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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, 1998
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 of (I.R.S. Employer
incorporation or organization) Identification No.)
5660 NEW NORTHSIDE DRIVE, SUITE 1400, ATLANTA, GEORGIA 30328
(Address of principal executive offices) (ZIP CODE)
(770) 857-0001
Registrant's telephone number, including area code
_____________________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of each class Name of each exchange on which registered
- --------------------------- -----------------------------------------
COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
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 28, 1999 (excluding
treasury shares) were 434,608,051. The aggregate market value, as of March 1,
1999 of such common shares held by non-affiliates of the registrant was
approximately $16.624 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 12, 1999
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PART I
ITEM 1. BUSINESS
GENERAL
First Data Corporation ("FDC" or "the Company") operates in three principal
business segments providing high-quality, high-volume information processing and
related services with respect to several market sectors: payment instruments,
card issuer services, and merchant processing services, representing
approximately 90% and 80% of FDC's revenues in 1998 and 1997, respectively. The
Company'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.
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, the Company's 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 considers 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 have been completed for
business units lacking sufficient financial prospects or for units not enhancing
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 acquisition or divestiture transaction.
FDC is incorporated in Delaware, and its principal executive offices are located
at 5660 New Northside Drive, Suite 1400, Atlanta, Georgia 30328-5800, telephone
(770) 857-0001.
SIGNIFICANT DEVELOPMENTS
In 1998, the Company continued the emphasis begun in 1997 on its three principal
business segments. The Company has continued this emphasis to further its
strategic objective: to process every electronic payment worldwide from the
point of occurrence to the point of settlement. FDC is keenly focused on
improving execution of strategic plans, enhancing sales and marketing
activities, identifying operational efficiencies and building on the fundamental
strengths of its business.
During 1998's third quarter, the Company announced the promotion of Charles T.
Fote to President and Chief Operating Officer, a new position for the Company.
Mr. Fote has twenty-five years of experience with the Company involved in many
of FDC's businesses. His promotion to President and COO is intended to provide
a stronger operating focus on meeting and exceeding operating and financial
goals. In addition, the Company has refocused its management in the individual
business units, including strengthening financial management at the business
unit level. The Company also initiated plans to merge certain critical
operations functions common to several business units - specifically the
Print/Mail/Plastics and Voice Center/Automatic Response Unit areas. By
combining such functions, the Company expects to lower expenses and improve
service quality by achieving greater production efficiencies and improving
processes.
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In the payment instruments segment, Western Union continues to experience strong
growth. Western Union now offers money transfer services at more than 55,000
agent locations, up 27 percent from last year, in 168 countries worldwide.
Development efforts continued on several new products and services, including
TransPoint, the Company's Internet-based bill presentment and payment service
joint venture, which is scheduled for introduction in 1999.
Card issuer services signed several significant new clients in 1998, including
GE Capital, First Consumers National Bank (whose private label portfolio
includes Spiegel Catalog, Eddie Bauer and Newport News), First Union, Partners
First, and, shortly after year-end, the First Chicago/NBD card holder accounts
of First USA/BancOne. The Company also addressed profitability issues in the
back office servicing and information management service lines of this segment.
Bankcard collections activities were reorganized under new management after
being transferred to the TeleCheck business unit of the merchant processing
services segment, and the remaining back office servicing business showed
improvement in both revenues and profits in 1998. On December 31, 1998, the
Company announced the closure of Innovis, Inc., its credit bureau reporting
business. This action was taken after the Company concluded that it could not
achieve an acceptable return on the investment necessary to make Innovis'
technology platform commercially competitive.
During the second quarter of 1998, the Company amended its agreement with HSBC
Holdings, plc ("HSBC") which revised the scope of services to be provided to
HSBC. As a result of this amendment and because of difficulties in the
development process in Hong Kong which resulted in delays to the conversion date
and, consequently, significant unanticipated costs, the Company determined that
total estimated costs under the amended contract would exceed anticipated
revenues. In September 1998, the Company announced the termination of its Hong
Kong card processing contract with HSBC.
In the merchant processing services segment, the Company focused on operational
execution and expanding its e-commerce and Internet capabilities. During 1998's
fourth quarter, the Company acquired an equity position in iMall, Inc., and
together the companies are marketing a variety of Internet commerce services to
merchants. Also, electronic check acceptance, which was introduced as a new
point of sale payment method during 1998, is now in over 7,500 locations. In
July 1998, a new gaming services joint venture was formed among FDC, BA Merchant
Services, Inc. and USA Processing ("BMCF") into which the Company contributed
the assets of First Data Financial Services ("FDFS"), a gaming services business
it acquired early in 1998. With respect to its merchant alliance program, the
Company added First Security Corporation to the program, and acquired the
remaining 20% interest in the NationsBank alliance following NationsBank's
merger with Bank of America. The Company is pursuing new business partners for
the former NationsBank alliance merchant portfolio, and expects to place this
portfolio with new or existing alliance partners during 1999.
During 1998's first quarter, the Company sold NTS, its transportation services
unit, to Ceridian Corporation in a transaction in which it simultaneously
acquired Ceridian's gaming services division (FDFS which was contributed to the
BMCF joint venture during July 1998). During the second quarter, the Company
completed the sale of First Image Management Company, its imaging and document
management business. In October 1998, the Company sold VIPS Healthcare
Information Solutions, marking the completion of FDC's exit from the health care
administrative services and software business. These transactions resulted in a
net pretax gain of approximately $60 million. NTS, First Image, and VIPS
represented approximately 6% of FDC's revenues in 1997 and 3% in 1998.
FDC remains the market leader in its three major segments: payment instruments,
card issuer services and merchant processing services. The Company will
continue to focus on these core business areas throughout 1999 and will continue
to assess how best to serve its customer base. This continued focus and
assessment could result in the Company taking future actions to enhance its
product and service offerings as well as action to further streamline operations
and reduce costs.
OPERATING SEGMENTS
FDC operates in three principal business segments providing high-quality, high-
volume information processing and related services to several market sectors:
payment instruments, card issuer services and merchant processing services.
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Payment Instruments
The payment instruments segment includes Western Union, Integrated Payment
Systems ("IPS"), Orlandi Valuta Companies ("Orlandi") and TransPoint and is the
leading provider of nonbank money transfer and payment services to consumers and
commercial entities, including money transfer, official check and money order.
As the leading provider of nonbank money transfer and bill payment services, FDC
utilizes an agent network of over 30,000 domestic and 25,000 international agent
locations to provide payment instrument transaction services to consumers in
over 168 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. The TransPoint joint
venture will provide a seamless, end-to-end system for delivery and payment of
richly formatted bills, statements, or notices. 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 (adjusted for the disposition of NTS)
totaled 651 million in 1998, compared to 482 million in 1997, and 451 million in
1996. 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 33% of FDC's total revenues in 1998,
compared with 27% in 1997 and 23% in 1996.
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 1998, 1% in 1997 and 5%
in 1996. 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 3% of FDC's
settlement assets at December 31, 1998, compared with 4% at December 31, 1997
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 in 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
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location, with the Company's commercial client benefiting from a convenient
collection tool that results in immediately available funds.
Card Issuer Services
The card issuer services segment encompasses domestic and international card
processing, bankcard customer servicing, and certain information based services.
This segment provides a comprehensive line of processing and related services to
financial institutions issuing credit and debit cards and to issuers of oil and
private label credit cards, including information-based products for enhanced
decision making and marketing. Within this segment, 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 Credit and Customer Services provides back-office support through
application processing, chargeback services and credit and customer support. The
information management services area 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. Collectively, this segment's services constituted approximately 28% of
the Company's total revenues in 1998, 26% in 1997 and 22% in 1996.
In addition to growth in existing clients' card accounts on file, several new
card issuing clients were converted onto FDCSG's processing systems in 1998
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 1998 (including FDCSG's card
issuing business in the United Kingdom) were 212 million, compared with 180
million and 153 million, respectively, at December 31, 1997 and 1996. 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 card holder'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
exceed credit limits. The Company's fraud detection systems help identify
fraudulent transactions by monitoring each card holder'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 card holders using the Company's in-house mail
facility. Examples of other service offerings include card holder database
analysis, card holder behavior scoring, customized communications to card
holders 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. 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.
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, 1998.
Services provided generally mirror the Company's domestic card issuing and
merchant processing services provided to financial institutions. 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. The percentages of FDC's revenues
from the international service
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areas were 5% for 1998 and 4% for both years ended December 31, 1997 and 1996.
The Company also provides third-party bankcard processing to clients in Mexico
and portions of Latin America.
Merchant Processing Services
The Merchant processing services segment is comprised of First Data Merchant
Services, TeleCheck, the Company's check and bankcard collections business,
First Data POS and its joint venture interests in BMCF and CardService
International, Inc. ("CSI"). The segment provides merchants with credit and
debit card transaction processing services, including authorization, transaction
capture, settlement, Internet-based transaction processing, check verification
and guarantee and collection services. FDC's First Data Merchant Services
("FDMS"), together with the Company's joint venture interest in CSI, is the
largest provider of merchant credit and debit card transaction processing
services in the United States. Its 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. 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. TeleCheck Collections
(formerly CPS) provides delinquent account processing, including pre-chargeoff
collection outsourcing services. BMCF provides credit card, debit card and money
transfer services to gaming establishments and their customers. The percentages
of FDC's revenues from this segment's services were 27%, 27%, and 25%,
respectively, during the years ended December 31, 1998, 1997 and 1996.
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 13 participating
banks currently in the program.
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 domestic merchant card processing on Visa and
Mastercard transaction dollar volume totaling $247 billion in 1998, compared
with $216 billion in 1997, and $185 billion in 1996. Merchant transactions
processed totaled 5.0 billion in 1998, compared to 4.6 billion in 1997 and 3.6
billion in 1996. 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. CPS,
which was formerly part of card issuer services, was combined with TeleCheck and
renamed TeleCheck Collections.
The Company's primary merchant card processing centers are located in
Hagerstown, Maryland; Nashville, Tennessee and Sunrise, Florida with additional
volumes of merchant card transactions being processed at FDMS'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 FDMS'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
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
card holder 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
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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 decreased 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. The assets of this new
subsidiary were contributed to the BMCF joint venture in 1998 in which FDC holds
a 58% equity interest.
All Other and Corporate
The remainder of the Company's business units are grouped in the "All Other and
Corporate" category, which includes the Investor Services Group, TeleServices,
Call Interactive, International Banking Technologies ("IBT"), and Corporate
operations. 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
recordkeeping 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 revenues from these services were 7% in 1998 and 5% in
1997.
Transfer agent revenues 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 26.6 million at December 31,
1998, 17.2 million at December 31, 1997, and 15.1 million at December 31, 1996.
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, 1998 totaled
$815 billion, compared with $572 billion and $429 billion, respectively, at
December 31, 1997 and 1996. 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.
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 Call Interactive and TeleServices units are leading providers 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.
MARKETING
FDC markets its services through a variety of channels including direct
solicitation and general 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,
CSI employees and bank alliance partner employees in the merchant processing
segment 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.
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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
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 "Y2K" remediation issues.
Many computer programs were written with a two digit date field and must be Y2K
compliant in order 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. See Year 2000 discussions in Management's Discussion
and Analysis for more detail.
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 $92.3 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.
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FDC's investment processing services area also is subject to federal securities
laws relating to, among other things, the regulation of transfer agents.
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.
In the payment instruments segment, FDC's money transfer services compete with
one national provider, 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.
The Company's merchant processing services segment 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 issuer services segment competes with other third-party card holder
processors as well as banks that process their accounts internally. FDC's
information management services areas compete with 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. In addition, certain merchant processing alliance relationships have
been impacted as a result of consolidations. Consolidation in the mutual fund
industry 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.
9
<PAGE>
EMPLOYEES AND LABOR RELATIONS
At December 31, 1998, the Company employed approximately 32,000 employees, over
94 percent of who 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 are generally good.
EXECUTIVE OFFICERS OF THE REGISTRANT
See Item 10 of this Form 10-K.
ITEM 2. PROPERTIES
The Company leases executive office space at 5660 New Northside Drive, Atlanta,
Georgia. The Company and its subsidiaries own or lease approximately 380
properties totaling approximately 8.7 million square feet which range in size
from approximately 330,000 square feet to less than 200 square feet. The
following table describes the principal facilities being used in connection with
the Company's operations. Unless otherwise indicated by an asterisk (*), such
facilities are leased.
<TABLE>
<CAPTION>
Business Segment Location(s) Approximate Square Footage
- ---------------- ----------- --------------------------
<S> <C> <C>
Card Issuer Services Ames, IA 60,000
Omaha, NE (5 facilities)* 800,000
Omaha, NE (24 facilities) 1,200,000
Tulsa, OK * 185,000
Tulsa, OK 178,000
Chesapeake, VA 118,000
Chandler, AZ 83,000
Houston, TX 72,000
Australia (5 facilities) 33,000
Basildon, England (4 facilities)* 270,000
Basildon, England (2 facilities) 87,000
Southend-on-Sea, England (3 facilities) 260,000
Merchant Processing Services Coral Springs, FL 203,000
Hagerstown, MD (3 facilities) 306,000
Hunt Valley, MD 51,000
Melville, NY (2 facilities) 191,000
Houston, TX (2 facilities) 181,000
Aurora, CO 55,000
Payment Instruments Englewood, CO (5 facilities) 592,000
St. Louis Area, MO (5 facilities) 150,000
Paramus, NJ 132,000
All Other Boston / Westborough, MA 550,000
Daytona, FL 87,000
Norcross / Kennesaw, GA (3 facilities) 178,000
Pensacola, FL 58,000
Tucson, AZ 64,000
Corpus Christi, TX 58,000
</TABLE>
10
<PAGE>
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.
ITEM 3. LEGAL PROCEEDINGS
As previously reported, 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, Western Union Financial Services,
Inc. On August 4, 1998, the court issued an order granting defendants' motion
to dismiss the claims asserted by the Plaintiff in their entirety. The court
granted the Plaintiff leave to amend within thirty days, but the Plaintiff did
not do so. On September 14, 1998, the Plaintiff filed a new putative class
action in the Superior Court of the State of California for the County of Los
Angeles alleging factual allegations similar to those alleged in the original
action. Plaintiff claims that Western Union charges an undisclosed "commission"
when it transmits consumers' money by wire from California to Mexico, in that
the exchange rate used in these transactions is less favorable than the exchange
rate that Western Union receives when it trades dollars for Mexican pesos in the
international money market. Plaintiff asserts that Western Union's failure to
disclose this so-called "commission" in its advertising and in the transactions
violates state law. Plaintiff also asserts that Western Union has discriminated
against persons who use Western Union to transmit money to Mexico, in that the
difference between the market exchange rate and the exchange rate used by
Western Union in the Mexico transactions is greater than the difference between
the market and Western Union exchange rates when transmitting funds to other
countries, The Plaintiff seeks injunctive relief, imposition of a constructive
trust, an accounting, restitution, compensatory and statutory damages alleged to
be in excess of $500 million, statutory penalties, punitive damages, attorneys'
fees, prejudgment interest, and costs of suit. Western Union has filed a
demurrer to all of the claims, which is pending with the court, and intends to
vigorously defend the action.
Four other actions based on similar factual allegations have been filed
subsequent to the original Garcia action. Plaintiffs Rita Sandoval and Andres
------
Pena, individually and on behalf of all others similarly situated, filed an
original complaint on February 20, 1998, and a first amended complaint on March
3, 1998, in the District Court of Morris County, Texas, against Western Union
Financial Services, Inc. (the "Sandoval action"). Plaintiffs claim that Western
--------
Union charges an undisclosed "commission" when it transmits consumers' money by
wire from Texas to Mexico, in that the exchange rate used in these transactions
is less favorable than the exchange rate that Western Union receives when it
trades dollars for Mexican pesos in the international money market. Plaintiffs
assert that Western Union's failure to disclose this so-called "commission" in
its advertising and in the transactions violates Texas state law. Plaintiffs
seek to recover the purported damage suffered by each class member. Western
Union has filed a motion to transfer venue and is engaged in discovery in this
action. Western Union intends to vigorously defend this action.
On April 20, 1998, Plaintiffs Luis Pelayo and Oscar Perales brought a putative
class action against Western Union Financial Services, Inc. in the United States
District Court for the Northern District of Illinois. This complaint makes
allegations substantially similar to those made in the Sandoval action described
--------
above, except that the Plaintiffs purported to assert their action on behalf of
a nationwide class of persons who sent money from the United States to Mexico
through Western Union's wire transfer service. Plaintiffs seek declaratory and
injunctive relief, compensatory damages, treble damages, punitive damages,
attorneys' fees, prejudgment interest, and costs of suit. Western Union intends
to vigorously defend this action.
On October 19, 1998, Plaintiff Jesus Villalobos, individually and behalf of all
others similarly situated, brought an action against Western Union Financial
Services, Inc., among others, in the District Court of Hidalgo County, Texas.
Although the claims were for violations of state law for transfers to any
international location, the claims were similar to the claims made in the
Sandoval action described above. Plaintiff sought a declaratory, equitable, and
- --------
injunctive relief, general and specific damages, punitive damages, attorney
fees, and costs of the suit. On December 23, 1998, the Plaintiff filed a
request for nonsuit which was granted by the Court on January 6, 1999. The
Court's grant of the request for nonsuit dismissed this case.
11
<PAGE>
On November 17, 1998, Plaintiffs Maria Rosa Ibarra, Rosa Maria Landin and
Rigoberto Estrada brought a putative class action against the Company's Orlandi
Valuta subsidiary in the United States District Court for the Central District
of California seeking compensatory damages, treble damages, injunctive relief,
attorneys' fees, and costs of suit. Plaintiffs filed an amended complaint on
January 29, 1999, naming the Company as an additional defendant. The claims are
based on factual allegations similar to those made in the Sandoval action
--------
described above, except that the Plaintiffs purported to assert their action on
behalf of a nationwide class of persons who sent money from the United States to
Mexico through Orlandi Valuta's wire transfer service. The Company intends to
vigorously defend this 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 management
believes, either individually or in the aggregate, currently is material to the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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 15, 1999, the registrant had 3,720 common stockholders of record.
