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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-11073
FIRST DATA CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 47-0731996
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5660 NEW NORTHSIDE DRIVE, SUITE 1400, ATLANTA, GEORGIA 30328
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (770) 857-0001
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
2% Senior Convertible Contingent Debt Securities
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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
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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, 2001 (excluding
treasury shares) were 394,836,354. The aggregate market value, as of March 1,
2001 of such common shares held by non-affiliates of the registrant was
approximately $24 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 9, 2001
PART I
ITEM 1. BUSINESS
General
First Data Corporation ("FDC" or "the Company") operates in four business
segments: payment services, merchant services, card issuing services, and
emerging payments representing approximately 97% and 95% of FDC's consolidated
revenues from continuing operations in 2000 and 1999 respectively. Payment
services includes Western Union, Integrated Payment Systems ("IPS"), and Orlandi
Valuta Companies and is the leading provider of nonbank domestic and
international money transfer and payment services to consumers and commercial
entities, including money transfer, official check and money order services.
Merchant services is comprised primarily of First Data Merchant Services,
TeleCheck, the Company's check and bankcard collections business and First Data
Financial Services ("FDFS"). This segment provides merchants with credit and
debit card transaction processing services, including authorization, transaction
capture, settlement, Internet-based transaction processing, check verification
and guarantee and collection services. Card issuing services encompasses
domestic and international card processing services. This segment provides a
comprehensive line of processing and related services to financial institutions
issuing credit and debit cards and to issuers of oil and private label credit
cards, including information-based products for enhanced decision making and
marketing. First Data Solutions also is included in the card issuing services
segment, providing consumer and business solutions in the areas of risk and
fraud management and information verification associated with granting of
credit, customer service and debt collecting. The emerging payments segment,
created in the third quarter of 2000, consists of eONE Global, a leader in
identifying, commercializing and operating emerging payment technologies that
support Internet and wireless payment products. The remainder of the Company's
business units are grouped in the "All other and Corporate" category, which
includes TeleServices, Call Interactive, International Banking Technologies
("IBT"), and Corporate operations. The Company's business strategy is to
generate recurring revenue by developing long-term contractual relationships
with clients who have decided to outsource various transaction and information
processing services.
FDC's facilities in the United States provide the vast majority of the Company's
transaction processing services. Currently, FDC's processing units in the United
Kingdom and Australia represent the Company's only foreign operations of
significance. Excluding these two foreign units, domestic facilities process
substantially all money transfer, merchant card and merchant check acceptance
transactions that are settled outside of the United States.
Portions of the Company's business are seasonal. FDC's revenues and earnings are
affected favorably by increased card and check volume during the holiday
shopping period in the fourth quarter and, to a lesser extent, during the back-
to-school buying period in the third quarter.
FDC considers acquisition opportunities as well as other forms of business
combinations and divestitures. Acquisitions supplement FDC's internal efforts to
access new markets and client groups, while divestitures have been completed for
business units lacking sufficient financial prospects or for units not enhancing
the Company's transaction processing competencies. No assurance can be given
with respect to the timing, likelihood or the financial or business effect of
any possible acquisitions or divestitures.
FDC is incorporated in Delaware, and its principal executive offices are located
at 5660 New Northside Drive, Suite 1400, Atlanta, Georgia 30328-5800, telephone
(770) 857-0001.
Significant Developments
In 2000, the Company continued to emphasize its three principal business
segments: payment services, merchant services and card issuing services. The
Company also continues to focus on revenue growth, cost management and execution
of core strategies. FDC continues to seek growth in these core segments from
Internet opportunities by enabling new and existing clients to do business on
the Internet, and expanding into adjacent Internet marketplaces. In the third
quarter 2000, the Company established its fourth segment, comprised of eONE
Global, which was created to identify, develop, commercialize and operate
innovative emerging payment businesses.
In the payment services segment, Western Union announced its intent to acquire a
25% equity interest in FEXCO in 2001, one of Ireland's largest financial
services companies, expanding its opportunities in the European market. Western
Union also signed a five-year agreement with the Government of India, Department
of Posts, to expand the availability of Western Union Money Transfer services
throughout India. The new agreement adds more than 3,000 new Western Union agent
locations. In addition, Western Union signed a five-year contract with Rite Aid,
expanding the availability of the Company's money transfer service to over 1,600
Rite Aid retail outlets in the United States. In January 2001, Western Union
acquired Bidpay.com, a provider of web based payment services to online auction
markets.
In September 2000, FDC completed the merger of its joint venture, TransPoint,
LLC, with Checkfree Holdings Corporation
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("Checkfree"). The merger resulted in FDC receiving consideration of 6.6 million
shares of Checkfree stock and recognizing a pre-tax gain of $186.0 million upon
consummation of the transaction.
In 2000, Merchant services increased its presence in Canada by purchasing the
Canada Trust MasterCard merchant portfolio and First Data Loan Company Canada
received approval to commence business as a merchant acquiring entity. In
January 2000, Wells Fargo contributed its Norwest portfolio to the Wells Fargo
alliance. In September 2000, the Company gained a controlling interest in one of
the Company's merchant alliances. Revenues and expenses have been restated to
the beginning of 2000 to reflect this alliance as a consolidated subsidiary.
In March 2000, card issuing services announced it had become the first in the
industry to be registered to personalize all VISA financial chip card products.
In May 2000, FDC announced the formation of a joint venture (finalized in
February, 2001) to offer card and merchant services in Japan. In October 2000,
card issuing services completed the largest account conversion in its history
consisting of approximately 44 million JC Penney retail credit cards. Card
issuing services extended its card production management contract covering
plastics management, card creation, and card distribution with Chase Manhattan
Bank to 2010. Also, card issuing services has signed a long-term agreement to
continue to provide processing services for certain Citibank USA bankcard
accounts and the Associates National Bank (Delaware) portfolio. During 2000 and
January 2001, card issuing services renewed more than 25 long-term contracts
ranging in terms of 5-7 years.
In November 2000, the Company launched eONE Global, a business focused on
identifying, developing, commercializing and operating emerging payment systems
and related technologies supporting e-commerce and Internet payment products.
eONE Global was formed upon FDC's contribution of certain operating businesses
and interests in Internet payment-related ventures and iFormation Group's (a
strategic partner comprised of The Boston Consulting Group Inc., General
Atlantic Partners LLC, and The Goldman Sachs Group) contribution of $135
million. FDC's contribution included CashTax and various equity investments and
strategic marketing agreements, including SurePay, Yclip.com, Meetchina.com and
Coolsavings.com. FDC has retained approximately a 75% ownership interest in the
new company and iFormation Group received approximately a 25% ownership interest
and a warrant to purchase 1.75 million shares of FDC common stock. The
agreements and investments noted above have been moved into and comprise the
emerging payments segment, established by the Company in the third quarter of
2000.
During 2000, the Company incurred net restructuring charges of $75.9 million
($47.2 million after tax). The charges represent net facility closure costs and
severance accruals for approximately 3,800 employees resulting from the
downsizing and relocation of various departments.
The Company wrote-down its investment in Excite@Home by recording a non-cash,
non-operating $33.6 million charge at year-end. This investment arose from the
1999 merger-related exchange of the Company's investment in iMall shares for
Excite@Home shares which resulted in a non-cash $19.8 million gain.
FDC is the market leader in its three major segments: payment services, merchant
services and card issuing services. The Company continues to focus on enhancing
these core business areas and to assess how best to serve its customer base as
well as pursue opportunities to expand its emerging payments businesses. Among
the actions the Company believes are necessary to continue its leadership
position is a focused effort to develop new products and services and to enhance
its processing platforms in response to Company growth, client requirements,
changing technology and expanding e-commerce initiatives. In this regard, the
Company continues to upgrade its business continuity plans to reflect new
systems and platforms developed to support these actions. Also, the Company
continues to take action to further streamline operations and reduce costs.
Operating Segments
The Company operates in four business segments: payment services, merchant
services, card issuing services and emerging payments. Financial information
relating to each of the Company's industry segments is set forth in Note 15 to
the Company's consolidated financial statements contained in this report.
Payment Services
The payment services segment includes Western Union, Integrated Payment Systems
("IPS"), and Orlandi Valuta Companies and is the leading provider of nonbank
money transfer and payment services to consumers and commercial entities,
including money transfer, official check and money order. As the leading
provider of nonbank money transfer services, Western Union utilizes an agent
network of over 44,000 agent locations in North America (United States, Canada
and Mexico) and 57,000 international agent locations to provide money transfer
services to consumers in 186 countries and territories. The primary market for
these services is comprised of people who periodically need to send or receive
cash quickly to meet emergency situations, to send funds to family in other
locations or to use nonbank financial services to pay
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bills or meet other obligations. Through Western Union's Easy Pay and Quick
Collect services, FDC also offers bill payment services to utility companies,
collection agencies, finance companies and other institutions. Official checks
serve as an alternative to a bank's own disbursement items such as teller's or
bank checks. Money transfer transactions totaled 88.9 million in 2000, compared
to 73.5 million in 1999 and 61.4 million in 1998.
In the payment services segment, the Company derives its revenues from
transaction processing fees and from the investment of funds received from the
sale of payment instruments (primarily official checks and money orders), net of
commissions paid to certain selling agents. These investments are the primary
component of settlement assets on the Company's consolidated balance sheets. In
addition, the Company has historically derived additional revenue from its
management of currency exchange spreads in its international money transfer
business. On a pre-tax equivalent basis, payment service revenues comprised 41%
of FDC's total revenues in 2000, compared with 36% in 1999 and 32% in 1998.
Merchant Services
The merchant services segment is comprised of First Data Merchant Services
("FDMS"), TeleCheck, the Company's check and bankcard collections business, and
First Data Financial Services ("FDFS"). This segment provides merchants with
credit and debit card transaction processing services, including authorization,
transaction capture, settlement, Internet-based transaction processing, check
verification and guarantee and collection services. FDMS is the largest provider
of merchant credit and debit card transaction processing services in the United
States. Its services include authorization, transaction capture, settlement,
chargeback handling, and Internet-based transaction processing. The substantial
majority of these services pertain to transactions in which payment is made
through MasterCard or VISA bank cards. TeleCheck, a check acceptance company,
provides electronic check conversion, check guarantee, check verification and
collections services. TeleCheck Collections provides delinquent account
processing, including pre-charge off collection outsourcing services. FDFS,
through a majority owned subsidiary, provides credit card, debit card and money
transfer services to gaming establishments and their customers. The percentages
of FDC's revenues from this segment's services were 32%, 28%, and 28%,
respectively, during the years ended December 31, 2000, 1999 and 1998.
A key element of FDC's strategy in the merchant processing area involves joint-
venture alliances with bank partners and implementation of International, debit
and Internet commerce initiatives. Under the alliance program, FDC and a bank
create a joint venture into which merchant contracts are contributed. Each joint
venture alliance requires successful management of the relationship between the
Company and the bank partner in that alliance. FDMS benefits by continuing to
provide point-of-sale card processing for the contributed merchants and new
merchants signed up by either the bank's or the venture's dedicated sales force.
The bank benefits by maintaining the merchant banking relationship. Alliance
partner banks provide cash clearing and settlement functions, while FDC provides
transaction processing and certain back-office functions. There were seven
participating banks in the program as of December 31, 2000.
The alliance strategy could be affected by further consolidation among financial
institutions. Merchant Services expects that the shift in payment methods from
cash and check to electronic and card based payments will continue to benefit
the alliances' internal growth. Internet commerce also presents a growth
opportunity for the Merchant Services segment. While Internet commerce
currently accounts for a small portion of the segment's transactions, it is
growing rapidly.
The Company's primary merchant card processing center is located in Hagerstown,
Maryland with additional volumes of merchant card transactions being processed
at FDMS's card issuing processing center in Omaha, Nebraska. These centers
support merchant electronic cash registers, Internet commerce, and dial up
point-of-sale authorization and draft capture terminals. Also, voice
authorization services are provided to merchants without electronic
authorization capabilities and in the event that electronic authorization
capabilities are interrupted. Transaction information is transmitted
electronically through the MasterCard and VISA networks, and may be posted to a
cardholder account maintained by FDC's card issuing services area.
FDMS's revenues are generated from fees charged for full service merchant
processing performed directly for merchants and for the alliances, and fees are
based on a percentage of dollar volume processed or on a per transaction basis.
The Company provided full service domestic merchant card processing on Visa and
MasterCard transaction dollar volume totaling $425 billion in 2000, compared
with $328 billion in 1999 and $252 billion in 1998. Merchant transactions
processed totaled 8.0 billion in 2000, compared to 6.4 billion in 1999 and 5.0
billion in 1998. 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.
Card Issuing Services
The card issuing services segment encompasses domestic and international card
processing. This segment provides a comprehensive line of processing and related
services to financial institutions issuing credit and debit cards and to issuers
of oil and private label credit cards. Within this segment, First Data Resources
("FDR") (with its principal operating facilities in Omaha, Nebraska) provides a
comprehensive line of products and processing and related services to financial
institutions
4
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. Also included in this
segment is First Data Solutions, a provider of consumer and business solutions
in the areas of risk and fraud management and information verification
associated with granting of credit, collecting debt and customer service. This
business was formerly a part of all other and corporate and was moved to card
issuing to reflect current management reporting relationships. Collectively,
this segment's services constituted approximately 26% of the Company's total
revenues in 2000 and approximately 25% of the Company's total revenues in 1999
and 1998.
Processing services include embossing, transaction reporting, settlement and
billing, and certain security and related services. The Company has the
capability to provide a full array of services throughout the period of each
card's use, starting from the moment a card-issuing client accepts an
application for a transaction card. The Company's in-house embossing facility
can issue cards for new accounts and at renewal dates (established by the
client) for existing card accounts. FDR's fraud management services monitor the
unauthorized use of cards which have been reported to be lost, stolen, or which
exceed credit limits. The Company's fraud detection systems help identify
fraudulent transactions by monitoring each cardholder's purchasing patterns and
flagging unusual purchases. Billing statements are prepared and mailed directly
to cardholders using the Company's in-house mail facilities. Examples of other
service offerings include cardholder database analysis, cardholder behavior
scoring, customized communications to cardholders and proprietary oil card
processing services.
Currently, FDC's operations in the United Kingdom and Australia are the
Company's principal processing facilities located outside the United States. FDC
is the largest third-party provider of card processing services in the United
Kingdom, with over 27 million card accounts on file at December 31, 2000.
Services provided generally mirror the Company's domestic card issuing and
merchant services provided to financial institutions. The Company also provides
third-party bankcard processing in Mexico and portions of Latin America. In
addition, FDC operates the largest independent electronic funds transfer network
in Australia, providing ATM, EFTPOS, smartcard, pay-by-phone and internet
payment processing services to over 400 financial institutions and merchant
clients.
Revenues for card issuing services are derived from fees payable under contracts
that primarily depend on the number of accounts or transactions processed. FDR
provides over one hundred transaction-based services, which are separately
priced and negotiated with clients. Most contracts provide for the payment of
minimum annual processing fees, payable without regard to transaction volume. In
some instances, FDR may make an advance payment to a client upon the signing of
a processing contract with the Company. FDR makes these payments to compensate
new clients for dedicating the resources to change service providers or to
outsource an internal service function.
Emerging Payments
The Company established the emerging payments segment in the third quarter of
2000. The emerging payments segment is comprised solely of eONE Global as
described above. The segments have been restated to reflect the movement of the
operations of CashTax from payment services and equity positions and strategic
marketing agreements including Yclip.com, Meetchina.com and Coolsavings.com from
the other segments to emerging payments. CashTax is a provider of electronic tax
processing services to banks and government agencies.
All Other and Corporate
The remainder of the Company's business units are grouped in the all other and
corporate category, which includes TeleServices, IBT, Call Interactive and
Corporate operations.
TeleServices is a provider of voice-center services to telecommunications and
financial services industries. IBT develops in-store branch banking programs and
derives its revenues from fees earned during the design and installation phases,
and the ongoing management of the in-store program. Call Interactive is a
provider of customized 800 telephone interactive voice services that gather,
process and disseminate information for client needs. Revenues from these
services consist of fees paid by clients which generally are based on call
volume, duration and the number of transactions.
Marketing
FDC markets its services through a variety of channels including direct
solicitation and general advertising. The Company's employees are utilized in
the direct solicitation of new clients and the cross selling of additional FDC
services to existing clients. Direct sales efforts by both Company employees and
bank alliance partner employees in the merchant services segment have been
effective in signing new merchant clients.
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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.
Regulation
Various aspects of FDC's service areas are subject to federal and state
regulation which, depending on the nature of any noncompliance, may result in
the suspension or revocation of any license or registration at issue, as well as
the imposition of civil fines and criminal penalties. To date, the Company has
experienced no material difficulties in complying with the various laws and
regulations affecting its business.
As a provider of electronic data processing services directly to governmental
agencies and to banks and other regulated financial institutions, the Company is
subject to regulatory oversight and examination by the Federal Financial
Institutions Examination Council, as well as review by various other federal and
state regulatory agencies. The Company's First Financial Bank ("FFB") and
Western Union Industrial Bank subsidiaries are subject to regulation by various
state and federal banking agencies. In addition, FFB and FDMS continue to be
subject to the rules of VISA and MasterCard, including a requirement that FFB
maintain adequate capital (currently $70.0 million) based on the merchant credit
card processing volume settled through FFB.
Most states license issuers of payment instruments and many require, among other
things, that proceeds from the sales of such instruments be invested in high-
quality marketable securities prior to the settlement of the transactions. Such
licensing laws may also cover matters such as regulatory approval of agent
locations and the filing of periodic reports by the licensee. The Company is
required to obtain and maintain licenses to conduct such operations, which
generally require the Company or the licensed subsidiary to demonstrate and
maintain levels of net worth and/or liquidity. In addition, the Company's
services related to money transfers also are regulated at the state level by
banking commissions or similar authorities.
The Company also provides certain services in compliance with (i) international
and United States anti-money laundering laws such as the Bank Secrecy Act, (ii)
privacy regulations such as the Gramm-Leach-Bliley Act which provides for
notices to be given to consumers of financial services, (iii) the Fair Debt
Collection Practices Act, and (iv) the Fair Credit Reporting Act.
Competition
The most significant competitive factors related to the Company's services are
price, quality, features and functionality, and reliability of service.
FDC is not aware of any single competitor that provides the same range of
services; however, the information services industry is highly fragmented and
FDC faces significant competitors in each of its service areas. The Company also
competes with companies that internally perform processing or other related
services offered by FDC. In addition, the Company believes that recently enacted
changes in telecommunications and other laws and developments regarding the
Internet and other new technologies related to electronic commerce may result in
competition from entities with access to significant capital and management
resources.
FDC creates a differentiated competitive position in its service areas by
offering a menu of enhanced services to clients. These enhanced services often
involve technologically sophisticated reporting features that add value to
information derived from the Company's transaction processing databases.
In the payment services segment, FDC's money transfer services compete with one
international provider, as well as numerous other niche providers. The Company
also competes with bank wire transfer services (primarily available to
commercial users). In addition, the Company faces several established
competitors in providing commercial money transfer services. FDC's money order
services primarily compete with postal money orders and those of one other
international provider.
The Company's merchant service areas compete against several other national
service providers, and against banks that continue to provide these services to
their merchant customers. FDC's check acceptance area is in competition
principally with two other national companies.
FDC's card issuing segment competes with other third-party cardholder processors
as well as banks that process their accounts internally.
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In addition, many of the Company's businesses are involved in Internet e-
commerce or have Internet applications. This Internet e-commerce nexus presents
growth opportunities that the Company is pursuing through the newly created
emerging payments segment. Internet e-commerce is characterized by both rapid
growth as well as rapid technological change and presents, in addition to
significant opportunities for the Company, the potential for other Internet
companies to enter the Company's markets.
Industry Trends
Technological capabilities required for the rapid and efficient creation,
processing, handling, storage and retrieval of information are becoming
increasingly complex. These capabilities require large development and capital
expenditures and processing expertise, and have contributed to a trend toward
the outsourcing of processing services that benefits the Company. In addition,
the evolution of these capabilities is creating new competitors with innovative
solutions, and also is driving an industry-wide consolidation which is creating
more established competitors. Also refer to the preceding paragraph regarding
Internet products and companies.
Bank industry consolidation impacts existing and potential clients in FDC's
service areas, primarily relating to card issuing services and payment services.
In addition, certain merchant processing alliance relationships have been
impacted as a result of consolidations. However, merchant services expects that
the shift from cash and check transactions to electronic and card transactions
will continue to benefit the Alliance's internal growth. In the aggregate, bank
mergers have not significantly affected the Company to date. However, FDC could
lose business in connection with future client mergers if the surviving or
acquiring entity utilizes in-house processing services or those of a competitor
of the Company.
Employees and Labor Relations
At December 31, 2000, the Company employed approximately 27,000 employees,
approximately 94% percent of whom were full-time employees. A portion of FDC's
approximately 2,700 employees in the United Kingdom are members of UNIFI
(formerly the Banking Insurance & Finance Union). In addition, Western Union has
two three-year labor contracts (expiring August 6, 2004) with the Communications
Workers of America, AFL-CIO and its local 1177, representing 45% of
approximately 2,400 employees. The Company's employees are not otherwise
represented by any labor organization. The Company believes that its relations
with its employees and the labor organizations identified above are generally
good.
Executive Officers of the Registrant
See Item 10 of this Form 10-K.
ITEM 2. PROPERTIES
As of December 31, 2000, the Company and its subsidiaries own or lease
approximately 300 properties, totaling approximately 6.8 million square feet.
These facilities are used for operational, sales and administrative purposes.
The following table describes the facilities which contain more than 10,000
square feet that are used in connection with the Company's operations.
Facilities Leased
Leased Facilities Owned Facilities with Option to Buy
---------------------- -------------------- -------------------
No. Appr. Sq. Ft. No. Appr. Sq. Ft. No. Appr. Sq. Ft.
----- ------------- ----- ------------- ---- -------------
Facilities in the United
States
Payment Services 13 870,000 -- -- 1 162,000
Merchant Services 14 923,000 -- -- 1 97,000
Card Issuing Services 30 1,583,000 7 1,084,000 2 281,000
Emerging Payments -- -- -- -- - --
Corporate and Other 5 303,000 2 164,000 - --
International Facilities
Payment Services 1 13,000 -- -- - --
Merchant Services -- -- -- -- - --
Card Issuing Services 11 395,000 1 270,000 - --
Emerging Payments -- -- -- -- - --
Corporate and Other -- -- -- -- - --
The Company conducts operations domestically and internationally. Payment
services has principal operations in Englewood, Colorado; St. Charles, Missouri
and Montvale, New Jersey. Merchant services' principal operations are conducted
in Melville, New York; Hagerstown, Maryland; Coral Springs, Florida; and
Houston, Texas. The principal operations for card issuing
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services are located in Omaha, Nebraska; England and Australia. The Company's
Corporate and other operations include the Company's corporate offices in
Atlanta, Georgia and other principal facilities in Englewood, Colorado and
Omaha, Nebraska.
