1
EXHIBIT 99.4
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1995
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from to
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Commission file number 1-11073
FIRST DATA CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 47-0731996
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
401 Hackensack Avenue, Hackensack, New Jersey 07601
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 525-4702
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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
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 1995
--------------------------------------- ----------------------------
Common Stock (par value $.01 per share) 118,803,261 shares
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FIRST DATA CORPORATION
FORM 10-Q
INDEX
PAGE NO.
--------
Part I. Financial Information
Consolidated Statement of Income--Three and six 1
months ended June 30, 1995 and 1994
Consolidated Balance Sheet--June 30, 1995 2
and December 31, 1994
Consolidated Statement of Cash Flows--Six 3
months ended June 30, 1995 and 1994
Notes to Consolidated Financial Statements 4-7
Management's Discussion and Analysis of 8-14
Financial Condition and Results of Operations
Independent Accountants' Review Report 15
Part II. Other Information 16
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FIRST DATA CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Amounts in thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1995 1994 1995 1994
-------- -------- -------- --------
REVENUES:
Fee revenues, net $447,362 $362,884 $830,703 $696,932
Fees related to sale of TRS financial
instruments, net 55,250 46,701 109,420 88,473
-------- -------- -------- --------
Total 502,612 409,585 940,123 785,405
-------- -------- -------- --------
EXPENSES:
Human resources 194,896 161,363 369,229 311,808
Equipment, supplies and facilities 84,686 59,595 151,946 112,986
Depreciation and amortization 51,714 34,810 94,616 65,891
Professional, advertising and other 73,503 66,466 138,813 124,532
-------- -------- -------- --------
Total 404,799 322,234 754,604 615,217
-------- -------- -------- --------
OPERATING INCOME 97,813 87,351 185,519 170,188
INTEREST EXPENSE (14,580) (10,652) (25,191) (21,471)
OTHER INCOME 77,937 1,800 80,937 3,600
-------- -------- -------- --------
PRETAX INCOME 161,170 78,499 241,265 152,317
INCOME TAXES 103,223 31,952 133,106 62,068
-------- -------- -------- --------
NET INCOME $ 57,947 $ 46,547 $108,159 $ 90,249
======== ======== ======== ========
NET INCOME PER COMMON SHARE $ 0.49 $ 0.42 $ 0.94 $ 0.81
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 119,355 111,438 115,615 111,530
======== ======== ======== ========
CASH DIVIDENDS DECLARED PER COMMON SHARE $ 0.03 $ -- $ 0.06 $ 0.03
======== ======== ======== ========
See notes to consolidated financial statements.
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FIRST DATA CORPORATION
CONSOLIDATED BALANCE SHEET
($ in thousands)
(Unaudited)
JUNE 30, DECEMBER 31,
ASSETS 1995 1994
---------- ----------
Cash and cash equivalents $ 111,434 $ 166,203
Short-term investments 58,189 197,134
Equity securities available for sale 209,480 --
Proceeds including proceeds due from financial instruments sold 3,794,862 3,058,829
Funds and funds due relating to merchant processing 284,833 --
Accounts receivable, less allowance: 1995, $8,577; 1994, $7,117 303,912 262,847
Land, buildings and equipment at cost, net of depreciation:
1995, $286,175; 1994, $262,590 367,288 303,294
Goodwill, net of amortization: 1995, $160,096; 1994, $149,374 1,581,173 832,349
Other intangibles, net of amortization: 1995, $133,733; 1994, $108,337 424,718 348,886
Other assets 260,365 249,902
---------- ----------
$7,396,254 $5,419,444
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Drafts outstanding $ 58,097 $ 197,046
Liabilities relating to financial instruments sold 3,753,000 3,069,000
Liabilities relating to merchant processing 277,422 --
Short-term debt 372,000 35,000
Long-term debt 468,292 474,680
Accounts payable 129,092 92,470
Income taxes payable 117,839 60,019
Employee-related liabilities 82,359 84,356
Accrued and other liabilities 378,588 391,614
---------- ----------
Total liabilities 5,636,689 4,404,185
---------- ----------
Stockholders' equity:
Common stock, par value $.01 per share,
authorized 300,000,000 shares; issued 119,527,317
shares in 1995 and 110,352,000 in 1994 1,195 1,104
Capital surplus 939,682 412,779
Net unrealized securities gains (losses) 30,460 (6,611)
Foreign currency translation adjustment (18,088) (17,033)
Retained earnings 843,229 755,558
Less treasury stock at cost, 714,720 shares in 1995
and 2,710,360 in 1994 (36,913) (130,538)
---------- ----------
Total stockholders' equity 1,759,565 1,015,259
---------- ----------
$7,396,254 $5,419,444
========== ==========
See notes to consolidated financial statements.
