FIRST DATA CORPORATION
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
---------------------------------
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
FIRST DATA CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 47-0731996
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5660 NEW NORTHSIDE DRIVE, SUITE 1400, ATLANTA, GA 30328-5800
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (770) 857-0001
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NOT APPLICABLE
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(Former name, former address and former
fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No____
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Number of Shares Outstanding
Title of each class as of May 3, 1999
------------------- ----------------------------
Common Stock, $.01 par value 431,917,678
1
INDEX
PAGE
PART I FINANCIAL INFORMATION NUMBER
------
Item 1. Consolidated Financial Statements:
Consolidated Statements of Income for the
three months ended March 31, 1999 and 1998................... 3
Consolidated Balance Sheets at March 31, 1999
and December 31, 1998........................................ 4
Consolidated Statements of Cash Flows for the
three months ended March 31, 1999 and 1998................... 5
Notes to Consolidated Financial Statements................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk...19
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................21
Item 6. Exhibits and Reports on Form 8-K.............................21
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 March 31,
----------------------------
1999 1998
--------- ---------
REVENUES
Service revenues $1,251.4 $1,181.3
Product sales and other 18.2 28.2
-------- --------
1,269.6 1,209.5
-------- --------
EXPENSES
Operating 846.5 788.6
Selling, general & administrative 197.4 198.6
Restructuring, business divestitures
and impairment, net -- 0.4
Interest 24.2 26.9
-------- --------
1,068.1 1,014.5
-------- --------
Income before income taxes 201.5 195.0
Income taxes 60.5 64.3
-------- --------
Net income $ 141.0 $ 130.7
======== ========
Earnings per common share - basic $ 0.32 $ 0.29
======== ========
Earnings per common share - diluted $ 0.32 $ 0.29
======== ========
See notes to consolidated financial statements.
3
FIRST DATA CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
March 31, December 31,
ASSETS 1999 1998
--------- ------------
Cash and cash equivalents $ 469.3 $ 459.5
Settlement assets 9,445.5 9,758.0
Accounts receivable, net of allowance for doubtful accounts
of $32.3 (1999) and $27.9 (1998) 854.6 940.1
Property and equipment, net 753.0 781.0
Goodwill, less accumulated amortization
of $561.5 (1999) and $542.7 (1998) 2,865.9 2,885.4
Other intangibles, less accumulated amortization
of $590.8 (1999) and $548.5 (1998) 1,103.7 1,107.9
Other assets 728.1 655.1
--------- ---------
$16,220.1 $16,587.0
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Settlement obligations $ 9,296.7 $ 9,617.0
Accounts payable and other liabilities 1,656.8 1,642.4
Borrowings 1,507.0 1,571.7
--------- ---------
Total Liabilities 12,460.5 12,831.1
--------- ---------
Commitments and contingencies
Stockholders' Equity:
Common Stock, $.01 par value; authorized 600.0 shares,
issued 448.9 shares in 1999 and 1998 4.5 4.5
Additional paid-in capital 2,153.9 2,143.2
--------- ---------
Paid-in capital 2,158.4 2,147.7
Retained earnings 2,008.4 1,893.9
Accumulated other comprehensive income 32.9 54.1
Less treasury stock at cost, 15.3 shares (1999)
and 13.4 shares (1998) (440.1) (339.8)
--------- ---------
Total Stockholders' Equity 3,759.6 3,755.9
--------- ---------
$16,220.1 $16,587.0
========= =========
See notes to consolidated financial statements.
4
FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Three Months Ended March 31,
----------------------------
1999 1998
------- -------
Cash and cash equivalents at beginning of period $ 459.5 $ 410.5
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 141.0 130.7
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization 144.9 141.4
Other noncash items 6.5 5.9
Increase (decrease) in cash, excluding the effects of acquisitions and
dispositions, resulting from changes in:
Accounts receivable 85.1 (2.3)
Other assets (72.9) 7.0
Accounts payable and other liabilities 38.5 (23.3)
Income tax accounts (1.0) 5.3
------- -------
Net cash provided by operating activities 342.1 264.7
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Current year acquisitions, net of cash acquired (4.2) (61.3)
Payments related to other businesses previously acquired (30.6) (34.2)
Additions to property and equipment, net (39.5) (120.3)
Payments to secure customer service contracts, including outlays
for conversion, and capitalized systems development costs (58.7) (97.0)
Other investing activities (7.8) 0.4
------- -------
Net cash used in investing activities (140.8) (312.4)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-term borrowings, net (163.6) (12.9)
Borrowings (payments) on long-term debt 98.9 (0.5)
Proceeds from issuance of common stock 52.9 23.0
Purchase of treasury shares (170.9) (46.5)
Cash dividends (8.8) (8.9)
------- -------
Net cash used for financing activities (191.5) (45.8)
------- -------
Change in cash and cash equivalents 9.8 (93.5)
------- -------
Cash and cash equivalents at end of period $ 469.3 $ 317.0
======= =======
See notes to consolidated financial statements
5
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying consolidated financial statements of First Data
Corporation ("FDC" or the "Company") should be read in conjunction with the
Company's consolidated financial statements for the year ended December 31,
1998. Significant accounting policies disclosed therein have not changed.
The accompanying consolidated financial statements are unaudited; however,
in the opinion of management, they include all normal recurring adjustments
necessary for a fair presentation of the consolidated financial position of
the Company at March 31, 1999 and the consolidated results of its
operations and cash flows for the three months ended March 31, 1999 and
1998. Results of operations reported for interim periods are not
necessarily indicative of results for the entire year.
