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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1994
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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 August 1, 1994
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Common Stock, $.10 par value 62,437,859
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FIRST FINANCIAL MANAGEMENT CORPORATION
INDEX
PAGE
PART I. FINANCIAL INFORMATION NUMBER
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Item 1 Consolidated Financial Statements:
Consolidated Balance Sheets at June 30, 1994
and December 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Income for the
three and six months ended June 30, 1994 and 1993 . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the
six months ended June 30, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . 9
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
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PART I. FINANCIAL INFORMATION
FIRST FINANCIAL MANAGEMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, 1994 DECEMBER 31, 1993
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ASSETS (Dollars in thousands)
Current Assets:
Cash and cash equivalents $ 201,619 $ 186,263
Accounts receivable, net of allowance for doubtful
accounts of $4,143 (1994) and $4,043 (1993) 359,164 323,130
Prepaid expenses and other current assets 94,346 87,797
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Total Current Assets 655,129 597,190
Property and equipment, net 135,574 134,804
Excess of cost over fair value of assets acquired,
less accumulated amortization of $61,412 (1994)
and $52,001 (1993) 677,574 647,746
Customer contracts, less accumulated amortization
of $37,841 (1994) and $31,806 (1993) 152,107 140,124
Other assets 119,929 106,279
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$1,740,313 $1,626,143
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $311,958 $278,637
Income taxes payable 13,047 10,563
Current portion of long-term debt 5,642 6,218
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Total Current Liabilities 330,647 295,418
Long-term debt, less current portion 15,330 8,495
Deferred income taxes payable 63,882 63,347
Other liabilities 10,512 10,919
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Total Liabilities 420,371 378,179
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Commitments
Shareholders' Equity:
Common stock, $.10 par value; authorized
150,000,000 shares, issued 61,348,093
shares (1994) and 59,881,709 shares (1993) 6,135 5,988
Paid-in capital 841,960 828,699
Retained earnings 472,498 413,928
Treasury stock at cost, 20,000 shares (651) (651)
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Total Shareholders' Equity 1,319,942 1,247,964
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$1,740,313 $1,626,143
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See notes to consolidated financial statements.
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FIRST FINANCIAL MANAGEMENT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED JUNE 30,
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1994 1993
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(In thousands, except per share amounts)
REVENUES:
Service revenues $469,547 $365,925
Product sales 17,934 25,817
Other 1,215 1,655
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488,696 393,397
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EXPENSES:
Operating 389,714 305,994
General and administrative 7,183 5,895
Cost of products sold 11,446 14,179
Depreciation and amortization 23,022 18,854
Interest, net (1,491) 885
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429,874 345,807
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Income before income taxes 58,822 47,590
Income taxes 24,707 19,703
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Net income $ 34,115 $ 27,887
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Earnings per common share $ 0.56 $ 0.46
======== ========
See notes to consolidated financial statements.
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FIRST FINANCIAL MANAGEMENT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
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1994 1993
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(In thousands, except per share amounts)
Revenues:
Service revenues $883,225 $688,854
Product sales 36,752 49,836
Other 1,574 3,176
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921,551 741,866
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Expenses:
Operating 738,119 577,934
General and administrative 11,986 10,613
Cost of products sold 22,893 29,509
Depreciation and amortization 44,959 37,440
Interest, net (2,677) 2,220
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815,280 657,716
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Income before income taxes 106,271 84,150
Income taxes 44,635 34,799
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Net income $ 61,636 $ 49,351
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Earnings per common share $ 1.01 $ 0.81
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See notes to consolidated financial statements.
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FIRST FINANCIAL MANAGEMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
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1994 1993
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(In thousands)
Cash and cash equivalents at January 1 $ 186,263 $ 16,823
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Cash flows from operating activities:
Net income 61,636 49,351
Adjustments to reconcile to net cash provided by
operating activities:
Depreciation and amortization 44,959 37,440
Interest expense allocated to discontinued operations (636)
Other non-cash items 3,033 1,307
Increase (decrease) in cash, net of effects from
acquisitions and dispositions, resulting from changes in:
Accounts receivable (26,818) (55,646)
Prepaid expenses and other assets (5,884) (3,067)
Accounts payable and accrued expenses 48,144 80,100
Income tax accounts 9,236 (13,384)
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Net cash provided by operating activities 134,306 95,465
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Cash flows from financing activities:
Proceeds from exercise of stock warrants 8,069 1,333
Principal payments on long-term debt (2,027) (144,259)
Payments of other liabilities (2,998) (4,314)
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Net cash provided by (used in) financing activities 3,044 (147,240)
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Cash flows from investing activities:
Acquisitions, net of cash received (46,532) (7,882)
Payments related to businesses previously acquired (35,012) (10,296)
Proceeds, net of expenses, from sale of business 87,955
Proceeds and dividends received from discontinued
operations, net of expenses and taxes paid (3,008) 213,864
Additions to property and equipment, net (13,961) (14,104)
Software development and customer conversions (23,481) (17,698)
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Net cash provided by (used in) investing activities (121,994) 251,839
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Change in cash and cash equivalents 15,356 200,064
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Cash and cash equivalents at June 30 $ 201,619 $ 216,887
========= =========
See notes to consolidated financial statements.
