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, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from_______________to_________________
Commission file number 0-14948
FISERV, INC.
----------------------------------------------------
(Exact name of Registrant as specified in its charter)
WISCONSIN 39-1506125
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(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)
(262) 879 5000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
As of July 15, 2002, there were 192,256,689 shares of common stock, $.01 par
value, of the Registrant outstanding.
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FISERV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Revenues:
Processing and services $563,032 $ 481,355 $1,122,856 $ 943,518
Customer reimbursements 69,394 62,269 141,498 127,757
-------- --------- ---------- ----------
Total revenues 632,426 543,624 1,264,354 1,071,275
Cost of revenues:
Salaries, commissions and payroll
related costs 267,606 230,638 539,238 452,851
Customer reimbursement expenses 69,394 62,269 141,498 127,757
Data processing costs and equipment rentals 41,665 36,213 80,773 70,551
Other operating expenses 117,676 98,490 234,026 190,400
Depreciation and amortization 25,220 27,635 49,440 54,732
-------- --------- ---------- ----------
Total cost of revenues 521,561 455,245 1,044,975 896,291
-------- --------- ---------- ----------
Operating income 110,865 88,379 219,379 174,984
Interest expense - net (2,178) (3,237) (4,865) (7,054)
Realized gain from sale of investment 567 1,506 1,482 3,327
-------- --------- ---------- ----------
Income before income taxes 109,254 86,648 215,996 171,257
Income tax provision 42,609 34,659 84,238 68,503
-------- --------- ---------- ----------
Net income $ 66,645 $ 51,989 $ 131,758 $ 102,754
======== ========= ========== ==========
Net income per share:
Basic $ 0.35 $ 0.28 $ 0.69 $ 0.55
======== ========= ========== ==========
Diluted $ 0.34 $ 0.27 $ 0.67 $ 0.54
======== ========= ========== ==========
Shares used in computing net income per share:
Basic 191,420 186,558 191,044 186,360
======== ========= ========== ==========
Diluted 195,474 191,252 195,313 191,051
======== ========= ========== ==========
See notes to consolidated financial statements.
2
FISERV, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
June 30, December 31,
2002 2001
----------- ------------
ASSETS
Cash and cash equivalents $ 188,329 $ 136,088
Accounts receivable-net 296,338 311,217
Securities processing receivables 1,461,555 1,427,051
Prepaid expenses and other assets 104,105 108,003
Investments 1,998,332 1,885,063
Property and equipment-net 262,678 247,748
Internally generated computer
software for external customers-net 100,339 97,250
Intangible assets-net 1,165,095 1,109,822
----------- -----------
Total $ 5,576,771 $ 5,322,242
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 88,298 $ 83,303
Securities processing payables 1,281,074 1,289,479
Short-term borrowings 137,390 112,800
Accrued expenses 215,265 241,904
Accrued income taxes 38,262 15,373
Deferred revenues 159,002 171,101
Customer retirement account deposits 1,585,516 1,420,956
Deferred income taxes 55,841 39,407
Long-term debt 262,503 343,093
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Total liabilities 3,823,151 3,717,416
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Shareholders' equity:
Common stock issued, 191,773,000 and
190,281,000 shares, respectively 1,918 1,903
Additional paid-in capital 591,282 564,959
Accumulated other comprehensive income 66,914 76,216
Accumulated earnings 1,093,506 961,748
----------- -----------
Total shareholders' equity 1,753,620 1,604,826
----------- -----------
Total $ 5,576,771 $ 5,322,242
=========== ===========
See notes to consolidated financial statements.
