FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1997
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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
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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.)
401 HACKENSACK AVENUE, HACKENSACK, NEW JERSEY 07601
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (201) 525-4700
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NOT APPLICABLE
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(Former name, former address and former fiscal year,
if changed since last report.)
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 Outstanding
Title of each class as of November 1, 1997
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Common Stock, $.01 par value 428,042,721
1
FIRST DATA CORPORATION
INDEX
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PAGE
PART I. FINANCIAL INFORMATION NUMBER
------
Item 1 Consolidated Financial Statements:
Consolidated Statements of Income for the
three and nine months ended September 30, 1997 and 1996.... 3
Consolidated Balance Sheets at September 30, 1997
and December 31, 1996...................................... 4
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1997 and 1996.............. 5
Notes to Consolidated Financial Statements................. 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 11
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K........................... 19
2
FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts)
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
-------- -------- -------- --------
REVENUES
Operating revenues $1,278.3 $1,254.4 $3,839.8 $3,584.5
Other income 15.0 4.0 15.0 4.0
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1,293.3 1,258.4 3,854.8 3,588.5
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EXPENSES
Operating 775.1 778.1 2,441.9 2,275.1
Selling, general & administrative 185.3 180.2 563.3 545.7
Restructuring, loss on business
divestitures and impairment, net - - 211.6 16.3
Interest expense 29.7 30.3 85.3 81.7
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990.1 988.6 3,302.1 2,918.8
-------- -------- -------- --------
Income before income taxes 303.2 269.8 552.7 669.7
Income taxes 109.2 103.2 250.9 257.5
-------- -------- -------- --------
Net income $194.0 $166.6 $301.8 $412.2
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Earnings per common share $0.42 $0.36 $0.66 $0.89
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See notes to consolidated financial statements.
3
FIRST DATA CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
September 30, December 31,
ASSETS 1997 1996
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Cash and cash equivalents $ 419.6 $ 271.7
Settlement assets 8,024.9 7,461.5
Accounts receivable, net of allowance for doubtful accounts
of $27.8 (1997) and $25.2 (1996) 912.5 958.1
Property and equipment, net 766.8 757.1
Goodwill, less accumulated amortization
of $465.1 (1997) and $409.6 (1996) 3,405.8 3,490.4
Other intangibles, less accumulated amortization
of $402.3 (1997) and $336.8 (1996) 1,048.1 1,003.1
Other assets 535.1 398.2
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$15,112.8 $14,340.1
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Settlement obligations $ 7,938.1 $ 7,389.9
Accounts payable and other liabilities 1,626.3 1,531.9
Borrowings 1,692.6 1,261.4
Senior convertible debentures 443.0 447.1
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Total Liabilities 11,700.0 10,630.3
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Commitments and contingencies
Put Options 119.3 --
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Stockholders' Equity:
Common Stock, $.01 par value; authorized 600.0 shares,
issued 448.9 shares (1997) and 448.9 shares (1996) 4.5 4.5
Additional paid-in capital 2,136.9 2,101.8
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Paid-in capital 2,141.4 2,106.3
Retained earnings 1,687.9 1,610.7
Other 28.3 26.3
Less treasury stock at cost, 14.4 shares (1997)
and 0.9 shares (1996) (564.1) (33.5)
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Total Stockholders' Equity 3,293.5 3,709.8
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$15,112.8 $14,340.1
========= =========
See notes to consolidated financial statements.
