FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission file number 1-11073
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FIRST DATA CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 47-0731996
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5660 NEW NORTHSIDE DRIVE, SUITE 1400, ATLANTA, GA 30328-5800
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (770) 857-0001
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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____
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Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Number of Shares
Title of each class Outstanding at November 7, 2000
-------------------------------- -------------------------------
(Common stock, $.01 par value) 395,030,961
1
FIRST DATA CORPORATION
INDEX
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PAGE
PART I FINANCIAL INFORMATION NUMBER
------
Item 1. Financial Statements:
Consolidated Statements of Income for the three and nine
months ended September 30, 2000 and 1999........................................................3
Consolidated Balance Sheets at September 30, 2000 and
December 31, 1999...............................................................................4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2000 and 1999........................................................5
Notes to Consolidated Financial Statements......................................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................................16
Item 3. Quantitative and Qualitative Disclosures About Market Risk.....................................23
PART II OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................25
Item 6. Exhibits and Reports on Form 8-K...............................................................25
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts)
(Unaudited)
Three months ended September 30, Nine months ended September 30,
-------------------------------------------- ------------------------------------------
2000 1999 2000 1999
-------------------- ------------------ ------------------- ------------------
REVENUES
Service revenues $1,405.7 $1,356.3 $4,101.8 $3,948.1
Product sales and other 34.6 26.7 95.6 75.8
-------------------- ------------------ ------------------- ------------------
1,440.3 1,383.0 4,197.4 4,023.9
-------------------- ------------------ ------------------- ------------------
EXPENSES
Operating 875.6 866.5 2,618.4 2,586.1
Selling, general & administrative 208.0 197.6 638.8 603.7
Restructuring, business divestitures,
litigation and impairment, net (112.9) 6.1 (100.6) 41.0
Interest 26.1 27.4 65.4 74.4
-------------------- ------------------ ------------------- ------------------
996.8 1,097.6 3,222.0 3,305.2
-------------------- ------------------ ------------------- ------------------
Income before income taxes 443.5 285.4 975.4 718.7
Income taxes 135.2 78.3 285.7 177.3
-------------------- ------------------ ------------------- ------------------
Net income $ 308.3 $ 207.1 $ 689.7 $ 541.4
==================== ================== =================== ==================
Earnings per share basic $ 0.76 $ 0.49 $ 1.68 $ 1.26
Earnings per share diluted $ 0.75 $ 0.48 $ 1.65 $ 1.24
==================== ================== =================== ==================
Weighted average shares outstanding:
Basic 404.2 425.8 410.9 430.7
Diluted 409.8 433.8 417.4 438.2
See notes to consolidated financial statements.
3
FIRST DATA CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
September 30, December 31,
2000 1999
----------------------- ------------------------
ASSETS
Cash and cash equivalents $ 592.3 $ 1,044.0
Settlement assets 9,224.7 9,585.6
Accounts receivable, net of allowance for doubtful
accounts of $32.9 (2000) and $31.3 (1999) 855.9 908.5
Property and equipment, net 641.7 710.6
Goodwill, less accumulated amortization of $628.8
(2000) and $560.1 (1999) 2,596.3 2,480.2
Other intangibles, less accumulated amortization of
$734.7 (2000) and $664.9 (1999) 966.3 1,002.3
Investment in affiliates 796.9 891.3
Other assets 694.9 382.3
----------------------- ------------------------
$16,369.0 $17,004.8
======================= ========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Settlement obligations $ 9,259.3 $ 9,694.6
Accounts payable and other liabilities 1,746.8 1,824.4
Borrowings 1,871.9 1,578.1
----------------------- ------------------------
Total Liabilities 12,878.0 13,097.1
----------------------- ------------------------
Stockholders' Equity:
Common Stock, $.01 par value; authorized 600.0
shares, issued 448.9 shares (2000 and 1999) 4.5 4.5
Additional paid-in capital 2,223.7 2,180.7
----------------------- ------------------------
Paid-in capital 2,228.2 2,185.2
Retained earnings 3,519.1 2,964.1
Accumulated other comprehensive income (126.2) (87.7)
Less treasury stock at cost, 52.9 shares (2000) and
31.0 shares (1999) (2,130.1) (1,153.9)
----------------------- ------------------------
Total Stockholders' Equity 3,491.0 3,907.7
----------------------- ------------------------
$16,369.0 $17,004.8
======================= ========================
See notes to consolidated financial statements.
4
FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Nine months ended September 30,
---------------------------------------------
2000 1999
-------------------- -------------------
Cash and cash equivalents at beginning of period $ 1,044.0 $ 459.5
-------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 689.7 541.4
Adjustments to reconcile to net cash provided by operating
activities:
Depreciation and amortization 437.4 462.5
Non-operating and non-cash portion of restructuring, 41.0
business divestitures, litigation and impairment, net (100.6)
Other noncash items, net (46.9) 41.8
Increase (decrease) in cash, excluding the effects of
acquisitions and dispositions, resulting from changes in:
Accounts receivable 95.2 36.6
Other assets (65.6) 9.4
Accounts payable and other liabilities (132.8) (101.9)
Income tax accounts (211.4) (91.4)
-------------------- -------------------
Net cash provided by operating activities 665.0 939.4
-------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Current year acquisitions, net of cash acquired (64.4) (459.8)
Payments related to other businesses previously acquired (30.8) (40.3)
Proceeds from dispositions, net of expenses paid 35.7 242.2
Additions to property and equipment, net (106.0) (163.6)
Payments to secure customer service contracts, including
outlays for conversion, and capitalized systems
development costs (84.6) (177.3)
Other investing activities (45.0) (102.8)
-------------------- -------------------
Net cash used in investing activities (295.1) (701.6)
-------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-term borrowings, net 415.1 680.4
Issuance of long-term debt 0.0 100.0
Principal payments on long-term debt (125.0) (158.1)
Proceeds from issuance of common stock 188.3 144.1
Purchase of treasury shares (1,275.6) (917.0)
Cash dividends (24.4) (26.1)
-------------------- -------------------
Net cash used for financing activities (821.6) (176.7)
-------------------- -------------------
Change in cash and cash equivalents (451.7) 61.1
-------------------- -------------------
Cash and cash equivalents at end of period $ 592.3 $ 520.6
==================== ===================
See notes to consolidated financial statements.
5
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: Basis of Presentation
The accompanying consolidated financial statements of First Data Corporation
("FDC" or the "Company") should be read in conjunction with the Company's
consolidated financial statements for the year ended December 31, 1999.
Significant accounting policies disclosed therein have not changed.
The accompanying consolidated financial statements are unaudited; however, in
the opinion of management, they include all normal recurring adjustments
necessary for a fair presentation of the consolidated financial position of
the Company at September 30, 2000 and the consolidated results of its
operations for the three and nine months ended September 30, 2000 and 1999 and
cash flows for the nine months ended September 30, 2000 and 1999. Results of
operations reported for interim periods are not necessarily indicative of
results for the entire year.
