Fidelity National Information Services Inc (FIS) 2003 Q4 法說會逐字稿

Good morning and welcome to the InterCept earnings conference call for March 25, 2004. Your host for today will be Carole Collins. Ms. Collins, please go ahead.

Thank you. Good morning everybody. Thanks for joining us, and I'm going to take just 30 seconds and read the Safe Harbor language real quick. Statements in this presentation relating to future events, projections, plans and underlying assumptions are forward-looking statements within the meaning of the federal securities laws. Actual results may differ materially from these forward-looking statements which are subject to risks and uncertainties. These risks and uncertainties include whether we can meet our budget goals, continue to sustain our current internal growth rate or our total growth rate in our financial institution business, successfully integrate acquisitions of assets and businesses and other operations we may acquire, continue to provide enhanced and new product and services that appeal to our customers, continue to have access to the debt and equity capital we need and achieve our sales objectives.

Other risks and uncertainties include how and when the SLM loan situation will ultimately be resolved and the timing and amount of any charges related to that loan and the possible inaccuracy of our estimates of the cost to defend and pursue litigation. In addition, in connection with the sale of our merchant services division, we face risks and uncertainties that include whether we will in fact receive the deferred payments from the purchasers of that division and whether we will incur indemnification claims from those purchasers including claims related to pending litigation and to fines or assessments for excessive credit card charge backs or other issues arising out of our preclosing merchant services operation.

For more information about some of these risks and uncertainties, please see the section in our most recent annual report on Form 10-K entitled, Management's Discussion and Analysis of Financial Condition and Results of Operations Disclosure Regarding Forward-looking Statements. Thanks for your patience on that, and I will turn the call over to John.

Thank you Carole. John Collins. Thanks for joining us this morning for our call on -- well as a matter-of-fact, I will discuss what our call is about right now. Joining me is Scott Meyerhoff, Lynn Boggs and Carole Collins, no relation. The call is to discuss the fourth quarter and 2003 in general. We will also be discussing the settle of the merchant which just occurred in the last 48 hours, the merchant division. I think most of you are aware of that and have been anticipating that. That certainly has been something that is talked about a lot lately. It has taken months to make that come together. There is still a lot of work to do as it relates to that. There is still a lot of coordination that has to be done having sold this business to two separate companies. Scott will discuss those details a little bit more later.

You may have noticed that we did sell the merchant business for substantially more than we had previously announced. The deal started changing on us and we wound up getting other people involved, so the transaction changed quite a bit and it was more than $10 million higher than first anticipated. Also, I am sure all of you are aware that we made an announcement yesterday that Scott, who is with us today and will go over the numbers, has decided to leave the company and take another job, and certainly we all think that is a loss to us. Scott has been a very -- made a major contribution to this company throughout the years, and we wish well. At this point, I'm going to make some comments. I want to reserve those until after Scott has talked about the numbers, and so at this point I'm just going to turn it over to Scott and I will reserve my comments for later.

Thanks John. I would like to take this time to discuss both the financial results for the fourth quarter and year end of '03, as well as discuss the details of the sales transaction of the company's merchant services units. I will start with the merchant pieces. We previously disclosed on February 11 that we had an agreement to sell all of the merchant unit to an unaffiliated company for about $37.5 million. Prior to the close of the transaction we were contacted by additional parties and ended up selling the unit in two components to two separate parties for a total consideration in excess of $50 million, as John talked about, a significant increase in the value from what we had previously disclosed on February 11.

The total consideration for the pieces, for the iBill transaction, was 23.5 million of total consideration consisting of $750,000 in cash, a short-term note of approximately $750,000, an assumption of net liabilities of $22 million. In order to further protect ourselves on the sale of this unit which was an LLC membership interest sale, we have further obtained an insurance policy from the purchaser to cover any of the assumed liabilities transferred in the sale. The total consideration for the mainstream portion of the business totaled approximately $30 million and consisted of $12 million in cash, a note for 15.5 million, payable in 180 days and secured by the company and several members of its Board of Directors, which if an additional 3 million is paid within the next 60 days will reduce the total remaining note to $9.5 million, a $2.5 million one year note payable in cash at the end of one year, but convertible at InterCept's option into Pay By Touch preferred stock at today's values, and $500,000 worth of preferred stock in Pay By Touch.

