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 JUNE 30, 1998
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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 August 3, 1998
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Common Stock, $.01 par value 446,808,295
DOCUMENTS INCORPORATED BY REFERENCE
Part II: Portions of Registrant's Proxy Statement relating to the
Annual Meeting of Stockholders held on May 13, 1998
INDEX
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PAGE
PART I FINANCIAL INFORMATION NUMBER
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Item 1. Consolidated Financial Statements:
Consolidated Statements of Operations for the
three and six months ended June 30, 1998 and 1997............ 3
Consolidated Balance Sheets at June 30, 1998
and December 31, 1997........................................ 4
Consolidated Statements of Cash Flows for the
six months ended June 30, 1998 and 1997...................... 5
Notes to Consolidated Financial Statements................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................ 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.................................................. 16
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................ 18
Item 2. Changes in Securities........................................ 18
Item 4. Submission of Matters to a Vote of Security Holders.......... 18
Item 6. Exhibits and Reports on Form 8-K............................. 19
2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------- ----------------------------------
1998 1997 1998 1997
--------------- ---------------- -------------- -------------
REVENUES
Service revenues $1,273.5 $1,269.6 $2,477.6 $2,467.6
Product sales and other 31.3 48.6 59.5 93.9
-------- -------- -------- --------
1,304.8 1,318.2 2,537.1 2,561.5
-------- -------- -------- --------
EXPENSES
Operating 844.3 852.9 1,655.9 1,666.8
Selling, general & administrative 186.2 182.6 384.6 378.0
Provision for loss on contract 125.2 --- 125.2 ---
Restructuring, business divestitures
and impairment, net 38.5 215.7 38.9 211.6
Interest expense 27.9 30.3 54.8 55.6
-------- -------- -------- --------
1,222.1 1,281.5 2,259.4 2,312.0
-------- -------- -------- --------
Income before income taxes 82.7 36.7 277.7 249.5
Income taxes 37.3 65.1 101.7 141.7
-------- -------- -------- --------
Net income (loss) $ 45.4 $ (28.4) $ 176.0 $ 107.8
======== ======== ======== ========
Earnings/(loss) per common share-basic $ 0.10 $ (0.06) $ 0.39 $ 0.24
======== ======== ======== ========
Earnings/(loss) per common share-diluted $ 0.10 $ (0.06) $ 0.39 $ 0.24
======== ======== ======== ========
See notes to consolidated financial statements.
3
FIRST DATA CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
(Unaudited)
JUNE 30, DECEMBER 31,
ASSETS 1998 1997
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Cash and cash equivalents $ 371.8 $ 410.5
Settlement assets 8,627.5 8,364.7
Accounts receivable, net of allowance for doubtful accounts
of $30.3 (1998) and $29.1 (1997) 880.5 984.2
Property and equipment, net 822.2 774.9
Goodwill, less accumulated amortization
of $492.2 (1998) and $470.1 (1997) 3,149.8 3,101.6
Other intangibles, less accumulated amortization
of $478.0 (1998) and $420.7 (1997) 1,190.2 1,100.5
Other assets 573.1 578.8
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$15,615.1 $15,315.2
========= =========
Liabilities:
Settlement obligations $ 8,525.1 $ 8,249.8
Accounts payable and other liabilities 1,721.4 1,657.4
Borrowings 1,584.1 1,750.7
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Total Liabilities 11,830.6 11,657.9
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Stockholders' Equity:
Common Stock, $.01 par value; authorized 600.0 shares,
issued 448.9 shares in 1998 and 1997 4.5 4.5
Additional paid-in capital 2,138.8 2,132.9
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Paid-in capital 2,143.3 2,137.4
Retained earnings 1,655.8 1,509.9
Accumulated other comprehensive income 63.9 65.8
Less treasury stock at cost, 2.6 shares (1998) and 2.0 shares
(1997) (78.5) (55.8)
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Total Stockholders' Equity 3,784.5 3,657.3
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$15,615.1 $15,315.2
========= =========
See notes to consolidated financial statements.
