<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 MARCH 31, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission file number 1-11073
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FIRST DATA CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 47-0731996
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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
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Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Number of Shares Outstanding
Title of each class as of May 1, 1998
- ---------------------------------------- ------------------------------
Common Stock, $.01 par value 446,476,486
1
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FIRST DATA CORPORATION
INDEX
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PAGE
PART I FINANCIAL INFORMATION NUMBER
------
Item 1. Consolidated Financial Statements:
Consolidated Statements of Income for the
three months ended March 31, 1998 and 1997..........3
Consolidated Balance Sheets at March 31, 1998
and December 31, 1997...............................4
Consolidated Statements of Cash Flows for the
three months ended March 31, 1998 and 1997..........5
Notes to Consolidated Financial Statements..........6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk...................................14
PART II OTHER INFORMATION
Item 1. Legal Proceedings...................................16
Item 6. Exhibits and Reports on Form 8-K....................16
2
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<TABLE>
<CAPTION>
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,
----------------------------
1998 1997
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<S> <C> <C>
REVENUES
Service revenues $1,204.1 $1,198.0
Product sales and other 28.2 45.3
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1,232.3 1,243.3
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EXPENSES
Operating 811.6 813.9
Selling, general & administrative 198.4 195.4
Restructuring, business divestitures
and impairment, net 0.4 (4.1)
Interest expense 26.9 25.3
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1,037.3 1,030.5
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Income before income taxes 195.0 212.8
Income taxes 64.3 76.6
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Net income $ 130.7 $ 136.2
======== ========
Earnings per common share - basic $ 0.29 $ 0.30
======== ========
Earnings per common share - diluted $ 0.29 $ 0.29
======== ========
See notes to consolidated financial statements.
</TABLE>
3
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<TABLE>
<CAPTION>
FIRST DATA CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
March 31, December 31,
ASSETS 1998 1997
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<S> <C> <C>
Cash and cash equivalents $ 327.9 $ 410.5
Settlement assets 8,527.5 8,364.7
Accounts receivable, net of allowance for doubtful accounts
of $27.7 (1998) and $29.1 (1997) 930.3 984.2
Property and equipment, net 837.3 774.9
Goodwill, less accumulated amortization
of $498.6 (1998) and $470.1 (1997) 3,182.1 3,101.6
Other intangibles, less accumulated amortization
of $455.1 (1998) and $420.7 (1997) 1,164.1 1,100.5
Other assets 591.0 578.8
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$15,560.2 $15,315.2
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Settlement obligations $ 8,419.7 $ 8,249.8
Accounts payable and other liabilities 1,644.3 1,657.4
Borrowings 1,737.8 1,750.7
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Total Liabilities 11,801.8 11,657.9
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Commitments and contingencies
Stockholders' Equity:
Common Stock, $.01 par value; authorized 600.0 shares,
issued 448.9 shares in 1998 and 1997 4.5 4.5
Additional paid-in capital 2,137.4 2,132.9
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Paid-in capital 2,141.9 2,137.4
Retained earnings 1,621.2 1,509.9
Accumulated other comprehensive income 65.1 65.8
Less treasury stock at cost, 2.4 shares (1998) and
2.0 shares (1997) (69.8) (55.8)
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Total Stockholders' Equity 3,758.4 3,657.3
--------- ---------
$15,560.2 $15,315.2
========= =========
</TABLE>
See notes to consolidated financial statements.