FDC recognizes revenues from its information processing services as such
services are performed, recording revenues net of certain costs not controlled
by the Company (primarily interchange fees and assessments charged by credit
card associations of $408.5 million and $492.9 million for the three months
ended September 30, 2000 and 1999, respectively, and $1,159.8 million and
$1,361.4 million for the nine months ended September 30, 2000 and 1999,
respectively).
The Company adopted the provisions of the Securities and Exchange Commission
("SEC") Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101") in the third quarter of 2000. SAB 101 provides
guidance on the recognition, presentation, and disclosure of revenue in
financial statements filed with the SEC. Upon adoption, the Company restated
prior periods to reflect the netting of certain revenues and expenses that
were previously presented gross. The restatement had the effect of reducing
revenues and operating expenses for the three and nine months ended September
30, 2000 by $6.2 million and $25.9 million, respectively. The reduction for
the three and nine months ended September 30, 1999 was $17.2 million and $43.8
million, respectively. The adoption of SAB 101 had no impact on income from
continuing operations, net income, or related per share amounts.
Note 2: Divestitures and Litigation Settlement
In January 2000, the Company completed the sale of its Hogan Information
Services business unit to Dolan Media Company for cash proceeds of $30.5
million. As a result of this transaction and the second quarter sale of
another small business, the Company recognized a pre-tax gain of $5.4 million.
In August 2000, the Company accrued $12.0 million based on the preliminary
settlement of a pending lawsuit. In September 2000, the Company signed a
letter of intent to sell a small subsidiary and, as a result, recorded an
impairment charge of approximately $5.4 million. During the three and nine
months ended September 30, 2000 the Company also recorded net benefits of $8.7
million and $9.2 million, respectively, related to the true-up of certain
previously recorded divestiture related accruals.
In September 2000, FDC completed the merger of its joint venture, TransPoint
LLC ("TransPoint"), with Checkfree Holdings Corporation ("Checkfree"). The
merger resulted in FDC receiving consideration of 6.6
6
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
million shares of Checkfree stock and recognizing a pre-tax gain of $186.0
million in the third quarter. The pre-tax gain reflects a $42 million cash
contribution from FDC to TransPoint immediately prior to the merger.
In April 1999, the Company sold Innovis, Inc. (formerly Consumer Credit
Associates, Inc.) to CBC Companies, Inc. for $20.0 million. As a result of
selling Innovis, rather than only shutting down operations, certain tax
benefits not previously available have been realized. Results for second
quarter 1999 include recognition of a pre-tax benefit of $24.5 million for
Innovis that relates primarily to the receipt of the net proceeds from the
sale.
In May 1999, the Company announced that its Western Union business unit
received preliminary approval for a proposed settlement of all claims in
several class action lawsuits pertaining to the Company's U.S.-to-Mexico money
transfer business. Under the terms of the proposed settlement, FDC will
establish a charitable fund for the advancement of Mexican and Mexican-
American causes in the amount of $4 million. Western Union will also issue
discount coupons to its customers who transferred money to Mexico from January
1, 1987 to August 31, 1999. In addition, the Company will issue coupons for
discounts on future Western Union transactions to customers who transferred
money to Mexico from January 1, 1988 to December 10, 1996 using the MoneyGram
service because the MoneyGram service was previously operated by a subsidiary
of the Company. FDC recorded a second quarter 1999 pre-tax charge of $34.1
million and a fourth quarter 1999 charge of $2 million to reflect legal fees,
the charitable fund and other outside administrative costs in connection with
the settlement. Future discounts related to coupon redemption will be
recorded as incurred. At September 30, 2000, the remaining accrual was $18.3
million. The Company is awaiting the Court's determination as to the fairness
and adequacy of the proposed settlement.
In May 1999, the Company sold its EBP Life business unit for cash proceeds of
$14.5 million. As a result of this transaction FDC recorded a pre-tax gain of
$4.5 million in the second quarter of 1999.
In July 1999, the Company completed the sale of its Donnelley Marketing
subsidiary to infoUSA for approximately $200 million in cash. As a result of
this transaction a pre-tax loss of $29.8 million was recorded in the second
quarter of 1999 upon the signing of a definitive purchase agreement in June
1999.
In September 1999, the Company recorded a pre-tax loss of $13.5 million
related to the termination of a specialty services joint venture. The charge
represents the funding required for the joint venture shutdown and payment of
a customer termination fee. Also in September 1999, a $7.4 million merger
accrual related to the 1995 merger of FDC with First Financial Management
Corporation (with no tax effect) was reversed due to the favorable resolution
of a contingency in the third quarter.
Note 3: Restructuring and Impairment
During the three and nine months ended September 30, 2000, the Company
recorded restructuring charges of $64.4 million and $79.8 million,
respectively, (reported on the "Restructuring, Business Divestitures,
Litigation, and Impairment" line on the Consolidated Statements of Income);
$0.3 million and $2.6 million related to payment instruments, $59.1 million
and $69.6 million related to card issuer services and $5.0 million and $7.6
million related to all other and corporate. The charges represent facility
closure costs of $9.6 million and severance accruals of $70.2
7
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
million for approximately 3,800 employees resulting from the downsizing of
certain operations.
8
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table summarizes the Company's utilization of restructuring
accruals for the nine months ended September 30, 2000 (in millions):
Employee Facility
Severance Closure
---------------- ----------------
Remaining Accrual at December 31, 1999 $ 1.0 $ 3.9
Current Period Expense Provision 70.2 9.6
Cash Payments and Other (a) (10.5) 0.2
---------------- ----------------
Remaining Accrual at September 30, 2000 $ 60.7 $13.7
================ ================
(a) Other includes net sub-lease income on facilities which will fund a lease
buyout.
In addition to the restructuring charges, during the nine months ended
September 30, 2000, the Company also recorded a $2.8 million asset impairment
charge related to a customer contract.
Note 4: Investments In Affiliates
Operating results include the Company's proportionate share of income from
affiliates, which consists of unconsolidated investments and joint ventures
accounted for under the equity method of accounting. The most significant of
these affiliates are related to the Company's merchant alliance program.
A merchant bank alliance is a joint venture between FDC and a financial
institution that combines the expertise of the Company with the visibility and
distribution of the bank. The joint ventures sell processing services to
merchants. At September 30, 2000, there were eight such joint ventures
accounted for under the equity method of accounting.
In September 2000, the Company gained a controlling interest in one of its
merchant alliances. Revenues and expenses for the merchant processing services
segment have been restated to the beginning of 2000 to reflect this alliance
as a consolidated subsidiary. This restatement caused revenues to increase by
$112.3 million for the nine months ended September 30, 2000. There was no
impact on reported earnings.