Both transactions were closed effective March 22nd. We will provide a final accounting for these transactions during the first quarter of 2004. The first quarter will include additional expenses in the corporate structure that support the merchant unit which have not yet been eliminated due to the timing of the sale of merchant in the first quarter. Prior to the close of the transaction, we had total outstanding indebtedness of approximately $24 million. We have received approximately $13 million in cash from the sale so far, and have other additional notes that are due to us. We've taken a portion of those proceeds immediately and paid down debt to approximately $19.5 million and have put the remaining amounts in cash accounts at our financial institution bank.

We believe that after the payment of the outstanding notes which we believe are adequately collateralized, that we will have minimal outstanding indebtedness. Additionally, with the disposition of merchant division we have created a large operating loss that will significantly reduce income taxes payable for many periods to come. We believe the total tax benefit created from the transaction to be in excess of $30 million, some of which we will be able to carry back against previous taxes paid, others which will offset previous income -- or additional income tax in the future. In layman's terms, we will not pay taxes on nearly the next $25 to $30 million of federal taxes payable which will greatly enhance our free cash flow. In regard to the company's financial results for 2003, revenues totaled approximately 65.1 million which was consistent with the prior period.

During the three months ended December 31, revenue from the financial institution services total 48.3 million, a 17 percent increase over the 41.3 million from the comparable 2002 period. Revenues from the merchant segment suffered somewhat totaling 13.8 million which was nearly a 30 percent decrease as compared to the 19.4 million recorded in the quarter ended December 31, 2002. So as you can see, the growth in this business to get us to even state came from the financial institution segment. Net revenues for the year ended December 31, totaled 258.5 million, a 14 percent increase compared to the 226 for the year ended December 31, 2002.

FI, once again, was the stronger grower, approximately 16 percent growth and merchant services actually did grow in whole dollars notwithstanding the fact that we had merchant for a full year in 2003 and only had components of approximately eight months from the date of acquisitions in March and April of 2002 through the end of the year. Of the 65.1 million of revenue, 93 percent was recurring in nature through long-term contracts, some in FI and some of it in merchant. Gross margin dollars were approximately 31.5 million for the three months ended as compared to 30.8 million for the three months ended September 30 -- sorry -- December 31 of 2002.

Operating income was negative as you can see from the press release due substantially to many nonrecurring non-cash items that were disclosed in great detail in the company's press release dated March 16, 2004. At December 31, we had nearly 10 million of cash on hand, outstanding debt of 24.0 million which we discussed would come down even greater with the cash flow from the sales of the unit and even after the impairment charge which we recorded in the fourth quarter on the company's merchant units, shareholders' equity continued to total in excess of $220 million. Capital expenditures for the 12 months ended December 31, 2003, totaled approximately 29 million of which 24.5 was in the FI group, nearly 5 million in the merchant group.

Other of the 24.5 in the FI group approximately 11.5 million relates to Sovereign giving a steady state number for 2003 of approximately $13 million. We expect 2004 CAPEX to be significantly less than the $13 million figure as we had upgraded significantly all of our facilities and items that we need to go ahead and take care, so we expect once again to be generating strong cash flow from operations in the 2004 period. Customer reimbursements, going to the balance sheet very quickly, customer reimbursements line item that we have all spent some time focusing on over the last two years, after the sale of merchant, all of those go away. They will no longer be on our balance sheet, so once again will no longer be a topic for conversation.

In summary, I would just like to reiterate that the first quarter numbers will continue to be somewhat distorted because of the results of the merchant processing unit. The finalization of this sale and the purchase price allocation or sale allocation that will occur as well as overhead costs related to merchant that are included in the FI segment disclosures. As we focus our energies on the financial institutions business and on eliminating the distractions related to merchant and other litigation, we expect to continue to see strong results in the FI unit on a go-forward basis. With that being said, I'll turn the call back over to John.

Thanks Scott. The comments that I want to make, I will just start with the fact that certainly we are pleased to, at this point, have the merchant sold and clean up that distraction. We have made announcements about settling the class-action lawsuit. We have worked very hard in the last six months to clean up a lot of distractions, and are making a lot of headway on that. Obviously as a result of that, that will eliminate our excuses for not getting back to business and running this FI business the way that we know we can and continue to grow the business the way that we have in past. There is -- the merchant business has been distraction. It continues to be distraction through today, hopefully that will be over soon. But it continues to cost us additional money and monies that were unexpected, and hopefully we can get right back into running this company the way that we used to run a company prior to acquiring the merchant business.

