.4 million as of June 30, 2001, future cash flows from
operations, and the amount of the credit facility in excess of the $275 million
payment described above, will be sufficient to meet the needs of
Page 19
existing operations and planned requirements for the foreseeable future.
Management regularly evaluates cash requirements for current operations,
development activities, and acquisitions. The Company may elect to raise
additional funds for these purposes, either through further bank financing or
the public capital markets, as appropriate. Based on the Company's recent
financial results and current financial position, management believes that
additional funding will be available if required to meet the Company's capital
requirements.
Seasonality, Inflation, and Economic Downturns
The Company is subject to the impact of general economic conditions; however,
this has historically been mitigated by the continued demand for payment
transaction processing. The Company is also subject to certain seasonal
fluctuations such as peak activity during the holiday buying season.
Management does not believe that inflation has had a material effect on the
Company's operating results. However, inflation could adversely affect the
financial results were inflation to result in a substantial weakening in
economic conditions that adversely affect the level of consumer spending.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that are
based on current expectations, estimates, forecasts, and projections about the
Company and its industry. They are not guarantees of future performance and are
subject to risks and uncertainties that may cause actual results to differ
significantly from what is expressed in those statements. The factors that
could, either individually or in the aggregate, affect the Company's performance
include matters such as a change in the growth rate of the overall U.S. economy,
or the international economies where the Company does business, such that
consumer spending and related consumer debt are impacted; a decline or change in
the marketing techniques of credit card issuers; a reversal of the trend toward
credit card use increasing as a percentage of total consumer expenditures;
unanticipated cancellation or termination of customer contracts; risks
associated with investments and operations in foreign countries, including
regulatory environments, exchange rate fluctuations, and local political,
social, and economic factors; the extent to which the Company can continue
successful development and marketing of new products and services; and generally
other risks listed in the "Risk Factors" and "Forward-Looking Statements"
sections of the Company's Registration Statement on Form 10 filed with the
Securities and Exchange Commission.
Page 20
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Approximately 20% of the Company's revenue for the six months ended June 30,
2001 and 42% of the Company's assets at June 30, 2001 are associated with
operations outside of the U.S. The U.S. dollar balance sheets and statements of
income for these businesses are subject to currency fluctuations. The Company
is most vulnerable to fluctuations in the Brazilian real and the British pound
against the U.S. dollar. Historically, the Company has not entered into
derivative financial instruments to mitigate this risk, as it has not been cost-
effective. The impact of currency fluctuations on profitability has not been
significant since both revenue and costs of these businesses are denominated in
local currency. The Company may use derivative financial instruments in the
future if it is deemed to be useful in mitigating an exposure to foreign
currency exchange rates. The cumulative translation adjustment, largely related
to the Company's investment in Unnisa, the Brazilian card processing operation,
was a $76.2 million and $57.3 million reduction of shareholder's equity at
June 30, 2001 and December 31, 2000, respectively.
Page 21
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The following matters were approved by Equifax as the sole shareholder of the
Company by written consent on the dates indicated below. All such matters were
approved prior to the pro rata distribution by Equifax of its shares of the
Common Stock of the Company to the shareholders of Equifax, and the registration
of the Common Stock under the Securities Exchange Act of 1934.
May 25, 2001 Amendment of the Articles of Incorporation to change the Company's
name to "Certegy Inc."
June 8, 2001 Merger of the Company's wholly-owned limited liability company
subsidiary, KLR, LLC, with and into the Company
June 19, 2001 Amendment of the Articles of Incorporation to increase the authorized
shares of the Company
June 29, 2001 Amendment and Restatement of the Articles of Incorporation
Election of the following directors to the Board:
Terms Expiring 2002: Thomas F. Chapman and Charles T. Doyle
Terms Expiring 2003: Robert H. Bohannon, Richard N. Child
and Lee A. Kennedy
Terms Expiring 2004: David K. Hunt and Kathy Brittain White
Approval of 2001 Stock Incentive Plan and Non-Employee Director
Stock Option Plan
Ratification of certain prior Company actions, including
relating to the pro rata distribution by Equifax of its shares
of the Common Stock of the Company to the shareholders of
Equifax and the approval of the Rights Agreement
Item 5. Other Information
-----------------
The following pro forma combined financial statements have been prepared as if
the Distribution had taken place at the beginning of 2000 and are presented for
information purposes.
