<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-10442
------------------
Date of Report (Date of earliest event reported) JULY 25, 1995
------------------------
FIRST FINANCIAL MANAGEMENT CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
GEORGIA 58-1107864
------------------------------- ---------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 CORPORATE SQUARE, SUITE 700, ATLANTA, GEORGIA 30329
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (404) 321-0120
-------------------
NOT APPLICABLE
- --------------------------------------------------------------------------------
(Former name, former address and formal fiscal year, if changed since last
report)
This is page 1 of 83 total pages.
The exhibit index can be found on page 80.
<PAGE> 2
Item 5. Other Events
As previously disclosed in First Financial Management Corporation's
("First Financial") Current Report on Form 8-K dated June 22, 1995, First
Financial entered into an Agreement and Plan of Merger (the "Merger
Agreement"), dated as of June 12, 1995, among First Financial, First Data
Corporation ("First Data") and FDC Merger Corp., a wholly owned subsidiary of
First Data. The Merger Agreement provides for the merger of FDC Merger Corp.
with and into First Financial, with First Financial remaining as the surviving
corporation in the merger and thus becoming a wholly owned subsidiary of First
Data. Pursuant to the Merger Agreement, and subject to the terms and conditions
thereof, each share of First Financial's common stock will be converted into
1.5859 shares of common stock of First Data.
First Financial and First Data recently completed preparation of
certain Unaudited Pro Forma Condensed Combined Financial Statements reflecting
the combined operations of First Financial and First Data. First Financial is
filing this Current Report on Form 8-K to make publicly available these
Unaudited Pro Forma Condensed Combined Financial Statements and is also
including certain supplemental historical financial statements and supplemental
pro forma financial statements previously filed by First Data but not yet part
of First Financial's publicly filed reports.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of Constituent Corporations.
For the financial statements of First Financial for the years ended
December 31, 1994, 1993 and 1992 and for the three months ended March 31,
1995 and 1994, see First Financial's Annual Report on Form 10-K for the
year ended December 31, 1994 and its Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995.
For the financial statements of Western Union Financial Services, Inc.
("Western Union") for the nine months ended September 30, 1994 and 1993,
which was acquired by First Financial in November 1994, see First
Financial's Current Report on Form 8-K dated November 4, 1994.
The following financial statements of First Data and CESI Holdings, Inc.
which First Data acquired in March 1995 are included herein:
First Data Corporation Financial Statements:
Report of Independent Auditors
Consolidated Statements of Income for the years ended December 31,
1994, 1993 and 1992
Consolidated Balance Sheets as of December 31, 1994 and 1993
Consolidated Statements of Cash Flows for the years ended December 31,
1994, 1993 and 1992
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements
Consolidated Statements of Income for the three months ended March 31,
1995 and 1994 (Unaudited)
Consolidated Balance Sheets as of March 31, 1995 (Unaudited) and
December 31, 1994
Consolidated Statements of Cash Flows for the three months ended March
31, 1995 and 1994 (Unaudited)
Notes to Unaudited Consolidated Financial Statements
-2-
<PAGE> 3
CESI Holdings, Inc. Financial Statements:
Report of Independent Auditors
Consolidated Balance Sheet as of June 30, 1994
Consolidated Statement of Operations for the year ended June 30, 1994
Consolidated Statement of Stockholders' Equity for the year ended June
30, 1994
Consolidated Statement of Cash Flows for the year ended June 30, 1994
Notes to Consolidated Financial Statements
Condensed Consolidated Balance Sheet as of December 31, 1994
(Unaudited)
Condensed Consolidated Statement of Operations for the six months
ended December 31, 1994 (Unaudited)
Condensed Consolidated Statement of Cash Flows for the six months
ended December 31, 1994 (Unaudited)
Notes to Unaudited Consolidated Financial Statements
(b) Pro Forma Combined Financial Statements (Unaudited):
Pro Forma Condensed Combined Balance Sheet as of March 31, 1995 and
Condensed Combined Statements of Income for the years ended December
31, 1992, 1993 and 1994 and the three months ended March 31, 1994 and
1995 reflecting combined operations of First Data Corporation and
First Financial Management Corporation
Supplemental Pro Forma Condensed Combined Statements of Income for the year
ended December 31, 1994 and the three months ended March 31, 1995
reflecting combined operations of First Data Corporation, CESI
Holdings, Inc., First Financial Management Corporation and Western
Union Financial Services, Inc.