Which brings us to our real focus on the go-forward basis, the intent clearly is to regain our focus on the financial institution side of our business rather than the merchant, to continue to grow the business the way we have in the past, that would be to continue to grow it through internal growth which we still think we have substantial internal growth, better than most of our competitors. We will continue to even look at acquisitions in the financial institution side of the business, just as we have in the past as part of our -- it has always been part of our growth strategy.

I know a lot of the shareholders and others have not been happy with the acquisition that we made in the merchant side of the business, but in fact we have made 25 acquisitions prior to that that were all excellent and have turned them into the business, the financial institution side of the business and I think our people did a great job. And as far as the comment on our people doing a great job, that too is something I would like to make one statement about. I talked about the distractions, and we have had plenty, between all of the litigation and all of the various things including fines around the merchant business and everything else, a lot of the management in this company has been distracted and the company still continues to grow the FI business.

So we do have a lot of good people doing a great job outside of the direct senior management of the company who has been focused on cleaning up some issues for the past several months, almost a year. Our sales continue to be strong of late even with these distractions. Our fourth quarter was much stronger than the fourth quarter of the previous year which is what here to talk about today, is fourth quarter and 2003. Fourth quarter was about 16 percent. Lynn, is that what you --?

About 16 percent over 2003 and 16 percent over third quarter of 2003.

So we have had strong sales recently and that is -- I commend our sales management and the people working in the company who continue to grow that part of the company. So I feel really strongly that we can get back on track and continue to grow this company the way we have in the past. We are positioned very well in the marketplace, I believe. I fully believe that we are positioned on Check 21 which is a real hot issue today. We are positioned on that, I believe, as well as anybody in the industry. We have a number of data centers, item processing centers, and (technical difficulty) we have even been questioned in the past, why do we want the item processing centers?

And of course now maybe that is even more clear. At least for a period of time collecting images is going to be really a hot issue. It is certainly one that all of our customers are talking about right now. So, having processing centers all over the country that are 100 percent image enabled really puts us in a different position we believe than any of our other competitors. We think that we have some good people that are on top of the Check 21 process as well as anybody else, and are very innovative.

We think that we will be presenting programs in the very near future that capture images at every level, at the bank level, the branch level, even the merchant level, and clear those images and reprint those images through the IRDs (ph) that are allowed with the Check 21 legislation. So, we feel like we are really positioned well along those lines. I think one of the things that I talked about from time to time and I don't know that we have ever said it on a conference call to the masses, but internally at least we talk about the takeaways and giveaways and that is pretty important to us. In the past several years, and I'm not going to give specific numbers, but in the past several years, we have lost -- I'm going to use a high number, I am going to say five but I don't believe it is that high, five customers in our core processing products to our competition.

In that same time frame, we have taken more than 100 from our competition. So, without giving these specific numbers, I will just say that in the give away, take away game, we win it on a regular basis day in and day out. We are pretty proud of our people but we are proud of the position we are in and we think that we certainly are going to have to refocus this company. We're going to have to refocus on the expenses, on every aspect of the company, but we think we are positioned to do that, and we fully believe that we can.

With that, Philip, I will turn it over and we will take questions. I request that you certainly will try to get in all of the questions that we can but I request that you kind of limit your questions to a smaller number on the front end in an effort to try to get more into the call. Go ahead Philip.

We will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS). Pete Swanson.

John, I wanted to ask you a question about the expense controls in the financial institution segment. You have been delivering good growth there and it sounds like the sales continue to be strong. Can you give us some specifics about what you plan to do to drive higher margins in that business and what type of a margin we might expect from you in 2004 and then moving into 2005? Thanks.

I am sorry, Pete, I don't really believe that we are prepared to -- I think what you're talking about is more of a strategy and I will tell you that we have clearly been focused on selling this merchant business. That has been an effort that most of the management of this company has put 40, 50, 60, 70 hours a week in for the past four or five months.

We obviously do deal with those types of things that you are asking about on a daily basis, but I don't think we are prepared on this call to talk about a strategy. I will hope that it will suffice to say that the strategy is to start working on that, and come up with those plans on how we do those things. Certainly that would even be something that we will take the strategy of the things that we do even to our full board. It is not something that we would be discussing on the conference call prior to the presentation to the board.

