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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 1-11073
FIRST DATA CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 47-0731996
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
401 Hackensack Avenue
Hackensack, New Jersey 07601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 525-4700
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
COMMON STOCK (PAR VALUE $.01 PER SHARE) 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 28, 1997 were
448,693,250. The aggregate market value, as of February 28, 1997, of such
common shares held by non-affiliates of the registrant was approximately $16.49
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 14, 1997.
PART I
ITEM 1. BUSINESS
GENERAL
First Data Corporation ("FDC" or "the Company") operates in a single
business segment providing high-quality, high-volume information processing and
related services to several market sectors. The Company has focused
particularly on its services related to payment transactions (which include
transaction card issuer services, merchant card and check processing services,
and processing services related to payment instruments), representing
approximately two-thirds of FDC's operating revenues in both 1996 and 1995. In
this area, the Company is emphasizing growth in electronic commerce, information
management and international expansion.
FDC's business strategy is to generate recurring revenue by developing
long-term contractual relationships with clients that have decided to outsource
various transaction and information processing services. The Company's training
and development efforts for its managers and service representatives are focused
on the "lifetime value" of these client relationships. FDC's ongoing objective
is to promote client retention and loyalty by providing services of superior
quality that consistently exceed client expectations. Specifically, FDC focuses
on a "service-profit-chain" model, whereby the Company's growth and
profitability are linked to satisfied and loyal employees who deliver services
of exceptional quality that promote the success of their clients.
The Company continues to pursue revenue growth through five primary
sources: internal growth, which consists primarily of increased transaction
processing for existing clients; sales of ancillary products and enhanced
services to existing clients; the addition of new clients in existing service
areas; expansion into adjacent markets where FDC can provide similar information
processing services to new client groups; and acquisitions. In addition,
certain of the Company's payment instruments are marketed directly to individual
consumers.
FDC's operations in the United States provide the vast majority of the
Company's transaction processing services, and generate a substantial majority
of FDC's revenues and earnings. Currently, FDC's processing units in the United
Kingdom and Australia represent the Company's only foreign operations of
significance. Excluding these two foreign units, domestic facilities process all
money transfer, merchant card and merchant check acceptance transactions that
are settled outside of the United States. The Company presently is emphasizing
international expansion as evidenced by its recent announcements of long-term
agreements with a German bank to provide credit card, information processing and
cardholder services and with Hong Kong and Shanghai Banking Corporation ("HSBC")
to provide credit card processing services to four members of the HSBC group.
Portions of the Company's business are seasonal. FDC's revenues and
earnings are affected favorably by increased card and check volume during the
holiday shopping period in the fourth quarter and, to a lesser extent, during
the back-to-school buying period in the third quarter. Higher money transfer
volume during the summer months in FDC's payment instruments area also affects
revenues and earnings.
FDC regularly considers acquisition opportunities to supplement the
Company's internal efforts to access new markets and client groups.
Divestitures also are considered if a business unit lacks sufficient growth
prospects or does not enhance the Company's transaction processing competencies.
No assurance can be given with respect to the timing, likelihood or the
financial or business effect of any possible transaction.
FDC is incorporated in Delaware, and its principal executive offices
are located at 401 Hackensack Avenue, Hackensack, New Jersey 07601, telephone
(201) 525-4700.
1
Strategic Transactions and Developments
During 1996, the Company substantially completed the integration of
First Financial Management Corporation's ("FFMC") operations with those of FDC.
The October 1995 merger of the two companies was accounted for as a pooling of
interests, and the results of the two entities have been combined for all
periods presented in the accompanying consolidated financial statements and in
this discussion. In addition, the Company divested its MoneyGram operation in
December 1996 through an initial public offering of its common stock to comply
with the Company's agreement with the Federal Trade Commission ("FTC") as part
of the merger with FFMC. MoneyGram represented approximately 3% of 1996
consolidated operating revenues and pretax earnings.
The Company formed First Data Solutions ("FDS") in 1996 to coordinate
its information management businesses and enhance current product and service
offerings to the Company's existing and potential clients. Subsequent product
expansion occurred through the Company's acquisitions of Donnelley Marketing,
Inc., a consumer information and direct marketing firm, in September 1996 and a
public record information business in June 1996. In addition, the Company
introduced the U$A Value Exchange product which offers its merchant base the
opportunity for targeted promotional programs to the cardholders of FDC's
issuing bank clients. The Company's technology allows merchants to target
consumers who are most likely to purchase their products based on historical
buying patterns.
During 1996, FDC implemented a number of additional alliance programs
with bank clients. The alliances are designed to preserve each bank's existing
merchant relationships while allowing both FDC and the bank to share in profit
opportunities with respect to the existing merchant business of both FDC and the
bank, namely in the form of cost efficiencies and expanded product offerings.
The structure of the alliances varies depending on the needs of each bank client
and FDC, as well as applicable tax, regulatory and other considerations;
however, each alliance involves the bank and FDC contributing some of their
merchant contracts, cash or a combination thereof. Additionally, cost
efficiencies and product offerings have benefited the alliances in generating
new merchant business.
In the fourth quarter, the Company also entered into several
agreements enhancing its merchant processing area, the most significant being
with Wal-Mart and Chase Manhattan Bank ("Chase"). The Company entered into a
10-year agreement with Wal-Mart to process all of their electronic payments. In
addition, use of the Company's check acceptance product, which is currently used
by certain Wal-Mart locations, will be expanded. The Company entered into an
agreement with Chase to form an alliance which initially will focus on national
level merchants. This venture is expected to become operational in the first
quarter of 1997.
In the payment instruments area, during 1996 the Company acquired the
remaining outside interest in the Western Union Mexican money transfer business.
The Company also acquired two fleet service operations which offers the trucking
industry various types of payment products. These fleet service acquisitions
offered an adjacent market for the Company's payment services.
During the 1996 third quarter, the Company's Board of Directors
declared a two-for-one stock split, effected in the form of a stock dividend,
distributed on November 15, 1996 to shareholders of record on November 1, 1996.
Accordingly, all earnings (loss) per common share amounts and related share
amounts have been retroactively restated.
Dispositions
The Company continues to scrutinize its businesses and their related
fit into FDC's long-term plans. During the past few years, FDC completed the
sale of several business units: the Company's MoneyGram operations as discussed
above, the Company's health systems business in June 1995 and its cable billing
services and hotel reservations businesses in November 1994. Collectively, these
businesses represented approximately 3% of FDC's operating revenues in 1996,
compared with 5% in 1995 and 10% in 1994.
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In February 1997, the Company completed the sale of its GENEX
subsidiary. GENEX performs workers compensation cost containment management
services and was a division of the Company's health care administration services
area.
SERVICE AREAS
Domestic Card Issuer Services
FDC's Card Services Group, based in Omaha, Nebraska, provides a
variety of processing and related services to financial institutions issuing
VISA and MasterCard credit cards, debit cards and oil company and retail store
credit cards. Financial institution clients include a wide variety of banks,
savings and loan associations and credit unions. First Data Solutions provides
information and solutions to the financial, retail, collections and insurance
industries, including customized card promotion services, target marketing and
credit risk decision modeling services. Credit Performance Services provides
back-office support through application processing, credit support, customer
service and delinquent account processing, including pre-chargeoff collection
outsourcing services. Collectively, these services constituted approximately
18% of the Company's total operating revenues for 1996 and 16% in both 1995 and
1994.
Several large card issuing clients were converted onto FDC's
processing systems in 1996, which was the principal reason for the 26% increase
in the Company's total card accounts on file. Card accounts on file at year end
1996 (including FDC's card issuing business in the United Kingdom) were 153
million, compared with 121 million and 92 million, respectively, at December 31,
1995 and 1994. These amounts exclude certain card accounts for which FDC
provides limited services.
Services include embossing, transaction reporting, settlement and
billing, and certain security and related services. The Company has the
capability to provide a full array of services throughout the period of each
card's use, starting from the moment a card issuing client accepts an
application for a transaction card. FDC is able to monitor the status of the
cardholder's application throughout the approval process and to provide a means
for "scoring" the application using criteria furnished by the client. The
Company's in-house embossing facility can issue cards for new accounts and at
renewal dates (established by the client) for existing card accounts. FDC's
fraud management services monitor the unauthorized use of cards which have been
reported to be lost, stolen, or which are exceeding credit limits. The
Company's fraud detection systems help identify fraudulent transactions by
monitoring each cardholder's purchasing patterns and flagging unusual purchases.
In addition, the Company will coordinate with the efforts of investigative and
enforcement authorities (at the card issuing client's request) in preventing
unauthorized card use. Billing statements are prepared and mailed directly to
cardholders using the Company's in-house mail facility.
Increasingly, the Company is utilizing its information processing
resources and its card issuing services expertise to offer enhanced services and
full-service outsourcing solutions to its card issuing clients. Examples of
enhanced services include cardholder database analysis, cardholder behavior
scoring, customized communications to cardholders and proprietary oil card
processing services such as PetroCash, a proprietary prepaid oil card. Full-
service outsourcing involves providing card issuing clients with the complete
infrastructure for a credit card program including credit application services,
account management and customer service.
Revenues for card issuing services are derived from fees payable under
contracts that primarily depend on the number of accounts or transactions
processed. FDC provides over one hundred transaction-based services which are
separately priced and negotiated with clients. Most contracts provide for the
payment of minimum annual processing fees, payable without regard to transaction
volume, and for price increases during the contract term. In some instances,
FDC may make an advance payment to a client upon the signing of a processing
contract with the Company. FDC makes these payments to compensate new clients
for dedicating the resources to change service providers or to outsource an
internal service function.
FDS provides a variety of information solutions as described above and
has increased its product and service offerings through the two 1996
acquisitions as previously described. FDS is working on improving the accuracy
of the decision making within the credit granting marketplace and developing
target
3
marketing programs. In 1996 FDS introduced ProfitSight which enables FDS'
clients to analyze the profitability of individual cardholder accounts.
Domestic Merchant Processing Services
The Company and its joint-venture bank alliances contract directly
with merchants to provide processing services related to the merchant's
acceptance of cards and checks at the point-of-sale. Services include the
authorization, processing and settlement of credit and debit card transactions,
and the verification or guarantee of check transactions. The percentages of
FDC's operating revenues from these services were 23%, 22% and 18%,
respectively, during the years ended December 31, 1996, 1995 and 1994.
In 1996, the Company created First Data Merchant Services Corporation
("FDMS") by combining the operations of NaBANCO (owned by FFMC) and CES (owned
by FDC). The Company has not yet combined FDMS back-office platforms but
anticipates beginning this process during 1997. In addition, FDMS has
contributed much of its merchant contract relationships into the bank alliances.
FDMS is the largest provider of merchant credit and debit card transaction
processing services in the United States. The substantial majority of these
services pertain to transactions in which payment is made through MasterCard or
VISA bank cards.
Fees for full service merchant sales and processing (which consists of
merchant sales and support, authorization, settlement and back office services)
directly for merchant and for bank alliances constitute a substantial majority
of FDC's revenues related to merchant card processing, which generally are based
on dollar volume of transactions processed. The Company provided full service
merchant card processing on transaction dollar volume totaling $215 billion in
1996, compared with $144 billion in 1995 and $74 billion in 1994. The addition
of new clients in 1996 and the acquisition of CES in March 1995 were major
factors behind the large dollar volume increases in 1996 and 1995 compared with
the respective prior years.
The Company's primary merchant card processing centers are located in
Hagerstown, Maryland and Sunrise, Florida with additional volumes of merchant
card transactions being processed at FDC's card issuing processing center in
Omaha, Nebraska. These centers support merchant electronic cash registers and
dial up point-of-sale authorization and draft capture terminals. Virtually all
of FDC's credit card authorizations are performed electronically, with responses
to customers typically in less than ten seconds. Also, voice authorization
services are provided to merchants without electronic authorization capabilities
and in the event that electronic authorization capabilities are interrupted.
Transaction information is transmitted electronically through the MasterCard and
VISA networks, and may be posted to a cardholder account maintained by FDC's
card issuing services area.
The Company provides its card processing services for merchant clients
under agreements as an agent for sponsoring member banks in the VISA and
MasterCard systems, as required by their rules. Starting in June 1993, NaBANCO
began providing most of its services under an agreement as agent for and in
conjunction with First Financial Bank ("FFB"), a special purpose credit card
bank formed by FFMC for the primary purpose of supporting NaBANCO's credit card
processing and settlement operations. FFB's activity will decrease in 1997 due
to the new agreement with Chase (as previously discussed) which forms the
nation's largest merchant processing business, Chase Merchant Services. Chase
will be the primary processing agent for the clearing and settlement of credit-
based merchant transactions.
TeleCheck provides check guarantee and check verification services.
Check guarantee services involve buying the approved check at face value from
the merchant if it is subsequently dishonored, subject to a pre-established
maximum. Check verification services help merchants reduce bad check write-offs
and control the costs of check acceptance by providing access to payment
databases and activity monitoring systems. These services allow merchants to
maintain a liberal check acceptance program to increase sales and profits. 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.
4
International Card Services
Currently, FDC's operations in the United Kingdom and Australia are
the Company's principal processing facilities located outside the United States.
FDC is the largest third-party provider of card processing services in the
United Kingdom, with over 14 million card accounts on file at December 31, 1996.
Services provided generally mirror the Company's domestic card issuing and
merchant processing services provided to financial institutions. The Company
also is providing third-party bankcard processing servicing Mexico and Latin
America. In addition, FDC operates the largest independent funds transfer
network in Australia, providing funds transfer, debit card and automated teller
machine services. The network extends to all of Australia's principal cities,
and is used primarily by credit unions, banks and building societies. The
percentages of FDC's operating revenues from these services were 5%, 5% and 6%
during the years ended December 31, 1996, 1995 and 1994, respectively.
Payment Instruments
FDC is the leading provider of nonbank money transfer and bill payment
services, utilizing an agent network (excluding MoneyGram agents) of over 21,000
domestic and 14,000 international agent locations to provide payment instrument
transaction services to consumers in over 130 countries. The primary market for
these services is comprised of people who periodically need to send or receive
cash quickly to meet emergency situations, to send funds to family in other
locations or to use nonbank financial services to pay bills or meet other
obligations. Payment instruments revenues include primarily consumer money
transfers, bill or debt payment money transfers, money orders and official
checks. Official checks serve as an alternative to a bank's own disbursement
items such as teller's or cashier's checks. Payment instrument transactions
totaled 458 million in 1996, compared with 401 million in 1995 and 318 million
in 1994. However, transaction counts are not necessarily indicators of revenue
growth as revenue per transaction varies greatly among the Company's product
offerings.
The Company derives its revenues primarily from transaction processing
fees and, to a lesser extent, 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. Payment instrument revenues (excluding MoneyGram revenues) comprised
22% of FDC's operating revenues in 1996, compared with 20% in 1995 and 8% in
1994. The acquisition of Western Union in November 1994 is the primary reason
for the significant percentage increase in 1995.
A significant but declining percentage of FDC's payment instrument
services is generated from official checks, money orders and money transfers
issued under an agreement with an entity affiliated with American Express
Company ("American Express"). Under the agreement, FDC earns transaction fees
paid by the selling agents and net earnings on the investment securities, with
such amounts totaling approximately 5% of the Company's operating revenues in
1996, 6% in 1995 and 7% in 1994. The Company manages this business and
indemnifies American Express against any losses in connection with this
business, thus assuming the risks and rewards of ownership. Accordingly, the
assets and liabilities related to these transactions are included with
settlement assets and obligations on the Company's consolidated balance sheets.
Settlement assets related to these payment instruments represented approximately
24% of FDC's settlement assets at December 31, 1996 compared with 38% at
December 31, 1995. FDC began issuing payment instruments under its own name in
1994, and plans to phase out those issued under the American Express name prior
to the end of the current agreement in April 1997.
