SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended Commission file number 0-13848
June 30, 1998
___________________________
CONCORD EFS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2462252
______________________________ _____________________
(State or other jurisdiction of (I.R.S. Employer
Incorporation of Organization) Identification Number)
2525 Horizon Lake Drive, Suite 120, Memphis, Tennessee 38133
(Address of Principal Executive Offices)
(901) 371-8000
(Registrant's telephone number, including area code)
_________________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes[X] No[ ]
The number of shares of the registrant's Common Stock, $.33 1/3 par value, as of
June 30, 1998 was 97,656,826.
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
INDEX
Page No.
--------
PART 1- Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets June 30, 1998
and December 31, 1997 1
Condensed Consolidated Statements of Income Three and Six
Months ended June 30, 1998 and June 30, 1997 2
Condensed Consolidated Statements of Cash Flows
Six Months ended June 30, 1998 and June 30, 1997 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
PART II - Other Information
Item 6. Exhibits and Reports on Form 8-K 8
Signatures 9
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30 December 31
1998 1997
--------- ---------
(Restated)
ASSETS (In thousands)
CURRENT ASSETS
Cash and cash equivalents $ 63,465 $ 63,795
Securities available-for-sale 182,319 140,199
Accounts receivable, net 65,570 54,166
Inventories 8,022 5,259
Prepaid expenses and other 7,483 5,765
-------- --------
TOTAL CURRENT ASSETS 326,859 269,184
SECURITIES HELD-TO-MATURITY 57,295 52,508
OTHER ASSETS 19,902 14,478
PROPERTY AND EQUIPMENT 103,716 89,520
Less accumulated depreciation
and amortization (62,929) (57,251)
-------- --------
40,787 32,269
-------- --------
TOTAL ASSETS $444,843 $368,439
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other
liabilities $ 55,557 $ 51,701
Accrued liabilities 12,455 10,453
Income taxes payable 990
Current maturities of long-term debt 342 445
-------- --------
TOTAL CURRENT LIABILITIES 68,354 63,589
LONG-TERM DEBT, LESS CURRENT MATURITY 68,000 28,329
DEFERRED INCOME TAXES 2,571 2,591
STOCKHOLDERS' EQUITY:
Common Stock-par value $.33 1/3
per share; authorized 200,000 shares,
issued and outstanding 97,657
shares at June 30, 1998; authorized
100,000 shares, issued and outstanding
66,404 shares at December 31, 1997 32,552 22,135
Other stockholders' equity 273,366 251,795
-------- --------
TOTAL STOCKHOLDERS' EQUITY 305,918 273,930
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'EQUITY $444,843 $368,439
======== ========
See Notes to Condensed Consolidated Financial Statements - Unaudited.
-1-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
-------------------- --------------------
1998 1997 1998 1997
------- ------- -------- --------
(Restated) (Restated) (Restated)
(In thousands, except earnings per share)
Revenue $90,588 $63,628 $166,855 $118,412
Cost of operations 66,940 47,451 123,552 89,464
Selling, general and
administrative expenses 3,701 3,799 8,386 7,507
------- ------- -------- --------
OPERATING INCOME 19,947 12,378 34,917 21,441
Other income (expense):
Interest income 3,671 2,557 7,766 4,863
Interest expense (895) (110) (1,628) (196)
------- ------- -------- --------
INCOME BEFORE INCOME TAXES 22,723 14,825 41,055 26,108
Income taxes 7,709 5,570 13,881 9,970
------- ------- -------- --------
NET INCOME $15,014 $9,255 $27,174 $16,138
======= ======= ======== ========
Per share data:
Weighted average shares 97,575 96,090 97,498 95,874
====== ====== ====== ======
Basic earnings per share $0.15 $0.10 $0.28 $0.17
===== ===== ===== =====
Adjusted weighted average
shares and assumed
conversions 100,133 98,727 99,852 98,712
======= ====== ====== ======
Diluted earnings per share $0.15 $0.09 $0.27 $0.16
===== ===== ===== =====
See Notes to Condensed Consolidated Financial Statements - Unaudited.
