<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2000
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission file number 1-11073
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FIRST DATA CORPORATION
- -------------------------------------------------------------------------------
(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, GA 30328-5800
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (770) 857-0001
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
------ ------
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Number of Shares
Title of each class Outstanding at May 3, 2000
------------------------------ --------------------------
(Common stock, $.01 par value) 412,269,663
1
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FIRST DATA CORPORATION
INDEX
-----
PAGE
PART I FINANCIAL INFORMATION NUMBER
------
Item 1. Financial Statements:
Consolidated Statements of Income for the three
months ended March 31, 2000 and 1999................. 3
Consolidated Balance Sheets at March 31, 2000 and
December 31, 1999.................................... 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 2000 and 1999................. 5
Notes to Consolidated Financial Statements........... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.......................................... 17
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..................... 19
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts)
(Unaudited)
Three months ended March 31,
----------------------------
2000 1999
-------- --------
REVENUES
Service revenues $1,290.7 $1,251.4
Product sales and other 27.1 18.2
-------- --------
1,317.8 1,269.6
-------- --------
EXPENSES
Operating 848.5 846.5
Selling, general & administrative 209.8 197.4
Restructuring and business divestitures, net 9.5 ---
Interest 20.4 24.2
-------- --------
1,088.2 1,068.1
-------- --------
Income before income taxes 229.6 201.5
Income taxes 64.6 60.5
-------- --------
Net income $ 165.0 $ 141.0
======== ========
Earnings per share - basic $ 0.40 $ 0.32
Earnings per share - diluted $ 0.39 $ 0.32
======== ========
Weighted average shares outstanding:
Basic 416.6 434.4
Diluted 423.4 441.1
See notes to consolidated financial statements.
3
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FIRST DATA CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
March 31, December 31,
2000 1999
--------- -----------
ASSETS
Cash and cash equivalents $ 403.0 $ 1,044.0
Settlement assets 8,855.9 9,585.6
Accounts receivable, net of allowance for doubtful
accounts of $29.3 (2000) and $31.3 (1999) 760.6 908.5
Property and equipment, net 694.2 710.6
Goodwill, less accumulated amortization of $578.6
(2000) and $560.1 (1999) 2,444.5 2,480.2
Other intangibles, less accumulated amortization of
$672.8 (2000) and $664.9 (1999) 954.1 1,002.3
Investment in affiliates 931.1 891.3
Other assets 341.7 382.3
--------- ---------
$15,385.1 $17,004.8
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Settlement obligations $ 8,958.2 $ 9,694.6
Accounts payable and other liabilities 1,463.6 1,824.4
Borrowings 1,171.8 1,578.1
--------- ---------
Total Liabilities 11,593.6 13,097.1
--------- ---------
Commitments and contingencies
Stockholders' Equity:
Common Stock, $.01 par value; authorized 600.0
shares, issued 448.9 shares (2000 and 1999) 4.5 4.5
Additional paid-in capital 2,198.3 2,180.7
--------- ---------
Paid-in capital 2,202.8 2,185.2
Retained earnings 3,079.4 2,964.1
Accumulated other comprehensive income (99.8) (87.7)
Less treasury stock at cost, 36.2 shares
(2000) and 31.0 shares (1999) (1,390.9) (1,153.9)
--------- ---------
Total Stockholders' Equity 3,791.5 3,907.7
--------- ---------
$15,385.1 $17,004.8
========= =========
See notes to consolidated financial statements.
4
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FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------
<S> <C> <C>
2000 1999
-------- -------
Cash and cash equivalents at beginning of period $1,044.0 $ 459.5
-------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 165.0 141.0
Adjustments to reconcile to net cash provided by operating
activities:
Depreciation and amortization 147.1 144.9
Non-operating and non-cash portion of restructuring and
business divestitures, net 9.5 ---
Other noncash items, net (27.9) 6.5
Increase (decrease) in cash, excluding the effects of
acquisitions and dispositions, resulting from changes in:
Accounts receivable 189.4 85.1
Other assets 34.7 (72.9)
Accounts payable and other liabilities (128.1) 38.5
Income tax accounts (273.2) (1.0)
-------- -------
Net cash provided by operating activities 116.5 342.1
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Current year acquisitions, net of cash acquired (10.2) (4.2)
Payments related to other businesses previously acquired (29.6) (30.6)
Proceeds from dispositions, net of expenses paid 30.5 ---
Additions to property and equipment, net (44.5) (39.5)
Payments to secure customer service contracts, including
outlays for conversion, and capitalized systems
development costs (31.2) (58.7)
Other investing activities 21.7 (7.8)
-------- -------
Net cash used in investing activities (63.3) (140.8)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-term borrowings, net (408.2) (163.6)
Borrowings on long-term debt --- 98.9
Proceeds from issuance of common stock 75.2 52.9
Purchase of treasury shares (352.8) (170.9)
Cash dividends (8.4) (8.8)
-------- -------
Net cash used for financing activities (694.2) (191.5)
-------- -------
Change in cash and cash equivalents (641.0) 9.8
-------- -------
Cash and cash equivalents at end of period $ 403.0 $ 469.3
======== =======
</TABLE>
See notes to consolidated financial statements.