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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. The Company operates
in a single business segment, providing a vertically integrated set of
data processing, storage and management products for the capture,
manipulation and distribution of information. Services include
merchant credit card authorization, processing and settlement; check
guarantee and verification; debt collection and accounts receivable
management; data imaging, micrographics and electronic data base
management; health care claims processing and integrated management
services; and the development and marketing of data communication and
information processing systems, including in-store marketing programs
and systems for supermarkets.
The financial information presented should be read in conjunction 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, 1993. 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 periods are not necessarily indicative of results to be
expected for the year.
2. Cash and cash equivalents at June 30, 1994 include approximately
$106.8 million in First Financial Bank ("FFB"), of which $70 million
relates to FFB's current capital requirements.
3. On March 22, 1994, the Company entered into an employment agreement
with Patrick H. Thomas, FFMC's Chairman of the Board, President and
Chief Executive Officer, which begins coterminous with the termination
of his current employment agreement on December 31, 1994 and extends
through 1999. Two awards totalling 972,500 restricted shares of FFMC
common stock were granted to Mr. Thomas in connection with the new
employment agreement. The first of these awards, for up to 472,500
shares, is in lieu of any cash bonus. For each calendar year during
the term of the agreement up to 94,500 shares will be earned,
contingent upon Mr. Thomas' continued employment through 1999, subject
to acceleration in the event of death, disability, a "change in
control" of FFMC or certain other circumstances. The number of shares
earned for any year will be equal to 2 1/2% of the pre-tax income of
FFMC, divided by the then current market price of FFMC Common Stock.
If all of the 94,500 shares are not earned in any year or years, the
difference between the number of shares earned and 94,500 will be
forfeited. The vesting of the second of these awards, for 500,000
shares, is contingent upon FFMC's attainment of a performance goal for
1994 and continued employment through 1999, except in the event of
disability, death or involuntary termination.
The value of these awards is adjusted using closing prices of the
Company's common stock on balance sheet dates through the date of
measurement for the FFMC performance goal or the date on which the
number of shares earned in each year is determined, as appropriate.
The Company has assumed that the performance goals will be attained
and that the maximum number of shares will be earned in each calendar
year during the term of the contract. The value of these awards is
being amortized to expense on a straight-line basis from the grant
date over the restriction period.
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FIRST FINANCIAL MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)
4. Publicly held stock warrants were exercised during the second quarter
of 1994, resulting in the issuance of 303,000 new shares of FFMC
common stock and cash proceeds to the Company of $8.1 million. After
such exercises, 1.3 million shares remained subject to publicly held
warrants at June 30, 1994, with these remaining warrants exercisable
at $26.67 per share during the second quarter of 1995.
5. Earnings per 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 and in connection with outstanding warrants. Weighted
average shares used in earnings per share computations were as follows
(amounts in thousands):
1994 1993
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Three months ended June 30 61,341 60,611
Three months ended March 31 61,222 60,588
Six months ended June 30 61,281 60,600
6. On June 30, 1994, FFMC signed a definitive agreement to acquire GENEX
Services, Inc. ("GENEX"), a company that provides workers'
compensation programs to self-insured employers, insurance companies,
third party administrators, and government agencies throughout the
United States, Puerto Rico and Canada. This business combination was
consummated on July 21, 1994, and the Company issued or reserved
1,258,000 unregistered shares of FFMC common stock as consideration
for all the outstanding shares and stock options of GENEX.
This transaction will be accounted for as a pooling of interests. The
accompanying financial statements do not reflect the combined
businesses or the additional shares issued or reserved to effect the
merger because the merger occurred subsequent to the end of the
periods presented.