<TABLE>
<CAPTION>
1998 High Low Dividend
- ---- ---- --- --------
<S> <C> <C> <C>
First Quarter................... $35 13/16 $25 9/16 $0.02
Second Quarter.................. 36 1/16 30 5/8 $0.02
Third Quarter................... 34 3/4 20 $0.02
Fourth Quarter.................. 32 1/4 19 11/16 $0.02
1997
- ----
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
</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
On December 22, 1998, the Company issued a 4.875% Convertible Note Due 2005 in
the amount of $50,000,000 to a customer of one of its wholly-owned subsidiaries.
The note was issued in consideration of $50,000,000, which was used by the
Company to repurchase shares of the Company's common stock. No underwriter or
placement agent was involved in the transaction.
The note establishes two separate periods during which portions of the note may
be converted into the Company's common stock. The holder may convert $16,666,667
of the note amount from December 22, 2000 until December 22, 2005. The holder
also may convert $33,333,333 of the note amount prior to December 22, 2005, upon
the occurrence of certain events specified in the note. Upon conversion, the
applicable note amount will be
12
<PAGE>
converted into shares of the Company's common stock at a purchase price of
$36.45 per share. The conversion price and the above dates are subject to
adjustment, acceleration or extension upon the occurrence of certain events
specified in the note. The issuance of the convertible note was not registered
under the Act in reliance upon the exemption from registration provided by
Section 4(2) of the Act.
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, 1998 1997 1996 1995 1994
----------------------------------------------------------------------------------------------------------------------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
INCOME STATEMENT DATA:
----------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 5,117.6 $ 5,234.5 $ 4,938.1 $ 4,186.2 $ 3,080.5
Expenses 4,405.7(a) 4,528.1(a) 3,906.3(a) 4,018.6(a) 2,469.2
----------- ------------ ------------ ------------ -----------
Income before income taxes 711.9 706.4 1,031.8 167.6 611.3
Income taxes 246.2 349.7 395.3 251.8 251.0
----------- ------------ ------------ ------------ -----------
Net income (loss) $ 465.7 $ 356.7 $ 636.5 $ (84.2) $ 360.3
=========== ============ ============ ============ ===========
Depreciation and amortization $ 591.1 $ 534.2 $ 423.6 $ 346.8 $ 242.5
PER SHARE DATA:
---------------
Earnings (loss) per share - basic $ 1.05(a) $ 0.81(a) $ 1.42(a) ($0.19)(a) $ 0.87
Earnings (loss) per share - diluted 1.04(a) 0.79(a) 1.37(a) (0.19)(a) 0.85
Cash dividends per share 0.08 0.08 0.065 0.06 0.06
BALANCE SHEET DATA (AT YEAR-END):
---------------------------------
Total assets $16,587.0 $ 15,315.2 $ 14,340.1 $ 12,217.8 $ 8,433.1
Settlement assets 9,758.0 8,364.7 7,461.5 6,210.6 3,554.0
Total liabilities 12,831.1 11,657.9 10,630.3 9,072.7 6,032.2
Settlement obligations 9,617.0 8,249.8 7,389.9 6,119.4 3,564.1
Borrowings 1,571.7 1,750.7 1,261.4 1,127.7 572.1
Convertible debt --- --- 447.1 447.1 447.1
Total stockholders' equity 3,755.9 3,657.3 3,709.8 3,145.1 2,400.9
SUMMARY OPERATING DATA:
-----------------------
At year-end -
Card accounts on file (in millions) 211.9 180.4 152.9 121.4 92.2
For the year -
Merchant dollar volume (in billions,
domestic only) (b) $ 247.0 $ 216.0 $ 185.0 $ 119.5 $ 61.7
Merchant transactions (in billions) 5.0 4.6 3.6 1.7 0.9
Payment instrument transactions
(in millions) 650.8 481.8 450.5 401.0 318.2
</TABLE>
(a) Includes restructuring, net business divestiture and impairment charges
totaling $319.1 million pretax, ($231.5 million after tax, or $0.52 per
share) for 1998 (including a provision for termination of a card processing
agreement); $369.3 million ($333.9 million after tax, or $0.72 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) 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) Includes Visa and Mastercard volume only from alliances and managed
accounts.
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
First Data Corporation ("FDC" or "the Company") operates in three principal
business segments providing high-quality, high-volume information processing and
related services to several market sectors: payment instruments, card issuer
services and merchant processing services. Payment instruments includes Western
Union, Integrated Payment Systems ("IPS"), and TransPoint and is the leading
provider of nonbank money transfer and payment services to consumers and
commercial entities, including money transfer, official check and money order.
Card issuer services encompasses domestic and international card processing,
bankcard customer servicing, and certain information-based services. This
segment provides a comprehensive line of processing and related services to
financial institutions issuing credit and debit cards and to issuers of oil and
private label credit cards, including information-based products for enhanced
decision making and marketing. Merchant processing services is comprised of
First Data Merchant Services, TeleCheck, the Company's check and bankcard
collections business, First Data POS and a joint venture interest in a gaming
services business. This segment provides merchants with credit and debit card
transaction processing services, including authorization, transaction capture,
settlement, Internet-based transaction processing, check verification and
guarantee and collection services. The remainder of the Company's business
units are grouped in the "All Other and Corporate" category, which includes the
Investor Services Group, TeleServices, IBT, and Corporate operations.
FDC considers 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 have been completed for
business units lacking sufficient financial prospects or for units not enhancing
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 acquisition or divestiture transaction.
SIGNIFICANT DEVELOPMENTS
In 1998, the Company continued the emphasis begun in 1997 on its three principal
business segments. The Company has continued this emphasis to further its
strategic objective: to process every electronic payment worldwide from the
point of occurrence to the point of settlement. FDC is keenly focused on
improving execution of strategic plans, enhancing sales and marketing
activities, identifying operational efficiencies and building on the fundamental
strengths of its business.
During 1998's third quarter, the Company announced the promotion of Charles T.
Fote to President and Chief Operating Officer, a new position for the Company.
Mr. Fote has 25 years of experience with the Company involved in many of FDC's
businesses. His promotion to President and COO is intended to provide a
stronger operating focus on meeting and exceeding operating and financial goals.
In addition, the Company has refocused its management in the individual business
units, including strengthening financial management at the business unit level.
The Company also initiated plans to merge certain critical operations functions
common to several business units - specifically the Print/Mail/Plastics and
Voice Center/Automatic Response Unit areas. By combining such functions, the
Company expects to lower expenses and improve service quality by achieving
greater production efficiencies and improving processes.
In the payment instruments segment, Western Union continues to experience strong
growth. Western Union now offers money transfer services at more than 55,000
agent locations, up 27 percent from last year, in 168 countries worldwide.
Development efforts continued on several new products and services, including
TransPoint, the Company's Internet-based bill presentment and payment service
joint venture, which is scheduled for introduction in 1999.
Card issuer services signed several significant new clients in 1998, including
GE Capital, First Consumers National Bank (whose private label portfolio
includes Spiegel Catalog, Eddie Bauer and Newport News), First Union, Partners
First, and, shortly after year-end, the First Chicago/NBD cardholder accounts of
First USA/BancOne. The Company also addressed profitability issues in the back
office servicing and
14
<PAGE>
information management service lines of this segment. Bankcard collections
activities were reorganized under new management after being transferred to the
TeleCheck business unit of the merchant processing services segment, and the
remaining back office servicing business showed improvement in both revenues and
profits in 1998. On December 31, 1998, the Company announced the closure of
Innovis, Inc., its credit bureau reporting business. This action was taken after
the Company concluded that it could not achieve an acceptable return on the
investment necessary to make Innovis' technology platform commercially
competitive.
During the second quarter of 1998, the Company amended its agreement with HSBC
Holdings, plc ("HSBC") which revised the scope of services to be provided to
HSBC. As a result of this amendment and because of difficulties in the
development process in Hong Kong which resulted in delays to the conversion date
and, consequently, significant unanticipated costs, the Company determined that
total estimated costs under the amended contract would exceed anticipated
revenues. In September 1998, the Company announced the termination of its Hong
Kong card processing contract with HSBC.
In the merchant processing services segment, the Company focused on operational
execution and expanding its e-commerce and Internet capabilities. During 1998's
fourth quarter, the Company acquired an equity position in iMall, Inc., and
together the companies are marketing a variety of Internet commerce services to
merchants. Also, electronic check acceptance, which was introduced as a new
point of sale payment method during 1998, is now in over 7,500 locations. In
July 1998, a new gaming services joint venture was formed among FDC, BA Merchant
Services, Inc. and USA Processing ("BMCF") into which the Company contributed
the assets of First Data Financial Services ("FDFS"), a gaming services business
it acquired early in 1998. With respect to its merchant alliance program, the
Company added First Security Corporation to the program, and acquired the
remaining 20% interest in the NationsBank alliance following NationsBank's
merger with Bank of America. The Company is pursuing new business partners for
the former NationsBank alliance merchant portfolio, and expects to place this
portfolio with new or existing alliance partners during 1999.
During 1998's first quarter, the Company sold NTS, its transportation services
unit, to Ceridian Corporation in a transaction in which it simultaneously
acquired Ceridian's gaming services division (FDFS which was contributed to the
BMCF joint venture during July 1998). During the second quarter, the Company
completed the sale of First Image Management Company, its imaging and document
management business. In October 1998, the Company sold VIPS Healthcare
Information Solutions, marking the completion of FDC's exit from the health care
administrative services and software business. These transactions resulted in a
net pretax gain of approximately $60 million. NTS, First Image, and VIPS
represented approximately 6% of FDC's revenues in 1997 and 3% in 1998.
FDC remains the market leader in its three major segments: payment instruments,
card issuer services, and merchant processing services. The Company will
continue to focus on these core business areas throughout 1999 and will continue
to assess how best to serve its customer base. Among the actions the Company
believes is necessary to continue its leadership position is a focused effort to
develop new products and services and to enhance its processing platforms in
response to Company growth, client requirements and changing technology. In
this regard, the Company also anticipates it will need to upgrade and redevelop
its business continuity plans to reflect new systems and platforms developed to
support these actions. Also, the Company may take future actions to further
streamline operations and reduce costs.
RESULTS OF OPERATIONS
1998 Compared with 1997
The Company derives revenues in each of its reportable segments based
principally on the number of transactions processed, a percentage of dollar
volume processed, or on a combination thereof. Total revenues in 1998 decreased
2% to $5.1 billion, compared with $5.2 billion in 1997. Revenue growth during
the year was significantly impacted by divestitures in 1997 and 1998. The
Company's internal
15
<PAGE>
growth rate in revenues over 1997 (excluding the effects of business
acquisitions and business and merchant portfolio divestitures) was 9%.
Product sales and other revenues decreased 52% from $256.0 million in 1997 to
$123.7 million in 1998. The largest component of the decrease is attributable
to 1997 gains on the sales of merchant contracts and an interest in a merchant
alliance, which are recorded in the merchant processing services segment. These
gains amounted to approximately $43.5 million, of which $26.5 million was
recorded in the fourth quarter 1997. Also, lesser amounts of contingent
payments from a previously-formed merchant alliance were received in 1998 than
1997. Other decreases are attributable to payments arising from the termination
of certain contracts as a result of consolidation in the bankcard industry,
which are recorded in the card issuer services segment. Although such
termination payments were insignificant in 1998, client terminations do occur
periodically, and gains related thereto in 1997 were recorded as a component of
product sales and other. Revenues from product and software sales occur in all
segments to varying degrees but declined in 1998 principally due to business
divestitures. Revenues from in-store branch installations are recorded in the
"All Other and Corporate" category and declined due to fewer installations in
1998 than 1997.
Consolidated operating expenses declined 1% (to $3.3 billion) in 1998 as
compared to 1997, and consolidated selling, general and administrative expenses
decreased 2% during 1998 (to $732.4 million). Company-wide cost containment and
reduction initiatives and profit improvement programs largely offset the effect
of increased investment spending in the payment instruments segment (principally
for TransPoint) and card issuer services segment and increased Year 2000
expenses. Year 2000 expenses for 1998 were approximately $75 million compared
to $32 million in 1997.
Interest expense decreased 11% from $116.5 million in 1997 to $104.1 million in
1998 due primarily to reductions in debt balances made possible by strong cash
flow, proceeds from divestitures, and lower acquisition spending. Year-end 1998
borrowings were $1.57 billion as compared to $1.75 billion at year-end 1997.
FDC's full year effective tax rate for 1998 was 34.6%, a decrease of 14.9
percentage points compared to 1997. The reduction in tax rate is attributable
to 1997 losses on several divestitures and impairments which were largely
nondeductible for tax purposes, while fewer such items occurred in 1998.
Excluding the effects of the nonrecurring charges discussed below in both years,
the effective tax rate decreased 3.4 percentage points to 32.4% in 1998 compared
to 35.8% in 1997. This decrease is explained by an increase in the amount of
nontaxable interest generated from investments in debt instruments issued by
state and local governments.
Net income of $465.7 million in 1998 increased 31% from $356.7 million in 1997.
Excluding nonrecurring charges in both years, 1998's net income of $697.2
million increased approximately 1% over 1997's net income of $690.6 million, and
net income margins increased to 13.6% from 13.2%. Diluted earnings per common
share increased from $0.79 in 1997 to $1.04 in 1998. Excluding nonrecurring
charges in both years, diluted earnings per share increased approximately 3% to
$1.56 in 1998 compared with $1.51 in 1997.
Payment Instruments
Total revenues in the payment instruments segment increased 21% in 1998 to $1.7
billion compared to $1.4 billion in 1997. This revenue growth reflects
continuing strong underlying volume increases, as well as the full year effect
of the August 1997 Orlandi Valuta acquisition. In particular, payment
instruments continues to experience strong growth in international and
commercial money transfer volumes. Aggregate money transfer transactions grew
29% to 61.4 million in 1998, while total money transfer revenues increased 23%
to $1.3 billion in 1998. Revenue per transaction was somewhat lower in 1998 than
1997 due to competitive pricing in certain markets and a shift in product mix
toward lower average revenue commercial products. At December 31, 1998 the
agent base had grown 27% (as compared to December 31, 1997) to over 55,000
agents in 168 countries.
16
<PAGE>
Transaction volume other than money transfer (excluding NTS) increased 36% to
589.4 million in 1998 compared to 1997. The increase in transaction volume was
offset by a 15% decrease in revenue per transaction resulting in an increase in
revenues of 15% (to $393.8 million). The decline in revenue per transaction was
driven primarily by the 1998 start-up of check processing which has a
comparatively low per item fee.
In addition to transaction processing revenues, the payment instruments segment
generates revenue from foreign currency exchange on money transfer transactions
and from sharing in investment earnings on fiduciary funds. The revenues from
fiduciary funds (before commissions of certain selling agents) increased from
$289.4 million in 1997 to $340.5 million in 1998 ($386.8 million and $462.2
million on a pretax equivalent basis for 1997 and 1998, respectively).
Operating profits for the year grew 20%, from $422.9 million in 1997 to $506.8
million, while operating margins were essentially unchanged from the prior year
at 30%. Margins improved somewhat from 1997 in the North American,
international, and commercial markets due to economies of scale and cost
reduction initiatives but were offset by investments in new electronic payment
services, primarily TransPoint, the Internet-based bill presentment and payment
joint venture with Microsoft and Citicorp.
Card Issuer Services
Total revenues in the card issuer services segment grew 6% to $1.4 billion in
1998 as compared to $1.3 billion in 1997. Processing revenues increased 9% while
information management services revenues declined 8%. Growth in underlying
volumes in card processing continued to be strong and 1998 saw significant
increases in accounts on file. Card accounts on file as of December 31, 1998
were 211.9 million (a 17% increase from December 31, 1997) with domestic card
accounts growing to 186.2 million (16% growth) and international card accounts
on file growing 31% to 25.7 million largely due to the mid-year conversion of
Lloyds TSB cardholder accounts in the United Kingdom card processing operation.
Revenues, however, grew more slowly than accounts on file due to the large
number of contract renewals at lower pricing during 1997, market pricing trends
for new business and a lower ratio of active accounts on file. Consolidation
among financial institutions has led to an increasingly concentrated client
base, which results in a changing client mix towards larger, highly
sophisticated customers. The effects on pricing, client mix and product mix of
providing services to this increasingly concentrated industry may continue to
cause revenues to grow more slowly than accounts on file on a percentage basis.
Revenues in information management services declined due to the effect of
certain nonrecurring contracts in 1997 and the closure of a lettershop operation
in 1997.
Operating profits declined 4%, from $274.9 million in 1997 to $264.1 million,
and operating margins were 18% in 1998 as compared to 20% in 1997. In 1997, the
favorable impact of the gains arising from contract terminations were
substantially offset by charges to write-down the book value of certain
intangible assets primarily in the oil card services area and to terminate a
contract with a software supplier. The decline in margins is due to significant
declines in profitability in the information management services area. During
1998, the Company refocused this business by taking several actions, most
notably the closure of Innovis, Inc. (formerly Consumer Credit Associates,
Inc.), with the expectation of returning the information business area to
profitable growth in 1999. Excluding the information management business and
despite pricing pressures, processing operating profits increased in 1998 due to
revenue growth and aggressive cost reduction initiatives.
