UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2002
Commission file no. 0-14948
FISERV, INC.
(Exact name of registrant as specified in its charter)
WISCONSIN |
39-1506125 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
255 FISERV DRIVE, BROOKFIELD, WISCONSIN |
53045 | |
(Address of principal executive offices) |
(Zip code) |
Registrants telephone number, including area code: (262) 879-5000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
(Title of Class)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $0.01 Par Value
(Title of Class)
Preferred Stock Purchase Rights
(Title of Class)
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 ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of January 31, 2003: $5,715,000,000
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No ¨
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of June 28, 2002: $6,738,000,000.
Indicate the number of shares outstanding of each of the registrants classes of common stock, as of January 31, 2003: 191,991,614
DOCUMENTS INCORPORATED BY REFERENCE:
2002 Annual Report to ShareholdersParts II, IV
Proxy Statement for April 3, 2003, Annual Meeting of ShareholdersPart III
Form 10-K
December 31, 2002
PART I |
Page | |||
Item 1. |
1 | |||
Item 2. |
8 | |||
Item 3. |
9 | |||
Item 4. |
9 | |||
9 | ||||
PART II |
||||
Item 5. |
Market for Registrants Common Equity and Related Shareholder Matters |
10 | ||
Item 6. |
11 | |||
Item 7. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
11 | ||
Item 7a. |
11 | |||
Item 8. |
11 | |||
Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
11 | ||
PART III |
||||
Item 10. |
11 | |||
Item 11. |
11 | |||
Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters |
12 | ||
Item 13. |
12 | |||
Item 14. |
12 | |||
PART IV |
||||
Item 15. |
Exhibits, Financial Statement Schedules and Reports on Form 8-K |
13 |
PART I
|
Special Note Regarding Forward-Looking Statements
Certain matters discussed in this Annual Report on Form 10-K are forward-looking statements intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statement will include words such as believes, anticipates or expects, or words of similar import. Similarly, statements that describe future plans, objectives or goals of Fiserv, Inc. (Fiserv or the Company) are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those currently anticipated. Factors that could affect results include, among others, economic, competitive, governmental and technological factors affecting the Companys operations, markets, services and related products, prices and other factors discussed in the Companys prior filings with the Securities and Exchange Commission. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements.
Fiserv is a leading provider of integrated data processing and information management systems to the financial industry. The Company was formed in 1984 through the combination of two major regional data processing firms that began as the data processing operations of their parent financial institutions. Historically, these firms expanded operations by developing a range of services for their parent organizations, as well as other financial institutions. Since its organization, Fiserv has grown by developing highly specialized services and product enhancements, adding new clients and acquiring firms complementing the Fiserv organization.
As a leading technology resource, Fiserv serves more than 13,000 financial services providers worldwide, including banks, broker-dealers, credit unions, financial planners and investment advisers, insurance companies and agents, leasing companies, mortgage lenders and savings institutions. The Company operates centers nationwide for full-service financial data processing, software system development, item processing and check imaging, technology support and related product businesses. In addition, the Company has business support centers in Argentina, Australia, Canada, Colombia, Indonesia, the Philippines, Puerto Rico, Poland, Singapore and the United Kingdom.
Business Strategy
The market for products and services offered by financial institutions continues to undergo change. The financial industry is introducing and implementing new alternative lending and investment products with great frequency. The distinctions among financial services traditionally offered by banking and thrift organizations as well as by securities and insurance firms continue to narrow. Financial institutions diversify and consolidate on an ongoing basis in response to market pressures, as well as under the auspices of regulatory agencies.
Although such market changes have led to consolidations that have reduced the number of financial institutions in the United States, consolidation has not resulted in a material reduction of the number of customers or financial accounts serviced by the financial industry as a whole. New organizations entering the once limited financial services industry have opened new markets for Fiserv services.
To stay competitive in this changing marketplace, financial institutions are providing their customers a broad variety of new products and services that are typically transaction-oriented and fee-
1
based. The growing volume and types of transactions and accounts have increased the data processing requirements of these institutions. As a consequence, Fiserv believes that the financial services industry is one of the largest users of data processing products and services.
Moreover, Fiserv expects that the financial industry will continue to require significant commitments of capital and human resources to the information systems requirements, to require application of more specialized systems and to require development, maintenance and enhancement of applications software. Fiserv believes that economies of scale in data processing operations are essential to justify the required level of expenditures and commitment of human resources.
In response to these market dynamics, financial institutions obtain data processing services by different means than in the past. Many smaller, local and regional third-party data processors are leaving the business or consolidating with larger providers. A number of large financial institutions previously providing third-party processing services for other institutions have withdrawn from the business to concentrate on their primary, core businesses. Similarly, an increasing number of financial institutions that previously developed their own software systems and maintained their own data processing operations have outsourced their data processing requirements by licensing their software from a third party or by contracting with third-party processors to reduce costs and enhance their products and services. Outsourcing can involve the licensing of software, which eliminates the costly technical expertise within a financial institution, or the utilization of service bureaus, facilities management or resource management capabilities. Fiserv provides all of these options to the financial industry.
To capitalize on these industry trends, Fiserv has implemented a strategy of continuing to develop new products, improving the cost effectiveness of services provided to clients, aggressively soliciting new clients, and making both opportunistic and strategic acquisitions. In 2001, Fiserv acquired 12 businesses, adding combined annual revenues of more than $380 million and approximately 4,000 new employees. In 2002, Fiserv acquired five businesses, with combined annual revenues of more than $210 million and approximately 1,100 employees. The following is a summary of acquisitions made by Fiserv since its organization.
Acquisition History
Formed |
Acquired |
Company |
Service | |||
1964 |
July 1984 |
First Data Processing, Milwaukee, WI |
Data processing | |||
1971 |
July 1984 |
Sunshine State Systems, Tampa, FL |
Data processing | |||
1966 |
Nov. 1984 |
San Antonio, Inc., San Antonio, TX |
Data processing | |||
1982 |
Oct. 1985 |
Sendero Corporation, Scottsdale, AZ |
Asset/liability management | |||
1962 |
Oct. 1985 |
First Trust Corporation, Denver, CO |
Retirement plans | |||
1962 |
Oct. 1985 |
First Retirement Marketing, Denver, CO |
Retirement plan marketing | |||
1973 |
Jan. 1986 |
On-Line, Inc., Seattle, WA |
Data processing, forms | |||
1966 |
May 1986 |
First City Financial Systems, Inc., Beaumont, TX |
Data processing | |||
1962 |
Feb. 1987 |
Pamico, Inc., Milwaukee, WI |
Specialized forms | |||
1975 |
Apr. 1987 |
Midwest Commerce Data Corp., Elkhart, IN |
Data processing | |||
1969 |
Apr. 1987 |
Fidelity Financial Services, Inc., Spokane, WA |
Data processing | |||
1965 |
Oct. 1987 |
Capbanc Computer Corp., Baton Rouge, LA (sold 1991) |
Data processing | |||
1971 |
Feb. 1988 |
Minnesota On-Line Inc., Minneapolis, MN |
Data processing | |||
1965 |
May 1988 |
Citizens Financial Corporation, Cleveland, OH |
Data processing | |||
1980 |
May 1988 |
ZFC Electronic Data Services, Inc., Bowling Green, KY |
Data processing | |||
1969 |
June 1988 |
GESCO Corporation, Fresno, CA |
Data processing | |||
1967 |
Nov. 1988 |
Valley Federal Data Services, Los Angeles, CA |
Data processing | |||
1984 |
Dec. 1988 |
Northeast Savings Data Services, Hartford, CT |
Data processing |
2
Formed |
Acquired |
Company |
Service | |||
1982 |
May 1989 |
Triad Software Network, Ltd., Chicago, IL (sold 1996) |
Data processing | |||
1969 |
Aug. 1989 |
Northeast Datacom, Inc., New Haven, CT |
Data processing | |||
1978 |
Feb. 1990 |
Financial Accounting Services Inc., Pittsburgh, PA |
Data processing | |||
1974 |
June 1990 |
Accurate Data On Line, Inc., Titusville, FL |
Data processing | |||
1982 |
June 1990 |
GTE EFT Services Money Network, Fresno, CA |
EFT networks | |||
1968 |
July 1990 |
First Interstate Management, Milwaukee, WI |
Data processing | |||
1982 |
Oct. 1990 |
GTE ATM Networks, Fresno, CA |
EFT networks | |||
1867 |
Nov. 1990 |
Boston Safe Deposit & Trust Co. IP services, MA |
Item processing | |||
1968 |
Dec. 1990 |
First Bank, N.A. IP services, Milwaukee, WI |
Item processing | |||
1979 |
Apr. 1991 |
Citicorp Information Resources, Inc., Stamford, CT |
Data processing | |||
1980 |
Apr. 1991 |
BMS Processing, Inc., Randolph, MA |
Item processing | |||
1979 |
May 1991 |
FHLB of Dallas IP services, Dallas, TX |
Item processing | |||
1980 |
Nov. 1991 |
FHLB of Chicago IP services, Chicago, IL |
Item processing | |||
1977 |
Feb. 1992 |
Data Holdings, Inc., Indianapolis, IN |
Automated card services | |||
1980 |
Feb. 1992 |
BMS On-Line Services, Inc. (assets), Randolph, MA |
Data processing | |||
1982 |
Mar. 1992 |
First American Information Services, St. Paul, MN |
Data processing | |||
1981 |
July 1992 |
Cadre, Inc., Avon, CT (sold 1996) |
Disaster recovery | |||
1992 |
July 1992 |
Performance Analysis, Inc., Cincinnati, OH |
Asset/liability management | |||
1986 |
Oct. 1992 |
Chase Manhattan Bank, REALM Software, NY |
Asset/liability management | |||
1984 |
Dec. 1992 |
Dakota Data Processing, Inc., Fargo, ND |
Data processing | |||
1983 |
Dec. 1992 |
Banking Group Services, Inc., Somerville, MA |
Item processing | |||
1968 |
Feb. 1993 |
Basis Information Technologies, Atlanta, GA |
Data processing, EFT | |||
1986 |
Mar. 1993 |
IPC Service Corporation (assets), Denver, CO |
Item processing | |||
1973 |
May 1993 |
EDS FHLB Seattle (assets), Seattle, WA |
Item processing | |||
1982 |
June 1993 |
Datatronix Financial Services, San Diego, CA |
Item processing | |||
1966 |
July 1993 |
Data Line Service, Covina, CA |
Data processing | |||
1978 |
Nov. 1993 |
Financial Processors, Inc., Miami, FL |
Data processing | |||
1974 |
Nov. 1993 |
Financial Data Systems, Jacksonville, FL |
Item processing | |||
1961 |
Nov. 1993 |
Financial Institutions Outsourcing, Pittsburgh, PA |
Data processing | |||
1972 |
Nov. 1993 |
Data-Link Systems, South Bend, IN |
Mortgage banking services | |||
1985 |
Apr. 1994 |
National Embossing Company, Inc., Houston, TX |
Automated card services | |||
1962 |
May 1994 |
Boatmens Information Systems of Iowa, Des Moines, IA |
Data processing | |||
1981 |
Aug. 1994 |
FHLB of Atlanta IP services, Atlanta, GA |
Item processing | |||
1989 |
Nov. 1994 |
CBIS Imaging Technology Banking Unit, Maitland, FL |
Imaging technology | |||
1987 |
Dec. 1994 |
RECOM Associates, Inc., Tampa, FL (sold 1998) |
Network integration | |||
1970 |
Jan. 1995 |
Integrated Business Systems, Glendale, CA |
Specialized forms | |||
1977 |
Feb. 1995 |
BankLink, Inc., New York, NY |
Cash management | |||
1976 |
May 1995 |
Information Technology, Inc., Lincoln, NE |
Software and services | |||
1957 |
Aug. 1995 |
Lincoln Holdings, Inc., Denver, CO |
DP for retirement planning | |||
1993 |
Sept. 1995 |
SRS, Inc., Austin, TX |
Data processing | |||
1992 |
Sept. 1995 |
ALLTELs Document Management Services, CA, NJ |
Item processing | |||
1978 |
Nov. 1995 |
Financial Information Trust, Des Moines, IA |
Data processing | |||
1983 |
Jan. 1996 |
UniFi, Inc., Fort Lauderdale, FL |
Software and services | |||
1982 |
Nov. 1996 |
Bankers Pension Services, Inc., Tustin, CA |
DP for retirement planning | |||
1992 |
Apr. 1997 |
AdminaStar Communications, Indianapolis, IN |
Laser print/mailing services |
3
Formed |
Acquired |
Company |
Service | |||
1982 |
May 1997 |
Interactive Planning Systems, Atlanta, GA |
PC-based financial systems | |||
1983 |
May 1997 |
BHC Financial, Inc., Philadelphia, PA |
Securities services | |||
1968 |
Sept. 1997 |
FIS, Inc., Orlando, FL, and Baton Rouge, LA |
Data processing | |||
n/a |
Sept. 1997 |
Stephens Inc. clearing business, Little Rock, AR |
Securities services | |||
1986 |
Oct. 1997 |
Emerald Publications, San Diego, CA |
Financial seminars and training | |||
1968 |
Oct. 1997 |
Central Service Corp., Greensboro, NC |
Data and item processing | |||
1993 |
Oct. 1997 |
Savoy Discount Brokerage, Seattle, WA |
Securities services | |||
1990 |
Dec. 1997 |
Hanifen, Imhoff Holdings, Inc., Denver, CO |
Securities services | |||
1980 |
Jan. 1998 |
Automated Financial Technology, Inc., Malvern, PA |
Data processing | |||
1981 |
Feb. 1998 |
The LeMans Group, King of Prussia, PA |
Automobile leasing software | |||
n/a |
Feb. 1998 |
PSI Group, Seattle, WA |
Laser printing | |||
1956 |
Apr. 1998 |
Network Data Processing Corporation, Cedar Rapids, IA |
Insurance data processing | |||
1977 |
Apr. 1998 |
CUSA Technologies, Inc., Salt Lake City, UT |
Software and services | |||
1982 |
May 1998 |
Specialty Insurance Service, Orange, CA |
Insurance data processing | |||
1985 |
Aug. 1998 |
Deluxe Card Services, St. Paul, MN |
Automated card services | |||
1981 |
Oct. 1998 |
FHLB of Topeka IP services, Topeka, KS |
Item processing | |||
n/a |
Oct. 1998 |
FiCATS, Norristown, PA |
Item processing | |||
1984 |
Oct. 1998 |
Life Instructors, Inc., New Providence, NJ |
Insurance/securities training | |||
1994 |
Nov. 1998 |
ASI Financial, Inc., New Jersey and New York |
PC-based financial systems | |||
1986 |
Dec. 1998 |
The FREEDOM Group, Inc., Cedar Rapids, IA |
Insurance data processing | |||
1994 |
Jan. 1999 |
QuestPoint, Philadelphia, PA |
Item processing | |||
1981 |
Feb. 1999 |
Eldridge & Associates, Lafayette, CA |
PC-based financial systems | |||
1984 |
Feb. 1999 |
RF/Spectrum Decision Science Corporation, Oakland, CA |
Software and services | |||
1978 |
Mar. 1999 |
FIPSCO, Inc., Des Plaines, IL |
Insurance marketing systems | |||
1987 |
Apr. 1999 |
Progressive Data Solutions, Inc./Infinity Software Systems, Inc., Orlando, FL |
Insurance software systems | |||
1973 |
June 1999 |
JWGenesis Clearing Corporation, Boca Raton, FL |
Securities services | |||
1987 |
June 1999 |
Alliance ADS, Redwood Shores, CA |
Imaging technology | |||
1962 |
Aug. 1999 |
Envision Financial Technologies, Inc., Chicago, IL |
Data processing | |||
1995 |
Oct. 1999 |
Pinehurst Analytics, Inc., Chapel Hill, NC |
PC-based financial systems | |||
1982 |
Dec. 1999 |
Humanic Design Corporation, Mahwah, NJ (sold 2001) |
Software and services | |||
1983 |
Jan. 2000 |
Patterson Press, Inc., Nashville, TN |
Card services | |||
1982 |
May 2000 |
Resources Trust Company, Denver, CO |
DP for retirement planning | |||
1986 |
Sept. 2000 |
National Flood Services, Inc., Kalispell, MT |
Insurance data processing | |||
1982 |
Jan. 2001 |
Benefit Planners, Boerne, TX |
Insurance data processing | |||
n/a |
Feb. 2001 |
Marshall & Ilsley IP services, IA, MN, MO |
Item processing | |||
1972 |
Mar. 2001 |
Facilities and Services Corp., Agoura Hills, Novato, CA |
Insurance software systems | |||
1991 |
Mar. 2001 |
Remarketing Services of America, Inc., Amherst, NY |
Automobile leasing services | |||
1982 |
July 2001 |
EPSIIA Corporation, Austin, TX |
Data processing | |||
1996 |
July 2001 |
Catapult Technology Limited, London, England |
Software and services | |||
1985 |
Sept. 2001 |
FHLB of Pittsburgh IP services, Pittsburgh, PA |
Item processing | |||
1959 |
Nov. 2001 |
NCR bank processing operations, Dayton, OH |
Data and item processing | |||
1972 |
Nov. 2001 |
NCSI, Rockville, MD |
Insurance data processing | |||
1940 |
Nov. 2001 |
Integrated Loan Services, Rocky Hill, CT |
Lending services | |||
1954 |
Nov. 2001 |
Trewit Inc., Minneapolis, MN |
Insurance data processing | |||
n/a |
Nov. 2001 |
FACT 400 credit card solution, Bogotá, Colombia |
Software and services |
4
Formed |
Acquired |
Company |
Service | |||
1991 |
May 2002 |
Case Shiller Weiss, Inc., Cambridge, MA |
Lending services | |||
1974 |
Aug. 2002 |
Investec Ernst & Companys clearing operations, NY |
Securities clearing services | |||
n/a |
Nov. 2002 |
Willis Groups TPA operations, Nashville, Wichita |
Insurance data processing | |||
1989 |
Nov. 2002 |
EDS Corporations Consumer Network Services |
EFT data processing | |||
business, New Jersey |
||||||
1979 |
Dec. 2002 |
Lenders Financial Services, Agoura Hills, CA |
Lending services | |||
1989 |
Jan. 2003 |
AVIDYN, Inc., Dallas, TX |
Insurance data processing |
Principal Services
The Companys core business is serving the needs of banking, lending, insurance, financial planners and securities providers. With its wide array of industry-specific products, Fiserv believes its clients can satisfy their customers growing desire for anywhere, anytime financial services. The Companys operations have been classified into two primary business segments. The Financial institution outsourcing, systems and services business segment provides account and transaction processing solutions and services to financial institutions and other financial intermediaries. The Securities processing and trust services business segment provides securities processing solutions and retirement plan administration services to brokerage firms, investment advisers and financial institutions. Fiserv also provides plastic card issuance, design, personalization and mailing services, and document solutions.