Page 22
PRO FORMA COMBINED STATEMENTS OF INCOME
EQUIFAX PAYMENT SERVICES DIVISION
UNAUDITED
(To be reorganized as Certegy Inc.)
(In thousands, except per share amounts)
Three Months Ended
June 30, 2001
-----------------------------------------------------
Pro Forma Pro Forma
Historical Adjustments Combined
---------- ----------- ----------
Revenues $ 205,416 $ $ 205,416
--------- --------- ---------
Operating expenses:
Costs of services 144,479 1,175 (a) 145,654
Selling, general and administrative expenses 25,087 450 (a) 25,537
--------- --------- ---------
169,566 1,625 171,191
--------- --------- ---------
Operating income 35,850 (1,625) 34,225
Other income (expense), net (190) (190)
Interest expense (256) (3,804)(b) (4,060)
--------- --------- ---------
Income before income taxes and minority interests 35,404 (5,429) 29,975
Provision for income taxes (13,808) 2,118 (c) (11,690)
Minority interests in earnings, net of tax (327) (327)
--------- --------- ---------
Net income $ 21,269 $ (3,311) $ 17,958
========= ========= =========
Basic earnings per share $ 0.31 $ 0.26
========= =========
Basic weighted average shares outstanding 68,268 68,268
========= =========
Six Months Ended
June 30, 2001
-----------------------------------------------------
Pro Forma Pro Forma
Historical Adjustments Combined
---------- ----------- ----------
Revenues $ 400,392 $ $ 400,392
--------- --------- ---------
Operating expenses:
Costs of services 287,923 2,350 (a) 290,273
Selling, general and administrative expenses 50,129 900 (a) 51,029
--------- --------- ---------
338,052 3,250 341,302
--------- --------- ---------
Operating income 62,340 (3,250) 59,090
Other income (expense), net (506) (506)
Interest expense (435) (8,413)(b) (8,848)
--------- --------- ---------
Income before income taxes and minority interests 61,399 (11,663) 49,736
Provision for income taxes (23,946) 4,549 (c) (19,397)
Minority interests in earnings, net of tax (945) (945)
--------- --------- ---------
Net income $ 36,508 $ (7,114) $ 29,394
========= ========= =========
Basic earnings per share $ 0.54 $ 0.43
========= =========
Basic weighted average shares outstanding 68,136 68,136
========= =========
The accompanying notes are an integral part of these Pro Forma Combined
Financial Statements.
Page 23
PRO FORMA COMBINED STATEMENTS OF INCOME
EQUIFAX PAYMENT SERVICES DIVISION
UNAUDITED
(To be reorganized as Certegy Inc.)
