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
September 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
September 30, 1998 was 97,797,141.
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
INDEX
Page No.
--------
PART 1- Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets September 30, 1998
and December 31, 1997 1
Condensed Consolidated Statements of Income Three and Nine
Months ended September 30, 1998 and September 30, 1997 2
Condensed Consolidated Statements of Cash Flows Nine
Months ended September 30, 1998 and September 30, 1997 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II - Other Information
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30 December 31
1998 1997
------------ -----------
(Restated)
ASSETS (In thousands)
CURRENT ASSETS
Cash and cash equivalents $ 68,164 $ 63,795
Securities available-for-sale 246,079 140,199
Accounts receivable, net 77,632 54,166
Inventories 7,554 5,259
Prepaid expenses and other 6,227 5,765
-------- --------
TOTAL CURRENT ASSETS 405,656 269,184
SECURITIES HELD-TO-MATURITY 52,508
OTHER ASSETS 23,358 14,478
PROPERTY AND EQUIPMENT 109,629 89,520
Less accumulated depreciation
and amortization (65,950) (57,251)
-------- --------
43,679 32,269
-------- --------
TOTAL ASSETS $472,693 $368,439
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other
liabilities $ 61,062 $ 51,701
Accrued liabilities 7,883 10,453
Income taxes payable 990
Current maturities of long-term debt 230 445
-------- --------
TOTAL CURRENT LIABILITIES 69,175 63,589
LONG-TERM DEBT, LESS CURRENT MATURITY 73,000 28,329
DEFERRED INCOME TAXES 3,877 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 32,599 22,135
Other stockholders' equity 294,042 251,795
-------- --------
TOTAL STOCKHOLDERS' EQUITY 326,641 273,930
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'EQUITY $472,693 $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 Nine Months Ended
September 30 September 30
-------------------- ---------------------
1998 1997 1998 1997
------- ------- -------- --------
(Restated) (Restated)
(In thousands, except earnings per share)
Revenue $99,715 $71,306 $266,570 $189,719
Cost of operations 73,490 52,360 197,042 141,825
Selling, general and
administrative expenses 3,987 4,090 12,373 11,596
------- ------- -------- --------
OPERATING INCOME 22,238 14,856 57,155 36,298
Other income (expense):
Interest income 4,442 3,299 12,209 8,162
Interest expense (1,063) (299) (2,692) (496)
------- ------- -------- --------
INCOME BEFORE INCOME TAXES 25,617 17,856 66,672 43,964
Income taxes 8,908 6,264 22,789 16,234
------- ------- -------- --------
NET INCOME $16,709 $11,592 $ 43,883 $ 27,730
======= ======= ======== ========
Per share data:
Weighted average shares 97,695 96,662 97,563 96,137
====== ====== ====== ======
Basic earnings per share $0.17 $0.12 $0.45 $0.29
===== ===== ===== =====
Adjusted weighted average
shares and assumed
conversions 100,750 99,848 100,168 99,090
======= ====== ======= ======
Diluted earnings per share $0.17 $0.12 $0.44 $0.28
===== ===== ===== =====
See Notes to Condensed Consolidated Financial Statements - Unaudited.
-2-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30
---------------------
1998 1997
-------- -------
(Restated)
(In thousands)
NET CASH PROVIDED BY OPERATING
ACTIVITIES $39,445 $ 6,921
INVESTING ACTIVITIES:
Acquisition of property and equipment (20,109) (9,739)
Purchases of securities available-for-sale (146,705) (98,444)
Purchase of securities held-to-maturity (9,630) (13,138)
Sale of securities available-for-sale 67,617 40,722
Maturities of securities available-for-sale 4,844 18,513
Maturities of securities held-to-maturity 33,681 14,713
Merchant contracts purchased (11,851) (9,033)
------- -------
NET CASH USED IN INVESTING ACTIVITIES (82,153) (56,406)
FINANCING ACTIVITIES:
Proceeds from exercise of stock options 2,621 5,377
Proceeds from notes payable 45,000 18,000
Payments on notes payable (544) (311)
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 47,077 23,066
------- -------
(DECREASE)INCREASE IN CASH AND CASH EQUIVALENTS 4,369 (26,419)
Cash and cash equivalents at beginning
of period 63,795 99,976
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $68,164 $73,557
======= =======
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)
SEPTEMBER 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 nine month periods ended
September 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.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
which is effective for annual and interim periods beginning after December 15,
1997. The Company will adopt the new requirements retroactively in fiscal 1999.
This statement established standards for the method that public entities use to
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographical areas and major customers. Management has not completed its review
of the statement, but does not anticipate its adoption will have a significant
effect on the Company's annual or interim reporting.