Merchant Processing Services
Revenues in the domestic merchant processing services segment were essentially
flat at $1.4 billion in 1998 and 1997. Merchant card dollar volume grew 14% to
$247 billion. Merchant card processing revenues, adjusted for the effects of
portfolio sales in 1997 and the dissolution of a bank alliance, grew
approximately 5% on a comparable year over year basis. Revenues continue to grow
more slowly than volume due to a continuing industry-wide trend of declining
prices and due to a shift in the mix of the business toward lower priced, higher
volume national merchants. However, pricing trends improved
17
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somewhat during 1998, and the fourth quarter 1998 revenue growth of 8% (adjusted
for the aforementioned items) was the highest growth rate of any quarter of
1998. Traditional TeleCheck revenues grew 11% for the year, while revenue from
bankcard collection activities, now combined with TeleCheck, declined $26
million from the prior year as a result of exiting certain unprofitable
contracts.
Operating profits declined 16% to $329.1 million in 1998 as compared to $390.0
million in 1997. Operating margins were 24% in 1998 as compared to 28% in 1997.
Year to year comparisons are adversely affected by operating profits and gains
on merchant portfolios sold in 1997, the 1997 gain resulting from the
dissolution of a merchant alliance, 1998 losses in the bankcard collections unit
that was transferred to TeleCheck, and significantly increased Year 2000
spending in 1998. Excluding the effects of these items, operating profits grew
approximately 8%.
Key elements of FDC's strategy in the merchant processing services segment
involve its joint venture alliances with its bank partners and internet
commerce. The joint venture alliances require close relationships and
cooperative efforts between the Company and its bank partners, and could be
affected by further consolidation among financial institutions. Internet
commerce, while accounting for a very small portion of the segment's
transactions currently, is growing rapidly. However, internet commerce is still
evolving industry-wide, and its ultimate impact on merchant processors and
acquirers is uncertain.
All Other and Corporate
Service revenues from all other continuing operations increased 10% in 1998 (to
$585.4 million) compared to 1997. This increase is driven primarily by a 23%
increase in revenues in the Investor Services Group due to the addition of
several new contracts and acquisitions completed in 1998. In addition, Call
Interactive revenue grew 16% due to strong growth in recurring business offset
by a 13% decline in revenues at TeleServices due to the transition of a portion
of MCI business from outsourcing to in-house. In-store bank branch installations
declined from the prior year, resulting in a revenue decline for IBT.
Operating profits declined somewhat in 1998, from $146.1 million to $143.8
million. Operating profits increased in the investment processing services area
due to strong revenue growth and cost reduction efforts, while they declined at
IBT due to fewer branch installations.
Divestitures, Restructuring, Impairment, and Provision for Loss on Contract
During the first quarter of 1998, the Company acquired Ceridian Corporation's
Gaming Services division (renamed FDFS) and simultaneously sold to Ceridian its
NTS transportation services unit resulting in a pretax gain of $28.5 million. In
the third quarter, the Company contributed the assets of FDFS to the BMCF gaming
services joint venture. No gain or loss was recorded on this transaction.
During the second quarter of 1998, the Company amended its agreement with HSBC
Holdings, plc ("HSBC") which revised the scope of services to be provided to
HSBC. As a result of this amendment and because of difficulties in the
development process in Hong Kong, which resulted in delays to the conversion
date and, consequently, significant unanticipated costs, the Company determined
that total estimated costs under the amended contract would exceed anticipated
revenues. Accordingly, a provision of $125.2 million was recorded in the second
quarter for these estimated net losses (reported on the "Provision for loss on
contract" line in the Consolidated Statements of Income). In September 1998, the
Company announced the termination of its Hong Kong card processing contract with
HSBC. The loss contract provision will be fully utilized for costs associated
with the contract termination. Such costs include the write-off of $72.5 million
of intangible assets as of June 30, 1998, $14.5 million of costs incurred from
June 30, 1998 to contract termination date in fulfillment of contractual
obligations, $5.3 million of fixed asset write-offs, $8.9 million of wind down
costs and $24 million designated for an Australian card processing contract. The
$8.9 million of wind down costs include $5.9 million of salary and facility
costs during the wind down period and $3.0 million of other exit type costs such
as severance and lease exit costs. The termination of the HSBC contract resulted
in an Australian card processing contract becoming a loss contract due to the
Australian card processing contract now bearing
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<PAGE>
the full cost of operating the Asian processing platform rather than sharing
such costs with HSBC. The remaining HSBC provision covering the Australian loss
contract, severance, lease and other commitments totaled $19.1 million at year-
end 1998.
Also in the second quarter of 1998, the Company determined that approximately
$38.5 million of platform development costs related to the HSBC project and
other potential non-U.S. clients may not be recoverable in the near to medium
term, and thus were written off (reported on the "Restructuring, business
divestitures and impairment, net" line in the Consolidated Statements of
Income). Recoverability became unlikely with the loss of the HSBC contract
profitability and the diminished prospects for previously anticipated new non-
U.S. clients.
During the fourth quarter of 1998 the Company recorded a $146.4 million charge
to shut down Innovis, Inc. (formerly Consumer Credit Associates, Inc.), the
Company's consumer credit reporting business (reported on the "Restructuring,
business divestitures and impairment, net" line in the Consolidated Statements
of Income). The decision to close Innovis was made in the fourth quarter after
in-depth study resulted in the conclusion that the effort required to make the
Innovis platform commercially competitive would not provide an adequate return
on the Company's investment. All operations ceased on December 31, 1998 except
for limited activities to fulfill contractual commitments. Shutdown activities,
which include the anticipated selling of tangible and intangible assets, are
planned to be completed by March 31, 1999. The charge includes writing off
intangible assets of $133.1 million, fixed assets of $3.8 million, and accrued
exit costs of $9.5 million. The accrued exit costs include severance for all 145
Innovis employees at a cost of $5.7 million and various other expenses such as
facility lease costs (net of expected sublease revenue), obligations to fulfill
vendor agreements or termination penalties and other shutdown activities. The
Company terminated 81 of the 145 employees on December 31, 1998 and the
remaining employees will be terminated over the first three months of 1999.
There were no cash expenditures in 1998 related to this accrual. It is possible
that the Company will be able to negotiate a transaction with a third party that
will result in the Company receiving proceeds and tax benefits greater than have
been anticipated to date. No assurances can be given that such a transaction
will take place.
In addition to the above, the Company recorded 1998 restructuring charges of
$35.7 million; $19.0 million related to merchant processing services, $10.7
million related to card issuer services and $6.0 million related to Corporate.
The charges included a provision of $20.0 million for severance related to 810
employees, a provision of $9.7 million for facility closure and related costs
and $6.0 million for settlement of a legal matter associated with the merger
with FFMC. Through December 31, 1998, 609 employees have been terminated, the
remaining severance accrual is $7.2 million and the other accrual balances are
$7.3 million. It is anticipated that these restructuring actions will result in
1999 cost savings of $31.0 million. The Company also recorded 1998 impairment
charges of $33.4 million of which $23.4 million related to software in the card
issuer services segment and the remaining $10.0 million related primarily to
merchant processing services and included assets that were impaired as a result
of facility closures and terminated conversion efforts. Of the card issuer
services software, $15.1 million related to the U$AVE product offering and was
deemed impaired due to a change in strategic direction by certain of the
Company's customers. Although the Company continues to offer the product to its
customers, it currently does not expect cash flows from the product to be
sufficient to recover the investment in the near to medium term. The remaining
$8.3 million software impairment charge related to the abandonment of certain
development efforts where the commercial viability of the planned product or
service offering became doubtful. These charges were partially offset by gains
of $31.6 million primarily related to the divestitures of First Image and VIPS.
The total of all the 1998 restructuring, impairment, and loss contract charges
was $319.1 million pretax and $231.5 million after tax, or $0.52 per share.
RESULTS OF OPERATIONS
1997 Compared with 1996
Consolidated revenues in 1997 increased 6% to $5.2 billion compared with $4.9
billion in 1996. The Company's internal growth rate in revenues over 1996
(excluding the effects of acquisitions, divestitures
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<PAGE>
and the planned divestiture of First Image) was 16%. Growth in existing
businesses, principally due to the addition of new clients along with strong
underlying volume increases from existing clients, accounted for a substantial
majority of the revenue increase. The Company's performance reflected, in
particular, strong growth in the card issuer services and payment instruments
segments, while growth in the merchant processing services segment slowed from
historical levels.
Consolidated expenses (excluding restructuring, divestiture, and impairment
amounts discussed below) increased 6%, at generally the same rate as the
increase in revenues. Operating expenses increased by 7%, while selling, general
and administrative expenses grew at a lesser rate of 3%. Accordingly, income
before income taxes (excluding the effects of restructuring, divestitures, and
impairment charges of $369.3 million in 1997 and a net gain of $13.5 million in
1996) increased 6% to $1,075.7 million in 1997 compared to $1,018.3 million in
1996. The Company's pretax margins excluding restructuring, divestiture and
impairment amounts for both 1997 and 1996 were 20.6%.
FDC's effective income tax rate of 35.8% in 1997 decreased from 38.3% in 1996
(excluding the impact of nonrecurring items in both years) due to increased
nontaxable interest income on settlement assets in 1997 as a result of the
conversion of American Express Travel Related Services payment products to the
Company's own payment products.
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%.
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 common share in 1996.
Payment Instruments
Total revenues in the payment instruments segment increased 23% to $1.4 billion
in 1997 compared to $1.1 billion in 1996. This increase is attributable to
strong transaction volume growth and the August 1997 acquisition of Orlandi
Valuta in Mexico. Aggregate money transfer transactions increased 36% to 47.8
million in 1997 compared to 1996. In addition, the payment instruments agent
base at December 31, 1997 had grown 24% (to 44,000) compared to December 31,
1996. Operating profits grew approximately 32% to $422.9 million, reflecting
strong internal growth, the Orlandi Valuta acquisition, and lower selling and
marketing costs due to the MoneyGram divestiture in December 1996.
Card Issuer Services
Revenues in the card issuer services segment increased 26% to $1.3 billion in
1997 compared to $1.1 billion in 1996. The overall revenue growth was
principally driven by 20% growth in domestic card accounts on file to 160.8
million in 1997 and several acquisitions in the information services area in
1997 and 1996. Domestic card accounts on file grew primarily due to the
conversion of new accounts of several large clients including BancOne, Marine
Midland, National City and Chase debit. Revenues in 1997 also were favorably
affected by payments arising from the termination of certain contracts as a
result of consolidation in the bankcard industry. Although there were no such
termination payments in 1996, client terminations do occur periodically and
gains related thereto in 1997 were recorded as revenues. Operating profits grew
approximately 21% to $274.9 million from 1996. Operating profits were negatively
impacted by significant contract repricing covering over 40% of the client base,
higher Year 2000 spending, and higher administrative costs associated with
managing the international business. These increased costs were offset by the
growth in revenue from higher accounts on file, acquisitions and cost reduction
initiatives. In addition, the favorable 1997 impact of the contract termination
gains was largely offset by charges to write-down the book value of certain
intangible assets primarily in the oil card services area and to terminate a
contract with a software supplier.
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<PAGE>
Merchant Processing Services
Merchant processing services revenues grew 14% to $1.4 billion in 1997 compared
to $1.2 billion in 1996. This growth was driven by a 17% increase in merchant
card volume and a 19% increase in check guarantee and verification dollar
volume. Dollar volume growth was somewhat offset by a decline in revenue per
transaction due to the continuing industry-wide trend of declining prices and to
a shift in the mix of business toward lower priced, higher volume, national
merchants. Operating profits grew 11% to $390.0 million from 1996. Both revenues
and operating profits were favorably impacted by 1997 gains of $43.5 million
from the sale of merchant contracts and the dissolution of an alliance.
All Other and Corporate
At $534 million, revenues from all other continuing operations declined slightly
as compared to 1996's revenues of $538 million. However, operating profits
increased from $137.6 million in 1996 to $146.1 million in 1997.
Divestitures, Restructuring and Impairment
The 1997 restructuring, divestitures and impairment charge totaled $369.3
million and includes $49.9 million of restructuring charges, the loss on the
FIRST HEALTH Strategies and FIRST HEALTH Services divestitures of $93.8 million,
the loss on Nationwide divestiture of $51.0 million and impairment charges
relating to other health care administrative services businesses of $118.4
million and to 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. The
net impact of these items on after tax income was $333.9 million ($0.72 per
share).
The $49.9 million restructuring charge included $23.9 million for card issuer
services, $9.5 million for corporate and other, $8.1 million for merchant
processing services, $5.4 million for divested businesses and $3.0 million for
payment instruments. The charge included $30.0 million for severance related
costs for 2,100 employees, $6.5 million for facility closure costs and $13.4
million of other exit costs, which consisted primarily of indemnification
relating to a previously sold product line ($4.0 million), contract termination
costs ($2.0 million) and obsolete inventory costs ($2.1 million). There were
$3.3 million of accruals remaining at December 31, 1998.
Results for 1996 included a net gain of $13.5 million from restructuring,
divestiture and impairment items. The net gain was the result of a $46.0 million
gain on the divestiture of MoneyGram offset by $22.3 million of restructuring
costs including $10.8 million of severance costs related to approximately 700
employees and $11.5 million of other integration costs. These restructuring
actions represent a continuation of integration activities associated with the
October 1995 merger with FFMC. In addition to the $22.3 million restructuring
charge, the Company recorded a $10.2 million asset impairment charge which
related, in part, to these integration activities, as well as abandoned product
development and client conversion efforts. The total charge of $32.5 million
included $18.5 million related to merchant processing services, $4.4 million
related to card issuer services, $5.6 million related to corporate and other and
the remaining $4.0 million related to divested businesses. There are no
remaining accruals for these restructuring activities at December 31, 1998.
ECONOMIC FLUCTUATIONS
Although FDC cannot precisely determine the impact of inflation on its
operations, the Company does not believe that it has 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.
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The FDC 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. 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.
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. First Data expects 1999 earnings per share to be in the range of
$1.68 - $1.76.
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 major clients; (d) timely, successful
and cost effective implementation of processing systems to provide new products,
improved functionality and increased efficiencies; (e) maintenance of
appropriate business continuity plans for the Company's processing systems based
on the needs and risks relative to each such system; (f) 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; (g) successful implementation of a strategy to improve
operating results in the information management service lines of the Company;
(h) absence of consolidation among client financial institutions or other client
groups which has a significant impact on FDC client relationships and no
material loss of business resulting from significant customers of the Company
involved in announced mergers; (i) 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; (j) anticipation of and response to technological
changes, particularly with respect to e-commerce; (k) 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; (l) 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; (m) continuation of the existing interest rate environment,
avoiding increases in agent fees related to the Company's consumer money
transfer products and the Company's short-term borrowing costs (see discussion
of market risk in ITEM 7a); (n) absence of significant changes in foreign
exchange spreads on retail money transfer transactions, particularly between the
United States and Mexico, without a corresponding increase in volume or consumer
fees; (o) no unanticipated developments relating to previously disclosed
lawsuits against Western Union alleging, inter-alia violation of consumer
protection laws in connection with advertising the cost of money transfers to
Mexico; and (p) successfully managing the potential both for patent protection
and patent liability in the context of rapidly developing legal framework for
expansive software patent protection.
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.
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CAPITAL RESOURCES AND LIQUIDITY
FDC continues to generate significant cash flow from operating activities,
aggregating $1.3 billion in 1998, as compared to $1.2 billion in 1997. This cash
flow in 1998 was produced primarily from net income of $465.7 million,
depreciation and amortization of $591.1 million, and noncash charges totaling
$320.0 million (primarily the impairment and restructuring charges, loss
contract provision and net loss on divestitures of business units), offset
somewhat by an increase in working capital. FDC utilized this cash flow to
reinvest in its existing businesses, to fund treasury stock purchases and to
contribute to the financing of acquisitions.
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 $649.8 million in 1998 compared with $616.9 million in 1997.
Overall, FDC's operating cash flow for 1998 exceeded nonacquisition investing
activities by $604.4 million as compared to $519.6 million in 1997.
Additionally, the Company received cash of $150.0 million in the second quarter
from the First Image divestiture and $48.0 million in the fourth quarter from
the VIPS divestiture. These cash sources contributed to funds utilized for
acquisitions and other capital expenditures and treasury stock purchases.
Cash outlays for acquisitions in 1998 totaled $94.2 million (as compared to
$366.8 million in 1997), the largest component of which was a $50.5 million
payment to purchase FDFS. The Company also paid $107.7 million relating to
businesses previously acquired including $93.2 million relating primarily to
certain of its alliance programs with bank clients in merchant processing.
The Company's financing activities include net borrowings, proceeds from stock
option exercises, share repurchases under the Board authorized program described
below and for purposes of meeting employee benefit programs and dividend
payments. Net cash used in financing activities was $551.5 million compared to
$428.5 million in 1997.
In December 1998, the Company issued a $100 million Medium-Term note and a $50
million convertible note. The proceeds of the Medium-Term note were used to
refinance shorter-term debt with debt at longer maturities to take advantage of
attractive market interest rates. Additionally, the Company made treasury stock
purchases of $419.4 million including purchases under the stock buy-back program
discussed below. Proceeds of $50 million from the convertible note and from
stock option exercises totaling $83.6 million partially offset these outlays.
The Company also continued its practice of paying quarterly cash dividends,
resulting in $35.7 million of cash payments for the year to the Company's common
stockholders.
In September 1998, the Company announced that its Board of Directors had
authorized management to purchase up to $500 million of its outstanding common
stock. In December 1998, the Board increased the total authorization to $550
million in conjunction with the issuance of the convertible note. Through
December 31, 1998 approximately 10 million shares had been repurchased for
approximately $257 million under this program.
During 1997, the Company made treasury stock purchases of $1.0 billion primarily
related to conversion of the senior convertible debentures. These repurchases
were largely funded by cash generated from operating activities, proceeds from
options exercises, and the issuance of a $125 million Medium-Term note in June
1997.
