<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended JUNE 30, 1997
----------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission file number 1-11073
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FIRST DATA CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 47-0731996
- --------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
401 HACKENSACK AVENUE, HACKENSACK, NEW JERSEY 07601
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (201) 525-4700
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NOT APPLICABLE
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(Former name, former address and former fiscal
year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---- ----
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Number of Shares Outstanding
Title of each class as of August 1, 1997
- ------------------------------ ----------------------------
Common Stock, $.01 par value 443,694,902
<PAGE>
FIRST DATA CORPORATION
INDEX
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PAGE
PART I. FINANCIAL INFORMATION NUMBER
------
Item 1 Consolidated Financial Statements:
Consolidated Statements of Operations for the
three and six months ended June 30, 1997 and 1996........ 3
Consolidated Balance Sheets at June 30, 1997
and December 31, 1996.................................... 4
Consolidated Statements of Cash Flows for the
six months ended June 30, 1997 and 1996.................. 5
Notes to Consolidated Financial Statements............... 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations............ 11
PART II. OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Securities Holders.... 17
Item 6 Exhibits and Reports on Form 8-K......................... 18
2
<PAGE>
FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amountS)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
Operating revenues $1,318.2 $1,200.4 $2,561.5 $2,330.1
EXPENSES
Operating 852.9 769.0 1,666.8 1,497.0
Selling, general & administrative 182.6 178.4 378 365.5
Restructuring, loss on business divestitures
and impairment, net 215.7 - 211.6 16.3
Interest 30.3 25.4 55.6 51.4
-------- -------- -------- --------
1,281.5 972.8 2,312.0 1,930.2
-------- -------- -------- --------
Income before income taxes 36.7 227.6 249.5 399.9
Income taxes 65.1 87.8 141.7 154.3
Net income (Loss) $ (28.4) $ 139.8 $ 107.8 $ 245.6
======== ======== ======== ========
Earnings/(Loss) per common share $ (0.06) $ 0.30 $ 0.24 $ 0.53
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
FIRST DATA CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1997 1996
--------- ------------
<S> <C> <C>
Cash and cash equivalents $ 393.9 $ 271.7
Settlement assets 7,482.0 7,461.5
Accounts receivable, net of allowance for doubtful
accounts of $27.4 (1997) and $25.2 (1996) 939.0 958.1
Property and equipment, net 787.0 757.1
Goodwill, less accumulated amortization
of $465.1 (1997) and $409.6 (1996) 3,341.5 3,490.4
Other intangibles, less accumulated amortization
of $393.8 (1997) and $336.8 (1996) 1,110.0 1,003.1
Other assets 577.3 398.2
--------- ---------
$14,630.7 $14,340.1
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Settlement obligations $ 7,413.4 $ 7,389.9
Accounts payable and other liabilities 1,490.9 1,531.9
Borrowings 1,713.9 1,261.4
Senior convertible debentures 443.1 447.1
--------- ---------
Total Liabilities 11,061.3 10,630.3
--------- ---------
Commitments and contingencies
Put Options 53.3 --
--------- ---------
Stockholders' Equity:
Common Stock, $.01 par value; authorized 600.0 shares,
issued 449.0 shares (1997) and 448.9 shares (1996) 4.5 4.5
Additional paid-in capital 2,127.8 2,101.8
--------- ---------
Paid-in capital 2,132.3 2,106.3
Retained earnings 1,592.5 1,610.7
Other 22.9 26.3
Less treasury stock at cost, 5.9 shares (1997)
and 0.9 shares (1996) (231.6) (33.5)
--------- ---------
Total Stockholders' Equity 3,516.1 3,709.8
--------- ---------
$14,630.7 $14,340.1
========= =========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Six Months Ended
June 30,
--------------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Cash and cash equivalents at beginning of period $ 271.7 $ 231.0
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 107.8 245.6
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization 253.0 195.6
Noncash portion of restructuring, loss on business
divestitures and impairment, net 187.6 13.4
Other noncash items 7.9 11.0
Increase (decrease) in cash, excluding the effects of acquisitions
and dispositions, resulting from changes in:
Accounts receivable (2.7) (92.8)
Other assets (32.4) (10.1)
Accounts payable and other liabilities 10.9 5.0
Income tax accounts (22.1) 54.1
--------------- ---------------
Net cash provided by operating activities 510.0 421.8
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Current year acquisitions, net of cash acquired (277.6) (257.4)
Payments related to other businesses previously acquired (52.1) (39.1)
Proceeds from dispositions, net of expenses paid 68.0 7.1
Additions to property and equipment, net (139.9) (180.0)
Payments to secure customer service contracts, including outlays
for conversion, and capitalized systems development costs (121.9) (96.1)
Payments related to Western Union acquisition:
Funding of assumed pension obligations for a suspended plan (35.0) --
Other investing activities (11.2) (0.9)
--------------- ---------------
Net cash used in investing activities (569.7) (566.4)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-term borrowings, net 339.2 82.0
Issuance of long-term debt 124.6 99.7
Principal payments on long-term debt (25.4) (11.4)
Proceeds from issuance of common stock 99.7 75.6
Proceeds from sale of put options 3.2 --
Purchase of treasury shares (341.5) (129.6)
Cash dividends (17.9) (12.7)
--------------- ---------------
Net cash provided by financing activities 181.9 103.6
--------------- ---------------
Change in cash and cash equivalents 122.2 (41.0)
--------------- ---------------
Cash and cash equivalents at end of period $ 393.9 $ 190.0
=============== ===============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
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, 1996.
