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 quarterly period ended Commission file number 0-13848
September 30, 2000
___________________________
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 November 10, 2000 was 215,961,325.
<PAGE>
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, 2000
and December 31, 1999 1
Condensed Consolidated Statements of Income Three
Months and Nine Months ended September 30, 2000
and September 30, 1999 3
Condensed Consolidated Statements of Cash Flows
Nine Months ended September 30, 2000 and September 30, 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 18
PART II - Other Information
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30 December 31
2000 1999
------------- ------------
(in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 134,727 $ 122,504
Securities available for sale 569,920 459,664
Accounts receivable, net 194,381 164,492
Inventories 13,370 18,076
Prepaid expenses and other current assets 19,664 11,573
Deferred income taxes 6,011 9,235
------------ ------------
TOTAL CURRENT ASSETS 938,073 785,544
LOANS, net 73,606 30,391
PROPERTY AND EQUIPMENT, net 189,302 168,169
GOODWILL, net 54,105 54,046
OTHER INTANGIBLE ASSETS, net 72,259 57,186
OTHER ASSETS 8,274 16,308
------------ ------------
TOTAL ASSETS $1,335,619 $1,111,644
============ ============
See notes to condensed consolidated financial statements.
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CONCORD EFS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED
(UNAUDITED)
September 30 December 31
2000 1999
------------- ------------
(in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other liabilities $ 192,005 $ 130,848
Deposits 119,415 100,475
Accrued liabilities 50,387 51,145
Income taxes payable 14,431 16,591
------------ ------------
TOTAL CURRENT LIABILITIES 376,238 299,059
------------ ------------
LONG-TERM DEBT 81,000 75,000
DEFERRED INCOME TAXES 17,661 16,566
OTHER LIABILITIES 4,009 9,669
------------ ------------
TOTAL LIABILITIES 478,908 400,294
------------ ------------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Common stock 71,788 71,536
Other stockholders' equity 784,923 639,814
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 856,711 711,350
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,335,619 $1,111,644
============ ============
See notes to condensed consolidated financial statements.
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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
----------------------- -----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(in thousands, except per share data)
Revenue $318,700 $231,253 $876,085 $621,805
Cost of operations 233,448 162,838 645,618 438,296
Selling, general and
administrative expenses 14,590 15,988 43,122 46,123
Acquisition expenses and
restructuring charges 10,915 - 11,691 34,810
--------- --------- --------- ---------
OPERATING INCOME 59,747 52,427 175,654 102,576
Other income (expense):
Interest income 11,952 7,071 31,417 17,874
Interest expense (2,662) (1,484) (6,962) (8,628)
--------- --------- --------- ---------
INCOME BEFORE TAXES 69,037 58,014 200,109 111,822
Income taxes 24,984 20,442 71,664 44,355
--------- --------- --------- ---------
NET INCOME $ 44,053 $ 37,572 $128,445 $ 67,467
========= ========= ========= =========
Pro forma provision
for income taxes - 598 260 1,653
--------- --------- --------- ---------
PRO FORMA NET INCOME $ 44,053 $ 36,974 $128,185 $ 65,814
========= ========= ========= =========
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CONCORD EFS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - CONTINUED
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- -----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
HISTORICAL AND PRO FORMA
PER SHARE DATA:
Basic earnings $ 0.20 $ 0.18 $ 0.60 $ 0.33
========= ========= ========= =========
Diluted earnings $ 0.20 $ 0.17 $ 0.58 $ 0.32
========= ========= ========= =========
Weighted average basic
shares outstanding 215,138 213,884 214,871 205,656
========= ========= ========= =========
Weighted average diluted
shares outstanding 224,228 220,660 221,938 212,958
========= ========= ========= =========
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
-----------------------
2000 1999
---------- ----------
(in thousands)
NET CASH PROVIDED BY OPERATING ACTIVITIES $202,991 $156,864
INVESTING ACTIVITIES:
Acquisition of securities available for sale (160,945) (227,819)
Sale of securities available for sale 36,579 44,977
Maturities of securities available for sale 20,528 22,999
Acquisition of property and equipment (52,252) (35,157)
Loans purchased (53,657) (10,065)
Loan principal payments received 10,893 524
Merchants contracts purchased (25,471) (14,174)
Other, net 2,260 -
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (222,065) (218,715)
FINANCING ACTIVITIES:
Net increase in deposits 18,940 22,773
Proceeds from sale of common stock 7,326 228,891
Retirement of common stock - (119)
Proceeds from notes payable 24,000 7,000
Payments under credit agreement, net - (21,000)
Payments on notes payable (18,969) (125,116)
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 31,297 112,429
---------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS 12,223 50,578
Cash and cash equivalents
at beginning of period 122,504 84,674
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $134,727 $135,252
========== ==========
See notes to condensed consolidated financial statements.