Financial Institution Outsourcing, Systems and Services. Fiserv provides financial solutions that are focused on technology needs to over 8,100 financial institutions, including banks, credit unions, leasing companies, mortgage lenders and savings institutions. The Company provides comprehensive solutions designed to meet the information processing requirements of financial institutions, including account and transactions processing services, item processing, loan servicing and lending systems. Fiserv also offers its clients service bureau and in-house processing systems, e-commerce solutions and complementary products. These complementary products and back-office solutions include treasury and investment management, decision support and performance measurement solutions, electronic funds transfer services, imaging systems, call center systems, loan origination and tracking, auto leasing software, data warehousing and data mining, and credit services. Fiserv provides a wide range of information processing solutions through multiple delivery channels primarily in the United States. In addition, many of the Companys systems have applications designed for the unique requirements of financial institutions located outside North America where the Company provides services in over 65 countries.
The insurance industry, like other financial industries, has requirements for basic administration services and information processing systems. Fiserv provides comprehensive insurance processing services and products to the insurance and related industries. Fiserv insurance solutions include administration services, systems and software for life, annuity, health, property and casualty, flood and workers compensation insurance companies. The Company also provides claims workstation software, financial accounting systems, computer-based training for insurance and securities, administrative services for employee benefit programs and electronic sales platforms that can be delivered over the Internet.
Securities Processing and Trust Services. Fiserv provides high-quality, integrated securities clearing, execution and facilitation of traditional and Internet brokerage services through advanced technology that makes executing trades faster, easier and more economical, focused customer service and economies of scale. The Companys clients include over 400 broker-dealers and financial institutions, including full-service and discount broker-dealers, registered investment advisers, municipal bond dealers, underwriters, retail brokerage operations of financial institutions, insurance firms and mutual fund companies.
5
Fiserv is a leading provider of retirement plan products and back-office services to financial advisers and is the largest independent trust company in the United States. The Companys clients to whom it provides self-directed retirement plan administration services and mutual fund custody and trading services include financial institutions, financial intermediaries, financial planners, investment advisers, third-party pension administrators and individual investors.
Financial information concerning the Companys industry segments is included in Note 8 to the Consolidated Financial Statements contained in the Companys Annual Report to Shareholders included in this Annual Report on Form 10-K as Exhibit 13 and such information is incorporated herein by reference.
Servicing the Market
The market for Fiserv account and transaction processing services and products has specific needs and requirements, with strong emphasis placed by clients on software flexibility, product quality, reliability of service, comprehensiveness and integration of product lines, timely introduction of new products and features, cost effectiveness and service excellence. Through its multiple product offerings, the Company believes it successfully services these market needs and requirements for clients ranging in size from start-ups to some of the largest financial services providers in the world.
Fiserv believes that the position it holds as an independent, growth-oriented company dedicated to its business is an advantage to its clients as compared to many of its competitors that are regional or local cooperatively owned organizations, data processing subsidiaries or affiliates of financial institutions or hardware vendors. Due to the economies of scale gained through its broad market presence, Fiserv offers clients a selection of information management and data processing solutions designed to meet the specific needs of the ever-changing financial services industry. The Company believes this independence and primary focus on the financial services industry helps its business development, client service and product support teams remain responsive to the technology needs of its market.
The Client Comes First is one of the Companys founding principles. It is a belief backed by a dedication to providing ongoing client service and supportno matter the client size.
The Company believes its commitment of substantial resources to training and technical support helps it retain clients. Fiserv conducts the majority of its new and ongoing client training in its technology centers, where the Company maintains fully equipped demonstration and training facilities containing equipment used in the delivery of Fiserv services. Fiserv also provides local and on-site training services to its clients.
Fiserv has been an international company since 1985, when its banking products were first launched throughout Europe, Asia and Latin America. Since then, the Company has developed an infrastructure for supporting clients in international markets. Fiserv currently maintains international support staffs in Argentina, Australia, Colombia, Indonesia, the Philippines, Puerto Rico, Poland, Singapore and the United Kingdom, and operates a joint venture in Canada.
Product Development
To meet the changing technology needs of the clients Fiserv serves the Company continually develops, maintains and enhances its systems. In 2002, product development expenses represented approximately 8% of the Companys processing and services revenues.
The Fiserv network of development and financial information technology centers applies the shared expertise of multiple Fiserv teams to design, develop and maintain specialized processing systems around its leading technology platforms. The applications of its account processing systems meet the preferences and diverse requirements of the various international, national, regional or local market-specific financial service environments of the Companys many clients.
Although multiple Fiserv development and financial technology centers share the Companys variety of nationally developed and supported software, each center has specialized capabilities that enable it to offer system application features and functions specialized to its client base. If the clients
6
requirements warrant, Fiserv purchases software programs from third parties that are interfaced with existing Fiserv systems. In developing its products, Fiserv stresses interaction with and responsiveness to the needs of its clients.
Fiserv provides a dedicated solution that is designed, developed, maintained and enhanced according to each clients goals for service quality, business development, asset and liability mix, local market positioning and other user-defined parameters.
Fiserv regards its software as proprietary and utilizes a combination of trade secrecy laws, internal security practices and employee non-disclosure agreements for protection. The Company believes that legal protection of its software, while important, is less significant than the knowledge and experience of the Companys management and personnel and their ability to develop, enhance and market new products and services. The Company believes that it holds all proprietary rights necessary for the conduct of its business.
Competition
The market for information technology products and services within the financial industry is highly competitive. The Companys principal competitors include internal data processing departments, data processing affiliates of large companies or large computer hardware manufacturers, independent computer service firms and processing centers owned and operated as user cooperatives. Some of these competitors possess substantially greater financial, sales and marketing resources than the Company. Competition for in-house data processing and software departments is intensified by the efforts of computer hardware vendors who encourage the growth of internal data centers.
Competitive factors for processing services include product quality, reliability of service, comprehensiveness and integration of product lines, timely introduction of new products and features, and price. The Company believes that it competes favorably in each of these categories. In addition, the Company believes that its position as an independent vendor, rather than as a cooperative, an affiliate of a larger corporation or a hardware vendor, is a competitive advantage.
We compete with vendors that offer similar transaction processing products and services to financial institutions and other financial intermediaries, including ALLTEL Information Services, Inc., Bisys, Inc., Jack Henry and Associates, Inc. and Metavante Corporation. There has been significant consolidation among providers of information technology products and services to financial institutions, and we believe this consolidation will continue in the future.
Government Regulation
The Companys data processing subsidiaries are not directly subject to federal or state regulations specifically applicable to financial institutions such as banks, thrifts and credit unions. However, as a provider of services to these financial institutions, the Companys data processing operations are examined on a regular basis by the Federal Deposit Insurance Corporation, the National Credit Union Association, the Office of Thrift Supervision, the Office of the Comptroller of the Currency and various state regulatory authorities. In addition, independent auditors annually review several of the Companys operations to provide internal control evaluations for its clients auditors and regulators.
As trust companies under Colorado law, First Trust Corporation, Lincoln Trust Company and Trust Industrial Bank, subsidiaries of the Company, are subject to the regulations of the Colorado Division of Banking. In 1991, First Trust Corporation received approval of its application for Federal Deposit Insurance Corporation coverage of its customer deposits.
The Companys securities processing business, Fiserv Securities, Inc., is subject to the broker-dealer rules of the Securities and Exchange Commission and the New York Stock Exchange, as well as the National Association of Securities Dealers and other stock exchanges of which it is a member.
7
Employees
Fiserv employs approximately 19,400 specialists in its information management centers and related product and service companies. This service support network includes employees with backgrounds in computer science and the financial industry, often complemented by management and other direct experience in banks, credit unions, insurance companies and agencies, mortgage firms, savings and other financial services business environments.
Fiserv employees provide expertise in sales and marketing; account management and client services; computer operations, network control and technical support; programming, software development, modification and maintenance; conversions and client training; financial planning and related support services.
In supporting international markets, Fiserv works closely with its clients to help ensure their continued success. Fiserv employees speak the same language as their clients and also understand the differences in the style of doing business, as well as the financial products requirements and regulations unique to each client and its specific market.
Fiserv employees are not represented by a union, and there have been no work stoppages, strikes or organizational attempts. The service nature of the Fiserv business makes its employees an important corporate asset, and while the market for qualified personnel is competitive, the Company does not experience significant difficulty with hiring or retaining its staff of top industry professionals. In assessing companies to acquire, the quality and stability of the prospective companys staff are emphasized.
Fiserv attributes its ability to attract and keep quality employees to, among other things, the Companys growth and dedication to state-of-the-art software development tools and hardware technologies.
Available Information
The Company maintains a Website with the address www.fiserv.com. The Company is not including the information contained on the Companys Website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K. The Company makes available free of charge (other than an investors own Internet access charges) through its Website its Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after the Company electronically files such material with, or furnishes such material to, the Securities and Exchange Commission.
Fiserv currently operates full-service data centers, software system development centers, and item processing and back-office support centers in 165 cities (154 in the United States).
The Company owns 12 facilities; all other buildings in which centers are located are subject to leases expiring through 2003 and beyond. The Company owns or leases approximately 161 mainframe computers (Amdahl, Compaq Alpha, Data General, Hewlett Packard, IBM, NCR, Tandem and Unisys). In addition, the Company maintains its own national data communication network consisting of communications processors and leased lines.
Fiserv believes its facilities and equipment are generally well maintained and are in good operating condition. The Company believes that the computer equipment it owns and its various facilities are adequate for its present and foreseeable business. Fiserv periodically upgrades its mainframe capability as needed. Fiserv contracts with multiple sites to provide processing back-up in the event of a disaster and maintains duplicate tapes of data collected and software used in its business in locations away from the Companys facilities.
8
In the normal course of business, the Company and its subsidiaries are named as defendants in various lawsuits in which claims are asserted against the Company. On October 4, 2001, the Company initiated legal action in the United States District Court for the Eastern District of Pennsylvania against E*TRADE Securities, Inc. (E*TRADE) as the result of E*TRADE refusing to accept delivery of a bond (with a carrying value of $27.0 million as of December 31, 2002) in violation of the terms of a contract between E*TRADE and a subsidiary of the Company. The Company intends to vigorously enforce its rights under the terms of its agreement with E*TRADE and expects to prevail and recover the carrying value of the bond. The Company expects that the liabilities, if any, which may ultimately result from such lawsuits will not have a material adverse effect on the consolidated financial statements of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of the fiscal year covered by this report, no matter was submitted to a vote of security holders of the Company.
Executive Officers of the Registrant
The executive officers of the Company as of February 28, 2003, together with their ages, positions and business experience are described below:
Name |
Age |
Position | ||
Leslie M. Muma |
58 |
President and Chief Executive Officer | ||
Donald F. Dillon |
62 |
Chairman of the Board and Chairman of Information Technology, Inc. | ||
Kenneth R. Jensen |
59 |
Senior Executive Vice President, Chief Financial Officer and Treasurer | ||
Norman J. Balthasar |
56 |
Senior Executive Vice President and Chief Operating Officer | ||
Kenneth R. Acheson |
54 |
Group President, Item Processing | ||
Robert H. Beriault |
51 |
Group President, Securities & Trust Services | ||
Douglas J. Craft |
49 |
Senior Vice President, Operating Group Chief Financial Officer | ||
Patrick C. Foy |
48 |
Group President, Bank Servicing | ||
Thomas A. Neill |
53 |
Group President, Credit Union & Industry Products | ||
Rodney D. Poskochil |
50 |
Group President, Bank Systems & eProducts | ||
James C. Puzniak |
56 |
Group President, Lending Systems & Services | ||
Dean C. Schmelzer |
52 |
Group President, Marketing & Sales | ||
Charles W. Sprague |
53 |
Executive Vice President, General Counsel, Chief Administrative Officer and Secretary |
Mr. Muma has been President and Chief Executive Officer since 1999 and a Director of the Company since it was established in 1984. He was President and Chief Operating Officer of the Company from 1984 to 1999.
