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, 1999
___________________________
CONCORD EFS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2462252
______________________________ _____________________
(State or other jurisdiction of (IRS 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, $0.33 1/3 par value, as
of September 30, 1999 was 205,660,135.
CONCORD EFS, INC. AND SUBSIDIARIES
INDEX
Page No.
--------
PART 1- Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998 1
Condensed Consolidated Statements of Income Three Months and
Nine Months ended September 30, 1999 and September 30, 1998 3
Condensed Consolidated Statements of Cash Flows
Nine Months ended September 30, 1999 and September 30, 1998 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 17
PART II - Other Information
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30 December 31
1999 1998
----------- -----------
ASSETS (In thousands)
CURRENT ASSETS
Cash and cash equivalents $ 133,562 $ 82,029
Securities available-for-sale 426,708 288,180
Accounts receivable, net 136,145 106,662
Inventories 14,883 11,396
Prepaid expenses and other 13,803 7,863
Deferred income taxes 8,750 5,977
----------- -----------
TOTAL CURRENT ASSETS 733,851 502,107
OTHER ASSETS 17,785 23,615
PROPERTY AND EQUIPMENT 334,329 302,937
Less accumulated depreciation
and amortization (174,473) (148,447)
----------- -----------
159,856 154,490
INTANGIBLE ASSETS 160,489 146,712
Less accumulated amortization (54,334) (42,806)
----------- -----------
106,155 103,906
----------- -----------
TOTAL ASSETS $ 1,017,647 $ 784,118
=========== ===========
See Notes to Condensed Consolidated Financial Statements - Unaudited.
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<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30 December 31
1999 1998
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (In thousands)
CURRENT LIABILITIES
Accounts payable and $ 172,963 $ 112,376
other liabilities
Accrued liabilities 67,090 47,641
Income taxes payable 15,804 10,148
Short-term borrowings - 21,000
Current maturities of long-term debt - 25,116
----------- -----------
TOTAL CURRENT LIABILITIES 255,857 216,281
LONG-TERM DEBT, LESS CURRENT MATURITY 80,000 173,000
DEFERRED INCOME TAXES 10,364 21,336
OTHER LIABILITIES 8,227 12,966
STOCKHOLDERS' EQUITY
Common Stock-par value $0.33 1/3
per share; authorized 500.0 million
shares, issued and outstanding 205.6
million shares at September 30, 1999;
issued and outstanding 191.9 million
shares at December 31, 1998 68,553 42,646
Other stockholders' equity 594,646 317,889
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 663,199 360,535
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,017,647 $ 784,118
=========== ===========
See Notes to Condensed Consolidated Financial Statements - Unaudited.
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<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30 September 30
--------------------- ---------------------
1999 1998 1999 1998
------- ------- ------- -------
(In thousands, except per share data)
Revenue $216,147 $167,555 $580,105 $457,479
Cost of operations 152,882 118,033 411,027 322,318
Selling, general and
administrative expenses 13,116 12,576 38,048 38,257
Acquisition expenses and
restructuring charges - - 34,810 -
------- ------- ------- -------
OPERATING INCOME 50,149 36,946 96,220 96,904
Other income (expense):
Interest income 7,005 4,610 17,749 12,564
Interest expense (1,484) (3,767) (8,628) (10,772)
------- ------- ------- -------
INCOME BEFORE TAXES 55,670 37,789 105,341 98,696
Income taxes 20,086 14,024 43,359 36,251
------- ------- ------- -------
NET INCOME $35,584 $23,765 $61,982 $62,445
======= ======= ======= =======
Per share data:
Weighted average shares 205,159 191,640 196,931 191,443
======= ======= ======= =======
Basic earnings per share $0.17 $0.12 $0.31 $0.33
======= ======= ======= =======
Adjusted weighted average
shares and assumed
conversions 211,935 196,149 204,233 196,681
======= ======= ======= =======
Diluted earnings per share $0.17 $0.12 $0.30 $0.32
======= ======= ======= =======
See Notes to Condensed Consolidated Financial Statements - Unaudited.