5
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FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying consolidated financial statements of First Data Corporation
("FDC" or the "Company") should be read in conjunction with the Company's
consolidated financial statements for the year ended December 31, 1999.
Significant accounting policies disclosed therein have not changed.
The accompanying consolidated financial statements are unaudited; however, in
the opinion of management, they include all normal recurring adjustments
necessary for a fair presentation of the consolidated financial position of
the Company at March 31, 2000 and the consolidated results of its operations
and cash flows for the three months ended March 31, 2000 and 1999. Results of
operations reported for interim periods are not necessarily indicative of
results for the entire year.
FDC recognizes revenues from its information processing services as such
services are performed, recording revenues net of certain costs not
controlled by the Company (primarily interchange fees and assessments charged
by credit card associations of $343.2 million and $391.3 million for the
three months ended March 31, 2000 and 1999, respectively).
2. In January 2000, the Company completed the sale of its Hogan Information
Services business unit to Dolan Media Company for cash proceeds of $30.5
million. As a result of this transaction, a pre-tax gain of $3.2 million was
recognized in the first quarter of 2000.
In February 2000, FDC and its partners signed a definitive agreement to sell
their interests in Transpoint, LLC to Checkfree Holdings Corporation
("Checkfree"). FDC will receive consideration of 6.6 million shares of
Checkfree stock and is expected to recognize a gain upon consummation of the
transaction. Additionally, First Data will provide at least $60 million in
revenue and/or cost savings to CheckFree. Immediately prior to closing the
transaction, the Company will contribute approximately $43 million to
TransPoint, which will be transferred to CheckFree at closing. The merger is
expected to occur in the second or third quarter.
3. During the three months ended March 31, 2000, the Company recorded
restructuring charges of $12.7 million; $1.1 million related to payment
instruments, $9.0 million related to card issuer services, $0.3 million
related to merchant processing services and $2.3 million related to all other
and corporate. All charges represent severance accruals for approximately
700 employees resulting from the downsizing and relocation of various
departments. Savings realized through the remainder of the year from this
reorganization are expected to approximate the amount of the restructuring
charge.
6
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FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table summarizes the Company's utilization of restructuring
accruals for the three months ended March 31, 2000 (in millions):
Employee Facility
Severance Closure
--------- --------
Remaining Accrual at December 31, 1999 $ 1.0 $3.9
Current Period Expense Provision 12.7 ---
Cash Payments and Other (a) (2.9) .1
----- ----
Remaining Accrual at March 31, 2000 $10.8 $4.0
===== ====
(a) Other includes net sub-lease income on facilities which will fund a
lease buyout.
4. Operating results include the Company's proportionate share of income from
affiliates, which consist of unconsolidated investments and joint ventures
accounted for under the equity method of accounting. The most significant of
these affiliates are related to the Company's merchant alliance program.
A merchant bank alliance is a joint venture between FDC and a financial
institution that combines the expertise of the Company with the visibility
and distribution of the bank. The joint ventures sell processing services to
merchants. At March 31, 2000, there were eight such joint ventures accounted
for under the equity method of accounting.
A summary of financial information for the merchant alliances and other
affiliates accounted for under the equity method of accounting is as follows
(in millions):
March 31, 2000 December 31, 1999
-------------- -----------------
Total Assets $2,723.9 $2,475.3
Total Liabilities 1,730.5 1,599.2
Three months ended March 31,
-------------------------------------
2000 1999
---------- ------------
Net Operating Revenues $ 344.3 $ 354.7
Operating Expenses 254.2 315.5
Operating Income 89.7 38.8
Net Income 86.6 37.3
FDC Share of Net Income 47.2 16.6
Amounts presented herein do not include amortization of $15.1 million and
$5.6 million for the three months ended March 31, 2000 and 1999,
respectively, related to the excess of FDC's investment over its
proportionate interest in the net assets of the joint venture. This
difference, which amounted to $688.4 and $635.0 million at March 31, 2000
and December 31, 1999, respectively, is amortized over the estimated useful
lives of the underlying intangible assets.
5. The Company's commercial paper borrowings at March 31, 2000 were $100
million. The Company's commercial paper program is supported by a $1 billion
revolving credit facility. Pursuant to a 1998 agreement, $175 million of the
facility has been designated to be used solely for the purpose of meeting
7
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FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
certain of the Company's settlement obligations, if necessary. At March 31,
2000, the Company also had $525 million available under shelf registrations
providing for the issuance of debt and equity securities and $200 million
available under its uncommitted bank lines.
6. Earnings per common share amounts are computed by dividing net income
amounts by weighted average common and common equivalent shares (when
dilutive) outstanding during the period.
