1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR QUARTER ENDED SEPTEMBER 30, 1998 COMMISSION FILE NUMBER 0-14948 FISERV, INC. ------------------------------------------------------ (Exact name of Registrant as specified in its charter) WISCONSIN 39-1506125 ------------------------------- ---------------------------- (State or other jurisdiction of (I. R. S. Employer incorporation or organization) Identification No.) 255 FISERV DRIVE, BROOKFIELD, WI. 53045 - ------------------------------------------- ---------- (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (414) 879 5000 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 ( ) At September 30, 1998, 81,974,000 shares of common stock of the Registrant were outstanding. Exhibit Index appears at page 9. 1 2 PART I. FINANCIAL INFORMATION FISERV, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME for the Three and Nine-Month Periods Ended September 30, 1998 and 1997 Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 (In thousands except per share amounts) REVENUES $309,543 $238,255 $894,592 $704,960 ------------------------------------------------------------------------ Cost of revenues: Salaries, commissions and payroll related costs 143,026 109,351 415,511 328,513 Data processing expenses, rentals and telecommunication costs 28,729 25,134 84,686 74,339 Other operating expenses 67,769 46,619 189,050 135,067 Depreciation and amortization of property and equipment 15,131 12,264 43,942 36,014 Amortization of intangible assets 4,005 3,437 11,336 10,627 Capitalization of internally generated computer software-net (2,051) (553) (5,073) (2,038) ------------------------------------------------------------------------ Total cost of revenues 256,609 196,252 739,452 582,522 ------------------------------------------------------------------------ OPERATING INCOME 52,934 42,003 155,140 122,438 Interest expense - net 3,998 2,701 11,593 9,529 ------------------------------------------------------------------------ INCOME BEFORE INCOME TAXES 48,936 39,302 143,547 112,909 Income tax provision 20,063 16,114 58,854 46,293 ======================================================================== NET INCOME $28,873 $23,188 $84,693 $66,616 ======================================================================== NET INCOME PER SHARE: Basic $0.35 $0.30 $1.03 $0.86 ======================================================================== Diluted $0.34 $0.29 $1.00 $0.83 ======================================================================== Shares used in computing net income per share: Basic 81,957 78,600 81,884 77,789 ======================================================================== Diluted 84,938 81,092 84,688 79,898 ======================================================================== See notes to consolidated financial statements. 2 3 FISERV, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, December 31, 1998 1997 ------------------------------------ (In thousands) ASSETS Cash and cash equivalents $ 87,802 $89,377 Accounts receivable 238,402 197,771 Securities processing receivables 1,554,253 1,386,169 Prepaid expenses and other assets 90,509 91,278 Trust account investments 1,213,199 1,082,740 Other investments 143,955 125,999 Deferred income taxes 29,470 35,233 Property and equipment-net 167,546 149,055 Internally generated computer software-net 83,519 73,163 Identifiable intangible assets relating to acquisitions-net 46,828 50,426 Goodwill-net 441,750 355,280 ------------------------------------- Total $4,097,233 $3,636,491 ===================================== LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable $ 56,652 $53,828 Securities processing payables 1,371,904 1,184,277 Short-term borrowings 33,850 94,975 Accrued expenses 144,378 123,380 Accrued income taxes 20,776 8,436 Deferred revenues 95,011 67,569 Trust account deposits 1,214,599 1,082,740 Long-term debt 333,632 252,031 ------------------------------------- TOTAL LIABILITIES 3,270,802 2,867,236 ------------------------------------- SHAREHOLDERS' EQUITY: Common stock issued, 83,174,000 and 80,887,000 shares, respectively 832 809 Additional paid-in capital 442,417 427,515 Accumulated earnings 409,061 324,368 Accumulated other comprehensive income 16,551 16,563 Treasury shares, at cost (1,200,000 shares) (42,430) ------------------------------------- TOTAL SHAREHOLDERS' EQUITY 826,431 769,255 ===================================== TOTAL $4,097,233 $3,636,491 ===================================== See notes to consolidated financial statements. 3 4 FISERV, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS for the Nine-Month Periods Ended September 30, 1998 and 1997 Nine Months Ended September 30, 1998 1997 ----------------------------------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $84,693 $66,616 Adjustments to reconcile income to net cash provided by operating activities: Deferred income taxes 3,152 2,465 Depreciation and amortization of property and equipment 43,942 36,014 Amortization of intangible assets 11,336 10,627 Capitalization of internally generated computer software-net (5,073) (2,038) ----------------------------------- 138,050 113,684 Cash provided (used) by changes in assets and liabilities, net of effects from acquisitions of businesses: Accounts receivable (24,522) 3,793 Prepaid expenses and other assets 2,626 (2,486) Accounts payable and accrued expenses 17,392 7,453 Deferred revenue 13,943 7,462 Income taxes payable 15,595 513 Securities processing receivables and payables - net 19,543 27,075 ----------------------------------- Net cash provided by operating activities 182,627 157,494 ----------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (52,978) (29,712) Investments and other assets (11,913) (80,627) Payment for acquisition of businesses (98,791) (22,106) Trust account investments (136,622) (3,226) ----------------------------------- Net cash provided (used) by investing activities (300,304) (135,671) ----------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase (decrease) in short-term obligations - net (61,125) (10,000) Increase (decrease) in long-term obligations - net 81,216 (51,588) Issuance of common stock 6,581 8,592 Purchases of treasury stock (42,430) Trust account deposits 131,860 2,127 ----------------------------------- Net cash provided (used) by financing activities 116,102 (50,869) ----------------------------------- Change in cash (1,575) (29,046) Beginning balance 89,377 101,282 =================================== Ending balance $87,802 $72,236 =================================== See notes to consolidated financial statements. 