AND SUBSIDIARIESSECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934[x]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended March 31, 2002 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended March 31, 2001 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES SECURITIES EXCHANGE ACT OF 1934. For the transition period from ____________ to _______________
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from to Commission file number
0-13848 ___________________________000-13848CONCORD EFS, INC.
(Exact name(Exact Name of
registrantRegistrant asspecifiedSpecified in itscharter) Delaware 04-2462252 _______________________________ _____________________ (State or other jurisdiction of (IRS Employer Incorporation of Organization) Identification Number)Charter)
Delaware 04-2462252 (State or Other Jurisdiction of
Incorporation or Organization)(I.R.S. Employer
Identification Number)2525 Horizon Lake Drive, Suite 120, Memphis, Tennessee 38133
(Address
(Address of Principal Executive Offices)(901) 371-8000
(Registrant's telephone number, including area code) _________________
(Registrant’s Telephone Number, Including Area Code)Indicate by check mark whether the
registrantregistrant: (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[ ]Yes x No oThe number of shares of the
registrant'sregistrant’s Common Stock, $0.33 1/3 par value, outstanding as of April 30,20002002 was242,319,486.510,523,433. TABLE OF CONTENTSCONCORD EFS, INC. AND SUBSIDIARIES
INDEX Page No. -------- PART I - Financial Information Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000 1 Condensed Consolidated Statements of Income for Three Months ended March 31, 2001 and March 31, 2000 2 Condensed Consolidated Statements of Cash Flows for Three Months ended March 31, 2001 and March 31, 2000 3 Notes to Condensed Consolidated Financial Statements 4 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 1: Legal Proceedings 18 Item 2: Changes in Securities and Use of Proceeds 18 Item 6: Exhibits and Reports on Form 8-K 19 Signatures 20
PART I — Financial Information Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001 1 Condensed Consolidated Statements of Income for Three Months Ended March 31, 2002 and March 31, 2001 2 Condensed Consolidated Statements of Cash Flows for Three Months Ended March 31, 2002 and March 31, 2001 3 Notes to Condensed Consolidated Financial Statements 4 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk 20 PART II — Other Information Item 1. Legal Proceedings 21 Item 6. Exhibits and Reports on Form 8-K 22 Signatures 23 CONCORD EFS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
March 31 December 31 2001 2000 ------------------------ (in thousands)Assets Current assets Cash and cash equivalents $ 224,379 $ 231,762 Securities available for sale 706,733 649,425 Accounts receivable, net 238,248 307,756 Inventories 17,218 15,087 Prepaid expenses and other current assets 24,171 22,125 Deferred income taxes 4,013 6,732 ---------- ---------- Total current assets 1,214,762 1,232,887 Loans, net 84,329 78,654 Property and equipment, net 219,625 214,662 Goodwill, net 147,525 150,049 Other intangible assets, net 78,449 75,644 Other assets 8,623 9,769 ---------- ---------- Total assets $1,753,313 $1,761,665 ========== ========== Liabilities and stockholders' equity Current liabilities Accounts payable and other liabilities $ 217,421 $ 296,980 Deposits 124,725 125,834 Accrued liabilities 40,314 48,307 Accrued restructuring charges 91,531 3,410 Income taxes payable 11,388 - Current maturities of long-term debt - 3,357 ---------- ---------- Total current liabilities 485,379 477,888 Long-term debt 111,562 109,911 Deferred income taxes 12,785 31,871 Other liabilities 6,604 6,412 ---------- ---------- Total liabilities 616,330 626,082 ---------- ---------- Commitments and contingent liabilities - - Minority interest in subsidiary 3,225 3,052 ---------- ---------- Stockholders' equity Common stock 80,758 80,485 Other stockholders' equity 1,053,000 1,052,046 ---------- ---------- Total stockholders' equity 1,133,758 1,132,531 ---------- ---------- Total liabilities and stockholders' equity $1,753,313 $1,761,665 ========== ==========
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31, 2002 2001 (in thousands) ASSETS CURRENT ASSETS Cash and cash equivalents $ 496,273 $ 682,906 Securities available for sale 1,200,563 1,228,805 Accounts receivable, net 391,541 134,496 Inventories 21,643 20,971 Prepaid expenses and other current assets 43,583 34,346 Deferred income taxes 14,821 13,054 TOTAL CURRENT ASSETS 2,168,424 2,114,578 Loans, net 86,473 89,038 Property and equipment, net 282,205 267,451 Goodwill, net 213,736 158,632 Other intangible assets, net 61,608 85,712 Other assets 20,179 14,034 TOTAL ASSETS $ 2,832,625 $ 2,729,445 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES Accounts payable and other liabilities $ 435,935 $ 488,789 Deposits 177,223 162,972 Accrued liabilities 42,403 29,837 Accrued restructuring charges 15,441 5,315 Income taxes payable 9,213 1,438 Current maturities of long-term debt 10,000 — TOTAL CURRENT LIABILITIES 690,215 688,351 Long-term debt 109,297 119,458 Deferred income taxes 59,335 55,437 Other liabilities 7,188 4,202 TOTAL LIABILITIES 866,035 867,448 Commitments and contingent liabilities — — Minority interest in subsidiary 4,429 3,410 STOCKHOLDERS’ EQUITY Common stock 170,174 169,352 Other stockholders’ equity 1,791,987 1,689,235 TOTAL STOCKHOLDERS’ EQUITY 1,962,161 1,858,587 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 2,832,625 $ 2,729,445 See Notes to Condensed Consolidated Financial Statements.
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CONCORD EFS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
Three months ended March 31 2001 2000 ----------------------- (in thousands, except per share data)Revenue $375,638 $302,917 Cost of operations 270,268 222,515 Selling, general and administrative expenses 23,812 21,837 Acquisition and restructuring charges 125,362 776 -------- -------- Operating Income (Loss) (43,804) 57,789 Other income (expense): Interest income 15,482 9,893 Interest expense (3,123) (2,416) -------- -------- Income (Loss) Before Taxes and Minority Interest (31,445) 65,266 Income taxes (benefit) (5,626) 23,608 -------- -------- Income (Loss) Before Minority Interest (25,819) 41,658 Minority interest in net income of subsidiary 173 146 -------- -------- Net Income (Loss) $(25,992) $ 41,512 ======== ======== Pro forma provision for income taxes - 260 -------- -------- Pro forma Net Income (Loss) $(25,992) $ 41,252 ======== ======== Per Share Data: Basic and proforma basic earnings (loss) per share $ (0.11) $ 0.17 ======== ======== Diluted and proforma diluted earnings (loss) per share $ (0.11) $ 0.17 ======== ======== Average shares outstanding: Basic shares 241,664 238,636 ======== ======== Diluted shares 241,664 244,748 ======== ========
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended March 31, 2002 2001 (in thousands, except per share data) Revenue $ 462,143 $ 375,638 Cost of operations 321,855 270,268 Selling, general and administrative expenses 24,782 23,812 Acquisition, restructuring and write-off charges 47,500 125,362 OPERATING INCOME (LOSS) 68,006 (43,804 ) Other income (expense): Interest income 19,572 15,482 Interest expense (3,106 ) (3,123 ) INCOME (LOSS) BEFORE TAXES AND MINORITY INTEREST 84,472 (31,445 ) Income taxes (benefit) 29,988 (5,626 ) INCOME (LOSS) BEFORE MINORITY INTEREST 54,484 (25,819 ) Minority interest in net income of subsidiary 275 173 NET INCOME (LOSS) $ 54,209 $ (25,992 ) PER SHARE DATA: Basic earnings (loss) per share $ 0.11 $ (0.05 ) Diluted earnings (loss) per share $ 0.10 $ (0.05 ) AVERAGE SHARES OUTSTANDING: Basic shares 508,699 483,329 Diluted shares 530,272 483,329 See Notes to Condensed Consolidated Financial Statements.