In 1996, the Company substantially combined the business operations of
Western Union(R) and FDC's Integrated Payment Systems unit. FDC plans to
utilize the well recognized Western Union name extensively in its plans to
migrate from the American Express name for its payment instrument products.
To initiate a money transfer transaction, the sender presents funds to
one of the Company's third-party agents. Data is entered into the money
transfer system by an agent. Funds are available throughout the agent network
for individual recipients or at a specified commercial establishment in the case
of a bill payment. The information processing and transfer is completed such
that money is available to the
5
intended recipient generally within minutes. FDC's revenues are derived from
the transfer fee, which typically is paid by the sender based on a graduated
schedule that varies with the principal amount of the money transfer. Money
transfers typically are handled by agents, a significant portion of which are
located in supermarkets and convenience stores in the United States. Customers
also can call toll-free to a Company service center and charge the transfer and
related fee to their credit card account. Commercial customers also can send
money transfers to traveling employees or clients. Substantially all money
transfers to recipients outside the United States are settled by FDC with the
agent in U.S. dollars. In addition, the Company also earns foreign exchange
fees from its international money transfer business.
FDC offers bill payment services to utility companies, collection
agencies, finance companies and other financial institutions. The debtor pays a
transaction fee to settle their account via a money transfer initiated at an
agent location, with the Company's commercial client benefiting from a
convenient collection tool that results in immediately available funds.
The Company also acquired two fleet service operations which provide
fuel procurement, parts and maintenance programs, ATM funds disbursement and
money-transfer services to the trucking industry. The Company also has started
to expand other payment services into this market.
Investment Processing Services
First Data Investor Services Group, based in Boston, Massachusetts,
provides a variety of back office processing services to the mutual fund
industry, including transfer agent services, fund administration and accounting
services, fulfillment and proxy services, and retirement account record keeping
and transaction services. The Company markets these services to mutual fund
organizations, banks and other investment organizations desiring to outsource
one or more of their back office processing functions. The percentage of FDC's
operating revenues from these services were 5.6%, 6.0% and 6.9% respectively,
during the years ended December 31, 1996, 1995 and 1994.
Transfer agent services principally consist of annual fees paid in
monthly installments based on the number of shareholder accounts. The number of
mutual fund shareholder accounts serviced by FDC totaled 15.1 million at
December 31, 1996, 13.3 million at December 31, 1995, and 12.1 million at
December 31, 1994. Revenues received by FDC for fund administration and
accounting services primarily consist of annual fees paid in monthly
installments based on mutual fund asset levels. Mutual fund assets serviced at
December 31, 1996 totaled $429 billion, compared with $360 billion and $277
billion, respectively, at December 31, 1995 and 1994. Fees for printing,
mailing and proxy solicitations are charged by volume for each job, whereas
retirement plan servicing fees consist of monthly billings based on contractual
agreements, the number of plan participants or asset levels.
Health Care Administrative Services
FDC, through its FIRST HEALTH(R) unit, provides health care
administrative services, which include primarily data processing and information
management services related to health care claims and resulting payments. FIRST
HEALTH markets its services principally to private sector employers to help
control their health care costs and to monitor the quality of health care
provided. These services comprised approximately 10% of the Company's operating
revenues in both 1996 and 1995, compared with 13% in 1994. The percentage
comparison between years are impacted by a fourth quarter 1995 acquisition.
The health care administration services area has experienced a decline
in business levels in 1996 as FDC has shifted away from government-related and
other low margin products, and focused on data processing and information
management related to employee claims and the resulting payment, including
completing the development of a new claims administration processing system,
Act3, which is entering the critical period of operational implementation.
FIRST HEALTH Strategies ("Strategies"), based in Salt Lake City, Utah,
is the nation's largest third party (non-insurance company) processor of private
sector health care claims. Its services include claims administration,
utilization management, insurance brokerage and data analysis and reporting.
This unit is
6
responsible for the Act3 project. During 1996, the claims administration and
processing business of Employee Benefit Plans, Inc. ("EBP"), which was acquired
in October 1995, was transfered to Strategies in order to gain operating
efficiencies. In addition, EBP offers a series of insurance product lines
through its life insurance subsidiary. In 1996 FDC reduced the insurance
product offerings, retaining only those that complement FIRST HEALTH's existing
health plan administrative services. The Company believes that its ability to
offer insurance coverages will assist in attracting and retaining clients that
are unable or choose not to self insure all of the aspects of their employee
health plans.
FIRST HEALTH Services, based in Glen Allen, Virginia, provides
pharmaceutical claims processing, drug utilization review services, and
management services for mental health, substance abuse, and preventive care
programs.
In February 1997, FDC completed the sale of its GENEX subsidiary,
which provides workers compensation and cost containment services.
Specialty Services
FDC has a variety of services that complement its transaction
processing service areas. Collectively, these services accounted for 14% of
FDC's operating revenues in 1996, compared with 16% in 1995 and 23% in 1994.
First Image Management Company ("First Image") provides a full array
of information management services, including data capture, data imaging,
micrographics, electronic database management, and output printing and
distribution. First Image is headquartered in Norcross, Georgia.
First Image markets its services under a "total solution" approach
with the objective of improving the utility of a user's database through ease of
access and efficient information output. In addition, services offered by First
Image reduce the need for its clients to devote substantial capital investments
to create, maintain and access large databases. Fees for First Image's services
are based on the volume and complexity of the information management services as
well as other factors such as required turnaround time, volume and duration of
contract. The majority of First Image's revenues are derived from contracts two
to three years in duration.
International Banking Technologies ("IBT") is headquartered in
Norcross, Georgia, and is a leader in developing in-store branch banking
programs in supermarkets and other high traffic retail superstores. IBT
provides a comprehensive array of services for its financial institution
customers, with the objective of developing a profitable financial services
outlet while achieving a value added arrangement for the retailer. IBT derives
its revenues from fees earned during the design and installation phases, and
also from the ongoing management of the in-store program between the financial
institution and the retailer.
FDC's Teleservices unit is the sole external provider of operator and
customer support services to one of the nation's leading long distance telephone
companies. In addition, its Call Interactive unit is a leading provider of
customized 800 telephone interactive voice services that gather, process and
disseminate information for client marketing needs. Revenues from these
services consist of fees paid by clients which generally are based on call
volume, duration and the number of transactions.
Nationwide Credit, Inc. ("Nationwide") is based in Atlanta, Georgia
and provides debt collection and accounts receivable management ("collection")
services from offices located throughout the United States. In 1996, the Company
integrated and consolidated the operations of ACB Business Services into those
of Nationwide. Nationwide is one of the nation's largest collection services,
with over $4 billion in annualized placement volume. Collection services are
provided to a wide variety of clients comprised of financial institutions
(including FDC card issuing clients), retailers, health care providers, and
government agencies.
American Express is a significant client within FDC's collection services area,
as the Company provides services related to certain types of American Express(R)
cards.
7
Revenues are derived principally through fees charged to clients based
on the dollar amount of the monies collected. FDC's collection services are
performed using paperless collection systems (including on-line skiptracing)
featuring automated dialing capabilities.
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 in the
domestic merchant processing services area have been effective in signing new
merchant clients in the past few years.
General advertising of the Company's services is accomplished through
industry and trade publications, direct mail, telemarketing, participation in
trade conventions and Company-sponsored seminars as well as direct sales.
Western Union maintains a broad based advertising and marketing program
supporting the Western Union brand name and the public's awareness of Western
Union's services.
In addition, FDC believes that its ongoing business acquisition
program is an important complement to direct marketing efforts in entering new
markets and expanding its service offerings.
SYSTEMS DEVELOPMENT
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.
FIRST HEALTH is finalizing the development of a new health care claims
administration processing system, Act3. In connection with the development of
Act3, the Company has incurred capitalized software development costs of $53.9
million at December 31, 1996. Act3 has been in development for several years.
This development is entering the critical period of operational implementation
and planned roll-out to many existing customers as well as new clients in 1997.
In 1997, the Company expects to expense approximately $30 million of
expenditures in connection with preparing its processing systems for the year
2000.
Capitalized costs for systems development activities (not including
recurring operating expenditures for systems maintenance and enhancements which
are expensed as incurred) totaled $53.7 million in 1996, $30 million in 1995 and
$35 million in 1994.
REGULATION
Various aspects of FDC's service areas are subject to federal and
state regulation which, depending on the nature of any noncompliance, may result
in the suspension or revocation of any license or registration at issue, as well
as the imposition of civil fines and criminal penalties. To date, the Company
has experienced no material difficulties in complying with the various laws and
regulations affecting its business.
As a provider of electronic data processing services directly to
governmental agencies and to banks and other regulated financial institutions,
the Company is subject to regulatory oversight and examination by the Federal
Financial Institutions Examination Council, as well as review by various other
federal and state regulatory agencies.
Certain activities of FDMS are subject to examination and regulation
related to merchant credit card processing. In addition, FFB acts as a sponsor
to and clearing bank for a portion of the Company's merchant card processing
business. FFB is subject to examination and regulation by the Georgia
8
Department of Banking and Finance ("GDB&F") and applicable federal regulatory
agencies, including the Federal Deposit Insurance Corporation ("FDIC") which
approved FFB's application for FDIC deposit insurance in 1993. FFB must
maintain certain minimum capital ratios imposed by the GDB&F and FDIC and
operates under certain activity limitations under the Federal Bank Holding
Company Act, as amended. In addition, FFB and FDMS continue to be subject to
rules of the VISA and MasterCard organizations, including a requirement that FFB
maintain adequate capital (currently $70 million) based on the merchant credit
card processing volume settled through FFB. Finally, each corporate entity in
the chain of ownership of FFB (e.g., FDMS, CESI Holdings, Inc., FFMC and the
Company) is a bank holding company under Georgia law and is subject to certain
examination, reporting, registration and capital requirements.
Most states license issuers of payment instruments and many require,
among other things, that proceeds from the sales of such instruments be invested
in high-quality marketable securities prior to the settlement of the
transactions. Such licensing laws also may cover matters such as regulatory
approval of agent locations and the filing of periodic reports by the licensee.
The Company's services related to debt collection are governed by the
Fair Debt Collection Practices Act and certain of the Company's services are
governed by the Fair Credit Reporting Act, both of which delegate regulatory
authority to the Federal Trade Commission. In addition, the Company's services
related to debt collection, health care claims administration and money
transfers also are regulated at the state level by banking or insurance
commissions or similar authorities. 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 minimum levels of
net worth and/or liquidity.
FDC's investment processing services area also is subject to federal
securities laws relating to, among other things, the regulation of transfer
agents.
An EBP subsidiary is licensed throughout the United States as a life
and health insurance company, and is subject to the insurance laws and
regulations of Oklahoma (where it is domiciled). These laws and regulations
include requirements of the entity to maintain minimum capital and surplus
ratios and minimum reserves. Regulations also require the filing of annual and
other reports related to the insurance entity's operation and financial
condition.
The Employee Retirement Income Security Act of 1974 ("ERISA")
regulates, among other things, the relationships between benefit plans and other
parties. The business practices of FDC's health care administrative services
area are structured to minimize the applicability of ERISA, and to comply with
provisions that management believes applicable to the Company. Regulatory and
judicial interpretation regarding ERISA's applicability to the Company continues
to evolve. There can be no assurance that either this evolving interpretation
or future legislation will not adversely affect FDC's health care administrative
services area.
COMPETITION
The most significant competitive factors related to the Company's
services are price, quality, features and functionality, and reliability of
service.
FDC is not aware of any single competitor which provides the same
range of services; however, the information services industry is highly
fragmented and FDC faces significant competitors in each of its service areas.
The Company also competes with companies that internally perform processing or
other related services offered by FDC. In addition, the Company believes that
recently enacted changes in telecommunications and other laws and developments
regarding the Internet and other new technologies related to electronic commerce
may result in competition from entities with access to significant capital and
management resources.
FDC creates a differentiated competitive position in its service areas
by offering a menu of enhanced services to clients. These enhanced services
often involve technologically sophisticated reporting features that add value to
information derived from the Company's transaction processing databases.
9
The Company's domestic merchant card processing service area competes
against several other national service providers, and against banks that
continue to provide these services to their merchant customers. FDC's check
acceptance area is in competition principally with two other national companies.
FDC's card issuing services area competes with other third-party
cardholder processors as well as banks that process their accounts internally.
In its collection services area, FDC promotes its nationwide presence and highly
automated process as competitive advantages in pursuing business with large
commercial accounts. This industry is highly fragmented, with many smaller
local and regional competitors, as well as several other national competitors.
In the payment instruments area, FDC's money transfer services compete
with MoneyGram Payment Systems, which the Company divested pursuant to an
initial public offering in 1996, as well as other niche providers. The Company
also competes with bank wire transfer services (primarily available to
commercial users). In addition, the Company faces several established
competitors in providing commercial money transfer and electronic bill payment
services. FDC's money order services primarily compete with postal money
orders and those of one other national provider.
FDC's investment processing services area competes with numerous other
service providers, as well as with in-house service areas within mutual fund
organizations.
The health care administrative services market continues to be
fragmented among numerous independent, non-insurance companies. First Image is
the largest provider in the data imaging market, a market composed primarily of
local area providers.
INDUSTRY TRENDS
Technological capabilities required for the rapid and efficient
creation, processing, handling, storage and retrieval of information are
becoming increasingly complex. These capabilities require large development and
capital expenditures and processing expertise, and have contributed to a trend
toward the outsourcing of processing services that benefits the Company. In
addition, the evolution of these capabilities is creating new competitors with
innovative solutions, and also is driving an industry-wide consolidation which
is creating more established competitors.
Bank industry consolidation impacts existing and potential clients in
FDC's service areas, primarily relating to card issuing and payment instruments
services. Consolidation in the mutual fund industry similarly could impact the
Company's investment processing services business. In the aggregate, bank and
mutual fund mergers have not significantly affected the Company to date.
However, FDC could lose business in connection with future client mergers if the
surviving or acquiring entity utilizes in-house processing services or those of
a competitor of the Company.
EMPLOYEES AND LABOR RELATIONS
At December 31, 1996, the Company employed approximately 40,000
employees, over 95 percent of whom were full-time employees. A significant
portion of FDC's 1,900 employees in the United Kingdom are members of the
Banking Insurance & Finance Union. In addition, Western Union has two three-
year labor contracts (expiring August 6, 1997) with the Communications Workers
of America, AFL-CIO and its local 1177, representing approximately 1,200
employees. The Company's employees are not otherwise represented by any labor
organization. The Company believes that its relations with its employees and
the labor organizations identified above generally to be good.
10
BACKGROUND OF THE COMPANY
The Company was a wholly-owned subsidiary of American Express prior to
its initial public offering in April 1992 (the "IPO"). In connection with the
IPO, the Company's Delaware Certificate of Incorporation was amended to change
the name of the Company to First Data Corporation. In October 1996, American
Express delivered a substantial majority of its remaining FDC shares to holders
of its 6 1/4% Exchangeable Notes in lieu of a cash redemption, reducing its
ownership interest in the Company to less than 5%.
EXECUTIVE OFFICERS OF THE REGISTRANT
See item 10 of this Form 10-K.
ITEM 2. PROPERTIES
The Company leases executive office space at 401 Hackensack Avenue,
Hackensack, New Jersey, and at 5660 New Northside Drive, Atlanta, Georgia. The
Company and its subsidiaries own or lease approximately 750 properties which
range in size from approximately 271,000 square feet to less than 200 square
feet. The following table describes the principal facilities used in connection
with the Company's operations. Unless otherwise indicated by an asterisk (*),
such facilities are leased.
