FIRST DATA CORPORATION
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, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission file number 1-11073
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FIRST DATA CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 47-0731996
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5660 NEW NORTHSIDE DRIVE, SUITE 1400, ATLANTA, GA 30328-5800
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (770) 857-0001
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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 2, 1999
---------------------------- ----------------------------
Common Stock, $.01 par value 429,038,474
1
INDEX
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PAGE
NUMBER
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PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Statements of Income for the three and six
months ended June 30, 1999 and 1998.............................. 3
Consolidated Balance Sheets at June 30, 1999 and
December 31, 1998................................................ 4
Consolidated Statements of Cash Flows for the
six months ended June 30, 1999 and 1998.......................... 5
Notes to Consolidated Financial Statements....................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 22
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................ 24
Item 4. Submission of Matters to a Vote of Security Holders.............. 25
Item 6. Exhibits and Reports on Form 8-K................................. 26
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts)
(Unaudited)
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
REVENUES
Service revenues $1,367.0 $1,245.8 $2,618.4 $2,427.1
Product sales and other 30.9 31.3 49.1 59.5
-------- -------- -------- --------
1,397.9 1,277.1 2,667.5 2,486.6
-------- -------- -------- --------
EXPENSES
Operating 899.7 818.2 1,746.2 1,606.8
Selling, general & administrative 208.7 184.6 406.1 383.2
Provision for loss on contract - 125.2 - 125.2
Restructuring, business divestitures,
litigation and impairment, net 34.9 38.5 34.9 38.9
Interest 22.8 27.9 47.0 54.8
-------- -------- -------- --------
1,166.1 1,194.4 2,234.2 2,208.9
-------- -------- -------- --------
Income before income taxes 231.8 82.7 433.3 277.7
Income taxes 38.5 37.3 99.0 101.6
-------- -------- -------- --------
Net income $ 193.3 $ 45.4 $ 334.3 $ 176.1
======== ======== ======== ========
Earnings per common share basic $ 0.45 $ 0.10 $ 0.77 $ 0.39
======== ======== ======== ========
Earnings per common share diluted $ 0.44 $ 0.10 $ 0.76 $ 0.39
======== ======== ======== ========
See notes to consolidated financial statements.
3
FIRST DATA CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
June 30, December 31,
1999 1998
--------- -----------
ASSETS
Cash and cash equivalents $ 464.6 $ 459.5
Settlement assets 10,065.7 9,758.0
Accounts receivable, net of allowance for doubtful accounts
of $34.2 (1999) and $27.9 (1998) 871.8 940.1
Property and equipment, net 755.2 781.0
Goodwill, less accumulated amortization of $587.3 (1999) and
$542.7 (1998) 2,852.4 2,885.4
Other intangibles, less accumulated amortization of $647.5
(1999) and $548.5 (1998) 1,105.4 1,107.9
Other assets 772.7 655.1
--------- ---------
$16,887.8 $16,587.0
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Settlement obligations $10,080.9 $ 9,617.0
Accounts payable and other liabilities 1,614.9 1,642.4
Borrowings 1,485.3 1,571.7
--------- ---------
Total Liabilities 13,181.1 12,831.1
--------- ---------
Commitments and contingencies
Stockholders' Equity:
Common Stock, $.01 par value; authorized 600.0 shares,
issued 448.9 shares in 1999 and 1998 4.5 4.5
Additional paid-in capital 2,165.1 2,143.2
--------- ---------
Paid-in capital 2,169.6 2,147.7
Retained earnings 2,168.9 1,893.9
Accumulated other comprehensive income (56.2) 54.1
Less treasury stock at cost, 18.6 shares (1999) and 13.4
shares (1998) (575.6) (339.8)
--------- ---------
Total Stockholders' Equity 3,706.7 3,755.9
--------- ---------
$16,887.8 $16,587.0
========= =========
See notes to consolidated financial statements.
4
FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Six months ended June 30,
-------------------------
1999 1998
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Cash and cash equivalents at beginning of period $ 459.5 $ 410.5
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income 334.3 176.1
Adjustments to reconcile to net cash provided by operating
activities:
Depreciation and amortization 308.2 287.5
Noncash portion of provision for loss on contract, restructuring,
business divestitures, litigation and impairment, net 33.2 153.9
Other noncash items 15.7 35.3
Increase (decrease) in cash, excluding the effects of
acquisitions and dispositions, resulting from changes in:
Accounts receivable 66.1 14.2
Other assets 10.4 (3.3)
Accounts payable and other liabilities 54.8 (15.7)
Income tax accounts (106.4) (62.9)
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Net cash provided by operating activities 716.3 585.1
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CASH FLOWS FROM INVESTING ACTIVITIES
Current year acquisitions, net of cash acquired (23.5) (79.9)
Payments related to other businesses previously acquired (34.3) (51.0)
Proceeds from dispositions, net of expenses paid 42.2 150.0
Additions to property and equipment, net (108.0) (197.4)
Payments to secure customer service contracts, including
outlays for conversion, and capitalized systems development costs (132.2) (190.8)
Other investing activities (75.4) (5.1)
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Net cash used in investing activities (331.2) (374.2)
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CASH FLOWS FROM FINANCING ACTIVITIES
Short-term borrowings, net (128.9) (171.9)
Long-term debt borrowings 100.0 --
Payments on long-term debt (57.7) (52.0)
Proceeds from issuance of common stock 108.3 55.5
Purchase of treasury shares (384.3) (92.7)
Cash dividends (17.4) (17.9)
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Net cash used for financing activities (380.0) (279.0)
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Change in cash and cash equivalents 5.1 (68.1)
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Cash and cash equivalents at end of period $ 464.6 $ 342.4
======= =======
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, 1998.
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 June 30, 1999 and the consolidated results of its operations
for the three and six months ended June 30, 1999 and 1998 and cash flows for
the six months ended June 30, 1999 and 1998. Results of operations reported
for interim periods are not necessarily indicative of results for the entire
year.
FDC recognizes revenues from its information processing services as such
services are performed, recording revenues net of certain costs not
controlled by the Company (primarily interchange fees and assessments
charged by credit card associations of $477.3 million and $399.1 million for
the three months ended June 30, 1999 and 1998, respectively, and $868.5
million and $718.2 million for the six months ended June 30, 1999 and 1998,
respectively).