9
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
A summary of financial information for the merchant alliances and other
affiliates accounted for under the equity method of accounting is as follows
(in millions):
September 30, 2000 December 31, 1999
---------------------- ---------------------
Total Assets $ 3,256.9 $2,475.3
Total Liabilities 2,406.3 1,599.2
Three months ended September 30, Nine months ended September 30,
--------------------------------------------- --------------------------------------
2000 1999 2000 1999
------------------- ---------------------- ----------------- -----------------
Net Operating Revenues $373.9 $281.3 $1,075.1 $725.8
Operating Expenses 278.9 233.6 801.6 580.3
Operating Income 95.0 47.8 273.5 145.5
Net Income 79.7 41.6 230.4 128.9
FDC Share of Net Income 41.5 17.1 117.1 59.3
Amounts presented herein do not include amortization of $12.2 million and $7.9
million for the three months ended September 30, 2000 and 1999, respectively,
related to the excess of FDC's investment over its proportionate interest in
the net assets of the joint venture. Amortization for the nine months ended
September 30, 2000 and September 30, 1999 was $39.7 million and $21.6 million,
respectively. This difference, which amounted to $664.8 million and $635.0
million at September 30, 2000 and December 31, 1999, respectively, is
amortized over the estimated useful lives of the underlying intangible assets.
The 1999 amounts do not include the Wells Fargo Alliance since it was
consolidated in 1999 and not accounted for under the equity method of
accounting.
Note 5: Borrowings
The Company's commercial paper borrowings at September 30, 2000 were $855
million. The Company's commercial paper program is supported by a $1 billion
revolving credit facility. At September 30, 2000, the Company also had $525
million available under a shelf registration providing for the issuance of
debt and equity securities and $250 million available under its uncommitted
bank lines.
10
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 6: Earnings Per Share
Earnings per common share amounts are computed by dividing net income amounts
by weighted average common and common equivalent shares (when dilutive)
outstanding during the period.
Amounts utilized in per share computations are as follows (in millions):
Three months ended Nine months ended
September 30, September 30,
--------------------------------- --------------------------------
2000 1999 2000 1999
--------------- -------------- -------------- --------------
Weighted average shares outstanding:
Basic weighted average shares 404.2 425.8 410.9 430.7
Stock options 5.3 7.8 6.2 7.3
Restricted stock awards 0.3 0.2 0.3 0.2
--------------- -------------- -------------- --------------
409.8 433.8 417.4 438.2
=============== ============== ============== ==============
Diluted earnings per common share was calculated based on weighted-average
shares outstanding including the dilutive impact of common stock equivalents
which consist of outstanding stock options and restricted stock awards.
Note 7: Accumulated Other Comprehensive Income
The components of comprehensive income are as follows (in millions):
Three months ended Nine months ended
September 30, September 30,
---------------------------------- ----------------------------------
2000 1999 2000 1999
--------------- -------------- -------------- ---------------
Net income $308.3 $207.1 $689.7 $ 541.4
Foreign exchange effect (19.6) 15.5 (48.0) 2.9
Unrealized gain (loss) on securities 29.2 (18.7) 24.3 (116.4)
Minimum pension liability adjustment - - 0.9 -
--------------- -------------- -------------- ---------------
Total comprehensive income $317.9 $203.9 $666.9 $ 427.9
=============== ============== ============== ===============
Note 8: Formation of eOne Global
In October 2000, the Company announced the launch of eOne Global, a business
focused on identifying, developing, commercializing and operating emerging
payment systems and related technologies supporting e-commerce and Internet
payment products. The Company is contributing operating businesses and
interests in Internet payment-related ventures to eOne Global. In addition,
an outside investor group will invest $135 million in eOne Global in exchange
for a 25% equity interest therein and a warrant to purchase 1,750,000 shares
of FDC common stock at a 20-day average per share price as outlined in the
agreement. This transaction is expected to close in the fourth quarter of
2000 and the resulting gain will be recorded in equity.
11
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 9: Segment Information
First Data Corporation classifies its businesses into four segments: payment
instruments, card issuer services, merchant processing services, and emerging
payments. See the Company's 1999 Annual Report on Form 10-K for a detailed
description of each segment and the accounting policies of the operating
segments except for the new emerging payments segment noted below. In the
third quarter of 2000, the Company created a new segment, emerging payments,
in anticipation of the formation of eOne Global, as discussed in Note 8. The
segments have been restated to reflect the movement of the operations of
CashTax from payment instruments and non-core e-commerce related activity and
investments from the other segments, to emerging payments. In addition, a
small information business from all other and corporate was moved to card
issuer services which reflects current management reporting relationships.
12
The following table presents the Company's restated operating segment results
(as noted above) for the three and nine months ended September 30, 2000 and
1999 (in millions):
Three months ended September 30, Nine months ended September 30,
------------------------------------------------ -----------------------------------------------
2000 1999 2000 1999
---------------------- --------------------- ---------------------- ---------------------
Revenues:
- ---------
Payment Instruments $ 596.4 $ 503.7 $ 1,695.3 $ 1,431.0
Card Issuer Services 363.2 361.1 1,099.1 1,016.0
Merchant Processing Services 454.9 387.9 1,311.2 1,126.0
Emerging Payments 16.4 17.5 55.0 52.9
All Other and Corporate 46.7 61.2 150.8 184.3
---------------------- --------------------- ---------------------- ---------------------
Subtotal 1,477.6 1,331.4 4,311.4 3,810.2
---------------------- --------------------- ---------------------- ---------------------
Divested or To Be Divested - 93.0 - 331.3
Eliminations (a) (37.3) (41.4) (114.0) (117.6)
---------------------- --------------------- ---------------------- ---------------------
Consolidated $ 1,440.3 $ 1,383.0 $ 4,197.4 $ 4,023.9
====================== ===================== ====================== =====================
Operating Profit:
- -----------------
Payment Instruments $ 190.2 $ 160.0 $ 481.5 $ 408.6
Card Issuer Services 73.5 64.7 223.8 193.0
Merchant Processing Services 137.3 108.9 347.6 277.8
Emerging Payments (0.4) 2.2 8.1 6.6
All Other and Corporate (6.6) 8.0 (6.8) 16.7
---------------------- --------------------- ---------------------- ---------------------
Subtotal 394.0 343.8 1,054.2 902.7
---------------------- --------------------- ---------------------- ---------------------
Divested or To Be Divested - 16.5 - 49.0
Corporate Interest Expense (26.1) (27.4) (65.4) (74.4)
Restructuring, Business 100.6 (41.0)
Divestitures, Litigation and
Impariments, net 112.9 (6.1)
Eliminations (a) (37.3) (41.4) (114.0) (117.6)
---------------------- --------------------- ---------------------- ---------------------
Consolidated $ 443.5 $ 285.4 $ 975.4 $ 718.7
====================== ===================== ====================== =====================
Depreciation & Amortization:
- ----------------------------
Payment Instruments $ 27.5 $ 27.6 $ 87.9 $ 78.4
Card Issuer Services 52.7 63.4 162.6 188.2
Merchant Processing Services 57.4 48.2 173.5 145.9
Emerging Payments 0.7 0.8 1.5 1.8
All Other and Corporate 4.2 4.7 11.9 12.9
---------------------- --------------------- ---------------------- ---------------------
Subtotal 142.5 144.7 437.4 427.2
---------------------- --------------------- ---------------------- ---------------------
Divested or To Be Divested - 9.6 - 35.3
---------------------- --------------------- ---------------------- ---------------------
Consolidated $ 142.5 $ 154.3 $ 437.4 $ 462.5
====================== ===================== ====================== =====================
(a) Represents elimination of adjustment to record payment instruments revenues
on a pre-tax equivalent basis.