Significant accounting policies disclosed therein have not changed.
The accompanying consolidated financial statements are unaudited; however,
in the opinion of management, they include all normal recurring adjustments
necessary for a fair presentation of the consolidated financial position of
the Company at June 30, 1997 and the consolidated results of its operations
for the three and six months ended June 30, 1997 and 1996 and cash flows for
the six months ended June 30, 1997 and 1996. Results of operations reported
for interim periods are not necessarily indicative of results for the entire
year.
FDC operates in a single business segment, providing a variety of
information services primarily to financial institutions and commercial
establishments. The largest category of services involves information
processing and funds transfer related to payment transactions, including
credit and debit cards, checks and other types of payment instruments (such
as money transfers, money orders, and official checks). These services
include the authorization, processing and settlement of credit and debit
card transactions, verification or guarantee of check transactions, and
worldwide nonbank money transfers. Other service areas include information
processing for investment companies, data imaging and related information
management services.
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 $324.0 million and $522.7 million
for the three months ended June 30, 1997 and 1996, respectively and $781.4
million and $952.7 million for the six months ended June 30, 1997 and 1996,
respectively). The amounts for 1997 are less than 1996 due to the
contribution of merchant contracts to alliances which are accounted for
under the equity method of accounting by the Company.
2. During the first six months of 1997, the Company completed dispositions of
three business units, incurred an impairment charge and incurred
restructuring charges involving most business areas, as detailed below.
These activities, which are reported on the "Restructuring, loss on business
divestitures and impairment, net" line in the Consolidated Statements of
Operations, resulted in a net pretax loss of $211.6 million. Primarily
because much of the impairment included in the charge is nondeductible
goodwill for tax purposes, the tax benefit on this loss was only $24.3
million (a 11.5% effective rate) and the impact of these activities was to
reduce net income by $187.3 million, or $0.40 per share for the six months
ending June 30, 1997.
During the first quarter of 1997 the Company completed the sale of its GENEX
subsidiary, a workers' compensation cost containment business, for $70.0
million in cash resulting in a pretax gain of $50.5 million (which was
previously reported as other income on the Company's Consolidated Statements
of Operations).
Substantially offsetting the impact of the gain were restructuring charges
of $46.4 million in the first quarter involving most business areas and
including severance accruals for approximately 2,100 employees of $29.1
million, facility closure costs of $5.5 million and other exit costs of
$11.8 million.
On July 1, 1997 the Company completed the sale of its FIRST HEALTH
Strategies and FIRST HEALTH Services businesses for cash proceeds of
approximately $200 million
6
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
and recorded a pretax loss on the divestiture of $93.8 million during the
quarter ending June 30, 1997. As a consequence of the Company's decision to
divest these FIRST HEALTH business units, the future value of the remaining
health care administration services businesses was diminished and, as a
result, the Company recorded impairment charges related to such businesses
of $118.4 million and other exit related costs of $3.5 million. FIRST HEALTH
Strategies and Services and GENEX represented, in the aggregate,
approximately seven percent of FDC's total operating revenues in 1996 and a
lesser percentage of net income in 1996.
The 1996 first quarter results included a $16.3 million merger,
restructuring and impairment charge, which reduced net income by $10.0
million ($.02 per share), related primarily to integration processes in
certain of the Company's businesses in connection with the 1995 merger with
First Financial Management Corporation ("FFMC").
At June 30, 1997, total remaining accrued liabilities for the 1997
restructuring charges and FFMC merger related integration charges recorded
in 1996 and 1995 were $75.6 million.
3. FDC has guaranteed the $447.1 million of 5% senior convertible debentures
issued by FFMC in December 1994. For the first six months of 1997, debenture
holders converted $4.0 million of debentures into 0.2 million shares of FDC
common stock.