4
FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Nine Months Ended
September 30,
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1997 1996
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Cash and cash equivalents at beginning of period $ 271.7 $ 231.0
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income 301.8 412.2
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization 389.5 304.9
Noncash portion of restructuring, loss on business
divestitures and impairment, net 180.2 9.9
Other noncash items (4.6) 11.6
Increase (decrease) in cash, excluding the effects of acquisitions
and dispositions, resulting from changes in:
Accounts receivable (30.2) (59.6)
Other assets (32.5) (54.2)
Accounts payable and other liabilities 31.8 (34.3)
Income tax accounts 106.3 118.4
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Net cash provided by operating activities 942.3 708.9
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CASH FLOWS FROM INVESTING ACTIVITIES
Current year acquisitions, net of cash acquired (318.5) (481.1)
Payments related to other businesses previously acquired (57.8) (40.3)
Proceeds from dispositions, net of expenses paid 262.9 11.2
Additions to property and equipment, net (210.7) (300.7)
Payments to secure customer service contracts, including outlays
for conversion, and capitalized systems development costs (208.7) (171.3)
Payments related to Western Union acquisition -
Funding of assumed pension obligations for a suspended plan (35.6) ---
Other investing activities (31.7) 10.1
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Net cash used in investing activities (600.1) (972.1)
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CASH FLOWS FROM FINANCING ACTIVITIES
Short-term borrowings, net 319.0 86.6
Issuance of long-term debt 124.6 348.8
Principal payments on long-term debt (26.5) (16.0)
Proceeds from issuance of common stock 136.4 130.4
Proceeds from sale of put options 2.9 ---
Purchase of treasury shares (723.9) (178.4)
Cash dividends (26.8) (19.5)
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Net cash (used for) provided by financing activities (194.3) 351.9
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Change in cash and cash equivalents 147.9 88.7
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Cash and cash equivalents at end of period $ 419.6 $ 319.7
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See notes to consolidated financial statements.
5
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. 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, 1996.
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, 1997 and the consolidated results of its
operations for the three and nine months ended September 30, 1997 and 1996
and cash flows for the nine months ended September 30, 1997 and 1996. Results
of operations reported for interim periods are not necessarily indicative of
results for the entire year.
FDC operates in a single business segment, providing a variety of information
services primarily to financial institutions and commercial establishments.
The largest category of services involves information processing and funds
transfer related to payment transactions, including credit and debit cards,
checks and other types of payment instruments (such as money transfers, money
orders, and official checks). These services include the authorization,
processing and settlement of credit and debit card transactions, verification
or guarantee of check transactions, and worldwide nonbank money transfers.
Other service areas include information processing for investment companies,
data imaging and related information management services.
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 $361.3 million and $547.2 million for the
three months ended September 30, 1997 and 1996, respectively and $1,142.7
million and $1,499.9 million for the nine months ended September 30, 1997 and
1996, respectively). The amounts for 1997 are less than 1996 due to the
contribution of merchant contracts to alliances which are accounted for under
the equity method of accounting by the Company.
2. During the first nine months of 1997, the Company completed dispositions of
three business units, incurred an impairment charge and incurred
restructuring charges involving most business areas, as detailed below.
These activities, which are reported on the "Restructuring, loss on business
divestitures and impairment, net" line in the Consolidated Statements of
Income, resulted in a net pretax loss of $211.6 million. Because much of the
impairment included in the charge is nondeductible goodwill for tax purposes,
the tax benefit on this loss was only $24.3 million (an 11.5% effective rate)
and the after-tax impact of these activities was to reduce net income by
$187.3 million, or $0.40 per share, for the nine months ending September 30,
1997.
During the first quarter of 1997 the Company completed the sale of its GENEX
subsidiary, a workers' compensation cost containment business, for $70.0
million in cash resulting in a pretax gain of $50.5 million. Substantially
offsetting the impact of the gain were restructuring charges of $46.4 million
in the first quarter involving most business areas and including severance
accruals for approximately 2,100 employees of $29.1 million, facility closure
costs of $5.5 million and other exit costs of $11.8 million.
On July 1, 1997 the Company completed the sale of its FIRST HEALTH Strategies
and FIRST HEALTH Services businesses for cash proceeds of approximately $200
million and recorded a pretax loss on the divestiture of $93.8 million during
6
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
the quarter ending June 30, 1997. As a consequence of the Company's decision
to divest these FIRST HEALTH business units, the future value of the
remaining health care administration services businesses (EBP and VIPS) was
diminished and, accordingly, the Company recorded impairment charges related
to such businesses of $118.4 million and other exit related costs of $3.5
million. FIRST HEALTH Strategies and Services and GENEX represented, in the
aggregate, approximately seven percent of FDC's total operating revenues in
1996 and a lesser percentage of net income in 1996.