2. In April 1999, the Company sold Innovis Inc. (formerly Consumer Credit
Associates, Inc.) to CBC Companies, Inc. for $20 million. As a result of
selling Innovis certain tax benefits will be realized. Results for second
quarter 1999 include recognition of a pre-tax benefit of $24.5 million ($40
million after tax) for Innovis that relates primarily to the receipt of the
net proceeds from its sale. The remaining shutdown reserve at June 30, 1999
of $4.4 million includes $3.5 million for severance and $0.9 million for
other exit costs.
In May 1999, the Company announced that its Western Union business unit
received preliminary approval for a proposed settlement of all claims in
several class action lawsuits pertaining to the Company's U.S.-to-Mexico
money transfer business. Under the terms of the settlement, FDC will
establish a charitable fund for the advancement of Mexican and Mexican-
American causes in the amount of $2 million. In addition, Western Union will
issue discount coupons for future money transfer transactions to Mexico to
its customers who transferred money from the U.S. to Mexico after January 1,
1987. Discount coupons for future Western Union transactions will also be
issued to MoneyGram (previously an FDC subsidiary) customers who transferred
money to Mexico from January 1, 1988 to December 10, 1996. FDC recorded a
second quarter pre-tax charge of $34.1 million ($21.1 million after tax) to
reflect legal fees, the charitable fund and other outside administrative
costs in connection with the settlement. Future discounts related to coupon
redemption will be recorded as incurred.
In May 1999, the Company sold its EBP Life business unit for $14.5 million
cash. As a result of this transaction FDC recorded a pre-tax gain of $4.5
million ($3.9 million after tax) in the second quarter of 1999. Included in
this pre-tax gain amount is $2.9 million related to the reversal of an
impairment charge previously recorded by the Company in anticipation of its
exit from the insurance line of business.
6
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Also in June 1999, the Company announced the signing of a definitive
agreement to divest its Donnelley Marketing subsidiary to infoUSA for
approximately $200 million in cash. The transaction closed on July 23, 1999.
As a result of this transaction, FDC recorded a pre-tax loss of $29.8
million ($14.7 million after tax) in the second quarter.
During the second quarter of 1998, the Company amended its agreement with
HSBC Holdings, plc ("HSBC") and recorded a $125.2 million loss contract
provision. In September 1998, the Company announced the termination of its
Hong Kong card-processing contract with HSBC. Such termination caused an
Australian card-processing contract to become a loss contract. Of the $19.1
million HSBC accrual at December 31, 1998, $10.8 million was utilized during
the first six months of 1999; $8.7 million for the Australian loss contract
and $2.1 million for Hong Kong wind down costs.
In January 1998, the Company announced its intention to sell First Image
Management Company ("First Image"), its imaging and document management
business, and recorded a 1997 pre-tax impairment charge of $106.7 million,
reflecting the anticipated loss on the disposition. In June 1998, the
Company completed the sale of First Image for $150.0 million in cash.The
finalization of the transaction resulted in the reversal of $9.8 million of
the 1997 impairment charge in the second quarter of 1998.
Also reported on the "Restructuring, business divestitures, litigation and
impairment, net" line in the Consolidated Statements of Income is a 1998
first quarter $28.5 million pre-tax gain on the sale of the NTS
transportation services unit.
During the first six months of 1998, the Company incurred restructuring
charges of $30.9 million ($7.8 million in the second quarter); $19.1 million
related to merchant processing services, $4.7 million related to card issuer
services and $7.1 million related to all other and corporate. The charges
consisted of severance accruals for approximately 681 employees of $15.1
million, facility closure and related costs of $9.8 million and $6.0 million
for settlement of a legal matter associated with the merger with FFMC.
During the first six months of 1998, the Company also recorded impairment
charges totaling $46.3 million ($40.5 million in the second quarter);
approximately $38.5 million of platform development costs related to the
HSBC project and other potential non-U.S. clients that may not be
recoverable in the near to medium term, and thus were written off in the
second quarter of 1998, $7.1 million related to merchant processing services
as a result of facility closures and terminated conversion efforts, and $0.7
million related to all other and corporate.
7
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
3. The following table summarizes the Company's utilization of restructuring
accruals for the six months ended June 30, 1999 (in millions):
Employee Facility Other Exit
Severance Closure Costs
--------- -------- ----------
Remaining Accrual at December 31, 1998 $7.9 $7.9 $2.0
Cash Payments and Other Charges 4.2 0.4 --
---- ---- ----
Remaining Accrual at June 30, 1999* $3.7 $7.5 $2.0
==== ==== ====
* Excludes Hong Kong and Innovis activities described previously.
4. During the first six months of 1999 the Company acquired four businesses
expanding FDC's markets and services. All of these acquisitions have been
accounted for as purchases and their results are included in 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.
In March 1999, the Company announced definitive agreements with Bank One
Corporation and Paymentech, Inc. for the acquisition of Paymentech's 16.4
million publicly held shares (45% of total shares outstanding) at a price of
$25.50 per share and for the combination of Paymentech's operations with the
existing Bank One/First Data merchant alliance. These transactions closed on
July 26, 1999 with First Data paying approximately $430 million for
Paymentech's publicly owned shares and for the cancellation of outstanding
options to purchase shares of Paymentech's common stock. Paymentech provides
full-service electronic payment solutions for merchants and third-party
transaction processing.
5. The Company's commercial paper borrowings at June 30, 1999 were $305.2
million under its $1.5 billion commercial paper program and supporting
revolving credit facilities. Pursuant to a 1998 agreement, $175.0 million of
the facilities have been designated to be used solely for the purpose of
meeting certain of the Company's settlement obligations, if necessary. At
June 30, 1999, the Company also had $525 million available under shelf
registrations providing for the issuance of debt and equity securities and
$210 million available under its uncommitted bank lines.
During March 1999, the Company entered into a $100 million, 5-year bullet
maturity debt financing with a floating interest rate. Under certain
circumstances the financing may be prepaid.
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.
8
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Amounts utilized in per share computations are as follows (in millions):
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
1999 1998 1999 1998
----- ----- ----- -----
Weighted average shares outstanding:
Basic weighted average shares 431.8 446.5 433.1 446.9
Stock options 7.7 4.0 7.1 3.8
Restricted stock awards 0.2 0.1 0.2 0.1
----- ----- ----- -----
439.7 450.6 440.4 450.8
===== ===== ===== =====
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 and restricted stock
awards.