(In thousands, except per share amounts)
Three Months Ended
June 30, 2000
-----------------------------------------------------
Pro Forma Pro Forma
Historical Adjustments Combined
---------- ----------- ----------
Revenues $ 193,108 $ $ 193,108
--------- --------- ---------
Operating expenses:
Costs of services 131,647 1,175 (a) 132,822
Selling, general and administrative expenses 24,912 450 (a) 25,362
--------- --------- ---------
156,559 1,625 158,184
--------- --------- ---------
Operating income 36,549 (1,625) 34,924
Other income (expense), net (365) (365)
Interest expense (38) (5,503)(b) (5,541)
--------- --------- ---------
Income before income taxes and minority interests 36,146 (7,128) 29,018
Provision for income taxes (14,149) 2,790 (c) (11,359)
Minority interests in earnings, net of tax 471 471
--------- --------- ---------
Net income $ 22,468 $ (4,338) $ 18,130
========= ========= =========
Basic earnings per share $ 0.34 $ 0.27
========= =========
Basic weighted average shares outstanding 67,045 67,045
========= =========
Six Months Ended
June 30, 2000
-----------------------------------------------------
Pro Forma Pro Forma
Historical Adjustments Combined
---------- ----------- ----------
Revenues $ 370,669 $ $ 370,669
--------- --------- ---------
Operating expenses:
Costs of services 260,746 2,350 (a) 263,096
Selling, general and administrative expenses 49,464 900 (a) 50,364
--------- --------- ---------
310,210 3,250 313,460
--------- --------- ---------
Operating income 60,459 (3,250) 57,209
Other income (expense), net (536) (536)
Interest expense (184) (10,648)(b) (10,832)
--------- --------- ---------
Income before income taxes and minority interests 59,739 (13,898) 45,841
Provision for income taxes (23,384) 5,440 (c) (17,944)
Minority interests in earnings, net of tax 985 985
--------- --------- ---------
Net income $ 37,340 $ (8,458) $ 28,882
========= ========= =========
Basic earnings per share $ 0.56 $ 0.43
========= =========
Basic weighted average shares outstanding 67,002 67,002
========= =========
The accompanying notes are an integral part of these Pro Forma Combined
Financial Statements.
Page 24
PRO FORMA COMBINED BALANCE SHEET
EQUIFAX PAYMENT SERVICES DIVISION
JUNE 30, 2001
UNAUDITED
(To be reorganized as Certegy Inc.)
(In thousands)
Pro Forma Pro Forma
Historical Adjustments Combined
---------- ----------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 47,443 $ $ 47,443
Trade accounts receivable, net of allowance
for doubtful accounts of $2,117 85,367 85,367
Settlement receivables 78,277 78,277
Other receivables 7,966 7,966
Deferred income taxes 4,961 4,961
Other current assets 9,691 9,691
-------- --------- ---------
Total current assets 233,705 - 233,705
Property and equipment, net 31,791 31,791
Intangibles, net 218,135 218,135
Other assets, net 103,174 103,174
-------- --------- ---------
Total Assets $586,805 $ - $ 586,805
======== ========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Trade accounts payable $ 13,185 $ $ 13,185
Settlement payables 82,013 82,013
Notes payable 221 221
Accrued salaries and bonuses 11,249 11,249
Income taxes payable 13,111 13,111
Other current liabilities 39,778 39,778
-------- --------- ---------
Total current liabilities 159,557 - 159,557
Deferred income taxes 10,353 10,353
Long-term debt - 275,000 (d) 275,000
Other long-term liabilities 4,618 4,618
-------- --------- ---------
Total liabilities 174,528 275,000 449,528
-------- --------- ---------
Shareholder's equity:
Common stock and paid-in capital - 213,460 (d) 213,460
Equifax equity investment 488,460 (488,460)(d) -
Cumulative translation adjustment (76,183) (76,183)
-------- --------- ---------
Total shareholder's equity 412,277 (275,000) 137,277
-------- --------- ---------
Total Liabilities and Shareholder's Equity $586,805 $ - $ 586,805
======== ========= =========
The accompanying notes are an integral part of these Pro Forma Combined
Financial Statements.
Page 25
EQUIFAX PAYMENT SERVICES DIVISION
(To be reorganized as Certegy Inc.)
Notes to Pro Forma Combined Financial Statements
(Unaudited)
1. Pro Forma Combined Statement of Income Adjustments
The following pro forma adjustments were made to the historical combined
statements of income of the Company for the three months and six months ended
June 30, 2001 and 2000 to reflect the Distribution as if it had occurred on
January 1, 2000.
a. To reflect additional expenses of approximately $1.6 million and $3.3
million for the three month and six month periods, respectively,
which specifically relate to incremental pension expense, insurance
costs, corporate headquarters rent, and stand-alone public company
costs for audit, director, and stock exchange fees. The increase in
pension expense is a result of the Company no longer benefiting from
the over-funded status of the consolidated Equifax pension plan.
b. To reflect interest expense on the $275 million of debt to be used to
fund the cash payment to Equifax in conjunction with the
Distribution, at an annual rate of LIBOR plus 100 basis points (5.17%
and 7.64% for the three months ended June 30, 2001 and 2000,
respectively, and 5.76% and 7.38% for the six months then ended,
respectively), plus amortization of financing costs over the three-
year term of the debt.
c. To reflect the income tax benefit resulting from the pro forma
adjustments using the Company's effective tax rate for the period.