Amounts utilized in per share computations are as follows (in millions):
Three months ended March 31,
----------------------------
2000 1999
----- -----
Weighted average shares outstanding:
Basic weighted average shares 416.6 434.4
Stock options 6.5 6.5
Restricted stock awards 0.3 0.2
----- -----
423.4 441.1
===== =====
Diluted earnings per common share was calculated based on weighted-average
shares outstanding including the dilutive impact of common stock equivalents
which consist of outstanding stock options and restricted stock awards.
7. The components of comprehensive income are as follows (in millions):
Three months ended March 31,
----------------------------
2000 1999
------ ------
Net income $165.0 $141.0
Foreign exchange effect (9.6) (11.5)
Unrealized loss on securities (2.5) (9.7)
------ ------
Total comprehensive income $152.9 $119.8
====== ======
8. First Data Corporation classifies its businesses into three principal
segments: payment instruments, card issuer services and merchant processing
services. See the Company's 1999 Annual Report on Form 10-K for a detailed
description of each segment and the accounting policies of the operating
segments.
As stated in the Company's 1999 Annual Report on Form 10-K, the Company sold
its Donnelley Marketing and Investor Services Group business units in 1999.
To appropriately reflect those divestitures, segment information has been
restated to represent the move of Donnelley Marketing and Investor Services
Group to "divested or to be divested" from the "card issuer services" and
"all other and corporate" segment, respectively. Additionally, other small
business units were moved to "all other and corporate" from the "card issuer
services" segment to reflect the current management reporting relationships.
8
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FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table presents the Company's operating segment results for the
three months ended March 31, 2000 and 1999 (in millions):
<TABLE>
<CAPTION>
Three months ended March 31,
------------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenues:
- ---------
Payment Instruments $ 550.0 $ 459.0
Card Issuer Services 356.1 307.6
Merchant Processing Services 371.2 345.6
All Other and Corporate 77.9 77.7
-------- --------
Subtotal 1,355.2 1,189.9
Divested or To Be Divested --- 115.7
Eliminations (a) (37.4) (36.0)
-------- --------
Consolidated $1,317.8 $1,269.6
======== ========
Operating Profit:
- -----------------
Payment Instruments $ 139.9 $ 116.6
Card Issuer Services 62.9 51.8
Merchant Processing Services 87.4 69.5
All Other and Corporate 6.7 10.7
-------- --------
Subtotal 296.9 248.6
Divested or To Be Divested --- 13.1
Corporate Interest Expense (20.4) (24.2)
Restructuring and Business
Divestitures, net (9.5) ---
Eliminations (a) (37.4) (36.0)
-------- --------
Consolidated $ 229.6 $ 201.5
======== ========
Depreciation & Amortization:
- ----------------------------
Payment Instruments $ 31.0 $ 25.0
Card Issuer Services 55.8 54.5
Merchant Processing Services 56.2 48.1
All Other and Corporate 4.1 4.6
-------- --------
Subtotal 147.1 132.2
Divested or To Be Divested --- 12.7
-------- --------
Consolidated $ 147.1 $ 144.9
======== ========
</TABLE>
(a) Represents elimination of adjustment to record payment instruments revenues
on a pre-tax equivalent basis.
9
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FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
March 31, 2000 December 31, 1999
-------------- -----------------
Segment Assets (in millions):
Payment Instruments $10,472.1 $11,096.1
Card Issuer Services 1,516.5 1,554.1
Merchant Processing Services 3,128.2 3,379.4
All Other and Corporate 268.3 975.1
--------- ---------
Subtotal 15,385.1 17,004.7
Divested or To Be Divested --- 0.1
--------- ---------
Consolidated $15,385.1 $17,004.8
========= =========
9. 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. SFAS 137 "Accounting for Derivative Instruments
and Hedging Activities Deferral of the Effective Date of FASB Statement No.
133 an Amendment of FASB Statement No. 133" was issued in June 1999, which
delayed the effective date of SFAS 133 to fiscal years beginning after June
15, 2000. 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.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
(SAB 101), which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the commission. The
Company is in the process of reviewing its revenue recognition policies and
will adopt the provisions of SAB 101 in the second quarter 2000 effective
January 1, 2000; however, the Company does not expect the SAB 101 guidance
to have a material impact on its revenue recognition practices.
10. In 1998, a putative class action was filed against, among others, the
Company's Western Union Financial Services, Inc. subsidiary in a California
state 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 violates the law in
failing to disclose this "commission" in its advertising and in the
transactions. The 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, among other
things, injunctive relief, imposition of a constructive trust, restitution,
compensatory and statutory damages, statutory penalties and punitive
damages. In addition, four other class actions based on similar factual
allegations were pending in United States District Courts and a Texas state
court on December 31, 1999, against, among others, subsidiaries of the
Company.
The parties to some of these actions reached a proposed settlement that the
Company believes would also extinguish the claims made in the other actions.
Under the proposed settlement, the Company will establish a charitable fund
for the advancement of Mexican and Mexican-American causes in the amount of
$4 million. Western Union also will issue coupons for discounts on future
money transfer transactions to Mexico to its customers who transferred money
from the U.S. to Mexico between January 1, 1987 and August 31, 1999. In
addition, the Company will issue coupons for discounts on future Western
Union transactions to customers who transferred money to Mexico from January
1, 1988 to December 10, 1996 using the MoneyGram service because the
MoneyGram service was previously operated by a subsidiary of the Company.
