<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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
----------------
FIRST DATA CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 47-0731996
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
401 HACKENSACK AVENUE, HACKENSACK, NEW JERSEY 07601
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(201) 525-4700
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
----------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
<S> <C>
COMMON STOCK NEW YORK STOCK EXCHANGE
(PAR VALUE $.01 PER SHARE)
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
----------------
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Common shares of the registrant outstanding at February 2, 1998 were
448,957,141. The aggregate market value, as of February 2, 1998 of such common
shares held by non-affiliates of the registrant was approximately $13.87
billion. (Aggregate market value estimated solely for the purposes of this
report. This shall not be construed as an admission for the purposes of
determining affiliate status.)
DOCUMENTS INCORPORATED BY REFERENCE
Part III: Portions of Registrant's Proxy Statement relating to the Annual
Meeting of Stockholders to be held on May 13, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
First Data Corporation ("FDC" or "the Company") operates in a single business
segment providing high-quality, high-volume information processing and related
services to several market sectors. The Company has focused on its services
related to payment transactions (which include transaction card issuer services,
merchant card and check processing services, and processing services related to
payment instruments), representing approximately 80% and 70% of FDC's revenues
in 1997 and 1996, respectively. In this area, the Company is emphasizing growth
in electronic commerce, information management and international opportunities,
as evidenced by its 1997 activities described below.
FDC's business strategy is to generate recurring revenue by developing long-
term contractual relationships with clients who have decided to outsource
various transaction and information processing services. The Company's training
and development efforts for its managers and service representatives are focused
on the "lifetime value" of these client relationships. FDC's ongoing objective
is to promote client retention and loyalty by providing services of superior
quality that consistently exceed client expectations. Specifically, FDC focuses
on a "service-profit-chain" model, whereby the Company's growth and
profitability are linked to satisfied and loyal employees who deliver services
of exceptional quality that promote the success of their clients.
The Company continues to pursue revenue growth through five primary sources:
internal growth, which consists primarily of increased transaction processing
for existing clients; sales of ancillary products and enhanced services to
existing clients; the addition of new clients in existing service areas;
expansion into adjacent markets where FDC can provide similar information
processing services to new client groups; and acquisitions.
FDC's operations in the United States provide the vast majority of the
Company's transaction processing services, and generate a substantial majority
of FDC's revenues and earnings. Currently, FDC's processing units in the United
Kingdom and Australia represent the Company's only foreign operations of
significance. Excluding these two foreign units, domestic facilities process
substantially all money transfer, merchant card and merchant check acceptance
transactions that are settled outside of the United States.
Portions of the Company's business are seasonal. FDC's revenues and earnings
are affected favorably by increased card and check volume during the holiday
shopping period in the fourth quarter and, to a lesser extent, during the back-
to-school buying period in the third quarter. Higher money transfer volume
during the summer months in FDC's payment instruments area also affects revenues
and earnings.
FDC regularly considers acquisition opportunities to supplement the Company's
internal efforts to access new markets and client groups. Divestitures also are
considered if a business unit lacks sufficient growth prospects or does not
enhance the Company's transaction processing competencies. No assurance can be
given with respect to the timing, likelihood or the financial or business effect
of any possible transaction.
FDC is incorporated in Delaware, and its principal executive offices are
located at 401 Hackensack Avenue, Hackensack, New Jersey 07601, telephone (201)
525-4700.
Strategic Transactions and Developments
Domestically, FDC established or enhanced several key relationships, including
signing an agreement, during the first quarter, to provide bank card processing
for Banc One following its announced
1
<PAGE>
acquisition of First USA. This agreement has added approximately six million
Banc One accounts and allows FDC to retain the First USA processing business,
though at pricing below the prior First USA processing agreement. In addition,
the existing Banc One merchant alliance will continue under its present
structure.
During the second quarter, the Company announced the formation of 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.
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 1997, the Company acquired
Consumer Credit Associates, Inc. ("CCA"), a provider of online consumer credit
reporting services. CCA operates as a unit of First Data Information Management
Group, the Company's information management services business, and will further
the Company's plans to provide enhanced decision making and risk management
products to credit grantors and other FDC clients.
Internationally, FDC signed a global credit card processing agreement with
HSBC Holdings plc. ("HSBC") to support business in the Hong Kong market as well
as to extend and expand services to HSBC operations in the United Kingdom and
the United States. This agreement will result in the establishment of an FDC
card processing center in Hong Kong. FDC also acquired an ownership interest in
Negocios Informaticos, SA which provides bank and oil card processing in Spain,
broadening FDC's presence in Europe. In August 1997, the Company completed the
acquisition of Orlandi Valuta companies ("Orlandi"), a provider of U.S. to
Mexico money transfer services. In October 1997, FDC announced the signing of a
long-term agreement with Lloyd's TSB Group Plc which extends and expands an
existing processing relationship. The expanded agreement is expected to add
approximately 4 million card accounts on file with conversion expected to occur
by the end of the 1998 second quarter.
Finally, throughout 1997 the Company has made several other small acquisitions
to complement and enhance its product offerings in the international card
processing, data imaging, messaging and payment instruments businesses and has
expanded the scope of its bank alliance program through the addition of
TeleCheck Services as a partner in the program.
In connection with its efforts to focus on its continuing businesses in
transaction and information processing, the Company divested four units during
1997, three of which were in the health care administration services area, and
in January 1998 announced its intention to divest another. The Company 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. On December 31, 1997, the Company
completed the sale of its Nationwide Credit subsidiary, a provider of debt
collection and accounts receivable management services. In December 1997, the
Company signed an agreement whereby a publicly traded insurance company will
begin a process of renewing insurance policies issued by EBP Life Insurance
Company, Inc. ("EBP Life") on its own paper. This transaction will allow EBP
Life to begin the process of exiting the insurance business and will allow FDC
to extract a majority of invested capital of approximately $85.0 million over
the course of the next 12 to 24 months. Collectively, the four divested units
and EBP Life represented approximately 6%, 12% and 13% of total revenues for
1997, 1996 and 1995, respectively.
2
<PAGE>
In January 1998, the Company announced its intent to sell First Image, its
imaging and document management business, and sold its NTS transportation-
services unit ("NTS"). These two units represented 6% of total revenues for
1997 and 5% of total revenues for 1996 and 1995, respectively. NTS provides
transaction services related to fund transfers, fuel purchases and permits to
the trucking industry. In conjunction with the sale of NTS, FDC simultaneously
purchased (from the company that acquired NTS) a gaming services business which
provides credit card, debit card and money transfer services to gaming
establishments and their customers.
Lastly, the Company took restructuring actions in the first quarter of 1997
involving most business areas. These actions consisted primarily of severing
approximately 2,100 employees, closing certain facilities and exiting other
activities.
SERVICE AREAS
Domestic Card Issuer Services
FDC's Card Services Group ("FDCSG"), with its principal operating facilities
in Omaha, Nebraska, provides a comprehensive line of products and processing and
related services to financial institutions issuing VISA and MasterCard credit
cards, debit cards and oil company and retail store credit cards. Financial
institution clients include a wide variety of banks, savings and loan
associations and credit unions. First Data Issuer Services provides back-office
support through application processing, chargeback services, credit and customer
support, and delinquent account processing, including pre-chargeoff collection
outsourcing services. The First Data Information Management Group provides
information and solutions to the financial, retail, collections and insurance
industries, including customized card promotion services, target marketing and
credit risk decision modeling services. The Company expanded its product
offerings during 1997 in the Information Management Group through the
acquisition of CCA, which provides consumer credit information products and
decision-making tools for credit and risk management. Collectively, these
services constituted approximately 22% of the Company's total revenues in 1997,
18% in 1996 and 16% in 1995.
In addition to growth in existing clients' card accounts on file, several new
card issuing clients were converted onto FDCSG's processing systems in 1997,
which was the principal reason for the 18% increase in the Company's total card
accounts on file. Card accounts on file at year end 1997 (including FDCSG's card
issuing business in the United Kingdom) were 180 million, compared with 153
million and 121 million, respectively, at December 31, 1996 and 1995. These
amounts exclude certain card accounts for which FDCSG provides limited services.
Full-service outsourcing involves providing card issuing clients with the
complete infrastructure for a credit card program including credit application
services, account management and customer service. Processing services include
embossing, transaction reporting, settlement and billing, and certain security
and related services. The Company has the capability to provide a full array of
services throughout the period of each card's use, starting from the moment a
card issuing client accepts an application for a transaction card. FDCSG is
able to monitor the status of the cardholder's application throughout the
approval process and to provide a means for "scoring" the application using
criteria furnished by the client. The Company's in-house embossing facility can
issue cards for new accounts and at renewal dates (established by the client)
for existing card accounts. FDCSG's fraud management services monitor the
unauthorized use of cards which have been reported to be lost, stolen, or which
are exceeding credit limits. The Company's fraud detection systems help
identify fraudulent transactions by monitoring each cardholder's purchasing
patterns and flagging unusual purchases. In addition, the Company will
coordinate with the efforts of investigative and enforcement authorities (at the
card issuing client's request) in preventing unauthorized card use. Billing
statements are prepared and mailed directly to cardholders using the Company's
in-house mail facility. Examples of other service offerings include cardholder
database analysis, cardholder behavior scoring, customized
3
<PAGE>
communications to cardholders and proprietary oil card processing services.
Revenues for card issuing services are derived from fees payable under
contracts that primarily depend on the number of accounts or transactions
processed. FDCSG provides over one hundred transaction-based services which are
separately priced and negotiated with clients. Most contracts provide for the
payment of minimum annual processing fees, payable without regard to transaction
volume, and for price increases during the contract term. In some instances, FDC
may make an advance payment to a client upon the signing of a processing
contract with the Company. FDC makes these payments to compensate new clients
for dedicating the resources to change service providers or to outsource an
internal service function.
Domestic Merchant Processing Services
First Data Merchant Services ("FDMS"), is the largest provider of merchant
credit and debit card transaction processing services in the United States.
Services include authorization, transaction capture, settlement, chargeback
handling, and Internet-based transaction processing. The substantial majority of
these services pertain to transactions in which payment is made through
MasterCard or VISA bank cards. TeleCheck provides check guarantee and check
verification services. Check guarantee services involve buying the approved
check at face value from the merchant if it is subsequently dishonored, subject
to a pre-established maximum. Check verification services help merchants reduce
bad check write-offs and control the costs of check acceptance by providing
access to payment databases and activity monitoring systems. These services
allow merchants to maintain a liberal check acceptance program to increase sales
and profits. The percentages of FDC's revenues from these services were 25%,
23%, and 22%, respectively, during the years ended December 31, 1997, 1996 and
1995.
A key element of FDC's strategy in the merchant processing area involves
joint-venture alliances with bank partners. Under this program, FDC and a bank
create a joint venture into which merchant contracts are contributed. FDMS
benefits by continuing to provide point-of-sale card processing for the
contributed merchants and new merchants signed up by either the bank's or the
venture's dedicated sales force. The bank benefits by maintaining the merchant
banking relationship. Alliance partner banks provide cash clearing and
settlement functions, while FDC provides card processing and certain back-office
functions. Earnings from the joint venture are split according to percentage
ownership of FDC and its bank partner. FDMS has contributed a significant
portion of its merchant contract relationships into the bank alliances, with 12
participating banks currently in the program. In 1998, the Company intends to
move its remaining owned and managed merchant contracts into its alliances.
FDMS's revenues are generated from fees charged for full service merchant
processing performed directly for merchants and for the alliances, and fees are
based on a percentage of dollar volume processed or on a per-transaction basis.
The Company provided full service merchant card processing on transaction dollar
volume totaling $259 billion in 1997, compared with $215 billion in 1996, and
$144 billion in 1995. Merchant transactions processed totaled 5.4 billion in
1997, compared to 4.8 billion in 1996 and 3.7 billion in 1995. Fees charged to
customers for check guarantee services are generally based on the dollar volume
of transactions processed, whereas verification fees are based on the number of
transactions. TeleCheck also offers collection services in conjunction with its
check verification services.
The Company's primary merchant card processing centers are located in
Hagerstown, Maryland and Sunrise, Florida with additional volumes of merchant
card transactions being processed at FDCSG's card issuing processing center in
Omaha, Nebraska. These centers support merchant electronic cash registers and
dial up point-of-sale authorization and draft capture terminals. Virtually all
of FDCSG's credit card authorizations are performed electronically, with
responses to customers typically in less than ten seconds. Also, voice
authorization services are provided to merchants without electronic
4
<PAGE>
authorization capabilities and in the event that electronic authorization
capabilities are interrupted. Transaction information is transmitted
electronically through the MasterCard and VISA networks, and may be posted to a
cardholder account maintained by FDC's card issuing services area.
The Company provides its card processing services for merchant clients under
agreements as an agent for sponsoring member banks in the VISA and MasterCard
systems, as required by their rules. Starting in June 1993, FDMS began providing
a portion of its services under an agreement as agent for and in conjunction
with its subsidiary First Financial Bank ("FFB"), a special purpose credit card
bank formed for the primary purpose of supporting certain of the Company's
merchant credit card processing and settlement operations. In connection with
the formation of a merchant processing alliance with Chase Manhattan Bank (Chase
Merchant Services) in 1996, FFB's activity will decrease during 1998 as the
merchant contracts contributed to the alliance are transferred to Chase Merchant
Services' processing system. Chase will be the primary processing agent for the
clearing and settlement of credit card-based merchant transactions now handled
by FFB.
In January 1998, FDC acquired the Gaming Services unit of Ceridian
Corporation, and, in a simultaneous transaction, Ceridian acquired substantially
all of the Company's NTS transportation services unit. This new subsidiary,
named First Data Financial Services, provides a full range of funds transfer and
other services to gaming establishments and their patrons. First Data Financial
Services will complement and enhance TeleCheck's product offerings to the gaming
industry.
International Card Services
Currently, FDC's operations in the United Kingdom and Australia are the
Company's principal processing facilities located outside the United States.
FDC is the largest third-party provider of card processing services in the
United Kingdom, with over 16 million card accounts on file at December 31, 1997.
As mentioned earlier, FDC is increasing its services in the United Kingdom by
signing a long-term agreement with Lloyd's TSB Group Plc. Services provided
generally mirror the Company's domestic card issuing and merchant processing
services provided to financial institutions. The Company also provides third-
party bankcard processing servicing Mexico and portions of Latin America. In
addition, FDC operates the largest independent funds transfer network in
Australia, providing funds transfer, debit card and automated teller machine
services. The network extends to all of Australia's principal cities, and is
used primarily by credit unions, banks and building societies. As noted above,
during 1997 the Company expanded its international presence through the
acquisition of an ownership interest in Negocios Informaticos, SA which provides
bank and oil card processing in Spain, and signing a global credit card
processing agreement with 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. The HSBC agreement will result in the establishment of an FDC card
processing center in Hong Kong.
The percentages of FDC's revenues from these services were 5% for each of the
three years ended December 31, 1997.
Payment Instruments
FDC is the leading provider of nonbank money transfer and bill payment
services, utilizing an agent network of over 26,000 domestic and 17,000
international agent locations to provide payment instrument transaction services
to consumers in over 150 countries. The primary market for these services is
comprised of people who periodically need to send or receive cash quickly to
meet emergency situations, to send funds to family in other locations or to use
nonbank financial services to pay bills or meet other obligations. Payment
instruments revenues are generated primarily from consumer money transfers, bill
or debt payment money transfers, money orders and official checks. Official
checks serve as an alternative to a bank's own disbursement items such as
teller's or cashier's checks. Payment instrument transactions totaled 502
million in 1997, compared to 458 million in
5
<PAGE>
1996, and 401 million in 1995. However, transaction counts are not necessarily
indicators of revenue growth as revenue per transaction varies greatly among the
Company's product offerings.
The Company derives its revenues from transaction processing fees and from the
investment of funds received by FDC from the sale of payment instruments
(primarily official checks and money orders), net of commissions paid to certain
selling agents. These investments are the primary component of settlement
assets on the Company's consolidated balance sheets. On a pretax equivalent
basis, payment instrument revenues comprised 26% of FDC's total revenues in
1997, compared with 23% in 1996 and 20% in 1995.
Prior to April 1997, a portion of FDC's payment instrument services was
generated from official checks, money orders and money transfers issued under an
agreement with an entity affiliated with American Express Company ("American
Express"). Under the agreement, FDC earned transaction fees paid by the selling
agents and net earnings on the investment securities, with such amounts totaling
approximately 1% of the Company's operating revenues in 1997, 5% in 1996, and 6%
in 1995. The Company managed this business and indemnified American Express
against any losses in connection with this business, thus assuming the risks and
rewards of ownership. Accordingly, the assets and liabilities related to these
transactions are included with settlement assets and obligations on the
Company's consolidated balance sheets. FDC began issuing payment instruments
under its own name in 1994, and completed the phase out of those issued under
the American Express name in 1996 and 1997 (utilizing the well recognized
Western Union name extensively). Settlement assets related to the American
Express branded payment instruments represented approximately 4% of FDC's
settlement assets at December 31, 1997, compared with 24% at December 31, 1996
and are expected to continue declining as the instruments issued under the
American Express name are cashed or otherwise settled.
To initiate a money transfer transaction, the sender presents funds to one of
the Company's third-party agents. Data is entered into the money transfer
system by an agent. Funds are available throughout the agent network for
individual recipients or at a specified commercial establishment in the case of
a bill payment. The information processing and transfer is completed such that
money is available to the intended recipient generally within minutes. FDC's
revenues are derived from the transfer fee, which typically is paid by the
sender based on a graduated schedule that varies with the principal amount of
the money transfer. Money transfers typically are handled by agents, a
significant portion of which are located in supermarkets and convenience stores
in the United States. Customers also can call toll-free to a Company service
center and charge the transfer and related fee to their credit card account.
Commercial customers also can send money transfers to traveling employees or
clients. Substantially all money transfers to recipients outside the United
States are settled by FDC with the agent in U.S. dollars. In addition, the
Company also earns foreign exchange fees from its international money transfer
business.
During 1997, the Company expanded its money transfer product offerings to the
Mexican market through the acquisition of Orlandi, a provider of U.S. to Mexico
money transfer services. Certain Orlandi agents are selling Western Union
branded services in addition to Orlandi's own products and services.
FDC offers bill payment services to utility companies, collection agencies,
finance companies and other financial institutions. The debtor pays a
transaction fee to settle their account via a money transfer initiated at an
agent location, with the Company's commercial client benefiting from a
convenient collection tool that results in immediately available funds.
6
<PAGE>
Investment Processing Services
First Data Investor Services Group ("FDISG"), based in Westborough,
Massachusetts, provides a variety of back-office processing services to the
mutual fund industry, including transfer agent services, fund administration and
accounting services, fulfillment and proxy services, and retirement account
record keeping and transaction services. The Company markets these services to
mutual fund organizations, banks and other investment organizations desiring to
outsource one or more of their back-office processing functions. The
percentages of FDC's operating revenues from these services were 5% in both 1997
and 1996 and 6% in 1995.
Transfer agent services principally consist of annual fees paid in monthly
installments based on the number of shareholder accounts. The number of mutual
fund shareholder accounts serviced by FDISG totaled 17.2 million at December 31,
1997, 15.1 million at December 31, 1996, and 13.3 million at December 31, 1995.
Revenues received by FDISG for fund administration and accounting services
primarily consist of annual fees paid in monthly installments based on mutual
fund asset levels. Mutual fund assets serviced at December 31, 1997 totaled
$572 billion, compared with $429 billion and $360 billion, respectively, at
December 31, 1996 and 1995. Fees for printing, mailing and proxy solicitations
are charged by volume for each job, whereas retirement plan servicing fees
consist of monthly billings based on contractual agreements, the number of plan
participants or asset levels.
Specialty Services
FDC has a variety of services that complement its transaction processing
service areas. Collectively, these services accounted for approximately 7% of
FDC's revenues in both 1997 and 1996, compared with 16% in 1995. On December
31, 1997, the Company completed the divestiture of its Nationwide Credit
subsidiary, which provides debt collection and accounts receivable management
services. In January 1998, the Company announced its intention to divest its
First Image Management Company division, which provides information management
services, including data capture, data imaging, micrographics, electronic
database management, and output printing and distribution.
International Banking Technologies ("IBT") is headquartered in Norcross,
Georgia, and is a leader in developing in-store branch banking programs in
supermarkets and other high traffic retail superstores. IBT provides a
comprehensive array of services for its financial institution customers, with
the objective of developing a profitable financial services outlet while
achieving a value added arrangement for the retailer. IBT derives its revenues
from fees earned during the design and installation phases, and also from the
ongoing management of the in-store program between the financial institution and
the retailer.
FDC's Teleservices unit is the sole external provider of operator and customer
support services to one of the nation's leading long distance telephone
companies. In addition, its Call Interactive unit is a leading provider of
customized 800 telephone interactive voice services that gather, process and
disseminate information for client marketing needs. Revenues from these
services consist of fees paid by clients which generally are based on call
volume, duration and the number of transactions.
Health Care Administrative Services
FDC divested substantially all of its health care administrative services
businesses during 1997. These businesses comprised approximately 3% of the
Company's revenues in 1997, 7% in 1996 and 8% in 1995.
MARKETING
FDC markets its services through a variety of channels including direct
solicitation and general
7
<PAGE>
advertising. The Company's employees are utilized in the direct solicitation of
new clients and the cross-selling of additional FDC services to existing
clients. Direct sales efforts by both Company employees and bank alliance
partner employees in the domestic merchant processing services area have been
effective in signing new merchant clients in the past few years.
General advertising of the Company's services is accomplished through industry
and trade publications, direct mail, telemarketing, participation in trade
conventions and Company-sponsored seminars as well as direct sales. Western
Union maintains a broad based advertising and marketing program supporting the
Western Union brand name and the public's awareness of Western Union's services.
In addition, FDC believes that its ongoing business acquisition program is an
important complement to direct marketing efforts in entering new markets and
expanding its service offerings.
SYSTEMS DEVELOPMENT AND YEAR 2000 REMEDIATION
The Company internally develops certain operating system platforms and data
capture terminal equipment to facilitate the delivery of FDC's processing
services to its clients. These platforms and equipment are designed to help
clients connect with the Company's information transfer network, and to make the
completion of transactions more convenient and efficient. These internal
development activities are in addition to ongoing investments by the Company to
maintain and enhance existing systems.
Most of the Company's business units are faced with "Year 2000" remediation
issues. Many computer programs were written with a two digit date field and if
these programs are not made Year 2000 compliant, they will be unable to
correctly process date information on or after the Year 2000. While these issues
impact all of the Company's data processing systems to some extent, they are
most significant in connection with various mainframe "legacy" computer
programs. Moreover, remediation efforts go beyond the Company's internal
computer systems and require coordination with clients, vendors, government
entities and other third parties to assure that their systems and related
interfaces are compliant. Given the different computer systems operated by the
Company's business units, the type and extent of the Year 2000 issues and the
cost of remediation vary significantly among the Company's business units.
