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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

OR

Commission file number 1-11073

FIRST DATA CORPORATION
(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code (303) 967-8000

             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 o

             Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

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FIRST DATA CORPORATION

INDEX

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PART I. FINANCIAL INFORMATION

FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts)
(Unaudited)

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See notes to consolidated financial statements.

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FIRST DATA CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)

See notes to consolidated financial statements.

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FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)

See notes to consolidated financial statements.

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FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1: Summary of Significant Accounting Policies

The accompanying consolidated financial statements of First Data Corporation (“FDC” or the “Company”) should be read in conjunction with the Company’s consolidated financial statements for the year ended December 31, 2001. As more fully discussed below, the Company has reformatted the presentation of its consolidated statements of income.

Consolidation

The accompanying consolidated financial statements include the accounts of FDC and its majority–owned subsidiaries. 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 “investment in affiliates” on the accompanying consolidated balance sheets. The Company generally utilizes the equity method of accounting when it has an ownership interest of between 20% and 50% in an entity, providing the Company is able to exercise significant influence over the investee’s operations.

In circumstances where the Company has a greater than 50% ownership interest in a subsidiary, the Company generally consolidates that subsidiary’s financial statements. The exception to this would occur in a situation where the Company does not exercise control over the subsidiary as a result of other investors having rights over the management and operations of the subsidiary. When this is the case, the Company accounts for the subsidiary under the equity method. As of September 30, 2002, there were no greater than 50% owned subsidiaries whose financial statements were not consolidated. At December 31, 2001, there was one such subsidiary and the Company’s ownership interest in it was 50.1%.

Use of Estimates

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

The Company has been in communication with The Securities and Exchange Commission (Division of Corporation Finance) regarding its Form 10-K for the year ended December 31, 2001 and Form 10-Q’s for both the first and second quarter 2002. These communications have focused on expanded and supplemental disclosures. Therefore, based on the Company's disciplined operating practices along with these communications beginning with this filing the line items on the face of the consolidated statement of income have been expanded. Equity earnings in affiliates, net of related amortization expense, minority interest and a portion of interest income are now presented as separate line items. Correspondingly, the Company increased its disclosure within Managements’ Discussion and Analysis of Financial Condition and Results of Operations. Also, for this Form 10-Q the Company has provided, this full accounting policies note, its critical accounting policies in Managements’ Discussion and Analysis of Financial Condition and Results of Operations, and Item 3., Quantitative and Qualitative Disclosures About Market Risk. On a go forward basis, absent any significant quarterly changes in accounting policy or market risk, these last three items will only be included in the Annual Report on Form 10-K. This format will be utilized in all future periods. Prior year amounts are consistent with the current 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.

In January 2002, the Company adopted EITF 01-14, “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred,” which requires that reimbursements received for “out-of-pocket” expenses be characterized as revenue. As a result of the adoption, results for the three and nine months ended September 30, 2001 were restated to increase revenues from external customers and operating expenses by $112.7 million and $331.3 million, respectively, primarily for telecommunication and postage costs. The adoption had no impact on net income.

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FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

In the third quarter of 2002, the Company acquired a controlling interest in each of three merchant alliances, Huntington Merchant Services, Wachovia Merchant Services and Wells Fargo Merchant Services. Revenues and expenses have been retroactively restated back to January 1, 2002 to reflect the merchant alliances, which were previously accounted for under the equity method of accounting, as consolidated subsidiaries. The restatement had no impact on net income. A summary of the retroactive consolidation of these entities is included in Note 2.

In the fourth quarter of 2001, the Company acquired the remaining 50 percent ownership interest in Cardservice International (CSI). Revenues and expenses for 2001 were previously restated to reflect CSI as a consolidated subsidiary retroactive to January 1, 2001. CSI was previously accounted for under the equity method of accounting.

The accompanying consolidated financial statements are unaudited; however, in the opinion of management, they include all normal recurring adjustments necessary for a fair presentation of the consolidated financial position of the Company at September 30, 2002, and the consolidated results of its operations for the three and nine months ended September 30, 2002 and 2001, and cash flows for the nine months ended September 30, 2002 and 2001. Results of operations reported for interim periods are not necessarily indicative of results for the entire year.

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 9).

FDC’s facilities in the United States provide the vast majority of transaction processing services for each of the Company’s business segments. FDC’s processing units in the United Kingdom and Australia represent the Company’s only foreign operating locations of significance and they process transactions for card issuing services clients located outside of North America. These units also represent the only foreign operations of any significance which have local currency as their functional currency. Domestic facilities process substantially all international payment and merchant services transactions. While these international transactions originate and settle outside of the United States, they are electronically routed to, and processed by the Company’s United States based infrastructure. Each of the Company’s business segments has an international presence through various regional or country offices where sales, customer service and/or administrative personnel are based. Revenues generated from processing transactions outside of the United States, primarily in Australia and the United Kingdom for the card issuing segment, represented 4% of FDC’s total revenues for the nine months ended September 30, 2002 and 2001, respectively, and a comparable portion of FDC’s assets and earnings (excluding the non-recurring items discussed in Note 3).

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 September 30, 2002 and December 31, 2001 include $70.0 million of required investments in connection with FDC’s merchant card settlement operation.