Pro Forma Combined Statement of Income for the year ended December 31, 1994
and the three months ended March 31, 1995 reflecting combined
operations of First Data Corporation and CESI Holdings, Inc.
(c) Exhibits
23.1 Consent of Ernst & Young LLP
23.2 Consent of Ernst & Young LLP
23.3 Letter of Ernst & Young LLP
-3-
<PAGE> 4
REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS
The Stockholders and Board of Directors
First Data Corporation
We have audited the accompanying consolidated balance sheets of First Data
Corporation as of December 31, 1994 and 1993, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1994. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of First
Data Corporation at December 31, 1994 and 1993, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1994, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
New York, New York
February 3, 1995
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<PAGE> 5
FIRST DATA CORPORATION
CONSOLIDATED STATEMENT OF INCOME
Years Ended December 31, 1994, 1993 and 1992
($ in thousands, except per share amounts)
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Fee revenues, net . . . . . . . . . . . . . . . . . . . . . . . $1,405,837 $1,210,899 $ 962,315
Revenues from affiliates . . . . . . . . . . . . . . . . . . . 65,798 108,257 118,237
Fees related to sale of TRS financial instruments, net . . . . 180,558 171,187 124,768
---------- ---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . 1,652,193 1,490,343 1,205,320
---------- ---------- ----------
Expenses:
Human resources . . . . . . . . . . . . . . . . . . . . . . . . 649,599 618,471 494,310
Equipment, supplies and facilities . . . . . . . . . . . . . . 245,660 213,592 184,731
Depreciation and amortization. . . . . . . . . . . . . . . . . . 143,597 117,811 97,497
Advertising, professional and other, net . . . . . . . . . . . 215,963 208,180 163,253
---------- ---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . 1,254,819 1,158,054 939,791
---------- ---------- ----------
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . 397,374 332,289 265,529
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . 41,257 41,430 33,972
---------- ---------- ----------
Pretax income . . . . . . . . . . . . . . . . . . . . . . . . . . . 356,117 290,859 231,557
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 147,971 117,812 90,132
---------- ---------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 208,146 $ 173,047 $ 141,425
========== ========== ==========
Net income per common share . . . . . . . . . . . . . . . . . . . . $ 1.87 $ 1.56 $ 1.30
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 6
FIRST DATA CORPORATION
CONSOLIDATED BALANCE SHEET
December 31, 1994 and 1993
($ in thousands, except per share amounts)
<TABLE>
<CAPTION>
ASSETS 1994 1993
------ ---------- ----------
<S> <C> <C>
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 166,203 $ 298,041
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197,134 141,026
Proceeds including proceeds due from financial instruments sold . . . . . . . . . . . . 3,058,829 1,818,000
Accounts receivable, less allowance: 1994, $7,117; 1993, $8,606 . . . . . . . . . . . . 225,552 197,841
Receivables from affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,072 43,446
Land, buildings and equipment at cost, net . . . . . . . . . . . . . . . . . . . . . . 303,294 238,724
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,395 46,365
Goodwill, net of amortization: 1994, $154,783; 1993, $125,294 . . . . . . . . . . . . . 866,505 811,421
Other intangibles, net of amortization: 1994, $100,016; 1993, $94,556 . . . . . . . . . 296,339 224,048
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214,121 135,752
---------- ----------
$5,419,444 $3,954,664
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Drafts outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 197,046 $ 140,813
Liabilities relating to financial instruments sold . . . . . . . . . . . . . . . 3,069,000 1,818,000
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,000 -
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 474,680 521,269
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,358 58,630
Payables to affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,112 2,359
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,019 50,456
Employee-related liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 84,356 56,504
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,366 60,165
Accrued and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 341,248 292,008
