Back to GetFilings.com
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, 1999
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. [ ]
Common shares of the registrant outstanding at February 29, 2000 (excluding
treasury shares) were 416,626,399. The aggregate market value, as of March 1,
2000 of such common shares held by non-affiliates of the registrant was
approximately $19 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 10, 2000
PART I
ITEM 1. BUSINESS
General
First Data Corporation ("FDC" or "the Company") operates in three principal
business segments: payment instruments, card issuer services, and merchant
processing services representing approximately 93% of FDC's revenues from
continuing operations in 1999 and 1998. Payment instruments includes Western
Union, Integrated Payment Systems ("IPS"), and Orlandi Valuta Companies 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 services. Card issuer services encompasses domestic and international card
processing. 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 and First Data Financial Services
("FDFS"). 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 TeleServices, Call
Interactive, IBT, First Data Solutions and Corporate operations. 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.
FDC's facilities in the United States provide the vast majority of the Company's
transaction processing services. Currently, FDC's processing units in the United
Kingdom and Australia represent the Company's only foreign operations of
significance. Excluding these two foreign units, domestic facilities process
substantially all money transfer, merchant card and merchant check acceptance
transactions that are settled outside of the United States.
Portions of the Company's business are seasonal. FDC's revenues and earnings are
affected favorably by increased card and check volume during the holiday
shopping period in the fourth quarter and, to a lesser extent, during the back-
to-school buying period in the third quarter. Higher money transfer volume
during the summer months in FDC's payment instruments area also affects revenues
and earnings.
FDC 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 acquisitions or divestitures.
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 1999, the Company continued the emphasis 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 focused on improving execution of
strategic plans, identifying operational efficiencies and building on the
fundamental strengths of its business.
The payment instruments segment continues to experience strong growth. Payment
instruments now offers money transfer services at more than 82,000 agent
locations (a 48% increase since December 31, 1998) in 176 countries and
territories worldwide. The dramatic growth in agent locations is due in part to
the addition of 11,000 locations for Postbank of Germany in 1999.
In 1999, the Company announced that its Western Union business unit had received
preliminary approval for a proposed settlement of all claims in several class
action lawsuits pertaining to the Company's U.S.-to-Mexico money transfer
business. Under the terms of the proposed settlement, FDC will establish a
charitable fund for the advancement of Mexican and Mexican-American causes in
the amount of $4 million. In addition, Western Union will issue discount coupons
to its customers who transferred money from the U.S. to Mexico between January
1, 1987 and August 31, 1999. These coupons will be for future money transfers to
Mexico. Discount coupons for future Western Union transactions also will be
issued to MoneyGram (previously an FDC subsidiary) customers who transferred
money to Mexico from January 1, 1988 to December 10, 1996.
2
Card issuer services volume trends remained positive in 1999 with total accounts
on file growing to 260 million -- up 23% from December 31, 1998. This growth was
fueled by the conversion of a record number of accounts in 1999 (approximately
42 million accounts) including the First Chicago bankcard portfolio now owned by
Bank One, the First Consumers retail card portfolio (including the Spiegel and
Eddie Bauer brands) and First Union.
The merchant processing segment experienced strong revenue growth in 1999 (11%)
compared to 1998. This growth in revenues is attributable to significant
increases in merchant dollar volume processed which grew 30% in 1999. Including
results for Paymentech (see discussion of the Paymentech acquisition below)
comparably for the last five months in both years, merchant dollar volume growth
would have been 18% in 1999 compared to 1998.
In July 1999, the Company completed the acquisition of Paymentech, Inc.'s 16.4
million publicly held shares (45% of total outstanding shares). Bank One owns
all of the remaining shares (55% of the outstanding shares). In conjunction
with this transaction, Paymentech's operations were combined with the existing
Bank One/First Data alliance, BancOne Payment Services, LLC. Paymentech provides
full-service electronic payment solutions for merchants and third-party
transaction processing.
FDC also is aggressively expanding its e-commerce activities. During the third
quarter 1999, the Company announced the creation of an Internet Commerce group
to focus on development and management of Internet-based electronic commerce
solutions and related initiatives across all First Data subsidiaries. In
addition, the Company announced a strategic marketing agreement between
Excite@Home and FDC. This agreement coincided with Excite's agreement to acquire
iMall,Inc. in which FDC held an 11% ownership stake before the transaction
closed in October 1999.
Several significant actions were taken in 1999 and early 2000 as the Company
continues to streamline its operations and focus on its three primary lines of
business.
In April 1999, the Company sold Innovis, Inc. (formerly Consumer Credit
Associates, Inc.) to CBC Companies, Inc. In May 1999, the Company sold its EBP
Life business unit. In July 1999, the Company completed the sale of its
Donnelley Marketing subsidiary to InfoUSA. In December 1999, the Company sold
its Investor Services Group business unit to PNC Bank Corporation. In January
2000, the Company completed the sale of its Hogan Information Services business
unit. 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.
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. In this
regard, the Company also anticipates it will need to upgrade and redevelop its
business continuity plans to reflect new systems and platforms being developed
to support these actions.
Operating Segments
The Company operates in three principal business segments: payment instruments,
card issuer services and merchant processing services.
Payment Instruments
The payment instruments segment includes Western Union, Integrated Payment
Systems ("IPS"), CashTax and Orlandi Valuta Companies ("Orlandi") 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 39,900 agent locations in North America
(United States, Canada and Mexico) and 42,400 international agent locations to
provide payment instrument transaction services to consumers in 176 countries
and territories. 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. Through Western
Union's Easy Pay and Quick Collect services, FDC also offers bill payment
services to utility companies, collection agencies, finance companies and other
institutions. The Company's CashTax subsidiary provides electronic tax
processing services to banks and government
3
agencies. Official checks serve as an alternative to a bank's own disbursement
items such as teller's or bank checks. Money transfer transactions totaled 73.5
million in 1999, compared to 61.4 million in 1998 and 47.8 million in 1997.
In the payment instruments segment, 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. In addition, the Company earns foreign exchange fees from its
international money transfer business. On a pre-tax equivalent basis, payment
instrument revenues comprised 37% of FDC's total revenues in 1999, compared with
33% in 1998 and 27% in 1997.
Card Issuer Services
The card issuer services segment encompasses domestic and international card
processing. 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. Within this segment, First Data Resources
("FDR") (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.
Collectively, this segment's services constituted approximately 25% of the
Company's total revenues in 1999 and 1998 and 22% in 1997.
In addition to growth in existing clients' card accounts on file, a record
number of new cards were converted onto FDR's processing systems in 1999 which
was the principal reason for the 23% increase in the Company's total card
accounts on file. Card accounts on file at year-end 1999 (including FDR's card
issuing business in the United Kingdom) were 260 million, compared with 212
million and 180 million, respectively, at December 31, 1998 and 1997. These
amounts exclude certain card accounts for which FDR provides limited services.
Processing services includes 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. 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. FDR'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 cardholder's purchasing patterns and
flagging unusual purchases. Billing statements are prepared and mailed directly
to cardholders using the Company's in-house mail facilities. Examples of other
service offerings include cardholder database analysis, cardholder behavior
scoring, customized communications to cardholders and proprietary oil card
processing services.
Currently, FDC's operations in the United Kingdom and Australia are the
Company's principal processing facilities located outside the United States. FDC
is the largest third-party provider of card processing services in the United
Kingdom, with over 24 million card accounts on file at December 31, 1999.
Services provided generally mirror the Company's domestic card issuing and
merchant processing services provided to financial institutions. The Company
also provides third-party bankcard processing in Mexico and portions of Latin
America. In addition, FDC operates the largest independent funds transfer
network in Australia, providing ATM, EFTPOS, smartcard, pay-by-phone and
internet payment processing services to over 300 financial institutions and
merchant clients. During early 1999 the Company relocated its Asia-Pacific card
and merchant account processing data center to Australia and is now capable of
providing full front end and back office transaction processing services to the
Australian and Asia-Pacific markets.
Revenues for card issuing services are derived from fees payable under contracts
that primarily depend on the number of accounts or transactions processed. FDR
provides over one hundred transaction-based services, which are separately
priced and negotiated with clients. Most contracts provide for the payment of
minimum annual processing fees, payable without regard to transaction volume. In
some instances, FDR may make an advance payment to a client upon the signing of
a processing contract with the Company. FDR makes these payments to compensate
new clients for dedicating the resources to change service providers or to
outsource an internal service function.
Merchant Processing Services
The merchant processing services segment is comprised of First Data Merchant
Services ("FDMS"), TeleCheck, the Company's check and bankcard collections
business and First Data Financial Services ("FDFS"). 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. FDMS is
the
4
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. TeleCheck, a
check acceptance company, provides electronic check conversion, check guarantee,
check verification and collections services. TeleCheck Collections (formerly
Credit Performance Services) provides delinquent account processing, including
pre-charge off collection outsourcing services. FDFS, through a joint venture,
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 28%, 27%, and 27%, respectively, during the years ended
December 31, 1999, 1998 and 1997.
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. Each joint
venture alliance requires successful management of the relationship between the
Company and the bank partner in that alliance. 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
transaction processing and certain back-office functions. There were eleven
participating banks in the program as of December 31, 1999.
The Company's primary merchant card processing center is located in Hagerstown,
Maryland 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. 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 cardholder account maintained by FDC's
card issuing services area.
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 $328 billion in 1999, compared
with $252 billion in 1998 and $216 billion in 1997. Merchant transactions
processed totaled 6.4 billion in 1999, compared to 5.0 billion in 1998 and 4.6
billion in 1997. 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.
All Other and Corporate
The remainder of the Company's business units are grouped in the all other and
corporate category, which includes TeleServices, IBT, Call Interactive, First
Data Solutions and Corporate operations.
International Banking Technologies ("IBT") develops in-store branch banking
programs and derives its revenues from fees earned during the design and
installation phases, and the ongoing management of the in-store program. FDC's
Call Interactive is a provider of customized 800 telephone interactive voice
services that gather, process and disseminate information for client needs.
TeleServices is a provider of voice-center services to telecommunications and
financial services industries. First Data Solutions is a provider of consumer
and business solutions in the areas of risk and fraud management and information
verification associated with granting of credit, collecting debt and customer
service. 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 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.
5
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 were faced with "Y2K" remediation issues.
As of March 1, 2000, the Company has not experienced any material issues or
problems related to the rollover to the year 2000. However, the Company still
may encounter Year 2000 issues. Management believes that if Year 2000 issues do
arise, they mostly likely would relate to the readiness of third parties with
which the Company has a relationship. In this regard, the Company's contingency
plans address the readiness of third parties as discussed in Year 2000
disclosures in the Company's prior Form 10-K/10-Q filings. At this time, the
Company has no reason to believe that any material Year 2000 issues will be
encountered.
Through December 31, 1999, the Company has spent, in aggregate, approximately
$206 million to prepare for the Year 2000, all of which was financed from
operating cash flows. Of the $206 million, $98 million was incurred in 1999,
which represented approximately 11% of the 1999 IT budget. Approximately 94% of
the 1999 expenditures was spent on software remediation and testing and
approximately 6% was spent to replace systems and equipment and to add testing
capacity. The Company does not anticipate material Year 2000 expenditures in
2000.
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. The Company's First Financial Bank ("FFB") and
Western Union Industrial Bank subsidiaries are subject to regulation by various
state and federal banking agencies. In addition, FFB and FDMS continue to be
subject to the rules of VISA and MasterCard, including a requirement that FFB
maintain adequate capital (currently $70.0 million) based on the merchant credit
card processing volume settled through FFB.
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 may also 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.
The Company also provides certain services in compliance with (i) international
and United States anti-money laundering laws such as the Bank Secrecy Act, (ii)
privacy regulations such as the Gramm-Leach-Bliley Act which provides for
notices to be given to consumers of financial services, (iii) the Fair Debt
Collection Practices Act, and (iv) the Fair Credit Reporting Act.
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 that 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.
6
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 international provider, as well as numerous 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 services. FDC's money order
services primarily compete with postal money orders and those of one other
international provider.
The Company's merchant processing service areas compete 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 segment competes with other third-party cardholder processors
as well as banks that process their accounts internally.
In addition, many of the Company's businesses are involved in internet
e-commerce or have internet applications. This internet e-commerce nexus
presents growth opportunities that the Company is pursuing through the newly
created Internet Commerce Group. Internet e-commerce is characterized by both
rapid growth as well as rapid technological change and presents, in addition to
significant opportunities for the Company, the potential for other internet
companies to enter the Company's markets.
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. Also refer to the preceding paragraph regarding
Internet products and companies.
Bank industry consolidation impacts existing and potential clients in FDC's
service areas, primarily relating to card issuer services and payment
instruments. In addition, certain merchant processing alliance relationships
have been impacted as a result of consolidations. In the aggregate, bank mergers
have not significantly affected the Company to date. However, FDC could lose
business in connection with future client mergers if the surviving or acquiring
entity utilizes in-house processing services or those of a competitor of the
Company.
Employees and Labor Relations
At December 31, 1999, the Company employed approximately 31,000 employees,
approximately 92 percent of whom were full-time employees. A portion of FDC's
approximately 2,700 employees in the United Kingdom are members of UNIFI
(formerly 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 48% of
approximately 2,300 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.
7
ITEM 2. PROPERTIES
As of December 31, 1999, the Company and its subsidiaries own or lease
approximately 330 properties, totaling approximately 7.4 million square feet.
These facilities are used for operational, sales and administrative purposes.
The following table describes the facilities which contain more than 10,000
square feet that are used in connection with the Company's operations.
Facilities Leased
Leased Facilities Owned Facilities with Option to Buy
----------------------- --------------------- ----------------------
No. Appr. Sq. Ft. No. Appr. Sq. Ft. No. Appr. Sq. Ft.
