FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2001
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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.)
6200 SOUTH QUEBEC STREET, GREENWOOD VILLAGE, COLORADO 80111
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (303) 488-8000
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No____
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Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Number of Shares
Title of each class Outstanding at July 20, 2001
------------------------------ ----------------------------
(Common stock, $.01 par value) 391,266,727
FIRST DATA CORPORATION
INDEX
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PAGE
PART I FINANCIAL INFORMATION NUMBER
------
Item 1. Financial Statements:
Consolidated Statements of Income for the three and six
months ended June 30, 2001 and 2000.............................. 3
Consolidated Balance Sheets at June 30, 2001 and
December 31, 2000................................................ 4
Consolidated Statements of Cash Flows for the six
months ended June 30, 2001 and 2000.............................. 5
Notes to Consolidated Financial Statements....................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 20
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................ 22
Item 4. Submission of Matters to a Vote of Securities Holders............ 22
Item 6. Exhibits and Reports on Form 8-K................................. 27
2
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
--------------------
FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts)
(Unaudited)
Three months ended June 30, Six months ended June 30,
---------------------------- -------------------------------
2001 2000 2001 2000
------------- ------------- -------------- --------------
REVENUES
Service revenues $1,479.7 $1,380.0 $2,907.0 $2,696.1
Product sales and other 88.9 33.9 132.8 61.0
-------- -------- -------- --------
1,568.6 1,413.9 3,039.8 2,757.1
-------- -------- -------- --------
EXPENSES
Operating 952.3 864.5 1,866.4 1,738.4
Selling, general & administrative 247.1 225.3 506.6 435.1
Restructuring, business divestitures,
litigation and impairment, net (5.7) 2.8 (5.7) 12.3
Interest 31.3 18.9 62.8 39.3
-------- -------- -------- --------
1,225.0 1,111.5 2,430.1 2,225.1
-------- -------- -------- --------
Income before cumulative effect of a
change in accounting principle and
income taxes 343.6 302.4 609.7 532.0
Income taxes 98.2 86.0 174.1 150.6
-------- -------- -------- --------
Income before cumulative effect of a
change in accounting principle 245.4 216.4 435.6 381.4
Cumulative effect of a change in
accounting principle, net of $1.6
income tax benefit - - (2.7) -
-------- -------- -------- --------
Net income $ 245.4 $ 216.4 $ 432.9 $ 381.4
======== ======== ======== ========
Earnings per share - basic $ 0.63 $ 0.53 $ 1.10 $ 0.92
Earnings per share - diluted $ 0.61 $ 0.52 $ 1.08 $ 0.91
======== ======== ======== ========
Weighted average shares outstanding:
Basic 391.3 412.0 392.9 414.3
Diluted 400.3 419.0 401.5 421.2
See notes to consolidated financial statements.
3
FIRST DATA CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
June 30, December 31,
2001 2000
-------------- ---------------
ASSETS
Cash and cash equivalents $ 880.6 $ 853.3
Settlement assets 11,648.2 9,816.6
Accounts receivable, net of allowance for doubtful
accounts of $47.0 (2001) and $34.4 (2000) 959.5 970.7
Property and equipment, net 611.6 624.3
Goodwill, less accumulated amortization of $700.1
(2001) and $656.6 (2000) 2,759.8 2,563.3
Other intangibles, less accumulated amortization of
$812.7 (2001) and $727.7 (2000) 1,078.9 1,005.6
Investment in affiliates 937.0 806.4
Other assets 670.6 654.9
--------- ---------
$19,546.2 $17,295.1
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Settlement obligations $11,540.1 $ 9,773.2
Accounts payable and other liabilities 1,867.1 1,964.2
Borrowings 2,292.2 1,830.0
--------- ---------
Total Liabilities 15,699.4 13,567.4
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Stockholders' Equity:
Common Stock, $.01 par value; authorized 600.0
shares, issued 448.9 shares (2001 and 2000) 4.5 4.5
Additional paid-in capital 2,394.6 2,292.7
--------- ---------
Paid-in capital 2,399.1 2,297.2
Retained earnings 4,019.1 3,717.1
Accumulated other comprehensive income (loss) (85.1) (18.9)
Less treasury stock at cost, 58.2 shares (2001) and
55.6 shares (2000) (2,486.3) (2,267.7)
--------- ---------
Total Stockholders' Equity 3,846.8 3,727.7
--------- ---------
$19,546.2 $17,295.1
========= =========
See notes to consolidated financial statements.
4
FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Six months ended June 30,
---------------------------------
2001 2000
----------- ------------
Cash and cash equivalents at beginning of period $ 853.3 $1,044.0
------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 432.9 381.4
Adjustments to reconcile to net cash provided by operating
activities:
Depreciation and amortization 312.8 294.9
Non-operating and non-cash portion of restructuring, business
divestitures, litigation and impairment, net (5.7) 12.3
Other noncash items, net 5.4 (41.8)
Increase (decrease) in cash, excluding the effects of
acquisitions and dispositions, resulting from changes in:
Accounts receivable 38.7 175.9
Other assets (54.9) 53.2
Accounts payable and other liabilities (195.1) (122.4)
Income tax accounts 53.4 (235.5)
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Net cash provided by operating activities 587.5 518.0
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CASH FLOWS FROM INVESTING ACTIVITIES
Current year acquisitions, net of cash acquired (421.9) (18.2)
Payments related to other businesses previously acquired (25.1) (30.5)
Proceeds from dispositions, net of expenses paid 1.8 35.7
Additions to property and equipment, net (84.3) (74.1)
Payments to secure customer service contracts, including
outlays for conversion, and capitalized systems
development costs (109.6) (58.0)
Other investing activities (24.7) (23.4)
------- --------
Net cash used in investing activities (663.8) (168.5)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-term borrowings, net (76.9) (259.3)
Proceeds from issuance of long-term debt 534.0 -
Principal payments on long-term debt - (125.0)
Proceeds from issuance of common stock 148.3 154.0
Proceeds from issuance of subsidiary stock 22.2 -
Purchase of treasury shares (508.3) (614.3)
Cash dividends (15.7) (16.2)
------- --------
Net cash provided by (used in) financing activities 103.6 (860.8)
------- --------
Change in cash and cash equivalents 27.3 (511.3)
------- --------
Cash and cash equivalents at end of period $ 880.6 $ 532.7
======= ========
See notes to consolidated financial statements.
5
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: Basis of Presentation
The accompanying consolidated financial statements of First Data Corporation
("FDC" or the "Company") should be read in conjunction with the Company's
consolidated financial statements for the year ended December 31, 2000.
Significant accounting policies disclosed therein have not changed except as
discussed below with respect to the Company's accounting for its derivatives and
hedging activities.
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, 2001 and the consolidated results of its operations for the
three and six months ended June 30, 2001 and 2000 and cash flows for the six
months ended June 30, 2001 and 2000. 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 $433.8 million and $392.8 million for the three months
ended June 30, 2001 and 2000, respectively, and $841.2 million and $751.2
million for the six months ended June 30, 2001 and 2000, respectively).