FFMC is not required to file periodic reports with the Securities and
Exchange Commission with respect to the outstanding senior convertible
debentures so long as such reports for FDC contain summarized financial
information concerning FFMC. Subsequent to the merger, certain FDC
businesses were merged into certain FFMC subsidiaries; also, ongoing
business activities have further eroded the distinction between the FDC and
FFMC businesses. Therefore, the current year results of FFMC are not
comparable with the prior year. The summarized financial information for
FFMC and its subsidiaries is as follows:
7
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ -----------------
<S> <C> <C> <C> <C>
For the periods ended June 30, 1997 1996 1997 1996
--------------------------------------------------------------------------
(In millions)
Revenues $773.2 $702.5 $1,518.7 $1,315.9
Restructuring, loss on business
divestitures and impairment 215.7 -- 179.7 0.2
Income (loss) before income taxes (28.5) 188.5 173.3 309.6
Net income (loss) (90.6) 116.6 37.7 190.1
June 30, December 31,
1997 1996
--------------------------------------------------------------------------
(In millions)
Goodwill $2,503.8 $2,650.8
Total assets 6,252.7 5,741.7
Borrowings 0.3 0.8
Senior convertible debentures 443.1 447.1
Total liabilities 3,951.8 3,478.5
</TABLE>
The debentures are redeemable at the option of the Company beginning December
15, 1997 and are convertible by the debenture holder into FDC common stock
based upon a conversion rate of $21.755 per share. In anticipation of meeting
the conversion requirements of the remaining $443.1 million of the senior
convertible debentures, the Board of Directors authorized management to
repurchase up to 20.4 million shares of FDC common stock. As part of this
repurchase program, the Company has sold put options representing a potential
obligation at June 30, 1997 to buy back 1.25 million shares of its common
stock at an aggregate price of $53.3 million, or an average price of
approximately $43 per share.
4. Through the first six months of 1997, the company acquired all or a portion
of several businesses. In April 1997 the Company acquired Consumer Credit
Associates, a provider of online consumer credit reporting, for $87.0 million
in cash (net of cash acquired). The Company also acquired a 50% ownership
interest in CardService International, Inc., an electronic transaction
service provider, for $60.0 million in cash (April). Seven other businesses
or ownership interests totaling $87.8 million in cash and stock were acquired
which expanded FDC's markets and service offerings in its international card
processing, data imaging, payments instruments, messaging, and collections
businesses.
In addition, the Company made payments in April totaling $53.0 million
relating to several agreements with Orlandi Valuta companies ("Orlandi"), a
provider of U.S. to Mexico money transfer services. Under these agreements,
FDC will provide Orlandi with data processing services, Orlandi agents will
be allowed to sell Western Union branded products and services, and FDC
obtained an option to acquire Orlandi. During June, the Company exercised
this option, signing a definitive agreement to acquire Orlandi for nominal
additional consideration, which is expected to close in the third quarter.
8
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
All current year acquisitions have been accounted for as purchases and their
results are included with the Company's results from the effective date of
each acquisition or have been carried on the equity method of accounting if
the Company's ownership is not greater than 50%. No pro forma financial
information with respect to the above acquisitions is presented as the
aggregate impact is not material.
Certain of the Company's acquisition agreements provide for additional
consideration to be paid if the acquired entity's results of operations
exceed certain targeted levels. Targeted levels are generally set
substantially above the historical experience of the acquired entity at the
time of acquisition. Such additional consideration is paid in cash and with
shares of the Company's common stock, and is recorded as additional purchase
price when earned. The maximum amount of contingent consideration on the
above acquisitions is $55 million and one million shares of FDC common stock
(payable through the year 2000).
5. The Company's commercial paper borrowings at June 30, 1997 were $815.1
million. In April 1997, FDC expanded the maximum amount of its commercial
paper and supporting facilities arrangements from $1.0 billion to $1.5
billion. In addition, the Company has $250.0 million available under its
uncommitted bank lines.
In April 1997, the Company also filed a shelf registration statement
providing for the further issuance of debt and equity securities up to $750.0
million. In June the Company issued a $125 million Medium-Term Note at an
interest rate of 6.61% and a three-year maturity, reducing the total
available under its shelf registration at June 30, 1997 to $875 million.