---- ------------- ---- ------------- ----- -------------
Facilities in the United States
Card Issuer Services 31 1,663,000 5 969,000 2 281,000
Merchant Processing
Services 9 1,239,000 -- -- 1 96,000
Payment Instruments 14 938,000 -- -- 1 155,000
Corporate and Other 7 441,000 -- -- - --
International Facilities
Card Issuer Services 11 395,000 1 270,000 - --
Merchant Processing
Services -- -- -- -- - --
Payment Instruments 1 13,000 -- -- - --
Corporate and Other -- -- -- -- - --
The Company conducts operations domestically and internationally. The principal
operations for card issuer services are located in Omaha, Nebraska; England and
Australia. Merchant processing services principal operations are conducted in
Melville, New York; Hagerstown, Maryland; Coral Springs, Florida; and Houston,
Texas. Payment instruments has principal operations in Englewood, Colorado and
Paramus, New Jersey. Corporate and Other includes the Company's corporate
offices in Atlanta, Georgia and other principal facilities in Englewood,
Colorado and Omaha, Nebraska.
The Company believes that its facilities are suitable and adequate for its
businesses; however, the Company periodically reviews its space requirements and
may acquire new space to meet the needs of its businesses or consolidate and
dispose of or sublet facilities which are no longer required.
ITEM 3. LEGAL PROCEEDINGS
As previously reported, on February 20, 1998, Plaintiffs Rita Sandoval and
Andres Pena, individually and on behalf of all others similarly situated, filed
a complaint 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 state law. Plaintiffs seek to
recover the purported damage suffered by each class member.
As previously reported, 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 (the "Pelayo action"). The Plaintiffs make 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.
As previously reported, on September 14, 1998, Plaintiff Raul Garcia filed a
putative class action in the Superior Court of the State of California for the
County of Los Angeles against, among others, the Company's subsidiary, Western
Union Financial Services, Inc. (the "Garcia" action). The Plaintiff asserts
------
claims based on factual allegations similar to those made in the Sandoval action
--------
described above, except that the Plaintiff purported to assert the action on
behalf of persons who sent money from California to Mexico. 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 exchange
rate at which Western Union purchased Mexican pesos and the exchange rate
provided by Western Union to its customers transmitting funds to Mexico is
greater than the difference between the exchange rate at which Western Union
purchased foreign currency and the exchange rate provided by Western Union to
its customers transmitting funds to other countries. The Plaintiff seeks
injunctive relief, imposition of a
8
constructive trust, an accounting, restitution, compensatory and statutory
damages, statutory penalties, punitive damages, attorneys' fees, prejudgment
interest, and costs of suit.
As previously reported, 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.
On May 3, 1999, the Court dismissed the federal statutory claims in the amended
complaint, but not the state claims, and granted the Plaintiffs leave to amend
the federal claims within 20 days.
As previously reported, in April 1998, Plaintiff Raul Ross Pineda, individually
and on behalf of all others similarly situated, filed a putative class action in
the United States District Court for the Northern District of Illinois naming
MoneyGram Payment Systems, Inc. as the defendant (the "Pineda action").
------
Integrated Payment Systems, Inc. ("IPS"), a subsidiary of the Company,
subsequently was added as a defendant in that action. IPS operated an
electronic money transfer service under the name "MoneyGram" prior to December
1996. The claims are based on factual allegations similar to those made in the
Pelayo action described above. Mr. Pineda seeks declaratory and injunctive
- ------
relief, damages in an amount to be proven at trial, treble damages, punitive
damages, attorneys' fees, and cost of suit.
The parties in the Pelayo and Pineda actions have reached a proposed settlement
------ ------
that the Company believes would also extinguish the claims in the Garcia,
------
Sandoval and Ibarra 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
MoneyGram was previously operated by a subsidiary of the Company. The proposed
settlement also includes reasonable attorneys' fees, expenses and costs.
On May 12, 1999, Plaintiffs in the Pelayo and Pineda actions filed First Amended
------ ------
Complaints alleging additional causes of action and naming additional
defendants. On that same day, the United States District Court for the Northern
District of Illinois issued a Preliminary Settlement Order in the Pelayo and
------
Pineda actions, inter alia, preliminarily approving the proposed settlement.
- ------ ----- ----
The Court also barred and enjoined the continued prosecution of the Garcia,
------
Sandoval and Ibarra 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.
On January 11, 2000, Plaintiffs Julieta Amorsolo and Apolonio Ezequiel Viruel
Torres brought a putative class action against First Data Corporation and its
subsidiaries Western Union Financial Services, Inc. and Orlandi Valuta in the
Superior Court of the State of California for the County of Los Angeles. 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 nationwide settlement
pending approval in the Pelayo Action. Approximately 2,100 individuals
------
purporting to be class members in the Pelayo action submitted requests to opt
------
out of the proposed settlement. Plaintiffs assert claims similar to the claims
in the Garcia action and seek injunctive relief, imposition of a constructive
------
trust, an accounting, restitution, compensatory and statutory damages alleged to
be in excess of $500,000,000, statutory penalties in an amount of $1,000 for
each offense, punitive damages, attorneys' fees, prejudgment interest, and costs
of suit. The Company is formulating its response in this matter.
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.
9
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 13, 2000, the registrant had 3,343 common stockholders of record.
1999 High Low Dividend
- ---- ---- --- --------
First Quarter ............... 44 1/2 31 5/16 $0.02
Second Quarter............... 49 15/16 38 7/8 $0.02
Third Quarter................ 51 1/2 42 11/16 $0.02
Fourth Quarter............... 50 7/8 40 $0.02
1998
- ----
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
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.
10
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.
Year Ended December 31, 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
(in millions, except share amounts or
otherwise noted)
Income statement data:
- ----------------------
Revenues $ 5,539.8 (a) $ 5,117.6 $ 5,234.5 $ 4,938.1 $ 4,186.2
Expenses 3,714.4 (b) 4,405.7 (b) 4,528.1 (b) 3,906.3 (b) 4,018.6 (b)
--------- --------- --------- --------- ---------
Income before income taxes 1,825.4 711.9 706.4 1,031.8 167.6
Income taxes 625.7 246.2 349.7 395.3 251.8
--------- --------- --------- --------- ---------
Net income (loss) $ 1,199.7 $ 465.7 $ 356.7 $ 636.5 $ (84.2)
========= ========= ========= ========= =========
Depreciation and amortization $ 617.8 $ 591.1 $ 534.2 $ 423.6 $ 346.8
Per share data:
- ---------------
Earnings (loss) per share - basic $ 2.81 (b) $ 1.05 (b) $ 0.81 (b) $ 1.42 (b) $ (0.19) (b)
Earnings (loss) per share - diluted 2.76 (b) 1.04 (b) 0.79 (b) 1.37 (b) (0.19) (b)
Cash dividends per share 0.08 0.08 0.08 0.065 0.06
Balance sheet data (at year-end):
- ---------------------------------
Total assets $17,004.8 $16,587.0 $15,315.2 $14,340.1 $12,217.8
Settlement assets 9,585.6 9,758.0 8,364.7 7,461.5 6,210.6
Total liabilities 13,097.1 12,831.1 11,657.9 10,630.3 9,072.7
Settlement obligations 9,694.6 9,617.0 8,249.8 7,389.9 6,119.4
Borrowings 1,528.1 1,521.7 1,750.7 1,261.4 1,127.7
Convertible debt 50.0 50.0 --- 447.1 447.1
Total stockholders' equity 3,907.7 3,755.9 3,657.3 3,709.8 3,145.1
Summary operating data:
- -----------------------
At year-end-
Card accounts on file (in millions) 259.8 211.9 180.4 152.9 121.4
For the year-
Merchant dollar volume (in billions,
domestic only) (c) $ 328.3 $ 252.2 $ 216.0 $ 185.0 $ 119.5
Merchant transactions (in billions) 6.4 5.0 4.6 3.6 1.7
Money transfer transactions (in
millions) 73.5 61.4 47.8 35.2 26.9
(a) Includes a $19.8 million gain recognized upon the merger exchange of
Excite@Home stock for iMall stock in which FDC held an 11% ownership
interest.
(b) Includes restructuring, business divestiture, litigation and impairment
items: A net benefit of $715.8 million pre-tax ($417.6 million after tax,
or $0.96 benefit per share, $0.99 benefit per share including the iMall
gain discussed above) for 1999; a net charge of $319.1 million pre-tax,
($231.5 million after tax, or $0.52 loss per share) for 1998 (including a
provision for termination of a card processing agreement); a net charge of
$369.3 million ($333.9 million after tax, or $0.72 loss per share) for
1997; a net benefit of $13.5 million ($8.3 million after tax, or $0.02 gain
per share) for 1996; and net charges of $645.7 million ($539.9 million
after tax, or $1.21 loss per share) for 1995.
(c) Includes Visa and Master Card volume only from alliances and managed
accounts.
11
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 : payment instruments, card issuer services and merchant
processing services. Payment instruments includes Western Union, Integrated
Payment Systems ("IPS"), and Orlandi Valuta Companies 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
services. Card issuer services encompasses domestic and international card
processing. 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 and First Data Financial Services
("FDFS"). 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 TeleServices, Call
Interactive, IBT, First Data Solutions 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 acquisitions or divestitures.
Significant Developments
In 1999, the Company continued the emphasis 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, identifying operational efficiencies and building
on the fundamental strengths of its businesses.
FDC continues to aggressively expand its e-commerce activities. During the third
quarter 1999, the Company announced the creation of an Internet commerce group
to focus on development and management of Internet-based electronic commerce
solutions and related initiatives across all First Data subsidiaries.
In the payment instruments segment, Western Union continues to experience strong
growth. Western Union now offers money transfer services at more than 39,900
locations in North America (United States, Canada and Mexico) and 42,400
International agent locations (in total, a 48% increase since December 31, 1998)
in 176 countries and territories worldwide. North America consumer money
transfer revenue increased 5% to $698 million in 1999 from $665 million in 1998.
International money transfer revenue (a transfer either sent to or received from
an international location) increased 52% to $579 million in 1999 from $381
million in 1998. The dramatic growth in agent locations is due in part to the
addition of 11,000 locations for Postbank of Germany in 1999.
In 1999, the Company announced that its Western Union business unit had received
preliminary approval for a proposed settlement of all claims in several class
action lawsuits pertaining to the Company's U.S.-to-Mexico money transfer
business. Under the terms of the settlement, FDC will establish a charitable
fund for the advancement of Mexican and Mexican-American causes in the amount of
$4 million. In addition, Western Union will issue discount coupons to its
customers who transferred money from the U.S. to Mexico after January 1, 1987.
These coupons will be for future money transfers to Mexico. Discount coupons for
future Western Union transactions will also be issued to MoneyGram (previously
an FDC subsidiary) customers who transferred money to Mexico from January 1,
1988 to December 10, 1996. FDC recorded a pre-tax charge of $36.1 million ($22.4
million after tax) in 1999 to reflect legal fees, the charitable fund and other
outside administrative costs in connection with the settlement. Future discounts
related to coupon redemption will be recorded as incurred.
Card issuer services' volume trends remained positive in 1999 with total
accounts on file growing to 260 million -- up 23% from December 31, 1998. This
growth was fueled by the conversion of a record number of accounts in 1999
(approximately 42 million accounts) including the First Chicago bankcard
portfolio now owned by Bank One, the First Consumers retail card portfolio
(including the Spiegel and Eddie Bauer brands) and First Union. Client
consolidation has
12
benefited the Company's growth in card accounts on file, as in the case of the
Bank One acquisition of First Chicago. The credit card issuer market continues
to consolidate and future consolidations could positively or negatively affect
the Company's card accounts on file. The loss of one of the Company's largest
card issuer clients could have a material adverse impact upon the card issuer
services business, but should such an event occur, the lengthy conversion
process should provide this business with sufficient time to adjust its cost
structure accordingly. The increasingly concentrated and competitive credit card
issuer market has increased client expectations regarding pricing, technology,
conversion, functionality and flexibility. In the GE contract, for example,
conversion is made contingent upon implementation of specific core system
developments. In order to be responsive to these market and contractual demands,
the Company continues to reassess its worldwide card issuer systems to determine
what hardware and software technology, system structure and management/
production processes can maintain the Company's competitiveness in response to
market demands. In addition to its ongoing investment in systems development,
FDC expects to make incremental investments of approximately 3% to 5% of card
issuer services revenues annually in each of the next several years to be used
for system development and initiatives to enhance the architectural foundation
of the card issuer services platforms.
In 1999, card issuer services also reached several major milestones including
processing over one billion off-line debit card transactions domestically in a
single year, and adding its one-millionth smart card on file in its European
operation. Building on this leading position in off-line debit processing, First
Data accelerated efforts to enter the on-line debit arena and provide end-to-end
debit card services to clients. In September 1999, the Company acquired U.S.
Processing, LLC, a provider of transaction processing services for the
electronic funds transfer industry, including on-line debit processing, to
further this objective.
The merchant processing segment experienced strong revenue growth in 1999 (11%)
compared to 1998. This growth in revenues is attributable to significant
increases in merchant dollar volume processed which grew 30% in 1999. Including
results for Paymentech (see discussion of Paymentech below) comparably for the
last 5 months in both years, dollar volume growth would have been 18% in 1999
compared to 1998.
In July 1999, the Company completed the acquisition of Paymentech, Inc.'s 16.4
million publicly held shares (45% of total outstanding shares) for a cash
payment of approximately $420 million. Bank One owns all of the remaining shares
(55% of the outstanding shares). In conjunction with this transaction,
Paymentech's operations were combined with the existing Bank One/First Data
alliance, BancOne Payment Services, LLC. Paymentech provides full-service
electronic payment solutions for merchants and third-party transaction
processing.
Several significant actions were taken in 1999 as the Company continues to
streamline its operations and focus on its three primary lines of business.