-2-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30
---------------------
1998 1997
-------- --------
(Restated)
(In thousands)
NET CASH PROVIDED BY OPERATING
ACTIVITIES $26,488 $24,817
INVESTING ACTIVITIES:
Acquisition of property and equipment (14,196) (5,459)
Purchases of securities available-for-sale (93,219) (58,643)
Purchase of securities held-to-maturity (9,630) (8,915)
Sale of securities available-for-sale 27,476 11,279
Maturities of securities available-for-sale 23,733 15,949
Maturities of securities held-to-maturity 4,844 10,884
Merchants contracts purchased (7,069) (5,276)
------- --------
NET CASH USED IN INVESTING ACTIVITIES (68,061) (40,181)
FINANCING ACTIVITIES:
Proceeds from exercise of stock options 1,675 2,278
Proceeds from notes payable 40,000 18,000
Payments on notes payable (432) (206)
------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 41,243 20,072
------- --------
(DECREASE)INCREASE IN CASH AND CASH EQUIVALENTS (330) 4,708
Cash and cash equivalents at beginning
of period 63,795 99,976
------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $63,465 $104,684
======= ========
For purposes of these statements, the Company considers all highly
liquid investments with a maturity of three months or less when
purchased to be cash equivalents.
See Notes to Condensed Consolidated Financial Statements - Unaudited.
-3-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulations S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six month periods ended June
30, 1998 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1998. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Registrant's annual report on Form 10-K for the year ended December 31, 1997.
The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
Restatement for Pooling
The historical financial information presented in this Form 10-Q has been
restated to include the results of Digital Merchant Systems(DMS). DMS was
acquired in a pooling-of-interests transaction completed on June 30, 1998. In
accordance with pooling-of-interests method of accounting, no adjustments have
been made to the historical carrying amounts of assets and liabilities of DMS.
However, the financial information has been restated to include the operating
results of DMS for all periods prior to the combination.
The results of operations reported by the separate enterprises and the combined
amounts are summarized as follows: (in thousands)
Three months ended Six months ended
---------------------------- ----------------------------
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
------------- ------------- ------------- -------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenue
Concord EFS $82,534 $56,759 $149,386 $103,804
DMS 8,054 6,869 17,469 14,608
------- ------- -------- --------
Combined $90,588 $63,628 $166,855 $118,412
======= ======= ======== ========
Net income (loss)
Concord EFS $14,221 $10,130 $ 25,260 $ 18,063
DMS 793 (875) 1,914 (1,925)
------- ------- -------- --------
Combined $15,014 $ 9,255 $ 27,174 $ 16,138
======= ======= ======== ========
Stock Split
The Board of Directors approved a three-for-two stock split on May 14, 1998.
Shareholders of record as of June 1, 1998 were distributed additional shares on
June 8, 1998.
Securities
Below is a summary of the net unrealized gains on securities available-for-sale,
in thousands:
June 30 December 31
1998 1997
---------- ----------
Increase in securities
available-for-sale $344 $161
Decrease in deferred taxes (102) (62)
Increase in equity 242 99
-4-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998
Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except earnings per share):
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
------- ------- ------- -------
Numerator:
Net income $15,014 $ 9,255 $27,174 $16,138
======= ======= ======= =======
Denominator:
Denominator for basic earnings per
share, weighted-average shares 97,575 96,090 97,498 95,874
Effect of dilutive securities,
employee stock options 2,558 2,637 2,354 2,838
------- ------ ------ ------
Denominator for diluted earnings per
share adjusted for weighted-average
shares and assumed conversions 100,133 98,727 99,852 98,712
======= ====== ====== ======
Basic earnings per share $0.15 $0.10 $0.28 $0.17
===== ===== ===== =====
Diluted earnings per share $0.15 $0.09 $0.27 $0.16
===== ===== ===== =====
Earnings per share and related per share data have been restated to reflect all
stock splits.
Comprehensive Income
As of January 1, 1998, the Company adopted Financial Accounting Standards Board
(FASB) Statement 130, "Reporting Comprehensive Income". Statement 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this Statement had no impact on the
Company's net income or stockholders' equity. Statement 130 requires unrealized
gains or losses on the Company's available-for-sale securities, which prior to
adoption were reported separately in stockholders' equity to be included in
other comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of Statement 130.
