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
June 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 August 11, 2000 was 212,680,489.
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
INDEX
Page No.
--------
PART 1 - Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Income Three
Months and Six Months ended June 30, 2000 and June 30, 1999 1
Condensed Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999 3
Condensed Consolidated Statements of Cash Flows
Six Months ended June 30, 2000 and June 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 17
PART II - Other Information
Item 2: Changes in Securities and Use of Proceeds 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
----------------------- -----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(In thousands, except per share data)
Revenue $290,123 $203,556 $547,891 $381,602
Cost of operations 214,337 144,850 407,600 271,385
Selling, general and
administrative expenses 12,261 13,102 24,785 25,907
Acquisition expenses and
restructuring charges - - 776 34,810
--------- --------- --------- ---------
OPERATING INCOME 63,525 45,604 114,730 49,500
Other income (expense):
Interest income 10,182 5,481 19,327 10,746
Interest expense (2,236) (3,611) (4,300) (7,144)
--------- --------- --------- ---------
INCOME BEFORE TAXES 71,471 47,474 129,757 53,102
Income taxes 25,484 16,632 46,181 23,601
--------- --------- --------- ---------
NET INCOME $ 45,987 $ 30,842 $ 83,576 $ 29,501
========= ========= ========= =========
Pro forma provision
for income taxes 536 260 1,055
--------- --------- --------- ---------
PRO FORMA NET INCOME $ 45,987 $ 30,306 $ 83,316 $ 28,446
========= ========= ========= =========
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<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - CONTINUED
(UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
----------------------- -----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
HISTORICAL AND PRO FORMA
PER SHARE DATA:
Basic earnings $ 0.22 $ 0.15 $ 0.39 $ 0.15
========= ========= ========= =========
Diluted earnings $ 0.21 $ 0.15 $ 0.38 $ 0.14
========= ========= ========= =========
Average basic shares
outstanding 212,311 199,839 212,238 199,043
========= ========= ========= =========
Average diluted shares
outstanding 219,070 207,323 218,284 206,604
========= ========= ========= =========
See Notes to Condensed Consolidated Financial Statements - Unaudited.
-2-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30 December 31
2000 1999
------------- ------------
(in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 122,226 $ 121,001
Securities available for sale 505,029 456,209
Accounts receivable, net 137,834 161,872
Inventories 18,198 18,076
Prepaid expenses and other current assets 17,189 11,376
Deferred income taxes 10,440 9,108
------------ ------------
TOTAL CURRENT ASSETS 810,916 777,642
LOANS, net 67,842 30,391
PROPERTY AND EQUIPMENT, net 181,330 167,829
GOODWILL, net 55,039 54,046
OTHER INTANGIBLE ASSETS, net 63,398 57,186
OTHER ASSETS 9,604 15,787
------------ ------------
TOTAL ASSETS $1,188,129 $1,102,881
============ ============
See notes to condensed consolidated financial statements.
-3-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED
(UNAUDITED)
June 30 December 31
2000 1999
------------- ------------
(in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other liabilities $ 115,032 $ 129,217
Deposits 115,037 100,475
Accrued liabilities 45,753 50,435
Income taxes payable 16,833 16,370
------------ ------------
TOTAL CURRENT LIABILITIES 292,655 296,497
------------ ------------
LONG-TERM DEBT 76,000 75,000
DEFERRED INCOME TAXES 18,899 16,566
OTHER LIABILITIES 4,962 9,669
------------ ------------
TOTAL LIABILITIES 392,516 397,732
------------ ------------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Common stock 70,810 70,703
Other stockholders' equity 724,803 634,446
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 795,613 705,149
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,188,129 $1,102,881
============ ============
See notes to condensed consolidated financial statements.
-4-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30
-----------------------
2000 1999
---------- ----------
(In thousands)
NET CASH PROVIDED BY OPERATING ACTIVITIES $117,444 $ 67,248
INVESTING ACTIVITIES:
Acquisition of securities available for sale (97,328) (101,334)
Sale of securities available for sale 30,280 28,020
Maturities of securities available for sale 14,644 11,784
Acquisition of property and equipment (33,453) (25,102)
Loans purchased (42,134) (9,187)
Loan principal payments received 4,398 357
Merchants contracts purchased (12,569) (7,933)
Other, net (2,106) -
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (134,056) (103,395)
FINANCING ACTIVITIES:
Net increase in deposits 14,562 33,692
Proceeds from sale of common stock 3,244 222,139
Proceeds from notes payable 19,000 7,000
Payments under credit agreement, net - (21,000)
Payments on notes payable (18,969) (125,116)
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 17,837 116,715
---------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS 1,225 80,568
Cash and cash equivalents
at beginning of period 121,001 82,890
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $122,226 $163,458
========== ==========
See notes to condensed consolidated financial statements.