4
FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-----------------------------------
1998 1997
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Cash and cash equivalents at beginning of period $ 410.5 $ 271.7
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income 176.0 107.8
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization 291.5 253.0
Provision for loss on contract 125.2 ---
Noncash portion of restructuring, business
divestitures and impairment, net 28.7 187.6
Other noncash items 35.3 7.9
Increase (decrease) in cash, excluding the effects of acquisitions
and dispositions, resulting from changes in:
Accounts receivable (1.9) (2.7)
Other assets (16.6) (32.4)
Accounts payable and other liabilities 44.8 10.9
Income tax accounts (62.9) (22.1)
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Net cash provided by operating activities 620.1 510 .0
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CASH FLOWS FROM INVESTING ACTIVITIES
Current year acquisitions, net of cash acquired (79.9) (277.6)
Payments related to other businesses previously acquired (51.0) (52.1)
Proceeds from dispositions, net of expenses paid 150.0 68.0
Additions to property and equipment, net (202.2) (139.9)
Payments to secure customer service contracts, including outlays
for conversion, and capitalized systems development costs (191.6) (121.9)
Other investing activities (5.1) (46.2)
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Net cash used in investing activities (379.8) (569.7)
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CASH FLOWS FROM FINANCING ACTIVITIES
Short-term borrowings, net (171.9) 339.2
Issuance of long-term debt --- 124.6
Principal payments on long-term debt (52.0) (25.4)
Proceeds from issuance of common stock 55.5 99.7
Purchase of treasury shares (92.7) (341.5)
Cash dividends (17.9) (17.9)
Other financing activities --- 3.2
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Net cash (used for) provided by financing activities (279.0) 181.9
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Change in cash and cash equivalents (38.7) 122.2
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Cash and cash equivalents at end of period $ 371.8 $ 393.9
======= =======
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, 1997.
Significant accounting policies disclosed therein have not changed.
Effective with the quarter ended December 31, 1997, the Company changed its
revenue presentation to report "Service revenues" and "Product sales and
other" versus "Operating revenues" and "Other income." Product sales and
other includes certain items formerly reported in operating revenues as well
as other income. The Company adopted this presentation in order to separate
recurring transaction and related service processing revenues, including
investment income and equity earnings, from all other revenues. Product sales
and other includes sales of the Company's products (which are generally
ancillary to service revenues), software and other items which recur but
which fluctuate as to amount and timing.
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 June 30, 1998 and the consolidated results of its operations
for the three and six months ended June 30, 1998 and 1997 and cash flows for
the six months ended June 30, 1998 and 1997. 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.
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 $399.1 million and $324.0 million for the
three months ended June 30, 1998 and 1997, respectively, and $718.2 million
and $781.4 million for the six months ended June 30, 1998 and 1997,
respectively). Although these cost increased for the second quarter (due
primarily to increase in the volume of transactions processed), the amounts
for the first half of 1998 are less than 1997 due to the contribution of
merchant contracts to alliances which are accounted for under the equity
method of accounting by the Company.
2. During 1998's second quarter, the Company amended its agreement with HSBC
Holdings, plc ("HSBC") which revised the scope of services to be provided to
HSBC. As a result of this amendment, and because of difficulties in the
development process in Hong Kong which will delay the conversion date and
result in significant unanticipated costs, the Company determined that total
estimated costs under the amended contract will exceed anticipated revenues.
Accordingly, the Company recorded a pretax provision of $125.2 million for
such estimated losses. This amount is reported on the "Provision for loss on
contract" line in the Consolidated Statements of Operations. In addition, the
Company determined that approximately $38.5 million of platform development
costs related to the HSBC project and other potential non-U.S. clients may
not be recoverable in the near to medium term, and thus were written off.
This amount is reported on the "Restructuring, business divestitures and
impairment, net" line. The impact of both these transactions was an after-tax
charge of $120.8 million or $0.27 per share for the quarter and year.
6
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Also reported on the "Restructuring, business divestitures and impairment,
net" line in the Consolidated Statements of Operations is a 1998 first
quarter $28.5 million pretax gain on the sale of the NTS transportation
services unit. This gain was offset by $28.9 million in restructuring charges
consisting principally of severance, facility closure and other activity exit
costs primarily related to the first quarter restructuring of the Company's
domestic merchant processing business unit.
In June 1998 the Company completed the sale of First Image Management Company
("First Image"), its imaging and document management business, for $150.0
million in cash. In January 1998, the Company announced its intention to sell
First Image, and recorded a 1997 pretax impairment charge of $106.7 million,
reflecting the anticipated loss on the disposition. The finalization of the
transaction resulted in no significant adjustment to the previously recorded
loss. First Image represented 4.3% of FDC revenues for the six months ended
June 30, 1998 and 5.2% of FDC revenues in 1997.