The proposed settlement also included reasonable attorneys' fees, expenses
and costs.
On May 12, 1999, the United States District Court for the Northern District
of Illinois issued a Preliminary Settlement Order in two of the actions,
inter alia, preliminarily approving the proposed settlement. The
10
<PAGE>
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Court also barred and enjoined the continued prosecution of the other
actions. Further, the Court barred the commencement of any new actions in
any state or federal court that assert any claims that would be released and
discharged upon final approval of the settlement. The Court has conducted a
Fairness Hearing to determine the fairness, reasonableness, and adequacy of
the proposed settlement and the parties await the court's ruling.
A subsequent putative class action which makes allegations similar to the
allegations described above was filed in a California state court in January
2000 against the Company and its subsidiaries, Western Union Financial
Services, Inc. and Orlandi Valuta. The putative class consists of those
persons who have used Western Union or Orlandi Valuta's services after
August 31, 1999 to transmit money from California to Mexico, or who have
used the Western Union money transfer service to transmit money from
California to Mexico and have opted out of the pending nationwide settlement
discussed above. The Company is formulating its response in this matter.
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.
11
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FIRST DATA CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
Significant Developments
During the first three months of 2000, First Data Corporation ("FDC" or the
"Company") continued to emphasize its three principal business segments: payment
instruments, card issuer services and merchant processing services. The Company
has continued this emphasis to further its overarching strategic objective: to
process every electronic transaction worldwide from the point of occurrence to
the point of settlement. FDC is keenly focused on improving execution of
strategic plans, enhancing sales and marketing activities, identifying
operational efficiencies and building on the fundamental strengths of its
business.
FDC continues to make strategic investments and develop partnerships with
emerging Internet companies that the Company believes will drive electronic
payments to FDC. In January 2000, FDC announced it had taken a 16% equity
position and entered into a strategic marketing agreement with Yclip.com, a
developer of advertising technology for the Internet. Also in January 2000, the
Company made an investment in Meetchina.com, a business-to-business e-commerce
portal. In March 2000, FDC announced it had taken an equity position and formed
a marketing agreement with Coolsavings.com, a provider of online coupons and
loyalty programs to registered members.
In the payment instruments segment, growth continues to be fueled by increases
in international money transfers (a transfer either sent to or received from an
international location). International money transfer revenue increased 48% over
1999's first quarter to $170.9 million for the first quarter of 2000, while
transaction growth for first quarter 2000 was 57% over last year's first
quarter. Overall, first quarter 2000 money transfer revenue grew 20% over last
year's first quarter, while money transfer transaction growth for the first
quarter of 2000 was 19% when compared to last year's first quarter.
Development efforts continued on new products and services, including the
upcoming launch of the new Western Union.com and a Person-to-Person Internet
payment service.
Card issuer services volume trends remained positive in the first three months
of 2000 with total accounts on file growing to over 256 million -- up 20% from
March 31, 1999. This growth was fueled by the conversion of a record number of
accounts in the third quarter of 1999 (approximately 38 million accounts)
including the First Chicago bankcard portfolio now owned by BankOne, the First
Consumers retail card portfolio (including the Spiegel and Eddie Bauer brands)
and First Union. Card issuer services continues to establish its role as the
leader in the electronic funds industry. In March 2000, FDC announced it had
become the first in the industry to be registered to personalize all VISA
financial chip card products.
With respect to the Company's U.K. card processing business ("FDRL"), the Royal
Bank of Scotland ("RBS") informed FDRL of its intention to enter into exclusive
negotiations with a third party to provide card issuer processing services for
RBS and NatWest. FDRL's existing processing agreements with RBS and NatWest
expire at the end of July 2001. The Company does not expect this development to
have any impact to earnings in 2000.
The merchant processing segment experienced revenue growth in the first quarter
of 2000 (7%) compared to the same period in 1999. This growth in revenue is
attributable to significant increases in merchant dollar volume processed, which
grew 49% in the first quarter of 2000 compared to last year's first quarter.
Including the results for Paymentech, Inc. (acquired in July, 1999) and Norwest
(contributed to the Wells Fargo alliance in January 2000) comparably for the
first quarter in 2000 and 1999, dollar volume growth in 2000 would have been
17%.
Significant actions were taken in the first three months of 2000 as the Company
continues to streamline its operations and focus on its three primary lines of
business.
12
<PAGE>
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
In January 2000, the Company completed the sale of its Hogan Information
Services business unit to Dolan Media Company for cash proceeds of $30.5
million. As a result of this transaction, a pre-tax gain of $3.2 million ($1.9
million after tax) was recorded in the first quarter of 2000.