The 1996 first quarter results included a $16.3 million merger, restructuring
and impairment charge, which reduced net income by $10.0 million ($.02 per
share), related primarily to integration processes in certain of the
Company's businesses in connection with the 1995 merger with First Financial
Management Corporation ("FFMC").
At September 30, 1997, total remaining accrued liabilities for the 1997
restructuring charges and FFMC merger related integration charges recorded in
1996 and 1995 were $61.1 million.
In conjunction with its merchant alliance program strategy, the Company
periodically sells some of its merchant portfolios. In September 1997, the
Company completed the sale of merchant contracts for cash proceeds of $17.6
million and recorded a gain of $15.0 million which is reported as other
income in the Consolidated Statements of Income.
3. FDC has guaranteed the $447.1 million of 5% senior convertible debentures
issued by FFMC in December 1994. During the first nine months of 1997,
debenture holders converted $4.1 million of debentures into 0.2 million
shares of FDC common stock.
FFMC is not required to file periodic reports with the Securities and
Exchange Commission with respect to the outstanding senior convertible
debentures so long as such reports for FDC contain summarized financial
information concerning FFMC. Subsequent to the merger, certain FDC businesses
were merged into certain FFMC subsidiaries; also, ongoing business activities
have further eroded the distinction between the FDC and FFMC businesses.
Therefore, the current year results of FFMC are not comparable with the prior
year. The summarized financial information for FFMC and its subsidiaries is
as follows:
7
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Three months ended Nine months ended
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For the periods ended September 30, 1997 1996 1997 1996
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(In millions)
Revenues $742.0 $744.4 $2,260.7 $2,060.3
Restructuring, loss on business
divestitures and impairment --- --- 179.7 0.2
Income (loss) before income taxes 214.1 192.5 387.4 502.1
Net income (loss) 124.2 118.9 161.9 309.0
September 30, December 31,
1997 1996
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(In millions)
Goodwill $2,441.2 $2,650.8
Total assets 5,689.8 5,741.7
Borrowings 0.3 0.8
Senior convertible debentures 443.0 447.1
Total liabilities 3,264.7 3,478.5
On November 3, 1997, FDC issued a notice of redemption of all debentures
outstanding on December 15, 1997. Debentures may be converted into shares of
FDC common stock (based upon a conversion rate of $21.755 per share) through
December 15. Any debentures not properly presented for conversion by the
close of business on December 15 will be redeemed at 102% of face value. In
anticipation of meeting the conversion requirements of the remaining $443.0
million of the senior convertible debentures, the Board of Directors
authorized management to repurchase up to 20.4 million shares of FDC common
stock. As part of this repurchase program, the Company sold put options
representing a potential obligation at September 30, 1997 to buy back 2.76
million shares of its common stock at an aggregate price of $119.3 million,
or an average price, net of put option proceeds, of approximately $41 per
share.
4. Through the first nine months of 1997, the Company acquired all or a portion
of several businesses. In April 1997 the Company acquired Consumer Credit
Associates, a provider of online consumer credit reporting, for $84.9 million
in cash (net of cash acquired). Also in April, the Company acquired a 50%
ownership interest in CardService International, Inc., an electronic
transaction service provider, for $60.0 million in cash. During the 1997
third quarter the Company exercised the option obtained in the second quarter
to acquire the remaining interest in the Orlandi Valuta companies
("Orlandi"), a provider of U.S. to Mexico money transfer services. The
Company paid a total of $67.2 million to acquire Orlandi. In addition, ten
other businesses or ownership interests totaling $117.9 million in cash and
stock were acquired which expanded FDC's markets and service offerings in its
international card processing, data imaging, payment instruments, messaging,
and collection businesses.
8
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
All current year acquisitions have been accounted for as purchases and their
results are included with the Company's results from the effective date of
each acquisition or have been accounted for using the equity method of
accounting if the Company's ownership is not greater than 50%. No pro forma
financial information with respect to the above acquisitions is presented as
the aggregate impact is not material.