4
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<TABLE>
<CAPTION>
FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
(In millions)
(Unaudited)
1998 1997
-------- --------
<S> <C> <C>
Cash and cash equivalents at beginning of period $410.5 $271.7
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 130.7 136.2
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization 142.7 121.5
Noncash portion of restructuring, business
divestitures and impairment, net (6.8) 11.4
Other noncash items 5.9 2.0
Increase (decrease) in cash, excluding the effects of acquisitions
and dispositions, resulting from changes in:
Accounts receivable (11.8) (24.2)
Other assets 12.5 9.2
Accounts payable and other liabilities 2.8 (50.6)
Income tax accounts 5.3 (5.9)
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Net cash provided by operating activities 281.3 199.6
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CASH FLOWS FROM INVESTING ACTIVITIES
Current year acquisitions, net of cash acquired (61.3) (38.0)
Payments related to other businesses previously acquired (34.2) (43.2)
Proceeds from dispositions, net of expenses paid --- 68.0
Additions to property and equipment, net (125.0) (73.4)
Payments to secure customer service contracts, including outlays
for conversion, and capitalized systems development costs (98.0) (49.8)
Payments related to Western Union acquisition:
Funding of assumed pension obligations for a suspended plan --- (35.0)
Other investing activities 0.4 ---
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Net cash used in investing activities (318.1) (171.4)
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CASH FLOWS FROM FINANCING ACTIVITIES
Short-term borrowings, net (12.9) 174.6
Principal payments on long-term debt (0.5) (2.1)
Proceeds from issuance of common stock 23.0 33.9
Purchase of treasury shares (46.5) (43.8)
Cash dividends (8.9) (9.0)
-------- --------
Net cash (used for) provided by financing activities (45.8) 153.6
-------- --------
Change in cash and cash equivalents (82.6) 181.8
-------- --------
Cash and cash equivalents at end of period $327.9 $453.5
======= =======
</TABLE>
See notes to consolidated financial statements.
5
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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, 1997.
Significant accounting policies disclosed therein have not changed.
Effective with the quarter ended December 31, 1997, the Company changed its
revenue presentation to report "Service revenues" and "Product sales and
other" versus "Operating revenues" and "Other income." Product sales and
other includes certain items formerly reported in operating revenues as well
as other income. The Company adopted this presentation in order to separate
recurring transaction and related service processing revenues, including
investment income and equity earnings, from all other revenues. Product
sales and other includes sales of the Company's products (which are
generally ancillary to service revenues), software and other items which
recur but which fluctuate as to amount and timing.
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, 1998 and the consolidated results of its operations
and cash flows for the three months ended March 31, 1998 and 1997. 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.
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 $319.1 million and $457.4 million for
the three months ended March 31, 1998 and 1997, respectively). The amounts
for 1998 are less than 1997 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 quarter of 1998, the Company sold its NTS transportation
services unit ("NTS") and incurred restructuring charges related principally
to staff reductions in Domestic Merchant Processing Services. These
activities, which are reported on the "Restructuring, business divestitures
and impairment, net" line in the Consolidated Statements of Income, resulted
in a minimal net pretax loss and had no impact on earnings per share.
In January 1998, NTS was sold which resulted in a pretax gain of $28.5
million. NTS provides transaction services related to fund transfers, fuel
purchases and permits to the trucking industry. NTS represented 0.8% of
total FDC revenues in 1997. In addition, the Company incurred restructuring
charges of $28.9 million consisting principally of severance accruals for
approximately 579 employees of $13.3 million, facility closure costs of $9.8
million, and other exit costs of $5.8 million.
6
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FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The 1997 first quarter results include a $50.5 million gain on the sale of
GENEX which was substantially offset by charges of $46.4 million consisting
principally of severance and other exit costs. The net effect of these two
items had no impact on earnings per share.
At March 31, 1998, total remaining accrued liabilities for the 1998 and 1997
restructuring charges were $21.6 million and $8.4 million, respectively.
3. During the 1998 first quarter, the Company acquired two businesses expanding
FDC's markets and services. In conjunction with the sale of NTS, FDC
simultaneously purchased (from the Company that acquired NTS) a gaming
services business (now called First Data Financial Services, or "FDFS"), for
$50.5 million (net of cash acquired) plus the fair market value of the NTS
net assets of $65.0 million. FDFS provides credit card, debit card and money
transfer services to gaming establishments and their customers. In February
1998 the Company acquired FPS Services, a provider of fund accounting to
more than 30 small retirement plans.