The Company has two outstanding shelf registration facilities, one providing for
the issuance of debt and equity securities under which $525 million remains
available and the other providing for the issuance of approximately 10 million
shares of the Company's common stock in connection with certain types of
acquisitions.
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As an integral part of FDC 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 Sheets) 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 Sheets at
December 31, 1998 is $92.3 million related to required investments of cash in
connection with the Company's merchant card settlement operation; the remainder
is available for general corporate purposes. Also, FDC has available borrowing
capacity of $1.1 billion at December 31, 1998 under the Company's commercial
paper program and 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.
YEAR 2000
The Company's business units provide information/transaction processing and
related services through computer systems running proprietary and third-party
software. While several units began Year 2000 ("Y2K") readiness efforts prior to
1997, in June of 1997 the Company created a Year 2000 Task Force (the "Task
Force") to coordinate, monitor and assist the units in their Y2K efforts. The
Task Force developed a common planning process with specific planning phases and
timeline goals and monitors the progress of each unit toward those goals. The
Task Force regularly reports to executive management and the Board of Directors.
In addition, in August 1997, the Audit Committee of the Board of Directors
engaged the Gartner Group to provide independent analysis and assessment of the
Company's Y2K efforts.
The Year 2000 Task Force is led on a day to day basis by the Company's Y2K
champion. The Company's Y2K champion has recently accepted a senior management
position outside of the Company and he anticipates leaving the Company in the
second quarter of 1999. The Company has identified an executive with 27 years of
experience in the credit card business as the new Y2K champion. He began his
duties in January 1999, thereby providing for a several month transition period
working cooperatively with the outgoing Y2K champion. A plan to transition the
Y2K duties to the incoming champion has been implemented and will be completed
by April 1999.
Safe Harbor for Year 2000 Forward-Looking Statements. All forward-looking
statements regarding Y2K readiness, including estimates, forecasts and
expectations, are inherently uncertain as they are based on various expectations
and assumptions concerning future events and are subject to numerous risks and
uncertainties which could cause actual events or results to differ materially
from those projected. Important factors upon which the Company's Y2K forward-
looking statements are premised include: (a) retention of employees and
contractors working on Y2K projects; (b) customers' remediation of their
internal systems to be Y2K ready and their cooperation in timely testing; (c) no
material disruption of telecommunication, data transmission networks, payment
networks, government services, utilities or other infrastructure services and no
unexpected failure of third-party products; (d) no unexpected failures by third-
parties providing services to the Company; (e) no undiscovered sabotage of
systems or program code affecting the Company's systems; (f) no undiscovered
material flaws in the Company's test processes; and (g) no unexpected
difficulties in the transition of duties to the Company's new Y2K executive
champion. The Company undertakes no obligation to update forward-looking
statements.
State of Readiness. The Company's Y2K preparedness efforts are differentiated
between information technology ("IT") systems and non-IT systems. Non-IT systems
are embedded systems that support facilities infrastructures, such as
microcontrollers in lighting, heating/ventilation/air conditioning, security,
elevator, fire, uninterrupted power supply, and other infrastructure systems.
All units are upgrading their
24
<PAGE>
facilities and have identified facilities champions who are reviewing these non-
IT systems that could affect the work environment. The upgrade of non-IT systems
for 94 of 111 mission critical buildings has been completed. The upgrade for
other mission critical and non-mission critical buildings is expected to be
completed by the second quarter of 1999.
IT systems include primarily computer hardware and software and related systems.
Described below are simplified explanations of the phases of the Y2K readiness
plan being implemented by the Task Force. Target dates for completion of each
phase as to all mission-critical systems are reflected in the chart below.
Phase 1- Impact Analysis and Inventory. Define and survey Y2K issues.
Perform automated code surveys, work-process reviews, risk analysis,
business case development, etc., to determine approach and strategy.
Identify all required changes regarding applications, platforms,
connectivity, clients and vendors.
Phase 2- Code Renovation/Operating System Upgrade. Complete code renovation
and regression testing so systems can process both current and future-dated
data.
Phase 3- Data-Aged Test Execution. Test all changes made to various
components in a Y2K data-aged test environment, including appropriate
hardware, system software, and application software. At the completion of
Phase 3, the Company's systems will be Y2K ready subject to production
implementation in Phase 5.
Phase 4- Client Test Execution. Test with clients in the Y2K data-aged test
environment. Although there have been minimal changes to data interface
formats, this phase is to ensure that client systems can continue to
interface with the Company's systems in a Y2K environment. The Company's
computer services business focus and Y2K regulatory requirements applicable
to a large portion of the Company's client base result in extensive client
testing requirements. While Phase 4 is to be completed by June 30, 1999,
many business units anticipate continuing tests with clients past this
date.
Phase 5- Production Implementation. Transition hardware, system /operating
software, application software and business processes into a
production/live environment. Phase 5 to be completed by June 30, 1999.
While management anticipates that most mission-critical software will be in
production by December 31, 1998, the June 30, 1999 date allows for changes
responsive to test results from Phases 3 and 4.
The following Status Chart identifies the status of each phase of the Company's
Y2K plan for the mission-critical systems of the following material business
units as of February 28, 1999. Mission-critical systems are those directly
serving clients or clients' customers, and having a material impact on client
service in a normative mode of operation if not working properly. Status is
indicated as the approximate percentage of work completed for each phase as of
February 28, 1999. Various business units have planned completion dates for
certain phases prior to the specified target dates. Management believes that its
Y2K effort is on schedule overall and that its mission-critical systems will be
Y2K ready in a timely manner.
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<TABLE>
<CAPTION>
Business Unit Phase 1 Phase 2 Phase 3 Phase 4 Phase 5
- ------------- ------------- --------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Target Completion Date
For each phase 12/31/97 12/31/98 3/31/99 6/30/99 6/30/99
Card Issuer Units
First Data Resources 100% 99% 95% 25% 90%
First Data Australia 100% 100% 99% 20% 99%
First Data Resources Limited 100% 100% 65% 35% 80%
First Data Oil Services 100% 100% 85% 80% 99%
First Data Solutions 100% 100% 99% 55% 99%
Hogan Information Services 100% 100% 100% 75% 99%
Merchant Processing Units
First Data Merchant Services* 100% 100% 99% 25% 99%
BMCF Gaming joint venture 100% 100% 100% 45% 45%
First Data POS (MicroBilt) 100% 100% 100% 100% 100%
TeleCheck 100% 100% 99% 10% 98%
Payment Instruments Units
Western Union 100% 100% 100% 70% 95%
Orlandi Valuta 100% 100% 100% 100% 100%
Integrated Payment Systems 100% 100% 70% 20% 99%
CashTax 100% 99% 50% 50% 99%
Other
Call Interactive 100% 100% 100% 100% 100%
Investor Services Group 100% 100% 100% 30% 99%
TeleServices 100% 100% 100% 90% 99%
</TABLE>
* The First Data Merchant Services business unit is converting
one of its merchant capture systems (the "Nashville" system),
representing approximately 9.2% of daily merchant authorization
volume of FDMS, to a new Y2K compliant system (the "FDMS6000"
system). Notwithstanding the Company's intention to convert from
the Nashville system in accordance with its conversion plan, the
Company has initiated remediation of this system as a contingency
measure. Because of the anticipated conversion, progress on
remediation of the Nashville system is not reflected in the
Status Chart but the status of both the conversion and the
remediation efforts are described below. The conversion from the
Nashville system to the FDMS6000 system started in January 1999.
The conversion involves three phases. The first phase involves
the conversion of file delivery process from the Nashville system
to the FDMS6000 system. This phase was completed in February. The
second phase involves the conversion of bank and processor back-
office processing functions to the FDMS6000 system. Clients began
converting to the FDMS6000 system in February, and the
certification process is ongoing. The anticipated completion date
for phase 2 is in June. The final phase involves the conversion
of merchants to the FDMS6000 system. Beta tests for merchant
conversions and related certification procedures are in progress.
It is anticipated that the merchant conversions will be completed
in the third quarter. The remediation effort is proceeding on a
parallel schedule. Code remediation of the Nashville system is
expected to be completed by the end of April. Testing is expected
to be completed by the end of July, and implementation of the Y2K
compliant Nashville system is expected to be completed by the end
of August.
As indicated in the Status Chart, some of our business units are reporting
exceptions to the above FDC completion dates. These exceptions are being
monitored closely, and management believes they will not affect the company's
overall Y2K readiness.
26
<PAGE>
Material Relationships. The Company's material third-party relationships
include: (i) providers of hardware/software products, (ii)
service/network/gateway providers, and (iii) clients. The Company's remediation
plan addresses third party readiness by requiring an inventory of client and
vendor issues, identifying required changes, and testing with material third
parties. The Company also is monitoring the Y2K disclosures made in public
filings by approximately 150 material third parties. The status of assessment
and testing with respect to third-party risks is reflected in the Status Chart.
Coordination with third parties regarding Y2K issues will continue to the Year
2000 and beyond and the Company is working with material third parties to
minimize service interruptions that could occur in connection with the Year
2000. Notwithstanding these efforts, unexpected third-party failures could occur
and, despite testing procedures, erroneous or corrupted data received from third
parties could impact internal systems and cause material service disruptions.
Third-party relationships currently believed to be most material to the Company
are described below. (i) Clients- The Company does not control clients'
remediation efforts or timely testing on the Company's systems. However, many of
the Company's largest clients are financial institutions subject to supervision
and regulation by banking regulatory agencies or the Securities and Exchange
Commission. These regulated entities are subject to Y2K compliance requirements
and supervisory examinations focusing on Y2K readiness. (ii) Telecommunications-
The Company has contracts for telecommunication services with AT&T, MCI and
Sprint in the U.S. and is reliant on regional bell operating companies and other
local service providers. Several of the Company's businesses are similarly
reliant upon telecommunication providers in foreign countries. Telecommunication
services are critical to all of the Company's businesses. Two of the three U.S.
based long-distance carriers used by the Company have provided contractual
agreements that they will be Y2K ready in a timely manner. We are in routine
communication with the major telephone companies and will be participating in
various Y2K testing programs in the first half of 1999. (iii) Postal Service-
The Company is one of the largest first-class mailers using the U.S. Postal
Service. Postal services are critical to many of the Company's businesses. By
law, no alternative for first-class mail service is available. The Postal
Service has provided assurances that it will be Y2K ready in a timely manner.
(iv) Electronic Money Transfer Networks- Most of the Company's businesses
require settlement of financial transactions through various electronic
networks, primarily the Federal Reserve Board's Fedwire (R) Funds Transfer
System ("FedWire"), the Automated Clearing House ("ACH"), the Bank Automated
Clearing Services in the U.K. and other similar settlement networks. The Federal
Reserve has provided assurances regarding their readiness and the Company is
engaged in Y2K testing for ACH transfers. FedWires are initiated and are being
tested by Financial Institutions. (v) Association Networks and Similar
Proprietary Third-Party Networks- Several of the Company's business units
provide services related to credit and debit card transactions which occur over
the VISA (R), MasterCard (R), Discover (R), American Express (R) and EuroPay
networks, regional Automated Teller Machine networks, and various other
proprietary third-party networks in the United States and abroad. MasterCard and
VISA have established testing schedules and the Company is participating in
testing with both networks. (vi) Utilities- All businesses are reliant upon
utilities for electricity, gas, water, and sewers. The Company's readiness plan
requires business units to work with utility providers to confirm Y2K readiness
and to coordinate contingency plans in case of unanticipated events. The
Company's major data centers have power generation systems to provide electrical
backup for reasonable periods of time based on accepted business practices for
the relevant business unit. In addition, each of our data centers are exploring
keeping additional fuel reserves on site. (vii) Internal Revenue Service-
CashTax processes EFTPS transactions for the IRS. CashTax is subject to
oversight by the IRS, the Treasury Department and the Inspector General, each of
which regularly reviews its systems and operations and all of which have
performed specific Y2K inspections. CashTax has tested its systems with the IRS
using future-dated test data. (viii) EDS- Electronic Data Systems provides data
center services for Western Union including application development and
maintenance. In addition, EDS provides debit gateway services to First Data
Resources. (ix) Internet- Numerous of the Company's businesses offer Internet-
based products and services. Moreover, an increasing amount of corporate
communication occurs over the Internet. The Internet is reliant upon
telecommunication and data transmission services and, therefore, it is subject
to the telecommunication risks noted above. The decentralized nature of the
Internet makes it difficult to obtain assurances concerning Y2K compliance. (x)
SIAC- Investor Services Group has a relationship with the Securities Industry
Automation Corporation ("SIAC") which provides clearing services for mutual fund
trading. Any failure in Y2K readiness on the part of the SIAC could have a
material impact upon the
27
<PAGE>
revenue of ISG which would not be able to process all transactions manually.
SIAC is testing its systems for Y2K readiness and ISG is approximately 50%
complete in the testing with an expected completion date by the end of April
1999. (xi) Credit Bureaus-Several of the Company's business units and most of
the Company's financial institution clients use the services of one of the three
national credit reporting bureaus. Failure of credit bureau services for an
extended period of time could adversely affect the Company's ability to deliver
certain services to clients.
Year 2000 Risks. Management believes that the most likely Y2K risks relate to
third parties with which it has material relationships. A failure or disruption
of (i) the Company's mission-critical computer systems caused by third-party
hardware/software, (ii) third-party service/network/gateway providers, or (iii)
significant clients for an extended period, could adversely affect the financial
condition and results of operations of the Company. Moreover, while management
believes that its internal "State of Readiness" as reflected in the Status Chart
indicates that the Company's mission-critical systems will be Y2K ready in a
timely manner, 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.
However, based on currently available information, while management anticipates
there could be isolated and intermittent disruptions of various services and
interfaces at its businesses, there is no expectation of extensive or protracted
systemic failures that would have a material adverse effect on the financial
condition or results of operations of the Company.
Contingency Plans. Each business unit is developing its own contingency plans
pursuant to Task Force guidelines. There are two types of plans. All of the
Company's major business units have hardware/software contingency plans in case
a supplier of hardware/software products or internally developed systems used in
a business does not have a Y2K ready version in time for implementation and
testing. A second type of contingency plan focuses on business contingency plans
to support the date change event. Although each business unit has its own unique
business plan, the plans generally call for obtaining goods and services from
alternative sources, utilizing alternative methods to perform functions, and
acquiring additional reserves of goods, such as fuel for power generation at the
Company's major data centers. In addition, the Company's units have developed
preliminary staffing support plans to ensure that appropriate on-site staff are
in place to implement any contingency plan and address any issues that may
arise. It is expected that these plans will be revised throughout 1999, as the
Company completes testing with clients and gains a better understanding of
external third party risks.
Regulatory Supervision; Independent Validation/Verification. Certain FDC
business units are subject to regulatory oversight and examination with detailed
Y2K requirements and examination processes as described below. (i) FFIEC- The
First Data Resources, First Data Merchant Services and Investor Services Group
units are examined regularly by the Federal Financial Institutions Examination
Council. These examinations occur as part of the FFIEC's Multiregional Data
Processing Servicer ("MDPS") program. Recently, the FFIEC has begun including a
special focus on Y2K issues in these general MDPS examinations. In addition to
the general MDPS examinations, the federal banking agencies are conducting
separate supervisory reviews of Y2K planning and conversion efforts by financial
institutions, data processing service providers and third-party software vendors
to financial institutions. FDR, FDMS and ISG have been reviewed by the FFIEC
under these procedures and these reviews will continue on a quarterly basis. The
FFIEC publishes a summary of its results to the financial institution clients of
the business units; however, the Company is prohibited by law from disclosing
the reports, or any conclusions, findings or ratings contained in such reports.
(ii) IRS/Treasury/Inspector General- The Company's Electronic Funds Tax
Processing Services ("EFTPS") business (part of the CashTax unit) is subject to
oversight and inspection by the IRS, the Treasury Department and the Inspector
General each of which has performed specific Y2K inspections regarding the EFTPS
business. (iii) SEC- Certain corporate entities in the Company's Investor
Services Group business are subject to regulation by the Securities and Exchange
Commission as a Transfer Agent and/or as a Broker-Dealer. ISG is filing routine
status reports with the SEC regarding Y2K compliance.
The Audit Committee of the Board of Directors engaged the Gartner Group to (i)
provide an independent analysis of the Company's Y2K preparedness and the
adequacy of its project plans, including project organization, tools,
methodology, implementation strategies and test plan/environment; (ii) examine
the
28
<PAGE>
Y2K project progress of each unit; and (iii) regularly report its findings to
executive management and the Board of Directors. The Gartner Group reviews,
among numerous other criteria, whether adequate resources and funding are
committed to the readiness plan and whether the Company has mitigated the risk
of revenue-interrupting failures in their IT systems. Management believes the
Gartner Group's independent evaluations of the Company's Y2K readiness are
consistent with the Status Chart and management's belief that mission-critical
systems will be Y2K ready in a timely manner.
Costs to Address the Company's Year 2000 Issues. Through December 31, 1998, the
Company has spent in aggregate approximately $108 million in connection with
preparing for the Year 2000, of which approximately $75 million was spent in
1998. Of the 1998 spending, approximately 85% has been spent on software
remediation and testing and approximately 15% has been spent to replace systems
and equipment and to add testing capacity. The Company anticipates that Y2K
expenditures for 1999 will be approximately $80-$95 million, most of which is
budgeted to support client testing. The Y2K expenses were approximately 9% of
the IT budget for 1998 and are anticipated to be approximately 10% of the 1999
IT budget. To date, the Company has financed its Y2K expenses from cash flow and
expects to continue to do so.
The Company's Y2K efforts have impacted finite IT resources and some portion of
the Company's IT personnel have been dedicated to the Y2K project who otherwise
could have worked on other system enhancements, client conversions and new
products. However, the Company has leveraged its IT resources by engaging off-
shore contract programmers to perform a substantial portion of this work and,
throughout the Company, every effort has been made to prioritize IT projects and
to focus available IT resources on the most critical projects. The Company has
reviewed new business opportunities, product launches and conversions and either
accelerated or deferred these developments, as appropriate, in response to Y2K
efforts.