Let me ask it in another way. In the past in the FI segment you have been able to generate midteens operating margins. I am wondering if anything has changed structurally with the company that might prevent you from getting back towards that? Obviously we have the sovereign impact on margins in '03 and as we look forward into '04, has the pricing environment changed or has anything structural changed to get back in at least double-digit operating margins?

Well I think -- Lynn is leaning over the table. I know he wants to talk, so I will let him answer this as well. I will point out that certainly the complexion of our business in general has changed somewhat. That is it's a lot heavier towards the item process than it has been in the past. Another thing that might've changed on purely the EFT is a lot of price pressure on the EFT, and also changes in Interchange rates because of the merchant suit which is referred to primarily as the Wal-Mart suit. The merchant suit for MasterCard and Visa have changed those margins. So there has been a lot of things in our business that have changed, but I fully expect that we can head back the other way somewhat. I don't know that we will recover to the same extent with the industries the way they are today that we may have had then. But Lynn, you want to make a comment?

Actually Pete, the same thing John said. If you look at the mix of the business, when you go back in history and look at the purchase of the SLM business and at that point in time our mixed changed pretty dramatically and we grew significantly in the IP business, the item processing business and that portion of our business carries less margins. From a pricing structure, we still don't feel any significant price pressure other than EFT. We have said I think in every call we have had and in every analyst day meeting, we have continued to see price pressure in the EFT business. The margins are so significant there that it's an issue to us. But that portion of the business is also significantly smaller than it was three or four years ago.

So, that has affected our margins. I think John is right. We believe we will grow back -- the margins will go up, but I don't believe personally will ever reach the margins we were three and four years ago. You look back in real history and go into double -- reach back into double-digits but I don't think we'll be at that 15, 16 number that you were throwing out earlier. I think we will see significantly growth but not back to there. John talked about looking at some of these issues within the company, expense controls and some things. We're doing that now.

We have really been doing it since the end of December, very significantly. We've identified jobs within the company. We have started the process of eliminating certain positions if they were overlapping. There is a lot to do that still deals with merchant business and we will address those and we're doing it today. We did it yesterday until late last night. We will eliminate those, but I think in just the FI business alone that does not overlap we're also looking at the significant margin we will gain by Check 21 and some of the things that are going on the imaging world. We are identifying those and there are processes in place today to see those results we hope in the second quarter of this year.

I think that some of these things are so new relative --- and especially relative to Check 21, that we have yet to even determine what the margins are relative to some of the imaging, but I believe that they should be better than traditional check processing. Maybe not as good as pure EFT, but potentially better than the laborious part of check processing. So, hopefully we will know more in the future as this evolves. The Check 21 does not go into effect until October. I think we are positioned very well for it, it should help our margins, but we should not get too excited about the help Check 21 might give us between now and October.

If I might ask one other quick question. You mentioned that you continue to have a strong sales result. I'm wondering which products tend to be selling the most. You did mention Check 21 type products, but how has the core processing productline been selling?

I think the core processing sales have been pretty significant. We already have a pipeline this year. Typically it's been in a service bureaus environment. Scott talked about the recurring revenue number being so high. I think that is higher than we would like to even see it be. We have had huge demand for core processing on a service bureau. The demand for in-house has not been as much as we would like for it to be. But I can tell you we have added two new additions to our staff in the conversion teams to handle the number of core processing business we've had to install this year.

Okay. Thank you.

Craig Peckham.

This is actually Courtney Kleman (ph) for Craig. I have a couple of questions about the quarterly results. One is, what was the contribution from Sovereign in the fourth quarter?

We don't specifically detail out individual customers in the total. I guess it is easy enough to go ahead and say that based on when we had gone ahead and disclosed that Sovereign was completely live on or around December 4th. That it has worked out in the fourth quarter as we would've expected it and they have performed as we would've expected.

Also, can you give some guidance in terms of what your internal growth was?

The total growth on the financial institution segment, that 17 percent that we had discussed earlier in the call, is all internal growth as we had no acquisitions in the period comparing '02 to '03.

Okay. Also can you comment on your sales activity particularly the monthly trends in the fourth quarter?

I believe Mr. Boggs and Mr. Collins have started talking about the sales components.

I think the only thing we addressed, not month by month but we did address the fact that Q4 2003 was about 16 percent higher than fourth quarter 2002. Obviously, those sales don't result in revenue in January of the year. They roll into -- it takes us anywhere from 90 days to 180 to put them into the pipeline and get them converted. So it is not immediately revenue, but they were about 16 percent higher quarter over whether.