The Company believes that its facilities are suitable and adequate for its
businesses; however, the Company periodically reviews its space requirements and
may acquire new space to meet the needs of its businesses or consolidate and
dispose of or sublet facilities which are no longer required.
ITEM 3. LEGAL PROCEEDINGS
As previously reported, on February 20, 1998, Plaintiffs Rita Sandoval and
Andres Pena, individually and on behalf of all others similarly situated in the
State of Texas, filed a complaint in the District Court of Morris County, Texas,
against Western Union Financial Services, Inc. ("Western Union") (the "Sandoval
action") a wholly owned subsidiary of the Company. Plaintiffs claim that
Western Union charges an undisclosed "commission" when it transmits consumers'
money by wire to Mexico, in that the exchange rate used in these transactions is
less favorable than the exchange rate that Western Union receives when it trades
dollars in the international money market. Plaintiffs assert that Western
Union's failure to disclose this "commission" in its advertising and in the
transactions violates state law. Plaintiffs seek to recover the purported
damage suffered by each class member.
As previously reported, on April 20, 1998, Plaintiffs Luis Pelayo and Oscar
Perales brought a putative class action against Western Union Financial
Services, Inc. in the United States District Court for the Northern District of
Illinois (the "Pelayo action"). The Plaintiffs later amended the complaint to
add the Company and its Orlandi Valuta and Orlandi Valuta Nacional subsidiaries
as defendants. The Plaintiffs make allegations substantially similar to those
made in the Sandoval action described above, except that the Plaintiffs
purported to assert their action on behalf of a nationwide class of persons who
sent money from the United States to Mexico through Western Union's or Orlandi
Valuta's wire transfer services. Plaintiffs seek declaratory and injunctive
relief, compensatory damages, treble damages, punitive damages, attorneys' fees,
prejudgment interest, and costs of suit.
As previously reported, on September 14, 1998, Plaintiff Raul Garcia filed a
putative class action in the Superior Court of the State of California for the
County of Los Angeles against, among others, the Company's subsidiary, Western
Union Financial Services, Inc. (the "Garcia" action). The Plaintiff asserts
claims based on factual allegations similar to those made in the Sandoval action
described above, except that the Plaintiff purported to assert the action on
behalf of persons who sent money from California to Mexico. Plaintiff also
asserts that Western Union has discriminated against persons who use Western
Union to transmit money to Mexico, in that the difference between the exchange
rate at which Western Union purchased Mexican pesos and the exchange rate
provided by Western Union to its customers transmitting funds to Mexico is
greater than the difference between the exchange rate at which Western Union
purchased foreign currency and the exchange rate provided by Western Union to
its customers transmitting funds to other countries. The Plaintiff seeks
injunctive relief, imposition of a constructive trust, an accounting,
restitution, compensatory and statutory damages alleged to be in excess of $500
million, statutory penalties in an amount of $1,000 for each offense, punitive
damages, attorneys' fees, prejudgment interest, and costs of suit.
As previously reported, on November 17, 1998, Plaintiffs Maria Rosa Ibarra, Rosa
Maria Landin and Rigoberto Estrada brought a putative class action against the
Company's Orlandi Valuta subsidiary in the United States District Court for the
Central District of California seeking compensatory damages, treble damages,
injunctive relief, attorneys' fees, and costs of suit. Plaintiffs filed an
amended complaint on January 29, 1999, naming the Company as an additional
defendant. The claims are based on factual allegations similar to those made in
the Sandoval action described above, except that the Plaintiffs purported to
assert their action on behalf of a nationwide class of persons who sent money
from the United States to Mexico through Orlandi Valuta's wire transfer service
and apparently on behalf of a statewide class. On May 3, 1999, the Court
dismissed the federal statutory claims in the amended complaint, but not the
state claims, and granted the Plaintiffs leave to amend the federal claims
within 20 days.
As previously reported, on April 28, 1998, Plaintiff Raul Ross Pineda,
individually and on behalf of all others similarly situated, filed a putative
class action in the United States District Court for the Northern District of
Illinois naming MoneyGram Payment Systems, Inc. as the defendant (the "Pineda
action"). Integrated Payment Systems, Inc. ("IPS"), a subsidiary of the Company,
subsequently was added as a defendant in that action. IPS operated an electronic
money transfer service under the name "MoneyGram" prior to December 1996. The
claims are based on factual allegations similar to those made in the Pelayo
action described above. Mr. Pineda seeks declaratory and injunctive relief,
damages in an amount to be proven at trial, treble damages, punitive damages,
attorneys' fees, and cost of suit.
The Court granted final approval of the proposed settlements reached by the
parties in the Pelayo and Pineda actions and entered final judgements on
December 21, 2000. In approving the settlements, the Court permanently enjoined
the continued prosecution of the Garcia, Sandoval and Ibarra actions as well as
the commencement of any new actions that assert any claims that were released or
discharged by the settlements. Under the settlements, the Company will establish
a charitable fund for
8
the advancement of Mexican and Mexican-American causes in the amount of $4
million. Western Union also will issue coupons for discounts on future money
transfer transactions to Mexico to its customers who transferred money from the
U.S. to Mexico between January 1, 1987 and August 31, 1999. In addition, the
Company will issue coupons for discounts on future Western Union transactions to
customers who transferred money to Mexico from January 1, 1988 to December 10,
1996 using the MoneyGram service because MoneyGram was previously operated by a
subsidiary of the Company. The settlements also include reasonable attorneys'
fees and costs as well as the costs of settlement notice and administration. On
January 18, 2001, a number of the class members in the Pelayo action who
objected to the settlement filed a notice of appeal from the final judgment in
that action. On January 19, 2001, a similar notice of appeal was filed in the
Pineda action by several of the class members who objected to the settlement in
that action.
As previously reported, on January 11, 2000, Plaintiffs Julieta Amorsolo and
Apolonio Ezequiel Viruel Torres brought a putative class action against First
Data Corporation and its subsidiaries Western Union Financial Services, Inc. and
Orlandi Valuta in the Superior Court of the State of California for the County
of Los Angeles. The putative class consists of those persons who have used
Western Union's or Orlandi Valuta's services after August 31, 1999 to transmit
money from California to Mexico, or who have used the Western Union money
transfer service to transmit money from California to Mexico and have opted out
of the nationwide settlement in the Pelayo Action. Plaintiffs assert claims
based on actual allegations similar to those made in the Sandoval action
described above and seek injunctive relief, imposition of a constructive trust,
an accounting, restitution, compensatory and statutory damages alleged to be in
excess of $500 million, statutory penalties in an amount of $1,000 for each
offense, punitive damages, attorneys' fees, prejudgment interest, and costs of
suit. The Company intends to vigorously defend this action.
As previously reported, on January 19, 2001, Plaintiff Ann Cruz filed a putative
class action in the United States District Court for the Eastern District of New
York against the Company and its subsidiary, Western Union Financial Services,
Inc., asserting claims on behalf of a putative worldwide class (excluding those
consumers who were members of the class certified by the U.S. District Court for
the Northern District of Illinois in the Pelayo action). Ms. Cruz claims that
the Company and Western Union impose an undisclosed "charge" when they transmit
consumers' money by wire to international locations, in that the exchange rate
used in these transactions is less favorable than the exchange rate that Western
Union receives when it trades currency in the international money market.
Plaintiff further asserts that Western Union's failure to disclose this "charge"
in the transactions violates 18 U.S.C. section 1961 et seq. and state deceptive
trade practices statutes, and also asserts claims for civil conspiracy.
Plaintiff seeks injunctive relief, compensatory damages in an amount to be
proven at trial, treble damages, punitive damages, attorney's fees, and costs of
suit. The Company intends to vigorously defend this action.
From time to time the Company is involved in various other litigation matters
arising in the ordinary course of its business, none of which management
believes, either individually or in the aggregate, currently is material to the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The principal market for the Company's common stock is the New York Stock
Exchange ("NYSE"). The following table sets forth, for the indicated calendar
periods, the reported intraday high and low sales prices of the common stock on
the NYSE Composite Tape and the cash dividends per share of common stock. At
March 12, 2001, the registrant had 3,185 common stockholders of record.
2000 High Low Dividend
- ---- --------- --------- --------
First Quarter ............... $54 1/4 $40 1/8 $0.02
Second Quarter............... 57 11/16 38 15/16 0.02
Third Quarter................ 51 1/4 36 15/16 0.02
Fourth Quarter............... 55 11/16 37 3/16 0.02
1999
- ----
First Quarter ............... $44 1/2 $31 5/16 $0.02
Second Quarter............... 49 15/16 38 7/8 0.02
Third Quarter................ 51 1/2 42 11/16 0.02
Fourth Quarter............... 50 7/8 40 0.02
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
9
Company, and (iii) payable only out of the Company's surplus or current net
profits in accordance with the General Corporation Law of the State of Delaware.
Recent Sales of Unregistered Securities
In connection with the formation of eONE Global, LP, on November 16, 2000, the
Company issued a warrant to purchase 1,750,000 shares of its common stock to
iFormation Group Holdings, L.P. in exchange for $15 million. The warrant may be
exercised from November 15, 2004 through November 15, 2006 at an exercise price
of $80.05. The expiration of the exercise period is subject to acceleration
upon the occurrence of certain events specified in the warrant. The issuance of
the warrant 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.
10
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
The following data should be read in conjunction with the consolidated financial
statements and related notes thereto and management's discussion and analysis of
financial condition and results of operations included elsewhere in this annual
report.
The notes to the consolidated financial statements contain additional
information about various acquisitions (accounted for as purchases) and
dispositions, which affect the comparability of information presented. Certain
prior years' amounts have been restated to conform to the current year's
presentation.
Year Ended December 31, 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
(in millions, except share amounts or
otherwise noted)
Income statement data:
- ----------------------
Revenues $ 5,705.2 $ 5,479.9(a) $ 5,047.1 $ 5,198.9 $ 4,911.3
Expenses 4,396.9(b) 3,654.5(b) 4,335.2(b) 4,492.5(b) 3,879.5(b)
----------- ------------ ------------ ------------ ------------
Income before income taxes 1,308.3 1,825.4 711.9 706.4 1,031.8
Income taxes 378.7 625.7 246.2 349.7 395.3
----------- ------------ ------------ ------------ ------------
Net income $ 929.6 $ 1,199.7 $ 465.7 $ 356.7 $ 636.5
=========== ============ ============ ============ ============
Depreciation and amortization $ 588.8 $ 617.8 $ 591.1 $ 534.2 $ 423.6
Per share data:
- ---------------
Earnings per share - basic $ 2.28(b) $ 2.81(b) $ 1.05(b) $ 0.81(b) $ 1.42(b)
Earnings per share - diluted 2.25(b) 2.76(b) 1.04(b) 0.79(b) 1.37(b)
Cash dividends per share 0.08 0.08 0.08 0.08 0.07
Balance sheet data (at year-end):
- ---------------------------------
Total assets $17,295.1 $17,004.8 $16,587.0 $15,315.2 $14,340.1
Settlement assets 9,816.6 9,585.6 9,758.0 8,364.7 7,461.5
Total liabilities 13,567.4 13,097.1 12,831.1 11,657.9 10,630.3
Settlement obligations 9,773.2 9,694.6 9,617.0 8,249.8 7,389.9
Borrowings 1,780.0 1,528.1 1,521.7 1,750.7 1,261.4
Convertible debt 50.0 50.0 50.0 --- 447.1
Total stockholders' equity 3,727.7 3,907.7 3,755.9 3,657.3 3,709.8
Summary operating data:
- -----------------------
At year-end-
Card accounts on file (in
millions) 309.9 259.8 211.9 180.4 152.9
For the year-
Merchant dollar volume (in billions,
domestic only) (c) $ 425.2 $ 328.3 $ 252.2 $ 216.0 $ 185.0
Merchant transactions (in
billions) 8.0 6.4 5.0 4.6 3.6
Money transfer transactions (in
millions) 88.9 73.5 61.4 47.8 35.2
(a) Includes a $19.8 million gain recognized upon the merger exchange of
Excite@Home stock for iMall stock in which FDC held an 11% ownership
interest.
(b) Includes restructuring, business divestiture, litigation, provision for
loss on contract and impairment items: A net benefit of $71.3 million pre-
tax ($46.0 million after tax, or $0.11 benefit per share) for 2000; net
benefit of $715.8 million pre-tax ($417.6 million after tax, or $0.96
benefit per share, $0.99 benefit per share including the iMall gain
discussed above) for 1999; a net charge of $319.1 million pre-tax, ($231.5
million after tax, or $0.52 loss per share) for 1998 (including a provision
for termination of a card processing agreement); a net charge of $369.3
million ($333.9 million after tax, or $0.72 loss per share) for 1997 and a
net benefit of $13.5 million ($8.3 million after tax, or $0.02 gain per
share) for 1996.
(c) Includes Visa and Master Card volume only from alliances and managed
accounts.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
First Data Corporation ("FDC" or "the Company") operates in four business
segments: payment services, merchant services, card issuing services and
emerging payments. Payment services includes Western Union, Integrated Payment
Systems ("IPS") and Orlandi Valuta Companies and is the leading provider of
nonbank domestic and international money transfer and payment services to
consumers and commercial entities, including money transfer, official check and
money order services. Merchant services is comprised primarily of First Data
Merchant Services, TeleCheck and First Data Financial Services. This segment
provides merchants with credit and debit card transaction processing services,
including authorization, transaction capture, settlement, Internet-based
transaction processing, check verification and guarantee services. Card issuing
services encompasses domestic and international card processing services. This
segment provides a comprehensive line of processing and related services to
financial institutions issuing credit and debit cards and to issuers of oil and
private label credit cards, including information-based products for enhanced
decision making and marketing. First Data Solutions is also included in the card
issuing services segment, providing consumer and business solutions in the areas
of risk and fraud management and information verification associated with
granting of credit, customer service and debt collecting. The emerging payments
segment, created in the third quarter of 2000, consists of eONE Global, a leader
in identifying, commercializing and operating emerging payment technologies that
support Internet and wireless payment products. The remainder of the Company's
business units are grouped in the "All Other and Corporate" category, which
includes TeleServices, Call Interactive, International Banking Technologies
("IBT") and Corporate operations.
FDC considers acquisition opportunities as well as other forms of business
combinations and divestitures. Acquisitions supplement FDC's internal efforts to
access new markets and client groups, while divestitures have been completed for
business units lacking sufficient financial prospects or for units not enhancing
the Company's transaction processing competencies. No assurance can be given
with respect to the timing, likelihood or the financial or business effect of
any possible acquisitions or divestitures.
Significant Developments
In 2000, the Company continued to emphasize its three principal business
segments: payment services, merchant services and card issuing services. The
Company also continues to focus on revenue growth, cost management and execution
of core strategies. FDC continues to seek growth in these core segments from
Internet opportunities by enabling new and existing clients to do business on
the Internet and expanding into adjacent Internet marketplaces. In the third
quarter 2000, the Company established its fourth segment, comprised of eONE
Global, which was created to identify, develop, commercialize and operate
innovative emerging payment businesses.
In the payment services segment, Western Union announced its intent to acquire a
25% equity interest in FEXCO in 2001, one of Ireland's largest financial
services companies, expanding its opportunities in the European market. Western
Union also signed a five-year agreement with the Government of India, Department
of Posts, to expand the availability of Western Union Money Transfer services
throughout India. The new agreement adds more than 3,000 new Western Union agent
locations. In addition, Western Union signed a five-year contract with Rite Aid,
expanding the availability of the Company's money transfer service to over 1,600
Rite Aid retail outlets in the United States. In January 2001, Western Union
acquired Bidpay.com, a provider of web-based payment services to online auction
markets.
In September 2000, FDC completed the merger of its joint venture, TransPoint,
LLC, with Checkfree Holdings Corporation ("Checkfree"). The merger resulted in
FDC receiving consideration of 6.6 million shares of Checkfree stock and
recognizing a pre-tax gain of $186.0 million upon consummation of the
transaction.
In 2000, merchant services increased its presence in Canada by purchasing the
Canada Trust MasterCard merchant portfolio and First Data Loan Company Canada
received approval to commence business as a merchant acquiring entity. In
January 2000, Wells Fargo contributed its Norwest portfolio to the Wells Fargo
alliance. In September 2000, the Company gained a controlling interest in one
of the Company's merchant alliances. Revenues and expenses have been restated
to the beginning of 2000 to reflect this alliance as a consolidated subsidiary.
In March 2000, card issuing services announced it had become the first in the
industry to be registered to personalize all VISA financial chip card products.
In May 2000, FDC announced the formation of a joint venture that was completed
in February 2001 to offer card and merchant services in Japan. In October 2000,
card issuing services completed the largest account conversion in its history
consisting of approximately 44 million JCPenney retail credit cards. Card
issuing services extended its card production management contract covering
plastics management, card creation, and card distribution with Chase Manhattan
Bank to 2010. Also, card issuing services has signed a long-term agreement to
continue to provide processing services for certain Citibank USA bankcard
accounts and the Associates National Bank (Delaware) portfolio.
12
During 2000 and January 2001, card issuing services renewed more than 25 long-
term contracts ranging in terms of 5-7 years.
With respect to the Company's U.K. card processing business ("FDRL"), the Royal
Bank of Scotland ("RBS") informed FDRL that it did not intend to renew its
contract in July 2001 for processing services. The loss of RBS business
represents approximately 3% of card issuing services' current annualized
revenue. In response, the Company is restructuring certain activities to adjust
its cost structure.
In November 2000, the Company launched eONE Global, a business focused on
identifying, developing, commercializing and operating emerging payment systems
and related technologies supporting e-commerce and Internet payment products.
eONE Global was formed upon FDC's contribution of certain operating businesses
and interests in Internet payment-related ventures and iFormation Group's (a
strategic partner comprised of The Boston Consulting Group Inc., General
Atlantic Partners LLC, and The Goldman Sachs Group) contribution of $135
million. FDC's contribution included CashTax and various equity investments and
strategic marketing agreements, including SurePay, Yclip.com, Meetchina.com and
Coolsavings.com. FDC has retained approximately a 75% ownership interest in the
new company and iFormation Group received approximately a 25% ownership interest
and a warrant to purchase 1.75 million shares of FDC common stock. The
agreements and investments noted above have been moved into and comprise the
emerging payments segment, established by the Company in the third quarter of
2000.
During 2000, the Company incurred net restructuring charges of $75.9 million.
The charges represent net facility closure costs and severance accruals for
approximately 3,800 employees resulting from the downsizing and relocation of
various departments.
The Company wrote-down its investment in Excite@Home by recording a non-cash,
non-operating $33.6 million charge at year-end. This investment arose from the
1999 merger-related exchange of the Company's investment in iMall shares for
Excite@Home shares which resulted in a non-cash $19.8 million gain.
In December 1999, the SEC released Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB 101"), which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. The Company adopted SAB 101 in the third quarter of 2000 and
as a result, the Statements of Income for all prior periods have been restated
to reflect the netting of certain revenues and expenses that were previously
presented gross. The adoption of SAB 101 only impacted the card issuing services
segment.
FDC is the market leader in its three major segments: payment services, merchant
services and card issuing services. The Company continues to focus on enhancing
these core business areas and to assess how best to serve its customer base as
well as pursue opportunities to expand its emerging payment businesses. Among
the actions the Company believes are necessary to continue its leadership
position is a focused effort to develop new products and services and to enhance
its processing platforms in response to Company growth, client requirements,
changing technology and expanding e-commerce initiatives. In this regard, the
Company continues to upgrade its business continuity plans to reflect new
systems and platforms developed to support these actions. Also, the Company
continues to take action to further streamline operations and reduce costs.
Results of Operations
2000 Compared with 1999
The Company derives revenues in each of its reportable segments principally
based on the number of transactions processed, a percentage of dollar volume
processed or on a combination thereof. Total revenues in 2000 increased 4% to
$5.7 billion compared to $5.5 billion in 1999. Excluding the impact of business
divestitures, the Company's growth rate in revenues over 1999 (excluding the
effects of the iMall/Excite@Home merger related gain) was 13%.
Product sales and other revenues increased 6% from $132.9 million in 1999 to
$141.0 million. This increase is primarily due to an increase in incentive
payments received from a partner in a previously formed merchant alliance and
royalty payments.
Consolidated operating expenses for 2000 remained relatively flat at $3.5
billion (an increase of approximately 1%) compared to 1999. Increases in
operating expenses primarily were due to the consolidation of a merchant
alliance in 2000 upon obtaining a controlling interest in such alliance and
increased business activities which were offset substantially by decreases due
to business divestitures, reduced Y2K readiness expense and benefits realized
from cost management
13
initiatives. As a result, operating expenses as a percent of revenue decreased
in 2000 as compared to 1999.
Selling, general and administrative expenses increased 9% to $867.3 million in
2000 compared to $794.2 million for 1999. As a percentage of revenue from
continuing operations, selling, general and administrative expenses were
relatively flat, 15.2% for 2000 compared to 14.5% for 1999. The dollar increase
primarily reflects increased employee costs, advertising and promotion spending
and the consolidation of a merchant alliance in 2000 due to the Company
obtaining of a controlling interest. These increases were partially offset by
the impact of business divestitures.
Interest expense decreased 4% to $99.2 million in 2000 from $103.8 million in
1999. The decrease is principally due to overall reductions in average debt
balances funded by strong cash flow from operations and the proceeds from the
sale of Investor Services Group ("ISG") in the fourth quarter of 1999.
FDC's full year effective tax rate for 2000 was 29.0%, compared to 34.3% in
1999. Excluding the impact of restructuring, business divestitures and other
nonrecurring items, the effective tax rate decreased 0.8 percentage points to
28.6% in 2000 compared to 29.4% in 1999.
Net income of $929.6 million was down from $1,199.7 million in 1999. Excluding
restructuring, business divestitures and other nonrecurring items, net income
increased 15% to $883.6 million from $769.9 million in 1999. The increase was
primarily the result of revenue growth and margin improvements in the combined
core businesses, driven primarily by strong volume trends and the impact of
significant cost management initiatives. Diluted earnings per share ("EPS")
decreased 18% to $2.25 in 2000 compared to $2.76 in 1999. Excluding the impact
of restructuring, business divestitures and other nonrecurring items, diluted
EPS increased 21% to $2.14 compared to $1.77 in 1999.