Approximate
Business Unit Location Square Footage
- ------------- -------- --------------
Domestic Card Issuer Services Omaha, NE (3 facilities)* 502,000
Omaha, NE (9 facilities) 860,000
Tulsa, OK* 188,000
Tulsa, OK 176,000
Domestic Merchant Processing Aurora, CO 78,000
Services Coral Springs, FL 97,000
Hagerstown, MD 120,000
Houston, TX 154,000
Melville, NY 131,000
Sunrise, FL 102,000
International Card Services Australia (5 facilities) 25,000
Basildon, England
(4 facilities)* 262,000
Southend-on-Sea, England
(3 facilities) 203,000
Payment Instruments Bridgeton, MO 78,000
Englewood, CO 271,000
Paramus, NJ 132,000
Investment Processing Services Boston, MA 201,000
Providence, RI 114,000
Westborough, MA 75,000
Health Care Administrative Glen Allen, VA 70,000
Services Minneapolis, MN 71,000
Salt Lake City, UT 173,000
Specialty Services Atlanta, GA 90,000
London, KY (6 facilities)* 108,000
Lynnfield, MA 185,000
Marietta, GA 70,000
Nashville, TN 122,000
Nevada, IA 232,000
Norcross, GA 90,000
Pensacola, FL 58,000
Tucson, AZ 49,000
11
The Company owns or leases a number of additional facilities in the United
States and foreign countries which are used for operational, sales and
administrative purposes. The Company's lease obligations generally include
customary provisions regarding increases in rent and related costs, such as
property taxes. The Company believes that its facilities are suitable and
adequate for its businesses; however, the Company periodically reviews its space
requirements to consolidate and dispose of or sublet facilities which are no
longer required in connection with its businesses and to acquire new space to
meet the needs of its businesses.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is involved in various litigation matters
arising in the ordinary course of its business, none of which, either
individually or in the aggregate, currently is material to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The principal market for the Company's common stock is the New York Stock
Exchange ("NYSE"). The following table sets forth, for the indicated calendar
periods, the reported 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 17,
1997, the registrant had 4,650 common stockholders of record.
1995 High Low Dividend
- ---- ------- ------- --------
First Quarter........ $27 $23 $.015
Second Quarter....... 29 1/4 25 5/8 .015
Third Quarter........ 31 1/4 27 5/8 .015
Fourth Quarter....... 35 5/8 30 1/2 .015
1996
- ----
First Quarter........ 37 7/8 30 3/8 .015
Second Quarter....... 40 7/8 34 .015
Third Quarter........ 41 3/8 34 3/8 .015
Fourth Quarter....... 44 35 1/4 .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. In addition, the terms of the Company's debt facilities limit the
Company's ability to pay dividends through a minimum net worth covenant
requiring the Company to maintain its consolidated net worth, as defined, at a
minimum level of $2.25 billion plus 25 percent of consolidated net income, as
defined, earned subsequent to July 1, 1995 and plus the aggregate amount of all
net cash proceeds received by the Company in respect of all capital stock issued
after June 30, 1995. As of December 31, 1996, approximately $1 billion was
available for the payment of dividends under these restrictions.
12
RECENT SALES OF UNREGISTERED SECURITIES
On November 8, 1996, 917,437 shares of the Company's common stock were
issued to the shareholders of Southern Telecheck, Inc. ("STI") in a merger
transaction pursuant to which FDC acquired 100% of the stock of STI. No
underwriter or placement agent was involved in the transaction. The issuance of
the FDC shares was not registered under the Securities Act of 1933 (the "Act")
in reliance upon the exemption from registration provided by Section 4(2) of the
Act and regulations enacted by the Securities and Exchange Commission under
Section 4(2).
A warrant, dated November 16, 1996, was issued by a wholly-owned
subsidiary of the Company to a customer of that subsidiary. The warrant was
issued in consideration of certain contractual agreements between the
subsidiary, certain affiliates of the subsidiary and the customer. The warrant
is exercisable during the period from October 21, 2001 through October 20, 2003,
subject to acceleration and extension upon the occurrence of certain events
specified in the warrant. When exercisable, the warrant permits the holder to
purchase up to 2,000,000 shares of the Company's common stock at a purchase
price of $70 per share, subject to adjustment upon the occurrence of certain
events specified in the warrant. No underwriter or placement agent was involved
in the transaction. The issuance of the warrant was not registered under the
Act in reliance upon the exemption from registration provided by Section 4(2) of
the Act.
13
ITEM 6. SELECTED FINANCIAL 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. Amounts in
1992 excluded First Financial Management Corporation's financial services
business segment that was sold in 1992. Certain prior years' amounts have been
restated to conform to the current year's presentation.
Year Ended December 31, 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
(In millions, except per share amounts)
Income statement data:
- ---------------------
Revenues $4,938.1 $4,186.2 $3,080.5 $2,658.2 $2,228.9
Expenses 3,906.3 (a) 4,018.6 (a) 2,469.2 2,161.1 1,945.1 (b)
---------- --------- --------- --------- ---------
Income from continuing operations
before income taxes 1,031.8 167.6 611.3 497.1 283.8
Income taxes 395.3 251.8 251.0 200.7 130.5
---------- --------- --------- --------- ---------
Income (loss) from continuing operations $636.5 ($84.2) $360.3 $296.4 $153.3
========== ========= ========= ========= =========
Depreciation and amortization $423.6 $346.8 $242.5 $199.7 $184.3
Per share data: (c)
- ---------------
Income (loss) per share - continuing operations $1.37 (a) ($0.19)(a) $0.85 $0.71 $0.38 (b)
Cash dividends per share 0.065 0.06 0.06 0.06 0.03 (d)
Balance sheet data (at year end):
Total assets $14,340.1 $12,217.8 $8,433.1 $5,538.4 $5,365.9
---------- --------- --------- --------- ---------
Settlement assets (e) 7,641.5 6,210.6 3,554.0 2,060.3 2,152.5
Goodwill 3,490.4 3,246.1 2,572.9 1,459.2 1,335.1
---------- --------- --------- --------- ---------
Total liabilities 10,630.3 9,072.7 6,032.2 3,366.6 3,474.6
---------- --------- --------- --------- ---------
Settlement obligations (e) 7,389.9 6,119.4 3,564.1 2,060.3 2,152.5
Borrowings 1,261.4 1,127.7 572.1 538.5 510.0
Senior convertible debentures 447.1 447.1 447.1 --- ---
---------- --------- --------- --------- ---------
Total stockholders' equity 3,709.8 3,145.1 2,400.9 2,171.8 1,891.3
---------- --------- --------- --------- ---------
Summary operating data:
- -----------------------
At year end -
Card accounts on file (in millions) (f) 152.9 121.4 92.2 70.0 58.9
Mutual fund assets serviced (in billions) $429.0 $360.1 $277.0 $259.0 $221.0
For the year -
Merchant dollar volume (in billions) (g) $214.5 $144.1 $74.2 $54.5 $42.8
Merchant transactions (in billions) 5.9 4.5 2.8 2.3 1.8
Payment instrument transactions (in millions) 457.8 401.0 318.2 262.6 238.5
(a) Includes merger, integration and impairment charge of $32.5 million and $46.0 million gain on the MoneyGram disposition
together totalling $13.5 million ($8.3 million after tax, or $0.02 per share after tax) for 1996, and charges of $645.7
million ($539.9 million loss after tax benefits, or $1.21 after tax loss per share) for 1995.
(b) Includes loss in FFMC business unit sold of $79.6 million ($64.7 million after tax benefits, or $0.16 after tax loss
per share).
(c) Per share data have been restated for the November 15, 1996 stock split effected as a 100% stock dividend.
(d) Excludes cash dividends paid to FDC's former parent company of $0.075 per share in 1992.
(e) Settlement asset and obligation totals differ due to the accounting for unrealized net investment gains and losses under
SFAS 115 (adopted in 1994).
(f) Excludes certain bankcard accounts for which the Company does not provide full processing.
(g) Includes only those merchant transactions for which FDC performed authorization, settlement and back office processing.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
First Data Corporation ("FDC" or "the Company") operates in a single
business segment providing high-quality, high-volume information processing and
related services to several market sectors. The Company has focused
particularly on its services related to payment transactions (which include
transaction card issuer services, merchant card and check processing services,
and processing services related to payment instruments), representing
approximately two-thirds of FDC's operating revenues in both 1996 and 1995. In
this area, the Company is emphasizing growth in electronic commerce, information
management and international expansion.
The Company continues to pursue revenue growth through five primary
sources: internal growth, which consists primarily of increased transaction
processing for existing clients; sales of ancillary products and enhanced
services to existing clients; the addition of new clients in existing service
areas; expansion into adjacent markets where FDC can provide similar information
processing services to new client groups; and acquisitions.
FDC continues to consider acquisition opportunities as well as other
forms of business combinations and divestitures. Acquisitions supplement FDC's
internal efforts to access new markets and client groups, while divestitures are
contemplated for business units lacking sufficient growth prospects or for units
not enhancing the Company's transaction processing competencies. However, no
assurance can be given with respect to the timing, likelihood or the financial
or business effect of any possible transaction.
Strategic Transactions and Developments
During 1996, the Company substantially completed the integration of
First Financial Management Corporation's ("FFMC") operations with those of FDC.
The October 1995 merger of the two companies was accounted for as a pooling of
interests, and the results of the two entities have been combined for all
periods presented in the accompanying consolidated financial statements and in
this discussion and analysis. In addition, the Company divested its MoneyGram
operation in December 1996 through an initial public offering of its common
stock to comply with the Company's agreement with the Federal Trade Commission
("FTC") as part of the merger with FFMC. MoneyGram represented approximately 3%
of 1996 consolidated operating revenues and pretax earnings.
The Company formed First Data Solutions in 1996 from its information
management businesses to enhance current product and service offerings to the
Company's existing and potential clients. Subsequent product expansion occurred
through the Company's acquisition of Donnelley Marketing, Inc., a consumer
information and direct marketing firm, in September 1996 and a public record
information business in June 1996. These business combinations were accounted
for as purchases, and their results have been included from the effective dates
of each acquisition. In addition, the Company introduced the U$A Value Exchange
product which offers its merchant base the opportunity for targeted promotional
programs to the cardholders of FDC's issuing bank clients.
During 1996, FDC implemented a number of additional alliance programs
with bank clients. The alliances are designed to preserve each bank's existing
merchant relationships while allowing both FDC and the bank to share in profit
opportunities with respect to the existing merchant business of both FDC and the
bank, namely in the form of cost efficiencies and expanded product offerings.
The structure of the alliances varies depending on the needs of each bank client
and FDC, as well as applicable tax, regulatory and other considerations;
however, each alliance involves the bank and FDC contributing some of their
merchant contracts, cash or a combination thereof. Additionally, cost
efficiencies and product offerings have benefited the alliances in generating
new merchant business.
In the fourth quarter, the Company also entered into several
agreements enhancing its merchant processing area, the most significant being
with Wal-Mart and Chase Manhattan Bank ("Chase"). The Company entered into a
10-year agreement with Wal-Mart to process all of its electronic payments. In
addition, use of the Company's check acceptance product, which is currently used
by certain Wal-Mart
15
locations, will be expanded. The Company entered into an agreement with Chase
to form an alliance which initially will focus principally on national level
merchants. This venture is expected to become operational in the first quarter
of 1997.
In the payment instruments area, the Company acquired the remaining
outside interest in the Western Union Mexican money transfer business. During
1996, the Company also acquired two fleet service operations which offers the
trucking industry various types of payment products. These acquisitions offered
an adjacent market for the Company's payment services.
The Company continues to scrutinize its businesses and their related
fit into FDC's long-term plans. During the past few years, FDC completed the
sale of several business units: the Company's MoneyGram operations as discussed
above, the Company's health systems business in June 1995 and its cable billing
services and hotel reservations businesses in November 1994. In February 1997,
the Company completed the sale of its GENEX subsidiary. GENEX was a division of
the Company's health care administration services area and performs workers
compensation cost containment and management services. The remainder of the
health care administration services area has experienced a decline in business
levels over the past year as FDC has shifted away from government-related and
other low margin products, and focused on data processing and information
management related to employee claims and the resulting payment, including
completing the development of a new claims administration processing system,
Act3, for which the Company has incurred capitalized software development costs
of $53.9 million at December 31, 1996. Act3 has been in development for several
years. This development is entering the critical period of operational
implementation and planned roll-out to many existing customers as well as new
clients in 1997.
During the 1996 third quarter, the Company's Board of Directors
declared a two-for-one stock split, effected in the form of a stock dividend,
distributed on November 15, 1996 to shareholders of record on November 1, 1996.
Accordingly, all earnings (loss) per common share amounts and related share
amounts have been retroactively restated in the accompanying consolidated
financial statements and in this discussion and analysis.
RESULTS OF OPERATIONS
1996 Compared with 1995
Operating revenues in 1996 increased 21% to $4.9 billion, compared
with $4.1 billion in the prior year. The Company's internal growth rate in
revenues over the prior year (excluding the effect of acquisitions and divested
businesses) was approximately 18%. Growth in existing businesses, principally
due to the addition of new clients along with strong underlying volume increases
from existing clients and enhanced services to such clients, accounted for a
substantial majority of the revenue increase. The Company's performance
reflects, in particular, continuing strong growth in the payment instruments,
merchant processing, and domestic card issuer services business areas.
A substantial portion of the Company's operating revenues is generated
from payment and other transactions occurring entirely within the United States.
Transactions outside the United States arise principally within the Company's
card services operation in the United Kingdom, and from nonbank money transfers
settled outside the United States, but originating and processed within the
United States. Both of these international transaction volume sources had
double digit growth in 1996.
The Company derives revenues in its primary service areas principally
based on the number of accounts or transactions processed, a percentage of
dollar volume processed, or on a combination thereof. Lesser amounts of revenue
are generated from foreign currency exchange on money transfer transactions and
from sharing in investment earnings on fiduciary funds. These payment instrument
investment revenues from fiduciary funds (before commissions to certain selling
agents) increased from $244.0 million in 1995 to $285.9 million in 1996. The
overall growth of FDC is demonstrated by the following key indicators (along
with the percentage growth compared to 1995): 153 million card accounts on file
at December 31, 1996 (+26%), 5.9 billion merchant transactions (+33%) and 458
million payment instrument transactions, excluding MoneyGram money transfers
(+14%).
16
Operating expenses increased 18% to $3.1 billion from $2.6 billion in
1995. The percentage increase was less than the operating revenue percentage
increase for the year, reversing the 1995 trend when operating expenses for the
year rose at a rate of four percentage points higher than operating revenue
growth. This reversal primarily was due to high growth in certain business
areas which have a lower ratio of operating expenses to revenue than the overall
Company average and the benefits of integration activities which have slowed the
rate of growth in operating expenses. These positive benefits were somewhat
offset by the continued impact of signing certain new business and renewing
larger customers at lower rates and the impact of a FFMC health care acquisition
in October 1995 (prior to FFMC's merger with the Company), which has relatively
higher operating expenses compared with its revenues.
Selling, general and administrative expenses increased to $724.7
million, up 10% from $660.3 million in 1995. The increase is associated
principally with the Company's efforts to attract customers and increase
business levels by devoting resources and expenditures to marketing and
advertising programs for the Company's businesses, including its alliance
programs with banks for its merchant processing services. General and
administrative increases for the year, which were driven primarily by the
merchant processing business and certain acquisitions, substantially were offset
by synergy savings from the merger with FFMC.
Interest expense increased modestly despite increased borrowing
levels, principally due to reduced costs related to assumed pension obligations
in connection with the Western Union acquisition (which has been classified as
interest expense since it is a suspended plan for which service credits are no
longer being earned by participants). In addition, the Company currently is
experiencing lower rates due to the short-term rate environment and use of its
commercial paper program.