6. Earnings per common share amounts are computed by dividing net income amounts
by weighted average common and common equivalent shares (when dilutive)
outstanding during the period. All share and per share amounts have been
retroactively restated for the November 1996 two-for-one stock split effected
as a 100% stock dividend. Amounts utilized in per share computations are as
follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
------------------ ----------------
For the periods ended June 30, 1997 1996 1997 1996
-------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C> <C>
Weighted average shares outstanding:
Simple weighted average shares 446.7 447.6 447.5 447.6
Common stock equivalents 27.8 28.4 26.9 28.1
------ ------ ------ ------
474.5 476.0 474.4 475.7
====== ====== ====== ======
Earnings add back related to senior
convertible debentures $ 3.5 $ 3.5 $ 7.0 $ 7.0
</TABLE>
The loss per common share for the second quarter ending June 30, 1997 was
computed based on FDC's simple weighted average shares outstanding for the
quarter, as the impact of common stock equivalents is anti-dilutive. In
computing the per share impact of the net restructuring, loss on business
divestitures and impairment charge, the 1997 weighted average common stock
9
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
equivalents were included since their impact would be dilutive on operating
results before this charge. Earnings per common share for all other periods
were computed based on weighted average shares outstanding including the
dilutive impact of common stock equivalents. Common stock equivalents consist
of outstanding stock options, warrants and convertible debentures. The after
tax interest expense and issue cost amortization on the debentures is added
back to net income when common stock equivalents are included in computing
earnings per common share.
7. In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS 128"), was issued and has a December 1997
effective date. At such time, the Company will change the method currently
used to compute earnings per share and restate all prior periods. Under the
new requirements, basic earnings per share will replace primary earnings per
share and will not include the dilutive effect of convertible debentures and
stock options. Under SFAS 128, basic earnings per share would have been
($0.06) per share and $0.31 per share for the three months ended June 30,
1997 and 1996, respectively and $0.24 per share and $0.55 per share for the
six months ended June 30, 1997 and 1996, respectively. SFAS 128 has replaced
fully diluted earnings per share with diluted earnings per share which
includes the dilutive effect of the debentures and stock options. Diluted
earnings per share would not have changed from the reported amounts of
($0.06) per share and $0.30 per share for the three months ending June 30,
1997 and 1996, respectively, and $0.24 per share and $0.53 per share for the
six months ended June 30, 1997, and 1996, respectively.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
STRATEGIC TRANSACTIONS
First Data Corporation ("FDC" or "the Company") continues to focus its resources
on services related to payment transactions, emphasizing growth in three key
areas: electronic commerce, information management and international expansion,
as evidenced by the completion of several strategic transactions in the first
half of 1997, including new business relationships, joint ventures, and
acquisitions and divestitures.
Internationally, FDC signed a global credit card processing agreement with HSBC
Holdings Plc. ("HSBC") to support its business in the Hong Kong market as well
as to expand services to HSBC operations in London and the United States. This
agreement will result in the establishment of an FDC card processing center in
Hong Kong. FDC also acquired a major ownership interest in Negocios
Informaticos, SA which provides bank and oil card processing in Spain,
broadening FDC's presence in Europe.
Domestically, FDC established or enhanced several key relationships, including
signing a major agreement to provide bank card processing for BancOne following
its announced acquisition of First USA and to joint venture with BancOne in
providing services to the retail private label card market. This agreement
added several million BancOne accounts and allows FDC to retain the First USA
processing business at pricing below the prior First USA processing agreement.
In addition, the existing BancOne merchant alliance will continue under its
present structure. The Company also signed agreements with the Orlandi Valuta
companies ("Orlandi"), a provider of U.S. to Mexico money transfer services,
under which FDC provides Orlandi with data processing services, Orlandi agents
are allowed to sell Western Union branded services, and FDC obtained an option
to acquire Orlandi. During June, the Company exercised this option, signing a
definitive agreement to acquire Orlandi, for nominal additional consideration,
which is scheduled to close during the third quarter, subject to certain state
regulatory approvals.
During the second quarter, the Company announced MSFDC, a joint venture with
Microsoft Corporation which furthers FDC's role in the evolving electronic
commerce market. In 1998, MSFDC plans to introduce a service that enables
companies to use the Internet to send bills to, and receive payments from,
consumers. In addition, the Company expanded the scope of its bank alliance
program through the addition of TeleCheck Services as a partner in the program.
Also during the second quarter, the Company acquired a 50% interest in
CardService International ("CSI"), a provider of electronic transaction services
to more than 80,000 merchants nationwide. In April, the Company acquired
Consumer Credit Associates, Inc. ("CCA"), a provider of online consumer credit
reporting services. CCA will operate as a unit of First Data Solutions, the
Company's information management services business, and will be integral to the
Company's plans to provide enhanced decision making and risk management products
to credit grantors and other FDC clients. Finally, the Company made several
other small acquisitions to complement and enhance its product offerings in the
data imaging, collection, messaging and payment instruments businesses.
In connection with its efforts to focus on its core competencies in transaction
and information processing, the Company divested three units of its health care
administration services area during the first six months of 1997. The Company
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
completed the sale of its GENEX subsidiary, which provides workers' compensation
cost containment and management services in February 1997. On July 1, 1997, FDC
completed the divestiture of FIRST HEALTH Strategies and FIRST HEALTH Services
which provide independent health care administration services such as claims
administration and associated health care management services to the self-
insured corporate and government markets.