Mr. Dillon was named Chairman of the Board of Directors in July 2000. He served as Vice Chairman from 1995 to 2000. From 1976 to 1995, Mr. Dillon was co-founder and President of Information Technology, Inc. (ITI), a software and services organization that the Company acquired in 1995. Mr. Dillon also serves as Chairman of ITI.
9
Mr. Jensen was named Senior Executive Vice President in 1986 and has been Chief Financial Officer, Treasurer, Assistant Secretary and a Director of the Company since it was established in 1984. He was an Executive Vice President of the Company from 1984 to 1986.
Mr. Balthasar was named Senior Executive Vice President and Chief Operating Officer of the Company in October 2002. He was President and Chief Operating Officer of the Fiserv Financial Institution Group from 2000 to 2002. He served as Corporate Executive Vice President and PresidentSavings and Community Bank Group from 1996 to 1999, when he was named President and Chief Operating Officer of the Fiserv Financial Institution Outsourcing Group. Mr. Balthasar has been with Fiserv and a predecessor company since 1974.
Mr. Acheson was named Group President, Item Processing in October 2002. He served as President of the Item Processing Division from 2000 to 2002. He was President of Fiserv Solutions of Canada and President of INTRIA Items Inc. from 1996 to 2000.
Mr. Beriault was named Group President, Securities & Trust Services in April 2002. He was President and Chief Operating Officer of the Fiserv Securities Group from 1999 to 2002. He served as Corporate Executive Vice President and PresidentSecurities Processing Group from 1998 to 1999. From 1986 to 1998, Mr. Beriault was President of Lincoln Trust Company, which the Company acquired in 1995.
Mr. Craft was named Senior Vice President and Operating Group Chief Financial Officer of the Company in October 2002. He was Senior Vice President of Finance of the Fiserv Financial Institution Group from 2000 to 2002. He served as Senior Vice President of Finance of the Savings and Community Bank Group from 1996 to 1999. Mr. Craft has been with Fiserv since 1985.
Mr. Foy was named Group President, Bank Servicing in October 2002. He joined Fiserv in 2001 as President of the Direct Banking Division. Previously he was founder and CEO of Login & Learn, Inc. From 1978 to 1999, he was with M&I Data Services (Metavante) in a number of management positions, serving as President of the Outsourcing Business Group from 1995 to 1999.
Mr. Neill was named Group President, Credit Union & Industry Products in October 2002. He served as President and Chief Operating Officer of the group from 2001 to 2002. He was President of the Products & Services Division and Group President of the Industry Products & Services Group from 1993 to 2001.
Mr. Poskochil was named Group President, Bank Systems & eProducts in October 2002. He served as President of the Bank Systems and eProducts Division from 1999 to 2002. He joined Information Technology, Inc. (ITI) in 1978 and served in a number of capacities. In 1998 he was named President and Chief Executive Officer of ITI, which the Company acquired in 1995.
Mr. Puzniak was named Group President, Lending Systems & Services in October 2002. He served as President Bank Servicing Division II from 1999 to 2002, and was President of the Outsourcing and Information Services Division from 1998 to 1999. He was President of the Fiserv Pittsburgh division from 1995 to 1998.
Mr. Schmelzer was named Group President, Marketing & Sales in February 2002. He served as Corporate Executive Vice President, Marketing & Sales for the Company from 1992 to 2002. Prior to joining Fiserv, he was Director of Commercial Analysis for IBM.
Mr. Sprague has been Corporate Executive Vice President, General Counsel and Secretary since 1994, and Chief Administrative Officer of the Company since 1999. He has been involved with the Companys corporate and legal concerns since it was formed in 1984.
PART II
|
Item 5. Market for Registrants Common Equity and Related Shareholder Matters
The information required by this item is incorporated by reference to the information pertaining thereto set forth under the captions Managements Discussion and Analysis of Financial Condition and
10
Results of Operations Liquidity and Capital Resources and Market Price Information in the Companys 2002 Annual Report to Shareholders (the Annual Report).
Item 6. Selected Financial Data
The information required by this item is incorporated by reference to the information set forth under the caption Selected Financial Data in the Annual Report.
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operation
The information required by this item is incorporated by reference to the information set forth under the caption Managements Discussion and Analysis of Financial Condition and Results of Operations in the Annual Report.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is incorporated by reference to the information set forth under the caption Managements Discussion and Analysis of Financial Condition and Results of Operations Market Risk in the Annual Report.
Item 8. Financial Statements and Supplementary Data
The information required by this item is incorporated by reference to the information set forth under the captions Consolidated Statements of Income, Consolidated Balance Sheets, Consolidated Statements of Shareholders Equity, Consolidated Statements of Cash Flows, Notes to Consolidated Financial Statements, Quarterly Financial Information and Independent Auditors Report in the Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
PART III |
Item 10. Directors and Executive Officers of the Registrant
The information required by this item with respect to directors is incorporated by reference to the information set forth under the captions Matter 1. Election of Directors and Information with Respect to Continuing Directors in the definitive Proxy Statement for the Companys 2003 annual meeting of shareholders (the Proxy Statement). The information required by this item with respect to executive officers appears at the end of Part I of this Form 10-K. The information required by this item with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934 by directors and officers is incorporated by reference to the information set forth under the caption Section 16(a) Beneficial Ownership Reporting Compliance in the Proxy Statement.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference to the information set forth under the captions Compensation of Directors, Compensation of Executive Officers, Agreements with Executive Officers and Stock Price Performance Graph in the Proxy Statement.
11
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated herein by reference to the information set forth under the caption Security Ownership of Certain Beneficial Owners and Management in the Proxy Statement.
In addition, the following table sets forth, as of December 31, 2002, information with respect to compensation plans under which equity securities of the Company are authorized for issuance (in thousands, except per share data):
Equity Compensation Plan Information
(a) |
(b) |
(c) |
||||||
Plan Category |
Number of shares to be issued upon exercise of outstanding options |
Weighted-average exercise price of outstanding options |
Number of shares remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
|||||
Equity compensation plans approved by the Companys shareholders: |
||||||||
Stock Option Plan |
11,610 |
$ |
21.77 |
8,540 |
| |||
Employee Stock Purchase Plan |
|
|
N/A |
422 |
(1) | |||
Equity compensation plans not approved by the Companys shareholders |
|
|
|
|
| |||
Total |
11,610 |
$ |
21.77 |
8,962 |
| |||
(1) The number of shares remaining available for future issuance under the Employee Stock Purchase Plan is subject to an annual increase on the first day of each fiscal year equal to the least of (i) 600,000 shares, (ii) 1% of the shares of Fiserv common stock outstanding on such date or (iii) a lesser amount determined by the Fiserv Board of Directors.
Item 13. Certain Relationships and Related Transactions
Not applicable.
Item 14. Controls and Procedures
(a) Evaluation of disclosure controls and procedures:
In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the Exchange Act), within 90 days prior to the filing date of this annual report on Form 10-K, an evaluation was carried out under the supervision and with the participation of the Companys management, including the
12
Companys President and Chief Executive Officer and Senior Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures (as defined in Rule 13a-14(c) and 15d-14(c) under the Exchange Act). Based upon their evaluation of these disclosures controls and procedures, the President and Chief Executive Officer and the Senior Executive Vice President and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the date of such evaluation to ensure that material information relating to the Company, including its consolidated subsidiaries, was made known to them by others within those entities, particularly during the period in which this Annual Report on Form 10-K was being prepared.
(b) Changes in internal controls:
There were not any significant changes in the Companys internal controls or other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
PART IV |
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements:
The consolidated financial statements of the Company as of December 31, 2002 and 2001 and for each of the three years in the period ended December 31, 2002, together with the report thereon of Deloitte & Touche LLP, dated January 24, 2003, appear on pages 15 through 40 of the Companys Annual Report to Shareholders and Exhibit 13 to this Form 10-K Annual Report, and are incorporated herein by reference.
(a) (2) Financial Statement Schedule:
The following financial statement schedule of the Company and related independent auditors report are included in this Report on Form 10-K:
Page | ||
Independent Auditors Report |
17 | |
Schedule IIValuation and Qualifying Accounts |
17 |
All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended December 31, 2002.
(c) Exhibits:
The exhibits listed in the accompanying exhibit index are filed as part of this Annual Report on Form 10-K.
13
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: February 28, 2003
FISERV, INC.
By: |
/S/ Leslie M. Muma | |
Leslie M. Muma President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the registrant and in the capacities indicated on February 28, 2003.
Signature |
Capacity | |
/S/ Donald F. Dillon Donald F. Dillon |
Chairman of the Board, | |
ChairmanInformation Technology, Inc. | ||
/S/ Leslie M. Muma Leslie M. Muma |
Director, President and Chief Executive Officer | |
/S/ Kenneth R. Jensen Kenneth R. Jensen |
Director, Senior Executive Vice President, | |
Chief Financial Officer, Treasurer | ||
/S/ Daniel P. Kearney Daniel P. Kearney |
Director | |
/S/ Gerald J. Levy Gerald J. Levy |
Director | |
/S/ Glenn M. Renwick Glenn M. Renwick |
Director | |
/S/ L. William Seidman L. William Seidman |
Director | |
/S/ Thekla R. Shackelford Thekla R. Shackelford |
Director |
14
CERTIFICATIONS
I, Leslie M. Muma, certify that:
1. | I have reviewed this Annual Report on Form 10-K of Fiserv, Inc.; |
2. | Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Annual Report; |
4. | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: |
a. | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Annual Report is being prepared; |
b. | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this Annual Report (the Evaluation Date); and |
c. | presented in this Annual Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
5. | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants Board of Directors (or persons performing the equivalent functions): |
a. | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and |
b. | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; |
6. | The registrants other certifying officers and I have indicated in this Annual Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Date: February 28, 2003 |
By: |
/S/ Leslie M. Muma | ||||||
Leslie M. Muma President and Chief Executive Officer |
15
CERTIFICATIONS
I, Kenneth R. Jensen, certify that:
1. | I have reviewed this Annual Report on Form 10-K of Fiserv, Inc.; |
2. | Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Annual Report; |
4. | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: |
a. | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Annual Report is being prepared; |
b. | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this Annual Report (the Evaluation Date); and |
c. | presented in this Annual Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
5. | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants Board of Directors (or persons performing the equivalent functions): |
a. | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and |
b. | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; |
6. | The registrants other certifying officers and I have indicated in this Annual Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Date: February 28, 2003 |
By: |
/S/ Kenneth R. Jensen | ||||||
Kenneth R. Jensen Senior Executive Vice President, Chief Financial Officer, Treasurer and Assistant Secretary |
16
INDEPENDENT AUDITORS REPORT
To the Board of Directors and Shareholders of Fiserv, Inc.:
We have audited the consolidated financial statements of Fiserv, Inc. and subsidiaries as of December 31, 2002 and 2001, and for each of the three years in the period ended December 31, 2002, and have issued our report thereon dated January 24, 2003, which report includes an explanatory paragraph as to the adoption in 2002 of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. Such consolidated financial statements and report are included in your 2002 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the consolidated financial statement schedule of Fiserv, Inc., listed in Item 15. This consolidated financial statement schedule is the responsibility of the Companys management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/S/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Milwaukee, Wisconsin
January 24, 2003
SCHEDULE II
Valuation and Qualifying Accounts
Allowance for Doubtful Accounts | |||||||||||||
Year Ended December 31, |
Beginning Balance |
Charged to Expense |
Write-offs |
Balance | |||||||||
2002 |
$ |
14,703,000 |
$ |
2,713,000 |
$ |
(4,248,000 |
) |
$ |
13,168,000 | ||||
2001 |
|
16,001,000 |
|
2,013,000 |
|
(3,311,000 |
) |
|
14,703,000 | ||||
2000 |
|
11,606,000 |
|
6,803,000 |
|
(2,408,000 |
) |
|
16,001,000 |
17
EXHIBIT INDEX
Exhibit Number |
Exhibit Description | |
3.1 |
Restated Articles of Incorporation, as amended (filed as Exhibit 3.1 to the Companys Annual Report on Form 10-K dated February 28, 2000, and incorporated herein by reference (File No. 0-14948)). | |
3.2 |
By-laws, as amended (filed as Exhibit 3.2 to the Companys Annual Report on Form 10-K dated February 28, 2000, and incorporated herein by reference (File No. 0-14948)). | |
4.1 |
Shareholder Rights Agreement (filed as Exhibit 4 to the Companys Current Report on Form 8-K dated February 23, 1998, and incorporated herein by reference (File No. 0-14948)). | |
4.2 |