In July 1998, the assets of First Data Financial Services ("FDFS") were
contributed to a joint venture. As a result, the consolidated financial
statements for the three months ended March 31, 1998 have been restated to
reflect FDFS operating results under the equity method of accounting.
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 $391.3 million and $319.1 million
for the three months ended March 31, 1999 and 1998, respectively).
2. Innovis, Inc. (formerly Consumer Credit Associates, Inc.) operations, other
than those included in the sale to CBC Companies, Inc. as described in Note
9 were substantially shut down by March 31, 1999. Innovis utilized $4.3
million of the $9.5 million December 31, 1998 reserve balance for severance
and other costs during the first quarter. The remaining reserve of $5.2
million, which includes $3.7 million for severance and $1.5 million for
other exit costs, will be utilized to cover the remaining shutdown costs.
During the second quarter of 1998, the Company amended its agreement with
HSBC Holdings, plc ("HSBC") and recorded a $125.2 million loss contract
provision. In September 1998, the Company announced the termination of its
Hong Kong card-processing contract with HSBC. Such termination caused an
Australian card-processing contract to become a loss contract. Of the $19.1
million HSBC accrual at December 31, 1998, $4.7 million was utilized during
the first quarter 1999, $3.3 million for the Australian loss contract and
$1.4 million for Hong Kong wind down costs. The remaining accrual of $14.4
million is expected to be utilized throughout the remainder of 1999
primarily for losses related to the Australian contract.
During the first quarter of 1998, the Company incurred restructuring
charges of $23.1 million; $19.1 million related to merchant processing
services and $4.0 million relating to card issuer services. The charges
consisted of severance accruals for approximately 579 employees of $13.3
million and facility closure costs and related costs of $9.8 million.
Through March 31, 1999 the Company had
6
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
utilized $14.4 million of the accrual; $11.8 for severance and $2.6 for
facility closure and related costs. During the first quarter of 1998, the
Company also recorded impairment charges of $5.8 million related to
merchant processing services as a result of facility closures and
terminated conversion efforts.
In February 1998, the Company sold its NTS transportation services unit and
simultaneously acquired a gaming services business from the company that
acquired NTS. The acquisition price of the gaming services business was
equal to the fair market value of NTS's assets plus approximately $50.5
million in cash. The disposition of NTS resulted in a pretax gain of $28.5
million.
The following table summarizes the Company's utilization of restructuring
accruals for the quarter ended March 31, 1999:
Employee Facility Other Exit
Severance Closure Costs
Remaining Accrual at
December 31, 1998 $7.9 $7.9 $2.0
Cash Payments and
Other Charges 2.3 0.2 ---
---- ---- ----
Remaining Accrual at
March 31, 1999* $5.6 $7.7 $2.0
==== ==== ====
*Excludes Hong Kong and Innovis activities described previously.
3. In March 1999, the Company announced definitive agreements with Bank One
Corporation and Paymentech, Inc. for the acquisition of Paymentech's 16
million publicly held shares (45% of total shares outstanding) at a price
of $25.50 per share and for the combination of Paymentech's operations with
the existing Bank One/First Data merchant alliance. This transaction is
subject to regulatory approval and certain other conditions and is expected
to be completed in the third quarter of 1999, assuming receipt of necessary
regulatory approvals.
4. The Company's commercial paper borrowings at March 31, 1999 were $278.7
million under its $1.5 billion commercial paper program and supporting
revolving credit facilities. At March 31, 1999, the Company has $525
million available under shelf registrations providing for the issuance of
debt and equity securities and $210 million available under its uncommitted
bank lines.
During March 1999, the Company entered into a $100 million, 5-year bullet
maturity debt financing with a floating interest rate. The effective
interest rate on this borrowing is based on 1.46% below the 90-day U.S.
LIBOR rate, which as of March 31, 1999 was approximately 3.44%. Under
certain circumstances the financing may be prepaid.
5. Earnings per common share amounts are computed by dividing net income
amounts by weighted average common and common equivalent shares (when
dilutive) outstanding during the period.
7
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Amounts utilized in per share computations are as follows:
For the three months ended March 31, 1999 1998
--------------------------------------------------------------------------
(In millions)
Weighted average shares outstanding:
Basic weighted average shares 434.4 447.3
Stock options 6.5 3.7
Restricted stock awards 0.2 ---
----- -----
441.1 451.0
===== =====
Diluted earnings per common share was calculated based on weighted-average
shares outstanding including the dilutive impact of common stock
equivalents which consist of outstanding stock options, warrants and
restricted stock awards.