In April 1999, the Company sold Innovis, Inc. (formerly Consumer Credit
Associates, Inc.) to CBC Companies, Inc. for $20 million. Results for 1999
included recognition of a pre-tax benefit of $24.5 million ($40.0 million after
tax) for Innovis that relates primarily to the receipt of the net proceeds from
its sale and the tax benefits realized.
In May 1999, the Company sold its EBP Life business unit for cash proceeds of
$14.5 million. As a result of this transaction FDC recorded a pre-tax gain
amount of $4.5 million ($3.9 million after tax) in 1999.
In July 1999, the Company completed the sale of its Donnelley Marketing
subsidiary to infoUSA for cash proceeds of approximately $200 million. As a
result of this transaction a pre-tax loss of $29.8 million ($14.7 million after
tax) was recognized.
In September 1999, the Company recorded a pre-tax loss of $13.5 million ($8.4
million after tax) related to the termination of a specialty services joint
venture. The charge represents the funding required for the joint venture
shutdown and payment of a customer termination fee. Also in September 1999, a
$7.4 million merger accrual related to the 1995 merger of FDC and First
Financial Management Corporation was reversed (with no tax effect) due to the
favorable resolution of a contingency.
In December 1999, the Company sold its Investor Services Group business unit to
PNC Bank Corp for cash proceeds of approximately $1.1 billion. Upon completion
of the sale, the Company recorded a pre-tax gain of $744.6 million ($403.0
million after tax) and will realize net after tax cash proceeds of
approximately $725.0 million.
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.
13
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 being developed to support these actions. Also, the
Company may take future actions to further streamline operations and reduce
costs.
Results of Operations
1999 Compared with 1998
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 1999 increased
8% to $5.5 billion, compared with $5.1 billion in 1998. The Company's internal
growth rate in revenues over 1998 (excluding the effects of the
iMall/Excite@Home merger-related gain and business acquisitions and
divestitures) was 11%.
Product sales and other revenues increased 7% from $123.7 million in 1998 to
$132.9 million in 1999. The largest component of the increase for the year is
attributable to an increase in incentive payments received from one of the
Company's merchant alliance partners and the recognition of a merger exchange
gain related to the iMall/Excite@Home transaction mentioned above. These
increases were partially offset by a reduction in the number of branch
installations at IBT. Revenues from product and software sales occur in all
segments, and the aggregate of such revenues declined in 1999 principally due to
business divestitures.
Consolidated operating expenses increased 9% (to $3.5 billion) in 1999 as
compared to 1998, consistent with the growth in revenues. Consolidated selling,
general and administrative expenses increased 8% during 1999 (to $794.2
million). Company-wide cost containment and reduction initiatives and profit
improvement programs largely offset the effect of increased investment spending
in the payment instruments and card issuer services segments and increased Year
2000 ("Y2K") expenses. Y2K expenses for 1999 were approximately $98 million
compared to $75 million in 1998.
Interest expense remained flat at $104 million in 1999 and 1998 reflecting a
decrease in the average interest rate offset by an increase in the average debt
balance in 1999 compared to 1998. Year-end 1999 borrowings were $1.58 billion as
compared to $1.57 billion at year-end 1998.
FDC's full year effective tax rate for 1999 was 34.3%, compared to 34.6% in
1998. Excluding the effects of the nonrecurring items (i.e., restructuring,
divestitures, litigation, impairment and iMall gain) in both years, the
effective tax rate decreased 3.0 percentage points to 29.4% in 1999 compared to
32.4% in 1998. This decrease resulted from an increase in the amount of
nontaxable interest generated from investments in debt instruments issued by
state and local governments and a lower effective state tax rate.
Net income of $1,199.7 million in 1999 increased from $465.7 million in 1998.
Excluding nonrecurring items in both years, 1999's net income of $769.9 million
increased approximately 10% over 1998's net income of $697.2 million, and net
income margins increased to 13.9% from 13.6%. Diluted earnings per common share
increased from $1.04 in 1998 to $2.76 in 1999. Excluding nonrecurring items in
both years, diluted earnings per share increased approximately 13% to $1.77 in
1999 compared with $1.56 in 1998.
Payment Instruments
Total revenues in the payment instruments operating segment increased 19% in
1999 to $2.0 billion compared to $1.7 billion in 1998 on a pre-tax equivalent
basis. This revenue growth reflects continuing strong underlying volume
increases principally related to international and commercial money transfer.
Total money transfer revenues increased 22% to $1.6 billion in 1999, driven by
aggregate money transfer transaction growth of 20% to 73.5 million combined with
an increase in revenue per money transfer transaction. At December 31, 1999 the
agent base had grown 48% (as compared to December 31, 1998) to over 82,000
agents in 176 countries and territories.
14
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
$340.5 million in 1998 to $387.4 million in 1999 ($462.2 million and $538.9
million on a pre-tax equivalent basis for 1998 and 1999, respectively).
Operating profits for the year grew 18%, from $506.8 million in 1998 to $596.3
million in 1999. Established product lines continued to gain operating leverage
through cost efficiencies and price increases in certain markets, offset by
price declines in the Mexican markets, increased Y2K spending and investment in
new businesses and products.
Card Issuer Services
Total revenues in the card issuer services segment grew 10% to $1.4 billion in
1999 as compared to $1.3 billion in 1998. Growth in underlying volumes
continued to be strong and 1999 saw significant increases in accounts on file.
Card accounts on file as of December 31, 1999 were 260 million (a 23% increase
from December 31, 1998). Domestic card accounts grew to 233 million (25% growth)
largely due to the conversion of a record number of accounts in 1999
(approximately 42 million accounts) including the First Chicago bankcard
portfolio now owned by Bank One, the First Consumers retail card portfolio
(including the Spiegel and Eddie Bauer brands) and First Union. International
card accounts on file grew 6% to 27 million. Revenues grew more slowly than
accounts on file due to an increased proportion of 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 on 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 profits increased 4%, from $231.9 million in 1998 to $242.0 million in
1999, and operating margins were 17.5% in 1999 as compared to 18.4% in 1998.
Increased systems investments and non-capitalizable expenses incurred as a
result of 1999's record number of client conversions was partially offset by
operating leverage gained from strong volume trends.
Merchant Processing Services
Revenues in the merchant processing services segment grew 11% in 1999 to $1.5
billion from $1.4 billion in 1998. This growth in revenues is attributable to
significant increases in merchant dollar volume processed, which grew 30% to
$328 billion in 1999. Including results for Paymentech (see discussion of the
Paymentech acquisition above) comparably for the last five months in both years,
dollar volume growth would have been 18% in 1999 compared to 1998. Revenue
growth was driven by the growth in dollar volume processed and the impact of
revenue enhancement initiatives implemented in the second half of 1998 and early
1999. 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) was owned
during the last five months of 1998 also, on a proforma basis, merchant
processing services segment revenue would have increased 15% from 1998 to 1999.
Traditional TeleCheck revenues grew 6% for the year (10% if adjusted for the
transfer of gaming revenues to the FDFS gaming joint venture during 1998), while
revenue from bankcard collection activities declined $6.8 million from the prior
year as a result of exiting certain unprofitable contracts.
Operating profits grew 24% to $407.7 million in 1999 as compared to $329.1
million in 1998. Operating margins were 26.3% in 1999 as compared to 23.6% in
1998. This improvement is reflective of strong volume and the impact of revenue
enhancement initiatives implemented in late 1998 and early 1999 and significant
cost reduction, somewhat offset by an increase in Y2K 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.
15
All Other and Corporate
Revenues from all other continuing operations increased 4% in 1999 (to $348.8
million) compared to $336.1 million in 1998. Excluding the gain on iMall
(discussed below), revenues declined 2% to $329.0 million. Call Interactive
revenue grew 9%, and First Data Solutions revenue increased 9% due to strong
growth in recurring business which was offset by a 17% decline in revenues at
IBT due to a decline in in-store bank branch installations.
Operating profits declined in 1999 from $115.6 million in 1998 to $69.8 million
and, excluding the gain on iMall, operating profit declined to $50 million in
1999. Operating profit declined at TeleServices due to increased expenses
associated with the ramp up of business related to a start-up contract.
Additionally, the extent and timing of certain corporate initiatives focused on
improving the effectiveness of the Company's overall operations increased
corporate expenses. Lastly, the Company recorded its proportionate share of
losses associated with a specialty services joint venture.
In the third quarter of 1999, the Company announced a strategic marketing
agreement between Excite@Home and FDC to enable merchants to quickly establish
an online commerce storefront with transaction capabilities and access to
Excite's daily users. This agreement coincided with Excite's agreement to
acquire iMall, Inc., in which FDC held an 11% ownership stake before the closing
of this transaction. As a result of this transaction FDC recognized a gain of
$19.8 million ($12.2 million after tax) in fourth quarter 1999 results.
In January 2000, the Company completed the sale of its Hogan Information
Services business unit to Dolan Media Company for $30.1 million in cash.
Restructuring, Business Divestitures, Litigation and Impairment
In April 1999, the Company sold Innovis Inc. (formerly Consumer Credit
Associates, Inc.) to CBC Companies, Inc. for $20 million. Results for second
quarter 1999 include recognition of a pre-tax benefit of $24.5 million ($40.0
million after tax) for Innovis that relates primarily to the receipt of the net
proceeds from its sale.
In May 1999, the Company sold its EBP Life business unit for cash proceeds of
$14.5 million. As a result of this transaction FDC recorded a pre-tax gain of
$4.5 million ($3.9 million after tax) in the second quarter of 1999.
In July 1999, the Company completed the sale of its Donnelley Marketing
subsidiary to infoUSA for cash proceeds of approximately $200 million. As a
result of this transaction a pre-tax loss of $29.8 million ($14.7 million after
tax) was recognized.
In May 1999, the Company announced that its Western Union business unit received
preliminary approval for a proposed settlement of all claims in several class
action lawsuits pertaining to the Company's U.S.-to-Mexico money transfer
business. Under the terms of the proposed settlement, FDC will establish a
charitable fund for the advancement of Mexican and Mexican-American causes in
the amount of $4 million. In addition, Western Union will issue discount coupons
to its customers who transferred money to Mexico from January 1, 1988 to
December 10, 1996. FDC recorded a pre-tax charge of $36.1 million ($22.4 million
after tax) in 1999 to reflect legal fees, the charitable fund and other outside
administrative costs in connection with the settlement. Future discounts related
to coupon redemption will be recorded as incurred. At December 31, 1999, the
remaining accrual is $22.5 million.
In September 1999, the Company recorded a pre-tax loss of $13.5 million ($8.4
million after tax) related to the termination of a specialty services joint
venture. The charge consisted of severance accruals for approximately 60
employees of $7.0 million and other accrued exit costs (primarily a termination
fee) of approximately $6.5 million. At December 31, 1999, the remaining accrual
is $0.8 million.
In December 1999, the Company sold its Investor Services Group subsidiary to PNC
Bank Corp for cash proceeds of approximately $1.1 billion. This sale allows FDC
to further concentrate its efforts on electronic payment services and e-commerce
solutions. As a result of this sale, the Company recorded a pre-tax gain of
$744.6 million ($403.0 million after tax) and will realize net after tax cash
proceeds of approximately $725.0 million.
In 1999, the Company recorded a pre-tax benefit of $21.6 million ($16.2 million
after tax) resulting from the reversal of restructuring, merger and divestiture
accruals (reported on the "Restructuring, Business Divestitures, Litigation and
Impairment" line on the Consolidated Statements of Income). Restructuring,
merger and divestiture accruals are
16
reviewed each period. As with the above, balances in excess of anticipated
requirements are reversed through the same Statement of Income caption in which
they were originally recorded. In 1999, the reversals resulted from favorable
resolution of contingencies and changes in facts and circumstances.
The net total effect of all the 1999 restructuring, business divestitures,
litigation and impairment items was a benefit of $715.8 million on pre-tax
profit and $417.6 million on after tax profit, or $0.96 per share.
Results of Operations
1998 Compared with 1997
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 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 was 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 fees 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 fees
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 (excluding restructuring, business divestitures
and impairment) 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 and card issuer
services segments and increased Y2K expenses. Y2K 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 items 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 items 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 items 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
continued 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
17
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 and territories.
Operating profits for 1998 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 9% to $1.3 billion in
1998 as compared to $1.2 billion in 1997. Growth in underlying volumes 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.
Operating profits increased 12%, from $206.2 million in 1997 to $231.9 million
in 1998, and operating margins were 18% in 1998 and 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. Processing operating profits also 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 17% to
$252 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 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 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 were adversely affected by operating profits and gains
on merchant portfolios sold in 1997, the 1997 gain resulting from the
dissolution of a merchant alliance, losses in bankcard collections in 1998 and
significantly increased Y2K spending in 1998. Excluding the effects of these
items, operating profits grew approximately 8%.
All Other and Corporate
Revenues from all other continuing operations decreased 5% in 1998 to $336.1
million compared to $354.4 million in 1997. This decrease was driven primarily
by a 13% decline in revenues at TeleServices due to the transition of a portion
of MCI business from outsourcing to in-house and offset by growth in Call
Interactive revenue of 16% due to strong growth in recurring business. In-store
bank branch installations also declined from the prior year, resulting in a
revenue decline for IBT.
Operating profits declined in 1998, from $140.8 million in 1997 to $115.6
million. This decrease was primarily driven by a decline in operating profits
at IBT due to fewer branch installations.
18
Restructuring, Business Divestitures, Impairments, and Provision for Loss on
Contract
During the first quarter 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 pre-tax gain of $28.5 million.
In the third quarter, the Company contributed the assets of FDFS to a gaming
services joint venture formed among FDC, BA Merchant Services, Inc. and USA
Processing ("BMCF"). 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 included $5.9 million of salary and facility
cost 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 was $19.1 million at year-end 1998 and $1.1 million at
year-end 1999 and will be utilized in the first quarter 2000.