The Company adopted the provisions of the Securities and Exchange Commission
("SEC") Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101") in the third quarter of 2000. SAB 101 provides guidance
on the recognition, presentation, and disclosure of revenue in financial
statements filed with the SEC. Upon adoption, the Company restated prior periods
to reflect the netting of certain revenues and expenses that were previously
presented gross. The restatement had the effect of reducing revenues and
operating expenses for the three months and six months ended June 30, 2000 by
$8.1 million and $19.8 million. The adoption of SAB 101 had no impact on income
from continuing operations, net income, or related per share amounts.
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"), as amended. SFAS 133 requires companies to
record derivatives on the balance sheet as assets or liabilities at fair value.
The adoption of SFAS 133 on January 1, 2001 resulted in a net of tax transition
adjustment loss of $24.8 million recognized in the Accumulated Other
Comprehensive Income component of stockholders' equity and a net of tax loss of
$2.7 million recognized in the Statement of Income for the three months ended
March 31, 2001.
Note 2: Acquisitions
In January 2001, the Company entered into a joint venture and formed Nihon Card
Processing Co. Ltd., providing third party credit card processing services, by
contributing cash of approximately $15 million. The Company is accounting for
this investment under the equity method of accounting.
In February 2001, the Company acquired Bidpay.com for approximately $24 million
in cash. Bidpay.com is a provider of web-based payment services to online
auction markets. The purchase price has been initially allocated to goodwill and
is being amortized over seven years.
In March 2001, the Company acquired a 90% ownership interest in TASQ Technology,
Inc. for approximately $176 million in cash. TASQ Technology, Inc. is an
industry leader in point-of-sale (POS) deployment operations. The purchase price
allocation resulted in identifiable intangible assets of $34.8 million which are
6
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
being amortized over periods of 5 to 10 years and goodwill of $137.1 million
which is being amortized over 20 years.
Also, the Company acquired a 23% equity interest in its agent FEXCO, one of
Ireland's largest financial services companies, for approximately $68 million in
cash. The Company is accounting for this investment under the equity method of
accounting.
In April 2001, the Company acquired PaySys International Inc., for approximately
$136 million in cash. PaySys International Inc. provides card processing
software in more than 35 countries for bank, retail, and private label cards.
The preliminary purchase price allocation resulted in identifiable intangible
assets of $39.8 million, which are being amortized over 5 years and goodwill of
$92.8 million which is being amortized over 20 years.
Each of these acquisitions has been accounted for as a purchase and their
respective 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.
In addition, the Company issued 1 million shares of its common stock, valued at
approximately $53 million, to a merchant alliance partner pursuant to the terms
of an earnout agreement entered into in connection with the Company's acquiring
its 50% ownership interest in 1997.
Note 3: Restructuring, Asset Impairments and Divestitures
During the six months ended June 30, 2001, the Company recorded restructuring
charges of $15.7 million; $8.4 million of charges related to payment services,
$5.6 million of charges related to merchant services, $0.8 million of charges
related to card issuing services, and $0.9 million of charges related to all
other and corporate. These charges were comprised of severance totaling $14.8
million, and $0.9 million related to losses on lease terminations and a customer
contract. Severance charges are for approximately 425 employees, representing
approximately 1.5% of the Company's workforce, resulting from the downsizing of
various departments. Savings realized through the remainder of the year from
these reorganizations are expected to be approximately $13 million. Offsetting
these charges were prior period restructuring reserve reversals resulting from
changes in estimates totaling $4.2 million.
In addition, the Company announced the planned third quarter 2001 discontinuance
of a collection business. As a result of the planned discontinuance, the Company
recorded a pre-tax loss of $11.4 million in the second quarter 2001 relating to
the closure. The charge includes $4.1 million for employee severance, $2.6
million for facility exit costs and an asset impairment charge of $4.7 million.
The following table summarizes the Company's utilization of restructuring
accruals for the six months ended June 30, 2001 (in millions):
Employee Facility
Severance Closure
----------- ----------
Remaining Accrual at December 31, 2000 $51.7 $14.0
Current Period Expense Provision 18.9 3.5
Cash Payments and Other (a) (15.1) (1.1)
Changes in Estimates (3.0) (1.2)
--------------------------
Remaining Accrual at June 30, 2001 $52.5 $15.2
=========== ==========
7
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(a) Other includes net sub-lease income on facilities which will fund a lease
buyout.
In addition to the restructuring charges, during the six months ended June 30,
2001, the Company also recorded asset impairment charges of $7.9 million. The
charge was primarily comprised of a $7.4 million write-down of the Company's
investment in Excite@Home due to a decline in market value that was considered
other than temporary.
Also, during the first six months of 2001, the Company reversed various
divestiture reserves totaling $36.5 million, due to the passage of certain
contractual indemnification provisions. These reversals related primarily to the
divestiture of Investor Services Group which was sold in the fourth quarter of
1999.
During the six months ended June 30, 2000, the Company recorded restructuring
charges of $15.4 million; $2.3 million related to payment services, $10.5
million related to card issuing services, $0.3 million related to merchant
services and $2.3 million related to all other and corporate. All charges
represent severance accruals for approximately 900 employees resulting from the
downsizing and relocation of various departments.
In addition to the restructuring charges, during the six months ended June 30,
2000, the Company also recorded a net charge of $2.3 million. The net charge was
comprised of a $2.8 million asset impairment charge related to a customer
contract and a net benefit of $0.5 million related to the true-up of certain
previously recorded divestiture related accruals.
In January 2000, the Company completed the sale of its Hogan Information
Services business unit to Dolan Media Company for cash proceeds of $30.5
million. As a result of this transaction and the second quarter sale of another
small business, the Company recognized a pre-tax gain of $5.4 million in the
first six months of 2000.
Note 4: Investments In Affiliates
Operating results include the Company's proportionate share of income from
affiliates, which consist of unconsolidated investments and joint ventures
accounted for under the equity method of accounting. The most significant of
these affiliates are related to the Company's merchant alliance program.
A merchant bank alliance is a joint venture between FDC and a financial
institution that combines the expertise of the Company with the visibility and
distribution of the bank. The joint ventures sell processing services to
merchants. At June 30, 2001, there were seven such joint ventures accounted for
under the equity method of accounting.
In September 2000, the Company gained a controlling interest in one of its
merchant alliances. Revenues and expenses for the merchant services segment have
been restated to the beginning of 2000 to reflect this alliance as a
consolidated subsidiary.