In February 2000, FDC announced the merger of its joint venture, Transpoint,
LLC, with Checkfree Holdings Corporation ("Checkfree") to accelerate moving the
bill payment and presentment market to the Internet. FDC will receive
consideration of 6.6 million shares of Checkfree stock and is expected to
recognize a gain upon consummation of the transaction, which is expected to
occur in the second or third quarter. Additionally, First Data will provide at
least $60 million in revenue and/or cost savings to CheckFree. Immediately
prior to closing the transaction, the Company will contribute approximately $43
million to TransPoint, which will be transferred to CheckFree at closing. The
merger is expected to occur in the second or third quarter.
During the three months ended March 31, 2000, the Company incurred restructuring
charges of $12.7 million ($7.9 million after tax); $1.1 million related to
payment instruments, $9.0 million related to card issuer services, $0.3 million
related to merchant processing services and $2.3 million related to all other
and corporate. All charges represent severance accruals for approximately 700
employees resulting from the downsizing and relocation of various departments.
Savings realized through the remainder of the year from this reorganization are
expected to approximate the amount of the restructuring charge.
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 2000 and will continue to
assess how best to serve its customer base. Among the actions the Company
believes are 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 and
expanding e-commerce initiatives. In this regard, the Company also anticipates
it will need to upgrade and redevelop its business continuity plans to reflect
new systems and platforms developed to support these actions. Also, the Company
may take future actions to further streamline operations and reduce costs.
Results of Operations
The Company derives revenues in each of its reportable segments based
principally on the number of transactions processed, a percentage of dollar
volume processed or on a combination thereof. For the three months ended March
31, 2000, total revenues increased 4% to $1.32 billion from $1.27 billion in the
prior year quarter. The Company's growth rate from continuing operations in
revenues for first quarter 2000 was 14%.
Product sales and other revenues increased 49% from $18.2 million in the first
three months of 1999 to $27.1 million in the same period of 2000. This increase
is due primarily to an increase in incentive payments earned from one of the
Company's merchant alliance partners.
For the three months ended March 31, 2000, operating expenses increased slightly
to $848.5 million from $846.5 million in the same period of 1999. This reflects
a general increase in operating expense offset by a decline in Year 2000 ("Y2K")
readiness expenses, which for the 2000 first quarter approximated $8.3 million
as compared to approximately $21 million in 1999's first quarter. This slight
increase resulted in a decline in operating expenses as a percent of revenue in
the first quarter of 2000 as compared to the 1999 first quarter.
Selling, general and administrative expenses increased 6% to $209.8 million in
2000's first quarter compared to $197.4 million for the same period in 1999. As
a percentage of revenue, selling, general and administrative expenses were
relatively flat on a quarter to date basis. The dollar increase reflects
increased advertising and
13
<PAGE>
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
promotion spending, especially in the payment instruments segment, and increased
general and administrative costs to support higher overall revenue.
Interest expense decreased 16% to $20.4 million for the first quarter of 2000
from $24.2 million for the first quarter of 1999. The decrease is due
principally to overall reductions in debt balances funded primarily with strong
cash flow from operations and the proceeds from the sale of Investor Services
Group in the fourth quarter of 1999.
FDC's effective tax rate for the first quarter of 2000 was 28.1%, compared with
1999's first quarter rate of 30.0%. Excluding the impact of restructuring and
business divestitures, the effective tax rate decreased 1.5 percentage points to
28.5% in the first quarter of 2000 compared to 30.0% in 1999's first quarter.
This decrease is primarily due to an increase in the amount of non-taxable
interest generated from investments in debt instruments issued by state and
local governments and lower nondeductible goodwill.
Net income of $165.0 million for the three months ended March 31, 2000 was up
from $141.0 million in the comparable period of 1999. Excluding restructuring
and business divestitures, net income for the three months ended March 31, 2000
of $171.0 million increased approximately 21% over 1999's first quarter net
income of $141.0 million. These increases were primarily the result of margin
improvements in the combined core businesses, driven primarily by strong volume
trends and the impact of significant cost reduction initiatives. Diluted
earnings per share ("EPS") increased 22% to $0.39 for the first three months of
2000. Excluding the impact of restructuring and business divestitures, diluted
EPS increased 25% to $0.40 in the first three months of 2000.
Payment Instruments
Total revenues in the payment instruments segment increased by 20% (on a tax-
equivalent basis) to $550.0 million in the first quarter of 2000, as compared to
$459.0 million in the same period of 1999. This increase reflects continuing
strong underlying volume increases in total worldwide money transfer
transactions. Total money transfer revenue increased 20% to $429.2 million in
the first quarter of 2000 compared to the same quarter in 1999, driven by
aggregate money transfer transaction growth of 19% (to 20.8 million). At March
31, 2000, the agent base had grown 47% as compared to a year ago, with nearly
86,000 agents in 178 countries and territories. The dramatic growth in agent
locations is due in part to the addition of 11,000 locations for Postbank of
Germany in the second quarter of 1999.