Failure to achieve timely remediation of business units' computer systems that
process client information and transactions would have a material adverse effect
on the Company's business, operations and financial results.
In response to the Year 2000 concerns, the Company created a Year 2000 Task
Force to coordinate and monitor the business units' progress in their Year 2000
remediation efforts. The Task Force reports directly to the Company's executive
management and also provides regular reports to the Board of Directors. In
addition, at the direction of the Audit Committee of the Board of Directors the
Company engaged the Gartner Group to provide an independent analysis and
assessment of its Year 2000 remediation efforts. The Gartner Group provides
regular progress reports to executive management and the Board of Directors and
regularly meets with the Audit Committee to discuss its reports.
The Company's plans call for all mission critical systems to be renovated and
compliance testing underway by the end of 1998. Acceptance testing with clients
and other third parties will take place between late 1998 and mid-1999 with time
frames differing by business unit. Completion of all third party interface
testing is dependent upon those third parties completing their own internal
remediation. The Company could be adversely affected to the extent third parties
with which it interfaces have not properly addressed their Year 2000 issues.
8
<PAGE>
In 1997, the Company spent approximately $32 million on its Year 2000
remediation efforts. The Company currently anticipates expenditures for Year
2000 remediation efforts and testing in the range of $75 million to $90 million
in 1998 and in the range of $35 million to $45 million in 1999.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated.
REGULATION
Various aspects of FDC's service areas are subject to federal and state
regulation which, depending on the nature of any noncompliance, may result in
the suspension or revocation of any license or registration at issue, as well as
the imposition of civil fines and criminal penalties. To date, the Company has
experienced no material difficulties in complying with the various laws and
regulations affecting its business.
As a provider of electronic data processing services directly to governmental
agencies and to banks and other regulated financial institutions, the Company is
subject to regulatory oversight and examination by the Federal Financial
Institutions Examination Council, as well as review by various other federal and
state regulatory agencies.
Certain activities of FDMS are subject to examination and regulation related
to merchant credit card processing. In addition, FFB acts as a sponsor to and
clearing bank for a portion of the Company's merchant card processing business.
FFB is subject to examination and regulation by the Georgia Department of
Banking and Finance ("GDB&F") and applicable federal regulatory agencies,
including the Federal Deposit Insurance Corporation ("FDIC") which approved
FFB's application for FDIC deposit insurance in 1993. FFB must maintain certain
minimum capital ratios imposed by the GDB&F and FDIC and operates under certain
activity limitations under the Federal Bank Holding Company Act, as amended. In
addition, FFB and FDMS continue to be subject to rules of the VISA and
MasterCard organizations, including a requirement that FFB maintain adequate
capital (currently $85.3 million) based on the merchant credit card processing
volume settled through FFB. Finally, each corporate entity in the chain of
ownership of FFB (e.g., FDMS and FDC) is a bank holding company under Georgia
law and is subject to certain examination, reporting, registration and capital
requirements.
Most states license issuers of payment instruments and many require, among
other things, that proceeds from the sales of such instruments be invested in
high-quality marketable securities prior to the settlement of the transactions.
Such licensing laws also may cover matters such as regulatory approval of agent
locations and the filing of periodic reports by the licensee. The Company is
required to obtain and maintain licenses to conduct such operations, which
generally require the Company or the licensed subsidiary to demonstrate and
maintain levels of net worth and/or liquidity. In addition, the Company's
services related to money transfers also are regulated at the state level by
banking commissions or similar authorities.
Certain of the Company's services are governed by the Fair Credit Reporting
Act and the Fair Debt Collection Practices Act, with regulatory authority
delegated to the Federal Trade Commission.
FDC's investment processing services area also is subject to federal
securities laws relating to, among other things, the regulation of transfer
agents.
EBP Life is licensed throughout the United States as a life and health
insurance company, and is subject to the insurance laws and regulations of
Oklahoma (where it is domiciled). These laws and
9
<PAGE>
regulations include requirements of the entity to maintain minimum capital and
surplus ratios and minimum reserves. Regulations also require the filing of
annual and other reports related to the insurance entity's operation and
financial condition.
COMPETITION
The most significant competitive factors related to the Company's services are
price, quality, features and functionality, and reliability of service.
FDC is not aware of any single competitor which provides the same range of
services; however, the information services industry is highly fragmented and
FDC faces significant competitors in each of its service areas. The Company
also competes with companies that internally perform processing or other related
services offered by FDC. In addition, the Company believes that recently
enacted changes in telecommunications and other laws and developments regarding
the Internet and other new technologies related to electronic commerce may
result in competition from entities with access to significant capital and
management resources.
FDC creates a differentiated competitive position in its service areas by
offering a menu of enhanced services to clients. These enhanced services often
involve technologically sophisticated reporting features that add value to
information derived from the Company's transaction processing databases.
The Company's domestic merchant card processing service area competes against
several other national service providers, and against banks that continue to
provide these services to their merchant customers. FDC's check acceptance area
is in competition principally with two other national companies.
FDC's card issuing services area competes with other third-party cardholder
processors as well as banks that process their accounts internally.
In the payment instruments area, FDC's money transfer services compete with
MoneyGram Payment Systems, which the Company divested pursuant to an initial
public offering in 1996, as well as other niche providers. The Company also
competes with bank wire transfer services (primarily available to commercial
users). In addition, the Company faces several established competitors in
providing commercial money transfer and electronic bill payment services.
FDC's money order services primarily compete with postal money orders and those
of one other national provider.
FDC's Information Management Group competes with national credit reporting
agencies and other national information database companies.
FDC's investment processing services area competes with numerous other service
providers, as well as with in-house service areas within mutual fund
organizations.
INDUSTRY TRENDS
Technological capabilities required for the rapid and efficient creation,
processing, handling, storage and retrieval of information are becoming
increasingly complex. These capabilities require large development and capital
expenditures and processing expertise, and have contributed to a trend toward
the outsourcing of processing services that benefits the Company. In addition,
the evolution of these capabilities is creating new competitors with innovative
solutions, and also is driving an industry-wide consolidation which is creating
more established competitors.
Bank industry consolidation impacts existing and potential clients in FDC's
service areas, primarily relating to card issuing and payment instruments
services. Consolidation in the mutual fund industry
10
<PAGE>
similarly could impact the Company's investment processing services business. In
the aggregate, bank and mutual fund mergers have not significantly affected the
Company to date. However, FDC could lose business in connection with future
client mergers if the surviving or acquiring entity utilizes in-house processing
services or those of a competitor of the Company.
EMPLOYEES AND LABOR RELATIONS
At December 31, 1997, the Company employed approximately 36,000 employees,
over 94 percent of whom were full-time employees. About 25% of FDC's
approximately 2,000 employees in the United Kingdom are members of the Banking
Insurance & Finance Union. In addition, Western Union has two three-year labor
contracts (expiring August 6, 2000) with the Communications Workers of America,
AFL-CIO and its local 1177, representing approximately 1,100 employees. The
Company's employees are not otherwise represented by any labor organization. The
Company believes that its relations with its employees and the labor
organizations identified above generally to be good.
EXECUTIVE OFFICERS OF THE REGISTRANT
See Item 10 of this Form 10-K.
11
<PAGE>
ITEM 2. PROPERTIES
The Company leases executive office space at 401 Hackensack Avenue,
Hackensack, New Jersey, and at 5660 New Northside Drive, Atlanta, Georgia. The
Company and its subsidiaries own or lease approximately 600 properties which
range in size from approximately 304,000 square feet to less than 200 square
feet. The following table describes the principal facilities used in connection
with the Company's operations. Unless otherwise indicated by an asterisk (*),
such facilities are leased.
<TABLE>
<CAPTION>
Approximate
Business Unit Location Square Footage
- -------------- -------- --------------
<S> <C> <C>
Domestic Card Issuer Services Nevada, IA* 232,000
Omaha, NE (4 facilities)* 700,000
Omaha, NE (9 facilities) 860,000
Tulsa, OK* 188,000
Tulsa, OK 176,000
Domestic Merchant Processing Aurora, CO 78,000
Services Coral Springs, FL* 97,000
Hagerstown, MD 120,000
Houston, TX 154,000
Melville, NY 140,000
Sunnyvale, CA 80,000
Sunrise, FL 102,000
International Card Services Australia (5 facilities) 25,000
Basildon, England (4 facilities)* 262,000
Southend-on-Sea, England
(3 facilities) 203,000
Payment Instruments Bridgeton, MO 78,000
Englewood, CO 271,000
Paramus, NJ 132,000
Investor Services Boston, MA 114,000
Providence, RI 114,000
Westborough, MA 304,000
Specialty Services Daytona, FL* 87,000
London, KY (6 facilities)* 108,000
Lynnfield, MA 185,000
Nashville, TN 122,000
Norcross, GA 90,000
Pensacola, FL* 58,000
Tucson, AZ 49,000
</TABLE>
The Company owns or leases a number of additional facilities in the United
States and foreign countries which are used for operational, sales and
administrative purposes. The Company's lease obligations generally include
customary provisions regarding increases in rent and related costs, such as
property taxes. The Company believes that its facilities are suitable and
adequate for its businesses; however, the Company periodically reviews its space
requirements to consolidate and dispose of or sublet facilities which are no
longer required in connection with its businesses and to acquire new space to
meet the needs of its businesses.
12
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
On November 3, 1997, plaintiff Raul Garcia brought a putative class action in
the United States District Court for the Central District of California against,
among others, the Company's subsidiary Western Union Financial Services, Inc.
Plaintiff claims that Western Union charges an undisclosed "commission" when
consumers transmit money to foreign countries, 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. Plaintiff
asserts that Western Union's failure to disclose this "commission" in its
advertising and in the transactions violates federal and state law. Plaintiff
seeks a declaratory judgment, imposition of a constructive trust, an accounting,
compensatory and statutory damages alleged to be in excess of $1,000,000,000,
and punitive damages. Plaintiff also has made a claim under the Racketeer
Influenced and Corrupt Organizations Act which provides for treble damages.
Western Union has filed a motion to dismiss the plaintiff's federal claims,
which motion is pending with the court, and intends to vigorously defend the
action.
From time to time the Company is involved in various other litigation matters
arising in the ordinary course of its business, none of which either
individually or in the aggregate currently is material to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
13
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The principal market for the Company's common stock is the New York Stock
Exchange ("NYSE"). The following table sets forth, for the indicated calendar
periods, the reported intraday high and low sales prices of the common stock on
the NYSE Composite Tape and the cash dividends per share of common stock. At
March 16, 1998 the registrant had 4,916 common stockholders of record.
<TABLE>
<CAPTION>
1997 High Low Dividend
- ---- ---- --- --------
<S> <C> <C> <C>
First Quarter.... $ 39 5/8 $ 32 1/4 $0.02
Second Quarter... 44 1/4 31 1/4 0.02
Third Quarter.... 46 1/8 35 9/16 0.02
Fourth Quarter... 39 15/16 25 0.02
1996
- ----
First Quarter.... 37 7/8 30 3/8 0.015
Second Quarter... 40 7/8 34 0.015
Third Quarter.... 41 3/8 34 7/8 0.015
Fourth Quarter... 44 35 1/4 0.02
</TABLE>
The timing and amount of future dividends will be (i) dependent upon the
Company's results of operations, financial condition, cash requirements and
other relevant factors, (ii) subject to the discretion of the Board of Directors
of the Company and (iii) payable only out of the Company's surplus or current
net profits in accordance with the General Corporation Law of the State of
Delaware.
Recent Sales of Unregistered Securities
None.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
The following data should be read in conjunction with the consolidated financial
statements and related notes thereto and management's discussion and analysis of
financial condition and results of operations included elsewhere in this annual
report. The notes to the consolidated financial statements contain additional
information about various acquisitions (accounted for as purchases) and
dispositions which affect the comparability of information presented. Certain
prior years' amounts have been restated to conform to the current year's
presentation.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
INCOME STATEMENT DATA:
- ----------------------
<S> <C> <C> <C> <C> <C>
Revenues $5,234.5 $4,938.1 $4,186.2 $3,080.5 $2,658.2
Expenses 4,528.1 (a) 3,906.3 (a) 4,018.6 (a) 2,469.2 2,161.1
---------- ---------- --------- --------- ---------
Income before income taxes 706.4 1,031.8 167.6 611.3 497.1
Income taxes 349.7 395.3 251.8 251.0 200.7
---------- ---------- --------- --------- ---------
Net income (loss) $356.7 $636.5 ($84.2) $360.3 $296.4
========== ========== ========= ========= =========
Depreciation and amortization $534.2 $423.6 $346.8 $242.5 $199.7
PER SHARE DATA: (b)
- ---------------
Earnings (loss) per share - basic $0.81 (a) $1.42 (a) ($0.19) (a) $0.87 $0.72
Earnings (loss) per share - diluted $0.79 (a) $1.37 (a) ($0.19) (a) $0.85 $0.71
Cash dividends per share $0.08 $0.065 $0.06 $0.06 $0.06
BALANCE SHEET DATA (AT YEAR-END):
- -------------------------------- ---------- ---------- --------- --------- ---------
Total assets $15,315.2 $14,340.1 $12,217.8 $8,433.1 $5,538.4
---------- ---------- --------- --------- ---------
Settlement assets (c) 8,364.7 7,461.5 6,210.6 3,554.0 2,060.3
Goodwill 3,101.6 3,490.4 3,246.1 2,572.9 1,459.2
---------- ---------- --------- --------- ---------
Total liabilities 11,657.9 10,630.3 9,072.7 6,032.2 3,366.6
---------- ---------- --------- --------- ---------
Settlement obligations (c) 8,249.8 7,389.9 6,119.4 3,564.1 2,060.3
Borrowings 1,750.7 1,261.4 1,127.7 572.1 538.5
Senior convertible debentures - 447.1 447.1 447.1 -
---------- ---------- --------- --------- ---------
Total stockholders' equity 3,657.3 3,709.8 3,145.1 2,400.9 2,171.8
---------- ---------- --------- --------- ---------
SUMMARY OPERATING DATA:
- -----------------------
At year end -
Card accounts on file (in millions) (d) 180.4 152.9 121.4 92.2 70.0
Mutual fund assets serviced (in billions) $572.0 $429.0 $360.1 $277.0 $259.0
For the year -
Merchant dollar volume (in billions) (e) $258.8 $214.5 $144.1 $74.2 $54.5
Merchant transactions (in billions) 5.4 4.8 3.7 2.5 2.3
Payment instrument transactions (in millions) 502.2 457.8 401.0 6.0 262.6
</TABLE>
(a) Includes restructuring, loss on business divestitures and impairment charge
of $369.3 million ($333.9 million after tax, or $0.72 after tax loss per
share) for 1997, a gain, net of integration and impairment charges, on
divestiture of $13.5 million ($8.3 million after tax, or $0.02 per share
after tax) for 1996, and merger, integration and impairment charges of
$645.7 million ($539.9 million after tax or $1.21 per share) for 1995.
(b) Per share data have been restated for the adoption of SFAS 128 and for the
November 15, 1996 stock split effected as a 100% stock dividend.
(c) Settlement asset and obligation totals differ due to the accounting for
unrealized net investment gains and losses under SFAS 115 (adopted in 1994).
(d) Excludes certain bankcard accounts for which the Company does not provide
full processing.
(e) Includes only those merchant transactions for which FDC performed
authorization, settlement and back-office processing.
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
First Data Corporation ("FDC" or "the Company") operates in a single business
segment providing high-quality, high-volume information processing and related
services to several market sectors. The Company has focused on its services
related to payment transactions (which include transaction card issuer services,
merchant card and check processing services, and processing services related to
payment instruments), representing approximately 80% and 70% of FDC's revenues
in 1997 and 1996, respectively. In this area, the Company's objective is to help
make electronic payments the payment method of choice worldwide. In particular,
the Company is emphasizing growth in three key areas: electronic commerce,
information management, and international opportunities, as evidenced by the
completion of several strategic transactions during 1997, including new business
relationships, joint ventures, acquisitions and divestitures and restructuring
activities, as more fully discussed below.
The Company continues to pursue revenue growth through five primary sources:
internal growth, which consists primarily of increased transaction processing
for existing clients; sales of ancillary products and enhanced services to
existing clients; the addition of new clients in existing service areas;
expansion into adjacent markets where FDC can provide similar information
processing services to new client groups; and acquisitions.
FDC continues to consider acquisition opportunities as well as other forms of
business combinations and divestitures. Acquisitions supplement FDC's internal
efforts to access new markets and client groups, while divestitures are
contemplated for business units lacking sufficient financial prospects or for
units not enhancing the Company's transaction processing competencies. However,
no assurance can be given with respect to the timing, likelihood or the
financial or business effect of any possible transaction.
Strategic Transactions and Developments
Domestically, FDC established or enhanced several key relationships, including
signing an agreement, during the first quarter, to provide bankcard processing
for Banc One following its announced acquisition of First USA. This agreement
has added approximately six million Banc One card accounts and allows FDC to
retain the First USA processing business, though at pricing below the prior
First USA processing agreement. In addition, the existing Banc One merchant
alliance will continue under its present structure.
During the second quarter, the Company announced the formation of 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.
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 1997, the Company acquired
Consumer Credit Associates, Inc. ("CCA"), a provider of online consumer credit
reporting services. CCA operates as a unit of First Data Information Management
Group, the Company's information management services business, and will further
the Company's plans to provide enhanced decision making and risk management
products to credit grantors and other FDC clients.
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 extend and expand services to HSBC operations in the United Kingdom
and the United States. This agreement will result in the establishment of a FDC
card processing center in Hong Kong. FDC also acquired an ownership interest
16
<PAGE>
in Negocios Informaticos, SA which provides bank and oil card processing in
Spain, broadening FDC's presence in Europe. In August 1997, the Company
completed the acquisition of Orlandi Valuta companies ("Orlandi"), a provider of
U.S. to Mexico money transfer services. In October 1997, FDC announced the
signing of a long-term agreement with Lloyd's TSB Group Plc which extends and
expands an existing processing relationship. The expanded agreement is expected
to add approximately four million card accounts on file with conversion expected
to occur by the end of the 1998 second quarter.
Finally, throughout 1997 the Company has made several other small acquisitions
to complement and enhance its product offerings in the international card
processing, data imaging, messaging, and payment instruments businesses and has
expanded the scope of its bank alliance program through the addition of
TeleCheck Services as a partner in the program.
In connection with its efforts to focus on its continuing businesses in
transaction and information processing, the Company divested four units during
1997, three of which were in the health care administration services area, and
in January 1998 announced its intention to divest another. The Company 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 divestitures 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. On December 31, 1997, the Company
completed the sale of its Nationwide Credit subsidiary, a provider of debt
collection and accounts receivable management services. In December 1997, the
Company signed an agreement whereby a publicly traded insurance company will
begin a process of renewing insurance policies issued by EBP Life Insurance
Company, Inc. ("EBP Life") on its own paper. This transaction will allow EBP
Life to begin the process of exiting the insurance business and will allow FDC
to extract a majority of invested capital of approximately $85.0 million over
the course of the next 12 to 24 months. Collectively, the four divested units
and EBP Life represented approximately 6%, 12% and 13% of total revenues for
1997, 1996 and 1995, respectively.
In January 1998, the Company announced its intent to sell First Image, its
imaging and document management business, and sold its NTS transportation
services unit ("NTS"). These two units represented 6% of total revenues for
1997 and 5% of total revenues for 1996 and 1995, respectively. NTS provides
transaction services related to fund transfers, fuel purchases and permits to
the trucking industry. In conjunction with the sale of NTS, FDC simultaneously
purchased (from the company that acquired NTS) a gaming services business which
provides credit card, debit card and money transfer services to gaming
establishments and their customers.
Lastly, the Company took restructuring actions in the first quarter of 1997
involving most business areas. These actions consisted primarily of severing
approximately 2,100 employees, closing certain facilities and exiting other
activities.
RESULTS OF OPERATIONS
1997 Compared with 1996
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
17
<PAGE>
to amount and timing. This category also includes nonrecurring gains, which are
separately described below.
Total revenues in 1997 increased 6% to $5.2 billion, compared with $4.9
billion in the prior year. Revenue growth during the year was impacted by the
divestitures of MoneyGram in late 1996, GENEX in February 1997 and FIRST HEALTH
Strategies and FIRST HEALTH Services in July 1997. The Company's internal growth
rate in revenues over 1996 (excluding the effects of acquisitions, divestitures
and the planned divestiture of First Image) was 16%. Growth in existing
businesses occurred principally 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 as strong revenue growth in most of the regional bank alliances was
partially offset by declines in business processed for other acquirers and in
certain owned portfolios with no active sales support. Merchant growth also was
impacted negatively by lower market growth in credit card charge volume, a
decline in net revenue per transaction and the sale and transfer of business to
the Chase Manhattan alliance, which is reported using the equity method of
accounting. Other service areas experienced approximately the same or slightly
lower revenue growth rates in 1997 as compared to 1996, although their overall
percentage of total FDC revenues remained approximately the same as in 1996.
A substantial portion of the Company's service revenues is generated from
payment and other transactions occurring entirely within the United States.
Transactions outside the United States arise principally within the Company's
card services operation in the United Kingdom, and from nonbank money transfers
settled outside the United States, but originating and processed within the
United States. Consistent with the trend in 1996, both of these international
transaction volume sources had double digit growth in 1997.
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. These payment instrument investment
revenues from fiduciary funds (before commission to certain selling agents)
increased from $285.9 million in 1996 to $289.4 million in 1997 ($386.8 million
for 1997 versus $333.9 million for 1996 on a pretax equivalent basis). The
overall growth of FDC is demonstrated by the following key indicators (along
with the percentage growth compared to 1996): 180.4 million total card accounts
on file (18%), with domestic cards representing 160.8 million of the total
(20%); $258.8 billion in domestic merchant dollar volume (20%), and money
transfer transactions of 47.8 million (36%). Certain 1996 key indicators have
been restated to conform to the current year classifications.
Product sales and other increased approximately 40% in 1997 as compared to
1996, from $180.7 million to $256.0 million, attributable to several items for
which there were no similar amounts in 1996 or amounts of much lesser
significance. The largest component of this increase relates to 1997 gains on
sale of merchant contracts. In connection with its merchant alliance program,
the Company periodically sells some of its merchant contracts. During the year
ended December 31, 1997, the Company completed sales of merchant contracts for
cash proceeds of $87.6 million and recorded a gain of approximately $43.5
million, of which $26.5 million was in the fourth quarter. (The most
significant component of these transactions was the fourth quarter gain on the
sale of the Company's 40% interest in a merchant alliance to its alliance
partner.) During the fourth quarter of 1997, the Company also disposed of a
small product line and recorded a gain of approximately $3.5 million. Other
increases include contingent payments associated with a recently formed merchant
alliance and gains arising from the termination of certain contracts as a result
of continued consolidation in the bankcard industry. Although there were no
such termination gains in 1996, client terminations do occur periodically and
gains related thereto are recorded as a component of product sales and other.