6. The components of comprehensive income are as follows (in millions):
Three months ended
March 31,
------------------------
1999 1998
------ ------
Net income $141.0 $130.7
Foreign exchange effect (11.5) (.7)
Unrealized loss on
Securities (9.7) ---
------ ------
Total comprehensive income $119.8 $130.0
====== ======
7. First Data Corporation classifies its businesses into three segments:
payment instruments, card issuer services and merchant processing services.
See the Company's 1998 Annual Report on Form 10-K for a detailed
description of each segment and the accounting policies of the operating
segments.
8
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the Company's operating segment results for
the three months ended March 31, 1999 and 1998 (in millions):
Three Months Ended
March 31,
--------------------
1999 1998
-------- --------
Revenues:
Payment Instruments $ 459.0 $ 382.6
Card Issuer Services 350.8 334.7
Merchant Processing Services 345.6 313.1
All Other and Corporate 150.2 138.8
-------- --------
Subtotal 1,305.6 1,169.2
-------- --------
Divested Operations -- 68.1
Eliminations (a) (36.0) (27.8)
-------- --------
Consolidated $1,269.6 $1,209.5
======== ========
Operating Profit:
Payment Instruments $ 116.6 $ 97.8
Card Issuer Services 59.8 57.0
Merchant Processing Services 69.5 55.1
All Other and Corporate 15.8 34.3
-------- --------
Subtotal 261.7 244.2
-------- --------
Divested Operations -- 5.9
Corporate Interest Expense, net (24.2) (26.9)
Restructuring, Business Divestitures
and Impairments, net -- (0.4)
Eliminations (a) (36.0) (27.8)
-------- --------
Consolidated $ 201.5 $ 195.0
======== ========
Depreciation & Amortization:
Payment Instruments $ 25.0 $ 22.1
Card Issuer Services 59.6 58.9
Merchant Processing Services 48.1 44.7
All Other and Corporate 12.2 9.5
-------- --------
Subtotal 144.9 135.2
Divested Operations -- 6.2
-------- --------
Consolidated $ 144.9 $ 141.4
======== ========
(a) Represents elimination of adjustment to record tax-exempt revenues
(primarily in Payment Instruments) on a pretax equivalent basis.
9
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires
companies to record derivatives on the balance sheet as assets or
liabilities at fair value. It is effective for financial statements for
fiscal years beginning after June 15, 1999. The Company is evaluating the
impact of SFAS 133 on the Company's future earnings and financial position,
but does not expect it to be material.
9. Subsequent Event - In April 1999, the Company entered into an agreement to
sell Innovis, Inc. (formerly Consumer Credit Associates, Inc.) to CBC
Companies, Inc. This transaction closed April 23, 1999 and resulted in the
Company receiving net proceeds of approximately $20 million. As a result of
selling Innovis, rather than only shutting down operations, certain tax
benefits not previously available will be realized; consequently, the
after-tax benefit, which will be recorded in the second quarter, will be
approximately $37 million.
10
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Significant Developments
During the first three months of 1999, First Data Corporation ("FDC" or the
"Company") continued to emphasize its three principal business segments: payment
instruments, card issuer services and merchant processing services. The Company
has continued this emphasis to further its overarching strategic objective: to
process every electronic transaction worldwide from the point of occurrence to
the point of settlement. FDC is keenly focused on improving execution of
strategic plans, enhancing sales and marketing activities, identifying
operational efficiencies and building on the fundamental strengths of its
business.
In the payment instruments segment, Western Union continues to experience strong
growth. Western Union now offers money transfer services at more than 58,000
agent locations (a 28% increase since March 31, 1998) in 169 countries
worldwide. Development efforts continued on several new products and services,
including TransPoint, the Company's Internet-based bill presentment and payment
service joint venture, which is scheduled for introduction in the second quarter
1999.
Card issuer services volume trends remained positive in the first quarter of
1999 with total accounts on file growing to 215 million - up 13% from the prior
year first quarter. The Company also signed an agreement with Dresdner Bank in
Germany and renewed its contract with Fleet Bank for an additional 10 years.
Revenues in the merchant processing services segment grew 10% in the first three
months of 1999 compared to the first three months of 1998. This growth was
driven primarily by increases in dollar volume processed (17% growth) and the
impact of 1998 revenue enhancement initiatives.
In March 1999, the Company announced the signing of a definitive agreement with
Bank One Corporation and Paymentech, Inc. for the acquisition of Paymentech,
Inc.'s publicly held shares (approximately 16 million shares) at a cost of
$25.50 per share (Bank One owns the remaining 20 million shares of Paymentech).
Subsequent to the share acquisition, the operations of Paymentech and Banc One
Payment Services, LLC, FDC's merchant bank alliance with Bank One, will be
combined. Pending approval by the shareholders of Paymentech as well as certain
regulatory agencies, this transaction will be completed during the third quarter
of 1999. The transaction, when completed, is expected to be approximately one
cent dilutive to First Data's earnings per share and to have an immediate
accretive impact to cash flow. The potential for this transaction was considered
in the Company's previously stated 1999 financial outlook and the Company
remains comfortable with its earnings per share guidance of $1.68 to $1.76.