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<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30
---------------------
1999 1998
-------- --------
NET CASH PROVIDED BY OPERATING (In thousands)
ACTIVITIES $169,088 $ 95,024
INVESTING ACTIVITIES:
Acquisition of property and equipment (34,903) (51,714)
Purchases of securities available-for-sale (225,819) (146,705)
Purchase of securities held-to-maturity (9,630)
Sale of securities available-for-sale 44,977 67,617
Maturities of securities available-for-sale 22,414 4,844
Maturities of securities held-to-maturity 33,681
Merchants contracts purchased (13,999) (11,851)
Other (6,596)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (207,330) (120,354)
FINANCING ACTIVITIES:
Proceeds from sale of common stock 228,891 2,621
Proceeds from notes payable 7,000 45,000
Payments under credit agreement, net (21,000)
Payments on notes payable (125,116) (20,294)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 89,775 27,327
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 51,533 1,997
Cash and cash equivalents at beginning
of period 82,029 82,592
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $133,562 $ 84,589
======== ========
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.
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<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1999
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 considered
necessary for a fair presentation have been included. Operating results for the
six month period ended September 30, 1999 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1999. 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, 1998.
The balance sheet at December 31, 1998 has been derived from the consolidated
audited financial statements included in exhibit 99 of the Company's Form 10-K
for the year ended December 31, 1998. The balance sheet does not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements.
Certain amounts have been reclassified from prior period consolidated financial
statements to conform with the current year presentation.
Restatement for Poolings
The historical financial information presented in this Form 10-Q has been re-
stated to include the results of Electronic Payment Services, Inc. ("EPS"). EPS
was acquired in a pooling-of-interests transaction, and in accordance with
pooling-of-interests method of accounting, no adjustments have been made to the
historical carrying amounts of assets and liabilities of EPS. However, the
financial information has been restated to include the operating results of EPS
for all stated periods prior to the combination.
On February 18, 1999, the stockholders approved the Company's issuance of shares
in connection with its acquisition of EPS. The Company completed the merger with
EPS on February 26, 1999 by exchanging 30,064,835 shares of the Company's common
stock for all of the outstanding common stock of EPS. EPS provides transaction
processing services to financial institutions and retailers throughout the
United States. EPS also owns and operates electronic data processing and
data-capture networks that process transactions originating at ATMs and
point-of-sale terminals.
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<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
SEPTEMBER 30, 1999
Restatement for Pooling - continued
The following table presents selected financial information, in thousands, split
between the Company and EPS for the three and nine month periods ended September
30, 1999 and 1998, respectively.
Three months ended Nine months ended
September 30 September 30
----------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenue
Concord EFS, Inc. $216,147 $ 99,715 $534,000 $266,570
EPS (1) 67,840 46,105 190,909
-------- -------- -------- --------
$216,147 $167,555 $580,105 $457,479
======== ======== ======== ========
Net income
Concord EFS, Inc. $ 35,584 $ 16,709 $57,068 $ 43,883
EPS (1) 7,056 4,914 18,562
-------- -------- -------- --------
$ 35,584 $ 23,765 $61,982 $ 62,445
======== ======== ======== ========
(1) The 1999 amounts reflect the results of operations from January 1, 1999
through February 28, 1999. The results of operations from March 1, 1999 to
June 30, 1999 are included in Concord EFS, Inc. amounts.
Stock Split
The Board of Directors approved a three-for-two stock split on August 26, 1999.
Shareholders of record as of September 15, 1999 were distributed additional
shares on September 22, 1999. Earnings per share and per share data have been
restated to reflect the stock split.
Offering of Common Stock
During the previous quarter ended June 30, 1999, the Company filed a
registration statement with the Securities and Exchange Commission offering
2,000,000 shares of its common stock, and the selling stockholders named in the
registration statement selling 29,659,125 shares of common stock for a total of
31,659,125 shares of common stock. As described in the registration statement,
the selling stockholders were the previous owner banks of EPS who received
unregistered common stock of the Company in connection with the February 26,
1999 acquisition. The underwriters named in the registration statement had the
option to purchase up to 4,748,000 additional shares of common stock from the
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<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
Offering of Common Stock - continued
Company. This option was exercised for a total of 36,407,125 shares of common
stock sold in the offering. Net of the underwriting discount and estimated other
expenses of the offering, the Company received $207.8 million for the 6,748,000
shares of common stock issued. The Company did not receive any proceeds from the
sale of shares by the selling stockholders.
Comprehensive Income
Total comprehensive income was $32,437 and $25,667 for the three months ended,
September 30, 1999 and 1998, respectively. Total comprehensive income, in
thousands, was $51,878 and $64,490 for the nine months ended, September 30, 1999
and 1998, respectively.
Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
------- ------- ------- -------
Numerator:
Net income $35,584 $23,765 $61,982 $62,445
======= ======= ======= =======
Denominator:
Denominator for basic earnings per
share, weighted-average shares 205,159 191,640 196,931 191,443
Effect of dilutive securities,
employee stock options 6,776 4,509 7,302 5,238
------- ------- ------- -------
Denominator for diluted earnings
per share adjusted for weighted-
average shares and assumed
conversions 211,935 196,149 204,233 196,681
======= ======= ======= =======
Basic earnings per share $0.17 $0.12 $0.31 $0.33
======= ======= ======= =======
Diluted earnings per share $0.17 $0.12 $0.30 $0.32
======= ======= ======= =======
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<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
SEPTEMBER 30, 1999
Earnings Per Share - continued
Excluding acquisition costs and restructuring charges described in management's
discussion and analysis of financial condition and results of operations, basic
and diluted earnings per share for the nine month period ended September 30,
1999 were $0.45 and $0.44, respectively.
Earnings per share and related per share data have been restated to reflect all
stock splits.
Operations By Industry Segment
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," which establishes standards for reporting
financial information about operating segments in annual and interim financial
statements. SFAS No. 131 requires that financial information be reported on the
same basis that is reported internally for evaluating segment performance and
allocating resources to segments. SFAS No. 131 addresses how supplemental
financial information is disclosed in annual and interim reports; therefore, its
adoption in 1998 had no impact on the financial condition or operating results
of the Company.
Concord has two reportable segments: Merchant Services and ATM Services.
Merchant Services results from processing credit card transactions for all major
credit card brands including VISA, MasterCard, American Express, Discover and
Diners Club; the processing of debit card transactions for financial
institutions issuing these and similar cards; and the provision of electronic
payment services to supermarket chains and multiple lane retailers, financial
institutions, petroleum and convenience stores, grocery stores, trucking
companies and other retailers.
ATM Services include transactional fee income and surcharge revenue from ATMs
owned by the Company as well as ATM transaction processing for ATMs owned by the
Company's merchants.
The Company evaluates performance and allocates resources based on profit or
loss from operations. Items classified as "Other" include revenue not
identifiable with the two reportable segments described above and costs of
operations and selling, general and administrative expenses which are not
allocated to the reportable segments.
No single customer of the Company accounts for a material portion of the
Company's revenues.
Certain amounts have been reclassified from prior period consolidated financial
information to conform with the current year presentation.
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<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
SEPTEMBER 30, 1999
Operations By Industry Segment - continued
Industry segment information, in thousands, for the three and nine month periods
ended September 30, 1999 and 1998 is presented below:
Merchant ATM
Services Services Other Total
---------- ---------- ---------- ----------
Three months ended
September 30, 1999
Revenue $146,818 $ 64,758 $ 4,571 $ 216,147
Cost of operations (93,731) (38,812) (20,339) (152,882)
Selling, general, &
administrative expenses (13,116) (13,116)
Taxes & interest, net (14,565) (14,565)
---------- ---------- ---------- ----------
Net income (loss) $ 53,087 $ 25,946 $ (43,449) $ 35,584
========== ========== ========== ==========
Three months ended
September 30, 1998
Revenue $112,334 $ 51,996 $ 3,225 $ 167,555
Cost of operations (68,016) (31,432) (18,585) (118,033)
Selling, general, &
administrative expenses (12,576) (12,576)
Taxes & interest, net (13,181) (13,181)
---------- ---------- ---------- ----------
Net income (loss) $ 44,318 $ 20,564 $ (41,117) $ 23,765
========== ========== ========== ==========
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<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
SEPTEMBER 30, 1999
Operations By Industry Segment - continued
Merchant ATM
Services Services Other Total
---------- ---------- ---------- ----------
Nine months ended
September 30, 1999
Revenue $392,259 $173,911 $ 13,935 $ 580,105
Cost of operations (248,101) (101,490) (61,436) (411,027)
Acquisition costs and
restructuring charges (34,810) (34,810)
Selling, general, &
administrative expenses (38,048) (38,048)
Taxes & interest, net (34,238) (34,238)
---------- ---------- ---------- ----------
Net income (loss) $144,158 $ 72,421 $(154,597) $ 61,982
========== ========== ========== ==========
Nine months ended
September 30, 1998
Revenue $302,626 $146,351 $ 8,502 $ 457,479
Cost of operations (180,696) (88,341) (53,281) (322,318)
Selling, general, &
administrative expenses (38,257) (38,257)
Taxes & interest, net (34,459) (34,459)
---------- ---------- ---------- ----------
Net income (loss) $121,930 $ 58,010 $(117,495) $ 62,445
========== ========== ========== ==========
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<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" information, within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities Act of