18
<PAGE>
The above items were somewhat offset by decreases in product and software sales
and in-store branch bank installations .
Operating expenses increased 7% to $3.3 billion from $3.1 billion in 1996,
while revenues for the year ended December 31, 1997 increased 6% as compared to
the same period in the prior year. However, such a comparison is unfavorably
affected (due to its impact on revenue growth) by the conversion of American
Express Travel Related Services ("TRS") payment products sold and managed by the
Company to FDC's own payment products line largely during the latter half of
1996 and first quarter of 1997. Although settlement assets relating to the sale
of TRS payment products were largely invested in tax-exempt securities, TRS
compensated the Company on a pretax 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 and effective tax rate in 1997. On a pretax equivalent basis the
Company's revenue growth rate in 1997 was 7%.
Operating expenses for the year were impacted by $30 million of charges
incurred during the fourth quarter to write down the book value of certain
intangible assets, principally in the oil card services business, and to
terminate a contract with a software supplier. In addition, the Company
incurred higher data center costs in 1997, including costs for its Year 2000
remediation program (discussed more fully below under "Impact of Year 2000").
Selling, general and administrative expenses increased to $745.9 million, up
3% from $724.7 million in 1996. The increase is primarily attributable to
increased selling costs and start-up costs of the First Data Information
Management Group and administrative costs related to managing the international
business units. These increases were partially offset by lower selling and
marketing costs due to the MoneyGram divestiture.
Interest expense for the year increased 6% to $116.5 million versus $110.3
million in 1996 primarily due to higher average borrowings to fund the
repurchase of 20.4 million shares of FDC common stock for the December
redemption of the convertible debentures.
Earnings comparisons between 1997 and 1996 are significantly impacted by
restructuring, divestitures and impairment charges. The 1997 restructuring,
divestitures and impairment charge totals $369.3 million and includes $46.4
million of restructuring charges, the loss on the FIRST HEALTH Strategies and
FIRST HEALTH Services divestitures of $93.8 million, the loss on the Nationwide
divestiture of $51.0 million and impairment charges relating to other health
care administrative services businesses of $121.9 million and First Image of
$106.7 million. These charges were slightly offset by a $50.5 million gain on
the sale of GENEX. Because much of the losses on business divestitures and
related impairment charges are nondeductible for income tax purposes, the tax
benefit on these items was only $35.4 million. These items, net, decreased after
tax income by $333.9 million ($0.72 per share). The 1996 restructuring,
divestitures and impairment amount consists of a $46.0 million gain on the sale
of the Company's MoneyGram operation and $32.5 million of integration and
impairment charges. These items, net, increased pretax income by $13.5 million
and after tax income by $8.3 million ($0.02 per share) .
FDC's full year effective tax rate of 49.5% (an increase of 11.2 percentage
points compared to 1996) was negatively affected by the losses on divestitures
of Nationwide, FIRST HEALTH Strategies and FIRST HEALTH Services, and the
impairment losses recorded on First Image, EBP and VIPS which were largely
nondeductible for tax purposes. Excluding the effect of these items, and the
1996 net merger and restructuring items, FDC's effective tax rate in 1997 was
35.8% as compared to 38.3% in the previous year. This decrease is explained by
the effect of higher nontaxable interest income on settlement assets in 1997
caused by the shift from TRS payment products, as previously discussed, which
lowered the effective tax rate by 2.8 percentage points over 1996.
19
<PAGE>
Net income of $356.7 million in 1997 decreased from $636.5 million in 1996.
Excluding restructuring, divestiture and impairment amounts in both years,
1997's net income of $690.6 million increased approximately 10% over 1996's net
income of $628.2 million and net income margins increased to 13.2% from 12.7%.
Effective for the quarter ended December 31, 1997, the Company adopted the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 128,
Earnings Per Share. Accordingly, all 1995, 1996 and 1997 earnings per share and
weighted-average share amounts have been computed under the provisions of SFAS
No. 128. Diluted earnings per common share (again excluding restructuring,
divestiture and impairment amounts in both years) increased approximately 12% to
$1.51 in 1997 compared with $1.35 per share in 1996 and $1.02 in 1995.
1996 Compared with 1995
Total revenues in 1996 increased 18% to $4.9 billion, compared with $4.2
billion in the prior year. The Company's internal growth rate in revenues over
the prior year (excluding the effect of acquisitions and divested businesses)
was also 18%. Growth in existing businesses, principally due to the addition of
new clients along with strong underlying volume increases from existing clients
and enhanced services to such clients, accounted for a substantial majority of
the revenue increase. The Company's performance reflected, in particular,
continuing strong growth in the payment instruments, merchant processing and
domestic card issuer services business areas.
Expenses (excluding restructuring, divestiture and impairment amounts)
increased 16%, somewhat lower than the rate of increase of revenues. Operating
expenses increased by 18% while selling, general and administrative expenses
grew at a lesser rate of 10%. Accordingly, income before income taxes
(excluding restructuring, divestiture and impairment amounts and the 1995 second
quarter impact of the divestiture of the health systems business which produced
a pretax gain of $68.9 million and offsetting income taxes of $67.7 million)
increased 37% to $1,018.3 million in 1996 compared with $744.4 million in 1995.
The Company's pretax margin on total revenues increased to 20.6% in 1996 from
18.1% in 1995. This margin improvement indicates the ongoing realization of
synergies, cost containment efforts and operating efficiencies.
FDC's effective income tax rate of 38.3% in 1996 decreased from 38.9% in 1995
(excluding the impact of the 1995 merger, integration and impairment charge and
the health systems divestiture discussed above) due to increased earnings from
nontaxable investments of settlement assets, partially offset by an increase in
state taxes as a larger percentage of business was conducted in states with
higher tax rates than the Company's prior average rate.
After tax earnings increased from a net loss of $84.2 million in 1995 to net
income of $636.5 million in 1996. Excluding restructuring, divestiture and
impairment amounts in both years, after tax earnings increased 38% to $628.2
million in 1996 from $455.7 million in 1995. Diluted earnings per common share
(again excluding the above amounts in both years) increased 32% to $1.35 in 1996
compared with $1.02 per share in 1995. The lower percentage increase in per
share earnings compared with after tax earnings principally results from the
issuance of common stock during 1995 to complete business combinations.
Economic Fluctuations
FDC's business is somewhat insulated from economic fluctuations due to
recurring service revenues from long-term relationships, and the fact that the
Company's services often result in cost savings for its customers. In addition,
its card issuing and merchant processing service areas are benefiting from
higher overall card use and, in particular, growing card use for recurring
transactions at outlets such as
20
<PAGE>
supermarkets and gas stations.
Portions of the Company's business are seasonal. FDC's revenues and earnings
are favorably affected by increased card and check volume during the holiday
shopping period in the fourth quarter and, to a lesser extent, during the back-
to-school buying period in the third quarter. Higher money transfer volume
during the summer months in FDC's payment instruments area also affects revenues
and earnings.
Although FDC cannot precisely determine the impact of inflation on its
operations, the Company has not been significantly affected by inflation. For
the most part, the Company has looked to operating efficiencies from scale and
technology, as well as decreases in technology and communication costs to offset
increased costs of employee compensation and other operating expenses. In
addition, a portion of FDC's service revenues are based on a percentage of
dollar volume processed, partially insulating operating margins on these
services from the effects of inflation.
Forward-Looking Statement
The Company has a long-term objective to achieve internally-driven growth in
revenues, net income and earnings per share of 13% - 16% per year, compounded.
In addition, acquisitions are an important part of the Company's strategy. The
Company expects acquisitions to add several percentage points to its compounded
growth rate over time, although such additional growth may not come equally in
each year. In 1998, as a result of divestitures of noncore businesses, First
Data expects 1998 earnings per share to be in the range of $1.60 - $1.70.
All forward-looking statements are inherently uncertain as they are based on
various expectations and assumptions concerning future events and they are
subject to numerous known and unknown risks and uncertainties which could cause
actual events or results to differ materially from those projected. Important
factors upon which the Company's forward-looking statements are premised
include: (a) continued growth at rates approximating recent levels for card-
based payment transactions, consumer money transfer transactions and other
product markets; (b) successful implementation of the Company's Year 2000
remediation plans substantially as scheduled and budgeted; (c) successful
conversions under service contracts with HSBC and other major client
conversions; (d) timely and successful implementation of processing systems to
provide new products, improved functionality and increased efficiencies; (e)
successful launch of new payment product initiatives including those related to
electronic bill presentment and payment, card-based money transfer products and
retail foreign exchange services; (f) achievement of expected growth of CCA,
the U$A Value Exchange program and other information product initiatives; (g)
absence of consolidation among client financial institutions or other client
groups which has a significant impact on FDC client relationships; (h)
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; (i)
no imposition of a Value Added Tax on third-party credit card processing
services by the European Community ("EC"), which could put credit card
processing outsourcers at a competitive disadvantage to in-house solutions in
the EC; (j) 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; (k) continuation of the
existing interest rate environment, avoiding increases in agent fees related to
the Company's consumer payment instrument products and the Company's short-term
borrowing costs (see discussion of market risk in ITEM 7a); (l) absence of
significant changes in foreign exchange spreads on retail money transfer
transactions, particularly between the United States and Mexico; and (m)
successfully managing the potential both for patent protection and patent
liability in the context of rapidly developing legal framework for expansive
software patent protection.
21
<PAGE>
Variations from these assumptions or failure to achieve these objectives could
cause actual results to differ from those projected in the forward-looking
statements. Due to the uncertainties inherent in forward-looking statements,
readers are urged not to place undue reliance on these 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.
CAPITAL RESOURCES AND LIQUIDITY
FDC continues to generate significant cash flow from operating activities,
aggregating $1,171.5 million in 1997, as compared to $1,053.8 million in 1996.
This cash flow was produced primarily from net income of $356.7 million,
depreciation and amortization of $534.2 million, and noncash charges totaling
$341.2 million (primarily the impairment charges and net loss on divestitures of
business units). 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 primarily to expand its
processing capabilities through property and equipment additions and to
establish customer processing relationships through initial contract payments
and costs for conversion and systems development. Capitalized amounts for these
cash outlays totaled $616.9 million in 1997 compared with $670.8 million in
1996. FDC expects expenditures for systems development in 1998 to approximate
the amounts spent in 1996 and 1997, as growth in the amount needed to support
growing businesses and larger continuing businesses is partially offset by
divestitures and lower per unit costs for data processing equipment. In
addition, the Company expects increased systems related spending, which will be
expensed as incurred, in conjunction with its Year 2000 remediation program
(discussed more fully below).
Overall, FDC's operating cash flow for 1997 exceeded nonacquisition investing
activities by $519.6 million. Additionally, the Company received cash of $70.0
million in the first quarter from the GENEX divestiture, $200 million in the
third quarter from the FIRST HEALTH divestitures and approximately $155 million
in the fourth quarter from the Nationwide divestiture. Also, the Company
received approximately $87.6 million in cash related to sales of merchant
contracts in conjunction with its merchant alliance program. These cash sources
contributed to funds utilized for acquisitions and treasury stock purchases.
Year-to-date cash outlays for acquisitions in 1997 totaled $366.8 million
consisting of a $60.0 million payment to purchase a 50% interest in CSI, an
electronic transaction service provider; an $84.9 million payment to purchase
CCA, a provider of online consumer credit reporting; a $55.9 million payment to
purchase Orlandi Valuta, a U.S.-Mexico money transfer business; and $166.0
million for 12 other businesses expanding the Company's international card
processing, data imaging and payment instruments businesses. The Company also
paid $53.1 million relating to businesses previously acquired and $38.1 million
relating to certain of its alliance programs with bank clients in merchant
processing.
Net cash used for financing activities in 1997 was $428.5 million compared to
net cash provided by financing activities of $11.0 million in 1996. During
1997, the Company made treasury stock repurchases of $1.0 billion primarily
related to conversion of the senior convertible debentures discussed below.
These repurchases were partially funded by cash generated from the activities
described above, short-term borrowings, proceeds from option exercises and
related tax benefits totaling $149.0 million, and the issuance of a $125 million
Medium-Term note in June 1997.
In December 1997, the Company issued $250 million in Medium-Term notes and
used the proceeds to refinance its short-term debt with longer maturities in
order to take advantage of attractive market interest rates.
22
<PAGE>
In addition, FDC continued its pattern of paying quarterly cash dividends to the
Company's common stockholders. Quarterly dividend payments in 1997 were $0.02
per share as compared to $0.015 per share in the prior year. The Company
increased dividends following the November 1996 stock split.
In May 1997, 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 $443.0 million in senior convertible
debentures. On November 3, 1997, FDC issued a notice of redemption of all
debentures outstanding on December 15, 1997. Between November 3 and December
15, $443.0 million in face value of debentures were converted into 20,360,835
shares of FDC common stock.
The above repurchases during 1997 are in addition to the Company's 6.7 million
shares of common stock purchased during 1997 in the open market and used in
conjunction with certain employee benefit plans pursuant to a formal ongoing
plan approved by FDC's Board of Directors.
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 $625 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.
As an integral part of FDC's information processing services for payment
transactions, FDC receives funds from instruments sold in advance of settlement
with payment recipients. These funds (referred to as "settlement assets" on
FDC's consolidated balance sheet) are not utilized to support the Company's
operations. However, the Company does have the opportunity to earn income from
investing a portion of these funds. The Company maintains a portion of its
settlement assets in highly liquid investments (classified as cash equivalents
within settlement assets) to fund settlement obligations.
Included in cash and cash equivalents on the consolidated balance sheet at
December 31, 1997 is $85.3 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 borrowing
capacity of $1,058.7 million at December 31, 1997 under the Company's commercial
paper program and through its $175.0 million of 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.
IMPACT OF YEAR 2000
Most of the Company's business units are faced with "Year 2000" remediation
issues. Many computer programs were written with a two digit date field and if
these programs are not made Year 2000 compliant, they will be unable to
correctly process date information on or after the Year 2000. While these issues
impact all of the Company's data processing systems to some extent, they are
most significant in connection with various mainframe "legacy" computer
programs. Moreover, remediation efforts go beyond the Company's internal
computer systems and require coordination with clients, vendors, government
entities and other third parties to assure that their systems and related
interfaces are compliant. Given the different computer systems operated by the
Company's business units, the type and extent of the Year 2000 issues and the
cost of remediation vary significantly among the Company's business units.
23
<PAGE>
Failure to achieve timely remediation of business units' computer systems that
process client information and transactions would have a material adverse
effect on the Company's business, operations and financial results.
In response to the Year 2000 concerns, the Company created a Year 2000 Task
Force to coordinate and monitor the business units' progress in their Year 2000
remediation efforts. The Task Force reports directly to the Company's executive
management and also provides regular reports to the Board of Directors. In
addition, at the direction of the Audit Committee of the Board of Directors the
Company engaged the Gartner Group to provide an independent analysis and
assessment of its Year 2000 remediation efforts. The Gartner Group provides
regular progress reports to executive management and the Board of Directors and
regularly meets with the Audit Committee to discuss its reports.
The Company's plans call for all mission critical systems to be renovated and
for compliance testing underway by the end of 1998. Acceptance testing with
clients and other third parties will take place between late 1998 and mid-1999
with time frames differing by business unit. Completion of all third party
interface testing is dependent upon those third parties completing their own
internal remediation. The Company could be adversely affected to the extent
third parties with which it interfaces have not properly addressed their Year
2000 issues.
In 1997, the Company spent approximately $32 million on its Year 2000
remediation efforts. The Company currently anticipates expenditures for Year
2000 remediation efforts and testing in the range of $75 million to $90 million
in 1998 and in the range of $35 million to $45 million in 1999.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated.
NEW ACCOUNTING PRONOUNCEMENTS
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 the Company will adopt the new requirements retroactively in 1998.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates. The
Company's assets consist of both fixed and floating rate interest bearing
securities. These investments arise primarily from the Company's sale of
payment instruments (principally official checks and money orders). The Company
invests the proceeds from the sale of these instruments, pending the settlement
of the payment instrument obligation. The Company has classified these
investments as available-for-sale. Accordingly, they are carried in the
Company's consolidated balance sheet at fair market value. A portion of the
Company's payment instruments business involves the payment of commissions to
selling agents that are computed based on short-term variable rates.
24
<PAGE>
To the extent that the Company does not pay commissions to its selling agents,
or invests the proceeds from the sale of payment instruments in floating rate
investments, interest rate risk is nonexistent or minimal. The unmatched
position, which is the amount of fixed income investments upon which the Company
also pays the selling agent a commission based on short-term interest rates, is
the amount which subjects the Company to interest rate risk arising from changes
in short-term interest rates.
The Company's objective in managing interest rate risk is to mitigate the risk
that earnings and the market value of the investments could be adversely
impacted by changes in interest rates. The Company has developed a risk
management program to quantify this risk utilizing advanced portfolio modeling
techniques.
The Company has hedged a portion of this risk through the purchase of interest
rate cap agreements which effectively limit the commission payments to selling
agents, and through the use of interest rate swap agreements which transform the
variable rate commission payments to a fixed rate.
The Company's interest sensitive liabilities are its debt instruments
consisting of commercial paper, fixed rate medium-term notes, and long-term debt
securities.
A 10% proportionate increase in interest rates in 1998, as compared to the
average level of interest rates in 1997, would result in a decrease to pretax
income of approximately $10.0 million (thus far in 1998, interest rates have
actually trended lower than rates experienced in the latter portion of 1997).
This decrease takes into consideration expected investment positions and debt
balances, commissions paid to selling agents, growth in new business, and the
effects of interest rate cap and swap agreements. Conversely, a corresponding
decrease in interest rates would result in a comparable improvement to pretax
earnings.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
25
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the executive
officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------ --- ----------------------------------------------------
<S> <C> <C>
Henry C. Duques......... 54 Chairman of the Board and Chief Executive Officer
Lee Adrean.............. 46 Executive Vice President and Chief Financial Officer
David P. Bailis......... 42 Executive Vice President
Henry T. DeNero......... 52 Executive Vice President
Charles T. Fote......... 49 Executive Vice President
Walter M. Hoff.......... 45 Executive Vice President
Robert J. Levenson...... 56 Executive Vice President and Director
Michael T. Whealy....... 45 Executive Vice President and General Counsel
Ben Burdetsky........... 69 Director
Courtney F. Jones....... 58 Director
James D. Robinson III... 62 Director
Charles T. Russell...... 68 Director
Bernard L. Schwartz..... 72 Director
Joan E. Spero........... 53 Director
Garen K. Staglin........ 53 Director
</TABLE>
The Board of Directors of the Company is divided into three classes serving
staggered three-year terms. The terms of office of Mr. Burdetsky, Mr. Duques and
Ms. Spero will expire in 1998, the terms of office of Mr. Robinson, Mr. Schwartz
and Mr. Staglin expire in 1999 and the terms of office of Mr. Jones, Mr.
Levenson and Mr. Russell will expire in 2000. Officers of the Company serve at
the discretion of the Board of Directors. Mr. Duques, Mr. Jones, and Mr.
Robinson (Chairman) serve on the Executive Committee of the Board of Directors.
Mr. Burdetsky, Mr. Jones (Chairman) and Mr. Staglin serve on the Audit Committee
of the Board of Directors. Mr. Burdetsky, Mr. Schwartz, Mr. Russell and Mr.
Staglin (Chairman) serve on the Compensation and Benefits Committee of the Board
of Directors (the "Compensation Committee").
HENRY C. DUQUES has served as Chairman of the Board and Chief Executive
Officer since April 1989. He joined American Express in September 1987 as
President and Chief Executive Officer of the Data Based Services Group of
American Express Travel Related Services Company, Inc. ("TRS"), the predecessor
of the Company, and served in that capacity until April 1989. Mr. Duques was
Group President Financial Services and a member of the Board of Directors of
Automatic Data Processing, Inc. ("ADP") from 1984 to 1987. Mr. Duques is a
director of Unisys Corporation.
LEE ADREAN joined the Company in May 1995 as Executive Vice President and
Chief Financial Officer. Mr. Adrean was President of Providian Agency Group from
1993 to the time he joined the Company. From 1991 to 1993 he was Senior Vice
President and Chief Financial Officer of Providian Corporation and from 1990 to
1991 he was Senior Vice President, Corporate Development and Strategic Planning
at Providian Corporation.
DAVID P. BAILIS was appointed to Executive Vice President in September 1996.
He holds responsibility for overseeing the Business Information Systems,
Corporate Communications and Security functions at the FDC corporate level. He
also services as Chief Operating Officer for First Data's Card Services Group.
26
<PAGE>
Mr. Bailis joined the Company in June 1989 and advised the Health Systems Group
and First Data Resources business units on legal matters prior to his promotion
to General Counsel of the Company in July 1992. He served as General Counsel for
First Data until 1998 with responsibility for Legal, Human Resources,
Procurement, Real Estate, Business Information Services, Corporate
Communications and Security at the FDC Corporate level. Before joining the
Company, Mr. Bailis served in a variety of positions at Peper, Martin, Jensen,
Maichel and Hetlage. Mr. Bailis earned an L.L.M. in Taxation from the New York
University and his J.D. from Washington University School of Law in St. Louis.
HENRY T. DENERO joined the Company in July 1995 as Executive Vice President.
From 1992 to 1994 Mr. Denero was Vice Chairman and Chief Financial Officer at
Dayton Hudson Corporation. From 1973 to 1992, he was employed by the management
consulting firm of McKinsey & Company, Inc. Mr. Denero is a director of Banta
Corporation.
CHARLES T. FOTE has been an Executive Vice President of the Company since its
initial public offering in April 1992. He was a Director of the Company from
the time of its formation in April 1989 as a subsidiary of American Express
Company until its initial public offering. Mr. Fote also served as President of
Integrated Payment Systems ("IPS") from December 1989 through December 1991.
From 1985 until 1989, he was Executive Vice President of the Payment Products
division of TRS, the predecessor of IPS.
WALTER M. HOFF has been an Executive Vice President of the Company since its
initial public offering in April 1992. He was a Director of the Company from
the time of its formation in April 1989 as a subsidiary of American Express
Company until its initial public offering. From 1989 until April 1992 and from
July 1993 until May 1995 Mr. Hoff also served as Chief Financial Officer of the
Company. He joined the Company in 1989 from ADP's Brokerage Information Services
Group, where he had been Chief Financial and Administrative Officer since 1985.