Operating profits for the first quarter of 2000 grew 20% over last year's first
quarter, from $116.6 million to $139.9 million. Established product lines
continue to gain operating leverage through cost efficiencies. The improvement
also was the result of price increases in certain markets and, to a lesser
extent, a decline in Y2K readiness expenses, offset by lower volumes and price
declines in the Mexican markets and investment in new businesses and products.
Card Issuer Services
Total revenues in the card issuer services segment grew 16% for the first
quarter of 2000 to $356.1 million as compared to $307.6 million for 1999's first
quarter. Growth in underlying volumes continued to be strong and increases in
accounts on file for 2000 was significant as compared to the first quarter of
1999. Card accounts on file as of March 31, 2000 were over 256 million (a 20%
increase from March 31, 1999) with domestic card accounts growing to 228 million
(21% growth) and international card accounts growing to 28 million (8% growth).
Revenues continue to grow more slowly than accounts on file due to an increased
proportion of
14
<PAGE>
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
accounts processed for large issuers with lower than average prices and growth
in debit and retail card accounts on file which generate lower revenue per
account. 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 of pricing, client mix and product
mix of providing services to this increasingly concentrated industry will most
likely continue to cause revenues to grow more slowly than accounts on file.
Operating profit for the card issuer services segment increased 21% to $62.9
million in 2000's first quarter from $51.8 million in 1999. Improved
performance was driven by strong volume trends combined with a decline in Y2K
readiness expenses, which was partially offset by increased non-capitalizable
systems investments.
Merchant Processing Services
Revenues in the merchant processing services segment grew 7% to $371.2 million
for the first quarter of 2000 compared to $345.6 million for first quarter 1999.
Total merchant dollar volume grew 49% (17% adjusted for Paymentech and Norwest)
over the first quarter of 1999 to $94.1 billion in 2000. Revenue growth was
driven by growth in the dollar volume processed. Note that revenues grew more
slowly than dollar volume processed because the increased dollar volume also
includes volume of the Company's alliances, which are generally accounted for
under the equity method of accounting. If all bank alliances were consolidated
and if Paymentech (acquired in July 1999) and Norwest (contributed to the Wells
Fargo alliance in January 2000) were owned during the first three months of 1999
also, on a proforma basis, merchant processing service segment revenue would
have increased 13% from 1999 to 2000.
Operating profits increased 26% to $87.4 million for the first quarter of 2000
from $69.5 million for the 1999 first quarter. This improvement is reflective of
strong volume, the impact of significant cost reduction initiatives and, to a
lesser extent, a decline in Y2K readiness expenses.
Key elements of FDC's strategy in the merchant processing services segment
involve its joint venture alliances with its bank partners and implementation of
Internet commerce initiatives. Each joint venture alliance requires successful
management of the relationship between the Company and the bank partner in that
alliance. Moreover, the alliance strategy could be affected by further
consolidation among financial institutions. Internet commerce presents a growth
opportunity for the merchant processing services segment. While Internet
commerce currently accounts for a small portion of the segment's transactions,
it is growing rapidly. However, Internet commerce is still evolving industry-
wide, and its ultimate impact on merchant processors and acquirers is uncertain.
All Other and Corporate
Revenues from these operations increased slightly to $77.9 million for the first
quarter of 2000 from $77.7 million in first quarter 1999. Stronger revenue at
First Data Solutions and TeleServices helped to offset a revenue decline at Call
Interactive.
Operating profits declined 37% in the first quarter of 2000, from $10.7 million
in the first quarter of 1999 to $6.7 million in 2000. The decline was due
primarily to lower volumes at Call Interactive and increased e-Commerce
investments.
15
<PAGE>
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Restructuring and Business Divestitures
During the three months ended March 31, 2000, the Company incurred restructuring
charges of $12.7 million ($7.9 million after tax); $1.1 million related to
payment instruments, $9.0 million related to card issuer services, $0.3 million
related to merchant processing services and $2.3 million related to all other
and corporate. All charges represent severance accruals for approximately 700
employees resulting from the downsizing and relocation of various departments.
Savings realized through the remainder of the year from this reorganization are
expected to approximate the amount of the restructuring charge.
In January 2000, the Company completed the sale of its Hogan Information
Services business unit to Dolan Media Company for cash proceeds of $30.5
million. As a result of this transaction, a pre-tax gain of $3.2 million ($1.9
million after tax) was recorded in the first quarter of 2000.
Capital Resources and Liquidity
FDC maintained a strong financial position in the first quarter of 2000. Cash
and cash equivalents were $403.0 million at March 31, 2000 compared to $1,044.0
million at December 31, 1999. Cash and cash equivalents at December 31, 1999
included a significant amount of liquidity on hand in preparation for any
potential Y2K related funding needs. These funds were utilized in the first
quarter of 2000 to pay down borrowings and taxes related to the sale of Investor
Services Group in the fourth quarter of 1999. FDC utilized cash flows from
operating activities to reinvest in its existing businesses, contribute to the
financing of business expansion, pay down short term borrowings and fund
treasury stock purchases.