A summary of financial information for the merchant alliances and other
affiliates accounted for under the equity method of accounting is as follows (in
millions):
June 30, December 31,
2001 2000
-------------- ------------------
Total Assets $ 3,417.0 $ 3,446.0
Total Liabilities 2,411.8 2,594.5
8
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Three months ended June 30, Six months ended June 30,
------------------------------------- -------------------------------------
2001 2000 2001 2000
--------------- --------------- --------------- ---------------
Net Operating Revenues $ 384.0 $ 363.2 $ 753.1 $ 701.2
Operating Expenses 241.9 268.2 486.5 522.7
Operating Income 142.1 95.0 266.6 178.5
Net Income 126.5 80.1 234.5 150.7
FDC Share of Net Income 61.9 40.6 113.8 75.6
Amounts presented herein do not include amortization, recorded by the Company,
of $14.4 million and $12.4 million for the three months ended June 30, 2001 and
2000, respectively, related to the excess of FDC's investment over its
proportionate interest in the net assets of the joint ventures. Amortization for
the six months ended June 30, 2001 and June 30, 2000 was $27.8 million and $25.3
million, respectively. This difference, which amounted to $699.1 and $676.3
million at June 30, 2001 and December 31, 2000, respectively, is amortized over
the estimated useful lives of the underlying intangible assets.
Note 5: Borrowings
The Company's commercial paper borrowings at June 30, 2001 were $790 million.
The Company's commercial paper program is supported by a $1.1 billion revolving
credit facility. During the first quarter of 2001, the Company filed a $1.5
billion shelf registration providing for the issuance of debt and equity
securities. At June 30, 2001, the Company had $1.5 billion available under this
registration, $250 million available under its uncommitted bank lines and a $300
million extendable commercial notes ("ECN") program.
In the first quarter of 2001, the Company issued $542 million of 2% Senior
Convertible Contingent Debt Securities due 2008 ("CODES"), and received net
proceeds of $534 million. The securities are contingently convertible into
approximately 6.62 million shares once certain conditions are satisfied based
upon the trading price of the Company's common stock and/or the CODES. The CODES
are redeemable at the option of the Company commencing March 1, 2004 and at the
option of holders of the CODES on March 1, 2004 and 2006.
Note 6: Earnings Per Share
Earnings per common share amounts are computed by dividing net income amounts by
weighted average common and common equivalent shares (when dilutive) outstanding
during the period.
Amounts utilized in per share computations are as follows (in millions):
Three months ended Six months ended
June 30, June 30,
-------------------------------- -------------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
Weighted average shares outstanding:
Basic weighted average shares 391.3 412.0 392.9 414.3
Common stock equivalents 7.6 7.0 7.2 6.9
4 7/8% convertible note due 2005 1.4 - 1.4 -
------------- ------------- ------------- -------------
400.3 419.0 401.5 421.2
============= ============= ============= =============
Earnings add back related to
convertible note .4 - .9 -
9
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Diluted earnings per common share was calculated based on weighted-average
shares outstanding including the dilutive impact of shares issuable upon
conversion of convertible debt and common stock equivalents which consist of
outstanding stock options, warrants and restricted stock. The after tax interest
expense and issue cost amortization on convertible debt is added back to net
income when common stock equivalents are included in computing diluted earnings
per common share. The "if converted" method is utilized in calculating diluted
earnings per common share only when conversion is not conditional upon the
occurrence of certain events.
Note 7: Accumulated Other Comprehensive Income
The components of comprehensive income are as follows (in millions):
Three months ended Six months ended
June 30, June 30,
------------------------------- -------------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
Net income: $245.4 $216.4 $432.9 $381.4
Foreign exchange effect (2.4) (18.7) (36.3) (28.3)
Unrealized gain (loss) on hedging
activities (a) 28.7 - (41.0) -
Unrealized gain (loss) on securities 7.8 (2.4) 11.1 (4.9)
Minimum pension liability adjustment - 0.9 - 0.9
------------- ------------- ------------- -------------
Total comprehensive income $279.5 $196.2 $366.7 $349.1
============= ============= ============= =============
(a) includes the ($24.8) million cumulative effect of adopting SFAS 133 on
January 1, 2001.
Note 8: Derivative Financial Instruments
Adoption of SFAS 133
The Company adopted SFAS 133 on January 1, 2001. SFAS 133 requires companies to
record derivatives on the balance sheet as assets or liabilities at fair value.
SFAS 133 requires that, upon adoption, the transition adjustment be reported in
net income or other comprehensive income, as appropriate, as the cumulative
effect of a change in accounting principle. In accordance with the transition
provisions of SFAS 133, the Company recorded a net-of-tax transition adjustment
loss of $24.8 million in other comprehensive income and a net-of-tax transition
adjustment loss of $2.7 million in earnings. Management does not believe that
ongoing application of SFAS 133 will significantly alter the Company's hedging
strategies or impact its net income. However, its application may increase the
volatility of other comprehensive income.
The transition adjustment recorded in other comprehensive income represented the
recognition of all derivatives that are designated cash flow hedging instruments
at fair value. The transition adjustment recorded in earnings represented
purchased option costs that were derecognized from the balance sheet upon
adoption.
Note 9: Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"),
which is effective for all business combinations initiated after June 30, 2001.
SFAS 141 requires companies to account for all business combinations using the
purchase method of accounting, recognize intangible assets if certain criteria
are met, as well as provide additional disclosures regarding business
combinations and allocation of purchase price.
10
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which requires
nonamortization of goodwill and intangible assets that have indefinite useful
lives and annual tests of impairments of those assets. The statement also
provides specific guidance about how to determine and measure goodwill and
intangible asset impairments, and requires additional disclosure of information
about goodwill and other intangible assets. The provisions of this statement are
required to be applied starting with fiscal years beginning after December 15,
2001 and applied to all goodwill and other intangible assets recognized in its
financial statements at that date. Goodwill and intangible assets acquired after
June 30, 2001 will be subject to the nonamortization provisions of the
statement. Annualized amortization of goodwill attributable to acquisitions
occurring prior to July 1, 2001 is approximately $140 million (less tax benefit
of approximately $20 million).
Note 10: Segment Information
First Data Corporation classifies its businesses into four segments: payment
services, merchant services, card issuing services and emerging payments. See
the Company's 2000 Annual Report on Form 10-K for a detailed description of each
segment and the accounting policies of the operating segments.
As stated in the Company's 2000 Annual Report on Form 10-K, the Company
established the emerging payments segment in the third quarter of 2000. The
segments have been restated to reflect the movement of the operations of govONE
Solutions, formerly CashTax, from payment services and non-core e-commerce
related activity and investments from the all other and corporate segment, to
emerging payments. In addition, a small information business from all other and
corporate was moved to card issuing services which reflects current management
reporting relationships.
The Company announced its plans to discontinue the operations of a collection
business in the merchant services segment in the third quarter of 2001.
Operations of the business were moved to the discontinued business line. All
periods were restated.