Investment Securities

The Company’s investments are comprised of state and municipal government obligations and corporate debt

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FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

securities which represent a majority of settlement assets. To a much lesser extent, the Company has investments in publicly traded corporate equity securities with the most significant investment being the common stock of Checkfree Holdings, which the Company received in 2000 in exchange for its ownership interest in the Transpoint joint venture. Investments are primarily held in the Company’s name, and in custody of, a major financial institution. The specific identification method is used to determine the cost basis of securities sold. At September 30, 2002 and December 31, 2001, substantially all of the Company’s investments were classified as available-for-sale. Unrealized gains and losses on these investments are included as a separate component of accumulated other comprehensive income (loss), net of any related tax effect. The Company also has equity securities of private companies for strategic purposes. These investments are included in “other assets” on the Company’s consolidated balance sheet and are carried at cost.

Declines in value that are judged to be other than temporary in nature are recognized in the consolidated statements of income. For public company investments, absent any other indications of a decline in value being other than temporary in nature, the Company’s policy is to treat a decline in the investment’s quoted market value that has lasted for more than six months as an other than temporary decline in value. The Company’s policy is the same for private company investments, however, their fair values are estimated. In estimating fair value, market conditions, offering prices, trends of earnings/losses, price multiples, financial position, new financing and other key measures are considered. The Company believes the estimates result in a reasonable reflection of the fair values of these investments.

Realized gains and losses and losses resulting from other than temporary declines in value relating to investments held in the Company’s payment services investment portfolio are included in the “investment income, net” component of revenues in the consolidated statements of income. These gains and losses are classified as such because they are recurring in nature as they are part of the Company’s investment portfolio management process and the management of this portfolio is a core component of the payment services business. Realized gains and losses and losses resulting from other than temporary declines in value relating to the Company’s other investments are classified within the “investment gains and (losses)” caption in the consolidated statements of income.

Reserve for Merchant Credit Losses and Check Guarantee

The merchant services segment conducts its business through both consolidated subsidiaries and alliances accounted for under the equity method. Under the rules of the credit card associations, the Company and/or its alliance partnerships have certain contingent liabilities for credit card transactions acquired from merchants. This contingent liability arises in the event of a billing dispute between the merchant and a cardholder that is not ultimately resolved in the merchant’s favor. In such a case, the Company or the alliance charges the transaction back to the merchant and the disputed amount is credited or otherwise refunded to the cardholder. If the Company or alliance is unable to collect this amount from the merchant, due to the merchant’s bankruptcy or other reasons, the Company or alliance will bear the loss for the amount of the refund paid to the cardholder. In most cases, this contingent liability situation is unlikely to arise because most products or services are delivered when purchased, and credits are issued on returned items. However, where the product or service is not provided until some later time following the purchase, the contingent liability could be more likely. The Company mitigates its risk by obtaining collateral from merchants considered higher risk.

The credit loss reserve recorded on the Company’s consolidated balance sheet only relates to the business conducted by its consolidated subsidiaries. The credit loss reserves for unconsolidated alliances are only recorded in the alliance’s financial statements. The Company has not recorded any reserves for estimated losses in excess of reserves recorded by the alliances nor has the Company identified needs to do so. At September 30, 2002 and December 31, 2001, the Company and its alliances had aggregate merchant credit loss reserves of $28.5 million and

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FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

$28.0 million, respectively. The foregoing disclosure presents merchant credit loss reserves in the aggregate without regard to whether the reserve relates to merchant contracts held by entities consolidated by the Company or alliances accounted for under the equity method. The amount of reserve attributable to entities consolidated by the Company was $19.9 million and $20.3 million at September 30, 2002 and December 31, 2001, respectively. This reserve is included in the allowance for doubtful accounts component of accounts receivable on the consolidated balance sheet.

The credit loss reserves, both for the unconsolidated alliances and the Company, are comprised of amounts for known losses and a provision for losses incurred but not reported (“IBNR”). Credit loss reserves are primarily determined by performing a historical analysis of chargeback loss experience. Other factors are considered that could affect that experience in the future. Such items include the general economy and economic challenges in a specific industry (such as the travel industry after September 11, 2001) or those affecting certain types of clients. Once these factors are considered, the Company or the unconsolidated alliance establishes a rate (percentage) that is calculated by dividing the expected chargeback (credit) losses by dollar volume processed. This rate is then applied against the dollar volume processed each month and charged against earnings. The resulting accrual balance is then compared to requirements for known losses and estimates for IBNR items. Historically, the Company’s estimation process in this area has proven to be materially accurate.

The majority of TeleCheck’s business involves the guarantee of checks received by merchants for a period of 90 days from the check date. Upon obtaining approval from TeleCheck to accept the check, the merchant will deposit the check in its bank account. TeleCheck earns a fee for each check it guarantees which is generally determined as a percentage of the check amount. If the check is returned, TeleCheck is required to purchase the check from the merchant at its face value and pursue collection from the check writer. At the time TeleCheck recognizes revenue, based on recent past history, a provision for estimated check returns net of anticipated recoveries is recorded. The estimated check returns and recovery amounts are subject to the risk that actual amounts returned and recovered in the future may not be consistent with recent past history. At September 30, 2002 and December 31, 2001, the Company had accrued warranty and accrued recovery balances of $22.5 million and $51.1 million, and $28.3 million and $55.4 million, respectively. Accrued warranties are included in accounts payable and other liabilities on the consolidated balance sheet and accrued recoveries are included in accounts receivable.