Is there any other follow-up to that ma'am? Philip?

Lee Houser.

Good morning. I just wanted to get a quick clarification on the CAPEX guidance that Scott had provided earlier. I think you said that it could go somewhere significantly below the $13 million level. I am wondering, going forward, are you looking at something less than 10 million, around 10 million?

Lee, what -- we look out at '04 and excluding Sovereign which certainly is not a recurring item for us and excluding the merchant services unit which now has been sold, a steady rate financial institutions number, it's an $8 to $10 million number for 2004. I guess the one thing to comment on that is the combination of the reduction in interest expense that we will receive from the payment from the merchant services sale and that debt going down to minimal if not zero levels. The benefit from the taxes which we won't have a cash payment -- (multiple speakers).

Our next question comes from Nik Fisken, please go ahead.

Philip, Philip.

We were still answering Lee's question, and Philip has gone onto Nik's question.

Hello?

Nik's here, but if Scott you want to finish?

First I want to talk to Philip.

Lee, could you hear all the answer, I'm sorry?

We got cut off as soon as he came in and said, our next question is from so and so.

Why don't we stop right there and let Scott go ahead and address that question first, if you don't mind Nik. Just stay where you are.

Before that, Philip can you hear me? Just one second. Before we move forward, I just want to make sure we actually have control of this call.

I am sorry about that. I was having some technical problems with the headset here.

The last time you came in and said the question is from, we were in the middle of answering a questions, so I just wanted to make sure you could hear us okay.

I apologize for that sir.

You can hear us now?

I can hear you now sir, yes.

I'm sorry. Scott, I hope you remember.

Let's go back and answer the CAPEX question from Lee. Lee, I guess where I was going with that was that $8 to $10 million on the CAPEX, reduction of interest expense to minimal levels, and additionally, from a cash flow perspective, tax benefits from the net operating loss carryforwards related to the sale, which will greatly reduced that and give us an opportunity to have significant cash flows. I don't know if that answers your question all the way. I think it does. If it doesn't, please chime in and ask again, but with that I will go forward to Nik's question.

Since we are almost done with the first quarter, can you comment on how that 17 percent internal growth is going so far, and kind of walk through the gross margin aspect to the business too, please?

I'm not going to go ahead and give specific number guidance. I guess to go back to one of the earlier questions which we don't comment specifically on, but certainly a benefit from the year-over-year comparisons for the first quarter will be that Sovereign will be a full 100 percent contributor in the first quarter of '04 and was nonexistent as a contributor in the first quarter of '03. So we would continue to expect strong internal growth notwithstanding any other trends which, as Mr. Boggs talked about on the sales side, were positive in nature. As to the gross margin question, in the fourth quarter we were approximately 50.8 percent on a consolidated basis as compared to 50.7 percent on a consolidated basis in the prior-year.

We really have a muddied first quarter based on the merchant components going through, and the cross costs, if you will, that we hope to eliminate. Upon the elimination of those which will not happen in the first quarter completely because it was a March 22 event, we would expect to see benefits from that. But really until we sort through all of the parts and the pieces from the unallocated overhead components, which support merchant whether it be the 15 percent of the employees through HR, accounting, risk, insurance, all of the other components which we have to go line item by line item and break out, it would probably be premature to go ahead and get into the details of that until at which point we have had time to get there.

One thing I like to walk away from is just to figure out what the ongoing liabilities are for the merchant operations to InterCept from second quarter this year on a go-forward basis. What I'm specifically thinking about are, what is -- are you guys going to be financially impacted by what happens at the merchant operations, whether it be FTC, Visa, EPX, anything like that?

I will go ahead and take that one. The way the transaction was set up was that really anything -- they were stock transfers, and the indemnification would be our responsibility for items preclose, whether they would be merchant signs, whether it would be FTC inquiries, whatever generally there which would generally be limited by the baskets or indemnification totals. We will go ahead and review those circumstances and situations and as such if we view there to be risk or exposure, properly accrue for that in the transaction in the sale of the transaction. So, we hope to minimize any potential fluctuations based on unknowns.

