FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended MARCH 31, 1995
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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 1-10442
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FIRST FINANCIAL MANAGEMENT CORPORATION
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(Exact name of registrant as specified in its charter)
GEORGIA 58-1107864
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(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
3 CORPORATE SQUARE, SUITE 700, ATLANTA, GEORGIA 30329
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (404) 321-0120
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NOT APPLICABLE
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(Former name, former address and former fiscal year,
if changed since last report.)
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 the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Number of Shares Outstanding
Title of each class as of May 1, 1995
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Common Stock, $.10 par value 63,816,170
FIRST FINANCIAL MANAGEMENT CORPORATION
INDEX
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PAGE
PART I. FINANCIAL INFORMATION NUMBER
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Item 1 Consolidated Financial Statements:
Consolidated Balance Sheets at March 31, 1995
and December 31, 1994 3
Consolidated Statements of Income for the
three months ended March 31, 1995 and 1994 4
Consolidated Statements of Cash Flows for the
three months ended March 31, 1995 and 1994 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders 11
Item 6 Exhibits and Reports on Form 8-K 11
2
PART I. FINANCIAL INFORMATION
FIRST FINANCIAL MANAGEMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, 1995 December 31, 1994
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(Dollars in millions)
ASSETS
Current Assets:
Cash and cash equivalents $ 295.6 $ 326.1
Accounts receivable, net of allowance for doubtful
accounts of $7.2 (1995) and $7.7 (1994) 411.8 473.8
Prepaid expenses and other current assets 105.4 103.3
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Total Current Assets 812.8 903.2
Property and equipment, net 159.6 163.6
Goodwill, less accumulated amortization
of $85.0 (1995) and $73.4 (1994) 1,737.2 1,740.6
Customer portfolios, less accumulated amortization
of $48.1 (1995) and $44.5 (1994) 164.0 160.5
Other assets 148.3 167.8
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$3,021.9 $3,135.7
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 553.7 $ 678.9
Income taxes payable 25.7 5.6
Current portion of long-term debt 9.5 9.2
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Total Current Liabilities 588.9 693.7
Long-term debt, less current portion 172.9 53.1
Pension obligations assumed 266.0 266.0
Senior convertible debentures 447.1 447.1
Other liabilities 75.2 246.0
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Total Liabilities 1,550.1 1,705.9
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Commitments and contingencies
Shareholders' Equity:
Common stock, $.10 par value; authorized
150,000,000 shares, issued 62,432,777
shares (1995) and 61,575,046 shares (1994) 6.2 6.2
Additional paid-in capital 864.8 858.2
Retained earnings 600.8 565.4
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Total Shareholders' Equity 1,471.8 1,429.8
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$3,021.9 $3,135.7
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See notes to consolidated financial statements.
3
FIRST FINANCIAL MANAGEMENT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended March 31,
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1995 1994
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(In millions, except per share amounts)
REVENUES
Service revenues $671.0 $442.1
Product sales 12.9 18.8
Other 0.4 0.4
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684.3 461.3
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EXPENSES
Operating 507.2 348.7
Selling, general and administrative 62.4 30.4
Cost of products sold 8.7 11.5
Depreciation and amortization 32.5 22.3
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610.8 412.9
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Operating income 73.5 48.4
Interest, net 8.2 (1.2)
Pension cost 5.3 --
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Income before income taxes 60.0 49.6
Income taxes 24.6 20.1
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Net income $ 35.4 $ 29.5
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Earnings per common share $0.56 $0.47
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See notes to consolidated financial statements.