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, litigation 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, litigation and impairment, net" line in the Consolidated
Statements of Income). The decision to close Innovis was made in the fourth
quarter after an 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. The charge included 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 included 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. No charges were made
against the exit cost accrual in 1998. The remaining exit cost accrual at
December 31, 1999 was $6.2 million.
In addition to the above, the Company recorded 1998 restructuring charges of
$35.7 million; $19.0 million related to merchant processing services, $9.6
million related to card issuer services and $7.1 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. As of December 31, 1999 the remaining severance accrual was $0.8
million and the facility closure accrual balance was $3.9 million versus
balances of $7.2 million and $7.3 million at December 31, 1998, respectively.
The Company had other impairment charges of $33.4 million of which $2.2 million
related to card issuer services, $10.0 million related to facility closures and
terminated conversion efforts in merchant processing services and $21.2 million
related to software in the corporate and other category. A change in strategic
direction by certain of the Company's customers resulted in $15.1 million of
software not being recoverable in the near to medium term. The remaining $6.1
million software impairment 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.
19
The net total effect of all the 1998 restructuring, business divestitures,
litigation, impairment and loss contract items was a charge of $319.1 million on
pre-tax profit and $231.5 million on after tax profit, or $0.52 per share.
In February 1997, the Company sold its GENEX health care administrative services
subsidiary for cash proceeds of $70 million which resulted in a pre-tax 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 pre-tax 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 pre-tax
loss of $51.0 million. In addition, the Company recorded a $106.7 million pre-
tax impairment charge in conjunction with the planned 1998 divestiture of First
Image.
In addition to the above, the Company recorded 1997 restructuring charges of
$49.9 million, which 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 previously 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 $23.4 million for card issuer
services, $5.3 million for Corporate and other, $8.1 million for merchant
processing services, $10.1 million for divested businesses and $3.0 million for
payment instruments. During 1997, 1998 and 1999 the Company utilized $38.0
million, $8.6 million and $0.1 million, respectively, of the accrual; $28.8
million for severance, $6.5 million for facility closure and $11.4 million for
exit costs leaving an accrual at December 31, 1999 of $0.2 million for the
remaining severance after reversing $3.0 million of the accrual in 1999.
The net total effect of the 1997 restructuring, business divestitures and
impairment items was a charge of $369.3 million on pre-tax profit and $333.9
million on after tax profit, or $0.72 per share.
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.
FDC's business is somewhat insulated from economic fluctuations due to recurring
service revenues from long-term relationships, and the fact that the Company's
services often result in cost savings for its customers. 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.
The Company expects to deliver earnings per share in 2000 in the range of $1.95
to $2.02. 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.
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) no undiscovered Y2K computer errors and no unanticipated
post-Y2K date-related computer disruptions; (c) successful conversions under
service contracts with major clients; (d) renewal of material contracts in the
Company's business
20
units consistent with past experience; (e) 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; (f) 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; (g) 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; (h)
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; (i) anticipation of and response to
technological changes, particularly with respect to e-commerce; (j) 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; (k)
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; (l) 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); (m) 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; (n) 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; (o) successfully managing the potential both for patent protection and
patent liability in the context of rapidly developing legal framework for
expansive software patent protection and (p) continued political stability in
countries in which Western Union has material operations.
Variations from these assumptions or failure to achieve these objectives could
cause actual results to differ from those projected in the forward-looking
statements. Due to the uncertainties inherent in forward-looking statements,
readers are urged not to place undue reliance on these statements. In addition,
FDC undertakes no obligation to update or revise forward-looking statements to
reflect changed assumptions, the occurrence of unanticipated events, or changes
to projections over time.
Capital Resources and Liquidity
FDC continues to generate significant cash flow from operating activities,
aggregating $1.3 billion in 1999 and 1998. The 1999 operating cash flow was
produced primarily from net income of $1,199.7 million adjusted for depreciation
and amortization expense of $617.8 million, offset somewhat by non-cash and non-
operating items totaling $733.5 million (primarily restructuring, business
divestitures, litigation and impairment items). FDC utilized this cash flow
primarily 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 $430.3 million in 1999 compared with $649.8 million in 1998.
Overall, FDC's operating cash flow for 1999 exceeded its investing activities
associated with additions to property and equipment and capitalized contract and
systems development costs by $889.1 million as compared to $619.1 million in
1998. Additionally, the Company received cash of $1,316.3 million in 1999 for
divestitures. These cash sources contributed to funds utilized for capital
expenditures, business acquisitions and treasury stock purchases.
Cash outlays for acquisitions in 1999 totaled $479.8 million (as compared to
$94.2 million in 1998), the largest component of which was a payment of $420
million for the outstanding shares of Paymentech, Inc. The Company also paid
$102.9 million relating to businesses previously acquired including $26.5
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 programs
described below and for purposes of meeting employee benefit programs and
dividend payments. Net cash used in financing activities was $943.6 million
compared to $551.5 million in 1998.
21
In 1999, the Company made treasury stock purchases of $1,104.7 million including
purchases under the stock buyback programs discussed below. Proceeds from stock
option exercises totaling $189.7 million partially offset these outlays. The
Company also continued its practice of paying quarterly cash dividends,
resulting in $34.5 million of cash payments for the year to the Company's common
stockholders.
In September 1998, the Board of Directors 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. The Company completed
utilization of the $550 million authorization during the third quarter of 1999.
A total of 16.9 million shares were purchased under the 1998 authorizations
including 7.0 million shares for $293.4 million in 1999. In July 1999, the
Board of Directors authorized management to purchase an additional $750 million
of its outstanding common stock. As a part of this authorization, the Company
purchased 10.7 million shares of its stock in 1999 at a cost of approximately
$485 million. Funding for additional purchases under this authorization will
come from operating cash flow and the proceeds from divestitures.
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.
In March 1999, the Company entered into a $100 million, 5-year, bullet maturity
debt financing with a floating interest rate based on LIBOR. Under certain
circumstances this financing may be pre-paid. Additionally, in November 1999,
the Company established an extendible commercial note program in the amount of
$300 million. These additional funds and funding will be used for the
Company's stock repurchases and investing activities.
As an integral part of FDC's information processing services for payment
transactions, FDC receives funds from instruments sold in advance of settlement
with payment recipients. These funds (referred to as "settlement assets" on
FDC's consolidated balance sheet) are not utilized to support the Company's
operations. However, the Company does have the opportunity to earn income from
investing a portion of these funds. The Company maintains a portion of its
settlement assets in highly liquid investments (classified as cash equivalents
within settlement assets) to fund settlement obligations.
Cash and cash equivalents at December 31, 1999 included a significant amount of
liquidity on hand in preparation for any Y2K related funding needs. Such cash
will be utilized in the first quarter 2000 to pay down borrowings. Also, FDC has
available borrowing capacity of $1.3 billion at December 31, 1999 under the
Company's commercial paper program and uncommitted bank credit lines. To provide
additional liquidity in early 2000 in the event of a business disruption due to
Y2K problems, the Company established a $1 billion credit facility that became
effective on January 3, 2000. This facility was not used and was cancelled on
January 31, 2000. Also included in cash and cash equivalents is $70 million
related to required investments of cash in connection with the Company's
merchant card settlement operation.
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
As of March 1, 2000, the Company has not experienced any material issues or
problems related to the rollover to the year 2000. However, the Company still
may encounter Y2K issues. Management believes that if Y2K issues do arise, they
most likely would relate to the readiness of third parties with which the
Company has a relationship. In this regard, the Company's contingency plans
address the readiness of third parties as discussed in Y2K disclosures in the
Company's prior Form 10-K/10-Q filings. At this time, the Company has no
reason to believe that any material Y2K issues will be encountered.
Through December 31, 1999, the Company has spent, in aggregate, approximately
$206 million to prepare for Y2K, all of which was financed from operating cash
flows. Of the $206 million, $98 million was incurred in 1999, which represented
approximately 11% of the 1999 IT operating budget. Approximately 94% of the
1999 expenditures was spent on software remediation and testing and
approximately 6% was spent to replace systems and equipment and to add testing
capacity. The Company does not anticipate material Y2K expenditures in 2000.
22
New Accounting Pronouncements
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 Data 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.
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 include 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 2000, as compared to the
average level of interest rates in 1999, would result in a decrease to pre-tax
income of approximately $10.6 million. Of this decrease $8.0 million takes into
consideration expected investment positions and debt balances, commissions paid
to selling agents, growth in new business, and the effects of interest rate cap
and swap agreements. The remaining $2.6 million decrease is primarily 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 pre-tax earnings.
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 pre-tax
income of approximately $10.5 million. Of this decrease $8.0 million takes into
consideration expected investment positions and debt balances, commissions paid
to selling agents, growth in new business, and the effects of interest rate cap
and swap agreements. The remaining $2.5 million decrease is primarily 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 pre-tax earnings.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
23
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:
Name Age Position
- ---- --- --------
Henry C. Duques........ 56 Chairman of the Board and Chief Executive Officer
Eula L. Adams.......... 50 Executive Vice President
David P. Bailis........ 44 Executive Vice President
Charles T. Fote........ 51 President and Chief Operating Officer
Kimberly S. Patmore.... 43 Executive Vice President and Chief Financial Officer
Pamela H. Patsley...... 43 Executive Vice President
Alan M. Silberstein.... 52 Executive Vice President
Michael T. Whealy...... 47 Executive Vice President, Secretary, General
Counsel and Chief Administrative Officer
Ben Burdetsky.......... 71 Director
Courtney F. Jones...... 60 Director
Robert J. Levenson..... 58 Director
James D. Robinson III.. 64 Director
Charles T. Russell..... 70 Director
Bernard L. Schwartz.... 74 Director
Joan E. Spero.......... 55 Director
Garen K. Staglin....... 55 Director
The Board of Directors of the Company is divided into three classes serving
staggered three-year terms. The terms of office of Mr. Jones, Mr. Levenson and
Mr. Russell will expire in 2000, the terms of office of Mr. Burdetsky, Mr.
Duques and Ms. Spero expire in 2001 and the terms of office of Mr. Robinson, Mr.
Schwartz and Mr. Staglin will expire in 2002. 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 Ms. Spero serve on the Audit Committee
of the Board of Directors. Mr. Russell (Chairman) and Mr. Schwartz 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. He 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.
Kimberly S. Patmore was promoted to Executive Vice President and Chief Financial
Officer of the Company in February 2000. She joined the Company in 1992 and most
recently served as Senior Vice President and Chief Financial Officer of First
Data Payment Businesses, which includes Western Union, First Data Merchant
Services and First Data Resources. Prior to joining the Company, Ms. Patmore
was with Ernst & Young.
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 Resources business units on legal matters prior to his
promotion to General
24
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,
Missouri.
Michael T. Whealy was promoted in March 1998 to Executive Vice President,
Secretary 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
of First Data Resources Inc. from April 1992 until his promotion to General
Counsel of Card Services Group in 1994. Prior to joining the Company, Mr. Whealy
was a partner in the law firm of Kutak Rock in Omaha, Nebraska.
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 served
as Managing Director in charge of the New World Banking Group of Bankers Trust
from December 1997 to July 1999. Mr. Jones has been a director of RSP
Manufacturing Corporation since March 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 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.
Robert J. Levenson has been a Director of the Company since April 1992. He is
the Managing General Partner of the Lenox Capital Group. From 1993 to 2000, he
was an Executive Vice President of the Company. Prior to joining the Company,
he 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 Emisphere Technologies, Inc., Superior Telecom,
Inc., Vestcom International, Inc., and Virtual Communities, Inc.
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 a General Partner of RRE
Ventures, L.P. He is also non-executive Chairman of Violy, Byorum & Partners
Holdings, LLC, a private investment firm specializing in financial advisory and
investment banking activities in Latin America. Mr. Robinson previously served
as Chairman and Chief Executive Officer and as a Director of American Express
from 1977 until February 1993. He 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 Institution.
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.
25
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 January 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 that time.
Garen K. Staglin has been a Director of the Company since April 1992. Mr.
Staglin is Managing Director of the Rutherford Fund, a private venture capital
fund. 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 as
Chief Executive Officer of Safelite Glass Corporation from August 1991 to 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 on the Advisory Council of the
Stanford Graduate School of Business.
Pamela H. Patsley joined the Company as Executive Vice President in February
2000. Prior to joining the Company, Ms. Patsley served as President and Chief
Executive Officer of Paymentech, Inc., one of the largest processors of bankcard
transactions and a leading issuer of commercial cards in the nation from 1991 to
February 2000. She is a director of Adolph Coors Company and MessageMedia Inc.
Alan M. Silberstein joined the Company as Executive Vice President in February
2000. Mr. Silberstein has served as a consultant to Western Union since October
1998. Prior to that, he was Chairman and Chief Executive Officer of Claim
Services (from 1996) and Executive Vice President of Travelers Property Casualty
Corp. From 1992 to 1995, Mr. Silberstein was Executive Vice President and
Director of Retail Banking of Midlantic Corporation which has since merged into
PNC Bank Corp.
Compliance with Section 16(a) of the Exchange Act
See the Proxy Statement for the Company's 2000 Annual Meeting of Stockholders,
which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
See the Proxy Statement for the Company's 2000 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 2000 Annual Meeting of Stockholders,
which information is incorporated herein by reference.
26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the Proxy Statement for the Company's 2000 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 (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).
27
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 its May 12, 1999 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)/ Form of Performance Grant Agreement under the 1992 Long-Term
Incentive Plan for the period beginning January 1, 1999
(incorporated by reference to Exhibit 10.12 of the registrant's
Annual Report on Form 10-K for the year ended December 31, 1998).
10.13/(1)(2)/ Form of Performance Grant Agreement under the terms of the 1992
Long-Term Incentive Plan for the period beginning January 1, 2000.
10.14/(1)/ Registrant's Senior Executive Incentive Plan (incorporated by
reference to Exhibit B of the registrant's Proxy Statement for its
May 12, 1999 Annual Meeting).