First Amendment to the Shareholder Rights Agreement (filed as Exhibit 4.3 to the Companys Form S-8 dated April 7, 2000, and incorporated herein by reference (File No. 333-34310)). | |
4.3 |
Second Amendment to the Shareholder Rights Agreement (filed as Exhibit 4.6 to the Companys Form 10-K dated February 27, 2001, and incorporated herein by reference (File No. 0-14948)). | |
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, the Company agrees to furnish to the Securities and Exchange Commission, upon request, any instrument defining the rights of holders of long-term debt that is not filed as an exhibit to this Form 10-K. | ||
10.1 |
Fiserv, Inc. Stock Option Plan, as amended (filed as Exhibit 4.1 to the Companys Form S-8 Registration Statement dated April 7, 2000, and incorporated herein by reference (File No. 333-34310)). | |
10.2 |
Fiserv, Inc. Executive Incentive Compensation Plan (filed as Exhibit A to the Companys Proxy Statement for the 2001 Annual Meeting of Shareholders). | |
10.3 |
Form of Key Executive Employment and Severance Agreement, between Fiserv, Inc. and each of Donald F. Dillon, Leslie M. Muma, Kenneth R. Jensen and Norman J. Balthasar (filed as Exhibit 10.3 to the Companys Form 10-K dated February 27, 2002, and incorporated herein by reference (File No. 0-14948)). | |
10.4 |
Form of Key Executive Employment and Severance Agreement, between Fiserv, Inc. and each of Kenneth R. Acheson, Robert H. Beriault, Douglas J. Craft, Patrick C. Foy, Thomas A. Neill, Rodney D. Poskochil, James C. Puzniak, Dean C. Schmelzer and Charles W. Sprague (filed as Exhibit 10.4 to the Companys Form 10-K dated February 27, 2002, and incorporated herein by reference (File No. 0-14948)). | |
13 |
2002 Annual Report to Shareholders (to the extent incorporated by reference herein). | |
21 |
List of Subsidiaries of the Registrant. | |
23 |
Independent Auditors Consent. | |
99.1 |
Written Statement of the Chief Executive Officer, dated February 28, 2003. | |
99.2 |
Written Statement of the Chief Financial Officer, dated February 28, 2003. |
18
EXHIBIT 13
2002 ANNUAL REPORT
FISERV, INC. AND SUBSIDIARIES
19
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, |
||||||||||||
2002 |
2001 |
2000 |
||||||||||
(In thousands, except per share data) |
||||||||||||
REVENUES: |
||||||||||||
Processing and services |
$ |
2,277,642 |
|
$ |
1,927,030 |
|
$ |
1,685,783 |
| |||
Customer reimbursements |
|
291,245 |
|
|
262,151 |
|
|
243,438 |
| |||
TOTAL REVENUES |
|
2,568,887 |
|
|
2,189,181 |
|
|
1,929,221 |
| |||
COST OF REVENUES: |
||||||||||||
Salaries, commissions and payroll related costs |
|
1,090,315 |
|
|
936,233 |
|
|
807,547 |
| |||
Customer reimbursement expenses |
|
291,245 |
|
|
262,151 |
|
|
243,438 |
| |||
Data processing costs and equipment rentals |
|
165,283 |
|
|
148,469 |
|
|
132,458 |
| |||
Other operating expenses |
|
437,891 |
|
|
340,935 |
|
|
282,630 |
| |||
Depreciation and amortization |
|
141,114 |
|
|
147,696 |
|
|
148,842 |
| |||
TOTAL COST OF REVENUES |
|
2,125,848 |
|
|
1,835,484 |
|
|
1,614,915 |
| |||
OPERATING INCOME |
|
443,039 |
|
|
353,697 |
|
|
314,306 |
| |||
Interest expense |
|
(17,758 |
) |
|
(20,159 |
) |
|
(28,823 |
) | |||
Interest income |
|
8,589 |
|
|
8,086 |
|
|
6,734 |
| |||
Realized gain from sale of investment |
|
2,420 |
|
|
5,404 |
|
|
7,818 |
| |||
INCOME BEFORE INCOME TAXES |
|
436,290 |
|
|
347,028 |
|
|
300,035 |
| |||
Income tax provision |
|
170,153 |
|
|
138,811 |
|
|
123,014 |
| |||
NET INCOME |
$ |
266,137 |
|
$ |
208,217 |
|
$ |
177,021 |
| |||
NET INCOME PER SHARE: |
||||||||||||
Basic |
$ |
1.39 |
|
$ |
1.11 |
|
$ |
0.96 |
| |||
Diluted |
$ |
1.37 |
|
$ |
1.09 |
|
$ |
0.93 |
| |||
SHARES USED IN COMPUTING NET INCOME PER SHARE: |
||||||||||||
Basic |
|
191,386 |
|
|
186,929 |
|
|
184,788 |
| |||
Diluted |
|
194,951 |
|
|
191,584 |
|
|
189,804 |
| |||
See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
December 31, | |||||||
2002 |
2001 | ||||||
(Dollars in thousands) | |||||||
ASSETS |
|||||||
Cash and cash equivalents |
$ |
227,239 |
|
$ |
136,088 | ||
Accounts receivable, less allowance for doubtful accounts of $13,168 and $14,703 |
|
339,737 |
|
|
311,217 | ||
Securities processing receivables |
|
1,740,512 |
|
|
1,427,051 | ||
Prepaid expenses and other assets |
|
119,882 |
|
|
108,003 | ||
Investments |
|
2,115,778 |
|
|
1,885,063 | ||
Property and equipment |
|
223,070 |
|
|
200,973 | ||
Intangible assets |
|
342,614 |
|
|
231,713 | ||
Goodwill |
|
1,329,873 |
|
|
1,022,134 | ||
TOTAL |
$ |
6,438,705 |
|
$ |
5,322,242 | ||
LIABILITIES AND SHAREHOLDERS EQUITY |
|||||||
Accounts payable |
$ |
122,266 |
|
$ |
83,303 | ||
Securities processing payables |
|
1,666,863 |
|
|
1,289,479 | ||
Short-term borrowings |
|
100,000 |
|
|
112,800 | ||
Accrued expenses |
|
280,614 |
|
|
241,904 | ||
Accrued income taxes |
|
23,711 |
|
|
15,373 | ||
Deferred revenues |
|
181,173 |
|
|
171,101 | ||
Customer funds held and retirement account deposits |
|
1,707,458 |
|
|
1,420,956 | ||
Deferred income taxes |
|
46,127 |
|
|
39,407 | ||
Long-term debt |
|
482,824 |
|
|
343,093 | ||
TOTAL LIABILITIES |
|
4,611,036 |
|
|
3,717,416 | ||
COMMITMENTS AND CONTINGENCIES |
|||||||
SHAREHOLDERS EQUITY |
|||||||
Preferred stock, no par value: 25,000,000 shares authorized; none issued |
|
|
|
|
| ||
Common stock, $0.01 par value: 300,000,000 shares authorized; 192,450,000 and 190,281,000 shares issued |
|
1,924 |
|
|
1,903 | ||
Additional paid-in capital |
|
599,700 |
|
|
564,959 | ||
Accumulated other comprehensive income |
|
23,882 |
|
|
76,216 | ||
Accumulated earnings |
|
1,227,885 |
|
|
961,748 | ||
Treasury stock, at cost, 804,775 shares |
|
(25,722 |
) |
|
| ||
TOTAL SHAREHOLDERS EQUITY |
|
1,827,669 |
|
|
1,604,826 | ||
TOTAL |
$ |
6,438,705 |
|
$ |
5,322,242 | ||
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Common Stock |
Additional Paid-In Capital |
Comprehensive Income |
Accumulated Other Comprehensive Income |
Accumulated Earnings |
Treasury Stock |
|||||||||||||||||||
Shares |
Amount |
|||||||||||||||||||||||
(In thousands) |
||||||||||||||||||||||||
Balance at January 1, 2000 |
125,388 |
$ |
1,254 |
$ |
458,550 |
|
$ |
125,026 |
|
$ |
576,510 |
$ |
(70,324 |
) | ||||||||||
Net income |
|
|
|
|
|
|
$ |
177,021 |
|
|
|
|
|
177,021 |
|
|
| |||||||
Foreign currency translation |
|
(1,310 |
) |
|
(1,310 |
) |
||||||||||||||||||
Change in unrealized gains on available-for-sale investmentsnet of tax of $30,705 |
|
(39,765 |
) |
|
(39,765 |
) |
||||||||||||||||||
Reclassification adjustment for realized gains included in net income |
|
(5,082 |
) |
|
(5,082 |
) |
||||||||||||||||||
Comprehensive income |
$ |
130,864 |
|
|||||||||||||||||||||
Shares issued under stock plans, including income tax benefits |
|
|
|
|
(3,106 |
) |
|
|
|
43,182 |
| |||||||||||||
Purchase of treasury stock |
|
|
|
|
|
|
|
|
|
(9,884 |
) | |||||||||||||
Balance at December 31, 2000 |
125,388 |
|
1,254 |
|
455,444 |
|
|
78,869 |
|
|
753,531 |
|
(37,026 |
) | ||||||||||
Net income |
|
|
|
|
|
|
$ |
208,217 |
|
|
|
|
|
208,217 |
|
|
| |||||||
Foreign currency translation |
|
(881 |
) |
|
(881 |
) |
||||||||||||||||||
Change in unrealized gains on available-for-sale investmentsnet of tax of $3,652 |
|
9,710 |
|
|
9,710 |
|
||||||||||||||||||
Reclassification adjustment for realized gains included in net income |
|
(3,513 |
) |
|
(3,513 |
) |
||||||||||||||||||
Fair market value adjustment on cash flow hedgesnet of tax |
|
(5,272 |
) |
|
(5,272 |
) |
||||||||||||||||||
Other |
|
(2,697 |
) |
|||||||||||||||||||||
Comprehensive income |
$ |
208,261 |
|
|||||||||||||||||||||
Shares issued under stock plans, including income tax benefits |
248 |
|
2 |
|
9,442 |
|
|
|
|
20,655 |
| |||||||||||||
Shares issued for acquired companies |
1,955 |
|
20 |
|
100,700 |
|
|
|
|
16,371 |
| |||||||||||||
Three-for-two stock split |
62,690 |
|
627 |
|
(627 |
) |
|
|
|
|
| |||||||||||||
Balance at December 31, 2001 |
190,281 |
|
1,903 |
|
564,959 |
|
|
76,216 |
|
|
961,748 |
|
|
| ||||||||||
Net income |
|
|
|
|
|
|
$ |
266,137 |
|
|
|
|
|
266,137 |
|
|
| |||||||
Foreign currency translation |
|
1,166 |
|
|
1,166 |
|
||||||||||||||||||
Change in unrealized gains on available-for-sale investmentsnet of tax of $29,047 |
|
(45,184 |
) |
|
(45,184 |
) |
||||||||||||||||||
Reclassification adjustment for realized gains included in net income |
|
(1,573 |
) |
|
(1,573 |
) |
||||||||||||||||||
Fair market value adjustment on cash flow hedgesnet of tax |
|
(6,743 |
) |
|
(6,743 |
) |
||||||||||||||||||
Comprehensive income |
$ |
213,803 |
|
|||||||||||||||||||||
Shares issued under stock plans, including income tax benefits |
2,169 |
|
21 |
|
34,741 |
|
|
|
|
7,856 |
| |||||||||||||
Purchase of treasury stock |
|
|
|
|
|
|
|
|
|
(33,578 |
) | |||||||||||||
Balance at December 31, 2002 |
192,450 |
$ |
1,924 |
$ |
599,700 |
|
$ |
23,882 |
|
$ |
1,227,885 |
$ |
(25,722 |
) | ||||||||||
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, |
||||||||||||
2002 |
2001 |
2000 |
||||||||||
(In thousands) |
||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||
Net income |
$ |
266,137 |
|
$ |
208,217 |
|
$ |
177,021 |
| |||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||
Realized gain from sale of investment |
|
(2,420 |
) |
|
(5,404 |
) |
|
(7,818 |
) | |||
Deferred income taxes |
|
30,805 |
|
|
11,700 |
|
|
4,813 |
| |||
Depreciation and amortization |
|
141,114 |
|
|
147,696 |
|
|
148,842 |
| |||
|
435,636 |
|
|
362,209 |
|
|
322,858 |
| ||||
Changes in assets and liabilities, net of effects from acquisitions of businesses: |
||||||||||||
Accounts receivable |
|
6,022 |
|
|
(1,656 |
) |
|
(21,153 |
) | |||
Prepaid expenses and other assets |
|
(7,899 |
) |
|
(10,694 |
) |
|
(179 |
) | |||
Accounts payable and accrued expenses |
|
30,302 |
|
|
(7,669 |
) |
|
9,706 |
| |||
Deferred revenues |
|
10,072 |
|
|
6,422 |
|
|
24,844 |
| |||
Accrued income taxes |
|
38,762 |
|
|
15,127 |
|
|
32,674 |
| |||
Securities processing receivables and payablesnet |
|
63,923 |
|
|
78,396 |
|
|
215,718 |
| |||
Net cash provided by operating activities |
|
576,818 |
|
|
442,135 |
|
|
584,468 |
| |||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||
Capital expenditures, including capitalization of software costs for external customers |
|
(141,880 |
) |
|
(104,609 |
) |
|
(106,987 |
) | |||
Payment for acquisitions of businesses, net of cash acquired |
|
(406,578 |
) |
|
(224,842 |
) |
|
(88,764 |
) | |||
Investments |
|
(303,222 |
) |
|
(72,571 |
) |
|
136,726 |
| |||
Net cash used in investing activities |
|
(851,680 |
) |
|
(402,022 |
) |
|
(59,025 |
) | |||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||
(Repayments of) proceeds from short-term borrowingsnet |
|
(12,286 |
) |
|
93,075 |
|
|
(214,625 |
) | |||
Proceeds from long-term debt |
|
156,481 |
|
|
1,800 |
|
|
5,004 |
| |||
Repayments of long-term debt |
|
(16,908 |
) |
|
(8,113 |
) |
|
(143,899 |
) | |||
Issuance of common stock and treasury stock |
|
11,420 |
|
|
15,053 |
|
|
20,576 |
| |||
Purchases of treasury stock |
|
(33,578 |
) |
|
|
|
|
(9,884 |
) | |||
Customer funds held and retirement account deposits |
|
260,884 |
|
|
(104,696 |
) |
|
(164,313 |
) | |||
Net cash provided by (used in) financing activities |
|
366,013 |
|
|
(2,881 |
) |
|
(507,141 |
) | |||
Change in cash and cash equivalents |
|
91,151 |
|
|
37,232 |
|
|
18,302 |
| |||
Beginning balance |
|
136,088 |
|
|
98,856 |
|
|
80,554 |
| |||
Ending balance |
$ |
227,239 |
|
$ |
136,088 |
|
$ |
98,856 |
| |||
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2002, 2001 and 2000
1. Summary of Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Fiserv, Inc. and all majority owned subsidiaries (the Company). All significant intercompany transactions and balances have been eliminated in consolidation. Certain amounts reported in prior periods have been reclassified to conform to the 2002 presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
FAIR VALUES
The fair values of cash equivalents, accounts receivable, accounts payable, securities processing receivables and payables, customer funds held and retirement account deposits, short-term borrowings and accrued expenses approximate the carrying values due to the short period of time to maturity. The fair value of investments is determined based on quoted market prices. The fair value of long-term debt is estimated using discounted cash flows based on the Companys current incremental borrowing rates and the fair value of derivative instruments is determined based on dealer quotes (see Note 3).
DERIVATIVE INSTRUMENTS
The Company uses interest rate swaps to hedge its exposure to interest rate changes. The Companys accounting method for derivative financial instruments is based upon the designation of such instruments as cash flow hedges under accounting principles generally accepted in the United States of America and changes in the fair value are recognized in other comprehensive income until the hedged item is recognized in net income. It is the policy of the Company to execute such instruments with creditworthy banks and not to enter into derivative financial instruments for speculative purposes.
REVENUE RECOGNITION
Revenues from the sale of data processing services, plastic card services, document solutions, consulting and administration fees on trust accounts are recognized as the related services are provided or when the product is shipped. Revenues from the sale of securities processing services are recognized as securities transactions are processed on a trade-date basis. Revenues from securities processing and trust services include net investment income of $95.4 million, $101.6 million and $124.3 million, net of direct credits to customer accounts of $20.0 million, $45.2 million and $94.1 million in 2002, 2001 and 2000, respectively. Revenues from software license fees (representing approximately 6%, 8% and 8% of 2002, 2001 and 2000 processing and services revenues) are recognized when written contracts are signed, delivery of the product has occurred, the fee is fixed or determinable and collection is probable. Maintenance fee revenues are recognized ratably over the term of the related support period, generally 12 months.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and investments with original maturities of 90 days or less.
SECURITIES PROCESSING RECEIVABLES AND PAYABLES
The Companys securities processing subsidiaries had receivables from and payables to brokers or dealers and clearing organizations related to the following at December 31:
2002 |
2001 | |||||
(In thousands) | ||||||
RECEIVABLES: |
||||||
Securities failed to deliver |
$ |
90,965 |
$ |
39,611 | ||
Securities borrowed |
|
904,045 |
|
706,918 | ||
Receivables from customers |
|
683,854 |
|
649,252 | ||
Other |
|
61,648 |
|
31,270 | ||
TOTAL |
$ |
1,740,512 |
$ |
1,427,051 | ||
PAYABLES: |
||||||
Securities failed to receive |
$ |
79,259 |
$ |
50,563 | ||
Securities loaned |
|
824,369 |
|
797,619 | ||
Payables to customers |
|
624,099 |
|
354,515 | ||
Other |
|
139,136 |
|
86,782 | ||
TOTAL |
$ |
1,666,863 |
$ |
1,289,479 | ||
Securities failed to deliver and failed to receive represent the contract value of securities that have not been delivered or received as of the settlement date. Securities borrowed and loaned represent deposits made to or received from other broker-dealers. Receivables from and payables to customers represent amounts due or payable on cash and margin transactions.