Earnings comparisons between 1996 and 1995 are impacted significantly
by merger, integration and impairment amounts. The 1996 merger, integration and
impairment amount consists of a $46.0 million gain on the sale of the Company's
MoneyGram operation through an initial public offering of 100% of its common
stock. This divestiture was ordered by the FTC as part of the FFMC merger. In
addition, the 1996 amount includes $32.5 million of integration and impairment
charges. These items, net, increased after tax income by $8.3 million ($0.02 per
share). The 1995 $645.7 million merger, integration and impairment charge
included $221.7 million in direct costs of the FFMC merger, primarily payments
pursuant to preexisting change in control agreements with FFMC management. As a
result of the FFMC merger, the Company conducted a strategic reevaluation of its
businesses, reviewing overall trends and developments in relation to its
business investments and industry concentrations. In addition to identifying
duplicate and overlapping operations, this process identified certain
insignificant business lines for disposition or discontinuance and highlighted
other business lines and customer relationships which had diminished future
value. As a result, the Company recorded restructuring and integration costs of
$121.2 million and impairment charges of $283.6 million. The impairment charge
included a $114.7 million write off of ENVOY goodwill caused by the subsequent
agreements that added CES and NaBANCO to FDC's operations. These additions
caused the Company not to pursue the business plans driving the assumptions used
to originally value ENVOY in August 1994 when the agreement to acquire ENVOY was
executed. Finally, the charge included a $19.2 million expense related to the
prepayment of certain long-term borrowings. After considering tax benefits of
only $105.8 million due to the nondeductibility of certain items, the 1995
charge reduced after tax earnings by $539.9 million ($1.21 per share). For a
more complete description of these charges, see Note 2 to the consolidated
financial statements.
Excluding merger, integration and impairment amounts and the 1995
second quarter impact of the divestiture of the health systems business (which
produced a pretax gain of $68.9 million and offsetting income taxes of $67.7
million), pretax income for the year was $1,018.3 million, up 37% from 1995's
$744.4 million. Pretax margins, as a percentage of total revenues, increased to
20.6% in 1996 from 18.1% in 1995. This margin improvement indicates the ongoing
realization of synergies, cost containment efforts and operating efficiencies.
In addition, margin improvements were experienced in the merchant processing
area due to the increased number of alliances accounted for under the equity
method and in the payment instruments area due to strong transaction growth in
high margin products. These improvements partially were offset by a decline in
margin in the Company's health care administration business.
17
FDC's effective income tax rate of 38.3% in 1996 decreased from 38.9%
in 1995 (excluding the impact of the 1995 merger, integration and impairment
charge and the health systems divestiture discussed above) due to increased
earnings from nontaxable investments of settlement assets, partially offset by
an increase in state taxes as a larger percentage of business was conducted in
states with higher tax rates than the Company's prior average rate.
After tax earnings increased from a net loss of $84.2 million in 1995
to a net income of $636.5 million in 1996. Excluding merger, integration and
impairment amounts in both years, after tax earnings increased 38% to $628.2
million in 1996 from $455.7 million in 1995. Earnings per common share (again
excluding the above amounts in both years) increased 32% to $1.35 in 1996
compared with $1.02 per share in 1995. The lower percentage increase in per
share earnings compared with after tax earnings principally results from the
issuance of common stock during 1995 to complete business combinations.
1995 Compared with 1994
Operating revenues in 1995 increased 35% to $4.1 billion, compared
with $3.0 billion in the prior year. Growth in existing businesses, principally
from new clients and strong underlying volume increases from existing clients,
accounted for approximately half of the revenue increase. The balance of the
growth in operating revenues primarily resulted from the effect of acquisitions,
net of the impact of revenue lost from divested businesses. Growth in existing
businesses was particularly strong in the Company's card issuer and merchant
processing as well as payment instrument services, with these service groups
experiencing 1995 internal revenue growth exceeding 20% compared with the prior
year. Other service areas experienced various lower growth rates or declines in
revenue, in certain instances either as a result of product development cycles
or a deemphasis of certain aspects of the business.
Expenses (excluding 1995's merger, integration and impairment charge
of $645.7 million) increased 37%, slightly higher than the rate of increase of
operating revenues. Operating expenses increased by 39% primarily due to
outlays to expand facilities and increase staffing to grow the Company's
infrastructure. Selling, general and administrative expenses grew at a lesser
rate of 22%. Accordingly, income before income taxes (excluding the 1995
merger, integration and impairment charge and the impact of the divestiture of
the health systems business as previously discussed) increased 22% to $744.4
million in 1995 compared with $611.3 million in 1994. The Company's pretax
margin on total revenues of 18.1% in 1995, down from 19.8% in 1994 due to the
Company's infrastructure expenses incurred and the impact of pricing for larger
clients in 1995.
FDC's effective income tax rate of 150.2% in 1995 increased from 41.1%
in 1994 principally from the nondeductibility of a large portion of the merger,
integration and impairment charge. Excluding the impact of the charge on 1995's
rate, the Company's effective income tax rate increased 2.9% in 1995 to 44.0%,
primarily from the impact of $67.7 million in taxes (a 98.3% tax rate) on the
gain from the sale of the Company's health systems business. Excluding the 1995
health systems divestiture, FDC's effective rate in 1995 of 38.9% decreased from
41.1% in 1994 due primarily to increased earnings from nontaxable investments of
settlement assets.
After tax earnings decreased from $360.3 million in 1994 to a net loss
of $84.2 million in 1995 as a result of the merger, integration and impairment
charge, which impacted per share amounts in a similar manner. Excluding the
impact of the charge, after tax earnings increased 26% to $455.7 million from
$360.3 million in 1994. Earnings per common share (again excluding the 1995
merger, integration and impairment charge) increased 20% to $1.02 in 1995
compared with $0.85 per share in 1994.
Economic Fluctuations
FDC's business is somewhat insulated from economic fluctuations due to
recurring service revenues from long-term relationships, and the fact that the
Company's services often result in cost savings for its customers. In addition,
its card issuing and merchant processing service areas are benefiting from
higher overall card use and, in particular, growing card use for recurring
transactions at outlets such as supermarkets and gas stations.
18
Portions of the Company's business are seasonal. FDC's revenues and
earnings are favorably affected by increased card and check volume during the
holiday shopping period in the fourth quarter and, to a lesser extent, during
the back-to-school buying period in the third quarter. Higher money transfer
volume during the summer months in FDC's payment instruments area also affects
revenues and earnings.
Although FDC cannot precisely determine the impact of inflation on its
operations, the Company has not been significantly affected by inflation. For
the most part, the Company has looked to operating efficiencies from scale and
technology, as well as decreases in technology and communications costs to
offset increased costs of employee compensation and other operating expenses.
In addition, a portion of FDC's service revenues are based on a percentage of
dollar volume processed, partially insulating operating margins on these
services from the effects of inflation.
Forward Looking Statement
The Company has a long-term objective to grow revenues, net income and
earnings per share at a compound annual rate of approximately 20%. Growth in
any one year may be modestly above or below this objective, reflecting changes
in business mix, investment in future growth opportunities, and/or acquisition
activities. In 1997, First Data expects earnings per share to be approximately
$1.60. Earnings of $1.60 per share would result in a five-year compound annual
growth rate of approximately 20% since the initial public offering in 1992. The
Company expects earnings growth in the first half of 1997 to be slightly lower,
and in the second half to be slightly higher, than the year as a whole due to
the timing of revenues and expenses related to new client and product
initiatives.
All forward-looking statements are inherently uncertain as they are
based on various expectations and assumptions concerning future events and they
are subject to numerous known and unknown risks and uncertainties which could
cause actual events or results to differ materially from those projected.
Important factors upon which the Company's
forward-looking statements are premised include the following:
. Continued growth at rates approximating recent levels for card-
based payment transactions, consumer money transfer transactions, and other
product markets.
. Successful implementation of the Act3 health care claims
administration processing system into the Company's existing customer base as
well as overall market appeal for the service.
. Successful implementation and achievement of expected growth of the
U$A Value Exchange program and other information product initiatives.
. Absence of consolidation among client financial institutions or
other client groups which has a significant impact on FDC client relationships.
. Successful management of pricing pressures through cost
efficiencies.
. No imposition of a Value Added Tax on third-party credit card
processing services by the European Community, which could put credit card
processing outsourcers at a competitive disadvantage to in-house solutions in
the European Community.
. No unanticipated changes in laws, regulations, credit card
association rules or other industry standards affecting FDC's businesses which
require significant product redevelopment efforts or render products obsolete.
. No dispositions of significant businesses, which could have a
short-term dilutive impact if other appropriate investment opportunities are not
immediately available.
. Continuation of the existing interest rate environment, avoiding
increases in agent fees related to a portion of the Company's payments
instruments business and in the Company's short-term borrowing costs.
. Absence of significant changes in retail foreign exchange spreads
on retail money transfer transactions, particularly between the United States
and Mexico.
. No significant increase in the cost of maintaining a role for FDC's
credit card processing, merchant processing and money transfer businesses in
connection with new payment technologies being developed.
19
. Successfully managing the potential both for patent protection and
patent liability in the context of rapidly developing legal framework for
expansive software patent protection.
Variations from these assumptions or failure to achieve these
objectives could cause actual results to differ from those projected in the
forward-looking statement. 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 operations,
aggregating $1,053.8 million in 1996. This cash flow was produced principally
from $636.5 million of net income and $423.6 million of non-cash depreciation
and amortization expense. Working capital items (principally accounts
receivable, accounts payable and income taxes) did not use cash as the deferral
of income tax payments offset the increase in receivables associated with the
overall revenue growth of the business. FDC utilized this cash flow to reinvest
in its existing businesses, to meet its dividend requirements, to fund purchases
of treasury shares and to contribute to the financing of business expansion.
Cash flow from operations in 1996 exceeded the comparable 1995 amount
by $344.7 million. Due to the 1995 merger, integration and impairment charge
not using a large amount of cash, this increase is significantly different than
the increase in net income between the two periods.
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. These cash outlays totaled
$670.8 million in 1996 compared with $466.7 million in the prior year. This
increase is primarily due to the Company's expansion of its overall processing
capacity to continue to meet growing transaction volumes and the conversion of
new customers onto the Company's processing systems. The Company expects that
these outlays will be slightly lower in 1997 due to 1996 investment in the
Company's processing systems. In 1997, the Company also expects to expense
approximately $30 million of expenditures in connection with preparing its
processing systems to handle the year 2000 issues.
Overall, FDC's operating cash flow in 1996 exceeded its non-
acquisition investing activities by $383.0 million. The Company also received
cash of $211.9 million during 1996 relating to dispositions, which is primarily
attributable to the December 1996 divestiture of MoneyGram, proceeds from the
formation of joint ventures in furtherance of FDC's bank alliance program and
the sale of a retail credit card receivables portfolio. These cash sources
contributed to funds utilized for acquisitions and treasury stock purchases.
During 1996, the Company invested $495.5 million of cash in several acquisitions
and ongoing investments in the bank alliance program. A $162 million payment
was made in the 1996 first quarter to purchase the remaining interest in a joint
venture relating to Western Union's money transfer services between the U.S. and
Mexico. In the third quarter, a $188.9 million payment was made to purchase
Donnelley Marketing, Inc., a consumer information and direct marketing firm.
The remainder consists principally of payments relating to the Company's
alliance programs with bank clients involving merchant business, and two
acquisitions which expanded the Company's markets and service offerings in its
payment instruments business.
The Company's financing activities include net borrowings, share
repurchases, and dividend payments. Net cash provided by financing activities
was $11.0 million in 1996, as compared to $480.0 million in 1995. The
significant decline is due to lower net borrowings ($114.6 million in 1996
versus $501.6 million in 1995) and higher net share repurchase activity.
During 1996, the Company issued $350 million in Medium-Term Notes
(with maturities ranging from two to five years), reducing its dependence on
short-term borrowings. The proceeds from these notes were used to reduce
outstanding commercial paper, which declined from $689.3 million at December 31,
1995 to $441.1 million at December 31, 1996. Also the Company obtained $250
million in uncommitted bank
20
lines from several financial institutions during 1996, under which $34.8 million
was outstanding at December 31, 1996.
The Company made cash outlays totaling $254.9 million in 1996 to buy
back shares of its common stock which were reissued primarily in connection with
the Company's stock compensation plans. Proceeds from option exercises and
related tax benefits of $177.5 million partially offset these outlays. In
addition, FDC continued its pattern of paying quarterly cash dividends of $0.015
per share to the Company's common stockholders, resulting in cash outlays
totaling $26.2 million and $13.8 million in 1996 and 1995, respectively.
Following the November 1996 stock split, the Company increased the fourth
quarter 1996 dividend to $0.02 per share which was paid in January 1997.
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 sheets) are not utilized to support the
Company's operations. However, the Company does have the opportunity to earn
income from investing a portion of these funds. The Company maintains a portion
of its settlement assets in highly liquid investments (classified as cash
equivalents within settlement assets) to fund settlement obligations.
The Company uses conventional interest rate swap and cap agreements
(off-balance sheet) to partially hedge specific exposures related to certain
commission expenses of its payment instruments business which are tied to short-
term variable rates. The impact of these instruments is not material to the
Company's overall financial position or results of operations. A more detailed
description of these financial instruments is contained in Note 7 to the
consolidated financial statements.
At December 31, 1996, the Company held cash and cash equivalents of
$271.7 million, an increase of 18% over 1995's $231.0 million. These amounts
include $70.0 million related to required investments in connection with the
Company's merchant card settlement operations, additional amounts used to
support the operations of certain business units, and the remainder available
for general corporate purposes. Also, FDC has available short-term borrowing
capability of $774.1 million at December 31, 1996 under the Company's
commercial paper program and through its uncommitted credit lines. In addition,
at December 31, 1996 the Company had an outstanding shelf registration statement
providing for the future issuance of debt and equity securities up to $250
million in the aggregate.
The Company believes that its current level of cash and borrowing
capability along with future cash flows from operations are sufficient to meet
the needs of its existing businesses. However, to achieve its objectives, the
Company may, when necessary, supplement its available cash resources by seeking
funds in the equity or debt markets. To provide additional flexibility, the
Company anticipates expanding its existing commercial paper program to $1.5
billion and has been authorized by its board of directors to file an additional
$750 million shelf registration.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements at Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
21
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........ 53 Chairman of the Board and Chief Executive Officer
Lee Adrean............. 45 Executive Vice President and Chief Financial Officer
Henry T. DeNero........ 51 Executive Vice President
Charles T. Fote........ 48 Executive Vice President
Walter M. Hoff......... 44 Executive Vice President
Robert J. Levenson..... 55 Executive Vice President and Director
Edward C. Nafus........ 56 Executive Vice President
David P. Bailis........ 41 Executive Vice President and General Counsel
Ben Burdetsky.......... 68 Director
Courtney F. Jones...... 57 Director
James D. Robinson III.. 61 Director
Charles T. Russell..... 67 Director
Bernard L. Schwartz.... 71 Director
Garen K. Staglin....... 52 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 1997, the terms of office of Mr.
Burdetsky and Mr. Duques will expire in 1998 and the terms of office of Mr.
Robinson, Mr. Schwartz and Mr. Staglin expire in 1999. Officers of the Company
serve at the discretion of the Board of Directors. Mr. Duques, Mr. Jones, and
Mr. Robinson (Chairman) serve on the Executive Committee of the Board of
Directors. Mr. Burdetsky, Mr. Jones (Chairman) and Mr. Staglin serve on the
Audit Committee of the Board of Directors. Mr. Burdetsky, Mr. Schwartz, Mr.
Russell and Mr. Staglin (Chairman) serve on the Compensation and Benefits
Committee of the Board of Directors (the "Compensation Committee").
HENRY C. DUQUES has served as Chairman of the Board and Chief
Executive Officer since April 1989. He joined American Express in September
1987 as President and Chief Executive Officer of the Data Based Services Group
of American Express Travel Related Services Company, Inc. ("TRS"), the
predecessor of the Company, and served in that capacity until April 1989. Mr.
Duques was Group President Financial Services and a member of the Board of
Directors of Automatic Data Processing, Inc. ("ADP") from 1984 to 1987.
LEE ADREAN joined the Company in May 1995 as Executive Vice President
and Chief Financial Officer. Mr. Adrean was President of Providian Agency Group
from 1993 to the time he joined the Company. From 1991 to 1993 he was Senior
Vice President and Chief Financial Officer of Providian Corporation and from
1990 to 1991 he was Senior Vice President, Corporate Development and Strategic
Planning at Providian Corporation.