13
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
September 30, 2000 December 31, 1999
-------------------------- --------------------------
Segment Assets (in millions):
Payment Instruments $10,863.5 $11,061.0
Card Issuer Services 1,512.9 1,567.9
Merchant Processing Services 3,544.4 3,372.9
Emerging Payments 73.2 42.4
All Other and Corporate 363.2 960.5
-------------------------- --------------------------
Subtotal 16,357.2 17,004.7
Divested or To Be Divested - 0.1
-------------------------- --------------------------
Consolidated $16,357.2 $17,004.8
========================== ==========================
Note 10: Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires companies
to record derivatives on the balance sheet as assets or liabilities at fair
value. SFAS 137 "Accounting for Derivative Instruments and Hedging Activities
Deferral of the Effective Date of FASB Statement No. 133 an Amendment of FASB
Statement No. 133" was issued in June 1999, which delayed the effective date
of SFAS 133 to fiscal years beginning after June 15, 2000. SFAS No. 138
"Accounting for Certain Derivative Instruments and Hedging Activities - an
Amendment of FASB Statement No. 133" was issued in June 2000 and amends
certain accounting and reporting standards of SFAS 133. The Company has
evaluated the impact of SFAS 133, as amended, on the Company's future earnings
and financial position. The Company is in the process of modifying its hedging
strategies to reduce potential ineffectiveness that would create earnings
volatility and believes that the adoption of SFAS 133 will not have a material
effect on earnings. The Company presently estimates that the initial adoption
of SFAS 133 effective January 1, 2001 will result in a significant increase to
the Accumulated Other Comprehensive Income component of stockholders equity.
Note 11: Commitments and Contingencies
In 1998, a putative class action was filed against, among others, the
Company's Western Union Financial Services, Inc. subsidiary in a California
state court. The plaintiff claims that Western Union charges an undisclosed
"commission" when consumers transmit money to Mexico, in that the exchange
rate used in these transactions is less favorable than the exchange rate that
Western Union receives when it trades dollars in the international money
market. The plaintiff asserts that Western Union violates the law in failing
to disclose this "commission" in its advertising and in the transactions. The
plaintiff also asserts that Western Union has discriminated against persons
who use Western Union to transmit money to Mexico, in that the difference
between the market exchange rate and the exchange rate used by Western Union
in the Mexico transactions is greater than the difference between the market
and Western Union exchange rates when transmitting funds to other countries.
The plaintiff seeks, among other things, injunctive relief, imposition of a
constructive trust, restitution, compensatory and statutory damages, statutory
penalties and punitive damages. In addition, four other class actions based on
similar factual allegations remain pending in United States District Courts
and a Texas state court on September 30, 2000, against, among others,
subsidiaries of the Company.
14
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The parties to some of these actions reached a proposed settlement that the
Company believes would also extinguish the claims made in the other actions.
Under the proposed settlement, the Company will establish a charitable fund
for the advancement of Mexican and Mexican-American causes in the amount of $4
million. Western Union also will issue coupons for discounts on future money
transfer transactions to Mexico to its customers who transferred money from
the U.S. to Mexico between January 1, 1987 and August 31, 1999. In addition,
the Company will issue coupons for discounts on future Western Union
transactions to customers who transferred money to Mexico from January 1, 1988
to December 10, 1996 using the MoneyGram service because the MoneyGram service
was previously operated by a subsidiary of the Company. The proposed
settlement also included reasonable attorneys' fees, expenses and costs.
On May 12, 1999, the United States District Court for the Northern District of
Illinois issued a Preliminary Settlement Order in two of the actions, inter
alia, preliminarily approving the proposed settlement. The Court also barred
and enjoined the continued prosecution of the other actions. Further, the
Court barred the commencement of any new actions in any state or federal court
that assert any claims that would be released and discharged upon final
approval of the settlement. The Court has conducted Fairness Hearings to
determine the fairness, reasonableness, and adequacy of the proposed
settlement and the parties await the Court's ruling.
A subsequent putative class action which makes allegations similar to the
allegations described above was filed in a California state court in January
2000 against the Company and its subsidiaries, Western Union Financial
Services, Inc. and Orlandi Valuta. The putative class consists of those
persons who have used Western Union or Orlandi Valuta's services after August
31, 1999 to transmit money from California to Mexico, or who have used the
Western Union money transfer service to transmit money from California to
Mexico and have opted out of the pending nationwide settlement discussed
above. The Company is vigorously defending this action.
In the normal course of business, the Company is subject to claims and
litigation, including indemnification obligations to purchasers of former
subsidiaries. Management of the Company believes that such matters involving
a reasonably possible chance of loss would not, individually or in the
aggregate, result in a materially adverse effect on the Company's results of
operations, liquidity or financial condition.
15
FIRST DATA CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
Significant Developments
During the first nine months of 2000, First Data Corporation ("FDC" or the
"Company") continued to emphasize its three principal business segments: payment
instruments, card issuer services and merchant processing services. The Company
also continues to emphasize profitable growth, cost management and execution of
core strategies. Additionally, FDC is seeking to realize growth from Internet
opportunities by 1) enabling new and existing clients to do business on the
Internet, 2) expanding into adjacent business-to-business and person-to-person
Internet marketplaces and 3) making strategic investments in emerging Internet
and payment systems technologies. The Company created a fourth segment in the
third quarter of 2000 to track these emerging payments businesses as noted
below.
In the payment instruments segment, growth continues to be fueled by increases
in international money transfers (a transfer either sent to or received from an
international location [other than Mexico] and Canadian transactions that do not
touch the United States). International money transfer revenues increased 41%
(46% after adjusting for the weaker Euro) and 44% (50% after adjusting for the
weaker Euro) in the quarter and nine months ended September 30, 2000,
respectively, as compared to the same periods in 1999. This growth was driven
primarily by transaction growth of 49% for the quarter and 52% for the nine
months ended September 30, 2000.