10.15/(1)/ Registrant's Supplemental Savings Plan 2000 (incorporated by
reference to Exhibit 4 of the Form S-8 filed by the registrant on
November 10, 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 1999:
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.
28
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, 2000
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:
Name Title Date
- ---- ----- ----
/s/ HENRY C. DUQUES Chairman of the Board and March 24, 2000
- --------------------------- Chief Executive Officer
Henry C. Duques
/s/ CHARLES T. FOTE President and Chief March 24, 2000
- --------------------------- Operating Officer
Charles T. Fote
/s/ KIMBERLY S. PATMORE Executive Vice President and March 24, 2000
- --------------------------- Chief Financial Officer
Kimberly S. Patmore (Principal Financial Officer)
/s/ JEFFREY W. HOLTZ Vice President and Corporate March 24, 2000
- --------------------------- Controller
Jeffrey W. Holtz (Principal Accounting Officer)
/s/ BEN BURDETSKY Director March 24, 2000
- ---------------------------
Ben Burdetsky
/s/ COURTNEY F. JONES Director March 24, 2000
- ---------------------------
Courtney F. Jones
/s/ ROBERT J. LEVENSON Director March 24, 2000
- ---------------------------
Robert J. Levenson
/s/ JAMES D. ROBINSON III Director March 24, 2000
- ---------------------------
James D. Robinson III
/s/ CHARLES T. RUSSELL Director March 24, 2000
- ---------------------------
Charles T. Russell
/s/ BERNARD L. SCHWARTZ Director March 24, 2000
- ---------------------------
Bernard L. Schwartz
/s/ JOAN E. SPERO Director March 24, 2000
- ---------------------------
Joan E. Spero
/s/ GAREN K. STAGLIN Director March 24, 2000
- ---------------------------
Garen K. Staglin
29
[THIS PAGE INTENTIONALLY LEFT BLANK]
FIRST DATA CORPORATION
INDEX TO FINANCIAL STATEMENTS
COVERED BY REPORT OF INDEPENDENT AUDITORS
(Item 14(a))
Page
----
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,
1999, 1998 and 1997..................................................... F-3
Consolidated Balance Sheets at December 31, 1999 and 1998............... F-4
Consolidated Statements of Cash Flows for the Years ended December 31,
1999, 1998 and 1997..................................................... F-5
Consolidated Statements of Stockholders' Equity for the Years ended
December 31, 1999, 1998 and 1997........................................ F-6
Notes to Consolidated Financial Statements.............................. F-7
Schedule:
Schedule II-Valuation and Qualifying Accounts........................... F-34
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
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, 1999 and 1998 and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1999. 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 auditing standards generally accepted
in the United States. 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, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. 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 herein.
Ernst & Young LLP
Atlanta, Georgia
January 27, 2000
F-2
FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
(in millions, except per share amounts)
REVENUES
Service revenues $5,406.9 $4,993.9 $4,978.5
Product sales and other 132.9 123.7 256.0
-------------------------------
5,539.8 5,117.6 5,234.5
-------------------------------
EXPENSES
Operating 3,532.2 3,250.1 3,296.4
Selling, general and administrative 794.2 732.4 745.9
Provision for loss on contract ---- 125.2 ----
Restructuring, business divestitures, litigation
and impairment, net (715.8) 193.9 369.3
Interest 103.8 104.1 116.5
-------------------------------
3,714.4 4,405.7 4,528.1
-------------------------------
Income before income taxes 1,825.4 711.9 706.4
Income taxes 625.7 246.2 349.7
-------------------------------
Net income $1,199.7 $ 465.7 $ 356.7
===============================
Earnings per share - basic $ 2.81 $ 1.05 $ 0.81
Earnings per share - diluted $ 2.76 $ 1.04 $ 0.79
===============================
Weighted-average Shares Outstanding:
Basic 427.7 445.2 442.3
Diluted 435.1 448.3 466.9
See notes to consolidated financial statements.
F-3
FIRST DATA CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
(in millions)
ASSETS
Cash and cash equivalents $ 1,044.0 $ 459.5
Settlement assets 9,585.6 9,758.0
Accounts receivable, net of allowance for doubtful accounts of
$31.3 (1999) and $27.9 (1998) 908.5 940.1
Property and equipment, net 710.6 781.0
Goodwill, less accumulated amortization of $560.1 (1999) and $542.7 (1998) 2,480.2 2,885.4
Other intangibles, less accumulated amortization of $664.9 (1999) and $548.5 (1998) 1,002.3 1,107.9
Investment in affiliates 891.3 340.0
Other assets 382.3 315.1
-----------------------
$17,004.8 $16,587.0
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Settlement obligations $ 9,694.6 $ 9,617.0
Accounts payable and other liabilities 1,824.4 1,642.4
Borrowings 1,578.1 1,571.7
-----------------------
Total Liabilities 13,097.1 12,831.1
-----------------------
Commitments and Contingencies
Stockholders' Equity:
Common Stock, $.01 par value; authorized 600.0 shares,
issued 448.9 shares (1999 and 1998) 4.5 4.5
Additional paid-in capital 2,180.7 2,143.2
-----------------------
Paid-in capital 2,185.2 2,147.7
Retained earnings 2,964.1 1,893.9
Accumulated other comprehensive income (87.7) 54.1
Less treasury stock at cost, 31.0 shares (1999)
and 13.4 shares (1998) (1,153.9) (339.8)
-----------------------
Total Stockholders' Equity 3,907.7 3,755.9
------------------------
$17,004.8 $16,587.0
=======================
See notes to consolidated financial statements.
F-4
FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
(in millions)
Cash and cash equivalents at January 1 $ 459.5 $ 410.5 $ 271.7
----------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 1,199.7 465.7 356.7
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization 617.8 591.1 534.2
Non-operating and non-cash portion of provision for loss on contract,
restructuring, business divestitures, litigation and impairment, net (715.8) 303.0 332.9
Other non-cash items, net (17.7) 17.0 8.3
Increase (decrease) in cash, excluding the effects of acquisitions
and dispositions, resulting from changes in:
Accounts receivable (63.1) (112.7) (111.2)
Other assets 16.8 23.9 (109.4)
Accounts payable and other liabilities (56.9) (45.4) (5.2)
Income tax accounts 338.6 26.3 165.2
----------------------------------
Net cash provided by operating activities 1,319.4 1,268.9 1,171.5
----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Current year acquisitions, net of cash acquired (479.8) (94.2) (366.8)
Payments related to other businesses previously acquired (102.9) (107.7) (91.2)
Proceeds from dispositions, net of expenses paid 1,316.3 198.0 505.7
Additions to property and equipment, net (243.8) (325.9) (297.3)
Payments to secure customer service contracts, including outlays
for conversion, and capitalized systems development costs (186.5) (323.9) (319.6)
Other investing activities (94.6) (14.7) (35.0)
----------------------------------
Net cash provided (used) in investing activities 208.7 (668.4) (604.2)
----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-term borrowings, net 63.9 (174.0) 140.4
Issuance of long-term debt 100.0 148.9 371.6
Principal payments on long-term debt (158.0) (154.9) (37.0)
Proceeds from issuance of common stock 189.7 83.6 149.0
Purchase of treasury shares (1,104.7) (419.4) (1,017.0)
Cash dividends (34.5) (35.7) (35.5)
----------------------------------
Net cash used for financing activities (943.6) (551.5) (428.5)
----------------------------------
Change in cash and cash equivalents 584.5 49.0 138.8
----------------------------------
Cash and cash equivalents at December 31 $ 1,044.0 $ 459.5 $ 410.5
==================================
See notes to consolidated financial statements.
F-5
FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Other Treasury Stock
Comprehensive Retained Comprehensive Common Paid-In -----------------
(in millions) Total Income Earnings Income Shares Capital Shares Cost
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $ 3,709.8 $1,610.7 $ 26.3 448.9 $2,106.3 (0.9) $ (33.5)
Comprehensive income
Net Income 356.7 $ 356.7 356.7
Other comprehensive income:
Unrealized gains on securities 25.8 25.8
Foreign currency translation
adjustment (1.4) (1.4)
Minimum pension liability
adjustment 15.1 15.1
-------
Other comprehensive income 39.5 39.5
-------
Comprehensive income $ 396.2
=======
Purchase of treasury shares (1,017.0) (34.6) (27.0) (982.4)
Stock issued for:
Acquisitions, including
additional consideration 10.2 0.3 10.2
Compensation and benefit plans 149.0 (79.3) 31.4 5.2 196.9
Convertible debentures 444.8 (308.2) 20.4 753.0
Other transactions and adjustments (0.2) 0.1 (0.3)
Cash dividends declared ($0.08 per
share) (35.5) (35.5)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 3,657.3 1,509.9 65.8 448.9 2,137.4 (2.0) (55.8)
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) (15.4) (419.4)
Stock issued for:
Acquisitions, including
additional consideration 6.2 0.1 0.2 6.1
Compensation and benefit plans 91.8 (45.1) 7.6 3.8 129.3
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 (13.4) (339.8)
Comprehensive income
Net Income 1,199.7 $1,199.7 1,199.7
Other comprehensive income:
Unrealized losses on securities (175.1) (175.1)
Foreign currency translation
adjustment (11.3) (11.3)
Minimum pension liability
adjustment 44.6 44.6
--------
Other comprehensive income (141.8) (141.8)
--------
Comprehensive income $1,057.9
========
Purchase of treasury shares (1,104.7) (25.0) (1,104.7)
Stock issued for compensation and
benefit plans 233.5 (94.9) 37.8 7.4 290.6
Other transactions and adjustments (0.5) (0.2) (0.3)
Cash dividends declared ($0.08 per
share) (34.4) (34.4)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $ 3,907.7 $2,964.1 $ (87.7) 448.9 $2,185.2 (31.0) $(1,153.9)
====================================================================================================================================
See notes to consolidated financial statements.
F-6
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 "investments in affiliates" 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 certain
nonrecurring gains.
Certain amounts from prior years have been reclassified to conform to the
current presentation.
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 15).
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 which have local
currency as their functional currency. These units, collectively, accounted for
5%, 5% and 4% of FDC's total revenues for the years ended December 31, 1999,
1998 and 1997, respectively, and a comparable portion of FDC's assets and
earnings (prior to the nonrecurring items 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, 1999 and 1998
include $70.0 million of required investments in connection with FDC's merchant
card settlement operation.
Investment Securities
FDC categorizes all of its investment securities as available-for-sale which are
recorded at fair value. Unrealized gains and losses on available-for-sale
securities are reported (net of tax effects) as adjustments to stockholders'
equity. Realized gains and losses (and declines in value judged to be other than
temporary) are included in FDC's results of operations. The cost of securities
sold is based upon the specific identification method.
F-7
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 7). The interest rate
indices specified by the agreements have been and are expected to be highly
correlated with the commission rates paid to these selling agents. Interest rate
swap agreements involve the receipt of floating rate payments in exchange for
fixed rate payments over the life of the agreement. The differential to be paid
or received is accrued as rates change and is recognized as an adjustment of
agent commission expense. Costs of variable rate cap agreements, which are
included in other assets, are amortized as an adjustment to agent commissions
over the lives of the agreements, and amounts due FDC under these agreements are
recognized as an adjustment of agent commissions as earned. The fair value of
these agreements and changes to their fair value resulting from changes in
market interest rates are not recognized in the financial statements.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation which
is computed using the straight-line method over the lesser of the estimated
useful life of the related assets (generally three to ten 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 $249.1 million in 1999, $266.7 million in 1998 and
$236.7 million in 1997.
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 ten to 40 years. Goodwill amortization expense totaled
$99.2 million in 1999, $105.9 million in 1998, and $109.7 million in 1997. Other
intangible assets consist primarily of contract costs (rights to provide
processing services to customers, acquired directly or through acquisitions) and
capitalized conversion costs (contractually required systems and programming and
other related costs to convert client accounts to FDC's 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 $128.1 million at December 31, 1999 and $102.0 million
at December 31, 1998. Other intangibles also 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 $269.5 million in 1999, $218.5
million in 1998, and $187.8 million in 1997.
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" ("SFAS 121"), long-lived assets are reviewed for impairment
whenever events indicate that their carrying amount may not be recoverable. In
accordance with APB Opinion No. 17 "Intangible Assets", enterprise goodwill is
assessed for impairment when events, such as a significant decline in the
profitability of an operating unit to which goodwill is associated, occur. In
such reviews, estimated undiscounted future cash flows associated with these
assets or operations 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 $1.9 billion in 1999, $1.6 billion in 1998 and $1.5 billion in
1997).
F-8
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Earnings Per Common Share
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:
Year Ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
(in millions)
Weighted-average shares outstanding:
Basic weighted-average shares 427.7 445.2 442.3
Common stock equivalents 7.4 3.1 5.3
Senior convertible debentures ---- ---- 19.3
------- ------- --------
435.1 448.3 466.9
Earnings add back related to senior
convertible debentures ---- ---- $ 12.8
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, restricted stock awards and
convertible debt (1997). 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 13). As permitted by the
standard, FDC continues to account for such arrangements under APB Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations.
F-9
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 2: Divestitures, Restructuring, Litigation, Impairment and Provision for
Loss on Contract
The company divested and closed certain businesses and recorded restructuring
and impairment charges related both to ongoing operations and divestitures in
the three years ended December 31, 1999 in order to focus on core businesses.