The Company also took first quarter restructuring actions involving most
business areas. These actions consisted primarily of severing approximately
2,100 employees (which includes steps taken to downsize certain non-core
businesses in line with planned revenue reductions), certain facility closures
and exiting other activities. The benefits from these activities are expected
to be realized in subsequent quarters and years.
RESULTS OF OPERATIONS
Operating revenues for the quarter ended June 30, 1997 were up 9.8% to $1.32
billion from $1.20 billion in the prior year quarter. Operating revenues for the
six months ended June 30, 1997 were up 9.9% to $2.56 billion, compared with
$2.33 billion in the prior year period. Revenue growth in the quarter and the
year was impacted by the divestitures of MoneyGram in late 1996 and GENEX in
February 1997. The Company's internal growth rate in revenues over both the 1996
second quarter and six month periods (excluding the effects of acquisitions,
divestitures and the refocus of EBP Life on a narrower target market) was
approximately 15%. Growth in existing businesses occurred both from the
addition of new clients and strong underlying volume increases from existing
clients. The Company's performance reflects continuing strong growth in the
domestic card issuer and payment instruments business areas. Growth in domestic
merchant processing revenue slowed somewhat, but the underlying trends remain
strong, as seen in the merchant transaction statistics below.
The Company derives revenues in its primary services areas principally on the
number of accounts or transactions processed, a percentage of dollar volume
processed, or on a combination thereof. Lesser amounts of revenue are generated
from foreign currency exchange on money transfer transactions and sharing in
investment earnings on fiduciary funds. The overall 1997 second quarter growth
of FDC is demonstrated by the following key indicators (along with the
percentage growth compared to second quarter 1996): 161.2 million total card
accounts on file (22%), with domestic cards representing 142.1 million of the
total (24%); 1.69 billion total merchant transactions (19%), with 1.52 billion
representing domestic merchant transactions (20%); and money transfer
transactions of 11.3 million (35%). These growth indicators are a continuation
of the first quarter trend, producing the following 1997 six month growth in key
indicators (along with the percentage growth compared to the 1996 period): 3.17
billion total merchant transactions (21%), with 2.87 billion representing
domestic merchant transactions (22%); and money transfer transactions of 21.9
million (38%).
During the first quarter of 1997, the Company sold its GENEX subsidiary
resulting in a pretax gain of $50.5 million. The Company also recorded
restructuring charges in the first quarter totaling $46.4 million. On July 1,
1997, the Company completed the divestitures of its FIRST HEALTH Strategies and
FIRST HEALTH Services businesses and recorded a 1997 second quarter pretax loss
of $93.8 million. These three business entities represented approximately seven
percent of the Company's consolidated operating revenues for 1996 and a lesser
percentage of consolidated earnings. As a consequence of the Company's decision
to divest of these FIRST HEALTH business units, the future value of the
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
remaining health care administration services businesses was diminished and, as
a result, the Company recorded impairment charges related to such businesses of
$118.4 million and other exit related costs of $3.5 million.
These transactions have been included in the "Restructuring, loss on business
divestitures and impairment, net" line on the Company's Consolidated Statements
of Operations. Primarily because much of the impairment charge is nondeductible
goodwill for tax purposes, the tax benefit on these activities was only $25.8
million and $24.3 million for the second quarter and six month period,
respectively. As a result, the above items reduced 1997 second quarter and six
month earnings by $189.9 million ($0.41 per share), and $187.3 million ($0.40
per share), respectively. In the first quarter of 1996, the Company recorded a
$16.3 million merger, restructuring and impairment charge, which reduced net
income by $10.0 million ($0.02 per share), related primarily to integration
processes in certain of the Company's businesses associated with the 1995 FFMC
merger.
Operating expenses for the 1997 second quarter and six months ended June 30,
1997 increased 11% to $852.9 million and $1,666.8 million, respectively, one
percentage point higher than the increase in operating revenues. This is
explained by the negative impact on revenue growth resulting from the conversion
of American Express Travel Related Services ("TRS") payment products sold and
managed by the Company to FDC's own payment products line. Although settlement
assets relating to the sale of TRS payment products were largely invested in
tax-exempt securities, TRS compensated the Company on a pre-tax equivalent
basis. The conversion to the Company's own payment products and investment of
settlement assets in tax-exempt securities, while having no impact on net
income, lowered the Company's revenue growth rate by approximately one percent
and lowered the Company's effective tax rate.
Selling, general and administrative expenses for the quarter ended June 30, 1997
increased to $182.6 million, up 2% from $178.4 million in 1996. These same
expenses for the six months ended June 30, 1997 increased to $378.0 million, up
3% from $365.5 million in the prior year period. The increase is primarily
attributable to increased selling costs and start-up costs of the First Data
Solutions group and higher sales and advertising costs in the payment
instruments business. These increases were partially offset by lower selling
costs due to the MoneyGram divestiture and lower general and administrative
costs across most business units, including corporate, which continue to realize
synergy savings from the FFMC merger.