-5-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 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 six month period ended June 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.
Note B - Recent Acquisitions
On February 1, 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 rather than the Company. The results of operations include
pro forma income taxes that would have been required if CPS had been a
C-Corporation.
-6-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
JUNE 30, 2000
Note B - Recent Acquisitions - continued
The following table represents selected unaudited financial information, in
thousands, split between the Company and CPS:
Three months ended Six months ended
June 30 June 30
--------------------- ---------------------
2000 1999 2000 1999
-------- -------- -------- --------
(Unaudited) (Unaudited)
Pro forma revenue
Concord EFS, Inc. $290,123 $193,724 $543,844 $363,958
CPS (1) 9,832 4,047 17,644
-------- -------- -------- --------
Combined $290,123 $203,556 $547,891 $381,602
======== ======== ======== ========
Pro forma net income
Concord EFS, Inc. $ 45,987 $ 29,266 $82,926 $ 26,398
CPS (1) 1,576 650 3,103
Pro forma provision
for CPS income
taxes (2) 536 260 1,055
-------- -------- -------- --------
Combined $ 45,987 $ 30,306 $83,316 $ 28,446
======== ======== ======== ========
Pro forma basic earnings
per share combined $0.22 $0.15 $0.39 $0.14
======== ======== ======== ========
Pro forma diluted earnings
per share combined $0.21 $0.15 $0.38 $0.14
======== ======== ======== ========
(1) The six months ended June 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 June 30, 2000 are
included in Concord EFS, Inc. amounts.
(2) CPS terminated its S-Corporation election at the time of the merger with
the Company.
-7-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
JUNE 30, 2000
Note B - Recent Acquisitions - continued
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.
On April 13, 2000, Concord EFS announced an agreement to acquire Cash Station
Inc., an electronic funds transfer network based in Chicago, Illinois. The
acquisition is to be accounted for as a pooling of interests transaction. The
acquisition is expected to close by October 1, 2000, subject to regulatory
approval and other customary closing conditions. The acquisition will have an
immaterial impact on the financial statements of Concord EFS.
Note C - Offering of Common Stock
Previous owners of Electronic Payment Systems, Inc. (EPS) and VCS who had
received unregistered common stock of the Company in connection with their
respective acquisitions sold 665,275 shares of common stock in a registration
statement filed May 15, 2000. The Company did not receive any proceeds from the
sale of shares by the previous owners of EPS or VCS.
Note D - Comprehensive Income
Total comprehensive income was $47,443 and $24,764, in thousands, for the three
months ended, June 30, 2000 and 1999, respectively. Total comprehensive income
was $85,186 and $22,544, in thousands, for the six months ended, June 30, 2000
and 1999, respectively.
-8-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
JUNE 30, 2000
Note E - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
(loss) per share (in thousands, except per share data):
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
------- ------- ------- -------
Numerator:
Net income $45,987 $30,842 $83,576 $29,501
======= ======= ======= =======
Denominator:
Denominator for basic earnings
per share, weighted-average
shares 212,311 199,839 212,238 199,043
Effect of dilutive securities,
employee stock options 6,759 7,484 6,046 7,561
------- ------- ------- -------
Denominator for diluted earnings
per share adjusted for weighted-
average shares and assumed
conversions 219,070 207,323 218,284 206,604
======= ======= ======= =======
Basic earnings per share $0.22 $0.15 $0.39 $0.15
======= ======= ======= =======
Diluted earnings per share $0.21 $0.15 $0.38 $0.14
======= ======= ======= =======
Excluding acquisition costs and restructuring charges described in management's
discussion and analysis of financial condition and results of operations, basic
earnings per share for the six month periods ended June 30, 2000 and 1999 were
$0.40 and $0.28, respectively, and diluted earnings per share for the six month
periods ended June 30, 2000 and 1999 were $0.39 and $0.27, respectively.