4
FIRST FINANCIAL MANAGEMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
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1995 1994
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(In millions)
Cash and cash equivalents at January 1 $ 326.1 $ 190.0
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income 35.4 29.5
Adjustments to reconcile to net cash provided by
operating activities:
Depreciation and amortization 32.5 22.3
Other non-cash items 5.0 0.3
Increase (decrease) in cash, excluding the effects of
acquisitions, resulting from changes in:
Accounts receivable 58.5 (21.5)
Prepaid expenses and other assets (3.0) (2.4)
Accounts payable and accrued expenses (23.1) 26.6
Income tax accounts 90.3 17.9
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Net cash provided by operating activities 195.6 72.7
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CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under revolving credit facility, net 120.0
Principal payments on long-term debt (0.5) (0.5)
Cash dividends and other payments (3.1) (3.0)
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Net cash provided by (used in) financing activities 116.4 (3.5)
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CASH FLOWS FROM INVESTING ACTIVITIES
Current year acquisitions, net of cash received (3.3) (25.2)
Payments related to businesses previously acquired (315.7) (26.4)
Payments related to businesses previously sold (1.0) (2.5)
Additions to property and equipment, net (9.9) (7.6)
Software development and customer conversions (12.6) (12.0)
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Net cash used in investing activities (342.5) (73.7)
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Change in cash and cash equivalents (30.5) (4.5)
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Cash and cash equivalents at March 31 $ 295.6 $ 185.5
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See notes to consolidated financial statements.
5
FIRST FINANCIAL MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The consolidated financial statements include the accounts of First
Financial Management Corporation and its wholly-owned subsidiaries (the
"Company" or "FFMC"). All material intercompany profits, transactions, and
balances have been eliminated. Certain prior year amounts have been
reclassified to conform to the current year's presentation.
The Company operates in a single business segment, providing information
services to commercial establishments, government agencies and consumers.
The largest category of services involves information processing and
transfer related to financial transactions. These services include the
authorization, processing and settlement of credit and debit card
transactions, verification or guarantee of check transactions, debt
collection and accounts receivable management, and worldwide nonbank money
transfers and bill payments. A second category includes data processing and
information management services related to health care and workers'
compensation claims and the resulting payments. The final service category
comprises a full array of information management services, including data
capture, data imaging, micrographics, electronic database management, and
output printing and distribution.
The financial information presented should be read with the Company's
annual consolidated financial statements and notes included in its Annual
Report on Form 10-K for the year ended December 31, 1994. The foregoing
unaudited consolidated financial statements reflect all adjustments (all of
which are of a normal recurring nature) which are, in the opinion of
management, necessary for a fair presentation of the results of the interim
periods. The results for the interim period are not necessarily indicative
of results to be expected for the year.
2. In November 1994, the Company acquired Western Union Financial Services,
Inc. and related assets ("Western Union"). The following table summarizes
pro forma results of operations of the Company as if the Company's
acquisition of Western Union had occurred, all cash purchase price
consideration was paid, and related debt financing was concluded on January
1, 1994. All other acquisitions have been excluded due to their immaterial
effect. This pro forma information is not necessarily indicative of what
the combined operations would have been if the Company had control of such
combined businesses for the period presented.
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Three Months Ended March 31, 1994
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(In millions, except per share amounts)
Revenues $577.1
Net income 25.9
Earnings per common share .43
6
FFMC also expanded its merchant services area during the first quarter of
1995 with the acquisition of the assets of Comdata Retail Services
("Comdata"), a company specializing in grocery store check approval and
debit card processing. This acquisition was accounted for as a purchase,
and the results included with the Company's results from the effective date
of acquisition. The pro forma results of operations of the Comdata
acquisition (as if the acquisition had occurred on January 1, 1994) were
immaterial relative to the overall results of operations of the Company.
3. In March 1995, the Company awarded Patrick H. Thomas, its Chairman,
President and Chief Executive Officer, 500,000 restricted shares as
incentive compensation for the years 1995 through 1999. The vesting of the
shares is contingent upon FFMC's attainment of a performance goal for 1995
and continued employment through 1999, unless termination occurs due to
specified conditions. The Company also awarded 94,500 restricted shares to
Mr. Thomas as incentive compensation, which are subject to forfeiture, in
part or in whole, based on a formula related to the pretax income of the
Company for 1995 and the market price of the Company's common stock at the
end of 1995.
The value of the award is adjusted using the closing price of the Company's
common stock on balance sheet dates through the date of measurement for the
FFMC performance goal. The Company has assumed the maximum number of shares
will be earned and is amortizing the value from the date of grant (March
1994 for the 94,500 share award as it replaced a similar previously issued
but subsequently cancelled award) over the restriction period.