I guess under FAS 5, it has to be probable and reasonably estimable. Certainly if we see things out there that are either probable or reasonably estimable we would go ahead and do the right thing and accrue for them. But I guess the thing, as you know Nik, is one of the heartening things for disposition of the merchant unit is that did have a significant amount of unpredictability associated with it whether it be through the merchant fines or chargeback level. We think the folks there did a very good job in managing the levels down to much lower than historical levels, and would hope that there would not be a whole lot of tail associated with it but in the event there is we certainly would protect ourselves from it.

Are you prepared to give us the indemnification totals?

I don't know -- the indemnification totals ultimately will just be whatever they are. I guess there are certain amounts in the agreement themselves that protect us for baskets and totals, which I don't know all of the particulars but those are all going to be public documents. Feel free to go ahead and look through any of the details and any follow-up questions, let me know.

The chargeback levels, can you give us the fourth quarter chargeback levels?

I don't believe we know those or we are prepared to talk about them. Rather than give you those, let me kind of reiterate and maybe a little bit to what Scott just said. Our people have managed those much better than they have been managed in the past. So we haven't necessarily been seeing a lot of fines and things associated with chargeback, that we had maintained fairly decent chargeback levels for the past year. So even though there have been some surprises, I don't think they have been tremendous. I think John Perry and his people are doing a great job in managing that process. So the only thing I could add to Scott's dissertation on we would try to accrue, is that we don't know of -- we are not anticipating a lot of surprises, but as we all know we can have some.

To the best of my knowledge, Nik, we were well under the one percent on the Visa association chargeback percentages in the fourth quarter.

One last question for John. If I read through the resignation letters from both John Burke and Boone Knox, it clearly sounds like there was an offer (technical difficulty) InterCept's level significantly higher than the then $12 share price. Number one, why didn't you pursue that? Number two, now that the stock is ten bucks would you go through a more complete sales process today?

I don't really think we are prepared to discuss that on this call. I really should not discuss their resignation. That was their resignation. I think the board addressed the issues at hand to the best of their ability and did what they believed was the best thing for the shareholder, to try to both increase and capitalize for shareholder value and I believe that is what the board did and that's the actions that were taken. Those will be the only comments I will make on it.

Thank you.

Stephen Laws.

Good morning. Quick question. I guess first with Scott, taking new a position, I saw the press release and Scott is leaving here in about a week. Can you maybe discuss the timeline where you would like to get someone in? I know you have retained the services of a search firm. Can you maybe comment towards that?

I can only tell you what we told them. We have contracted with a search firm. We have actually given them some names. We have had various people throw names at them. They have started the process. We have told them that we would really like to be finished with the process by May 1. That doesn't mean that the person would necessarily be on board. Certainly somebody at this level may have notice issues to work with, things like that. But we would -- our goal is to finish the process by May 1. That is a goal. Nobody can predict the future.

Okay. Looking at the core business, we have talked about Check 21 and the core. Can you talk about cross-sells? Have you seen any slowdown in your cross-sells the last few quarters and if so do you think that is the result of management's focus being on selling off this IPS segment or -- talk about it a little bit. Also what are the other products that you're really seeing demand for? I know CRM was something that was hot about two quarters back. Can you talk to some of the other products please?

Actually to your second part, we have been wildly distracted but we actually have seen an increase in cross-sells. We talked about our program -- we started last year with our customer relationship managers and put into place in June and spent some time training those folks. We had them out working with our customers on a daily basis looking at sales that are other than the typical IP or core systems we are looking at.

So we have actually seen a pickup in that really beginning in the fourth quarter. Obviously not as large of a sale as selling core systems. You got out and you sell a $20,000 telesystem or something, so it's not a huge number. But the numbers picked up and probably the product they are seeing the most interest in today is the CRM and the loan and deposit platforms that we rolled out. We continue to add states on our loan and deposit platform. I think we now have seven states and probably have another seven or eight in the queue that we can furnish that to those banks and we will eventually have the whole country, we hope. That has been a significant, probably the number one item that people have come in and wanted to have interest in.

Great. John, what are you seeing out there with de novos? Are you seeing -- is it still a steady start, a steady number of start-up banks that you're seeing and is that still an opportunity for you guys?

Absolutely. I really don't see a whole lot of changes. Lynn probably knows more about that than I know. Lynn, do you --?

It is still the same thing and the great news with those is good news and bad news. The bad news, they obviously started with zero in assets and the growth is tremendous in those banks and they also take the whole sheet of products. Check your box, that is one of the things that we put out there. We can cover that bank from end to end, so when a de novo comes in and buys, they are buying everything and we have not seen a slow down in that at all.