7. The components of comprehensive income are as follows (in millions):
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
1999 1998 1999 1998
------ ----- ------ ------
Net income $193.3 $45.4 $334.3 $176.1
Foreign exchange effect (1.1) (0.2) (12.6) (0.9)
Unrealized loss on securities (88.0) (1.0) (97.7) (1.0)
----- ----- ----- -----
Total comprehensive income $104.2 $44.2 $224.0 $174.2
====== ===== ====== ======
8. First Data Corporation classifies its businesses into three principal
segments: payment instruments, card issuer services and merchant processing
services. See the Company's 1998 Annual Report on Form 10-K for a detailed
description of each segment and the accounting policies of the operating
segments.
As stated in Notes 2 and 10, the Company sold its Donnelley Marketing
business unit and has announced the impending sale of its Investor Services
Group business unit. To appropriately reflect these divestitures, segment
information has been restated to represent the move of Donnelley Marketing
and Investor Services Group to "divested or to be divested" from the "card
issuer services" and "all other and corporate" segment, respectively.
Additionally, other small information businesses were moved to "all other
and corporate" from the "card issuer services" segment to reflect current
management reporting relationships.
9
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table presents the Company's operating segment results for the
three months and six months ended June 30, 1999 and 1998 (in millions):
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
Revenues:
Payment Instruments $ 503.2 $ 417.9 $ 962.2 $ 800.5
Card Issuer Services 338.0 308.2 645.6 602.4
Merchant Processing Services 392.5 344.3 738.1 657.4
All Other and Corporate 81.8 85.0 159.5 162.6
-------- -------- -------- --------
Subtotal 1,315.5 1,155.4 2,505.4 2,222.9
-------- -------- -------- --------
Divested or To Be Divested 122.6 154.0 238.3 323.8
Eliminations (a) (40.2) (32.3) (76.2) (60.1)
-------- -------- -------- --------
Consolidated $1,397.9 $1,277.1 $2,667.5 $2,486.6
======== ======== ======== ========
Operating Profit:
Payment Instruments $ 137.1 $ 115.9 $ 253.7 $ 213.7
Card Issuer Services 62.5 59.8 114.3 110.4
Merchant Processing Services 98.2 78.9 167.7 134.0
All Other and Corporate 12.5 34.1 23.2 61.8
-------- -------- -------- --------
Subtotal 310.3 288.7 558.9 519.9
-------- -------- -------- --------
Divested or To Be Divested 19.4 17.9 32.5 36.8
Corporate Interest Expense, net (22.8) (27.9) (47.0) (54.8)
Restructuring, Business
Divestitures, Litigation and
Impairments, net (34.9) (163.7) (34.9) (164.1)
Eliminations (a) (40.2) (32.3) (76.2) (60.1)
-------- -------- -------- --------
Consolidated $ 231.8 $ 82.7 $ 433.3 $ 277.7
======== ======== ======== ========
Depreciation & Amortization:
Payment Instruments $ 26.8 $ 23.7 $ 51.8 $ 45.8
Card Issuer Services 70.5 55.3 125.0 109.5
Merchant Processing Services 47.4 45.9 95.6 90.6
All Other and Corporate 5.6 3.2 10.1 7.4
-------- -------- -------- --------
Subtotal 150.3 128.1 282.5 253.3
Divested or To Be Divested 13.0 17.4 25.7 34.2
-------- -------- -------- --------
Consolidated $ 163.3 $ 145.5 $ 308.2 $ 287.5
======== ======== ======== ========
(a) Represents principally the elimination of an adjustment to record
tax-exempt revenues (primarily in Payment Instruments) on a pretax
equivalent basis.
10
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
June 30, 1999 December 31, 1998
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Segment Assets (in millions):
Payment Instruments $11,027.5 $10,875.3
Card Issuer Services 1,536.9 1,537.5
Merchant Processing Services 3,249.9 3,153.8
All Other and Corporate 337.3 330.7
--------- ---------
Subtotal 16,151.6 15,897.3
Divested or To Be Divested 736.2 689.7
--------- ---------
Consolidated $16,887.8 $16,587.0
========= =========
9. In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires
companies to record derivatives on the balance sheet as assets or
liabilities at fair value. SFAS 137 "Accounting for Derivative Instruments
and Hedging Activities--Deferral of the Effective Date of FASB Statement
No. 133--an Amendment of FASB Statement No. 133" was issued in June 1999,
which delayed the effective date of SFAS 133 to fiscal years beginning after
June 15, 2000. 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.
10. In July 1999, the Company announced that it has entered into a definitive
agreement with PNC Bank Corp. to sell its Investor Services Group business
unit for approximately $1.1 billion in cash. This sale allows FDC to further
concentrate its efforts on electronic payment services and e-commerce
solutions. Upon completion of the sale, the Company will record a one-time
pre-tax gain of approximately $700 million (approximately $370 after tax)
and will realize net after tax cash proceeds of approximately $700 million.
This transaction, which is subject to customary regulatory approvals, is
expected to be completed during the fourth quarter of 1999.
11
FIRST DATA CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Significant Developments
During the first six months of 1999, First Data Corporation ("FDC" or the
"Company") continued to emphasize its three principal business segments: payment
instruments, card issuer services and merchant processing services. The Company
has continued this emphasis to further its overarching strategic objective: to
process every electronic transaction worldwide from the point of occurrence to
the point of settlement. FDC is keenly focused on improving execution of
strategic plans, enhancing sales and marketing activities, identifying
operational efficiencies and building on the fundamental strengths of its
business.
In the payment instruments segment, Western Union continues to experience strong
growth. Western Union now offers money transfer services at more than 74,000
agent locations (a 57% increase since June 30, 1998) in 172 countries worldwide.
The dramatic growth in agent locations from first quarter 1999 (27%) is
primarily due to the signing of the Postbank of Germany -- which added 12,000
locations in the second quarter of 1999. Development efforts continued on
several new products and services, including TransPoint, the Company's Internet-
based bill presentment and payment service joint venture, of which service went
live with a limited number of billers in the second quarter of 1999.
In May 1999, the Company announced that its Western Union business unit has
received preliminary approval for a proposed settlement of all claims in several
class action lawsuits pertaining to the Company's U.S.-to-Mexico money transfer
business. Under the terms of the settlement, FDC will establish a charitable
fund for the advancement of Mexican and Mexican-American causes in the amount of
$2 million. In addition, Western Union will issue coupons to its customers who
transferred money from the U.S. to Mexico after January 1, 1987. These coupons
will be for future money transfers to Mexico. Discount coupons for future
Western Union transactions will also be issued to MoneyGram (previously an FDC
subsidiary) customers who transferred money to Mexico from January 1, 1988 to
December 10, 1996. FDC recorded a second quarter pre-tax charge of $34.1 million
($21.1 million after tax) to reflect legal fees, the charitable fund and other
outside administrative costs in connection with the settlement. Future discounts
related to coupon redemption will be recorded as incurred.