In addition, during 1999 the Company recorded a charge for costs associated with
the proposed settlement of Western Union litigation and reversed excess
restructuring, merger and divestiture accruals. Restructuring, merger and
divestiture accruals are reviewed each period and balances in excess of
anticipated requirements are reversed through the same Statement of Income
caption in which they were originally recorded. In 1999, the reversals resulted
from the favorable resolution of contingencies and changes in facts and
circumstances. During 1998, the Company recorded a provision for an anticipated
loss on an overseas processing contract. A summary of these items follows:
Pretax (Gain) Charge
--------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
(in millions)
(Gain) loss on business divestitures and
associated impairments $(743.8) $(60.1) $319.4
Other impairments --- 71.9 --
Restructuring --- 35.7 49.9
Business closure 13.5 146.4 --
Litigation settlement 36.1 -- --
Reversal of restructuring,
merger and divestiture accruals (21.6) -- --
--------------------------------------------------------------------------
Total pre-tax (gain) charge for restructuring,
divestitures, litigation and
impairment, net $(715.8) $193.9 $369.3
==========================================================================
Provision for loss on contract $125.2
===================
1999 Activities
Business Divestitures and Associated Impairments - In April 1999, the Company
sold Innovis Inc. (formerly Consumer Credit Associates, Inc.) to CBC Companies,
Inc. for $20 million. Results for second quarter 1999 include recognition of a
pre-tax benefit of $24.5 million for Innovis that relates primarily to the
receipt of the net proceeds from its sale.
In May 1999, the Company sold its EBP Life business unit for $14.5 million in
cash. As a result of this transaction FDC recorded a pre-tax gain of $4.5
million in 1999. In July 1999, the Company completed the sale of its Donnelley
Marketing subsidiary to infoUSA for cash proceeds of approximately $200 million.
As a result of this transaction a pre-tax loss of $29.8 million was recognized
in 1999.
In December 1999, the Company sold its Investor Services Group subsidiary to PNC
Bank Corp. for cash proceeds of approximately $1.1 billion. This sale allows FDC
to further concentrate its efforts on electronic payment services and e-commerce
solutions. As a result of this sale, the Company recorded a pre-tax gain of
$744.6 million and will realize net after tax cash proceeds of approximately
$725.0 million.
In January 2000, the Company completed the sale of its Hogan Information
Services business unit to Dolan Media Company for cash proceeds of $30.1
million.
Business Closure - In September 1999, the Company recorded a pre-tax loss of
$13.5 million related to the termination of a specialty services joint venture.
The charge consisted of severance accruals for approximately 60 employees of
$7.0 million and other accrued exit costs (primarily a termination fee) of
approximately $6.5 million. At December 31, 1999, the remaining accrual was
$0.8 million.
F-10
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Litigation Settlement - In May 1999, the Company announced that its Western
Union business unit received preliminary approval for a proposed settlement of
all claims in several class action lawsuits pertaining to the Company's U.S.-to-
Mexico money transfer business. Under the terms of the proposed settlement, FDC
will establish a charitable fund for the advancement of Mexican and Mexican-
American causes in the amount of $4 million. In addition, Western Union will
issue discount coupons to its customers who transferred money to Mexico from
January 1, 1988 to December 10, 1996. FDC recorded pre-tax charges of $36.1
million in 1999 to reflect legal fees, the charitable fund and other outside
administrative costs in connection with the settlement. Future discounts related
to coupon redemption will be recorded as incurred. At December 31, 1999, the
remaining accrual was $22.5 million.
Reversal of Restructuring, Merger and Divestiture Accruals - The Company
reversed $6.5 million restructuring, $9.6 million merger and $5.5 million
divestiture reserves in 1999. These reversals resulted primarily from the
favorable resolution of a contingency related to the 1995 merger with First
Financial Management Corporation and a delay in closure of a leased operating
facility.
Other - 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.
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
pre-tax gain of $28.5 million.
In June 1998, the Company completed the sale of First Image Management Company
("First Image") for cash proceeds of $150.0 million. In January 1998, the
Company announced its intention to sell First Image, and recorded a 1997 pre-tax
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 cash proceeds of $48
million and recorded a pre-tax 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 $2.2 million related to card issuer services, $10.0
million related to facility closures and terminated conversion efforts in
merchant processing services and $21.2 million related to software in the
corporate and other category. A change in strategic direction by certain of the
Company's customers resulted in $15.1 million of software not being recoverable
in the near to medium term. The remaining $6.1 million software impairment
related to the abandonment of certain development efforts where the commercial
viability of the planned product or service offering became doubtful.
Restructuring - Restructuring charges of $35.7 million were recorded; $19.0
million related to merchant processing services, $9.6 million related to card
issuer services and $7.1 million related to corporate and other. 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.
During 1998 and 1999, respectively, the Company utilized $21.2 million and $6.3
million of the accrual; $18.5 million for severance, $3.0 million for facility
closure and $6.0 million for the FFMC legal matter. After the reversal of $3.5
million of this accrual in 1999, the remaining accrual was $4.7 million at
December 31, 1999 versus $14.5 million at December 31, 1998. The reversal and
the continued balance in the accrual was primarily caused by a delay in the
closure of the Nashville facility required by the Federal Financial Institutions
Examination Council because of Year 2000 concerns. The facility is scheduled
for closure in November 2000.
F-11
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. The charge included 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 was $9.5
million and at December 31, 1999 was $6.2 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 service 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 such estimated net losses (reported on the
"Provision for loss on contract" line in the Consolidated Statements of Income).
In September of 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. At December 31, 1998, the remaining loss accrual
was $19.1 million. During 1999, the Company utilized $18.0 million of the HSBC
provision leaving a provision of $1.1 million at year-end 1999 which will be
utilized in the first quarter 2000.
1997 Activities
Business Divestitures and Associated Impairment - 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 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 $23.4 million
for card issuer services, $5.3 million for Corporate and other, $8.1 million for
merchant processing services, $10.1 million for divested businesses and $3.0
million for payment instruments. During 1997, 1998 and 1999 the Company utilized
$38.0 million, $8.6 million and $0.1 million, respectively, of the accrual;
$28.8 million for severance, $6.5 million for facility closure and $11.4 million
for exit costs leaving an accrual at December 31, 1999 of $0.2 million for the
remaining severance after reversing $3.0 million of the accrual in 1999.
F-12
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following summarizes activity with respect to the Company's restructuring
activities for the years ended December 31 (in millions):
1998 (a) 1997
----------------- -----------------
Expense Provision:
Employee severance $20.0 $30.0
Facility closure 9.7 6.5
Other exit costs 6.0 13.4
----------------- -----------------
35.7 49.9
----------------- -----------------
Cash Payments:
1999 6.3 0.1
1998 21.2 8.6
1997 --- 38.0
----------------- -----------------
27.5 46.7
Reversals:
1999 3.5 3.0
----------------- -----------------
3.5 3.0
Remaining accrual at December 31, 1999:
Employee severance 0.8 0.2
Facility closure 3.9 ---
Other exit costs --- ---
----------------- -----------------
$ 4.7 $ 0.2
================= =================
(a) Excludes Hong Kong and Innovis activities described above.
There were not any restructuring activities for 1999.
F-13
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3: Business Combinations and Asset Acquisitions
Initial Consideration
------------------------------------------------------
FDC Common Stock
--------------------
(in millions) Dollar
Businesses and Assets Acquired Month Total (a) Cash Value Shares
------------------------------------------------------
1999:
Transaction Processing Services April $ 8.0 $ 8.0
State Street Global Advisors (b) April 13.0 13.0 --- ---
Paymentech, Inc July 420.0 420.0 --- ---
U.S. Processing, LLC September 10.1 10.1 --- ---
Six other acquisitions 29.6 29.2 --- ---
----------------------------------------
$480.7 $480.3
========================================
1998:
First Data Financial Services January $115.5 $ 50.5 --- ---
FPS Services (b) February 12.0 12.0 --- ---
U.S. Benefits Services (b) May 11.7 5.5 $ 6.2 0.2
Bank alliance programs 12.2 12.2 --- ---
Four other acquisitions 18.7 16.4 --- ---
----------------------------------------
$170.1 $ 96.6 $ 6.2 0.2
========================================
1997:
Innovis (formerly Consumer Credit
Associates) April $ 93.0 $ 90.2 --- ---
CardService International (Joint Venture) April 60.0 60.0 --- ---
Orlandi Valuta August 66.5 66.5 --- ---
Bank alliance programs 58.0 58.0 --- ---
Eleven other acquisitions 120.6 109.1 $10.2 0.3
-----------------------------------------
$398.1 $383.8 $10.2 0.3
=========================================
(a) Other consideration, not separately listed in the table or described above,
consists of promissory notes and other amounts payable of $0.4 million
in 1999, $2.3 million in 1998 and $4.1 million in 1997. In addition, total
consideration for First Data Financial Services included $65.0 million
representing the fair market value of the Company's NTS subsidiary's net
assets which were sold as part of the transaction.
(b) Acquired by Investor Services Group which was sold in December 1999.
Transaction Processing Services performs check and off-line debit card
processing for broker cash management accounts and credit card and merchant
processing for small community banks and group service providers. State Street
Global Advisors is a retirement services business which has been subsequently
sold in conjunction with the sale of the Investor Services Group subsidiary.
Paymentech provides full-service electronic payment solutions for merchants and
third-party transaction processing (see additional discussion below). U.S.
Processing, LLC, provides transaction processing services for the electronic
funds transfer industry.
In July 1999, the Company completed the acquisition of Paymentech, Inc's 16.4
million publicly held shares (45% of total outstanding shares) for a cash
payment of approximately $420 million. Bank One owns all of the remaining
shares (55% of outstanding shares). In conjunction with this transaction,
Paymentech's operations were combined with the existing Bank One/First Data
alliance, BancOne Payment Services, LLC.
In July 1998, a 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
unit acquired in early 1998.
F-14
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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):
Year Ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------
(in millions)
Fair value of net assets acquired $480.7 $170.1 $398.1
Less acquisition notes and accounts payable (0.4) (2.3) (4.1)
Less value of common stock issued --- (6.2) (10.2)
Less fair value of assets sold --- (65.0) ---
Less cash acquired (0.5) (2.4) (17.0)
---------------------------------------------------
Net cash paid for acquisitions $479.8 $ 94.2 $366.8
===================================================
The acquisition of Paymentech has been reflected as a $420.0 million Investment
in Affiliate, accounted for under the equity method. The $416.7 million excess
of purchase price over FDC's 45% interest in the tangible net assets of
Paymentech is being amortized over the estimated remaining life of the
underlying intangibles, including goodwill. The remaining fair value of net
assets acquired includes initial goodwill and other intangible amounts
aggregating $50.3 million in 1999, $168.2 million in 1998 and $371.0 million in
1997. In connection with the above noted acquisitions FDC recorded exit
liabilities of $0.1 million, $6.3 million and $5.7 million in 1999, 1998 and
1997, respectively. The exit liabilities related primarily to facility shutdown,
severance, unfavorable lease commitments, and legal costs. At December 31, 1999
and 1998, FDC had remaining acquisition reserves of $8.5 million and $20.4
million, respectively, pertaining to these acquisitions. 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 $32.3 million in 1999, $2.3
million in 1998 and $2.7 million in 1997 (including 0.5 million shares of common
stock valued at $21.0 million). The maximum amount of remaining contingent
consideration is $86.0 million (payable through 2001).
Note 4: Investments in Affiliates
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 December 31, 1999, there were seven such joint ventures accounted
for under the equity method of accounting.
F-15
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of financial information for the merchant alliances and other
affiliates accounted for under the equity method of accounting is as follows:
December 31, 1999 1998
- ---------------------------------------------------------------------------------------
(in millions)
Total Assets $2,475.3 $1,172.0
Total Liabilities 1,599.2 969.1
Year Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
(in millions)
Net Operating Revenues $1,046.8 $ 758.4 $533.3
Operating Expenses 837.5 646.2 387.3
Operating Income 209.3 112.2 146.0
Net Income 177.4 106.7 143.5
FDC Share of net income 110.8 54.3 70.8
The primary components of assets and liabilities are settlement related accounts
as described in Note 5 below.
Amounts presented herein do not include amortization of $26.4 million, $18.2
million and $7.8 million for the years ended December 31, 1999, 1998, and 1997,
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 $635.0 and $183.6 million at December 31, 1999 and 1998, respectively, is
amortized over the estimated useful lives of the underlying intangible assets.
Note 5: Settlement Assets and Obligations
Settlement assets and obligations result from FDC's 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 primarily due to unrealized net investment gains and losses,
which are reported as other comprehensive income in stockholders' equity. The
principal components of FDC's settlement assets and obligations are as follows:
December 31, 1999 1998
- ---------------------------------------------------------------------------------------------------------
(In millions)
Settlement assets:
- ------------------
Cash and cash equivalents $2,280.3 $3,253.9
Investment securities 6,980.9 5,864.6
Due from card associations 188.6 322.5
Due from selling agents 135.8 317.0
--------------------- ---------------------
$9,585.6 $9,758.0
===================== =====================
Settlement obligations:
- -----------------------
Payment instruments outstanding $8,203.8 $7,846.0
Card settlements due to merchants 429.0 580.3
Due to selling agents 1,061.8 1,067.1
Other --- 123.6
--------------------- ---------------------
$9,694.6 $9,617.0
===================== =====================
F-16
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATMENTS (Continued)
Cash equivalents consist of short-term time deposits, reverse repurchase
agreements, commercial paper and other highly liquid investments. See Note 6 for
information concerning the Company's investment securities.
FDC generates revenues from its investment of certain settlement assets, a
substantial majority of which are cash equivalents and investment securities
within the Company's payment instruments business. Payment instrument investment
portfolio balances averaged $7.8 billion in 1999, $6.6 billion in 1998 and $5.3
billion in 1997. Investment revenues (before commissions to certain selling
agents) from payment instrument portfolios totaled $387.4 million in 1999,
$340.5 million in 1998 and $289.4 million in 1997 ($538.9 million, $462.2
million and $386.8 million, respectively, on a pre-tax equivalent basis).