Payment Services
Total revenues in the payment services segment increased by 19% (on a pre-tax
equivalent basis) to $2.3 billion in 2000, compared to $2.0 billion in 1999. The
increase in revenues was fueled by 21% growth in worldwide money transfer
transactions to 89 million in 2000. Revenue for international money transfers (a
transfer either sent to or received from an international location other than
Mexico) grew 41% (47% after adjusting for the weaker euro) with transaction
growth of 50%. Domestic money transfer and Quick Collect money transfer
transactions grew near the 10% range in 2000. Western Union continues to achieve
market penetration with a 22% increase in agent locations to nearly 101,000
agent locations in 186 countries and territories. Western Union is responding to
pricing pressure from niche market competitors in certain international
corridors and Mexico.
Operating profits for 2000 grew 18% over 1999, from $580.8 million to $684.1
million. Established businesses continued to gain operating leverage on fixed
expenses through cost efficiencies, price increases in certain markets and a
decrease in Y2K spending, which were offset by price reductions in certain
markets and increased promotional and advertising spending.
Merchant Services
Revenues in the merchant services segment grew 17% to $1.8 billion in 2000
compared to $1.5 billion for 1999. Revenues were impacted positively by FDC
gaining a controlling interest in one of the Company's merchant alliances in the
third quarter of 2000, partially offset by the deconsolidation of one of the
Company's merchant alliances in the first quarter of 2000. Results for 2000
have been adjusted to reflect the consolidation of the alliance for the full
year. Total merchant dollar volume grew 30% (14% adjusted for Paymentech
[acquired in July 1999] and Norwest [contributed to the Wells Fargo alliance in
January 2000]) over 1999 to $425 billion in 2000. Revenue growth was driven by
growth in the dollar volume and transactions processed. Revenues grew more
slowly than dollar volume processed because the increased dollar volume also
includes volume of the Company's alliances, which generally are accounted for
under the equity method of accounting.
Operating profits increased 23% to $507.9 million for 2000 from $411.8 million
for 1999. This improvement is reflective of strong volume and increased margins
due to the impact of significant cost reduction initiatives and a significant
decrease related to Y2K spending.
Key elements of FDC's strategy in the merchant services segment involve its
joint venture alliances with its bank partners and implementation of
International, debit and Internet commerce initiatives. Each joint venture
alliance requires successful management of the relationship between the Company
and the bank partner in that alliance. The alliance strategy could be affected
by further consolidation among financial institutions. Merchant services expects
that the shift from cash and check transactions to electronic and card
transactions will continue to benefit the alliances' internal growth. Internet
commerce
14
also presents a growth opportunity for the merchant services segment. While
Internet commerce currently accounts for a small portion of the segment's
transactions, it is growing rapidly.
Card Issuing Services
Total revenues in the card issuing services segment grew 6% for 2000 to $1.5
billion as compared to $1.4 billion for 1999. Card accounts on file as of
December 31, 2000 were approximately 310 million, an increase of 19%. Revenue
growth is expected to be relatively flat in 2001 due in part to deconversions
and pricing concessions, which often result in term extensions, offset by the
increase in accounts on file due to internal growth and scheduled conversions.
The Company has a pipeline of more than 40 million retail and bankcards to be
converted, with most scheduled to convert in 2002 and 2003. Certain milestones
for core system developments have been delayed due to, among other things,
start-up of the Wal-Mart portfolio and conversion of the JCPenney portfolio,
which have added approximately 45 million card accounts on file, and recent
finalization of the plan for the future architectural foundation for the card
issuing services platform. While management is confident that these system
developments will be completed, the delay in system development has delayed
certain conversions, which are contingent on such system development, and may
impact the continuation of performance on certain significant contracts.
Management has considered the conversion delays in its stated revenue and
earnings objectives and does not expect that the conversion delays will have any
effect on revenue or earnings objectives for future years for either the card
issuing services segment or the Company as a whole.
Due to the adoption of SAB 101 in 2000, card issuing services revenues and
operating expenses each were reduced by $32.9 and $59.9 million for 2000 and
1999, respectively, to reflect certain transactions on a net versus gross basis.
Operating profit for the card issuing services segment increased 15% to $307.1
million in 2000 from $266.0 million in 1999. Improved performance was driven by
cost management initiatives, including workforce reductions in the first and
third quarters of 2000, and productivity improvements that resulted in
significant operating margin improvements (from 19.1% in 1999 to 20.7% for
2000). Adoption of SAB 101 in 2000 had no impact on the reported operating
profits for the card issuing services segment.
Emerging Payments
Revenues for the emerging payments segment were $74.9 million and $70.9 million
for 2000 and 1999, respectively, representing revenues of the CashTax operating
company that was contributed to the eONE Global venture, discussed previously.
This operating company was previously reported in the payment services segment.
The full year operating profit was $5.3 million for 2000 and $11.2 million for
1999. Results primarily reflect operating profits of CashTax offset by
increased spending on e-commerce initiatives in 2000 over 1999.
All Other and Corporate
Revenues from other operations decreased 33% from 1999 to $184.3 million.
Excluding the iMall/Excite@Home gain (discussed below), revenue declined 28%.
Much of the decrease was attributed to a reduction in in-store bank branch
installations, price and volume declines and the loss of a significant contract
at IBT, Call Interactive and Teleservices, respectively.
Operating profits decreased in 2000 from $46.0 million profit in 1999 to a $14.3
million loss for 2000. This decline resulted from lower revenues from several
operating units, the discontinuance of a significant contract and increased
spending on certain corporate initiatives.
Restructuring, Business Divestitures, Impairment and Litigation
During 2000, the Company incurred net restructuring charges of $75.9 million;
$2.6 million related to payment services, $69.6 million related to card issuing
services and $3.7 million related to all other and corporate. The charges
represent net facility closure costs of $5.7 million and severance accruals of
$70.2 million for approximately 3,800 employees resulting from the downsizing of
certain operations. These restructuring activities resulted in cost savings of
approximately $40 million in 2000. The full amount of the annualized savings is
expected to be approximately $85 million with realization expected to commence
in the third quarter of 2001. These cost savings are expected to be
substantially offset by reductions in revenues as previously discussed.
15
In January 2000, the Company completed the sale of its Hogan Information
Services business unit to Dolan Media Company for cash proceeds of $30.5
million. As a result of this transaction and the sale of another small
business, the Company recognized a gain totaling $5.4 million in 2000.
In August 2000, the Company accrued $12.0 million based on the preliminary
settlement of a pending lawsuit.
In September 2000, the Company signed a letter of intent to sell a small
subsidiary and, as a result, recorded an impairment charge of approximately $5.4
million. In addition, the Company recorded a $2.8 million asset impairment
charge related to a customer contract. During 2000 the Company also recorded a
benefit of $9.6 million related to the true-up of certain previously recorded
divestiture-related accruals (reported on the "Restructuring, Business
Divestitures, Litigation and Impairment" line on the Consolidated Statements of
Income). Restructuring, merger and divestiture accruals are reviewed each
period. As with the above, balances in excess of anticipated requirements are
reversed through the same Statement of Income caption in which they were
originally recorded.
Also in September 2000, the Company completed the sale of its interest in
TransPoint LLC to Checkfree Holdings Corporation ("Checkfree"). As a result of
this transaction, FDC recognized a pre-tax gain of $186.0 million.
The Company wrote-down its investment in Excite@Home by recording a non-cash,
non-operating $33.6 million charge at year-end. This investment arose from the
1999 merger-related exchange of the Company's investment in iMall shares for
Excite@Home shares which resulted in a non-cash $19.8 million gain.
The net total effect of all the 2000 restructuring, business divestitures,
litigation and impairment items was a benefit of $71.3 million on pre-tax profit
and $46.0 million on after-tax profit, or $0.11 per share.
Results of Operations
1999 Compared with 1998
The Company derives revenues in each of its reportable segments principally
based on the number of transactions processed, a percentage of dollar volume
processed or on a combination thereof. Total revenues in 1999 increased 9% to
$5.5 billion, compared with $5.0 billion in 1998. The Company's internal growth
rate in revenues over 1998 (excluding the effects of the iMall/Excite@Home
merger-related gain and business acquisitions and divestitures) was 12%.
Product sales and other revenues increased 7% from $123.7 million in 1998 to
$132.9 million in 1999. The largest component of the increase for the year was
attributable to an increase in incentive payments received from one of the
Company's merchant alliance partners and the recognition of a merger exchange
gain related to the iMall/Excite@Home transaction discussed below. These
increases were offset partially by a reduction in the number of branch
installations at IBT. Revenues from product and software sales occur in all
segments, and the aggregate of such revenues declined in 1999 principally due to
business divestitures.
Consolidated operating expenses increased 9% (to $3.5 billion) in 1999 as
compared to 1998, consistent with the growth in revenues. Consolidated selling,
general and administrative expenses increased 8% during 1999 (to $794.2
million). Company-wide cost containment and reduction initiatives and profit
improvement programs largely offset the effect of increased investment spending
in the payment services and card issuing services segments and increased Year
2000 ("Y2K") expenses. Y2K expenses for 1999 were approximately $98 million
compared to $75 million in 1998.
Interest expense remained flat at $104 million in 1999 and 1998 reflecting a
decrease in the average interest rate offset by an increase in the average debt
balance in 1999 compared to 1998. Year-end 1999 borrowings were $1.58 billion as
compared to $1.57 billion at year-end 1998.
FDC's full year effective tax rate for 1999 was 34.3%, compared to 34.6% in
1998. Excluding the effects of the nonrecurring items (i.e., restructuring,
divestitures, litigation, impairment and iMall gain) in both years, the
effective tax rate decreased 3.0 percentage points to 29.4% in 1999 compared to
32.4% in 1998. This decrease resulted from an increase in the amount of
nontaxable interest generated from investments in debt instruments issued by
state and local governments and a lower effective state tax rate.
Net income of $1,199.7 million in 1999 increased from $465.7 million in 1998.
Excluding nonrecurring items in both years, 1999's net income of $769.9 million
increased approximately 10% over 1998's net income of $697.2 million, and net
income margins increased to 13.9% from 13.6%. Diluted earnings per common share
increased from $1.04 in 1998 to $2.76 in
16
1999. Excluding non-recurring items in both years, diluted earnings per share
increased approximately 13% to $1.77 in 1999 compared with $1.56 in 1998.
Payment Services
Total revenues in the payment services operating segment increased 19% in 1999
to $2.0 billion compared to $1.6 billion in 1998 on a pre-tax equivalent basis.
This revenue growth reflects continuing strong underlying volume increases
principally related to international and commercial money transfers. Total money
transfer revenues increased 22% to $1.6 billion in 1999, driven by aggregate
money transfer transaction growth of 20% to 73.5 million combined with an
increase in revenue per money transfer transaction. At December 31, 1999 the
agent base had grown 48% (as compared to December 31, 1998) to over 82,000
agents in 176 countries and territories.
Operating profits for the year grew 18%, from $493.4 million in 1998 to $580.8
million in 1999. Established product lines continued to gain operating leverage
through cost efficiencies and price increases in certain markets, offset by
price declines in the Mexican markets, increased Y2K spending and investment in
new businesses and products.
Merchant Services
Revenues in the merchant services segment grew 11% in 1999 to $1.5 billion from
$1.4 billion in 1998. This growth in revenues is attributable to significant
increases in merchant dollar volume processed, which grew 30% to $328 billion in
1999. Including results for Paymentech comparably for the last five months in
both years, dollar volume growth would have been 18% in 1999 compared to 1998.
Revenue growth was driven by the growth in dollar volume processed and the
impact of revenue enhancement initiatives implemented in the second half of 1998
and early 1999. Revenues grew more slowly than dollar volume processed because
the increased dollar volume also includes volume of the Company's alliances,
which are generally accounted for under the equity method of accounting.
Operating profits grew 25% to $411.8 million in 1999 as compared to $329.1
million in 1998. Operating margins were 26.6% in 1999 as compared to 23.6% in
1998. This improvement is reflective of strong volume and the impact of revenue
enhancement initiatives implemented in late 1998 and early 1999 and significant
cost reduction, somewhat offset by an increase in Y2K expenses.
Key elements of FDC's strategy in the merchant services segment involve its
joint venture alliances with its bank partners and implementation of Internet
commerce initiatives. Each joint venture alliance requires successful management
of the relationship between the Company and the bank partner in that alliance.
Moreover, the alliance strategy could be affected by further consolidation among
financial institutions. Internet commerce presents a growth opportunity for the
merchant services segment. While Internet commerce currently accounts for a
small portion of the segment's transactions it is growing rapidly.
Card Issuing Services
Total revenues in the card issuing services segment grew 11% to $1.4 billion in
1999 as compared to $1.3 billion in 1998. Growth in underlying volumes
continued to be strong and 1999 saw significant increases in accounts on file.
Card accounts on file as of December 31, 1999 were 260 million (a 23% increase
from December 31, 1998). Domestic card accounts grew to 233 million (25% growth)
largely due to the conversion of a record number of accounts in 1999
(approximately 42 million accounts) including the First Chicago bankcard
portfolio now owned by Bank One, the First Consumers retail card portfolio
(including the Spiegel and Eddie Bauer brands) and First Union. International
card accounts on file grew 6% to 27 million. Revenues grew more slowly than
accounts on file due to an increased proportion of accounts processed for large
issuers with lower than average prices and growth in debit and retail card
accounts on file which generate lower revenue per account. Consolidation among
financial institutions has led to an increasingly concentrated client base,
which results in a changing client mix towards larger, highly sophisticated
customers. The effects on pricing, client mix and product mix of providing
services to this increasingly concentrated industry will most likely continue to
cause revenues to grow more slowly than accounts on file.
Operating profits increased 4%, from $255.5 million in 1998 to $266.0 million in
1999, and operating margins were 19.1% in 1999 as compared to 20.3% in 1998.
Increased systems investments and non-capitalizable expenses incurred as a
result of 1999's record number of client conversions was partially offset by
operating leverage gained from strong volume trends.
17
Emerging Payments
Revenues for the emerging payments segment were $70.9 million and $57.6 million
for 1999 and 1998, respectively, representing revenue growth of the CashTax
operating company that was contributed to the eONE Global venture in 2000,
discussed previously. This operating company was previously reported in the
payment services segment.
The full year operating profit was $11.2 million for 1999 and $13.4 million for
1998. Results reflect operating profits of the CashTax operating company in
the segment offset by spending on e-commerce initiatives.
All Other and Corporate
Revenues from all other continuing operations increased 2% in 1999 to $276.4
million compared to $270.4 million in 1998. Excluding the gain on iMall
(discussed below), revenues declined 5% to $256.6 million. Call Interactive
revenue grew 9% and was offset by a 17% decline in revenues at IBT due to a
decline in in-store bank branch installations.
Operating profits declined in 1999 from $92.0 million in 1998 to $46.0 million
and, excluding the gain on iMall, operating profit declined to $26.2 million in
1999. Operating profit declined at TeleServices due to increased expenses
associated with the ramp up of business related to a start-up contract.
Additionally, the extent and timing of certain corporate initiatives focused on
improving the effectiveness of the Company's overall operations increased
corporate expenses. Lastly, the Company recorded its proportionate share of
losses associated with a specialty services joint venture.
In the third quarter of 1999, the Company announced a strategic marketing
agreement between Excite@Home and FDC to enable merchants to quickly establish
an online commerce storefront with transaction capabilities and access to
Excite's daily users. This agreement coincided with Excite's agreement to
acquire iMall, Inc., in which FDC held an 11% ownership stake before the closing
of this transaction. As a result of this transaction FDC recognized a gain of
$19.8 million ($12.2 million after tax) in fourth quarter 1999 results.
Restructuring, Business Divestitures, Litigation and Impairment
In April 1999, the Company sold Innovis Inc. (formerly Consumer Credit
Associates, Inc.) to CBC Companies, Inc. for $20 million. Results for second
quarter 1999 included recognition of a pre-tax benefit of $24.5 million ($40.0
million after tax) for Innovis that related primarily to the receipt of the net
proceeds from its sale.
In May 1999, the Company sold its EBP Life business unit for cash proceeds of
$14.5 million. As a result of this transaction FDC recorded a gain of $4.5
million in the second quarter of 1999.
In July 1999, the Company completed the sale of its Donnelley Marketing
subsidiary to infoUSA for cash proceeds of approximately $200 million. As a
result of this transaction a loss of $29.8 million was recognized.
In May 1999, the Company announced that its Western Union business unit received
preliminary approval for a proposed settlement of all claims in several class
action lawsuits pertaining to the Company's U.S.-to-Mexico money transfer
business. Under the terms of the proposed settlement, FDC will establish a
charitable fund for the advancement of Mexican and Mexican-American causes in
the amount of $4 million. In addition, Western Union will issue discount coupons
to its customers who transferred money to Mexico from January 1, 1987 to August
31, 1999. FDC recorded a charge of $36.1 million in 1999 to reflect legal fees,
the charitable fund and other outside administrative costs in connection with
the settlement. Future discounts related to coupon redemption will be recorded
as incurred. At December 31, 1999, the remaining accrual was $22.5 million and
at December 31, 2000 it was $18.3 million.
In September 1999, the Company recorded a loss of $13.5 million related to the
termination of a specialty services joint venture. The charge consisted of
severance accruals for approximately 60 employees of $7.0 million and other
accrued exit costs (primarily a termination fee) of approximately $6.5 million.
At December 31, 1999, the remaining accrual was $0.8 million and at December 31,
2000 it was $1.0 million.
In December 1999, the Company sold its Investor Services Group subsidiary to PNC
Bank Corp for cash proceeds of approximately $1.1 billion. This sale allows FDC
to further concentrate its efforts on electronic payment services and e-commerce
solutions. As a result of this sale, the Company recorded a gain of $744.6
million and realized net after-tax cash proceeds of approximately $725.0
million.
18
In 1999, the Company recorded a benefit of $21.6 million resulting from the
reversal of restructuring, merger and divestiture accruals (reported on the
"Restructuring, Business Divestitures, Litigation and Impairment" line on the
Consolidated Statements of Income). Restructuring, merger and divestiture
accruals are reviewed each period. As with the above, balances in excess of
anticipated requirements are reversed through the same Statement of Income
caption in which they were originally recorded. In 1999, the reversals resulted
from favorable resolution of contingencies and changes in facts and
circumstances.
The net total effect of all the 1999 business divestitures, litigation and
impairment items was a benefit of $715.8 million on pre-tax profit and $417.6
million on after tax profit, or $0.96 per share.
During the first quarter 1998, the Company acquired Ceridian Corporation's
Gaming Services division (renamed FDFS) and simultaneously sold to Ceridian its
NTS transportation services unit resulting in a pre-tax gain of $28.5 million.
In the third quarter, the Company contributed the assets of FDFS to a gaming
services joint venture formed among FDC, BA Merchant Services, Inc. and USA
Processing ("BMCF"). No gain or loss was recorded on this transaction.
During the second quarter of 1998, the Company amended its agreement with HSBC
Holdings, plc ("HSBC") which revised the scope of services to be provided to
HSBC. As a result of this amendment and because of difficulties in the
development process in Hong Kong, which resulted in delays to the conversion
date and, consequently, significant unanticipated costs, the Company determined
that total estimated costs under the amended contract would exceed anticipated
revenues. Accordingly, a provision of $125.2 million was recorded in the second
quarter for these estimated net losses (reported on the "Provision for loss on
contract" line in the Consolidated Statements of Income). In September 1998, the
Company announced the termination of its Hong Kong card processing contract with
HSBC. The loss contract provision was fully utilized for costs associated with
the contract termination. Such costs include the write-off of $72.5 million of
intangible assets as of June 30, 1998, $14.5 million of costs incurred from June
30, 1998 to contract termination date in fulfillment of contractual obligations,
$5.3 million of fixed asset write-offs, $8.9 million of wind down costs and
$24.0 million designated for an Australian card processing contract. The $8.9
million of wind down costs included $5.9 million of salary and facility cost
during the wind down period and $3.0 million of other exit type costs such as
severance and lease exit costs. The termination of the HSBC contract resulted in
an Australian card processing contract becoming a loss contract due to the
Australian card processing contract now bearing the full cost of operating the
Asian processing platform rather than sharing such costs with HSBC. The
remaining HSBC provision was $19.1 million at year-end 1998, $1.1 million at
year-end 1999 and zero at year-end 2000.
Also in the second quarter of 1998, the Company determined that approximately
$38.5 million of platform development costs related to the HSBC project and
other potential non-U.S. clients may not be recoverable in the near to medium
term, and thus were written off (reported on the "Restructuring, business
divestitures, litigation and impairment, net" line in the Consolidated
Statements of Income). Recoverability became unlikely with the loss of the HSBC
contract profitability and the diminished prospects for previously anticipated
new non-U.S. clients.
During the fourth quarter of 1998 the Company recorded a $146.4 million charge
to shut down Innovis, Inc. (formerly Consumer Credit Associates, Inc.), the
Company's consumer credit reporting business (reported on the "Restructuring,
business divestitures, litigation and impairment, net" line in the Consolidated
Statements of Income). The decision to close Innovis was made in the fourth
quarter after an in-depth study resulted in the conclusion that the effort
required to make the Innovis platform commercially competitive would not provide
an adequate return on the Company's investment. All operations ceased on
December 31, 1998 except for limited activities to fulfill contractual
commitments. The charge included writing off intangible assets of $133.1
million, fixed assets of $3.8 million and accrued exit costs of $9.5 million.
The accrued exit costs included severance for all 145 Innovis employees at a
cost of $5.7 million and various other expenses such as facility lease costs
(net of expected sublease revenue), obligations to fulfill vendor agreements or
termination penalties and other shutdown activities. No charges were made
against the exit cost accrual in 1998. The remaining exit cost accrual at
December 31, 1999 was $6.2 million and at December 31, 2000 was $4.2 million.
In addition to the above, the Company recorded 1998 restructuring charges of
$35.7 million; $19.0 million related to merchant services, $9.6 million related
to card issuing services and $7.1 million related to Corporate. The charges
included a provision of $20.0 million for severance related to 810 employees, a
provision of $9.7 million for facility closure and related costs and $6.0
million for settlement of a legal matter associated with the merger with FFMC.