Certain of the Company's acquisition agreements provide for additional
consideration to be paid if the acquired entity's results of operations
exceed certain targeted levels. Targeted levels are generally set
substantially above the historical experience of the acquired entity at the
time of acquisition. Such additional consideration is paid in cash and with
shares of the Company's common stock, and is recorded as additional purchase
price when earned. The maximum amount of contingent consideration on the
above acquisitions is $65.0 million and one million shares of FDC common
stock (payable through the year 2000).
5. The Company's commercial paper borrowings at September 30, 1997 were $795.0
million. In April 1997, FDC expanded the maximum amount of its commercial
paper program and supporting banking facilities from $1.0 billion to $1.5
billion. In addition, the Company has $250.0 million available under its
uncommitted bank lines.
In April 1997, the Company also filed a shelf registration statement
providing for the further issuance of debt and equity securities up to $750.0
million. In June, the Company issued a $125 million Medium-Term Note bearing
interest at 6.61% with a three-year maturity, reducing the total available
under its shelf registration to $875 million at September 30, 1997.
6. 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. All share and per share amounts have been
retroactively restated for the November 1996 two-for-one stock split effected
as a 100% stock dividend. Amounts utilized in per share computations are as
follows:
Three months ended Nine months ended
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For the periods ended September 30, 1997 1996 1997 1996
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(In millions)
Weighted average shares outstanding:
Simple weighted average shares 441.1 447.6 445.4 447.6
Common stock equivalents 26.7 28.0 26.8 28.0
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467.8 475.6 472.2 475.6
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Earnings add back related to senior
convertible debentures $ 3.5 $ 3.5 $ 10.5 $ 10.5
Common stock equivalents consist of outstanding stock options, warrants and
convertible debentures. The after-tax interest expense and issue cost
amortization on the debentures is added back to net income when common stock
equivalents are included in computing earnings per common share.
9
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
7. In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS 128"), was issued and has a December 1997
effective date. At such time, the Company will change the method currently
used to compute earnings per share and restate all prior periods. Under the
new requirements, basic earnings per share will replace primary earnings per
share and will not include the dilutive effect of convertible debentures and
stock options. SFAS 128 has replaced fully diluted earnings per share with
diluted earnings per share which includes the dilutive effect of the
debentures and stock options. Under SFAS 128, basic and diluted earnings per
share would have been the following:
Three Months Ended Nine Months Ended
1997 1996 1997 1996
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Basic $0.44 $0.37 $0.68 $0.92
Diluted $0.42 $0.36 $0.66 $0.89
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
STRATEGIC TRANSACTIONS
First Data Corporation ("FDC" or the "Company") continues to focus its resources
on services related to payment transactions, emphasizing growth in three key
areas: electronic commerce, information management and international expansion,
as evidenced by the completion of several strategic transactions during 1997,
including new business relationships, joint ventures, acquisitions and
divestitures and restructuring activities.
Internationally, FDC signed a global credit card processing agreement with HSBC
Holdings Plc. ("HSBC") to support its business in the Hong Kong market as well
as to expand services to HSBC operations in London and the United States. This
agreement will result in the establishment of an FDC card processing center in
Hong Kong. FDC also acquired a major ownership interest in Negocios
Informaticos, SA which provides bank and oil card processing in Spain,
broadening FDC's presence in Europe. In August 1997, the Company completed the
acquisition of Orlandi Valuta companies ("Orlandi"), a provider of U.S. to
Mexico money transfer services. Certain Orlandi agents are allowed to sell
Western Union branded services. In October 1997, FDC announced the signing of a
long-term agreement with Lloyd's TSB Group Plc which extends and expands an
existing processing relationship. The expanded agreement is expected to add
approximately 4 million card accounts on file with conversion expected to occur
by the end of the 1998 first quarter.
Domestically, FDC established or enhanced several key relationships, including
signing a major agreement, during the first quarter, to provide bank card
processing for BancOne following its announced acquisition of First USA and to
joint venture with BancOne in providing services to the retail private label
card market. This agreement will add several million BancOne accounts and
allows FDC to retain the First USA processing business, though at pricing below
the prior First USA processing agreement. In addition, the existing BancOne
merchant alliance will continue under its present structure.