EURO CURRENCY CONVERSION DISCLOSURE
The Company's First Data Resources Limited ("FDRL") and Western Union business
units provide services in the European Community.
Over 90% of FDRL's business relates to credit card issuer and merchant
processing of transactions that occur in the United Kingdom. The United Kingdom
is not a "participating country" with respect to the January 1, 1999 "Euro"
currency conversion and it currently is not known when or if the United Kingdom
will elect to convert to the Euro. Nonetheless, FDRL's merchant processing and
card issuer systems are now capable of processing Euro-denominated transactions,
and the latter has been doing so successfully since January 1, 1999. FDRL also
expects to complete its facility to convert pre-existing accounts designated in
the currency of one of the participating countries into Euro denominated
accounts within the next few months. FDRL's costs in connection with the Euro
conversion are not expected to be material. FDRL does not believe that the
conversion will have a competitive impact on its business, though over the long-
term the conversion may present opportunities for FDRL to enter new markets.
Western Union made minor system modifications to accommodate the Euro
conversion. The cost of those modifications was not material. While Western
Union may experience a decrease in foreign exchange revenue from money transfers
between countries participating in the Euro conversion, the Company does not
expect that any such impact will be material. Western Union does not anticipate
any competitive impact resulting from the Euro conversion.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". The SOP is effective for the
Company beginning on January 1, 1999. The SOP will require the capitalization of
certain costs incurred after the date of adoption in connection with developing
or obtaining software for internal use. The Company does not expect the impact
of the SOP on the Company's future earnings and financial position to be
material.
29
<PAGE>
In April 1998, the AICPA issued SOP 98-5, "Reporting the Costs of Start-up
Activities". The SOP is effective beginning on January 1, 1999, and requires
that start-up costs be expensed as incurred. The Company does not expect the
impact of the SOP on the Company's future earnings and financial position to be
material.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 requires companies to record
derivatives on the balance sheet as assets or liabilities at fair value. It is
effective for financial statements for fiscal years beginning after June 15,
1999. The Company is evaluating the impact of SFAS 133 on the Company's future
earnings and financial position, but does not expect it to be material.
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.
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 use of interest rate
swap agreements which transform the variable rate commission payments to a fixed
rate and through the purchase of interest rate cap agreements which effectively
limit the commission payments to selling agents.
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 1999, as compared to the
average level of interest rates in 1998, would result in a decrease to pretax
income of approximately $10.5 million. Of this decrease $8.0 million takes into
consideration expected investment positions, commissions paid to selling agents,
growth in new business, and the effects of interest rate cap and swap
agreements. The remaining $2.5 million decrease is caused by the Company's
short-term variable rate commercial paper. Conversely, a corresponding decrease
in interest rates would result in a comparable improvement to pretax earnings.
A 10% proportionate increase in interest rates in 1998, as compared to the
average level of interest rates in 1997, would have resulted in a decrease to
pretax income of approximately $10.0 million. Of this decrease $8.0 million
takes into consideration expected investment positions, commissions paid to
selling agents, growth in new business and the effects of interest rate cap and
swap agreements. The remaining $2.0 million decrease is primarily caused by
variable rate commercial paper. Conversely, a corresponding decrease in interest
rates would result in a comparable improvement to pretax earnings.
30
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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................................. 55 Chairman of the Board and Chief Executive Officer
Eula Adams...................................... 49 Executive Vice President
Lee Adrean...................................... 47 Executive Vice President and Chief Financial Officer
David P. Bailis................................. 43 Executive Vice President
Charles T. Fote................................. 50 President and Chief Operating Officer
Robert J. Levenson.............................. 57 Executive Vice President and Director
Michael T. Whealy............................... 46 Executive Vice President and Chief Administrative Officer
Ben Burdetsky................................... 70 Director
Courtney F. Jones............................... 59 Director
James D. Robinson III........................... 63 Director
Charles T. Russell.............................. 69 Director
Bernard L. Schwartz............................. 73 Director
Joan E. Spero................................... 54 Director
Garen K. Staglin................................ 54 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. Robinson, Mr. Schwartz
and Mr. Staglin expire in 1999. The terms of office of Mr. Jones, Mr. Levenson
and Mr. Russell will expire in 2000, and the terms of office of Mr. Burdetsky,
Mr. Duques and Ms. Spero will expire in 2001. 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
theglobe.com and Unisys Corporation.
CHARLES T. FOTE has been President and Chief Operating Officer of the Company
since September 1998. He served as Executive Vice President of the Company from
its initial public offering in April 1992 until September 1998. 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.
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
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<PAGE>
1990 to 1991 he was Senior Vice President, Corporate Development and Strategic
Planning at Providian Corporation.
DAVID P. BAILIS has been an Executive Vice President of the Company since
September 1996. From July 1992 until March 1998 he served as General Counsel of
the Company. He joined the Company in June 1989 and advised the Health Systems
Group and First Data business units on legal matters prior to his promotion to
General Counsel. From January 1988, until joining the Company, Mr. Bailis was a
partner at the law firm of Peper, Martin, Jensen, Maichel and Hetlage in St.
Louis.
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 Vestcom International, Inc., Superior Telecom, Inc.
and Emisphere Technologies, Inc.
MICHAEL T. WHEALY was promoted in March 1998 to Executive Vice President and
General Counsel of the Company and to Chief Administrative Officer in September
1998. 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 where he served in that capacity until March 1998.
EULA L. ADAMS was promoted to Executive Vice President of the Company in
September 1998. He joined the Company in 1991 and has led operations in numerous
business units including Western Union, TeleServices and First Data Merchant
Services. Prior to joining the Company, Mr. Adams was a partner with Deloitte &
Touche.
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.
COURTNEY F. JONES has been a Director of the Company since April 1992. He is
Managing Director in charge of the New World Banking Group of Bankers Trust. Mr.
Jones has been a director of RSP Manufacturing Corporation since March 1998,
Outsourcing Solutions, Inc. since April 1998, and Medical Manager Corporation
since April 1997. He was a Managing Director in Merrill Lynch's Investment
Banking Division from July 1989 to December 1990. Prior thereto, he 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
information technology venture investment firm, and Chairman of Violy, Byorum &
Partners Holdings, LLC. Mr. Robinson is Senior Advisor to Salomon Smith Barney,
Inc. Mr. Robinson is a Director of Bristol-Myers Squibb Company, The Coca-Cola
Company, Cambridge Technology Partners and Concur Technologies Inc. Mr. Robinson
is a member of the Business Council and the Council on Foreign Relations. He is
Honorary Co-Chairman of Memorial Sloan-Kettering Cancer Center, an Honorary
Trustee of the Brookings Institution and Chairman Emeritus of the World Travel
and Tourism Council.
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<PAGE>
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. He 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. and InfiStar Corporation
(formerly Card Issuer Program Management 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 Mount Sinai-New York University Medical Center, and a trustee
of Thirteen/WNET.
JOAN E. SPERO has been a Director of the Company since March 1998. She has been
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. She is a member of the Board of
Trustees of the Brookings Institution, the Wisconsin Alumni Research Foundation
and Columbia University. She serves as a Director/Trustee of certain Scudder
Kemper Funds. Ms. Spero 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.
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,
a manufacturer and retailer of auto glass, 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 member of the Advisory Council of the
Stanford Graduate School of Business.
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, 1998.
ITEM 11. EXECUTIVE COMPENSATION
See the Proxy Statement for the Company's 1999 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 1999 Annual Meeting of Stockholders,
which information is incorporated herein by reference.
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<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the Proxy Statement for the Company's 1999 Annual Meeting of Stockholders,
which information is incorporated herein by reference.
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 heretofore 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 of the registrant's Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 1998).
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.
10.1 364 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).
10.2 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 Form 10-Q for the quarterly
period ended March 31, 1997).
10.3/(1)/ First Data Corporation Salary Deferral Plan (incorporated by
reference to Exhibit 10.9 of the registrant's Annual Report on
Form 10-K for the year ended December 31, 1997).
10.4/(1)/ Amended form of First Data Corporation 1993 Director's Stock
Option Plan
34
<PAGE>
(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).
10.5/(1)/ Form of First Data Corporation 1992 Long-Term Incentive
Plan, as amended (incorporated by reference to Exhibit A of
the registrant's Proxy Statement for the May 13, 1998 Annual
Meeting).
10.6/(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)).
10.7/(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).
10.8/(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).
10.9/(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).
10.10/(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).
10.11/(1)/ Form of Performance Grant Agreement under the 1992 Long-Term
Incentive Plan for the period beginning January 1, 1998
(incorporated by reference to Exhibit 10.7 of the
registrant's Annual Report on Form 10-K for the year ended
December 31, 1997).
10.12/(1)/(2)/ Form of Performance Grant Agreement under the 1992 Long-Term
Incentive Plan for the period beginning January 1, 1999.
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.
(b) Reports filed on Form 8-K during the fourth quarter of fiscal 1998:
None.
/(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.
35
<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 24, 1999
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>
/s/ HENRY C. DUQUES Chairman of the Board and March 24, 1999
- -----------------------------------
Henry C. Duques Chief Executive Officer
/s/ LEE ADREAN Executive Vice President and March 24, 1999
- -----------------------------------
Lee Adrean Chief Financial Officer
(Principal Financial Officer)
/s/ J. ALLEN BERRYMAN Vice President and Corporate
- -----------------------------------
J. Allen Berryman Controller March 24, 1999
(Principal Accounting Officer)
/s/ BEN BURDETSKY Director March 24, 1999
- -----------------------------------
Ben Burdetsky
/s/ COURTNEY F. JONES Director March 24, 1999
- -----------------------------------
Courtney F. Jones
/s/ ROBERT J. LEVENSON Director March 24, 1999
- -----------------------------------
Robert J. Levenson
/s/ JAMES D. ROBINSON III Director March 24, 1999
- -----------------------------------
James D. Robinson III
/s/ CHARLES T. RUSSELL Director March 24, 1999
- ----------------------
Charles T. Russell
/s/ BERNARD L. SCHWARTZ Director March 24, 1999
- -----------------------------------
Bernard L. Schwartz
/s/ JOAN E. SPERO Director March 24, 1999
- -----------------------------------
Joan E. Spero
/s/ GAREN K. STAGLIN Director March 24, 1999
- -----------------------------------
Garen K. Staglin
</TABLE>
36
<PAGE>
[This Page Intentionally Left Blank]
37
<PAGE>
FIRST DATA CORPORATION
INDEX TO FINANCIAL STATEMENTS
COVERED BY REPORT OF INDEPENDENT AUDITORS
(ITEM 14(A))
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
First Data Corporation and Subsidiaries:
Consolidated Financial Statements:
Report of Ernst & Young LLP Independent Auditors F-2
Consolidated Statements of Income for the Years ended December 31,
1998, 1997 and 1996..................................................... F-3
Consolidated Balance Sheets at December 31, 1998 and 1997............... F-4
Consolidated Statements of Cash Flows for the Years ended December 31,
1998, 1997 and 1996..................................................... F-5
Consolidated Statements of Stockholders' Equity for the Years ended
December 31, 1998, 1997 and 1996........................................ F-6
Notes to Consolidated Financial Statements.............................. F-7
Schedule:
Schedule II--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, 1998 and 1997 and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1998. 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, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998, 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
Atlanta, Georgia
January 28, 1999
F-2
<PAGE>
FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(In millions, except per share amounts)
<S> <C> <C> <C>
REVENUES
Service revenues
Product sales and other $ 4,993.9 $ 4,978.5 $ 4,757.4
123.7 256.0 180.7
----------------------------------------------------
5,117.6 5,234.5 4,938.1
EXPENSES ----------------------------------------------------
Operating
Selling, general and administrative 3,250.1 3,296.4 3,084.8
Provision for loss on contract 732.4 745.9 724.7
Restructuring, business divestitures 125.2 ---- ----
and impairment, net
Interest 193.9 369.3 (13.5)
104.1 116.5 110.3
----------------------------------------------------
4,405.7 4,528.1 3,906.3
Income before income taxes ----------------------------------------------------
Income taxes 711.9 706.4 1,031.8
246.2 349.7 395.3
Net income ----------------------------------------------------
$ 465.7 $ 356.7 $ 636.5
Earnings per share - basic ====================================================
Earnings per share - diluted $ 1.05 $ 0.81 $ 1.42
$ 1.04 $ 0.79 $ 1.37
====================================================
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
FIRST DATA CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 459.5 $ 410.5
Settlement assets 9,758.0 8,364.7
Accounts receivable, net of allowance for doubtful accounts of
$27.9 (1998) and $29.1 (1997) 940.1 984.2
Property and equipment, net 781.0 774.9
Goodwill, less accumulated amortization of $542.7 (1998) and $470.1 (1997) 2,885.4 3,101.6
Other intangibles, less accumulated amortization of
$548.5 (1998) and $420.7 (1997) 1,107.9 1,100.5
Other assets 655.1 578.8
------------------ -----------------
$16,587.0 $15,315.2
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Settlement obligations $ 9,617.0 $ 8,249.8
Accounts payable and other liabilities 1,642.4 1,657.4
Borrowings 1,571.7 1,750.7
------------------ -----------------
Total Liabilities 12,831.1 11,657.9
------------------ -----------------
Commitments and Contingencies
Stockholders' Equity:
Common Stock, $.01 par value; authorized 600.0 shares,
Issued 448.9 shares (1998) and 448.9 shares (1997) 4.5 4.5
Additional paid-in capital 2,143.2 2,132.9
------------------ -----------------
Paid-in capital 2,147.7 2,137.4
Retained earnings 1,893.9 1,509.9
Accumulated other comprehensive income 54.1 65.8
Less treasury stock at cost, 13.4 shares (1998)
and 2.0 shares (1997) (339.8) (55.8)
------------------ -----------------
Total Stockholders' Equity 3,755.9 3,657.3
------------------ -----------------
$16,587.0 $15,315.2
================== =================
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C>
Cash and cash equivalents at January 1 $ 410.6 $ 271.7 $ 231.0
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 465.7 356.7 636.5
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization 591.1 534.2 423.6
Noncash portion of provision for loss on contract, restructuring, loss (gain)
on business divestitures and impairment, net 303.0 332.9 (26.5)
Other noncash items 17.0 8.3 4.7
Increase (decrease) in cash, excluding the effects of acquisitions
and dispositions, resulting from changes in:
Accounts receivable (112.7) (111.2) (183.2)
Other assets 23.9 (109.4) (17.0)
Accounts payable and other liabilities (45.4) (5.2) 4.9
Income tax accounts 26.3 165.2 210.8
----------- ----------- -----------
Net cash provided by operating activities 1,268.9 1,171.5 1,053.8
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Current year acquisitions, net of cash acquired (94.2) (366.8) (495.5)
Payments related to other businesses previously acquired (107.7) (91.2) (69.7)
Proceeds from dispositions, net of expenses paid 198.0 505.7 211.9
Additions to property and equipment, net (325.9) (297.3) (392.6)
Payments to secure customer service contracts, including outlays
for conversion, and capitalized systems development costs (323.9) (319.6) (278.2)
Other investing activities (14.7) (35.0) ---
----------- ----------- -----------
Net cash used in investing activities (668.4) (604.2) (1,024.1)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-term borrowings, net (174.0) 140.4 (213.4)
Issuance of long-term debt 148.9 371.6 348.4
Principal payments on long-term debt (154.9) (37.0) (20.4)
Proceeds from issuance of common stock 83.6 149.0 177.5
Purchase of treasury shares (419.4) (1,017.0) (254.9)
Cash dividends (35.7) (35.5) (26.2)
----------- ----------- -----------
Net cash (used for) provided by financing activities (551.5) (428.5) 11.0
----------- ----------- -----------
Change in cash and cash equivalents 49.0 138.8 40.7
----------- ----------- -----------
Cash and cash equivalents at December 31 $ 459.5 $ 410.5 $ 271.7
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE RETAINED COMPREHENSIVE COMMON PAID-IN
(In millions) TOTAL INCOME EARNINGS INCOME SHARES CAPITAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 3,145.1 $1,146.5 $ 18.7 448.0 $2,025.5
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)
Stock issued for:
Acquisitions, including additional
consideration 20.1 0.9
Compensation and benefit plans 173.3 (139.7) 74.6
Convertible debentures 6.7 (3.5)
Other transactions and adjustments 4.5 6.2
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
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)
Stock issued for:
Acquisitions, including additional
consideration 10.2
Compensation and benefit plans 149.0 (79.3) 31.4
Convertible debentures 444.8 (308.2)
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
Comprehensive income
Net income 465.7 $ 465.7 465.7
Other comprehensive income:
Unrealized gains on securities 35.6 35.6
Foreign currency translation
Adjustment 1.0 1.0
Minimum pension liability
adjustment (48.3) (48.3)
-------------
Other comprehensive income (11.7) (11.7)
-------------
Comprehensive income $ 454.0
=============
Purchase of treasury shares (419.4)
Stock issued for:
Acquisitions, including additional
consideration 6.2 0.1
Compensation and benefit plans 91.8 (45.1) 7.6
Other transactions and adjustments 1.7 (1.0) 2.7
Cash dividends declared ($0.08 per share) (35.7) (35.7)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $ 3,755.9 $1,893.9 $ 54.1 448.9 $2,147.7
===================================================================================================================================
<CAPTION>
TREASURY STOCK
--------------
SHARES COST
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Balance, December 31, 1995 (1.4) $ (45.6)
Comprehensive income
Net Income
Other comprehensive income:
Unrealized losses on securities
Foreign currency translation
adjustment
Minimum pension liability
adjustment
Other comprehensive income
Comprehensive income
Purchase of treasury shares (6.7) (254.9)
Stock issued for:
Acquisitions, including additional
consideration 0.5 20.1
Compensation and benefit plans 6.5 238.4
Convertible debentures 0.2 10.2
Other transactions and adjustments (1.7)
Cash dividends declared ($0.065 per share)
- ---------------------------------------------------------------------------------------
Balance, December 31, 1996 (0.9) (33.5)
Comprehensive income
Net income
Other comprehensive income:
Unrealized gains on securities
Foreign currency translation
adjustment
Minimum pension liability
adjustment
Other comprehensive income
Comprehensive income
Purchase of treasury shares (27.0) (982.4)
Stock issued for:
Acquisitions, including additional
consideration 0.3 10.2
Compensation and benefit plans 5.2 196.9
Convertible debentures 20.4 753.0
Other transactions and adjustments
Cash dividends declared ($0.08 per share)
- ---------------------------------------------------------------------------------------
Balance, December 31, 1997 (2.0) (55.8)
Comprehensive income
Net income
Other comprehensive income:
Unrealized gains on securities
Foreign currency translation
Adjustment
Minimum pension liability
adjustment
Other comprehensive income
Comprehensive income
Purchase of treasury shares (15.4) (419.4)
Stock issued for:
Acquisitions, including additional
consideration 0.2 6.1
Compensation and benefit plans 3.8 129.3
Other transactions and adjustments
Cash dividends declared ($0.08 per share)
- ---------------------------------------------------------------------------------------
Balance, December 31, 1998 (13.4) $ (339.8)
=======================================================================================
</TABLE>
See notes to consolidated financial statement
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.