As of December 31, 2000 the remaining severance accrual was $0.7 million and the
facility closure accrual balance was $4.4 million versus balances of $0.8
million and $3.9 million at December 31, 1999, respectively and $7.2 million and
$7.3 million at December 31, 1998, respectively. The Company had other
impairment charges of $33.4 million of which $2.2 million related to card
issuing services, $10.0 million related to facility closures and terminated
conversion efforts in merchant services and $21.2 million related to software in
the corporate and other category. A change in strategic direction by certain of
the Company's customers resulted in $15.1 million of software not being
recoverable in the near to medium term. The remaining $6.1
19
million software impairment related to the abandonment of certain development
efforts where the commercial viability of the planned product or service
offering became doubtful. These charges were partially offset by gains of $31.6
million primarily related to the divestitures of First Image and VIPS.
The net total effect of all the 1998 restructuring, business divestitures,
litigation, impairment and loss contract items was a charge of $319.1 million on
pre-tax profit and $231.5 million on after tax profit, or $0.52 per share.
Economic Fluctuations
Although FDC cannot precisely determine the impact of inflation on its
operations, the Company does not believe that it has been significantly affected
by inflation. For the most part, the Company has looked to operating
efficiencies from scale and technology, as well as decreases in technology and
communication costs to offset increased costs of employee compensation and other
operating expenses. In addition, a portion of FDC's service revenues are based
on a percentage of dollar volume processed, partially insulating operating
margins on these services from the effects of inflation.
FDC's business is somewhat insulated from economic fluctuations due to recurring
service revenues from long-term relationships. The Merchant business is the
least insulated from economic slow downs as its revenue is driven by both dollar
volume and transactions and a severe downturn of the economy could reduce both
dollar volume and transactions processed. However, the Company has noted, and
the December 2000 Nilson report shows, a secular trend in the shift in payment
methods from cash and check to electronic and card based payments. The secular
trend is accelerating on a year over year comparison. This continuing shift is
expected to help offset the effects of an economic slowdown. Portions of the
Company's businesses 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.
Forward-Looking Statement
The Company has a long-term objective to achieve growth in revenues of 13% - 16%
and earnings per share of 14% - 17% per year, compounded. The Company expects
to deliver earnings per share in 2001 in the range of $2.44 to $2.50. In
addition, acquisitions are an important part of the Company's strategy. The
Company expects acquisitions to add several percentage points to its compounded
growth rate over time, although such additional growth may not come equally in
each year.
All forward-looking statements are inherently uncertain as they are based on
various expectations and assumptions concerning future events and they are
subject to numerous known and unknown risks and uncertainties which could cause
actual events or results to differ materially from those projected. Important
factors upon which the Company's forward-looking statements are premised
include: (a) continued growth at rates approximating recent levels for card-
based payment transactions, consumer money transfer transactions and other
product markets; (b) successful conversions under service contracts with major
clients; (c) renewal of material contracts in the Company's business units
consistent with past experience; (d) timely, successful and cost-effective
implementation of processing systems to provide new products, improved
functionality and increased efficiencies particularly in the card issuing
services segment; (e) continuing development and maintenance of appropriate
business continuity plans for the Company's processing systems based on the
needs and risks relative to each such system; (f) absence of consolidation
among client financial institutions or other client groups which has a
significant impact on FDC client relationships and no material loss of business
from significant customers of the Company; (g) achieving planned revenue growth
throughout the Company, including in the merchant alliance program which
involves several joint ventures not under the sole control of the Company and
each of which acts independently of the others, and successful management of
pricing pressures through cost efficiencies and other cost management
initiatives; (h) no material slowing of economic conditions or consumer
spending; (i) anticipation of and response to technological changes,
particularly with respect to e-commerce; (j) attracting and retaining qualified
key employees; (k) no imposition of a Value Added Tax on third-party credit card
processing services by the European Union ("EU"), which could put credit card
processing outsourcers at a competitive disadvantage to in-house solutions in
the EC; (l) no unanticipated changes in laws, regulations, credit card
association rules or other industry standards affecting FDC's businesses which
require significant product redevelopment efforts, reduce the market for or
value of its products or render products obsolete; (m) continuation of the
existing interest rate environment, avoiding increases in agent fees related to
the Company's consumer money transfer products and the Company's short-term
borrowing costs (see discussion of market risk in ITEM 7a); (n) absence of
significant changes in foreign exchange spreads on retail money transfer
transactions, particularly between the United States and Mexico, without a
corresponding increase in volume or consumer fees; (o) no unanticipated
developments relating to previously disclosed lawsuits against Western Union
inter alia, violation of consumer protection laws in connection with advertising
the cost of money transfers to Mexico; (p) successfully managing the potential
20
both for patent protection and patent liability in the context of rapidly
developing legal framework for expansive software patent protection and (q)
continued political stability in countries in which Western Union has material
operations.
Variations from these assumptions or failure to achieve these objectives could
cause actual results to differ from those projected in the forward-looking
statements. Due to the uncertainties inherent in forward-looking statements,
readers are urged not to place undue reliance on these statements. In addition,
FDC undertakes no obligation to update or revise forward-looking statements to
reflect changed assumptions, the occurrence of unanticipated events, or changes
to projections over time.
Capital Resources and Liquidity
FDC continues to generate significant cash flow from operating activities,
aggregating $1.2 billion in 2000 and $1.3 billion in 1999. The 2000 operating
cash flow was produced primarily from net income of $929.6 million adjusted for
depreciation and amortization expense of $588.8 million, offset by tax payments
of approximately $300 million related to the sale of ISG in the fourth quarter
of 1999 and by non-cash and non-operating items totaling $122.4 million
(primarily restructuring, business divestitures, litigation and impairment
items). Excluding the impact of the ISG related tax payment, cash flow from
operations increased in 2000 over 1999. FDC utilized this cash flow primarily
to reinvest in its existing businesses, to fund treasury stock purchases and to
contribute to the financing of acquisitions.
FDC reinvests cash in its existing businesses primarily to expand its processing
capabilities through property and equipment additions and to establish customer
processing relationships through initial contract payments and costs for
conversion and systems development. Capitalized amounts for these cash outlays
totaled $292.4 million in 2000 compared with $430.3 million in 1999. The Company
expects that these outlays will increase in 2001 to a level approaching 1999
expenditures.
Overall, FDC's operating cash flow for 2000 exceeded its investing activities
associated with additions to property and equipment and capitalized contract and
systems development costs by $888.8 million as compared to $889.1 million in
1999. This cash source contributed to funds utilized for business acquisitions
and treasury stock purchases.
Cash outlays for acquisitions in 2000 totaled $52.9 million (compared to $479.8
million in 1999). The Company also paid $47.3 million relating primarily to
certain of its alliance programs with bank clients in merchant processing.
The Company's financing activities include net borrowings, proceeds from stock
option exercises, share repurchases under the Board authorized programs
described below and for purposes of meeting employee benefit programs and
dividend payments. Net cash used in financing activities was $931.6 million
compared to $943.6 million in 1999.
In 2000, the Company made treasury stock purchases of $1,509.8 million including
purchases under the stock buyback programs discussed below. Proceeds from stock
option exercises totaling $251.9 million and a $135 million cash infusion from
iFormation Group related to the formation of eONE Global, a consolidated
subsidiary, partially offset these outlays. The Company also continued its
practice of paying quarterly cash dividends, resulting in $32.3 million of cash
payments for the year to the Company's common stockholders.
In July 1999, the Board of Directors authorized management to purchase $750
million of its outstanding common stock. The Company completed utilization of
the $750 million authorization during the first quarter of 2000. A total of
16.7 million shares were repurchased under this program. In May 2000, the Board
of Directors authorized a $1 billion stock repurchase. The Company repurchased
18.1 million of its common shares at a cost of approximately $836.9 million
during 2000 under this program. In December, the Board of Directors authorized
an additional $500 million stock repurchase. Funding for additional purchases
under this authorization will come from operating cash flows.
The Company has two outstanding shelf registration facilities, one providing for
the issuance of debt and equity securities up to $1.0 billion in the aggregate
(of which $525 million was available at year-end, see discussion below) and the
other providing for the issuance of approximately 10 million shares of the
Company's common stock in connection with certain types of acquisitions.
Included in cash and cash equivalents on the Consolidated Balance Sheet at
December 31, 2000 is $70 million related to required investments of cash in
connection with the Company's merchant card settlement operation. FDC has
remaining available short-term borrowing capability of approximately $569.9
million at December 31, 2000 under the Company's commercial paper program and
uncommitted bank credit lines. To provide additional liquidity in early 2000 in
the event of a business disruption due to Y2K problems, the Company established
a $1 billion credit facility that became effective on January 3, 2000. This
facility was not used and was cancelled on January 31, 2000.
21
On February 28, 2001, the Company issued $525 million of 2% Senior Convertible
Contingent Debt Securities due 2008. The net proceeds of the sale will be used
to repay outstanding commercial paper and for general corporate purposes. This
issuance reduced the amount available under shelf registrations to zero.
As an integral part of FDC's information processing services for payment
transactions, FDC receives funds from instruments sold in advance of settlement
with payment recipients. These funds (referred to as "settlement assets" on
FDC's consolidated balance sheet) are not utilized to support the Company's
operations. However, the Company does have the opportunity to earn income from
investing a portion of these funds. The Company maintains a portion of its
settlement assets in highly liquid investments (classified as cash equivalents
within settlement assets) to fund settlement obligations.
The Company believes that its current level of cash and financing capability
along with future cash flows from operations are sufficient to meet the needs of
its existing businesses. However, the Company may from time to time seek longer-
term financing to support additional cash needs or reduce its short-term
borrowings.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), as amended. SFAS 133 requires companies to
record derivatives on the balance sheet as assets or liabilities at fair value.
The Company has evaluated the impact of SFAS 133, as amended, on the Company's
future earnings and financial position. The Company modified its hedging
strategies to reduce potential ineffectiveness that would create earnings
volatility and believes that the adoption of SFAS 133 will not have a material
effect on earnings. The adoption of SFAS 133 on January 1, 2001 resulted in a
net of tax transition adjustment loss of $24.8 million recognized in the
Accumulated Other Comprehensive Income component of stockholders' equity and a
net of tax loss of $1.7 million recognized in the Statement of Income.
In December 1999, the SEC released Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB 101"), which provides guidance on the
recognition, presentation, and disclosure of revenue in financial statements
filed with the SEC. The Company adopted SAB 101 in the third quarter of 2000
and, as a result, the Statements of Income for all prior periods have been
restated to reflect the netting of certain revenues and expenses that were
previously presented gross. The adoption of SAB 101 only impacted the card
issuing services segment.
ITEM 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates. The
Company's assets include both fixed and floating rate interest bearing
securities. These investments arise primarily from the Company's sale of payment
instruments (principally official checks and money orders). The Company invests
the proceeds from the sale of these instruments, pending the settlement of the
payment instrument obligation. The Company has classified these investments as
available-for-sale. Accordingly, they are carried in the Company's consolidated
balance sheet at fair market value. A portion of the Company's payment services
business involves the payment of commissions to selling agents that are computed
based on short-term variable rates.
To the extent that the Company does not pay commissions to its selling agents,
or invests the proceeds from the sale of payment instruments in floating rate
investments, interest rate risk is nonexistent or minimal. The unmatched
position, which is the amount of fixed income investments upon which the Company
also pays the selling agent a commission based on short-term interest rates, is
the amount which subjects the Company to interest rate risk arising from changes
in short-term interest rates.
The Company's objective in managing interest rate risk is to mitigate the risk
that earnings and the market value of the investments could be adversely
impacted by changes in interest rates. The Company has developed a risk
management program to quantify this risk utilizing advanced portfolio modeling
techniques. The Company has hedged a portion of this risk through the use of
interest rate swap agreements which transform the variable rate commission
payments to a fixed rate.
The Company's interest sensitive liabilities are its debt instruments consisting
of commercial paper, fixed rate medium-term notes, and long-term debt
securities.
A 10% proportionate increase in interest rates in 2001, as compared to the
average level of interest rates in 2000, would result in a decrease to pre-tax
income of approximately $14.1 million. Of this decrease, $8.0 million relates to
expected
22
investment positions, commissions paid to selling agents, growth in new
business, and the effects of swap agreements. The remaining $6.1 million
decrease primarily relates to the Company's expected balance of short-term
variable rate commercial paper. Conversely, a corresponding decrease in interest
rates would result in a comparable improvement to pre-tax earnings.
A 10% proportionate increase in interest rates in 2000, as compared to the
average level of interest rates in 1999, would have resulted in a decrease to
pre-tax income of approximately $10.6 million. Of this decrease, $8.0 million
takes into consideration expected investment positions, commissions paid to
selling agents, growth in new business and the effects of swap agreements. The
remaining $2.6 million decrease is primarily caused by the Company's expected
balance of short-term variable rate commercial paper. Conversely, a
corresponding decrease in interest rates would have resulted in a comparable
improvement to pre-tax earnings.
ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA. See pages F1 - F38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers
The following table sets forth certain information regarding the executive
officers and directors of the Company:
Name Age Position
- ---- --- --------
Henry C. Duques 57 Chairman of the Board and Chief Executive Officer
Eula L. Adams 51 Senior Executive Vice President
David P. Bailis 45 Executive Vice President
Charles T. Fote 52 President, Chief Operating Officer and Director
Kimberly S. Patmore 44 Executive Vice President and Chief Financial Officer
Pamela H. Patsley 44 Senior Executive Vice President
Alan M. Silberstein 53 Executive Vice President
Michael T. Whealy 48 Executive Vice President, Secretary, General Counsel
and Chief Administrative Officer
Courtney F. Jones 61 Director
Robert J. Levenson 59 Director
James D. Robinson III 65 Director
Charles T. Russell 71 Director
Bernard L. Schwartz 75 Director
Joan E. Spero 56 Director
Garen K. Staglin 56 Director
Arthur F. Weinbach 57 Director
The Board of Directors of the Company is divided into three classes serving
staggered three-year terms. The terms of office of Mr. Duques, Mr. Fote and Ms.
Spero will expire in 2001, the terms of office of Mr. Robinson, Mr. Schwartz,
Mr. Staglin and Mr. Weinbach will expire in 2002, and the terms of office of Mr.
Jones, Mr. Levenson and Mr. Russell will expire in 2003. 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. Jones (Chairman), Ms. Spero, and Mr. Weinbach serve on the Audit
Committee of the Board of Directors. Mr. Russell (Chairman), Mr. Schwartz, and
Ms. Spero 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 and Chairman of the Board of eONE Global, LLC, a majority-owned
subsidiary of the Company, since November 2000. He joined American Express in
September 1987 as President and Chief Executive Officer of the Data Based
Services Group of American Express Travel Related Services Company, Inc.
("TRS"), the predecessor of the Company, and served in that capacity until April
1989. Mr. Duques was Group President Financial Services and a member of the
Board of Directors of Automatic Data Processing, Inc. ("ADP") from 1984 to 1987.
He is a director of theglobe.com, Unisys Corporation and Checkfree Corporation,
as well as a member of the Board of Trustees of The George Washington
University.
23
Charles T. Fote has been a Director of the Company since May 2000 and President
and Chief Operating Officer of the Company since September 1998. He served as
Executive Vice President of the Company from its initial public offering in
April 1992 until September 1998. He was a Director of the Company from the time
of its formation in April 1989 as a subsidiary of American Express Company until
its initial public offering. Mr. Fote also served as President of Integrated
Payment Systems ("IPS") from December 1989 through December 1991. From 1985
until 1989, he was Executive Vice President of the Payment Products division of
TRS, the predecessor of IPS.
Courtney F. Jones has been a Director of the Company since April 1992. He
served as Managing Director in charge of the New World Banking Group of Bankers
Trust from December 1997 to July 1999. He was a Managing Director in Merrill
Lynch's Investment Banking Division from July 1989 to December 1990. Prior
thereto, he served as Chief Financial Officer, Executive Vice President and a
member of the Board of Directors for Merrill Lynch & Co. Inc. From February
1982 to September 1985, Mr. Jones served as Treasurer and Secretary of the
Finance Committee of the Board of Directors of General Motors Corporation. He
also was formerly a Director of General Motors Acceptance Corporation and
General Motors Insurance Company.
Robert J. Levenson has been a Director of the Company since April 1992 and he
continues to perform certain functions for the Company under the Agreement dated
June 6, 2000. He is a Managing Member of the Lenox Capital Group L.L.C.. From
1993 to 2000, Mr. Levenson was an Executive Vice President of the Company. Prior
to joining the Company, he served as Senior Executive Vice President, Chief
Operating Officer, and Member of the Office of the President of Medco
Containment Services, Inc., a provider of managed care prescription benefits.
Mr. Levenson was a Director of Medco Containment Services, Inc. from October
1990 until December 1992. From 1985 until October 1990, he was Group President
and Director of ADP. Mr. Levenson is a director of Emisphere Technologies, Inc.,
Superior Telecom, Inc. and Vestcom International, Inc.
James D. Robinson III has been a Director of the Company since April 1992 and a
Director of eONE Global, LLC, a majority-owned subsidiary of the Company, since
November 2000. He is the Chairman and Chief Executive Officer of RRE Investors,
LLC, a private information technology venture investment firm, and a General
Partner of RRE Ventures, L.P. He is also non-executive Chairman of Violy,
Byorum & Partners Holdings, LLC, a private investment firm specializing in
financial advisory and investment banking activities in Latin America. Mr.
Robinson previously served as Chairman and Chief Executive Officer and as a
Director of American Express from 1977 until February 1993. He is a Director of
Bristol-Myers Squibb Company, The Coca-Cola Company, Cambridge Technology
Partners, Sunbeam Corporation, and ScreamingMedia Inc. Mr. Robinson is a member
of the Business Council and the Council on Foreign Relations. He is Honorary
Co-Chairman of Memorial Sloan-Kettering Cancer Center, an honorary Trustee of
the Brookings Institution and Chairman Emeritus of the World Travel and Tourism
Council Institution.
Charles T. Russell has been a Director of the Company since May 1994 and a
Director of eONE Global, LLC, a majority-owned subsidiary of the Company since
November 2000. He served as President and Chief Executive Officer of Visa
International from 1984 to January 1994. Mr. Russell joined Visa in 1971. He
serves on the Board of Visitors at the University of Pittsburgh's Joseph M. Katz
School of Business.
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 leading defense
electronics business from 1972 to 1996. Mr. Schwartz is a member of the Board of
Directors of both Globalstar Telecommunications Limited, which offers global,
mobil satellite-based digital telecommunications services. In addition, Mr.
Schwartz is a member of the Advisory Council at the Paul H. Nitze School of
Advanced International Studies at Johns Hopkins University where he established
a chair in political economy, Director of Reliance Group Holdings, Inc., a
trustee of Mount Sinai-New York University Medical Center, a trustee of
Thirteen/WNET and vice chairman of the New York Film Society.
Joan E. Spero has been a Director of the Company since March 1998. She has been
President of the Doris Duke Charitable Foundation since January 1997. Ms. Spero
was Undersecretary of State for Economic, Business and Agricultural Affairs from
1993 to 1997. From 1981 to 1993, Ms. Spero held several offices with American
Express Company, the last being Executive Vice President, Corporate Affairs and
Communications. Prior to that Ms. Spero was Ambassador to the United Nations
for Economic and Social Affairs from 1980 to 1981 and she was an Assistant
Professor at Columbia University from 1973 to 1979. She is a member of the
Board of Trustees of the Brookings Institution, the Wisconsin Alumni Research
Foundation, and Columbia University. She serves as a Director/Trustee of
certain Scudder Kemper Funds. Ms. Spero was a member of the Board of Directors
of Hercules Incorporated from 1985 to 1993 and acted as Chair of the Audit and
Compensation Committees for periods of that time.
24
Garen K. Staglin has been a Director of the Company since April 1992. He has
been President and Chief Executive Officer of eONE Global, LLC, a majority-owned
subsidiary of the Company since November 2000. Mr. Staglin served as the
Chairman of the Board of Directors of Safelite Glass Corporation, a manufacturer
and retailer of auto glass, from August 1991 to September 2000 and he was the
Chief Executive Officer of Safelite Glass Corporation from August 1991 to April
1997. From April 1980 until August 1991 Mr. Staglin served as the Corporate Vice
President and General Manager of ADP's Automotive Services Group. He serves as a
Director of Quick Response Services, Inc. and several private companies. Mr.
Staglin serves on the Advisory Council of the Stanford Graduate School of
Business and as Vice President - Trustee of the American Center for Wine, Food
and the Arts.
Arthur F. Weinbach has been a Director of the Company since September 2000. He
has served as Chairman and Chief Executive Officer of Automatic Data Processing
Inc. ("ADP") since 1998. Mr. Weinbach joined ADP in 1980 and has served as an
ADP Director since 1989. He is also a Director of HealthPlan Services and
Schering-Plough Corp. as well as serving on the boards of Boys Hope, New Jersey
Seeds and the United Way of Tri-State.
Eula L. Adams was promoted to Senior Executive Vice President of the Company in
December 2000. He joined the Company in 1991 and has led operations in numerous
business units including Western Union, Teleservices and First Data Merchant
Services. Prior to joining the Company, Mr. Adams was a partner with Deloitte &
Touche.
David P. Bailis has been an Executive Vice President of the Company since
September 1996. From July 1992 until March 1998 he served as General Counsel of
the Company. He joined the Company in June 1989 and advised the Health Systems
Group and First Data Resources business units on legal matters prior to his
promotion to General Counsel. From January 1988, until joining the Company, Mr.
Bailis was a partner at the law firm of Peper, Martin, Jensen, Maichel and
Hetlage in St. Louis, Missouri.
Guy A. Battista was promoted to Executive Vice President of the Company in March
2001. Mr. Battista joined the Company in 1990 and most recently held the
position of Senior Vice President & Chief Information Officer for multiple
divisions of First Data Corporation. He serves on the Board of Advisors for the
University of Colorado at Denver helping to develop a masters program in
Information Technology.
Kimberly S. Patmore was promoted to Executive Vice President and Chief Financial
Officer of the Company in February 2000. She joined the Company in 1992 and
most recently served as Senior Vice President and Chief Financial Officer of
First Data Payment Businesses, which includes Western Union, First Data Merchant
Services and First Data Resources. Prior to joining the Company, Ms. Patmore
was with Ernst & Young.
Pamela H. Patsley was promoted to Senior Executive Vice President of the Company
in December 2000. Prior to joining the Company, Ms. Patsley served as President
and Chief Executive Officer of Paymentech, Inc., one of the largest processors
of bankcard transactions and a leading issuer of commercial cards in the nation,
from 1991 to February 2000. She is a director of Adolph Coors Company and
MessageMedia Inc.