HENRY T. DENERO joined the Company in July 1995 as Executive Vice
President. From 1992 to 1994 Mr. DeNero was Vice Chairman and Chief Financial
Officer at Dayton Hudson Corporation. From 1973 to 1992, he was employed by the
management consulting firm of McKinsey & Company, Inc. Mr. DeNero is a director
of Banta Corporation.
CHARLES T. FOTE has been an Executive Vice President of the Company
since its initial public offering in April 1992. He was a Director of the
Company from the time of its formation in April 1989 as a subsidiary of American
Express Company until its initial public offering. Mr. Fote also served as
President of
22
Integrated Payment Systems ("IPS") from December 1989 through December 1991.
From 1985 until 1989, he was Executive Vice President of the Payment Products
division of TRS, the predecessor of IPS.
WALTER M. HOFF has been an Executive Vice President of the Company
since its initial public offering in April 1992. He was a Director of the
Company from the time of its formation in April 1989 as a subsidiary of American
Express Company until its initial public offering. From 1989 until April 1992
and from July 1993 until May 1995 Mr. Hoff also served as Chief Financial
Officer of the Company. He joined the Company in 1989 from ADP's Brokerage
Information Services Group, where he had been Chief Financial and Administrative
Officer since 1985.
ROBERT J. LEVENSON has been a Director of the Company since April 1992
and he joined the Company as an Executive Vice President in July 1993. He
formerly served as Senior Executive Vice President, Chief Operating Officer, and
Member of the Office of the President of Medco Containment Services, Inc., a
provider of managed care prescription benefits. Mr. Levenson was a Director of
Medco Containment Services, Inc. from October 1990 until December 1992. From
1985 until October 1990, Mr. Levenson was Group President and Director of ADP.
Mr. Levenson is a director of Superior Telecom, Inc. and Broadway & Seymour,
Inc.
EDWARD C. NAFUS has been an Executive Vice President of the Company
since its initial public offering in April 1992. He was a Director of the
Company from the time of its formation in April 1989 as a subsidiary of American
Express Company until its initial public offering. He also served as President
of First Data Resources ("FDR") from December 1988 to February 1992. Mr. Nafus
has been with FDR since 1978, when he joined the Company as a customer service
manager and thereafter held progressively senior management positions. Mr.
Nafus has announced his intention to retire from the Company effective at the
end of 1997.
DAVID P. BAILIS was promoted in September 1996 to Executive Vice
President and 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 Counsel of the Company
in July 1992. 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.
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 was a Managing Director in Merrill Lynch's Investment Banking Division from
July 1989 to December 1990. Prior thereto, Mr. Jones served as Chief Financial
Officer, Executive Vice President and a member of the Board of Directors for
Merrill Lynch & Co. Inc. from October 1985. From February 1982 to September
1985, Mr. Jones served as Treasurer and Secretary of the Finance Committee of
the Board of Directors of General Motors Corporation. He also was formerly a
Director of General Motors Acceptance Corporation and General Motors Insurance
Company.
JAMES D. ROBINSON III has been a Director of the Company since April
1992. He is the Chairman and Chief Executive Officer of RRE Investors, LLC, a
private venture investment firm, and President of J.D. Robinson Inc., a
strategic advisory company. Mr. Robinson also is Chairman of Violy Byorum &
Partners and Senior Advisor to Trust Company of the West. He previously served
as Chairman and Chief Executive Officer and as a Director of American Express
from 1977 until February 1993. Mr. Robinson is a Director of Bristol-Myers
Squibb Company, The Coca-Cola Company, Cambridge Technology Partners, and Union
Pacific Corporation.
23
CHARLES T. RUSSELL has been a Director of the Company since May 1994.
He served as President and Chief Executive Officer of Visa International from
1984 to January 1994. Mr. Russell joined Visa in 1971. Mr. Russell serves on
the Board of Visitors at the University of Pittsburgh's Joseph M. Katz School of
Business. Mr. Russell also is a Director of First USA Corp., E-Funds Corp., a
check processing company, the Janol-Hydro Corp., a manufacturer of automobile
and truck braking equipment, and Card Issuer Program Management Corporation,
which provides management services to credit card issuers.
BERNARD L. SCHWARTZ has been a Director of the Company since April
1992. He is Chairman of the Board of Directors and Chief Executive Officer of
Loral Space & Communications Ltd., a high-technology company concentrating on
satellite manufacturing and satellite-based services. He served as Chairman of
the Board of Directors and Chief Executive Officer of Loral Corporation, a
manufacturer of components for information systems, from 1972 to 1996. Mr.
Schwartz is Chairman of the Board of Directors and Chief Executive Officer of
both Globalstar Telecommunications Limited, which is developing a world-wide,
low-earth-orbit satellite-based digital telecommunications service and K&F
Industries Inc., a world-wide supplier of aircraft braking systems. He also is
Chairman of Space Systems/Loral, a manufacturer of telecommunications and
environmental satellites. In addition, Mr. Schwartz is a Director of Reliance
Group Holdings, Inc., Vice Chairman of Lockheed Martin Corp. and a trustee of
New York University Medical Center.
GAREN K. STAGLIN has been a Director of the Company since April 1992.
He has served as the Chairman of the Board of Directors and Chief Executive
Officer of Safelite Glass Corporation since August 1991. 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., Cyber Cash, Inc. and Grimes Aerospace Corp. Mr.
Staglin is a member of the Advisory Council of the Stanford Graduate School of
Business.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors, executive officers and persons who own more than ten
percent of the Company's Common Stock ("Section 16 Persons") to file reports of
ownership and changes in ownership in the Company's Common Stock with the
Securities and Exchange Commission and the New York Stock Exchange. Based on
the Company's records and other information, the Company believes that all
Section 16(a) filing requirements for the Section 16 Persons have been complied
with during or with respect to the fiscal year ended December 31, 1996 except as
described below. In each of 1995 and 1996, each of the Company's Directors
Jones, Staglin and Robinson filed a Section 16(a) report reflecting a grant of
options on the Company's stock made to them in lieu of cash payment of their
Director's fees for those years. Due to an error by the Company, each of these
reports understated by ten percent the actual number of shares subject to those
option grants.
ITEM 11. EXECUTIVE COMPENSATION
See the Proxy Statement for the Company's 1997 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 1997 Annual Meeting of
Stockholders, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the Proxy Statement for the Company's 1997 Annual Meeting of
Stockholders, which information is incorporated herein by reference.
24
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(ii) of the registrant's Annual Report on Form 10-K for
the year ended December 31, 1995).
4.1 The instruments defining the rights of holders of long-term debt
securities of the registrant and its subsidiaries are omitted
pursuant to Item 601(b) (4)(iii)(A) of Regulation S-K. The
registrant hereby agrees to furnish copies of these instruments to
the SEC upon request.
10.1/(1)/ Form of First Data Corporation 1992 Long-Term Incentive Plan, as
amended (incorporated by reference to Exhibit 10.2 of the
registrant's Annual Report on Form 10-K for the year ended December
31, 1995).
10.2 /(1)/ 1992 Long-Term Incentive Plan Performance Grant Agreement dated
January 1, 1993 between the Registrant and Henry C. Duques
(incorporated by reference to Exhibit 10.16 to the Company's
registration statement on Form S-1 (File No. 33-59440)).
10.3 /(1)/ Letter agreement dated March 4, 1993 between the Registrant and
Edward C. Nafus (incorporated by reference to Exhibit 10.16 to the
Registrant's registration statement on Form S-1 (File No. 33-
59440)).
10.4/(1)/ Amended form of 1992 Long-Term Incentive Plan Performance Grant
Agreement dated January 1, 1994 between the Registrant and its
executive vice presidents (incorporated by reference to Exhibit 10.5
of the registrant's Annual Report on Form 10-K for the year ended
December 31, 1995).
25
EXHIBIT NO. DESCRIPTION
- ---------- -----------
10.5/(1)/ Form of 1992 Long-Term Incentive Plan Performance Grant Agreement
between the Registrant and its executive vice presidents for the
performance 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 Decembr 31, 1995).
10.6/(1)/ Form of 1992 Long-Term Incentive Plan Performance Grant Agreement
between the Registrant and its executive vice presidents for the
performance 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 Decembr 31, 1995).
10.7/(1)/ Amended form of First Data Corporation 1993 Director's Stock Option
Plan (incorporated by reference to Exhibit 10.8 of the registrant's
Annual Report on Form 10-K for the year ended Decembr 31, 1995).
10.8 364 Day Credit Agreement, dated as of October 1, 1995, among the
registrant, Chemical Bank, as administrative agent, and the 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 September 30, 1995).
10.9 5 Year Credit Agreement, dated as of October 1, 1995, among the
registrant, Chemical Bank, as administrative agent, and the 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 September 30, 1995).
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.
23.2/(2)/ Consent of Deloitte & Touche LLP.
(b) Reports filed on Form 8-K during the fourth quarter of fiscal 1996:
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.
26
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 18, 1997
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 18, 1997
- ----------------------------- Chief Executive Officer
Henry C. Duques
/s/ LEE ADREAN Executive Vice President and March 18, 1997
- ----------------------------- Chief Financial Officer
Lee Adrean (Principal Financial Officer)
/s/ RICHARD MACCHIA Senior Vice President-Finance March 18, 1997
- ----------------------------- (Principal Accounting Officer)
Richard Macchia
/s/ BEN BURDETSKY Director March 18, 1997
- -----------------------------
Ben Burdetsky
/s/ COURTNEY F. JONES Director March 18, 1997
- -----------------------------
Courtney F. Jones
/s/ ROBERT J. LEVENSON Director March 18, 1997
- -----------------------------
Robert J. Levenson
/s/ JAMES D. ROBINSON III Director March 18, 1997
- -----------------------------
James D. Robinson III
/s/ CHARLES T. RUSSELL Director March 18, 1997
- -----------------------------
Charles T. Russell
/s/ BERNARD L. SCHWARTZ Director March 18, 1997
- -----------------------------
Bernard L. Schwartz
/s/ GAREN K. STAGLIN Director March 18, 1997
- -----------------------------
Garen K. Staglin
27
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
Report of Deloitte & Touche LLP Independent Auditors............. F-3
Consolidated Statements of Operations for the Years ended
December 31, 1996, 1995 and 1994.............................. F-4
Consolidated Balance Sheets at December 31, 1996 and 1995........ F-5
Consolidated Statements of Cash Flows for the Years ended
December 31, 1996, 1995 and 1994.............................. F-6
Consolidated Statements of Stockholders' Equity for the Years
ended December 31, 1996, 1995 and 1994........................ F-7
Notes to Consolidated Financial Statements....................... F-8
Schedule:
Schedule VIII--Valuation and Qualifying Accounts................. F-29
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.
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, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. 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 did not audit the 1994 financial statements and
schedule of First Financial Management Corporation, a company merged with and
into the Company in a business combination accounted for as a pooling of
interests, as described in Note 2 to the consolidated financial statements,
which First Financial Management Corporation financial statements reflect total
revenues constituting 44% of consolidated 1994 revenues. Those statements and
schedule were audited by other auditors whose report is included herein, and our
opinion, insofar as it relates to the 1994 amounts included for First Financial
Management Corporation, is based solely upon the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of First Data Corporation
at December 31, 1996 and 1995, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Ernst & Young LLP
---------------------------
Ernst & Young LLP
New York, New York
February 5, 1997
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
First Financial Management Corporation
Atlanta, Georgia
We have audited the consolidated statements of income, shareholders' equity and
cash flows of First Financial Management Corporation and subsidiaries for the
year ended December 31, 1994 (not presented separately herein). Those financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on those financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
First Financial Management Corporation and subsidiaries for the year ended
December 31, 1994 in conformity with generally accepted accounting principles.
Our audit also included the financial statement schedule, "Valuation and
Qualifying Accounts" for the year ended December 31, 1994 (not presented
separately herein). That financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audit. In our opinion, such financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Atlanta, Georgia
January 27, 1995
F-3
FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------
(In millions, except per share amounts)
REVENUES
Operating revenues $4,934.1 $4,081.2 $3,030.3
Other income 4.0 105.0 50.2
-------- -------- --------
4,938.1 4,186.2 3,080.5
-------- -------- --------
EXPENSES
Operating 3,084.8 2,606.2 1,874.3
Selling, general and administrative 724.7 660.3 542.5
Merger, integration and impairment (13.5) 645.7 --
Interest 110.3 106.4 52.4
-------- -------- --------
3,906.3 4,018.6 2,469.2
-------- -------- --------
Income before income taxes 1,031.8 167.6 611.3
Income taxes 395.3 251.8 251.0
-------- -------- --------
Net income (loss) $ 636.5 $ (84.2) $ 360.3
======== ======== ========
Earnings (loss) per share $ 1.37 $ (0.19) $ 0.85
======== ======== ========
See notes to consolidated financial statements.
F-4
FIRST DATA CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions)
December 31, December 31,
ASSETS 1996 1995
------------ ------------
Cash and cash equivalents $ 271.7 $ 231.0
Settlement assets 7,461.5 6,210.6
Accounts receivable, net of allowance for doubtful
accounts of $25.2 (1996) and $20.9 (1995) 958.1 835.9
Property and equipment, net 757.1 571.4
Goodwill, less accumulated amortization
of $409.6 (1996) and $298.1 (1995) 3,490.4 3,246.1
Other intangibles, less accumulated amortization
of $336.8 (1996) and $237.0 (1995) 1,003.1 720.0
Other assets 398.2 402.8
--------- ---------
$14,340.1 $12,217.8
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Settlement obligations $ 7,389.9 $ 6,119.4
Accounts payable and other liabilities 1,531.9 1,378.5
Borrowings 1,261.4 1,127.7
Senior convertible debentures 447.1 447.1
--------- ---------
Total Liabilities 10,630.3 9,072.7
--------- ---------
Commitments and contingencies
Stockholders' Equity:
Common Stock, $.01 par value; authorized
600.0 shares, issued 448.9 shares (1996)
and 448.0 shares (1995) 4.5 4.5
Additional paid-in capital 2,101.8 2,021.0
--------- ---------
Paid-in capital 2,106.3 2,025.5
Retained earnings 1,610.7 1,146.5
Other 26.3 18.7
Less treasury stock at cost, 0.9 shares (1996)
and 1.4 shares (1995) (33.5) (45.6)
--------- ---------
Total Stockholders' Equity 3,709.8 3,145.1
--------- ---------
$14,340.1 $12,217.8
========= =========
See notes to consolidated financial statements.
F-5
FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
(In millions)
1996 1995 1994
--------- --------- ---------
Cash and cash equivalents at beginning of January 1 $ 231.0 $ 350.5 $ 476.3
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) 636.5 (84.2) 360.3
Adjustments to reconcile to net cash provided by
operating activities:
Depreciation and amortization 423.6 346.8 242.5
Non-cash portion of merger, integration and
impairment charge (24.1) 492.3 ---
Gains on sales of businesses, net of taxes (2.4) (23.3) (27.6)
Other non-cash items 4.7 34.0 35.6
Increase (decrease) in cash, excluding the effects
of acquisitions and dispositions, resulting
from changes in:
Accounts receivable (183.2) (146.8) (133.9)
Other assets (17.0) (31.0) (28.8)
Accounts payable and other liabilities 4.9 3.1 74.2
Income tax accounts 210.8 118.2 45.8
--------- --------- ---------
Net cash provided by operating activities 1,053.8 709.1 568.1
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Current year acquisitions, net of cash acquired (495.5) (422.3) (698.8)
Payments related to the Western Union acquisition:
Payment of deferred cash purchase consideration --- (300.0) ---
Funding of assumed pension obligations for a suspended plan --- (199.0) ---
Payments related to other businesses previously acquired (69.7) (85.3) (94.9)
Proceeds from dispositions, net of expenses and taxes paid 211.9 164.7 120.0
Additions to property and equipment, net (392.6) (261.5) (182.4)
Payments to secure customer service contracts, including outlays
for conversion and capitalized systems development costs (278.2) (205.2) (143.6)
Other investing activities --- --- (17.4)
--------- --------- ---------
Net cash used in investing activities (1,024.1) (1,308.6) (1,017.1)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-term borrowings, net (213.4) 609.2 80.1
Net proceeds from issuance of long-term debt 348.4 198.1 ---
Principal payments on long-term debt (20.4) (305.7) (55.1)
Net proceeds from issuance of senior convertible debentures --- 441.6
Proceeds from issuance of common stock 177.5 93.5 19.1
Purchase of treasury shares (254.9) (92.7) (142.5)
Cash dividends and other distributions (26.2) (22.4) (20.0)
--------- --------- ---------
Net cash provided by financing activities 11.0 480.0 323.2
--------- --------- ---------
Change in cash and cash equivalents 40.7 (119.5) (125.8)
--------- --------- ---------
Cash and cash equivalents at December 31 $ 271.7 $ 231.0 $ 350.5
========= ========= =========
See notes to consolidated financial statements.