3
FISERV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six Months Ended
June 30,
2002 2001
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Cash flows from operating activities:
Net income $ 131,758 $ 102,754
Adjustments to reconcile net income to net cash provided
by operating activities:
Realized gain from sale of investment (1,482) (3,327)
Deferred income taxes 19,572 4,990
Depreciation and amortization 49,440 54,732
Amortization of internally generated computer software for external customers 18,674 16,656
--------- ---------
217,962 175,805
Changes in assets and liabilities, net of effects from acquisitions of
businesses:
Accounts receivable 14,414 11,189
Prepaid expenses and other assets 2,461 (616)
Accounts payable and accrued expenses (24,538) (20,853)
Deferred revenues (11,890) (3,718)
Accrued income taxes 45,628 27,466
Securities processing receivables and payables - net (42,909) (2,170)
--------- ---------
Net cash provided by operating activities 201,128 187,103
--------- ---------
Cash flows from investing activities:
Capital expenditures (57,211) (34,115)
Capitalization of internally generated computer software for external customers (21,105) (16,546)
Payment for acquisitions of businesses, net of cash acquired (59,304) (93,121)
Investments (124,005) 14,184
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Net cash used in investing activities (261,625) (129,598)
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Cash flows from financing activities:
Proceeds from short-term borrowings - net 25,104 16,400
Repayment of long-term debt - net (80,749) (24,775)
Issuance of common stock 3,338 9,092
Customer retirement account deposits 165,045 (79,115)
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Net cash provided by (used in) financing activities 112,738 (78,398)
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Change in cash and cash equivalents 52,241 (20,893)
Beginning balance 136,088 98,856
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Ending balance $ 188,329 $ 77,963
========= =========
See notes to consolidated financial statements.
4
FISERV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Principles of Consolidation
The consolidated financial statements for the three and six month periods ended
June 30, 2002 and 2001 are unaudited. In the opinion of management, all
adjustments necessary for a fair presentation of such consolidated 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 consolidated
financial statements and notes of Fiserv, Inc. and subsidiaries (the "Company").
Certain amounts reported in prior periods have been reclassified to conform to
the 2002 presentation.
2. Recent Accounting Pronouncements
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS
No. 142 requires that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead tested for impairment at least
annually. The Company has completed its transitional impairment test for
goodwill and intangible assets with indefinite lives and has determined that no
potential impairment exists. Proforma net income and net income per share for
the three month and six month periods ended June 30, 2001, adjusted to eliminate
historical amortization of goodwill and related tax effects, are as follows:
Three Six
Months Ended Months Ended
June 30, 2001 June 30, 2001
------------- -------------
(In thousands)
Reported net income $51,989 $102,754
Add: goodwill amortization, net of tax 4,626 9,199
------- --------
Pro forma net income $56,615 $111,953
======= ========
Reported net income per share:
Basic $0.28 $0.55
Diluted $0.27 $0.54
Pro forma net income per share:
Basic $0.30 $0.60
Diluted $0.30 $0.59
In addition, effective January 1, 2002, the Company adopted Emerging Issues Task
Force Issue No. 01-14, "Income Statement Characterization of Reimbursements
Received for `Out of Pocket' Expenses Incurred" which requires that customer
reimbursements received for direct costs paid to third parties and related
expenses be characterized as revenue. Comparative financial statements for prior
periods have been reclassified to provide consistent presentation. The Company
has presented customer reimbursement revenue and expenses of $69.4 million and
$62.3 million for the three months ended June 30, 2002 and 2001, respectively,
and $141.5 million and $127.8 million for the six months ended June 30, 2002 and
2001, respectively, in accordance with Issue No. 01-14. Customer reimbursements
represent direct costs paid to third parties primarily for postage and data
communication costs. In addition, processing and services revenues and
salaries/data processing expenses were increased by $9.7 million and $8.7
million for the three months ended June 30, 2002 and 2001, respectively and
$18.7 million and $17.0 million for the six months ended June 30, 2002 and 2001,
respectively. The adoption of Issue No. 01-14 did not impact the Company's
financial position, operating income or net income.
5
ITEM 2. 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. This table and the following discussion exclude the
revenues and expenses associated with customer reimbursements as discussed in
Note 2.
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
(Percent of Revenues)
Processing and services revenues 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Salaries and related costs 47.5 47.9 48.0 48.0
Data processing costs 7.4 7.5 7.2 7.5
Other operating expenses 20.9 20.5 20.9 20.2
Depreciation and amortization 4.5 5.7 4.4 5.8
----- ----- ----- -----
Total cost of revenues 80.3 81.6 80.5 81.5
----- ----- ----- -----
Operating income 19.7 18.4 19.5 18.5
===== ===== ===== =====
Processing and Services Revenues
Processing and services revenues increased $81.7 million, or 17.0%, from $481.4
million in the second quarter of 2001 to $563.0 million in the current second
quarter, and $179.3 million, or 19.0%, from $943.5 million in the first six
months of 2001 to $1,122.9 million in the comparable current period.