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FIRST DATA CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
($ in thousands)
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
--------------------------
1995 1994
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 108,159 $ 90,249
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 47,421 34,236
Amortization (1995 and 1994 include charges
of $16,561 and $10,128, respectively, against revenues) 63,756 41,783
Gain on sale of businesses (80,937) (3,600)
Other non-cash charges, net 20,674 5,944
Changes in operating assets and liabilities:
Short-term investments 138,945 13,987
Proceeds including proceeds due from
financial instruments sold (684,000) (231,000)
Funds and funds due relating to merchant processing (18,639) --
Accounts receivable (55,564) (22,137)
Other assets (6,564) 5,636
Drafts outstanding (138,949) (13,859)
Liabilities relating to financial
instruments sold 684,000 231,000
Liabilities relating to merchant processing 27,186 --
Accounts payable and other liabilities 40,959 24,303
--------- ---------
Net cash provided by operating activities 146,447 176,542
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of variable rate cap agreements -- (28,850)
Deferred contract costs (75,022) (46,205)
Purchase of land, buildings and equipment (90,547) (70,823)
Acquisition-related expenditures (219,959) (91,256)
Divestitures 11,210 --
--------- ---------
Net cash used by investing activities (374,318) (237,134)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term debt, net 337,000 --
Principal payments of long-term debt (142,530) (8,850)
Proceeds from exercise of stock options 17,482 4,341
Purchase of treasury stock (32,821) (25,210)
Dividends paid (6,698) (6,610)
--------- ---------
Net cash provided (used) by financing activities 172,433 (36,329)
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 669 2,055
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (54,769) (94,866)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 166,203 298,041
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 111,434 $ 203,175
========= =========
See notes to consolidated financial statements.
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FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements of First Data Corporation (the Company or
FDC) should be read in conjunction with the Company's consolidated financial
statements for the year ended December 31, 1994. Significant accounting
policies disclosed therein have not changed. However, in 1995 the Company has
incurred software development costs for major new product and platform
offerings and has capitalized a portion of such costs as required by Statement
of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to Be Sold, Leased or Otherwise Marketed". Historically, software
development costs have been principally for product enhancements or refinements
and expensed as incurred. Amounts capitalized through June 30, 1995 for new
product and platform offerings approximated $3.3 million.
The 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,
1995 and the consolidated results of its operations for the three and six
months ended June 30, 1995 and 1994 and cash flows for the six months ended
June 30, 1995 and 1994. Results of operations reported for interim periods are
not necessarily indicative of results for the entire year. Certain prior year
amounts have been reclassified to conform to the current year presentation.
The Company recently completed a study of goodwill and other intangible assets
arising from purchase business combinations and has concluded it is appropriate
to reclassify certain costs associated with the July 1991 acquisition of First
Data Resources Limited (FDRL) from "Goodwill" to acquired contract and
conversion costs which are included in "Other intangibles" on the Company's
Consolidated Balance Sheet. Conversion costs primarily include systems and
programming and other related costs associated with the conversion of new
client accounts to the Company's processing systems. The reclassified costs
represent those necessary to modify the acquired FDRL processing system in 1992
to provide the functionality of the Company's processing system to FDRL's
customer base. The result of the reclassification, as of December 31, 1994,
was an increase of $53 million in acquired contract and conversion costs, net
of accumulated amortization, which will be amortized over the remaining
six-year estimated life of the contracts. The $169 million remaining carrying
value of goodwill relating to FDRL will be amortized over its remaining
estimated life of 26 years. Previously, all acquired intangibles resulting
from the FDRL acquisition were amortized over their estimated aggregate life of
20 years from the date of acquisition. The impact of these changes is
immaterial to the Company's results of operations.
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2. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Net income taxes paid during the six months ended June 30, 1995 were
approximately $44 million. Net income taxes paid during the same period in
1994 were approximately $60 million, net of a $1.1 million refund from American
Express Company. Interest paid during the six months ended June 30, 1995 and
1994 was approximately $31 million and $21 million, respectively.