Card issuer services volume trends remained positive in the first half of 1999
with total accounts on file growing to 225 million -- up 13% from June 30, 1998.
During the second quarter, the Company announced a new Internet Account
Acquisition Service. This new service will allow Card Issuer Services' bank
clients to give their customers "instant" credit and is consistent with the
industry-wide growth in internet services.
The Company also announced the opening of the Asia Pacific Regional Data Center
in Sydney, Australia. FDC is currently the primary ATM network processor in
Australia. The establishment of this new, broader data center affords FDC the
opportunity to grow its credit card processing business in the Asia Pacific
Region.
Revenues in the merchant processing services segment grew 14% and 12% in the
quarter and six months ended June 30, 1999, respectively, as compared to the
same periods in 1998. This growth was driven primarily by increases in dollar
volume processed of 20% for the quarter and 19% for the six month period and the
impact of 1998 revenue enhancement initiatives.
12
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
In March 1999, the Company announced the signing of a definitive agreement with
Bank One Corporation and Paymentech, Inc. for the acquisition of Paymentech,
Inc.'s publicly held shares (approximately 16 million shares) at a cost of
$25.50 per share (Bank One owns the remaining 20 million shares of Paymentech).
Paymentech provides full service electronic payment solutions for merchants and
third-party transaction processing. As a result of this agreement the operations
of Paymentech and Banc One Payment Services, LLC, FDC's merchant bank alliance
with BankOne Corporation, will be combined, resulting in a larger alliance with
a greater market presence. This transaction was completed on July 26, 1999 and
is expected to be approximately one cent dilutive to First Data's earnings per
share in 1999 and to have an immediate accretive impact to cash flow. The
potential for this transaction was considered in the Company's previously stated
1999 financial outlook and the Company remains comfortable with its earnings per
share guidance of $1.68 to $1.76.
FDC continues to aggressively expand its merchant processing e-commerce
activities by building critical relationships with Internet-related companies.
In the second quarter of 1999, the Company announced that it had reached an
agreement with Verio, a Web-hosting company with customers in more than 170
countries, to aggressively market FDC's e-commerce solutions to Verio's customer
base and offer it as part of their web-hosting services. Also in the second
quarter, the Company, along with IBM, announced its plans to deliver a suite of
comprehensive e-commerce services to enable small and medium-sized businesses to
build online storefronts and begin transacting Internet commerce -- complete
with online payment -- within a matter of hours.
More recently, the Company announced a strategic marketing agreement between
Excite@Home and FDC to enable merchants to quickly establish an online commerce
- -----------
storefront with transaction capabilities and access to Excite's daily users.
This agreement coincided with Excite's agreement to acquire iMall, Inc. in which
FDC currently holds an 11% ownership stake.
Several significant actions were taken in the 1999 second quarter as the Company
continues to streamline its operations and focus on its three primary lines of
business.
In April 1999, the Company sold Innovis, Inc. (formerly Consumer Credit
Associates, Inc.) to CBC Companies, Inc. for $20 million. As a result of selling
Innovis certain tax benefits will be realized. Results for the second quarter
1999 include recognition of a pre-tax benefit of $24.5 million ($40 million
after tax) for Innovis that relates primarily to the receipt of the net proceeds
from its sale. The remaining shutdown reserve at June 30, 1999 of $4.4 million
includes $3.5 million for severance and $0.9 million for other exit costs.
In May 1999, the Company sold its EBP Life business unit for $14.5 million cash.
As a result of this transaction FDC recorded a pre-tax gain of $4.5 million
($3.9 million after tax) in the second quarter of 1999. Included in this pre-tax
gain amount is $2.9 million related to the reversal of an impairment charge
previously recorded by the Company in anticipation of its exit from the
insurance line of business.
In June 1999, the Company announced the signing of a definitive agreement to
divest its Donnelley Marketing subsidiary to infoUSA for approximately $200
million in cash. The transaction closed on July 23, 1999. As a result of this
transaction, FDC recorded a pre-tax loss of $29.8 million ($14.7 million after
tax) in the second quarter.
13
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
In July 1999, the Company announced that it had entered into a definitive
agreement with PNC Bank Corp. to sell its Investor Services Group business unit
for approximately $1.1 billion in cash. This sale allows FDC to further
concentrate its efforts on electronic payment services and e-commerce solutions.
Upon completion of the sale, the Company will record a one-time pre-tax gain of
approximately $700 million (approximately $370 million after tax) and will
realize net after tax cash proceeds of approximately $700 million. This
transaction, which is subject to customary regulatory approvals, is expected to
be completed during the fourth quarter of 1999.
FDC remains the market leader in its three major segments: payment instruments,
card issuer services and merchant processing services. The Company will continue
to focus on these core business areas throughout 1999 and will continue to
assess how best to serve its customer base. Among the actions the Company
believes are necessary to continue its leadership position is a focused effort
to develop new products and services and to enhance its processing platforms in
response to Company growth, client requirements and changing technology. In this
regard, the Company also anticipates it will need to upgrade and redevelop its
business continuity plans to reflect new systems and platforms developed to
support these actions. Also, the Company may take future actions to further
streamline operations and reduce costs.
Results of Operations
The Company derives revenues in each of its reportable segments based
principally on the number of transactions processed, a percentage of dollar
volume processed or on a combination thereof. Lesser amounts of revenue are
generated from foreign currency exchange on money transfer transactions and
sharing in investment earnings on fiduciary funds. For the quarter ended June
30, 1999, total revenues increased 9% to $1.40 billion from $1.28 billion in the
prior year quarter, and for the six months ended June 30, 1999, total revenues
increased 7% to $2.67 billion from $2.49 billion in the prior year six months.
Revenues continued to be impacted by significant divestiture activity over the
last year as the Company has focused on its core payment services businesses.
The Company's internal growth rate (excluding the effects of business
acquisitions and business divestitures) in revenues for second quarter 1999 was
13% and for the first six months of 1999 was 12%.
Product sales and other revenues decreased 17% from $59.5 million in the first
six months of 1998 to $49.1 million in the first six months of 1999. Product
sales and other revenues decreased 1% from $31.3 million in the second quarter
1998 to $30.9 million in the second quarter of 1999. The largest component of
these declines is attributable to decreases in IBT branch installations.