---------- ----------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,404,185 3,000,204
---------- ----------
Stockholders' equity:
Common stock, par value $.01 per share, authorized 300,000,000 shares;
issued 110,352,000 shares in 1994 and 110,351,858 in 1993 . . . . . . . . . . . 1,104 1,104
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 412,779 410,211
Net unrealized securities losses . . . . . . . . . . . . . . . . . . . . . . . . (6,611) -
Foreign currency translation adjustment . . . . . . . . . . . . . . . . . . . . . (17,033) (20,021)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 755,558 567,035
Less treasury stock at cost, 2,710,360 shares in 1994 and 107,793 in 1993 . . . . (130,538) (3,869)
---------- ----------
1,015,259 954,460
---------- ----------
$5,419,444 $3,954,664
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
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<PAGE> 7
FIRST DATA CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 31, 1994, 1993 and 1992
($ in thousands)
<TABLE>
<CAPTION>
1994 1993 1992
----------- --------- ---------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 208,146 $ 173,047 $ 141,425
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74,296 62,101 53,748
Amortization (1994, 1993 and 1992 include charges of
$21,936, $18,350 and $13,756 against revenues) . . . . . . . . . . . . 91,237 74,060 57,505
Gain on sale of businesses, net. . . . . . . . . . . . . . . . . . . . . . . . (50,198) (22,000) -
Other non-cash charges, net. . . . . . . . . . . . . . . . . . . . . . . . . . 36,646 40,910 15,907
Changes in operating assets and liabilities:
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . (56,108) 27,978 16,319
Proceeds including proceeds due from financial instruments
sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,251,000) 155,000 (559,000)
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . (45,702) (26,806) 3,071
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (38,966) 9,737 7,266
Drafts outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,233 (27,812) (16,267)
Liabilities relating to financial instruments sold . . . . . . . . . . . 1,251,000 (155,000) 559,000
Accounts payable and other liabilities . . . . . . . . . . . . . . . . . 66,947 (49,357) (15,397)
Receivables from/payables to affiliates, net . . . . . . . . . . . . . . (9,478) 3,094 26,456
----------- --------- ---------
Net cash provided by operating activities . . . . . . . . . . . . 333,053 264,952 290,033
----------- --------- ---------
Cash Flows From Investing Activities:
Purchase of variable rate cap agreements . . . . . . . . . . . . . . . . . . . (28,850) (2,100) (14,450)
Proceeds from redemption of preferred stock investment . . . . . . . . . . . . 11,478 - 13,522
Deferred contract payments . . . . . . . . . . . . . . . . . . . . . . . . . . (123,381) (87,318) (72,402)
Purchase of land, buildings and equipment. . . . . . . . . . . . . . . . . . . (154,871) (84,888) (62,232)
Acquisition-related expenditures . . . . . . . . . . . . . . . . . . . . . . . (153,839) (156,306) (108,469)
Divestitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143,867 67,233 5,413
----------- --------- ---------
Net cash used by investing activities . . . . . . . . . . . . . . (305,596) (263,379) (238,618)
----------- --------- ---------
Cash Flows From Financing Activities:
Net increase (decrease) in short-term debt . . . . . . . . . . . . . . . . . . 35,000 - (3,000)
Issuance of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . - 197,862 22,434
Principal payments of long-term debt . . . . . . . . . . . . . . . . . . . . . (48,360) (49,075) (96,071)
Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . 7,641 7,839 83,064
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . (142,374) (5,577) -
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13,209) (13,205) (18,572)
----------- --------- ---------
Net cash (used) provided by financing activities. . . . . . . . . (161,302) 137,844 (12,145)
----------- --------- ---------
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . 2,007 (967) (9,969)
----------- --------- ---------
Net (decrease) increase in cash and cash equivalents. . . . . . . . . . . . . . . . (131,838) 138,450 29,301
Cash and cash equivalents at beginning of year. . . . . . . . . . . . . . . . . . . 298,041 159,591 130,290
----------- --------- ---------
Cash and cash equivalents at end of year. . . . . . . . . . . . . . . . . . . . . . $ 166,203 $ 298,041 $ 159,591
=========== ========= =========
</TABLE>
See notes to consolidated financial statements.