3. ACQUISITIONS/DISPOSITION
On June 13, 1995, the Company announced execution of a merger agreement with
First Financial Management Corporation (FFMC), a leading worldwide information
services provider. Pursuant to the terms of the merger agreement, each
outstanding share of FFMC common stock will be converted into 1.5859 shares of
FDC common stock at closing. The transaction is valued at approximately $6.7
billion based on FDC's closing price on June 12, 1995 of $56.875. The
transaction, which will be accounted for as a pooling of interests, requires
the approval of the stockholders of both companies as well as various
regulatory agencies. The Company anticipates closing the transaction in late
1995 or early 1996; however, no assurance can be given with respect to the
timing or likelihood of such transaction closing.
Upon closing, FDC will incur one-time merger expenses including (i) investment
banking, legal and miscellaneous transaction costs, currently estimated to be
$52.3 million on an after-tax basis; (ii) costs associated with termination
benefits of certain employees of FFMC, currently estimated to be $143.1 million
on an after-tax basis, and (iii) costs associated with the integration and
consolidation of the companies which are not presently estimable. The
accounting policies utilized by FDC and FFMC are currently being studied from a
conformity perspective; however, the impact of any potential adjustments is
presently estimated to be immaterial.
On June 6, 1995, the Company completed the acquisition of the merchant
processing and point-of-sale unit of ENVOY Corporation (ENVOY). ENVOY was
combined with the existing merchant operations of the Company's U.S.
transaction card processing unit and is reflected in the accompanying financial
statements from its date of acquisition.
A summary of the purchase price paid and the preliminary allocation thereof to
tangible assets acquired less liabilities assumed is as follows (thousands):
Total consideration paid $174,533
Tangible assets acquired less liabilities
assumed at fair value 32,426
-------
Excess of purchase price over tangible
assets acquired less liabilities assumed $142,107
=======
The total consideration paid primarily represents the issuance of 3 million
shares of FDC common stock to ENVOY stockholders valued at approximately $171
million. An additional payment of up to $21 million in FDC common stock will
be required over a one- to three-year period if the acquired entity attains
certain performance objectives. The excess of purchase price over tangible
assets acquired less
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liabilities assumed is being amortized over 30 years. This acquisition has
been accounted for using the purchase method.
On March 9, 1995, the Company completed the acquisition of CESI Holdings, Inc.
and its subsidiary, Card Establishment Services Inc., (CES) a leading merchant
transaction processor. CES was combined with the Company's U.S. transaction
card processing unit to strengthen both front-end and back-office merchant
transaction processing capabilities and is reflected in the accompanying
financial statements from its date of acquisition.
The following table lists the unaudited pro forma financial information
reflecting the estimated effect on the Company of the CES acquisition as if it
had occurred at the beginning of each of 1995 and 1994 (in thousands, except
per share amounts):
Three Months Six Months Ended
Ended June 30,
June 30, 1994 1995 1994
------------- --------------------------
Revenue $461,555 $978,495 $884,113
Net income 45,959 103,472 86,819
Net income per
common share 0.38 0.87 0.72
The pro forma financial information presented above does not give pro forma
effect to the ENVOY acquisition as the effect on pro forma earnings in the
aggregate would be immaterial.
Adjustments made in arriving at pro forma unaudited results of operations
include the preliminary revaluation of CES assets to their fair value,
reduction of interest expense on existing debt due to lower borrowing rates of
the Company, amortization of goodwill and related tax adjustments. The pro
forma results do not, however, include any adjustments for cost savings or
benefits from economies of scale that the Company believes would have been
achieved had the transaction occurred at the beginning of each of 1995 and
1994. The pro forma financial information is presented for informational
purposes and is not necessarily indicative of the future results of operations
of the combined companies.
Pro forma results present revenues net of interchange and association fees.
Interchange fees represent a standardized fee charged by the Visa and
Mastercard credit card associations to compensate card issuing banks for the
risk of transaction fraud, processing expenses and funding costs and are
settled with the card issuing banks. Historically, CES presented its revenues
on a gross basis. The Company presents revenues on a net basis on its
consolidated financial statements as generally there is no risk to the Company
associated with the interchange fees. CES' interchange and association fees
were $172 million and $140 million for the three months ended June 30, 1995 and
1994, respectively, and $314 million and $258 million for the six months ended
June 30, 1995 and 1994, respectively.
During the 1995 second quarter, the Company completed the sale of its health
systems business to HBO & Company (HBOC) in exchange for 4 million shares of
HBOC common stock valued at approximately
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$205 million, resulting in a pretax gain of $68.9 million which has been
included in "Other income" on the Company's Consolidated Statement of Income.