The FASB issued in June 1998 its new standard on derivatives - Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities". The new
Statement resolves the inconsistencies that existed wiht respect to derivative
accounting, and dramatically changes the way that many derivative transactions
and hedged items are reported. The Statement is effective for years beginning
after June 15, 1999, however, the Company adopted the statement early on July 1,
1998. The Company has determined that the effect of Statement 133 will not be
material to the earnings and financial condition of the Company. Under
provisions of the Statement, the Company has reclassified all securities
held-to-maturity to securities available-for-sale on July 1, 1998.
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.
-4-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1998
Restatement for Pooling - continued
The results of operations reported by the separate enterprises and the combined
amounts are summarized as follows: (in thousands)
Three months ended Nine months ended
September 30 September 30
---------------------------- ----------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenue
Concord EFS $91,195 $64,716 $243,917 $168,521
DMS 8,520 6,590 22,653 21,198
------- ------- -------- --------
Combined $99,715 $71,306 $266,570 $189,719
======= ======= ======== ========
Net income (loss)
Concord EFS $15,681 $11,422 $40,941 $ 29,485
DMS 1,028 170 2,942 (1,755)
------- ------- -------- --------
Combined $16,709 $11,592 $43,883 $ 27,730
======= ======= ======== ========
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:
September 30 December 31
1998 1997
------------ -----------
Increase in securities
available-for-sale $3,306 $161
Decrease in deferred taxes (1,161) (62)
Increase in equity 2,145 99
-5-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 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 Nine Months Ended
September 30 September 30
1998 1997 1998 1997
------- ------- ------- -------
Numerator:
Net income $16,709 $11,592 $43,883 $27,730
======= ======= ======= =======
Denominator:
Denominator for basic earnings per
share, weighted-average shares 97,695 96,662 97,563 96,137
Effect of dilutive securities,
employee stock options 3,055 3,186 2,605 2,953
------- ------ ------- ------
Denominator for diluted earnings per
share adjusted for weighted-average
shares and assumed conversions 100,750 99,848 100,168 99,090
======= ====== ======= ======
Basic earnings per share $0.17 $0.12 $0.45 $0.29
===== ===== ===== =====
Diluted earnings per share $0.17 $0.12 $0.44 $0.28
===== ===== ===== =====
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 third quarter of 1998 and 1997, total comprehensive income, in
thousands, amounted to $18,612 and $11,911, respectively. During the nine months
ended September 30, 1998 and 1997, total comprehensive income, in thousands,
amounted to $45,929 and $28,191, respectively.
-6-
<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, successful implementation of the
Company's Year 2000 compliance project, 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 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. Additionally,
the Company filed a registration statment under Form S-3 during the third
quarter. The filing registered the shares issued in the DMS pooling, allowing
the resale of the shares. The registration was declared effective September 17,
1998.
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 Company established a Year 2000 committee in November 1997 in response to
the Year 2000 concerns. Mission critical systems have been identified and
reviewed by the Company and are currently being tested. Internal mission
critical system testing is estimated to be completed by December 31, 1998. The
Company's processing systems also require testing for Year 2000 compliance with
external entities such as credit and debit networks and telephone companies.
External testing is estimated to be completed by March 31, 1999. The entire Year
2000 project is estimated to be completed not later than June 30, 1999, which is
prior to any anticipated impact on its operating systems.
-7-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Impact of Year 2000 - continued
The Year 2000 committee is also developing a contigency plan to respond to the
worst case scenarios of the the Year 2000 issue. The Company anticpates
completion of the contigency plan by March 31, 1999.