For the second quarter of 1999, operating expenses increased 10% to $899.7
million compared to $818.2 million in the 1998 second quarter. For the six
months ended June 30, 1999, operating expenses increased 9% to $1,746.2 million
from $1,606.8 million in the six month period in 1998. The increase in operating
expenses as a percent of revenue over 1998 was driven primarily by an increase
in Year 2000 ("Y2K") readiness expenses which for the 1999 second quarter
approximated $25 million as compared to $19 million in 1998's second quarter.
Y2K expenses were $46 million and $33 million for the six months ended June 30,
1999 and 1998, respectively.
Selling, general and administrative expenses increased 13% to $208.7 million in
1999's second quarter compared to $184.6 million for the same period in 1998.
For the first six month period, selling, general and administrative expenses
increased 6% to $406.1 million in 1999 from $383.2 million in 1998. The increase
as a percent of revenue is attributable primarily to increases in advertising
and promotion spending, especially in the payment instruments segment.
14
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Interest expense decreased 18% to $22.8 million in the second quarter of 1999
from $27.9 in the second quarter of 1998, and 14% to $47.0 million for the first
six month period of 1999 from $54.8 million for the six month period of 1998,
due primarily to reductions in debt balances achieved through strong cash flow
from operations and significantly reduced capital expenditures.
FDC's effective tax rate (excluding the impact of divestitures and
restructuring) for the second quarter of 1999 was 30.6%, a decrease of 1.9
percentage points from 1998's second quarter rate. Similarly, the 1999 year-to-
date effective tax rate excluding divestitures and restructuring was 30.3%, down
2.4 percentage points from 1998. This decrease is primarily due to an increase
in the amount of non-taxable interest generated from investments in debt
instruments issued by state and local governments and a lower effective state
tax rate.
Net income of $193.3 million and $334.3 million for the second quarter and six
months ended June 30, 1999, respectively, was up from $45.4 million and $176.1
million in the comparable periods of 1998. These increases were primarily the
result of margin improvement in the core businesses and the provision for loss
on contract which impacted the results for the 1998 periods.
Diluted earnings per share ("EPS") increased significantly to $0.44 and $0.76
for the second quarter and first half of 1999, respectively. Excluding the
impact of restructuring, impairments and other one-time items, diluted EPS
increased 14% to $0.42 in the second quarter and 12% to $0.74 for the six month
period of 1999. This growth in EPS was driven by strong performance in the core
businesses, the divestiture of less profitable businesses and the implementation
of cost reduction and profit improvement programs.
Payment Instruments
Total revenues in the payment instruments segment increased by 20% (on a tax-
equivalent basis) to $503.2 million in the second quarter of 1999, as compared
to $417.9 million in the same period of 1998. Year-to-date revenues also
increased by 20% to $962.2 million in 1999 from $800.5 million in 1998. This
increase reflects continuing strong underlying volume increases principally
related to international and commercial money transfer. Aggregate money
transfer transactions grew 20% (to 17.9 million) over the second quarter of
1998. At June 30, 1999, the agent base had grown 57% as compared to a year ago,
with over 74,000 agents in 172 countries. The dramatic growth in agent
locations during the second quarter (27%) of 1999 is due to the signing of
Postbank of Germany -- which added 12,000 locations.
Operating profits for the second quarter of 1999 grew 18% over last year's
second quarter, from $115.9 million to $137.1 million. For the six month
period, operating profits grew by 19% from the prior year, from $213.7 million
to $253.7 million. Mature businesses continue to gain operating leverage
through cost efficiencies and price increases in certain markets, offset by
price declines in the Mexican markets, increased Y2K spending and investment in
new businesses and products.
15
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Card Issuer Services
Total revenues in the card issuer services segment grew 10% for the second
quarter of 1999 to $338.0 million as compared to $308.2 million for 1998's
second quarter. For the six month period, card issuer services segment revenues
grew 7% to $645.6 million in 1999 from $602.4 million in 1998. Card accounts on
file as of June 30, 1999 were 224.9 million (a 13% increase from June 30, 1998)
with domestic card accounts growing to 199.0 million (14% growth) and
international card accounts growing to 25.9 million. Revenues continue to grow
more slowly than accounts on file due to a lower ratio of active accounts to
total accounts on file, market pricing trends for new business and growth in
debit card accounts on file which generate lower revenue per account.
Operating profit for the card issuer services segment increased 5% from $59.8
million in 1998's second quarter to $62.5 million in 1999. Year-to-date profit
increased 4% to $114.3 million in 1999 from $110.4 million in 1998. Improved
performance driven by strong volume trends was partially offset by increased
systems investments and non-capitalized expenses incurred in preparation for
third quarter 1999 client conversions.
During the quarter, the card issuer services segment entered into several new
agreements to provide processing services. The Company also anticipates
deconversion of several clients, the most significant of which was due to the
acquisition of a client by a financial institution which processes its card
portfolio in-house. None of these terminations, individually or in the
aggregate, are expected to have a significant impact on the Company's results of
operations.
For several years, it has been uncertain whether the U.K. could impose a value
added tax (VAT) on the processing services provided by the Company's First Data
Resources Limited (FDRL) business unit. Imposition of a VAT could put FDRL at a
competitive disadvantage to in-house credit card processing solutions, which
would not be subject to the tax. FDRL recently received a favorable opinion in a
pending legal matter that held that the VAT could not be imposed by the U.K.
taxing authorities in that case. However, the U.K. recently adopted new
legislation that purports to impose a VAT on third-party credit card processors
such as FDRL. The decision received by FDRL indicates that the European
Community doctrines prevent the U.K. from imposing a VAT on processing services
such as those provided by FDRL. U.K. authorities are appealing the decision;
therefore, the imposition of a VAT in the U.K. remains uncertain.
Merchant Processing Services
Revenues in the merchant processing services segment grew 14% to $392.5 million
for the second quarter of 1999 compared to $344.3 million for second quarter
1998. Total merchant card dollar volume processed grew 20% to $74 billion as
compared to the second quarter of 1998. Revenues grew 12% to $738.1 million for
the first six months of 1999 compared to $657.4 million for the same period in
1998. Total merchant card dollar volume grew 19% over the first six month period
of 1998 to $137.3 billion. Revenue growth was driven by growth in the dollar
volume processed and the impact of revenue enhancement initiatives implemented
in the second half of 1998; however, revenues may not continue to grow at this
level as these initiatives anniversary.