INVESTMENTS
The Companys trust administration subsidiaries accept money market deposits from trust customers and invest the funds in securities. Such amounts due trust depositors represent the primary source of funds for the Companys investment securities and amounted to $1.7 billion and $1.4 billion as of December 31, 2002 and 2001, respectively. Investments in government agency and certain fixed income obligations had an average duration of approximately one year and six months at December 31, 2002. These investments are accounted for as held to maturity and are carried at amortized cost as the Company has the ability and intent to hold these investments to maturity.
Available for sale investments are carried at market, based upon quoted market prices. Unrealized gains or losses on available for sale investments are accumulated in shareholders equity as accumulated other comprehensive income, net of related deferred income taxes. Related gross unrealized gains were $65.6 million and $142.2 million as of December 31, 2002 and 2001, respectively. Realized gains or losses are computed based on specific identification of the investments sold.
The following summarizes the Companys investments at December 31:
2002 |
2001 | |||||||||||
Carrying Value |
Estimated Fair Value |
Carrying Value |
Estimated Fair Value | |||||||||
(In thousands) | ||||||||||||
U.S. Government and government agency obligations |
$ |
1,488,361 |
$ |
1,512,466 |
$ |
986,531 |
$ |
998,026 | ||||
Other fixed income obligations |
|
232,334 |
|
242,498 |
|
600,156 |
|
613,621 | ||||
Total held to maturity investments |
|
1,720,695 |
|
1,754,964 |
|
1,586,687 |
|
1,611,647 | ||||
Available for sale investments |
|
95,723 |
|
95,723 |
|
145,417 |
|
145,417 | ||||
Money market mutual funds |
|
249,830 |
|
249,830 |
|
115,901 |
|
115,901 | ||||
Other investments |
|
49,530 |
|
49,530 |
|
37,058 |
|
37,058 | ||||
TOTAL |
$ |
2,115,778 |
$ |
2,150,047 |
$ |
1,885,063 |
$ |
1,910,023 | ||||
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are computed primarily using the straight-line method over the estimated useful lives of the assets, ranging from three to 40 years. Property and equipment consist of the following at December 31:
2002 |
2001 | |||||
(In thousands) | ||||||
Data processing equipment |
$ |
299,263 |
$ |
269,490 | ||
Buildings and leasehold improvements |
|
123,553 |
|
104,309 | ||
Furniture and equipment |
|
127,860 |
|
129,167 | ||
|
550,676 |
|
502,966 | |||
Less accumulated depreciation and amortization |
|
327,606 |
|
301,993 | ||
TOTAL |
$ |
223,070 |
$ |
200,973 | ||
INTANGIBLE ASSETS
Intangible assets consist of the following at December 31:
Gross Carrying Amount |
Accumulated Amortization |
Net Book Value | |||||||
(In thousands) | |||||||||
2002 |
|||||||||
Software development costs for external customers |
$ |
362,558 |
$ |
245,981 |
$ |
116,577 | |||
Purchased software |
|
145,486 |
|
90,333 |
|
55,153 | |||
Customer base |
|
211,738 |
|
63,954 |
|
147,784 | |||
Other |
|
27,288 |
|
4,188 |
|
23,100 | |||
TOTAL |
$ |
747,070 |
$ |
404,456 |
$ |
342,614 | |||
Gross Carrying Amount |
Accumulated Amortization |
Net Book Value | |||||||
(In thousands) | |||||||||
2001 |
|||||||||
Software development costs for external customers |
$ |
318,349 |
$ |
213,358 |
$ |
104,991 | |||
Purchased software |
|
113,205 |
|
66,430 |
|
46,775 | |||
Customer base |
|
116,531 |
|
55,267 |
|
61,264 | |||
Other |
|
22,570 |
|
3,887 |
|
18,683 | |||
TOTAL |
$ |
570,655 |
$ |
338,942 |
$ |
231,713 | |||
Software development costs for external customers include internally generated computer software for external customers and software acquired in conjunction with acquisitions of businesses. The Company capitalizes certain costs incurred to develop new software or enhance existing software which is marketed externally or utilized by the Company to process customer transactions in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed." Costs are capitalized commencing when the technological feasibility of the software has been established. Routine maintenance of software products, design costs and development costs incurred prior to establishment of a product's technological feasibility are expensed as incurred. Amortization of all software is computed on a straight-line basis over the expected useful life of the product, generally three to five years.
Gross software development costs for external customers capitalized for new products and enhancements to existing products totaled $44.9 million, $36.6 million and $34.0 million in 2002, 2001 and 2000, respectively. Amortization of previously capitalized development costs, included in depreciation and amortization, was $38.3 million, $35.5 million and $35.9 million in 2002, 2001 and 2000, resulting in net capitalized (amortized) development costs of $6.6 million, $1.1 million and $(1.9 million) in 2002, 2001 and 2000, respectively.
Customer base intangible assets represent customer contracts and relationships obtained as part of acquired businesses and are amortized using the straight-line method over their estimated useful lives, ranging from five to 20 years. Other intangible assets consist primarily of non-compete agreements, which are generally amortized over their estimated useful lives, and trade names that have been determined to have indefinite lives and therefore, as of January 1, 2002, are no longer amortized in accordance with the provisions of SFAS No. 142 "Goodwill and Other Intangible Assets."
Amortization expense for intangible assets was $74.8 million, $58.0 million and $65.9 million for the years ended December 31, 2002, 2001 and 2000, respectively. Aggregate amortization expense with respect to existing intangible assets with finite lives resulting from acquisitions of businesses should approximate $20.0 million annually.
GOODWILL
On January 1, 2002, the Company adopted SFAS No. 142, which requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. Accordingly, effective January 1, 2002, the Company discontinued the amortization of goodwill and intangible assets with indefinite lives. The Company completed its transitional impairment test for goodwill and intangible assets with indefinite lives and determined that no impairment exists. Pro forma net income and net income per share for the years ended December 31, 2001 and 2000, adjusted to eliminate historical amortization of goodwill and related tax effects, are as follows:
2001 |
2000 | |||
(In thousands, except per share data) | ||||
Reported net income |
$208,217 |
$177,021 | ||
Add: goodwill amortization, net of tax |
18,439 |
16,595 | ||
Pro forma net income |
$226,656 |
$193,616 | ||
Reported net income per share: |
||||
Basic |
$1.11 |
$0.96 | ||
Diluted |
1.09 |
0.93 | ||
Pro forma net income per share: |
||||
Basic |
$1.21 |
$1.05 | ||
Diluted |
1.18 |
1.02 |
The excess of the purchase price over the estimated fair value of tangible and identifiable intangible assets acquired is recorded as goodwill. The changes in the carrying amount of goodwill by business segment during the year ended December 31, 2002 are as follows:
Financial Institution Outsourcing, Systems and Services |
Securities Processing and Trust Services |
All Other and Corporate |
Total | |||||
(In thousands) | ||||||||
Balance, January 1, 2002 |
$884,417 |
$107,887 |
$29,830 |
$1,022,134 | ||||
Goodwill additions |
267,373 |
37,629 |
2,737 |
307,739 | ||||
Balance, December 31, 2002 |
$1,151,790 |
$145,516 |
$32,567 |
$1,329,873 | ||||
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically assesses the likelihood of recovering the cost of long-lived assets based on current and projected operating results and cash flows of the related business operations using undiscounted cash flow analyses. These factors, along with management's plans with respect to the operations, are considered in assessing the recoverability of property and equipment and intangible assets subject to amortization. Measurement of any impairment loss is based on discounted operating cash flows. During 2000, the Company recorded a charge of $11.0 million for impairment of goodwill associated with
the consolidation of certain ancillary product lines in the Companys software businesses. This charge was recorded in the Financial institution outsourcing, systems and services segment as additional amortization of intangible assets.
SHORT-TERM BORROWINGS
The Companys securities and trust processing subsidiaries had short-term loans payable of $100.0 million and $112.8 million as of December 31, 2002 and 2001, respectively, with interest at an average rate of 1.9% and 1.8% as of December 31, 2002 and 2001, respectively, and were collateralized by investments and customers margin account securities.
INCOME TAXES
Deferred income taxes are provided for temporary differences between the Companys income for accounting and tax purposes.
NET INCOME PER SHARE
Basic net income per share is computed using the weighted average number of common shares outstanding during the periods. Diluted net income per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the periods. Common equivalent shares consist of stock options and are computed using the treasury stock method. During the year ended December 31, 2002, the Company excluded 1.3 million shares under stock options from the calculation of common equivalent shares as the impact was anti-dilutive.
STOCK BASED COMPENSATION
The Company has accounted for its stock based compensation plans in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (see Note 5).
SHAREHOLDER RIGHTS PLAN
The Company has a shareholder rights plan. Under this plan, each shareholder holds one preferred stock purchase right for each outstanding share of the Companys common stock held. The stock purchase rights are not exercisable until certain events occur.
ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income consisted of the following at December 31:
2002 |
2001 |
|||||
(In thousands) |
||||||
Unrealized gains on investments |
$ 40,023 |
|
$86,780 |
| ||
Unrealized losses on cash flow hedges |
(14,712 |
) |
(7,969 |
) | ||
Foreign currency translation adjustments |
(1,429 |
) |
(2,595 |
) | ||
TOTAL |
$ 23,882 |
|
$76,216 |
| ||
SUPPLEMENTAL CASH FLOW INFORMATION
2002 |
2001 |
2000 | |||||||
(In thousands) | |||||||||
Interest paid |
$ |
17,724 |
$ |
19,469 |
$ |
29,346 | |||
Income taxes paid |
|
97,808 |
|
117,443 |
|
87,633 | |||
Liabilities assumed in acquisitions of businesses |
|
29,033 |
|
68,833 |
|
401,129 |
RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2002, the Company adopted Emerging Issues Task Force (EITF) Issue No. 01-14, Income Statement Characterization of Reimbursements Received for Out of Pocket Expenses Incurred, which requires that customer reimbursements received for direct costs paid to third parties and related expenses be characterized as revenue. Comparative financial statements for 2001 and 2000 have been reclassified to provide consistent presentation. In accordance with EITF No. 01-14, the Company has presented customer reimbursement revenue and expenses of $291.2 million, $262.2 million and $243.4 million for the years ended December 31, 2002, 2001 and 2000, respectively. Customer reimbursements represent direct costs paid to third parties primarily for postage and data communication costs. The adoption of EITF No. 01-14 did not impact the Companys financial position, operating income or net income.
Effective January 1, 2002, the Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. The impact of adopting this statement did not have a material impact on the consolidated financial statements.
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes EITF No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The Company will adopt SFAS No. 146 on January 1, 2003 and does not anticipate that the adoption of this statement will have a material impact on the consolidated financial statements.
2. Acquisitions
During 2002, 2001 and 2000 the Company completed the following acquisitions of businesses. The results of operations of all of these acquired businesses have been included in the accompanying consolidated statements of income from the dates of acquisition.
Company |
Month Acquired |
Service |
Consideration | |||
2002: |
||||||
Case Shiller Weiss, Inc. |
May |
Lending services |
Cash for stock | |||
Investec Ernst & Companys clearing operations |
Aug. |
Securities clearing services |
Cash for assets | |||
Willis Groups TPA operations |
Nov. |
Insurance data processing |
Cash for assets | |||
EDS Corporations Consumer Network Services business |
Dec. |
EFT data processing |
Cash for assets | |||
Lenders Financial Services |
Dec. |
Lending services |
Cash for stock | |||
2001: |
||||||
Benefit Planners |
Jan. |
Insurance data processing |
Cash and stock for stock | |||
Marshall & Ilsley IP services |
Feb. |
Item processing |
Cash for assets | |||
Facilities and Services Corp. |
Mar. |
Insurance software systems |
Cash for stock | |||
Remarketing Services of America, Inc. |
Mar. |
Automobile leasing services |
Cash for stock | |||
EPSIIA Corporation |
July |
Data processing |
Cash for stock | |||
Catapult Technology Limited |
July |
Software and services |
Cash for stock | |||
FHLB of Pittsburgh IP services |
Sept. |
Item processing |
Cash for assets | |||
NCR bank processing operations |
Nov. |
Data and item processing |
Cash for assets | |||
NCSI |
Nov. |
Insurance data processing |
Cash for stock | |||
Integrated Loan Services |
Nov. |
Lending services |
Cash for assets | |||
Trewit Inc. |
Nov. |
Insurance data processing |
Cash and stock for stock | |||
FACT 400 credit card solution |
Nov. |
Software and services |
Cash for assets | |||
2000: |
||||||
Patterson Press, Inc. |
Jan. |
Card services |
Cash for stock | |||
Resources Trust Company |
May |
Data processing for retirement planning |
Cash for assets | |||
National Flood Services, Inc. |
Sept. |
Insurance data processing |
Cash for stock |
During 2002, the Company completed five acquisitions accounted for as purchases. Net cash paid for these acquisitions was $366.9 million, subject to certain adjustments. Goodwill recorded in conjunction with all of these acquisitions was $290.6 million. Pro forma combined results of operations are not presented, other than in connection with the acquisition of EDS Corporations Consumer Network Services (CNS) business as shown below, since the results of operations as reported in the accompanying consolidated statements of income would not be materially different.
On December 5, 2002, the Company acquired CNS for $305.8 million, net of $17.4 million of cash acquired, subject to certain adjustments. The following unaudited pro forma combined information is provided for illustrative purposes only and should not be relied upon as necessarily being indicative of the historical results that would have been obtained if this acquisition had actually occurred during those periods, or the results that may be obtained in the future.
2002 |
2001 | |||||
(In thousands, except per share data) | ||||||
Processing and services revenues |
$ |
2,417,542 |
$ |
2,105,061 | ||
Net income |
|
268,756 |
|
214,504 | ||
Diluted net income per shareas reported |
|
1.37 |
|
1.09 | ||
Pro forma diluted net income per share |
|
1.38 |
|
1.12 |
At December 31, 2002, the preliminary purchase price allocation for the CNS acquisition resulted in goodwill of $218.2 million, other intangible assets of $55.9 million, tangible assets of $68.0 million and assumed liabilities of $18.9 million. The amounts allocated to intangible assets are based on preliminary conclusions resulting from an independent appraisal, which includes an analysis of the business and expected future cash flows.
During 2001, the Company completed 12 acquisitions accounted for as purchases. Net cash paid for these acquisitions was $224.8 million, subject to certain adjustments. In addition to cash consideration, the Company issued, in conjunction with two of the acquisitions, approximately 3.1 million unregistered shares of its common stock, valued at approximately $117.0 million. Goodwill recorded in conjunction with the 2001 acquisitions was $285.7 million.
During 2000, the Company completed three acquisitions accounted for as purchases. Net cash paid for these acquisitions was $88.8 million, subject to certain adjustments. Goodwill recorded in conjunction with the 2000 acquisitions was $52.0 million.
The Company may be required to pay additional cash and common stock consideration for acquisitions up to maximum payments of $243.2 million through 2006, if certain of the acquired entities achieve specific escalating operating income targets. During 2002, cash paid as a result of acquired entities achieving their targets was $39.7 million. Any additional consideration paid will be treated as additional purchase price.