Derivative Financial Instruments

The Company adopted Statement of Financial Accounting Standards No. 133 (“SFAS 133”), “Accounting for Derivative Instruments and Hedging Activities”, on January 1, 2001. The Company utilizes derivative instruments primarily to mitigate interest rate risk. To a much lesser extent, derivative instruments are utilized to mitigate market and foreign currency risk. As a result of the adoption of SFAS 133, the Company recognizes all derivative financial instruments on the consolidated balance sheet as assets or liabilities at fair value. Such amounts are recorded in either the “other assets” or “accounts payable and other liabilities” captions on the consolidated balance sheet. Generally, changes in fair value are recognized immediately in earnings, unless the derivative qualifies as a hedge of future cash flows. For derivatives that qualify as hedges of future cash flows, the effective portion of changes in fair value is recorded temporarily in stockholders’ equity as a component of other comprehensive income (“OCI”) and then recognized in earnings in the period or periods the hedged item affects earnings.

SFAS 133 requires that, upon adoption, the transition adjustment be reported in net income or OCI, as appropriate, as the cumulative effect of a change in accounting principle. In accordance with the transition provisions of SFAS 133, the Company recorded a net-of-tax transition adjustment loss of $24.8 million in OCI and a net-of-tax transition adjustment loss of $2.7 million in earnings in 2001. Management does not believe that ongoing application of SFAS 133 will significantly alter the Company’s hedging strategies or impact its net income.

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FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

However, its application will increase the volatility of OCI.

The transition adjustment recorded in OCI represented the recognition of all derivatives that are designated cash flow hedging instruments at fair value. The transition adjustment recorded in earnings represented purchased option costs that were derecognized from the balance sheet upon adoption.

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 of property and equipment were $51.7 million and $54.8 million for the three months ended September 30, 2002 and 2001, respectively, and $150.8 million and $164.2 million for the comparable nine-month periods.

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. SFAS No. 142, “Goodwill and Other Intangible Assets”, (“SFAS 142”), issued in June 2001, requires that goodwill acquired in a business combination after June 30, 2001, shall not be amortized. In addition, as required by SFAS 142, the Company ceased amortizing all goodwill effective January 1, 2002. Prior to the adoption of SFAS 142, goodwill was amortized on a straight–line basis over estimated useful lives ranging from seven to 40 years. Goodwill attributable to 2001 acquisitions, occurring subsequent to June 30, 2001, amounted to $593.3 million. Goodwill acquired in business combinations during the nine months ended September 30, 2002 totaled $358.2 million. Information concerning the Company’s adoption of SFAS 142 on January 1, 2002 is contained in Note 8 to these consolidated financial statements. Goodwill amortization expense totaled $35.0 million and $102.0 million for the three and nine months ended September 30, 2001, respectively.

FDC capitalizes initial contract payments and conversion costs associated with customer processing relationships. Capitalization of initial contract payments and conversion costs only occurs when management is satisfied that such costs are recoverable through future operations, contractual minimums and/or penalties in case of early termination.

The Company’s accounting policy is to limit the amount of capitalized costs for a given contract to the lesser of the estimated ongoing future cash flows from the contract or the termination fees the Company would receive in the event of early termination of the contract by the customer.

The Company develops software that is used in providing processing services to customers. To a much lesser extent, the Company also develops software to be sold or licensed to customers. Software development costs are capitalized once technological feasibility of the software has been established. Costs incurred prior to establishing technological feasibility are expensed as incurred. Technological feasibility is established when the Company has completed all planning, designing, coding and testing activities that are necessary to determine that a product can be produced to meet its design specifications, including functions, features and technical performance requirements. Capitalization of costs ceases when the product is available for general use. Software development costs are amortized using the straight-line method over the estimated useful life of the software, which is generally five years.

In addition to capitalized contract and software development costs, other intangibles include databases, copyrights, patents, acquired software, trademarks and noncompete agreements acquired in business combinations. Other

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FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

intangibles are amortized on a straight–line basis over the length of the contract or benefit period, which generally ranges from three to 20 years. Other intangibles amortization expense totaled $85.6 million and $80.4 million for the three months ended September 30, 2002 and 2001, respectively, and $243.8 million and $233.2 million for the comparable nine month periods.

The following table provides the components of other intangibles (in millions):

In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (“SFAS 144”), effective January 1, 2002, and its predecessor SFAS No. 121 prior thereto, long-lived assets are reviewed for impairment on an annual basis and whenever events indicate that their carrying amount may not be recoverable. 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.

A discussion of impairment testing for goodwill is contained in Note 8 to these consolidated financial statements.

Revenue Recognition

The majority of the Company’s revenues are comprised of transaction based fees. Product sales and other includes sales of the Company’s products (which are generally ancillary to service revenues and primarily relate to point-of-sale devices in the merchant services segment), gains considered part of normal operations, and other items which recur but which fluctuate as to amount and timing. A description of the major components of revenue, by business segment, is as follows:

Payment services- revenue is primarily derived from two sources, transaction fees charged to consumers and investment income earned on the investment of funds received from the sale of payment instruments (primarily official checks and money orders). These investments are the primary component of settlement assets on the Company’s consolidated balance sheets.