In March 2000, card issuer services announced it had become the first in the
industry to be registered to personalize all VISA financial chip card products.
In May 2000, FDC announced it will form a joint venture to offer card and
merchant processing services in Japan. In October 2000, card issuer services
completed the largest account conversion in their history consisting of
approximately 45 million JC Penney retail credit cards. Card issuer also
recently signed a significant card production management contract covering
plastics management, card creation, and card distribution.
With respect to the Company's U.K. card processing business ("FDRL"), the Royal
Bank of Scotland ("RBS") informed FDRL that it did not intend to renew its
contract in July 2001 for processing services. The loss of RBS and NatWest
(NatWest was recently acquired by RBS) business represents approximately 2.7% of
card issuers services' current annualized revenue, however, the Company has
initiated restructuring activities to adjust its cost structure.
The merchant processing segment experienced merchant dollar volume processed
growth of 24% and 37% for the quarter and nine months ending September 30, 2000,
respectively, as compared to the same periods in 1999. Including the results
for Paymentech, Inc. (acquired in July 1999) and Norwest (contributed to the
Wells Fargo alliance in January 2000) comparably for the quarter and nine months
ended in 2000 and 1999, dollar volume growth in 2000 would have been 14% and
15%, respectively. In June 2000, FDC announced its intent to purchase the Canada
Trust MasterCard merchant acquiring portfolio. In addition, in July 2000 First
Data Loan Company Canada (the "Loan Company") received approval to commence
business from the Office of Superintendent of Financial Institutions and will
serve as the acquiring entity for the Canada Trust portfolio. Additionally, the
MasterCard Board approved the Loan Company's membership. In September 2000, the
Company gained a controlling interest in one of the Company's merchant
alliances. Revenues and expenses have been restated to the beginning of 2000 to
reflect this alliance as a consolidated subsidiary.
In October 2000, the Company announced the launch of eOne Global, a business
focused on identifying, developing, commercializing and operating emerging
payment systems and related technologies supporting e-commerce and Internet
payment products. eOne Global will be formed upon FDC's contribution of certain
operating businesses and interests in Internet payment-related ventures and an
outside investor's contribution of
16
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
$135 million. FDC's contribution will include CashTax and equity positions and
strategic marketing agreements including SurePay, Yclip.com, Meetchina.com,
Coolsavings.com, Entrust Technologies Inc. into eOne Global. FDC will retain a
75% ownership interest in the new company. In order to facilitate the tracking
of its emerging payments businesses, the Company established a new emerging
payments segment in the third quarter. The agreements and investments noted
above have been moved into and comprises the emerging payments segment in the
third quarter of 2000.
In September 2000, FDC completed the merger of its joint venture, Transpoint,
LLC, with Checkfree Holdings Corporation ("Checkfree"). The merger resulted in
FDC receiving consideration of 6.6 million shares of Checkfree stock and
recognizing a pre-tax gain of $186.0 million ($119.8 million after tax) upon
consummation of the transaction.
During the nine months ended September 30, 2000, the Company incurred
restructuring charges of $79.8 million ($49.7 million after tax). The charges
represent facility closure costs and severance accruals for approximately 3,800
employees resulting from the downsizing and relocation of various departments.
In December 1999, the SEC released Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB 101"), which provides guidance on the
recognition, presentation, and disclosure of revenue in financial statements
filed with the SEC. The Company adopted SAB 101 in the third quarter of 2000 and
as a result, the Statements of Income for all prior periods have been restated
to reflect the netting of certain revenues and expenses that were previously
presented gross. The adoption of SAB 101 only impacted the card issuer services
segment.
FDC remains the market leader in its three major segments: payment instruments,
card issuer services and merchant processing services. The Company will continue
to focus on these core business areas throughout 2000 and will continue to
assess how best to serve its customer base. Among the actions the Company
believes are necessary to continue its leadership position is a focused effort
to develop new products and services and to enhance its processing platforms in
response to Company growth, client requirements and changing technology and
expanding e-commerce initiatives. In this regard, the Company is in the process
of upgrading and redeveloping its business continuity plans to reflect new
systems and platforms developed to support these actions. Also, the Company may
take future actions to further streamline operations and reduce costs.
Results of Operations
The Company derives revenues in each of its reportable segments based
principally on the number of transactions processed, a percentage of dollar
volume processed or on a combination thereof. For the three months ended
September 30, 2000, total revenues increased 4% to $1.44 billion from $1.38
billion in the prior year quarter, and for the nine months ended September 30,
2000, total revenues increased 4% to $4.20 billion from $4.02 billion in the
prior year nine months. Excluding the impact of business divestitures, the
Company's revenue growth rate for the third quarter 2000 was 12% and for the
first nine months of 2000 was 14%.
Product sales and other revenues increased 30% from $26.7 million in the third
quarter of 1999 to $34.6 million in the same period of 2000. Product sales and
other revenues increased 26% from $75.8 million in the first nine months of 1999
to $95.6 million for the first nine months of 2000. This increase is due
primarily to an increase in incentive payments received from a partner in a
previously formed merchant alliance.
For the third quarter of 2000, operating expenses increased 1% to $875.6 million
from $866.5 million in the same period of 1999. For the nine months ended
September 30, 2000, operating expenses increased 1% to
17
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
$2,618.4 million from $2,586.1 million in the nine month period in 1999.
Increases in operating expenses in the third quarter were primarily due to the
consolidation of a merchant alliance. Other increases were more than offset by
decreases due to business divestitures and reduced Y2K readiness expense for the
nine months ended September 30, 2000. As a result, operating expenses as a
percent of revenue decreased in the third quarter and nine months ended
September 30, 2000 as compared to the same periods in 1999.
Selling, general and administrative expenses increased 5% to $208.0 million in
2000's third quarter compared to $197.6 million for the same period in 1999.
For the nine month period, selling, general and administrative expenses
increased 6% to $638.8 million in 2000 from $603.7 million in 1999. As a
percentage of revenue from continuing operations, selling, general and
administrative expenses were relatively flat on a quarter and year to date
basis. The dollar increase primarily reflects increased employee costs and
advertising and promotion spending. The increase was partially offset by the
impact of business divestitures.
Interest expense decreased 5% to $26.1 million in the third quarter of 2000 from
$27.4 million in the third quarter 1999, and 12% to $65.4 million for the nine
month period of 2000 from $74.4 million for the nine month period of 1999. The
decrease is due principally to overall reductions in average debt balances
funded by strong cash flow from operations and the proceeds from the sale of
Investor Services Group in the fourth quarter of 1999.