During the second quarter, the Company announced MSFDC, a joint venture with
Microsoft Corporation which furthers FDC's role in the evolving electronic
commerce market. In 1998, MSFDC plans to introduce a service that enables
companies to use the Internet to send bills to, and receive payments from,
consumers. In addition, the Company expanded the scope of its bank alliance
program through the addition of TeleCheck Services as a partner in the program.
Also during the second quarter, the Company acquired a 50% interest in
CardService International ("CSI"), a provider of electronic transaction services
to more than 80,000 merchants nationwide. In April 1997, the Company acquired
Consumer Credit Associates, Inc. ("CCA"), a provider of online consumer credit
reporting services. CCA will operate as a unit of First Data Information
Management Group, the Company's information management services business, and
will be integral to the Company's plans to provide enhanced decision making and
risk management products to credit grantors and other FDC clients.
In September 1997 the Company acquired Funds Associates Ltd., a provider of
technical solutions for the financial services industry. Finally, the Company
throughout 1997 has made several other small acquisitions to complement and
enhance its product offerings in the international card processing, data
imaging, messaging, collection and payment instruments businesses.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
In connection with its efforts to focus on its core competencies in transaction
and information processing, the Company divested three units of its health care
administration services area during the first half of 1997. The Company
completed the sale of its GENEX subsidiary, which provides workers' compensation
cost containment and management services in February 1997. On July 1, 1997, FDC
completed the divestiture of FIRST HEALTH Strategies and FIRST HEALTH Services
which provide independent health care administration services such as claims
administration and associated health care management services to the self-
insured corporate and government markets.
In October 1997, the Company signed an agreement whereby another publicly traded
insurance company will begin a process of renewing EBP policies on its own
paper. Subject to regulatory approval, this transaction will allow EBP Life to
begin the process of exiting the insurance business and will allow FDC to
extract a majority of invested capital of approximately $85.0 million over the
course of the next 12 to 24 months.
Lastly, the Company took first quarter restructuring actions involving most
business areas. These actions consisted primarily of severing approximately
2,100 employees, certain facility closures and exiting other activities (which
includes steps taken to downsize certain non-core businesses in line with
planned revenue reductions). The benefits from these activities are expected to
be realized in subsequent quarters and years.
RESULTS OF OPERATIONS
Operating revenues for the quarter ended September 30, 1997 were up 2.0% to
$1.28 billion from $1.25 billion in the prior year quarter. Operating revenues
for the nine months ended September 30, 1997 were up 7% to $3.84 billion,
compared with $3.58 billion in the prior year period. Revenue growth in the
quarter and the nine months ended September 30, 1997 was impacted by the
divestitures of MoneyGram in late 1996, GENEX in February 1997 and FIRST HEALTH
Strategies and FIRST HEALTH Services in July 1997. The Company's internal growth
rate in revenues over the 1996 third quarter and nine month period (excluding
the effects of acquisitions, divestitures and the refocus of EBP Life on a
narrower target market) was 12% and 15%, respectively. Growth in existing
businesses occurred both from the addition of new clients and strong underlying
volume increases from existing clients. The Company's performance reflects
continuing strong growth in the domestic card issuer and payment instruments
business areas. Growth in domestic merchant processing revenue slowed as strong
revenue growth in the regional bank alliances was partially offset by declines
in business processed for other acquirers and in certain purchased portfolios
with no active sales support. Merchant growth was also negatively impacted by
the sale and transfer of business to the Chase alliance, which is reported using
the equity method of accounting.