FDC continues to aggressively expand its e-commerce activities. In the first
three months of 1999, the Company launched several new marketplace tools
including MerchantStuff.com and VirtualApp.com. At the MerchantStuff.com
website, a merchant can get everything needed to do business on the internet
from setting up a storefront to securing the necessary payment software.
VirtualApp.com is a fully automated merchant activation website wherein a
merchant is able to obtain all the authorization codes and gateway connections
needed to accept payments on the Internet. In addition to introducing new
e-commerce marketplace tools, the Company also began building critical
relationships with several Internet-related companies including Yahoo!store,
Register.com and recently, Verio.
11
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
The Company continues its national rollout of TeleCheck's electronic check
acceptance service. At March 31, 1999 this service was being offered at 10,000
merchant locations (up from 7,500 locations at December 31, 1998).
In April 1999, the Company entered into an agreement to sell Innovis, Inc.
(formerly Consumer Credit Associates, Inc.) to CBC Companies, Inc. This
transaction closed April 23, 1999 and resulted in the Company receiving net
proceeds of approximately $20 million. As a result of selling Innovis, rather
than only shutting down operations, certain tax benefits not previously
available will be realized; consequently, the after-tax benefit, which will be
recorded in the second quarter, will be approximately $37 million.
Innovis operations, other than those included in the sale to CBC, were
substantially shutdown by March 31, 1999. Innovis utilized $4.3 million of the
$9.5 million December 31, 1998 reserve balance for severance and other exit
costs during the first quarter. The remaining reserve of $5.2 million, which
includes $3.7 million for severance and $1.5 million for other exit costs, will
be utilized to cover the remaining shutdown costs.
FDC remains the market leader in its three major segments: payment instruments,
card issuer services and merchant processing services. The Company will continue
to focus on these core business areas throughout 1999 and will continue to
assess how best to serve its customer base. Among the actions the Company
believes is necessary to continue its leadership position is a focused effort to
develop new products and services and to enhance its processing platforms in
response to Company growth, client requirements and changing technology. In this
regard, the Company also anticipates it will need to upgrade and redevelop its
business continuity plans to reflect new systems and platforms developed to
support these actions. Also, the Company may take future actions to further
streamline operations and reduce costs.
Results of Operations
The Company derives revenues in each of its reportable segments based
principally on the number of transactions processed, a percentage of dollar
volume processed, or on a combination thereof. Lesser amounts of revenue are
generated from foreign currency exchange on money transfer transactions and
sharing in investment earnings on fiduciary funds. Total revenues for the
quarter ended March 31, 1999 increased 5% to $1.27 billion from $1.21 billion in
the prior year quarter. Revenues continued to be impacted by significant
divestiture activity over the last year as the Company has focused on its core
payment services business. The Company's internal growth rate in revenues over
first quarter 1998 (excluding the effects of business acquisitions and business
divestitures) was 11%.
Product sales and other revenues decreased 35% from $28.2 million in the first
quarter of 1998 to $18.2 million in first quarter 1999. The largest component of
the decline is attributable to decreases in IBT branch installations. Also,
lesser amounts of contingent payments from a previously-formed merchant alliance
were received in the first quarter of 1999 compared to the same period in 1998.
Operating expenses for the first quarter of 1999 increased 7% to $846.5 million
compared to $788.6 million in the 1998 first quarter. Year 2000 ("Y2K")
readiness expenses for the 1999 first quarter approximated $21 million as
compared to $14 million in 1998's first quarter. Expense associated with
investment spending (principally in the payment instruments segment) increased
approximately $7 million over 1998's first quarter. In addition, the Company has
undertaken certain corporate initiatives
12
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
which will improve the effectiveness of the Company overall but which results in
increased costs in the short-term.
Selling, general and administrative expenses declined 1% to $197.4 million in
1999's first quarter compared to $198.6 million for the same period in 1998.
This decrease is attributable mainly to the impact of business unit divestitures
in 1998.
Interest expense decreased 10% to $24.2 million in 1999 from $26.9 in the first
quarter of 1998 due primarily to reductions in debt balances achieved through
strong cash flow from operations and significantly reduced capital expenditures.
Borrowings at March 31, 1999 were $1.51 billion as compared to $1.57 billion at
the end of 1998.
FDC's effective tax rate for the first quarter of 1999 was 30%, a decrease of 3
percentage points from 1998's first quarter rate. This decrease is primarily due
to an increase in the amount of non-taxable interest generated from investments
in debt instruments issued by state and local governments.
Net income of $141.0 million for the first quarter of 1999 increased 8% from
$130.7 million in 1998, and net income margins increased to 11.1% from 10.8%.