During the first six months of 1997, the Company completed dispositions of
three business units, incurred a related impairment charge and incurred
restructuring charges (consisting principally of employee severance, facility
closures and other exit costs) involving most business areas. These
activities, which are reported on the "Restructuring, business divestitures
and impairment, net" line in the Consolidated Statements of Operations,
reduced net income by $187.3 million, or $0.40 per share.
At June 30, 1998, total remaining accrued liabilities for the 1998 and 1997
restructuring charges were $18.5 million and $6.6 million, respectively.
3. During the 1998 first half, the Company acquired three businesses expanding
FDC's markets and services. In conjunction with the sale of NTS, FDC
simultaneously purchased (from the Company that acquired NTS) a gaming
services business (now called First Data Financial Services, or "FDFS") for
$50.5 million (net of cash acquired) plus the fair market value of the NTS
net assets of $65.0 million. FDFS provides credit card, debit card and money
transfer services to gaming establishments and their customers. The Company
also made two other acquisitions expanding the product and service offerings
of the investor services group for total consideration of $16 million in cash
and approximately 183,000 shares of FDC common stock.
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. No pro forma financial information with respect to the
above acquisitions is presented as the aggregate impact is not material.
4. The Company's commercial paper borrowings at June 30, 1998 were $502.0
million under its $1.5 billion commercial paper program and supporting
revolving credit facilities. Pursuant to a 1998 agreement between FDC and
VISA USA, $175.0 million of the supporting banking facilities has been
designated to be used solely for the purpose of meeting the Company's VISA
related bankcard settlement obligations, if necessary.
The Company also has an effective shelf registration providing for issuance
of debt and equity securities of up to $1.35 billion. The Company currently
has $675 million of Medium-Term Notes outstanding bearing an average interest
rate of 6.44%, reducing the total available under its shelf registration to
$675 million at June 30, 1998. In addition, the Company has $210.0 million
available under its uncommitted bank lines.
7
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
5. 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:
Three months ended Six months ended
June 30, June 30,
------------------------------- -------------------------------
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------
(In millions)
Weighted average shares outstanding:
Basic weighted average shares 446.5 446.7 446.9 447.5
Stock options 4.0 7.4 3.8 6.5
Senior convertible debentures - 20.4 - 20.4
Restricted stock awards 0.1 - 0.1 -
----- ----- ----- -----
450.6 474.5 450.8 474.4
===== ===== ===== =====
Earnings add back related to senior
convertible debentures - $ 3.5 - $ 7.0
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, warrants, restricted stock awards
and convertible debentures (1997). 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.
The loss per common share for the three months ended June 30, 1997 was
computed by dividing the net loss of $28.4 million for the quarter by basic
weighted average shares. Earnings per common share before nonrecurring
charges for the three months ended June 30, 1997 was computed by adding $3.5
million of after-tax interest expense attributable to the Company's senior
convertible debentures and dividing the resulting total by diluted weighted
average shares.
6. The components of comprehensive income are as follows (in millions):
Three months ended June 30, Six months ended June 30,
---------------------------------- -------------------------------
1998 1997 1998 1997
-------------- --------------- ------------- -------------
Net income (loss) $45.4 $(28.4) $176.0 $107.8
Foreign exchange effect (0.2) 1.9 (0.9) (0.1)
Unrealized gain (loss) on
securities (1.0) 75.6 (1.0) 50.1
----- ------ ------ ------
Total comprehensive income $44.2 $ 49.1 $174.1 $157.8
===== ====== ====== ======
8
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
7. In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131, establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. SFAS 131 is effective for financial statements for fiscal years
beginning after December 15, 1997, and therefore the Company will adopt its
requirements in connection with its annual reporting for the year ending
December 31, 1998.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". The SOP is
effective for the Company beginning on January 1, 1999; however, earlier
adoption is permitted. The SOP will require the capitalization of certain
costs incurred after the date of adoption in connection with developing or
obtaining software for internal use. The Company currently expenses internal
development costs for internal use software as incurred. The Company is
evaluating the impact of the SOP on the Company's future earnings and
financial position, but does not expect it to be material.