Approximately 25% of the year-to-date revenue growth (excluding a business
disposition and a $12.0 million termination fee in 2001) was derived from sales
to new clients, cross-sales to existing clients, increases in transaction
volumes from existing clients and price increases, with the remaining revenue
growth from acquired businesses. Revenue growth was positively impacted by
strong growth of $216.6 million, or 28.8%, for the first six months of 2002
compared to 2001 in the Financial institution outsourcing, systems and services
segment which is the Company's main operating segment. In addition, revenue
growth was negatively impacted by the Securities processing and trust services
segment, primarily due to lower transaction volumes from continued weakness in
the United States retail financial markets. Revenues for the Securities
processing and trust services segment declined $29.2 million for the first six
months of 2002 compared to 2001, excluding a $12.0 million termination fee
received from a broker-dealer customer acquired by a third party in the second
quarter of 2001.
Cost of Revenues
Cost of revenues increased 15.1% from $393.0 million in the second quarter of
2001 to $452.2 million in the current second quarter, and 17.6% from $768.5
million in the first six months of 2001 to $903.5 million in the first six
months of 2002.
Depreciation and Amortization
Depreciation and amortization decreased $2.4 million from $27.6 million in the
second quarter of 2001 to $25.2 million in the current second quarter, and $5.3
million from $54.7 million in the first six months of 2001 to $49.4 in the first
six months of 2002. The decrease was primarily attributable to the adoption of
SFAS No. 142 that resulted in a reduction of goodwill amortization expense of
approximately $12.0 million for the first six months of 2002, offset primarily
by incremental depreciation expense from capital expenditures.
Operating Income
Operating income increased 25.4% from $88.4 million in the second quarter of
2001 to $110.9 million in the current second quarter, and increased 25.4% from
$175.0 million in the first six months of 2001 to $219.4 million in the first
six months of 2002.
6
Realized Gain from Sale of Investment
During the first six months of 2002 and 2001, the Company recorded a pre-tax
realized gain from sale of investment of $1.5 million and $3.3 million,
respectively.
Income Tax Provision
The effective income tax rate was 39% in 2002 and 40% in 2001. The effective
income tax rate for 2002 has declined from 2001 due to the impact of adopting
SFAS No. 142.
Net Income
Net income for the second quarter increased 28.2% from $52.0 million in 2001 to
$66.6 million in 2002. Net income for the first six months increased 28.2% from
$102.8 million in 2001 to $131.8 million in 2002. Net income per share-diluted
(excluding realized gains from sale of investment) for the second quarter was
$.34 in 2002 compared to $.27 in 2001. Net income per share-diluted (excluding
realized gains from sale of investment) for the first six months of 2002 was
$.67 compared to $.53 in the comparable 2001 period. The impact of adopting SFAS
No. 142 would have increased 2001 diluted net income per share (excluding
realized gain from sale of investment) by approximately $.02 per share in the
second quarter and $.04 per share on a year-to-date basis due to the elimination
of goodwill amortization.
Business Segment Information
The Company is a leading independent provider of financial data processing
systems and related information management services and products to financial
institutions and other financial intermediaries. The Company's operations have
been classified into three business segments: Financial institution outsourcing,
systems and services; Securities processing and trust services; and All other
and corporate. Financial information for the six months ended June 30, 2001 has
been restated to reflect the transfer of one business unit representing $7.2
million in revenue and $.6 million in operating income from the Securities and
trust services segment to the Financial institution outsourcing, systems and
services segment. Summarized financial information by business segment has been
restated and is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
-------- -------- ---------- ---------
(In thousands)
Processing and services revenues:
Financial institution outsourcing, systems
and services $487,061 $383,461 $ 968,764 $ 752,184
Securities processing and trust services 54,513 78,049 109,276 150,443
All other and corporate 21,458 19,845 44,816 40,891
-------- -------- ---------- ---------
Total $563,032 $481,355 $1,122,856 $ 943,518
======== ======== ========== =========
Operating income:
Financial institution outsourcing, systems
and services $107,667 $ 78,848 $ 209,456 $ 158,710
Securities processing and trust services 5,924 11,803 13,490 19,925
All other and corporate (2,726) (2,272) (3,567) (3,651)
-------- -------- ---------- ---------
Total $110,865 $ 88,379 $ 219,379 $ 174,984
======== ======== ========== =========
Processing and services revenues in the Financial institution outsourcing,
systems and services business segment increased from $383.5 million in the
second quarter of 2001 to $487.1 million in the current second quarter, and
increased from $752.2 million in the first six months of 2001 to $968.8 million
in the comparable current period. Operating income in the Financial institution
outsourcing, systems and services business segment increased from $78.8 million
in the second quarter of 2001 to $107.7 million in the current second quarter
and increased from $158.7 million in the first six months of 2001 to $209.5
million in the first six months of 2002. Year-to-date operating income was
positively impacted in 2002 by the elimination of goodwill amortization of
approximately $10.0 million.