Prior to the merger, GENEX was a Subchapter S Corporation and included
no federal income taxes in its financial statements since its income
was taxed at the shareholder level. The separate results of
operations of GENEX prior to combination with FFMC were as follows
(dollars in thousands):
Six Months Ended Year Ended
June 30, 1994 December 31, 1993
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Revenues $44,946 $89,965
Net income 2,053 4,169
The effect of combining the separate results of GENEX with the
Company's results will increase FFMC's earnings per common share by
$.01 per share for the six months ended June 30, 1994 and by $.02 per
share for the year ended December 31, 1993.
The Company paid $46.5 million in cash (net of cash received) and
entered into $7.0 million in notes payable in connection with other
acquisitions in 1994. These other acquisitions include a credit
claims and collection company, two merchant credit card processing
portfolios, and data imaging assets, all of which expanded the markets
for FFMC's existing information services. These other acquisitions
were accounted for as purchases, and their results have been included
in the Company's results from the effective dates of acquisition. The
results of operations of these other acquisitions are immaterial
relative to the overall results of operations of the Company.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
FFMC reported net income of $34.1 million for the second quarter ended June
30, 1994, an increase of 22% from the $27.9 million in the second quarter of
1993. Revenues were $488.7 million for the quarter, or 24% over the $393.4
million in revenues for 1993's second quarter. Earnings per share increased to
$.56 per share in the second quarter of 1994 from $.46 per share in the prior
year's second quarter.
For the six months ended June 30, 1994, the Company reported net income of
$61.6 million, a 25% increase over the $49.4 million for the comparable 1993
period. Revenues were $921.6 million compared with $741.9 million in the first
six months of 1993, an increase of 24%. Earnings per share increased to $1.01
per share for the six months ended June 30, 1994 from the $.81 per share
reported in 1993's first six months.
Record new business (signed in the latter half of 1993 and during 1994)
together with the assimilation of acquisitions contributed to the Company's 24%
revenue growth. Internal growth approximating 13% and 14% for the second
quarter and first six months of 1994, respectively, was the principal component
of the overall revenue increases compared with similar 1993 periods. Over
33,000 new customers were added during the first six months of 1994 (including
18,000 during the second quarter), the majority of which occurred in FFMC's
merchant services areas.
Total expenses also increased 24% for both the second quarter and first six
months of 1994 compared with prior year periods. Operating expenses grew at a
slower rate than service revenues for these same periods due to a continued
emphasis on expense controls, which more than offset the fact that the
strongest growth in service revenues was concentrated in an area (merchant
services) that has a margin lower than the overall Company enjoys. Product
sales declined during the second quarter and six month periods in 1994 compared
with similar periods in 1993, partially from the Company's decision to
eliminate certain ancillary product sales in its imaging business. Changes in
the composition of product sales resulted in a gross profit percentage on
product sales of 37.7% during 1994's first six months compared with 40.8% for
the first six months of 1993.
General and administrative expenses increased in the second quarter and first
six months of 1994 compared with year earlier periods, due primarily to the
amortization of stock compensation costs in 1994's second quarter from an
employment agreement entered into on March 22, 1994. Depreciation and
amortization expense increased in the 1994 periods compared with the second
quarter and six month periods in 1993, due to reinvestment in the business
through equipment purchases and software development activities associated with
the Company's revenue growth and the impact of acquisitions completed in the
preceding twelve months. As a result of proceeds from sales of businesses
during 1993's first six months and strong cash flow from operations, the
Company moved from a net interest expense position in the second quarter and
first six months of 1993 to a net interest income position in the comparable
periods in 1994.
The combination of these revenue and expense changes produced pre-tax margins
during the second quarter and first six months of 1994 that were comparable to
pre-tax margins for the prior year periods. The second quarter pre-tax margin
of 12.0% was similar to the 12.1% for the second quarter of 1993. For the
first six months of 1994 the pre-tax margin was 11.5%, up slightly from the
11.3% in 1993's first six months.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
The Company's effective tax rate for the quarter and six month period ended
June 30, 1994 was 42%, up slightly from the 41.4% effective tax rate during the
comparable 1993 periods. The increase in the effective tax rate is due
primarily to the pooling of interests accounting treatment of a 1993 merger
with a Subchapter S Corporation, which had previously recorded taxes at the
shareholder level.