Margin improvement in the core businesses and a lower tax rate were the primary
factors in this increase. Basic and diluted earnings per share increased
approximately 10% to $0.32 in 1999 from $0.29 in 1998, as a result of higher net
income and fewer weighted average shares outstanding.
Payment Instruments
Total revenues in the payment instruments segment increased by 20% (on a
tax-equivalent basis) to $459.0 million in the first quarter of 1999, as
compared to $382.6 million in 1998. This increase reflects continuing strong
underlying volume increases principally related to international and commercial
money transfer. Aggregate money transfer transactions grew 23% (to 17.5 million)
over the first quarter of 1998. At March 31, 1999, the agent base had grown 28%
as compared to a year ago, with over 58,000 agents in 169 countries.
Operating profits for the first quarter of 1999 grew 19% over last year's first
quarter, from $97.8 million to $116.6 million, while margins remained steady at
25%. Mature businesses continue to gain operating leverage through cost
efficiencies and price increases in certain markets, offset by price declines in
the Mexican market and by investment in new businesses and products.
Card Issuer Services
Total revenues in the card issuer services segment grew 5% for the first quarter
of 1999 to $350.8 million as compared to $334.7 million for 1998's first
quarter. Card accounts on file as of March 31, 1999 were 214.6 million ( a 13%
increase from March 31, 1998) with domestic card accounts growing to 188.3
million (11% growth) and international card accounts growing to 26.3 million
(32% growth). Revenues continue to grow more slowly than accounts on file due to
a lower ratio of active accounts to total accounts on file and market pricing
trends for new business.
During the quarter, the card issuer services segment entered into several new
agreements to provide processing services and renewed certain existing
processing agreements. The Company also anticipates deconversion of several
clients, the most significant which was due to the acquisition of a client by a
13
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
financial institution which processes its card portfolio in-house. None of these
terminations, individually or in the aggregate, are expected to have a
significant impact on the Company's results of operations. Overall, the Company
expects accounts on file to grow approximately 21% for the full year 1999.
Operating profit for the card issuer services segment increased 5% from $57.0
million in 1998's first quarter to $59.8 million in 1999, while operating
margins remained flat at 17%.
For several years, it has been uncertain whether the U.K. could impose a value
added tax (VAT) on the processing services provided by the Company's First Data
Resources Limited (FDRL) business unit. Imposition of a VAT could put FDRL at a
competitive disadvantage to in-house credit card processing solutions, which
would not be subject to the tax. FDRL recently received a favorable opinion in a
pending legal matter that held that the VAT tax could not be imposed by the U.K.
taxing authorities in that case. However, the U.K. recently adopted new
legislation that purports to impose VAT on third-party credit card processors
such as FDRL. Although the imposition of a VAT in the U.K. remains uncertain,
the decision received by FDRL indicates that the European Community doctrines
prevent the U.K. from imposing a VAT on processing services such as those
provided by FDRL.
Merchant Processing Services
Revenues in the domestic merchant processing services segment grew 10% to $345.6
million for the first quarter of 1999 compared to first quarter 1998. Total
merchant card dollar volume grew 17% as compared to the first quarter of 1998.
Revenue growth was driven by growth in the dollar volume processed and the
impact of 1998 revenue enhancement initiatives; however, revenues may not
continue to grow at this level due to annualization of these initiatives.
Operating profits increased 26% to $69.5 million for the first quarter of 1999
from $55.1 million for last year's first quarter. Operating margins improved to
20.1% in first quarter 1999 as compared to 17.6% in last year's first quarter.
This improvement is reflective of the impact of significant cost reduction and
revenue enhancement initiatives implemented in the last year, somewhat offset by
an increase in Y2K expenses.
Key elements of FDC's strategy in the merchant processing services segment
involve its joint venture alliances with its bank partners and internet
commerce. The joint venture alliances require close relationships and
cooperative efforts between the Company and its bank partners and could be
affected by further consolidation among financial institutions. Internet
commerce, while accounting for a very small portion of the segment's
transactions currently, is growing rapidly. However, internet commerce is still
evolving industry-wide and its ultimate impact on merchant processors and
acquirers is uncertain.
All Other and Corporate
Revenues from all other continuing operations increased 8% to $150.2 million for
the first quarter of 1999 from $138.8 million in first quarter 1998. This
increase is primarily attributable to a 16% increase in revenues in the Investor
Services Group due to the addition of new contracts and acquisitions completed
in 1998. IBT revenues were down approximately $8 million from the prior year
first quarter due to a decline in branch installations, while Call Interactive
and TeleServices revenues were up over last year.
14
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
Operating profits declined 54% in 1999, from $34.3 million to $15.8 million.
Operating profit for the Investor Services Group was relatively flat primarily
as a result of expense relating to new business and the integration of 1998
acquisitions. Operating profit declined at IBT as a result of lower revenues.
Additionally, the extent and timing of certain Corporate initiatives focused on
improving the effectiveness of the Company's overall operations increased
Corporate expenses.