Operating activities generated cash of $116.5 million for the three months ended
March 31, 2000 compared to $342.1 million for 1999's first quarter. This
decrease is primarily due to the first quarter 2000 tax payments associated with
the fourth quarter 1999 sale of Investor Services Group offset somewhat by the
net source of cash resulting from changes in working capital.
FDC reinvests cash in its existing businesses principally to expand its
processing capabilities through property and equipment additions, to establish
customer-processing relationships through contract payments and costs for
conversion and to acquire or develop software for use in its operations.
Capitalized amounts of these cash outlays decreased to $75.7 million for the
first three months of 2000 as compared to $98.2 million for the first three
months of 1999.
Overall, FDC's operating cash flow for the three months ended March 31, 2000
exceeded its investing activities associated with additions to property and
equipment and capitalized contract and systems development costs by $40.8
million. These cash sources contributed to funds utilized for short term
borrowing repayments and treasury stock purchases.
In the first three months of 2000, the Company had net cash outlays of $10.2
million for acquisitions (as compared to $4.2 million in 1999). The Company
also paid $29.6 million relating to businesses previously acquired, compared to
$30.6 million in the first quarter of 1999.
The Company's net use of cash for financing activities was due to debt
reduction, share repurchases under the Company's $750 million share repurchase
program discussed below and dividend payments partially offset by proceeds from
stock option exercises and other employee stock benefit programs. Net cash used
in financing activities was $694.2 million during the first three months of
2000, as compared to $191.5 million in the same
16
<PAGE>
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
1999 period.
The Company made cash outlays totaling $352.8 million in the three months ended
March 31, 2000 to buy back shares of its common stock. Proceeds from stock
option exercises totaling $75.2 million partially offset these outlays. The
Company had a net cash outflow of $409.3 million for the repayment of its
borrowings during the first three months of 2000 as compared to $64.7 million in
the same 1999 period. In addition, the Company continued its practice of paying
quarterly cash dividends, resulting in $8.4 million of cash payments to the
Company's common stockholders during the first three months of 2000.
The Company completed the $750 million stock repurchase authorized by the Board
of Directors in July 1999 by purchasing 6.1 million of its common shares at a
cost of $265 million during the first quarter of 2000. A total of 16.7 million
shares were repurchased under this program.
The Company has two outstanding shelf registration facilities, one providing for
the issuance of debt and equity securities up to $1.0 billion in the aggregate
(of which $525 million remains available) and the other providing for the
issuance of approximately 10 million shares of the Company's common stock in
connection with certain types of acquisitions.
Included in cash and cash equivalents on the Consolidated Balance Sheet at March
31, 2000 is $70 million related to required investments of cash in connection
with the Company's merchant card settlement operation. FDC has remaining
available short-term borrowing capability of approximately $1.2 billion at March
31, 2000 under the Company's commercial paper program, uncommitted bank credit
lines and its $300 million extendable commercial notes program. The Company
believes that its current level of cash and financing capability along with
future cash flows from operations are sufficient to meet the needs of its
existing businesses. However, the Company may from time to time seek longer-term
financing to support additional cash needs or reduce its short-term borrowings.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
There have been no material changes from the 1999 Annual Report on Form 10-K
related to the Company's exposure to market risk from interest rates.
17
<PAGE>
Independent Accountants' Review Report
The Stockholders and Board of Directors
First Data Corporation
We have reviewed the accompanying consolidated balance sheet of First Data
Corporation as of March 31, 2000 and the related consolidated statements of
income and cash flows for the three-month periods ended March 31, 2000 and 1999.
These financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements referred to above
for them to be in conformity with accounting principles generally accepted in
the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of First Data
Corporation as of December 31, 1999, and the related consolidated statements of
income, stockholders' equity, and cash flows for the year then ended (not
presented herein) and in our report dated January 27, 2000, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated balance sheet as of
December 31, 1999, is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
Ernst & Young LLP
Atlanta, Georgia
April 17, 2000
18
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
- ------------
12 Computation of Ratio of Earnings to Fixed Charges
15 Letter from Ernst & Young LLP Regarding Unaudited Interim
Financial Information
27.1 Financial Data Schedule (for SEC use only)
99.1 Private Securities Litigation Reform Act of 1995
Safe Harbor Compliance Statement for Forward-Looking Statements
(b) Reports on Form 8-K
- ------------------------
None.