In April 1998, the AICPA issued SOP 98-5, "Reporting the Costs of Start-up
Activities". The SOP is effective beginning on January 1, 1999, and requires
that start-up costs capitalized prior to January 1, 1999 be written-off and
any future start-up costs be expensed as incurred. The Company is evaluating
the impact of the SOP on the Company's future earnings and financial
position.
In June 1998, the Financial Accounting Standards Board issued statement of
Financial Accounting Standards No. 133 "Accounting for Derivative and Hedging
Activities" (SFAS 133). SFAS 133 requires companies to record derivatives on
the balance sheet as assets or liabilities at fair value. It is effective for
financial statements for fiscal years beginning after June 15, 1999. The
Company is evaluating the impact of SFAS 133 on the Company's future earnings
and financial position, but does not expect it to be material.
9
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
STRATEGIC TRANSACTIONS AND SIGNIFICANT DEVELOPMENTS
During the first half of 1998, First Data Corporation ("FDC" or "the Company")
continued the emphasis begun in 1997 on its three primary lines of service
within the United States and around the world: domestic and international card
issuer and information services, merchant processing services and payment
instruments services. The Company has continued this emphasis to further its
overarching strategic objective: to help make electronic payments the payment
method of choice worldwide.
During the second quarter, a number of developments relating to the Company's
efforts to establish a data processing center in Hong Kong and to provide
credit card processing services to the Hongkong and Shanghai Banking
Corporation resulted in a reassessment of the related long-term contract's
expected results of operations. These developments included signing an
amendment to its agreement with HSBC Holdings plc ("HSBC"), which revised the
scope of services to be provided to HSBC, and missing certain development and
conversion milestone dates contained in the contract. As a result of not
meeting these milestones, the Company incurred penalty payments and reassessed
the timetable to complete the conversion of HSBC's cardholder accounts to the
Company's processing systems. Based on an internal evaluation of an
appropriate timetable, the Company expects to incur significant unanticipated
costs to complete the conversion effort. Such costs plus estimated costs of
operation over the life of the contract are projected to exceed anticipated
revenues under the amended contract. Accordingly, a provision of $125.2
million has been recorded in the second quarter for such estimated net losses.
The Company expects to discuss a revised timetable for conversion with HSBC
during the third quarter of 1998. Should the negotiations fail to produce a
timeframe acceptable to both parties, HSBC may choose to terminate the
contract. In that event, the provision is believed to be sufficient to cover
the costs of termination.
In conjunction with the HSBC project, and to provide a processing platform for
other future non-U.S. clients, the Company has been developing a new
processing platform and as of June 30, 1998 had capitalized $38.5 million of
costs related thereto. Although the Company plans to complete those portions
of this platform required by its obligations to HSBC, due to the developments
described above and fewer expected market opportunities in Asia in light of
current economic conditions in that region, the Company believes that such
capitalized costs may not be recoverable in the near to medium term, and thus
they were written off.
Notwithstanding the developments with HSBC, FDC has a long-term commitment to
grow internationally. Currently, 12% of FDC's revenues are derived from
international business, 7% of which come from Western Union International.
Western Union International, which is not impacted by the HSBC contract, is
experiencing 60% revenue growth in 1998 and is expected to continue to
experience above average revenue growth rates in 1999. Substantially all of
the remaining 5% of the international business relates to card and merchant
processing business in the United Kingdom and FDC expects some of its U.S.
clients to expand into that market. FDC's operation in the U.K. has
experienced significant growth in cardholder accounts on file, primarily due
to the successful conversion of the new Lloyd's/TSB accounts in May 1998
which added over 4.5 million accounts. The growth in the Asia Pacific area
will not be as significant as expected due to the combination of the delay in
the HSBC conversion and the economic issues occurring in that region.
10
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Domestically, the Company continues to sign new clients, such as First Union,
and existing clients are growing their account base. As an indication of
expected future growth, nine and a half million new card accounts are
scheduled for conversion in the second half of 1998. The information
management services area has not performed as anticipated, with revenues
essentially flat as compared to the second quarter of 1997, and up slightly
for the first six months of 1998. The divestiture of the lettershop
operations, a large project in 1997 which ended in first quarter 1998, a
delay in the introduction of a new product in the consumer credit reporting
business, and delays in closing new sales have impacted revenue growth. The
Company has taken numerous actions intended to restore profitable growth to
this business, including the addition of new sales management, an aggressive
cost reduction program, workforce reduction, and the introduction of new
decision support and risk management products. However, there can be no
assurances that these actions will achieve the desired results.