In a typical money transfer transaction, a consumer will go to one of the Company’s domestic or international agent locations and pay the agent a fee. The fee is generally based on the dollar amount of the transaction and the location of where the funds are to be transferred. This transaction fee is set by the Company and is recorded as revenue by the Company at the time-of-sale. In addition, in certain money transfer transactions involving different send and receive currencies, Western Union generates revenue by acquiring currency at wholesale exchange rates

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FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

and providing the currency to consumers at retail exchange rates.

There are generally two agent locations involved in a money transfer transaction, the agent initiating the transaction (the “send agent”) and the agent disbursing funds (the “receive agent”). The send and receive agents each earn a per transaction commission generally based on a percentage of the fee charged to the customer. These commissions are included in cost of services in the consolidated statements of income and are recorded at the time-of-sale.

The Company’s money order and official check products generate revenue primarily through the Company’s ability to invest funds pending settlement. The Company invests most of these funds in high quality investments issued by municipalities to minimize its exposure to credit risks. In a money order transaction, a consumer purchases a money order from an agent. The agent selling the money order generally remits the funds collected from the consumer to the Company within a matter of days of the transaction date. An agent generally does not receive a commission on the sale of a money order. In an official check transaction, a consumer will procure an official check from one of the Company’s agents, typically a financial institution. The official check agent is generally required to remit the funds collected from the consumer to the Company the following day. The Company pays its official check agents commissions based on short-term variable rates and the balance of outstanding official checks. The Company considers this to be a revenue sharing arrangement and, therefore, nets the commissions paid to official check agents against the revenues it earns from its investments.

Merchant services - in the case of merchant contracts that the Company owns and manages, revenue is primarily comprised of fees charged to the merchant, net of interchange and assessments charged by the credit card associations. The Company has no control over interchange fees and assessments charged by credit card associations and believes its presentation of revenue, net of these fees and assessments, more accurately depicts the revenue earned by the Company. This net revenue is recognized by the Company at the time-of-sale. The fees charged to the merchant are a percentage of the credit card transaction’s dollar value, a fixed amount or a combination of the two.

Interchange and assessments amounted to $830.8 million and $481.4 million for the three months ended September 30, 2002 and 2001, respectively, and $2,325.6 million and $1,400.5 million for the comparable nine month periods.

The Company charges processing fees to its merchant alliance joint ventures. In situations where an alliance is accounted for under the equity method, the Company’s consolidated revenues include the processing fees charged to the alliance, as disclosed on the face of the consolidated statements of income.

Revenue from check verification and guarantee services is also recognized at the time-of-sale. Check verification fees generally are a fixed amount per transaction. Check guarantee fees generally are a percentage of the check amount. At the time-of-sale, the Company also recognizes an estimate of the net cost of honoring the guarantees, which is reflected within cost of services in the consolidated statements of income.

Card issuing services – revenue is primarily comprised of fees based on cardholder accounts on file, and to a lesser extent, transaction volumes processed. As described above under “Presentation”, effective January 1, 2002, the Company adopted EITF 01-14, “Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred,” which requires that reimbursements received for “out-of-pocket” expenses be characterized as revenue. As a result of the adoption, telecommunication and postage costs charged to clients are recorded in revenue. Revenue is recognized at the time an account on file amount is earned or at the time a transaction is processed. Professional service revenues are comprised of custom programming services and are recorded as work is performed.

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FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

PaySys International, acquired by the Company in April 2001, is in the business of licensing credit card processing software. The Company follows the requirements of AICPA Statement of Position 97-2, “Software Revenue Recognition” (“SOP 97-2”), in its accounting for PaySys’ revenue. In following SOP 97-2 revenue is not recognized until each of the following four criteria are met:

Emerging payments - revenue is primarily comprised of fees based on transaction volumes processed. Revenue is recognized at the time a transaction is processed. This segment also provides professional services, primarily to governmental entities. Revenue from these services is recognized as work is performed.

Acquisitions occurring during 2001 and 2002 have resulted in the segment’s business including the licensing of software. The Company follows the requirements of SOP 97-2, as outlined above, in its accounting for software related revenue.

Earnings Per Common Share

Earnings per common share amounts are computed by dividing net income amounts by weighted-average common and common equivalent shares (when dilutive) outstanding during the period. Amounts utilized in per share computations are as follows (in millions):

Diluted earnings per common share was calculated based on weighted-average shares outstanding, including the impact of shares issuable upon conversion of convertible debt and in-the-money 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. The “if converted” method is utilized in calculating diluted earnings per common share only when conversion is not conditional upon the occurrence of certain events.

The diluted earnings per share calculation excludes stock options, warrants and convertible debt to purchase, or that are convertible into, 41.1 million common shares and 35.1 million common shares for the three and nine month periods ended September 30, 2002, respectively, and 26.4 million common shares and 26.6 million common shares for the three and nine month periods ended September 30, 2001, respectively, because the exercise or conversion price of these instruments was greater than the average market price of the common stock, and their inclusion would have been anti-dilutive.

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FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

In March 2002, the Company’s Board of Directors declared a 2-for-1 stock split of the Company’s common stock to be effected in the form of a stock dividend. Shareholders of record on May 20, 2002 received one share of the Company’s common stock for each share owned. The distribution of the shares occurred after the close of business on June 4, 2002. All share and per share amounts have been retroactively restated for all periods to reflect the impact of the stock split.