19
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST DATA CORPORATION
----------------------
(Registrant)
Date: May 10, 2000 By /s/ Kimberly S. Patmore
------------ -----------------------------
Kimberly S. Patmore
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: May 10, 2000 By /s/ Jeffrey W. Holtz
------------ -----------------------------
Jeffrey W. Holtz
Vice President and
Corporate Controller
(Principal Accounting Officer)
20
<PAGE>
FIRST DATA CORPORATION
INDEX TO EXHIBITS
-----------------
Exhibit
Number Description
- ------
12 Computation of Ratio of Earnings to Fixed Charges
15 Letter from Ernst & Young LLP Regarding Unaudited Interim Financial
Information
27.1 Financial Data Schedule (for SEC use only)
99.1 Private Securities Litigation Reform Act of 1995
Safe Harbor Compliance Statement for Forward-Looking Statements
21
<PAGE>
EXHIBIT 12
FIRST DATA CORPORATION
COMPUTATION OF
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Millions)
Three months ended March 31,
----------------------------
2000 1999
------ ------
Earnings:
Income before income taxes $229.6 (1) $201.5
Interest expense 20.4 24.2
Other adjustments 12.1 12.2
------ ------
Total earnings (a) $262.1 $237.9
====== ======
Fixed charges:
Interest expense $ 20.4 $ 24.2
Other adjustments 12.1 12.2
------ ------
Total fixed charges (b) $ 32.5 $ 36.4
====== ======
Ratio of earnings to fixed charges (a/b) 8.06 6.54
(1) Includes restructuring and business divestiture charges of $9.5 million
($6.0 million after tax). The pro forma ratio of earnings to fixed charges
without these charges would have been 8.36.
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 15
The Stockholders and Board of Directors
First Data Corporation
We are aware of the incorporation by reference in the Registration Statements
(Forms S-8 No. 33-47234, No. 33-48578, No. 33-82826, No. 33-87338, No. 33-90992,
No. 33-62921, No. 33-98724, No. 33-99882, No. 333-09017, No. 333-09031, No. 333-
28857, No. 333-68689, No. 333-81691, No. 333-85715, No. 333-90719 and No. 333-
93703, Forms S-3 No. 333-04012 and No. 333-24667, and Form S-4 No. 333-15497) of
First Data Corporation of our report dated April 17, 2000 relating to the
unaudited consolidated interim financial statements of First Data Corporation
which are included in its Form 10-Q for the quarter ended March 31, 2000.
Pursuant to Rule 436(c) of the Securities Act of 1933 our reports are not a part
of the registration statements prepared or certified by accountants within the
meaning of Section 7 or 11 of the Securities Act of 1933.
/s/ Ernst & Young LLP
May 10, 2000
Atlanta, Georgia
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<PAGE>
EXHIBIT 99.1
Private Securities Litigation Reform Act of 1995
Safe Harbor Compliance Statement for Forward-Looking Statements
- ---------------------------------------------------------------
In passing the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"), Congress encouraged public companies to make "forward-looking
statements"* by creating a safe-harbor to protect companies from securities law
liability in connection with forward-looking statements. First Data Corporation
("FDC") intends to qualify both its written and oral forward-looking statements
for protection under the Reform Act. To qualify oral forward-looking statements
for protection under the Reform Act, a readily available written document must
identify important factors that could cause actual results to differ materially
from those in the forward-looking statements. FDC provides the following
information in connection with its continuing effort to qualify forward-looking
statements for the safe harbor protection of the Reform Act.
Important factors upon which the Company's forward-looking statements are
premised include the following:
. Continued growth at rates approximating recent levels for card-based payment
transactions, consumer money transfer transactions and other product markets.
Successful conversions under service contracts with major clients.
. Renewal of material contracts in the Company's business units consistent
with past experience.
. Timely, successful and cost effective implementation of processing systems to
provide new products, improved functionality and increased efficiencies
particularly in the card issuer services segment.
. Continuing development and maintenance of appropriate business continuity
plans for the Company's processing systems based on the needs and risks
relative to each such system.
. 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.
. Achieving planned revenue growth throughout the Company, including in the
merchant alliance program which involves several joint ventures not under the
sole control of the Company and each of which acts independently of the
others, and successful management of pricing pressures through cost
efficiencies and other cost management initiatives.
. Anticipation of and response to technological changes, particularly with
respect to e-commerce.
. 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.
. No unanticipated changes in laws, regulations, credit card association rules
or other industry standards affecting FDC's businesses which require
significant product redevelopment efforts, reduce the market for or value of
its products, or render products obsolete.
. Continuation of the existing interest rate environment, avoiding increases in
agent fees related to the Company's consumer money transfer products and the
Company's short-term borrowing costs.
<PAGE>
. 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.
. No unanticipated developments relating to previously disclosed lawsuits
against Western Union inter alia, violation of consumer protection laws in
connection with advertising the cost of money transfers to Mexico.
. Successfully managing the potential both for patent protection and patent
liability in the context of rapidly developing legal framework for expansive
software patent protection.
. Continued political stability in countries in which Western Union has
material operations.
Forward-looking statements express expectations of future events. All forward-
looking statements are inherently uncertain as they are based on various
expectations and assumptions concerning future events and they are subject to
numerous known and unknown risks and uncertainties which could cause actual
events or results to differ materially from those projected. Due to these
inherent uncertainties, the investment community is urged not to place undue
reliance on forward-looking statements. In addition, FDC undertakes no
obligation to update or revise forward-looking statements to reflect changed
assumptions, the occurrence of unanticipated events, or changes to projections
over time.
* "Forward-looking statements" can be identified by use of words such as
"expect", "estimate", "project", "forecast", "anticipate", "plan" and similar
expressions.