Interest expense in the 1997 second quarter increased 19% to $30.3 million
compared with $25.4 million in 1996, primarily due to increased outstanding
debt balances resulting from several acquisitions, treasury stock repurchases
and higher interest rates on medium term notes compared to commercial paper
borrowing rates.
FDC's effective income tax rate (excluding the impact of the restructuring, loss
on divestitures and impairment charges) of 36% for the second quarter and the
six months ended June 30, 1997 decreased considerably from 38.6% in the same
1996 periods principally due to increased tax-exempt earnings of settlement
assets caused by the shift from TRS payment products, as previously discussed.
The Company reported a net loss for the 1997 second quarter of $28.4 million and
net income of $107.8 million for the six months ended June 30, 1997. Net
income (before the restructuring, loss on divestitures and impairment charges)
rose 16% to $161.5 million in the quarter ended June 30, 1997 compared with
$139.8 million in the prior year quarter and net income margins increased to
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
12.3% from 11.6%, respectively. Net income (before the net restructuring, loss
on divestitures and impairment charges) rose 15% to $295.1 million for the six
months ended June 30, 1997 compared with $255.6 million in the prior year period
and net income margins increased to 11.5% from 11.0%, respectively.
The Company reported a loss per common share for the 1997 second quarter of
$0.06 per share and earnings per share of $0.24 for the six months ended June
30, 1997. Excluding the above mentioned charges, earnings per share would have
increased 17% to $0.35 for the second quarter from $0.30 in the 1996 comparable
period and 16% to $0.64 for the six months ended June 30, 1997, from $0.55 for
the 1996 period.
CAPITAL RESOURCES AND LIQUIDITY
FDC continues to generate significant cash flow from operating activities,
aggregating $510.0 million for the six months ended June 30, 1997. This cash
flow was produced primarily from net income of $107.8 million, depreciation and
amortization of $253.0 million, and other noncash charges totaling $195.5
million (primarily the impairment charges and net loss on divestitures of
business units). Slightly offsetting these sources were changes in working
capital items. FDC utilized this cash flow to reinvest in its existing
businesses, to fund treasury stock purchases and to contribute to the financing
of business expansion.
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 $261.8
million in the first half of 1997 compared with $276.1 million in the same 1996
period. The Company expects that these outlays for the 1997 full year will be
comparable to 1996.
Overall, FDC's operating cash flow for the first half of 1997 exceeded its
nonacquistion investing activities by $248.2 million. Additionally, the Company
received cash of $70.0 million in the first quarter from its GENEX divestiture.
These cash sources contributed to funds utilized for acquisitions and treasury
stock purchases.
Cash outlays for acquisitions in the first half of 1997 as previously discussed
consists of a $60.0 million payment to purchase a 50% interest in CSI, an
electronic transaction service provider; an $87.0 million payment to purchase
CCA, a provider of online consumer credit reporting; a $53.0 million payment
related to several agreements with Orlandi, a U.S.-Mexico money transfer
business; $77.6 million for six other businesses expanding the Company's
international card processing, data imaging, payment instruments and collection
businesses. The Company also paid $35.9 million relating to businesses
previously acquired and $16.2 million relating to certain of its alliance
programs with bank clients in merchant processing. In addition, the Company
funded $35.0 million of its assumed pension obligations for the Western Union
suspended defined benefit plan.
Net cash provided by financing activities for the six months ended June 30, 1997
was $181.9 million compared to $103.6 million in the same 1996 period. The
increase is due primarily to increased net borrowings and the June 1997 issuance
of a $125 million Medium-Term Note. These borrowings were used primarily for
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
repurchases of the Company's common stock. Cash outlays for stock purchases
totaled $341.5 million for the six months ended June 30, 1997, which was
partially offset by proceeds from option exercises and related tax benefits of
$99.7 million.
In May, the Company's Board of Directors authorized management to repurchase up
to 20.4 million shares of FDC common stock in anticipation of meeting the
conversion requirements of $443.1 million in senior convertible debentures which
were guaranteed by FDC following the 1995 merger with FFMC. The debentures are
redeemable at the option of the Company beginning December 15, 1997 and are
convertible by the debenture holder into FDC common stock based upon a
conversion rate of $21.755 per share. To date, 5.4 million shares have been
repurchased for this purpose. The purchase of additional shares will be subject
to several factors including the price of FDC stock and market conditions. The
Company plans to fund any further acquisition of these shares with borrowings
and the FIRST HEALTH Strategies and Services sale proceeds.