Merchant processing services is a stable and improving business. The Company
introduced electronic check acceptance as a new method of point of sale
payment during 1998, and believes it has good growth potential in 1999. The
Company continues to expand the scope of its bank alliance program with the
addition of First Security Corporation as a new alliance partner and has
recently announced a new alliance in the gaming business.
In the payment instrument services area, Western Union continues to experience
strong growth. With the addition of both Kmart and Safeway Stores during
1998's second quarter, Western Union now offers money transfer services at
more than 47,000 agent locations in 157 countries worldwide. In addition,
Western Union is experiencing rapid growth in money transfers from one foreign
country to another, whereas previously most transfers had been between the
United States and a foreign country.
FDC remains the market leader in its three major business groups: card issuer
processing, merchant processing and payment instruments. The Company will
continue to focus on these core business areas throughout 1998 and will
continue to assess how best to serve its customer base. This continued focus
and assessment could result in the Company taking future actions to alter its
product and service offerings as well as actions to further streamline
operations and reduce costs. These actions could result in further charges
against income, the timing and magnitude of which is not presently
determinable.
RESULTS OF OPERATIONS
Effective with the quarter ended December 31, 1997, the Company changed its
revenue presentation to report "Service revenues" and "Product sales and
other" versus "Operating revenues" and "Other income." Product sales and
other includes certain items formerly reported in operating revenues as well
as other income. The Company adopted this presentation in order to separate
recurring transaction and related service processing revenues, including
investment income and equity earnings, from all other revenues. Product sales
and other includes sales of the Company's products (which are generally
ancillary to service revenues), software and other items which recur but which
fluctuate as to amount and timing.
11
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Results of operations comparisons to the first half of 1997 are significantly
impacted by the divestitures completed in 1997: GENEX in February 1997, FIRST
HEALTH Services and FIRST HEALTH Strategies in July 1997 and Nationwide Credit
in December 1997. Also in December 1997, the Company signed an agreement
whereby another publicly traded insurance company began a process of renewing
insurance policies issued by EBP Life Insurance Company, Inc. ("EBP Life") on
its own paper. This transaction allows EBP Life to substantively exit the
insurance business. Collectively, the four divested units and EBP Life
represented approximately 6% of total 1997 revenues.
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. Total revenues for the
quarter ended June 30, 1998 decreased 1% to $1.30 billion from $1.32 billion
in the prior year quarter and for the six months were also down 1%, to $2.54
billion. Revenue growth of continuing businesses was 11% for the quarter and
12% year-to-date. Internal revenue growth on a tax-equivalent basis (excluding
the effects of acquisitions and divestitures on continuing businesses) was
approximately 7% for the quarter and 8% year-to-date.
Growth in underlying volumes continued to be strong in the card issuing
services area, and the second quarter of 1998 saw large increases in accounts
on file. Total card accounts on file grew 24% (to 199.7 million) over second
quarter 1997 with domestic card accounts growing to 174.4 million (23%
growth). However, revenues grew more slowly due to the large amount of
contract renewals at lower pricing during 1997, a lower ratio of active
accounts to total accounts on file, and exiting certain unprofitable contracts
in the back office servicing business.
Revenues in the merchant processing services area grew 14%, due principally to
the acquisition of FDFS in January 1998. Revenues in core merchant
processing, while continuing to grow at a slower rate than volume and
transactions processed, showed a slight increase during the second quarter of
1998 versus a small decrease during the first quarter. Adjusted for revenues
associated with merchant contracts sold in 1997 and the effect of changes in
revenue reporting due to the consolidation of two alliances in 1998 formerly
reported on the equity method, revenue growth was 5% for the quarter and 6%
year-to-date. While pricing continues to be very competitive in merchant card
processing, it remained on average approximately the same during the second
quarter when compared with the first quarter of 1998. During the second
quarter, the Company formed a new merchant alliance with First Security
Corporation. Overall, the merchant alliance program continues to show
progress with respect to volume growth, the number of sales referrals from the
bank partners and in expense control. Domestic merchant card dollar volume
grew 14% over the second quarter of 1997 to $60.6 billion, while domestic
merchant card transactions processed increased 15% to 2.07 billion over the
first half of 1997. Total merchant transactions processed were up 11% over
the first half of 1997 to 2.34 billion.