The Company derives revenues in its primary services areas principally on the
number of accounts or transactions processed, a percentage of dollar volume
processed, or on a combination thereof. Lesser amounts of revenue are generated
from foreign currency exchange on money transfer transactions and sharing in
investment earnings on fiduciary funds. The overall 1997 third quarter growth
of FDC is demonstrated by the following key indicators (along with the
percentage growth compared to third quarter 1996): 169.2 million total card
accounts on file (24%), with domestic cards representing 150.0 million of the
total (26%); $65.4 billion in domestic merchant dollar volume (20%), and money
transfer transactions of 12.5 million (33%). These growth indicators are
generally a continuation of the second quarter trend, producing the following
1997 nine month growth in key indicators (along with the percentage growth
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
compared to the 1996 period): $184.5 billion representing domestic merchant
dollar volume (23%) and money transfer transactions of 34.4 million (36%).
Certain 1996 quarter key indicators have been restated to conform to the current
year classifications.
During the first quarter of 1997, the Company sold its GENEX subsidiary
resulting in a pretax gain of $50.5 million. The Company also recorded
restructuring charges in the first quarter totaling $46.4 million. On July 1,
1997, the Company completed the divestitures of its FIRST HEALTH Strategies and
FIRST HEALTH Services businesses and recorded a 1997 second quarter pretax loss
of $93.8 million. These three business entities represented approximately 7% of
the Company's consolidated operating revenues for 1996 and a lesser percentage
of consolidated earnings. As a consequence of the Company's decision to divest
of these FIRST HEALTH business units, the future value of the remaining health
care administration services businesses was diminished and, as a result, the
Company recorded impairment charges related to such businesses of $118.4 million
and other exit related costs of $3.5 million. In October 1997, the Company
signed an agreement, subject to regulatory approval, which provides an exit
strategy for EBP Life's remaining insurance business.
These transactions have been included in the "Restructuring, loss on business
divestitures and impairment, net" line on the Company's Consolidated Statements
of Income. Primarily because much of the impairment charge is nondeductible
goodwill for tax purposes, the tax benefit on these activities was only $24.3
million for the nine month period. As a result, the above items reduced 1997
nine month earnings by $187.3 million ($0.40 per share). In the first quarter
of 1996, the Company recorded a $16.3 million merger, restructuring and
impairment charge, which reduced net income by $10.0 million ($0.02 per share),
related primarily to integration processes in certain of the Company's
businesses associated with the 1995 FFMC merger.
Operating expenses for the 1997 third quarter remained flat as compared to the
prior year's third quarter, while operating revenues increased 2% for the same
time period. Operating expenses and operating revenues for the nine months
ended September 30, 1997 increased 7% as compared to the same period in the
prior year. These comparisons would be more favorable as revenue growth is
negatively impacted by the conversion of American Express Travel Related
Services ("TRS") payment products sold and managed by the Company to FDC's own
payment products line largely during the latter half of 1996 and first half of
1997. Although settlement assets relating to the sale of TRS payment products
were largely invested in tax-exempt securities, TRS compensated the Company on a
pre-tax equivalent basis. The conversion to the Company's own payment products
and investment of settlement assets in tax-exempt securities, while having no
impact on net income, lowered the Company's revenue growth rate and effective
tax rate in 1997.
Selling, general and administrative expenses for the quarter ended September 30,
1997 increased to $185.3 million, up 3% from $180.2 million in 1996. These same
expenses for the nine months ended September 30, 1997 increased to $563.3
million, up 3% from $545.7 million in the prior year period. The increase is
primarily attributable to increased selling costs and start-up costs of the
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
First Data Information Management Group and higher sales and advertising costs
in the payment instruments business. These increases were partially offset by
lower selling costs due to the MoneyGram divestiture and lower general and
administrative costs across most business units, including corporate.
Interest expense for the quarter decreased 2% to $29.7 million versus $30.3
million in 1996 primarily due to lower average borrowings during the period.
FDC's 36.0% effective income tax rate for the third quarter decreased 2.2
percentage points from the prior year's third quarter. This decrease is
substantially due to higher nontaxable interest income on settlement assets in
1997 caused by the shift from TRS payment products, as previously discussed.
FDC's year to date effective tax rate increased 7.0 percentage points to 45.4%
due to the FIRST HEALTH Strategies and FIRST HEALTH Services divestiture and the
related impairment charges which were largely nondeductible for tax purposes.