The above repurchases are in addition to the Company's 3.1 million shares of
common stock purchased in the open market pursuant to a formal plan approved by
FDC's Board of Directors for use in conjunction with certain employee benefit
plans. As part of the Company's authorized stock repurchase program for the
future conversion of senior convertible debentures, the Company has sold put
options representing a potential obligation at June 30, 1997, to buy back 1.25
million shares of common stock at an aggregate price of $53.3 million or an
average price of approximately $43 per share.
During 1997, the Company expanded the maximum amount under its existing
commercial paper program to $1.5 billion and increased the maximum borrowing
capacity under its primary credit facilities to $1.5 billion. In addition, the
Company has two outstanding shelf registration facilities, one providing for the
issuance of debt and equity securities up to $875 million in the aggregate and
the other providing for the issuance of up to 10 million shares of the Company's
common stock in connection with certain types of acquisitions.
Included in cash and cash equivalents on the Consolidated Balance Sheet at June
30, 1997 is $70.0 million related to required investments of cash in connection
with the Company's merchant card settlement operation and additional amounts
used to support the operations of certain business areas; the remainder is
available for general corporate purposes. Also, FDC has available short-term
borrowing capability of $934.9 million at June 30, 1997 under the Company's
commercial paper program and through its uncommitted 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.
15
<PAGE>
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, 1997, and the related consolidated statements of
operations for the three-month and six-months periods ended June 30, 1997 and
1996, and the consolidated statements of cash flows for the six-month periods
ended June 30, 1997 and 1996. 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, 1996, and the related consolidated statements of income,
stockholders' equity, and cash flows for the year then ended (not presented
herein) and in our report dated February 5, 1997, 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, 1996, 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, 1997
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
-----------------------------------------------------
The Company held its Annual Meeting of Stockholders on May 14, 1997. Two
matters were voted upon and approved at the meeting.
Proposal 1 Election of Directors
- ---------- ---------------------
The terms of office of three current directors, Courtney F. Jones, Robert J.
Levenson and Charles T. Russell, expired at the 1997 Annual Meeting. The re-
election of Messrs. Jones, Levenson and Russell was voted on at the Annual
Meeting. The results of the voting were as follows:
FOR WITHHELD
Courtney F. Jones 374,307,513 1,750,744
Robert J. Levenson 374,520,035 1,538,222
Charles T. Russell 374,422,497 1,635,760
Other directors whose terms continued after the meeting are Ben Burdetsky, Henry
C. Duques, James D. Robinson III, Bernard L. Schwartz and Garen K. Staglin.
Proposal 2 Ratification of the selection of Ernst & Young LLP as independent
- ---------- -----------------------------------------------------------------
auditors of the Company for 1997
--------------------------------
The results of the voting were as follows:
BROKER
FOR 374,524,908 AGAINST 1,070,667 ABSTAIN 462,682 NON-VOTE 0
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
--------
12 Computation of Ratio of Earnings to Fixed Charges
15 Letter from Ernst & Young LLP Regarding Unaudited Interim
Financial Information
27.1 Financial Data Schedule (for SEC use only)
99 Private Securities Litigation Reform Act of 1995
Safe Harbor Compliance Statement for Forward-Looking Statements
(b) Reports on Form 8-K
-------------------
Item 5, Form 8-K, dated May 23, 1997, reporting the registrant's
"forward looking statements".
18
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST DATA CORPORATION
----------------------
(Registrant)
Date: August 8, 1997 By /s/ Lee Adrean
---------------------- ---------------------------------
Lee Adrean
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: August 8, 1997 By /s/ Richard Macchia
---------------------- ---------------------------------
Richard Macchia
Senior Vice President - Finance
(Principal Accounting Officer)
19
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 12
FIRST DATA CORPORATION
COMPUTATION OF
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ --------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Earnings:
Income before income taxes $36.7(1) $227.6 $249.5(2) $399.9
Interest expense 30.3 25.4 55.6 51.4
Other adjustments 13.4 13.3 27.9 26.0
----- ------ ------ ------
Total earnings (a) $80.4 $266.3 $333.0 $477.3
===== ====== ====== ======
Fixed charges:
Interest expense $30.3 $25.4 $55.6 $51.4
Other adjustments 13.4 13.3 27.9 26.0
----- ----- ----- -----
Total fixed charges (b) $43.7 $38.7 $83.5 $77.4
===== ===== ===== =====
Ratio of earnings to
fixed charges (a (/) b) 1.84 6.88 3.99 6.17
</TABLE>
- ------------
(1) Includes a loss from business divestitures and impairment charges of $215.7
million. The pro-forma ratio of earnings to fixed charges without this
loss would have been 6.78.
(2) Includes restructuring, net loss on business divestitures and impairment
charges of $211.6 million. The pro-forma ratio of earnings to fixed charges
without these charges would have been 6.52.