The following table presents the Company's operating segment results for the
three and six months ended June 30, 2001 and 2000 (in millions):
Three months ended June 30, Six months ended June 30,
--------------------------------------- --------------------------------------
2001 2000 2001 2000
---------------- ---------------- ---------------- ----------------
Revenues:
--------
Payment Services $ 668.1 $ 568.4 $ 1,293.7 $ 1,098.9
Merchant Services 524.5 437.4 994.0 834.9
Card Issuing Services 376.3 371.9 738.1 735.9
Emerging Payments 20.5 18.2 41.9 38.6
All Other and Corporate 31.9 46.7 70.5 104.1
---------------- ---------------- ---------------- ----------------
Subtotal 1,621.3 1,442.6 3,138.2 2,812.4
---------------- ---------------- ---------------- ----------------
Eliminations (a) (57.4) (39.3) (109.8) (76.7)
Discontinued Business 4.7 10.6 11.4 21.4
---------------- ---------------- ---------------- ----------------
Consolidated $ 1,568.6 $ 1,413.9 $ 3,039.8 $ 2,757.1
================ ================ ================ ================
11
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Three months ended June 30, Six months ended June 30,
------------------------------- ------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Operating Profit:
-----------------
Payment Services $ 192.0 $ 156.9 $ 353.3 $ 291.3
Merchant Services 149.0 125.6 255.7 210.9
Card Issuing Services 85.2 81.5 157.9 150.4
Emerging Payments (5.9) 5.3 (5.7) 8.5
All Other and Corporate (2.7) (4.9) (3.9) (0.2)
------------ ------------ ------------ ------------
Subtotal 417.6 364.4 757.3 660.9
------------ ------------ ------------ ------------
Corporate Interest Expense, net (31.3) (18.9) (62.8) (39.3)
Restructuring, Business
Divestitures, Litigation and
Impairments, net 5.7 (2.8) 5.7 (12.3)
Eliminations (a) (44.6) (39.3) (83.4) (76.7)
Discontinued Business (3.8) (1.0) (7.1) (0.6)
------------ ------------ ------------ ------------
Consolidated $ 343.6 $ 302.4 $ 609.7 $ 532.0
============ ============ ============ ============
Depreciation & Amortization:
----------------------------
Payment Services $ 33.3 $ 30.1 $ 63.5 $ 60.4
Merchant Services 69.2 56.0 132.7 113.2
Card Issuing Services 54.8 53.9 104.9 109.9
Emerging Payments 0.8 0.1 1.5 0.8
All Other and Corporate 4.7 3.8 8.0 7.7
Discontinued Business 1.1 1.5 2.2 2.9
------------ ------------ ------------ ------------
Consolidated $ 163.9 $ 145.4 $ 312.8 $ 294.9
============ ============ ============ ============
(a) Represents elimination of adjustment to record payment services revenues on
a pre-tax equivalent basis and elimination of inter-segment revenue.
June 30, December 31,
2001 2000
------------ ------------
Segment Assets (in millions):
Payment Services $ 13,327.4 $ 11,437.1
Merchant Services 3,950.0 3,672.2
Card Issuing Services 1,606.1 1,525.6
Emerging Payments 256.7 235.9
All Other and Corporate 394.5 410.1
Discontinued Business 11.5 14.2
------------ ------------
Consolidated $ 19,546.2 $ 17,295.1
============ ============
Note 11: Commitments and Contingencies
In 1998, five putative class actions based on similar factual allegations were
filed in United States District Courts, a California state court and a Texas
state court against, among others, the Company or its subsidiaries, including
its Western Union Financial Services, Inc. subsidiary. The plaintiffs in these
actions claim that an undisclosed "commission" is charged by the Company or its
subsidiaries when consumers transmit money to Mexico, in that the exchange rate
used in these transactions is less favorable than the exchange rate that the
Company or its subsidiaries receive when they trade dollars in the international
money market. The plaintiffs
12
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
assert that the Company and its subsidiaries violated the law by failing to
disclose this "commission" in advertising and in the transactions. Some of the
plaintiffs also assert that the Company or its subsidiaries have discriminated
against persons who use their services to transmit money to Mexico, in that the
difference between the market exchange rate and the exchange rate used by
Western Union in the Mexico transactions is greater than the difference between
the market and exchange rates used by the Company or its subsidiaries when
transmitting funds to other countries. The plaintiffs seek, among other things,
injunctive relief, imposition of a constructive trust, restitution, compensatory
and statutory damages, statutory penalties and punitive damages.
The parties to some of these actions reached proposed settlements. Under the
proposed settlement, the Company will establish a charitable fund for the
advancement of Mexican and Mexican-American causes in the amount of $4 million.
Western Union also will issue coupons for discounts on future money transfer
transactions to Mexico to its customers who transferred money from the U.S. to
Mexico between January 1, 1987 and August 31, 1999. In addition, the Company
will issue coupons for discounts on future Western Union transactions to
customers who transferred money to Mexico from January 1, 1988 to December 10,
1996 using the MoneyGram service because MoneyGram was previously operated by a
subsidiary of the Company. The proposed settlement also includes reasonable
attorneys' fees and costs as well as the costs of settlement notice and
administration.
On December 21, 2000, the United States District Court for the Northern District
of Illinois granted final approval of the proposed settlement and entered a
final judgment. In approving the settlement, the Court permanently enjoined the
continued prosecution of the other actions. In January 2001, notices of appeal
from the final judgment were filed in two of the actions by some of the class
members who objected to the settlement in the respective action.
On January 11, 2000, a subsequent putative class action that makes allegations
similar to the allegations described above was filed in a California state court
against the Company and its subsidiaries, Western Union Financial Services, Inc.
and Orlandi Valuta. The putative class consists of those persons who have used
Western Union's or Orlandi Valuta's services after August 31, 1999 to transmit
money from California to Mexico, or who have used the Western Union or Orlandi
Valuta money transfer services to transmit money from California to Mexico and
have opted out of one of the nationwide settlements discussed above. The
plaintiffs seek injunctive relief, imposition of a constructive trust, an
accounting, restitution, compensatory and statutory damages alleged to be in
excess of $500,000,000, statutory penalties in an amount of $1,000 for each
offense, punitive damages, attorneys' fees, prejudgment interest, and costs of
suit. The Company is vigorously defending this action.
In 2001, two putative class actions based on similar factual allegations were
filed in the United States District Court for the Eastern District of New York
against the Company and its subsidiary, Western Union Financial Services, Inc.
asserting claims on behalf of a putative worldwide class (excluding members of
the settlement class certified in one of the above actions). The plaintiffs
claim that the Company and Western Union impose an undisclosed "charge" when
they transmit consumers' money by wire to international locations, in that the
exchange rate used in these transactions is less favorable than the exchange
rate that Western Union receives when it trades currency in the international
money market. They further assert that Western Union's failure to disclose this
"charge" in the transactions violates 18 U.S.C. section 1961 et seq. and state
deceptive trade practices statutes, and also asserts claims for civil
conspiracy. The plaintiffs seek injunctive relief, compensatory damages in an
amount to be proven at trial, treble damages, punitive damages, attorneys' fees,
and costs of suit. The Company intends to vigorously defend these actions.
In the normal course of business, the Company is subject to claims and
litigation, including indemnification obligations to purchasers of former
subsidiaries. Management of the Company believes that such matters will not have
a material adverse effect on the Company's results of operations, liquidity or
financial condition.