Lastly, can you just discuss competition pricing? Are you seeing any new players? Is it the same people? Any increase in pricing pressure? Maybe talk towards that for a second, that would be great?

I would like to talk toward it for a long time, but the answer is no. I hate to put it into words, but we don't see a lot of pricing pressure on the core product. I don't see a lot of pricing pressure on the item. The EFT, we have stated time and time again that there is constant pricing pressure on the EFT but that is not news. So no, it is pretty much status quo. There are no new players. There are no new prices. Nobody's out there trying to buy business. That will happen on an isolated basis from time to time. We will run up on somebody that just -- they have got to have some business in a particular geography and they will literally buy and most of the time we don't get that business. We just move onto the next one. But no, nothing significant and nothing that we can really talk about as it relates to that impact.

Great. Thanks a lot.

David Trossman.

I want to ask two questions related to the Sovereign ramp up. First the capital spending related to that conversion seems like it was a little higher than we thought going into that. What were the big surprises there?

David we had talked about $5 to $10 million as being the range on the capital side. Part of it came from switching over from some operating leases and capital leases, kind of the mix between the two, and then secondly there was probably about another million dollars or so in equipment that it did take us to over the high end of the range but just slightly. I don't really view it as tremendous surprises. I view it really as looking at an opportunity to add some additional equipment to further automate the process and streamline the operations for a go-forward basis.

I think that last note, there was about 250 people that you had hired related to that? Is that where it is going to stay or is there an opportunity once that business is ramped actually, but the numbers of people more towards 200 where it was originally thought of?

I actually think we were a little under 250. Yes, there will be some opportunities. The second half of the conversion, when we went through that process we probably put a few additional people on just to make sure we didn't have any issues come up and we have already started the process of trimming that where we think it is necessary and where we can. My guess is we will end up at the end of the day somewhere between 200 and 225.

Thank you.

Avery Bonn (ph).

Hi guys. Good morning. I just want to get a sense in terms of timing, it certainly sounds like there are a lot of opportunities here in the business from a cost perspective. How far along are you guys in terms of rolling those up into a plan and being able to put guidance out?

I'm sorry. Rolling what up? Just say the question one more time. Let me make sure I have it clear.

You broke up a little bit.

I guess I'm just trying to get an understanding. You've talked about some of the opportunities in your business, trying to understand how far along you are in aggregating those opportunities into a financial plan going forward and when we might be able to hear about that plan?

I think from the standpoint of working on the plan, we have been and we were here, I even made a comment. I caught myself saying that we were here late last night working on where the overlaps are in the emergent versus the FI business, and Scott talked about some of the issues we have there. How many people are in HR, how many people in finance, how people in the risk management group, and there's a lot of -- we're going through now identifying all of that.

We started it -- initially when we started this process (technical difficulty) sales and there were certain things that would happen if we sold the company to one company. Today we've got two companies that we sold it to, so there are some changes had to be made to that and what we needed to do. We are in that process now. I think, I cannot tell you specifically. I wish I could tell you that I'll finish it tomorrow at 4:00, but it's a lot that is going through there. We're also, at the same time, I mentioned that we are identifying within our own FI group, things that are just FI. We are working pretty diligently trying to see what we can change going forward, the mix of the business, what we need to do. Scott, do you have anything to add to that?

Avery, I think the key is that there is the formulation of a plan. We are working on it. I don't have a definitive answer for you on when we will be able to go ahead and do it and roll it out. But from a standpoint of the what we talked about earlier that the first quarter being muddy from these things being in there and then just going ahead being able to effect the change and roll it through which I think the most important take away from this is that this management team is very focused on going ahead and delivering on that change.

One of the things I might even like to add and we seem to be kind of all over the board with this question a little bit, but sometimes it sounds like maybe we did not have plan before. It's like, are you working on a plan? We work on a plan constantly. This is -- we're constantly trying to develop what is the strategy to capitalize on the new things, the Check 21, the EFT, the new rules, the new products. Certainly the overall management of the company, and I said it early in this call that those people are working on those things every day.