12
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Payment instruments services revenues grew 20% (on a tax equivalent basis),
reflecting continuing strong underlying volume increases. In particular, the
Company continues to experience strong growth in international and commercial
money transfer volumes. The Mexico market continues to be price competitive,
with indications of slowing overall growth in the market. Nonetheless,
aggregate money transfer transactions grew 32% (to 14.9 million) and 33% (to
29.1 million), respectively, over the second quarter and first six months of
1997. (Excluding the impact of the Orlandi Valuta acquisition in August 1997,
total money transfer transactions grew approximately 27% for the quarter and
28% year-to-date.) At June 30, 1998, the agent base had grown 26% as compared
to a year ago, with over 47,000 agents in 157 countries.
Product sales and other for the 1998 second quarter decreased 36% to $31.3
million from $48.6 million in the prior year quarter, continuing the trend
noted in the first quarter. The largest component of this decline is due to
the prior year quarter containing higher contingent payments associated with
the formation of a merchant alliance.
Operating expenses decreased 1% for both the 1998 second quarter and six
months ended June 30, 1998 to $844.3 million and $1,655.9 million,
respectively, compared to $852.9 million and $1,666.8 million in the same
periods in the prior year. Excluding the impact of divested businesses,
operating expenses grew at a rate generally consistent with the revenue growth
of continuing businesses. The Company has incurred Year 2000 expenses of
approximately $16.7 million for the quarter and $30.2 million for the six
months ended June 30, 1998.
Selling, general and administrative expenses increased 2% for both the 1998
second quarter and six months ended June 30, 1998 to $186.2 million and $384.6
million, respectively, compared to $182.6 million and $378.0 million for the
same periods in the prior year. Advertising expense increases at Western
Union combined with acquisitions were offset by the impact of the divested
companies, resulting in flat sales and marketing expenses. General and
administrative expenses increased 5% for the quarter and 4% year-to-date due
to continued focus on building a sales infrastructure in the information
services area in order to accelerate revenue growth.
During the second quarter of 1998, the Company recorded a $125.2 million
provision related to estimated net losses associated with the HSBC contract
(see "Strategic Transactions and Significant Developments" herein). This
amount is reported on the "Provision for loss on contract" line in the
Company's Consolidated Statements of Operations.
During the first quarter of 1998, the Company sold its NTS subsidiary,
resulting in a pretax gain of $28.5 million. NTS represented less than 1% of
FDC's total revenues for 1997. The Company also recorded restructuring
charges in the first quarter totaling $28.9 million, principally relating to
employee severance and facility closure costs in the merchant processing
services area. During the second quarter of 1998, the Company wrote off $38.5
million of capitalized platform development costs related primarily to the
HSBC processing agreement and other potential non-U.S. clients. In the first
quarter of 1997, the Company sold its GENEX subsidiary which resulted in a
pretax gain of $50.5 million and also recorded restructuring charges totaling
$46.4 million. On July 1, 1997, the Company completed the divestiture of its
FIRST HEALTH Strategies and FIRST HEALTH Services businesses and recorded a
1997 second quarter pretax loss of $93.8 million. As a consequence of the
Company's
13
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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.
These items reduced 1997 second quarter and six month earnings by $189.9
million ($0.41 per share) and $187.3 million ($0.40 per share). All of these
1998 and 1997 items are reported on the "Restructuring, business divestitures
and impairment, net" line in the Company's Consolidated Statements of
Operations.
Interest expense for the 1998 second quarter decreased 8% to $27.9 million
compared to $30.3 million in the 1997 second quarter. The decrease in
interest expense is attributable to proceeds from divestitures and fewer
acquisitions which resulted in lower average debt balances.
FDC's effective income tax rate (excluding the impact of the loss contract
provision and restructuring, divestitures and impairment charges) of 32.5%
and 32.7% for the second quarter and the six months ended June 30, 1998
decreased from 36% in the same 1997 periods due to increased tax-exempt
interest earnings on fiduciary funds in the investment portfolios (as a result
of the conversion of American Express Travel Related Services payment products
to the Company's own payment products) and the growth of the business giving
rise to fiduciary funds at a rate faster than the Company as a whole.