F-6
FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Treasury Stock
Common Paid-in Retained ----------------
Shares Capital Earnings Other Shares Cost Total
- ---------------------------------------------------------------------------------------------------------------------
(in millions)
Balance, January 1, 1994 414.0 $1,255.0 $940.7 $17.9 (0.2) ($3.9) $2,209.7
Purchase of treasury shares (6.0) (142.5) (142.5)
Stock issued for:
Additional acquisition consideration 0.2 1.6 1.6
Compensation and benefit plans 1.0 17.5 (6.5) 0.6 14.2 25.2
FFMC warrant exercises 1.0 8.1 8.1
Other adjustments (41.5) (41.5)
Cash dividends declared ($0.06 per share) (13.1) (13.1)
Cash dividends and distributions by
merged entities (6.9) (6.9)
Net income 360.3 360.3
-------------------------------------------------------------------
Balance, December 31, 1994 416.0 1,280.6 1,274.5 (23.6) (5.4) (130.6) 2,400.9
Purchase of treasury shares (3.2) (92.7) (92.7)
Stock issued for:
Acquisitions, including additional
consideration 23.6 642.6 4.2 100.8 743.4
Compensation and benefit plans 4.2 67.3 (23.4) 3.0 76.9 120.8
FFMC warrant exercises 4.2 35.0 35.0
Other adjustments 42.3 42.3
Cash dividends declared ($0.06 per share) (17.3) (17.3)
Cash dividends by merged entity (3.1) (3.1)
Net loss (84.2) (84.2)
-------------------------------------------------------------------
Balance, December 31, 1995 448.0 2,025.5 1,146.5 18.7 (1.4) (45.6) 3,145.1
Purchase of treasury shares (6.7) (254.9) (254.9)
Stock issued for:
Acquisitions, including additional
consideration 0.9 0.5 20.1 20.1
Compensation and benefit plans 74.6 (139.7) 6.5 238.4 173.3
Convertible Debentures (3.5) 0.2 10.2 6.7
Other transactions and adjustments 6.2 7.6 (1.7) 12.1
Cash dividends declared ($0.065 per share) (29.1) (29.1)
Net Income 636.5 636.5
-------------------------------------------------------------------
Balance, December 31, 1996 448.9 $2,106.3 $1,610.7 $26.3 (0.9) ($33.5) $3,709.8
===================================================================
See notes to consolidated financial statements.
F-7
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation and Basis of Preparation
The accompanying consolidated financial statements include the accounts of First
Data Corporation and its majority-owned subsidiaries ("FDC" or "the Company").
All material intercompany accounts and transactions have been eliminated.
Investments in unconsolidated affiliated companies are accounted for under the
equity method, and are included in "other assets" on the accompanying
consolidated balance sheets. Such investments are not material to the Company's
consolidated financial position or results of operations.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from these estimates.
Presentation
FDC's balance sheet presentation is unclassified due to the short-term nature of
its settlement obligations, contrasted with the Company's ability to invest cash
awaiting settlement in long-term investment securities. Certain prior years'
amounts have been reclassified to conform to the current year's presentation.
Business Description
FDC operates in a single business segment, providing a variety of information
services primarily to financial institutions and commercial establishments. The
largest category of services involves information processing, information
management and funds transfer related to payment transactions, including credit
and debit cards, checks, and other types of payment instruments (such as money
transfers, money orders, and official checks). These services include the
authorization, processing and settlement of credit and debit card transactions,
verification or guarantee of check transactions, and worldwide nonbank money
transfers. Other service areas include information processing for investment
companies, health care claims processing, and data imaging and other similar
information management services.
The Company derives a substantial portion of its operating revenues from its
services, which are based on the number of accounts or transactions processed, a
percentage of dollar volume processed, or a combination thereof. The balance of
FDC's operating revenues consists of investment earnings (primarily on certain
settlement assets) and ancillary product sales (primarily sales and rentals of
terminals enabling customers to receive the Company's services). FDC has made
numerous acquisitions, primarily to expand its service offerings, to enter new
markets, and to supplement internal growth.
FDC's operations in the United States provide the vast majority of the Company's
transaction processing services, including the processing for almost all of the
money transfers and credit card transactions that are ultimately settled outside
of the U.S. Currently, FDC's processing centers in the United Kingdom and
Australia are the only foreign operations of any significance. These units,
collectively, accounted for 4% of FDC's total operating revenues in 1996
(compared with 5% in 1995 and 6% in 1994) and a comparable portion of FDC's
assets and earnings (prior to the merger, integration and impairment charges).
F-8
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, 1996 and 1995
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.
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 specific aspects of its
overall business (see Note 7). 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 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.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation or
amortization which is computed using the straight-line method over the lesser of
the estimated useful life of the related assets (generally three to 10 years for
equipment, furniture and leasehold improvements, and 30 years for buildings) or
the lease term. Amounts charged to expense for the depreciation and
amortization of property and equipment were $185.0 million in 1996, $140.5
million in 1995 and $110.7 million in 1994.
Goodwill and Other Intangibles
Goodwill represents the excess of purchase price over tangible and other
intangible assets acquired less liabilities assumed arising from business
combinations and is being amortized on a straight-line basis over estimated
useful lives ranging from 20 to 40 years. Other intangible assets consist
primarily of contract costs (rights to provide processing services to customers,
acquired directly or through acquisitions), capitalized conversion costs
(systems and programming and other related costs to convert new client accounts
to FDC's processing systems), and capitalized systems development costs (costs
to create new platforms for certain of the Company's information processing
services) of $102.3 million at December 31, 1996 and $48.6 at December 31, 1995.
Client contracts for which costs are capitalized generally provide for the
payment by the client of minimum annual fees and contract termination penalties.
Other intangibles also include, to a lesser extent, databases, copyrights,
patents, software and noncompete agreements acquired in business combinations.
Other intangibles are amortized on either a straight-line basis or as a
F-9
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
percentage of expected revenues over the length of the contract or benefit
period, which ranges from three to 20 years.
Goodwill and other intangible assets are reviewed for impairment whenever events
indicate that their carrying amount may not be recoverable. In such reviews,
estimated undiscounted future cash flows associated with these assets are
compared with their carrying value to determine if a write-down to fair value
(normally measured by discounting estimated future cash flows) is required.
Revenue Recognition
FDC recognizes revenues from its information processing services as such
services are performed, recording revenues net of certain costs not controlled
by the Company (primarily interchange fees charged by credit card associations
of $2.1 billion in 1996, $1.7 billion in 1995 and $869 million in 1994).
Earnings (Loss) Per Common Share
In September 1996, the Company's Board of Directors declared a two-for-one stock
split, effected in the form of a stock dividend distributed on November 15, 1996
to shareholders of record on November 1, 1996. Accordingly, all share and
earnings (loss) per common share amounts have been retroactively restated for
this 100% stock dividend. Earnings (loss) per common share amounts are computed
by dividing income or loss amounts by the weighted average of common and common
equivalent shares (when dilutive) outstanding during the period. Amounts
utilized in per share computations are as follows:
Year Ended December 31, 1996 1995 1994
- ---------------------------------------------------------------
(In millions)
Weighted average shares outstanding:
Simple weighted average shares 447.7 434.0 415.6
Common stock equivalents 28.0 27.2 6.8
------ ------ ------
475.7 461.2 422.4
Earnings add back related to senior
convertible debentures $ 14.2 $ 14.2 $ 0.7
Earnings per common share computations for 1996 and 1994 were computed based on
weighted average shares outstanding including the dilutive impact of common
stock equivalents which consist of outstanding stock options, warrants and
convertible debt. The after tax interest expense and issue cost amortization on
convertible debt is added back to net income when common stock equivalents are
included in computing earnings per common share. The loss per common share in
1995 was computed based on FDC's simple weighted average shares outstanding for
the year, as the impact of common stock equivalents is anti-dilutive. In
computing the per share impact of the 1995 merger, integration and impairment
charge, common stock equivalents were included since their impact would be
dilutive on operating results before this charge.
Foreign Currency Translation
The U.S. dollar is the functional currency for all FDC businesses except its
operations in the United Kingdom and Australia. Foreign currency denominated
assets and liabilities for these units are translated into U.S. dollars based on
F-10
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 adjustments to stockholders' equity.
Stock Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123"), establishes accounting and reporting standards for
stock based employee compensation plans (see Note 13). As permitted by the
standard, FDC continues to account for such arrangements under APB Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations. Accordingly, adoption of the standard has not affected the
Company's results of operations or financial position.
NOTE 2: FFMC BUSINESS COMBINATION AND MERGER, INTEGRATION AND IMPAIRMENT CHARGE
FFMC Business Combination
In October 1995, FDC merged with First Financial Management Corporation ("FFMC")
by converting all of FFMC's outstanding shares into approximately 209.0 million
shares of FDC common stock. The merger has been accounted for as a pooling of
interests and, accordingly, the Company's financial statements and related notes
include FFMC's accounts and operations for all periods presented. Information
concerning common stock, stock compensation plans, and per share data has been
restated on an equivalent share basis.
Operating results of FFMC included with FDC's consolidated results for the nine
months ended September 30, 1995 and the year ended December 31, 1994, adjusted
for conformity of accounting policies utilized by FDC and FFMC, are as follows
(in millions):
1995 1994
---------- --------
(Unaudited)
Revenues $1,488.9 $1,352.3
Net income 127.3 152.2
Merger, Integration and Impairment Charge
Results in 1996 include a $46.0 million gain on the divestiture of MoneyGram
(see Note 4) and $22.3 million of integration and $10.2 million of impairment
charges, which increased net income by $8.3 million ($0.02 per share). During
the fourth quarter of 1995, the Company recorded a merger, integration and
impairment charge which reduced net income by $539.9 million ($1.21 per common
share). The pretax components of the charge are as follows (in millions):
Transaction costs $221.7
Restructuring and integration costs 121.2
Impairment charges 283.6
Early extinguishment of debt 19.2
------
$645.7
======
F-11
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Transaction costs related to the merger and consisted primarily of payments
pursuant to preexisting change in control agreements with FFMC management
totaling $174.7 million, with the remainder comprised of professional fees and
other expenses incurred in connection with the transaction. A large portion of
these expenditures were not deductible for income tax purposes.
As a result of the FFMC merger, the Company conducted a strategic reevaluation
of its businesses, reviewing overall trends and developments in relation to its
business investments and industry concentrations. In addition to identifying
duplicate and overlapping operations, this process identified certain
insignificant business lines for disposition or discontinuance and highlighted
other business lines and customer relationships which had diminished future
value. As a result, the Company recorded restructuring and integration costs
and impairment charges.
Restructuring and integration costs in 1995 and 1996 consist of accruals for
personnel severance, lease termination costs for facilities and equipment,
contract termination and modification costs for exit activities related to
duplicate or overlapping operations and incurred employee relocations. Through
December 31, 1996, cash expenditures of $85.2 million were charged against the
accruals. Personnel severance in 1995 and 1996 included in the costs aggregated
$34.8 million and involved approximately 1900 employees in the card issuing,
merchant processing, collections, and corporate groups. In addition, asset
write-downs in connection with these activities were recorded as a part of the
impairment charges.
The Company measures the need for a reduction in the carrying amount of long-
lived assets using Statement of Financial Accounting Standards No. 121 ("SFAS
121"). A discount rate of 15% is utilized for discounting estimated future cash
flows for purposes of measuring fair market value. This process resulted in the
substantial portion of the $283.6 million charge in 1995 for impairment. The
charge included $136.1 million for goodwill, principally related to the ENVOY
acquisition (see Note 3); $77.0 million for other long-lived assets, principally
systems development and conversion costs and other intangibles; $30.3 million
for other assets and $40.2 million for assets which were substantially disposed
of during 1996.
On October 12, 1995, the Company exercised its prepayment option with respect to
certain notes payable. The prepayment premium plus the write-off of related
deferred issue costs resulted in an early extinguishment of debt cost of $19.2
million before income taxes ($12.5 million after tax). This was not reflected
as an extraordinary item due to its immaterial effect.
F-12
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3: Other Business Combinations and Asset Acquisitions
Initial Consideration
-----------------------------------------
FDC Common Stock
----------------
Dollar
Businesses and Assets Acquired Month Total (a) Cash Value Shares
- ------------------------------ --------- --------- ---------- ------ --------
(In millions)
1996:
Donnelley Marketing, Inc. (Donnelley) September $ 195.4 $188.9 $ -- --
Elektra (Mexican Joint Venture -
remaining interest) January 162.0 162.0 -- --
Bank alliance programs 137.8 73.8 -- --
6 other acquisitions 144.7 83.1 36.2 0.9
-------- ------ ------ ----
$ 639.9 $507.8 $ 36.2 0.9
======== ====== ====== ====
1995:
Employee Benefit Plans, Inc. (EBP) October $ 122.4(d) $ 1.8 $120.6 5.4
Merchant processing and point of
sale unit of ENVOY Corporation (ENVOY) June 175.0 3.9 171.1 6.0
CESI Holdings, Inc. and its subsidiary
Card Establishment Services Inc. (CES) March 757.3 309.0(b) 448.3 16.4
Bank alliance programs 36.9 23.9
8 other acquisitions 124.9 116.7 -- --
-------- ------ ------ ----
$1,216.5 $455.3 $740.0 27.8
======== ====== ====== ====
1994:
Western Union Financial Services, Inc.
(Western Union) November $ 893.2(c) $593.2 $ -- --
GENEX Services, Inc. (GENEX) July 60.2(d) -- 60.2 3.4
13 other acquisitions 169.1 161.8 -- --
-------- ------ ------ ----
$1,122.5 $755.0 $ 60.2 3.4
======== ====== ====== ====
(a) Other consideration, not separately listed in the table or described above,
consists of promissory notes and other amounts payable of $95.9 million in
1996, $21.2 million in 1995 and $7.3 million in 1994.
(b) Includes amounts infused to prepay CES debt obligations of $215.0 million.
(c) Deferred cash consideration of $300 million was paid in January 1995. FDC
also assumed pension obligations of $304 million as part of the Western
Union acquisition (see Note 14).
(d) Does not include the assumption of stock options.
Donnelley provides marketing database and information based services and Elektra
represents the balance of Western Union-Mexico money transfer services not owned
by FDC. The Company continues to develop bank alliance programs (joint
ventures) in the domestic merchant credit card processing area. EBP is a
health care claims processor and plan administrator (with a life
insurance subsidiary selling insurance products ancillary to its processing
area), and ENVOY and CES are merchant payment transaction processors. Western
F-13
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Union is a provider of nonbank money transfer and bill payment services in over
130 countries. GENEX provides workers' compensation cost containment and
management services (see Note 4). Other acquisitions expanded the Company's
markets and service offerings in various business categories.
The merger with GENEX was accounted for as a pooling of interests.