FFMC's business is not seasonal, except that its revenues, earnings and margins
are favorably affected in the fourth quarter, primarily by increased merchant
credit card and check volume during the holiday season.
Capital Resources and Liquidity
Cash generated from operating activities for the six months ended June 30, 1994
totalled $134.3 million, compared with $95.5 million generated in 1993's first
six months. This increase was due to higher earnings in the 1994 period
(before non-cash expenses for depreciation and amortization) and the favorable
timing of income tax payments compared with the year earlier period.
Amounts reinvested in existing businesses, principally for property and
equipment additions, software development and customer conversions, totalled
$37.4 million in 1994's first six months compared with $31.8 million during the
first six months of 1993. The majority of this increase is due to higher 1994
spending on software development activities in FFMC's health claims processing
business. The Company anticipates that total outlays for these capital
expenditures in its existing businesses for the full year 1994 will be similar
to the total outlays incurred in the year ended December 31, 1993.
Cash from operating activities exceeded reinvestments in existing businesses by
$96.9 million in the six months ended June 30, 1994, as compared with the $63.7
million excess for the first six months of 1993. This excess cash generated in
1994's first six months was utilized primarily to fund $81.5 million in
payments related to current and prior year acquisitions.
Publicly held stock warrants were exercised during the second quarter of 1994,
resulting in the issuance of 303,000 new shares of FFMC common stock and cash
proceeds to the Company of $8.1 million. After such exercises, 1.3 million
shares remained subject to publicly held warrants at June 30, 1994, with these
remaining warrants exercisable at $26.67 per share during the second quarter of
1995.
On January 3, 1994, FFMC paid a cash dividend of $.05 per share to shareholders
of record as of December 1, 1993 (declared by the Company's Board of Directors
on October 27, 1993). On July 1, 1994, FFMC paid a cash dividend of $.05 per
share to shareholders of record as of June 1, 1994 (declared by the Company's
Board of Directors on April 27, 1994).
FFMC's cash and cash equivalents of $201.6 million at June 30, 1994, except for
cash and cash equivalents in its credit card bank (currently $106.8 million),
are available for acquisitions and general corporate purposes. The Company has
an available credit facility of $450 million; no borrowings have been made
under this facility in 1994. 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 or FFMC may seek additional funds in the
equity or debt markets. 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.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Amendments 1 and 2 to the FFMC Savings Plus
Plan, dated November 2, 1992 and April 1,
1993, respectively.
10.1 Amendment to the Registrant's 1988 Incentive
Stock Plan, dated March 22, 1994.
10.2 Agreement, Plan of Reorganization and Plan of
Merger, dated June 30, 1994, by and among
First Financial Management Corporation,
Bluebird Acquisition Corporation, Gencan
Acquisition Corporation, GENEX Services,
Inc., GENEX Services of Canada, Ltd. The
Schedules to this Agreement, Plan of
Reorganization and Plan of Merger are
identified on a list of schedules contained
at the end of the Table of Contents to such
agreement, which list is incorporated herein
by reference. All schedules were omitted for
purposes of filing but will be furnished
supplementally to the Commission upon
request.
(b) Reports on Form 8-K
The Company did not file any current report on Form 8-K during
the quarter ended June 30, 1994.
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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
(Registrant)
Date: August 12, 1994 By /s/ M. Tarlton Pittard
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M. Tarlton Pittard
Senior Executive Vice President
and Chief Financial Officer
Date: August 12, 1994 By /s/ Richard Macchia
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Richard Macchia
Executive Vice President
and Principal Accounting Officer
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INDEX OF EXHIBITS
Sequentially
Exhibits Numbered Page
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4.1 Amendments 1 and 2 to the FFMC Savings Plus Plan, dated November 2, 14
1992 and April 1, 1993, respectively.
10.1 Amendment to the Registrant's 1988 Incentive Stock Plan, dated March 37
22, 1994.
10.2 Agreement, Plan of Reorganization and Plan of Merger, dated June 30, 38
1994, by and among First Financial Management Corporation, Bluebird
Acquisition Corporation, Gencan Acquisition Corporation, GENEX
Services, Inc., GENEX Services of Canada, Ltd. The Schedules to this
Agreement, Plan of Reorganization and Plan of Merger are identified
on a list of schedules contained at the end of the Table of Contents
to such agreement, which list is incorporated herein by reference.
All schedules were omitted for purposes of filing but will be
furnished supplementally to the Commission upon request.