Foreign Currency Translation

The U.S. dollar is the functional currency for all FDC businesses except its operations in the United Kingdom and Australia and certain other smaller international operations. Foreign currency denominated assets and liabilities for these units are translated into U.S. dollars based on exchange rates prevailing at the end of the period, and revenues and expenses are translated at average exchange rates during the period. The effects of foreign exchange gains and losses arising from the translation of assets and liabilities of those entities where the functional currency is not the U.S. dollar are included as a component of OCI.

Gains and losses attributable to foreign currency hedging included in the consolidated income statements amounted to a $7.1 million loss and a $1.7 million gain for the three-months ended September 30, 2002 and 2001, respectively, and an $11.4 million loss and a $4.6 million gain for the comparable nine-month periods. Other foreign currency transaction gains and losses were immaterial for each of the periods. This results from the Company’s daily settlement of most of its foreign currency denominated transactions.

Stock Based Compensation

SFAS No. 123, “Accounting for Stock Based Compensation” (“SFAS 123”), establishes accounting and reporting standards for stock based employee compensation plans. 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 its related interpretations.

Advertising and Marketing Costs

Advertising and marketing costs, included in “selling, general and administrative” expenses, are expensed as incurred or at the first time the advertising takes place. Advertising and marketing expense for the three months ended September 30, 2002 and 2001 amounted to $49.4 million and $41.8 million, respectively, and $153.5 million and $140.2 million for the comparable nine-month periods.

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 a 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.

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FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Note 2: Acquisitions

In January 2002, the Company acquired an ownership interest of approximately 25 percent in Christopher C. Varvias & Associates S.A., its money transfer agent in Greece.

In March 2002, the Company and SunTrust Banks, Inc. (“SunTrust”) formed an alliance, SunTrust Merchant Services, LLC. The Company and SunTrust each contributed a merchant portfolio to the alliance. Following the contribution, the Company acquired a portion of SunTrust’s equity interest in the alliance for cash. The payment to SunTrust has been treated as an acquired contract cost and is being amortized over a ten-year period. FDC has majority ownership of and management control over the alliance and is consolidating its financial statements.

In April 2002, the Company acquired Paymap Inc. for an initial purchase price of approximately $82 million in cash. Additional consideration of up to $26 million may be paid if certain operational targets are met. Paymap Inc. is a financial services company that develops and markets electronic payment services such as a mortgage payment accelerator. The preliminary purchase price allocation resulted in identifiable intangible assets of $20.6 million, which are being amortized over five to six years, and goodwill of $62.5 million.

Also in April 2002, TeleCheck Services, Inc., a wholly owned subsidiary of the Company, acquired substantially all of the assets of International Check Services, Inc (ICS). ICS is a check acceptance company that provides both traditional and electronic check products.

Additionally in April 2002, govONE Solutions, LP, an operating company of eONE Global, acquired GovConnect, Inc., a provider of electronic service delivery, consulting and technology solutions to the government marketplace.

In May 2002, the Company completed an acquisition of a front-end authorization and capture business within the merchant services segment.

In June 2002, the Company acquired E Commerce Group Products, Inc. for an initial purchase price of approximately $71 million in cash. Additional consideration of up to $50 million may be paid if certain operational targets are met. E Commerce Group Products, Inc. provides e-commerce offerings, including technology that allows companies to receive electronic bill payments through multiple sources. The preliminary purchase price allocation resulted in identifiable intangible assets of $6.7 million which are being amortized over one to five years and goodwill of $57.5 million.

In July 2002, the Company paid cash to acquire substantially all of the remaining 50 percent ownership interest in the Huntington Merchant Services (“Huntington”) alliance. As a result of the purchase, FDC finalized a new ten-year merchant referral agreement with Huntington Bancshares Incorporated. In August 2002, the Company paid cash to acquire the remaining 50 percent ownership interest in the Wachovia Merchant Services (“Wachovia”) alliance. The payments to the alliance partners have been treated as acquired contract costs and are being amortized over a ten-year period.

In August 2002, the Company acquired PayPoint Electronic Payment Systems for approximately $251 million in cash. PayPoint is a leader in electronic commerce and payment services, processing credit and debit transactions, and one of the largest point-of-sale (POS) transaction processors of personal identification number (PIN)-based debit transactions and a leading national electronic payment processor. The preliminary purchase price allocation resulted in identifiable intangible assets of $61.7 million, which are being amortized over ten years, except for trademarks which are amortized over 25 years, and goodwill of $185.8 million.

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FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

In September 2002, the Company obtained an additional ownership interest in the Wells Fargo Merchant Services (“Wells Fargo”) alliance by contributing non-bank-allied merchants from its Unified Merchant Services portfolio to the alliance. Additionally, the alliance arrangement was restructured resulting in the Company gaining management control over the alliance.

Revenues and expenses have been retroactively restated to the beginning of 2002 to reflect the Huntington, Wachovia and Wells Fargo alliances, which were previously accounted for under the equity method of accounting, as consolidated subsidiaries for the nine months ended September 30, 2002. As a result of the transactions, the Company recorded acquired contracts of $54.5 million, which are being amortized over ten years. In addition, approximately $62.1 million was reclassified from investment in affiliates to acquired contracts. The following summarizes the impact of retroactively consolidating the results of these alliances back to January 1, 2002:

In September 2002, the Company acquired a controlling interest in OMNIPAY, an international payment processor that provides foreign currency applications at the point of sale and back-office settlement operations.