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CONCORD EFS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Three months ended March 31 2001 2000 ---------------------- (in thousands)Operating activities Net cash provided by operating activities $ 69,563 $ 58,576 Investing activities Acquisition of securities available for sale (172,411) (69,538) Proceeds from sales of securities available for sale 110,784 29,325 Proceeds from maturity of securities available for sale 15,532 9,763 Purchases of loans (9,417) (15,072) Acquisition of property and equipment (23,843) (19,035) Purchased merchant contracts (7,490) (6,661) Other investing activity 1,629 (4,298) ---------------------- Net cash used in investing activities (85,216) (75,516) Financing activities Net increase (decrease) in deposits (1,109) 1,472 Repayment under credit agreement (net) (14,706) - Proceeds from notes payable 13,000 6,000 Payments on notes payable - (7,808) Proceeds from exercise of stock options 11,085 420 Activity by pooled subsidiaries - (2,905) ---------------------- Net cash provided by financing activities 8,270 (2,821) ---------------------- Net decrease in cash and cash equivalents (7,383) (19,761) Cash and cash equivalents at beginning of year 231,762 173,099 ---------------------- Cash and cash equivalents at end of Quarter $ 224,379 $153,338 ======================
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended March 31, 2002 2001 (in thousands) OPERATING ACTIVITIES NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ (181,189 ) $ 69,213 INVESTING ACTIVITIES Acquisition of securities available for sale (232,020 ) (172,411 ) Proceeds from sales of securities available for sale 205,155 110,784 Proceeds from maturity of securities available for sale 47,499 15,532 Purchases of loans (15,828 ) (9,417 ) Net change in loans 18,952 3,522 Acquisition of property and equipment (36,981 ) (23,843 ) Purchased merchant contracts — (7,490 ) Business acquisitions, net (15,509 ) — Other investing activity (6,681 ) (1,893 ) NET CASH USED IN INVESTING ACTIVITIES (35,413 ) (85,216 ) FINANCING ACTIVITIES Net increase (decrease) in deposits 14,251 (1,109 ) Proceeds from borrowings — 13,000 Payments on borrowings (161 ) (14,268 ) Proceeds from exercise of stock options 15,938 11,085 Payments on leases payable (59 ) (438 ) NET CASH PROVIDED BY FINANCING ACTIVITIES 29,969 8,270 NET DECREASE IN CASH AND CASH EQUIVALENTS (186,633 ) (7,733 ) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 682,906 298,383 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 496,273 $ 290,650 See Notes to Condensed Consolidated Financial Statements.
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CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSMarch 31, 2001
(Unaudited)Note A
-— Basis of PresentationThe 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 Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the three
month periodmonths ended March 31,20012002 are not necessarily indicative of the results that may be expected for the year ended December 31,2001.2002. For further information, refer to the consolidated financial statements and footnotes thereto included in the Concord EFS, Inc. and Subsidiaries (Concord)currentannual report on Form8-K/A10-K filedApril 16, 2001February 26, 2002 for the year ended December 31,2000.2001.Nature of Operations: Concord is a
vertically-integratedvertically integrated electronic transaction processor. Concord acquires, routes, authorizes, captures and settles virtually all types ofnon-cashelectronic payment and deposit access transactions forretailers andfinancial institutions and merchants nationwide.Concord'sConcord’s primary activities consist of(1)Network Services, which provides automated teller machine (ATM) processing, debit card processing, deposit risk management and coast-to-coast debit network access principally for financial institutions, and Payment Services, which provides payment processingservicesforcredit card, debit card,supermarkets, major retailers, petroleum dealers, convenience stores, restaurants, trucking companies andelectronic benefits transfer card transactions for retailers; and (2) Network Services, which provides network and ATM processing services for financial institutions.independent retailers.Principles of Consolidation: The condensed consolidated financial statements include the accounts of Concord and its subsidiaries after elimination of all material intercompany balances and transactions.
Business Combinations: The condensed consolidated financial statements have been restated for all transactions accounted for as poolings of interests to combine the financial position, results of operations and cash flows of the respective companies for all periods presented. Transactions accounted for under the purchase method of accounting reflect the net assets of the acquired company at fair value on the date of acquisition, and the excess of the purchase price over fair value of the net assets is recorded as goodwill. The results of operations of the purchased company are included in Concord’s results of operations since the date of acquisition.
Reclassification: Certain
20002001 amounts have been reclassified to conform to the 2002 presentation.Note B — Business Combinations
In June 2001
presentation.the Financial Accounting Standards Board issued Statement of Financial Accounting Standards 141, “Business Combinations.” SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completed after June 30, 2001.-4-
CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSMarch 31, 2001
(Unaudited)Note B
-— Business Combinations, continuedOn March 1, 2002 Concord acquired The Logix Companies, LLC, an electronic transaction processor. The acquisition, for which Concord issued approximately 0.9 million shares of its common stock and $6.3 million in cash, was accounted for as a purchase transaction and is immaterial to Concord’s financial statements. The allocation of the purchase price is preliminary because a valuation study has not yet been completed.
On January 1, 2002 Concord acquired H & F Services, Inc., an independent sales organization, for $8.9 million in cash. Prior to the acquisition, Concord had purchased merchant contracts through H & F Services. The acquisition was accounted for as a purchase transaction and is immaterial to Concord’s financial statements.
Concord owns a majority interest in Primary Payment Systems, Inc., a deposit risk management company. In April 2001 Concord increased its ownership position in Primary Payment Systems to 85.5% through the purchase of newly issued shares, which largely funded Primary Payment Systems’ acquisition of Wally Industries, Inc. d/b/a WJM Technologies. The acquisition of WJM, for which Primary Payment Systems paid approximately $20.0 million, was accounted for as a purchase transaction and is immaterial to Concord’s financial statements.
On February 1, 2001 Concord acquired
STAR,Star Systems, Inc. (STARSM), a debit network. The acquisition was accounted for as a pooling of interests transaction in which Concord issued approximately24.848.0 million shares of its common stock.On August 21, 2000 Concord acquired Cash Station, Inc., a debit network. 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 Concord acquired National Payment Systems Inc. d/b/a Card Payment Systems, a 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.-5-
CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)Note B — Business Combinations, continued
The following table presents selected financial information split
amongbetween ConcordCard Payment Systems, Cash Station,andSTAR:STAR (in thousands, except per share data):
Three months ended March 31, 2002 2001 Revenue: Concord $ 462,143 $ 360,766 STAR (1) — 15,396 Intercompany eliminations (2) — (524 ) Combined revenue $ 462,143 $ 375,638 Net income (loss): Concord $ 54,209 $ (28,920 ) STAR (1) — 2,928 Combined net income (loss) $ 54,209 $ (25,992 ) Basic earnings (loss) per share combined $ 0.11 $ (0.05 ) Diluted earnings (loss) per share combined $ 0.10 $ (0.05 )
Three months ended March(1) The 2001 amounts reflect the results of STAR operations from January 1, 2001 through January 31, 2001. Results of operations from February 1, 2001 2000 ---------------------- (in thousands, except per share data)Revenue:are included in Concord$360,766 $253,721 Card Payment Systems (1) - 4,047 Cash Stationamounts.(2) - 4,676All material activity between Concord and STAR (3) 15,396 42,144 Intercompany eliminations (4) (524) (1,671) ---------------------- Combined revenue $375,638 $302,917 ====================== Pro forma net income (loss): Concord (28,920) 36,939 Card Payment Systems (1) - 650 Cash Station (2) - 329 STAR (3) 2,928 3,594 Pro forma provision for Card Payment Systems income taxes (5) - (260) ---------------------- Combined net income (loss) $(25,992) $ 41,252 ====================== Pro forma basic earnings (loss) per share combined $ (0.11) $ 0.17 ====================== Pro forma diluted earnings (loss) per share combined $ (0.11) $ 0.17 ======================has been eliminated.-5--6-
CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)Note B — Business Combinations, continued
Acquisition, restructuring and write-off charges were $47.5 million ($30.6 million, net of taxes) for the three months ended March 31,