Net income rose 16% to $194.0 million in the quarter ended September 30, 1997
compared with $166.6 million in the prior year quarter and net income margins
increased to 15.0% from 13.2%. The Company reported net income of $301.8
million for the nine months ended September 30, 1997. Year-to-date net income in
1997 (before the restructuring, loss on divestitures and impairment charge)
increased 15.9% to $489.1 million from $422.2 million for the same period in
1996 and net income margins increased to 12.7% from 11.8%.
The Company reported earnings per common share of $0.42 for the 1997 third
quarter and $0.66 for the nine months ended September 30, 1997. Excluding the
above mentioned charges, earnings per share would have increased 16.5% to $1.06
for the nine months ended September 30, 1997, from $0.91 for the same period in
1996.
FORWARD LOOKING STATEMENT
The Company has provided estimates of its 1997 earnings in its annual report and
subsequent press releases. After reviewing current results and expectations,
the Company is revising this outlook and expects earnings for the year to be in
the range of $1.51-$1.56 per share (exclusive of any loss from divestitures and
related impairment charges during 1997). The revised outlook reflects the lower
current rate of revenue growth in domestic merchant processing, the absence of
sustained growth in certain non-core businesses and the level of investment
being made in the development of new services. In addressing these causes of
lower earnings, the Company is actively evaluating certain slow growing, non-
core businesses which may result in their divestiture, if market conditions
permit an orderly sale at terms acceptable to the Company.
All forward looking statements are inherently uncertain as they are based on
various expectations and assumptions concerning future events and they are
subject to numerous known and unknown risks and uncertainties which could cause
actual events or results to differ materially from those projected.
Important factors upon which the Company's forward-looking statement is premised
include the following:
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
. Continued growth at rates approximating recent levels for card-based payment
transactions, consumer money transfer transactions, and other product markets.
. Successful implementation and achievement of expected growth of the U$A Value
Exchange program and other information product initiatives.
. Absence of consolidation among client financial institutions or other client
groups which has a significant impact on FDC client relationships.
. Successful management of pricing pressures through cost efficiencies.
. Continuation of the existing interest rate environment, avoiding increases in
agent fees related to a portion of the Company's payment instruments business
and in the Company's short-term borrowing costs.
. Absence of significant changes in retail foreign exchange spreads on retail
money transfer transactions, particularly between the United States and
Mexico.
Variations from these assumptions or failure to achieve these objectives could
cause results to differ from those projected in the forward looking statement.
Due to the uncertainties inherent in forward looking statements, readers are
urged not to place undue reliance on these statements. In addition, FDC
undertakes no obligation to update or revise forward looking statements to
reflect changed assumptions, the occurrence of unanticipated events, or changes
to projections over time.
CAPITAL RESOURCES AND LIQUIDITY
FDC continues to generate significant cash flow from operating activities,
aggregating $942.3 million for the nine months ended September 30, 1997. This
cash flow was produced primarily from net income of $301.8 million, depreciation
and amortization of $389.5 million, other noncash charges totaling $175.6
million (primarily the impairment charges and net loss on divestitures of
business units) and a net decrease in working capital items. FDC utilized this
cash flow to reinvest in its existing businesses, to fund treasury stock
purchases and to contribute to the financing of business expansion.
FDC reinvests cash in its existing businesses primarily to expand its processing
capabilities through property and equipment additions and to establish customer
processing relationships through initial contract payments and costs for
conversion and systems development. These cash outlays decreased to $419.4
million for the nine months ended September 30, 1997 compared with $472.0
million in the same 1996 period. Also, the Company is incurring significant
expenditures to ensure that all processing systems are Year 2000 compliant and
anticipates Year 2000 expenses in the range of $30.0 million to $40.0 million in
1997 with continuing expenditures occurring in 1998.
Overall, FDC's operating cash flow for the nine months of 1997 exceeded these
nonacquistion investing activities by $522.9 million. Additionally, the Company
received cash of $70.0 million in the first quarter and approximately $200
million in the third quarter from the GENEX and FIRST HEALTH divestitures,
respectively. These cash sources contributed to funds utilized for acquisitions
and treasury stock purchases.