Capital Resources and Liquidity
FDC continues to generate significant cash flow from operations, aggregating
$342.1 million in the three months ended March 31, 1999, as compared to $264.7
million for the three months ended March 31, 1998. FDC utilized this cash flow
to reinvest in its existing businesses, to contribute to the financing of
business expansion, to fund treasury stock purchases and to repay borrowings.
FDC reinvests cash in its existing businesses principally to expand its
processing capabilities through property and equipment additions and to
establish customer-processing relationships through contract payments and costs
for conversion and systems development. These cash outlays decreased to $98.2
million for the first quarter of 1999 as compared to $217.3 million for the
first quarter of 1998. For the full year 1999, the Company expects such total
non-acquisition spending to be less than 1998's full year total of $649.8
million. The Company currently expects total Year 2000 related systems spending
for the full year 1999, which will be expensed as incurred, to be approximately
$85-$95 million, as compared to $75 million incurred for the full year 1998.
(See the Year 2000 section following Capital Resources and Liquidity for
additional information.) Although some of the Company's Year 2000 spending is
incremental, the Company expects to redeploy much of its Year 2000 spending to
make significant investments in new and enhanced operating platforms after
completion of its Year 2000 program. Such investments will encompass all
segments, but are likely to be concentrated in the merchant processing services
and card issuer services segments.
Overall, FDC's operating cash flow for the three months ended March 31, 1999
exceeded its non-acquisition investing activities by $236.1 million. These cash
sources contributed to funds utilized for short-term borrowing repayments and
treasury stock purchases.
The Company's financing activities include net borrowings, proceeds from stock
option exercises, share repurchases under the Board authorized program described
below and for purposes of meeting requirements of employee benefit programs, and
dividend payments. Net cash used in financing activities was $191.5 million
during the first three months of 1999, as compared to $45.8 million in the 1998
period.
The Company made cash outlays totaling $170.9 million in the three months ended
March 31, 1999 to buy back shares of its common stock. Proceeds from stock
option exercises totaling $52.9 million partially offset these outlays. In
addition, the Company continued its practice of paying quarterly cash dividends,
resulting in $8.8 million of cash payments to the Company's common stockholders.
In September 1998, the Company announced that its Board of Directors authorized
management to purchase up to $500 million of its outstanding common stock. The
Company expects funding for the program will come from operating cash flow and
existing bank facilities. In December 1998, the Board increased the total
authorization to $550 million in conjunction with the issuance of a convertible
note. Through March 31, 1999, the Company had repurchased 13.1 million shares
under this program. Approximately $173 million remains available for share
repurchase under the current authorization.
15
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
The Company has two outstanding shelf registration facilities, one providing for
the issuance of debt and equity securities up to $1.0 billion in the aggregate
(of which $525 million remains available) and the other providing for the
issuance of approximately 10 million shares of the Company's common stock in
connection with certain types of acquisitions. During March 1999, the Company
entered into a $100 million, 5-year, bullet maturity debt financing with a
floating interest rate. The effective interest rate on this borrowing is based
on 1.46% below the 90-day U.S. LIBOR rate, which as of March 31, 1999 was
approximately 3.44%. Under certain circumstances the financing may be prepaid.
Included in cash and cash equivalents on the Consolidated Balance Sheet at March
31, 1999 is $90.4 million related to required investments of cash in connection
with the Company's merchant card settlement operation and additional amounts
used to support the operations of certain business areas; the remainder is
available for general corporate purposes. Also, FDC has remaining available
short-term borrowing capability of $1.3 billion at March 31, 1999 under the
Company's commercial paper program and through its bank credit lines.
The Company believes that its current level of cash and financing capability
along with future cash flows from operations are sufficient to meet the needs of
its existing businesses. However, the Company may from time to time seek
longer-term financing to support additional cash needs or reduce its short-term
borrowings.
Year 2000
See pages 23-28 of the Company's 1998 Annual Report on Form 10-K for additional
information regarding the Company's Year 2000 program.
State of Readiness. The Company's Y2K preparedness efforts are differentiated
between information technology ("IT") systems and non-IT systems. Non-IT systems
are embedded systems that support facilities infrastructures. The upgrade of
non-IT systems for 105 of 110 mission critical buildings has been completed. The
upgrade for other mission critical and non-mission critical buildings is
expected to be completed during the second quarter of 1999.
IT systems include primarily computer hardware and software and related
systems. The Company is implementing a five phase Y2K readiness plan for IT
systems: (i) Phase 1- Impact Analysis and Inventory, (ii) Phase 2- Code
Renovation/Operating System Upgrade, (iii) Phase 3- Data-Aged Test Execution,
(iv) Phase 4- Client Test Execution, and (v) Phase 5- Production Implementation.
A description of each phase may be found on page 24 of the Company's 1998 Annual
Report on Form 10-K. The following Status Chart indicates the approximate
percentage of work completed for the mission-critical systems of the following
material business units by phase as of April 30, 1999.