ROBERT J. LEVENSON has been a Director of the Company since April 1992 and he
joined the Company as an Executive Vice President in July 1993. He formerly
served as Senior Executive Vice President, Chief Operating Officer, and Member
of the Office of the President of Medco Containment Services, Inc., a provider
of managed care prescription benefits. Mr. Levenson was a Director of Medco
Containment Services, Inc. from October 1990 until December 1992. From 1985
until October 1990, Mr. Levenson was Group President and Director of ADP. Mr.
Levenson is a Director of Superior Telecom, Inc. and Broadway & Seymour, Inc.
MICHAEL T. WHEALY was promoted in March 1998 to Executive Vice President and
General Counsel of the Company. He joined the Company in April 1991 as Counsel
of the WATS Marketing and Teleservices business units. Mr. Whealy served as
General Counsel for First Data Resources Inc. from April 1992 until his
promotion to General Counsel of Card Services Group in 1994. Mr. Whealy
previously served as a partner with the law firm of Kutak Rock and prior to that
as an Assistant to the General Counsel of the Department of the Army. Mr.
Whealy is a graduate of Harvard Law School and S.D. School of Mines and
Technology.
BEN BURDETSKY has been a Director of the Company since April 1992. He is a
Professor Emeritus of the School of Business and Public Management of The George
Washington University since 1995 and Director of the Burdetsky Labor-Management
Institute at the University. Dr. Burdetsky was a member of the full-time
faculty from January 1977 to 1994. From June 1988 until 1992, he served as
Dean, and from March 1984 to June 1988 he served as an Associate Dean, of the
School of Business and Public Management of The George Washington University.
Dr. Burdetsky is a director of National Capital Preferred Provider Organization.
27
<PAGE>
COURTNEY F. JONES has been a Director of the Company since April 1992. He is
a Director of Medical Manager Corporation. Mr. Jones was a Managing Director in
Merrill Lynch's Investment Banking Division from July 1989 to December 1990.
Prior thereto, Mr. Jones served as Chief Financial Officer, Executive Vice
President and a member of the Board of Directors for Merrill Lynch & Co. Inc.
from October 1985. From February 1982 to September 1985, Mr. Jones served as
Treasurer and Secretary of the Finance Committee of the Board of Directors of
General Motors Corporation. He also was formerly a Director of General Motors
Acceptance Corporation and General Motors Insurance Company.
JAMES D. ROBINSON III has been a Director of the Company since April 1992. He
is the Chairman and Chief Executive Officer of RRE Investors, LLC, a private
venture investment firm, and Chairman of Violy Byorum & Partners Holding LLC, a
private firm specializing in financial advisory and investment banking
activities in Latin America. He previously served as Chairman and Chief
Executive Officer and as a Director of American Express from 1977 until February
1993. Mr. Robinson is a Director of Bristol-Myers Squibb Company, The Coca-Cola
Company, Cambridge Technology Partners, Union Pacific Corporation, and The
Coleman Company.
CHARLES T. RUSSELL has been a Director of the Company since May 1994. He
served as President and Chief Executive Officer of Visa International from 1984
to January 1994. Mr. Russell joined Visa in 1971. Mr. Russell serves on the
Board of Visitors at the University of Pittsburgh's Joseph M. Katz School of
Business. Mr. Russell also is a Director of CyberCash, Inc., E-Funds Corp., a
check processing company, the Janol-Hydro Corp., a manufacturer of automobile
and truck braking equipment, and InfiStar Corporation, which provides management
services to credit card issuers.
BERNARD L. SCHWARTZ has been a Director of the Company since April 1992. He
is Chairman of the Board of Directors and Chief Executive Officer of Loral Space
& Communications Ltd., a high-technology company concentrating on satellite
manufacturing and satellite-based services. He served as Chairman of the Board
of Directors and Chief Executive Officer of Loral Corporation, a manufacturer of
components for information systems, from 1972 to 1996. Mr. Schwartz is Chairman
of the Board of Directors and Chief Executive Officer of both Globalstar
Telecommunications Limited, which is developing a world-wide, low-earth-orbit
satellite-based digital telecommunications service and K&F Industries Inc., a
world-wide supplier of aircraft braking systems. He also is Chairman of Space
Systems/Loral, a manufacturer of telecommunications and environmental
satellites. In addition, Mr. Schwartz is a Director of Reliance Group Holdings,
Inc., a trustee of New York University Medical Center, and a trustee of
Thirteen/WNET.
JOAN E. SPERO was elected a Director of the Company by the Board in March 1998
to fill the vacancy created when the Board increased the number of Directors
from eight to nine. She has served as President of the Doris Duke Charitable
Foundation since 1997. Ms. Spero was Undersecretary of State for Economic,
Business and Agricultural Affairs from 1993 to 1997. From 1981 to 1993, Ms.
Spero held several offices with American Express Company, the last being
Executive Vice President, Corporate Affairs and Communications. Prior to that
Ms. Spero was Ambassador to the United Nations for Economic and Social Affairs
from 1980 to 1981 and she was an Assistant Professor at Columbia University from
1973 to 1979. Ms. Spero is a member of the Board of Trustees of the Brookings
Institution and the Wisconsin Alumni Research Foundation. She was a member of
the Board of Directors of Hercules Incorporated from 1985 to 1993 and acted as
Chair of the Audit and Compensation Committees for periods of 1988 to 1993 and
she was a member of the Board of Directors of the French-American Foundation
from 1988 to 1993.
GAREN K. STAGLIN has been a Director of the Company since April 1992. He has
served as the Chairman of the Board of Directors of Safelite Glass Corporation
since August 1991 and he was the Chief Executive Officer of Safelite Glass
Corporation from August 1991 until April 1997. From April 1980 until August
1991 Mr. Staglin served as the Corporate Vice President and General Manager of
ADP's Automotive Services Group. He serves as a Director of Quick Response
Services, Inc., CyberCash, Inc. and Specialized Bicycle Corp. Mr. Staglin is a
28
<PAGE>
member of the Advisory Council of the Stanford Graduate School of Business.
29
<PAGE>
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, executive officers and persons who own more than ten percent of the
Company's Common Stock ("Section 16 Persons") to file reports of ownership and
changes in ownership in the Company's Common Stock with the Securities and
Exchange Commission and the New York Stock Exchange. Based on the Company's
records and other information, the Company believes that all Section 16(a)
filing requirements for the Section 16 Persons have been complied with during or
with respect to the fiscal year ended December 31, 1997.
ITEM 11. EXECUTIVE COMPENSATION
See the Proxy Statement for the Company's 1998 Annual Meeting of Stockholders,
which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See the Proxy Statement for the Company's 1998 Annual Meeting of Stockholders,
which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the Proxy Statement for the Company's 1998 Annual Meeting of Stockholders,
which information is incorporated herein by reference.
30
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1 Financial Statements
--------------------
See Index to Financial Statements on page F-1
2 Financial Statement Schedules
-----------------------------
See Index to Financial Statements on page F-1
3 The following exhibits are filed as part of this Annual Report or,
where indicated, were previously filed and are hereby incorporated by
reference:
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3(i) Registrant's Restated Certificate of Incorporation, as amended
to date (incorporated by reference to Exhibit 3 of the
registrant's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1995).
3(ii) Registrant's By-Laws, as amended to date (incorporated by
reference to Exhibit 3(ii) of the registrant's Annual Report on
Form 10-K for the year ended December 31, 1995).
4.1 The instruments defining the rights of holders of long-term debt
securities of the registrant and its subsidiaries are omitted
pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K. The
registrant hereby agrees to furnish copies of these instruments
to the SEC upon request.
10.1/(1)/ Form of First Data Corporation 1992 Long-Term Incentive Plan, as
amended incorporated by reference to Exhibit 10.2 of the
registrant's Annual Report on Form 10-K for the year ended
December 31, 1995).
10.2/(1)/ 1992 Long-Term Incentive Plan Performance Grant Agreement dated
January 1, 1993 between the Registrant and Henry C. Duques
(incorporated by reference to Exhibit 10.16 to the Company's
registration statement on Form S-1 (File No. 33-59440)).
10.3/(1)/ Amended form of Performance Grant Agreement under the 1992 Long-
Term Incentive Plan for the period beginning January 1, 1994
(incorporated by reference to Exhibit 10.5 of the registrant's
Annual Report on Form 10-K for the year ended December 31,
1995).
10.4/(1)/ Form of Performance Grant Agreement under the 1992 Long-Term
Incentive Plan for the period beginning January 1, 1995
(incorporated by reference to Exhibit 10.6 of the registrant's
Annual Report on Form 10-K for the year ended December 31,
1995).
31
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
10.5/(1)/ Form of Performance Grant Agreement under the 1992 Long-Term
Incentive Plan for the period beginning January 1, 1996
(incorporated by reference to Exhibit 10.7 of the
registrant's Annual Report on Form 10-K for the year ended
December 31, 1995).
10.6/(1)/ Form of Performance Grant Agreement under the 1992 Long-Term
Incentive Plan for the period beginning January 1, 1997
(incorporated by reference to Exhibit 10.3 of the
registrant's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1997).
10.7/(1)//(2)/ Form of Performance Grant Agreement under the 1992 Long-Term
Incentive Plan for the period beginning January 1, 1998.
10.8/(1)/ Amended form of First Data Corporation 1993 Director's Stock
Option Plan (incorporated by reference to Exhibit 10.2 of the
registrant's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1996).
10.9/(1)//(2)/ First Data Corporation Salary Deferral Plan.
10.10/(1)//(2)/ Compensation Committee Minutes Regarding Quality Improvement
Performance Award for Walter Hoff.
10.11 364 Day Credit Agreement, dated as of April 1, 1997, among
the registrant, The Chase Manhattan Bank, as administrative
agent, and the Banks, Swing-Line Banks and Other Financial
Institutions Parties Thereto (incorporated by reference to
Exhibit 10.2 of the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1997).
10.12 Revolving Credit Agreement, dated as of April 1, 1997, among
the registrant, The Chase Manhattan Bank, as administrative
agent, and the Banks, Swing-Line Banks and Other Financial
Institutions Parties Thereto (incorporated by reference to
Exhibit 10.1 of the Registrant's Quarterly Report on Form10-Q
for the quarterly period ended March 31, 1997).
12/(2)/ Computation in Support of Ratio of Earnings to Fixed Charges.
21/(2)/ Subsidiaries of the registrant.
23.1/(2)/ Consent of Ernst & Young LLP.
27.1/(2)/ Financial Data Schedule (for SEC use only).
</TABLE>
(b) Reports filed on Form 8-K during the fourth quarter of fiscal 1997:
Item 5, Form 8-K, dated October 22, 1997, reporting the registrant's earnings
for the third quarter and nine months ended September 30, 1997 and revising the
registrant's forward-looking statement.
- -----------------
(1) Constitutes a management contract or compensatory plan, contract or
arrangement described under Item 601 (b)(10)(iii)(A) of Regulation S-K.
(2) Filed herewith.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized.
FIRST DATA CORPORATION
(Registrant)
By /s/ HENRY C. DUQUES
------------------------------
Henry C. Duques
Chairman of the Board
Chief Executive Officer
March 20, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Name Title Date
- ----- ----- ----
<S> <C> <C> <C>
/s/ HENRY C. DUQUES Chairman of the Board and March 20, 1998
- ------------------------------------ Chief Executive Officer
Henry C. Duques
/s/ LEE ADREAN Executive Vice President and March 20, 1998
- ------------------------------------ Chief Financial Officer
Lee Adrean (Principal Financial Officer)
/s/ J. ALLEN BERRYMAN Vice President and Corporate March 20, 1998
- ------------------------------------ Controller
J. Allen Berryman (Principal Accounting Officer)
/s/ BEN BURDETSKY Director March 20, 1998
- ------------------------------------
Ben Burdetsky
/s/ COURTNEY F. JONES Director March 20, 1998
- ------------------------------------
Courtney F. Jones
/s/ ROBERT J. LEVENSON Director March 20, 1998
- ------------------------------------
Robert J. Levenson
/s/ JAMES D. ROBINSON III Director March 20, 1998
- ------------------------------------
James D. Robinson III
/s/ CHARLES T. RUSSELL Director March 20, 1998
- ------------------------------------
Charles T. Russell
/s/ BERNARD L. SCHWARTZ Director March 20, 1998
- ------------------------------------
Bernard L. Schwartz
/s/ JOAN E. SPERO Director March 20, 1998
- ------------------------------------
Joan E. Spero
/s/ GAREN K. STAGLIN Director March 20, 1998
- ------------------------------------
Garen K. Staglin
</TABLE>
33
<PAGE>
FIRST DATA CORPORATION
INDEX TO FINANCIAL STATEMENTS
COVERED BY REPORT OF INDEPENDENT AUDITORS
(ITEM 14(a))
<TABLE>
<CAPTION>
PAGE
----
First Data Corporation and Subsidiaries:
Consolidated Financial Statements:
<S> <C>
Report of Ernst & Young LLP Independent Auditors............................. F-2
Consolidated Statements of Operations for the Years ended December 31,
1997, 1996 and 1995.......................................................... F-3
Consolidated Balance Sheets at December 31, 1997 and 1996.................... F-4
Consolidated Statements of Cash Flows for the Years ended December 31,
1997, 1996 and 1995.......................................................... F-5
Consolidated Statements of Stockholders' Equity for the Years ended
December 31, 1997, 1996 and 1995............................................. F-6
Notes to Consolidated Financial Statements................................... F-7
Schedule:
Schedule VIII--Valuation and Qualifying Accounts............................. F-30
</TABLE>
All other schedules for First Data Corporation and subsidiaries have been
omitted since the required information is not present or not present in amounts
sufficient to require submission of the schedule, or because the information
required is included in the respective financial statements or notes thereto.
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS
The Stockholders and Board of Directors of First Data Corporation
We have audited the accompanying consolidated balance sheets of First Data
Corporation as of December 31, 1997 and 1996 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of First
Data Corporation at December 31, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
New York, New York
February 5, 1998
F-2
<PAGE>
FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUES
Service revenues $ 4,978.5 $ 4,757.4 $ 3,946.0
Product sales and other 256.0 180.7 240.2
--------------------------------------------
5,234.5 4,938.1 4,186.2
--------------------------------------------
EXPENSES
Operating 3,296.4 3,084.8 2,606.2
Selling, general and administrative 745.9 724.7 660.3
Restructuring, loss on business divestitures and impairment, net 369.3 (13.5) 645.7
Interest 116.5 110.3 106.4
---------------------------------------------
4,528.1 3,906.3 4,018.6
---------------------------------------------
Income before income taxes 706.4 1,031.8 167.6
Income taxes 349.7 395.3 251.8
---------------------------------------------
Net income (loss) $ 356.7 $ 636.5 $ (84.2)
=============================================
Earnings (loss) per share - basic $ 0.81 $ 1.42 $ (0.19)
Earnings (loss) per share - diluted $ 0.79 $ 1.37 $ (0.19)
=============================================
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
FIRST DATES CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions)
<TABLE>
<CAPTION>
ASSETS December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Cash and cash equivalents $410.5 $271.7
Settlement assets 8,364.7 7,461.5
Accounts receivable, net of allowance for doubtful accounts of
$29.1 (1997) and $25.2 (1996) 984.2 958.1
Property and equipment, net 774.9 757.1
Goodwill,less accumulated amortization of
$470.1 (1997) and $409.6 (1996) 3,101.6 3,490.4
Other intangibles, less accumulated amortization of
$420.7 (1997) and $336.8 (1996) 1,100.5 1,003.1
Other assets 578.8 398.2
----------- ----------
$15,315.2 $14,340.1
=========== ==========
LIABILITES AND STOCKHOLDERS' EQUITY
Liabilities:
Settlement obligations $8,249.8 $7,389.9
Accounts payable and other liabilites 1,657.4 1,531.9
Borrowings 1,750.7 1.261.4
Senior convertible debentures -- 447.1
----------- ----------
Total Liabilities 11,657.9 10,630.3
----------- ----------
Stockholders' Equity:
Common Stock, $.01 par value; authorized 600.0 shares,
issued 448.9 shares (1997) and 448.9 shares (1996) 4.5 4.5
Additional paid-in capital 2,132.9 2,101.8
----------- ----------
Paid-in capital 2,137.4 2,106.3
Retained earnings 1,509.9 1,610.7
Accumulated other comprehensive income 65.8 26.3
Less treasury stock at cost, 2.0 shares (1997) and 0.9 shares (1996) (55.8) (33.5)
----------- ----------
Total Stockholders' Equity 3,657.3 3,709.8
----------- ----------
$15,315.2 $14,340.1
=========== =========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
(IN MILLIONS)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash and cash equivalents at January 1 $271.7 $231.0 $350.5
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (loss) 356.7 636.5 (84.2)
Adjustments to reconcile to net cash provided by operating
activities:
Depreciation and amortization 534.2 423.6 346.8
Noncash portion of restructuring, loss (gain) on business
divestitures and impairment, net 332.9 (26.5) 469.0
Other noncash items 8.3 4.7 34.0
Increase (decrease) in cash, excluding the effects of
acquisitions and dispositions, resulting from changes in:
Accounts receivable (111.2) (183.2) (146.8)
Other assets (109.4) (17.0) (31.0)
Accounts payable and other liabilities (5.2) 4.9 3.1
Income tax accounts 165.2 210.8 118.2
-------- -------- --------
Net cash provided by operating activities 1,171.5 1,053.8 709.1
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Current year acquisitions, net of cash acquired (366.8) (495.5) (422.3)
Payments related to other businesses previously acquired (91.2) (69.7) (85.3)
Proceeds from dispositions, net of expenses paid 505.7 211.9 164.7
Additions to property and equipment, net (297.3) (392.6) (261.5)
Payments to secure customer service contracts, including outlays
for conversion, and capitalized systems development costs (319.6) (278.2) (205.2)
Payments related to Western Union acquisition:
Payment of deferred cash purchase consideration -- -- (300.0)
Funding of assumed pension obligations for a suspended plan (35.0) -- (199.0)
-------- -------- --------
Net cash used in investing activities (604.2) (1,024.1) (1,308.6)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-term borrowings, net 140.4 (213.4) 609.2
Issuance of long-term debt 371.6 348.4 198.1
Principal payments on long-term debt (37.0) (20.4) (305.7)
Proceeds from issuance of common stock 149.0 177.5 93.5
Purchase of treasury shares (1,017.0) (254.9) (92.7)
Cash dividends (35.5) (26.2) (22.4)
-------- -------- --------
Net cash (used for) provided by financing activities (428.5) 11.0 480.0
-------- -------- --------
Change in cash and cash equivalents 138.8 40.7 (119.5)
-------- -------- --------
Cash and cash equivalents at December 31 $410.5 $271.7 $231.0
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FIRST DATA CORPORATION
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE RETAINED COMPREHENSIVE COMMON PAID-IN TREASURY STOCK
--------------
(IN MILLIONS) TOTAL INCOME EARNINGS INCOME SHARES CAPITAL SHARES COST
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 $2,400.9 $1,274.5 $(23.6) 416.0 $1,280.6 (5.4) $(130.6)
Comprehensive income
Net loss (84.2) $(84.2) (84.2)
Other comprehensive
income:
Unrealized gains on
securities 66.7 66.7
Foreign currency
translation
adjustment (4.0) (4.0)
Minimum pension
liability adjustment (20.4) (20.4)
--------------
Other comprehensive income 42.3 42.3
--------------
Comprehensive income $(41.9)
==============
Purchase of treasury shares (92.7) (3.2) (92.7)
Stock issued for:
Acquisitions, including
additional consideration 743.4 23.6 642.6 4.2 100.8
Compensation and benefit
plans 120.8 (23.4) 4.2 67.3 3.0 76.9
FFMC warrant exercises 35.0 4.2 35.0
Cash dividends declared
($0.06 per share) (17.3) (17.3)
Cash dividends by merged
entity (3.1) (3.1)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 3,145.1 1,146.5 18.7 448.0 2,025.5 (1.4) (45.6)
Comprehensive income
Net income 636.5 $636.5 636.5
Other comprehensive
income:
Unrealized losses on
securities (13.7) (13.7)
Foreign currency
translation adjustment 16.6 16.6
Minimum pension
liability adjustment 4.7 4.7
--------------
Other comprehensive
income 7.6 7.6
--------------
Comprehensive income $644.1
==============
Purchase of treasury shares (254.9) (6.7) (254.9)
Stock issued for:
Acquisitions, including
additional
consideration 20.1 0.9 0.5 20.1
Compensation and benefit
plans 173.3 (139.7) 74.6 6.5 238.4
Convertible debentures 6.7 (3.5) 0.2 10.2
Other transactions and
adjustments 4.5 6.2 (1.7)
Cash dividends declared
($0.065 per share) (29.1) (29.1)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 3,709.8 1,610.7 26.3 448.9 2,106.3 (0.9) (33.5)
Comprehensive income
Net income 356.7 $356.7 356.7
Other comprehensive
income:
Unrealized gains on
securities 25.8 25.8
Foreign currency
translation adjustment (1.4) (1.4)
Minimum pension liability
adjustment 15.1 15.1
--------------
Other comprehensive
income 39.5 39.5
--------------
Comprehensive income $396.2
==============
Purchase of treasury shares (1,017.0) (34.6) (27.0) (982.4)
Stock issued for:
Acquisitions, including
additional
consideration 10.2 0.3 10.2
Compensation and benefit
plans 149.0 (79.3) 31.4 5.2 196.9
Convertible debentures 444.8 (308.2) 20.4 753.0
Other transactions and
adjustments (0.2) 0.1 (0.3)
Cash dividends declared
($0.08 per share) (35.5) (35.5)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $3,657.3 $1,509.9 $65.8 448.9 $2,137.4 (2.0) $(55.8)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation and Basis of Preparation
The accompanying consolidated financial statements include the accounts of
First Data Corporation and its majority-owned subsidiaries ("FDC" or "the
Company"). All material intercompany accounts and transactions have been
eliminated. Investments in unconsolidated affiliated companies are accounted
for under the equity method, and are included in "other assets" on the
accompanying consolidated balance sheets. Such investments are not material to
the Company's consolidated financial position or results of operations.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from these estimates.
Presentation
FDC's balance sheet presentation is unclassified due to the short-term nature
of its settlement obligations, contrasted with the Company's ability to invest
cash awaiting settlement in long-term investment securities.
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 from all other revenues. The
Company's service revenues are principally based on the number of accounts or
transactions processed, a percentage of dollar volume processed, or a
combination thereof. Service revenues also include investment earnings
(primarily on certain settlement assets related to payment instruments) and
FDC's equity in earnings of unconsolidated affiliated companies. 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. This category also includes nonrecurring
gains. Prior year amounts have been reclassified to conform to the current
year's presentation.