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CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2000
Note A - 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 nine month period ended September 30,
2000 are not necessarily indicative of the results that may be expected for the
year ended December 31, 2000. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Concord EFS, Inc. and
Subsidiaries (Company) annual report on Form 10-K for the year ended December
31, 1999.
Restatement of Historical Financial Information
The historical financial information presented herein has been restated in
accordance with pooling of interests method of accounting for business
combinations. The financial information reflects the financial position,
operating results and cash flows of the respective companies as though the
companies were combined for all periods presented.
Certain amounts have been reclassified from prior period consolidated financial
statements to conform with the current year presentation.
Recent Pronouncements
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement will be adopted effective
January 1, 2001, but it is not expected to materially impact the Company's
financial statements.
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<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2000
Note B - Recent Acquisitions
The Company entered into an agreement and plan of merger as of October 6, 2000
with Star Systems, Inc. (Star), an EFT network based in Maitland, Florida. In
connection with the closing of the merger, Concord will issue 24.75 million
shares of common stock for all of the outstanding shares of Star Systems' common
stock. The merger is expected to be completed during the first half of 2001,
subject to regulatory approval and other closing conditions, and is expected to
be accounted for as a pooling of interests transaction. For further information
see our Form 8-K dated October 9, 2000.
On August 21, 2000, the Company acquired Cash Station Inc. (Cash Station), an
electronic funds transfer network based in Chicago, Illinois. The acquisition
was accounted for as a pooling of interests transaction in which Concord issued
2.5 million shares of its common stock.
On January 31, 2000, the Company acquired Card Payment Systems (CPS), a New
York-based reseller of payment processing services. The acquisition was
accounted for as a pooling of interests transaction in which Concord issued 6.2
million shares of its common stock. CPS provides card-based payment processing
services to independent sales organizations (ISOs), which in turn sell those
services to retailers.
CPS was an S-Corporation for tax purposes prior to its merger with Concord. As
such, the former owners of CPS were responsible for income taxes for the periods
prior to the merger. CPS terminated its S-Corporation election at the time of
the merger with the Company according to Internal Revenue Service regulations.
On February 7, 2000 the Company announced completion of its acquisition of
Virtual Cyber Systems (VCS), an internet software development company. The
acquisition of VCS, for which the Company paid approximately $1.7 million in
common stock, was accounted for as a purchase transaction and is immaterial to
the Company's financial statements.
-7-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2000
Note B - Recent Acquisitions, continued
The following table represents selected unaudited financial information, in
thousands, split between the Company and recent acquisitions:
Three months ended Nine months ended
September 30 September 30
--------------------- ---------------------
2000 1999 2000 1999
-------- -------- -------- --------
Pro forma revenue
Concord EFS, Inc. $318,700 $216,147 $862,544 $580,105
Cash Station (1) - 4,681 9,494 13,631
CPS (2) - 10,425 4,047 28,069
-------- -------- -------- --------
Combined $318,700 $231,253 $876,085 $621,805
======== ======== ======== ========
Pro forma net income
Concord EFS, Inc. $ 44,053 $ 35,584 $126,979 $ 61,982
Cash Station (1) - 229 816 623
CPS (2) - 1,759 650 4,862
Pro forma provision
for CPS income
taxes (3) - 598 260 1,653
-------- -------- -------- --------
Combined $ 44,053 $ 36,974 $128,185 $ 65,814
======== ======== ======== ========
Pro forma basic earnings
per share combined $0.20 $0.17 $0.60 $0.32
======== ======== ======== ========
Pro forma diluted earnings
per share combined $0.20 $0.17 $0.58 $0.31
======== ======== ======== ========
(1) The nine months ended September 30, 2000 amounts reflect the results of
Cash Station operations from January 1, 2000 through June 30, 2000
(unaudited). Cash Station results of operations from July 1, 2000 to
September 30, 2000 are included in Concord EFS, Inc. amounts.