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.
The presentation of service revenues and product sales and other revenues
separates 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.
Business Description
FDC provides a variety of transaction processing services and money transfer and
payment services to financial institutions, commercial establishments and
consumers. The Company classifies its operations into three reportable segments:
payment instruments, card issuer services, and merchant processing services (see
Note 14).
FDC 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 for all periods presented
and a comparable portion of FDC's assets and earnings (prior to the charges
discussed in Note 2).
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, 1998 and 1997
include $92.3 and $85.3 million, respectively, 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.
F-7
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 6). 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 $266.7 million in 1998, $236.7 million in 1997
and $185.0 million in 1996.
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
$105.9 million in 1998, $109.7 million in 1997, and $110.6 million in 1996.
Other intangible assets consist primarily of contract costs (rights to provide
processing services to customers, acquired directly or through acquisitions) and
capitalized conversion costs (systems and programming and other related costs to
convert new client accounts to FDC processing systems). Other intangible assets
also include capitalized systems development costs (costs to create new
platforms for certain of the Company's information processing services) of
$102.0 million at December 31, 1998 and $135.4 million at December 31, 1997.
Other intangibles further include, to a lesser extent, databases, copyrights,
patents, software and noncompete agreements acquired in business combinations.
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 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 $218.5 million in 1998, $187.8 million in 1997, and
$128.0 million in 1996.
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 and transaction 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 $1.6 billion in 1998, $1.5 billion in 1997, and $2.1 billion in
1996).
Earnings 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 per common share amounts have been retroactively restated for this 100%
stock dividend.
F-8
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Earnings per common share amounts are computed by dividing net income amounts by
weighted-average common stock and common stock equivalent shares (when dilutive)
outstanding during the period. Amounts utilized in per share computations are
as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C>
Weighted-average shares outstanding:
Basic weighted-average shares 445.2 442.3 447.7
Stock options 3.1 5.3 7.3
Senior convertible debentures --- 19.3 20.6
----------------- ----------------------- ----------------------
448.3 466.9 475.6
Earnings add back related to senior
Convertible debentures --- $ 12.8 $ 14.2
</TABLE>
Diluted earnings per common share are 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 (1997 and
1996). 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.
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 12). 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.
Segment Information
Effective December 31, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). The new rules establish revised standards for
public companies relating to the reporting of financial and descriptive
information about their operating segments in financial statements. The adoption
of SFAS 131 did not have any effect on FDC's primary financial statements, but
did affect the disclosure of segment information contained elsewhere herein.
Pension Disclosures
FDC adopted Statement of Financial Accounting Standards No. 132, "Employer's
Disclosures about Pensions and Other Post-retirement Benefits" ("SFAS 132"),
effective December 31, 1998. The standard provides new guidelines for pension
disclosures (See Note 13) but does not address measurement or recognition. The
Company continues to account for pension plans in accordance with Statement of
Financial Accounting Standards No. 87, "Employer's Accounting for Pensions"
("SFAS 87"). The adoption of SFAS 132 has not affected the Company's results of
operations or financial position.
F-9
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: DIVESTITURES, RESTRUCTURING, IMPAIRMENT AND PROVISION FOR LOSS ON
CONTRACT
In each of the three years ended December 31, 1998, the company divested certain
businesses and incurred restructuring and impairment charges related both to its
ongoing operations and divestitures. In addition, during 1998 the Company
recorded a provision for an anticipated loss on an overseas processing contract.
A summary of these charges follows:
<TABLE>
<CAPTION>
Pretax Charge (Gain)
----------------------------------------------------------
Year Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(in millions)
(Gain) loss on business divestitures and
associated impairments $(60.1) $319.4 $(46.0)
Other impairments 71.9 ---- 10.2
Restructuring 35.7 49.9 22.3
Business closure 146.4 ---- ----
----------------------------------------------------------
Total pretax charge (gain) for divestitures,
Restructuring, and impairment $193.9 $369.3 $(13.5)
==========================================================
Provision for loss on contract $125.2
===================
</TABLE>
1998 Activities
Business Divestitures and Associated Impairments - In February 1998, the Company
sold NTS, its transportation services unit, and simultaneously acquired a gaming
services business from the company that acquired NTS. The acquisition price of
the gaming services business was equal to the fair market value of NTS's assets
plus approximately $50.5 million in cash. The disposition of NTS resulted in a
pretax gain of $28.5 million.
In June 1998, the Company completed the sale of First Image Management Company
("First Image") for $150.0 million in cash. In January 1998, the Company
announced its intention to sell First Image, and recorded a 1997 pretax
impairment charge of $106.7 million, reflecting the anticipated loss on the
disposition. The finalization of this transaction resulted in the reversal of
$9.8 million of the 1997 impairment charge.
In October 1998, the Company completed the sale of VIPS for $48 million in cash
and recorded a gain of $21.8 million.
Other Impairments - In the second quarter 1998, the Company determined that
approximately $38.5 million of platform development costs related to the HSBC
Holdings, plc ("HSBC") project (see "Provision for Loss on Contract" below) and
other potential non-U.S. clients would not be recoverable in the near to medium
term, and thus were written off. Recoverability became unlikely with the loss
of the HSBC contract profitability and the diminished prospects for previously
anticipated new non-U.S. clients. The Company had other impairment charges of
$33.4 million of which $23.4 million related to software in the card issuer
services segment and the remaining $10.0 million related to merchant processing
services and included assets that were impaired as a result of facility closures
and terminated conversion efforts. The card issuer services software was deemed
impaired due to a change in strategic direction by certain of the Company's
customers which resulted in $15.1 million of software not being recoverable in
the near to medium term. The remaining $8.3 million software impairment charge
related to the abandonment of certain development efforts where the commercial
viability of the planned product or service offering became doubtful.
Restructuring - The Company recorded restructuring charges of $35.7 million;
$19.0 million related to merchant processing services, $10.7 million related to
card issuer services and $6.0 related to corporate. The charges included a
provision of $20.0 million for severance related to 810 employees, a provision
of $9.7 million for facility closure and related costs and $6.0 million for
settlement of a legal matter associated with the
F-10
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
merger with FFMC. Through December 31, 1998 the Company had utilized $21.2
million of the accrual; $12.8 million for severance, $2.4 million for facility
closure and $6.0 million for the FFMC legal matter.
Business Shut Down - During the fourth quarter the Company recorded a $146.4
million charge to shut down Innovis, Inc. (formerly Consumer Credit Associates,
Inc.), the Company's consumer credit reporting business. All operations ceased
on December 31, 1998 except for limited activities to fulfill contractual
commitments. Shutdown activities, which include the anticipated selling of
tangible and intangible assets, are planned to be completed by March 31, 1999.
The charge includes writing off intangible assets of $133.1 million, fixed
assets of $3.8 million, severance of $5.7 million and other accrued exit costs
of $3.8 million. At December 31, 1998 the accrual remained at $9.5 million.
Provision for Loss on Contract - During the second quarter of 1998, the Company
amended its agreement with HSBC Holdings, plc ("HSBC") which revised the scope
of services to be provided to HSBC. As a result of this amendment and because
of difficulties in the development process in Hong Kong which resulted in delays
to the conversion date and, consequently, significant unanticipated costs, the
Company determined that total estimated costs under the amended contract would
exceed anticipated revenues. Accordingly, a provision of $125.2 million was
recorded in the second quarter for these estimated net losses. In September
1998, the Company announced the termination of its Hong Kong card processing
contract with HSBC. The loss contract provision will be fully utilized for
costs associated with the contract termination. Such costs include the write-
off of $72.5 million of intangible assets as of June 30, 1998, $14.5 million of
costs incurred from June 30, 1998 to contract termination date in fulfillment of
contractual obligations, $5.3 million of fixed asset write-offs, $8.9 million of
wind down costs and $24.0 million designated for an Australian card processing
contract. The $8.9 million of wind down costs include $5.9 million of salary
and facility costs during the wind down period and $3.0 million of other exit
type costs such as severance and lease exit costs. The termination of the HSBC
contract resulted in an Australian card processing contract becoming a loss
contract due to the Australian card processing contract now bearing the full
cost of operating the Asian processing platform rather than sharing such costs
with HSBC. The remaining HSBC provision covering the Australian loss contract,
severance, lease and other commitments totaled $19.1 million at year-end 1998.
1997 Activities
Business Divestitures and Associated Impairments - In February 1997, the Company
sold its GENEX health care administrative services subsidiary for cash proceeds
of $70 million which resulted in a pretax gain of $50.5 million. In July 1997,
the Company completed the divestiture of FIRST HEALTH Strategies and FIRST
HEALTH Services for cash proceeds of $200 million which generated a 1997 second
quarter pretax loss of $93.8 million. As a consequence of the Company's
decision to divest the 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. In December 1997, the Company sold
Nationwide Credit for cash proceeds of $155.2 million which generated a pretax
loss of $51.0 million. In addition, the Company recorded a $106.7 million
pretax impairment charge in conjunction with the planned 1998 divestiture of
First Image.
Restructuring - Restructuring costs of $49.9 million were recorded and included
severance accruals for approximately 2,100 employees of $30.0 million, facility
closure costs of $6.5 million and other exit costs of $13.4 million. Other exit
costs consisted primarily of indemnification relating to a previous sold product
line ($4.0 million), contract termination costs ($2.0 million) and obsolete
inventory costs ($2.1 million). The $49.9 million charge included $23.9 million
for card issuer services, $9.5 million for Corporate and other, $8.1 million for
merchant processing services, $5.4 million for divested businesses and $3.0
million for payment instruments. During 1997 and 1998 the Company utilized
$38.0 million and $8.6 million, respectively, of the accrual; $29.3 million for
severance, $5.9 million for facility closure and $11.4 for exit costs leaving an
accrual at December 31, 1998 of $3.3 million; $0.7 million for severance, $0.6
million for facility closure and $2.0 million for exit costs.
F-11
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1996 Activities
Business Divestitures and Associated Impairment - In December 1996, the Company
divested its MoneyGram operation through an initial public offering of 100% of
its stock for net cash proceeds of $199.5 million which generated a gain of
$46.0 million.
Other Impairments - The Company recorded impairment charges of $10.2 million
related to software and other assets. These charges included $6.5 million of
asset writeoffs related to merchant processing services, $2.5 million related to
corporate and other and the remainder related to divested businesses. The $6.5
million write-off in merchant processing services was due, in part, to the
restructuring activities outlined below which had the effect of altering the
plans for the future use of certain assets.
Restructuring - The Company recorded a $22.3 million restructuring charge
primarily related to integration activities associated with the October 1995
FFMC merger: $10.8 million for severance related to approximately 700 employees
and $11.5 million for other integration activities including facility closures
and related costs. The charge included $12.0 million for merchant processing
services, $4.4 million for card issuer services, $3.2 million for corporate and
other and $2.7 million for divested businesses. Usage of this accrual was $18.2
million in 1996, $3.4 million in 1997 and $0.7 million in 1998.
The following summarizes activity with respect to the Company's restructuring
activities for the years ended December 31:
<TABLE>
<CAPTION>
1998(A) 1997 1996
---------------------------------------------------------------------
<S> <C> <C> <C>
EXPENSE PROVISION:
Employee severance $20.0 $30.0 $10.8
Facility closure 9.7 6.5
Other exit costs 6.0 13.4 11.5
---------------------------------------------------------------------
35.7 49.9 22.3
CASH PAYMENTS AND OTHER CHARGES (B):
1998 21.2 8.6 0.7
1997 --- 38.0 3.4
1996 --- --- 18.2
---------------------------------------------------------------------
21.2 46.6 22.3
REMAINING ACCRUAL AT DECEMBER 31, 1998:
Employee severance 7.2 0.7 ---
Facility closure 7.3 0.6 ---
Other exit costs --- 2.0 ---
---------------------------------------------------------------------
$14.5 $ 3.3 $ ---
=====================================================================
</TABLE>
(a) Excludes Hong Kong and Innovis activities described above
(b) Other charges include changes in estimate which were insignificant
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
---------- --------- ---------- -------- ---------
(In millions)
<S> <C> <C> <C> <C> <C>
1998: (b)
First Data Financial Services January $115.5 $ 50.5 ---- ----
FPS Services February 12.0 12.0 ---- ----
US Benefits Services May 11.7 5.5 $ 6.2 0.2
Bank alliance programs 12.2 12.2 ---- ----
4 other acquisitions 18.7 16.4 ---- ----
-------- ---------- -------------------
$170.1 $ 96.6 $ 6.2 0.2
======== ========== ===================
1997:
Innovis (formerly Consumer Credit April $ 93.0 $ 90.2 -- --
Associates)
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 September $195.4 $188.9 -- --
Elecktra (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
======== ========= ==================
</TABLE>
(a) Other consideration, not separately listed in the table or described above,
consists of promissory notes and other amounts payable of $2.3 million in
1998, $4.1 million in 1997 and $95.9 million in 1996. In addition, total
consideration for First Data Financial Services includes $65.0 million
representing the fair market value of NTS's assets (see below).
(b) FPS Services is a full service mutual fund servicing organization providing
fund accounting to more than 30 small retirement plans. United States
Benefits Services, Inc. is a third-party daily and traditional retirement
plan administrator (providing recordkeeping and compliance services). In
conjunction with the sale of its NTS subsidiary, FDC simultaneously
purchased (from the company that acquired NTS) a gaming services business
(renamed First Data Financial Services or "FDFS") for $50.5 million (net of
cash acquired) plus the fair market value of the NTS net assets of $65.0
million. The assets of FDFS were contributed to a joint venture formed
among FDC, BA Merchant Services, Inc., and USA Processing ("BMCF") in July
1998 and the Company utilizes the equity method to account for its
investment in the venture. BMCF provides credit card, debit card and money
transfer services to gaming establishments and their customers.
F-13
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C>
Fair value of net assets acquired $170.1 $398.1 $603.7
Less acquisition notes and accounts payable (2.3) (4.1) (95.9)
Less value of common stock issued (6.2) (10.2) --
Less fair value of assets sold (65.0) -- --
Less cash acquired (2.4) (17.0) (12.3)
------------- ============= =============
Net cash paid for acquisitions $ 94.2 $366.8 $495.5
============= ============= =============
</TABLE>
The fair value of net assets acquired includes initial goodwill and other
intangible amounts aggregating $168.2 million in 1998, $371.0 million in 1997
and $560.0 million in 1996. In connection with the above noted acquisitions FDC
recorded exit liabilities of $6.3 million, $5.7 million and $9.9 million in
1998, 1997, and 1996, respectively. The exit liabilities related primarily to
facility shutdown, severance, unfavorable lease commitments, and legal costs. At
December 31, 1998 FDC had remaining acquisition reserves of $20.4 million. A
significant portion of the acquisition reserves consists of long-term related
costs and pre-acquisition contingent liabilities. FDC does not anticipate any
significant adjustment to the purchase price allocations.
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 $2.3 million in
1998, $2.7 million in 1997 and $26.6 million in 1996 (including 0.5 million
shares of common stock valued at $21.0 million). The maximum amount of remaining
contingent consideration is $99.8 million (payable through 2002).
F-14
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: SETTLEMENT ASSETS AND OBLIGATIONS
Settlement assets and obligations result from FDC information processing
services and associated settlement activities, including settlement of 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:
<TABLE>
<CAPTION>
December 31, 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
(In millions)
<S> <C> <C>
Settlement assets:
- -------------------
Cash and cash equivalents $3,253.9 $2,175.7
Investment securities 5,864.6 4,885.0
Due from card associations 322.5 650.6
Due from selling agents 317.0 653.4
============== ===============
$9,758.0 $8,364.7
============== ===============
Settlement obligations:
- -----------------------
Payment instruments outstanding $7,846.0 $6,416.5
Card settlements due to merchants 580.3 902.1
Due to selling agents 1,067.1 801.5
Other 123.6 129.7
-------------- ---------------
$9,617.0 $8,249.8
============== ===============
</TABLE>
Cash equivalents consist of short-term time deposits, reverse repurchase
agreements, commercial paper and other highly liquid investments. See Note 5 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 $6.6 billion in 1998, $5.3 billion in
1997 and $4.5 billion in 1996. Investment revenues (before commissions to
certain selling agents) from payment instrument portfolios totaled $340.5
million in 1998, $289.4 million in 1997 and $285.9 million in 1996 ($462.2
million, $386.8 million and $333.9 million, respectively, on a pretax equivalent
basis).