FDC's effective tax rate for the third quarter of 2000 was 30.5%, compared with
1999's third quarter rate of 27.4%. Excluding the impact of restructuring and
business divestitures, and other one-time items, the effective tax rate
decreased 0.1 percentage points to 28.5% in the third quarter of 2000 compared
to 28.6% in 1999's third quarter. Comparable rates for the nine month periods
were 28.5% and 29.7% for 2000 and 1999, respectively. This decrease is primarily
due to an increase in previously taxed equity earnings and various other changes
to items such as non-deductible goodwill and the Company's effective state tax
rate.
Net income of $308.3 million and $689.7 million for the third quarter and nine
months ended September 30, 2000, respectively, was up from $207.1 million and
$541.4 million in the comparable periods of 1999. Excluding restructuring,
business divestitures, and other one-time items, net income increased 14% to
$236.4 million from $208.1 million for the third quarter and net income
increased 17% to $625.5 million from $534.3 for the nine months ended September
30, 2000. These increases were primarily the result of margin improvements in
the combined core businesses, driven primarily by strong volume trends and the
impact of significant cost management initiatives. Diluted earnings per share
("EPS") increased 56% to $0.75 for the third quarter and 33% to $1.65 for the
nine months ended September 30, 2000. Excluding the impact of restructuring and
business divestitures and other one-time items, diluted EPS increased 21% to
$0.58 for the third quarter and 23% to $1.50 for the nine months ended September
30, 2000.
Payment Instruments
Total revenues in the payment instruments segment increased by 18% (on a tax-
equivalent basis) to $596.4 million in the third quarter of 2000, as compared to
$503.7 million in the same period of 1999. Year-to-date revenues increased by
18% to $1,695.3 million in 2000 from $1,431.0 million in 1999. The increase in
revenues was fueled by 23% and 20% growth in worldwide money transfer
transactions in the third quarter and nine months of 2000, respectively. Total
money transfer revenue increased 17% to $482.5 million in the third quarter of
2000 compared to the same period in 1999 and increased 18% to $1,373.3 million
for the nine months ended September 30, 2000. International money transfer
revenue grew 41% (46% after adjusting for the weaker Euro) for the three months
ended September 30, 2000 with transaction growth of 49%. Payment Instruments
continues to achieve market penetration with a 21% increase in agent locations
over the third
18
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
quarter of 1999. At September 30, 2000 there were nearly 94,000 agent locations
in 185 countries and territories.
Operating profits for the third quarter of 2000 grew 19% over the same period in
1999, from $160.0 million to $190.2 million. Operating profits increased 18% to
$481.5 million for the first nine months of 2000 as compared to $408.6 for the
same period last year. Results were fueled by the revenue growth noted above.
Card Issuer Services
Total revenues in the card issuer services segment grew 1% for the third quarter
of 2000 to $363.2 million as compared to $361.1 million for 1999's third
quarter. For the nine month period, card issuer services segment revenues grew
8% to $1,099.1 million in 2000 from $1,016.0 million in 1999. Card accounts on
file as of September 30, 2000 were over 261 million, an increase of 0.7%.
Revenue growth in the near term is not expected to be as robust as prior
quarters primarily due to the annualization of the large number of new accounts
converted in the third quarter of 1999 as well as certain deconversions. The
Company has a pipeline of more than 54 million retail and bankcards to be
converted, with most scheduled to convert in 2002 and 2003. Certain milestones
for core system developments have been delayed due to, among other things,
start-up of the Wal-Mart portfolio and conversion of the JC Penney portfolio,
which have added approximately 46 million card accounts on file, and recent
finalization of the plan for the future architectural foundation for the card
issuer services platform. While management is confident that these system
developments will be completed, some account conversions have been delayed from
previously anticipated 2001 conversions. Management does not expect this delay
will have any effect on revenue or earnings objectives for future years for
either the card issuer services segment or the Company as a whole.
Due to the adoption of SAB 101 in the third quarter of 2000, card issuer
services revenues and operating expenses were each reduced by $6.2 million and
$17.2 million for the three months ended September 30, 2000 and 1999
respectively, and $25.9 million and $43.8 million for the nine months ended
September 30, 2000 and 1999 respectively, to reflect certain transactions on a
net versus gross basis.
Operating profit for the card issuer services segment increased 14% to $73.5
million in the third quarter of 2000 from $64.7 million in 1999. Year-to-date
profit increased 16% to $223.8 million in 2000 from $193.0 million in 1999.
Improved performance was driven by cost management initiatives, including a
workforce reduction in the first quarter of 2000, and productivity improvements
that resulted in significant operating margin improvements (from 17.9% to 20.2%
for the quarter and from 19.0% to 20.4% year to date). Adoption of SAB 101 in
the third quarter of 2000 had no impact on the reported operating profits for
the card issuer services segment.
Merchant Processing Services
Revenues in the merchant processing services segment grew 17% and 16% to $454.9
million and 1,311.2 million for the third quarter and nine months of 2000
compared to $387.9 million 1,126.0 million for third quarter and nine months
ended 1999, respectively. Revenues were positively impacted by FDC gaining a
controlling interest in one of the Company's merchant alliances in the third
quarter of 2000. Results for the first six months of 2000 have been restated to
reflect the consolidation of the alliance. Total merchant dollar volume grew 24%
(14% adjusted for Paymentech and Norwest as described below) over the third
quarter of 1999 to $107.5 billion in 2000. Revenue growth was driven by growth
in the dollar volume processed. Revenues grew more slowly than dollar volume
processed because the increased dollar volume also includes volume of the
Company's alliances, which are generally accounted for under the equity method
of accounting. If all bank alliances were consolidated and if Paymentech
(acquired in July 1999) and Norwest (contributed to the Wells Fargo alliance in
January 2000) were owned during the first nine months of 1999, on a proforma
basis, merchant processing service segment revenue would have increased 13% and
12% for the three and nine months ended September 30, 2000, respectively.
Operating profits increased 26% to $137.3 million for the third quarter of 2000
from $108.9 million for the
19
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
1999 third quarter. Operating profits increased 25% to $347.6 million for the
first nine months of 2000 as compared to $277.8 million for the same period last
year. This improvement is reflective of strong volume and increased margins due
to the impact of significant cost reduction initiatives.
Key elements of FDC's strategy in the merchant processing services segment
involve its joint venture alliances with its bank partners and implementation of
Internet commerce initiatives. Each joint venture alliance requires successful
management of the relationship between the Company and the bank partner in that
alliance. Moreover, the alliance strategy could be affected by further
consolidation among financial institutions. Internet commerce presents a growth
opportunity for the merchant processing services segment. While Internet
commerce currently accounts for a small portion of the segment's transactions,
it is growing rapidly. However, Internet commerce is still evolving industry-
wide, and its ultimate impact on merchant processors and acquirers is uncertain.