2001 (1)2002. During the first quarter, management approved a corporate consolidation plan initiated to continue improvements in overall operating efficiency and integrate recent acquisitions. The2000 amounts reflectcharge consisted of $6.7 million for closing and consolidating certain facilities, $5.9 million for compensation and severance, and $4.5 million for exiting non-strategic businesses. In addition, asset impairment charges of $22.5 million were incurred for theresultswrite-off ofCard Payment Systems operations from January 1, 2000 through Januarynon-performing purchased merchant contracts identified in the first quarter and $7.9 million was incurred for the write-off of capitalized software and computer and communications equipment no longer in use. In connection with the consolidation plan, Concord expects to eliminate approximately 165 positions, 76 of which were eliminated as of March 31,2000 (unaudited). Results of operations from2002. Compensation and severance costs paid and charged against theeffective merger date of February 1, 2000 are included in Concord amounts. (2) The 2000 amounts reflect the results of Cash Station operations from January 1, 2000restructuring charge accrual were $0.7 million through March 31,2000 (unaudited). Results2002. As ofoperations from the effective merger date of July 1, 2000 are included in Concord amounts. (3) The 2001 amounts reflect the results of STAR operations from January 1, 2001 through January 31, 2001. Results of operations from February 1, toMarch 31,2001 are included2002, $15.4 million of the charges were accrued but unpaid. Concord expects to complete the consolidation plan by March 31, 2003.The following table presents a summary of activity in
Concord amounts. (4) All material activity between Concordthe 2002 restructuring charge accrual (in thousands):
Acquisition, restructuring and write-off charges $ 47,500 Cash outlays 1,623 Non-cash writedowns and charges – asset impairment 30,436 Balance, March 31, 2002 $ 15,441 The following table presents a summary of the remaining components of the 2002 restructuring charge accrual (in thousands):
Facility closings and consolidations $ 6,260 Compensation and severance 5,255 Non-strategic business closures 3,926 Balance, March 31, 2002 $ 15,441 -7-
CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)Note B — Business Combinations, continued
Acquisition, restructuring and
STAR has been eliminated. (5) The results of operations include pro forma income taxes that would have been required if Card Payment Systems had been a taxable corporation. The former owners of Card Payment Systems were responsible for income taxes for the periods prior to the merger. Concord owns a majority interest in Primary Payment Systems, Inc., a risk management service, as a result of Concord's acquisitions of STAR and Cash Station. Primary Payment Systems is immaterial to Concord's financial statements. On February 7, 2000 Concord acquired Virtual Cyber Systems, Inc., an Internet software development company. The acquisition of Virtual Cyber Systems, for which Concord paid approximately $2.0 million, was accounted for as a purchase transaction and was immaterial to Concord's financial statements. Acquisition and restructuringwrite-off charges were $125.4 million ($86.4 million, net of taxes) for the three months ended March 31, 2001. Theexpenses andchargesarewere a result of a company-wide consolidation plan to address areas of operating redundancies created byourrecent acquisitions. The planincludesincluded consolidation of data centers and other facilities to eliminate redundancies, the reassignment or termination of certain employees timed to coincide with the integration of redundant processing platforms and the functional integration of the STAR organization into Concord. The chargesincludeconsisted of $63.9 million for combining various processing platforms, $16.0 million for the consolidation of duplicate products and internal systems, $15.6 million for accounting, legal and advisory fees,and$19.1 million for the termination of certain data center servicescontracts.contracts, $9.8 million for compensation and severance costs and $1.0 million for other expenses. In connection with the consolidation plan, Concordexpectsexpected to eliminate approximately 250 positions,73all of whichhave beenwere eliminated as of March 31,2001. The individual components of2002. Compensation and severance costs paid and charged against theexpenses and charges are listed below.restructuring charge accrual were $9.8 million through March 31, 2002. As of March 31,2001, $89.3 million of these expenses were accrued but unpaid. As of March 31, 2001, expenses of $2.2 million, primarily2002, the consolidation activities have been completed and there was no remaining balance related toCash Station network deconversion costs, were accrued but unpaid. -6-the 2001 restructuring charge accrual. The following table presents a summary of activity in the 2001 restructuring charge accrual (in thousands):
Balance, December 31, 2001 $ 5,315 Cash outlays 5,286 Non-cash writedowns and charges — asset impairment 29 Balance, March 31, 2002 $ — Note C — Goodwill and Other Intangible Assets
In June 2001 the Financial Accounting Standards Board issued Statements of Financial Accounting Standards 142, “Goodwill and Other Intangible Assets.” SFAS 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives. SFAS 142 requires that these assets be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives.
Concord adopted SFAS 142 effective January 1, 2002. Application of the nonamortization provisions of SFAS 142 is immaterial to Concord’s financial statements. Concord has tested goodwill for impairment using the two-step process prescribed in SFAS 142. The first step is a screen for potential impairment, while the second step measures the amount of the impairment, if any. Concord has performed the first of the required impairment tests for goodwill as of January 1, 2002 and has determined that the carrying amount of goodwill is not impaired.
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CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSMarch 31, 2001
(Unaudited)Note
B - Business Combinations,C — Goodwill and Other Intangible Assets, continuedThe following table
detailspresents a reconciliation of net income adjusted to exclude amortization expense of goodwill with indefinite useful lives (in thousands, except per share data):
Three months ended March 31, 2002 2001 Reported net income (loss) $ 54,209 $ (25,992 ) Goodwill amortization, net of tax — 2,275 Adjusted net income (loss) $ 54,209 $ (23,717 ) Adjusted basic earnings (loss) per share $ 0.11 $ (0.05 ) Adjusted diluted earnings (loss) per share $ 0.10 $ (0.05 ) The following table presents the
activity inallocation of unamortized goodwill to Concord’s reporting units (in thousands):
Network Services $ 124,982 Payment Services 33,650 Balance, December 31, 2001 $ 158,632 The following table presents Concord’s amortization expense for the
restructuring charge accrual by category, in millions:
2001 Expenses Cash or Balance & Charges Balance Description Non-cash 12/31/00 Accrued Activity 3/31/01 - ------------------------------------------------------------------------------------2000: Compensation and severance Cash $ 1.0 $ - $ 0.8 $ 0.2 Network de-conversion costs Cash 2.4 - 0.4 2.0 2001: Office closings and operational deconversions Cash - 63.9 3.1 60.8 Duplicate or abandoned products & systems Cash - 4.4 0.7 3.7 Duplicate or abandoned products & systems Non-cash - 11.6 5.9 5.7 Advisory, legal, & accounting Cash - 15.6 15.0 0.6 Contract terminations Cash - 19.1 8.7 10.4 Compensation and severance Cash - 9.8 2.0 7.8 Other Non-cash - 1.0 0.7 0.3 --------------------------------------------- $ 3.4 $125.4 $ 37.3 $ 91.5 =============================================-7-CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2001periods listed for other intangible assets, net of the write-off of non-performing purchased merchant contracts of $22,496 (in thousands):
2002 $ 10,098 2003 8,790 2004 8,738 2005 8,738 2006 8,465 Thereafter 18,387 Total $ 63,216 Note
C -D — Comprehensive Income(Loss)Total comprehensive income (loss) was
($18,886)$49.4 million and$41,666, in thousands,$(18.9) million for the three months ended March 31,20012002 and2000,2001, respectively. Comprehensive income includes net income and the change in the unrealized gain or loss on securities available for sale arising during the period.-9-
CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)Note
D -E — Earnings Per ShareThe following table sets forth the computation of basic and diluted earnings (loss) per
share:share (in thousands, except per share data):
Three months ended March 31 2001 2000 ------------- ------------ (in thousands, except per share data)Numerator: Net income (loss) ($ 25,992) $ 41,512 ========= ======== Denominator: Denominator for basic earnings per share, weighted-average shares 241,664 238,636 Effect of dilutive employee stock options - 6,112 --------- -------- Denominator for diluted earnings per share-adjusted weighted-average shares and assumed conversions 241,664 244,748 ========= ======== Basic (loss) earnings per share ($0.11) $ 0.17 ========= ======== Diluted (loss) earnings per share ($0.11) $ 0.17 ========= ========
Three months ended March 31, 2002 2001 Numerator: Net income (loss) $ 54,209 $ (25,992 ) Denominator: Denominator for basic earnings per share, weighted-average shares 508,699 483,329 Effect of dilutive stock options 21,573 — Denominator for diluted earnings per share, adjusted weighted-average shares and assumed conversions 530,272 483,329 Basic earnings (loss) per share $ 0.11 $ (0.05 ) Diluted earnings (loss) per share $ 0.10 $ (0.05 ) Excluding acquisition,
costsrestructuring andrestructuringwrite-off charges and related taxes, diluted earnings per share for the threemonth periodmonths ended March 31, 2002 and 2001 were $0.16 and2000 were $0.24 and $0.17,$0.12, respectively. Earnings (loss) per share and related per share data have been restated to reflect all stock splits.-8-Note F — Operations by Business Segment
Concord has two reportable segments: Network Services and Payment Services.