During the second quarter of 1998 and 1997, total comprehensive income, in
thousands, amounted to $15,021 and $9,775, respectively. During the six months
ended June 30, 1998 and 1997, total comprehensive income, in thousands, amounted
to $27,317 and $16,281, respectively.
-5-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Form 10-Q may contain or incorporate by reference statements which may
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended and Section 21E of the Securities Exchange
Act of 1934, as amended. Prospective investors are cautioned that any such
statements are not guarantees for future performance and involve risks and
uncertainties, and that actual results may differ materially from those
contemplated by such forward-looking statements. Important factors currently
known to management that could cause actual results to differ materially from
those in forward-looking statements include significant fluctuations in interest
rates, inflation, economic recession, significant changes in the federal and
state legal and regulatory environment, and competition in the Company's
markets. The Company undertakes no obligation to update or revise
forward-looking statements to reflect changed assumptions, the occurrence of
unanticipated events or changes to future results over time.
Restatement for Pooling
The historical financial information presented in this Form 10-Q has been
restated to include the results of Digital Merchant Systems(DMS). DMS was
acquired in a pooling-of-interests transaction completed on June 30, 1998. In
accordance with pooling-of-interests method of accounting, no adjustments have
been made to the historical carrying amounts of assets and liabilities of DMS.
However, the financial information has been restated to include the operating
results of DMS for all periods prior to the combination.
Acquisition
On June 30, 1998, the Company issued 4.425 million shares of its common stock in
exchange for all the outstanding stock of Digital Merchant Systems and
affiliated entities (DMS), an independent sales organization in the credit card
processing industry. This business combination has been accounted for as a
pooling-of-interests combination and, accordingly, the consolidated financial
statements for periods prior to the combination have been restated to include
the accounts and results of operations of DMS.
Impact of Year 2000
The Company has completed an assessment and will have to modify portions of its
software so that its computer systems will function properly with respect to
dates in the year 2000 and thereafter. The total Year 2000 project cost is not
expected to be material to the Company's financial position or operating results
and will be expensed as incurred. To date, the Company has expensed all cost
associated with its Year 2000 assessment and related modifications of its
software.
The project is estimated to be completed not later than December 31, 1998, which
is prior to any anticipated impact on its operating systems. The Company
believes that with modifications to existing software, the Year 2000 Issue will
not pose significant operational problems for its computer systems. However, if
such modifications and conversions are not made, or are not completed timely,
the Year 2000 Issue could have a material impact on the operations of the
Company. The Company has initiated formal communications with all of its
significant suppliers, networks and large customers to determine the extent to
which the Company's interface systems are vulnerable to those third parties'
failure to remediate their own Year 2000 issues. There is no guarantee that the
systems of other companies on which the Company's systems rely will be timely
converted and would not have an adverse effect on the Company's systems.
The cost of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
-6-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Results of Operations
For the second quarter of 1998, revenue increased 42% when compared to the same
quarter of the prior year. Transaction processing revenue from Card Services
(81% of total revenue) increased 46% as new merchants were added and usage at
existing merchants increased. Transaction processing for Trucking Services (15%
of total revenue) increased 25%, driven by surcharge revenue at cash dispensing
machines (ATMs), ATM transaction fees, ATM processing fees and additional
trucking companies using the Company's fuel and cash advance services. Check and
Terminal Services (4% of total revenue) increased 41% as terminal sales
increased due to merchant additions and terminal requirements to process
Electronic Benefits Transfer (EBT) transactions.
For the second quarter of 1998, net income as a percentage of revenue increased
to 16.6% from 14.5% in the same quarter of the prior year. The primary factor
for this improvement was selling, general and administrative costs decreased
$98,000 from $3,799,000 to $3,701,000 in the current year quarter. Operating
cost containment also contributed to the increase in net income as a percentage
of revenue. Operating costs as a percentage of revenue improved to 73.9% in the
current quarter compared to 74.6% in the same quarter of the prior year. This
improvement was the net result of operational payroll, computer maintenance,
depreciation and other operational costs growing less rapidly than transaction
processing revenue.