(2) The nine months ended September 30, 2000 amounts reflect the results of CPS
operations from January 1, 2000 through January 31, 2000 (unaudited). The
CPS results of operations from February 1, 2000 to September 30, 2000 are
included in Concord EFS, Inc. amounts.
(3) The results of operations include pro forma income taxes that would have
been required if CPS had been a C-Corporation.
-8-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
SEPTEMBER 30, 2000
Note C - Comprehensive Income
Total comprehensive income was $47,214 and $34,425, in thousands, for the three
months ended, September 30, 2000 and 1999, respectively. Total comprehensive
income was $133,216 and $57,363, in thousands, for the nine month period ended,
September 30, 2000 and 1999, respectively.
Note D - 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
2000 1999 2000 1999
-------- -------- -------- --------
Numerator:
Net income $ 44,053 $ 37,572 $128,445 $ 67,467
======== ======== ======== ========
Denominator:
Denominator for basic earnings
per share, weighted-average
shares 215,138 213,884 214,871 205,656
Effect of dilutive securities,
employee stock options 9,090 6,776 7,067 7,302
-------- -------- ------- --------
Denominator for diluted earnings
per share adjusted for weighted-
average shares and assumed
conversions 224,228 220,660 221,938 212,958
======== ======== ======== ========
Basic earnings per share $0.20 $0.18 $0.60 $0.33
======== ======== ======== ========
Diluted earnings per share $0.20 $0.17 $0.58 $0.32
======== ======== ======== ========
Excluding acquisition costs and restructuring charges described in management's
discussion and analysis of financial condition and results of operations,
diluted earnings per share for the three month periods ended September 30, 2000
and 1999 were $0.23 and $0.17, respectively, and the nine month periods ended
September 30, 2000 and 1999 were $0.62 and $0.44, respectively.
Earnings per share and related per share data have been restated to reflect all
stock splits.
-9-
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CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
SEPTEMBER 30, 2000
Note E - Segment Information
Industry segment information, in thousands, for the three and nine months ended
September 30, 2000 and 1999 is presented below. Merchant Services and ATM
Services segments are described in the Overview section to Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in this filing.
Merchant ATM
Services Services Other Total
---------- ---------- ---------- ----------
Three months ended
September 30, 2000
Revenue $223,376 $ 89,814 $ 5,510 $ 318,700
Cost of operations (175,010) (52,712) (5,726) (233,448)
Selling, general, &
administrative expenses - - (14,590) (14,590)
Acquisition &
restructuring charges - (10,915) - (10,915)
Taxes & interest, net - - (15,694) (15,694)
---------- ---------- ---------- ----------
Net income (loss) $ 48,366 $ 26,187 $ (30,500) $ 44,053
========== ========== ========== ==========
Three months ended
September 30, 1999
Revenue $157,243 $ 69,439 $ 4,571 $ 231,253
Cost of operations (118,716) (41,721) (2,401) (162,838)
Selling, general, &
administrative expenses - - (15,988) (15,988)
Acquisition &
restructuring charges - - - -
Taxes & interest, net - - (14,855) (14,855)
---------- ---------- ---------- ----------
Net income (loss) $ 24,232 $ 14,983 $ (29,340) $ 37,572
========== ========== ========== ==========
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<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
SEPTEMBER 30, 2000
Note E - Segment Information - continued
Industry segment information, in thousands, for the nine month period ended
September 30, 2000 and 1999 is presented below:
Merchant ATM
Services Services Other Total
---------- ---------- ---------- ----------
Nine months ended
September 30, 2000
Revenue $616,145 $248,811 $ 11,129 $ 876,085
Cost of operations (491,140) (146,741) (7,737) (645,618)
Selling, general, &
administrative expenses - - (43,122) (43,122)
Acquisition &
restructuring charges (776) (10,915) - (11,691)
Taxes & interest, net - - (47,209) (47,209)
---------- ---------- ---------- ----------
Net income (loss) $124,229 $ 91,155 $ (86,939) $ 128,445
========== ========== ========== ==========
Nine months ended
September 30, 1999
Revenue $421,056 $187,615 $ 13,134 $ 621,805
Cost of operations (322,279) (109,905) (6,112) (438,296)
Selling, general, &
administrative expenses - - (46,123) (46,123)
Acquisition &
restructuring charges - - (34,810) (34,810)
Taxes & interest, net - - (35,109) (35,109)
---------- ---------- ---------- ----------
Net income (loss) $ 98,777 $ 77,710 $(109,020) $ 67,467
========== ========== ========== ==========
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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) changes in card association rules,