Network Services revenue consists of processing fees for driving and monitoring ATMs, processing fees for managing debit card records, and access and switching fees for network access.
Revenue from Payment Services primarily includes discount fees charged to merchants, which are a percentage of the dollar amount of each credit card transaction Concord processes, as well as a flat fee per transaction. The discount fee, primarily charged to smaller merchants, is negotiated with each merchant and typically constitutes a bundled rate for the transaction authorization, processing, settlement, and funds transfer services Concord provides, plus the interchange fees charged by the credit card associations and collected by Concord. The balance of Payment Services revenue is derived from transaction fees for processing debit card and electronic benefits transfer card transactions, check verification and authorization services, and sales of POS terminals.
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CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSMarch 31, 2001
(Unaudited)Note
E -F — Operations by Business Segment, continuedBusiness segment information for the three months ended March 31, 2002 and 2001 is presented below (in thousands):
Network Payment Services Services Other Total 2002Revenue $ 185,657 $ 276,486 $ — $ 462,143 Cost of operations 94,607 227,248 — 321,855 Selling, general and administrative expenses — — 24,782 24,782 Acquisition, restructuring and write-off charges — — 47,500 47,500 Taxes and interest, net — — 13,522 13,522 Minority interest in subsidiary — — 275 275 Net income (loss) $ 91,050 $ 49,238 $ (86,079 ) $ 54,209
Network Payment Services Services Other Total 2001Revenue $ 147,778 $ 227,860 $ — $ 375,638 Cost of operations 84,429 185,839 — 270,268 Selling, general and administrative expenses — — 23,812 23,812 Acquisition, restructuring and write-off charges — — 125,362 125,362 Taxes and interest, net (benefit) — — (17,985 ) (17,985 ) Minority interest in subsidiary — — 173 173 Net income (loss) $ 63,349 $ 42,021 $ (131,362 ) $ (25,992 ) Note G — Contingencies
In September 2000 EFS National Bank was named as a defendant in a purported class action lawsuit filed in the Circuit Court of Tennessee for the Thirtieth Judicial District at Memphis alleging that certain of EFS National Bank’s rate and fee changes were improper under Tennessee law due to allegedly deficient notice. The plaintiffs filed an amended complaint alleging that the class consists of at least 60,000 merchants who were subjected to the allegedly improper rate and fee changes over a several-year period. The amended complaint seeks damages in excess of $15.0 million as well as injunctive relief and unspecified punitive damages, treble damages, attorney fees, and costs.
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CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)Note G — Contingencies, continued
The parties are currently engaged in settlement discussions and have advised the Tennessee Court that they have made significant progress towards and are close to resolving this matter. The parties have reached an agreement in principle to settle the case, subject to the completion of mutually satisfactory documentation by the parties and approval by the Court. The maximum amount of credits and payments by EFS National Bank under the proposed settlement would be $37.6 million, payable over a five-year period. A portion of such amount would be used to pay plaintiffs’ counsel and certain claims administration expenses. Concord believes the actual amount of credits and payments if the proposed settlement becomes final will be less than the $37.6 million because credits and payments are contingent upon merchant retention and submission of claims.
A number of procedural steps must now be undertaken before the proposed settlement becomes final. Those steps include, without limitation, finalizing and executing the proposed settlement agreement and related documentation, presenting the proposed settlement agreement and related documentation to the Court and seeking preliminary approval from the Court, sending notices to all potential class members, and allowing time for potential class members (a) to opt out of the class or to remain in the class and (b) to object to the proposed settlement and to attempt to persuade the court not to approve the proposed settlement.
There can be no assurance that the foregoing steps will be completed or that the proposed settlement will become final, on the terms described above or otherwise.
A purported class action complaint with similar allegations and requests for relief has been filed in St. Charles County, Missouri, but there has not been a substantial amount of activity in the Missouri case. The proposed settlement would also resolve the issues in the Missouri case.
Although these matters are in the preliminary stages, EFS National Bank believes it has various defenses to the claims against it, and if these matters cannot be resolved by settlement, EFS National Bank intends to vigorously defend against all claims. Due to the current status of the claims, EFS National Bank cannot predict the outcome of the proposed settlement, and accordingly, no amounts have been accrued in the financial statements relating to these contingencies.
-12-
CONCORD EFS, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONSYou should read the following discussion together with our condensed consolidated financial statements and the notes to those financial statements, which are included in this report. This report may contain forward-looking statements made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties, and other factors, including those set forth in this paragraph. Important factors that could cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by those statements include, but are not limited to: (i) the failure to successfully execute our corporate consolidation plan, (ii) the loss of key personnel or inability to attract additional qualified personnel, (iii) the loss of key customers, (iv) increasing competition, (v) changes in card association rules and practices, (vi) the inability to remain current with rapid technological change, (vii) risks related to acquisitions, (viii) the imposition of additional state taxes, (ix) continued consolidation in the banking and retail industries, (x) business cycles and the credit risk of our merchant customers, (xi) the outcome of litigation involving VISA and MasterCard, (xii) utility and system interruptions or processing errors, (xiii) susceptibility to fraud at the merchant level, (xiv) changes in card association fees, products, or practices, (xv) restrictions on surcharging, (xvi) rules and regulations governing financial institutions and changes in such rules and regulations, and (xvii) volatility of the price of our common stock. We undertake no obligation to publicly update or revise any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, or changes to future results over time. See the cautionary statements included as Exhibit 99.2 to our annual report on Form 10-K filed on February 26, 2002 for a more detailed discussion of the foregoing and other factors.
Overview
Concord EFS, Inc. (Concord) is a leading vertically integrated electronic transaction processor. We acquire, route, authorize, capture, and settle virtually all types of electronic payment and deposit access transactions for financial institutions and merchants nationwide. Our primary activities consist of Network Services, which provides automated teller machine (ATM) processing, debit card processing, deposit risk management, and coast-to-coast debit network access principally for financial institutions, and Payment Services, which provides
the systems andpayment processingthat allow retail clients to accept virtually any type of cashless payment, including all card types- credit, debit, electronic benefits transfer (EBT), fleet, prepaid and automated clearing house (ACH) -- and a variety of check-based options. Payment Services also includes providing payment cards that enable drivers offor supermarkets, major retailers, petroleum dealers, convenience stores, restaurants, trucking companies,to purchase fuelandobtain cash advances at truck stops.independent retailers.Network Services includes terminal driving and monitoring for ATMs, transaction routing and authorization via
creditthe combined STARsm, MAC®, and Cash Station® debit networkgateways,as well as other debit networks, deposit risk management, and real-time card management and authorization foronlinepersonal identification number (PIN)-secured debit and signature debit cards.We alsoIn addition, we operate the network switch that connects acoast to coastcoast-to-coast network of ATMs andPOSpoint of sale (POS) locations that accept debit cards issued by our member financial institutions. Our network access services include transaction switching and settlement.Industry segment information, in thousands, for the three months ended March 31, 2001 and 2000 is presented below.