1934, as amended. Any such statements are not guarantees for future performance
and involve risks and uncertainties, and actual results may differ materially
from those contemplated by such forward-looking statements. Important factors
that could cause actual results to differ materially from those in
forward-looking statements include (i) the loss of key personnel or inability to
attract additional qualified personnel, (ii) the failure to fully integrate the
operations of Electronic Payment Services, (iii) changes in card association
rules, (iv) changes in card association fees, (v) restrictions on surcharging or
a decline in the deployment of automated teller machines, (vi) dependence on
VISA and MasterCard registrations, (vii) the credit risk of merchant customers,
(viii) susceptibility to fraud at the merchant level, (ix) the failure of the
Company, its vendors or its customers to appropriately manage Year 2000 code
problems, (x) increasing competition, (xi) the success of a new VISA debit card
product, (xii) the loss of key customers, (xiii) continued consolidation in the
banking and retail industries, (xiv) risks related to acquisitions, (xv) changes
in rules and regulations governing financial institutions, (xvi) the inability
to remain current with rapid technological change, (xvii) dependence on
third-party vendors, (xviii) the imposition of additional state taxes, (xix)
volatility of the Company's common stock price and (xx) changes in interest
rates. 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.
Recent Acquisitions
On February 26, 1999 the Company completed its acquisition of EPS, a company
which provides transaction processing services to financial institutions and
retailers throughout the United States. The acquisition was accounted for as a
pooling of interests in which the Company exchanged 30.1 million of its shares
for all of the outstanding common stock of EPS. The Company incurred $34.8
million of expenses related to the acquisition in the first quarter of 1999.
These expenses included communication conversion costs, advisory fees and asset
write-offs. Management continues to review potential operational synergies from
the acquisition, such as duplicate facilities, computer hardware and software
and other contractual relationships.
Restatement for Pooling
The historical financial information presented in this Form 10-Q has been
restated to include the results of EPS. In accordance with pooling-of- interests
method of accounting, no adjustments have been made to the historical carrying
amounts of assets and liabilities of EPS. However, the financial information has
been restated to include the operating results of EPS for all stated periods
prior to the combination.
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<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Overview
Concord EFS, Inc. (the "Company") is a fully integrated leading provider of
electronic transaction authorization, processing, settlement and funds transfer
services on a nationwide basis. The Company focus on marketing its services to
supermarket chains and multiple lane retailers, financial institutions,
petroleum and convenience stores, grocery stores, the trucking industry and
other retailers. The Company's primary activity is Merchant Services, in which
it provides integrated electronic transaction services for credit card, debit
card and electronic benefits transfer ("EBT") card transactions. These
transaction services include data capture, authorization and settlement services
for over 400,000 point-of-sale terminals. The Company also provides automated
teller machine ("ATM") Services, consisting of owning and operating the MAC-
branded electronic funds transfer network and processing for approximately
35,000 ATMs nationwide, of which it owns approximately 1,000.
The substantial majority of the Company's revenue (67.9% in the third quarter of
1999 and 67.0% in the third quarter of 1998) is generated from fee income
related to Merchant Services. These services include:
-- the processing of credit card transactions for all major credit card brands
including VISA, MasterCard, American Express, Discover and Diners Club;
-- the processing of debit card transactions for financial institutions
issuing these and similar cards; and
-- the provision of electronic payment services to supermarket chains and
multiple lane retailers, financial institutions, petroleum and convenience
stores, grocery stores, trucking companies and other retailers.
Revenue from Merchant Services includes primarily discount fees charged to
merchants, which are a percentage of the dollar amount of each credit card
transaction the Company processes, as well as a flat fee per transaction. The
discount fee is negotiated with each merchant and typically constitutes a
bundled rate for the transaction authorization, processing, settlement and funds
transfer services we provide. This revenue and fees from other transactions are
recognized at the time the merchants' transactions are processed.
The other principal component of the Company's revenue derives from ATM Services
(approximately 30.0% in the third quarter of 1999 and 31.0% in the third quarter
of 1998). ATM Services revenue consists of fee income and other surcharges
charged for proprietary ATMs, processing fees for third party ATMs and
terminals, and other access, switching and card processing fees. The remaining
balance of the Company's revenue is derived principally from check verification
and authorization services, sales of point-of-sale terminals and payroll
processing services.