F-5
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<PAGE> 8
FIRST DATA CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1994, 1993 and 1992
($ in thousands, except per share amounts)
<TABLE>
<CAPTION>
UNREALIZED FOREIGN
SECURITIES CURRENCY
COMMON CAPITAL GAINS AND TRANSLATION
STOCK SURPLUS (LOSSES) ADJUSTMENT
--------- --------- ---------- ------------
<S> <C> <C> <C> <C>
Balance at January 1, 1992 . . . . . . . . . . . $ 1,041 $ 275,988 $ - $ 1,930
Net income . . . . . . . . . . . . . . . . . . . - - - -
Cash dividends ($0.21 per common share) . . . . . - - - -
Foreign currency translation adjustment . . . . . - - - (16,559)
Issuance of common stock (4,000,000
shares) . . . . . . . . . . . . . . . . . . 40 83,024 - -
Conversion of debt into common stock
(1,886,364 shares) . . . . . . . . . . . . 19 41,481 - -
--------- --------- -------- --------
Balance at December 31, 1992 . . . . . . . . . . 1,100 400,493 - (14,629)
--------- --------- -------- --------
Net income . . . . . . . . . . . . . . . . . . . - - - -
Cash dividends ($0.12 per common share) . . . . . - - - -
Foreign currency translation adjustment . . . . . - - (5,392) -
Stock options exercised and related tax
benefits (351,858 shares) . . . . . . . . . 4 9,718 - -
Purchase of treasury stock (153,533 shares) . . . - - - -
Incentive savings plan contribution (45,740
shares) . . . . . . . . . . . . . . . . . . - - - -
--------- --------- -------- --------
Balance at December 31, 1993 . . . . . . . . . . 1,104 410,211 - (20,021)
--------- --------- -------- --------
Net income . . . . . . . . . . . . . . . . . . . - - - -
Cash dividends ($0.12 per common share) . . . . . - - - -
Adjustment to beginning balance for change
in accounting method, net of income
taxes of $20,397 . . . . . . . . . . . . . - - 37,880 -
Change in unrealized gains and (losses), net
of income tax benefits of $23,957 . . . . . - - (44,491) -
Foreign currency translation adjustment . . . . . - - - 2,988
Stock options exercised and related tax
benefits (321,857 shares) . . . . . . . . . - 2,544 - -
Purchase of treasury stock (2,962,200
shares) . . . . . . . . . . . . . . . . . - - - -
Acquisition purchase price (37,918 shares) . . . - 24 - -
--------- --------- -------- --------
Balance at December 31, 1994 . . . . . . . . . . $ 1,104 $ 412,779 $ (6,611) $(17,033)
========= ========= ======== ========
<CAPTION>
RETAINED TREASURY
EARNINGS STOCK TOTAL
-------- -------- ----------
<S> <C> <C> <C>
Balance at January 1, 1992 . . . . . . . . . . . $287,649 $ - $ 566,608
Net income . . . . . . . . . . . . . . . . . . . 141,425 - 141,425
Cash dividends ($0.21 per common share) . . . . . (21,872) - (21,872)
Foreign currency translation adjustment . . . . . - - (16,559)
Issuance of common stock (4,000,000
shares) . . . . . . . . . . . . . . . . . . - - 83,064
Conversion of debt into common stock
(1,886,364 shares) . . . . . . . . . . . . - - 41,500
-------- --------- ----------
Balance at December 31, 1992 . . . . . . . . . . 407,202 - 794,166
-------- --------- ----------
Net income . . . . . . . . . . . . . . . . . . . 173,047 - 173,047
Cash dividends ($0.12 per common share) . . . . . (13,214) - (13,214)
Foreign currency translation adjustment . . . . . - (5,392)
Stock options exercised and related tax
benefits (351,858 shares) . . . . . . . . . - - 9,722
Purchase of treasury stock (153,533 shares) . . . - (5,577) (5,577)
Incentive savings plan contribution (45,740
shares) . . . . . . . . . . . . . . . . . . - 1,708 1,708
-------- --------- ----------
Balance at December 31, 1993 . . . . . . . . . . 567,035 (3,869) 954,460
-------- --------- ----------
Net income . . . . . . . . . . . . . . . . . . . 208,146 - 208,146
Cash dividends ($0.12 per common share) . . . . . (13,123) - (13,123)
Adjustment to beginning balance for change
in accounting method, net of income
taxes of $20,397 . . . . . . . . . . . . . - - 37,880
Change in unrealized gains and (losses), net
of income tax benefits of $23,957 . . . . . - - (44,491)
Foreign currency translation adjustment . . . . . - - 2,988
Stock options exercised and related tax
benefits (321,857 shares) . . . . . . . . . (6,500) 14,162 10,206
Purchase of treasury stock (2,962,200
shares) . . . . . . . . . . . . . . . . . - (142,482) (142,482)
Acquisition purchase price (37,918 shares) . . . - 1,651 1,675
-------- --------- ----------
Balance at December 31, 1994 . . . . . . . . . . $755,558 $(130,538) $1,015,259
======== ========= ==========
</TABLE>
See notes to consolidated financial statements.