Payment Network Services Services Other Total ---------- ---------- --------- ----------2001 Revenue $ 227,860 $ 147,778 $ - $ 375,638 Cost of operations (185,839) (84,429) - (270,268) Selling, general & administrative expenses - - (23,812) (23,812) Acquisition & restructuring charges (21,787) (103,575) - (125,362) Taxes & interest, net - - 17,985 17,985 Minority interest in subsidiary - - (173) (173) -------------------------------------------- Net income (loss) $ 20,234 $ (40,226) $ (6,000) $ (25,992) ============================================ 2000 Revenue $ 190,397 $ 112,520 $ - $ 302,917 Cost of operations (150,821) (71,694) - (222,515) Selling, general & administrative expenses - - (21,837) (21,837) Acquisition & restructuring charges (776) - - (776) Taxes & interest, net - - (16,131) (16,131) Minority interest in subsidiary - - (146) (146) -------------------------------------------- Net income (loss) $ 38,800 $ 40,826 $(38,114) $ 41,512 ============================================-9--13-
CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
MANAGEMENT’S DISCUSSION & ANALYSIS OF
FINANCIALSTATEMENTSCONDITION AND RESULTS OF OPERATIONSIn March
31,2002 we announced that we had reached an agreement to acquire Core Data Resources, a privately held electronic transaction processor based in Amarillo, Texas. Core Data provides ATM processing and related services to financial institutions, retailers, and independent sales organizations nationwide. We expect to close the Core Data transaction in the second quarter of 2002, subject to various conditions, including regulatory approval.On March 1, 2002 we completed our acquisition of The Logix Companies, LLC, an electronic transaction processor based in Longmont, Colorado. A private limited liability company, Logix provides financial institutions, retailers, and independent sales organizations with ATM processing, electronic check conversion, identification and authentication services, database development and reporting, and merchant processing services. This acquisition was accounted for as a purchase transaction in which we exchanged approximately 0.9 million shares of our common stock and $6.3 million in cash for all of the outstanding membership units of Logix.
In 2001
Note F - Subsequent Event In Aprilwe expanded our debit network in our Network Services area. On February 1, 2001Concord increased its ownership positionwe completed our acquisition of Star Systems, Inc. (STAR), the nation’s largest PIN-secured debit network, based in Maitland, Florida. The merger was accounted for as a pooling-of-interests transaction in which we exchanged approximately 48.0 million shares of our common stock for all of STAR’s outstanding common stock.As a result of our acquisition of STAR and subsequent purchase of shares, we acquired a majority interest in Primary Payment Systems, Inc., a company providing deposit risk management services to
85% through the purchase of newly issued shares, which largely fundedmerchants and financial institutions. We own an 85.5% interest in Primary PaymentSystems'Systems, with the remainder owned by certain financial institutions and a credit union service provider. Primary Payment Systems’ deposit risk management services provide advance notification of potential losses associated with fraudulent checks or high risk accounts utilizing a national database.In 2001 Primary Payment Systems expanded its operations in the deposit risk management area through its acquisition of Wally Industries, Inc.
(doing businessd/b/a WJM Technologies. WJM’s front-end tools, which screen new deposit accounts before they are opened, increase the breadth of Primary Payment Systems’ deposit risk management services. Primary Payment Systems believes that the addition of WJM will enable it to develop more powerful fraud filters that can be extended to other markets, asWJM Technologies). The incremental investment was not material to Concord's financial statements. -10-CONCORD EFS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS March 31, 2001 You should read the following discussion together with our condensed consolidated financial statementswell as provide additional cross-selling opportunities andthe notes to the condensed consolidated financial statements which are included in this report. This management's discussion and analysis contains forward-looking statements that reflect our plans, estimates and beliefs about future events. These forward-looking statements are not guarantees of future performance and involve risks, uncertainties and assumptions, including those set forth in this paragraph. Important factors that could cause actual results to differ materially from those discussed in the forward-looking statements include, but are not limited to, (i) the loss of key personnel or inability to attract additional qualified personnel, (ii) risks related to acquisitions (including the acquisition of Star Systems, Inc.), (iii) changes in card association rules, products, or practices, (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) increasing competition, (x) the loss of key customers, (xi) continued consolidation in the banking and retail industries, (xii) changes in rules and regulations governing financial institutions, (xiii) the inability to remain current with rapid technological change, (xiv) dependence on third-party vendors, (xv) the imposition of additional state taxes, (xvi) the adverse impact of shares eligible for future sale, (xvii) volatility of our common stock price, and (xviii) changes in interest rates. These forward-looking statements involve substantial risks and uncertainties which we believe are within the meaning of the Private Litigation Reform Act of 1995. Words such as "expect," "anticipate," "intend," "plan," "believe," "estimate" and variations of such words and similar expressions are intended to identify such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this quarterly report might not occur. See the cautionary statements included as Exhibit 99 to the Form 10-Q for the quarter ended March 31, 1999 filed on May 11, 1999 for a more detailed discussion of the foregoing and other factors. Overview Concord EFS, Inc. is a vertically-integrated electronic transaction processor. We acquire, route, authorize, capture, and settle all types of non-cash payment transactions for retailers and financial institutions nationwide. Our primary activities consist of Payment Services, which provides payment processing for supermarkets, major retailers, petroleum dealers, convenience stores, trucking companies, and independent retailers, and Network Services, which provides automated teller machine (ATM) processing, debit card processing, and nationwide debit network access for financial institutions.augment customer retention.Payment Services provides the systems and processing that allow retail clients to accept virtually any type of
cashlesselectronic payment, including all cardtypes-types—credit, debit, electronic benefits transfer (EBT),fleet,prepaid, andautomated -11-CONCORD EFS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS March 31, 2001 Overview, continued clearing house (ACH) -- andproprietary cards—as well as a variety of check-based options. We focus on providing payment processing services to selected segments, with specialized systems designed for supermarkets, gas stations, convenience stores, and restaurants. Payment Services also includes providing payment cards that enable drivers of trucking companies to purchase fuel and obtain cash advances at truck stops. Our services arecompletelyturn-key, providingretailersmerchants withpoint of sale (POS)POS terminal equipment, transaction routing and authorization, settlement, funds movement, and sponsorship into all credit card associations (such as VISA and MasterCard) andmajordebit networks (such asSTARsm,STAR, Pulse and NYCE).Early in 2000 we completed two acquisitions in the Payment Services area. On January 31, 2000 we completed our acquisition of National Payment Systems Inc. d/b/a Card Payment Systems, a New York-based reseller of payment processing services. Card Payment Systems provides card-based payment processing services to independent sales organizations (ISOs), which in turn sell those services to retailers. The acquisition was accounted for as a pooling of interests transaction in which we exchanged 6.2 million shares of our stock for all the outstanding shares of Card Payment Systems' common stock. We incurred acquisition costs of $0.8 million related to this transaction during the first quarter of 2000. On February 7, 2000 we completed our acquisition of Virtual Cyber Systems, Inc., an Internet software development company. This acquisition, for which we paid approximately $2.0 million, was accounted for as a purchase transaction and was immaterial to our financial statements. Network Services includes terminal driving and monitoring for ATMs, transaction routing and authorization via credit and debit network gateways, and real-time card management and authorization for online debit and signature debit cards. We also operate the switch that connects a coast to coast network of ATMs and POS locations that accept debit cards issued by our member financial institutions. Our network access services include transaction switching and settlement. We recently expanded our debit network in our Network Services area through two acquisitions. On August 21, 2000 we completed our acquisition of Cash Station, Inc., a leading Midwest debit network based in Chicago, Illinois. The acquisition was accounted for as a pooling of interests transaction in which we exchanged approximately 2.5 million shares of our stock for all of the outstanding common stock of Cash Station. On February 1, 2001 we completed our acquisition of Star Systems, Inc. (STAR), the nation's largest PIN-secured debit network, based in Maitland, Florida. The merger was accounted for as a pooling of interests transaction in which we exchanged approximately 24.8 million shares of our stock for all of STAR's outstanding common stock. We believe the STAR acquisition lays the foundation for important growth opportunities in the future for our Network Services segment. Our debit network which is comprised of our STAR, MAC, and Cash Station networks, now has 6,500 financial institution members with 124 million cards. Consumers carrying these cards have access to their deposit accounts at approximately 180,000 ATMs and -12--14-