Alan M. Silberstein joined the Company as Executive Vice President in February
2000. Mr. Silberstein previously served as a consultant to Western Union since
October 1998. Prior to that, he was Chairman and Chief Executive Officer of
Claim Services (from 1996) and Executive Vice President of Travelers Property
Casualty Corp. From 1992 to 1995, Mr. Silberstein was Executive Vice President
and Director of Retail Banking of Midlantic Corporation which has since merged
into PNC Bank Corp.
Michael T. Whealy was promoted in March 1998 to Executive Vice President,
Secretary and General Counsel of the Company and to Chief Administrative Officer
in September 1998. He joined the Company in April 1991 as Counsel of the WATS
Marketing and Teleservices business units. Mr. Whealy served as General Counsel
of First Data Resources Inc. from April 1992 until his promotion to General
Counsel of Card Services Group in 1994. Prior to joining the Company, Mr.
Whealy was a partner in the law firm of Kutak Rock in Omaha, Nebraska.
Compliance with Section 16(a) of the Exchange Act
See the Proxy Statement for the Company's 2001 Annual Meeting of Stockholders,
which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
25
See the Proxy Statement for the Company's 2001 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 2001 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 2001 Annual Meeting of Stockholders,
which information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1 Financial Statements
See Index to Financial Statements on page F-1
2 Financial Statement Schedules
See Index to Financial Statements on page F-1
3 The following exhibits are filed as part of this Annual Report or, where
indicated, were heretofore filed and are hereby incorporated by reference:
EXHIBIT NO. DESCRIPTION
- ------------ -----------
3(i) Registrant's Restated Certificate of Incorporation, as amended to date
(incorporated by reference to Exhibit 3 of the registrant's Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1995).
3(ii) Registrant's By-Laws, as amended to date (incorporated by reference to
Exhibit 3 of the registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1998).
4.1 The instruments defining the rights of holders of long-term debt
securities of the registrant and its subsidiaries are omitted pursuant
to Item 601 (b)(4)(iii)(A) of Regulation S-K. The registrant hereby
agrees to furnish copies of these instruments to the SEC upon
request.
10.1 Revolving Credit Agreement, dated as of November 3, 2000, among the
registrant, The Chase Manhattan Bank, as administrative agent, and the
Syndication Agents, Banks, Swing-Line Banks and Other Financial
Institutions Parties Thereto (incorporated by reference to Exhibit 10-1
of the registrant's Current Report on Form 8-K filed on February 21,
2001).
10.2 First Data Corporation Salary Deferral Plan (incorporated by reference
to Exhibit 10.9 of the registrant's Annual Report on Form 10-K for the
year ended December 31, 1997).
10.3 First Data Corporation 1993 Director's Stock Option Plan (incorporated
by reference to Exhibit 10.2 of the registrant's Quarterly Report on
Form 10-K for the quarterly period ended September 30, 1996).
10.4 Amendment No. 1 to the First Data Corporation 1993 Director's Stock
Option Plan dated May 10, 2000 (incorporated by reference to Exhibit
10.1 of the registrant's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2000).
10.5 Registrant's Senior Executive Incentive Plan (incorporated by
reference to Exhibit B of the registrant's Proxy Statement for its May
12, 1999 Annual Meeting).
26
10.6 Registrant's Supplemental Savings Plan 2000 (incorporated by reference
to Exhibit 4 of the Form S-8 filed by the registrant on November 10,
1999).
10.7 Form of First Data Corporation 1992 Long-Term Incentive Plan, as
amended (incorporated by reference to Exhibit A of the registrant's
Proxy Statement for its May 12, 1999 Annual Meeting).
10.8 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)).
10.9 Form of Performance Grant Agreement under the 1992 Long-Term Incentive
Plan for the period beginning January 1, 1998 (incorporated by
reference to Exhibit 10.7 of the registrant's Annual Report on Form 10-
K for the year ended December 31, 1997).
10.10 Form of Performance Grant Agreement under the 1992 Long-Term Incentive
Plan for the period beginning January 1, 1999 (incorporated by
reference to Exhibit 10.12 of the registrant's Annual Report on Form
10-K for the year ended December 31, 1998).
10.11 Form of Performance Grant Agreement under the terms of the 1992 Long-
Term Incentive Plan for the period beginning January 1, 2000
(incorporated by reference to Exhibit 10.13 of the registrant's Annual
Report on Form 10-K for the year ended December 31, 1999).
10.12(1) Form of Performance Grant Agreement under the terms of the 1992
Long-Term Incentive Plan for the period beginning January 1, 2001.
10.13 Agreement and Release between Robert Levenson and First Data
Corporation and related exhibits A, B, and C (incorporated by reference
to Exhibit 10.2 of the registrant's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 2000).
10.14 Description of Oral Contract with Garin Staglin (incorporated by
reference to Exhibit 10.3 of the registrant's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2000).
10.15(1) Promissory note dated November 10, 2000 issued by Charles T. Fote in
favor of First Data Corporation.
10.16(1) eONE Global, LP Long-Term Incentive Plan (the eONE Global, LP
California Long-Term Incentive Plan is identical in all material
respects and details to the eONE Global, LP Long-Term Incentive Plan
and is omitted pursuant to Instruction 2 to Item 601 of Regulation S-
K).
10.17(1) Exercise Notice and Share Repurchase Agreement dated as of February
1, 2001 between Garin Staglin and eONE Global, LP.
10.18(1) Secured Recourse Promissory Note dated February 1, 2001 issued by
Garen K. Staglin in favor of eONE Global, LP.
12(1) Computation in Support of Ratio of Earnings to Fixed Charges.
21 (1) Subsidiaries of the registrant.
23.1(1) Consent of Ernst & Young LLP.
(b) Reports filed on Form 8-K during the fourth quarter of fiscal 2000:
None.
(1) Filed herewith.
27
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 22, 2001
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 22, 2001
- ---------------------------
Henry C. Duques Chief Executive Officer
/s/ CHARLES T. FOTE President and Chief March 22, 2001
- ---------------------------
Charles T. Fote Operating Officer
/s/ KIMBERLY S. PATMORE Executive Vice President and March 22, 2001
- ---------------------------
Kimberly S. Patmore Chief Financial Officer
(Principal Financial Officer)
/s/ TOM MOORE Vice President and Corporate March 22, 2001
- ---------------------------
TOM MOORE Chief Financial Officer
(Principal Accounting Officer)
/s/ COURTNEY F. JONES Director March 22, 2001
- ---------------------------
Courtney F. Jones
/s/ ROBERT J. LEVENSON Director March 22, 2001
- ---------------------------
Robert J. Levenson
/s/ JAMES D. ROBINSON III Director March 22, 2001
- ---------------------------
James D. Robinson III
/s/ CHARLES T. RUSSELL Director March 22, 2001
- ---------------------------
Charles T. Russell
/s/ BERNARD L. SCHWARTZ Director March 22, 2001
- ---------------------------
Bernard L. Schwartz
/s/ JOAN E. SPERO Director March 22, 2001
- ---------------------------
Joan E. Spero
/s/ GAREN K. STAGLIN Director March 22, 2001
- ---------------------------
Garen K. Staglin
/s/ ARTHUR WEINBACH Director March 22, 2001
- ---------------------------
Arthur F. Weinbach
28
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FIRST DATA CORPORATION
INDEX TO FINANCIAL STATEMENTS
COVERED BY REPORT OF INDEPENDENT AUDITORS
(Item 14(a))
Page
----
First Data Corporation and Subsidiaries:
Consolidated Financial Statements:
Report of Ernst & Young LLP Independent Auditors....................... F-2
Consolidated Statements of Income for the Years ended December 31,
2000, 1999 and 1998.................................................... F-3
Consolidated Balance Sheets at December 31, 2000 and 1999.............. F-4
Consolidated Statements of Cash Flows for the Years ended December 31,
2000, 1999 and 1998.................................................... F-5
Consolidated Statements of Stockholders' Equity for the Years ended
December 31, 2000, 1999 and 1998....................................... F-6
Notes to Consolidated Financial Statements............................. F-7
Schedule:
Schedule II-Valuation and Qualifying Accounts.......................... F-37
All other schedules for First Data Corporation and subsidiaries have been
omitted since the required information is not present or not present in amounts
sufficient to require submission of the schedule, or because the information
required is included in the respective financial statements or notes thereto.
F-1
Report of Ernst & Young LLP Independent Auditors
The Stockholders and Board of Directors of First Data Corporation
We have audited the accompanying consolidated balance sheets of First Data
Corporation as of December 31, 2000 and 1999 and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 2000. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of First
Data Corporation at December 31, 2000 and 1999, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth herein.
Ernst & Young LLP
Denver, Colorado
January 24, 2001
F-2
FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
(in millions, except per share amounts)
REVENUES
Service revenues $5,564.2 $5,347.0 $4,923.4
Product sales and other 141.0 132.9 123.7
--------------- --------------- ---------------
5,705.2 5,479.9 5,047.1
--------------- --------------- ---------------
EXPENSES
Operating 3,501.7 3,472.3 3,179.6
Selling, general and administrative 867.3 794.2 732.4
Provision for loss on contract ---- ---- 125.2
Restructuring, business divestitures, litigation
and impairment, net (71.3) (715.8) 193.9
Interest 99.2 103.8 104.1
--------------- --------------- ---------------
4,396.9 3,654.5 4,335.2
--------------- --------------- ---------------
Income before income taxes 1,308.3 1,825.4 711.9
Income taxes 378.7 625.7 246.2
--------------- --------------- ---------------
Net income $ 929.6 $1,199.7 $ 465.7
=============== =============== ===============
Earnings per share - basic $ 2.28 $ 2.81 $ 1.05
Earnings per share - diluted $ 2.25 $ 2.76 $ 1.04
=============== =============== ===============
Weighted-average Shares Outstanding:
Basic 406.9 427.7 445.2
Diluted 414.1 435.1 448.3
See notes to consolidated financial statements.
F-3
FIRST DATA CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
(in millions)
ASSETS
Cash and cash equivalents $ 853.3 $ 1,044.0
Settlement assets 9,816.6 9,585.6
Accounts receivable, net of allowance for doubtful accounts of
$34.4 (2000) and $31.3 (1999) 970.7 908.5
Property and equipment, net 624.3 710.6
Goodwill, less accumulated amortization of $656.6 (2000) and $560.1 (1999) 2,563.3 2,480.2
Other intangibles, less accumulated amortization of $727.7 (2000) and $664.9 (1999) 1,005.6 1,002.3
Investment in affiliates 806.4 891.3
Other assets 654.9 382.3
----------- ------------
$17,295.1 $17,004.8
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Settlement obligations $ 9,773.2 $ 9,694.6
Accounts payable and other liabilities 1,964.2 1,824.4
Borrowings 1,830.0 1,578.1
----------- ------------
Total Liabilities 13,567.4 13,097.1
----------- ------------
Commitments and Contingencies
Stockholders' Equity:
Common Stock, $.01 par value; authorized 600.0 shares,
issued 448.9 shares (2000 and 1999) 4.5 4.5
Additional paid-in capital 2,292.7 2,180.7
----------- ------------
Paid-in capital 2,297.2 2,185.2
Retained earnings 3,717.1 2,964.1
Accumulated other comprehensive income (18.9) (87.7)
Less treasury stock at cost, 55.6 (2000)
and 31.0 shares (1999) (2,267.7) (1,153.9)
----------- ------------
Total Stockholders' Equity 3,727.7 3,907.7
----------- ------------
$17,295.1 $17,004.8
=========== ============
See notes to consolidated financial statements.
F-4
FIRST DATA CORPORATION
COSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
(in millions)
Cash and cash equivalents at January 1 $ 1,044.0 $ 459.5 $ 410.5
----------- ------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 929.6 1,199.7 465.7
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization 588.8 617.8 591.1
Non-operating and non-cash portion of provision for loss on contract,
restructuring, business divestitures, litigation and impairment, net (71.3) (715.8) 303.0
Other non-cash items, net (51.1) (17.7) 17.0
Increase (decrease) in cash, excluding the effects of acquisitions
and dispositions, resulting from changes in:
Accounts receivable (16.1) (63.1) (112.7)
Other assets 9.7 16.8 23.9
Accounts payable and other liabilities 39.2 (56.9) (45.4)
Income tax accounts (247.6) 338.6 26.3
----------- ------------ -----------
Net cash provided by operating activities 1,181.2 1,319.4 1,268.9
----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Current year acquisitions, net of cash acquired (52.9) (479.8) (94.2)
Payments related to other businesses previously acquired (47.3) (102.9) (107.7)
Proceeds from dispositions, net of expenses paid 35.7 1,316.3 198.0
Additions to property and equipment, net (148.8) (243.8) (325.9)
Payments to secure customer service contracts, including outlays
for conversion, and capitalized systems development costs (143.6) (186.5) (323.9)
Other investing activities (83.4) (94.6) (14.7)
----------- ------------ -----------
Net cash provided (used) in investing activities (440.3) 208.7 (668.4)
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-term borrowings, net 348.6 63.9 (174.0)
Issuance of long-term debt --- 100.0 148.9
Principal payments on long-term debt (125.0) (158.0) (154.9)
Proceeds from issuance of common stock 251.9 189.7 83.6
Proceeds from formation of eONE Global 135.0 --- ---
Purchase of treasury shares (1,509.8) (1,104.7) (419.4)
Cash dividends (32.3) (34.5) (35.7)
----------- ------------ -----------
Net cash used for financing activities (931.6) (943.6) (551.5)
----------- ------------ -----------
Change in cash and cash equivalents (190.7) 584.5 49.0
----------- ------------ -----------
Cash and cash equivalents at December 31 $ 853.3 $ 1,044.0 $ 459.5
=========== ============ ===========
See notes to consolidated financial statements.
F-5
FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Other Treasury Stock
Comprehensive Retained Comprehensive Common Paid-In --------------
(in millions) Total Income Earnings Income Shares Capital Shares Cost
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $ 3,657.3 $1,509.9 65.8 448.9 $2,137.4 (2.0)$ (55.8)
Comprehensive income
Net Income 465.7 $ 465.7 465.7
Other comprehensive income:
Unrealized gains on securities 35.6 35.6
Foreign currency translation
adjustment 1.0 1.0
Minimum pension liability
adjustment (48.3) (48.3)
----------------
Other comprehensive income (11.7) (11.7)
----------------
Comprehensive income $ 454.0
================
Purchase of treasury shares (419.4) (15.4) (419.4)
Stock issued for:
Acquisitions, including
additional consideration 6.2 0.1 0.2 6.1
Compensation and benefit plans 91.8 (45.1) 7.6 3.8 129.3
Other transactions and adjustments 1.7 (1.0) 2.7
Cash dividends declared ($0.08 per
share) (35.7) (35.7)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 3,755.9 1,893.9 54.1 448.9 2,147.7 (13.4) (339.8)
Comprehensive income
Net Income 1,199.7 $1,199.7 1,199.7
Other comprehensive income:
Unrealized losses on securities (175.1) (175.1)
Foreign currency translation
adjustment (11.3) (11.3)
Minimum pension liability
adjustment 44.6 44.6
---------------
Other comprehensive income (141.8) (141.8)
----------------
Comprehensive income $1,057.9
================
Purchase of treasury shares (1,104.7) (25.0) (1,104.7)
Stock issued for compensation and
benefit plans 233.5 (94.9) 37.8 7.4 290.6
Other transactions and adjustments (0.5) (0.2) (0.3)
Cash dividends declared ($0.08 per
share) (34.4) (34.4)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 3,907.7 2,964.1 (87.7) 448.9 2,185.2 (31.0) (1,153.9)
Comprehensive income
Net Income 929.6 $ 929.6 929.6
Other comprehensive income:
Unrealized gains on securities 81.7 81.7
Foreign currency translation
adjustment (17.2) (17.2)
Minimum pension liability
adjustment 4.3 4.3
----------------
Other comprehensive income 68.8 68.8
----------------
Comprehensive income $ 998.4
================
Purchase of treasury shares (1,509.8) (32.8) (1,509.8)
Stock issued for compensation and
benefit plans 311.9 (144.6) 60.5 8.2 396.0
Gain on sale of minority interest in
eONE Global, net 36.5 36.5
Issuance of Common Stock Warrant 15.0 15.0
Cash dividends declared ($0.08 per
Share) (32.0) (32.0)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 $ 3,727.7 $3,717.1 $ (18.9) 448.9 $2,297.2 (55.6)$(2,267.7)
===================================================================================================================================
See notes to consolidated financial statements.
F-6
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Summary of Significant Accounting Policies
Consolidation and Basis of Preparation
The accompanying consolidated financial statements include the accounts of First
Data Corporation and its majority-owned subsidiaries ("FDC" or "the Company").
All material intercompany accounts and transactions have been eliminated.
Investments in unconsolidated affiliated companies are accounted for under the
equity method and are included in "investments in affiliates" on the
accompanying consolidated balance sheets.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from these estimates.
Presentation
FDC's balance sheet presentation is unclassified due to the short-term nature of
its settlement obligations, contrasted with the Company's ability to invest cash
awaiting settlement in long-term investment securities.
The presentation of service revenues and product sales and other revenues
separates recurring transaction and related service processing revenues from all
other revenues. The Company's service revenues are principally based on the
number of accounts or transactions processed, a percentage of dollar volume
processed, or a combination thereof. Service revenues also include investment
earnings (primarily on certain settlement assets related to payment instruments)
and FDC's equity in earnings of unconsolidated affiliated companies. Product
sales and other includes sales of the Company's products (which are generally
ancillary to service revenues), software and other items which recur but which
fluctuate as to amount and timing. This category also includes certain
nonrecurring gains.
Certain amounts from prior years have been reclassified to conform to the
current presentation.
Business Description
FDC provides a variety of transaction processing services and money transfer and
payment services to financial institutions, commercial establishments and
consumers. The Company classifies its operations into four reportable segments:
payment services, merchant services, card issuing services, and emerging
payments (see Note 15).
FDC operations in the United States provide the vast majority of the Company's
transaction processing services, including the processing for almost all of the
money transfers and credit card transactions that are ultimately settled outside
of the U.S. Currently, FDC's processing centers in the United Kingdom and
Australia are the only foreign operations of any significance which have local
currency as their functional currency. These units, collectively, accounted for
6%, 5%, and 5% of FDC's total revenues for the years ended December 31, 2000,
1999 and 1998, respectively, and a comparable portion of FDC's assets and
earnings (prior to the non-recurring items discussed in Note 2).
Cash and Cash Equivalents
Highly liquid investments (other than those included in settlement assets) with
original maturities of three months or less (that are readily convertible to
cash) are considered to be cash equivalents and are stated at cost, which
approximates market value. Cash equivalents at December 31, 2000 and 1999
include $70.0 million of required investments in connection with FDC's merchant
card settlement operation.
Investment Securities
FDC categorizes all of its investment securities as available-for-sale which are
recorded at fair value. Unrealized gains and losses on available-for-sale
securities are reported (net of tax effects) as adjustments to stockholders'
equity. Realized gains and losses (and declines in value judged to be other than
temporary) are included in FDC's results of operations. The cost of securities
sold is based upon the specific identification method.
F-7
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Off-Balance Sheet Financial Instruments
FDC, through the use of interest rate swap and cap agreements, hedges certain
exposures to changes in variable rates that impact commissions paid to certain
of its payment services selling agents (see Note 7). The interest rate indices
specified by the agreements have been and are expected to be highly correlated
with the commission rates paid to these selling agents. Interest rate swap
agreements involve the receipt of floating rate payments in exchange for fixed
rate payments over the life of the agreement. The differential to be paid or
received is accrued as rates change and is recognized as an adjustment of agent
commission expense. Costs of variable rate cap agreements, which are included in
other assets, are amortized as an adjustment to agent commissions over the lives
of the agreements, and amounts due FDC under these agreements are recognized as
an adjustment of agent commissions as earned.
In addition, the Company utilizes purchased foreign currency options and forward
exchange contracts which qualify as cash flow hedges. These are intended to
offset the effect of exchange rate fluctuations on forecasted sales and
intercompany royalties expected to occur over the next 12 months. Gains and
losses on the derivative are intended to offset losses and gains on the hedged
transaction in an effort to reduce the earnings volatility resulting from
fluctuating foreign currency exchange rates.
The fair value of these agreements and changes to their fair value resulting
from changes in market rates are not recognized in the financial statements.
Effective January 1, 2001, these agreements will be recognized in the financial
statements in connection with the Company's required adoption of Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities", as amended.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation which
is computed using the straight-line method over the lesser of the estimated
useful life of the related assets (generally three to ten years for equipment,
furniture and leasehold improvements, and 30 years for buildings) or the lease
term. Amounts charged to expense for the depreciation and amortization of
property and equipment were $229.4 million in 2000, $249.1 million in 1999, and
$266.7 million in 1998.
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 seven to 40 years. Goodwill amortization expense
totaled $97.5 million in 2000, $99.2 million in 1999, and $105.9 million in
1998. Other intangible assets consist primarily of contract costs (rights to
provide processing services to customers, acquired directly or through
acquisitions) and capitalized conversion costs (contractually required systems
and programming and other related costs to convert client accounts to FDC's
processing systems). Other intangible assets also include capitalized systems
development costs (costs to create new platforms for certain of the Company's
information processing services) of $133.4 million at December 31, 2000 and
$128.1 million at December 31, 1999. Other intangibles also include, to a
lesser extent, databases, copyrights, patents, software and noncompete
agreements acquired in business combinations. Client contracts for which costs
are capitalized generally provide for the payment by the client of minimum
annual fees and contract termination penalties. Other intangibles are amortized
on either a straight-line basis or as a percentage of expected revenues over the
length of the contract or benefit period, which generally ranges from three to
20 years. Other intangibles amortization expense totaled $261.9 million in 2000,
$269.5 million in 1999, and $218.5 million in 1998.
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" ("SFAS 121"), long-lived assets are reviewed for impairment
whenever events indicate that their carrying amount may not be recoverable. In
accordance with APB Opinion No. 17 "Intangible Assets", enterprise goodwill is
assessed for impairment when events, such as a significant decline in the
profitability of an operating unit to which goodwill is associated, occur. In
such reviews, estimated undiscounted future cash flows associated with these
assets or operations are compared with their carrying value to determine if a
write-down to fair value (normally measured by discounting estimated future cash
flows) is required.