This pretax gain was substantially offset by income taxes of $67.7 million
relating thereto. The investment in HBOC common stock is presented as "Equity
securities available for sale" on the Company's Consolidated Balance Sheet.
The health systems business accounted for approximately 8 percent of the
Company's 1994 annual consolidated revenues and a lesser percentage of its 1994
annual consolidated operating income.
4. DEBT OFFERING
On July 24, 1995, the Company completed a $200 million public debt offering of
6 3/4% Notes (the Notes) due July 15, 2005. Interest on the Notes is payable
semi-annually in arrears on January 15 and July 15 of each year, commencing
January 15, 1996. There is no sinking fund obligation applicable to the Notes,
nor are the Notes redeemable prior to maturity. The Company received net
proceeds of approximately $197 million of which $165 million was used to pay
down the Company's short-term borrowings under its revolving credit facilities.
The remainder was used for general corporate purposes.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 1995 COMPARED TO QUARTER ENDED JUNE 30, 1994.
Revenues
The Company's consolidated second quarter 1995 revenues were $503 million, up
23 percent over $410 million in 1994. Excluding revenues from the cable
services and hotel reservation businesses sold late in 1994 and the health
systems business sold during the second quarter of 1995, revenues were up 34
percent. The increased revenue came substantially from continued growth in its
transaction card processing, mutual fund servicing and payment instruments
businesses. Approximately 90 percent of the 1995 increase resulted from
acquisitions, sales of enhanced services and new client signings with the
remainder attributable to expansion into adjacent markets and internal growth
in its financial sector businesses. Growth from acquisitions was primarily
attributable to Card Establishment Services, Inc. (CES), acquired on March 9,
1995, which contributed revenues of $57 million. The Company's financial
sector businesses, which include the transaction card processing, payment
instruments, mutual fund servicing and receivables management businesses,
represented approximately 90 percent of the Company's consolidated revenues and
a greater proportion of the Company's consolidated operating income in the 1995
second quarter. Revenues in the financial sector, which is the Company's
focus, increased 25 percent even without the effect of the CES acquisition and
44 percent including CES.
Worldwide transaction card processing revenues grew by $115 million, or 64
percent, primarily due to strong growth in card accounts, transactions
processed and sales of enhanced services, as well as the results of the
newly-acquired CES business. The volume of worldwide card and merchant
transactions processed increased 59 percent to 1,266 million in the 1995 second
quarter (which included 176 million incremental CES merchant transactions)
compared with 794 million in the 1994 second quarter. Excluding CES, the
increase in card and merchant transactions processed is attributable to an
approximate 40 percent increase in the U.S. and an approximate 20 percent
increase in the U.K. The volume of worldwide card accounts processed increased
to 104.8 million in the second quarter of 1995 from 75.8 million in the 1994
second quarter primarily due to strong internal growth and the addition of new
clients.
Revenues derived from the payment instruments business grew by $6.2 million
over the 1994 second quarter. This growth was attributable to an increase in
fee revenue associated with a 60 percent increase in MoneyGram(SM) service
transactions processed. MoneyGram(SM) revenue per transaction resulting from
conditions relating to Mexican exchange rates was comparable to the prior year
quarter. This growth was partially offset by a decrease in revenues derived
from the investment portfolios due to an increase in variable rate commissions
paid to selling agents. Payment instruments transactions processed increased
11 percent to 79 million in the 1995 second quarter compared with 71 million in
the 1994
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second quarter. The Company continued its aggressive MoneyGram(SM) service
marketing campaign during the 1995 second quarter.
Prior to 1994, FDC issued payment instruments solely under the name of American
Express Travel Related Services Company, Inc. (TRS), a wholly-owned subsidiary
of American Express Company (American Express). In 1994, the Company's payment
instruments business began transitioning away from American Express to its own
payment instruments. In conjunction with the March 1994 acquisition of a major
financial institution's official check business (the new official check
business) the Company began signing new official check agents as well as
converting the acquired and new agents to its own payment instruments which
generated an investment portfolio balance of $1.4 billion at June 30, 1995.
This is in addition to the investment portfolio of $2.0 billion generated from
the Company's sale of TRS payment instruments. As a result of the Company's
transition to its own payment instruments, 1995 second quarter results include
earnings on tax-exempt investments included in the Company's separate
investment portfolio that did not exist in 1994. On a pretax equivalent basis,
which is the basis of recognition of earnings on the portfolio owned by TRS,
the Company's 1995 second quarter revenues, operating and pretax income, and
income taxes would have been $6.1 million higher.