3. Long-term debt
The Company has available a $437.0 million unsecured line of credit and commercial paper facility with a group of banks, of which $393.3 million was in use at December 31, 2002, with a weighted average variable interest rate of 2.0%. The credit facilities, which expire in May 2004, consist of a $250.0 million five-year revolving credit facility and a $187.0 million 364-day revolving credit facility which is renewable annually through 2004. There were no significant commitment fees or compensating balance requirements under these facilities. The Company must, among other requirements, maintain a minimum net worth of $662.0 million as of December 31, 2002, maintain a fixed charge coverage ratio of 1.35 to one, and limit its total debt to no more than three and one-half times the Companys earnings before interest, taxes, depreciation and amortization. The Company was in compliance with all debt covenants throughout 2002. As of December 31, 2002, the Company had interest rate swap agreements to fix the interest rates on certain floating rate debt at an average rate approximating 6.75% (based on current bank fees and spreads) for a principal amount of $200.0 million until 2005. The estimated fair value of the interest rate swap agreements is included on the accompanying consolidated balance sheets in accrued expenses.
As of December 31, 2002, the Company has available $35.0 million in additional unsecured lines of credit, of which $25.0 million was in use at an average variable rate of 1.7%.
The carrying value and estimated fair values of the Companys long-term debt and interest rate swap agreements at December 31 are as follows:
2002 |
2001 | |||||||||||
Carrying Value |
Estimated Fair Value |
Carrying Value |
Estimated Fair Value | |||||||||
(In thousands) | ||||||||||||
8.00% senior notes payable, due 20032005 |
$ |
38,571 |
$ |
42,068 |
$ |
51,428 |
$ |
56,871 | ||||
Bank notes and commercial paper, at short-term rates |
|
444,253 |
|
444,253 |
|
291,665 |
|
291,665 | ||||
Total long-term debt |
$ |
482,824 |
$ |
486,321 |
$ |
343,093 |
$ |
348,536 | ||||
Interest rate swap agreements |
$ |
24,116 |
$ |
24,116 |
$ |
13,062 |
$ |
13,062 | ||||
Annual principal payments required under the terms of the long-term debt agreements were as follows at December 31, 2002:
Years ending December 31, | ||
(In thousands) | ||
2003 |
$204,087 | |
2004 |
264,782 | |
2005 |
13,893 | |
2006 |
62 | |
TOTAL |
$482,824 | |
4. Income taxes
A reconciliation of recorded income tax expense with income tax computed at the statutory federal tax rates for the three years ended December 31 is as follows:
2002 |
2001 |
2000 |
||||||||||
(In thousands) |
||||||||||||
Statutory federal tax rate |
|
35 |
% |
|
35 |
% |
|
35 |
% | |||
Tax computed at statutory rate |
$ |
152,702 |
|
$ |
121,460 |
|
$ |
105,012 |
| |||
State income taxes, net of federal effect |
|
15,712 |
|
|
12,033 |
|
|
11,156 |
| |||
Non-deductible amortization expense |
|
|
|
|
4,219 |
|
|
3,887 |
| |||
Othernet |
|
1,739 |
|
|
1,099 |
|
|
2,959 |
| |||
TOTAL |
$ |
170,153 |
|
$ |
138,811 |
|
$ |
123,014 |
| |||
The provision for income taxes consisted of the following:
2002 |
2001 |
2000 |
||||||||||
(In thousands) |
||||||||||||
Current: |
||||||||||||
Federal |
$ |
116,021 |
|
$ |
105,081 |
|
$ |
98,630 |
| |||
State |
|
21,564 |
|
|
18,118 |
|
|
16,295 |
| |||
Foreign |
|
1,763 |
|
|
3,912 |
|
|
3,276 |
| |||
|
139,348 |
|
|
127,111 |
|
|
118,201 |
| ||||
Deferred: |
||||||||||||
Federal |
|
29,386 |
|
|
11,067 |
|
|
5,090 |
| |||
State |
|
2,226 |
|
|
948 |
|
|
388 |
| |||
Foreign |
|
(807 |
) |
|
(315 |
) |
|
(665 |
) | |||
|
30,805 |
|
|
11,700 |
|
|
4,813 |
| ||||
TOTAL |
$ |
170,153 |
|
$ |
138,811 |
|
$ |
123,014 |
| |||
Significant components of the Companys deferred tax assets and liabilities consisted of the following at December 31:
2002 |
2001 |
|||||||
(In thousands) |
||||||||
Purchased incomplete software technology |
$ |
32,980 |
|
$ |
37,477 |
| ||
Accrued expenses not currently deductible |
|
28,721 |
|
|
33,671 |
| ||
Deferred revenues |
|
12,218 |
|
|
11,916 |
| ||
Unrealized losses on cash flow hedges |
|
9,405 |
|
|
5,094 |
| ||
Net operating loss carryforwards |
|
6,034 |
|
|
4,323 |
| ||
Other |
|
5,202 |
|
|
5,519 |
| ||
Total deferred tax assets |
|
94,560 |
|
|
98,000 |
| ||
Software development costs for external customers |
|
(36,095 |
) |
|
(31,641 |
) | ||
Excess of tax over book depreciation and amortization |
|
(60,665 |
) |
|
(29,739 |
) | ||
Unrealized gains on investments |
|
(25,573 |
) |
|
(55,467 |
) | ||
Other |
|
(18,354 |
) |
|
(20,560 |
) | ||
Total deferred tax liabilities |
|
(140,687 |
) |
|
(137,407 |
) | ||
TOTAL |
$ |
(46,127 |
) |
$ |
(39,407 |
) | ||
Tax benefits associated with the exercise of non-qualified employee stock options were credited directly to additional paid-in capital and amounted to $31.2 million, $15.0 million and $19.5 million in 2002, 2001 and 2000, respectively.
At December 31, 2002, the Company has state net operating loss carryforwards of $73.4 million, with expiration dates ranging from 2005 through 2022 and foreign net operating loss carryforwards of $4.2 million, with no expiration dates.
5. Employee Benefit Plans
STOCK OPTION PLAN
The Company's Stock Option Plan (the Plan) provides for the granting to its employees and directors of either incentive or non-qualified options to purchase shares of the Company's common stock for a price not less than 100% of the fair value of the shares at the date of grant. In general, 20% of the options awarded under the Plan vest annually and expire 10 years from the date of the award. Changes in stock options outstanding are as follows:
Number of Shares (In thousands) |
Weighted Average Exercise Price | |||||
Outstanding, December 31, 1999 |
13,594 |
|
$ |
11.26 | ||
Granted |
1,792 |
|
|
21.48 | ||
Forfeited |
(625 |
) |
|
19.18 | ||
Exercised |
(2,303 |
) |
|
8.85 | ||
Outstanding, December 31, 2000 |
12,458 |
|
|
12.76 | ||
Granted |
2,277 |
|
|
36.99 | ||
Forfeited |
(387 |
) |
|
18.18 | ||
Exercised |
(1,345 |
) |
|
8.68 | ||
Outstanding, December 31, 2001 |
13,003 |
|
|
17.18 | ||
Granted |
1,519 |
|
|
41.21 | ||
Forfeited |
(116 |
) |
|
24.49 | ||
Exercised |
(2,796 |
) |
|
10.70 | ||
Outstanding, December 31, 2002 |
11,610 |
|
$ |
21.77 | ||
The number of shares under option that were exercisable at December 31, 2002, 2001 and 2000 were 8.1 million, 9.0 million and 8.2 million, at weighted average exercise prices of $16.69, $12.80 and $9.93, respectively. The following summarizes information about the Company's stock options outstanding and exercisable at December 31, 2002:
Options Outstanding |
Options Outstanding and Exercisable | |||||||||||
Range of Exercise Prices |
Number of Shares (In thousands) |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Life (in years) |
Number of Shares (In thousands) |
Weighted Average Exercise Price | |||||||
$3.01$10.67 |
3,347 |
$ |
7.86 |
2.6 |
3,347 |
$ |
7.86 | |||||
10.8920.14 |
3,185 |
|
17.30 |
5.5 |
2,784 |
|
17.13 | |||||
20.3837.04 |
3,591 |
|
30.50 |
7.7 |
1,659 |
|
29.19 | |||||
37.2145.99 |
1,487 |
|
41.59 |
9.1 |
303 |
|
41.56 | |||||
$3.01$45.99 |
11,610 |
$ |
21.77 |
5.8 |
8,093 |
$ |
16.69 | |||||
At December 31, 2002, options to purchase 8.5 million shares were available for grant under the Plan. The Company has accounted for its stock-based compensation plans in accordance with the intrinsic value provisions of APB Opinion No. 25. Accordingly, the Company did not record any compensation expense in the accompanying consolidated financial statements for its stock-based compensation plans. Had compensation expense been recognized consistent with the fair value provisions of SFAS No.123, Accounting for Stock-Based Compensation, the Companys net income and net income per sharebasic and diluted would have been changed to the pro forma amounts indicated below for the years ended December 31:
2002 |
2001 |
2000 |
||||||||||
(In thousands, except per share data) |
||||||||||||
Net income: |
||||||||||||
As reported |
$ |
266,137 |
|
$ |
208,217 |
|
$ |
177,021 |
| |||
Less: stock compensation expensenet of tax |
|
(18,200 |
) |
|
(13,400 |
) |
|
(9,700 |
) | |||
Pro forma |
$ |
247,937 |
|
$ |
194,817 |
|
$ |
167,321 |
| |||
Reported net income per share: |
||||||||||||
Basic |
$ |
1.39 |
|
$ |
1.11 |
|
$ |
0.96 |
| |||
Diluted |
|
1.37 |
|
|
1.09 |
|
|
0.93 |
| |||
Pro forma net income per share: |
||||||||||||
Basic |
$ |
1.30 |
|
$ |
1.04 |
|
$ |
0.91 |
| |||
Diluted |
|
1.27 |
|
|
1.02 |
|
|
0.88 |
|
The fair value of each stock option granted in 2002, 2001 and 2000 was estimated on the date of grant using the Black-Scholes pricing model with the following weighted average assumptions:
2002 |
2001 |
2000 |
|||||||
Expected life (in years) |
5.0 |
|
5.0 |
|
5.0 |
| |||
Risk-free interest rate |
4.4 |
% |
4.6 |
% |
5.0 |
% | |||
Volatility |
50.0 |
% |
49.8 |
% |
48.6 |
% | |||
Dividend yield |
0.0 |
% |
0.0 |
% |
0.0 |
% |
The weighted-average estimated fair value of stock options granted during the years ended December 31, 2002, 2001 and 2000 was $20.24, $18.02 and $10.72 per share, respectively.
EMPLOYEE STOCK PURCHASE PLAN
The Companys employee stock purchase plan provides that eligible employees may purchase a limited number of shares of common stock each quarter through payroll deductions, at a purchase price equal to 85% of the closing price of the Company's common stock on the last business day of each calendar quarter. As of January 1, 2003, there were 1.0 million shares available for grant under this plan.
EMPLOYEE SAVINGS PLAN
The Company and its subsidiaries have defined contribution savings plans covering substantially all employees, under which eligible participants may elect to contribute a specified percentage of their salaries, subject to certain limitations. The Company makes matching contributions, subject to certain limitations, and makes discretionary contributions based upon the attainment of certain profit goals. Company contributions vest ratably at 20% for each year of service. Company contributions charged to operations under these plans approximated $41.5 million, $35.3 million and $30.4 million in 2002, 2001 and 2000, respectively.
6. Restructuring and Other Charges
In the second quarter of 2001, the Company recorded $12.3 million of pre-tax charges consisting of severance and related termination benefits ($3.8 million), future lease and other contractual obligations ($6.2 million), and the disposal and write-down of assets ($2.3 million). These charges related to managements plan to improve overall business efficiencies by consolidating the Companys securities processing operations and eliminating duplicate operational functions. At December 31, 2002 and 2001, approximately $3.4 million and $6.2 million, respectively, of future lease and other obligations were yet to be incurred.
7. Leases, other commitments and contingencies
LEASES
The Company leases certain office facilities and equipment under operating leases. Future minimum rental payments on operating leases with initial noncancellable lease terms in excess of one year were due as follows as of December 31, 2002:
Years Ending December 31, | |||
(In thousands) | |||
2003 |
$ |
86,304 | |
2004 |
|
74,617 | |
2005 |
|
61,214 | |
2006 |
|
47,852 | |
2007 |
|
33,958 | |
Thereafter |
|
69,263 | |
TOTAL |
$ |
373,208 | |
Rent expense applicable to all operating leases was approximately $99.7 million, $87.1 million and $83.1 million during the years ended December 31, 2002, 2001 and 2000, respectively.
OTHER COMMITMENTS AND CONTINGENCIES
The Company's trust administration subsidiaries had fiduciary responsibility for the administration of approximately $26.0 billion in trust funds as of December 31, 2002. The Companys securities processing subsidiaries are subject to the Uniform Net Capital Rule of the Securities and Exchange Commission. At December 31, 2002, the aggregate net capital of such subsidiaries was $86.7 million, exceeding the net capital requirement by $68.3 million.
In the normal course of business, the Company and its subsidiaries are named as defendants in various lawsuits in which claims are asserted against the Company. The Company has initiated legal action against E*TRADE Securities, Inc. (E*TRADE) as the result of E*TRADE refusing to accept delivery of a bond (with a carrying value of $27.0 million as of December 31, 2002) in violation of the terms of a contract between E*TRADE and a subsidiary of the Company. The Company intends to vigorously enforce its rights under the terms of its agreement with E*TRADE and expects to prevail and recover the carrying value of the bond. In the opinion of management, the liabilities, if any, which may ultimately result from such lawsuits are not expected to have a material adverse effect on the consolidated financial statements of the Company.
8. Business Segment Information
The Company is a leading independent provider of data processing systems and related information management services and products to financial institutions and other financial intermediaries. The Company has three business segments based on the services provided by each: Financial institution outsourcing, systems and services; Securities processing and trust services; and All other and corporate. The Financial institution outsourcing, systems and services segment provides account and transaction processing solutions and services to financial institutions and other financial intermediaries. The Securities processing and trust services segment provides securities processing solutions and retirement plan administration services to brokerage firms, financial planners and financial institutions. The All other and corporate segment provides plastic card services and document solutions, and includes general corporate expenses. The plastic card and document solutions businesses provide plastic card issuance services, card design, personalization and mailing, along with electronic document delivery and print-related solutions.