In September 2002, the Company entered into two partnerships with CU Electronic Transaction Services (CUETS), a Canadian card processing company. FDC will have a 50 percent ownership interest in a merchant processing business which will be accounted for using the equity method of accounting and a controlling interest in a merchant acquiring business that will be consolidated.

The aggregate consideration paid, net of cash acquired, for acquisitions completed during the nine months ended September 30, 2002 was $585.5 million. The aggregate preliminary purchase price allocation for these acquisitions resulted in $224.1 million of identifiable intangible assets, which are being amortized over one to ten years (average of 8 years), except for trademarks of $12.3 million which are amortized over 25 years, and goodwill of $358.2 million.

Note 3: Restructuring, Impairments, Litigation and Investment Gains and Losses and Divestitures

During the nine months ended September 30, 2002, the Company incurred net charges of $46.0 million, related to restructuring activities, asset impairments, anticipated litigation settlements and investment losses, offset by prior period restructuring and divestiture reserve reversals. The Company did not record any such charges or benefits during the three months ended September 30, 2002.

During the nine months ended September 30, 2002, the Company recorded restructuring charges of $9.0 million. These charges were comprised of severance totaling $8.5 million and $0.5 million related to lease termination

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losses. Severance charges resulted from the termination of 281 employees, representing all levels of employees and less than 1% of the Company’s workforce. Merchant services charges were $6.0 million for the nine months ended September 30, 2002. The charges related to streamlining the span of management control and elimination of job redundancies across many departments at most employee levels within the merchant acquiring business. The restructuring plans were completed in the second quarter of 2002. Emerging payments charges were $2.4 million for the nine months ended September 30, 2002, which related to a reduction in force and closure of a leased facility for the SurePay business to adjust its employee base to match the slower than expected participation in the business to business exchange market place. The restructuring plans were completed in the first quarter of 2002. Card issuing charges were $0.3 million for the nine months ended September 30, 2002 as a result of consolidating Tulsa data center operations. The restructuring plans were completed in the first quarter of 2002. All other and corporate charges were $0.3 million for the nine months ended September 30, 2002, which related to the elimination of duplicative positions due to the integration of the Achex acquisition. The restructuring plans were completed in the first quarter of 2002. Offsetting these charges were prior period restructuring reserve reversals resulting from changes in estimates totaling $1.9 million. The majority of these reversals related to the third quarter 2000 restructuring charge related to the United Kingdom based operations of the card issuing services segment. The change in estimate related to this charge was caused primarily by pension obligations associated with severed employees being less than anticipated.

The following table summarizes the Company’s utilization of restructuring accruals for the nine months ended September 30, 2002 (in millions):

During the nine months ended September 30, 2002, the Company recorded an $11.3 million asset impairment charge in emerging payments related to SurePay’s capitalized business to business software development costs. The impairment resulted from the second quarter 2002 decision to cease SurePay platform development efforts.

During the second quarter of 2002, the Company recorded a payment services charge of $30.0 million relating to the anticipated settlements of various class action lawsuits pertaining to the Company’s money transfer business, including legal fees and other outside administrative costs. See Note 10 for additional discussion.

During the nine months ended September 30, 2002, the Company recorded a gain on the sale of a portion of the Company’s investment in CheckFree Corporation, totaling $8.1 million, offset by $5.6 million of investment impairments in the emerging payments segment relating to e-commerce companies. The remaining impairment charge of $2.5 million related to an investment in a software business held by the card issuing services segment. These investments were written-down to fair value based on quoted market prices for public companies, and for privately held companies, by considering market conditions, offering prices, trends of earnings/losses, price multiples, financial position, new financing or other measures.

During the nine months ended September 30, 2002, the Company released $2.4 million of prior period divestiture reserves related primarily to Investor Services Group due to the passage of certain contractual indemnification

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provisions and the release of amounts previously held in escrow. Investor Services Group was divested in the fourth quarter of 1999.

During the three and nine months ended September 30, 2001, the Company recorded $6.0 million and $21.7 million relating to restructuring charges. These charges were comprised of severance totaling $4.1 million and $18.9 million for the three and nine months ended September 30, 2001, respectively, and $1.9 million and $2.8 million related to lease termination losses and a customer contract for the three and nine months ended September 30, 2001. Severance charges resulted from the termination of 562 employees for the nine months ended September 30, 2001, representing all levels of employees and approximately 2% of the Company’s workforce. Amounts attributable to payment services were $0.4 million and $8.8 million for the three and nine months ended September 30, 2001. The charges were a result of the discontinuance of the Payment Card Solutions and Skyteller operations, consolidation of international support functions and transition of a Mexico call center and operations support to a third party provider. The restructuring plans were completed in the second quarter of 2002. Amounts attributable to merchant services were $2.6 million and $8.2 million for the three and nine months ended September 30, 2001. The charges related to closing facilities in Nashville, Tennessee, Louisville, Kentucky, Belmont, California, Reston, Virginia and Lakewood, Ohio to eliminate job redundancies related to front end system support, relationship management and quality assurance. The restructuring plan was completed in the third quarter of 2001. In addition, TeleCheck restructured under new management and eliminated management positions at several levels within the organization. The restructuring plans were completed in the second quarter of 2001. Amounts attributable to card issuing services were $2.0 million and $2.8 million for the three and nine months ended September 30, 2001, which related to the closure of a facility and terminations associated with converting certain debit operations to the NYCE platform and other department reorganizations. The restructuring plans were completed in the first quarter of 2002. Amounts attributable to all other and corporate were $1.0 million and $1.9 million for the three and nine months ended September 30, 2001, which related to consolidating corporate functions to the Denver office and elimination of redundant functions. The restructuring plans were completed in the third quarter 2001.