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. No pro forma financial information with respect to the
above acquisitions is presented as the aggregate impact is not material.
4. The Company's commercial paper borrowings at March 31, 1998 were $603.4
million under its $1.5 billion commercial paper program and supporting
revolving credit facilities. Pursuant to a 1998 agreement between FDC and
VISA USA, $175.0 million of the supporting banking facilities has been
designated to be used solely for the purpose of meeting the Company's VISA
related bankcard settlement obligations, if necessary.
The Company also has an approved shelf registration providing for issuance
of debt and equity securities of up to $1.4 billion. The Company currently
has $725 million of Medium-Term Notes outstanding bearing an average
interest rate of 6.43%, reducing the total available under its shelf
registration to $625 million at March 31, 1998. In addition, the Company has
$210.0 million available under its uncommitted bank lines.
7
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FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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. Amounts utilized in per share
computations are as follows:
For the periods ended March 31, 1998 1997
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(In millions)
Weighted average shares outstanding:
<TABLE>
<CAPTION>
<S> <C> <C>
Basic weighted average shares 447.3 448.2
Stock Options 3.7 5.7
Senior Convertible Debentures -- 20.4
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451.0 474.3
===== =====
Earnings add back related to senior
convertible debentures - $ 3.5
</TABLE>
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, restricted stock
awards 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.
6. Comprehensive income for the three months ended March 31, 1998 and 1997 is
as follows:
Three months ended March 31,
----------------------------
(In millions)
1998 1997
------ ------
Net Income $130.7 $136.2
Foreign Exchange Effect (.7) (2.0)
Unrealized Gain (Loss) on Securities - (25.5)
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Total Comprehensive Income $130.0 $108.7
====== ======
7. In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. SFAS 131 is effective for financial statements for fiscal years
beginning after December 15, 1997, and therefore
8
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FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
the Company will adopt its requirements in connection with its annual
reporting for the year ending December 31, 1998.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". The SOP is
effective for the Company beginning on January 1, 1999; however, earlier
adoption is permitted. The SOP will require the capitalization of certain
costs incurred after the date of adoption in connection with developing or
obtaining software for internal use. The Company currently expenses internal
development costs for internal use software as incurred. The Company is
evaluating the impact of the SOP on the Company's future earnings or
financial position, but does not expect it to be material.
9
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FIRST DATA CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
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of Operations.
- -------------
STRATEGIC TRANSACTIONS
During 1997, First Data Corporation ("FDC" or "the Company") took steps to
focus its resources on three primary lines of service within the United States
and around the world: domestic and international card issuer and information
services, merchant processing services and payment instruments services. In
the first quarter of 1998, the Company continued this emphasis to further its
overarching strategic objective: to help make electronic payments the payment
method of choice worldwide.
The first three months of 1998 saw several strategic accomplishments in
merchant processing services, including executing agreements with two of its
bank alliance partners which, in substance, places the majority of FDC's owned
merchant portfolios into management arrangements with those alliances,
providing economic upside for the alliances and thereby providing the Company
with increased referrals and lower attrition. FDC and domestic merchant VISA
and MasterCard volume increased 22% over the prior year's first quarter
largely due to the cross-selling and referrals provided by the alliance
partners. During 1998's first quarter the Company added First Security Bank
as a merchant alliance partner giving FDC an increased presence in the
mountain states and signed a new full-service agreement with Harris Bank
providing additional annual volume of more than $5.0 billion in merchant
processing. Lastly, the Company took restructuring actions (more fully
described below) in March 1998 in this area in order to better focus on client
needs and reduce costs.