Revenue Recognition
FDC recognizes revenues from its information and transaction processing services
as such services are performed, recording revenues net of certain costs not
controlled by the Company (primarily interchange fees charged by credit card
associations of $1.6 billion in 2000, $1.9 billion in 1999, and $1.6 billion in
1998). The Company adopted the provisions of the
F-8
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Securities and Exchange Commission ("SEC") Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101") in the third quarter
of 2000. SAB 101 provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. Upon adoption,
the Company restated prior periods to reflect the netting of certain revenues
and expenses that were previously presented gross. The restatement had the
effect of reducing revenues and operating expenses by $32.9 million in 2000,
$59.9 million in 1999, and $70.5 million in 1998. The adoption of SAB 101 had
no impact on income from continuing operations, net income, or related per share
amounts.
F-9
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Earnings Per Common Share
Earnings per common share amounts are computed by dividing net income amounts by
weighted-average common stock and common stock equivalent shares (when dilutive)
outstanding during the period. Amounts utilized in per share computations are as
follows:
Year Ended December 31, 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
(in millions)
Weighted-average shares outstanding:
Basic weighted-average shares 406.9 427.7 445.2
Common stock equivalents 6.3 7.4 3.1
Convertible debentures 0.9 --- ---
-------- -------- --------
414.1 435.1 448.3
Earnings add back related to
convertible debentures $ 1.2 --- ---
Diluted earnings per common share are computed based on weighted-average shares
outstanding including the dilutive impact of common stock equivalents which
consist of outstanding stock options, warrants and restricted stock. The after
tax interest expense and issue cost amortization on convertible debt is added
back to net income when common stock equivalents are included in computing
diluted earnings per common share.
Foreign Currency Translation
The U.S. dollar is the functional currency for all FDC businesses except its
operations in the United Kingdom and Australia. Foreign currency denominated
assets and liabilities for these units are translated into U.S. dollars based on
exchange rates prevailing at the end of each year, and revenues and expenses are
translated at average exchange rates during the year. The effects of foreign
exchange gains and losses arising from these translations of assets and
liabilities are included as a component of other comprehensive income.
Stock Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123"), establishes accounting and reporting standards for
stock based employee compensation plans (see Note 13). As permitted by the
standard, FDC continues to account for such arrangements under APB Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations.
Advertising Costs
Advertising costs, included in "selling, general, and administrative" expenses,
are expensed as incurred or at the first time the advertising takes place.
Advertising expense for 2000, 1999 and 1998 was $153.2 million, $135.2 million,
and $120.3 million, respectively.
Gains on Issuance of Stock by Subsidiaries
At the time a subsidiary sells its stock to unrelated parties at a price in
excess of its book value, the Company's net investment in that subsidiary
increases. If at that time, the subsidiary is not a newly-formed, non-operating
entity, nor a research and development, start-up or development stage company,
nor is there question as to the subsidiary's ability to continue in existence,
the Company records the increase in its Consolidated Statements of Income.
Otherwise, the increase is reflected in additional paid in capital in the
Company's Consolidated Statements of Stockholders' Equity.
F-10
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 2: Divestitures, Restructuring, Litigation, Impairment and Provision for
Loss on Contract
The Company divested and closed certain businesses and recorded restructuring,
litigation settlements and impairment charges related both to ongoing operations
and divestitures in the three years ended December 31, 2000 in order to focus on
core businesses and to manage costs. Restructuring, merger and divestiture
accruals are reviewed each period and balances in excess of anticipated
requirements are reversed through the same Statement of Income caption in which
they were originally recorded. Such reversals resulted from the favorable
resolution of contingencies and changes in facts and circumstances. During 1998,
the Company recorded a provision for an anticipated loss on an overseas
processing contract. A summary of these items follows:
Pre-tax (Gain) Charge
Year Ended December 31, 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
(in millions)
Net gain on business divestitures and
associated impairments $(186.0) $(743.8) $(60.1)
Other impairments 36.4 --- 71.9
Restructuring 75.9 --- 35.7
Business closure --- 13.5 146.4
Litigation settlement 12.0 36.1 ---
Reversal of restructuring,
merger and divestiture accruals (9.6) (21.6) ---
--------------------- --------------------- ---------------------
Total pre-tax (gain) charge for restructuring,
divestitures, litigation and
impairment, net $ (71.3) $(715.8) $193.9
====================== ===================== =====================
Provision for loss on contract $125.2
2000 Activities
Business Divestitures and Associated Impairments - In January 2000, the Company
completed the sale of its Hogan Information Services business unit to Dolan
Media Company for cash proceeds of $30.5 million. As a result of this
transaction and the second quarter sale of another small business, the Company
recognized a pre-tax gain of $5.4 million. In September 2000, the Company signed
a letter of intent to sell a small subsidiary and, as a result, recorded an
impairment charge of approximately $5.4 million. The sale was completed in
January 2001.
In September 2000, FDC completed the merger of its joint venture, TransPoint,
LLC, with Checkfree Holdings Corporation ("Checkfree"). The merger resulted in
FDC receiving consideration of 6.6 million shares of Checkfree stock and
recognizing a pre-tax gain of $186.0 million. The pre-tax gain reflects a $42
million cash contribution from FDC to TransPoint immediately prior to the
merger.
Other Impairments - In June 2000, the Company recorded an impairment charge of
$2.8 million related to a customer contract. In December 2000, the Company
recorded a $33.6 million write-down of its investment in Excite@Home due to a
decline in the market value that was considered other than temporary.
Restructuring - Net restructuring charges of $75.9 million were recorded; $2.6
million related to payment services, $69.6 million related to card issuing
services and $3.7 million related to all other and corporate. These charges
represent net facility closure costs of $5.7 million (including a $3.9 million
gain on the sale of a closed facility) and severance accruals of $70.2 million
for approximately 3,800 employees resulting from the downsizing of certain
operations. During 2000, the Company utilized $19.2 million of the accrual for
severance, leaving an accrual at December 31, 2000 of $60.6 million.
Litigation, and Reversal of Restructuring, Merger and Divestiture Accruals - In
August 2000, the Company accrued $12.0 million based on the preliminary
settlement of a pending lawsuit. During 2000 the Company also recorded net
benefits of $9.6 million, related to the true-up and reversals of certain
previously recorded divestiture related accruals.
F-11
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1999 Activities
Business Divestitures and Associated Impairments - In April 1999, the Company
sold Innovis Inc. (formerly Consumer Credit Associates, Inc.) to CBC Companies,
Inc. for $20 million. Results for second quarter 1999 include recognition of a
pre-tax benefit of $24.5 million for Innovis that relates primarily to the
receipt of the net proceeds from its sale.
In May 1999, the Company sold its EBP Life business unit for $14.5 million in
cash. As a result of this transaction FDC recorded a pre-tax gain of $4.5
million in 1999. In July 1999, the Company completed the sale of its Donnelley
Marketing subsidiary to infoUSA for cash proceeds of approximately $200 million.
As a result of this transaction a pre-tax loss of $29.8 million was recognized
in 1999.
In December 1999, the Company sold its Investor Services Group subsidiary to PNC
Bank Corp. for cash proceeds of approximately $1.1 billion. This sale allows FDC
to further concentrate its efforts on electronic payment services and e-commerce
solutions. As a result of this sale, the Company recorded a pre-tax gain of
$744.6 million and realized net after tax cash proceeds of approximately $725.0
million.
Business Closure - In September 1999, the Company recorded a pre-tax loss of
$13.5 million related to the termination of a specialty services joint venture.
The charge consisted of severance accruals for approximately 60 employees of
$7.0 million and other accrued exit costs (primarily a termination fee) of
approximately $6.5 million. At December 31, 1999, the remaining accrual was
$0.8 million and at December 31, 2000 was $1.0 million.
Litigation Settlement - In May 1999, the Company announced that its Western
Union business unit received approval for a proposed settlement of all claims in
several class action lawsuits pertaining to the Company's U.S.-to-Mexico money
transfer business. Under the terms of the proposed settlement, FDC will
establish a charitable fund for the advancement of Mexican and Mexican-American
causes in the amount of $4 million. In addition, Western Union will issue
discount coupons to its customers who transferred money to Mexico from January
1, 1987 to August 31, 1999. FDC recorded pre-tax charges of $36.1 million in
1999 to reflect legal fees, the charitable fund and other outside administrative
costs in connection with the settlement. Future discounts related to coupon
redemption will be recorded as incurred. This settlement received final
approval and judgment in December 2000. At December 31, 1999, the remaining
accrual was $22.5 million and at December 31, 2000 was $18.3 million.
Reversal of Restructuring, Merger and Divestiture Accruals - The Company
reversed $6.5 million restructuring, $9.6 million merger and $5.5 million
divestiture reserves in 1999. These reversals resulted primarily from the
favorable resolution of a contingency related to the 1995 merger with First
Financial Management Corporation and a delay in closure of a leased operating
facility.
1998 Activities
Business Divestitures and Associated Impairments - In February 1998, the Company
sold NTS, its transportation services unit, and simultaneously acquired a gaming
services business from the company that acquired NTS. The acquisition price of
the gaming services business was equal to the fair market value of NTS's assets
plus approximately $50.5 million in cash. The disposition of NTS resulted in a
pre-tax gain of $28.5 million.
In June 1998, the Company completed the sale of First Image Management Company
("First Image") for cash proceeds of $150.0 million. In January 1998, the
Company announced its intention to sell First Image and recorded a 1997 pre-tax
impairment charge of $106.7 million, reflecting the anticipated loss on the
disposition. The finalization of this transaction resulted in the reversal of
$9.8 million of the 1997 impairment charge.
In October 1998, the Company completed the sale of VIPS for cash proceeds of $48
million and recorded a pre-tax gain of $21.8 million.
Other Impairments - In the second quarter 1998, the Company determined that
approximately $38.5 million of platform development costs related to the HSBC
Holdings, plc ("HSBC") project (see "Provision for Loss on Contract" below) and
other potential non-U.S. clients would not be recoverable in the near to medium
term, and thus were written off. Recoverability became unlikely with the loss of
the HSBC contract profitability and the diminished prospects for previously
anticipated new non-U.S. clients. The Company had other impairment charges of
$33.4 million of which $2.2 million related to card issuing services, $10.0
million related to facility closures and terminated conversion efforts in
merchant services and
F-12
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
$21.2 million related to software in the corporate and other category. A change
in strategic direction by certain of the Company's customers resulted in $15.1
million of software not being recoverable in the near to medium term. The
remaining $6.1 million software impairment related to the abandonment of certain
development efforts where the commercial viability of the planned product or
service offering became doubtful.
Restructuring - Restructuring charges of $35.7 million were recorded; $19.0
million related to merchant services, $9.6 million related to card issuing
services and $7.1 million related to corporate and other. The charges included a
provision of $20.0 million for severance related to 810 employees, a provision
of $9.7 million for facility closure and related costs and $6.0 million for
settlement of a legal matter associated with the merger with FFMC. During 1998,
1999 and 2000, respectively, the Company utilized $21.2 million, $6.3 million
and $0.7 million of the accrual; $18.6 million for severance, $3.6 million for
facility closure and $6.0 million for the FFMC legal matter. Including 2000 sub-
lease income of $1.1 million on facilities and a 1999 reversal of $3.5 million,
the remaining accrual was $5.1 million at December 31, 2000 versus $4.7 million
at December 31, 1999 and $14.5 million at December 31, 1998. The 1999 reversal
and the continued balance in the accrual was primarily caused by a delay in the
closure of the Nashville facility required by the Federal Financial Institutions
Examination Council because of Year 2000 concerns. The facility is scheduled for
closure in May 2001.
Business Shut Down - During the fourth quarter the Company recorded a $146.4
million charge to shut down Innovis, Inc. (formerly Consumer Credit Associates,
Inc.), the Company's consumer credit reporting business. All operations ceased
on December 31, 1998 except for limited activities to fulfill contractual
commitments. The charge included writing off intangible assets of $133.1
million, fixed assets of $3.8 million, severance of $5.7 million and other
accrued exit costs of $3.8 million. At December 31, 1998, 1999 and 2000 the
remaining accrual was $9.5 million, $6.2 million and $4.2 million, respectively.
Provision for Loss on Contract - During the second quarter of 1998, the Company
amended its agreement with HSBC Holdings, plc ("HSBC") which revised the scope
of service to be provided to HSBC. As a result of this amendment and because of
difficulties in the development process in Hong Kong which resulted in delays to
the conversion date and, consequently, significant unanticipated costs, the
Company determined that total estimated costs under the amended contract would
exceed anticipated revenues. Accordingly, a provision of $125.2 million was
recorded in the second quarter for such estimated net losses (reported on the
"Provision for loss on contract" line in the Consolidated Statements of Income).
In September of 1998, the Company announced the termination of its Hong Kong
card processing contract with HSBC. The loss contract provision was fully
utilized for costs associated with the contract termination. Such costs include
the write-off of $72.5 million of intangible assets as of June 30, 1998, $14.5
million of costs incurred from June 30, 1998 to contract termination date in
fulfillment of contractual obligations, $5.3 million of fixed asset write-offs,
$8.9 million of wind down costs and $24.0 million designated for an Australian
card processing contract. The $8.9 million of wind down costs include $5.9
million of salary and facility costs during the wind down period and $3.0
million of other exit type costs such as severance and lease exit costs. The
termination of the HSBC contract resulted in an Australian card processing
contract becoming a loss contract due to the Australian card processing contract
now bearing the full cost of operating the Asian processing platform rather than
sharing such costs with HSBC. At December 31, 1998, the remaining loss accrual
was $19.1 million. During 1999, the Company utilized $18.0 million of the HSBC
provision leaving a provision of $1.1 million at year-end 1999. During 2000
the Company utilized $0.7 million of the provision and reversed the remaining
$0.4 million accrual as a component of the $9.6 million included in the table
above.
F-13
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following summarizes activity with respect to the Company's restructuring
activities for the years ended December 31 (in millions):
2000 1998 (a)
----------------- -----------------
Expense Provision:
Employee severance $70.2 $20.0
Facility closure 9.6 9.7
Other exit costs --- 6.0
----------------- -----------------
79.8 35.7
----------------- -----------------
Cash Payments and Other (b):
2000 19.2 (0.4)
1999 --- 6.3
1998 --- 21.2
----------------- -----------------
19.2 27.1
Reversals:
1999 --- 3.5
----------------- -----------------
--- 3.5
Remaining accrual at December 31, 2000:
Employee severance 51.0 0.7
Facility closure 9.6 4.4
Other exit costs --- ---
----------------- -----------------
$60.6 $ 5.1
================= =================
(a) Excludes Hong Kong and Innovis activities described above.
(b) Other includes net sub-lease income on facilities which will fund a
lease buyout.
There were no restructuring activities in 1999.
F-14
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3: Business Combinations and Asset Acquisitions
Initial Consideration
------------------------------------------------------
FDC Common Stock
----------------------
Dollar
Businesses and Assets Acquired Month Total (a) Cash Value Shares
------------------------------------------------------
(in millions)
2000:
Canada Trust merchant portfolio August $ 22.7 $ 22.7 --- ---
Bank alliance programs 63.1 38.6 --- ---
Two other acquisitions 13.5 13.5 --- ---
-----------------------------------------
$ 99.3 $ 74.8 --- ---
=========================================
1999:
Transaction Processing Services April $ 8.0 $ 8.0 --- ---
State Street Global Advisors (b) April 13.0 13.0 --- ---
Paymentech, Inc July 420.0 420.0 --- ---
U.S. Processing, LLC September 10.1 10.1 --- ---
Six other acquisitions 29.6 29.2 --- ---
-----------------------------------------
$480.7 $480.3 --- ---
=========================================
1998:
First Data Financial Services January $115.5 $ 50.5 --- ---
FPS Services (b) February 12.0 12.0 --- ---
U.S. Benefits Services (b) May 11.7 5.5 $6.2 0.2
Bank alliance programs 12.2 12.2 --- ---
Four other acquisitions 18.7 16.4 --- ---
-----------------------------------------
$170.1 $ 96.6 $6.2 0.2
=========================================
(a) Other consideration, not separately listed in the table or described above,
consists of promissory notes and other amounts payable of $24.5 million in
2000, $0.4 million in 1999, and $2.3 million in 1998. In addition, total
consideration for First Data Financial Services included $65.0 million
representing the fair market value of the Company's NTS subsidiary's net
assets which were sold as part of the transaction.
(b) Acquired by Investor Services Group which was sold in December 1999.
First Data Loan Company Canada will serve as the acquiring entity for the Canada
Trust merchant portfolio, which was acquired in 2000. In addition, other
acquisitions for 2000 include the acquisition of a remittance processing
business.
In September 2000, FDC obtained a controlling interest in the joint venture
formed in 1998 among FDC, BA Merchant Services, Inc. and USA Processing ("BMCF")
into which the Company contributed the assets of First Data Financial Services
("FDFS") acquired in early 1998. The Company increased its ownership interest
in this joint venture to 67%. The $45 million cost of the additional ownership
interest (of which $24.5 million is in the form of a promissory note) is
included within the $63.1 million for bank alliance programs in the foregoing
table. The remaining $18.1 million relates to the Company's purchase of a bank
alliance partner's 50% interest in a merchant portfolio.
Transaction Processing Services performs check and off-line debit card
processing for broker cash management accounts and credit card and merchant
processing for small community banks and group service providers. State Street
Global Advisors is a retirement services business which has been subsequently
sold in conjunction with the sale of the Investor Services Group subsidiary.
Paymentech provides full-service electronic payment solutions for merchants and
third-party transaction processing (see additional discussion below). U.S.
Processing, LLC, provides transaction processing services for the electronic
funds transfer industry.
In July 1999, the Company completed the acquisition of Paymentech, Inc's 16.4
million publicly held shares (45% of total outstanding shares) for a cash
payment of approximately $420 million. Bank One owns all of the remaining
shares (55% of outstanding shares). In conjunction with this transaction,
Paymentech's operations were combined with the existing Bank One/First Data
alliance, BancOne Payment Services, LLC.
F-15
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
All of the above business combinations and asset acquisitions have been
accounted for as purchases, and their results have been included in the
Company's results of operations from the effective dates of acquisition. The
following table outlines the assets acquired and liabilities assumed (at date of
acquisition):
Year Ended December 31, 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
(in millions)
Fair value of net assets acquired $ 99.3 $480.7 $170.1
Less acquisition notes and accounts payable (24.5) (0.4) (2.3)
Less value of common stock issued --- --- (6.2)
Less fair value of assets sold --- --- (65.0)
Less cash acquired (21.9) (0.5) (2.4)
--------------------------------------------------------------------------
Net cash paid for acquisitions $ 52.9 $479.8 $ 94.2
==========================================================================
The acquisition of Paymentech has been reflected as a $420.0 million Investment
in Affiliate, accounted for under the equity method. The $416.7 million excess
of purchase price over FDC's 45% interest in the tangible net assets of
Paymentech is being amortized over the estimated remaining life of the
underlying intangibles, including goodwill. The remaining fair value of net
assets acquired includes initial goodwill and other intangible amounts
aggregating $95.8 million in 2000, $50.3 million in 1999, and $168.2 million in
1998. In connection with the above noted acquisitions, FDC recorded exit
liabilities of $0.2 million, $0.1 million, and $6.3 million in 2000, 1999 and
1998, respectively. The exit liabilities related primarily to facility shutdown,
severance, unfavorable lease commitments, and legal costs. At December 31, 2000
and 1999, FDC had total remaining acquisition reserves of $8.1 million and $8.5
million. FDC does not anticipate any significant adjustment to the purchase
price allocations.
The terms of certain of the Company's acquisition agreements provide for
additional consideration to be paid if the acquired entity's results of
operations exceed certain targeted levels. Targeted levels are generally set
substantially above the historical experience of the acquired entity at the time
of acquisition. Such additional consideration is paid in cash and with shares of
the Company's common stock, and is recorded when earned as additional purchase
price. Additional consideration was paid totaling $47.2 million in 2000, $32.3
million in 1999, and $2.3 million in 1998. The maximum amount of remaining
contingent consideration is $142.8 million (payable through 2003), of which
$15.3 million was earned in 2000 and accrued at December 31, 2000.
Note 4: Investments in Affiliates
Operating results include the Company's proportionate share of income from
affiliates, which consist of unconsolidated investments and joint ventures
accounted for under the equity method of accounting. The most significant of
these affiliates are related to the Company's merchant alliance program.
A merchant bank alliance is a joint venture between FDC and a financial
institution that combines the expertise of the Company with the visibility and
distribution of the bank. The joint ventures sell processing services to
merchants. At December 31, 2000, there were seven such joint ventures accounted
for under the equity method of accounting.
F-16
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of financial information for the merchant alliances and other
affiliates accounted for under the equity method of accounting is as follows:
December 31, 2000 1999
- ---------------------------------------------------------------------------------------
(in millions)
Total Assets $3,446.0 $2,475.3
Total Liabilities 2,594.5 1,599.2
Year Ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
(in millions)
Net Operating Revenues $1,403.0 $1,046.8 $758.4
Operating Expenses 966.6 837.5 646.2
Operating Income 436.4 209.3 112.2
Net Income 377.9 177.4 106.7
FDC Share of Net Income 186.2 110.8 54.3
The primary components of assets and liabilities are settlement related accounts
as described in Note 5 below.
Amounts presented herein do not include amortization of $50.9 million, $26.4
million and $18.2 million for the years ended December 31, 2000, 1999 and 1998,
respectively, related to the excess of FDC's investment over its proportionate
interest in the net assets of the joint venture. This difference, which amounted
to $655.3 million and $635.0 million at December 31, 2000 and 1999,
respectively, is amortized over the estimated useful lives of the underlying
intangible assets. In addition, the 1999 amounts do not include the Wells Fargo
Alliance since it was consolidated in 1999 and not accounted for under the
equity method of accounting.
Note 5: Settlement Assets and Obligations
Settlement assets and obligations result from FDC's processing services and
associated settlement activities, including settlement of payment transactions.
Settlement assets are generated principally from payment instrument sales
(primarily official checks and money orders) and card transactions. FDC records
corresponding settlement obligations for amounts payable to merchants and for
payment instruments not yet presented for settlement. The difference in the
aggregate amount of such assets and liabilities is primarily due to unrealized
net investment gains and losses, which are reported as other comprehensive
income in stockholders' equity. The principal components of FDC's settlement
assets and obligations are as follows:
December 31, 2000 1999
- ---------------------------------------------------------------------------------------------------------
(In millions)
Settlement assets:
- ------------------
Cash and cash equivalents $2,568.1 $2,280.3
Investment securities 6,613.9 6,980.9
Due from card associations 319.3 188.6
Due from selling agents 315.3 135.8
--------------------- ---------------------
$9,816.6 $9,585.6
===================== =====================
Settlement obligations:
- -----------------------
Payment instruments outstanding $8,235.3 $8,203.8
Card settlements due to merchants 529.8 429.0
Due to selling agents 1,008.1 1,061.8
--------------------- ---------------------
$9,773.2 $9,694.6
===================== =====================
s F-17
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 revenues from its investment of certain settlement assets, a
substantial majority of which are cash equivalents and investment securities
within the Company's payment services business. Payment services investment
portfolio balances averaged $7.8 billion in 2000, $7.8 billion in 1999, and $6.6
billion in 1998. Investment revenues (before commissions to certain selling
agents) from payment services portfolios totaled $411.7 million in 2000, $387.4
million in 1999 and $340.5 million in 1998 ($564.2 million, $538.9 million, and
$462.2 million, respectively, on a pre-tax equivalent basis).