Earnings per share and related per share data have been restated to reflect all
stock splits.
-9-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
JUNE 30, 2000
Note F - Segment Information
Industry segment information, in thousands, for the three and six months ended
June 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
June 30, 2000
Revenue $208,658 $ 78,524 $ 2,941 $ 290,123
Cost of operations (168,729) (44,511) (1,097) (214,337)
Selling, general, &
administrative expenses (12,261) (12,261)
Taxes & interest, net (17,538) (17,538)
---------- ---------- ---------- ----------
Net income (loss) $ 39,929 $ 34,013 $ (27,955) $ 45,987
========== ========== ========== ==========
Three months ended
June 30, 1999
Revenue $142,948 $ 56,704 $ 3,904 $ 203,556
Cost of operations (111,980) (32,398) (472) (144,850)
Selling, general, &
administrative expenses (13,102) (13,102)
Taxes & interest, net (14,762) (14,762)
---------- ---------- ---------- ----------
Net income (loss) $ 30,968 $ 24,306 $ (24,432) $ 30,842
========== ========== ========== ==========
-10-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
JUNE 30, 2000
Note F - Segment Information - continued
Industry segment information, in thousands, for the six months ended June 30,
2000 and 1999 is presented below:
Merchant ATM
Services Services Other Total
---------- ---------- ---------- ----------
Six months ended
June 30, 2000
Revenue $392,769 $149,503 $ 5,619 $ 547,891
Cost of operations (316,130) (89,459) (2,011) (407,600)
Selling, general, &
administrative expenses (24,785) (24,785)
Acquisition &
restructuring charges (776) (776)
Taxes & interest, net (31,154) (31,154)
---------- ---------- ---------- ----------
Net income (loss) $ 75,863 $ 60,044 $ (52,331) $ 83,576
========== ========== ========== ==========
Six months ended
June 30, 1999
Revenue $263,085 $109,153 $ 9,364 $ 381,602
Cost of operations (203,563) (64,111) (3,711) (271,385)
Selling, general, &
administrative expenses (25,907) (25,907)
Acquisition &
restructuring charges (34,810) (34,810)
Taxes & interest, net (19,999) (19,999)
---------- ---------- ---------- ----------
Net income (loss) $ 59,522 $ 45,042 $ (75,063) $ 29,501
========== ========== ========== ==========
-11-
<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.
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 the MAC-branded electronic
funds transfer network and processing for approximately 42,000 ATMs nationwide,
of which it owns approximately 1,000.
-12-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Overview - continued
The substantial majority of the Company's revenue (71.9% in 2000 and 70.2% 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.
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
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).
-13-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Results of Operations
Revenue increased 42.5% to $290.1 million in the second quarter of 2000 from
$203.6 million in the second quarter of 1999. Of 2000 revenue, Merchant
Services, ATM Services and Other Services accounted for 71.9%, 27.1% and 1.0%,
respectively of revenue. Revenue from merchant card services, increased 46.0%,
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 38.5%. Increased transactional volumes
and in-house processing of the EPS off-line debit product were the primary
factors for the increase. Other revenues decreased 24.7% due primarily to lower
terminal sales.
Net income as a percentage of revenue was 15.9% in the second quarter of 2000
compared to 15.2% in the second quarter of 1999. The margin improvement was the
result of a combination of factors. Improvements, as a percentage of revenue,
were made in selling, general and administrative expenses and net interest
income. These improvements were partially offset by an increase in the cost of
operations as a percentage of revenue.
Cost of operations increased in the second quarter of 2000 to 73.9% of revenue
compared to 71.2% 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 $13.1 million in the
second quarter of 1999 to $12.3 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 4.2% of
revenue in the second quarter of 2000 versus 6.4% in the second quarter of 1999,
a decrease of 2.2% as a percentage of revenue.
Net interest income improved as a percentage of total revenue to 2.7% in the
second quarter of 2000 compared to 0.9% 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
-14-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Results of Operations - continued
investments. These factors increased interest income by 85.8% in the second
quarter of 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 38.1% in the second quarter of 2000 over the same period of the prior
year. The combination of these factors increased net interest income as a
percentage of revenue.