For the six months ended June 30, 1998, revenue increased 41% when compared to
the same period of the prior year. Transaction processing revenue from Card
Services (81% of total revenue) increased 45% as new merchants were added and
usage at existing merchants increased. Transaction processing for Trucking
Services (15% of total revenue) increased 25%, driven by surcharge revenue at
cash dispensing machines (ATMs), ATM transaction fees, ATM processing fees and
additional trucking companies using the Company's fuel and cash advance
services. Check and Terminal Services (4% of total revenue) increased 32% as
terminal sales increased due to merchant additions and terminal requirements to
process Electronic Benefits Transfer (EBT) transactions.
For the six months ended June 30, 1998, net income as a percentage of revenue
increased to 16.3% from 13.6% in the same period of the prior year. The primary
factors were operating, selling, general and administrative expenses growing
less rapidly than transaction processing revenue.
Liquidity and Capital Resources
In the six months ended June 30, 1998, the Company generated $26.5 million
from operating activities, received $40.0 million in proceeds from notes
payable, and received $1.7 million from stock issued from exercises of options
under the Company's Incentive Stock Option Plan. Investment securities purchases
were $46.8 million, net of sales and maturities, $7.1 million was spent to
purchase merchant contracts, and $14.2 million was disbursed on capital
additions. The capital additions were primarily new computer equipment
With little debt, adequate available credit and strong cash generation, the
Company is in sound financial condition and expects to fund continued growth
from currently available resources. EFS National Bank and EFS Federal Savings
Bank, wholly-owned subsidiaries of the Company, exceed required regulatory
capital ratios.
-7-
<PAGE>
PART II
OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K.
(a) Exhibits
None
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the second quarter.
-8-
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
CONCORD EFS, INC.
Date: August 12 1998 By: /s/ Dan M. Palmer
---------------------------
Dan M. Palmer
Chairman of the Board and
Chief Executive Officer
Date: August 12, 1998 By: /s/ Thomas J. Dowling
---------------------------
Thomas J. Dowling
Vice President & Controller
-9-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 63465 63465
<SECURITIES> 239614 239614
<RECEIVABLES> 66845 66845
<ALLOWANCES> 1275 1275
<INVENTORY> 8022 8022
<CURRENT-ASSETS> 326859 326859
<PP&E> 103716 103716
<DEPRECIATION> 62929 62929
<TOTAL-ASSETS> 444843 444843
<CURRENT-LIABILITIES> 68354 68354
<BONDS> 0 0
0 0
0 0
<COMMON> 32552 32552
<OTHER-SE> 273366 273366
<TOTAL-LIABILITY-AND-EQUITY> 444843 444843
<SALES> 90588 166855
<TOTAL-REVENUES> 90588 166855
<CGS> 66940 123552
<TOTAL-COSTS> 70641 131938
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 192 366
<INTEREST-EXPENSE> 895 1628
<INCOME-PRETAX> 22723 41055
<INCOME-TAX> 7709 13881
<INCOME-CONTINUING> 15014 27174
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 15014 27174
<EPS-PRIMARY> 0.15 0.28
<EPS-DILUTED> 0.15 0.27
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-END> JUN-30-1997 JUN-30-1997
<CASH> 104684 104684
<SECURITIES> 149723 149723
<RECEIVABLES> 52284 52284
<ALLOWANCES> 1248 1248
<INVENTORY> 6164 6164
<CURRENT-ASSETS> 263770 263770
<PP&E> 79401 79401
<DEPRECIATION> 51420 51420
<TOTAL-ASSETS> 354744 354744
<CURRENT-LIABILITIES> 94426 94426
<BONDS> 0 0
0 0
0 0
<COMMON> 21892 21892
<OTHER-SE> 217872 217872
<TOTAL-LIABILITY-AND-EQUITY> 354744 354744
<SALES> 63628 118412
<TOTAL-REVENUES> 63628 118412
<CGS> 47451 89464
<TOTAL-COSTS> 51250 96971
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 315 615
<INTEREST-EXPENSE> 110 196
<INCOME-PRETAX> 14825 26108
<INCOME-TAX> 5570 9970
<INCOME-CONTINUING> 9255 16138
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 9255 16138
<EPS-PRIMARY> 0.10 0.17
<EPS-DILUTED> 0.09 0.16
</TABLE>