16
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Operating profits increased 24% to $98.2 million for the second quarter of 1999
from $78.9 million for the 1998 second quarter. Operating profits increased 25%
to $167.7 million for the first six month period of 1999 as compared to $134.0
million for the same period last year. This improvement is reflective of strong
volume and the impact of significant cost reduction and revenue enhancement
initiatives implemented in 1998, somewhat offset by an increase in Y2K expenses.
Key elements of FDC's strategy in the merchant processing services segment
involve its joint venture alliances with its bank partners and its internet
commerce initiatives. The joint venture alliances require close relationships
and cooperative efforts between the Company and its bank partners and could be
affected by further consolidation among financial institutions. Internet
commerce, while accounting for a very small portion of the segment's
transactions currently, is growing rapidly. However, internet commerce is still
evolving industry-wide and its ultimate impact on merchant processors and
acquirers is uncertain.
All Other and Corporate
Revenues from this segment decreased 4% to $81.8 million for the second quarter
of 1999 from $85.0 million in second quarter 1998. For the first six month
period, revenues decreased 2% to $159.5 million in 1999 from $162.6 million in
1998. IBT revenues were down approximately $15 million from the prior year six
months due to a decline in branch installations, while Call Interactive and
First Data Solutions revenues increased over last year's six month period.
Operating profits declined 63% and 62% in the second quarter and first six
months of 1999, respectively, from $34.1 million and $61.8 million in the second
quarter and first six months of 1998 to $12.5 million and $23.2 million in 1999.
Operating profit declined at IBT as a result of lower revenues and at
Teleservices due to expenses associated with a start-up contract. Additionally,
the extent and timing of certain corporate initiatives focused on improving the
effectiveness of the Company's overall operations increased corporate expenses.
Capital Resources and Liquidity
FDC continues to generate significant cash flow from operations, aggregating
$716.3 million in the six months ended June 30, 1999, as compared to $585.1
million for the six months ended June 30, 1998. 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.
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 decreased to $240.2
million for the first half of 1999 as compared to $388.2 million for the first
half of 1998. For the full year 1999, the Company expects such total non-
acquisition spending to be less than 1998's full year total of $649.8 million.
The Company currently expects total Year 2000 related systems spending for the
full year 1999, which will be expensed as incurred, to be approximately $85-$95
million, as compared to $75 million incurred for the full year 1998. (See the
Year 2000 section following Capital Resources and Liquidity for additional
information.) Although some of the Company's Year 2000 spending is incremental,
the Company expects to redeploy much of its Year 2000 spending to make
significant investments in new and enhanced operating platforms after completion
of its Year 2000 program. Such investments will encompass all segments, but are
likely to be concentrated in the merchant processing services and card issuer
services segments.
17
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Overall, FDC's operating cash flow for the six months ended June 30, 1999
exceeded its non-acquisition investing activities by $400.7 million. These cash
sources contributed to funds utilized for short-term borrowing repayments and
treasury stock purchases.
In the first six months of 1999, the Company had net expenditures of $15.6
million on acquisitions and divestitures including $34.3 million in cash outlays
for businesses previously acquired. There were also net proceeds of $42.2
million for 1999 dispositions. During the comparable period of 1998, proceeds
from dispositions were $150.0 million, with a total of net $130.9 million in
cash spending on acquisitions and businesses previously acquired.
The Company's net use of cash for financing activities was due to net repayments
of debt, share repurchases under the Company's $550 million share repurchase
program and dividend payments partially offset by proceeds from stock option
exercises and other employee stock benefit programs. Net cash used in financing
activities was $380.0 million during the first six months of 1999, as compared
to $279.0 million in the 1998 period.
The Company made cash outlays totaling $384.3 million in the six months ended
June 30, 1999 to buy back shares of its common stock. Proceeds from stock option
exercises totaling $108.3 million partially offset these outlays. In addition,
the Company continued its practice of paying quarterly cash dividends, resulting
in $17.4 million of cash payments to the Company's common stockholders during
the first half of 1999.
As a part of its repurchase programs (totaling $550 million), the Company
purchased 2.7 million shares of its stock during the second quarter. As of
August 2, 1999 the Company had completely utilized the $550 million dollars
provided for repurchases under the September and December 1998 authorizations. A
total of 16.9 million shares were repurchased under these programs.
In July 1999, the Company announced that its Board of Directors authorized
management to purchase an additional $750 million of its outstanding common
stock. The Company expects funding for the program will come from operating cash
flow and the proceeds from its current year divestitures. As of August 2, 1999,
approximately 0.2 million shares had been repurchased under this program at a
cost of approximately $10.8 million.
The Company has two outstanding shelf registration facilities, one providing for
the issuance of debt and equity securities up to $1.0 billion in the aggregate
(of which $525 million remains available) and the other providing for the
issuance of approximately 10 million shares of the Company's common stock in
connection with certain types of acquisitions. During March 1999, the Company
entered into a $100 million, 5-year, bullet maturity debt financing with a
floating interest rate. Under certain circumstances the financing may be
prepaid.
Included in cash and cash equivalents on the Consolidated Balance Sheet at June
30, 1999 is $90.6 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 remaining available
short-term borrowing capability of $1.2 billion at June 30, 1999 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.
18
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Year 2000
See pages 24-29 of the Company's 1998 Annual Report on Form 10-K for additional
information regarding the Company's Year 2000 ("Y2K") program.
State of Readiness. The Company's Y2K preparedness efforts are differentiated
between information technology ("IT") systems and non-IT systems. Non-IT systems
are embedded systems that support facilities infrastructures. The upgrade of
non-IT systems for 112 out of 116 of the Company's mission critical buildings
has been completed. The four mission critical buildings that are not completed
are either under construction or recently acquired. The Company is assessing and
upgrading these buildings and expects to complete the upgrade in a timely
manner. The Company has also completed upgrades for most of the non-mission
critical buildings. The Company expects to complete the upgrade for the
remainder of the non-mission critical buildings by October 1, 1999. However, new
facilities may be added in 1999 that will be assessed and upgraded in the fourth
quarter of 1999.
IT systems include primarily computer hardware and software and related systems.
The Company has implemented a five phase Y2K readiness plan for IT systems: (i)
Phase 1- Impact Analysis and Inventory, (ii) Phase 2- Code Renovation/Operating
System Upgrade, (iii) Phase 3- Data-Aged Test Execution, (iv) Phase 4- Client
Test Execution and (v) Phase 5- Production Implementation. A description of each
phase may be found on page 25 of the Company's 1998 Annual Report on Form 10- K.
The following Status Chart indicates the approximate percentage of work
completed for the mission-critical systems of the following material business
units by phase as of July 30, 1999.