Note 6: Investment Securities
Investment securities are a principal component of the Company's settlement
assets, and represent the investment of funds received by FDC from the sale of
payment instruments (principally official checks and money orders) by authorized
agents. The Company also maintains various other investments, primarily equity
securities, which are classified as available for sale and carried at fair
market value of $41.3 million at December 31, 1999 and $38.1 million at December
31, 1998. Such investments include Excite@Home. Excite@Home acquired iMall, Inc.
in which FDC held an 11% ownership interest in 1999. FDC received Excite shares
for its iMall shares and, as a result of this transaction recognized a gain of
$19.8 million. In addition, the Company has investments in equity securities
that are not publicly traded which are carried at cost.
Virtually all of FDC's investment securities are debt securities, most of which
have maturities greater than one year. At December 31, 1999, 60% of these debt
securities mature within five years and 93% 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:
Fair Value Amortized Cost Net Unrealized
Gain (Loss)
- ---------------------------------------------------------------------------------------------------------------
(In millions)
December 31, 1999
State and municipal obligations $6,206.1 $6,297.0 $ (90.9)
Adjustable rate mortgage-backed securities 208.1 210.1 (2.0)
Corporate bonds 407.1 420.8 (13.7)
Other 215.7 212.6 3.1
------------------------------------------------------------
Totals $7,037.0 $7,140.5 $(103.5)
============================================================
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
============================================================
Note 7: Financial Instruments
Concentration of credit risk
FDC maintains cash and cash equivalents, investment securities and certain off-
balance sheet hedging arrangements (for specified purposes) with various
financial institutions. The Company limits its concentration of these financial
instruments with any one institution, and periodically reviews the credit
standings of these institutions. FDC has a large and diverse customer base
across various industries, thereby minimizing the credit risk of any one
customer to FDC's accounts receivable amounts. In addition, each of the
Company's business units perform ongoing credit evaluations of their customers'
financial condition.
F-17
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. 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 December
31, 1999, these agreements had effective notional amounts totaling $800 million
($400 million become effective mid-2000) with cap rates ranging from 6.00% to
6.50% and maturities ranging from December 2000 through July 2001. 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 $4.1 billion at December 31, 1999, expire between
2000 and 2012 and require the Company to pay based upon fixed rates between
5.00% and 6.94% (weighted average of 6.01%) while the Company receives payments
principally based on three month variable rates. At December 31, 1998 the
notional amount of these swaps was $2.3 billion with fixed rates between 5.00%
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's financial instruments (cash and cash
equivalents and short-term borrowings) approximate fair value due to their short
maturities. These instruments are not in the following table, which provides the
estimated fair values of other financial instruments.
December 31, 1999 1998
- -----------------------------------------------------------------------------------------------
(In millions) Carrying Fair Carrying Fair
Value Value Value Value
- -----------------------------------------------------------------------------------------------
Balance sheet financial instruments:
- ------------------------------------
Long-term investment securities $7,037.0 $7,037.0 $5,928.4 $5,928.4
Long-term debt 1,072.0 1,033.6 1,129.4 1,164.0
Off-balance sheet financial instruments:
- ----------------------------------------
Variable rate hedging arrangements,
principally rate swap and cap agreements $ 3.7 $ 104.3 ---- $ (111.8)
The estimated fair values of balance sheet financial instruments are based
primarily on market quotations, whereas the estimated fair values of off-balance
sheet arrangements are based on dealer quotations. These estimated values may
not be representative of actual values that could have been realized as of the
year-end dates or that will be realized in the future.
F-18
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 8: Income Taxes
Year Ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
(In millions)
Components of pretax income:
Domestic $1,767.6 $690.1 $667.5
Foreign 57.8 21.8 38.9
----------------------------------------------------
$1,825.4 $711.9 $706.4
====================================================
Provision for income taxes:
Federal $ 494.2 $194.1 $277.1
State and local 114.7 43.3 57.5
Foreign 16.8 8.8 15.1
----------------------------------------------------
$ 625.7 $246.2 $349.7
====================================================
The Company's effective tax rates differ from statutory rates as follows
(differences are calculated by excluding the impact of restructuring, business
divestitures, litigation and impairment items, the impact of which is
separately disclosed):
Year Ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit 2.7 3.3 3.8
Nondeductible amortization of intangible assets 2.0 2.1 2.3
Interest earned on municipal investments (9.3) (7.8) (5.8)
Restructuring, business divestitures, litigation and
impairment items 4.9 2.2 13.7
Other (1.0) (0.2) 0.5
------------------------------------------
Effective tax rate 34.3% 34.6% 49.5%
==========================================
FDC's income tax provisions consist of the following components:
Year Ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
(in millions)
Current $620.8 $ 347.1 $190.1
Deferred 4.9 (100.9) 159.6
----------------------------------------------------
$625.7 $ 246.2 $349.7
====================================================
F-19
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income tax payments of $266.6 million in 1999 are less than current expense
primarily because tax on the disposition of First Data Investor Services Group
is not due until the first quarter of 2000. Income tax payments of $234.2
million in 1998, and $144.0 million in 1997 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 1999 or
1998. 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:
December 31, 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
(in millions)
Deferred tax assets related to:
Accrued expenses $ 176.6 $ 191.3
Pension obligations 19.1 49.3
Employee related liabilities 26.1 29.6
Deferred revenues 10.4 5.9
Unrealized securities loss 36.2 --
----------------------------
268.4 276.1
----------------------------
Deferred tax liabilities related to:
Property, equipment and intangibles (272.0) (282.1)
Unrealized securities gain -- (58.0)
Other (15.5) (20.5)
----------------------------
(287.5) (360.6)
----------------------------
Net deferred tax liabilities $ (19.1) $ (84.5)
============================
Note 9: Borrowings
December 31, 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
(in millions)
Short-Term Borrowings:
- ----------------------
Commercial paper $ 207.5 $ 442.3
Extendable Commercial Notes 148.8 --
Other short-term borrowings 149.8 --
Long-Term Debt:
- ---------------
Medium-Term Notes 521.5 670.8
6 3/4% Notes due 2005 199.1 199.0
6 5/8% Notes due 2003 199.7 199.6
4 7/8% Convertible Note due 2005 50.0 50.0
Floating Rate Note 100.0 --
Other 1.7 10.0
----------------------------
$1,578.1 $1,571.7
============================
The Company's commercial paper borrowings at December 31, 1999 and 1998 had
weighted-average interest rates of 5.9% and 5.3%, respectively.
F-20
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. Interest rates for borrowings under the Facilities are based on
market rates. The Facilities contain customary covenants which are not expected
to significantly affect FDC's operations. At December 31, 1999, the Company was
in compliance with all of these covenants. Pursuant to a 1998 agreement, $175.0
million of the Facilities has been designated to be used solely for the purpose
of meeting certain of the Company's settlement obligations, if necessary. To
provide additional liquidity in early 2000 in the event of a business disruption
due to Y2K problems, the company established a $1 billion credit facility that
became effective on January 3, 2000. This facility was not used and was
cancelled on January 31, 2000.
In November 1999, the Company established a $300 million extendable commercial
notes ("ECN") program. As of December 31, 1999, $148.8 million of commercial
notes were outstanding under the ECN program.
In 1999, the amount available under FDC's uncommitted bank credit lines was
initially increased from $210.0 million to $235.0 million and was subsequently
decreased to $200.0 million in conjunction with the sale of ISG. The interest
rates for borrowings under the credit lines are based on market rates. As of
December 31, 1999, $149.8 million of unsecured bank loans were outstanding at an
average interest rate of 6.2%. Through the Facilities, the ECN Program and the
uncommitted bank credit lines, the Company had available borrowing capacity of
$1.3 billion at December 31, 1999.
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 March 1999, the Company entered
into a $100 million, 5-year maturity debt financing (Floating Rate Note) with a
floating interest rate based on LIBOR. Under certain circumstances the financing
may be prepaid. The debt and interest are denominated in Australian and New
Zealand dollars, respectively. Through a series of currency swap agreements the
Company's obligations have been effectively converted to U.S. dollar
denomination. During 1998, the Company issued a 10-year $100 million Medium-Term
Note at an interest rate of 5.80%. 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 $126.0 million in 2000, $50.2
million in 2001, $0.2 million in 2002, $199.8 million in 2003, $100.0 million in
2004 and $595.8 million in all periods thereafter. The Company paid interest
amounts totaling $103.1 million in 1999, $107.2 million in 1998 and $102.6
million in 1997.
F-21
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 10: Supplemental Balance Sheet Information
December 31, 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
(in millions)
Property and equipment:
Land $ 25.2 $ 18.8
Buildings 195.4 200.8
Leasehold improvements 125.1 143.2
Equipment and furniture 1,284.0 1,270.0
----------------------------
1,629.7 1,632.8
Less accumulated depreciation and amortization (919.1) (851.8)
----------------------------
$ 710.6 $ 781.0
============================
Accounts Payable and other liabilities:
Accounts payable and accrued expenses $ 560.5 $ 607.9
Compensation and benefit liabilities 188.4 162.6
Assumed Western Union pension obligations 54.4 122.5
Accrued costs of businesses acquired (including deferred 86.1 52.9
acquisition consideration)
Income taxes payable 586.1 291.9
Deferred income taxes 19.1 84.5
Other liabilities 329.8 320.1
----------------------------
$1,824.4 $1,642.4
============================
Note 11: Commitments and Contingencies
The Company leases certain of its facilities and equipment under operating lease
agreements, substantially all of which contain renewal options. Total rent
expense for operating leases, net of sublease income, was $133.6 million in
1999, $123.1 million in 1998 and $148.7 million in 1997. Minimum aggregate
rental commitments at December 31, 1999 under all noncancelable leases, net of
sublease income, were $97.9 million in 2000, $86.0 million in 2001, $46.6
million in 2002, $35.0 million in 2003, $35.1 million in 2004 and $97.0 million
for all periods thereafter. The sublease income is earned from leased space
which FDC concurrently subleases to its customers with mirrored time periods.
Future lease rental income exceeds lease payments, with FDC's obligations at
December 31, 1999 for remaining lease terms totaling $45.2 million.
In connection with FDC's money transfer business, the Company has entered into a
minimum purchase agreement with one of its data processing vendors. Under this
agreement, the Company is required to purchase at least $100 million in goods
and services over a period of 66 months commencing January 1, 1998. As of
December 31, 1999 approximately $58 million in goods and services remained to be
purchased under this agreement.
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.
F-22
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 MoneyGram was previously operated by a
subsidiary of the Company. The proposed settlement also includes 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 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.
Note 12: Stockholders' Equity
Dividends
FDC continued paying cash dividends of $0.02 per share on a quarterly basis to
stockholders during 1999. The Company's Articles of Incorporation authorizes
10.0 million shares of preferred stock, none of which are issued.
F-23
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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):
Tax Net-of-
Beginning Pre-tax (Benefit)/ Tax Ending
Balance Amount Expense Amount Balance
---------------------------------------------------------------------------
December 31, 1999
Unrealized gains(losses) on securities $107.8 $(269.3) $ (94.2) $(175.1) $(67.3)
Currency translation adjustment (4.8) (17.4) (6.1) (11.3) (16.1)
Minimum pension liability (48.9) 68.2 23.6 44.6 (4.3)
--------------------------------------------------------------------------
$ 54.1 $(218.5) $ (76.7) $(141.8) $(87.7)
===========================================================================
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
==========================================================================
Other Stockholders' Equity Transactions
In July 1999, the Board of Directors authorized management to purchase an
additional $750 million of the Company's outstanding common stock. As of
December 31, 1999, the Company had repurchased approximately 10.7 million shares
under the program for approximately $485 million.
In September 1998, the Board of Directors 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. The Company completed the
utilization of the $550 million provided for repurchases under the 1998
authorization in July 1999. A total of 16.9 million shares were repurchased
under this program.
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 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.
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 13: Stock Compensation Plans
FDC has a plan that provides for the granting of stock options to key employees
and other key individuals who perform services for the Company. A total of 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 17.6 million shares remain
available for future grant. The options have been issued at a price equivalent
to the common stock's fair market value at the date of grant, generally have ten
year terms and become exercisable in three or four equal annual increments
beginning 12 months after the date of grant.
F-24
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In December 1997, the Company instituted a restricted stock award program for
key technical systems and related employees. As of December 31, 1999, a total of
0.7 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 $22.4
million ($19.8 million net of cancellations as of December 31, 1999) and is
being amortized 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
2.8 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 the use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by
SFAS 123, assuming the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of SFAS 123.
The fair value for options and employee stock purchase plan rights was estimated
at the date of grant using a Black-Scholes option pricing model with the
following assumptions:
1999 1998 1997
---------------------------------------------------------
Risk-free interest rate 6.34% 4.54% 6.23%
Dividend yield 0.17% 0.27% 0.22%
Volatility 25.4% 24.0% 18.9%
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 $ 15 $ 8 $ 11
Weighted-average fair value of employee stock purchase rights $ 8 $ 6 $ 7
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 is not fully reflected until 1999):
(In millions, except per share amounts) 1999 1998 1997
---------------------------------------------------------
Pro forma net income $1,140.8 $417.6 $320.1
Pro forma earnings per share -- basic 2.67 0.94 0.72
Pro forma earnings per share -- diluted 2.64 0.94 0.72
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.