CONCORD EFS, INC. AND SUBSIDIARIES
MANAGEMENT'S
MANAGEMENT’S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONSMarch 31, 2001 Overview, continued 720,000 POS locations nationwide.On January 1, 2002 we acquired H & F Services, Inc., an independent sales organization. Prior to the acquisition, we had purchased merchant contracts through H & F Services. We believe that this
national networkacquisition will increase our control over the sales channel, including pricing and compensation. We expect the acquisition to reduce the average cost ofcardsacquiring merchant contracts, reduce the cost of operations, andterminals providesincrease selling, general and administrative expenses.In the
critical mass necessaryfirst quarter of 2002 we initiated a consolidation plan tobring new productscontinue improvements in overall operating efficiency and integrate recent acquisitions. The plan includes closing and consolidating certain facilities, exiting several non-strategic businesses, eliminating approximately 165 positions, and writing off impaired assets. We incurred a charge of $30.6 million, net of taxes, related to thefinancial services industry, including person-to-person payments, check electronification,consolidation plan. During the next 12 months, we will implement the plan andsecure debit paymentfocus on consolidation activities for operational improvements in our Payment Services segment.In the
Internet. We also ownfirst quarter of 2001 we initiated amajority interest in Primary Payment Systems, Inc., a company providing deposit risk management servicescompany-wide consolidation plan tomerchantsaddress areas of operating redundancies created by our recent acquisitions. The plan included consolidation of data centers andfinancial institutions. An exampleother facilities to eliminate redundancies, the reassignment or termination of certain employees timed to coincide with the integration of redundant processing platforms, and the functional integration of thevertical integrationSTAR organization into Concord. We incurred a charge of $86.4 million, net of taxes, related to ourservices isconsolidation plan, including costs incurred in combining operating platforms and facilities, communications conversion costs, asset write-offs, and severance and compensation costs, as well as investment banking fees and advisory, legal, and accounting fees incurred in connection with the acquisition of STAR. Our consolidation activities to capture synergies within ourownershipnetwork operations and align our resources across the enterprise for greater efficiency and improved service delivery were completed as oftwo financial institutions, EFS National Bank and EFS Federal Savings Bank. These banks allow us to provide our merchants with bank sponsorship into credit and debit card associations, and to own and deploy ATMs. They also provide traditional banking activities such as lending and deposit-taking.March 31, 2002.Restatement of Historical Financial Information
The financial information for prior periods presented below and elsewhere in this report has been restated for the results of STAR in accordance with the
pooling of interestspooling-of-interests method of accounting for business combinations. The financial information includes the financial position, operating results, and cash flowsof STARfor all periods presented.Components of Revenue and Expenses
PaymentNetwork Services and
NetworkPayment Services are our two reportable business segments. These business units are managed separately because they offer distinct products for different end users. All of our revenue isattributed togenerated in the United States, and no single customer of Concord accounts for a material portion of our revenue.Over 75% percentThe majority of ourtotalrevenue is tied to contracts with terms of between three and five years.A principal component of our revenue is derived from Network Services (40.2% and 39.3% for the three months ended March 31, 2002 and 2001). Network Services revenue consists of processing fees for driving and monitoring ATMs, processing fees for managing debit card records and access and switching fees for network access. We recognize this revenue at the time of the transaction.
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CONCORD EFS, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONSComponents of Revenue and Expenses, continued
The majority of our revenue
(60.7%(59.8% and62.9%60.7% for the threemonth periodmonths ended March 31,20012002 and2000)2001) is generated from fee income related to Payment Services. Revenue from Payment Services primarily includes discount fees charged to merchants, which are a percentage of the dollar amount of each credit card transaction we process, as well as a flat fee per transaction. The discount fee, primarily charged to smaller merchants, is negotiated with each merchant and typically constitutes a bundled rate for the transaction authorization, processing, settlement, and funds transfer services weprovide.provide, plus the interchange fees charged by the credit card associations and collected by us. The balance of Payment Services revenue is derived from transaction fees for processing credit card transactions for larger merchants, debit card and EBT card transactions, check verification and authorization services, and sales of POS terminals. We recognize this revenue at the time of the transaction.TheOne result of basing revenue on the total dollar volume processed is that lower ticket size or otherprincipal componentreduction in total purchases causes a reduction in our revenue. However, net income is not correspondingly affected because the majority of ourrevenue derives from Network Services (39.3% and 37.1% for three month period ended March 31, 2001 and 2000). Network Services revenue consists of processing fees for driving and monitoring ATMs, processing fees for managing debit card records, and access and switching fees for network access. We recognize this revenue at the time of the transaction. -13-CONCORD EFS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS March 31, 2001 Components of Revenue and Expenses, continuedtransactions are priced on a fixed fee per transaction basis.The following table
is a listing oflists revenue by segment for the periodsindicated:indicated (in millions):
Three months ended March 31 2001 2000 ---------------------------(in millions) Payment Services $227.8 $190.4 Network Services 147.8 112.5 ------ ------ Total $375.6 $302.9 ====== ======
Three months ended March 31, 2002 2001 Network Services $ 185.6 $ 147.8 Payment Services 276.5 227.8 Total $ 462.1 $ 375.6 Cost of operations includes all costs directly attributable to our providing services to our customers. The most significant component of cost of operations is interchange and
assessmentnetwork fees, whicharerepresent amounts charged by the credit and debitassociations.networks. Interchange andassessmentnetwork fees are billed primarily as a percentage of dollar volume processed and, to a lesser extent, as a transaction fee. This amount is a direct expense of the revenue component described above, so that when total dollar volume processed declines, due to lower ticket size or other reduction in total purchases, there is a corresponding decline in cost of operations. Cost of operations also includes telecommunications costs, personnel costs, occupancy costs, depreciation, the cost of equipment leased and sold, the cost of operating our debit network and other miscellaneous merchant supplies and services expenses. We strive to maintain a highly efficient operational structure, which includesefficient marketing,volume purchasing arrangements with equipment and communications vendors and direct membership by our subsidiary, EFS National Bank, in bank card associations and major debit networks.-16-
CONCORD EFS, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONSComponents of Revenue and Expenses, continued
The following table lists cost of operations by segment for the periods
indicated:indicated (in millions):
Three months ended March 31 2001 2000 ---------------------------(in millions) Payment Services $185.9 $150.8 Network Services 84.4 71.7 ------ ------ Total $270.3 $222.5 ====== ======
Three months ended March 31, 2002 2001 Network Services $ 94.6 $ 84.4 Payment Services 227.2 185.9 Total $ 321.8 $ 270.3 Our selling, general and administrative expenses include certain salaries and wages and other general administrative
expenses (including certain amortization costs).expenses. These costs are not allocated to the reportable segments.-14-CONCORD EFS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS March 31, 2001Results of Operations
The following table shows, for the periods indicated, the
percentpercentage of revenue represented by certain items on our consolidated statements of income:
Three months ended March 31 2001 2000 ---------------------------Revenue 100.0% 100.0% Cost of operations 71.9 73.5 Selling, general and administrative expenses 6.3 7.2 Acquisition and restructuring charges 33.5 0.3 ----- ----- Operating income (loss) (11.7) 19.0 Interest income, net 3.3 2.5 ----- ----- Income (loss) before taxes (8.4) 21.5 Income taxes (benefit) (1.5) 7.8 ----- ----- Net income (loss) (6.9%) 13.7% ===== =====Three months ended March 31,
Three months ended March 31, 2002 2001 Revenue 100.0 % 100.0 % Cost of operations 69.6 71.9 Selling, general and administrative expenses 5.4 6.3 Acquisition, restructuring and write-off charges 10.3 33.5 Operating income (loss) 14.7 (11.7 ) Interest income, net 3.5 3.3 Income (loss) before taxes 18.2 (8.4 ) Income taxes (benefit) 6.5 (1.5 ) Net income (loss) 11.7 % (6.9 )% -17-
CONCORD EFS, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONSFirst Quarter 2002 Compared to 2001
comparedRevenue in the first quarter 2002 increased 23.0% to