In the payment instrument services area during the first quarter of 1998,
Western Union obtained an exclusive, worldwide license to use a patent
developed by EDS for consumer initiated cash and cash equivalent transfers
through participating ATM machines. The Western Union-branded system will
allow consumers to access online, real-time money transfer services to and
from Western Union agent locations and participating ATMs. This new system
will be piloted in 1999 and will enable Western Union agents to further
enhance the customer service they can provide by adding the convenience of an
ATM as a supplemental distribution channel. Western Union also experienced
continued strong growth in its agent network, a leading indicator of future
growth.
In conjunction with its efforts to focus on its continuing businesses in
transaction and information processing, the Company completed a transaction,
during the first quarter of 1998, with Ceridian Corporation. FDC acquired
Ceridian's Gaming Services division (now called First Data Financial Services,
or "FDFS") and simultaneously sold to Ceridian its NTS transportation services
unit ("NTS"). FDFS provides credit card, debit card and money transfer
services to gaming establishments and their customers. NTS provides
transaction services related to fund transfers, fuel purchases and permits to
the trucking industry. In addition, in January 1998, the Company announced
its intent to sell First Image, its imaging and document management business
(an impairment charge, reflecting the anticipated loss on the disposition, was
recorded in the fourth quarter of 1997). In May 1998, the Company announced
an agreement to sell First Image for cash proceeds of approximately $150
million, and expects no material gain or loss on the divestiture. The
transaction, which is subject to, among other things, compliance with
regulatory requirements, is expected to close in June 1998.
10
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FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The Company will continue to focus on its core business areas throughout 1998
and will continue to assess how best to serve its customer base. This
continued focus and assessment could result in the Company taking actions to
alter its product and service offerings as well as actions to further
streamline operations and reduce costs. These actions could result in further
charges against income, the timing and magnitude of which is not presently
determinable.
RESULTS OF OPERATIONS
Effective with the quarter ended December 31, 1997, the Company changed its
revenue presentation to report "Service revenues" and "Product sales and
other" versus "Operating revenues" and "Other income." Product sales and
other includes certain items formerly reported in operating revenues as well
as other income. The Company adopted this presentation in order to separate
recurring transaction and related service processing revenues, including
investment income and equity earnings, from all other revenues. Product sales
and other includes sales of the Company's products (which are generally
ancillary to service revenues), software and other items which recur but which
fluctuate as to amount and timing.
Results of operations comparisons to the first quarter of 1997 are
significantly impacted by the divestitures completed in 1997: GENEX in
February 1997, FIRST HEALTH Services and FIRST HEALTH Strategies in July 1997
and Nationwide Credit in December 1997. Also in December 1997, the Company
signed an agreement whereby another publicly traded insurance company began a
process of renewing insurance policies issued by EBP Life Insurance Company,
Inc. ("EBP Life") on its own paper. This transaction allows EBP Life to
substantively exit the insurance business. Collectively, the four divested
units and EBP Life represented approximately 6% of total 1997 revenues.
Total revenues for the quarter ended March 31, 1998 decreased 1% to $1.23
billion from $1.24 billion in the prior year quarter. Revenue growth of
continuing businesses was 13% as compared to the first quarter of 1997, while
internal growth (excluding the effects of acquisitions in continuing
businesses) was 9% on a tax-equivalent basis. Growth in underlying volumes
continued to be strong in the card issuing services area, and the first
quarter of 1998 saw large increases in debit cards and bank cards on file.
However, revenues grew more slowly due to the large amount of contract
renewals at lower pricing during 1997 and due to exiting certain unprofitable
contracts in the back office servicing business. Revenues in the merchant
processing services area grew 10%, due principally to the acquisition of FDFS
in January 1998. Revenues in the core merchant processing business grew at a
slower rate than volume and transactions processed, continuing the slow down
in growth noted in prior quarters.
Payment instruments services revenues grew 21% (on a tax equivalent basis),
reflecting continuing strong underlying volume increases.
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 1998 first
quarter growth of FDC is
11
<PAGE>
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
demonstrated by the following key indicators (along with the percentage
growth compared to first quarter 1997): 189.6 million total card accounts on
file (22%), with domestic cards representing 169.6 million of the total (25%);
$52.8 billion in domestic merchant dollar volume (22%), and money transfer
transactions of 14.2 million (34%).