F-25
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of stock option activity is as follows (options in millions):
- -------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
Weighted- Weighted- Weighted-
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
- -------------------------------------------------------------------------------------------------------------------------
Outstanding at January 1 37.1 $29 31.2 $28 28.0 $25
Granted 7.7 46 14.7 31 9.2 36
Exercised (6.1) 27 (2.7) 20 (4.0) 21
Canceled (4.4) 33 (6.1) 33 (2.0) 35
------ ------ ------
Outstanding at December 31 34.3 33 37.1 29 31.2 28
====== ====== ======
Options exercisable at
Year-end 15.0 $27 14.3 $23 14.0 $21
===========================================================================================================================
The following summarizes information about stock options outstanding (options in
millions):
Options Outstanding Options Exercisable
---------------------------------------------------------------------------------------------------
Weighted-
Range of Number Average Weighted- Number Weighted-
Exercise Outstanding at Remaining Average Exercisable at Average
Prices 12/31/99 Contractual Life Exercise Price 12/31/99 Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------
$0.88 to $26.75 8.7 4 years $19 6.7 $17
$26.19 to $39.56 17.3 8 years 33 6.6 34
$39.63 to $70.00 8.3 9 years 46 1.7 45
------------- --------------
34.3 7 years 33 15.0 27
============= ==============
Note 14: Employee Benefit Plans
Defined Contribution Plans
FDC and certain of its subsidiaries maintain defined contribution savings plans
covering virtually all of the Company's full-time employees. The plans provide
tax deferred amounts for each participant, consisting of employee elective
contributions and additional matching and discretionary Company contributions.
In addition, the Company provides a supplemental savings plan for certain highly
compensated employees. The plan provides tax deferred contributions, matching
and the restoration of Company contributions under the defined contribution
plans otherwise limited by the IRS. The aggregate amounts charged to expense in
connection with these plans were $49.4 million in 1999, $45.6 million in 1998
and $39.3 million in 1997.
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. and a separate plan covering certain employees
located in the United Kingdom. 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
F-26
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
under the largest of the other U.S. plans were frozen as of December 31, 1997,
resulting in the recognition of a $12.2 million curtailment gain. As a result,
participants of this plan were given enhanced benefits under the defined
contribution plan. The cost of retirement benefits for eligible employees,
measured by length of service, compensation and other factors, is being funded
through trusts established under the plans in accordance with laws and
regulations of the respective countries. Plan assets consist of cash and a
variety of investments in equity (U.S. and foreign) and fixed income securities.
The 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, 1999 and a statement of the funded status as of December 31 for
both years:
December 31, 1999 1998
-----------------------------------------------------------------------------------------------
(in millions)
Change in benefit obligation
Benefit obligation at January 1, $912.8 $ 852.4
Service costs 8.7 8.0
Interest costs 55.0 56.4
Actuarial (gain) loss (52.0) 60.1
Benefits paid (73.1) (63.8)
Foreign currency translation (6.3) (0.7)
Other 0.7 0.4
-------------------------------
Benefit obligation at December 31, 845.8 912.8
Change in plan assets
Fair value of plan assets at January 1, 781.7 826.9
Actual return on plan assets 116.4 12.7
Company contributions 6.9 6.3
Plan participant contributions 0.6 0.4
Benefits paid (73.1) (63.8)
Foreign currency translation (6.9) (0.8)
-------------------------------
Fair value of plan assets at December 31, 825.6 781.7
-------------------------------
Funded status of the plan (20.2) (131.1)
Unrecognized amounts, principally net (gain) loss (22.9) 78.8
-------------------------------
Total recognized $(43.1) $ (52.3)
===============================
F-27
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table provides the amounts recognized in the statement of
financial position:
December 31 1999 1998
-------------------------------------------------------------------------------------------------------------
(in millions)
Prepaid benefit $ 2.4 $ 4.0
Accrued benefit liability (52.2) (131.1)
Accumulated other comprehensive income 6.7 74.8
-----------------------------------------
Net amount recognized $(43.1) $ (52.3)
=========================================
The benefit obligation, and fair value of plan assets for pension plans with
accumulated benefit obligations in excess of plan assets, were $656.1 and $605.3
million as of December 31, 1999 and $721.1 and $585.4 million as of December 31,
1998, respectively.
The following table provides the components of net periodic benefit cost for the
plans:
Year-ended December 31, 1999 1998 1997
-------------------------------------------------------------------------------------------------------------------------
(in millions)
Service costs $ 8.7 $ 8.0 $ 10.8
Interest costs 55.0 56.4 59.6
Expected return on plan assets (68.5) (71.2) (64.5)
Amortization 1.4 1.0 --
-----------------------------------------------
Net periodic benefit cost (income) (3.4) (5.8) 5.9
Curtailment (gain) -- -- (12.2)
Settlement loss 1.0 -- --
-----------------------------------------------
Net periodic benefit income after curtailment $ (2.4) $ (5.8) $ (6.3)
===============================================
The weighted average rate assumptions used in the measurement of the Company's
benefit obligation are shown as follows:
1999 1998
-------------------------------------
Discount Rate 6.81% 6.27%
Expected return on plan assets 8.70% 8.76%
Rate of compensation increase 4.00% 4.00%
Pension plan assets include 8,300 shares of FDC stock as of December 31, 1999
and 1998 with fair market values of $409,294 and $264,562, 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 15: Segment Information
Operating segments are defined by Statement of Financial Accounting Standards
No. 131 - "Disclosures About Segments of an Enterprise and Related Information"
("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, the Executive Vice
Presidents and certain key management. The operating segments are reviewed
separately because each operating segment represents a strategic business unit
that generally offers different products and serves different markets.
F-28
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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
include check verification and guarantee and check and other collection
services. The "all other and corporate" category includes a leader in developing
in-store branch banking programs in supermarkets and other retail superstores,
an external provider of operator and customer support services, a provider of
consumer and business solutions in the areas of risk and fraud management and
information verification 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, significant litigation, asset impairment charges,
interest expense and income taxes are not allocated to the segments 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). Intersegment 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.
As stated in Note 2, the Company sold its Donnelley Marketing and Investor
Services Group business units. To appropriately reflect these 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 information businesses were moved to "all other and
corporate" from the card issuer services segment to reflect the current
management reporting relationships.
F-29
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in Millions)
- ---------------------------------------------------------------------------------------------------------------------------------
Merchant
Payment Card Issuer Processing All Other and
Year Ended December 31, 1999 Instruments Services Services Corporate Totals
- ----------------------------------------------------------------------------------------------------------------------------------
Revenues $ 2,023.7 $1,383.0 $1,547.7 $348.8 $ 5,303.2
Depreciation and amortization 111.4 246.9 198.9 18.9 576.1
Operating profit 596.3 242.0 407.7 69.8 1,315.8
Segment assets 11,096.1 1,554.1 3,379.4 975.1 17,004.7
Expenditures for long-lived assets 105.1 217.5 533.4 29.3 885.3
Equity in earnings of unconsolidated affiliates (6.8) -- 126.1 (8.5) 110.8
Investment in unconsolidated affiliates 7.1 -- 884.2 -- 891.3
Merchant
Payment Card Issuer Processing All Other and
Year Ended December 31, 1998 Instruments Services Services Corporate Totals
- ----------------------------------------------------------------------------------------------------------------------------------
Revenues $ 1,696.6 $1,260.2 $1,394.2 $336.1 $ 4,687.1
Depreciation and amortization 94.8 228.3 188.4 20.3 531.8
Operating profit 506.8 231.9 329.1 115.6 1,183.4
Segment assets 10,875.3 1,537.5 3,153.8 330.7 15,897.3
Expenditures for long-lived assets 96.1 371.6 179.9 46.4 694.0
Equity in earnings of unconsolidated affiliates (22.5) -- 70.3 6.5 54.3
Investment in unconsolidated affiliates 14.7 -- 311.7 13.6 340.0
Merchant
Payment Card Issuer Processing All Other and
Year Ended December 31, 1997 Instruments Services Services Corporate Totals
- ----------------------------------------------------------------------------------------------------------------------------------
Revenues $ 1,406.1 $1,152.3 $1,392.6 $354.4 $ 4,305.4
Depreciation and amortization 87.9 185.3 154.0 18.8 446.0
Operating profit 422.9 206.2 390.0 140.8 1,159.9
Segment assets 9,095.9 1,651.5 3,174.1 351.8 14,273.3
Expenditures for long-lived assets 125.5 475.8 211.1 41.0 853.4
Equity in earnings of unconsolidated affiliates (0.4) -- 54.0 17.2 70.8
Investment in unconsolidated affiliates 14.4 -- 180.7 9.1 204.2
F-30
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation of reportable segment amounts to the Company's consolidated
balances is as follows (in millions):
1999 1998 1997
-----------------------------------------------------------------------------------------------------------------------------
Revenues:
Total reported segments $ 4,954.4 $ 4,351.0 $ 3,951.0
All other and corporate 348.8 336.1 354.4
Divested or to be divested 394.5 554.2 1,027.6
Eliminations* (157.9) (123.7) (98.5)
-------------------------------------------------------------------------------------------------------------------------------
Consolidated $ 5,539.8 $ 5,117.6 $ 5,234.5
===============================================================================================================================
Income before income taxes:
Total reported segments $ 1,246.0 $ 1,067.8 $ 1,019.1
All other and corporate 69.8 115.6 140.8
Corporate interest expense (103.8) (104.1) (116.5)
Divested or to be divested 55.5 75.4 130.8
Restructuring, business divestitures, litigation,
impairment and provision for
loss on contract, net 715.8 (319.1) (369.3)
Eliminations* (157.9) (123.7) (98.5)
-------------------------------------------------------------------------------------------------------------------------------
Consolidated $ 1,825.4 $ 711.9 $ 706.4
===============================================================================================================================
Assets:
Total reported segments $16,029.6 $15,566.6 $13,921.5
All other and corporate 975.1 330.7 351.8
Divested or to be divested 0.1 689.7 1,041.9
-------------------------------------------------------------------------------------------------------------------------------
Consolidated $17,004.8 $16,587.0 $15,315.2
===============================================================================================================================
Depreciation and amortization:
Total reported segments $ 557.2 $ 511.5 $ 427.2
All other and corporate 18.9 20.3 18.8
Divested or to be divested 41.7 59.3 88.2
-------------------------------------------------------------------------------------------------------------------------------
Consolidated $ 617.8 $ 591.1 $ 534.2
===============================================================================================================================
Expenditures for long-lived assets:
Total reported segments $ 856.0 $ 647.6 $ 812.4
All other and corporate 29.3 46.4 41.0
Divested or to be divested 24.8 50.0 130.3
-------------------------------------------------------------------------------------------------------------------------------
Consolidated $ 910.1 $ 744.0 $ 983.7
===============================================================================================================================
- -----------
*Represents elimination of adjustment to record payment instruments revenues on
a pre-tax equivalent basis.
F-31
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information concerning principal geographic areas was as follows (in millions):
United States Rest of World Total
---------------------------------------------------------------
Revenues
1999 $5,251.5 $288.3 $5,539.8
1998 4,850.2 267.4 5,117.6
1997 4,999.9 234.6 5,234.5
Long-Lived Assets
1999 $3,865.6 $327.5 $4,193.1
1998 4,419.3 355.0 4,774.3
1997 4,586.3 390.7 4,977.0
"Rest of World" represents businesses of significance which have local currency
as their functional currency.
F-32
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 16: Quarterly Financial Results (Unaudited)
Summarized quarterly results for the two years ended December 31, 1999 are as
follows (in millions, except per share amounts):
First Second Third Fourth
--------- -------- -------- ---------
1999 by Quarter:
Revenues (a) $1,269.6 $1,397.9 $1,400.2 $1,472.1
Restructuring, business divestitures,
litigation and impairments, net (b) -- 34.9 6.1 (756.8)
Other expenses 1,068.1 1,131.2 1,108.7 1,122.2
---------------------------------------------------------------------------------------
Income before income taxes 201.5 231.8 285.4 1,106.7
Income tax expense 60.5 38.5 78.3 448.4
---------------------------------------------------------------------------------------
Net income $ 141.0 $ 193.3 $ 207.1 $ 658.3
=======================================================================================
Basic earnings per common share $ 0.32 $ 0.45 $ 0.49 $ 1.57
Diluted earnings per common share $ 0.32 $ 0.44 $ 0.48 $ 1.55
1998 By Quarter:
Revenues $1,209.5 (d) $1,277.1 (d) $1,282.1 $1,348.9
Restructuring, business divestitures,
impairments and provision for
loss on contract, net (c) 0.4 163.7 -- 155.0
Other expenses 1,014.1 (d) 1,030.7 (d) 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
- ----------
(a) Includes a $19.8 million gain recognized in the fourth quarter upon the
merger exchange of Excite@Home stock for iMall stock, in which FDC held an
11% ownership interest. The after tax effect of this gain was $12.2 million
($0.03 per share)
(b) Results for 1999 include fourth quarter benefits resulting from the sale of
Investor Services Group in the amount of $744.6 million and a $14.2 million
reversal of restructuring, merger and divestiture accruals; a third quarter
reversal of a $7.4 million merger accrual related to the 1995 merger of FDC
and First Financial Management Corp.; and a second quarter gain resulting
from the sale of Innovis in the amount of $24.5 million and a $4.5 million
gain from the divestiture of EBP Life. These gains were slightly offset by
a fourth quarter addition to the Western Union litigation settlement
accrual in the amount of $2 million; a third quarter joint venture
termination loss in the amount of $13.5 million; and a second quarter loss
on the sale of Donnelley of $29.8 million and settlement of Western Union
litigation of $34.1 million. The after tax effect of these items was $417.6
million ($0.96 per share).
(c) 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, a second quarter net 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 fourth quarter gain on the
disposition of VIPS and the resolution of matters from prior divestitures
totaling $24.4 million and a first quarter $28.5 million gain on the sale
of NTS. The after tax effect of these items was $231.5 million or $0.52
per share.
(d) The assets of First Data Financial Services ("FDFS") was contributed to a
joint venture in July 1998. Revenues and expenses have been restated to
reflect FDFS under the equity method of accounting.
F-33
SCHEDULE II - Valuation and Qualifying Accounts
(dollars in millions)
Additions
------------------------------------
Balance at Charged Charged to Balance at
Beginning to Costs other End of
Description of Period and Expenses accounts Deductions Period
- -----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1999
Deducted from Receivables $27.9 $32.0 $0.3 $28.9 (b) $31.3
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
- ----------
(a) Primarily due to acquisitions.
(b) Amounts related to business divestitures and write-offs against assets.
F-34