Cost of operations includes all costs directly attributable to the provision of
services to the Company's customers. The most significant component of cost of
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<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Overview - continued
operations includes interchange and assessment fees, which are amounts charged
by the credit and debit card associations. Interchange and assessment fees are
billed primarily as a percentage of dollar volume processed and, to a lesser
extent, as a per-transaction fee. Cost of operations also includes
telecommunications costs, occupancy costs, depreciation, the cost of equipment
leased and sold, operating salaries and wages, amortization of merchant
contracts and other intangibles, the cost of operating the Company's MAC network
and other miscellaneous merchant supplies and services expenses.
The Company's selling, general and administrative expenses include salaries and
wages, and other general administrative expenses (including certain amortization
costs).
Results of Operations
Revenue increased 29.0% to $216.1 million in the third quarter of 1999 from
$167.6 million in the third quarter of 1998. Of 1999 revenue, merchant services,
ATM services and other services accounted for 67.9%, 30.0% and 2.1%,
respectively of revenue. Revenue from merchant services, increased 30.7%, due
primarily to increased transactional volumes. Increased volumes resulted from
the addition of new merchants, the widening acceptance of debit and EBT card
transactions at new and existing merchants and higher credit card transaction
processing fees. The increase in fees was a pass through to customers of higher
interchange processing fees that were assessed by the credit card associations
in April 1998 and April 1999. ATM services revenue increased 24.5%; the
placement of new ATMs, new ATM processing customers and increases in
transactional volumes and the conversion to in house processing of offline debit
transactions accounted for the increase. Other revenue increased 41.7% due to
increased terminal sales primarily to our new merchants.
Cost of operations increased in the third quarter of 1999 to 70.7% of revenue
compared to 70.4% in the prior year. Credit card association interchange fees
and certain other transactional related costs were higher as a percentage of
revenue in the third quarter of 1999 than in the same period of 1998. This was
largely offset by a decrease, as a percentage of revenue, in payroll expenses
and other operating expenses.
Net income as a percentage of revenue was 16.5% and 14.2% in the third quarter
of 1999 and 1998, respectively. The increase in cost of operations as a
percentage of revenue described above, was offset by selling, general and
administrative expenses, net interest income and income taxes improved as a
percentage of revenue. Selling, general and administrative expenses increased to
$13.1 million in the third quarter of 1999 from $12.6 million in 1998 as
increased salaries and wages were offset by lower legal costs. Net interest
income increased to $5.5 million in the third quarter of 1999 from $0.8 million
in the third quarter of 1998 as net proceeds a common stock offering in June
1999 of approximately $208 million was used to repay approximately $146 million
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<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Results of Operations - continued
in long term debt. The balance of the offering along with available cash from
operations was invested in securities available for sale resulting in an
increase in net interest income. The effective tax rate dropped from 37.1% in
the third quarter of 1998 to 36.1% in the third quarter of 1999 which also
improved net income as a percentage of revenue.
For the nine months ended September 30, 1999, revenue increased 26.8% to $580.1
million from $457.5 million. Of 1999 revenue, merchant services, ATM services
and other services accounted for 67.6%, 30.0% and 2.4%, respectively of revenue.
Revenue from merchant card services increased 29.6% due primarily to increased
transactional volumes. Increased volumes resulted from the addition of new
merchants, the widening acceptance of debit and EBT card transactions at new and
existing merchants and higher credit card transaction processing fees. The
increase in fees was a pass through to customers of higher interchange
processing fees that were assessed by the credit card associations in April 1998
and April 1999. ATM services revenue increased 18.8%; the placement of new ATMs,
new ATM processing customers, increases in transactional volumes and the
conversion to in house processing of offline debit transactions accounted for
the increase. Other revenue increased 63.9% due to increased terminal sales
primarily to our new merchants.
Net income as a percentage of revenue was 10.7% and 13.6% in the nine months
ended of 1999 and 1998, respectively. The primary factor in the change was the
acquisition expenses and restructuring charges incurred in the first quarter of
1999 in connection with the acquisition of EPS. The total pretax charges were
$34.8 million. No additional acquisition expenses or restructuring charges were
incurred in the third quarter of 1999. For a detailed explanation of the pretax
expenses and charges please see the Company's Form 10-Q for the quarter ended
March 31, 1999.