F-6
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<PAGE> 9
FIRST DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of First Data Corporation (the Company or FDC) and its wholly-owned
subsidiaries. All material intercompany accounts and transactions have been
eliminated.
Foreign Currency and Hedging Contracts
Foreign currency denominated assets and liabilities are translated into
U.S. dollar equivalents based on exchange rates prevailing at the end of each
year. Revenues and expenses are translated at average exchange rates during
the year. Aggregate foreign exchange gains and losses arising from the
translation of foreign currency denominated assets and liabilities are included
in Stockholders' Equity.
Foreign currency products used to hedge net investments in foreign
entities or identifiable firm foreign currency commitments are recognized as
adjustments to the values of the hedged items. Gains and losses resulting from
hedging activities are intended to offset the gains and losses on the hedged
foreign currency exposures.
Contracts, principally variable rate cap agreements, used to hedge
exposure to fluctuations in variable rates are recognized as an adjustment of
the rates. The cost of each contract, which is designated and effective in
reducing risk, is recognized ratably over the life of the contract.
Cash and Cash Equivalents
The Company has principally defined cash and cash equivalents as cash,
time deposits and certain highly liquid instruments with maturities of three
months or less at the date of purchase. Excluded from this definition are
amounts attributable to drafts outstanding. Cash equivalents totaled $146
million and $283 million at December 31, 1994 and 1993, respectively, and are
carried at cost which approximates market value.
Short-Term Investments
Short-term investments are principally comprised of highly liquid
investments including time deposits, short-term money market preferred stock
and money market mutual funds. These investments, which are not available for
general corporate purposes, principally arise from drafts outstanding relative
to the Company's mutual fund transfer agent business and are carried at cost
which approximates market value.
Securities Held-To-Maturity and Available-For-Sale
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"
for investments held as of and acquired after January 1, 1994. In accordance
with the Statement, prior period financial statements have not been restated to
reflect the change in accounting principle. Stockholders' Equity, as of January
1, 1994, increased approximately $38 million (net of approximately $20 million
in deferred federal income taxes) to reflect the net unrealized holding gains
on securities classified as available-for-sale previously carried at amortized
cost or lower of aggregate cost or market.
Pursuant to this Statement, management determines the appropriate
classification of debt securities included in the investment portfolio owned by
American Express Travel Related Services Company, Inc. (TRS), a whollyowned
subsidiary of American Express Company (American Express), (TRS Portfolio) and
F-7
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<PAGE> 10
FIRST DATA CORPORATION AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
the Company's own investment portfolio (Company's Portfolio) at the time of
purchase and reevaluates such designation as of each balance sheet date. Debt
securities are classified as held-to-maturity when the Company has the positive
intent and ability to hold the securities to maturity. Held-to-maturity
securities are carried at amortized cost.
Debt securities not classified as held-to-maturity and marketable equity
securities are classified as available-for-sale. The Company currently has no
securities classified as trading securities. Available-for-sale securities are
carried at fair value, with the unrealized gains and losses, net of federal
income taxes, reported in a separate component of Stockholders' Equity
captioned "Net unrealized securities losses."
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity. Realized gains and losses and any declines in value
judged to be other than temporary are included in net income. The cost of
securities sold is based upon the specific identification method.
Land, Buildings and Equipment
Land, buildings and equipment are depreciated over their estimated
useful lives. Leasehold improvements are amortized over the shorter of their
estimated useful lives or the remaining lease term. Depreciation is computed
using the straight-line method. The ranges of estimated useful lives are as
follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings . . . . . . . . . . . . . . . . . . . . . . 30
Leasehold improvements . . . . . . . . . . . . . . . 3-10
Computer equipment . . . . . . . . . . . . . . . . . 3-4
Communications and other equipment and furniture . . . 3-8
</TABLE>
Land, buildings and equipment at December 31 consist of (thousands):
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Land . . . . . . . . . . . . . . . . . . . . . . . $ 9,578 $ 10,121
Buildings . . . . . . . . . . . . . . . . . . . . . 113,154 98,932
Leasehold improvements . . . . . . . . . . . . . . 38,082 22,934
Equipment and furniture . . . . . . . . . . . . . . 405,070 321,428
--------- ---------
565,884 453,415
Less accumulated depreciation and amortization . . . (262,590) (214,691)
--------- ---------
Total . . . . . . . . . . . . . . . . . . . $ 303,294 $ 238,724
========= =========
</TABLE>
Included in the above are assets held under capital lease agreements of
$2.0 million and $3.9 million, net of accumulated amortization of $5.6 million
and $7.8 million as of December 31, 1994 and 1993, respectively.