Business Description
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's operations in the United States provide the vast majority of the
Company's transaction processing services, including the processing for almost
all of the money transfers and credit card transactions that are ultimately
settled outside of the U.S. Currently, FDC's processing centers in the United
Kingdom and Australia are the only foreign operations of any significance. These
units, collectively, accounted for 5% of FDC's total revenues in 1997 (compared
with 5% in 1996 and 1995) and a comparable portion of FDC's assets and earnings
F-7
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(prior to the restructuring, loss on business divestitures and impairment
charges).
Cash and Cash Equivalents
Highly liquid investments (other than those included in settlement assets)
with original maturities of three months or less (that are readily convertible
to cash) are considered to be cash equivalents, and are stated at cost which
approximates market value. Cash equivalents at December 31, 1997 and 1996
include $85.3 million of required investments in connection with FDC's merchant
card settlement operation.
Investment Securities
FDC categorizes all of its investment securities as available-for-sale which
are recorded at fair value. Unrealized gains and losses on available-for-sale
securities are reported (net of tax effects) as adjustments to stockholders'
equity. Realized gains and losses (and declines in value judged to be other
than temporary) are included in FDC's results of operations. The cost of
securities sold is based upon the specific identification method.
Off-Balance Sheet Financial Instruments
FDC, through the use of interest rate swap and cap agreements, hedges certain
exposures to changes in variable rates that impact commissions paid to certain
of its payment instruments selling agents (see Note 7). The interest rate
indices specified by the agreements have been and are expected to be highly
correlated with the commission rates paid to these selling agents. Interest
rate swap agreements involve the receipt of floating rate payments in exchange
for fixed rate payments over the life of the agreement. The differential to be
paid or received is accrued as rates change and is recognized as an adjustment
of agent commission expense. Costs of variable rate cap agreements, which are
included in other assets, are amortized as an adjustment to agent commissions
over the lives of the agreements, and amounts due FDC under these agreements are
recognized as an adjustment of agent commissions as earned. The fair value of
these agreements and changes to their fair value resulting from changes in
market interest rates are not recognized in the financial statements.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation or
amortization which is computed using the straight-line method over the lesser of
the estimated useful life of the related assets (generally three to 10 years for
equipment, furniture and leasehold improvements, and 30 years for buildings) or
the lease term. Amounts charged to expense for the depreciation and
amortization of property and equipment were $236.7 million in 1997, $185.0
million in 1996 and $143.9 million in 1995.
Goodwill and Other Intangibles
Goodwill represents the excess of purchase price over tangible and other
intangible assets acquired less liabilities assumed arising from business
combinations and is being amortized on a straight-line basis over estimated
useful lives ranging from 20 to 40 years. Goodwill amortization expense totaled
$109.7 million in 1997, $110.6 million in 1996, and $101.7 million in 1995.
F-8
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other intangible assets consist primarily of contract costs (rights to provide
processing services to customers, acquired directly or through acquisitions),
capitalized conversion costs (systems and programming and other related costs to
convert new client accounts to FDC's processing systems), and capitalized
systems development costs (costs to create new platforms for certain of the
Company's information processing services of $135.4 million at December 31, 1997
and $102.3 million at December 31, 1996). Client contracts for which costs are
capitalized generally provide for the payment by the client of minimum annual
fees and contract termination penalties. Other intangibles also include, to a
lesser extent, databases, copyrights, patents, software and noncompete
agreements acquired in business combinations. Other intangibles are amortized on
either a straight-line basis or as a percentage of expected revenues over the
length of the contract or benefit period, which generally ranges from three to
20 years. Other intangibles amortization expense totaled $187.8 million in 1997,
$128.0 million in 1996, and $101.2 million in 1995.
Goodwill and other intangible assets are reviewed for impairment whenever
events indicate that their carrying amount may not be recoverable. In such
reviews, estimated undiscounted future cash flows associated with these assets
are compared with their carrying value to determine if a write-down to fair
value (normally measured by discounting estimated future cash flows) is
required.
Revenue Recognition
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 charged by credit card associations
of $1.5 billion in 1997, $2.1 billion in 1996 and $1.7 billion in 1995).
Earnings (Loss) Per Common Share
In September 1996, the Company's Board of Directors declared a two-for-one
stock split, effected in the form of a stock dividend distributed on November
15, 1996 to shareholders of record on November 1, 1996. Accordingly, all share
and earnings (loss) per common share amounts have been retroactively restated
for this 100% stock dividend.
Effective December 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128"), which changes the method
used to compute earnings per share. Under the new requirements, basic earnings
per share replaces primary earnings per share and does not include the dilutive
effect of convertible debentures and stock options. 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. The Company has restated
all prior period earnings per share amounts in accordance with SFAS 128. Amounts
utilized in per share computations are as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- -------------------------------------------------------------------
<S> <C> <C> <C>
(In millions)
Weighted-average shares outstanding:
Basic weighted-average shares 442.3 447.7 434.0
Stock options 5.3 7.3 6.1
Senior convertible debentures 19.3 20.6 20.6
------ ------ ------
466.9 475.6 460.7
Earnings add back related to senior
</TABLE>
F-9
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<S> <C> <C> <C>
convertible debentures $ 12.8 $ 14.2 $ 14.2
</TABLE>
Diluted earnings per common share computations for 1997 and 1996 were computed
based on weighted-average shares outstanding including the dilutive impact of
common stock equivalents which consist of outstanding stock options, warrants
and convertible debt. The after tax interest expense and issue cost
amortization on convertible debt is added back to net income when common stock
equivalents are included in computing diluted earnings per common share. The
loss per common share in 1995 was computed based on FDC's basic weighted-average
shares outstanding for the year, as the impact of common stock equivalents is
anti-dilutive. In computing the per share impact of the 1995 merger,
integration and impairment charge, common stock equivalents were included since
their impact would be dilutive on operating results before this charge.
Foreign Currency Translation
The U.S. dollar is the functional currency for all FDC businesses except its
operations in the United Kingdom and Australia. Foreign currency denominated
assets and liabilities for these units are translated into U.S. dollars based on
exchange rates prevailing at the end of each year, and revenues and expenses are
translated at average exchange rates during the year. The effects of foreign
exchange gains and losses arising from these translations of assets and
liabilities are included as a component of other comprehensive income.
Stock Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation" ("SFAS 123"), establishes accounting and reporting standards
for stock based employee compensation plans (see Note 13). As permitted by the
standard, FDC continues to account for such arrangements under APB Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations. Accordingly, adoption of the standard has not affected the
Company's results of operations or financial position.
Comprehensive Income
Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"),
which establishes new rules for the reporting and display of comprehensive
income and its components; however, the adoption had no impact on the Company's
net income or stockholders' equity. SFAS 130 requires unrealized gains or
losses on the Company's available-for-sale securities, currency translation
adjustments, and minimum pension liability, which prior to adoption were
reported separately in stockholders' equity, to be included in other
comprehensive income. Prior year financial statements have been reclassified to
conform to the requirements of SFAS 130.
NOTE 2: FFMC BUSINESS COMBINATION AND RESTRUCTURING, LOSS ON BUSINESS
DIVESTITURES AND IMPAIRMENT CHARGES
FFMC Business Combination
In October 1995, FDC merged with First Financial Management Corporation
("FFMC") by converting all of FFMC's outstanding shares into approximately 209.0
million shares of FDC common stock. The merger has been accounted for as a
F-10
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
pooling of interests and, accordingly, the Company's financial statements and
related notes include FFMC's accounts and operations for all periods presented.
Operating results, unaudited, of FFMC included with FDC's consolidated results
for the nine months ended September 30, 1995, adjusted for conformity of
accounting policies utilized by FDC and FFMC, were $1,488.9 million in revenues
and net income of $127.3 million.
Restructuring, Loss on Business Divestitures and Impairment Charges
During 1997, the Company completed dispositions of four business units and
incurred impairment and restructuring charges involving most business areas, as
detailed in Note 4 and following. 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 charge of $369.3
million. Because much of the impairment included in the charge is nondeductible
goodwill for tax purposes, the tax benefit on this loss was only $35.4 million
(a 9.6% effective rate) and the after tax impact of these activities was to
reduce net income by $333.9 million, or $0.72 per share.
During the first quarter of 1997 the Company completed the sale of its GENEX
subsidiary, resulting in a pretax gain of $50.5 million. On July 1, 1997 the
Company completed the sale of its FIRST HEALTH Strategies and FIRST HEALTH
Services businesses and recorded a pretax loss on the divestiture of $93.8
million. 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 (EBP and VIPS) was diminished and, accordingly, the Company
recorded impairment charges related to such businesses of $118.4 million and
other exit related costs of $3.5 million. On December 31, 1997 the Company
completed the sale of its Nationwide Credit subsidiary and recorded a pretax
loss on the divestiture of $51.0 million.
In January 1998, the Company announced its intention to sell First Image
Management Company, its imaging and document management business, and recorded a
1997 pretax impairment charge of $106.7 million, reflecting the anticipated loss
on the disposition. Such impairment charge was recorded as a reduction of
goodwill.
Restructuring costs in 1997 involved most business areas and include 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. Through December
31, 1997, cash expenditures of $34.4 million were charged against these
accruals.
1996 results include $22.3 million of restructuring costs primarily related to
integration activities associated with the FFMC merger, impairment charges of
$10.2 million and a $46.0 million gain on the MoneyGram disposition (see Note
4), which increased net income by $8.3 million ($0.02 per share). Through
December 31, 1997, substantially all cash expenditures have been incurred.
During the fourth quarter of 1995 the Company recorded a $645.7 million
merger, integration and impairment charge which reduced net income by $539.9
million ($1.21 per common share). The charge consisted of transaction costs
($221.7 million), restructuring and integration costs ($121.2 million),
impairment charges ($283.6 million) and an early extinguishment of debt ($19.2
million). Through December 31, 1997, substantially all cash expenditures have
been incurred.
Transaction costs related to the merger and consisted primarily of payments
pursuant to preexisting change in control agreements with FFMC management
totaling $174.7 million, with the remainder comprised of professional fees and
other expenses incurred in connection with the transaction.
F-11
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As a result of the FFMC merger, the Company conducted a strategic reevaluation
of its businesses, reviewing overall trends and developments in relation to its
business investments and industry concentrations. Consequently, the Company
recorded restructuring and integration costs and impairment charges.
Restructuring and integration costs in 1995 and 1996 consist of accruals for
personnel severance of $34.8 million involving 1900 employees, lease termination
costs for facilities and equipment, contract termination and modification costs
and costs for exit activities related to duplicate or overlapping operations and
incurred employee relocations.
The Company measures the need for a reduction in the carrying amount of long-
lived assets using Statement of Financial Accounting Standards No. 121 ("SFAS
121"). A discount rate of 15% is utilized for discounting estimated future cash
flows for purposes of measuring fair market value. This process resulted in the
substantial portion of the $283.6 million charge in 1995 for impairment. The
charge included $136.1 million for goodwill, principally related to the ENVOY
acquisition; $77.0 million for other long-lived assets, principally systems
development and conversion costs and other intangibles; $30.3 million for other
assets and $40.2 million for assets which were substantially disposed of during
1996. The agreement to acquire ENVOY in August 1994 (almost one year prior to
completion of the transaction in June 1995) was viewed at such time as a
strategic expansion of FDC's merchant card processing area. The subsequent
additions of CES and FFMC's merchant card processing operations, combined with
industry trends toward consolidation, caused the Company not to pursue the ENVOY
business plan.
On October 12, 1995, the Company exercised its prepayment option with respect
to certain notes payable which was not reflected as an extraordinary item due to
its immaterial effect.
F-12
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3: OTHER BUSINESS COMBINATIONS AND ASSET ACQUISITIONS
<TABLE>
<CAPTION>
Initial Consideration
----------------------------------------------------
FDC Common Stock
----------------
Dollar
Businesses and Assets Acquired Month Total (a) Cash Value Shares
- ------------------------------ ----- ----- ---- ----- ------
<S> <C> <C> <C> <C> <C>
(In millions)
1997:
Consumer Credit Associates April $ 93.0 $ 90.2 $ -- --
CardService International (Joint Venture) April 60.0 60.0 -- --
Orlandi Valuta August 66.5 66.5 -- --
Bank alliance programs 58.0 58.0 -- --
11 other acquisitions 120.6 109.1 10.2 0.3
-------- ------ ------ ------
$ 398.1 $383.8 $ 10.2 0.3
======== ====== ====== ======
1996:
Donnelley Marketing, Inc. (Donnelley) September $ 195.4 $188.9 $ -- --
Elektra (Mexican Joint Venture -
remaining interest) January 162.0 162.0 -- --
Bank alliance programs 137.8 73.8 -- --
6 other acquisitions 144.7 83.1 36.2 0.9
-------- ------ ------ ------
$ 639.9 $507.8 $ 36.2 0.9
======== ====== ====== ======
1995 (b):
Employee Benefit Plans, Inc. (EBP) October $ 122.4(c) $ 1.8 $120.6 5.4
Merchant processing and point of
sale unit of ENVOY Corporation (ENVOY) June 175.0 3.9 171.1 6.0
CESI Holdings, Inc. and its subsidiary
Card Establishment Services (CES) March 757.3 309.0(d) 448.3 16.4
Bank alliance programs 36.9 23.9 -- --
8 other acquisitions 124.9 116.7 -- --
-------- ------ ------ ------
$1,216.5 $455.3 $740.0 27.8
======== ====== ====== ======
</TABLE>
(a) Other consideration, not separately listed in the table or described above,
consists of promissory notes and other amounts payable of $4.1 million in
1997, $95.9 million in 1996 and $21.2 million in 1995.
(b) See Note 2 with regard to FFMC merger.
(c) Does not include the assumption of stock options.
(d) Includes amounts infused to prepay CES debt obligations of $215.0 million.
Consumer Credit Associates is a provider of consumer credit information;
CardService International, Inc. is an electronic transaction service provider
(in which FDC acquired a 50% ownership interest); and Orlandi Valuta companies
("Orlandi") is a provider of U.S. to Mexico money transfer services. The
Company continues to develop bank alliance programs (joint ventures) in the
domestic merchant credit card processing area.
F-13
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Donnelley provides marketing database and information based services and Elektra
represents the balance of Western Union-Mexico money transfer services that was
not owned by FDC. EBP is a health care claims processor and plan administrator
(with a life insurance subsidiary selling insurance products ancillary to its
processing area), and ENVOY and CES are merchant payment transaction processors.
Other acquisitions expanded the Company's markets and service offerings in
various business categories.
Except for one transaction in 1996 involving the issuance of approximately
900,000 shares of FDC common stock, all of the above business combinations and
asset acquisitions have been accounted for as purchases, and their results have
been included in the Company's results of operations from the effective dates of
acquisition. The following table outlines the assets acquired and liabilities
assumed (at date of acquisition):
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
(In millions)
Fair value of net assets acquired $398.1 $603.7 $1,216.5
Less acquisition notes and accounts payable (4.1) (95.9) (21.2)
Less value of common stock issued (10.2) --- (740.0)
Less cash acquired (17.0) (12.3) (33.0)
------ ------ --------
Net cash paid for acquisitions $366.8 $495.5 $ 422.3
====== ====== ========
</TABLE>
The fair value of net assets acquired includes initial goodwill and other
intangible amounts aggregating $371 million in 1997, $560 million in 1996 and
$1.1 billion in 1995.
The terms of 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 when earned as additional
purchase price. Additional consideration was paid totaling $2.7 million in
1997, $26.6 million in 1996 (including 0.5 million shares of common stock valued
at $21.0 million), and $10.0 million in 1995. The maximum amount of remaining
contingent consideration is $105.6 million (payable through 2001).
F-14
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
NOTE 4: DISPOSITIONS
Pretax Gain (Loss) on Sale
Cash --------------------------
Business Sold Period Proceeds 1997 1996 1995
- ------------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C> <C> <C>
Nationwide Credit December 1997 $155.2 $(51.0) $ --- $ ---
FIRST HEALTH Strategies
and Services July 1997 200.0 (93.8)
GENEX February 1997 70.0 50.5
MoneyGram December 1996 199.5 46.0
Health Systems June 1995 231.1 93.0
Cable Services November 1994 143.4 12.0
</TABLE>
Revenues from these businesses were approximately 5% of the Company's
consolidated revenues in 1997, compared with 13% in 1996 and 17% in 1995.
A description of 1997 divestitures is contained in Note 2.
In December 1996, the Company divested its MoneyGram operation through an
initial public offering of 100% of its common stock. Since the merger with FFMC
required the divestiture of MoneyGram pursuant to an order by the Federal Trade
Commission, the gain on the divestiture has been reflected as a component of the
1996 restructuring, loss on business divestitures and impairment amount.
The pretax gains on the 1995 dispositions have been included in "Product sales
and other" in the Company's consolidated statements of operations. The
aggregate pretax gain in 1995 on the sale of the health systems business (which
included a $24.0 million pretax gain on the September 1995 sale of the buyer's
stock received as consideration in the sale) was substantially offset by income
taxes related to the sale totaling $76.9 million. The Company also recorded
pretax gains in 1995 resulting from the favorable resolution of certain
indemnification issues related to the 1994 sale of the cable services business.
NOTE 5: SETTLEMENT ASSETS AND OBLIGATIONS
Settlement assets and obligations result from FDC's information processing
services and associated settlement activities related to payment transactions.
Settlement assets are generated principally from payment instrument sales
(primarily official checks and money orders) and card transactions. FDC records
corresponding settlement obligations for amounts payable to merchants and for
payment instruments not yet presented for settlement. The difference in the
aggregate amount of such assets and liabilities is due to unrealized net
investment gains and losses, which are reported as adjustments to stockholders'
equity. The principal components of FDC's settlement assets and obligations are
as follows:
F-15
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
December 31, 1997 1996
- --------------------------------------------------------
(In millions)
<S> <C> <C>
Settlement assets:
- ------------------------------------
Cash and cash equivalents $2,175.7 $2,115.8
Investment securities 4,885.0 4,291.0
Due from card associations 650.6 818.4
Due from selling agents 653.4 236.3
-------- --------
$8,364.7 $7,461.5
======== ========
Settlement obligations:
- ------------------------------------
Payment instruments outstanding $6,416.5 $5,361.0
Card settlements due to merchants 902.1 1,263.5
Due to selling agents 801.5 671.3
Other 129.7 94.1
-------- --------
$8,249.8 $7,389.9
========= ========
</TABLE>
Cash equivalents consist of short-term time deposits, reverse repurchase
agreements, commercial paper and other highly liquid investments. See Note 6
for information concerning the Company's investment securities.
FDC generates revenues from its investment of certain settlement assets, a
substantial majority of which are cash equivalents and investment securities
within the Company's payment instruments business. Payment instrument
investment portfolio balances averaged $5.3 billion in 1997, $4.5 billion in
1996 and $3.3 billion in 1995. Investment revenues (before commissions to
certain selling agents) from payment instrument portfolios totaled $289.4
million in 1997, $285.9 million in 1996 and $244.0 million in 1995 ($386.8
million, $333.9 million and $270.2 million, respectively, on a pretax equivalent
basis).
Prior to 1997, a portion of FDC's payment instruments services was generated
from official checks, money orders and money transfers issued under an agreement
with an entity affiliated with American Express Company ("American Express"),
the state-licensed issuer of the instruments. Settlement assets (primarily cash
equivalents, investment securities and amounts due from selling agents)
resulting from payment instruments issued under the agreement with American
Express represented approximately 4% of FDC's total settlement assets at
December 31, 1997 compared with 24% at December 31, 1996. FDC began issuing
payment instruments under its own name in 1994, and phased out those issued
under the American Express name in April 1997.
NOTE 6: INVESTMENT SECURITIES
Investment securities are a principal component of the Company's settlement
assets, and represent the investment of funds received by FDC from the sale of
payment instruments (principally official checks and money orders) by authorized
agents. In addition, the Company had a separate portfolio of investment
securities arising from the sale of insurance products ancillary to its health
care claims processing services. This portfolio was liquidated in December 1997
and the proceeds were invested in short-term instruments. At December 31, 1997
and 1996, these investment securities totaled $93.8 million and $93.2 million,
respectively, are classified as available-for-sale, and are recorded at fair
value in other assets in FDC's consolidated balance sheets.
F-16
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Virtually all of FDC's investment securities are debt securities, most of
which have maturities greater than one year. At December 31, 1997, 64% of these
debt securities mature within five years and 89% within 10 years. Realized gains
and losses from the sale of investment securities were not material.
The principal components of investment securities, which are carried at fair
value, are as follows:
<TABLE>
<CAPTION>
Fair Value Amortized Cost Net Unrealized Gains
- ------------------------------------------------------------------------------------------
(In millions)
December 31, 1997:
<S> <C> <C> <C>
State and municipal obligations $4,378.3 $4,269.3 $109.0
Adjustable rate mortgage-backed
securities 442.9 440.3 2.6
Other 63.8 60.5 3.3
-------- -------- ------
Totals $4,885.0 $4,770.1 $114.9
======== ======== ======
December 31, 1996:
State and municipal obligations $3,945.1 $3,876.7 $ 68.4
Adjustable rate mortgage-backed
securities 313.6 311.0 2.6
Other 125.5 125.2 0.3
-------- -------- ------
Totals $4,384.2 $4,312.9 $ 71.3
======== ======== ======
</TABLE>
NOTE 7: FINANCIAL INSTRUMENTS
Concentration of credit risk
FDC maintains cash and cash equivalents, investment securities and certain
off-balance sheet hedging arrangements (for specified purposes) with various
financial institutions. The Company limits its concentration of these financial
instruments with any one institution, and periodically reviews the credit
standings of these institutions. FDC has a large and diverse customer base
across various industries, thereby minimizing the credit risk of any one
customer to FDC's accounts receivable amounts. In addition, each of the
Company's business units perform ongoing credit evaluations of their customers'
financial condition.
Management of investment risks
FDC does not hold or issue financial instruments for trading purposes. FDC
encounters credit and market risks related to the Company's financial
instruments, principally its investment securities. The Company attempts to
mitigate credit risk by making high quality investments. Substantially all of
its long-term investment securities have credit ratings of "A" or better from a
major rating agency. FDC maintains a significant portion of its settlement
assets in cash and cash equivalents, thereby mitigating market risks (such as a
reduction in the fair value of long-term investment securities due to rising
interest rates) that could impact the Company's funding of its settlement
obligations. Accordingly, FDC does not enter into hedging arrangements in
connection with its investment securities. However, a reduction in the fair
value of the Company's investment securities resulting from rising interest
rates would be somewhat mitigated by increases in the fair value of the
interest rate swap and cap agreements described below.