4. Earnings per common share amounts are computed by dividing income
amounts by the weighted average number of common and common equivalent
shares (when dilutive) outstanding during the period. Common stock
equivalents consist of shares issuable under the Company's stock option
plans, shares issuable in connection with outstanding warrants and an
assumed conversion into common stock of FFMC's senior convertible
debentures issued in December 1994. The after tax interest expense and
amortization on these debentures ($3.5 million for the quarter ended March
31, 1995) are added back to net income in computing earnings per common
share. Weighted average shares for all periods reflect the shares issued in
July 1994 to effect FFMC's merger with GENEX Services, Inc., which was
accounted for as a pooling of interests. Weighted average shares used to
compute earnings per common share for the three months ended March 31, 1995
and 1994, respectively, were 69.5 million and 62.4 million.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
First Financial Management Corporation ("FFMC" or "the Company") completed its
merger with GENEX Services, Inc. ("GENEX") in July 1994. This business
combination was accounted for as a pooling of interests and, accordingly, for
all periods in the following discussions the results of GENEX are included in
the Company's results. In November 1994, the FFMC completed its acquisition of
Western Union Financial Services, Inc. and related assets ("Western Union").
This business combination was accounted for as a purchase, and the results of
Western Union have been included in the Company's results from the effective
date of the acquisition.
Results of Operations
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FFMC's revenues increased 48% to $684.3 million in the first quarter of 1995
from $461.3 million in 1994's first quarter, including a 52% increase in service
revenues. Net income for 1995's first quarter was $35.4 million, up 20% from
the $29.5 million in after tax earnings during the prior year's first quarter.
Per share earnings increased to $0.56 compared with per share earnings of $0.47
in the first quarter of 1994, an increase of 19%.
The revenue increases were due primarily to continued strong growth in the
Company's merchant services area, with revenues up 76% in this area during
1995's first quarter compared with the year earlier period. While a majority of
this increase was due to the acquisition of Western Union, internal growth
continued to play a major role in this area's growth. The Company's overall
internal growth rate was 15% during the first quarter of 1995, reflecting the
addition of over 15,000 new customers (net of attrition).
The Company continues to emphasize growth in its service revenues, as reflected
by the 52% increase in 1995's first quarter compared with the prior year's first
three months. Product sales declined in the first quarter of 1995 compared with
the prior year's first quarter, reflecting FFMC's ongoing efforts to decrease
the significance of one-time product sales and focus its product development
effort on data capture platforms that link customers to the Company's
information services.
FFMC continues to place important emphasis on expense controls, as reflected by
the 45% increase in operating expenses compared with the higher percentage
increase in service revenues. Depreciation and amortization expense increased
46% during 1995's first quarter over the comparable 1994 period, reflecting
higher goodwill amortization in 1995 resulting from the Western Union
acquisition. The impact of Western Union's marketing costs in 1995 was also the
primary factor in the increase in selling, general and administrative expenses
during the first quarter of 1995 compared with the year earlier period.
These revenue and expense comparisons translated into an expansion of the
Company's operating income margins to 10.7% in the first quarter of 1995
compared with 10.5% in 1994's first quarter.
Increases in interest expense and pension cost for the first quarter of 1995
reflect borrowings and obligations assumed related to the Western Union
acquisition. Higher levels of interest expense arose from FFMC's senior
convertible debentures and borrowings under its revolving credit facility.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Pension cost in the first quarter of 1995 represents primarily interest expense
on the unfunded obligations of the Western Union suspended defined benefit plan.
Since benefits under this plan have been suspended for several years and its
assumption was primarily a financing for the Western Union acquisition, the
Company has classified the related costs as nonoperating.
The higher level of interest and pension expense in 1995 resulted in a pre-tax
margin of 8.8% compared with a pre-tax margin of 10.8% in 1994's first quarter.
The Company's effective tax rate was up slightly to 41.0% in 1995's first
quarter compared with a 40.5% rate for the first quarter of 1994.
Portions of FFMC's business are seasonal. The Company's revenues and earnings
are favorably affected by increased credit 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. The Company believes
that its revenues and earnings will also be affected by higher Western Union
money transfer volume during the summer months.
Capital Resources and Liquidity
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In January 1995, the Company paid $300 million in cash for the final purchase
consideration for its acquisition of Western Union Financial Services and
related assets ("Western Union"). This final cash payment was financed from
borrowings under FFMC's revolving credit facility and from existing cash on
hand.