Product sales and other for the 1998 first quarter decreased 38% to $28.2
million from $45.3 million in the prior year quarter, principally due to the
prior year quarter containing higher contingent payments associated with the
formation of merchant alliances and a 1997 gain arising from the
termination of a processing contract.
Operating expenses of $811.6 million during the first quarter of 1998 were
down slightly as compared to $813.9 million during the same period in the
prior year. The Company's systematic and aggressive cost reduction
initiatives helped offset first quarter Year 2000 expenses of approximately
$11.8 million.
Selling, general and administrative expenses for the 1998 first quarter
increased 2% to $198.4 million from $195.4 million for the same period in the
prior year. This increase is primarily attributable to the continued start-up
activities of the First Data Information Management Group, increased
advertising expense at Western Union and the impact of 1997 acquisitions.
Offsetting these increases was the impact of the 1997 business unit
divestitures.
During the first quarter of 1998, the Company sold its NTS subsidiary,
resulting in a pretax gain of $28.5 million. NTS represented approximately
0.8% of FDC's total revenues for 1997. The Company also recorded
restructuring charges in the first quarter totaling $28.9 million, principally
relating to employee severance and facility closure costs in the merchant
processing services area. These activities, which are reported on the
"Restructuring, business divestitures and impairment, net" line in the
Consolidated Statement of Income, resulted in a minimal net pretax loss and
had no impact on earnings per share. In the first quarter of 1997, the
Company sold its GENEX subsidiary which resulted in a pretax gain of $50.5
million and also recorded restructuring charges totaling $46.4 million. The
net effect of these two items had no impact on earnings per share.
Interest expense for the 1998 first quarter increased 6% to $26.9 million from
$25.3 million for the same period in the prior year due to higher average
medium term note balances and higher average rates on short-term borrowings.
FDC's effective income tax rate of 33% in the 1998 first quarter decreased
considerably from 36% in the 1997 quarter due primarily to higher tax-exempt
interest earnings on fiduciary funds in the investment portfolio.
Net income of $130.7 million for the first three months of 1998 decreased 4%
from $136.2 million for the same period in the prior year. Excluding
restructuring and divestiture items in both years, net income decreased 2%.
Net income margins of 10.6% and 10.7% (again excluding restructuring and
divestiture items) for the three months ended March 31, 1998 and 1997,
respectively, remained essentially unchanged.
12
<PAGE>
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The Company reported diluted earnings per common share of $0.29 for the first
quarters of both 1998 and 1997.
CAPITAL RESOURCES AND LIQUIDITY
FDC continues to generate significant cash flow from operations, aggregating
$281.3 million in the 1998 first quarter. This cash flow was produced
primarily from net income of $130.7 million and depreciation and amortization
of $142.7 million. FDC utilized this cash flow to reinvest in its existing
businesses, to contribute to the financing of business expansion and to fund
treasury stock purchases.
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 increased to
$223.0 million in the 1998 first quarter compared with $123.2 million in the
1997 first quarter. FDC expects total expenditures for systems and
development and customer conversions in 1998 to be somewhat higher than in
1997 due to growth in the amount needed to support growing businesses and
larger continuing businesses and entries into new markets. This growth will
be partially offset by the effect of divestitures and lower per unit costs for
data processing equipment. In addition, the Company expects total Year 2000
related systems spending for the full year 1998, which will be expensed as
incurred, to be in the range of $75 million to $90 million, as compared to $32
million incurred for the full year 1997. (See the Company's Annual Report on
Form 10-K for additional information regarding Year 2000 spending.)
Overall, FDC's operating cash flow in 1998 exceeded its nonacquisition and
disposition investing activities by $58.7 million. These cash sources
contributed to funds utilized for acquisitions and treasury stock purchases.