(iii) changes in card association fees, (iv) restrictions on surcharging or a
decline in the deployment of automated teller machines, (v) dependence on VISA
and MasterCard registrations, (vi) the credit risk of merchant customers, (vii)
susceptibility to fraud at the merchant level, (viii) receiving lower price
margins from higher volume merchants, (ix) increasing competition, (x) the loss
of key customers, (xii) continued consolidation in the banking and retail
industries, (xii) risks related to acquisitions, (xiii) changes in rules and
regulations governing financial institutions, (xiv) the inability to remain
current with rapid technological change, (xv) dependence on third-party vendors,
(xvi) the imposition of additional state taxes, (xvii) volatility of the
Company's common stock price and (xviii) 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.
Restatement of Historical Financial Information
The historical financial information presented herein has been restated in
accordance with pooling of interests method of accounting for business
combinations. The financial information reflects the financial position,
operating results and cash flows of the respective companies as though the
companies were combined for all periods presented.
Recent Developments
The Company announced an agreement to merge with Star Systems, Inc. (Star), an
EFT network based in Maitland, Florida. In connection with the closing of the
merger, Concord will issue 24.75 million shares of common stock for all of the
outstanding shares of Star Systems' common stock. The merger is expected to be
completed during the first half of 2001, subject to regulatory approval and
other closing conditions, and is expected to be accounted for as a pooling of
interests transaction.
On August 21, 2000, the Company acquired Cash Station Inc. (Cash Station), an
electronic funds transfer network based in Chicago, Illinois. The acquisition
was accounted for as a pooling of interests transaction in which Concord issued
2.5 million shares of its common stock.
-12-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Overview
The Company is a fully integrated leading provider of electronic transaction
authorization, processing, settlement and funds transfer services on a
nationwide basis. The Company focuses 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 both the MAC and Cash
Station-branded electronic funds transfer network and processing for
approximately 47,000 ATMs nationwide, of which it owns approximately 700.
The substantial majority of the Company's revenue (70.3% in 2000 and 67.7% in
1999) 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 occurring at point of sale
terminals at our merchants' businesses; 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 consists primarily of discount fees charged to
merchants, which are a percentage of the dollar amount of each credit card
transaction the Company processes, and may also include 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.
ATM Services revenue consists of processing fees for third party ATMs and
terminals, and other access, switching and card processing fees, and fee income
and other surcharges charged for proprietary ATMs. ATM Services revenue is
recognized at the time of the transaction.
The remaining balance of the Company's revenue is derived principally from check
verification and authorization services and sales of point-of-sale terminals.
-13-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Overview - continued
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
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
tele-communications 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 and
Cash Station networks 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 37.8% to $318.7 million in the third quarter of 2000 from
$231.3 million in the third quarter of 1999. Of 2000 revenue, Merchant Services,
ATM Services and Other Services accounted for 70.1%, 28.2% and 1.7%,
respectively of revenue. Revenue from Merchant Services, increased 42.1%, due
primarily to increased transactional volumes. Increased volumes resulted from
adding new merchants, increasing acceptance of electronic payment cards and the
cross-selling of settlement processing to several EPS higher volume merchants.
ATM Services revenue increased 29.3% on increased transactional volumes. Other
revenues increased 20.5% due primarily to increased terminal sales.
Net income as a percentage of revenue was 13.8% in the third quarter of 2000
compared to 16.2% in the third quarter of 1999. The decrease in margin was
primarily the result of acquisition and restructuring charges of $10.9 million
resulting from the acquisition of Cash Station.