Emerging Payments
Revenues for the emerging payments segment were $16.4 million and $17.5 million
for the three months ended September 30, 2000 and 1999, respectively,
representing revenues of the CashTax operating company that will be contributed
to the eOne Global venture, discussed previously. This operating company was
previously reported in the Payment Instruments segment. Revenues for the nine
months ended September 30, 2000 and 1999 were $55.0 million and $52.9 million,
respectively.
For the three months ended September 30, 2000 operating loss was $0.4 million.
Operating profit was $2.2 million for the three months ended September 30, 1999.
Results reflect operating profits of the one operating unit in the segment
offset by spending on e-commerce initiatives. Nine month results reflect
operating profits of $8.1 million and $6.6 million for 2000 and 1999,
respectively.
All Other and Corporate
Revenues from other operations decreased 24% from the third quarter of 1999 to
$46.7 million. Year-to-date revenues decreased 18% to $150.8 million from
$184.3 million in 1999. Operating profits decreased $14.6 million to a $6.6
million loss for the three months ended September 30, 2000 and decreased $23.5
million to a $6.8 million loss for the nine months ended September 30, 2000.
This decline resulted from lower revenues from several operating units and the
discontinuance of a specialty services joint venture in the third quarter of
1999.
Restructuring, Business Divestitures, Impairment and Litigation
During the three and nine months ended September 30, 2000, the Company incurred
restructuring charges of $64.4 million ($40.2 million after tax) and $79.8
million ($49.7 million after tax), respectively; $0.3 million and $2.6 million
related to payment instruments, $59.1 million and $69.6 million related to card
issuer services and $5.0 million and $7.6 million related to all other and
corporate. The charges represent facility closure costs of $9.6 million and
severance accruals of $70.2 million for approximately 3,800 employees resulting
from the downsizing of certain operations.
In January 2000, the Company completed the sale of its Hogan Information
Services business unit to Dolan Media Company for cash proceeds of $30.5
million. As a result of this transaction and the sale of another small
20
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
business, the Company recognized a pre-tax gain totaling $5.4 million ($3.3
million after tax) in the first six months of 2000.
In September 2000, the Company signed a letter of intent to sell a small
subsidiary and, as a result, recorded an impairment charge of approximately $5.4
million. During the three and nine months ended September 30, 2000 the Company
also recorded net benefits of $8.7 million and $9.2 million, respectively,
related to the true-up of certain previously recorded divestiture related
accruals (reported on the "Restructuring, Business Divestitures, Litigation and
Impairment" line on the Consolidated Statements of Income). Restructuring,
merger and divestiture accruals are reviewed each period. As with the above,
balances in excess of anticipated requirements are reversed through the same
Statement of Income caption in which they were originally recorded. In addition
to the restructuring charges, during the nine months ended September 30, 2000,
the Company recorded a $2.8 million asset impairment charge related to a
customer contract.
Also in September 2000, the Company completed the sale of their interests in
TransPoint LLC to Checkfree Holdings Corporation ("Checkfree"). As a result of
this transaction, FDC recognized a pre-tax gain of $186.0 million ($119.8
million after tax).
In April 1999, the Company sold Innovis, Inc. (formerly Consumer Credit
Associates, Inc.) to CBC Companies, Inc. for $20.0 million. As a result of
selling Innovis, rather than only shutting down operations, certain tax benefits
not previously available have been realized. Results for second quarter 1999
include recognition of a pre-tax benefit of $24.5 million for Innovis that
relates primarily to the receipt of the net proceeds from the sale.
In May 1999, the Company announced that its Western Union business unit received
preliminary approval for a proposed settlement of all claims in several class
action lawsuits pertaining to the Company's U.S.-to-Mexico money transfer
business. Under the terms of the proposed settlement, FDC will establish a
charitable fund for the advancement of Mexican and Mexican-American causes in
the amount of $4 million. Western Union will also issue discount coupons to its
customers who transferred money to Mexico from January 1, 1987 to August 31,
1999. In addition, the Company will issue coupons for discounts on future
Western Union transactions to customers who transferred money to Mexico from
January 1, 1988 to December 10, 1996 using the MoneyGram service because the
MoneyGram service was previously operated by a subsidiary of the Company. FDC
recorded a second quarter 1999 pre-tax charge of $34.1 million and a fourth
quarter 1999 charge of $2 million to reflect legal fees, the charitable fund and
other outside administrative costs in connection with the settlement. Future
discounts related to coupon redemption will be recorded as incurred. At
September 30, 2000, the remaining accrual was $18.3 million. The Company is
awaiting the Court's determination as to the fairness and adequacy of the
proposed settlement.
In May 1999, the Company sold its EBP Life business unit for cash proceeds of
$14.5 million. As a result of this transaction FDC recorded a pre-tax gain of
$4.5 million in the second quarter of 1999.
In July 1999, the Company completed the sale of its Donnelley Marketing
subsidiary to infoUSA for approximately $200 million in cash. As a result of
this transaction a pre-tax loss of $29.8 was recorded in the second quarter of
1999 upon the signing of a definitive purchase agreement in June 1999.
In September 1999, the Company recorded a pre-tax loss of $13.5 million related
to the termination of a specialty services joint venture. The charge represents
the funding required for the joint venture shutdown and payment of a customer
termination fee. Also in September 1999, a $7.4 million merger accrual related
to the 1995 merger of FDC with First Financial Management Corporation (with no
tax effect) was reversed due to the favorable resolution of a contingency in the
third quarter.
21
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Capital Resources and Liquidity
FDC maintained a strong financial position during the third quarter of 2000.
Cash and cash equivalents were $592.3 million at September 30, 2000 compared to
$1,044.0 million at December 31, 1999. Cash and cash equivalents at December
31, 1999 included a significant amount of liquidity on hand in preparation for
any potential Y2K related funding needs. These funds were utilized in 2000 to
pay down borrowings and pay taxes related to the sale of Investor Services Group
in the fourth quarter of 1999. FDC utilized cash flows from operating
activities to reinvest in its existing businesses, contribute to the financing
of business expansion, pay down short-term and long-term borrowings and fund
treasury stock purchases.
Operating activities generated cash of $665.0 million for the nine months ended
September 30, 2000 compared to $939.4 million for the nine months ended
September 30, 1999. This decrease is primarily due to the first quarter 2000
tax payments associated with the fourth quarter 1999 sale of Investor Services
Group and an increased net use of cash resulting from changes in working
capital.
FDC reinvests cash in its existing businesses principally to expand its
processing capabilities through property and equipment additions, to establish
customer-processing relationships through contract payments and costs for
conversion and to acquire or develop software for use in its operations.
Capitalized amounts of these cash outlays decreased to $190.6 million for the
first nine months of 2000 as compared to $340.9 million for the first nine
months of 1999. For the full year 2000, the Company expects such total non-
acquisition spending to be less than 1999's full year total of $430.3 million.