Revenues from the mutual fund servicing business increased by 27 percent over
the 1994 second quarter as a result of increased sales of enhanced services and
expansion into adjacent markets principally due to 440 Financial Group acquired
in March 1995 and the mutual fund administration business acquired in May 1994.
Mutual fund assets serviced increased 28 percent in the 1995 second quarter to
$341 billion compared with $266 billion in the 1994 second quarter.
Revenues from the Company's receivables management business declined slightly
from the 1994 second quarter. The Company continues to focus on this business
and sees opportunities to further penetrate the market and offer these services
to its existing customer base.
Revenues from the teleservices business declined 11 percent from the 1994
second quarter due to lower pricing and lower volumes partially attributable to
further automation of operator services, slightly offset by other ancillary
teleservices and an increase in volumes associated with the Company's
computer-based interactive telephone service.
Expenses
The Company's total operating expenses increased 26 percent to $405 million.
The Company's expenses included increased product development and
infrastructure costs incurred in advance of accelerating financial sector
revenues anticipated for the second half of 1995 as reflected by the increase
in "Human resources," "Equipment, supplies and facilities" and "Professional,
advertising, and other" on the Company's Consolidated Statement of Income.
Growth in volumes of transactions processed and the impact of sales of
additional enhanced services also contributed to higher systems development and
programming, data processing and facilities costs. The Company's additional
investment in hardware and operating systems and recently acquired businesses
contributed substantially to the increase in depreciation and amortization.
9
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The Company's effective tax rate increased from 40.7 percent in 1994 to 64.0
percent in 1995 as a result of the taxes on the sale of the health systems
business. Excluding the impact of the sale of the health systems business, the
effective tax rate would have been 38.5 percent in 1995; this decrease in rate
from 1994 is due to the impact of tax-exempt earnings on the Company's separate
investment portfolio in 1995.
Net Income and Earnings Per Share
The Company's consolidated net income increased 24 percent to $58 million in
the 1995 second quarter compared with $47 million in the 1994 second quarter.
The Company's earnings per share increased 17 percent to $0.49 in the 1995
second quarter from $0.42 in the 1994 second quarter. The disparity of the
foregoing growth percentages was the result of the additional shares issued in
connection with the CES and ENVOY Corporation (ENVOY) acquisitions. The
increase in net income came substantially from increased operating income due
to continued growth in its two largest financial sector businesses. FDC's
transaction card processing unit had strong growth in card accounts,
transactions processed and sales of enhanced services, as well as the results
of the newly-acquired CES business. In addition, FDC's payment instruments
business had higher volumes, particularly in its MoneyGram(SM) service. These
increases were partially offset by a decline at the teleservices business.
During the 1995 second quarter, the Company recorded a $68.9 million pretax
gain on the sale of its health systems business, which was offset by a $67.7
million increase in income taxes relating thereto. In addition, increased
product development and infrastructure costs incurred in advance of
accelerating revenues anticipated for the second half of 1995 were largely
offset by a $5.4 million after-tax gain ($9 million pretax) resulting from the
favorable resolution of certain indemnification issues relative to the 1994
sale of the cable services business. The pretax gains are included in "Other
income" on the Company's Consolidated Statement of Income.
In 1995, the Company continues to expect earnings per share, before the effect
of the First Financial Management Corporation (FFMC) merger discussed below, to
grow near the Company's objective of 20 percent.
SIX MONTHS ENDED JUNE 30, 1995 COMPARED TO SIX MONTHS ENDED JUNE 30, 1994.
Revenues
The Company's consolidated revenues for the 1995 period were $940 million, up
20 percent over $785 million in the 1994 period. Excluding revenues from the
cable services and hotel reservation businesses sold late in 1994 and the
health systems business sold during the second quarter of 1995, revenues
increased 31 percent over the same period in the prior year. The increased
revenue came substantially from continued growth in its transaction card
processing, mutual fund servicing and payment instruments businesses.
Approximately 85 percent of the 1995 increase resulted from acquisitions, sales
of enhanced services and new client signings with the remainder attributable to
expansion into adjacent markets and internal growth in its financial sector
businesses. Growth from acquisitions was primarily attributable to CES which
contributed revenues of $70 million. The Company's financial sector businesses
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represented approximately 85 percent of the Company's consolidated revenues and
a significantly greater proportion of the Company's consolidated operating
income in the 1995 period.