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.
Results of Operations
For the third quarter of 1998, revenue increased 40% when compared to the same
quarter of the prior year. Transaction processing revenue from Card Services
(84% of total revenue) increased 49% as new merchants were added and usage at
existing merchants increased. Transaction processing for Trucking Services (13%
of total revenue) increased 15%, 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 (3% of total revenue) decreased 24% due primarily to higher
terminal sales experienced in the third quarter of 1997.
For the third quarter of 1998, net income as a percentage of revenue increased
to 16.8% from 16.3% in the same quarter of the prior year. The primary factor
for this improvement was selling, general and administrative costs decreased
$103,000 from $4,090,000 to $3,987,000 in the current year quarter.
For the nine months ended September 30, 1998, revenue increased 41% when
compared to the same period of the prior year. Transaction processing revenue
from Card Services (83% of total revenue) increased 47% as new merchants were
added and usage at existing merchants increased. Transaction processing for
Trucking Services (14% of total revenue) increased 21%, 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 (3% of total revenue) increased 6%.
For the nine months ended September 30, 1998, net income as a percentage of
revenue increased to 16.5% from 14.6% 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.
-8-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Liquidity and Capital Resources
In the nine months ended September 30, 1998, the Company generated $39.4 million
from operating activities, received $45.0 million in proceeds from notes
payable, and received $2.6 million from stock issued from exercises of options
under the Company's Incentive Stock Option Plan. Investment securities purchases
were $50.2 million, net of sales and maturities, $11.9 million was spent to
purchase merchant contracts, and $20.1 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.
-9-
<PAGE>
PART II
OTHER INFORMATION
Item 3: Quantitative and Qualitative Disclosures About Market Risk.
The Company has determined that there has been no significant changes since
December 31, 1997. For futher discussion, refer to "Interest Rate Risk
Management" on page 7 of the Company's 1997 Annual Report.
Item 6: Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 21 - Subsidiaries of the Registrant:
Jurisdiction of
Company Organization Ownership
- ------------------------------- ---------------------------- ---------
Concord Computing Corporation Delaware 100%
EFS National Bank National Bank Charter 100%
Concord Equipment Sales Tennessee 100%
EFS Federal Savings Bank Federal Savings Bank Charter 100%
Pay Systems of America, Inc. Tennessee 100%
American Bankcard, Inc. Illinios 100%
Digital Merchants Systems, Inc. Illinios 100%
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the third quarter.
-10-
<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: November 16, 1998 By: /s/ Dan M. Palmer
---------------------------
Dan M. Palmer
Chairman of the Board and
Chief Executive Officer
Date: November 16, 1998 By: /s/ Thomas J. Dowling
---------------------------
Thomas J. Dowling
Vice President & Controller
-11-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997 DEC-31-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997 SEP-30-1997
<CASH> 68164 73557 73557
<SECURITIES> 246079 158404 158404
<RECEIVABLES> 78850 45628 45628
<ALLOWANCES> 1218 1206 1206
<INVENTORY> 7554 5404 5404
<CURRENT-ASSETS> 405656 231143 231143
<PP&E> 109629 83681 83681
<DEPRECIATION> 65950 54114 54114
<TOTAL-ASSETS> 472693 327099 327099
<CURRENT-LIABILITIES> 69175 48343 48343
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 32599 22045 22045
<OTHER-SE> 294042 236118 236118
<TOTAL-LIABILITY-AND-EQUITY> 472693 327099 327099
<SALES> 99715 71306 189719
<TOTAL-REVENUES> 99715 71306 189719
<CGS> 73490 52360 141825
<TOTAL-COSTS> 77477 56450 153421
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 588 310 925
<INTEREST-EXPENSE> 1063 299 496
<INCOME-PRETAX> 25617 17856 43964
<INCOME-TAX> 8908 6264 16234
<INCOME-CONTINUING> 16709 11592 27730
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 16709 11592 27730
<EPS-PRIMARY> 0.17 0.12 0.29
<EPS-DILUTED> 0.17 0.12 0.28
</TABLE>