F-17
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Off-balance sheet financial instruments
A portion of the Company's payment instruments business involves the payment
of commissions to selling agents that are computed based on short-term variable
rates. The Company has purchased variable rate caps (under agreements expiring
at various dates through 2000) to partially insulate its sales commission
amounts from increases in these rates. These agreements have effective notional
amounts totaling $600 million at December 31, 1997 compared with $950 million
at December 31, 1996. The majority of these agreements provide the Company
protection in the event that short-term interest rates exceed 5 1/4% and 5 1/2%,
and the one remaining agreement becomes effective in the event that short-term
interest rates exceed 6 1/2%. In addition, the Company has interest rate swap
agreements which serve to effectively convert the variable rate commissions to
agents to fixed rate amounts. These agreements have an aggregate notional
amount of $1.1 billion at December 31, 1997, expire between 1998 and 2012 and
require the Company to pay based upon fixed rates of between 5.81% and 6.94%
while the Company receives payments principally based on three month variable
rates. At December 31, 1996 the notional amount of these swaps was $0.8 billion
with fixed rates of between 5.38% and 6.89%. The counterparties to these
agreements are financial institutions with a major rating agency credit rating
of "A" or better. The credit risk inherent in these cap and swap agreements
represents the possibility that a loss may occur from the nonperformance of a
counterparty to the agreements. The Company monitors the credit risk of these
counterparties and the concentration of its contracts with any individual
counterparty. FDC anticipates that the counterparties will be able to fully
satisfy their obligations under the agreements.
Fair value of financial instruments
Carrying amounts for certain of FDC's financial instruments (cash and cash
equivalents and short-term borrowings) approximate fair value due to their short
maturities. These instruments are not in the following table, which provides
the estimated fair values of other financial instruments.
<TABLE>
<CAPTION>
December 31, 1997 1996
- -----------------------------------------------------------------------------------------
(In millions)
Carrying Fair Carrying Fair
Value Value Value Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance sheet financial instruments:
- ----------------------------------------------
Long-term investment securities $4,885.0 $4,885.0 $4,384.2 $4,384.2
Long-term debt 1,134.4 1,192.1 785.5 782.4
Senior convertible debentures -- -- 447.1 770.7
Off-balance sheet financial instruments:
- ---------------------------------------------
Variable rate hedging arrangements,
principally rate swap and cap agreements $ 6.3 $ (28.3) $ 13.5 $ 2.4
</TABLE>
The estimated fair values of balance sheet financial instruments are based
primarily on market quotations, whereas the estimated fair values of off-balance
sheet arrangements are based on dealer quotations. These estimated values may
not be representative of actual values that could have been realized as of the
year-end dates or that will be realized in the future.
F-18
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
NOTE 8: INCOME TAXES
Year Ended December 31, 1997 1996 1995
- ------------------------------------------------------------
(In millions)
<S> <C> <C> <C>
Components of pretax income:
Domestic $ 667.5 $999.0 $150.2
Foreign 38.9 32.8 17.4
-------- -------- ------
$706.4 $1,031.8 $167.6
======== ======== ======
Provision for income taxes:
Federal $ 277.1 $325.5 $203.0
State and local 57.5 61.4 38.6
Foreign 15.1 8.4 10.2
-------- -------- ------
$349.7 $ 395.3 $251.8
======== ======== ======
</TABLE>
The Company's effective tax rates differ from statutory rates as follows (1997
and 1995 differences are calculated by excluding the impact of restructuring,
business divestitures and impairment charges, the impact of which is separately
disclosed):
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit 3.8 3.9 3.2
Nondeductible amortization of intangible assets 2.3 2.6 2.8
Interest earned on municipal investments (5.8) (3.0) (2.0)
Restructuring, business divestitures and impairment charge 13.7 --- 111.6
Other 0.5 (0.2) (0.4)
------ ------ ------
Effective tax rate 49.5% 38.3% 150.2%
====== ====== ======
<CAPTION>
FDC's income tax provisions consist of the following components:
Year Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C>
Current $190.1 $259.5 $276.7
Deferred 159.6 135.8 (24.9)
------ ------ ------
$349.7 $395.3 $251.8
====== ====== ======
</TABLE>
Income tax payments of $144.0 million in 1997, $77.6 million in 1996 and
$144.6 million in 1995 are less than current expense due primarily to tax
benefits recorded directly to equity and reductions of goodwill. Deferred tax
assets and liabilities are recognized for the expected tax consequences of
temporary differences between the book and tax bases of the Company's assets and
liabilities. There was no valuation allowance in 1997 or 1996. Net deferred tax
liabilities are included in accounts payable and other liabilities in FDC's
consolidated balance sheets. The following table outlines the principal
components of deferred tax items.
F-19
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
December 31, 1997 1996
- -------------------------------------------------------------
(In millions)
<S> <C> <C>
Deferred tax assets related to:
Accrued expenses $ 122.0 $ 159.3
Pension obligations 27.3 41.7
Employee related liabilities 35.0 48.8
-------- -------
184.3 249.8
-------- -------
Deferred tax liabilities related to:
Property, equipment and intangibles (305.5) (245.7)
Unrealized securities gain (38.8) (25.1)
Other (27.4) (32.9)
-------- -------
(371.7) (303.7)
-------- -------
Net deferred tax liabilities $ (187.4) $ (53.9)
======== =======
</TABLE>
NOTE 9: BORROWINGS
<TABLE>
<CAPTION>
December 31, 1997 1996
- -------------------------------------------------------------
(In millions)
<S> <C> <C>
Short-Term Borrowings:
- ---------------------
Commercial paper $ 616.3 $ 441.1
Uncommitted lines of credit --- 34.8
Long-Term Debt:
- --------------
Medium-Term Notes 724.1 349.1
6 3/4% Notes due 2005 196.0 198.8
6 5/8% Notes due 2003 199.4 199.4
Term loan, 7.19% due 1997 --- 8.8
Other 14.9 29.4
-------- --------
$1,750.7 $1,261.4
======== ========
</TABLE>
The Company's commercial paper borrowings at December 31, 1997 and 1996 had
weighted-average interest rates of 5.9% and 5.6%, respectively.
FDC has established two revolving credit facilities ("the Facilities") for its
short-term borrowings to support its commercial paper program with maximum
borrowings of $1.5 billion. The maximum amount of borrowings possible under the
Facilities, which consist of a $500 million 364-day facility and a $1 billion
five-year facility at December 31, 1997, is reduced by outstanding commercial
paper amounts. Interest rates for borrowings under the Facilities are based on
market rates. The Facilities contain customary covenants, none of which are
expected to significantly affect FDC's operations. At December 31, 1997, the
Company was in compliance with all of these covenants.
In 1997, FDC expanded the maximum amount of its commercial paper program and
supporting banking facilities from $1.0 billion to $1.5 billion. Also, the
Company obtained new uncommitted bank credit lines of $175.0 million from
several financial institutions during 1997. The interest rates for borrowings
under the credit lines are based on market rates. Through the Facilities and
the uncommitted bank credit lines, the Company had available borrowing capacity
of $1,058.7 million at December 31, 1997.
F-20
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During 1997, the Company issued $375 million in Medium-Term Notes with
maturities ranging from 3 to 10 years and interest rates between 6.38% and
6.61%.
In 1996, FDC issued $350 million in Medium-Term Notes with maturities ranging
from two to five years. The interest rates on the Medium-Term Notes are between
6.19% and 6.82%. Interest on the 6 3/4% and 6 5/8% term notes, which are public
debt offerings, is payable semi-annually in arrears. These notes do not have
sinking fund obligations, and they are not redeemable prior to maturity.
Aggregate annual maturities of long-term debt are $154.9 million in 1998,
$154.7 million in 1999, $127.7 million in 2000, $51.6 million in 2001, $0.1 in
2002 and $645.4 million in all periods thereafter. The Company paid interest
amounts totaling $102.6 million in 1997, $95.6 million in 1996 and $92.7 million
in 1995.
NOTE 10: SUPPLEMENTAL BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
December 31, 1997 1996
- ---------------------------------------------------------------------
(In millions)
<S> <C> <C>
Property and equipment:
- ----------------------
Land $ 18.9 $ 15.2
Buildings 157.6 140.6
Leasehold improvements 135.3 130.7
Equipment and furniture 1,255.6 1,133.8
-------- --------
1,567.4 1,420.3
Less accumulated depreciation
and amortization (792.5) (663.2)
-------- --------
$ 774.9 $ 757.1
======== ========
Accounts payable and other liabilities:
- --------------------------------------
Accounts payable and accrued expenses $ 650.3 $ 557.4
Compensation and benefit liabilities 159.4 175.2
Assumed Western Union pension obligations 70.7 121.4
Accrued costs of businesses acquired 92.5 147.7
Income taxes payable 190.4 190.1
Deferred income taxes 187.4 53.9
Other liabilities 306.7 286.2
-------- --------
$1,657.4 $1,531.9
======== ========
</TABLE>
NOTE 11: COMMITMENTS AND CONTINGENCIES
The Company leases certain of its facilities and equipment under operating
lease agreements, substantially all of which contain renewal options. Total
rent expense for operating leases was $162.4 million in 1997, $169.2 million in
1996, and $166.6 million in 1995. Minimum aggregate rental commitments at
December 31, 1997 under all noncancelable leases were $91.3 million in 1998,
$77.3 million in 1999, $55.7 million in 2000, $43.1 million in 2001, $33.3
million in 2002, and $104.7 million for all periods thereafter.
F-21
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2000, $43.1 million in 2001, $33.3 million in 2002, and $104.7 million for all
periods thereafter. Additionally, one of the Company's businesses leases space
which it concurrently leases to its customers with mirrored terms. Future lease
rental income exceeds lease payments, with obligations at December 31, 1997 for
remaining lease terms totaling $44.8 million.
In connection with FDC's money transfer business, the Company has entered into
a minimum purchase agreement with one of its data processing vendors. Under
this agreement, the Company is required to purchase at least $100 million in
goods and services over a period of 66 months commencing January 1, 1998.
On November 3, 1997, a putative class action against, among others, the
Company's Western Union Financial Services, Inc. subsidiary was filed. The
plaintiff claims that Western Union charges an undisclosed "commission" when
consumers transmit money to foreign countries, 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. The
plaintiff asserts that Western Union's failure to disclose this "commission" in
its advertising and in the transactions violates federal and state law. The
plaintiff seeks, among other things, a declaratory judgment, compensatory and
statutory damages alleged to be in excess of $1 billion, and punitive damages.
The plaintiff also has made a claim under the Racketeer Influenced and Corrupt
Organizations Act which provides for treble damages. Western Union has filed a
motion to dismiss the plaintiff's federal claims, which motion is pending with
the court, and intends to vigorously defend the action.
In the normal course of business, the Company is subject to claims and
litigation, including indemnification obligations to purchasers of former
subsidiaries. Management of the Company believes that such matters involving a
reasonably possible chance of loss would not, individually or in the aggregate,
result in a materially adverse effect on the Company's results of operations,
liquidity or financial condition.
NOTE 12: STOCKHOLDERS' EQUITY AND SENIOR CONVERTIBLE DEBENTURES
Dividends
FDC continued paying cash dividends of $0.02 per share on a quarterly basis to
stockholders during 1997. The Company's Articles of Incorporation authorizes
10.0 million shares of preferred stock, none of which are issued.
Other Comprehensive Income
The income tax effects allocated to and the cumulative balance of each
component of other comprehensive income are as follows (in millions):
F-22
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
Tax
Beginning Pretax (Benefit)/ Net-of-Tax Ending
Balance Amount Expense Amount Balance
---------- ------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
December 31, 1997
Unrealized gains on securities $ 46.4 $ 39.5 $ 13.7 $ 25.8 $ 72.2
Currency translation adjustment (4.4) (2.2) (0.8) (1.4) (5.8)
Minimum pension liability (15.7) 23.2 8.1 15.1 (0.6)
------ ------ ------ ------ ------
26.3 60.5 21.0 39.5 65.8
December 31, 1996
Unrealized gains (losses) on securities 60.1 (21.1) (7.4) (13.7) 46.4
Currency translation adjustment (21.0) 25.5 8.9 16.6 (4.4)
Minimum pension liability (20.4) 7.2 2.5 4.7 (15.7)
------ ------ ------ ------ ------
18.7 11.6 4.0 7.6 26.3
December 31, 1995
Unrealized gains (losses) on securities (6.6) 102.6 35.9 66.7 60.1
Currency translation adjustment (17.0) (6.2) (2.2) (4.0) (21.0)
Minimum pension liability -- (31.4) (11.0) (20.4) (20.4)
------ ------ ------ ------ ------
$(23.6) $ 65.0 $ 22.7 $ 42.3 $ 18.7
====== ====== ====== ====== ======
</TABLE>
Convertible Debentures
On November 3, 1997 FDC issued a notice of redemption of all senior
convertible debentures outstanding on December 15, 1997. Between November 3 and
December 15, $443 million in face value of debentures were converted into
20,360,835 shares of FDC common stock. In anticipation of meeting the
conversion requirements of the senior convertible debentures, the Company
repurchased 20.4 million shares of FDC common stock pursuant to the Board of
Directors' authorization.
Other Stockholders' Equity Transactions
In May 1997, 0.3 million shares of the Company's common stock were issued to
the shareholders of Technology Solutions International, Inc. ("TSI") in a merger
transaction pursuant to which FDC acquired 100% of the stock of TSI. In June
1996, FDC converted EBP debentures (which were assumed through the October 1995
acquisition) by issuing 0.2 million shares of common stock. In November 1996,
0.9 million shares of the Company's common stock were issued to the shareholders
of Southern TeleCheck, Inc. ("STI") in a merger transaction pursuant to which
FDC acquired 100% of the stock of STI.
In June 1996, the Company issued warrants to purchase up to two million shares
of FDC common stock at a price of $70 per share. The warrants, which are
generally exercisable from October 2001 through 2003, were issued as part of
contractual agreements with a customer. The calculated fair value was recorded
as paid-in capital and is being expensed over the contract period.
NOTE 13: STOCK COMPENSATION PLANS
FDC has a plan that provides for the granting of stock options to key
employees and other key individuals who perform services for the Company. A
total of 53.7 million shares of common stock have been reserved for issuance
under the plan, of which 7.6 million shares remain available for future grant.
The options have been issued at a price equivalent to the common stock's fair
market value at the date of grant, generally have ten year terms and become
exercisable in three or four equal annual increments beginning 12 months after
the date of grant.
F-23
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In December 1997, the Company instituted a restricted stock award program for
key technical employees. A total of 247,660 restricted shares were granted
under this program. These awards have a three year restriction period from the
date of grant. The restricted stock award is subject to forfeiture unless
certain conditions are met. The fair value of the shares awarded, as determined
on the grant date, was $6.8 million and is being amortized to expense on a
straight-line basis over the restriction period. The unamortized portion of such
awards is reported as a reduction of paid-in capital.
In October 1996, the Company instituted an employee stock purchase plan for
which a total of six million shares have been reserved for issuance, of which
4.8 million shares remain available for future grant. Monies accumulated
through payroll deductions elected by eligible employees are used to effect
quarterly purchases of FDC common stock at a 15% discount from the lower of the
market price at the beginning or end of the quarter.
In addition, the Company maintains other stock option plans which were assumed
in connection with the Company's business combinations. These options were
converted to options to purchase shares of FDC common stock (at prices ranging
from $0.46 to amounts substantially above current market prices for the
Company's common stock) and are exercisable at specified times not later than
ten years from the date of grant.
The Company has elected to follow APB 25 for its employee stock options
because, as discussed below, the alternative fair value accounting under SFAS
123 requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required
by SFAS 123, assuming the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of SFAS 123.
The fair value for options and employee stock purchase plan rights was estimated
at the date of grant using a Black-Scholes option pricing model with the
following assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Risk-free interest rate - options 6.23% 6.28% 5.29%
Risk-free interest rate - employee stock purchase rights 6.23% 5.04% ---
Dividend yield 0.22% 0.22% 0.22%
Volatility 18.9% 16.9% 17.6%
Expected option life 5 years 5 years 5 years
Expected employee stock purchase right life (in years) 0.25 0.25 ---
Weighted-average fair value of options granted $ 11 $ 11 $ 8
Weighted-average fair value of employee stock purchase rights $ 7 $ 7 ---
</TABLE>
The Company's pro forma information, amortizing the fair value of the options
over their vesting period and the stock purchase rights, is as follows (because
SFAS 123 is applicable only to options granted subsequent to December 31, 1994,
its pro forma effect will not be fully reflected until 1999):
F-24
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
(In millions, except per share amounts) 1997 1996 1995
- ----------------------------------------------------- ------ ------ -------
<S> <C> <C> <C>
Pro forma net income (loss) $320.1 $618.2 $(89.0)
Pro forma earnings (loss) per share - basic 0.72 1.38 (0.21)
Pro forma earnings (loss) per share - diluted 0.72 1.35 (0.21)
</TABLE>
Because the Company's employee stock options have characteristics
significantly different from those of traded options for which the Black-Scholes
model was developed, and because changes in the subjective input assumptions can
materially affect the fair value estimate, the existing models, in management's
opinion, do not necessarily provide a reliable single measure of the fair value
of its employee stock options.
A summary of stock option activity is as follows (options in millions):
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------- ---------------------------- -------------------------
Weighted- Weighted- Weighted-
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1 28.0 $25 29.4 $ 20 25.4 $ 16
Granted 9.2 36 6.7 37 9.8 29
Exercised (4.0) 21 (6.5) 15 (6.4) 12
Canceled (2.0) 35 (1.6) 26 (0.6) 22
Assumed -- -- -- -- 1.2 3
---- ----- ----
Outstanding at December 31 31.2 $28 28.0 $ 25 29.4 $ 20
==== ===== ====
Options exercisable at
year-end 14.0 $21 13.5 $ 18 8.6 $ 15
</TABLE>
The following summarizes information about stock options outstanding (options
in millions):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------- ------------------------------------
Weighted-
Range of Number Average Weighted- Number Weighted-
Exercise Outstanding Remaining Average Exercisable Average
Prices at 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price
- -------------------------------------------------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C>
$0.46 to $11.00 3.6 4 Years $ 10 3.6 $ 10
$12.10 to $28.25 11.8 6 Years 23 7.9 22
$28.53 to $63.46 15.8 9 Years 37 2.5 34
---- -----
31.2 7 Years $ 28 14.0 $ 21
==== =====
</TABLE>
F-25
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 14: EMPLOYEE BENEFIT PLANS
Defined Contribution Plans
FDC and certain of its subsidiaries maintain defined contribution savings
plans covering virtually all of the Company's full-time employees. The plans
provide tax deferred amounts for each participant, consisting of employee
elective contributions and additional matching and discretionary Company
contributions. In addition, the Company provides a supplemental savings plan
for certain highly compensated employees. The plan provides tax deferred
contributions, matching and the restoration of Company contributions under the
defined contribution plans otherwise limited by the IRS. The aggregate amounts
charged to expense in connection with these plans were $39.3 million in 1997,
$29.1 million in 1996 and $26.6 million in 1995.
Defined Benefit Plans
The acquisition of Western Union in 1994 included the assumption of $304
million of underfunded obligations related to a suspended defined benefit
pension plan ("Western Union Plan"). Benefit accruals under this plan were
suspended in 1988. The Company reduced these underfunded obligations by
contributing $35.0 million in cash to the Western Union Plan during 1997 and
$199.0 million in 1995.
The Company has three defined benefit pension plans covering certain full-time
employees in the U.S. ("other U.S. Plans") and a separate plan covering certain
employees located in the United Kingdom ("U.K. Plan"). New employees do not
participate in the other U.S. Plans due to a past restructuring of benefit plans
which allowed only existing participants to accrue benefits. Benefits under the
largest of the other U.S. plans were frozen as of December 31, 1997, resulting
in the recognition of a $12.2 million curtailment gain. As a result,
participants of this plan were given enhanced benefits under the defined
contribution plan. The cost of retirement benefits for eligible employees,
measured by length of service, compensation and other factors, is being funded
through trusts established under the plans in accordance with laws and
regulations of the respective countries. Plan assets consist of cash and a
variety of investments in equity (U.S. and foreign) and fixed income securities.
The Western Union Plan has accumulated benefit obligations in excess of plan
assets. The remaining plans have assets in excess of accumulated benefits. A
summary of the Company's defined benefit plans and a reconciliation of the
funded status to obligations recognized in the Company's consolidated balance
sheet are as follows:
F-26
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
Western Other
Union U.S. U.K. Total
Plan Plans Plan All Plans
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In millions)
December 31, 1997:
- -----------------
Projected benefit obligation $(582.4) $(86.7) $(171.4) $(840.5)
Plan assets at fair value 530.0 102.8 194.1 826.9
------- ------ ------- -------
Projected benefit obligation less than
(in excess of) plan assets (52.4) 16.1 22.7 (13.6)
Unrecognized amounts, primarily net loss (gain) (18.3) (0.4) (20.2) (38.9)
Minimum pension liability adjustment -- (0.6) -- (0.6)
------- ------ ------- -------
Net prepaid (accrued) pension cost $ (70.7) $ 15.1 $ 2.5 $ (53.1)
======= ====== ======= =======
December 31, 1996:
- -----------------
Projected benefit obligation $(574.9) $(77.1) $(148.3) $(800.3)
Plan assets at fair value 453.5 80.0 156.6 690.1
------- ------ ------- -------
Projected benefit obligation less than
(in excess of) plan assets (121.4) 2.9 8.3 (110.2)
Unrecognized amounts, primarily net loss (gain) 14.6 1.6 (8.8) 7.4
Minimum pension liability adjustment (14.6) (1.1) -- (15.7)
------- ------ ------- -------
Net prepaid (accrued) pension cost $(121.4) $ 3.4 $ (0.5) $(118.5)
======= ====== ======= =======
</TABLE>
The aggregate accumulated benefit obligation represented greater than 95% of the
projected benefit obligation at December 31, 1997 and 1996.
Excluding the 1997 curtailment gain, net periodic pension costs consisted of the
following components:
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
(In millions)
Service cost-benefit earned during period $ 10.8 $ 10.3 $ 10.0
Interest cost on projected benefit obligations 59.6 56.9 58.3
Actual return on plan assets (151.4) (82.0) (82.1)
Net amortization and deferral 86.9 24.3 34.4
------- ------ ------
$ 5.9 $ 9.5 $ 20.6
======= ====== ======
</TABLE>
The primary assumptions used in computing amounts for FDC's defined benefit
plans follow. Changes in interest rates are the primary factor behind year-to-
year fluctuations in discount rates.