Worldwide transaction card processing revenues grew by $184 million primarily
due to strong growth in card accounts, transactions processed and sales of
enhanced services, as well as the results of the newly-acquired CES business.
The volume of worldwide card and merchant transactions processed increased 44
percent to 2.2 billion in the 1995 period compared with 1.5 billion in the 1994
period. The increase in transactions processed is primarily attributable to
the U.S. transaction card processing business, including 214 million
incremental CES merchant transactions.
Revenues derived from the payment instruments business grew by 21 percent or
$20 million over the 1994 period. This growth was attributable to an increase
in fee revenue associated with an approximate 80 percent increase in
MoneyGram(SM) service transactions processed and higher MoneyGram(SM) revenue
per transaction resulting from conditions relating to Mexican exchange rates in
the 1995 first quarter. This growth was partially offset by a decrease in
revenues derived from the investment portfolios due to an increase in variable
rate commissions paid to selling agents. As discussed above, 1995 results
include earnings on tax-exempt investments included in the Company's separate
investment portfolio that did not exist in 1994. On a pretax equivalent basis,
which is the basis of recognition of earnings on the portfolio owned by TRS,
the Company's 1995 revenues, operating and pretax income, and income taxes
would have been $10.8 million higher. Payment instrument transactions
processed increased 18 percent to 156 million in the 1995 period compared with
132 million in the same period in 1994.
Revenues from the mutual fund servicing business increased by 27 percent over
the 1994 period as a result of increased sales of enhanced services and
expansion into adjacent markets principally due to the addition of the mutual
fund administration business and 440 Financial Group.
Revenues from the receivables management and teleservices businesses declined
slightly from the 1994 period.
Expenses
The Company's total operating expenses increased 23 percent to $755 million.
The Company's expenses included increased product development and
infrastructure costs incurred in advance of accelerating financial sector
revenues anticipated for the second half of 1995 as reflected by the increase
in "Human Resources," "Equipment, supplies and facilities" and "Professional,
advertising and other" on the Company's Consolidated Statement of Income.
Growth in volumes of transactions processed and the impact of sales of
additional enhanced services also contributed to higher systems development and
programming, data processing and facilities costs. The Company's additional
investment in hardware and operating systems and recently acquired businesses
contributed substantially to the increase in depreciation and amortization.
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Net Income and Earnings Per Share
The Company's consolidated net income increased 20 percent to $108 million
compared with $90 million for the corresponding period in 1994. The Company's
earnings per share increased 16 percent to $0.94 in the 1995 period from $0.81
in the 1994 period. The disparity of the foregoing growth percentages was the
result of the additional shares issued in connection with the CES and ENVOY
acquisitions. The increase in net income came substantially from increased
operating income due to continued growth in its two largest financial sector
businesses. FDC's transaction card processing unit had strong growth in card
accounts, transactions processed and sales of enhanced services, as well as the
results of the newly-acquired CES business. In addition, FDC's payment
instruments business had higher volumes, particularly in its MoneyGram(SM)
service. These increases were partially offset by a decline at the
teleservices business. See "Quarter Ended June 30, 1995 Compared to Quarter
Ended June 30, 1994" for discussion of one-time gains recorded during 1995.
LIQUIDITY AND CAPITAL RESOURCES
Total assets of the Company increased to $7.4 billion at June 30, 1995 from
$5.4 billion at December 31, 1994. "Proceeds including proceeds due from
financial instruments sold" increased by $736 million primarily due to the sale
of the Company's own payment instruments in conjunction with the new official
check business. "Goodwill" and "Other intangibles", net of amortization,
increased by $825 million substantially due to the acquisitions of CES and
ENVOY, partially offset by the reduction of goodwill associated with the sale
of the health systems business. As a result of the newly-acquired CES merchant
business, "Funds and funds due relating to merchant processing" represents
amounts received and due from the issuing banks via card associations in
connection with the normal merchant settlement process, while the related
liability, "Liabilities relating to merchant processing", represents amounts
due to merchants.
The Company increased its investing activities by $137 million over 1994. This
was primarily due to higher acquisition- related expenditures largely
attributable to the CES acquisition, an increase in deferred contract costs
attributable to the signing and converting of clients to the Company's systems
and higher capital expenditures for data processing equipment.
Cash flows from financing activities increased by $209 million, principally due
to the additional draw-down of $337 million against the Company's $400 million
revolving credit facilities and higher proceeds from the exercise of stock
options. These increases were partially offset by the payment of CES' senior
subordinated debt of $139 million and higher purchases of treasury stock in
1995.