19
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Business Unit Phase 1 Phase 2 Phase 3 Phase 4 Phase 5
- ------------- ----------------------------------------------------------------
Target Completion Date for
each phase 12/31/97 12/31/98 3/31/99 6/30/99 6/30/99
Card Issuer Units
First Data Resources 100% 100% 100% 100% 100%
First Data Australia 100% 100% 100% 100% 100%
First Data Resources Limited 100% 100% 100% 100% 100%
First Data Oil Services 100% 100% 100% 100% 100%
Merchant Processing Units
First Data Merchant Services 100% 100% 100% 100% 100%
BMCF Gaming joint venture* 100% 100% 100% 100% 87%
First Data POS (Microbilt) 100% 100% 100% 100% 100%
TeleCheck 100% 100% 100% 100% 100%
Payment Instruments Units
Western Union 100% 100% 100% 100% 100%
Orlandi Valuta 100% 100% 100% 100% 100%
Integrated Payment Systems 100% 100% 100% 100% 100%
CashTax 100% 100% 100% 100% 100%
Other
Hogan Information Services 100% 100% 100% 100% 100%
Call Interactive 100% 100% 100% 100% 100%
TeleServices 100% 100% 100% 100% 100%
To Be Divested
Investor Services Group 100% 100% 100% 100% 100%
*There has been a delay in completing Phase 5 for certain clients of the
BMCF Gaming joint venture. Management expects that Phase 5 will be
completed by August 15, 1999. However, approximately 2% of BMCF Gaming's
clients are not prepared for implementation because they operate a seasonal
business that is not open at this time or cruise ships whose travel
schedules have not allowed for completion of implementation. For these
clients, Phase 5 will be completed as soon as scheduling will allow.
Management is closely monitoring the implementation for these clients and
does not expect any material adverse impact due to the delays.
Phase 4 client testing was conducted with a representative sample of the
Company's clients to provide adequate testing of the Company's IT systems
interface. However, the sample only included a portion of the Company's clients.
The Company expects to do additional client testing during the second half of
1999.
Although the five phases for the mission critical systems are complete, except
as noted above, the Company will continue its efforts to prepare for the Year
2000 date change. For the remainder of 1999, the company expects to (i) perform
additional selected client testing and internal testing, (ii) employ an outside
party to independently validate and verify the Company's source code to insure
that it is Year 2000 ready, (iii) test and refine its business contingency
plans, (iv) continue to coordinate with third parties regarding Year 2000
issues, (v) assess and upgrade the four
20
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
remaining mission critical buildings and (vi) intensify its readiness efforts
for non-mission critical systems, facilities and business processes.
Material Relationships. The status of assessment and testing with respect to
material third-party risks is reflected in the Status Chart. Although assessment
and testing is substantially complete, coordination with third parties regarding
Y2K issues will continue to the Year 2000 and beyond and the Company will
continue to work with material third parties to minimize service interruptions
that could occur in connection with the Year 2000. Notwithstanding these
efforts, unexpected third-party failures could occur and, despite testing
procedures, erroneous or corrupted data received from third parties could impact
internal systems and cause material service disruptions.
The Company identified third-party relationships believed to be most material to
the Company on pages 27 and 28 of the Company's 1998 Annual Report on Form 10-K.
The information in the Annual Report on Form 10-K concerning the status of
assessment and testing regarding those relationships is updated as follows: (i)
Telecommunications -- The Company participated in Y2K testing programs with
various telecommunication companies. The testing has been completed and all
issues discovered during the testing have been addressed; and (ii) Association
Networks and Similar Proprietary Third-Party Networks -- The Company
successfully participated in an end-to-end testing program from the point of
sale to the card issuer using the VISA network.
Contingency Plans. The business contingency plans are substantially complete and
the Company will test these plans in the third quarter. Although each business
unit has its own unique plan, the plans generally call for obtaining goods and
services from alternative sources, utilizing alternative methods to perform
functions and establishing command centers and communication procedures to
manage the actual rollover to the Year 2000. The business units have developed
preliminary staffing support plans to ensure that appropriate on-site staff are
in place to implement any contingency plan and address any issues that may
arise. The Company's major data centers also have power generation systems to
provide electrical backup for reasonable periods of time based on accepted
business practices for the relevant business unit. Each data center is exploring
keeping additional fuel reserves on site as part of its contingency plan. The
plans will be revised throughout 1999 as needed.
Costs to Address the Company's Year 2000 Issues. Through June 30, 1999, the
Company has spent in aggregate approximately $154 million in connection with
preparing for the Year 2000, of which approximately $25 million was spent in the
second quarter of 1999. The Company anticipates that Y2K expenditures for the
remainder of 1999 will be approximately $39-$49 million. Of the 1999 spending,
approximately 93% has been spent on software remediation and testing and
approximately 7% has been spent to replace systems and equipment and to add
testing capacity. The Company anticipates that Y2K expenses will be
approximately 9% of the IT budget for 1999. To date, the Company has financed
its Y2K expenses from cash flow and expects to continue to do so.
Regulatory Supervision; Independent Validation/Verification. In addition to
engaging the Gartner Group to assist with Year 2000 issues, in May 1999, the
Company engaged Silverline Technologies, Inc. to perform an independent
verification and validation of all of the source code used by the Company to
insure that the code is Year 2000 ready. Silverline Technologies, Inc. will be
reviewing the approximately 167 million lines of source code used by the Company
and reporting its findings by mid-August 1999. The Company anticipates that
Silverline Technologies, Inc. will perform a second verification and validation
review of the source code later in the year.
21
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Safe Harbor for Year 2000 Forward-Looking Statements. All forward-looking
statements regarding Y2K readiness, including estimates, forecasts and
expectations, are inherently uncertain, as they are based on various
expectations and assumptions concerning future events and are subject to
numerous risks and uncertainties which could cause actual events or results to
differ materially from those projected. Important factors upon which the
Company's Y2K forward-looking statements are premised include: (a) retention of
employees and contractors working on Y2K projects; (b) customer's remediation of
their internal systems to be Y2K ready and their cooperation in timely testing;
(c) no material disruption of telecommunication, data transmission networks,
payment networks, government services, utilities or other infrastructure
services and no unexpected failure of third-party products; (d) no unexpected
failures by third-parties providing services to the Company; (e) no undiscovered
sabotage of systems or program code affecting the Company's systems; and (f) no
undiscovered material flaws in the Company's test processes. The Company
undertakes no obligation to update forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ------------------------------------------------------------------
There have been no material changes from the 1998 Annual Report on Form 10-K
related to the Company's exposure to market risk from interest rates.