Overall, FDC's operating cash flow for the nine months ended September 30, 2000
exceeded its investing activities associated with additions to property and
equipment and capitalized contract and systems development costs by $474.4
million. These cash sources contributed to funds utilized for short-term and
long-term borrowing repayments and treasury stock purchases.
In the first nine months of 2000, the Company had net cash outlays of $95.2
million for acquisitions and payments relating to businesses previously acquired
as compared to $500.1 million in 1999. The Company also received cash proceeds
of $35.7 million relating to dispositions during the nine months ended September
30, 2000 as compared to $242.2 million for the same period in 1999.
The Company's net use of cash for financing activities was due to share
repurchases under the Company's $1 billion and $750 million share repurchase
programs discussed below, share repurchases in connection with the exercise of
stock options and dividend payments partially offset by proceeds from stock
option exercises and other employee stock benefit programs and increases in
short term borrowings. Net cash used in financing activities was $821.6 million
during the first nine months of 2000, as compared to $176.7 million in the same
period in 1999.
The Company made cash outlays totaling $1,275.6 million in the nine months ended
September 30, 2000 to repurchase shares of its common stock under common stock
repurchase plans and to cover stock option exercises. Proceeds from stock option
exercises totaling $188.3 million partially offset these outlays. In addition,
the Company continued its practice of paying quarterly cash dividends, resulting
in $24.4 million of cash payments to the Company's common stockholders during
the first nine months of 2000.
The Company completed the $750 million stock repurchase authorized by the Board
of Directors in July 1999
22
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
by purchasing 6.1 million of its common shares at a cost of $265 million during
the first quarter of 2000. A total of 16.7 million shares were repurchased under
this program. In May 2000, the Board of Directors authorized a $1 billion stock
repurchase. The Company repurchased 12.5 million of its common shares at a cost
of $562.4 million during the third quarter and 14.5 million of its shares at a
cost of $661.0 million during the first nine months of 2000 under this new
authorization.
The Company has two outstanding shelf registration facilities, one providing for
the issuance of debt and equity securities under which $525 million remains
available and the other providing for the issuance of approximately 10 million
shares of the Company's common stock in connection with certain types of
acquisitions.
Included in cash and cash equivalents on the Consolidated Balance Sheet at
September 30, 2000 is $70 million related to required investments of cash in
connection with the Company's merchant card settlement operation. FDC has
remaining available short-term borrowing capability of approximately $695.0
million at September 30, 2000 under the Company's commercial paper program,
uncommitted bank credit lines and its $300 million extendable commercial notes
program. The Company believes that its current level of cash and financing
capability along with future cash flows from operations are sufficient to meet
the needs of its existing businesses. However, the Company may from time to time
seek longer-term financing to support additional cash needs or reduce its short-
term borrowings.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
There have been no material changes from the 1999 Annual Report on Form 10-K
related to the Company's exposure to market risk from interest rates.
23
Independent Accountants' Review Report
The Stockholders and Board of Directors
First Data Corporation
We have reviewed the accompanying consolidated balance sheet of First Data
Corporation as of September 30, 2000 and the related consolidated statements of
income for the three-month and nine-month periods ended September 30, 2000 and
1999, and the consolidated statements of cash flows for the nine month periods
ended September 30, 2000 and 1999. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements referred to above
for them to be in conformity with accounting principles generally accepted in
the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of First Data
Corporation as of December 31, 1999, and the related consolidated statements of
income, stockholders' equity, and cash flows for the year then ended (not
presented herein) and in our report dated January 27, 2000, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated balance sheet as of
December 31, 1999, is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
Ernst & Young LLP
Atlanta, Georgia
October 12, 2000
24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
From time to time the Company is involved in various litigation matters arising
in the ordinary course of its business. None of these matters, either
individually or in the aggregate, currently is material to the Company except as
reported in the Company's Annual Report on Form 10-K for the year ended December
31, 1999 (the "Annual Report"), and discussed in the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2000 (the "Quarterly Report').
There were no material developments in the litigation matters previously
disclosed except for the developments discussed below.
In the action filed by Luis Pelayo that was previously reported in the Annual
Report and discussed in the Quarterly Report, a small number of class members
filed objections to, opted out of, or withdrew their request to be excluded from
the proposed settlement. The parties filed responses to any newly filed
objections. Judge Pallmeyer conducted the final day of proceedings in the
Fairness Hearing in this action on August 11, 2000 and the parties submitted
proposed Findings of Fact and Conclusions of Law as directed by the Court.
In the action filed by Raul Pineda that was previously reported in the Annual
Report and discussed in the Quarterly Report, a small number of class members
withdrew their request to be excluded from the proposed settlement. Judge
Pallmeyer conducted the final day of proceedings in the Fairness Hearing in this
action on August 11, 2000 and the parties submitted proposed Findings of Fact
and Conclusions of Law as directed by the Court.
In July 2000, the action filed by Julieta Amorsolo and Apolonio Ezequiel Viruel
Torres (the "Amorsolo action") and the action filed by Raul Garcia which were
--------
previously reported in the Annual Report (the Amorsolo action also was discussed
--------
in the Quarterly Report), were reassigned to the Complex Civil Litigation Pilot
Program, the Honorable Victoria G. Chaney presiding. Judge Chaney conducted a
status conference in these actions on September 14, 2000, and scheduled a
further status conference in these actions and a hearing on the demurrer and
motion to strike in the Amorsolo action for October.
--------
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
- ------------
12 Computation of Ratio of Earnings to Fixed Charges
15 Letter from Ernst & Young LLP Regarding Unaudited Interim Financial
Information
27.1 Financial Data Schedule (for SEC use only)
99.1 Private Securities Litigation Reform Act of 1995
Safe Harbor Compliance Statement for Forward-Looking Statements
(b) Reports on Form 8-K
- -----------------------
None.
25
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST DATA CORPORATION
---------------------------
(Registrant)
Date: November 14, 2000 By /s/ Kimberly S. Patmore
----------------- -----------------------------
Kimberly S. Patmore
Executive Vice President and
Chief Financial Officer
Principal Financial Officer)
Date: November 14, 2000 By /s/ Brian Mooney
----------------- -----------------------------
Brian Mooney
Vice President Finance
(Principal Accounting Officer)
26
FIRST DATA CORPORATION
INDEX TO EXHIBITS
-----------------
Exhibit
Number Description
- ------
12 Computation of Ratio of Earnings to Fixed Charges
15 Letter from Ernst & Young LLP Regarding Unaudited Interim Financial
Information
27.1 Financial Data Schedule (for SEC use only)
99.1 Private Securities Litigation Reform Act of 1995
Safe Harbor Compliance Statement for Forward-Looking Statements
27