The Company's cash flows from operating activities decreased by $30 million
primarily due to net cash outflows attributable to changes in operating assets
and liabilities.
During the six months ended June 30, 1995, the Company repurchased 734,300
shares of common stock in the open market for approximately $39 million. These
purchases are pursuant to a formal plan approved by FDC's Board of Directors in
March 1995 for use in conjunction with certain employee
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benefit programs, as well as past and future acquisition-related payments. The
Company is authorized to repurchase shares in numbers reasonably expected to be
required for issuance within the two years following any purchase date in
connection with the Company's employee benefit plans and may hold up to 3.0
million shares of its common stock, at any time, pursuant to this
authorization. The Company anticipates continued repurchases. During the 1995
second quarter, the Company reissued 2 million shares of common stock in
conjunction with the ENVOY acquisition. In addition, the Company reissued
729,940 shares of common stock in connection with stock option exercises and
the settlement of a portion of the deferred purchase price of the Company's
receivables management business.
On March 9, 1995, the Company completed the acquisition of CES, a leading
merchant transaction processor, for approximately $540 million which included
the issuance of approximately 8.1 million shares of FDC common stock to CES
shareholders valued at $419 million with an additional 0.6 million shares in
the form of common stock options valued at approximately $27 million. The
remainder of the consideration represents cash paid at the time of closing and
acquisition costs. In conjunction with the CES acquisition, the Company
provided cash of $76 million to CES to retire its outstanding indebtedness
under its senior credit facility. CES also had $125 million outstanding of
publicly traded Senior Subordinated Notes (CES Notes). In April 1995, the
Company repurchased and retired the CES Notes for $139 million which was funded
by a draw-down against the Company's revolving credit facilities.
The Company continues to pursue strategic alliance programs with bank clients
offering them the opportunity to participate in the merchant relationships
associated with the existing business of CES. Currently the Company has three
signed contracts and has received several letters of intent. The formation of
certain alliances will involve cash payments by the Company to certain alliance
partners. Cash payments required by agreements signed to date are not material
to the Company's overall cash flows.
On June 6, 1995, the Company completed the acquisition of the merchant
processing and point-of-sale unit of ENVOY for approximately $175 million,
which primarily represents the issuance of 3 million shares of FDC common
stock. In addition, a contingent payment of up to $21 million in the form of
FDC common stock will be due over a one- to three- year period if the acquired
entity attains certain performance objectives.
On June 13, 1995, the Company announced execution of a merger agreement with
FFMC, a leading worldwide information services provider. Pursuant to the terms
of the merger agreement, each outstanding share of FFMC common stock will be
converted into 1.5859 shares of FDC common stock at closing. The transaction
is valued at approximately $6.7 billion based on FDC's closing price on June
12, 1995 of $56.875. The transaction, which will be accounted for as a pooling
of interests, requires the approval of the stockholders of both companies as
well as various regulatory agencies. The Company anticipates closing the
transaction in late 1995 or early 1996; however, no assurance can be given with
respect to the timing or likelihood of such transaction closing.
As discussed in Note 3 to the Company's Consolidated Financial Statements, FDC
will incur one-time transaction and termination expenses currently estimated at
$195.4 million, net of related taxes, upon closing of the FFMC transaction.
Costs associated with the integration and consolidation of the
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companies are not presently estimable. These costs will be funded through
available cash, proceeds from the sale of the Company's investment in HBO &
Company (HBOC) common stock discussed below or available credit facilities or a
combination thereof.
During the 1995 second quarter, the Company completed the sale of its health
systems business to HBOC in exchange for 4 million shares of HBOC common stock
valued at approximately $205 million. The investment in HBOC common stock is
presented as "Equity securities available for sale" on the Company's
Consolidated Balance Sheet. The Company has exercised its demand registration
rights and anticipates selling its investment in HBOC by the end of 1995. The
health systems business accounted for approximately 8 percent of the Company's
1994 annual consolidated revenues and a lesser percentage of its 1994 annual
consolidated operating income.
The Company regularly considers acquisition opportunities as well as other
forms of business combinations and divestitures. Historically, the Company has
been involved in numerous transactions of various magnitudes, for consideration
which has included cash or securities (including common stock) or combinations
thereof. The Company continues to evaluate and pursue transaction
opportunities as they arise. No assurance can be given with respect to the
timing, likelihood or the financial or business effect of any possible
transaction. The Company's future acquisition and investing activities are
expected to rely on internally generated funds and the issuance of debt or
equity securities or bank borrowings. The Company believes it has adequate
internal and external financing available to meet anticipated liquidity needs.