Business Unit Phase 1 Phase 2 Phase 3 Phase 4 Phase 5
- ------------- -------- -------- ------- ------- -------
Target Completion Date
For each phase 12/31/97 12/31/98 3/31/99 6/30/99 6/30/99
Card Issuer Units
First Data Resources 100% 100% 100% 90% 96%
First Data Australia 100% 100% 100% 35% 97%
First Data Resources Limited* 100% 100% 65% 49% 80%
First Data Oil Services 100% 100% 95% 90% 99%
16
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
Donnelley Marketing** 100% 100% 100% 80% 100%
Hogan Information Services 100% 100% 100% 100% 100%
Merchant Processing Units
First Data Merchant Services*** 100% 100% 91% 79% 95%
BMCF Gaming joint venture 100% 100% 100% 75% 75%
First Data POS (MicroBilt) 100% 100% 100% 100% 100%
TeleCheck 100% 100% 100% 35% 100%
Payment Instruments Units
Western Union 100% 100% 100% 94% 99%
Orlandi Valuta 100% 100% 100% 100% 100%
Integrated Payment Systems 100% 100% 100% 56% 100%
CashTax* 100% 100% 75% 67% 100%
Other
Call Interactive 100% 100% 100% 100% 100%
Investor Services Group 100% 100% 100% 58% 100%
TeleServices 100% 100% 100% 100% 100%
* The First Data Resources Limited and CashTax business units are
conducting a portion of their internal testing in Phase 3 and client
testing in Phase 4 in segments rather than completing each phase
independently. Under the segment method, both phase 3 and phase 4 are
conducted on segments of the IT system at the same time. This method
increases the time period for completion of phase 3 but does not affect
the time period to complete both phases. Both business units are being
closely monitored and management anticipates that both business units
will complete phases 3 and 4 by June 30, 1999.
**Formerly reported as First Data Solutions.
*** Original Year 2000 plans called for the First Data Merchant
Services business unit to convert one of its merchant capture systems
(the "Nashville" system), representing approximately 9.2% of daily
merchant authorization volume of FDMS, to a new Y2K compliant system
(the "FDMS 6000" system). Due to delays in the conversion of the
Nashville platform to the FDMS 6000 system, the Company decided to
remediate the Nashville front-end platform. Code renovation of the
Nashville system is complete and the Company is currently in the
testing phase. Future-dated testing is expected to be completed by the
end of June and the code is expected to be in full production by July
1999. The Company and the federal banking agencies that comprise the
Federal Financial Institutions Examination Council (FFIEC) entered into
an agreement confirming the Company's commitment to the completion
dates for testing and implementation into production of the Nashville
system. Remediation of the Nashville system is reflected in the Status
Chart.
As indicated in the Status Chart, some of our business units are reporting
exceptions to the above FDC completion dates. These exceptions are being
monitored closely, and management believes that its mission-critical systems
will be Y2K ready in a timely manner.
17
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
Material Relationships. The Company continues to coordinate with third parties
regarding Y2K issues. The status of assessment and testing with respect to
third-party risks is reflected in the Status Chart. Notwithstanding these
efforts, unexpected third-party failures could occur and, despite testing
procedures, erroneous or corrupted data received from third parties could impact
internal systems and cause material service disruptions.
The Company identified third-party relationships believed to be most material to
the Company on pages 26 and 27 of the Company's 1998 Annual Report on Form 10-K.
The information in the Annual Report on Form 10-K concerning the status of
assessment and testing regarding those relationships is updated as follows: (i)
Telecommunications- The Company is participating in Y2K testing programs with
various telecommunication companies; the testing is expected to be completed by
the end of the second quarter of 1999; and (ii) SIAC- Investor Services Group
has completed its testing with the Securities Industry Automation Corporation
(SIAC) and no Year 2000 issues were reported as a result of the SIAC testing.
Contingency Plans. Each business unit is developing its own contingency plans
pursuant to Task Force guidelines. There are two types of plans. All of the
Company's major business units have hardware/software contingency plans in case
a supplier of hardware/software products or internally developed systems used in
a business does not have a Y2K ready version in time for implementation and
testing. A second type of contingency plan focuses on business contingency plans
to support the date change event. Although each business unit has its own unique
business plan, the plans generally call for obtaining goods and services from
alternative sources, utilizing alternative methods to perform functions, and
establishing command centers and communication procedures to manage the actual
rollover to the Year 2000. The Company's units have developed preliminary
staffing support plans to ensure that appropriate on-site staff are in place to
implement any contingency plan and address any issues that may arise. The
Company's major data centers also have power generation systems to provide
electrical backup for reasonable periods of time based on accepted business
practices for the relevant business unit. Each data center is exploring keeping
additional fuel reserves on site as part of its contingency plan. It is expected
that these plans will be revised throughout 1999, as the Company completes
testing with clients and gains a better understanding of external third party
risks.
Costs to Address the Company's Year 2000 Issues. Through March 31, 1999, the
Company has spent in aggregate approximately $130 million in connection with
preparing for the Year 2000, of which approximately $21 million was spent in the
first quarter of 1999. The Company anticipates that Y2K expenditures for the
remainder of 1999 will be approximately $64-$74 million. Of the 1999 spending,
approximately 98% has been spent on software remediation and testing and
approximately 2% has been spent to replace systems and equipment and to add
testing capacity. The Company anticipates that Y2K expenses will be
approximately 10% of the IT budget for 1999. To date, the Company has financed
its Y2K expenses from cash flow and expects to continue to do so.