Year-to-date cash outlays for acquisitions in 1997 totaled $318.5 million
consisting of a $60.0 million payment to purchase a 50% interest in CSI, an
electronic transaction service provider; an $84.9 million payment to purchase
CCA, a provider of online consumer credit reporting; a $67.2 million payment to
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
purchase Orlandi Valuta, a U.S.-Mexico money transfer business; and $106.4
million for nine other businesses expanding the Company's international card
processing, data imaging, payment instruments and collection businesses. The
Company also paid $41.6 million relating to businesses previously acquired and
$16.2 million relating to certain of its alliance programs with bank clients in
merchant processing. In addition, the Company funded $35.6 million of its
assumed pension obligations for the Western Union suspended defined benefit
plan.
Net cash used for financing activities for the nine months ended September 30,
1997 was $194.3 million due primarily to treasury stock repurchases relating to
the buy-back program discussed below ($723.9 million), partially offset by
increased short-term borrowings, the June 1997 issuance of a $125 million
Medium-Term note and proceeds from option exercises and related tax benefits
totaling $136.4 million.
In May, the Company's Board of Directors authorized management to repurchase up
to 20.4 million shares of FDC common stock in anticipation of meeting the
conversion requirements of $443.0 million in senior convertible debentures which
were guaranteed by FDC following the 1995 merger with FFMC. On November 3, 1997,
FDC issued a notice of redemption of all debentures outstanding on December 15,
1997. Debentures may be converted into shares of FDC common stock (based upon a
conversion rate of $21.755 per share) through December 15. Any debentures not
properly presented for conversion by close of business on December 15 will be
redeemed at 102% of face value. As of September 30, 1997, 13.3 million shares
have been repurchased for this purpose. During October 1997, the Company
purchased an additional 4.3 million shares. As part of the Company's authorized
stock repurchase program for the future conversion of senior convertible
debentures, the Company has sold put options representing a potential obligation
to buy back 2.76 million shares of common stock at an aggregate price of $119.3
million or an average price, net of put option proceeds, of approximately $41
per share. Considering the outstanding put obligations and the shares already
purchased, the Company has sufficient shares to meet the conversion requirements
of the senior convertible debentures.
The above repurchases during the nine month period ended September 30, 1997 are
in addition to the Company's 5.0 million shares of common stock purchased during
1997 in the open market and used in conjunction with certain employee benefit
plans pursuant to a formal ongoing plan approved by FDC's Board of Directors.
During 1997, the Company expanded the maximum amount under its existing
commercial paper program to $1.5 billion and increased the maximum borrowing
capacity under its primary credit facilities to $1.5 billion. In addition, the
Company has two outstanding shelf registration facilities, one providing for the
issuance of debt and equity securities up to $875 million in the aggregate and
the other providing for the issuance of up to 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, 1997 is $70.0 million related to required investments of cash in
connection with the Company's merchant card settlement operation, and additional
amounts used to support the operations of certain business areas; the remainder
is available for general corporate purposes. Also, FDC has available short-term
borrowing capability of $955.0 million at September 30, 1997 under the Company's
commercial paper program and through its uncommitted bank credit lines.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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.
17
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, 1997, and the related consolidated statements of
income for the three-month and nine-month periods ended September 30, 1997 and
1996, and the consolidated statements of cash flows for the nine-month periods
ended September 30, 1997 and 1996. 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 generally accepted auditing standards, 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 generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of First Data Corporation as of
December 31, 1996, 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 February 5, 1997, 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, 1996, is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
Ernst & Young LLP
New York, New York
November 11, 1997
18
PART II. OTHER INFORMATION
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)
(b) Reports on Form 8-K
-------------------
Item 5, Form 8-K, dated October 22, 1997, reporting the registrant's
"forward looking statements".
19
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 13, 1997 By /s/ Lee Adrean
----------------- --------------
Lee Adrean
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: November 13, 1997 By /s/ Richard Macchia
----------------- -------------------
Richard Macchia
Senior Vice President - Finance
(Principal Accounting Officer)
20