On July 24, 1995, the Company completed a $200 million public debt offering of
6 3/4% Notes (the Notes) due July 15, 2005. Interest on the Notes is payable
semi-annually in arrears on January 15 and July 15 of each year, commencing
January 15, 1996. There is no sinking fund obligation applicable to the Notes,
nor are the Notes redeemable prior to maturity. The Company received net
proceeds of approximately $197 million of which $165 million was used to pay
down the Company's short-term borrowings under its revolving credit facilities.
The remainder was used for general corporate purposes. Currently $193 million
remains available under the Company's revolving credit facilities.
On July 26, 1995, the Company declared a regular quarterly cash dividend of
$0.03 per common share, payable on October 16, 1995 to stockholders of record
on October 2, 1995.
RECENTLY ISSUED ACCOUNTING STANDARDS
In May 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment
of Long-Lived Assets," effective for fiscal years beginning after December 15,
1995. The Company does not believe SFAS No. 121 will have a material impact on
its financial statements.
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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, 1995, and the related consolidated statements of
income for the three-month and six-month periods ended June 30, 1995 and 1994,
and the consolidated statements of cash flows for the six-month periods ended
June 30, 1995 and 1994. 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 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, 1994, and the related consolidated statements of income,
stockholders' equity, and cash flows for the year then ended (not presented
herein) and in our report dated February 3, 1995, 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, 1994, is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
ERNST & YOUNG LLP
New York, New York
August 4, 1995
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PART II. OTHER INFORMATION
FIRST DATA CORPORATION
Item 4. Submission of Matters to a Vote of Securities Holders:
------------------------------------------------------
The Company held its Annual Meeting of Stockholders on May 17, 1995. Three
matters were voted upon and approved at the meeting.
Proposal 1 Election of Directors
The terms of office of two current directors, Henry C. Duques and Ben
Burdetsky, expired at the 1995 Annual Meeting. The re-election of Messrs.
Duques and Burdetsky was voted on at the Annual Meeting. The results of the
voting were as follows:
FOR WITHHELD
Henry C. Duques 100,503,929 326,363
Ben Burdetsky 100,586,243 244,049
Proposal 2 Approval of an Amendment to the Company's Restated Certificate
of Incorporation to delete all Provisions relating
specifically to American Express Company
The results of the voting were as follows:
FOR 99,772,215 AGAINST 171,044 ABSTAIN 887,033
Proposal 3 The ratification of the selection of Ernst & Young LLP as
independent auditors for 1995
The results of the voting were as follows:
FOR 100,659,460 AGAINST 25,006 ABSTAIN 145,826
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PART II. OTHER INFORMATION
FIRST DATA CORPORATION
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
(b) Reports filed on Form 8-K during the quarter for which this report is filed:
(i) Item 5, Form 8-K, dated April 26, 1995, reporting the Company's earnings for the quarter ended
March 31, 1995.
(ii) Item 5, Form 8-K, dated May 16, 1995, filing a Press Release announcing that the Company had
entered into a definitive agreement for the sale of its First Data Health Systems Corporation
subsidiary.
(iii) Item 5, Form 8-K, dated June 6, 1995, filing a Press Release announcing the consummation of the
merger of ENVOY Corporation, with and into the Company.
(iv) Item 5, Form 8-K, dated June 12, 1995, filing a Press Release reporting that the Company had
entered into an Agreement and Plan of Merger dated June 12, 1995 among the Company, FDC Merger
Corp., a wholly-owned subsidiary of the Company, and First Financial Management Corporation.
(v) Item 5, Form 8-K, dated June 30, 1995, filing a copy of the Company's Restated Certificate of
Incorporation as filed with the Delaware Secretary of State on June 2, 1995, and filing a copy
of Unaudited Pro Forma Condensed Combined Statement of Income which provided pro forma financial
information for the Company and CESI Holdings, Inc. for the three months ended March 31, 1995
and 1994.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned,
thereunto duly authorized.
FIRST DATA CORPORATION
----------------------
(Registrant)
Date: August 9, 1995 By LEE ADREAN
---------------------------- -----------------------------
Lee Adrean
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: August 9, 1995 By CHERYL L. KING
----------------------------- -----------------------------------
Cheryl L. King
Vice President and Controller
(Principal Accounting Officer)
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