Note 6: Investment Securities
Investment securities are a principal component of the Company's settlement
assets, and represent the investment of funds received by FDC from the sale of
payment instruments (principally official checks and money orders) by authorized
agents. The Company also maintains various other investments, primarily equity
securities, which are classified as available-for-sale and carried at fair
market value of $345.2 million at December 31, 2000 and $41.3 million at
December 31, 1999. Such investments include Checkfree and Excite@Home. During
2000 FDC completed the merger of its joint venture, TransPoint, LLC, with
Checkfree. The merger resulted in FDC receiving consideration of 6.6 million
shares of Checkfree stock. Excite@Home acquired iMall, Inc. in which FDC held
an 11% ownership interest in 1999. FDC received Excite@Home shares for its iMall
shares. In addition, the Company has investments in equity securities and other
investments that are not publicly traded which are carried at cost of $71.7
million and $92.5 million at December 31, 2000 and 1999, respectively.
Within settlement assets, virtually all of FDC's investment securities are debt
securities, most of which have maturities greater than one year. At December 31,
2000, 68% of these debt securities mature within five years and 97% within 10
years.
The principal components of investment securities, which are carried at fair
value, are as follows:
Net Unrealized
Fair Value Amortized Cost Gain (Loss)
- ---------------------------------------------------------------------------------------------------------------
(In millions)
December 31, 2000
State and municipal obligations $5,769.9 $5,716.6 $ 53.3
Corporate bonds 502.6 505.9 (3.3)
Adjustable rate mortgage-backed securities 168.1 170.3 (2.2)
Other 590.2 616.1 (25.9)
------------------------------------------------------------
Totals $7,030.8 $7,008.9 $ 21.9
============================================================
December 31, 1999
State and municipal obligations $6,206.1 $6,297.0 $ (90.9)
Corporate bonds 407.1 420.8 (13.7)
Adjustable rate mortgage-backed securities 208.1 210.1 (2.0)
Other 215.7 212.6 3.1
------------------------------------------------------------
Totals $7,037.0 $7,140.5 $(103.5)
============================================================
Note 7: Financial Instruments
Concentration of credit risk
FDC maintains cash and cash equivalents, investment securities and certain off-
balance sheet hedging arrangements (for specified purposes) with various
financial institutions. The Company limits its concentration of these financial
instruments with any one institution, and periodically reviews the credit
standings of these institutions. FDC has a large and diverse customer base
across various industries, thereby minimizing the credit risk of any one
customer to FDC's accounts receivable amounts. In addition, each of the
Company's business units perform ongoing credit evaluations of their customers'
financial condition.
F-18
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Management of investment risks
FDC does not hold or issue financial instruments for trading purposes. FDC
encounters credit and market risks related to the Company's financial
instruments, principally its investment securities. The Company attempts to
mitigate credit risk by making high quality investments. Substantially all of
its long-term investment securities have credit ratings of "A" or better from a
major rating agency. FDC maintains a large portion of its settlement assets in
cash and cash equivalents, thereby mitigating market risks (such as a reduction
in the fair value of long-term investment securities due to rising interest
rates) that could impact the Company's funding of its settlement obligations. A
reduction in the fair value of the Company's investment securities resulting
from rising interest rates would be somewhat mitigated by increases in the fair
value of the interest rate swap and cap agreements described below.
Off-balance sheet financial instruments
A portion of the Company's payment services business involves the payment of
commissions to selling agents that are computed based on short-term variable
rates. From time to time the Company has purchased variable rate caps to
partially insulate its sales commission amounts from increases in these rates.
There were no such agreements at December 31, 2000. At December 31, 1999, these
agreements had effective notional amounts totaling $800 million ($400 million
becoming effective mid-2000) with cap rates ranging from 6.00% to 6.50% and
maturities ranging from December 2000 through July 2001. 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 $3.9 billion at December 31, 2000, expire
between 2001 and 2012 and require the Company to pay based upon fixed rates
between 4.38% and 6.94% (weighted average of 5.99%) while the Company receives
payments principally based on three month variable rates. At December 31, 1999
the notional amount of these swaps was $4.1 billion with fixed rates between
5.00% and 6.94%. The counterparties to these agreements are financial
institutions with a major rating agency credit rating of "A" or better. The
credit risk inherent in these cap and swap agreements represents the possibility
that a loss may occur from the nonperformance of a counterparty to the
agreements. The Company monitors the credit risk of these counterparties and the
concentration of its contracts with any individual counterparty. FDC anticipates
that the counterparties will be able to fully satisfy their obligations under
the agreements.
In addition, the Company utilizes purchased foreign currency options and forward
exchange contracts which qualify as cash flow hedges. These are intended to
offset the effect of exchange rate fluctuations on forecasted sales and
intercompany royalties expected to occur over the next 12 months. Gains and
losses on the derivative are intended to offset losses and gains on the hedged
transaction in an effort to reduce the earnings volatility resulting from
fluctuating foreign currency exchange rates. The primary currencies hedged by
the Company are the European euro and British pound. At December 31, 2000 the
Company had purchased put options totaling 175 million euros and 30 million
pounds and forward sale contracts for 16 million euros. These agreements expire
between January and December 2001. At December 31, 1999 the Company had
purchased put options totaling 89 million euros, 5 million Australian dollars,
22 million Canadian dollars and forward sale contracts for 40 million pounds
expiring between January and June 2000.
F-19
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, 2000 1999
- ------------------------------------------------------------------------------------------------
(In millions) Carrying Fair Carrying Fair
Value Value Value Value
- ------------------------------------------------------------------------------------------------
Balance sheet financial instruments:
- ------------------------------------
Long-term investment securities $7,030.8 $7,030.8 $7,037.0 $7,037.0
Long-term debt 975.3 969.1 1,072.0 1,033.6
Off-balance sheet financial instruments:
- ----------------------------------------
Variable rate hedging arrangements,
Principally rate swap and cap agreements $ 9.9 $ (29.8) $ 3.7 $ 104.3
Foreign currency options and forward
contracts 5.8 4.7 2.1 6.0
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-20
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 8: Income Taxes
Year Ended December 31, 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------
(In millions)
Components of pre-tax income:
Domestic $1,262.8 $1,767.6 $690.1
Foreign 45.5 57.8 21.8
----------------------------------------------------
$1,308.3 $1,825.4 $711.9
====================================================
Provision for income taxes:
Federal $ 329.5 $ 494.2 $194.1
State and local 42.5 114.7 43.3
Foreign 6.7 16.8 8.8
----------------------------------------------------
$ 378.7 $ 625.7 $246.2
====================================================
The Company's effective tax rates differ from statutory rates as follows
(differences are calculated by excluding the impact of restructuring, business
divestitures, litigation and impairment items, the impact of which is
separately disclosed):
Year Ended December 31, 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit 2.4 2.7 3.3
Nondeductible amortization of intangible assets 1.9 2.0 2.1
Interest earned on municipal investments (8.0) (9.3) (7.8)
Restructuring, business divestitures, litigation
and impairment items 0.4 4.9 2.2
Other (2.7) (1.0) (0.2)
-------------------------------------------------
Effective tax rate 29.0% 34.3% 34.6%
=================================================
FDC's income tax provisions consist of the following components:
Year Ended December 31, 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
(in millions)
Current $327.1 $620.8 $ 347.1
Deferred 51.6 4.9 (100.9)
--------------------------------------------------------------
$378.7 $625.7 $ 246.2
==============================================================
Income tax payments of $569.9 million in 2000 are greater than current expenses
and income tax payments of $266.6 million in 1999 are less than current expense
primarily because tax on the disposition of First Data Investor Services Group
was not due until the first quarter of 2000. Income tax payments of $234.2
million in 1998 are less than current expense due primarily to tax benefits
recorded directly to equity and reductions of goodwill.
F-21
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 2000 or
1999. Net deferred tax liabilities are included in accounts payable and other
liabilities in FDC's consolidated balance sheets. The following table outlines
the principal components of deferred tax items:
December 31, 2000 1999
- ----------------------------------------------------------------------------------------
(in millions)
Deferred tax assets related to:
Accrued expenses $ 184.9 $ 176.6
Pension obligations 16.2 19.1
Employee related liabilities 51.8 26.1
Deferred revenues 4.4 10.4
Unrealized securities loss 5.7 36.2
Other 17.9 ---
--------------------------------
280.9 268.4
--------------------------------
Deferred tax liabilities related to:
Property, equipment and intangibles (297.4) (272.0)
Sale/exchange of equity interest in affiliates (78.7) ---
Other (26.1) (15.5)
--------------------------------
(402.2) (287.5)
--------------------------------
Net deferred tax liabilities $(121.3) $ (19.1)
================================
Note 9: Borrowings
December 31, 2000 1999
- ------------------------------------------------------------------------------------------------
(in millions)
Short-Term Borrowings:
- ----------------------
Commercial paper $ 780.1 $ 207.5
Extendable Commercial Notes 74.7 148.8
Other short-term borrowings --- 149.8
Long-Term Debt:
- ---------------
Medium-Term Notes 397.0 521.5
6 3/4% Notes due 2005 199.2 199.1
6 5/8% Notes due 2003 199.8 199.7
4 7/8% Convertible Note due 2005 50.0 50.0
Floating Rate Note 100.0 100.0
Other 29.2 1.7
----------------------------------
$1,830.0 $1,578.1
==================================
The Company's commercial paper borrowings during December 31, 2000 and 1999 had
weighted-average interest rates of 6.5% and 5.9%, respectively.
The Company has a $1.5 billion commercial paper program that is supported by a
$1.1 billion revolving credit facility. Interest rates for borrowings under the
Facility are based on market rates. The Facility contains customary covenants
which are not expected to significantly affect FDC's operations. At December 31,
2000, the Company was in compliance with all of these covenants. To provide
additional liquidity in early 2000 in the event of a business disruption due to
Y2K problems, the Company established a $1.0 billion credit facility that became
effective on January 3, 2000. This facility was not used and was cancelled on
January 31, 2000.
In November 1999, the Company established a $300 million extendable commercial
notes ("ECN") program. As of December 31, 2000, $74.7 million of commercial
notes were outstanding under the ECN program.
F-22
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In 2000, the amount available under FDC's uncommitted bank credit lines was
increased from $200.0 million to $250.0 million. The interest rates for
borrowings under the credit lines are based on market rates. As of December 31,
2000, there were no unsecured bank loans outstanding. Through the Facility and
the uncommitted bank credit lines, the Company had available borrowing capacity
of $569.9 million at December 31, 2000.
The Company has an effective shelf registration facility providing for the
issuance of debt and equity securities up to $1.0 billion in the aggregate (of
which $525 million remains available). During March 1999, the Company entered
into a $100 million, 5-year maturity debt financing (Floating Rate Note) with a
floating interest rate based on LIBOR. Under certain circumstances the financing
may be prepaid. The debt and interest are denominated in Australian and New
Zealand dollars, respectively. Through a series of currency swap agreements the
Company's obligations have been effectively converted to U.S. dollar
denomination. The outstanding Medium-Term Notes have interest rates ranging
from 5.80% to 6.82% and are due at various dates through 2008. Interest on the 6
3/4% and 6 5/8% term notes, which are public debt offerings, is payable semi-
annually in arrears. These notes do not have sinking fund obligations, and they
are not redeemable prior to maturity.
In December 1998, in conjunction with the execution of a card issuing services
processing contract, the Company issued a 7-year $50 million convertible
debenture at an interest rate of 4.875%. Subject to customary covenants and
conditions, the note is not redeemable prior to maturity. The conversion feature
of the note becomes exercisable upon the achievement of certain contract
milestones into approximately 1.37 million shares. As of December 31, 2000,
914,495 shares are exercisable.
Aggregate annual maturities of long-term debt are $75.2 million in 2001, $2.1
million in 2002, $200.6 million in 2003, $100.1 million in 2004, $249.2 million
in 2005 and $348.0 million in all periods thereafter. The Company paid interest
amounts totaling $97.2 million in 2000, $103.1 million in 1999 and $107.2
million in 1998.
F-23
Note 10: Supplemental Balance Sheet Information
December 31, 2000 1999
- ------------------------------------------------------------------------------------------------------------------
(in millions)
Property and equipment:
Land $ 26.6 $ 25.2
Buildings 190.6 195.4
Leasehold improvements 138.0 125.1
Equipment and furniture 1,323.1 1,284.0
--------------------------------------
1,678.3 1,629.7
Less accumulated depreciation and amortization (1,054.0) (919.1)
--------------------------------------
$ 624.3 $ 710.6
======================================
Other assets:
Investments $ 416.9 $ 133.8
Prepaid expenses 58.9 32.8
Inventory 47.6 57.7
Other 131.5 158.0
--------------------------------------
$ 654.9 $ 382.3
======================================
Accounts payable and other liabilities:
Accounts payable and accrued expenses $ 742.7 $ 560.5
Compensation and benefit liabilities 202.7 188.4
Assumed Western Union pension obligations 43.5 54.4
Accrued costs of businesses acquired (including deferred 83.5 86.1
acquisition consideration)
Income taxes payable 286.4 586.1
Deferred income taxes 121.3 19.1
Other liabilities 484.1 329.8
--------------------------------------
$ 1,964.2 $1,824.4
======================================
Note 11: Commitments and Contingencies
The Company leases certain of its facilities and equipment under operating lease
agreements, substantially all of which contain renewal options. Total rent
expense for operating leases, net of sublease income, was $117.6 million in
2000, $133.6 million in 1999, and $123.1 million in 1998. Minimum aggregate
rental commitments at December 31, 2000 under all noncancelable leases, net of
sublease income, were $96.7 million in 2001, $61.7 million in 2002, $45.4
million in 2003, $36.2 million in 2004, $32.0 million in 2005, and $84.0 million
for all periods thereafter. The sublease income is earned from leased space
which FDC concurrently subleases to its customers with mirrored time periods.
Future lease rental income exceeds lease payments, with FDC's obligations at
December 31, 2000 for remaining lease terms totaling $44.6 million.
In connection with FDC's money transfer business, the Company has entered into a
minimum purchase agreement with one of its data processing vendors. Under this
agreement, the Company is required to purchase at least $100 million in goods
and services over a period of 66 months commencing January 1, 1998. As of
December 31, 2000 approximately $49 million in goods and services remained to be
purchased under this agreement.
In 1998, five putative class actions based on similar factual allegations were
filed in United States District Courts, a California state court and a Texas
state court against, among others, the Company or its subsidiaries, including
its Western Union Financial Services, Inc. subsidiary. The plaintiffs in these
actions claim that an undisclosed "commission" is charged by the Company or its
subsidiaries when consumers transmit money to Mexico, in that the exchange rate
used in these transactions is less favorable than the exchange rate that the
Company or its subsidiaries receive when they trade dollars in the international
money market. The plaintiffs assert that the Company and its subsidiaries
violated the law by failing to disclose this "commission" in advertising and in
the transactions. Some of the plaintiffs also assert that the Company or its
subsidiaries have discriminated against persons who use their services to
transmit money to Mexico, in that the difference between the market exchange
rate and the exchange rate used by Western Union in the Mexico transactions is
greater than
F-24
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the difference between the market and exchange rates used by the Company or its
subsidiaries when transmitting funds to other countries. The plaintiffs seek,
among other things, injunctive relief, imposition of a constructive trust,
restitution, compensatory and statutory damages, statutory penalties and
punitive damages.
The parties to some of these actions reached proposed settlements. Under the
proposed settlement, the Company will establish a charitable fund for the
advancement of Mexican and Mexican-American causes in the amount of $4 million.
Western Union also will issue coupons for discounts on future money transfer
transactions to Mexico to its customers who transferred money from the U.S. to
Mexico between January 1, 1987 and August 31, 1999. In addition, the Company
will issue coupons for discounts on future Western Union transactions to
customers who transferred money to Mexico from January 1, 1988 to December 10,
1996 using the MoneyGram service because MoneyGram was previously operated by a
subsidiary of the Company. The proposed settlement also includes reasonable
attorneys' fees and costs as well as the costs of settlement notice and
administration.
On December 21, 2000, the United States District Court for the Northern District
of Illinois granted final approval of the proposed settlement and entered a
final judgment. In approving the settlement, the Court permanently enjoined the
continued prosecution of the other actions. In January 2001, notices of appeal
from the final judgment were filed in two of the actions by some of the class
members who objected to the settlement in the respective action.
On January 11, 2000, a subsequent putative class action that makes allegations
similar to the allegations described above was filed in a California state court
against the Company and its subsidiaries, Western Union Financial Services, Inc.
and Orlandi Valuta. The putative class consists of those persons who have used
Western Union's or Orlandi Valuta's services after August 31, 1999 to transmit
money from California to Mexico, or who have used the Western Union or Orlandi
Valuta money transfer services to transmit money from California to Mexico and
have opted out of one of the nationwide settlements discussed above. The
plaintiffs seek injunctive relief, imposition of a constructive trust, an
accounting, restitution, compensatory and statutory damages alleged to be in
excess of $500,000,000, statutory penalties in an amount of $1,000 for each
offense, punitive damages, attorneys' fees, prejudgment interest, and costs of
suit. The Company is vigorously defending this action.
On January 19, 2001, another putative class was filed in the United States
District Court for the Eastern District of New York against the Company and its
subsidiary, Western Union Financial Services, Inc. asserting claims on behalf of
a putative worldwide class (excluding members of the settlement class certified
in one of the above actions). The plaintiff claims that the Company and Western
Union impose an undisclosed "charge" when they transmit consumers' money by wire
to international locations, in that the exchange rate used in these transactions
is less favorable than the exchange rate that Western Union receives when it
trades currency in the international money market. Plaintiff further asserts
that Western Union's failure to disclose this "charge" in the transactions
violates 18 U.S.C. section 1961 et seq. and state deceptive trade practices
statutes, and also asserts claims for civil conspiracy. Plaintiff seeks
injunctive relief, compensatory damages in an amount to be proven at trial,
treble damages, punitive damages, attorneys' fees, and costs of suit. The
Company intends to vigorously defend this action.
In the normal course of business, the Company is subject to claims and
litigation, including indemnification obligations to purchasers of former
subsidiaries. Management of the Company believes that such matters will not have
a material adverse effect on the Company's results of operations, liquidity or
financial condition.
Note 12: Stockholders' Equity
Dividends
FDC continued paying cash dividends of $0.02 per share on a quarterly basis to
stockholders during 2000. The Company's Articles of Incorporation authorizes
10.0 million shares of preferred stock, none of which are issued.
F-25
Other Comprehensive Income
The income tax effects allocated to and the cumulative balance of each component
of other comprehensive income are as follows (in millions):
Tax Net-of-
Beginning Pre-tax (Benefit) Tax Ending
Balance Amount /Expense Amount Balance
------------------------------------------------------------------------------
December 31, 2000
Unrealized gains(losses) on
securities $(67.3) $ 125.7 $ 44.0 $ 81.7 $ 14.4
Currency translation adjustment (16.1) (35.1) (17.9) (17.2) (33.3)
Minimum pension liability (4.3) 6.7 2.4 4.3 ---
------------------------------------------------------------------------------
$(87.7) $ 97.3 $ 28.5 $ 68.8 $ (18.9)
==============================================================================
December 31, 1999
Unrealized gains(losses) on
securities $107.8 $(269.3) $ (94.2) $(175.1) $ (67.3)
Currency translation adjustment (4.8) (17.4) (6.1) (11.3) (16.1)
Minimum pension liability (48.9) 68.2 23.6 44.6 (4.3)
------------------------------------------------------------------------------
$ 54.1 $(218.5) $ (76.7) $(141.8) $ (87.7)
==============================================================================
December 31, 1998
Unrealized gains on securities $ 72.2 $ 54.8 $ 19.2 $ 35.6 $ 107.8
Currency translation adjustment (5.8) 1.5 0.5 1.0 (4.8)
Minimum pension liability (0.6) (74.3) (26.0) (48.3) (48.9)
------------------------------------------------------------------------------
$ 65.8 $ (18.0) $ (6.3) $ (11.7) $ 54.1
==============================================================================
Other Stockholders' Equity Transactions
In May 2000, the Board of Directors authorized a $1 billion stock repurchase.
The Company repurchased 18.1 million of its common shares at a cost of
approximately $836.9 million during 2000 under this new authorization.
In November 2000, the Company and iFormation Group completed the formation of
eONE Global ("eONE"). Under the terms of the formation agreements, the Company
has approximately a 75% interest in eONE. The Company contributed cash,
operating assets, and Internet venture interests, and iFormation Group
contributed cash of $135 million for approximately a 25% interest and a warrant
to purchase 1,750,000 shares of FDC common stock. In connection with the
transaction, the Company recognized an after-tax gain of $36.5 million (pre-tax
$58.2 million), which has been reflected in additional paid-in capital.
In December 2000, the Board of Directors authorized a $500 million stock
repurchase. No purchases have been made under this authorization.
In July 1999, the Board of Directors authorized management to purchase an
additional $750 million of the Company's outstanding common stock. The Company
completed the utilization of the $750 million provided for repurchase under the
1999 authorization during the first quarter of 2000. A total of 16.7 million
shares were repurchased under this program at a cost of approximately $750
million during 1999 and 2000.
In September 1998, the Board of Directors authorized management to purchase up
to $500 million of its outstanding common stock. In December 1998, the Board
increased the total authorization to $550 million. The Company completed the
utilization of the $550 million provided for repurchases under the 1998
authorization in July 1999. A total of 16.9 million shares were repurchased
under this program.
The Company has available an outstanding shelf registration facility providing
for the issuance of approximately 10 million shares of the Company's common
stock in connection with certain types of acquisitions.