2000 Revenue increased 24.0% to$462.1 million from $375.6 million in2001 from $302.9 million in 2000.2001. In2001the first quarter 2002 Network Services accounted for 40.2% of revenue, and Payment Services accounted for60.7% of revenue, and Network Services accounted for 39.3%59.8%.Revenue from Payment Services increased 19.7%, due primarily to increased transaction volumes. The increased volumes resulted from the addition of new merchants and the widening acceptance of debit and EBT card transactions at new and existing merchants.Network Services revenue in the first quarter 2002 increased31.3% over 200025.6% compared to 2001 as a result ofan increase in the number of ATMs driven,the addition of new network and processing customers and increases in transaction volumes. The increased transaction volumes resulted primarily from increased use of our network debit cards for payment at the point of sale. Revenue from Payment Services in the first quarter 2002 increased 21.3% compared to 2001, due primarily to increased transaction volumes. The increased volumes resulted from the addition of new merchants and the increased use of debit and EBT card transactions at new and existing merchants.Cost of operations decreased in
2001the first quarter 2002 to71.9%69.6% of revenue compared to73.5%71.9% in2000.2001. This percentage decrease was due primarily to a decreaseas a percent of revenue,incertain operating costs, such as telecommunications, payroll expenses anddepreciation and amortizationexpenses. Selling,expenses, improvements in operating efficiencies and economies of scale.In the first quarter 2002 selling, general and administrative expenses decreased as a
percentpercentage of revenue to 5.4% from 6.3% in2001 from 7.2% in 2000.2001. Overall, selling, general and administrative expensesicreasedincreased to$23.8$24.8 millionfrom $21.8in the first quarter 2002 from $23.8 million in 2001. This increase is primarily attributable to the expenses related to the acquisition of2000. -15-CONCORD EFS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSIONH &ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS March 31, 2001 Three months ended March 31, 2001 comparedF Services, Inc. sales force.Acquisition, restructuring and write-off charges decreased to
2000, continued Acquisition expenses and restructuring charges increased to$47.5 million in 2002 from $125.4 million in2001 from $0.8 million in 2000.2001. In the first quarter of2001,2002 we initiated acompany-wideconsolidation plan to continue improvements inorder to address areas ofoverall operatingredundancies created by ourefficiency and integrate recent acquisitions. The plan includesconsolidationclosing and consolidating certain facilities, exiting several non-strategic businesses, eliminating approximately 165 positions, and writing off impaired assets. The charge ofdata centers$47.5 million ($30.6 million, net of tax) consisted of $6.7 million for closing andotherconsolidating certain facilities,to eliminate redundancies,$5.9 million for compensation and severance, and $4.5 million for exiting non-strategic businesses. In addition, asset impairment charges of $22.5 million were incurred for thereassignment or terminationwrite-off ofcertain employees timed to coincide with the integration of redundant processing platforms and the functional integration of the STAR organization into Concord. During the next 12 months we intend to take steps to capture synergies within our network operations and align our resources across the enterprise for greater efficiency and improved service delivery. Duringnon-performing purchased merchant contracts identified in the first quarter and $7.9 million was incurred for the write-off of2001, we incurred a charge of $86.4 million, net of taxes, related to our consolidation plan, including costs incurredcapitalized software and computer and communications equipment no longer incombining operating platforms and facilities, communications conversion costs, asset write-offs, severance and compensation costs, as well as investment banking fees and advisory, legal and accounting fees incurred in the acquisition of STAR. We accrued charges of $63.9 million for combining various STAR processing platforms and facilities that will be closed and consolidated. We also accrued $16.0 million for duplicate products and systems such as abandoned products and internal systems that do not support our new network strategy. Various data center services contracts were terminated as part of the overall restructuring, for which we accrued $19.1 million. The consolidation of products, services, processing platforms and facilities created personnel duplications. As a result, we accrued compensation and severance packages of $9.8 million to diminish redundancies and consolidate operational groups. In addition to these charges we also incurred legal, accounting and advisory fees totaling $15.6 million in connection with the STAR merger.use.Excluding acquisition, restructuring and
restructuringwrite-off charges, operating income as apercentpercentage of revenue increased to 25.0% in the first quarter 2002 from 21.7% in2001 from 19.3% in 2000. An2001. This increase in operating income resulted from improved operating efficiencies and economies ofscalescale.Net interest income improved as a percentage of revenue to 3.5% in the first quarter 2002 compared to 3.3% in 2001. This improvement resulted primarily from our increased investment in various securities of available cash flow from operations plus approximately $420.6 million in proceeds from our June 2001 stock offering, which increased interest income by 26.4% compared to 2001.
Our overall tax rate increased to 35.5% in the first quarter 2002 compared to (17.9%) in 2001. Excluding acquisition, restructuring and
decliningwrite-off charges, the tax rate was 35.5% in 2002 and 2001.-18-
CONCORD EFS, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONSFirst Quarter 2002 Compared to 2001, continued
Net income as a percentage of revenue increased to 11.7% in the first quarter 2002 from (6.9%) in 2001. Excluding acquisition, restructuring and write-off charges, net income as a percentage of revenue was 18.4% in 2002 compared to 16.1% in 2001. This increase is the result of improved margins, reduced selling, general and administrative expenses as a percentage of
revenue. Net interest income improved as a percent ofrevenueto 3.3% in 2001 compared to 2.5% in 2000. The improvement was the result of returns we received on our investing available cash from operations, whichand increased interestincome by 56.5% over 2000. Our overall tax rate decreased to (17.9%) for the three months ended March 31, 2001 compared to 36.2% for the same period in 2000. Excluding acquisition and restructuring charges, the tax rate was 35.5% in 2001 compared to 35.9% for the same period in 2000. Net income, as a percent of revenue, decreased to (6.9%) for the three months ended March 31, 2001 from 13.7% for the same period in 2000. The primary factor in this net margin decrease was the acquisition and restructuring charges. Excluding these charges and related tax items, net income, as a percent of revenue, increased to 16.1% for the three months ended March 31, 2001 compared to 13.9% for the same period in 2000. -16-CONCORD EFS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS March 31, 2001income.Liquidity and Capital Resources
In the
three months ended March 31 2001,first quarter 2002 wegenerated $69.6 million from operating activities. We also received $13.0used $181.2 million inproceeds from Federal Home Loan Bank (FHLB) advances and $11.1operating activities due primarily to the timing of settlement operations. We received $15.9 million from stock issued for exercises of options under our stock optionplan. Deposits decreased $1.1plan and deposits increased $14.3 million.From cash provided from operating and financing activities, we invested $46.1We liquidated $20.6 million in securities, net ofsalespurchases and maturities. Wealsospent$23.8$37.0 million on capital additions and$7.5$15.5 millionto purchase merchant contracts. Additionally, we reduced long-term debt by $14.7 million.for business acquisitions. Our capital additions were primarily forcommunications equipment, point-of-sale terminals, newcapitalized and purchased software and computerequipmentfacilities andcapitalized software.equipment.Our assets are primarily monetary, consisting of cash, assets convertible into cash, securities
owned,and receivables. Because of their liquidity, these assets are not significantly affected by inflation. We believe that anticipated replacement costs ofequipment, furniture,software, facilities andleasehold improvementsequipment will not materially affect operations. However, the rate of inflation affects our expenses, such as those for employee compensation and telecommunications, which may not be readily recoverable in the price of services offered by us.We believe that our cash and cash equivalents, securities, available credit and cash generated from operations are adequate to meet our capital and operating needs. EFS National Bank and EFS Federal Savings Bank, our
wholly-ownedwholly owned financial institution subsidiaries, exceed required regulatory capital ratios.-19-
CONCORD EFS, INC. AND SUBSIDIARIES
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKQuantitative and Qualitative Disclosures About Market Risk
ThereSince December 31, 2001, there have been no
significantchanges with regard to market risk that would require further quantitative or qualitative disclosure. For ourdisclosures onquantitative and qualitative disclosures about market risksincefor the fiscal year ending December 31,2000. For additional information,2001, refer to Exhibit99.3 - Supplemental Consolidated Financial Statements and Notes13 to our annual report on Form8-K/A10-K, filedApril 16, 2001. -17-on February 26, 2002. -20-
CONCORD EFS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATIONItem
1:1. Legal ProceedingsFrom time to time Concord is involved in various litigation matters arising out of the conduct of its business. Pending matters that are currently material to Concord were reported in Concord’s Annual Report on Form 10-K for the year ended December 31, 2001. There were no material developments in the litigation matter previously disclosed except for the developments discussed below.