Substantially all other business combinations and asset acquisitions have been
accounted for as purchases, and their results have been included in the results
of the Company's operations from the effective dates of acquisition. The
following table outlines the assets acquired and liabilities assumed (at the
date of acquisition) for FDC business combinations and asset acquisitions
accounted for as purchases.
Year Ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------------
(In millions)
Fair value of net assets acquired $603.7 $1,216.5 $1,062.3
Less acquisition notes and accounts payable (95.9) (21.2) (307.3)
Less value of common stock issued --- (740.0) ---
Less cash acquired (12.3) (33.0) (56.2)
------ -------- --------
Net cash paid for acquisitions $495.5 $ 422.3 $ 698.8
====== ======== ========
The fair value of net assets acquired includes initial goodwill and other
intangible amounts aggregating $560 million in 1996, $1.1 billion in 1995 and
$1.3 billion in 1994.
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 $26.6 million in
1996 (including 0.5 million shares of common stock valued at $21.0 million),
$10.0 million in 1995 and $9.3 million in 1994. The maximum amount of other
remaining contingent consideration is $13 million (payable through 2008).
The agreement to acquire ENVOY in August 1994 (almost one year prior to
completion of the transaction in June 1995) was viewed at such time as a
strategic expansion of FDC's merchant card processing area. The subsequent
additions of CES and FFMC's merchant card processing operations, combined with
industry trends toward consolidation, caused the Company not to pursue the ENVOY
business plan. Accordingly, the Company recorded a $114.7 million impairment
charge in the fourth quarter of 1995 to reduce the carrying amount of goodwill
to its current estimated fair value under SFAS 121.
Note 4: Dispositions
Pretax Gain on Sale
Cash -----------------------------
Business Sold Period Proceeds 1996 1995 1994
- ------------------------------------------------------------------------------------------
(In millions)
MoneyGram December 1996 $199.5 $ 46.0 $ --- $ ---
Health systems June 1995 231.1 --- 93.0 ---
Cable services and hotel
reservations November 1994 143.4 --- 12.0 40.2
F-14
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Operating revenues from these businesses were approximately 3% of the Company's
consolidated operating revenues in 1996, compared with 5% in 1995 and 10% in
1994, and a comparable percentage of FDC's earnings in each of the years
(measured prior to the impact of the merger, integration and impairment charge
in the case of 1995).
In December 1996, the Company divested its MoneyGram operation through an
initial public offering of 100% of its common stock. Since the merger with FFMC
required the divestiture of MoneyGram pursuant to an order by the Federal Trade
Commission, the gain on the divestiture has been reflected as a component of the
1996 merger, integration and impairment amount.
The pretax gains on the 1995 and 1994 dispositions have been included in "other
income" in the Company's consolidated statements of operations. The aggregate
pretax gain in 1995 on the sale of the health systems business (which included a
$24.0 million pretax gain on the September 1995 sale of the buyer's stock
received as consideration in the sale) was substantially offset by income taxes
related to the sale totaling $76.9 million. The Company also recorded pretax
gains in 1995 resulting from the favorable resolution of certain indemnification
issues related to the 1994 sale of the cable services business. In 1994, FDC
also received $10.0 million in contingent proceeds from a business sold in 1993.
In February 1997, FDC completed the sale of its GENEX subsidiary (see Note 3).
The transaction will produce a gain to the Company.
Note 5: Settlement Assets and Obligations
Settlement assets and obligations result from FDC's information processing
services and associated settlement activities related to payment transactions.
Settlement assets are generated principally from payment instrument sales
(primarily official checks and money orders) and card transactions. FDC records
corresponding settlement obligations for amounts payable to merchants and for
payment instruments not yet presented for settlement. The difference in the
aggregate amount of such assets and liabilities is due to unrealized net
investment gains and losses, which are reported as adjustments to stockholders'
equity. The principal components of FDC's settlement assets and obligations are
as follows:
December 31, 1996 1995
- ---------------------------------------------------------
(In millions)
Settlement assets:
Cash and cash equivalents $2,115.8 $1,739.7
Investment securities 4,291.0 3,235.6
Due from card associations 818.4 915.2
Due from selling agents 236.3 320.1
-------- --------
$7,461.5 $6,210.6
======== ========
Settlement obligations:
Payment instruments outstanding $5,361.0 $4,572.0
Card settlements due to merchants 1,263.5 1,092.5
Due to selling agents 671.3 366.9
Other 94.1 88.0
-------- --------
$7,389.9 $6,119.4
======== ========
F-15
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 operating 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 $4.5 billion in 1996, $3.3
billion in 1995 and $1.9 billion in 1994. Investment revenues (before
commissions to certain selling agents) from payment instrument portfolios
totaled $285.9 million in 1996, $244.0 million in 1995 and $192.6 million in
1994.
A significant but declining percentage of FDC's payment instruments services is
generated from official checks, money orders and money transfers issued under an
agreement with an entity affiliated with American Express Company ("American
Express"), the state-licensed issuer of the instruments. Settlement assets
(primarily cash equivalents, investment securities and amounts due from selling
agents) resulting from payment instruments issued under the agreement with
American Express represented approximately 24% of FDC's total settlement assets
at December 31, 1996 compared with 38% at December 31, 1995. FDC began issuing
payment instruments under its own name in 1994, and plans to phase out those
issued under the American Express name prior to the end of the current agreement
in April 1997.
FDC manages this business and indemnifies American Express against any losses in
connection with this business, thus assuming the risks and rewards of ownership.
Accordingly, the assets and liabilities related to these transactions are
included with settlement assets and obligations on the Company's consolidated
balance sheets. Under the agreement, the Company earns transaction fees paid by
selling agents and net earnings on the investment securities, with such amounts
totaling approximately 5% of FDC's operating revenues in 1996, 6% in 1995 and 7%
in 1994.
Note 6: Investment Securities
Investment securities are a principal component of the Company's settlement
assets, and represent the investment of funds received by FDC from the sale of
payment instruments (principally official checks and money orders) by authorized
agents. In addition, the Company has a separate portfolio of investment
securities arising from the sale of insurance products ancillary to its health
care claims processing services. These investment securities (totaling $93.2
million and $104.7 million at December 31, 1996 and 1995, respectively) are
classified as available-for-sale, and are recorded at fair value in other assets
in FDC's consolidated balance sheets.
Virtually all of FDC's investment securities are debt securities, all of which
have maturities greater than one year. At December 31, 1996, 65% of these debt
securities mature within five years and 90% within 10 years. Realized gains and
losses from the sale of investment securities were not material.
F-16
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The principal components of investment securities, which are carried at fair
value, are as follows:
Gross Unrealized
Fair Value Amortized Cost Gains Losses
- -----------------------------------------------------------------------------------------
(In millions)
December 31, 1996:
State and municipal obligations $3,945.1 $3,876.7 $68.4
Adjustable rate mortgage-backed
securities 313.6 311.0 2.6
Other 125.5 125.2 0.3
-------- -------- -----
Totals $4,384.2 $4,312.9 $71.3
======== ======== =====
December 31, 1995:
State and municipal obligations $2,914.7 $2,824.2 $90.5
Adjustable rate mortgage-backed
securities 261.9 261.2 0.7
Other 163.7 162.5 1.2
-------- -------- -----
Totals $3,340.3 $3,247.9 $92.4
======== ======== =====
Note 7: Financial Instruments
Concentration of credit risk
FDC maintains cash and cash equivalents, investment securities and certain off-
balance sheet hedging arrangements (for specified purposes) with various
financial institutions. The Company limits its concentration of these financial
instruments with any one institution, and periodically reviews the credit
standings of these institutions. FDC has a large and diverse customer base
across various industries, thereby minimizing the credit risk of any one
customer to FDC's accounts receivable amounts. In addition, each of the
Company's business units perform ongoing credit evaluations of their customers'
financial condition.
Management of investment risks
FDC does not hold or issue financial instruments for trading purposes. FDC
encounters credit and market risks related to the Company's financial
instruments, principally its investment securities. The Company attempts to
mitigate credit risk by making high quality investments. Substantially all of
its long-term investment securities have credit ratings of "A" or better from a
major rating agency. FDC maintains a significant portion of its settlement
assets in cash and cash equivalents, thereby mitigating market risks (such as a
reduction in the fair value of long-term investment securities due to rising
interest rates) that could impact the Company's funding of its settlement
obligations. Accordingly, FDC does not enter into hedging arrangements in
connection with its investment securities. However, a reduction in the fair
value of the Company's investment securities resulting from rising interest
rates would be somewhat mitigated by increases in the fair value of the interest
rate swap and cap agreements described below.
F-17
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Off-balance sheet financial instruments
A portion of the Company's payment instruments business involves the payment of
commissions to selling agents that are computed based on short-term variable
rates. The Company has purchased variable rate caps (under agreements expiring
at various dates through 1999) to partially insulate its sales commission
amounts from increases in these rates. These agreements have effective notional
amounts totaling $950 million at December 31, 1996 compared with $1.1 billion
at December 31, 1995. The current impact of these agreements limits rates
between 5-1/4% and 5-1/2%, and in certain instances provides for a minimum rate
of 5-1/2%. In addition the Company has interest rate swap agreements which serve
to effectively convert the variable rate commissions to agents to fixed rate
amounts. These agreements have an aggregate notional amount of $772 million at
December 31, 1996, expire between 1997 and 2006 and require the Company to pay
based upon fixed rates of between 5.38% and 6.89% while the Company receives
payments principally based on 3-month variable rates. 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, 1996 1995
- ----------------------------------------------------------------------------------
(In millions)
Carrying Fair Carrying Fair
Value Value Value Value
-------- -------- -------- --------
Balance sheet financial instruments:
Long-term investment securities $4,384.2 $4,384.2 $3,340.3 $3,340.3
Long-term debt 785.5 782.4 438.4 457.5
Senior convertible debentures 447.1 770.7 447.1 692.5
Off-balance sheet financial instruments:
Variable rate hedging arrangements,
principally rate swap and cap agreements $ 13.5 $ 2.4 $ 25.0 $ 9.3
Foreign currency hedging arrangements,
principally currency swap agreements --- --- 7.6 6.9
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, 1996 1995 1994
- -------------------------------------------------------
(In millions)
Components of pretax income:
Domestic $999.0 $150.2 $601.2
Foreign 32.8 17.4 10.1
-------- ------ ------
$1,031.8 $167.6 $611.3
======== ====== ======
Provision for income taxes:
Federal $325.5 $203.0 $217.9
State and local 61.4 38.6 24.7
Foreign 8.4 10.2 8.4
------ ------ ------
$395.3 $251.8 $251.0
====== ====== ======
The Company's effective tax rates differ from statutory rates as follows (1995
differences are calculated by excluding the impact of merger, integration and
impairment charges, the impact of which is separately disclosed):
Year Ended December 31, 1996 1995 1994
- ---------------------------------------------------------------------------------------------
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit 3.9 3.2 3.3
Nondeductible amortization of intangible assets 2.6 2.8 2.5
Interest earned on municipal investments (3.0) (2.0) (0.1)
Book/tax basis differences related to businesses sold --- 5.4 0.8
Other (0.2) (0.4) (0.4)
Nondeductible portion of merger, integration and
impairment charge --- 106.2 ---
---- ----- ----
Effective tax rate 38.3% 150.2% 41.1%
==== ===== ====
FDC's income tax provisions consist of the following components:
Year Ended December 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------------
(In millions)
Current $259.5 $276.7 $236.4
Deferred 135.8 (24.9) 14.6
------ ------ ------
$395.3 $251.8 $251.0
====== ====== ======
Income tax payments of $77.6 million in 1996, $144.6 million in 1995 and $205.6
million in 1994 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 1996 or 1995. Net deferred tax
assets are included in other assets and net deferred tax liabilities are
included in accounts payable and other liabilities in FDC's consolidated balance
sheets. The following table outlines the principal components of deferred tax
items.
F-19
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 1995
- ------------------------------------------------------------
(In millions)
Deferred tax assets related to:
Accrued expenses $ 159.3 $ 211.3
Pension obligations 41.7 44.9
Employee related liabilities 48.8 35.6
Deferred revenue (1.0) 4.3
-------- -------
248.8 296.1
======== =======
Deferred tax liabilities related to:
Property, equipment and intangibles (245.7) (172.9)
Unrealized securities gain (25.1) (32.3)
Foreign currency translation gains --- (3.5)
Other (31.9) (11.4)
-------- -------
(302.7) (220.1)
-------- -------
Net deferred tax assets (liabilities) $ (53.9) $ 76.0
======== =======
Note 9: Borrowings
December 31, 1996 1995
- -------------------------------------------------------------
(In millions)
Short-Term Borrowings:
Commercial paper $ 441.1 $ 689.3
Uncommitted lines of credit 34.8 ----
Long-Term Debt:
Medium-Term Notes 349.1 ----
6-3/4% Notes due 2005 198.8 198.6
6-5/8% Notes due 2003 199.4 199.2
Term loan, 7.19% due 1997 8.8 13.3
Other 29.4 27.3
-------- --------
$1,261.4 $1,127.7
======== ========
The Company's commercial paper borrowings at December 31, 1996 and 1995 had
weighted average interest rates of 5.6% and 5.9%, respectively.
In October 1995, FDC revised its short-term borrowing arrangement by
establishing two revolving credit facilities ("the Facilities") to support a
newly instituted commercial paper program with maximum borrowings of $1 billion.
The maximum amount of borrowings possible under the Facilities, which consist of
a $500 million 364 day facility and a $500 million five year facility at
December 31, 1996, is reduced by outstanding commercial paper amounts. Interest
rates for borrowings under the Facilities are based on market rates. FDC plans
to increase the maximum borrowings under its existing commercial paper program
and its Facilities to $1.5 billion. The Facilities contain customary covenants,
none of which are expected to significantly affect FDC's operations. At
December 31, 1996, the Company was in compliance with all of these covenants.
Also, the Company obtained new uncommitted credit lines of $250 million from
F-20
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
several financial institutions during 1996. The interest rates for borrowings
under the credit lines are based on market rates.
In 1996, FDC issued $350 million in Medium-Term Notes with maturities ranging
from two to five years. The interest rates on the Medium-Term Notes are between
6.19% and 6.82%. Interest on the 6-3/4% and 6-5/8% term notes, which are public
debt offerings, is payable semi-annually in arrears. These notes do not have
sinking fund obligations, and they are not redeemable prior to maturity.
Aggregate annual maturities of long-term debt are $33.9 million in 1997, $151.5
million in 1998, $151.6 million in 1999, $0.3 million in 2000, $49.9 in 2001 and
$398.3 million in all periods thereafter. The Company paid interest amounts
totaling $95.6 million in 1996, $92.7 million in 1995 and $45.1 million in 1994.
Note 10: Supplemental Balance Sheet Information
December 31, 1996 1995
- ------------------------------------------------------------------
(In millions)
Property and equipment:
Land $ 15.2 $ 11.6
Buildings 140.6 112.0
Leasehold improvements 130.7 81.9
Equipment and furniture 1,133.8 853.7
-------- --------
1,420.3 1,059.2
Less accumulated depreciation
and amortization (663.2) (487.8)
-------- --------
$ 757.1 $ 571.4
======== ========
Accounts payable and other liabilities:
Accounts payable and accrued expenses $ 557.4 $ 450.3
Accrued merger and integration costs 74.0 144.2
Compensation and benefit liabilities 175.2 137.6
Assumed Western Union pension obligations 121.4 126.8
Accrued costs of businesses acquired 147.7 159.1
Income taxes payable 190.1 83.8
Other liabilities 266.1 276.7
-------- --------
$1,531.9 $1,378.5
======== ========
Note 11: Commitments and Contingencies
The Company leases certain of its facilities and equipment under operating lease
agreements, substantially all of which contain renewal options. Total rent
expense for operating leases was $169.2 million in 1996, $166.6 million in 1995
and $141.1 million in 1994. Minimum aggregate rental commitments at December
31, 1996 under all noncancelable leases were $118.9 million in 1997, $93.8
million in 1998, $70.2 million in 1999, $53.4 million in 2000, $41.3 million in
2001, and $137.0 million for all periods thereafter. Additionally, one of the
Company's businesses leases space which it concurrently leases to its customers
with mirrored terms. Future lease rental income exceeds lease payments, with
obligations at December 31, 1995 for remaining lease terms totaling $41.0
million.