The Cash Station charges, summarized on page 16 of this report, were $4.2
million for compensation and severance, $2.2 million for legal and accounting
fees and $4.5 million for network deconversion costs. Cash Station currently
outsources its transaction processing to a third party vendor. The Company
approved a plan to deconvert the existing transaction processing platform and
integrate that platform with MAC. The Company currently anticipates additional
compensation and severance expenses to be incurred in the fourth quarter of 2000
and these expenses may total approximately $1.0 million.
-14-
<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 pre-tax charges, net income as a percentage of revenue remained
the same at 16.2% in the third quarters of 2000 and 1999. The margin was the
result of increases, as a percentage of revenue, in cost of operations and taxes
which were offset by a combination of improvements, as a percentage of revenue,
in selling, general and administrative expenses, and net interest income.
Cost of operations increased to 73.3% of revenue in the third quarter of 2000
compared to 70.4% in the same period of the prior year. The increase in cost of
operations, as a percentage of revenue, was primarily due to lower margin
revenue principally from larger, higher volume merchants who command and deserve
lower transactional pricing. This lower margin revenue was primarily from the
cross-selling of settlement processing to several higher volume EPS merchants
and from bringing our off-line debit product in-house. The new lower margin
revenue was partially offset by other operating costs such as payroll,
depreciation and amortization and other certain operating costs, decreasing as a
percentage of revenue.
Selling, general and administrative expenses decreased from $16.0 million in the
third quarter of 1999 to $14.6 million in 2000. These expenses were down
slightly as higher salaries and wages were offset by lower legal and other
expenses. As a result, selling, general and administrative expenses were 4.6% of
revenue in the third quarter of 2000 versus 6.9% in 1999, a decrease of 2.3% as
a percentage of revenue.
Net interest income improved as a percentage of total revenue to 2.9% in the
third quarter of 2000 compared to 2.4% in the same period of the prior year.
Increased transaction settlement volumes contributed to interest earned from
overnight and short-term investments.
In the nine month period ended September 30, 2000, revenue increased 40.9% to
$876.1 million from $621.8 million in 1999. Of 2000 revenue, Merchant Services,
ATM Services and Other Services accounted for 70.3%, 28.4% and 1.3%,
respectively of revenue. Revenue from Merchant Services, increased 46.3%, due
primarily to increased transactional volumes. Increased volumes resulted from
adding new merchants, increasing acceptance of electronic payment cards and the
cross-selling of settlement processing to several EPS higher volume merchants.
ATM Services revenue increased 32.6%. Increased transactional volumes and
in-house processing of the EPS off-line debit product were the primary factors
for the increase. Other revenues decreased 15.3% due primarily to decreased
terminal sales.
Net income as a percentage of revenue was 14.7% for the nine month period ended
September 30, 2000 compared to 10.9% in 1999. The margin improvement was the
result of a combination of factors, with the primary factor being the decrease
in acquisition expenses and restructuring charges.
-15-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Results of Operations - continued
Acquisition expenses and restructuring charges were $11.7 million for the nine
month period ended September 30, 2000 compared to $34.8 million in the same
period of the prior year. The current year expenses were primarily advisory,
legal and accounting fees incurred in the acquisitions of CPS and Cash Station.
As of September 30, 2000, approximately $8.3 million of these expenses were
accrued but unpaid. The acquisition and restructuring charges of $34.8 million
incurred in the first quarter of 1999 were in connection with the acquisition of
EPS. Further impacting this comparison, certain nondeductible acquisition costs
and a tax component write-off of $1.3 million for impaired state tax net
operating losses were recognized. The pre-tax expenses and charges were for
acquisition expenses, communication conversion costs, asset write-offs, off-line
debit conversion and severance and other.
The following table details the reserve balance, in millions, from the various
acquisition expenses and charges:
First Third
Qtr.2000 Qtr.2000
Expenses Expenses
Cash or Balance & Charges & Charges Balance
Description Non-cash 12/31/99 Accrued Accrued Activity 9/30/00
------------------ -------- -------- -------- -------- -------- -------
EPS:
Communication
conversion costs Cash $11.3 - - $ 8.7 $ 2.6
Severance and other Cash 1.4 - - 1.3 0.1
CPS:
Advisory, Legal
and accounting Cash - $ 0.8 - 0.8 -
Cash Station:
Compensation and
severance Cash - - $ 4.2 3.2 1.0
Legal and
Accounting fees Cash - - 2.2 2.1 0.1
Network deconversion
costs Cash - - 4.5 - 4.5
----- ----- ----- ----- -----
$12.7 $ 0.8 $10.9 $16.1 $ 8.3
===== ===== ===== ===== =====
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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
Excluding the pre-tax charges and tax component write-off, net income as a
percentage of revenue improved to 15.6% for the nine month period ended
September 30, 2000 compared to 15.2% in the same period of the prior year.