Offsetting these charges were prior period restructuring reserve reversals totaling $1.9 million and $6.0 million for the three and nine months ended September 30, 2001, respectively. The largest component of these reversals related to the third quarter 2000 restructuring of the United Kingdom based operations. The change in estimate related to this charge was caused primarily by the unanticipated voluntary separation of a large number of employees resulting in a lesser amount of severance being paid than anticipated.

During the three months ended September 30, 2001, the Company recorded an asset impairment charge of $12.2 million, of which $10.7 million related to the payment services segment, $1.1 million related to the card issuing segment and $0.4 million related to the merchant services segment. The $10.7 million payment services charge related to goodwill and other assets associated with the discontinuance of the Skyteller service offering. The $1.1 million card issuing charge related to a $0.8 million software impairment, as well as fixed assets associated with the card issuing facility closures discussed in restructurings above. The $0.4 million related to the merchant services segment also related to fixed assets associated with the facility closures discussed in restructurings above. The Company’s results for the nine months ended September 30, 2001 also include a $0.5 million charge for fixed assets associated with the restructurings discussed above.

During the three and nine months ended September 30, 2001, the Company released prior period divestiture reserves of $0.8 million and $37.3 million related primarily to Investor Services Group due to the passage of certain contractual indemnification provisions. Investor Services Group was divested in the fourth quarter of 1999.

During the second quarter of 2001, the Company announced the discontinuance of a collections business resulting in a charge of $11.4 million, which included $4.1 million for employee severance, $2.6 million for facility exit costs and a $4.7 million asset impairment charge for leasehold improvements and fixed assets.

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During the three months ended September 30, 2001, the Company recorded $176.4 million of investment losses, of which $142.8 million related to payment services, $6.7 million related to merchant services, $21.7 million related to emerging payments and $5.2 million related to corporate and other. The $142.8 million payment service charge related to the write-down of the Company’s investment in CheckFree Corporation due to CheckFree’s stock trading below the Company’s cost basis for more than six months. The $6.7 million merchant services charge related to a $1.8 million charge to fully write-down the Company’s investment in Excite@Home, and a $4.9 million write-down of investments in other e-commerce related businesses. The $21.7 million emerging payments charge and $5.2 million corporate and other charge also related to investments in e-commerce businesses. The $183.7 million of investment losses for the nine months ended September 30, 2001 also included a $7.3 million charge for Excite@Home. These investments were written-down to fair value based on quoted market prices for public companies and for privately held companies by considering market conditions, offering prices, trends of earnings/losses, price multiples, financial position, new financing or other measures.

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 bank 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 acquire credit and debit card transactions from merchants. The Company provides processing and other services to the joint ventures and charges fees to the joint venture primarily based on contractual transaction based pricing. These fees have been separately identified on the face of the consolidated statements of income. At September 30, 2002, there were fourteen affiliates accounted for under the equity method of accounting, comprised of six merchant alliances and eight strategic investments in companies in related markets, including Western Union agents. As discussed in Note 2, the 2002 amounts reflect the retroactive consolidations back to January 1, 2002, of the Huntington Merchant Services, Wachovia Merchant Services and Wells Fargo Merchant Services alliances based on the Company gaining a controlling interest in each of these alliances in the third quarter of 2002. The presentation below, therefore, excludes results and balances for these three entities for 2002. The 2001 amounts and balances include the results of the three alliances consolidated in 2002 but exclude the results and balances of CSI. The Company increased its ownership interest in CSI to 100% in December 2001 and retroactively consolidated CSI back to January 1, 2001.

A summary of financial information for the unconsolidated merchant alliances and international joint ventures accounted for under the equity method of accounting is as follows (in millions):

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The formation of a merchant alliance generally involves each of the Company and its partner contributing contractual merchant relationships to the alliance and a cash payment from one partner to the other to achieve the desired ownership percentage for each partner. The asset amounts reflected above are owned by the alliances and other equity method investees and do not include any of such payments made by the Company. The amount by which the total of the Company’s investments in its joint ventures exceeded its proportionate share of the joint ventures’ net assets totaled $556.2 million and $614.7 million at September 30, 2002 and December 31, 2001, respectively. Prior to 2002, the entire excess was being amortized, however, in connection with the January 1, 2002 adoption of SFAS 142, the Company ceased amortizing the $369.2 million portion of the excess deemed to be goodwill.