13
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 2001, First Data Corporation ("FDC" or the
"Company") continued to emphasize its three principal business segments: payment
services, merchant services and card issuing services. The Company's focus is on
revenue growth, cost management and execution of core strategies. FDC also
continues to seek Internet growth opportunities in these core segments as well
as in its fourth segment, emerging payments.
During the first six months of the year in the payment services segment, Western
Union signed agreements with the respective Departments of Post in India, China,
Thailand and the Ukraine. These agreements are expected to add over 14,000 new
agent locations within the next three years. Additionally, Western Union signed
an agreement with 7-Eleven to offer automated money transfer services to
potentially 5,000 new locations, signed a five-year agreement with Publix
supermarkets to increase its presence throughout the Southeast United States
with 650 new locations and signed an agreement with Rite-Aid drugstores to add
1,600 money transfer locations during 2001. Further, Western Union signed
additional agreements in South Korea, through an agreement with Kookmin Bank,
which has over 500 branches, and in Yugoslavia, which will have more than 300
agent locations by year-end 2001. Lastly, Western Union has a newly signed
agreement to provide money transfer services to as many as 10,000 locations in
the next three years through the Agriculture Bank of China.
Western Union and Orlandi Valuta signed agreements with Banco Nacional de
Mexico, S.A. (Banamex), in which Banamex has become the principal agent in
Mexico for consumer money transfers. As Mexico's leading bank, Banamex is now
offering these services at its 1,700 branch and retail locations. In January
2001, Western Union acquired Bidpay.com, a provider of web-based payment
services to online auction markets. In March 2001, Western Union acquired a 23%
equity interest in its agent FEXCO, one of Ireland's largest financial services
companies, expanding its opportunities in the European market.
In the merchant services segment, the Company acquired a majority interest in
TASQ Technology, Inc., an industry leader in point-of-sale (POS) technologies
that will complement First Data Merchant Services' POS deployment operations.
The acquisition was effective March 1, 2001. Also, merchant services formed an
alliance with the Postbank, the largest retail bank in Germany. This
relationship will expand merchant services' international presence through
electronic financial services such as online banking services and web hosting.
Merchant services also successfully completed the largest merchant conversion to
its platform, moving 120,000 Paymentech alliance merchants.
In April 2001, card issuing services acquired PaySys International Inc., which
provides card processing software in more than 35 countries for bank, retail,
and private label cards. Also, card issuing services entered into a joint
venture and formed Nihon Card Processing Co. Ltd., the first company in Japan to
provide third-party credit card processing services.
With respect to the Company's U.K. card processing business ("FDR Europe"), card
issuing services deconverted part of the Royal Bank of Scotland ("RBS") accounts
during the second quarter of 2001. The remainder of the RBS business is expected
to be deconverted during the third quarter of 2001.
In March 2001, eONE Global launched govONE Solutions, combining CashTax with the
recently acquired transaction processing business of govWorks to augment payment
solutions for local, state and federal governmental entities. Also, eONE Global
announced alliances with Verisign and IBM during the first six months. eONE will
partner with Verisign to co-market products and to develop solutions to
14
FIRST DATA CORPORATION
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
increase secure payment options in business to business and business to consumer
marketplaces. IBM's global sales force will market and sell the SurePay
business-to-business eProcurement solution and govONE Solutions' payment
services to enterprises, trading networks, financial institutions and merchants.
In June 2001, the company announced plans to acquire a 60-65% equity interest in
NYCE, which services 48 million cardholders through 44,000 ATMs and 270,000
point-of-sale locations. The deal is expected to close in the third quarter
2001. The partnership greatly accelerates First Data's opportunities in the fast
growing online, point-of-sale debit markets. It also adds to the company's
existing position in the ATM market.
In July 2001, the Company announced the acquisition of Achex Inc., an online
payments provider. The acquisition provides First Data a new Internet technology
infrastructure that will integrate with many of its online payment services,
offering new merchant integration capabilities and expanding the Company's
Internet payments presence.
FDC announced the launch of First Data Net, a proprietary payment system that
maximizes the efficiency and speed of payment processing for card issuers and
the company's 2.6 million merchant locations.
FDC is a market leader in its three major segments: payment services, merchant
services and card issuing services. The Company continues to focus on enhancing
these core business areas and to assess how best to serve its customer base as
well as pursue opportunities to expand its emerging payment businesses. Among
the actions the Company believes are necessary to continue its leadership
position is a focused effort to expand internationally, develop new products and
services and to enhance its processing platforms in response to Company growth,
client requirements, changing technology and expanding e-commerce initiatives.
In this regard, the Company continues to upgrade its business continuity plans
to reflect new systems and platforms developed to support these actions. Also,
the Company continues to take action to further streamline operations and reduce
costs.
Results of Operations
The Company derives revenues in each of its reportable segments based
principally on the number of transactions processed, a percentage of dollar
volume processed or on a combination thereof. For the three months ended June
30, 2001, total revenues increased 11% to $1.57 billion from $1.41 billion in
the prior year quarter, and for the six months ended June 30, 2001, total
revenues increased 10% to $3.04 billion from $2.76 billion in the prior year six
months.
Product sales and other revenues increased 162% from $33.9 million in the second
quarter of 2000 to $88.9 million in the same period of 2001. Product sales and
other revenues increased 118% during the first six months of 2001 from $61.0
million in the first six months of 2000 to $132.8 million in the same period of
2001. This increase is due primarily to the sales of products by TASQ
Technology, Inc., which was acquired at the end of the first quarter 2001, an
increase in incentive payments received from a partner in a previously-formed
merchant alliance, and royalty payments.
For the second quarter of 2001, operating expenses increased 10% to $952.3
million from $864.5 million in the same period of 2000. For the six months ended
June 30, 2001, operating expenses increased 7% to $1,866.4 million from $1,738.4
million in the same period in 2000. This increase resulted from growth in
business, partially offset by cost reduction initatives. As a result, operating
expenses as a percent of revenue remained relatively flat during the second
quarter and first six months of 2001 as compared to the same periods in 2000.
Selling, general and administrative expenses increased 10% to $247.1 million in
2001's second quarter compared to $225.3 million for the same period in 2000.
For the six month period, selling, general and
15
FIRST DATA CORPORATION
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
administrative expenses increased 16% to $506.6 million in 2001 from $435.1
million in 2000. As a percentage of revenue from continuing operations, selling,
general and administrative expenses were relatively flat on a quarterly basis.
The dollar increase is primarily attributable to increased advertising and
promotional spending in the payment services segment to drive revenue growth,
and increased spending on system advisory services for re-architecture
initiatives in card issuing services. These same factors also caused selling,
general and administrative expenses as a percentage of revenue to increase by 1%
on a year to date basis.
Interest expense increased 66% to $31.3 million in the second quarter of 2001
from $18.9 million in the second quarter of 2000, and 60% to $62.8 million for
the six month period of 2001 from $39.3 million for the six month period of
2000. The increase is attributed to an increase in average total debt balances,
partially offset by lower interest rates.