As previously disclosed, in September 2000, EFS National Bank
has beenwas named as a defendant in a purported class action lawsuit filedin September 2000in the Circuit Court of Tennessee for the Thirtieth Judicial District at Memphis alleging that certain of EFS NationalBank'sBank’s rate and fee changes were improper under Tennessee law due to allegedly deficient notice. The plaintiffsrecentlyfiled an amended complaint alleging that the class consists of at least 60,000 merchants who were subjected to the allegedly improper rate and feechanges.changes over a several-year period. The amended complaint seeks damages in excess of$15$15.0 million as well as injunctive relief and unspecified punitive damages, treble damages, attorney fees, and costs.The parties are currently engaged in settlement discussions and have advised the Tennessee Court that they have made significant progress towards and are close to resolving this matter. The parties have reached an agreement in principle to settle the case, subject to the completion of mutually satisfactory documentation by the parties and approval by the Court. The maximum amount of credits and payments by EFS National Bank under the proposed settlement would be $37.6 million, payable over a five-year period. A portion of such amount would be used to pay plaintiffs’ counsel and certain claims administration expenses. Concord believes the actual amount of credits and payments if the proposed settlement becomes final will be less than the $37.6 million because credits and payments are contingent upon merchant retention and submission of claims.
A number of procedural steps must now be undertaken before the proposed settlement becomes final. Those steps include, without limitation, finalizing and executing the proposed settlement agreement and related documentation, presenting the proposed settlement agreement and related documentation to the Court and seeking preliminary approval from the Court, sending notices to all potential class members, and allowing time for potential class members (a) to opt out of the class or to remain in the class and (b) to object to the proposed settlement and to attempt to persuade the court not to approve the proposed settlement.
There can be no assurance that the foregoing steps will be completed or that the proposed settlement will become final, on the terms described above or otherwise.
A purported class action complaint with similar allegations and requests for relief has been filed in St. Charles County,
Missouri.Missouri, but there has not been a substantial amount of activity in the Missouri case. The proposed settlement would also resolve the issues in the Missouri case.Although these matters are in the preliminary stages, EFS National Bank believes
thatit has various defenses to the claims against it,are without meritand if these matters cannot be resolved by settlement, EFS National Bank intends to vigorously defend against all claims.Card Payment Services, a subsidiary of the Company has been named as a defendant in a class action suit filed in the District Court, Harrison County, Texas. Plaintiffs allege that the subsidiary has violated Section 227(b)(1)(C) of the Telephone Consumer Protection Act, 47 U.S.C. Section 227 et seq., and Section 35.47(g) of the Texas Business and Commerce Code by sending unsolicited advertisements by facsimile. Plaintiffs seek injunctive relief and statutory damages in the amount of $500 per facsimile and treble damages in the amount of $1500 per facsimile for willful or knowing violations of the statutes. The full amount of damages sought by plaintiffs is not known at this time. Although this matter is in the preliminary stages, Card Payment Services intends to file an answer denying all liability to Plaintiffs and intends to vigorously defend itself against all claims. We are also a party to various routine lawsuits arising out fo the conduct of our business, none of which are expected to have a material adverse effect upon our financial condition or results of operations.-21-
CONCORD EFS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATIONItem
2: Changes in Securities and Use of Proceeds On February 1, 2001, we issued 23,970,756 shares of our common stock in connection with our acquisition of all the outstanding common stock of Star Systems, Inc. (STAR). In the merger, STAR became our wholly-owned subsidiary, and all the outstanding common stock of STAR at the time of the merger was converted into shares of our common stock. The 23,970,756 shares issued to the 49 shareholders of STAR who held all of the outstanding shares of STAR common stock at the time of the merger were issued without registration under the Securities Act of 1933 in reliance on the exemption under Section 4(2) of that Act. We believe that each of these shareholders was either an accredited investor or had such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of the investment in shares of Concord; was afforded access to material information about Concord, understood that the shares of Concord acquired in the merger were "restricted securities" and agreed not to transfer those shares except pursuant to an effective registration statement under the Securities Act of 1933 or an exemption from registration under that act. -18-Item 6:6. Exhibits and Reports on Form8-K. (a) Exhibits 3.1 Agreement and Plan of Merger among Concord EFS, Inc., Orion Acquisition Corporation, and Star Systems, Inc. dated as of October 6, 2000 is incorporated herein by reference to Exhibit 10 to the quarterly report on Form 10-Q, (File No. 000-13848) filed on November 14, 2000. 3.2 Restated Certificate of Incorporation of the registrant is incorporated herein by reference to Exhibit 4.1 to the registrant's registration statement of Form S-8 (File No. 333-74215) filed on March 10, 1999. 3.3 Certificate of Amendment to the Restated Certificate of Incorporation of the registrant is incorporated herein by reference to Exhibit 3.3 to Amendment No. 2 to the registrant's registration statement on Form S-3 (File No 333-77829), filed on June 14, 1999. 3.4 By-Laws of the registrant are incorporated herein by reference to Exhibit 4.2 to the registrant's registration statement on Form S-8 (File No. 333- 74215) filed on March 10, 1999. (b) Reports on Form8-K
(a) Exhibits
Exhibit Number Description of Exhibit 3.1 Restated Certificate of Incorporation of Concord EFS, Inc. is incorporated herein by reference to Exhibit 4.4 to Amendment No. 1 to Concord’s registration statement on Form S-3 (File No. 333-61084), filed on June 4, 2001. 3.2 Amended and Restated Bylaws of Concord EFS, Inc. are incorporated herein by reference to Exhibit 4.2 to Concord’s registration statement on Form S-8 (File No. 333-74215), filed on March 10, 1999. 10.1 Amendment, dated November 16, 2000, to Concord EFS, Inc. 1993 Incentive Stock Option Plan (Second 1999 Restatement)
(b) Reports on Form 8-K On
February 14, 2001,January 22, 2002, we filed a current report on Form 8-Kannouncing we had completed our acquisition of Star Systems, Inc. on February 1, 2001. We subsequently amended the February 14, 2001 Form 8-K on April 16, 2001to report,the audited financial statementsunder Item 5 ofStar Systems, Inc. andthat form, developments with regard toreport and file the supplemental financial statements of Concord giving retroactive effect to the merger of Concord and STAR on February 1, 2001, which was accounted for as a pooling of interests. -19-pending legal proceedings. -22-
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: May 9, 2002 By: /s/ Dan M. Palmer
Dan M. Palmer
Chairman of the Board and
Chief Executive OfficerDate: May 9, 2002 By: /s/ Edward T. Haslam
Edward T. Haslam
Senior Vice President,
Chief Financial Officer and Treasurer-23-
CONCORD EFS, INC.
Date: May 15, 2001 By: /s/ Dan M. Palmer -------------------------- Dan M. Palmer Chairman of the Board and Chief Executive Officer Date: May 15, 2001 By: /s/ Edward T. Haslam ------------------------- Edward T. Haslam Chief Financial Officer -20-
Exhibit | ||
Number | Description of Exhibit | |
3.1 | Restated Certificate of Incorporation of Concord EFS, Inc. is incorporated herein by reference to Exhibit 4.4 to Amendment No. 1 to Concord’s registration statement on Form S-3 (File No. 333-61084), filed on June 4, 2001. | |
3.2 | Amended and Restated Bylaws of Concord EFS, Inc. are incorporated herein by reference to Exhibit 4.2 to Concord’s registration statement on Form S-8 (File No. 333-74215), filed on March 10, 1999. | |
10.1 | Amendment, dated November 16, 2000, to Concord EFS, Inc. 1993 Incentive Stock Option Plan (Second 1999 Restatement) |