In the six month period ended June 30, 2000, revenue increased 43.6% to $547.9
million from $381.6 million in 1999. Of 2000 revenue, Merchant Services, ATM
Services and Other Services accounted for 71.7%, 27.3% and 1.0%, respectively of
revenue. Revenue from merchant card services, increased 49.3%, 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 37.0%. Increased transactional volumes and
in-house processing of the EPS off-line debit product were the primary factors
for the increase. Other revenues decreased 40.0% due primarily to lower terminal
sales.
Net income as a percentage of revenue was 15.3% for the six month period ended
June 30, 2000 compared to 7.7% in 1999. The margin improvement was the result of
a combination of factors. 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. Further impacting this comparison was
related to certain nondeductible acquisition costs and a tax component write-off
of $1.3 million for impaired state tax net operating losses. These items were
incurred in the first quarter of 1999 and were related to the acquisition of
EPS. Excluding the pre-tax charges and tax component write-off, the tax rate
decreased to 35.4% in the six month period ended June 30, 2000 compared to 35.8%
in the same period for the prior year.
Acquisition expenses and restructuring charges were $0.8 million for the six
month period ended June 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 acquisition of CPS. As of June 30, 2000,
approximately $0.1 million of these expenses were accrued but unpaid. The
acquisition and restructuring charges for the first quarter of 1999 were a
result of the Company's merger with EPS. As explained in detail in the annual
report section of the Company's Form 10-K for the year ended December 31, 1999,
the pre-tax expenses and charges were for acquisition expenses, communication
conversion costs, asset write-offs, off-line debit conversion and severance and
other.
-15-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Results of Operations - continued
The following table brings forward from December 31, 1999 the remaining reserve
balance, in millions, from the EPS acquisition expenses and charges:
Balance at Balance at
Cash or December 31 June 30
Description Non-cash 1999 Activity 2000
------------------ -------- ----------- -------- -----------
Communication
conversion costs Cash $11.3 $6.5 $4.8
Severance and
other Cash 1.4 1.1 0.3
----- ---- ----
$12.7 $7.6 $5.1
===== ==== ====
Excluding the pre-tax charges and tax component write-off, net income as a
percentage of revenue improved to 15.4% for the six month period ended June 30,
2000 compared to 14.8% 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 six month period ended June 30, 2000 to
74.4% of revenue compared to 71.1% 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 $25.9 million in the
six months ended June 30, 1999 to $24.8 million in the same period of the
current year. 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 4.5% of revenue in the six months ended June 30,
2000 versus 6.8% in the same period of the prior year, a decrease of 2.3% as a
percentage of revenue.
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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
Net interest income improved as a percentage of total revenue to 2.7% in the six
month period ended June 30, 2000 compared to 0.9% 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 79.9% in the
six month period ended June 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 39.8% in the six month period ended June 30, 2000
over the same period of the prior year. The combination of these factors
increased net interest income as a percentage of revenue.
Liquidity and Capital Resources
In the six months ended June 30, 2000, the Company generated cashflow of $117.4
million from operating activities. The Company also received $19.0 million in
proceeds from Federal Home Loan Bank (FHLB) advances and $3.2 million from stock
issued for exercises of options under the Company's stock option plan. Deposits
increased $14.6 million. From cash provided from operating and financing
activities, $52.4 million was invested in securities, net of sales and
maturities, $37.7 million was invested through the Company's banking
subsidiaries in loans, net of repayments, $33.5 million was disbursed on capital
additions, and $12.6 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 2: Changes in Securities and Use of Proceeds
Previous owners of EPS and VCS had received unregistered common stock of the
Company in connection with their respective acquisitions in reliance on the
exemption under Section 4(2) the Securities Act of 1933 registered 665,275
shares of common stock in a registration statement filed May 15, 2000 in
accordance with the requirements of the Securities Act of 1933. The Company did
not receive any proceeds from the subsequent sale of shares by the previous
owners of EPS or VCS.
Item 6: Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports were filed on Form 8-K for the six month period ended June 30,
2000.
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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: August 11, 2000 By: /s/ Dan M. Palmer
---------------------------
Dan M. Palmer
Chairman of the Board and
Chief Executive Officer
Date: August 11, 2000 By: /s/ Edward T. Haslam
---------------------------
Edward T. Haslam
Chief Financial Officer
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