Summarized financial information by business segment for each of the three years ended December 31 is as follows:
Financial Institution Outsourcing, Systems and Services |
Securities Processing and Trust Services |
All Other and Corporate |
Total | ||||||||||
(In thousands) | |||||||||||||
2002 |
|||||||||||||
Processing and services revenues |
$ |
1,956,449 |
$ |
228,201 |
$ |
92,992 |
|
$ |
2,277,642 | ||||
Operating income |
|
418,824 |
|
28,839 |
|
(4,624 |
) |
|
443,039 | ||||
Identifiable assets |
|
2,100,894 |
|
4,071,403 |
|
266,408 |
|
|
6,438,705 | ||||
Capital expenditures, including capitalization of software development costs for external customers |
|
125,637 |
|
12,306 |
|
3,937 |
|
|
141,880 | ||||
Depreciation and amortization expense |
|
113,658 |
|
22,127 |
|
5,329 |
|
|
141,114 | ||||
2001 |
|||||||||||||
Processing and services revenues |
$ |
1,581,216 |
$ |
259,437 |
$ |
86,377 |
|
$ |
1,927,030 | ||||
Operating income |
|
322,073 |
|
34,793 |
|
(3,169 |
) |
|
353,697 | ||||
Identifiable assets |
|
1,655,071 |
|
3,410,914 |
|
256,257 |
|
|
5,322,242 | ||||
Capital expenditures, including capitalization of software development costs for external customers |
|
91,034 |
|
10,092 |
|
3,483 |
|
|
104,609 | ||||
Depreciation and amortization expense |
|
115,829 |
|
25,004 |
|
6,863 |
|
|
147,696 | ||||
2000 |
|||||||||||||
Processing and services revenues |
$ |
1,276,254 |
$ |
325,839 |
$ |
83,690 |
|
$ |
1,685,783 | ||||
Operating income |
|
220,619 |
|
95,441 |
|
(1,754 |
) |
|
314,306 | ||||
Identifiable assets |
|
1,185,819 |
|
4,160,939 |
|
239,562 |
|
|
5,586,320 | ||||
Capital expenditures, including capitalization of software development costs for external customers |
|
89,235 |
|
13,628 |
|
4,124 |
|
|
106,987 | ||||
Depreciation and amortization expense |
|
120,050 |
|
21,370 |
|
7,422 |
|
|
148,842 |
The Companys domestic operations comprised approximately 95%, 92% and 93% of processing and services revenues for the years ended December 31, 2002, 2001 and 2000, respectively. No single customer accounted for more than 3% of consolidated processing and services revenues during the years ended December 31, 2002, 2001 and 2000.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for the historical information contained herein, the matters discussed in this Annual Report are forward-looking statements which involve risks and uncertainties, including but not limited to economic, competitive, governmental and technological factors affecting the Companys operations, markets, services and related products, prices and other factors discussed in the Companys prior filings with the Securities and Exchange Commission. Since these statements are subject to risks and uncertainties and are subject to change at any time, actual results could differ materially from expected results. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved.
CRITICAL ACCOUNTING POLICIES
The Companys consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Companys management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The Company continually evaluates the accounting policies and estimates it uses to prepare the consolidated financial statements. The Company bases its estimates on historical experience and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates made by management.
The Company has identified that its accounting policy regarding intangible assets and goodwill is critical to the Companys results of operations and financial position. The Company has reviewed the carrying value of goodwill and other intangible assets in connection with the implementation of SFAS No. 142 by comparing such amounts to their fair values. The Company determined that the carrying amounts of goodwill and other intangible assets did not exceed their respective fair values. The Company is required to perform this comparison at least annually or more frequently if circumstances indicate possible impairment. When determining fair value, the Company uses various assumptions, including projections of future cash flows. Given the significance of goodwill and other intangible asset balances, an adverse change to the fair value could result in an impairment charge, which could be material to the Companys financial statements.
The Company does not participate in, nor has it created, any off-balance sheet special purpose entities or other off-balance sheet financing, other than operating leases. In addition, the Company does not enter into any derivative financial instruments for speculative purposes and uses derivative financial instruments primarily for managing its exposure to changes in interest rates.
MARKET RISK
Market risk refers to the risk that a change in the level of one or more market prices, interest rates, indices, correlations or other market factors, such as liquidity, will result in losses for a certain financial instrument or group of financial instruments. The Company is exposed primarily to interest rate risk and market price risk on investments and borrowings. The Company actively monitors these risks through a variety of control procedures involving senior management.
The Companys trust administration subsidiaries accept money market account deposits from trust customers and invest those funds in marketable securities. Substantially all of the investments are rated within the highest investment grade categories for securities. The Companys trust administration subsidiaries utilize simulation models for measuring and monitoring interest rate risk and market value of portfolio equities. A formal Asset Liability Committee of the Company meets quarterly to review interest rate risks, capital ratios, liquidity levels, portfolio diversification, credit risk ratings and adherence to investment policies and guidelines. Substantially all of the investments at December 31, 2002, have contractual maturities of one year or less except for government agency and certain fixed income mortgage backed obligations, which have an average duration of approximately one year and six months. The Company does not believe any significant change in interest rates would have a material impact on the consolidated financial statements.
The Company manages its debt structure and interest rate risk through the use of fixed and floating-rate debt and through the use of interest rate swaps. The Company uses interest rate swaps to partially hedge its exposure to interest rate changes, and to control its financing costs. Generally, under these swaps, the Company agrees with a counterparty to exchange the difference between fixed-rate and floating-rate interest amounts based on an agreed principal amount. While changes in interest rates could decrease the Companys interest income or increase its interest expense, the Company does not believe that it has a material exposure to changes in interest rates, primarily due to $200.0 million of fixed interest rate swap agreements in place at December 31, 2002. Based on the Companys current borrowings under its credit and commercial paper facility of $393.3 million, a 1% increase in the Companys borrowing rate would increase annual interest expense related to the credit facility by $1.9 million. Based on the controls in place, management believes the risks associated with financial instruments at December 31, 2002, will not have a material effect on the Companys consolidated financial position or results of operations.
RESULTS OF OPERATIONS
The Company is a leading independent provider of financial data processing systems and related information management services and products to financial institutions and other financial intermediaries. The Companys operations have been classified into three business segments: Financial institution outsourcing, systems and services (FIS); Securities processing and trust services; and All other and corporate. The following table sets forth, for the period indicated, certain amounts included in the Companys consolidated statements of income, the relative percentage that those amounts represent to processing and services revenues, and the percentage change in those amounts from period to period. This information should be read along with the Consolidated Financial Statements and Notes thereto. The following table and discussion exclude the revenues and expenses associated with customer reimbursements recorded in accordance with EITF No. 01-14 as explained in Note 1 of the accompanying consolidated financial statements.
Year ended December 31, (In millions) |
Percent of revenue Year ended December 31, |
Percent Increase (Decrease) |
||||||||||||||||||||||
2002 |
2001 |
2000 |
2002 |
2001 |
2000 |
2002 vs. 2001 |
2001 vs. 2000 |
|||||||||||||||||
Processing and services revenues: |
||||||||||||||||||||||||
Financial institution outsourcing, systems |
$ |
1,956.4 |
|
$ |
1,581.2 |
|
$ |
1,276.3 |
|
86% |
82% |
76% |
24% |
|
24% |
| ||||||||
Securities processing and trust services |
|
228.2 |
|
|
259.4 |
|
|
325.8 |
|
10% |
13% |
19% |
(12% |
) |
(20% |
) | ||||||||
All other and corporate |
|
93.0 |
|
|
86.4 |
|
|
83.7 |
|
4% |
5% |
5% |
8% |
|
3% |
| ||||||||
TOTAL |
$ |
2,277.6 |
|
$ |
1,927.0 |
|
$ |
1,685.8 |
|
100% |
100% |
100% |
18% |
|
14% |
| ||||||||
Cost of revenues: |
||||||||||||||||||||||||
Salaries, commissions and payroll related costs |
$ |
1,090.3 |
|
$ |
936.2 |
|
$ |
807.6 |
|
48% |
49% |
48% |
16% |
|
16% |
| ||||||||
Data processing costs and equipment rentals |
|
165.3 |
|
|
148.5 |
|
|
132.5 |
|
7% |
8% |
8% |
11% |
|
12% |
| ||||||||
Other operating expenses |
|
437.9 |
|
|
340.9 |
|
|
282.6 |
|
19% |
18% |
17% |
28% |
|
21% |
| ||||||||
Depreciation and amortization |
|
141.1 |
|
|
147.7 |
|
|
148.8 |
|
6% |
8% |
9% |
(4% |
) |
(1% |
) | ||||||||
TOTAL |
$ |
1,834.6 |
|
$ |
1,573.3 |
|
$ |
1,371.5 |
|
81% |
82% |
81% |
17% |
|
15% |
| ||||||||
Operating income: |
||||||||||||||||||||||||
Financial institution outsourcing, systems |
||||||||||||||||||||||||
and services (1) |
$ |
418.8 |
|
$ |
322.1 |
|
$ |
220.6 |
|
21% |
20% |
17% |
30% |
|
46% |
| ||||||||
Securities processing and trust services (1) |
|
28.8 |
|
|
34.8 |
|
|
95.4 |
|
13% |
13% |
29% |
(17% |
) |
(64% |
) | ||||||||
All other and corporate (2) |
|
(4.6 |
) |
|
(3.2 |
) |
|
(1.8 |
) |
|||||||||||||||
TOTAL |
$ |
443.0 |
|
$ |
353.7 |
|
$ |
314.3 |
|
19% |
18% |
19% |
25% |
|
13% |
| ||||||||
(1) | Percent of segment revenues is calculated as a percent of FIS revenues and Securities processing and trust services revenues. |
(2) | Percents not meaningful, amounts include corporate expenses. |
PROCESSING AND SERVICES REVENUES
Total processing and services revenues increased $350.6 million, or 18%, in 2002 and $241.2 million, or 14%, in 2001. Revenue growth was derived from sales to new clients, existing client growth, cross-sales to existing clients, price increases and revenues from acquired companies. Revenue growth was positively impacted by revenue growth of $375.2 million in 2002 and $305.0 million in 2001 in the FIS segment. The FIS segments revenue growth in 2002 was negatively impacted by a decrease in European revenue of $36.0 million in 2002 compared to 2001 related to the Companys international banking system primarily due to reduced customer spending on professional services. In addition, total revenue growth was negatively impacted by a decline in revenues of $31.2 million in 2002 and $66.4 million in 2001 in the Securities processing and trust services segment due to continued weakness in the United States retail financial markets. The internal revenue growth rate for the Company was approximately 4% in 2002 (excluding a business disposition and a $12.0 million customer termination fee in 2001).
COST OF REVENUES
Total cost of revenues increased $261.3 million, or 17%, in 2002 and $201.9 million, or 15%, in 2001. As a percent of processing and services revenues, cost of revenues were 81% in 2002, 82% in 2001 and 81% in 2000.
Cost of revenues, excluding depreciation and amortization, increased $267.9 million, or 19%, in 2002 and $203.0 million, or 17% in 2001. The increases in these cost of revenues is due primarily to acquired businesses and continued growth in the FIS segment. The make up of cost of revenues each year has been affected by business acquisitions and changes in the mix of the Companys business. In 2001, the Company recorded charges of $12.3 million, as explained in Note 6 of the accompanying consolidated financial statements.
Depreciation and amortization expense decreased $6.6 million in 2002 and $1.1 million in 2001. The decrease in 2002 was primarily attributable to the adoption of SFAS No. 142 that resulted in a reduction of goodwill amortization expense of approximately $24.0 million in 2002, offset primarily by incremental depreciation and amortization expense from capital expenditures and other intangible assets subject to amortization. The decrease in 2001 was primarily due to an impairment charge of $11.0 million recorded in the FIS segment in 2000, offset by amortization associated with acquisitions and incremental depreciation expense on capital expenditures.
OPERATING INCOME
Operating income increased $89.3 million, or 25%, in 2002 and $39.4 million, or 13%, in 2001. Operating income in the FIS segment increased $96.8 million in 2002 and $101.5 million in 2001. The increase in operating income in 2002 compared to 2001 in the FIS segment was due to a number of factors, including revenue growth across its business lines, acquisitions and the elimination of goodwill amortization of approximately $20.0 million. Operating income in the Securities processing and trust services segment decreased $6.0 million in 2002 and $60.6 million in 2001, primarily due to continued weakness in the United States retail financial markets.
REALIZED GAIN FROM SALE OF INVESTMENT
During 2002, 2001 and 2000, the Company recorded a pre-tax realized gain from sale of investment of $2.4 milion, $5.4 million and $7.8 million, respectively.
INCOME TAX PROVISION
The effective income tax rate was 39% in 2002, 40% in 2001 and 41% in 2000. The effective income tax rate for 2002 declined from 2001 due to the impact of adopting SFAS No. 142. The income tax rate for 2003 is expected to remain at 39%.
NET INCOME
Net income for 2002 increased $57.9 million, or 28%, in 2002 and $31.2 million, or 18%, in 2001. Net income per share-diluted (excluding realized gain from sale of investment) for 2002 was $1.36 compared to $1.07 in 2001 and $0.91 in 2000. The impact of adopting SFAS No. 142 would have increased 2001 and 2000 net income per share-diluted (excluding realized gain from sale of investment) by approximately $0.09 per share each year due to the elimination of goodwill amortization.
The Companys growth has been accomplished, to a significant degree, through the acquisition of businesses which are complementary to its operations. Management believes that a number of acquisition candidates are available which would further enhance the Companys competitive position and plans to pursue them vigorously. Management is engaged in an ongoing program to reduce expenses related to acquisitions by eliminating operating redundancies. The Companys approach has been to move slowly in achieving this goal in order to minimize the amount of disruption experienced by its clients and the potential loss of clients due to this program.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes the Companys primary sources (uses) of funds during the years ended December 31:
2002 |
2001 |
2000 |
||||||||||
(In millions) |
||||||||||||
Cash provided by operating activities before changes in securities processing receivables and payablesnet |
$ |
512.9 |
|
$ |
363.7 |
|
$ |
368.8 |
| |||
Securities processing receivables and payablesnet |
|
63.9 |
|
|
78.4 |
|
|
215.7 |
| |||
Cash provided by operating activities |
|
576.8 |
|
|
442.1 |
|
|
584.5 |
| |||
Capital expenditures |
|
(141.9 |
) |
|
(104.6 |
) |
|
(107.0 |
) | |||
Payment for acquisitions of businesses |
|
(406.6 |
) |
|
(224.8 |
) |
|
(88.8 |
) | |||
(Repayments of) proceeds from short-term borrowingsnet |
|
(12.3 |
) |
|
93.1 |
|
|
(214.6 |
) | |||
Proceeds from (repayments of) long-term debtnet |
|
139.6 |
|
|
(6.3 |
) |
|
(138.9 |
) | |||
TOTAL |
$ |
155.6 |
|
$ |
199.4 |
|
$ |
35.2 |
| |||
Cash flow from operations before securities processing receivables and payables increased 41% in 2002, reaching $512.9 million. At December 31, 2002, the Company had $482.8 million of long-term debt, while shareholders equity exceeded $1.8 billion. Long-term debt includes $393.3 million borrowed under the Companys credit and commercial paper facility of which $143.3 million is payable under a 364-day agreement in 2003 and $250.0 million is payable in 2004 or earlier at the Companys option. The Company expects to renew its 364-day agreement prior to expiration in the second quarter of 2003. At December 31, 2002, cash and cash equivalents were $227.2 million, an increase of $91.2 million from December 31, 2001, after spending $406.6 million on acquired businesses in 2002.
At December 31, 2002, the Companys remaining commitments consist primarily of operating leases for office facilities and equipment aggregating $373.2 million, of which $86.3 million will be incurred in 2003. The Company believes that its cash flow from operations together with other available sources of funds will be adequate to meet its operating requirements, debt repayments, contingent payments in connection with business acquisitions and ordinary capital spending needs. At December 31, 2002, the Company had $53.7 million available for borrowing and $227.2 million in cash and cash equivalents. In the event that the Company makes significant future acquisitions, however, it may raise funds through additional borrowings or the issuance of securities.