Cash generated from operating activities during the first quarter of 1995
increased to $195.6 million, up from $72.7 million in 1994's first quarter,
reflecting the Company's higher earnings and the receipt of a refund of
estimated income taxes for 1994. The tax refund (amounting to $68 million)
resulted from FFMC's ability to reflect an anticipated advance funding in 1995
of its pension plan obligations as a deduction in the Company's 1994 income tax
return.
FFMC reinvested cash in its businesses (principally for property and equipment
additions, software development and customer conversions) totalling $22.5
million in the first quarter of 1995, compared with $19.6 million in the first
quarter of 1994. The Company estimates that business reinvestment amounts will
increase moderately in 1995.
Cash from operating activities exceeded nonacquisition investing activities by
$173.1 million in 1995's first three months, compared with $53.1 in the
comparable prior year period. This excess cash was utilized during the first
quarter of 1995 primarily to repay indebtedness, reducing outstanding borrowings
under the Company's revolving credit facility to $165 million at March 31, 1995.
The excess cash was also utilized for $19.0 million in other acquisition related
payments (net of cash received) during the quarter.
In May 1995, FFMC issued 1.3 million shares of the Company's common stock and
received $35 million in cash from the exercise (during the final exercise
period) of all remaining publicly held warrants.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
During 1995, FFMC also anticipates making an advance funding of its pension plan
obligations assumed in the Western Union acquisition in order to reduce the
future costs of this plan to the Company. FFMC anticipates that this funding,
primarily using borrowings under the Company's credit facility, will approximate
$175 million. A portion of this funding may be in the form of FFMC common
stock.
On January 3, 1995, FFMC paid a cash dividend of $.05 per share to shareholders
of record as of December 1, 1994. On April 26, 1995, the Company's Board of
Directors declared a cash dividend of $.05 per share, payable on July 3, 1995 to
shareholders of record as of June 1, 1995.
Cash equivalents of $100.2 million relate to required investments of cash in
connection with the Company's merchant credit card and money transfer
settlements. FFMC's remaining cash and cash equivalents are available for
acquisitions and general corporate purposes. If suitable opportunities arise
for additional acquisitions, the Company may use cash, draw on its available
credit facility, or use common stock or other securities as payment of all or
part of the consideration for such acquisitions. Alternatively, FFMC may seek
additional funds in the equity or debt markets to finance such acquisitions or
to repay outstanding borrowings under its credit facility. The Company believes
that its current level of cash and future cash flows from operations are
sufficient to meet the needs of its existing businesses.
10
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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On April 26, 1995, at the annual shareholders' meeting for which proxies
were solicited pursuant to Regulation 14A, the Company's shareholders
voted to elect all eight of the Company's nominees to the Company's
Board of Directors. The following table shows the number of votes cast
for each nominee and the number of votes withheld as to each nominee.
There were no abstentions or broker non-votes as to any nominee, and
there were no nominees other than those named in the Company's proxy
statement.
NAME OF NOMINEE AFFIRMATIVE VOTES VOTES WITHHELD
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Patrick H. Thomas 50,591,383 282,843
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George L. Cohen 50,592,585 281,641
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Robert E. Coleman 50,631,491 242,735
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Jack R. Kelly, Jr. 50,608,912 265,314
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Henry A. Leslie 50,606,624 267,602
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M. Tarlton Pittard 50,579,127 295,099
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Charles B. Presley 50,606,799 267,427
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Virgil R. Williams 50,604,060 270,166
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits
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27 Financial Data Schedule
(b) Reports on Form 8-K
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The Company filed a Current Report on Form 8-K on March 28, 1995 as a
supplemental report to update the pro forma combined financial
statements of First Financial Management Corporation and its acquired
business (Western Union Financial Services, Inc. and related assets)
through December 31, 1994.
11
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
FIRST FINANCIAL MANAGEMENT CORPORATION
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(Registrant)
Date: May 12, 1995 By /s/ M. Tarlton Pittard
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M. Tarlton Pittard
Vice Chairman, Chief Financial Officer
and Treasurer
Date: May 12, 1995 By /s/ Richard Macchia
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Richard Macchia
Executive Vice President
and Principal Accounting Officer
12