Processing and services revenues in the Securities processing and trust services
business segment, excluding a $12.0 million termination fee received in the
second quarter of 2001, decreased from $66.0 million in the second quarter of
2001 to $54.5 million in the current second quarter, and decreased from $138.4
million in the first six months of 2001 to $109.3 million in the comparable
current period. The revenue decrease in 2002 was primarily related to lower
transaction volumes in the Securities processing and trust services segment due
to continued weakness in the United States retail financial markets. Operating
income in this business segment decreased from $11.8 million in the second
quarter of 2001 to $5.9 million in the current second quarter, and decreased
from $19.9 million in the first six months of 2001 to $13.5 million in the first
six months of 2002 primarily as a result of lower revenues. In the second
quarter of 2002, the segment recorded a net charge of $3.2 million related
7
to the write-down of WorldCom, Inc. debt securities to market value. The
WorldCom, Inc. debt securities were acquired by the Company through the
acquisition of Resources Trust Company in 2000 and the securities were
classified as held-to-maturity. As of June 30, 2002, the Company's remaining
held-to-maturity corporate debt securities had an aggregate fair market value
in excess of carrying value of $4.1 million. In the second quarter of 2001, the
segment recorded $12.3 million in restructuring charges.
Liquidity and Capital Resources
The following table summarizes the Company's primary sources (uses) of funds
from operating activities for the six months ended June 30, 2002 and 2001:
2002 2001
------ -------
(In thousands)
Cash provided by operating activities
before changes in securities processing
receivables and payables $ 244,037 $ 189,273
Securities processing receivables and payables
- net (42,909) (2,170)
--------- ---------
Cash provided by operating activities 201,128 187,103
Decrease in net borrowings (55,645) (8,375)
--------- ---------
TOTAL $ 145,483 $ 178,728
========= =========
The Company has historically used a significant portion of its cash flow from
operations for acquisitions and capital expenditures with any remainder used to
reduce long-term debt.
The Company's strategy includes the acquisition of complementary businesses
financed by a combination of internally generated funds and borrowings from the
Company's credit facilities. The Company believes that its cash flow from
operations together with other available sources of funds will be adequate to
meet its funding requirements. In the event that the Company makes significant
future acquisitions, however, it may raise funds through additional borrowings
or the issuance of securities.
Critical Accounting Policies
The Company does not consider any specific accounting policies to be critical to
the economic success of the entity. The Company does not participate in, nor has
created, any off-balance sheet special purpose entities or other off-balance
sheet financing, other than operating leases. In addition, the Company does not
enter into any derivative financial instruments for speculative purposes and
uses derivative financial instruments primarily for managing its exposure to
changes in interest rates.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
Except for the historical information contained herein, the matters discussed in
this Form 10-Q are forward-looking statements that involve risks and
uncertainties, including but not limited to economic, competitive, governmental
and technological factors affecting the Company's operations, markets, services
and related products, prices and other factors discussed in the Company's prior
filings with the Securities and Exchange Commission. Although the Company
believes that the assumptions underlying the forward-looking statements
contained herein are reasonable, any of the assumptions could be inaccurate.
Therefore, there can be no assurance that the forward-looking statements
included in this Form 10-Q will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the Company will be achieved.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
The Company's quantitative and qualitative disclosures about market risk are
incorporated by reference in Item 7A of the Company's Annual Report on Form 10-K
for the year ended December 31, 2001 and have not materially changed since that
report was filed.
8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company has initiated legal action against E*TRADE Securities, Inc.
("E*TRADE") as the result of E*TRADE refusing to accept delivery of a $27
million bond in violation of the terms of a contract between E*TRADE and a
subsidiary of the Company. The Company intends to vigorously enforce its rights
under the terms of its agreement with E*TRADE and expects to prevail and recover
the carrying value of the bond.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
No exhibits are filed as part of this Quarterly Report on Form 10-Q.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30, 2002.
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 July 22, 2002 by /s/ Kenneth R. Jensen
------------ ---------------------------------
KENNETH R. JENSEN
Senior Executive Vice President, Chief
Financial Officer, Treasurer and Assistant
Secretary
9