The 1998 first quarter cash outlays for acquisitions totaled $61.3 million
consisting primarily of a $50.5 million payment to purchase FDFS, a provider
of credit card, debit card and money transfer services to gaming
establishments and their customers. The Company also paid $6.0 million
relating to businesses previously acquired and $28.2 million relating to
certain of its alliance programs with bank clients in merchant processing.
The Company's financing activities include net borrowings, proceeds from stock
option exercises, share repurchases and dividend payments. Net cash used in
financing activities was $45.8 million during the 1998 first quarter, as
compared to $153.6 million provided by financing activities in the prior year
first quarter. The large change is due to the high level of commercial paper
borrowings in 1997 to support FDC's investing activities, while such
activities were largely funded by cash flow from operating activities in 1998.
The Company made cash outlays totaling $46.5 million in the 1998 first quarter
to buy back shares of its common stock which were largely reissued in
connection with the Company's stock compensation plans. Proceeds from stock
option exercises and related tax benefits of $23.0 million partially offset
these outlays. In addition, the Company continued its pattern of paying
quarterly cash dividends, resulting in $8.9 million of cash payments to the
Company's common stockholders.
13
<PAGE>
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 $1.4 billion in the
aggregate (of which $625 million remains available) 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
March 31, 1998 is $87.0 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 $932 million at March 31, 1998
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ------------------------------------------------------------------
There have been no material changes from the 1997 Annual Report on Form 10-K
related to the Company's exposure to market risk from interest rates.
14
<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 March 31, 1998, and the related consolidated statements of
income and cash flows for the three-month periods ended March 31, 1998 and 1997.
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, 1997, 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, 1998, 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, 1997, 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
May 7, 1998
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
On February 20, 1998 an original complaint was filed and on March 3, 1998
a first amended complaint was filed in the District Court of Morris County,
Texas, individually and on behalf of all others similarly situated within the
State against the Company's subsidiary Western Union Financial Services, Inc.
Plaintiffs claim that Western Union charges an undisclosed "commission" when
consumers transmit money by wire to Mexico, in that the exchange rate used in
these transactions is less favorable than the exchange rate that Western Union
receives when it trades dollars in the international money market. Plaintiffs
assert that Western Union's failure to disclose this "commission" in its
advertising and in the transactions violates state law. While limited to
allegations of violation of Texas law, this complaint makes claim substantially
similar to those made in the November 3, 1997 complaint filed in the United
States District Court for the Central District of California as previously
disclosed in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997. The Texas complaint asserts claims on behalf of a putative
statewide class asserting the following causes of action: Fraudulent Accounting
and Restitution Resulting from Unjust Enrichment, Breach of Contract and
Violation of Texas Finance Code Section 153.205, which regulates advertisements
relating to the transmission of currency. Plaintiffs' seek to recover the
purported damage suffered by each class member, i.e., each individual who
utilized Western Union's "Dinero en Minutos" service to wire funds to Mexico
during the past four years, which amount is to be proven at trial. Western Union
has filed a general denial and a motion to change venue and intends to
vigorously defend the action.
On April 20, 1998, a complaint was filed in the United States District
Court for the Northern District of Illinois against the Company's subsidiary
Western Union Financial Services, Inc. Plaintiffs claim that Western Union
charges an undisclosed "commission" when consumers transmit money by wire to
Mexico, in that the exchange rate used in these transactions is less favorable
than the exchange rate that Western Union receives when it trades dollars in the
international money market. Plaintiffs further assert that Western Union's
failure to disclose this "commission" in its advertising and in the transactions
violates federal and state law. This complaint makes substantially the same
claims as those made in the November 3, 1997 complaint filed in the United
States District Court for the Central District of California as previously
disclosed in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997. The Illinois complaint asserts a claim on behalf of a
putative nationwide class based on violation of federal law as well as on behalf
of a putative statewide class based on violation of Illinois law. Plaintiffs
seek declaratory and injunctive relief, compensatory damages in an amount to be
proven at trial, and punitive damages. Plaintiffs' federal claims includes a
claim under the Racketeer Influenced and Corrupt Organizations Act which
provides for treble damages. Western Union's answer to the complaint is due on
May 11, 1998 and Western Union intends to vigorously defend the action.