2. Pro Forma Combined Balance Sheet Adjustment
The following pro forma adjustment was made to the historical combined
balance sheet of the Company as of June 30, 2001 to reflect the Distribution as
if it had occurred on June 30, 2001.
d. To reflect the capitalization of the Equifax equity investment and
the $275 million of debt to be used to fund the cash payment to
Equifax in conjunction with the Distribution.
Page 26
SUPPLEMENTAL FINANCIAL INFORMATION
EQUIFAX PAYMENT SERVICES DIVISION
(UNAUDITED)
(To be reorganized as Certegy Inc.)
1. Revenues by product and service offerings are as follows (in millions):
2000 2001
--------------------------------------------------- ---------------------
Q1 Q2 Q3 Q4 Q1 Q2
------ ------ ------ ------ ------ ------
Card Issuer Services $ 81.6 $ 87.7 $ 92.3 $ 94.5 $ 86.0 $ 88.8
Check Services 58.3 63.0 63.1 75.7 63.7 66.8
Merchant Processing Services 35.0 36.1 37.1 41.1 43.5 45.5
Other 2.7 6.3 2.2 1.9 1.8 4.3
------ ------ ------ ------ ------ ------
$177.6 $193.1 $194.7 $213.2 $195.0 $205.4
====== ====== ====== ====== ====== ======
2. Revenues by geographic area (based on location of customer) are as follows (in millions):
2000 2001
--------------------------------------------------- ---------------------
Q1 Q2 Q3 Q4 Q1 Q2
------ ------ ------ ------ ------ ------
Domestic $139.5 $150.7 $152.9 $172.1 $156.8 $166.1
International 38.1 42.4 41.8 41.1 38.2 39.3
------ ------ ------ ------ ------ ------
$177.6 $193.1 $194.7 $213.2 $195.0 $205.4
====== ====== ====== ====== ====== ======
3. Check volume in dollars are as follows (in billions):
2000 2001
--------------------------------------------------- ---------------------
Q1 Q2 Q3 Q4 Q1 Q2
------ ------ ------ ------ ------ ------
Domestic $ 5.6 $ 6.2 $ 6.0 $ 7.8 $ 6.1 $ 6.8
International 0.8 0.8 0.8 0.9 0.8 0.8
------ ------ ------ ------ ------ ------
$ 6.4 $ 7.0 $ 6.8 $ 8.7 $ 6.9 $ 7.6
====== ====== ====== ====== ====== ======
Guarantee $ 4.8 $ 5.2 $ 5.0 $ 6.2 $ 5.0 $ 5.4
Verification 1.6 1.8 1.8 2.5 1.9 2.2
------ ------ ------ ------ ------ ------
$ 6.4 $ 7.0 $ 6.8 $ 8.7 $ 6.9 $ 7.6
====== ====== ====== ====== ====== ======
4. Number of cards and accounts processed (end of period) are as follows (in millions):
2000 2001
--------------------------------------------------- ---------------------
Q1 Q2 Q3 Q4 Q1 Q2
------ ------ ------ ------ ------ ------
Cards:
Domestic 22.5 22.5 22.2 21.8 20.9 21.4
International 8.5 9.4 11.0 13.3 14.0 16.0
------ ------ ------ ------ ------ ------
31.0 31.9 33.2 35.1 34.9 37.4
====== ====== ====== ====== ====== ======
Accounts:
Domestic 17.0 17.0 16.8 16.6 16.0 16.4
International 7.6 8.4 9.8 11.8 12.5 14.3
------ ------ ------ ------ ------ ------
24.6 25.4 26.6 28.4 28.5 30.7
====== ====== ====== ====== ====== ======
5. Merchant volumes in dollars and number of transactions are as follows:
2000 2001
--------------------------------------------------- ---------------------
Q1 Q2 Q3 Q4 Q1 Q2
------ ------ ------ ------ ------ ------
Dollars (in billions) $ 1.6 $ 1.6 $ 1.7 $ 1.9 $ 1.9 $ 2.1
====== ====== ====== ====== ====== ======
Number of Transactions (in millions) 15.7 16.2 17.0 15.2 25.0 27.4
====== ====== ====== ====== ====== ======
Page 27
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
The following exhibits are filed with this Report:
Exhibit No. Description
- ----------- -----------
10.1 Master Agreement previously filed as Exhibit 10.27 on Form 10-K
filed March 30, 2000 by Equifax Inc. (SEC file no. 001-06605) and
incorporated by reference. (Document omits information pursuant
to a Request for Confidential Treatment granted under Rule 24b-2
of the Securities Exchange Act of 1934.)