The Companys current policy is to retain earnings to support future business opportunities, rather than to pay dividends. During 1999, the Companys Board of Directors authorized the repurchase of up to 4.9 million shares of the Companys common stock. Shares purchased under the authorization will be made through open market transactions that may occur from time to time as market conditions warrant. Shares acquired will be held for issuance in connection with acquisitions and employee stock option and purchase plans. As of December 31, 2002, approximately 1.7 million shares remained available under the repurchase authorization.
Selected Financial Data
The following data, which has been affected by acquisitions, should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this Annual Report.
Years ended December 31, | |||||||||||||||
2002 |
2001 |
2000 |
1999 |
1998 | |||||||||||
(In thousands, except per share data) | |||||||||||||||
Processing and services revenues |
$ |
2,277,642 |
$ |
1,927,030 |
$ |
1,685,783 |
$ |
1,407,545 |
$ |
1,233,670 | |||||
Income before income taxes |
|
436,290 |
|
347,028 |
|
300,035 |
|
233,675 |
|
193,684 | |||||
Income tax provision |
|
170,153 |
|
138,811 |
|
123,014 |
|
95,807 |
|
79,410 | |||||
Net income |
|
266,137 |
|
208,217 |
|
177,021 |
|
137,868 |
|
114,274 | |||||
Net income per share: |
|||||||||||||||
Basic |
|
1.39 |
|
1.11 |
|
0.96 |
|
0.75 |
|
0.62 | |||||
Diluted |
|
1.37 |
|
1.09 |
|
0.93 |
|
0.73 |
|
0.60 | |||||
Diluted (excluding realized gain from sale of investment) |
|
1.36 |
|
1.07 |
|
0.91 |
|
0.73 |
|
0.60 | |||||
Total assets |
$ |
6,438,705 |
$ |
5,322,242 |
$ |
5,586,320 |
$ |
5,307,710 |
$ |
3,958,338 | |||||
Long-term debt |
|
482,824 |
|
343,093 |
|
334,958 |
|
472,824 |
|
389,622 | |||||
Shareholders equity |
|
1,827,669 |
|
1,604,826 |
|
1,252,072 |
|
1,091,016 |
|
885,797 |
MARKET PRICE INFORMATION
The following information relates to the closing price of the Companys common stock, which is traded on the Nasdaq Stock Market under the symbol FISV. Information has been adjusted to recognize the three-for-two stock split effective August 2001.
2002 |
2001 | |||||||||||
Quarter Ended |
High |
Low |
High |
Low | ||||||||
March 31 |
$ |
46.60 |
$ |
39.88 |
$ |
38.00 |
$ |
29.58 | ||||
June 30 |
|
46.08 |
|
35.16 |
|
42.65 |
|
30.29 | ||||
September 30 |
|
39.25 |
|
28.08 |
|
42.12 |
|
32.72 | ||||
December 31 |
|
35.04 |
|
22.60 |
|
44.39 |
|
31.93 |
At December 31, 2002, the Companys common stock was held by 9,729 shareholders of record. It is estimated that an additional 38,000 shareholders own the Companys stock through nominee or street name accounts with brokers. The closing sale price for the Companys stock on January 23, 2003, was $32.68 per share.
QUARTERLY FINANCIAL INFORMATION (Unaudited)
Quarters |
||||||||||||||||||||
First |
Second |
Third |
Fourth |
Total |
||||||||||||||||
(In thousands, except per share data) |
||||||||||||||||||||
2002 |
||||||||||||||||||||
Processing and services revenues |
$ |
559,824 |
|
$ |
563,032 |
|
$ |
563,663 |
|
$ |
591,123 |
|
$ |
2,277,642 |
| |||||
Cost of revenues |
|
451,310 |
|
|
452,167 |
|
|
453,840 |
|
|
477,286 |
|
|
1,834,603 |
| |||||
Operating income |
|
108,514 |
|
|
110,865 |
|
|
109,823 |
|
|
113,837 |
|
|
443,039 |
| |||||
Interest expensenet |
|
(2,687 |
) |
|
(2,178 |
) |
|
(1,804 |
) |
|
(2,500 |
) |
|
(9,169 |
) | |||||
Realized gain from sale of investment |
|
915 |
|
|
567 |
|
|
426 |
|
|
512 |
|
|
2,420 |
| |||||
Income before income taxes |
|
106,742 |
|
|
109,254 |
|
|
108,445 |
|
|
111,849 |
|
|
436,290 |
| |||||
Income tax provision |
|
41,629 |
|
|
42,609 |
|
|
42,294 |
|
|
43,621 |
|
|
170,153 |
| |||||
Net income |
$ |
65,113 |
|
$ |
66,645 |
|
$ |
66,151 |
|
$ |
68,228 |
|
$ |
266,137 |
| |||||
Net income per share: |
||||||||||||||||||||
Basic |
$ |
0.34 |
|
$ |
0.35 |
|
$ |
0.34 |
|
$ |
0.36 |
|
$ |
1.39 |
| |||||
Diluted |
$ |
0.33 |
|
$ |
0.34 |
|
$ |
0.34 |
|
$ |
0.35 |
|
$ |
1.37 |
| |||||
Diluted (excluding realized gain from sale of investment) |
$ |
0.33 |
|
$ |
0.34 |
|
$ |
0.34 |
|
$ |
0.35 |
|
$ |
1.36 |
| |||||
2001 |
||||||||||||||||||||
Processing and services revenues |
$ |
462,163 |
|
$ |
481,355 |
|
$ |
476,102 |
|
$ |
507,410 |
|
$ |
1,927,030 |
| |||||
Cost of revenues |
|
375,558 |
|
|
392,976 |
|
|
386,887 |
|
|
417,912 |
|
|
1,573,333 |
| |||||
Operating income |
|
86,605 |
|
|
88,379 |
|
|
89,215 |
|
|
89,498 |
|
|
353,697 |
| |||||
Interest expensenet |
|
(3,817 |
) |
|
(3,237 |
) |
|
(2,501 |
) |
|
(2,518 |
) |
|
(12,073 |
) | |||||
Realized gain from sale of investment |
|
1,821 |
|
|
1,506 |
|
|
1,000 |
|
|
1,077 |
|
|
5,404 |
| |||||
Income before income taxes |
|
84,609 |
|
|
86,648 |
|
|
87,714 |
|
|
88,057 |
|
|
347,028 |
| |||||
Income tax provision |
|
33,844 |
|
|
34,659 |
|
|
35,085 |
|
|
35,223 |
|
|
138,811 |
| |||||
Net income |
$ |
50,765 |
|
$ |
51,989 |
|
$ |
52,629 |
|
$ |
52,834 |
|
$ |
208,217 |
| |||||
Net income per share: |
||||||||||||||||||||
Basic |
$ |
0.27 |
|
$ |
0.28 |
|
$ |
0.28 |
|
$ |
0.28 |
|
$ |
1.11 |
| |||||
Diluted |
$ |
0.27 |
|
$ |
0.27 |
|
$ |
0.27 |
|
$ |
0.27 |
|
$ |
1.09 |
| |||||
Diluted (excluding realized gain from sale of investment) |
$ |
0.26 |
|
$ |
0.27 |
|
$ |
0.27 |
|
$ |
0.27 |
|
$ |
1.07 |
| |||||
Note: The above information excludes the revenues and expenses associated with customer reimbursements recorded in accordance with EITF No. 01-14.
MANAGEMENTS STATEMENT OF RESPONSIBILITY
The management of Fiserv, Inc. assumes responsibility for the integrity and objectivity of the information appearing in the 2002 Annual Report. This information was prepared in conformity with accounting principles generally accepted in the United States of America and necessarily reflects the best estimates and judgment of management.
To provide reasonable assurance that transactions authorized by management are recorded and reported properly and that assets are safeguarded, the Company maintains a system of internal controls. The concept of reasonable assurance implies that the cost of such a system is weighed against the benefits to be derived therefrom.
The control environment is complemented by the Companys internal audit function, which evaluates the adequacy of the controls, policies and procedures in place, as well as adherence to them, and recommends improvements for implementation when applicable. In addition, Deloitte & Touche LLP, certified public accountants, audits the consolidated financial statements of the Company in accordance with auditing standards generally accepted in the United States of America. Their audits include a review of the internal control system, and improvements are made to the system based upon their recommendations.
The Audit Committee ensures that management and the independent auditors are properly discharging their financial reporting responsibilities. In performing this function, the Committee meets with management and the independent auditors throughout the year. Additional access to the Committee is provided to Deloitte & Touche LLP on an unrestricted basis, allowing discussion of audit results and opinions on the adequacy of internal accounting controls and the quality of financial reporting.
/s/ Leslie M. Muma |
Leslie M. Muma |
President and Chief Executive Officer |
INDEPENDENT AUDITORS REPORT
SHAREHOLDERS AND DIRECTORS OF FISERV, INC.
We have audited the accompanying consolidated balance sheets of Fiserv, Inc. and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, shareholders equity and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Fiserv, Inc. and subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America.
As described on Note 1 to the consolidated financial statements, on January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.
/S/ Deloitte & Touche LLP |
Deloitte & Touche LLP |
Milwaukee, Wisconsin January 24, 2003 |
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Name under which Subsidiary does Business |
State (Country) of Incorporation | |
The Affinity Group, Inc. |
Colorado | |
Agio Insurance Agency, Inc. |
Montana | |
Aspen Investment Alliance, Inc. |
Colorado | |
Benefit Control Management, LLC |
Texas | |
Benefit Planners Limited, L.L.P. |
Texas | |
Benesight Insurance Agency of Massachusetts, Inc. |
Delaware | |
Benesight, Inc. |
Delaware | |
Benesight.com, Incorporated |
Delaware | |
BHC Investments, Inc. |
Delaware | |
BHCM Insurance Agency, Inc. |
Delaware | |
BP, Inc. |
Delaware | |
Catapult Technology Limited |
England | |
Cusick Enterprises Limited, L.L.P. |
Texas | |
Cusick Management, LLC |
Texas | |
Data-Chain Solutions, Inc. |
Delaware | |
Data-Link Systems, LLC |
Wisconsin | |
Employee Benefit Services, Inc. |
Louisiana | |
EPSIIA Corporation |
Texas | |
F.T. Agency, Inc. |
Ohio | |
First Trust Corporation |
Colorado | |
Fiserv (ASPAC) Pte. Ltd. |
Singapore | |
Fiserv (Europe) Ltd. |
England | |
Fiserv Argentina S.R.L. |
Argentina | |
Fiserv Australia Pty. Limited |
Australia | |
Fiserv BP, Inc. |
Wisconsin | |
Fiserv BPI, Inc. |
Texas | |
Fiserv CIR, Inc. |
Delaware | |
Fiserv Clearing, Inc. |
Delaware | |
Fiserv Colombia Limitada |
Colombia | |
Fiserv Connecticut Sub, Inc. |
Connecticut | |
Fiserv CSW, Inc. |
Massachusetts | |
Fiserv DC, Inc. |
Wisconsin | |
Fiserv Execution Services, Inc. |
Delaware | |
Fiserv FSC, Inc. |
California | |
Fiserv Federal Systems, Inc. |
Delaware | |
FIserv Fresno, Inc. |
California | |
Fiserv Health, Inc. |
Delaware | |
Fiserv Insurance Agency of Alabama, Inc. |
Alabama | |
Fiserv Investor Services, Inc. |
Delaware | |
Fiserv International (Barbados) Limited |
Barbados | |
Fiserv LeMans, Inc. |
Pennsylvania | |
Fiserv Mercosur, Inc. |
Delaware |
20
EXHIBIT 21 (continued)
SUBSIDIARIES OF THE REGISTRANT
Name under which Subsidiary does Business |
State (Country) of Incorporation | |
Fiserv NCSI, Inc. |
Maryland | |
Fiserv Polska Sp. z.o.o. |
Poland | |
Fiserv San Juan, Inc. |
Puerto Rico | |
Fiserv Securities, Inc. |
Delaware | |
Fiserv Solutions of Canada Inc. |
Ontario | |
Fiserv Solutions, Inc. |
Wisconsin | |
The Freedom Group, Inc. |
Iowa | |
Harrington Benefit Services, Inc. |
Delaware | |
HEC Newbridge Insurance Services, Inc. |
Texas | |
ILS Title Agency, LLC |
Delaware | |
ILS Services, LLC |
Delaware | |
Information Technology, Inc. |
Nebraska | |
ITI of Nebraska, Inc. |
Nebraska | |
J.O. One, Ltd. |
Texas | |
Lenders Financial Services, LLC |
California | |
LFS Realty, Inc. |
California | |
Lincoln Trust Company |
Colorado | |
National Flood Services, Inc. |
Montana | |
Precision Direct, Inc. |
Washington | |
Preferred Health Arrangement Limited, LLP |
Texas | |
PT Fiserv Indonesia |
Indonesia | |
Remarketing Services of America, Inc. |
Delaware | |
REH Agency, Inc. |
Ohio | |
RemitStream Solutions, LLC |
Delaware | |
RL Reserve, Inc. |
Colorado | |
Sheridan Re |
Cayman Islands | |
Specialty Insurance Service |
California | |
Tower Agency, Inc. |
Ohio | |
TradeStar Investments, Inc. |
Delaware | |
Trust Industrial Bank |
Colorado | |
USERS Incorporated |
Maryland | |
XP Systems Corporation |
Minnesota |
21
EXHIBIT 23
INDEPENDENT AUDITORS CONSENT
We consent to the incorporation by reference in Registration Statement Nos. 333-64353, 333-04417, 333-28121, 333-34310 and 333-34396 on Form S-8; Registration Statement No. 333-44935 on Form S-4, and Registration Statement No. 333-74910 on Form S-3 of Fiserv, Inc. of our reports dated January 24, 2003 (which report expresses an unqualified opinion and includes an explanatory paragraph as to the adoption in 2002 of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets), appearing in and incorporated by reference in this Annual Report on Form 10-K of Fiserv, Inc. for the year ended December 31, 2002.
/S/ Deloitte & Touche LLP
Deloitte & Touche LLP
Milwaukee, Wisconsin
February 28, 2003
22
EXHIBIT 99.1
WRITTEN STATEMENT OF THE CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
Solely for the purposes of complying with 18 U.S.C. Section 1350, I, the undersigned President and Chief Executive Officer of Fiserv, Inc. (the Company), hereby certify that the Annual Report on Form 10-K of the Company for the year ended December 31, 2002, (the Report) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: February 28, 2003 |
By: |
/S/ Leslie M. Muma | ||||
Leslie M. Muma President and Chief Executive Officer |
23
EXHIBIT 99.2
WRITTEN STATEMENT OF THE CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
Solely for the purposes of complying with 18 U.S.C. Section 1350, I, the undersigned Senior Executive Vice President, Chief Financial Officer, Treasurer and Assistant Secretary of Fiserv, Inc. (the Company), hereby certify that the Annual Report on Form 10-K of the Company for the year ended December 31, 2002, (the Report) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: February 28, 2003 |
By: |
/S/ Kenneth R. Jensen | ||||
Kenneth R. Jensen Senior Executive Vice President, Chief Financial Officer, Treasurer and Assistant Secretary |
24