Prior to 1997, a portion of FDC 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 3% of FDC's total settlement assets at
December 31, 1998 compared with 4% at December 31, 1997. 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 5: 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, 1998
and 1997, these investment securities totaled $10.5 million and $93.8 million,
respectively, are classified as available-for-sale, and are recorded at fair
value in other assets in FDC's consolidated balance sheets. The Company also
maintains various other investments, primarily equity
F-15
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
securities, which are classified as available for sale and carried at fair
market value of $38.1 million at December 31, 1998.
Virtually all of FDC investment securities are debt securities, most of which
have maturities greater than one year. At December 31, 1998, 65% of these debt
securities mature within five years and 88% 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 Gain (Loss)
- -----------------------------------------------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C>
December 31, 1998:
State and municipal obligations $5,436.9 $5,294.1 $142.8
Adjustable rate mortgage-backed
Securities 288.3 290.9 (2.6)
Other 203.2 177.6 25.6
-------------- -------------- --------------
Totals $5,928.4 $5,762.6 $165.8
============== ============== ==============
December 31, 1997:
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
============== ============== ==============
</TABLE>
NOTE 6: 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 large 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 generally 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.
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. From time to time the Company purchases variable rate caps to partially
insulate its sales commission amounts from increases in these rates. At
F-16
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997 these agreements had effective notional amounts totaling $600
million. There were no such agreements outstanding at December 31, 1998. 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 $2.3 billion at
December 31, 1998, expire between 1999 and 2012 and require the Company to pay
based upon fixed rates of between 5.00% and 6.94% while the Company receives
payments principally based on three month variable rates. At December 31, 1997
the notional amount of these swaps was $1.1 billion with fixed rates of between
5.81% and 6.94%. 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 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, 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
(In millions)
Carrying Fair Carrying Fair
Value Value Value Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance sheet financial instruments:
- ------------------------------------
Long-term investment securities $5,789.0 $5,789.0 $4,885.0 $4,885.0
Long-term debt 1,129.4 1,164.0 1,134.4 1,150.6
Off-balance sheet financial instruments:
- ----------------------------------------
Variable rate hedging arrangements,
Principally rate swap and cap agreements --- $ (111.8) $ 6.3 $ (28.3)
</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.
NOTE 7: INCOME TAXES
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C>
Components of pretax income:
Domestic $690.1 $667.5 $ 999.0
Foreign 21.8 38.9 32.8
---------- ---------- ----------
$711.9 $706.4 $1,031.8
========== ========== ==========
Provision for income taxes:
Federal $194.1 $277.1 $ 325.5
State and local 43.3 57.5 61.4
Foreign 8.8 15.1 8.4
---------- ---------- ----------
$246.2 $349.7 $ 395.3
========== ========== ==========
</TABLE>
F-17
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's effective tax rates differ from statutory rates as follows :
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit 3.3 3.8 3.9
Nondeductible amortization of intangible assets 2.1 2.3 2.6
Interest earned on municipal investments (7.8) (5.8) (3.0)
Restructuring, business divestitures and impairment
Charges 2.2 13.7 -
Other (0.2) 0.5 (0.2)
---------- ---------- ----------
Effective tax rate 34.6% 49.5% 38.3%
========== ========== ==========
</TABLE>
FDC's income tax provisions consist of the following components:
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C>
Current $ 347.1 $190.1 $259.5
Deferred (100.9) 159.6 135.8
------- ------ ------
$ 246.2 $349.7 $395.3
======= ====== ======
</TABLE>
Income tax payments of $234.2 million in 1998, $144.0 million in 1997 and $77.6
million in 1996 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 1998 or 1997. 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.
<TABLE>
<CAPTION>
December 31, 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
(In millions)
<S> <C> <C>
Deferred tax assets related to:
Accrued expenses $ 191.3 $ 122.0
Pension obligations 49.3 27.3
Employee related liabilities 29.6 35.0
Deferred revenues 5.9 ---
--------- -------
276.1 184.3
--------- -------
Deferred tax liabilities related to:
Property, equipment and intangibles (282.1) (305.5)
Unrealized securities gain (58.0) (38.8)
Other (20.5) (27.4)
--------- -------
(360.6) (371.7)
--------- -------
Net deferred tax liabilities $ (84.5) $(187.4)
========== ========
</TABLE>
F-18
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: BORROWINGS
<TABLE>
<CAPTION>
December 31, 1998 1997
- --------------------------------------------------------------------------------
(In millions)
<S> <C> <C>
Short-Term Borrowings:
- ----------------------
Commercial paper $ 442.3 $ 616.3
Long-Term Debt:
- ---------------
Medium-Term Notes 670.8 724.1
6 3/4% Notes due 2005 199.0 196.0
6 5/8% Notes due 2003 199.6 199.4
4 7/8% Convertible Note due 2005 50.0 -
Other 10.0 14.9
-------------- --------------
$1,571.7 $1,750.7
============== ==============
</TABLE>
The Company's commercial paper borrowings at December 31, 1998 and 1997 had
weighted-average interest rates of 5.3% and 5.9%, respectively.
FDC maintains two revolving credit facilities ("the Facilities") providing up to
a maximum of $1.5 billion of short-term borrowings to support its commercial
paper program. The maximum amount of borrowings possible under the Facilities 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, 1998, the Company was in compliance with all of these covenants.
Pursuant to a 1998 agreement between FDC and VISA USA, $175.0 million of the
Facilities has been designated to be used solely for the purpose of meeting the
Company's VISA related bankcard settlement obligations, if necessary.
In 1998, the amount available under FDC's uncommitted bank credit lines was
increased from $175.0 million to $210.0 million. 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 $1.1 billion at December 31, 1998.
The Company has an effective shelf registration facility providing for the
issuance of debt and equity securities up to $1.0 billion in the aggregate (of
which $525 million remains available). During 1998, the Company issued a 10-year
$100 million Medium-Term Note at an interest rate of 5.80% under this facility.
In 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 2 to 5
years and interest rates between 6.19% and 6.82%. During 1998, $150 million of
these Medium-Term Notes matured. The outstanding Medium-Term Notes have interest
rates ranging from 5.80% to 6.82% and are due at various dates through 2008.
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.
In December 1998, in conjunction with the execution of a card issuer services
processing contract, the Company issued a 7-year $50 million convertible
debenture at an interest rate of 4.875%. Subject to customary covenants and
conditions, the note is not redeemable prior to maturity. The conversion feature
of the note becomes exercisable upon the achievement of certain contract
milestones, at a conversion price of $36.45 (approximately 1.37 million shares).
Aggregate annual maturities of long-term debt are $154.9 million in 1999, $127.9
million in 2000, $51.7 million in 2001, $0.1 million in 2002, $199.6 million in
2003 and $595.2 million in all periods thereafter. The Company paid interest
amounts totaling $107.2 million in 1998, $102.6 million in 1997 and $95.6
million in 1996.
F-19
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: SUPPLEMENTAL BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
December 31, 1998 1997
- -----------------------------------------------------------------------------------------------------
(In millions)
<S> <C> <C>
Property and equipment:
- -----------------------
Land $ 18.8 $ 18.9
Buildings 200.8 157.6
Leasehold improvements 143.2 135.3
Equipment and furniture 1,270.0 1,255.6
---------------- ----------------
1,632.8 1,567.4
Less accumulated depreciation
and amortization (851.8) (792.5)
---------------- ----------------
$ 781.0 $ 774.9
================ ================
Accounts payable and other liabilities:
- ---------------------------------------
Accounts payable and accrued expenses $ 607.9 $ 650.3
Compensation and benefit liabilities 162.6 159.4
Assumed Western Union pension obligations 122.5 70.7
Accrued costs of businesses acquired
(including deferred acquisition consideration) 52.9 92.5
Income taxes payable 291.9 190.4
Deferred income taxes 84.5 187.4
Other liabilities 320.1 306.7
---------------- ----------------
$1,642.4 $1,657.4
================ ================
</TABLE>
NOTE 10: 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 $138.8 million in 1998, $162.4 million in 1997,
and $169.2 million in 1996. Minimum aggregate rental commitments at December 31,
1998 under all noncancelable leases were $96.3 million in 1999, $85.0 million in
2000, $71.2 million in 2001, $38.7 million in 2002, $38.9 million in 2003, and
$111.5 million for all periods thereafter. Additionally, one of the Company's
businesses leases space which it concurrently subleases to its customers with
mirrored time periods. Future lease rental income exceeds lease payments, with
obligations at December 31, 1998 for remaining lease terms totaling $43.9
million.
In connection with the FDC 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. As of
December 31, 1998 approximately $93 million in goods and services remained to be
purchased under this agreement.
In November 1997, a putative class action against, among others, the Company's
Western Union Financial Services, Inc. subsidiary was filed in U.S. District
Court. The plaintiff claims that Western Union charges an undisclosed
"commission" when consumers transmit money to Mexico, in that the exchange rate
used in these transactions is less favorable than the exchange rate that Western
Union receives when it trades dollars in the international money market. The
plaintiff asserts that Western Union's failure to disclose this "commission" in
its advertising and in the transactions violates federal and state law.
Plaintiff also asserts that Western Union has discriminated against persons who
use Western Union to transmit money to Mexico, in that the difference between
the market exchange rate and the exchange rate used by Western Union in the
Mexico transactions is greater than the difference between the market and
Western Union exchange rates when transmitting funds to other countries. In
August 1998, the federal court issued an order granting Western Union's motion
to dismiss the claims. In September 1998, the plantiff filed a new putative
class action in California state court making the same basic factual allegations
as alleged in the original complaint. The plantiff seeks, among other things,
F-20
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
injunctive relief, imposition of a constructive trust, restitution, compensatory
and statutory damages alleged to be in excess of $500 million, statutory
penalties and punitive damages. Western Union has filed a demurrer to all of the
claims, and intends to continue to vigorously defend the action. In addition,
subsequent to the original action, four other class actions based on similar
factual allegations have been filed against the Company or its subsidiaries in
United States District Court, Texas state courts and California state court. The
Court granted the plaintiff's request for nonsuit in one of the Texas state
court actions on January 6, 1999. All of the remaining actions are being
vigorously defended by Western Union.
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 11: STOCKHOLDERS' EQUITY
Dividends
FDC continued paying cash dividends of $0.02 per share on a quarterly basis to
stockholders during 1998. 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):
<TABLE>
<CAPTION>
BEGINNING PRETAX TAX NET-OF-TAX ENDING
BALANCE AMOUNT (BENEFIT)/ AMOUNT BALANCE
EXPENSE
-------------- -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
December 31, 1998
Unrealized gains on securities $ 72.2 $ 54.8 $ 19.2 $ 35.6 $107.8
Currency translation adjustment (5.8) 1.5 0.5 1.0 (4.8)
Minimum pension liability (0.6) (74.3) (26.0) (48.3) (48.9)
-------------- -------------- -------------- --------------- --------------
65.8 (18.0) (6.3) (11.7) 54.1
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
============== ============== ============== =============== ==============
</TABLE>
Other Stockholders' Equity Transactions
In May 1998, 0.2 million shares of the Company's common stock were issued to the
shareholders of United States Benefits Service, Inc. ("USBS") in a merger
transaction pursuant to which FDC acquired 100% of the stock of USBS.
In September 1998, the Company announced that its Board of Directors had
authorized management to purchase up to $500 million of its outstanding common
stock. In December 1998, the Board increased the total authorization to $550
million. As of December 31, 1998, the Company had repurchased approximately 10
million shares under this program for approximately $257 million.
F-21
<PAGE>
FIRST DATE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
The Company has available an outstanding shelf registration facility providing
for the issuance of approximately 10 million shares of the Company's common
stock in connection with certain types of acquisitions.
NOTE 12: 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 69.6
million shares of common stock have been reserved for issuance under the plan,
and an additional 6.1 million shares are reserved for issuance in conjunction
with certain business combinations. A total of 21.0 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.
In December 1997, the Company instituted a restricted stock award program for
key technical systems and related employees. As of December 31, 1998, a total of
0.5 million restricted shares had been 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 dates, totaled $13.0
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
3.8 million shares remain available for future grant. Monies accumulated through
payroll deductions elected by eligible employees are used to make 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.
Stock options related to plans which were assumed in connection with the
Company's business combinations were converted to options to purchase shares of
FDC common stock (at prices ranging from $0.88 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.
F-22
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Risk-free interest rate - options 4.54% 6.23% 6.28%
Risk-free interest rate - employee stock purchase rights 4.54% 6.23% 5.04%
Dividend yield 0.27% 0.22% 0.22%
Volatility 24.0% 18.9% 16.9%
Expected option life 5 years 5 years 5 years
Expected employee stock purchase right life (in years) 0.25 0.25 0.25
Weighted-average fair value of options granted $ 8 $ 11 $ 11
Weighted-average fair value of employee stock purchase rights $ 6 $ 7 $ 7
</TABLE>
The Company's pro forma information, amortizing the fair value of the options
over their vesting period and including 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):
<TABLE>
<CAPTION>
(In millions, except per share amounts) 1998 1997 1996
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pro forma net income $417.6 $320.1 $618.2
Pro forma earnings per share - basic 0.94 0.72 1.38
Pro forma earnings per share - diluted 0.94 0.72 1.35
</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>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Options Weighted- Weighted- Weighted-
Average Average Average
Exercise Price Options Exercise Price Options Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1 31.2 $28 28.0 $25 29.4 $20
Granted 14.7 31 9.2 36 6.7 37
Exercised (2.7) 20 (4.0) 21 (6.5) 15
Canceled (6.1) 33 (2.0) 35 (1.6) 26
--------- --------- -----------
Outstanding at December 31 37.1 29 31.2 28 28.0 25
========= ========= ===========
Options exercisable at
Year-end 14.3 $23 14.0 $21 13.5 $18
</TABLE>
F-23
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 at Remaining Average Exercisable at Average
Prices 12/31/98 Contractual Life Exercise Price 12/31/98 Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.88 to $20.16 6.8 3 Years $15 6.6 $15
$20.38 to $31.84 15.7 8 Years 27 4.9 27
$32.69 to $63.46 14.6 8 Years 37 2.8 37
----------------- ------------------
37.1 7 Years 29 14.3 23
================= ==================
</TABLE>
NOTE 13: 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 $45.6 million in 1998, $39.3 million in 1997
and $29.1 million in 1996.
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.
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 other 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.
F-24
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATE FINANCIAL STATEMENTS (CONTINUED)
The following table provides a reconciliation of the changes in the plans'
benefit obligation and fair value of assets over the two-year period ending
December 31, 1998 and a statement of the funded status as of December 31 for
both years:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
--------------------------------------------------------------------------
(IN MILLIONS)
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at January 1 $ 852.4 $817.4
Service costs 8.0 10.8
Interest costs 56.4 59.6
Actuarial loss 60.1 42.2
Benefits paid (63.8) (64.7)
Other (0.3) (12.9)
--------- --------
Benefit obligation at December 31 912.8 852.4
CHANGE IN PLAN ASSETS
Fair value of plan assets at January 1 826.9 696.1
Actual return on plan assets 12.7 151.4
Company contributions 6.3 43.3
Plan participant contributions 0.4 0.2
Benefits paid (63.8) (64.7)
Other (0.8) 0.6
--------- --------
Fair value of plan assets at December 31 781.7 826.9
--------- --------
Funded status of the plan (131.1) (25.5)
Unrecognized amounts, principally net loss
(gain) 78.8 (38.8)
--------- --------
Total recognized $ (52.3) $(64.3)
========= ========
</TABLE>
The following table provides the amounts recognized in the statement of
financial position:
<TABLE>
<CAPTION>
December 31 1998 1997
- ------------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Prepaid benefit $ 4.0 $ 18.8
Accrued benefit liability (131.1) (83.7)
Accumulated other comprehensive income 74.8 0.6
---------------- ---------------
Net amount recognized $ (52.3) $(64.3)
================ ===============
</TABLE>
The benefit obligation, and fair value of plan assets for pension plans with
accumulated benefit obligations in excess of plan assets, were $721.1 million
and $585.4 million as of December 31, 1998 and $586.5 million and $532.9 million
as of December 31, 1997, respectively.
The following table provides the components of net periodic benefit cost for the
plans:
<TABLE>
<CAPTION>
Year-ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C>
Service costs $ 8.0 $ 10.8 $ 10.3
Interest cost 56.4 59.6 56.9
Expected return on plan assets (71.2) (64.5) (60.4)
Amortization 1.0 --- 2.7
------------------ ------------------- ------------------
Net periodic benefit cost (income) (5.8) 5.9 9.5
Curtailment gain -- (12.2) 0.1
------------------ ------------------- ------------------
Net periodic benefit cost (income) after curtailment $ (5.8) $ (6.3) $ 9.6
================== =================== ==================
</TABLE>
F-25
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The weighted average rate assumptions used in the measurement of the Company's
benefit obligation are shown as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------
<S> <C> <C>
Discount rate 6.27% 6.95%
Expected return on plan assets 8.76% 8.90%
Rate of compensation increase 4.00% 4.81%
</TABLE>
Pension plan assets include 8,300 and 22,200 shares of FDC stock as of December
31, 1998 and 1997 with fair market values of $264,562 and $649,350,
respectively.
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. Generally,
retiring Western Union employees bear the entire cost of the premiums and
Western Union's former owner was obligated by agreement through 1997 to pay FDC
for its administrative services in continuing these coverages.
NOTE 14: SEGMENT INFORMATION
Operating segments are defined by SFAS 131 as components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker, or decision making group, in deciding how to
allocate resources and in assessing performance. FDC's chief operating decision-
making group is the Executive Committee, which consists of the Chairman of the
Board and Chief Executive Officer, the President and Chief Operating Officer,
and the Executive Vice Presidents. The operating segments are reviewed
separately because each operating segment represents a strategic business unit
that generally offers different products and serves different markets.