4 5 FISERV, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS 1. PRINCIPLES OF CONSOLIDATION The consolidated balance sheet as of September 30, 1998 and the related consolidated statements of income and cash flows for the three and nine-month periods ended September 30, 1998 and 1997 are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been included. Such adjustments consisted only of normal recurring items. Interim results are not necessarily indicative of results for a full year. The financial statements and notes are presented as permitted by Form 10-Q, and do not contain certain information included in the annual financial statements and notes of Fiserv, Inc. and subsidiaries (the Company). 2. ACQUISITIONS During the nine months ended September 30, 1998, the Company completed seven acquisitions including three which were accounted for as poolings of interests. Financial statements for prior periods have not been restated to include the operations of these three pooled companies due to lack of materiality. 3. SHARES USED IN COMPUTING NET INCOME PER SHARE Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 ---------------------------------------------------------------------- (In thousands) Weighted average number of common shares outstanding 81,957 78,600 81,884 77,789 Shares issuable upon exercise of options reduced by the number of shares which could have been purchased with the proceeds of such exercise 2,981 2,492 2,804 2,109 ====================================================================== Shares used in computing diluted net income per share 84,938 81,092 84,688 79,898 ====================================================================== Basic income per share is computed using the weighted average number of shares outstanding during the periods. Diluted income per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the periods. Shares outstanding have been restated for periods ending prior to April 1, 1998 to give affect to a three-for-two stock split issued May 29, 1998. 4. ACCOUNTING FOR INCOME TAXES Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating and tax credit carryforwards. Significant components of the Company's net deferred tax asset as of September 30, 1998 and December 31, 1997 are as follows: SEPTEMBER 30, December 31, 1998 1997 --------------------------------- (in thousands) Allowance for doubtful accounts $3,091 $2,027 Accrued expenses not currently deductible 19,157 16,835 Deferred revenue 8,578 8,688 Other 4,885 230 Net operating loss and credit carryforwards 1,388 2,295 Purchased incomplete software technology 53,429 56,888 Deferred costs (4,863) (4,314) Internally generated capitalized software (34,243) (29,999) Excess of tax over book depreciation and amortization (10,563) (5,992) Unrealized gain on investments (11,389) (11,425) ================================= Total deferred income taxes $29,470 $35,233 ================================= 5 6 5. SUPPLEMENTAL CASH FLOW INFORMATION Nine Months Ended September 30, 1998 1997 --------------------------------- (In thousands) Income taxes paid $45,313 $42,950 Interest paid 14,372 11,119 Liabilities assumed in acquisitions of businesses 30,273 8,639 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the relative percentage which certain items in the Company's consolidated statements of income bear to revenues and the percentage change in these items. Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 ---------------------------------------------------------------------- (Percent of Revenues) Revenues 100.00% 100.00% 100.00% 100.00% ---------------------------------------------------------------------- Salaries and related costs 46.21 45.90 46.45 46.60 Data processing costs 9.28 10.55 9.47 10.55 Other operating expenses 21.89 19.57 21.13 19.16 Depreciation and amortization 4.89 5.15 4.91 5.11 Amortization of intangible assets 1.29 1.44 1.27 1.51 Capitalization of software-net (0.66) (0.23) (0.57) (0.29) ------------------------------- --------------------------------- Total cost of revenues 82.90 82.38 82.66 82.64 ------------------------------- --------------------------------- Operating income 17.10 17.62 17.34 17.36 =============================== ================================= REVENUES Revenues increased 30% from $238.3 million in the third quarter of 1997 to $309.5 million in the current third quarter and 27% from $705.0 million in the first nine months of 1997 to $894.6 million in the comparable current period. Approximately 65% of the year to date growth resulted from the inclusion of revenues from the date of purchase of acquired companies and approximately 35% from increases in revenue from the addition of new clients, growth in the transaction volume experienced by existing clients and price increases. COST OF REVENUES Cost of revenues increased 31% from $196.3 million in the third quarter of 1997 to $256.6 million in the current third quarter, and 27% from $582.5 million in the first nine months of 1997 to $739.5 million in the first nine months of 1998. These increases were in line with increases in revenues during the periods. OPERATING INCOME Operating income increased 26% from $42.0 million in the third quarter of 1997 to $52.9 million in the current third quarter, and increased 27% from $122.4 million in the first nine months of 1997 to $155.1 million in the first nine months of 1998. As a percentage of revenues, operating margins did not vary significantly during the third quarter and first nine months of 1998 when compared to the comparable prior year periods. 