10.2 Transaction Document #1 previously filed as Exhibit 10.26 on Form
10-K filed March 30, 2000 by Equifax Inc. (SEC file no. 001-
06605) and incorporated by reference. (Document omits information
pursuant to a Request for Confidential Treatment granted under
Rule 24b-2 of the Securities Exchange Act of 1934. )
10.3 Assignment and Assumption of Lease and Other Operative Documents,
dated June 25, 2001, among Equifax Inc., Certegy Inc., Prefco VI
Limited Partnership, Atlantic Financial Group, Ltd. and SunTrust
Bank.
10.4 Amended and Restated 364-Day Revolving Credit Agreement, dated
July 6, 2001, among Certegy Inc., SunTrust Bank, Wachovia Bank,
N.A., Fleet National Bank, and Bank of America, N.A.
10.5 Amended and Restated Revolving Credit Agreement, dated July 6,
2001, among Certegy Inc., SunTrust Bank, Wachovia Bank, N.A.,
Fleet National Bank, and Bank of America, N.A.
10.6 $130,000,000 Credit Agreement, dated June 29, 2001, between
Certegy Inc. and First Union National Bank.
10.7 Acquisition Agreement, dated May 24, 2001, among Equifax Payment
Services, Inc., Equifax Do Brasil Holdings Ltda., Andrade
Gutierrez Telecomunicacoes Ltda., Andrade Gutierrez S.A.,
Construtora Andrade Gutierrez S.A. and Unnisa-Solucoes Em Meios
De Pagamento Ltda.
10.8 Acquisition Agreement, dated May 24, 2001, among Equifax Payment
Services, Inc., Equifax Do Brasil Holdings Ltda., Socma Americana
S.A., Sideco Do Brasil S.A. and Unnisa-Solucoes Em Meios De
Pagamento Ltda.
2.1 Distribution Agreement, Plan of Reorganization and Distribution,
dated as of June 30, 2001, between Equifax Inc. and Certegy Inc.,
previously filed as an Exhibit on Form 8-K filed July 20, 2001
(SEC file no. 001-16427) and incorporated by reference.
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10.9 Tax Sharing and Indemnification Agreement, dated as of June 30,
2001, between Equifax Inc. and Certegy Inc., previously filed as
an Exhibit on Form 8-K filed July 20, 2001 (SEC file no. 001-
16427) and incorporated by reference.
10.10 Employee Benefits Agreement, dated as of June 30, 2001, between
Equifax Inc. and Certegy Inc., previously filed as an Exhibit on
Form 8-K filed July 20, 2001 (SEC file no. 001-16427) and
incorporated by reference.
(b) Reports on Form 8-K:
None
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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.
Date: August 14, 2001 CERTEGY INC.
------------------
/s/ Lee A. Kennedy
--------------------------------------
Its: President and Chief Executive Officer
(duly authorized officer)
/s/ Michael T. Vollkommer
--------------------------------------------
Corporate Vice President and Chief Financial
Officer
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