Safe Harbor for Year 2000 Forward-Looking Statements. All forward-looking
statements regarding Y2K readiness, including estimates, forecasts and
expectations, are inherently uncertain as they are based on various expectations
and assumptions concerning future events and are subject to numerous risks and
uncertainties which could cause actual events or results to differ materially
from those projected. Important factors upon which the Company's Y2K
forward-looking statements are premised include: (a) retention of employees and
contractors working on Y2K projects; (b) customers' remediation of their
internal systems to be Y2K ready and their cooperation in timely testing; (c) no
material disruption of telecommunication, data transmission networks, payment
networks, government
18
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
services, utilities or other infrastructure services and no unexpected failure
of third-party products; (d) no unexpected failures by third-parties providing
services to the Company; (e) no undiscovered sabotage of systems or program code
affecting the Company's systems; and (f) no undiscovered material flaws in the
Company's test processes. The Company undertakes no obligation to update
forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes from the 1998 Annual Report on Form 10-K
related to the Company's exposure to market risk from interest rates.
19
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 March 31, 1999, and the related consolidated statements of
income and cash flows for the three-month periods ended March 31, 1999 and 1998.
These financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, which will be performed
for the full year with the objective of expressing an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements referred to above
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of First Data Corporation as of
December 31, 1998, and the related consolidated statements of income,
stockholders' equity, and cash flows for the year then ended (not presented
herein) and in our report dated January 28, 1999, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
December 31, 1998, is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
Ernst & Young LLP
Atlanta, Georgia
April 23, 1999
20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time the Company is involved in various litigation matters arising
in the ordinary course of its business. None of these matters, either
individually or in the aggregate, currently is material to the Company except
for the matters reported in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998 (the "Annual Report"). There were no material
developments in the litigation matters previously disclosed. In connection with
the Company's acquisition of the outstanding public ownership of Paymentech,
Inc. (PTI), representing approximately 45% of the outstanding shares of PTI,
three suits have been filed which management does not expect to be material to
the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Agreement and Plan of Merger dated as of March 22, 1999, among
First Data Corporation FB Merging Corporation and Paymentech,
Inc. (incorporated by reference to 99(a) of the registrant's
Schedule 13D filed on April 1, 1999).
2.2 Stockholder Agreement, dated as of March 22, 1999, among First
Data Corporation, FDC Offer Corporation, FB Merging
Corporation, BANK ONE CORPORATION and First USA Financial,
Inc. (incorporated by reference to Exhibit 99(b) of the
registrant's Schedule 13D filed on April 1, 1999).
2.3 Contribution Agreement, dated as of March 22, 1999, between
First Data Corporation and BANK ONE CORPORATION (incorporated
by reference to Exhibit 99(c) of the registrant's Schedule 13D
filed on April 1, 1999).
12 Computation of Ratio of Earnings to Fixed Charges
15 Letter from Ernst & Young LLP Regarding Unaudited Interim
Financial Information
27.1 Financial Data Schedule (for SEC use only)
99.1 Private Securities Litigation Reform Act of 1995 Safe Harbor
Compliance Statement for Forward-Looking Statements
(b) Reports on Form 8-K
None.
21
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: May 6, 1999 By /s/ Lee Adrean
-------------- ----------------------------------
Lee Adrean
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: May 6, 1999 By /s/ J. Allen Berryman
-------------- ----------------------------------
J. Allen Berryman
Vice President and
Corporate Controller
(Principal Accounting Officer)
22
FIRST DATA CORPORATION
INDEX TO EXHIBITS
-----------------
Exhibit
Number Description
- ------ --------------------------------------------------------------
2.1 Agreement and Plan of Merger dated as of March 22, 1999, among
First Data Corporation FB Merging Corporation and Paymentech,
Inc. (incorporated by reference to 99(a) of the registrant's
Schedule 13D filed on April 1, 1999).
2.2 Stockholder Agreement, dated as of March 22, 1999, among First
Data Corporation, FDC Offer Corporation, FB Merging
Corporation, BANK ONE CORPORATION and First USA Financial,
Inc. (incorporated by reference to Exhibit 99(b) of the
registrant's Schedule 13D filed on April 1, 1999).
2.3 Contribution Agreement, dated as of March 22, 1999, between
First Data Corporation and BANK ONE CORPORATION (incorporated
by reference to Exhibit 99(c) of the registrant's Schedule 13D
filed on April 1, 1999).
12 Computation of Ratio of Earnings to Fixed Charges
15 Letter regarding Unaudited Interim Financial Information
27.1 Financial Data Schedule (for SEC use only)
99.1 Private Securities Litigation Reform Act of 1995
Safe Harbor Compliance Statement for Forward-Looking
Statements
23