The Company reported net income of $45.4 million and $176.0 million for the
second quarter and six months ended June 30, 1998. Net income (before the
loss contract provision and restructuring, divestitures and impairment
charges) rose 3% to $166.2 million in the quarter ended June 30, 1998 compared
with $161.5 million in the prior year quarter and net income margins increased
to 12.7% from 12.3% in the prior year period. Net income (before the loss
contract provision and restructuring, divestitures and impairment charges) was
up 1% to $297.1 million for the six months ended June 30, 1998 compared to
$295.1 in the prior year period. Net income margins (before the loss contract
provision and restructuring, divestitures and impairment charges) for the 1998
and 1997 six month periods were 11.7% and 11.5%, respectively.
The Company reported diluted earnings per common share of $0.10 and $0.39 per
share for the second quarter and six months ended June 30, 1998, respectively.
Excluding the above mentioned charges, earnings per share would have increased
6% to $0.37 for the second quarter from $0.35 in the 1997 comparable period
and 3% to $0.66 for the six months ended June 30, 1998 from $0.64 for the 1997
period.
CAPITAL RESOURCES AND LIQUIDITY
FDC continues to generate significant cash flow from operations, aggregating
$620.1 million in the six months ended June 30, 1998, as compared to $510.0
for the six months ended June 30, 1997. FDC utilized this cash flow to
reinvest in its existing businesses, to contribute to the financing of
business expansion, to fund treasury stock purchases, and to repay borrowings.
14
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
FDC reinvests cash in its existing businesses principally to expand its
processing capabilities through property and equipment additions and to
establish customer processing relationships through contract payments and
costs for conversion and systems development. These cash outlays increased to
$393.8 million in the 1998 six months compared with $261.8 million in the 1997
six months. FDC expects total expenditures for systems and development and
customer conversions in 1998 to be somewhat higher than in 1997 due to growth
in the amount needed to support growing businesses and larger continuing
businesses and entries into new markets. This growth will be partially offset
by the effect of divestitures and lower per unit costs for data processing
equipment. In addition, the Company expects total Year 2000 related systems
spending for the full year 1998, which will be expensed as incurred, to be in
the range of $75 million to $90 million, as compared to $32 million incurred
for the full year 1997. (See the Company's Annual Report on Form 10-K for
additional information regarding Year 2000 spending.) On July 29, 1998, the
Securities and Exchange Commission issued a release providing detailed
guidance to public companies concerning disclosure of information regarding
Year 2000 issues (the "Release"). The Company has not had sufficient time to
prepare disclosure information responsive to the Release for inclusion in this
Report on Form 10-Q and the Company intends to provide responsive disclosure
in a future report.
Overall, FDC's operating cash flow for the six months ended June 30, 1998
exceeded its nonacquisition and disposition investing activities by $221.2
million. These cash sources contributed to funds utilized for acquisitions,
short-term borrowing repayments and treasury stock purchases.
The 1998 six months cash outlays for acquisitions totaled $79.9 million
consisting primarily of a $50.5 million payment to purchase FDFS, a provider
of credit card, debit card and money transfer services to gaming
establishments and their customers. The Company also paid $7.3 million
relating to businesses previously acquired and $43.7 million relating
primarily to certain of its alliance programs with bank clients in merchant
processing.
The Company's financing activities include net borrowings, proceeds from stock
option exercises, share repurchases for purposes of meeting requirements of
employee benefit programs and dividend payments. Net cash used in financing
activities was $279.0 million during the 1998 six months, as compared to
$181.9 million provided by financing activities in the prior year period.
During 1997, the Company utilized funds from commercial paper borrowings to
support its investing activities, whereas in 1998 cash generated from
operations and proceeds from the First Image disposition funded such
activities and enabled the Company to reduce commercial paper outstanding.
The Company made cash outlays totaling $92.7 million in the six months ended
June 30, 1998 to buy back shares of its common stock which were largely
reissued in connection with the Company's stock compensation plans. Proceeds
from stock option exercises and related tax benefits totaling $55.5 million
partially offset these outlays. In addition, the Company continued its
practice of paying quarterly cash dividends, resulting in $17.9 million of
cash payments to the Company's common stockholders.