6 7 INTEREST EXPENSE - NET As a result of increased borrowings, interest expense increased $1.3 million in the third quarter of 1998 and $2.1 million for the first nine months of 1998 when compared to amounts incurred for the comparable 1997 periods. Acquisitions and the purchase of treasury stock were partly funded by the increased borrowings. INCOME TAX PROVISION Income taxes were computed at 41% in both 1998 and 1997. The 41% rate is expected to apply throughout the current year. NET INCOME Net income for the third quarter increased 25% from $23.2 million in 1997 to $28.9 million in 1998. Net income for the first nine months increased 27% from $66.6 million in 1997 to $84.7 million in 1998. Net income per share-diluted for the third quarter was $.34 in 1998 compared to $.29 in 1997. Net income per share-diluted for the first nine months of 1998 was $1.00 compared to $.83 in the comparable 1997 period. The increases in net income per share-diluted for the third quarter and first nine months of 1998 over the comparable 1997 periods amounted to $.05 and $.17, respectively. LIQUIDITY AND CAPITAL RESOURCES The following table summarizes the Company's primary sources of funds for the nine months ended September 30, 1998 and 1997: 1998 1997 --------------------------------- (In thousands) Cash provided by operating activities before changes in securities processing receivables and payables - net 163,084 130,419 Securities processing receivables and payables - net 19,543 27,075 --------------------------------- Cash provided by operating activities 182,627 157,494 Issuance (purchases) of common stock - net (35,849) 8,592 Decrease (increase) in investments (16,675) (81,726) Increase (decrease) in net borrowings 20,091 (61,588) ================================= TOTAL 150,194 22,772 ================================= Long-term obligations amounted to $333.6 million at September 30, 1998. The majority of this debt comprises $106.1 million of senior notes due 1999 to 2005 and $204.7 million advanced under a $280 million unsecured line of credit and commercial paper facility expiring May 17, 2000. A facility fee of .1% to .2% per annum is required on the entire bank line regardless of usage. The Company has historically applied a significant portion of its cash flow from operating activities and proceeds of its common stock offerings and long-term borrowings to acquisitions. The Company believes that its cash flow from operating activities together with other available sources of funds will be adequate to meet its funding requirements. However, in the event that the Company makes significant future acquisitions, it may raise funds through additional borrowings or issuance of securities. 7 8 YEAR 2000 SYSTEMS EVALUATION The Company provides data processing and other related services to financial institutions of all kinds. Failure by the Company in making its proprietary software systems Year 2000 compliant would have a material adverse effect on its business. The Company believes, however, that its remediation process started in 1996 will be successful and anticipates no material processing problems. The Company has completed its assessment of its proprietary systems and has largely completed upgrading and revising the software it will continue to use in providing service to its clients. The Company anticipates that all of its proprietary systems will be completely upgraded to Year 2000 compliance, tested (including client testing) and implemented by March 31, 1999. The Company's contingency plans provide for a variety of actions in the event that a business unit has not progressed sufficiently to meet its remediation goals, including adding necessary resources, and/or migration of clients to other Company software that is Year 2000 compliant. The Company does not anticipate the need for these contingency plans based on the current system remediation status. Testing and implementation of the remaining non-mission critical systems, which are not material to the Company's business, are expected to be completed by mid-1999. The Company has reviewed Year 2000 disclosures prepared by its principal vendors indicating that the embedded systems in the equipment which they supply to the Company or the software systems necessary to maintain their networks adequately, in the case of telephone service vendors, will be Year 2000 compliant in all material respects. Similarly, the Company has no reason to believe that its clients will not be Year 2000 compliant in all material respects. The Company believes that it will meet its Year 2000 compliance commitments using existing resources, without incurring significant incremental expenses. The disclosure set forth above contains forward-looking statements. Specifically, such statements are contained in sentences including the words "expect" or "anticipate" or "could" or "should". Such forward-looking statements are subject to inherent risks and uncertainties that may cause actual results to differ materially from those contemplated by such forward-looking statements. The factors that may cause actual results to differ materially from those contemplated by the forward-looking statements include the failure by third parties adequately to remediate Year 2000 issues or the inability of the Company to complete writing and/or testing software changes on the time schedules currently expected. Nevertheless, the Company expects that its Year 2000 compliance efforts will be successful without any adverse effects on its business. 8 9 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Index to exhibits (11) Statement regarding computation of per share earnings (included on page 5, Part 1). (b) Reports on Form 8-K During the quarter ended September 30, 1998, the Registrant did not file any reports on Form 8-K. 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. FISERV, INC. ------------------------ (Registrant) Date October 19, 1998 by /s/ Edward P. Alberts ----------------- ----------------------------------- EDWARD P. ALBERTS Senior Vice President, Finance and Controller 9