Goodwill and Other Intangibles
Goodwill represents the excess of purchase price over tangible and other
identifiable assets acquired less liabilities assumed arising from business
combinations and is being amortized over estimated useful lives ranging from 20
to 40 years. Included in goodwill at December 31, 1994 and 1993 is
approximately $197 million and $203 million, respectively, associated with the
original acquisition of First Data Resources Inc. Other intangible assets
consist of rights to provide processing services to clients acquired directly
or through business combinations, costs associated with the conversion of major
new client accounts to the Company's
F-8
10
<PAGE> 11
FIRST DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
systems, and, to a lesser extent, copyrights, patents, software and non-compete
agreements acquired in business combinations. Client contracts provide for the
payment by the client of minimum annual fees and contract termination
penalties. Other intangibles are amortized on either a straight-line basis or
as a percentage of expected revenue over the length of the contract or benefit
period, from 4 to 25 years.
Goodwill and other intangible assets are reviewed for impairment
whenever events indicate that their carrying amount may not be recoverable.
When the Company believes that those assets may not be recoverable, it
estimates the future cash flows to be generated by the business associated with
those assets. In the event that the sum of the cash flows is less than the
carrying amount of those assets, the assets would be written down to their fair
value which is normally measured by discounting estimated future cash flows.
Revenue Recognition
As a provider of computer-based information processing and related
services to a variety of industries, FDC records its net fee revenues as
services are performed. Revenue is stated net of commissions paid to selling
agents relative to the sale of payment instruments. Processing fees from TRS
include the pretax equivalent of the earnings on the investment portfolio owned
by TRS and are recorded as earned. A substantial portion of the gross profit on
software license fees and the sale of the related hardware, principally related
to the Company's healthcare business, is deferred and amortized on a
straight-line basis over the period during which the Company has significant
contract support responsibilities, which is generally four to five years.
Software Development Costs
Internal costs of computer software development are expensed as incurred.
Income Taxes
The Company accounts for income taxes under the liability method
required by SFAS No. 109, "Accounting for Income Taxes." Prior to the Company's
initial public offering (see Note 3), the taxable income of the Company was
included in the consolidated U.S. federal income tax return of American
Express, and under an agreement with American Express, the provision for income
taxes and tax benefits was determined by the Company on a stand-alone basis.
Net Income Per Common Share
Net income per common share is computed on the basis of the weighted
average of common shares outstanding and common share equivalents. The weighted
average shares used in the computations were 111,232,177; 111,093,832; and
108,924,890 for 1994, 1993 and 1992, respectively. Common share equivalents
relating to the dilutive effect of stock options aggregated 1,545,234;
1,039,126; and 537,719 for 1994, 1993 and 1992, respectively.
Reclassification
Certain prior years' amounts have been reclassified to conform to the
current year's presentation.
NOTE 2: PAYMENT INSTRUMENTS
Pursuant to a management agreement with TRS (Management Agreement), the
Company, through its wholly-owned subsidiary Integrated Payment Systems Inc.
(IPS), selects selling agents, negotiates contracts and determines fees to be
remitted by selling agents with respect to a payment instruments business which
F-9
11
<PAGE> 12
FIRST DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
includes products and services such as American Express(R) Money Order,
American Express(R) Official Check and MoneyGram(SM). Proceeds from the sale of
payment instruments by others, who act as selling agents for TRS, are invested
by TRS pending encashment consistent with state regulatory requirements. The
Company earns processing fees from TRS which are comprised of transaction fees
remitted by selling agents and an amount based on the pretax equivalent of the
earnings on the TRS Portfolio (plus or minus any gains or losses with respect
to securities that have been liquidated), net of commissions subsequently paid
to the selling agents. The processing fees earned from TRS and other associated
revenues for this business were comprised of the following during the years
ended December 31 (thousands):
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Transaction fees received from selling agents and
other . . . . . . . . . . . . . . . . . . . . . . . . $109,321 $ 71,167 $ 52,827
Earnings on TRS Portfolio, net . . . . . . . . . . . . 71,237 100,020 71,941
-------- -------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . $180,558 $171,187 $124,768
======== ======== ========
</TABLE>
Variable rate commissions paid to selling agents, based upon float
participation, have been applied against "Earnings on TRS Portfolio, net" in
the foregoing table. The earnings also included realized gains of approximately
$18 million in 1993 on the sale of certain long-term debt and equity
securities. Realized gains from such sales were immaterial during the years
ended December 31, 1994 and 1992.