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<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Results of Operations - continued
The pretax expenses and charges incurred in the first quarter and remaining
reserve balances, in millions, are summarized as follows:
Acquisition
Expenses and Reserve
Cash or Restructuring Balance
Description Non-cash Charges Activity at 9/30/99
-------------------- -------- ------------- -------- ----------
Acquisition expenses cash $10.5 $10.5 $ -
Communication
conversion costs cash 12.4 0.3 12.1
Asset write-offs non-cash 8.2 8.2 -
Off-line debit
conversion cash 2.8 2.8 -
Severance and other cash 0.9 0.9 -
----- ----- -----
$34.8 $22.7 $12.1
===== ===== =====
Due to the year 2000 preparedness efforts of the Company and our customers, the
communication conversion project is not expected to begin in force until after
January 15, 2000. The project is expected to be substantially complete by the
end of the year 2000.
In addition to the pre-tax charges, a tax component write off of $1.3 million
for impaired state tax net operating losses of EPS was incurred. Combined with
the non-tax deductibility of certain acquisition costs, these items increased
income taxes as a percentage of revenue for the nine months ended September 30,
1999.
Excluding the $34.8 million in restructuring charges and acquisition expenses
described above, cost of operations increased in the nine months ended of 1999
from 70.9% of revenue compared to 70.5% in the same period of the prior year.
Credit card association interchange fees and certain other transactional related
costs were higher as a percentage of revenue during the nine months ended
September 30, 1999 than in the same period of 1998. This was largely offset by a
decrease, as a percentage of revenue, in payroll expenses, depreciation and
certain amortization and other operating expenses.
-15-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Results of Operations - continued
Excluding the restructuring charges and acquisition expenses, net income as a
percentage of revenue increased to 15.3% for the nine months ended September 30,
1999 from 13.6% in the same period of the prior year. The primary factors for
the improvement were selling, general and administrative expenses declining to
$38.0 million for the nine months ended September 30, 1999 from $38.3 million in
the same period of the prior year offset by the increase in cost of operations
as a percentage of revenue, described above.
Liquidity and Capital Resources
In the nine months ended September 30 1999, the Company generated $169.1 million
from operating activities. The Company also received $7.0 million in proceeds
from notes payable, $207.8 million from an offering of stock, and $21.1 million
from stock issued from exercises of options under the Company's stock option
plans. From cash provided from operating and financing activities, $158.4
million was invested in securities, net of sales and maturities, $34.9 million
was disbursed on capital additions, $14.0 million was spent to purchase merchant
contracts, long-term debt was reduced by $125.1 million, and short-term
borrowings of $21.0 million were paid off. The capital additions were primarily
for communications equipment, point-of-sale terminals, new computer equipment
and capitalized software.
The Company believes that available credit and cash generated from operations
are adequate to meet the Company's capital needs. EFS National Bank and EFS
Federal Savings Bank, wholly-owned subsidiaries of the Company, exceed required
regulatory capital ratios.
Impact of Year 2000
The Year 2000 preparedness efforts of the Company cover both information
technologies ("IT") and non-IT systems. Non-IT systems include those systems
used in the daily operations of buildings and facilities. IT systems include
computer hardware, software and related applications.
The Company has instituted a five-phase plan with the goal of having its IT and
non-IT systems function properly with respect to dates in the year 2000 and
beyond. These five phases are: awareness, assessment, renovation, validation and
implementation. Based on progress to date, the Company has completed all five
phases for all systems.
There is no guarantee that the systems of other companies on which the Company's
systems rely will be converted in a timely manner. However, contingency plans
have been created for all mission critical vendor products and services. The
contingency plans have been further enhanced and expanded to include business
resumption planning. These plans include both the Company's internal mission
critical systems and third-party exposures, based on the evaluation of progress
at that time.
-16-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Impact of Year 2000 - continued
Additional testing of new or remediated systems and applications will continue
as needed. Any new system must be tested and approved by the Year 2000 Committee
for necessity and Year 2000 impact before development and implementation begins.
Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes to our disclosures on quantitative and
qualitative disclosures about market risk since December 31, 1998. For
additional information, refer to Exhibit 99 - Supplemental Consolidated
Financial Statements in our Form 10-K for the year ended December 31, 1998.
-17-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K.
(a) Exhibits
none
(b) Reports on Form 8-K
none
-18-
<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 15, 1999 By: /s/ Dan M. Palmer
---------------------------
Dan M. Palmer
Chairman of the Board and
Chief Executive Officer
Date: November 15, 1999 By: /s/ Thomas J. Dowling
---------------------------
Thomas J. Dowling
Vice President and Chief
Financial Officer
-19-
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