First Data Corporation classifies its businesses into three fundamental
segments: payment instruments, card issuer services and merchant processing
services. Payment instruments is the leading provider of nonbank money transfer
and payment services to consumers and commercial entities, including money
transfer, official check and money order. Card issuer services provides a
comprehensive line of processing and related services to financial institutions
issuing credit and debit cards and to issuers of oil and private label credit
cards, including information-based products for enhanced decision making and
marketing. Merchant processing services provides merchant credit and debit card
transaction processing services, including authorization, transaction capture,
settlement and Internet-based transaction processing. Merchant services also
includes check verification and guarantee and check and other collection
services. The "All Other and Corporate" category includes a provider of back-
office processing services to the mutual fund industry, a leader in developing
in-store branch banking programs in supermarkets and other retail superstores,
an external provider of operator and customer support services and corporate
operations.
The accounting policies of the operating segments are generally the same as
those described in the summary of significant accounting policies. Corporate
overhead is allocated to the segments based on a percentage of the segment's
revenues. Gains or losses arising from business divestitures, restructuring and
loss contract provisions, asset impairment charges, interest expense, and income
taxes are not allocated to the segments in the computation of segment operating
profit for internal evaluation purposes. Revenues and operating profit of the
payment instruments segment are stated on a tax-equivalent basis (i.e., as if
investment earnings on settlement assets, which are substantially all
nontaxable, were fully taxable at FDC's marginal tax rate). Inter-segment sales
and transfers are not material to any reported segment. Revenues are attributed
to geographic areas based on the location of the unit processing the underlying
transactions. No individual foreign country accounted for more than 10% of
consolidated revenues in any period presented. SFAS 131 requires disclosure of
investments in and equity in earnings of unconsolidated affiliated companies;
however, such information, in isolation, is generally not considered by the
Executive Committee to be relevant in evaluating segment performance.
F-26
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 Card Merchant All Other
($ millions) Payment Issuer Processing and
Instruments Services Services Corporate Totals
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 1,696.6 $1,433.6 $1,394.2 $585.4 $ 5,109.8
Depreciation and amortization 94.8 249.4 188.4 45.7 578.3
Operating profit (as defined) 506.8 264.1 329.1 143.8 1,243.8
Segment Assets 10,875.3 1,813.1 3,153.8 724.6 16,566.8
Expenditures for long-lived assets 96.1 380.6 179.9 84.4 741.0
Equity in earnings of unconsolidated
Affiliates (22.5) 6.3 70.3 --- 54.3
Investment in unconsolidated affiliates 14.7 13.6 311.7 --- 340.3
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 Card Merchant All Other
Payment Issuer Processing and
Instruments Services Services Corporate Totals
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $1,406.1 $1,349.4 $1,392.6 $533.6 $ 4,681.7
Depreciation and amortization 87.9 199.5 154.0 42.3 483.7
Operating profit (as defined) 422.9 274.9 390.0 146.1 1,233.9
Segment Assets 9,095.9 1,953.9 3,174.1 679.6 14,903.5
Expenditures for long-lived assets 125.5 488.6 211.1 64.2 889.4
Equity in earnings of unconsolidated
Affiliates (0.4) 17.2 54.0 --- 70.8
Investment in unconsolidated affiliates 14.4 9.1 180.7 --- 204.2
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 Card Merchant All Other
Payment Issuer Processing and
Instruments Services Services Corporate Totals
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $1,144.7 $1,072.7 $1,218.6 $537.8 $ 3,973.8
Depreciation and amortization 78.2 144.0 112.7 38.5 373.4
Operating profit (as defined) 320.5 227.5 350.9 137.6 1,036.5
Segment Assets 7,744.9 1,568.7 3,375.9 577.0 13,266.5
Expenditures for long-lived assets 279.8 463.4 268.5 35.3 1,047.0
Equity in earnings of unconsolidated
Affiliates --- --- 21.9 --- 21.9
Investment in unconsolidated affiliates --- --- 75.5 --- 75.5
</TABLE>
F-27
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation of reportable segment amounts to the Company's consolidated
balances is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ----------------- ---------------------
<S> <C> <C> <C>
Revenues:
Total reported segments $ 4,524.4 $ 4,148.1 $ 3,436.0
All other and corporate 585.4 533.6 537.8
Divested 131.5 651.3 1,012.6
Eliminations* (123.7) (98.5) (48.3)
------------------- ----------------- ---------------------
Consolidated $ 5,117.6 $ 5,234.5 $ 4,938.1
=================== ================= =====================
Income before income taxes:
Total reported segments $ 1,100.0 $ 1,087.8 $ 898.9
All other and corporate 143.8 146.1 137.6
Corporate interest expense (104.1) (116.5) (110.3)
Divested 15.0 56.8 140.4
Restructuring, business
Divestitures , and impairment, net (319.1) (369.3) 13.5
Eliminations* (123.7) (98.5) (48.3)
------------------- ----------------- ---------------------
Consolidated $ 711.9 $ 706.4 $ 1,031.8
=================== ================= =====================
Assets:
Total reported segments $15,842.2 $14,223.9 $12,689.5
All other and corporate 724.6 679.6 577.0
Divested 20.2 411.7 1,073.6
------------------- ----------------- ---------------------
Consolidated $16,587.0 $15,315.2 $14,340.1
=================== ================= =====================
Depreciation and amortization:
Total reported segments $ 532.6 $ 441.4 $ 334.9
All other and corporate 45.7 42.3 38.5
Divested 12.8 50.5 50.2
------------------- ----------------- ---------------------
Consolidated $ 591.1 $ 534.2 $ 423.6
=================== ================= =====================
Expenditures for long-lived assets:
Total reported segments $ 656.6 $ 825.2 $ 1,011.7
All other and corporate 84.4 64.2 35.3
Divested 3.0 94.3 119.3
------------------- ----------------- ---------------------
Consolidated $ 744.0 $ 983.7 $ 1,166.3
=================== ================= =====================
</TABLE>
* Represents elimination of adjustment to record revenues (primarily payment
instruments) on a pretax equivalent basis.
F-28
<PAGE>
FIRST DATE CORPORTION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Information concerning principal geographic areas is as follows:
<TABLE>
<CAPTION>
United States Rest of World Total
-------------------- ---------------- --------------
<S> <C> <C> <C>
Revenues
1998 $4,850.2 $267.4 $5,117.6
1997 4,999.9 234.6 5,234.5
1996 4,734.0 204.1 4,938.1
Long-Lived Assets
1998 $4,419.3 $355.0 $4,774.3
1997 4,586.3 390.7 4,977.0
1996 4,904.0 346.6 5,250.6
</TABLE>
F-29
<PAGE>
NOTE 15: QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Summarized quarterly results for the two years ended December 31, 1998 are as
follows (in millions, except per share amounts):
<TABLE>
<CAPTION>
1998 By Quarter: First Second Third Fourth
------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Revenues $1,209.5 (a) $1,277.1 (a) $1,282.1 $1,348.9
Restructuring, business divestitures,
impairments and provision for loss on
contract, net (b) 0.4 163.7 --- 155.0
Other expenses 1,014.1 (a) 1,030.7 (a) 1,006.2 1,035.6
------------- -------------- -------------- -------------
Income before income taxes 195.0 82.7 275.9 158.3
Income tax expense 64.3 37.3 88.7 55.9
------------- -------------- -------------- -------------
Net income $ 130.7 $ 45.4 $ 187.2 $ 102.4
============= ============== ============== =============
Basic earnings per common share $ 0.29 $ 0.10 $ 0.42 $ 0.24
Diluted earnings per common share $ 0.29 $ 0.10 $ 0.42 $ 0.23
1997 By Quarter:
Revenues $1,243.3 $1,318.2 $1,293.3 $1,379.7
Restructuring, business
divestitures and impairment, net (c) (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 $ 0.30 $ (0.06) $ 0.44 $ 0.13
Diluted earnings (loss) per common share $ 0.29 $ (0.06) $ 0.42 $ 0.13
============= ============== ============== =============
</TABLE>
a) The assets of First Data Financial Services ("FDFS") were contributed to a
joint venture in July 1998. Revenues and expenses have been restated to
reflect this joint venture under the equity method of accounting
b) Results for 1998 include fourth quarter costs relating to the closure of
Innovis (formerly Consumer Credit Associates) and other restructuring
charges totaling $179.4 million; second quarter loss resulting from the
termination of a card processing agreement in the amount of $125.2 million
and a $38.5 million write-off of related capitalized platform development
costs; and $28.9 million of first quarter restructuring charges. These
charges were slightly offset by a first quarter $28.5 million gain on the
sale of NTS and a fourth quarter gain on the disposition of VIPS and the
resolution of matters from prior divestitures totaling $24.4 million. The
after-tax effect of these items was $231.5 million or $0.52 per share.
c) 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).
F-30
<PAGE>
FIRST DATA CORPORATION
SCHEDULE II - Valuation and Qualifying Accounts
(dollars in millions)
<TABLE>
<CAPTION>
ADDITIONS
-------------------------------------
CHARGED
BALANCE TO CHARGED
AT COSTS TO BALANCE AT
BEGINNING AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ---------------------------------- ------------------------------------------------------ --------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1998
Deducted from Receivables $29.1 $27.4 $0.8 (a) $29.4 (b) $27.9
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
</TABLE>
- ------------
(a) Primarily due to acquisitions
(b) Amounts related to business divestitures and write-offs against assets.
F-31
<PAGE>
FIRST DATA CORPORATION
1992 LONG-TERM INCENTIVE PLAN
PERFORMANCE GRANT AGREEMENT
(AWARD PERIOD BEGINNING JANUARY 1, 1999)
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, 1999.
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, 1999 and ending on December 31, 2000 (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
<PAGE>
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.
(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
<PAGE>
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.
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.
<PAGE>
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: Michael Whealy, 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
- ----------------- -----
*** ***
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
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
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
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 A
(TO CHIEF OPERATING OFFICER AGREEMENT)
UNIT VALUE
ANNUAL GROWTH IN TARGET UNIT
SHAREHOLDER VALUE VALUE
- ----------------- -----
*** ***
Threshold
Rate
Exceeds Comparator Company at 50% level $ 500,000
Exceeds Comparator Company at 55% level 800,000
Exceeds Comparator Company at 60% level 1,100,000
Exceeds Comparator Company at 65% level 1,400,000
Exceeds Comparator Company at 70% level 1,700,000
Exceeds Comparator Company at 75% level (Maximum) 2,000,000
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 12
FIRST DATA CORPORATION
COMPUTATION OF
RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
----------------------------------------------------------------------
EARNINGS
<S> <C> <C> <C>
Income before income taxes $711.9 (1) $706.4 (2) $1,031.8 (3)
Interest expense 104.1 116.5 110.3
Other adjustments 47.5 55.5 56.5
------------- ------------- -------------
Total earnings (a) $863.5 $878.4 $1,198.6
============= ============= =============
FIXED CHARGES:
Interest expense 104.1 116.5 $ 110.3
Other adjustments 47.5 55.5 56.5
------------- ------------- -------------
Total fixed charges (b) $151.6 $172.0 $ 166.8
============= ============= =============
RATIO OF EARNINGS TO FIXED
CHARGES (a/b) 5.70 5.11 7.19
</TABLE>
(1) Includes loss contract, restructuring, net loss on business divestitures
and impairment charges of $319.1 million ($231.5 million after tax). The
pro-forma ratio of earnings to fixed charges without these charges would
have been 7.80.
(2) Includes restructuring, net loss on business divestitures and impairment
charges of $369.3 million ($333.9 million after tax). The pro-forma ratio
of earnings to fixed charges without these charges would have been 7.25.
(3) Includes merger, integration and impairment charge of $32.5 million and
$46.0 million gain on the MoneyGram disposition together totaling $13.5
million gain ($8.3 million after tax). The pro-forma ratio of earnings to
fixed charges without these charges would have been 7.10.
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 DECEMBER 31, 1998)
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY JURISDICTION OF INCORPORATION
- ------------------ -----------------------------
<S> <C>
3418677 Canada Inc. Canada
440 Insurance Agency Connecticut
440 Insurance Agency of Massachusetts, Inc. Massachusetts
Actuarial Computer Technology, Inc. Delaware
American Rapid Corporation Delaware
Applied Mailing Systems, Inc. Massachusetts
Atlantic Bankcard Properties Corporation North Carolina
Atlantic States Bankcard Association, Inc. Delaware
BancOne Payment Services, L.L.C.* Delaware
BankBoston Merchant Services, L.L.C.* Delaware
Bankcard Investigative Group Inc. Delaware
Basin Industrial Bank Colorado
BMCF Gaming, L.L.C.* Delaware
Business Office Services, Inc. Delaware
Call Interactive Delaware General Partnership
Cardnet Merchant Services Ltd.* United Kingdom
Cardservice International, Inc.* California
CashTax Inc. Delaware
CESI Holdings, Inc. Delaware
Chase Merchant Services, L.L.C.* Delaware
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
FDC International Inc. Delaware
FDMS/UMS Partner, 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 United Kingdom
FDWYCO, Inc. Delaware
First Data Asia Pacific Limited Hong Kong
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 Canada, Inc. Ontario
First Data Financial Services, L.L.C. Delaware
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, L.L.C. Delaware
</TABLE>
<PAGE>
<TABLE>
<S> <C>
First Data Latin America Inc. Delaware
First Data Merchant Services Corporation Florida
First Data Pittsburgh Alliance Partner Inc. Delaware
First Data POS, Inc. Georgia
First Data 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 United Kingdom
First Data Services Inc. Maryland
First Data Solutions Inc. Delaware
First Data Technologies, Inc. Delaware
First Data Tennessee Inc. Delaware
First Financial Bank Georgia
First Financial Management Corporation Georgia
First Security Merchant Services L.L.C.* Delaware
GAMMA Micro-Systemes LTEE Quebec
Global Sourcing Services L.L.C.* Delaware
Grupo Dinamico Empresarial S.A. de C.V. Mexico
Hogan Information Services Co. Delaware
Hogan Resources L.L.C. Oklahoma
Huntington Merchant Services, L.L.C.* Delaware
Innovis Data Solutions, Inc. Missouri
Integrated Payment Systems Canada Inc. Canada
Integrated Payment Systems Inc. Delaware
International Banking Technologies, Inc. Georgia
IPS Card Solutions, Inc. Maryland
IPS Holdings Inc. Delaware
MSFDC, L.L.C.* Delaware
NA Insurance Services, Inc. California
Negocios Informaticos, S.A.* Spain
Orlandi de Mexico S.A. de C.V. Mexico
Orlandi Valuta California
Orlandi Valuta Nacional Nevada
Pension Marketing Inc. Delaware
Phoenix Collections Alliance, L.L.C.* Delaware
PNC Bank Merchant Services Company* Delaware General Partnership
Research Park Association, Inc. Florida not-for-profit
Servicio Internacional de Envios, S.A. de C.V. Mexico
Servicio Mexicano de Apoyo, S.C. Mexico
Shared Global Systems, Inc. Texas
Signet United Kingdom
Signet Network Services Limited United Kingdom
Signet Processing, Ltd. United Kingdom
SkyTeller, L.L.C.* Delaware
Southern TeleCheck, Inc. Louisiana
Technology Solutions International, Inc. Georgia
TeleCheck Holdings, Inc. Georgia
TeleCheck International, Inc. Georgia
TeleCheck Payment Systems Limited New Zealand
TeleCheck Pittsburgh/West Virginia, Inc. Pennsylvania
TeleCheck Services Canada, Inc. Canada
TeleCheck Services Ontario Limited Canada
TeleCheck Recovery Services, Inc. Colorado
</TABLE>
<PAGE>
<TABLE>
<S> <C>
TeleCheck Services, Inc. Delaware
TeleCheck Services of Puerto Rico, Inc. Georgia
The Basin Finance Company Colorado
The Joint Credit Card Company Limited United Kingdom
The Shareholder Services Group (Bermuda) Limited Bermuda
TransPoint, L.L.C.* Delaware
Unified Merchant Services Georgia General Partnership
Union del Oeste de Costa Rica S.A. Costa Rica
United States Pension Services, Inc. Delaware
Wachovia Merchant Services, L.L.C.* Delaware
Wells Fargo Merchant Services, L.L.C.* Delaware
Western Union Communications, Inc. Delaware
Western Union Financial Services (Australia) Pty. Ltd. Australia
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 Holdings, Inc. Georgia
Western Union MT East* Russian Federation
Western Union S.A. Argentina
</TABLE>
* 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. 33-47234, No. 33-48578, No. 33-82826, No. 33-87338, No. 33-90992,
No. 33-62921, No. 33-98724, No. 33-99882, No. 333-9017, No. 333-9031, No. 333-
28857 and No. 333-68689, Forms S-3 No. 333-4012 and 333-24667, and Form S-4 No.
333-15497) of First Data Corporation of our report dated January 28, 1999, with
respect to the consolidated financial statements and schedule included in this
Annual Report (Form 10-K) for the year ended December 31, 1998.
Ernst & Young LLP
Atlanta, Georgia
March 24, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 460
<SECURITIES> 0
<RECEIVABLES> 940
<ALLOWANCES> 28
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 781
<DEPRECIATION> 0
<TOTAL-ASSETS> 16,587
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 5
<OTHER-SE> 3,751
<TOTAL-LIABILITY-AND-EQUITY> 16,587
<SALES> 0
<TOTAL-REVENUES> 5,117
<CGS> 0
<TOTAL-COSTS> 4,406
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 125
<INTEREST-EXPENSE> 104
<INCOME-PRETAX> 712
<INCOME-TAX> 246
<INCOME-CONTINUING> 466
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 466
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 1.04
<FN>
<F1>(a) Unclassified balance sheet
</FN>
</TABLE>