<TABLE>
<CAPTION>
December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rates 6.50% to 7.50% 7.50% to 8.00% 7.25% to 8.50%
Rates of increase in compensation levels 4.50% 5.50% to 6.00% 5.50% to 6.00%
Expected long-term rate of return on assets 7.00% to 9.50% 9.00% to 9.50% 9.00% to 9.50%
</TABLE>
The Company does not offer post-retirement health care or other insurance
benefits for retired employees; however, the Company is required to continue
such plans that were in effect when it acquired Western Union.
F-27
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Generally, retiring Western Union employees bear the entire cost of the premiums
and Western Union's former owner is obligated by agreement through 1997 to pay
FDC for its administrative services in continuing these coverages.
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 15: QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Summarized quarterly results for the two years ended December 31, 1997 are as
follows (in millions, except per share amounts):
<TABLE>
<CAPTION>
1997 By Quarter: First Second Third Fourth
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Revenues $1,243.3 $1,318.2 $1,293.3 $1,379.7
Restructuring, loss on business
divestitures and impairment, net (a) (4.1) 215.7 ---- 157.7
Other expenses 1,034.6 1,065.8 990.1 1,068.3
-------- -------- -------- --------
Income before income taxes 212.8 36.7 303.2 153.7
Income tax expense 76.6 65.1 109.2 98.8
-------- -------- -------- --------
Net income (loss) $ 136.2 $ (28.4) $ 194.0 $ 54.9
======== ======== ======== ========
Basic earnings (loss) per common share (b) $ 0.30 $ (0.06) $ 0.44 $ 0.13
Diluted earnings (loss) per common share (b) $ 0.29 $ (0.06) $ 0.42 $ 0.13
======== ======== ======== ========
1996 By Quarter:
Revenues $1,129.7 $1,200.4 $1,258.4 $1,349.6
Restructuring, loss on business
and impairment, net (c) 16.3 --- --- (29.8)
Other expenses 941.1 972.8 988.6 1,017.3
-------- -------- -------- --------
Income before income taxes 172.3 227.6 269.8 362.1
Income tax expense 66.5 87.8 103.2 137.8
-------- -------- -------- --------
Net income $ 105.8 $ 139.8 $ 166.6 $ 224.3
======== ======== ======== ========
Basic earnings per common share (b) $ 0.24 $ 0.31 $ 0.37 $ 0.50
Diluted earnings per common share (b) $ 0.23 $ 0.30 $ 0.36 $ 0.48
======== ======== ======== ========
</TABLE>
(a) Results for 1997 include a second quarter loss on the FIRST HEALTH Services
and Strategies divestitures of $93.8 million, a fourth quarter loss on the
Nationwide divestiture of $51.0 million, second quarter impairment charges
relating to other health care administrative services businesses of $121.9
million, fourth quarter impairment charges related to First Image of $106.7
million, and $46.4 million of first quarter restructuring charges. These
charges were slightly offset by a $50.5 million gain on the first quarter
sale of GENEX. The after tax effect of these items was $333.9 million
($0.72 per share).
(b) Effective for the quarter ended December 31, 1997, the Company adopted the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 128,
Earnings Per Share. Accordingly, all 1996 and 1997 earnings per share and
weighted-average share amounts have been computed in accordance with SFAS
128.
(c) Results for 1996 include merger, restructuring and impairment charges of
$32.5 million and a $46.0 million fourth quarter gain on the MoneyGram
disposition, which increased net income by $8.3 million ($0.02 per share).
F-29
<PAGE>
FIRST DATA CORPORATION
SCHEDULE VIII - Valuation and Qualifying Accounts
(dollars in millions)
<TABLE>
<CAPTION>
Additions
------------------------
Balance at Charged to Charged Balance
Beginning Costs and to Other at End of
Description of Period Expenses Accounts Deductions Period
- -------------------------------- ----------- ----------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1997
Deducted from Receivables $25.2 $18.9 $5.3 (a) $20.3 (b) $29.1
Year Ended December 31, 1996
Deducted from Receivables 20.9 15.8 4.4 (a) 15.9 (b) 25.2
Year Ended December 31, 1995
Deducted from Receivables 16.4 19.9 7.9 (a) 23.3 (b) 20.9
</TABLE>
- --------------------------------
(a) Primarily due to acquisitions.
(b) Amounts related to business divestitures and write-offs against assets.
F-30
<PAGE>
EXHIBIT 10.7
FIRST DATA CORPORATION
1992 LONG-TERM INCENTIVE PLAN
PERFORMANCE GRANT AGREEMENT
(Award Period Beginning January 1, 1998)
This AGREEMENT is made by and between FIRST DATA CORPORATION, a Delaware
corporation (the "Company") and [Officer Name], an officer of the Company (the
"Executive"), as of January 1, 1998.
RECITALS
--------
WHEREAS, the Board of Directors of the Company (The "Board") established
and the Company maintains the 1992 Long-Term Incentive Plan (The "Plan") which
authorizes the Compensation and Benefits Committee of the Board (the
"Committee") to award Performance Grants to eligible key employees of the
Company and its affiliates; and
WHEREAS, the Committee has determined to award a Performance Grant to
Executive on the terms and conditions set forth herein;
NOW THEREFORE, in consideration of the mutual covenants contained herein,
the parties hereto agree as follows:
AGREEMENT
---------
1. Defined Terms. All terms not otherwise defined herein shall have the
-------------
meaning set forth in the Plan.
2. Award of Performance Grants. The Company hereby grants to Executive a
---------------------------
Performance Grant (referred to hereinafter as the "Performance Grant")
subject to the terms and conditions set forth below.
3. Terms and Conditions of Performance Grants.
------------------------------------------
(a) The value of the Performance Grant (the "Unit Value") shall be
determined by the Committee in accordance with the formula set forth on
Exhibit A attached hereto based upon the percentage increase in the share
price of the Company's common stock, $.01 par value per share (the
"Common Shares"), plus dividends paid, if any, during the period
beginning on January 1, 1998 and ending on December 31, 1999 (the "Award
Period") (the "Growth in Shareholder Value"), relative to the Growth in
Shareholder Value of those companies in the S&P 500 index whose Growth in
Shareholder Value during the Award Period would place such companies
above the fiftieth (50th) percentile of all companies in the S&P 500
index ("Comparator Companies"); provided, however, that the Growth in
Shareholder Value is in excess of the fiftieth percentile of the
Comparator Companies and the Threshold Rate as defined below. For
purposes of this Agreement, the share price of the Common Shares and the
share price of the Comparator Companies shall be the average of such
share price for the sixty (60) day period ending on the last Business Day
preceding the first day of the Award period and the last day of the Award
Period, respectively. For purposes of this Agreement, the Threshold Rate
for any Award Period shall mean the rate of return during the Award
Period of the average two-year treasury note for the sixty (60) day
period ending on the last Business Day preceding the first day of the
Award Period assuming that dividends with respect to such
two-year treasury note paid during the Award Period are reinvested at
such two-year treasury note rate. For purposes of this Agreement, the
methodology which shall be used to determine whether the Growth in
Shareholder Value of the Company's common shares during the Award Period
exceeds the 50th percentile shall be to rank each of the comparator
companies from one (1) to five hundred (500) based on its Growth in
Shareholder Value during the Award Period and then compare the Growth in
Shareholder Value of the Company with the Growth in Shareholder Value of
the Comparator Companies. If the Committee determines that a Performance
Grant has no Unit Value, such Performance Grant shall be deemed to have
been canceled.
<PAGE>
(b) Subject to the conditions set forth in Subparagraph 3 (e) and Paragraph
4 below, Executive shall have no vested or non-forfeitable interest in
the Unit Value of a Performance Grant, as determined by the Committee,
until the expiration of two fiscal years following the end of the Award
Period with respect to the Performance Grant (the "Vesting Period").
For each fiscal year during the Vesting Period in which the Company's
net income (determined pursuant to the guidelines previously approved
by the Committee) before dividends divided by stockholder's equity at
the beginning of such fiscal year ("Return on Equity Percentage") is a
positive number, the Unit Value of the Award shall increase in an
amount equal to fifty (50%) percent of the Return on Equity Percentage
("Adjusted Return on Equity Percentage"). For each fiscal year during
the Vesting Period in which the Return on Equity Percentage is a
negative number, the Unit Value of the Award shall decrease by an
amount equal to the Return on Equity Percentage.
(c) Subject to the terms and conditions set forth in Paragraph 4 below,
Executive shall be entitled to receive an amount equal to the Unit
Value of the Performance Grant, as adjusted pursuant to the Adjusted
Return on Equity Percentage or the Return on Equity Percentage, as the
case may be (the "Adjusted Unit Value") as determined as of the last
day of the Vesting Period applicable to the Performance Grant. Such
Adjusted Unit Value shall be payable solely in cash and shall be paid
to Executive within 90 days after the last day of such Vesting Period.
(d) Executive may elect to defer receipt of cash in the amount of the
Adjusted Unit Value of a Performance Grant in accordance with the terms
and conditions of the First Data Corporation Salary Deferral Plan.
(e) In the event that Executive's employment is terminated for any reason
prior to the end of the Award Period (with respect to a Performance
Grant), or for any reason other than Executive's death, Disability, or
early, normal or deferred retirement under an approved retirement plan
of the Company (or any such other plan or arrangement as may be
approved by the Committee in its discretion, for this purpose) after
the Award Period with respect to such Performance Grant but prior to
the end of the Vesting Period, any unpaid Unit Value shall not be paid
out and the Performance Grant shall be forfeited.
4. Committee Authority. The Committee has the sole and exclusive authority
-------------------
to interpret and apply any provision of this Agreement, and may reduce the
amount of any such award to be made hereunder (including a determination of
a lower Unit Value than that which the formula on Exhibit A would yield)
based on factors it selects in its discretion. The Board may, for time to
time, amend, modify or terminate, in whole or in part, any or all
provisions of the Plan; provided, that no such change or termination shall
in any way materially impair Executive's right under this Agreement without
the prior written consent of Executive. Notwithstanding anything in the
foregoing sentence to the contrary, the Committee may, in its sole
discretion, extend at any time the Vesting Period for any Performance Grant
for up to an additional two fiscal years (the "Extended Phase") provided
that (a) the Committee in its sole discretion may provide for the payment
to Executive during the Extended Phase of all or any portion of the Unit
Value of the Performance Grant, and (b) any action by the Committee in
extending the Vesting Period pursuant to this sentence shall be disregarded
for purposes of Paragraph 3 (e) of this Agreement.
5. Nontransferability. The Performance Grant shall not be transferred or
------------------
assigned, hypothecated or encumbered in whole or in part either directly or
by operation of law or otherwise (except in the event of Executive's death)
including, but not by way of limitation, execution, levy, garnishment,
attachment, pledge, bankruptcy or in any other manner.
6. No Employment Contract. Neither the Plan nor this Agreement shall
----------------------
constitute a contract of employment between the Company and Executive, and
the Company specifically reserves the right to terminate the employment of
or performance of services by the Executive at any time for any reason.
7. Compliance with Other Laws and Regulations. The Performance Grant shall be
------------------------------------------
subject to all applicable federal and state laws, rules and regulation,
including those related to disclosure of financial and other information to
Executive, and to such approvals by any government or regulatory agency as
may be required.
<PAGE>
8. Executive Bound by Plan. Executive hereby acknowledges a receipt of a copy
-----------------------
of the Plan, and agrees to be bound by all the terms and provisions
thereof, which are incorporated herein by reference.
9. Acceptance. By executing this Agreement and accepting the Performance
----------
Grant, Executive (or any person acting on Executive's behalf or claiming
under or through Executive) shall be conclusively deemed to have indicated
his acceptance and ratification of, and consent to, any action taken under
the Plan by the Company, the Board or the Committee or its delegates.
10. Funding. The Plan shall be unfunded. The Company shall not be required
-------
to establish any special fund or to make any other segregation of assets
to assure the payment of the Adjusted Unit Value attributable to any
Performance Grant. Any rights to the payment of any such Adjusted Unit
Value shall be no greater than the right of the Company's general
creditors.
11. Notices. Any notice hereunder to the Company shall be addressed to:
-------
First Data Corporation
5660 New Northside Drive
Suite 1400
Atlanta, GA 30328
Attn: David Bailis, Executive Vice President and General
Counsel
and any notice hereunder to Executive shall be addressed to Executive at
Executive's last address on the records of the Company, subject to the
right of either party to designate at any time hereafter in writing some
other address. Any notice shall be deemed to have been duly given when
enclosed in a properly sealed envelope, addressed as set forth above, and
deposited (with first class postage prepaid) in the United States mail.
12. Counterparts. This Agreement may be executed in one or several
------------
counterparts, each of which shall constitute one and the same instrument.
13. Governing Law. The validity, construction, interpretation, administration
-------------
and effect of the Plan and this Agreement, and of its and their rules and
regulations, and rights relating to the Plan and to the Performance Grants
granted under the Plan pursuant to this Agreement shall be governed by the
substantive laws, but not the choice of law rules, of the State of
Delaware.
14. Variation of Pronouns. All pronouns and any variations thereof contained
---------------------
herein shall be deemed to refer to masculine, feminine, neuter, singular
or plural, as the identity of the person or persons may require.
15. Shareholder Approval. This Agreement shall be void in the event the
--------------------
stockholders of the Company fail to approve either this Agreement or a
plan authorizing this Agreement prior to the payment of any amount to
Executive under this Agreement.
IN WITNESS WHEREOF, the Company and Executive has executed this Agreement
as of the date first written below.
FIRST DATA CORPORATION
BY: ______________________________
TITLE: _____________________________
[OFFICER]
__________________________________
<PAGE>
EXHIBIT A
(To Chief Executive Officer Agreement)
UNIT VALUE
ANNUAL GROWTH IN TARGET UNIT
SHAREHOLDER VALUE VALUE
----------------- -----
<TABLE>
<CAPTION>
*** ***
<S> <C> <C>
Threshold
Rate
Exceeds Comparator Company at 50% level $ 660,000
Exceeds Comparator Company at 55% level 1,200,000
Exceeds Comparator Company at 60% level 1,800,000
Exceeds Comparator Company at 65% level 2,400,000
Exceeds Comparator Company at 70% level 3,000,000
Exceeds Comparator Company at 75% level (Maximum) 3,600,000
</TABLE>
If the Company's Growth in Shareholder Value exceeds a Comparator Company at a
level above 50% and below 75%, the Target Value will be interpolated to the
nearest whole percent based on the scale above.
*** For purposes of this Agreement, the Threshold Rate for any Award Period
shall mean the rate of the return during the Award Period of the average two-
year treasury note for the sixty (60) day period ending on the last Business
Day preceding the first day of the Award Period assuming that interest with
respect to such two-year treasury note paid during the Award Period is
reinvested at such Threshold Rate. If the Growth in Shareholder Value for the
Award Period is less than the Threshold Rate, then regardless of the Growth in
Shareholder Value, the Committee shall assign no Unit Value to the Performance
Grant. For example, if Growth in Shareholder Value exceeds that of the
Comparator Company at the seventy-fifth percent (75%) level but that Growth in
Shareholder Value is less than the Threshold Rate, no Unit Value shall be
assigned.
<PAGE>
EXHIBIT A
(To EVP Agreements)
UNIT VALUE
ANNUAL GROWTH IN TARGET UNIT
SHAREHOLDER VALUE VALUE
----------------- ------
*** ***
Threshold
Rate
<TABLE>
<CAPTION>
<S> <C> <C>
Exceeds Comparator Company at 50% level $250,000
Exceeds Comparator Company at 55% level 350,000
Exceeds Comparator Company at 60% level 450,000
Exceeds Comparator Company at 65% level 550,000
Exceeds Comparator Company at 70% level 650,000
Exceeds Comparator Company at 75% level (Maximum) 750,000
</TABLE>
If the Company's Growth in Shareholder Value exceeds a Comparator Company at a
level above 50% and below 75%, the Target Unit Value will be interpolated to
the nearest whole percent based on the scale above.
*** For purposes of this Agreement, the Threshold Rate for any Award Period
shall mean the rate of the return during the Award Period of the average two-
year treasury note for the sixty (60) day period ending on the last Business
Day preceding the first day of the Award Period assuming that interest with
respect to such two-year treasury note paid during the Award Period is
reinvested at such Threshold Rate. If the Growth in Shareholder Value for the
Award Period is less than the Threshold Rate, then regardless of the Growth in
Shareholder Value, no Unit Value shall be assigned to the Performance Grant by
the Committee. For example, if Growth in Shareholder Value exceeds that of
the Comparator Company at the seventy-fifth percent (75%) level but that
Growth in Shareholder Value is less than the Threshold Rate, no Unit Value
shall be assigned.
<PAGE>
EXHIBIT 10.9
FIRST DATA CORPORATION
SALARY DEFERRAL PLAN
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
ARTICLE I
<S> <C>
Definitions 1
ARTICLE II
Administration 3
ARTICLE III
Participation 4
ARTICLE IV
Deferred Compensation Accounts 7
ARTICLE V
Vesting 8
ARTICLE VI
Payment of Deferred Compensation Withdrawals 8
ARTICLE VII
Amendment and Termination 9
ARTICLE VIII
General Provisions 9
</TABLE>
<PAGE>
ARTICLE I
---------
Definitions
-----------
As used in the Plan, unless the context requires otherwise, the following terms
shall have the meanings hereinafter set forth:
1.1 "Board of Directors" means the Board of Directors of the Company, as
constituted from time to time.
1.2 "Committee" means the Compensation Committee of the Board of Directors of
the Company, as such committee is constituted from time to time, which
administers the Plan in accordance with ARTICLE II hereof. If at any time
no such Compensation Committee of the Board of Directors shall be in
office, then the functions of the Committee shall be exercised by the Board
of Directors.
1.3 "Company" means First Data Corporation, a Delaware corporation, and its
successors and assigns.
1.4 "Deferred Compensation Account" means the account maintained under the Plan
for a Participant for each Plan Year.
1.5 "Disability" means termination of a Participant's employment with the
Employer by reason of total and permanent disability as determined by the
Committee; provided, that a Participant shall be considered to be totally
and permanently disabled only if, as a result of bodily injury or disease,
the Participant is prevented from engaging in any gainful occupation or
employment for which he is reasonably suited by virtue of his education,
capabilities, training and experience, and at such time is entitled to
receive disability benefits under the Social Security Act.
1.6 "Effective Date" means December 15, 1992.
1.7 "Eligible Employee" means an officer or other key employee of the Employer,
designated by the Committee as eligible to participate in the Plan.
1.8 "Employer" means the Company or any Subsidiary thereof which shall be
designated by the Board of Directors and by the board of directors of the
Subsidiary as a participating employer under the Plan.
<PAGE>
1.9 "Hardship" means severe financial hardship resulting from an unanticipated
emergency, including, but not limited to, illness or accident involving the
Participant or his dependents, or other severe hardship.
1.10 "Installments" means substantially equal installments payable annually as
of the date chosen and as of the anniversary thereof in each succeeding
year over a period certain not longer than 15 years.
1.11 "Interest Equivalents" on the amount credited to an Interest Equivalents
Account shall have the meaning set forth in Section 4.3 hereof.
1.12 "Interest Equivalents Account" means that portion (or all) of a Deferred
Compensation Account for a Plan Year, which the Participant elects to be
credited with Interest Equivalents under the Plan.
1.13 "Participant" for any Plan Year means an Eligible Employee who elects to
participate in the Plan in accordance with ARTICLE III hereof.
1.14 "Plan" means the First Data Corporation Salary Deferral Plan, as set forth
herein and as hereafter amended from time to time.
1.15 "Plan Year" means the calendar year beginning on the Effective Date and
each succeeding calendar year thereafter in which the Plan remains in
effect.
1.16 "Retirement" means a Participant's retirement from employment with the
Employer under the provisions of an approved retirement program of the
Company or a Subsidiary (or such other plan as may be approved by the
Committee, in its sole discretion, for this purpose).
1.17 "Separation from Service" means termination of Participant's employment
with the Employer by reason of Retirement, Disability, death or otherwise.
1.18 "Subsidiary" means any corporation at least fifty percent (50%) of the
voting rights, value or securities of which is owned or controlled,
directly or indirectly, by the Company.
<PAGE>
The masculine pronoun shall be deemed to include the feminine, and the singular
number shall be deemed to include the plural, unless a different meaning is
plainly required by the context.
ARTICLE II
----------
Administration
--------------
2.1 The Plan shall be administered by the Committee. The Committee shall have
all the powers vested in it by the terms of the Plan, such powers to
include exclusive authority (within the limitations described herein) to
select the Eligible Employees under the Plan, to determine the terms and
conditions of the salary deferrals under the Plan, and to prescribe the
form of the instruments relating to the salary deferrals under the Plan.
2.2 Subject to the limitations of the Plan, the Committee shall be authorized
to interpret the Plan, to establish, rescind and amend the rules for the
administration of the Plan and the transaction of its business, and to make
any other determinations which it believes necessary or advisable for the
administration of the Plan. The Committee may correct any defect, supply
any omission or reconcile any inconsistency in the Plan in the manner and
to the extent the Committee deems desirable to carry it into effect. Any
decisions of the Committee in the administration of the Plan shall be final
and conclusive. The Company, and the Employer and the Participant involved
in any controversy under the Plan, and any successors in interest thereof
and any and all other persons claiming under or through any of them, shall
be conclusively bound by such decision.
2.3 Any act which the Plan authorizes or requires the Committee to do may be
done only by a majority of its members in office, except that the members
of the Committee may authorize one or more of their number to execute or
deliver any instrument, make any payment or perform any other act which the
Plan authorizes or requires the Committee to do. The action of such
majority, expressed from time to time by a vote at a meeting or in writing
without a meeting, shall constitute the actions of the Committee and shall
have the same effect for all purposes as if assented to by all members of
the Committee at the time in office.
2.4 The Committee may employ or retain agents to perform such clerical,
accounting, and other services as they may deem necessary or desirable in
carrying out the provisions of the Plan.
<PAGE>
2.5 The Company shall indemnify and hold harmless each member of the Committee
against all expenses and liabilities arising out of membership on the
Committee, excepting only expenses and liabilities arising from his own
gross negligence or willful misconduct (as determined by the Board of
Directors), or as expressly provided by statute.
ARTICLE III
-----------
Participation
-------------
3.1(a)Prior to the Effective Date, each Eligible employee may elect to
participate in the Plan for the Plan Year commencing on the Effective Date
by written notice to the Committee on a form furnished by it. Subject to
the provisions of Section 3.2 hereof, in order to participate in the Plan
each such Eligible Employee must elect in such notice to defer part or all
of his Salary and/or bonuses otherwise payable or attributable to such Plan
Year.
(b) Prior to the first day of each Plan year beginning after the Effective Date
or at such other date as the Committee shall determine, each Eligible
Employee may elect to participate in the Plan for such Plan Year by written
notice to the Committee on a form furnished by it. Subject to the
provisions of Section 3.2 hereof, in order to participate in the Plan, each
such Eligible Employee must elect in such notice to defer part or all of
his Salary and/or bonuses for such Plan Year.