15
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The Company has two outstanding shelf registration facilities, one providing
for the issuance of debt and equity securities up to $1.35 billion in the
aggregate (of which $675 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
June 30, 1998 is $88.9 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 $1.0 billion at June 30, 1998
under the Company's commercial paper program and through its bank credit
lines.
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 1997 Annual Report on Form 10-K
related to the Company's exposure to market risk from interest rates.
16
INDEPENDENT ACCOUNTANT'S 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 June 30, 1998 and the related consolidated statements of
income and cash flows for the three-month and six-month periods ended June 30,
1998 and 1997. 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, 1997, 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, 1998, 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, 1997, 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
August 10, 1998
17
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
for the matters reported in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997, and the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998. There were no material developments to
litigation matters previously disclosed except as follows. On August 4, 1998,
the United States District Court for the Central District of California granted
the Company's motion to dismiss the Plaintiff's complaint in the Garcia
litigation previously described in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997. The Court found that the Plaintiff failed to
allege sufficient facts to sustain the federal claims and the Court declined to
retain supplemental jurisdiction over Plaintiff's state law claims. The
dismissal was with leave to amend within thirty days.
ITEM 2. CHANGES IN SECURITIES
---------------------
On May 6, 1998, 182,662 shares of the Company's common stock were
issued to the shareholders of United States Benefits Service, Inc. ("USBS") in a
merger transaction pursuant to which FDC acquired 100% of the stock of USBS. No
underwriter or placement agent was involved in the transaction. The issuance of
the FDC shares was not registered under the Securities Act of 1933 (the "Act")
in reliance upon the exemption from registration provided by Section 4(2) of the
Act and regulations enacted by the Securities and Exchange Commission under
Section 4(2).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The Company held its Annual Meeting of Stockholders on May 13, 1998. Three
matters were voted upon and approved at the meeting.
Proposal 1 Election of Directors
- ---------- ---------------------
The terms of office of three current directors, Ben Burdetsky, Henry C. Duques
and Joan E. Spero, expired at the 1998 Annual Meeting. The re-election of Mr.
Burdetsky, Mr. Duques and Ms. Spero was voted on at the Annual Meeting. The
results of the voting were as follows:
FOR WITHHELD
Ben Burdetsky 373,411,596 9,544,519
Henry C. Duques 373,191,181 9,764,907
Joan E. Spero 373,288,402 9,667,686
Other directors whose terms continued after the meeting are Courtney F. Jones,
Robert J. Levenson, James D. Robinson III, Charles T. Russell, Bernard L.
Schwartz and Garen K. Staglin.
Proposal 2 Approval of an increase in the number of shares issuable under the
- ---------- ------------------------------------------------------------------
Company's 1992 Long-Term Incentive Plan by 22,000,000 shares of the
-------------------------------------------------------------------
Company's Common Stock
----------------------
The results of the voting were as follows:
BROKER
FOR 247,167,059 AGAINST 133,409,156 ABSTAIN 2,379,873 NON-VOTE 0
See the Proxy Statement for the Company's 1998 Annual Meeting of Stockholders,
which information is incorporated herein by reference.
18
PART II. OTHER INFORMATION
Proposal 3 Ratification of the selection of Ernst & Young LLP as independent
- ---------- -----------------------------------------------------------------
auditors of the Company for 1998
--------------------------------
The results of the voting were as follows:
BROKER
FOR 381,141,764 AGAINST 863,330 ABSTAIN 950,994 NON-VOTE 0
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 Private Securities Litigation Reform Act of 1995
Safe Harbor Compliance Statement for Forward-Looking Statements
(b) Reports on Form 8-K
-------------------
None.
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: August 12, 1998 By /s/ Lee Adrean
-------------------------- ----------------------------------------
Lee Adrean
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: August 12, 1998 By /s/ J. Allen Berryman
-------------------------- ----------------------------------------
J. Allen Berryman
Vice President and
Corporate Controller
(Principal Accounting Officer)
20
FIRST DATA CORPORATION
INDEX TO EXHIBITS
-----------------
Exhibit
Number Description
- ------ -----------
12 Statement Regarding Computation of Ratio of Earnings to Fixed Charges
15 Letter regarding Unaudited Interim Financial Information
27.1 Financial Data Schedule (for SEC use only)
99 Private Securities Litigation Reform Act of 1995
Safe Harbor Compliance Statement for Forward-Looking Statements
21