FDC's effective tax rate for the second quarter of 2001 was 28.6%, compared with
2000's second quarter rate of 28.4% and for the six months ended June 30, 2001
the effective tax rate increased to 28.4% from 28.3% for the same period in
2000. Excluding the impact of restructuring, business divestitures and
impairments the effective tax rate decreased 0.3 percentage points to 28.2% in
the second quarter of 2001. Comparable rates for the six month periods were
28.3% and 28.5% for 2001 and 2000, respectively.
Net income of $245.4 million and $432.9 million for the second quarter and six
months ended June 30, 2001, respectively, were up from $216.4 million and $381.4
million in the comparable periods of 2000. Excluding restructuring, business
divestitures, and other non-recurring items, net income increased 11% to $242.6
million from $218.1 million for the second quarter and net income increased 11%
to $432.8 million from $389.1 million for the six months ended June 30, 2001.
These increases were primarily driven by revenue growth in the combined core
businesses, and the impact of cost reduction initiatives. Diluted earnings per
share ("EPS") increased 17% to $0.61 for the second quarter and 19% to $1.08 for
the six months ended June 30, 2001. Excluding the impact of restructuring and
business divestitures and other non-recurring items, diluted EPS increased 17%
to $0.61 for the second quarter and 17% to $1.08 for the six months ended June
30, 2001.
Payment Services
Total revenues in the payment services segment increased 18% (on a tax-
equivalent basis) to $668.1 million in the second quarter of 2001, as compared
to $568.4 million in the same period of 2000. Year-to-date revenues increased
18% to $1,293.7 million in 2001 from $1,098.9 million in 2000. The increase in
revenues reflects continuing strong underlying volume increases in total
worldwide money transfer transactions, which increased by 23% to 26.3 million
for the second quarter of 2001 and 24% to 51.9 million for the six months ended
June 30, 2001. Revenue for international money transfers (a transfer either sent
to or received from an international location other than Mexico) grew 32% (36%
after adjusting for foreign currency exchange rates) for the second quarter 2001
compared to the same period in 2000, and 33% (37% after adjusting for foreign
currency exchange rates) for the six months ended June 30, 2001 compared to the
same period in 2000, with transaction growth of 45% for the second quarter and
first six months of 2001. Domestic money transfer and Quick Collect money
transfer transactions grew approximately 10% in the second quarter 2001 and the
six months ended June 30, 2001 compared to the same period in 2000. At June 30,
2001, the agent base grew 20% as compared to a year ago, with approximately
109,000 agents in 186 countries and territories.
Operating profits for the second quarter of 2001 grew 22% over the same period
in 2000, from $156.9 million to $192.0 million. Operating profits increased 21%
to $353.3 million for the first six months of 2001 compared to $291.3 million
for the same period last year. The segment continued to gain operating leverage
on fixed expenses through cost efficiencies, which were offset by price
reductions in certain markets and increased promotional and advertising
spending.
16
FIRST DATA CORPORATION
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Western Union's revenue growth is driven by its worldwide network of roughly
15,000 "corridors" - country-to-country money-transfer pairs. Within these
corridors, immigration patterns, economic conditions and the introduction of
corridor specific competition can impact both transactions and revenues.
Merchant Services
Revenues in the merchant services segment grew 20% to $524.5 million for the
second quarter of 2001 compared to $437.4 million for second quarter 2000.
Revenues grew 19% to $994.0 million for the first six months of 2001 compared to
$834.9 million for the same period in 2000. North America merchant dollar volume
and transactions grew 10% over the second quarter and first six months of 2000
with merchant dollar volume increasing to $123.3 billion in second quarter and
$233.4 billion during the six months ended June 30, 2001. Revenue growth for the
quarter and six months ended June 30, 2001 was driven by growth in dollar volume
and transactions processed, an increase in revenue from the gaming merchant
alliance, the addition of TASQ Technology, Inc., acquired in March 2001, an
increase in incentive payments received from a partner in a previously formed
merchant alliance and royalty payments. In the fourth quarter of 2000, merchant
services acquired an ATM business, which is reported in its gaming merchant
alliance.
Operating profits increased 19% to $149.0 million for the second quarter of 2001
from $125.6 million for the second quarter of 2000. Operating profits increased
21% to $255.7 million for the first six month period of 2001 as compared to
$210.9 million for the same period last year. This improvement is driven by the
revenue growth noted above and is reflective of increased volume and
transactions, and the continuation of cost reduction initiatives.
Key elements of FDC's strategy in the merchant services segment involve its
joint venture alliances with its bank partners and implementation of
international, debit and Internet commerce initiatives. Each joint venture
alliance requires successful management of the relationship between the Company
and the bank partner in that alliance. The alliance strategy could be affected
by further consolidation among financial institutions.
The merchant services segment is the least insulated segment from economic slow
downs as its revenue is driven by both dollar volume and transactions processed
and a severe downturn of the economy could reduce both. However, the Company has
noted, and the December 2000 Nilson Report shows, an accelerating secular trend
in the shift in payment methods from cash and check to electronic and card based
payments. This continuing shift is expected to help offset some of the effects
of an economic slowdown.
Internet commerce and an increased number of debit transactions also present
growth opportunities for the merchant services segment. While Internet commerce
and debit transactions currently account for a small portion of the segment's
transactions, they are growing rapidly. The Company will continue to develop new
credit and fraud detection systems to address the risks attributed to Internet
commerce.
Card Issuing Services
Total revenues in the card issuing services segment remained relatively flat at
$376.3 million for the second quarter of 2001 and $738.1 million for the six
months ended June 30, 2001 as compared to $371.9 million and $735.9 million for
the respective periods in 2000. Card accounts on file as of June 30, 2001 were
over 297 million (a 14% increase from June 30, 2000) with domestic card accounts
at approximately 274 million (an increase of 17%) and international card
accounts at 23 million (a decrease of 10%). The increase is attributed to the
addition of the Wal-Mart portfolio and conversion of the JCPenney portfolio in
the third quarter of 2000, which have added approximately 45 million card
accounts on file, slightly offset by certain deconversions. Accounts on file
have decreased during the six months ended June 30, 2001, due to certain
deconversions. The Company expects the level of accounts on file to remain
relatively flat through the end of the year. During the second quarter the
17
FIRST DATA CORPORATION
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Company added three major tactical enhancements to the transaction processing
system that will provide better customer service and operational efficiencies.
Management is confident that current system developments will be completed
timely, but delay in system development could delay certain conversions, which
are contingent on such system development, and may impact the continuation of
performance on certain significant contracts. Management expects to invest
approximately 3-5% of card issuing services revenues for the current year into
this re-architecture of its systems.
Consolidation among financial institutions has led to an increasingly
concentrated client base, which results in a changing client mix towards larger,
highly sophisticated customers. The effects of pricing, client mix and product
mix of providing services to this increasingly concentrated industry will most
likely cause prospective revenues to grow more slowly than accounts on file.