(c) Notwithstanding the provisions of Section 3.1(a) and (b) hereof, an
Eligible Employee who is first employed by the Employer during any Plan
Year may elect to participate in the Plan for such Plan Year by written
notice to the Committee (on a form furnished by it) not later than 30 days
after his date of employment. Subject to the provisions of Section 3.2
hereof, in order to participate in the Plan the Eligible Employee must
elect in such notice to defer part or all of his Salary or bonuses for such
Plan Year.
(d) Notwithstanding the other provisions of this Section 3.1, upon application
of a Participant and approval thereof by the Committee, the Participant may
at any time during a Plan Year revoke, by reason of Hardship, his election
to participate in the Plan for such Plan Year. Upon such revocation, any
amount credited to his Deferred Compensation Account for such Plan Year,
minus any previously credited Income Equivalents thereon (which shall be
forfeited), shall be paid to him as soon as practicable thereafter.
<PAGE>
3.2(a)The election for any Plan Year pursuant to Section 3.1 hereof may defer
any specified dollar amount out of the Participant's Salary and/or any
specified percentages of the Participant's Salary and/or bonuses, unless
otherwise determined by the Committee in its sole discretion.
(b) Notwithstanding the provisions of Section 3.2(a) hereof:
(i) the minimum amount which may be deferred by a participant for any Plan
Year is $5,000, unless otherwise determined by the Committee in its
sole discretion; and
(ii) the maximum amount which may be deferred by a Participant for any Plan
Year is 100% of his Salary and bonuses for such Plan Year, unless
otherwise determined by the Committee in its sole discretion;
provided, however, that if notified by his Employer that it is
necessary, a Participant shall make prompt payment to his Employer of
any and all amounts required for maintenance of benefit plans coverage
and of other required amounts.
(c) In the event that
(i) a Participant's election to participate for any Plan Year does not
result in a deferral of at least the minimum amount determined under
Section 3.2(b)(i) hereof or
(ii) a Participant's Separation from Service occurs prior to the end of any
Plan Year, his election to participate in the Plan for such Plan Year shall be
deemed revoked and any amount credited to his Deferred Compensation Account for
such Plan Year, minus (for Separation from Service occurring other than by
reason of death, Disability or Retirement) any previously credited Interest
Equivalents for such Plan Year shall be paid to him (or the legal
representatives of his estate) as soon as practicable thereafter, unless
otherwise determined by the Committee in its sole discretion.
3.3 The amount which the Participant elected to defer under Section 3.1 hereof
shall be withheld from his Salary and/or bonuses in accordance with such
rules and procedures as shall be established by the Committee.
ARTICLE IV
----------
Deferred Compensation Accounts
------------------------------
<PAGE>
4.1 The Committee shall establish and maintain a Deferred Compensation Account
for each Participant for each Plan Year commencing on and after the
Effective Date.
4.2 The Committee shall cause to be credited to each Participant's Deferred
Compensation Account for each calendar quarter of a Plan Year (i) the
amount or amounts which he elected to defer in accordance with Section 3.1
hereof, as of the effective date of deferral, and (ii) such additional
amounts of Interest Equivalents as may be credited to the Deferred
Compensation Account until the date or dates of payment, the availability
and the terms and conditions of which are to be determined by the Committee
in its sole discretion.
4.3 Interest Equivalents shall be credited on amounts credited to the
applicable portion, if any, of each Deferred Compensation Account as of the
last day of each calendar quarter from the effective date of deferral to
the day as of which such amounts are distributed to the Participant, as
follows:
at an annual rate equal to the average 26-week U.S. Treasury Bill rate
during such quarter or such other measure established by the Committee in
its sole discretion, and such Interest Equivalents shall be compounded
quarterly commencing with the first day of each calendar quarter of each
Plan Year provided, however, that if a distribution of a lump sum is made
under Section 6.2 hereof, no Interest Equivalents shall be credited to the
Participant's Deferred Compensation Accounts after the last day of the
calendar quarter in which his Separation from Service occurred, and
provided further that if Section 3.2(c) hereof is applicable, no Interest
Equivalents shall be credited to the Participant's Deferred Compensation
Account for the applicable Plan Year.
ARTICLE V
---------
Vesting
-------
5.1 Except as otherwise provided herein, a Participant shall have a fully
vested interest in his Deferred Compensation Account for any Plan Year at
all times.
ARTICLE VI
----------
Payment of Deferred Compensation
--------------------------------
<PAGE>
6.1 At the time an Eligible Employee elects to become a Participant for any
Plan Year, he shall also elect in writing to the Committee on a form
furnished by it, to have his Deferred Compensation Account for such Plan
Year paid in a lump sum or in Installments commencing as of a date or an
event occurring not earlier than the fifth anniversary of the last day of
the applicable Plan Year, unless otherwise determined by the Committee in
its sole discretion.
6.2 Subject to the provisions of Section 3.2(c), following a Participant's
Separation from Service or such other date as the Participant shall have
elected, the amount credited to his Deferred Compensation Account for each
Plan Year shall be paid to him (or the legal representatives of his estate,
in the case of his death) in accordance with his election under Section
6.1(a) hereof; provided, however, that if a Participant's Separation from
Service occurs other than by reason of Retirement, Disability or death,
payment of the amount credited to his Deferred Compensation Account for all
Plan Years shall be made in a lump sum as soon as practicable following his
Separation from Service.
6.3 Upon application of any Participant and upon approval thereof by the
Committee, the Participant may withdraw, by reason of hardship, part or all
of his Deferred Compensation Account for any or all Plan Years, subject to
the provisions of Section 3.1(d) hereof.
6.4 For the purpose of this ARTICLE VI, the amount credited to a Participant's
Deferred Compensation Account as of any date shall mean the amount
initially credited to such account under Section 4.2 hereof, as of the last
day of the applicable month, plus Interest Equivalents credited thereon as
determined in accordance with Section 4.3 hereof from such date to the date
in question, reduced by the amount of any prior withdrawals or installment
payments made to the Participant (or the legal representatives of his
estate).
6.5 The Employee shall deduct and withhold from any payments under the Plan any
federal, state, local or foreign income or other taxes which the Committee
determines are required to be deducted or withheld pursuant to the laws of
any jurisdiction whatsoever. The Employer shall not be required to make
any payments under the Plan to the legal representatives of the estate of a
Participant until such legal representatives shall have furnished evidence
satisfactory to the Committee of the payment or the provision for the
payment of all estate, transfer, inheritance and other taxes, if any, which
may be payable with respect thereto.
<PAGE>
ARTICLE VII
-----------
Amendment and Termination
-------------------------
7.1 The Committee may, at any time and from time to time, modify or amend any
or all of the provisions of the Plan or may at any time terminate the Plan.
ARTICLE VIII
------------
General Provisions
------------------
8.1 If a Subsidiary of the Company wishes to participate in the Plan and its
participation shall have been approved by the Board of Directors, the board
of directors of the Subsidiary shall adopt a resolution in form and
substance satisfactory to the Committee authorizing participation by the
Subsidiary in the Plan with respect to its employees. A Subsidiary
participating in the Plan may cease to be a participating employer at any
time by action of the Board of Directors or by action of the board of
directors of such Subsidiary, which latter actions shall be effective not
earlier than the date of delivery to the Secretary of the Company of a
certified copy of a resolution of the Subsidiary's board of directors
taking such action. If the participation in the Plan of a Subsidiary shall
terminate, such termination shall not relieve it of any obligations
theretofore incurred by it under the Plan, except with the approval of the
Board of Directors.
8.2 No participant or Eligible Employee shall have any right to any payment or
benefit hereunder except to the extent provided in the Plan.
8.3 The employment rights of any Participant or Eligible Employee shall not be
enlarged, guaranteed or affected by reason of any of the provisions of the
Plan. The Employer shall have the right to dismiss any Participant or
Eligible Employee at any time with or without cause, and without liability
for the effect which such dismissal might have upon him as a Participant or
Eligible Employee under the Plan.
8.4 A Participant's right to payments under the Plan may not be assigned or
transferred in whole or in part either directly or by operation of law or
otherwise (except in the event of a Participant's death) including, but not
by way of limitation, execution, levy, garnishment, attachment, pledge,
bankruptcy or in any other manner, and no such right of any Participant
under the Plan shall be subject to any obligation or liability of such
<PAGE>
Participant. In the event that any Participant under the Plan becomes
bankrupt or attempts to assign or transfer any such payment or part
thereof, then all such payments due him shall cease, and, in that event,
the Employer shall hold and apply the same to or for his benefit or that of
his spouse, children, or other dependents, or any of them, in such manner
and in such proportions as the Committee may deem proper, in its sole
discretion.
8.5 If the Committee determines that any person whom a payment is due hereunder
is unable to care for his affairs because of illness, accident,
imprisonment, minority or other incapacity, the Committee shall have the
power to cause the payments becoming due to such person to be made to
another for the benefit of the minor or incompetent, without responsibility
of the Company, the Employer or the Committee to see to the application of
such payment, unless claim prior to such payment is made therefore by a
duly appointed guardian, committee or other legal representative. Payments
made pursuant to such power shall operate as a complete discharge of the
Company, the Employer, the Committee and each member of the Committee of
all liability under the Plan therefor.
8.6 The provisions of this Plan shall be binding upon each Participant as a
consequence of his election to participate in the Plan, the Company and the
Employer, and their respective heirs, executors, administrations,
successors and assigns.
8.7 Any election made or notice given by a Participant pursuant to the Plan
shall be in writing to the Committee on a form furnished by it, or to such
representative as may be designated by it for such purpose, and shall be
deemed to have been made or given on the date received by the Committee or
its representative.
8.8 By accepting any benefits under the Plan, each Participant and each person
claiming under or through him, shall be conclusively deemed to have
indicated his acceptance and ratification of, and consent to, any action
taken or not taken or decision made under the Plan by the Company, the
Employer, the Board of Directors or the Committee.
8.9 The Plan shall be unfunded and all payments under the Plan shall be payable
out of the general assets of the Employer. The Employer shall not be
required to establish any special or separate fund or to make any other
separation of assets to assure the payment of any amount under the Plan.
The obligation of any Employer under the Plan to make payments when due is
merely contractual and no amount credited to a Deferred Compensation
Account of a Participant on the books of any Employer shall be deemed to
<PAGE>
be held in a trust, escrow or similar fiduciary capacity for such
Participant or for his legal representatives. Any property held or
acquired by any Employee specifically for use under the Plan or otherwise
shall, unless and until transferred in accordance with the terms and
conditions of the Plan, be and at all times remain the property of such
Employer, irrespective of whether such securities or other property shall
at all times be and remain available for any corporation purpose. Rights
to payments under the Plan shall be neither subordinate to nor superior to
the claims of the Employer's general unsecured creditors.
8.10 The proportionate share of the costs and expenses of the Plan to be borne
by the Company and the Employers shall be determined each Plan Year by the
Committee in its sole discretion.
8.11 The validity of the Plan or of any of its provisions, and all actions
taken under the Plan, shall be determined under, and construed according
to, the laws of the State of Nebraska.
8.12 The invalidity or unenforceability of any one or more provisions of the
Plan shall not affect the validity or enforceability of any other provision
of the Plan, which shall remain in full force and effect.
8.13 Notwithstanding anything in the Plan to the contrary, neither the Company
nor any of the other Employers nor any of their affiliates nor their
respective officers, directors, employees or agents, shall have any
liability to any Participant or Eligible Employee (or his heirs) under the
Plan or otherwise on account of any action taken, or not taken, in good
faith by any of the foregoing persons with respect to the business or
operations of the Company or any entity controlling, controlled by, or
under common control with the Company, notwithstanding the fact that any
such action or inaction in any way whatsoever may adversely affect amounts
which are accrued, credited or payable or any other rights or benefits of a
Participant or Eligible Employees (or his heirs) under the Plan.
8.14 Claims. If, pursuant to the provisions of the Plan, the Committee denies
------
the claim of the Participant for benefits under the Plan, the Committee
shall provide written notice, within ninety (90) days after receipt of the
claims, setting forth in a manner calculated to be understood by the
claimant:
(a) the specific reasons for such denial;
<PAGE>
(b) the specific reference to the Plan provisions on which the denial is
based;
(c) a description of any additional material or information necessary to
perfect the claim and an explanation of why such material or
information is needed; and
(d) an explanation of the Plan's claim review procedure and the time
limitations of this subsection applicable thereto.
The Participant whose claim for benefit has been denied may request review
by the Committee of the denied claim by notifying the Committee in writing
within sixty (60) days after receipt of the notification of claim denial.
As part of said review procedure, the claimant or his authorized
representative may review pertinent documents and submit issues and
comments to the Committee in writing. The Committee shall render its
decision to the claimant in writing in a manner calculated to be understood
by the claimant not later than sixty (60) days after receipt of the request
for review, unless special circumstances require an extension of time, in
which case decision shall be rendered as soon after the sixty-day period as
possible, but not later than one hundred and twenty (120) days after
receipt of the request for review. The decision on review shall state the
specific reasons therefor and the specific Plan reference on which it is
based.
<PAGE>
EXHIBIT 10.10
Compensation and Benefits Committee Minutes
-------------------------------------------
From January 22, 1997 Meeting
-----------------------------
Regarding Quality Improvement Performance Award to Walter Hoff
--------------------------------------------------------------
Special Award
Mr. Staglin then indicated that the final item of business was the
consideration of a special award to Walter Hoff. He noted that Mr. Hoff had
recommended that he receive neither an annual bonus for 1995 nor a shareholder
value plan award for the period ending December 31, 1995 due to significant
quality performance issues in the Card Services businesses and that the
Committee had followed Mr. Hoff's recommendation. Mr. Duques advised the
Committee that there had been dramatic improvement in the quality of services
provided in the Card Services business and recommended that Mr. Hoff be
compensated for his achievement. The Committee concurred and unanimously
adopted the following resolutions:
RESOLVED, that the Corporation is authorized to pay to Mr. Hoff on or
about April 1, 1997 the amount of $100,000 in recognition of the
significant improvement in the quality of service being provided by the
Card Services business.
FURTHER RESOLVED, that in March 1998, management will again report to
the Committee on the quality of service improvement achieved by Card
Services and that provided such service has continued to improve, Mr. Hoff
will be awarded an amount not to exceed $450,000 to be paid on or about
April 1, 1998.
<PAGE>
Exhibit 12
FIRST DATA CORPORATION
COMPUTATION OF
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------
1997 1996 1995 1994 1993
------- --------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Earnings:
Income before income taxes $ 706.4 $ 1,031.8 $ 167.6 (1) $ 611.3 $ 497.1
Interest expense 116.5 110.3 106.4 52.4 46.4
Other adjustments 55.6 56.5 56.2 50.2 42.6
------- --------- ------- ------- -------
Total earnings (a) $ 878.5 $ 1,198.6 $ 330.2 $ 713.9 $ 586.1
======= ========= ======= ======= =======
Fixed charges:
Interest expense 116.5 $ 110.3 $ 106.4 $ 52.4 $ 46.4
Other adjustments 55.6 56.5 56.2 50.2 42.6
------- --------- -------- ------- -------
Total fixed charges (b) $ 172.1 $ 166.8 $ 162.6 $ 102.6 $ 89.0
======= ========= ======= ======= =======
Ratio of earnings to
fixed charges (a divided by b) 5.10 7.19 2.03 6.96 6.59
</TABLE>
(1) Includes a merger, integration, and impairment charge of $645.7 million
($539.9 million loss after tax benefits) relating to the FFMC merger. The
pro forma ratio of earnings to fixed charges without this charge would have
been 6.00.
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.
<PAGE>
Exhibit 21
LIST OF FIRST DATA CORPORATION SUBSIDIARIES
(AS OF FEBRUARY 15, 1998)
NAME OF SUBSIDIARY Jurisdiction of Incorporation
- ------------------ -----------------------------
3418677 Canada Inc. Canada
440 Insurance Agency, Inc. Connecticut
440 Insurance Agency of Massachusetts, Inc. Massachusetts
Actuarial Computer Technology, Inc. Delaware
American Rapid Corporation Delaware
Appalachian Computer Services, Inc. Kentucky
Applied Mailing Systems, Inc. Massachusetts
Atlantic Bankcard Properties Corporation North Carolina
Atlantic States Bankcard Association, Inc. Delaware
Banc One Payment Services, L.L.C.* Delaware
BankBoston Merchant Services, L.L.C.* Delaware
Bankcard Investigative Group Inc. Delaware
Barnett - First Data Alliance* Delaware
Boatmen's Merchant Processing Company, L.L.C Delaware
Business Office Services, Inc. Delaware
Call Interactive Delaware General Partnership
Cardservice International, Inc.* California
CashTax Inc. Delaware
CESI Holdings, Inc. Delaware
Chase Merchant Services, L.L.C.* Delaware
Consumer Credit Associates, Inc. Missouri
Credit Performance Inc. Delaware
DM Holdings, Inc. Delaware
Dabco Computer Services, Inc. California
Donnelley Funding, Inc. Delaware
Donnelley Marketing Consumer Promotions, Inc. Delaware
Donnelley Marketing Holdings, Inc. Delaware
EBPLife Insurance Company Oklahoma
Eastern States Bankcard Association Inc. New York
Eastern States Monetary Services, Inc. New York non-profit
Employee Benefit Plans, Inc. Delaware
FDC International Inc. Delaware
FDR (First Data Resources) Europe B.V. Netherlands
FDR Interactive Technologies Corporation New York
FDR Ireland Limited Delaware
FDR Limited Delaware
FDR Missouri Inc. Delaware
FDR Signet Inc. Delaware
FDR U.K. Limited U.K.
First Data Asia Pacific Limited Hong Kong
First Data Barnett Alliance Partner Inc. Delaware
First Data Canada Limited Ontario
First Data Communications Corporation Delaware
First Data de Mexico, S.A. de C.V. Mexico
First Data Distributors, Inc. Massachusetts
First Data Financial Services, L.L.C. Delaware
<PAGE>
Exhibit 21
First Data Information Management Group Inc. Delaware
First Data Integrated Services Inc. Delaware
First Data Investor Services Group, Inc. Massachusetts
First Data Investor Services Group Limited Cayman Islands
First Data Latin America Inc. Delaware
First Data Merchant Services Corporation Florida
First Data Pittsburgh Alliance Partner Inc. Delaware
First Data Resources Asia-Pacific Limited Australia
First Data Resources Australasia Limited Australia
First Data Resources Australia Limited Australia
First Data Resources Canada, Inc. Ontario
First Data Resources Holdings Pty Limited Australia
First Data Resources Investments Pty Limited Australia
First Data Resources Inc. Delaware
First Data Resources Limited U.K.
First Data Solutions Inc. Delaware
First Data Technologies, Inc. Delaware
First Data Tennessee Inc. Delaware
First Financial Bank Georgia
First Financial Management Corporation Georgia
GAMMA Micro-Systems LTEE Quebec
Grupo Dinamico Empresarial, S.A. de C.V. Mexico
Hogan Information Public Record Company L.L.C. Oklahoma
Hogan Information Services Co. Delaware
Huntington Merchant Services, L.L.C.* Delaware
Integrated Payment Systems Canada Inc. Canada
Integrated Payment Systems Inc. Delaware
International Banking Technologies, Inc. Georgia
MicroBilt Corporation Georgia
MSFDC, L.L.C.* Delaware
NaBANCO Georgia, Inc. Georgia
National Truckers Service Canada Inc. Ontario
Negocios Informaticos, S.A.* Spain
NTS, Inc. Maryland
Orlandi Valuta California
Orlandi Valuta Nacional Nevada
Orlandi cle Mexico S.A. de C.V. Mexico
PNC Merchant Services Company* Delaware General Partnership
Research Park Association, Inc. Florida not-for-profit
Service Center, Inc. Maryland
Servicio Internacional de Envios, S.A. de C.V. Mexico
Servicio Mexicano de Apoyo, S.C. Mexico
Shared Global Systems, Inc. Texas
Signet U.K.
Signet Network Services Limited U.K.
Signet Processing, Ltd. U.K.
SkyTeller, L.L.C.* Delaware
Southern Telecheck, Inc. Louisiana
Technology Solutions International, Inc. Georgia
TeleCheck International, Inc. Georgia
TeleCheck Payment Systems Limited New Zealand
TeleCheck Pittsburgh/West Virginia, Inc. Pennsylvania
<PAGE>
First Data Corporation
Page 3
TeleCheck Services Canada, Inc. Canada
TeleCheck Recovery Services, Inc. Colorado
TeleCheck Services, Inc. Delaware
TeleCheck Services of Puerto Rico, Inc. Georgia
The Joint Credit Card Company Limited U.K.
The Shareholder Services Group (Bermuda) Limited Bermuda
Unified Merchant Services* Georgia General
Partnership
VIPS, Inc. Maryland
Wachovia Merchant Services, L.L.C.* Delaware
Wells Fargo Merchant Services, L.L.C.* Delaware
Western Union Communications, Inc. Delaware
Western Union Financial Services (Belgium), S.A. Belgium
Western Union Financial Services (Canada), Inc. Ontario
Western Union Financial Services (France)
International Sarl France
Western Union Financial Services Eastern Europe Limited Delaware
Western Union Financial Services GmbH Austria
Western Union Financial Services (Hong Kong) Limited Hong Kong
Western Union Financial Services, Inc. Delaware
Western Union MT East* Russian Federation
Western Union S.A. Argentina
* not wholly owned by FDC
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Forms S-8 No. 3347234, No. 33-48578, No. 33-82826, No. 33-87338, No. 33-90992,
No. 3362921, No. 3398724, No. 33-99882, No. 333-9017 and No. 333-9031, No. 333-
28857, Forms S-3 No. 3334012, No. 333-24667 and Form S-4 No. 333-15497) of
First Data Corporation of our report dated February 5, 1998, with respect to the
consolidated financial statements and schedule of First Data Corporation
included in this Annual Report (Form 10-K) for the year ended December 31, 1997.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
New York, New York
March 20, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 411
<SECURITIES> 0
<RECEIVABLES> 1,013
<ALLOWANCES> 29
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 775
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,315
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 5
<OTHER-SE> 3,652
<TOTAL-LIABILITY-AND-EQUITY> 15,315
<SALES> 0
<TOTAL-REVENUES> 5,235
<CGS> 0
<TOTAL-COSTS> 3,296
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 117
<INCOME-PRETAX> 706
<INCOME-TAX> 350
<INCOME-CONTINUING> 357
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 357
<EPS-PRIMARY> 0.81
<EPS-DILUTED> 0.79
<FN>
<F1> UNCLASSIFIED BALANCE SHEET
</FN>
</TABLE>