For purposes of computing the ratio of earnings to fixed charges, fixed charges
consist of interest on debt, amortization of deferred financing costs and a
portion of rentals determined to be representative of interest. Earnings consist
of income before income taxes plus fixed charges.
20
<PAGE>
Exhibit 15
August 8, 1997
The Stockholders and Board of Directors
First Data Corporation
We are aware of the incorporation by reference in the Registration Statements
(Forms S-8 No. 33-47234, No. 33-48578, No. 33-82826, No. 33-87338, No. 33-90992,
No. 33-62921, No. 33-98724, No. 33-99882, No. 333-9017, No. 333-9031 and
No. 333-28857, Forms S-3 No. 333-4012 and 333-24667, and Form S-4
No. 333-15497) of First Data Corporation of our reports dated May 7, 1997 and
August 4, 1997 relating to the unaudited consolidated interim financial
statements of First Data Corporation which are included in its Forms 10-Q for
the quarters ended March 31, 1997 and June 30, 1997.
Pursuant to Rule 436(c) of the Securities Act of 1933 our reports are not a part
of the registration statements prepared or certified by accountants within the
meaning of Section 7 or 11 of the Securities Act of 1933.
Ernst & Young LLP
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 394
<SECURITIES> 0
<RECEIVABLES> 966
<ALLOWANCES> 27
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 787
<DEPRECIATION> 0
<TOTAL-ASSETS> 14,631
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 443
0
0
<COMMON> 5
<OTHER-SE> 3,511
<TOTAL-LIABILITY-AND-EQUITY> 14,631
<SALES> 0
<TOTAL-REVENUES> 2,562
<CGS> 0
<TOTAL-COSTS> 1,667
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 56
<INCOME-PRETAX> 250
<INCOME-TAX> 142
<INCOME-CONTINUING> 108
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 108
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.24
<FN>
<F1>Unclassified Balance Sheet.
</FN>
</TABLE>
<PAGE>
EXHIBIT 99
Private Securities Litigation Reform Act of 1995
Safe Harbor Compliance Statement for Forward-Looking Statements
- ---------------------------------------------------------------
In passing the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"), Congress encouraged public companies to make "forward-looking
statements"* by creating a safe-harbor to protect companies from securities law
liability in connection with forward-looking statements. First Data Corporation
("FDC") intends to qualify both its written and oral forward-looking statements
for protection under the Reform Act.
To qualify oral forward-looking statements for protection under the Reform
Act, a readily available written document must identify important factors that
could cause actual results to differ materially from those in the forward-
looking statements. FDC provides the following information in connection with
its continuing effort to qualify forward-looking statements for the safe harbor
protection of the Reform Act.
Important factors upon which the Company's forward-looking statements are
premised include the following:
. Continued growth at rates approximating recent levels for card-based payment
transactions, consumer money transfer transactions, and other product
markets.
. Successful implementation and achievement of expected growth of the U$A Value
Exchange program and other information product initiatives.
. Absence of consolidation among client financial institutions or other client
groups which has a significant impact on FDC client relationships.
. Successful management of pricing pressures through cost efficiencies.
. No imposition of a Value Added Tax on third-party credit card processing
services by the European Community, which could put credit card processing
outsourcers at a competitive disadvantage to in-house solutions in the
European Community.
. No unanticipated changes in laws, regulations, credit card association rules
or other industry standards affecting FDC's businesses which require
significant product redevelopment efforts or render products obsolete.
. No further dispositions of significant businesses, which could have a short-
term dilutive impact if other appropriate investment opportunities are not
immediately available.
. Continuation of the existing interest rate environment, avoiding increases in
agent fees related to a portion of the Company's payments instruments
business and in the Company's short-term borrowing costs.
. Absence of significant changes in retail foreign exchange spreads on retail
money transfer transactions, particularly between the United States and
Mexico.
. No significant increase in the cost of maintaining a role for FDC's credit
card processing, merchant processing and money transfer businesses in
connection with new payment technologies being developed.
. Successfully managing the potential both for patent protection and patent
liability in the context of rapidly developing legal framework for
expansive software patent protection.
<PAGE>
Forward-looking statements express expectations of future events. All
forward-looking statements are inherently uncertain as they are based on various
expectations and assumptions concerning future events and they are subject to
numerous known and unknown risks and uncertainties which could cause actual
events or results to differ materially from those projected. Due to these
inherent uncertainties the investment community is urged not to place undue
reliance on forward-looking statements. In addition, FDC undertakes no
obligation to update or revise forward-looking statements to reflect changed
assumptions, the occurrence of unanticipated events, or changes to projections
over time.
* "Forward-looking statements" can be identified by use of words such as
---------------------------
"expect," "estimate," "project," "forecast," "anticipate," "plan" and similar
expressions.