Improvements, as a percentage of revenue, were made in selling, general and
administrative expenses, net interest income and income taxes. These
improvements were offset by an increase in the cost of operations as a
percentage of revenue.
Cost of operations increased in the nine month period ended September 30, 2000
to 73.7% of revenue compared to 70.5% in the same period of the prior year. The
increase in cost of operations, as a percentage of revenue, was primarily due to
lower margin revenue which was principally from larger, higher volume merchants
who command and deserve lower transactional pricing. This lower margin revenue
was primarily from the cross-selling of settlement processing to several higher
volume EPS merchants and from bringing our off-line debit product in-house. The
new lower margin revenue was partially offset by other operating costs such as
payroll, depreciation and amortization and other certain operating costs,
decreasing as a percentage of revenue.
Selling, general and administrative expenses decreased from $46.1 million in the
nine months ended September 30, 1999 to $43.1 million in the same period of the
current year. These expenses were down as higher salaries and wages were offset
by lower legal and other expenses. As a result, selling, general and
administrative expenses were 4.9% of revenue in the nine months ended September
30, 2000 versus 7.4% in the same period of the prior year, a decrease of 2.5% as
a percentage of revenue.
Net interest income improved as a percentage of total revenue to 2.8% in the
nine month period ended September 30, 2000 compared to 1.5% in the same period
of the prior year. A principal source of additional interest income each year is
the investment of available cash flow from operations in securities available
for sale. Also approximately $61.7 million from the June 1999 offering of the
Company's common stock was invested in securities available for sale. Increased
transaction settlement volumes contributed to interest earned from overnight and
short-term investments. These factors increased interest income by 75.8% in the
nine month period ended September 30, 2000 over the same period of the prior
year. Total long and short-term debt was reduced approximately $146 million in
June 1999 from the proceeds of the June 1999 common stock offering. As a result,
interest expense decreased 19.3% in the nine month period ended September 30,
2000 over the same period of the prior year. The combination of these factors
increased net interest income as a percentage of revenue.
Excluding the pre-tax charges and tax component write-off, the tax rate
decreased to 35.4% in the nine month period ended September 30, 2000 compared to
35.6% in the same period for the prior year.
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<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, 2000, the Company generated cashflow of
$203.0 million from operating activities. The Company also received $24.0
million in proceeds from Federal Home Loan Bank (FHLB) advances and $7.3 million
from stock issued for exercises of options under the Company's stock option
plan. Deposits increased $18.9 million. From cash provided from operating and
financing activities, $103.8 million was invested in securities, net of sales
and maturities, $42.8 million was invested through the Company's banking
subsidiaries in loans, net of repayments, $52.3 million was disbursed on capital
additions, and $25.5 million was spent to purchase merchant contracts. Long-term
debt was reduced by $19.0 million. 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 capital
ratios required by their respective regulatory agencies.
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, 1999. For
additional information, refer to Exhibit 13 - Annual Report to Stockholders in
our Form 10-K for the year ended December 31, 1999.
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<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 10 - Material Contracts - Agreement and Plan of Merger Among Concord
EFS, Inc., Orion Acquisition Corporation and Star Systems, Inc.
Exhibit 27 - Restated Financial Data Schedules
Exhibit 99 - Other Financial Data - Unaudited Restated Income Statement
Information
(b) Reports on Form 8-K
On October 10, 2000, the Company filed a current report on Form 8-K, dated
October 9, 2000 announcing an agreement to merge with Star Systems, Inc. of
Maitland, Florida.
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<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 14, 2000 By: /s/ Dan M. Palmer
---------------------------
Dan M. Palmer
Chairman of the Board and
Chief Executive Officer
Date: November 14, 2000 By: /s/ Edward T. Haslam
---------------------------
Edward T. Haslam
Chief Financial Officer
-20-