Operating profit for the card issuing services segment increased 5% to $85.2
million in the second quarter of 2001 from $81.5 million in 2000. Year-to-date
profit increased 5% to $157.9 million in 2001 from $150.4 million in 2000.
Operating profit remained positive against pricing pressures due to cost
reduction initiatives, including workforce reductions in 2000, productivity
improvements, and certain liquidated damages relating to account deconversions.
Emerging Payments
Revenues for the emerging payments segment increased 13% to $20.5 million in the
second quarter of 2001 compared to $18.2 million for the same period in 2000,
and increased 9% for the six months ended June 30, 2001 to $41.9 million from
$38.6 million in 2000. The increase in revenue is mainly attributed to
investment income.
The emerging payments segment had an operating loss of $5.9 million for second
quarter of 2001 and a profit of $5.3 million for 2000. For the six months ended
June 30, 2001, the operating loss was $5.7 million and for the same period in
2000 there was an operating profit of $8.5 million. Results primarily reflect a
decrease in operating profits of govONE Solutions, increased spending on
e-commerce initiatives in 2001 over 2000 and the launch of the SurePay gateway
during the second quarter of 2001.
All Other and Corporate
Revenues from other operations decreased 32% from $46.7 million in the second
quarter of 2000 to $31.9 million. Year-to-date revenues decreased 32% to $70.5
million from $104.1 million in 2000. Much of the decline was attributed to a
reduction in in-store bank branch installations at IBT and the loss of a
significant contract at Teleservices.
Operating losses decreased to $2.7 million in the second quarter of 2001 from a
$4.9 million loss in 2000. The decrease in the operating loss is mainly
attributable to an increase in investment income. For the six months ended June
30, 2001, operating losses increased to $3.9 million from $0.2 million in 2000.
The increase in the operating loss is attributed to the loss of a significant
contract at Teleservices during the third quarter of 2000 and increased spending
on certain corporate initiatives.
Restructuring, Asset Impairments and Divestitures
During the quarter and six months ended June 30, 2001, the Company recorded a
net benefit of $5.7 million related to restructuring charges, prior period
restructuring reserve reversals, the discontinuance of a business, asset
impairments, and the reversal of divestiture reserves as detailed below and
presented on the restructuring, business divestitures, litigation and impairment
line in the income statement.
18
FIRST DATA CORPORATION
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The Company recorded restructuring charges of $15.7 million; $8.4 million of
charges related to payment services, $5.6 million of charges related to merchant
services, $0.8 million of charges related to card issuing services, and $0.9
million of charges related to all other and corporate. These charges were
comprised of severance totaling $14.8 million, and $0.9 million related to
losses on lease terminations and a customer contract. Severance charges resulted
from the termination of approximately 425 employees, representing approximately
1.5% of the Company's workforce, due to the reorganization of various
departments. Savings realized through the remainder of the year from these
reorganizations are expected to be approximately $13 million. Offsetting these
charges were prior period restructuring reserve reversals resulting from changes
in estimates totaling $4.2 million.
In addition, the Company announced the planned third quarter 2001 discontinuance
of a collection business. As a result of the planned discontinuance, the Company
recorded a pre-tax loss of $11.4 million in the second quarter 2001 relating to
the closure. The charge includes $4.1 million for employee severance, $2.6
million for facility exit costs and an asset impairment charge of $4.7 million.
In addition to the restructuring charges, during the six months ended June 30,
2001, the Company also recorded asset impairment charges of $7.9 million. The
charge was primarily comprised of a $7.4 million write-down of the Company's
investment in Excite@Home due to a decline in market value that was considered
other than temporary.
Also, during the six months ended June 30, 2001, the Company reversed various
divestiture reserves totaling $36.5 million, due to the passage of certain
contractual indemnification provisions. These reversals related primarily to the
divestiture of Investor Services Group, which was sold in the fourth quarter of
1999.
Capital Resources and Liquidity
FDC maintained a strong financial position during the first six months of 2001.
Cash and cash equivalents were $880.6 million at June 30, 2001 compared to
$853.3 million at December 31, 2000. FDC utilized cash flows from operating
activities primarily to reinvest in its existing businesses, fund treasury stock
purchases and to contribute to the financing of acquisitions.
Operating activities generated cash of $587.5 million for the six months ended
June 30, 2001 compared to $518.0 million for the six months ended June 30, 2000.
This increase in 2001 is primarily due to increased net income and the first
quarter 2000 tax payments associated with the fourth quarter 1999 sale of the
Investor Services Group offset somewhat by the net use of cash resulting from
changes in working capital.
FDC reinvests cash in its existing businesses principally to expand its
processing capabilities through property and equipment additions, to establish
customer-processing relationships through contract payments and costs for
conversion and to acquire or develop software for use in its operations.
Capitalized amounts of these cash outlays increased to $193.9 million for the
first half of 2001 as compared to $132.1 million for the first half of 2000.
Overall, FDC's operating cash flow for the six months ended June 30, 2001
exceeded its investing activities associated with additions to property and
equipment and capitalized contract and systems development costs by $393.6
million. These cash sources contributed to funds utilized for short-term
borrowing repayments, treasury stock purchases and the financing of
acquisitions.
In the first six months of 2001, the Company had net cash outlays of $421.9
million for acquisitions (as compared to $18.2 million in 2000). The Company
also paid $25.1 million during the six months ended June
19
FIRST DATA CORPORATION
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
30, 2001 relating to businesses previously acquired, compared to $30.5 million
during the same period of 2000. In addition, the Company issued 1 million of its
common shares, valued at $53 million, as part of an earnout agreement relating
to the acquisition of one of its equity method investments.
The Company's financing activities included the issuance of $542 million of 2%
Senior Convertible Contingent Debt Securities due 2008, which generated net cash
proceeds of $534 million. Also, the Company received proceeds from stock option
exercises and other employee stock benefit programs. Offsetting these cash
inflows were repayments of short-term debt, and share repurchases under the
Company's $1 billion and $500 million share repurchase programs discussed below
and dividend payments. Net cash generated from financing activities was $103.6
million during the first six months of 2001, as compared to a use of cash of
$860.8 million in the same period of 2000.
The Company made cash outlays totaling $508.3 million in the six months ended
June 30, 2001 to buy back shares of its common stock. Proceeds from stock option
exercises totaling $148.3 million partially offset these outlays. eONE Global
raised $22.2 million through the issuance of additional equity interests. In
addition, the Company continued its practice of paying quarterly cash dividends,
resulting in $15.7 million of cash payments to the Company's common stockholders
during the first six months of 2001.
The Company completed the $1 billion stock repurchase authorized by the Board of
Directors in May 2000 by purchasing 2.9 million of its common shares at a cost
of $164 million during the first quarter of 2001. A total of 21.0 million common
shares were repurchased under this program. Additionally, during the first
quarter of 2001, the Company repurchased 0.4 million shares of its common stock
for $21 million under the $500 million stock repurchase program authorized in
December 2000 leaving $479 million available under the program as of June 30,
2001. The remaining $323 million of treasury stock purchases during the six
months ended June 30, 2001 related to the exercise of stock options and share
issuances under the Company's employee stock purchase program.