Note 5: Borrowings

The Company’s commercial paper borrowings at September 30, 2002 were $355.0 million. The Company’s $1.5 billion commercial paper program is supported by a $1.1 billion revolving credit facility. At September 30, 2002, the Company has $200 million available under the $1.5 billion shelf registration filed in the first quarter of 2001, $250 million available under its uncommitted bank lines, and $300 million available under its extendable commercial note (“ECN”) program. FDC has remaining available short-term borrowing authorization of approximately $1.7 billion at September 30, 2002 under the Company’s commercial paper program, extendable commercial note program and uncommitted bank credit lines.

During the first nine months of 2002 the Company entered into capital lease agreements to finance the purchase of equipment and software. The terms of the capital leases range from two to three years and resulted in the Company recording $17.0 million in short-term and $18.0 million in long-term borrowings. Payments on the lease obligations will be made from cash provided by operating activities.

Note 6: Comprehensive Income

The components of comprehensive income, net of tax, are as follows (in millions):

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133, (SFAS 133) “Accounting for Derivative Instruments and Hedging Activities”, on January 1, 2001.

(b) net of reclassification adjustment for realized gains included in the investment income, net component of revenues and net income of $15.5 million and $9.7 million, and $49.0 million and $30.7 million for the three and nine months ended September 30, 2002, respectively, and $10.4 million and $6.5 million, and $25.5 million and $16.0 million for the three and nine months ended September 30, 2001, respectively.

Note 7: Derivative Financial Instruments

Adoption of SFAS 133

The Company adopted SFAS 133 on January 1, 2001. SFAS 133 requires companies to record derivatives on the balance sheet as assets or liabilities at fair value. SFAS 133 requires that, upon adoption, the transition adjustment be reported in net income or other comprehensive income, as appropriate, as the cumulative effect of a change in accounting principle. In accordance with the transition provisions of SFAS 133, the Company recorded a net-of-tax transition adjustment loss of $24.8 million in other comprehensive income and a net-of-tax transition adjustment loss of $2.7 million in earnings in the first quarter 2001. The ongoing application of SFAS 133 has not significantly altered the Company’s hedging strategies or impacted its net income. However, its application increased the volatility of other comprehensive income, other assets and other liabilities.

The transition adjustment recorded in other comprehensive income represented the recognition of all derivatives that are designated cash flow hedging instruments at fair value. The transition adjustment recorded in earnings represented purchased option costs that were derecognized from the balance sheet upon adoption.

The Company is exposed to various financial and market risks, including those related to changes in interest rates, foreign currency rates and equity prices that exist as part of ongoing business operations. As discussed in notes 1 and 7 of the 2001 Annual Report on Form 10-K, the Company uses derivative financial instruments to mitigate certain of those risks.

Note 8: Adoption of SFAS 142 and Other New Accounting Pronouncements

The Company adopted SFAS 142 for acquisitions occurring prior to July 1, 2001 on January 1, 2002. SFAS 142 prohibits amortization of goodwill and intangible assets that have indefinite useful lives and requires annual impairment tests of those assets. The statement also provides specific guidance about how to determine and measure goodwill and intangible asset impairment, and requires additional disclosure of information about goodwill and other intangible assets. Goodwill and intangible assets acquired after June 30, 2001 were subject to the non-amortization provisions of the statement. The Company has completed the transitional goodwill impairment test required by SFAS 142 and did not identify any impairments.

The following presents net income and per share amounts exclusive of goodwill amortization, as required by SFAS 142:

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The following table provides the components of other intangibles:

The estimated future aggregate amortization expense for existing other intangibles as of December 31, 2001 is $262.9 million in 2002, $229.2 million in 2003, $196.3 million in 2004, $169.3 million in 2005 and $138.7 million in 2006.

At December 31, 2001, goodwill recorded at the segment reporting level was $1,150.7 million in payment services, $1,793.2 million in merchant services, $400.8 million in card issuing services, $66.6 million in emerging payments and $27.7 million in all other and corporate.

In June 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”), which applies to exit or disposal activities initiated after December 31, 2002. The statement requires that a liability for a cost associated with an exit or disposal activity be recognized only when the liability is incurred versus when the commitment is made.

Note 9: Segment Information

Operating segments are defined by SFAS 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 (“CODM”), or decision-making group, in deciding how to allocate resources and in assessing performance. FDC’s CODM is its Executive Committee, which consists of the Company’s President and Chief Executive Officer, Executive Vice Presidents and certain other senior executives. The operating segments are reviewed separately because each operating segment represents a strategic business unit that generally offers different products and serves different markets.

FDC classifies its businesses into four segments: payment services, merchant services, card issuing services, and emerging payments. Payment services is a leading provider of money transfer and payment services to consumers and commercial entities, including money transfer, official check, bill payment and money order. Merchant services

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provides merchant credit and debit card transaction processing services, including authorization, transaction capture, settlement and Internet-based transaction processing. Merchant services also includes check verification, guarantee and check collection services and also provides processing services to debit card issuers and operates automated teller machine networks. 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. 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 “all other and corporate” category includes external providers of operator and customer support services and corporate operations.

The Company divested and discontinued two businesses in 2001, a collection business included in merchant services and an in-store branch banking business included in all other and corporate. Operations of the businesses were moved to the divested and discontinued businesses line. All periods were restated.

The business segment measurements provided to, and evaluated by, the Company’s CODM are computed in accordance with the following principles:

The following tables present the Company’s operating segment results for the three and nine months ended September 30, 2002 and 2001 (in millions):

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