F-21
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In the normal course of business, the Company is subject to claims and
litigation, including indemnification obligations to purchasers of former
subsidiaries. Management of the Company believes that such matters involving a
reasonably possible chance of loss would not, individually or in the aggregate,
result in a materially adverse effect on the Company's results of operations,
liquidity or financial condition.
Note 12: Stockholders' Equity and Senior Convertible Debentures
FDC has paid cash dividends of $0.015 per share on a quarterly basis to
stockholders through the 1996 third quarter which was increased to $0.02 per
share in the fourth quarter. The dividend payout rate is significantly below
maximum levels permissible under FDC's revolving credit facilities. The
Company's Articles of Incorporation authorizes 10.0 million shares of preferred
stock, none of which are issued.
Other adjustments, net of income taxes, that increase (decrease) stockholders'
equity are as follows (in millions):
Foreign Net Unrealized Minimum
Currency Securities Pension
Translation Gains (Losses) Liability Total
----------- -------------- --------- ------
Cumulative balances, January 1, 1994 $(20.0) $ 37.9 $ -- $ 17.9
1994 adjustment 3.0 (44.5) -- (41.5)
------ ------ ------ ------
Cumulative balances, December 31, 1994 (17.0) (6.6) -- (23.6)
1995 adjustment (4.0) 66.7 (20.4) 42.3
------ ------ ------ ------
Cumulative balances, December 31, 1995 (21.0) 60.1 (20.4) 18.7
1996 adjustment 16.6 (13.7) 4.7 7.6
------ ------ ------ ------
Cumulative balances, December 31, 1996 $ (4.4) $ 46.4 $(15.7) $ 26.3
====== ====== ====== ======
FDC has guaranteed the $447.1 million of 5% senior convertible debentures issued
by FFMC in December 1994. The debentures are convertible into 20.6 million
shares of FDC common stock on or before December 15, 1999 based upon a
conversion rate of $21.755 per share (subject to adjustment in certain events).
The debentures are redeemable on at least 30 days' notice at the option of the
Company (in whole or in part) at 102% during the 12-month period beginning
December 15, 1997, at 101% during the 12-month period beginning December 15,
1998 and at 100% if redeemed at maturity.
FFMC is not required to file periodic reports with the Securities and Exchange
Commission with respect to the outstanding senior convertible debentures so long
as such reports for the Company contain summarized financial information
concerning FFMC. Subsequent to the merger, certain FDC businesses were merged
into certain FFMC subsidiaries; therefore, the current year results are not
comparable with the prior years. The summarized financial information for FFMC
and its consolidated subsidiaries is as follows:
Year Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------
(In millions)
Revenues $2,860.8 $2,066.5 $1,352.3
Merger, integration and impairment 17.2 320.1 ---
Income before income taxes 690.3 2.5 255.2
Net income (loss) 425.9 (89.2) 152.2
F-22
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 1995
- ------------------------------------------------------------
(In millions)
Goodwill $2,650.8 $1,794.8
Total assets 5,741.7 3,330.2
Borrowings 0.8 24.0
Senior convertible debentures 447.1 447.1
Total liabilities 3,478.5 1,816.6
Other Stockholders' Equity Transactions
In June 1996, FDC converted EBP debentures (which were assumed through the
October 1995 acquisition) by issuing 0.2 million shares of common stock. In
November 1996, 0.9 million shares of the Company's common stock were issued to
the shareholders of Southern TeleCheck, Inc. ("STI") in a merger transaction
pursuant to which FDC acquired 100% of the stock of STI. In 1996, the Company
also issued warrants to purchase up to two million shares of FDC common stock at
a price of $70 per share. The warrants, which are generally exercisable from
October 2001 through 2003, were issued as part of contractual agreements with a
customer and their calculated fair value was recorded as paid-in-capital and is
being expensed over the contract period.
Note 13: Stock Compensation Plans
FDC has a plan that provides for the granting of stock options to key employees
and other key individuals who perform services for the Company. A total of 53.6
million shares of common stock have been reserved for issuance under the plan,
of which 14.8 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, and generally have ten year terms and are exercisable in
four equal annual increments beginning 12 months after the date of grant.
In October 1996, the Company instituted an employee stock purchase plan for
which a total of six million shares have been reserved for issuance. Monies
accumulated through payroll deductions elected by eligible employees are used to
effect quarterly purchases of FDC common stock at a 15% discount from the lower
of the market price at the beginning or end of the quarter.
In addition, the Company maintains other stock option plans which were assumed
in connection with the Company's business combinations. These options were
converted to options to purchase shares of FDC common stock (at prices ranging
from $0.005 to amounts substantially above current market prices for the
Company's common stock) and are exercisable on specified conditions and at
specified times not later than ten years from the date of grant.
The Company has elected to follow APB 25 for its employee stock options because,
as discussed below, the alternative fair value accounting under SFAS 123
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by
SFAS 123, assuming the Company has accounted for its employee stock options
F-23
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
granted subsequent to December 31, 1994 under the fair value method of SFAS 123.
The fair value for options was estimated at the date of grant using a Black-
Scholes option pricing model with the following weighted-average assumptions for
1995 and 1996, respectively: risk-free interest rate of 5.29% and 6.28%; a
dividend yield of 0.22%; volatility factor of the expected market price of the
Company's common stock of 17.6% and 16.9%; and an expected option life of 5
years. The weighted average fair value of these options granted are
approximately $11 and $8 for the period ending December 31, 1996 and 1995,
respectively. Assumptions for the stock purchase plan rights are as follows:
dividend yield of 0.22 percent; an expected life of 0.25 years; expected
volatility of 16.9%; and risk-free interest rate of 5.04%. The weighted-average
fair value of those purchase rights granted during the fourth quarter of 1996
is approximately $7. The Company's pro forma information, amortizing the fair
value of the options over their vesting period and the stock purchase rights, is
as follows (because SFAS 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1998):
1996 1995
------ ------
Proforma net income (loss)(millions) $618.2 $(89.0)
Proforma earnings (loss) per share 1.35 (0.21)
Because the Company's employee stock options have characteristics significantly
different from those of traded options for which the Black-Scholes model was
developed, and because changes in the subjective input assumptions can
materially affect the fair value estimate, the existing models, in management's
opinion, do not necessarily provide a reliable single measure of the fair value
of its employee stock options.
A summary of stock option activity is as follows (options in millions):
1996 1995 1994
----------------------- ----------------------- -----------------------
Weighted Weighted- Weighted-
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
- -------------------------------------------------------------------------------------------------------------
Outstanding at January 1 29.4 $ 20 25.4 $16 21.0 $14
Granted 6.7 37 9.8 29 6.6 22
Exercised (6.5) 15 (6.4) 12 (1.2) 8
Canceled (1.6) 26 (0.6) 22 (1.0) 18
Assumed --- --- 1.2 3 --- ---
---- ----- ---- --- ---- ---
Outstanding at December 31 28.0 $ 25 29.4 $20 25.4 $16
==== ===== ==== === ==== ===
Options exercisable at
year-end 13.5 $ 18 8.6 $15 7.8 $12
F-24
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 Remaining Average Exercisable Average
Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
- ------------------------------------------------------------------------------------------------------
$0.005 to 10.99 0.9 6 Years $ 3 0.8 $ 3
11.00 to 35.00 20.7 8 Years 22 12.7 19
35.01 to 69.84 6.4 10 Years 37 --- ---
---- -------- --- ---- ---
28.0 8 Years $25 13.5 $18
==== ======== === ==== ===
FFMC had plans that provided for the granting of restricted stock awards to
certain officers, employees and non-employee members of its board of directors.
The value of these awards was determined using closing prices of FFMC common
stock on the grant dates, and was amortized to expense on a straight-line basis
over the restriction periods of two to five years (with the unamortized portion
of such awards reported as a reduction in paid-in capital). All remaining
restrictions on these stock awards expired effective with the merger, and the
unamortized value of the awards at the merger date ($62.4 million) was included
in the 1995 merger, integration and impairment charge.
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.
The aggregate amounts charged to expense in connection with these plans were
$29.1 million in 1996, $26.6 million in 1995 and $25.5 million in 1994.
Defined Benefit Plans
The acquisition of Western Union in 1994 included the assumption of $304 million
of underfunded obligations related to a suspended defined benefit pension plan
("Western Union Plan"). Benefit accruals under this plan were suspended in
1988. The Company reduced these underfunded obligations by contributing $199.0
million in cash to the Western Union Plan during 1995.
The Company has two defined benefit pension plans covering certain full-time
employees in the U.S. ("Other U.S. Plans") and a separate plan covering certain
employees located in the United Kingdom ("U.K. Plan"). New employees do not
participate in the Other U.S. Plans due to a past restructuring of benefit plans
which allowed only existing participants to accrue benefits. The cost of
retirement benefits for eligible employees, measured by length of service,
compensation and other factors, is being funded through trusts established under
the plans in accordance with laws and regulations of the respective countries.
Plan assets consist of cash and a variety of investments in equity (U.S. and
foreign) and fixed income securities.
F-25
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of the Company's defined benefit plans is as follows:
Western Other
Union U.S. U.K. Total
Plan Plans Plan All Plans
- ------------------------------------------------------------------------------------------
(In millions)
December 31, 1996:
Projected benefit obligation $(574.9) $(77.1) $(148.3) $(800.3)
Plan assets at fair value 453.5 80.0 156.6 690.1
------- ------ ------- -------
Projected benefit obligation less than
(in excess) of plan assets (121.4) 2.9 8.3 (110.2)
Unrecognized amounts, primarily net (gain) loss 14.6 1.6 (8.8) 7.4
Minimum pension liability adjustment (14.6) (1.1) --- (15.7)
------- ------ ------- -------
Net prepaid (accrued) pension cost $(121.4) $ 3.4 $ (0.5) $(118.5)
======= ====== ======= =======
December 31, 1995:
Projected benefit obligation $(583.7) $(76.6) $(120.7) $(781.0)
Plan assets at fair value 456.9 73.6 124.5 655.0
------- ------ ------- -------
Projected benefit obligation less than
(in excess) of plan assets (126.8) (3.0) 3.8 (126.0)
Unrecognized amounts, primarily net (gain) loss 19.5 10.1 (5.4) 24.2
Minimum pension liability adjustment (19.5) (0.9) --- (20.4)
------- ------ ------- -------
Net prepaid (accrued) pension cost $(126.8) $ 6.2 $ (1.6) $(122.2)
======= ====== ======= =======
Net periodic pension cost:
1996 $ (0.4) $ 4.6 $ 5.3 $ 9.5
1995 11.3 4.6 4.7 20.6
1994 2.3 4.9 4.2 11.4
Net periodic pension costs consisted of the following components:
Year Ended December 31, 1996 1995 1994
- ---------------------------------------------------------------------------------
(In millions)
Service cost-benefit earned during period $ 10.3 $ 10.0 $ 10.8
Interest cost on projected benefit obligations 56.9 58.3 17.6
Actual return on plan assets (82.0) (82.1) (6.7)
Net amortization and deferral 24.3 34.4 (10.3)
------ ------ ------
$9.5 $ 20.6 $ 11.4
====== ====== ======
F-26
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Reconciliations of the funded status of FDC's defined benefit plans to
obligations recognized in the Company's consolidated balance sheets are as
follows:
December 31, 1996 1995
- -----------------------------------------------------------------------
(In millions)
Actuarial present value of benefit obligations:
Vested benefit obligation $(763.2) $(746.6)
Accumulated benefit obligation (770.5) (753.2)
Projected benefit obligation (800.3) (781.0)
Plan assets at fair value 690.1 655.0
------ -------
Projected benefit obligation in excess
of plan assets (110.2) (126.0)
Unrecognized net loss 6.1 23.5
Unrecognized net asset at transition (0.2) (0.7)
Unrecognized prior service cost 1.5 1.4
Minimum pension liability adjustment (15.7) (20.4)
------- -------
$(118.5) $(122.2)
======= =======
The primary assumptions used in computing amounts for FDC's defined benefit
plans follow. Changes in interest rates are the primary factor behind year-to-
year fluctuations in discount rates.
December 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
Discount rates 7.50% to 8.00% 7.25% to 8.50% 8.25% to 9.00%
Rates of increase in compensation levels 5.50% to 6.00% 5.50% to 6.00% 5.50% to 6.50%
Expected long-term rate of return on assets 9.00% to 9.50% 9.00% to 9.50% 9.00% to 10.00%
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 FFMC acquired Western Union. Generally,
retiring Western Union employees bear the entire cost of the premiums and
Western Union's former owner is obligated by agreement through 1997 to pay FDC
for its administrative services in continuing these coverages.
F-27
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 15: Quarterly Financial Results (Unaudited)
Summarized quarterly results for the two years ended December 31, 1996 are as
follows (in millions, except per share amounts):
1996 By Quarter: First Second (a) Third Fourth
-------- --------- -------- --------
Revenues $1,129.7 $1,200.4 $1,258.4 $1,349.6
Merger, integration and impairment 16.3 (29.8)
Other expenses 941.1 972.8 988.6 1,017.3
-------- -------- -------- --------
Income before income taxes 172.3 227.6 269.8 362.1
Income tax expense 66.5 87.8 103.2 137.8
-------- -------- -------- --------
Net income $ 105.8 $ 139.8 $ 166.6 $ 224.3
======== ======== ======== ========
Earnings per common share (c) $ 0.23 $ 0.30 $ 0.36 $ 0.48
======== ======== ======== ========
1995 By Quarter:
Revenues $ 903.4 $1,092.6 $1,071.1 $1,119.1
Merger, integration and impairment 645.7
Other expenses 766.1 860.5 868.1 878.2
-------- -------- -------- --------
Income (loss) before income taxes 137.3 232.1 203.0 (404.8)
Income tax expense (benefit) (b) 53.4 132.4 81.1 (15.1)
-------- -------- -------- --------
Net income (loss) $ 83.9 $ 99.7 $ 121.9 $ (389.7)
======== ======== ======== ========
Earnings (loss) per common share (c) $ 0.20 $ 0.22 $ 0.27 $ (0.88)
======== ======== ======== ========
(a) Revenues in 1995's second quarter include a gain on the sale of FDC's
health systems business of $68.9 million, and income tax expense in the
quarter includes $67.7 million in income taxes associated with this gain.
(b) The Company recorded income tax benefits totaling $105.8 million related
to the merger, integration and impairment charge.
(c) The fourth quarter 1995 loss per common share was computed based on FDC's
simple weighted average shares outstanding, as the impact of common stock
equivalents is anti-dilutive. Earnings per common share computations for
all other quarters were computed based on weighted average shares
outstanding which include the dilutive impact of common stock equivalents
(see Note 1).
F-28
FIRST DATA CORPORATION
SCHEDULE VIII -- Valuation and Qualifying Accounts
(dollars in millions)
Additions
----------------------
Balance at Charged to Charged to Balance
Beginning Costs and Other at End
Description of Period Expenses Accounts Deductions of Period
----------- --------- ---------- ---------- ---------- ---------
Year Ended December 31, 1994
Deducted from Receivables $13.6 $ 9.1 $2.4 (a) $ 8.7 (c) $16.4
Year Ended December 31, 1995
Deducted from Receivables 16.4 19.9 7.9 (b) 23.3 (c) 20.9
Year Ended December 31, 1996
Deducted from Receivables 20.9 15.8 4.4 (b) 15.9 (c) 25.2
- ----------------
(a) Amounts related to business acquisitions.
(b) Primarily due to acquisitions.
(c) Amounts related to business divestitures and write-offs against assets.
F-29