The Company filed a new $1.5 billion shelf registration in the first quarter
2001, all of which was available at quarter end, providing for the issuance of
up to $1.5 billion of debt and equity securities of the Company. The Company has
another shelf registration providing for the issuance of approximately 10
million shares of the Company's common stock in connection with certain types of
acquisitions, of which approximately 10 million shares are available at quarter
end.
Included in cash and cash equivalents on the Consolidated Balance Sheet at June
30, 2001 is $70 million related to required investments of cash in connection
with the Company's merchant card settlement operation. FDC has remaining
available short-term borrowing capability of approximately $860 million at June
30, 2001 under the Company's commercial paper program, uncommitted bank credit
lines and its $300 million extendable commercial notes program. The Company
believes that its current level of cash and financing capability along with
future cash flows from operations are sufficient to meet the needs of its
existing businesses. However, the Company may from time to time seek longer-term
financing to support additional cash needs or reduce its short-term borrowings.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
There have been no material changes from the 2000 Annual Report on Form 10-K
related to the Company's exposure to market risk from interest rates.
20
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, 2001 and the related consolidated statements of
income for the three-month and six-month periods ended June 30, 2001 and 2000,
and the consolidated statements of cash flows for the six month periods ended
June 30, 2001 and 2000. These financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements referred to above
for them to be in conformity with accounting principles generally accepted in
the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of First Data
Corporation as of December 31, 2000, 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 24, 2001, 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, 2000, is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
Ernst & Young LLP
Denver, Colorado
July 11, 2001
21
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 below and in the Company's Annual Report on Form 10-K for the year
ended December 31, 2000 (the "Annual Report") and the Company's Quarterly Report
on Form 10-Q for the quarterly period ended March 31, 2001 (the "Quarterly
Report"). There were no material developments in the litigation matters
previously disclosed except for the developments discussed below.
In the action filed by Julieta Amorsolo and Apolonio Ezequiel Viruel Torres that
was previously reported in the Annual Report and Quarterly Report, plaintiffs
petitioned the California Court of Appeal for a Writ of Mandate directing the
trial court to reverse and vacate its order sustaining defendants' demurrer as
to plaintiffs' claim for violation of California Financial Code section
1810.5(a). On May 1, 2001, the Court of Appeal summarily denied plaintiffs'
Petition for a Writ of Mandate. Plaintiffs then filed a petition in the
California Supreme Court seeking review of the Court of Appeal's order but the
petition was denied. On June 13, 2001, plaintiffs filed and served a Second
Amended Complaint in which they abandoned their claim for violation of
California Financial Code section 1810.5(a).
On April 20, 2001, Nubia Godoy, on behalf of herself and all other similarly
situated persons, filed an action in the United States District Court for the
Eastern District of New York against the Company and its subsidiary Western
Union Financial Services, Inc. Ms. Godoy's claims are essentially identical to
those alleged in the action filed by Ana Cruz which was previously reported in
the Annual Report. Ms. Godoy claims that the defendants impose an undisclosed
"charge" when they transmit consumers' money by wire to international locations,
in that the exchange rate used in these transactions is less favorable than the
exchange rate that the defendants receive when they trade dollars in the
international money market. Ms. Godoy further asserts that the failure to
disclose this "charge" in the transactions violates federal and state law. Ms.
Godoy asserts the claims on behalf of a putative worldwide class (excluding
those consumers who used revised send forms adopted in August 1999 and those
consumers who were members of the class certified in the action filed by Luis
Pelayo and Oscar Perales which was previously reported in the Annual Report)
based on violation of 18 U.S.C. section 1961 et seq., violations of state
deceptive trade practices statutes, and civil conspiracy. Ms. Godoy seeks
injunctive relief, compensatory damages in an amount to be proven at trial,
treble damages, punitive damages, attorneys' fees, and costs of suit. The
Company intends to vigorously defend this action.
In the action filed by Luis Pelayo and Oscar Perales and the action filed by
Raul Ross Pineda which were previously reported in the Annual Report, all of the
parties have filed their appellate briefs and oral argument for the appeals has
been scheduled for September 7, 2001.
Item 4. Submission of Matters to a Vote of Securities Holders:
-----------------------------------------------------
The Company held its Annual Meeting of Stockholders on May 9, 2001. Five matters
were voted upon and approved at the meeting.
Proposal 1 Election of Directors.
----------------------------------------
The terms of office of three current directors, Henry C. Duques, Charles T. Fote
and Joan E. Spero, expired at the 2001 Annual Meeting and all were re-elected.
The results of the voting were as follows:
22
FOR WITHHELD
Henry C. Duques 319,828,604 5,021,344
Charles T. Fote 319,849,938 5,000,010
Joan E. Spero 319,696,406 5,153,542
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, Garen K. Staglin and Arthur F. Weinbach.
Proposal 2 Approval of an amendment to the Company's Shareholder Value Plan to
-------------------------------------------------------------------------------
establish a new maximum unit value for Senior Executive Vice
------------------------------------------------------------
Presidents.
----------
The results of the voting were as follows:
BROKER
FOR 317,295,578 AGAINST 6,117,566 ABSTAIN 1,436,804 NON-VOTE 0
Proposal 3 Approval of an amendment to the Company's Senior Executive
----------------------------------------------------------------------
Incentive Plan to establish new maximum annual awards.
-----------------------------------------------------
The results of the voting
were as follows:
BROKER
FOR 307,454,471 AGAINST 15,808,761 ABSTAIN 1,586,716 NON-VOTE 0
Proposal 4 Approval of amendments to the 1993 Director's Stock Option Plan and
-------------------------------------------------------------------------------
allocation of 1,000,000 shares of the Company's common stock to the
-------------------------------------------------------------------
Plan.
----
The results of the voting were as follows:
BROKER
FOR 282,164,873 AGAINST 41,161,902 ABSTAIN 1,523,173 NON-VOTE 0
Proposal 5 Ratification of the selection of Ernst & Young LLP as independent
-----------------------------------------------------------------------------
auditors of the Company for 2001.
--------------------------------
The results of the voting were as follows:
BROKER
FOR 321,637,078 AGAINST 2,151,495 ABSTAIN 1,061,375 NON-VOTE 0
See the Proxy Statement for the Company's 2001 Annual Meeting of Stockholders,
which information is incorporated herein by reference.
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
23
(b) Reports on Form 8-K
-----------------------
None.
24
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: July 30, 2001 By /s/ Kimberly S. Patmore
------------- ------------------------------
Kimberly S. Patmore
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: July 30, 2001 By /s/ Tom Moore
------------- -----------------------------
Tom Moore
Vice President and
Corporate Chief Financial Officer
(Principal Accounting Officer)
25
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
99.1 Private Securities Litigation Reform Act of 1995
Safe Harbor Compliance Statement for Forward-Looking Statements
26