22
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 June 30, 1999 and the related consolidated statements of
income and cash flows for the three-month and six-month periods ended June 30,
1999 and 1998. 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, 1998, and the related consolidated statements of income,
stockholders' equity, and cash flows for the year then ended (not presented
herein) and in our report dated January 28, 1999, 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, 1998, is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
Ernst & Young LLP
Atlanta, Georgia
July 26, 1999
23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
From time to time the Company is involved in various litigation matters arising
in the ordinary course of its business. None of these matters, either
individually or in the aggregate, currently is material to the Company except as
reported in the Company's Annual Report on Form 10-K for the year ended December
31, 1998. There were no material developments in the litigation matters
previously disclosed except for the following developments.
The parties in the putative class action brought by Luis Pelayo, Oscar Perales,
and Marcelo Garcia against Western Union Financial Services, Inc. and others
(the "Pelayo action") reached a proposed settlement. Under the proposed
------
settlement, the Company will establish a charitable fund for the advancement of
Mexican and Mexican-American causes in the amount of $2 million. Western Union
also will issue coupons for discounts on future money transfer transactions to
Mexico to its customers who transferred money from the U.S. to Mexico after
January 1, 1987. In addition, the Company will issue coupons for discounts on
future Western Union transactions to customers who transferred money to Mexico
from January 1, 1988 to December 10, 1996 using the MoneyGram service because
MoneyGram was previously operated by a subsidiary of the Company. The proposed
settlement also includes reasonable attorney fees, expenses and costs.
On May 12, 1999, the United States District Court for the Northern District of
Illinois issued a Preliminary Settlement Order in the Pelayo action, inter alia
------ ----- ----
preliminarily approving the proposed settlement and scheduling a Fairness
Hearing to determine the fairness, reasonableness, and adequacy of the proposed
settlement. The Court also barred and enjoined the continued prosecution of the
putative class action brought by Raul Garcia against Western Union Financial
Services, Inc. and others (the "Garcia action"), the putative class action
------
brought by Rita Sandoval and Andres Pena against Western Union Financial
Services, Inc. and others (the "Sandoval action") and the putative class action
--------
brought by Maria Rosa Ibarra, Rosa Maria Landin and Rigoberto Estrada against
Orlandi Valuta the "Ibarra action"). Finally, the Court barred the commencement
of any new actions in any state or federal court that assert any claims that
would be released and discharged upon final approval of the settlement.
In light of the Preliminary Settlement Order, the plaintiffs and defendants in
the Sandoval action filed a Joint Request for Temporary Abatement of the
--------
Sandoval action, pending the decision of the Court as to the fairness of the
- --------
proposed settlement in the Pelavo action which was granted on June 25, 1999. The
------
plaintiffs and defendants in the Ibarra action filed a Stipulation and Proposed
------
Order for Temporary Stay of the Ibarra action which was granted on May 26, 1999.
------
Several weeks prior to the court entering the temporary stay in the Ibarra
------
action the court dismissed the federal statutory claims in the amended complaint
with leave to amend but declined to dismiss plaintiffs' state law claims.
In the Garcia action, the defendants provided notice of the Preliminary
------
Settlement Order to the Court. Shortly thereafter, a status conference hearing
in the Garcia action was scheduled for December 1, 1999.
------
24
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Company held its Annual Meeting of Stockholders on May 12, 1999. Four
matters were voted upon and approved at the meeting.
Proposal 1 Election of Directors
- ---------- ---------------------
The terms of office of three current directors, James D. Robinson III, Bernard
L. Schwartz and Garen K. Staglin, expired at the 1999 Annual Meeting. The re-
election of Messrs. Robinson, Schwartz and Staglin was voted on at the Annual
Meeting. The results of the voting were as follows:
FOR WITHHELD
James D. Robinson III 371,586,908 4,201,042
Bernard L. Schwartz 286,147,863 89,640,087
Garen K. Staglin 371,817,729 3,970,221
Other directors whose terms continued after the meeting are Ben Burdetsky, Henry
C. Duques, Courtney F. Jones, Robert J. Levenson, Charles T. Russell and Joan E.
Spero.
Proposal 2 Approval of an amendment to the Company's Shareholder Value Plan to
- ---------- -------------------------------------------------------------------
establish a maximum unit value for the Chief Operating Officer
--------------------------------------------------------------
The results of the voting were as follows:
BROKER
FOR 290,921,145 AGAINST 83,442,114 ABSTAIN 1,424,691 NON-VOTE 0
Proposal 3 Approval of the Senior Executive Incentive Plan
- ---------- -----------------------------------------------
The results of the voting were as follows:
BROKER
FOR 367,483,592 AGAINST 6,794,927 ABSTAIN 1,509,431 NON-VOTE 0
Proposal 4 Ratification of the selection of Ernst & Young LLP as
- ---------- -----------------------------------------------------
independent auditors of the Company for 1999
--------------------------------------------
The results of voting were as follows:
BROKER
FOR 374,529,722 AGAINST 323,882 ABSTAIN 934,346 NON-VOTE 0
See the Proxy Statement for the Company's 1999 Annual Meeting of Stockholders,
which information is incorporated herein by reference.
25
Item 6. Exhibits and Reports on Form 8-K
------------ -------------------
(a) Exhibits
- --- --------
12 Computation of Ratio of Earnings to Fixed Charges
15 Letter from Ernst & Young LLP Regarding Unaudited Interim Financial
Information
27.1 Financial Data Schedule (for SEC use only)
99.1 Private Securities Litigation Reform Act of 1995
Safe Harbor Compliance Statement for Forward-Looking Statements
(b) Reports on Form 8-K
- --- -------------------
None.
26
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 10, 1999 By /s/ Lee Adrean
--------------- --------------
Lee Adrean
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: August 10, 1999 By /s/ Jeffrey W. Holtz
--------------- --------------------
Jeffrey W. Holtz
Vice President and
Corporate Controller
(Principal Accounting Officer)
27
FIRST DATA CORPORATION
INDEX TO EXHIBITS
-----------------
Exhibit
Number Description
- ------ -----------
12 Computation of Ratio of Earnings to Fixed Charges
15 Letter from Ernst & Young LLP Regarding Unaudited Interim Financial
Information
27.1 Financial Data Schedule (for SEC use only)
99.1 Private Securities Litigation Reform Act of 1995
Safe Harbor Compliance Statement for Forward-Looking Statements
28