There has been a lot of distractions among especially the people sitting in this room right now. Often those plans are being worked on and we don't even know necessarily that a particular thing has been worked on as it relates to developing the plan for a new product. They update us and they're doing a great job. But certainly, I think that what we are all trying to convey is, more time is going to be spent on the development of the plan. Once we get the merchant out it will be a lot easier to start focusing on the core business here and get back to what we do. Can you add anything to that?

I think that covers -- I think the other issue we all have to fight is Scott's decision to move on. We hope -- you asked me for a timeframe, I can tell you that I would hope that by the time we have someone in place and the CFO ready to move forward, that we are prepared with everything tat we have end pass that knowledge to him and we are able to move very quickly with a new CFO in place. That is all.

I think that Scott has committed to continue to work with us. That goes without question. Scott is going to continue to consult with us. He will help the new person when that is required. He will help us, so Scott is not exactly -- he didn't die. So, we will still continue to work on that in our very near future. We are going to take -- Philip, we're going to take one more question. We have reached the end of the call, so let's take one more question an then we will wrap it up.

Andrew Jeffrey.

Good morning. Sort of a two-part question as it pertains to the item processing business. First off, can you talk about the pipeline in terms of additional wins of the Sovereign type magnitude or larger than the average sort of core? And two, given certainly the uncertain timing of any wins like that out there, can you talk about overall capacity in the business? Have you built up excess capacity in the process of ramping Sovereign? Is margin expansion going to be dependent on taking up some of that capacity by adding volume through new customer wins?

I think from the standpoint of two issues I will address first and that is capacity. If you look at all the centers across the country and take into account where we are today, we're probably somewhere around 70 percent of capacity today, country-wide. That may be 54 percent in one and 78 percent in another one. But overall we're only at about 70 percent capacity today. So I think we've got plenty of room to expand. And as Check 21 comes into play and we look at the imaging systems and what we can do there, we actually think that capacity will go up. It will drop down in the utilization and we will actually have more capacity to do more business. So I think from that standpoint we have build out an infrastructure that is very strong and able to handle additional business as it comes on.

As far as the large type accounts similar to Sovereign, we are out talking to those accounts today. We have had very good reception. As all of you know, it took us a significant amount of time to sign the Sovereign contract. When you're talking about a business that you're adding over 500 banks that was a two year project that we worked on and I don't think we will close anything in two months, but we have been working -- rolled that out last spring. Really put it into place really about May or June of last year.

We have had some success with that. We have several banks that we're working through the process and have run through RFPs and are now in the second phases of, but that doesn't mean anything that we will get them. It is a very competitive business, and there are great competition, great players in that business that we've got to compete with. But it's very obvious to us now that with the Sovereign project and with it going as well as it did, that we have been very well-received and we expect to eventually see some significant business out of that big bank, if you want to call it that way, in the large financial institution business.

Andrew, or you still there?

Yes, I am.

Does that take care of your question?

Yes, I guess the one follow-up then would be would you expect operating margin expansion or contribution improvement from Sovereign in '04 as that business ramps or are you pretty much near the sort of run rate operating contribution from that business or from that customer today?

In regard to Sovereign, as you know when we talked about building out the infrastructure for it, we had plans from Sovereign, from their plans, that they were going to grow as an organization and as such we built the mousetrap much bigger than we needed it on the day of conversion because of their stated plans to grow. When you take a look at what they have done so far just since we have had them as a customer, they did two pretty significant acquisitions which added almost 10 billion in assets to a $45 billion bank. The first acquisition which they did, we already had a majority of it as a current customer, so that adds an incremental billion dollars or so to our processing volumes.

The second acquisition which they just announced of about a $5.5 billion organization in Pennsylvania, we had no previous relationship on the item processing imaging side whatsoever. Those banks, those acquisitions have not cleared regulatory diligence yet. They have not yet been approved. We would imagine it would be late in '04 before we got any incremental benefit from those particular ones at all. But I guess it goes back to the fact that we had anticipated Sovereign would grow as a customer adding that significant of asset initially plus their stated goal to go ahead and take a good bit of business away from the Fleet BofA merger in the Boston region, which would certainly bode well for us from a volumes perspective.

All looked good for the future but certainly not for the next immediate quarter or two until the regulatory approval happened, and as you know with big banks as we have stated before, there are always delays involved. But to get back to your original question, real simply, additional volume should be able to be handled by and large by existing facilities.

Great. Thank you.

With that, we will end the call. We appreciate all of you joining us today and look forward to talking you again. Thanks very much.