F-26
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 13: Stock Compensation Plans
FDC has a plan that provides for the granting of stock options to key employees
and other key individuals who perform services for the Company. A total of 69.6
million shares of common stock have been reserved for issuance under the plan,
and an additional 6.1 million shares are reserved for issuance in conjunction
with certain business combinations and other issuances. A total of 16.9 million
shares remain available for future grant. The options have been issued at a
price equivalent to or in excess of the common stock's fair market value at the
date of grant, generally have ten year terms and become exercisable in three or
four equal annual increments beginning 12 months after the date of grant.
In December 1997, the Company instituted a restricted stock award program for
key technical systems and related employees. As of December 31, 2000, a total of
0.8 million restricted shares had been granted under this program. These awards
have a three-year restriction period from the date of grant. The restricted
stock award is subject to forfeiture unless certain conditions are met. The fair
value of the shares awarded, as determined on the grant dates, totaled $18.1
million ($14.6 million net of cancellations as of December 31, 2000) and is
being amortized on a straight-line basis over the restriction period. The
unamortized portion of such awards is reported as a reduction of paid-in
capital.
In October 1996, the Company instituted an employee stock purchase plan for
which a total of 6.0 million shares have been reserved for issuance, of which
2.0 million shares remain available for future grant. Monies accumulated through
payroll deductions elected by eligible employees are used to make quarterly
purchases of FDC common stock at a 15% discount from the lower of the market
price at the beginning or end of the quarter.
Stock options related to plans which were assumed in connection with the
Company's business combinations were converted to options to purchase shares of
FDC common stock (at prices ranging from $0.88 to amounts substantially above
current market prices for the Company's common stock) and are exercisable at
specified times not later than ten years from the date of grant.
In November 2000, eONE and its two subsidiaries, SurePay, LLP ("SurePay") and
CashTax, LLP ("CashTax"), instituted long-term incentive plans that provide for
the granting of partnership interests to employees and other key individuals.
The options have been issued at a price equivalent to the fair market value of
the interests at the date of grant, generally have ten-year terms and become
exercisable over a four-year vesting period. Following is a detail of
partnership interests reserved for issuance under the respective plans and the
interests that remain available for future grant (in millions).
Reserved for Available for Future
Issuance Grant
------------ --------------------
eONE 13.1 4.3
SurePay 13.2 7.4
CashTax 7.5 3.1
The Company has elected to follow APB 25 for its employee stock options because,
as discussed below, the alternative fair value accounting under SFAS 123
requires the use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by
SFAS 123, assuming the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of SFAS 123.
The fair value for options and employee stock purchase plan rights was estimated
at the date of grant using a Black-Scholes option pricing model with the
following assumptions:
FDC: 2000 1999 1998
---------------------------------------------------------
Risk-free interest rate 4.98% 6.34% 4.54%
Dividend yield 0.17% 0.17% 0.27%
Volatility 35.3% 25.4% 24.0%
Expected option life 5 years 5 years 5 years
Expected employee stock purchase right life (in years) 0.25 0.25 0.25
F-27
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
eONE, SurePay and CashTax: 2000
-------------------
Risk-free interest rate 4.98%
Dividend yield 0.0%
eONE volatility 50.0%
SurePay volatility 103.0%
CashTax volatility 35.3%
Expected option life 5 years
Weighted-average fair value: 2000 1999 1998
----------------------------------------------------------
FDC options granted $ 19 $ 15 $ 8
FDC employee stock purchase rights 9 8 6
eONE options granted 2 --- ---
SurePay options granted 1 --- ---
CashTax options granted 1 --- ---
On December 31, 2000, eONE granted 240,000 options to non-employees.
Compensation expense related to these options will be recorded in future
periods.
The Company's pro forma information, amortizing the fair value of the options
over their vesting period and including the stock purchase rights, is as follows
(because SFAS 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect is not fully reflected until 1999):
(In millions, except per share amounts) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------
Pro forma net income $883.1 $1,157.5 $429.2
Pro forma earnings per share - basic 2.17 2.71 0.96
Pro forma earnings per share - diluted 2.14 2.67 0.96
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 FDC stock option activity is as follows (options in millions):
2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
- -------------------------------------------------------------------------------------------------------------------------
Outstanding at January 1 34.3 $33 37.1 $29 31.2 28
Granted 3.2 48 7.7 46 14.7 31
Exercised (7.4) 30 ) (6.1 27 (2.7) 20
Canceled (2.6) 36 ) (4.4 33 (6.1) 33
--------- -------- --------
Outstanding at December 31 27.5 35 34.3 33 37.1 29
========= ======== ========
Options exercisable at
Year-end 13.1 $30 15.0 $27 14.3 $23
=========================================================================================================================
F-28
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following summarizes information about FDC stock options outstanding
(options in millions):
Options Outstanding Options Exercisable
----------------------------------------------------------------------------------
Weighted-
Range of Number Average Weighted- Number Weighted-
Exercise Outstanding at Remaining Average Exercisable at Average
Prices 12/31/00 Contractual Life Exercise Price 12/31/00 Exercise Price
- ------------------------------------------------------------------------------------------------------
$0.88 to $26.75 5.8 3 years $19 4.6 $17
$27.18 to $37.06 10.1 7 years 32 5.0 32
$37.41 to $44.88 7.3 8 years 43 2.3 42
$46.00 to $70.00 4.3 9 years 51 1.2 46
------- --------
27.5 7 years 35 13.1 30
======= ========
The following summarizes the information regarding the Company's subsidiaries'
stock options granted during 2000 and outstanding as of December 31, 2000, all
of which remain unexercisable at year-end (options in millions).
Remaining
Options Exercise Price Contractual Life
----------------------- ----------------------- -----------------------
eONE 8.8 $4 10 years
SurePay 5.8 $1 10 years
CashTax 4.4 $3 10 years
Note 14: Employee Benefit Plans
Defined Contribution Plans
FDC and certain of its subsidiaries maintain defined contribution savings plans
covering virtually all of the Company's full-time employees. The plans provide
tax deferred amounts for each participant, consisting of employee elective
contributions and additional matching and discretionary Company contributions.
In addition, the Company provides a supplemental savings plan for certain highly
compensated employees. The plan provides tax deferred contributions, matching
and the restoration of Company contributions under the defined contribution
plans otherwise limited by the IRS. The aggregate amounts charged to expense in
connection with these plans were $41.9 million in 2000, $49.4 million in 1999
and $45.6 million in 1998.
Defined Benefit Plans
The acquisition of Western Union in 1994 included the assumption of $304 million
of underfunded obligations related to a suspended defined benefit pension plan.
Benefit accruals under this plan were suspended in 1988. The Company reduced
these underfunded obligations by contributing $35.0 million in cash to the
Western Union Plan during 1997 and $199.0 million in 1995.
The Company has three other defined benefit pension plans covering certain full-
time employees in the U.S. and a separate plan covering certain employees
located in the United Kingdom. New employees do not participate in the other
U.S. Plans due to a past restructuring of benefit plans which allowed only
existing participants to accrue benefits. Benefits under the largest of the
other U.S. plans were frozen as of December 31, 1997. As a result, participants
of this plan were given enhanced benefits under the defined contribution plan.
The cost of retirement benefits for eligible employees, measured by length of
service, compensation and other factors, is being funded through trusts
established under the plans in accordance with laws and regulations of the
respective countries. Plan assets consist of cash and a variety of investments
in equity (U.S. and foreign) and fixed income securities.
The following table provides a reconciliation of the changes in the plans'
benefit obligation and fair value of assets over the two-year period ending
December 31, 2000 and a statement of the funded status as of December 31 for
both years:
F-29
December 31, 2000 1999
- --------------------------------------------------------------------------------------------------
(in millions)
Change in benefit obligation
Benefit obligation at January 1, $845.8 $912.8
Service costs 8.6 8.7
Interest costs 55.0 55.0
Actuarial (gain)loss 14.5 (52.0)
Benefits paid (64.2) (73.1)
Foreign currency translation (16.0) (6.3)
Other 0.7 0.7
--------------- --------------
Benefit obligation at December 31, 844.4 845.8
Change in plan assets
Fair value of plan assets at January 1, 825.6 781.7
Actual return on plan assets 128.8 116.4
Company contributions 6.8 6.9
Plan participant contributions 0.7 0.6
Benefits paid (64.2) (73.1)
Foreign currency translation (17.9) (6.9)
--------------- --------------
Fair value of plan assets at December 31, 879.8 825.6
--------------- --------------
Funded status of the plan 35.4 (20.2)
Unrecognized amounts, principally net (gain)
loss (67.5) (22.9)
--------------- --------------
Total recognized $(32.1) $(43.1)
=============== ==============
The following table provides the amounts recognized in the statement of
financial position:
December 31 2000 1999
- ------------------------------------------------------------------------------------------------------------
(in millions)
Prepaid benefit $ 10.8 $ 2.4
Accrued benefit liability (42.9) (52.2)
Accumulated other comprehensive income --- 6.7
--------------------------------------
Net amount recognized $(32.1) $(43.1)
======================================
As of December 31, 2000, plan assets were in excess of accumulated benefit
obligations for all pension plans. The benefit obligation, and fair value of
plan assets for pension plans with accumulated benefit obligations in excess of
plan assets, were $656.1 and $605.3 million as of December 31, 1999,
respectively.
The following table provides the components of net periodic benefit cost for the
plans:
Year-ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------
(in millions)
Service costs $ 8.6 $ 8.7 $ 8.0
Interest costs 55.0 55.0 56.4
Expected return on plan assets (69.2) (68.5) (71.2)
Amortization 1.1 1.4 1.0
----------------- ----------------- -----------------
Net periodic benefit income (4.5) (3.4) (5.8)
Settlement loss --- 1.0 ---
----------------- ----------------- -----------------
Net periodic benefit income after settlement $ (4.5) $ (2.4) $ (5.8)
================= ================= =================
The weighted-average rate assumptions used in the measurement of the Company's
benefit obligation are shown as follows:
2000 1999
--------------------------------------
Discount Rate 6.79% 6.81%
Expected return on plan assets 8.75% 8.70%
Rate of compensation increase 4.00% 4.00%
F-30
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Pension plan assets include 42,100 and 8,300 shares of FDC stock as of December
31, 2000 and 1999 with fair market values of $2.2 million and $0.4 million
respectively.
The Company does not offer post-retirement health care or other insurance
benefits for retired employees; however, the Company is required to continue
such plans that were in effect when it acquired Western Union. Generally,
retiring Western Union employees bear the entire cost of the premiums.
F-31
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 15: Segment Information
Operating segments are defined by Statement of Financial Accounting Standards
No. 131 - "Disclosures About Segments of an Enterprise and Related Information"
("SFAS 131") as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker, or decision-making group, in deciding how to allocate resources
and in assessing performance. FDC's chief operating decision-making group is the
Executive Committee, which consists of the Chairman of the Board and Chief
Executive Officer, the President and Chief Operating Officer, the Executive Vice
Presidents and certain key management. The operating segments are reviewed
separately because each operating segment represents a strategic business unit
that generally offers different products and serves different markets.
First Data Corporation classifies its businesses into four segments: payment
services, merchant services, card issuing services, and emerging payments.
Payment services is the leading provider of nonbank money transfer and payment
services to consumers and commercial entities, including money transfer,
official check and money order. Merchant services provides merchant credit and
debit card transaction processing services, including authorization, transaction
capture, settlement and Internet-based transaction processing. Merchant services
also include check verification and guarantee and check and other collection
services. Card issuing services provides a comprehensive line of processing and
related services to financial institutions issuing credit and debit cards and to
issuers of oil and private label credit cards, including information-based
products for enhanced decision making and marketing and a provider of consumer
and business solutions in the areas of risk and fraud management and information
verification. Emerging payments was established in the third quarter of 2000 and
is comprised solely of eONE; a business focused on identifying, developing,
commercializing, and operating innovative emerging payment systems businesses.
The segments have been restated to reflect the movement of the operations of
CashTax from payment services and non-core e-commerce related activity and
investments from the other segments, to emerging payments. In addition, a small
information business from all other and corporate was moved to card issuing
services which reflects current management reporting relationships. The "all
other and corporate" category includes a leader in developing in-store branch
banking programs in supermarkets and other retail superstores, an external
provider of operator and customer support services and corporate operations.
The accounting policies of the operating segments are generally the same as
those described in the summary of significant accounting policies. A majority of
corporate overhead is allocated to the segments based on a percentage of the
segment's revenues. Gains or losses arising from business divestitures,
restructuring and loss contract provisions, significant litigation, asset
impairment charges, interest expense and income taxes are not allocated to the
segments for internal evaluation purposes. Revenues and operating profit of the
payment services segment are stated on a tax-equivalent basis (i.e., as if
investment earnings on settlement assets, which are substantially all
nontaxable, were fully taxable at FDC's marginal tax rate). Revenues are
attributed to geographic areas based on the location of the unit processing the
underlying transactions. No individual foreign country accounted for more than
10% of consolidated revenues in any period presented. SFAS 131 requires
disclosure of investments in and equity in earnings of unconsolidated affiliated
companies; however, such information, in isolation, is generally not considered
by the Executive Committee to be relevant in evaluating segment performance.
F-32
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in Millions)
- ---------------------------------------------------------------------------------------------------------------
Payment Merchant Card Issuing Emerging All Other and
Year Ended December 31, 2000 Services Services Services Payments Corporate Totals
- ---------------------------------------------------------------------------------------------------------------
Revenues $ 2,315.2 $1,811.7 $1,480.4 $ 74.9 $184.3 $ 5,866.5
Depreciation and amortization 120.5 233.1 216.9 4.9 13.4 588.8
Operating profit 684.1 507.9 307.1 5.3 (14.3) 1,490.1
Segment assets 11,437.1 3,686.4 1,525.6 235.9 410.1 17,295.1
Expenditures for long-lived
assets 76.7 124.5 112.9 20.5 10.7 345.3
Equity in earnings of
unconsolidated affiliates (14.2) 201.0 --- --- (0.6) 186.2
Investment in unconsolidated
affiliates 4.4 802.0 --- --- --- 806.4
Payment Merchant Card Issuing Emerging All Other and
Year Ended December 31, 1999 Services Services Services Payments Corporate Totals
- ---------------------------------------------------------------------------------------------------------------
Revenues $ 1,953.3 $1,547.7 $1,395.0 $ 70.9 $276.4 $ 5,243.3
Depreciation and amortization 108.8 198.9 247.9 2.6 17.9 576.1
Operating profit 580.8 411.8 266.0 11.2 46.0 1,315.8
Segment assets 11,065.1 3,384.9 1,583.1 25.6 946.1 17,004.8
Expenditures for long-lived
assets 84.0 538.5 218.4 16.0 28.4 885.3
Equity in earnings of
unconsolidated affiliates (6.8) 126.1 --- --- (8.5) 110.8
Investment in unconsolidated
affiliates 7.1 884.2 --- --- --- 891.3
Payment Merchant Card Issuing Emerging All Other and
Year Ended December 31, 1998 Services Services Services Payments Corporate Totals
- ---------------------------------------------------------------------------------------------------------------
Revenues $ 1,639.0 $1,394.2 $1,255.4 $ 57.6 $270.4 $ 4,616.6
Depreciation and amortization 92.3 188.4 230.3 2.5 18.3 531.8
Operating profit 493.4 329.1 255.5 13.4 92.0 1,183.4
Segment assets 10,849.1 3,153.8 1,555.0 26.2 313.2 15,897.3
Expenditures for long-lived
assets 94.9 179.9 368.6 1.2 49.4 694.0
Equity in earnings of
unconsolidated affiliates (22.5) 70.3 --- --- 6.5 54.3
Investment in unconsolidated
affiliates 14.7 311.7 --- --- 13.6 340.0
F-33
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation of reportable segment amounts to the Company's consolidated
balances is as follows (in millions):
2000 1999 1998
- -----------------------------------------------------------------------------------------------------------
Revenues:
Total reported segments $ 5,682.2 $ 4,966.9 $ 4,346.2
All other and corporate 184.3 276.4 270.4
Divested or to be divested --- 394.5 554.2
Eliminations * (161.3) (157.9) (123.7)
- -----------------------------------------------------------------------------------------------------------
Consolidated $ 5,705.2 $ 5,479.9 $ 5,047.1
===========================================================================================================
Income before income taxes:
Total reported segments $ 1,504.4 $ 1,269.8 $ 1,091.4
All other and corporate (14.3) 46.0 92.0
Corporate interest expense (99.2) (103.8) (104.1)
Divested or to be divested --- 55.5 75.4
Restructuring, business
divestitures, litigation,
impairment and provision for
loss on contract, net 71.3 715.8 (319.1)
Eliminations * (153.9) (157.9) (123.7)
- -----------------------------------------------------------------------------------------------------------
Consolidated $ 1,308.3 $ 1,825.4 $ 711.9
===========================================================================================================
Assets:
Total reported segments $16,885.0 $16,058.7 $15,584.1
All other and corporate 410.1 946.1 313.2
Divested or to be divested --- --- 689.7
- -----------------------------------------------------------------------------------------------------------
Consolidated $17,295.1 $17,004.8 $16,587.0
===========================================================================================================
Depreciation and amortization:
Total reported segments $ 575.4 $ 558.2 $ 513.5
All other and corporate 13.4 17.9 18.3
Divested or to be divested --- 41.7 59.3
- -----------------------------------------------------------------------------------------------------------
Consolidated $ 588.8 $ 617.8 $ 591.1
===========================================================================================================
Expenditures for long-lived assets:
Total reported segments $ 334.6 $ 856.9 $ 644.6
All other and corporate 10.7 28.4 49.4
Divested or to be divested --- 24.8 50.0
- -----------------------------------------------------------------------------------------------------------
Consolidated $ 345.3 $ 910.1 $ 744.0
===========================================================================================================
*Represents elimination of adjustment to record payment services revenues on a
pre-tax equivalent basis and elimination of intersegment revenue.
F-34
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information concerning principal geographic areas was as follows (in millions):
United States Rest of World Total
---------------------------------------------------------
Revenues
2000 $5,390.0 $315.2 $5,705.2
1999 5,191.6 288.3 5,479.9
1998 4,779.7 267.4 5,047.1
Long-Lived Assets
2000 3,902.4 290.8 4,193.2
1999 3,865.6 327.5 4,193.1
1998 4,419.3 355.0 4,774.3
"Rest of World" represents businesses of significance which have local currency
as their functional currency.
Note 16: Quarterly Financial Results (Unaudited)
Restated summarized quarterly results for the two years ended December 31, 2000
are as follows (in millions, except per share amounts):
2000 by Quarter: First Second Third Fourth
----------------- --------------- ----------- ---------------
Revenues $1,343.2 $1,413.9 $1,440.3 $1,507.8
Restructuring, business divestitures,
litigation and impairments, net (a) 9.5 2.8 (112.9) 29.3
Other expenses 1,104.1 1,108.8 1,109.7 1,145.6
----------------------------------------------------------------------------
Income before
income taxes 229.6 302.3 443.5 332.9
Income tax expense 64.6 86.0 135.2 93.0
----------------------------------------------------------------------------
Net income $ 165.0 $ 216.3 $ 308.3 $ 239.9
============================================================================
Basic earnings per common share $ 0.40 $ 0.53 $ 0.76 $ 0.61
Diluted earnings per common share $ 0.39 $ 0.52 $ 0.75 $ 0.60
1999 by Quarter:
Revenues (b) $1,257.9 $1,383.0 $1,383.0 $1,456.0
Restructuring, business divestitures,
litigation and impairments, net (c) --- 34.9 6.1 (756.8)
Other expenses 1,056.4 1,116.3 1,091.5 1,106.1
----------------------------------------------------------------------------
Income before
income taxes 201.5 231.8 285.4 1,106.7
Income tax expense 60.5 38.5 78.3 448.4
----------------------------------------------------------------------------
Net income $ 141.0 $ 193.3 $ 207.1 $ 658.3
============================================================================
Basic earnings per common share $ 0.32 $ 0.45 $ 0.49 $ 1.57
Diluted earnings per common share $ 0.32 $ 0.44 $ 0.48 $ 1.55
(a) Results for 2000 include a fourth quarter impairment charge of $33.6
million related to the Company's investment in Excite@Home, $0.4 million of
a loss contract reserve reversal and a $3.9 million gain on the sale of a
facility; a third quarter gain of $186.0 million related to the Company's
sale of its investment in TransPoint, $8.7 million of divestiture reserve
reversals, a $12.0 million litigation charge, a $5.4 million divestiture
related impairment charge and a $64.4 million restructuring provision;
second quarter impairment and restructuring charges of $2.8 million and
$2.7 million, respectively, partially offset by a divestiture gain of $2.2
million and a divestiture reserve reversal of $0.5 million; and first
quarter restructuring charges of $12.7 million partially offset by a
divestiture gain of $3.2 million. The after-tax effect of these items was a
benefit of $46.0 million ($0.11 per share).
(b) Includes a $19.8 million gain recognized in the fourth quarter upon the
merger exchange of Excite@Home stock for iMall stock, in which FDC held an
11% ownership interest. The after-tax effect of this gain was $12.2 million
($0.03 per share).
F-35
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(c) Results for 1999 include fourth quarter benefits resulting from the sale of
Investor Services Group in the amount of $744.6 million and a $14.2
million reversal of restructuring, merger and divestiture accruals; a third
quarter reversal of a $7.4 million merger accrual related to the 1995
merger of FDC and First Financial Management Corp.; and a second quarter
gain resulting from the sale of Innovis in the amount of $24.5 million and
a $4.5 million gain from the divestiture of EBP Life. These gains were
slightly offset by a fourth quarter addition to the Western Union
litigation settlement accrual in the amount of $2 million; a third quarter
joint venture termination loss in the amount of $13.5 million; and a second
quarter loss on the sale of Donnelley of $29.8 million and settlement of
Western Union litigation of $34.1 million. The after-tax effect of these
items was $417.6 million ($0.96 per share).
F-36
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FIRST DATA CORPORATION
SCHEDULE II - Valuation and Qualifying Accounts
(dollars in millions)
Additions
------------------------------------
Balance at Charged Charged to Balance at
Beginning to Costs Other End of
Description of Period and Expenses Accounts Deductions Period
- ---------------------------------------- --------------------------------------------------------------------- ----------------
Year Ended December 31, 2000
Deducted from Receivables $31.3 $27.4 $24.3 (b) $34.4
Year Ended December 31, 1999
Deducted from Receivables 27.9 32.0 0.3 28.9 (b) 31.3
Year Ended December 31, 1998
Deducted from Receivables 29.1 27.4 0.8 (a) 29.4 (b) 27.9
(a) Primarily due to acquisitions.
(b) Amounts related to business divestitures and write-offs against assets.
F-37