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
16
<PAGE>
PART II. OTHER INFORMATION (Continued)
(b) Reports on Form 8-K
-------------------
None.
17
<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: May 11, 1998 By /s/ Lee Adrean
----------------------- ------------------
Lee Adrean
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: May 11, 1998 By /s/ J. Allen Berryman
----------------------- ------------------------
J. Allen Berryman
Vice President and
Corporate Controller
(Principal Accounting Officer)
18
<PAGE>
FIRST DATA CORPORATION
INDEX TO EXHIBITS
-----------------
Exhibit
Number Description
- ------ --------------------------------------------------------------------
12 Statement Regarding Computation of Ratio Earnings to Fixed Charges
15 Letter 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
19
<PAGE>
EXHIBIT 12
<TABLE>
<CAPTION>
FIRST DATA CORPORATION
COMPUTATION OF
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
Three Months Ended
March 31,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
Earnings:
Income before income taxe $195.0 $212.8
Interest expense 26.9 25.3
Other adjustments 11.6 14.5
------ ------
Total earnings (a) $233.5 $252.6
====== ======
Fixed charges:
Interest expense $ 26.9 $ 25.3
Other adjustments 11.6 14.5
------ ------
Total fixed charges (b) $ 38.5 $ 39.8
====== ======
Ratio of earnings to
fixed charges (a / b) 6.06 6.35
</TABLE>
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
May 7, 1998
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, No. 333-24667, and Form S-4 No. 333-15497) of
First Data Corporation of our report dated May 7, 1998 relating to the unaudited
consolidated interim financial statements of First Data Corporation which are
included in its Form 10-Q for the quarter ended March 31, 1998.
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
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FIRST
QUARTER 10-Q - 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 328
<SECURITIES> 0
<RECEIVABLES> 930
<ALLOWANCES> 28
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 837
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,560
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 5
<OTHER-SE> 3,753
<TOTAL-LIABILITY-AND-EQUITY> 15,560
<SALES> 0
<TOTAL-REVENUES> 1,232
<CGS> 0
<TOTAL-COSTS> 1,037
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27
<INCOME-PRETAX> 195
<INCOME-TAX> 64
<INCOME-CONTINUING> 131
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 131
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.29
<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 of the Company's Year 2000 remediation plans
substantially as scheduled and budgeted as previously disclosed in the Company's
last Annual Report on Form 10-K.
. Successful conversions under service contracts with Hong Kong Shanghai Bank
and other major client conversions.
. Timely and successful implementation of processing systems to provide new
products, improved functionality and increased efficiencies.
. Successful launch of new payment product initiatives including those related
to electronic bill presentment and payment, card-based money transfer products
and retail foreign exchange services.
. Achievement of expected growth of Consumer Credit Associates, 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.
. Achieving planned revenue growth throughout the Company, including in the
merchant alliance program which requires a cooperative effort between the
Company and its merchant alliance partners, and successful management of pricing
pressures through cost efficiencies and other cost management initiatives.
. 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 EC.
. No unanticipated changes in laws, regulations, credit card association rules
or other industry standards affecting FDC's businesses which require significant
product redevelopment efforts, reduce the market for or value of its products,
or render products obsolete.
. Continuation of the existing interest rate environment, avoiding increases in
agent fees related to the Company's consumer money transfer products and the
Company's short-term borrowing costs.
. Absence of significant changes in foreign exchange spreads on retail money
transfer transactions, particularly between the United States and Mexico.
. Successfully managing the potential both for patent protection and patent
liability in the context of rapidly developing legal framework for expansive
software patent protection.
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.
22