In conjunction with the March 1994 acquisition of Citicorp's official
check business (See Note 4), the Company began signing new official check
agents and converting the acquired and new agents to its own payment
instruments for which proceeds are invested in the Company's Portfolio. Prior
to the conversion of the acquired official check agents, which was
substantially completed at December 31, 1994, the Company received processing
fees which consisted of transaction fees remitted by selling agents and an
additional amount calculated as an agreed-upon rate of return on the proceeds
of payment instruments sold prior to conversion net of commissions payable to
the selling agents. These revenues, as well as revenues from the Company's own
payment instruments and cash management services, are included within "Fee
revenues, net" on the Company's Consolidated Statement of Income.
An affiliate of American Express provides investment management,
asset-liability management, and accounting and reporting services for TRS and
IPS with respect to both the Company and TRS portfolios pursuant to investment
management agreements. The portfolios are managed in accordance with guidelines
developed by TRS and IPS.
The Management Agreement provides, among other things, that if the
market value of the securities in the TRS Portfolio falls below certain levels,
IPS may be required, under certain circumstances, to make payments to TRS, and
TRS will deposit such payments in the TRS Portfolio; and TRS will have the
right, under certain circumstances, to assume the management and control of
certain aspects of the IPS payment instruments business relating to instruments
issued by TRS.
The Company has agreed to indemnify TRS against any losses, damages and
costs with respect to the payment instruments of TRS. Accordingly, the assets
and liabilities of TRS relative thereto are included with the assets and
liabilities related to the Company's own payment instruments on the Company's
Consolidated Balance Sheet under the captions "Proceeds including proceeds due
from financial instruments sold" and "Liabilities relating to financial
instruments sold." "Proceeds including proceeds due from financial instruments
sold" reflect the amount of short- and long-term investments owned and held by
TRS and the Company of $2,686 million and $1,642 million, cash of $38 million
and $4 million, and receivables from selling agents of $335 million and $172
million, at December 31, 1994 and 1993, respectively. At December
F-10
12
<PAGE> 13
FIRST DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
31, 1994, "Proceeds including proceeds due from financial instruments sold"
include $2,125 million relating to TRS payment instruments and $934 million
relating to the Company's payment instruments.
The following is a summary of available-for-sale and held-to-maturity
securities included in both portfolios as of December 31, 1994 (thousands):
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE SECURITIES
-----------------------------
GROSS GROSS
AMORTIZED FAIR UNREALIZED UNREALIZED
COST VALUE(d) GAINS LOSSES
--------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Short-term(a)
Time deposits . . . . . . . . . . . . . . . . . . $ 34,512 $ 34,512 $ - $ -
Reverse repurchase agreements(b) . . . . . . . . 296,099 296,099 - -
Variable rate put bonds and other tax-exempt
investments(c) . . . . . . . . . . . . . . . . 455,930 455,666 - 264
---------- ---------- ------ -------
786,541 786,277 - 264
---------- ---------- ------ -------
Long-term
State and municipal obligations . . . . . . . . . 1,102,264 1,095,527 7,865 14,602
Preferred stock . . . . . . . . . . . . . . . . . 66,242 63,072 143 3,313
---------- ---------- ------ -------
1,168,506 1,158,599 8,008 17,915
---------- ---------- ------ -------
Total . . . . . . . . . . . . . . . . . . . $1,955,047 $1,944,876 $8,008 $18,179
========== ========== ====== =======
</TABLE>
<TABLE>
<CAPTION>
HELD-TO-MATURITY SECURITIES
---------------------------
GROSS GROSS
CARRYING FAIR UNREALIZED UNREALIZED
VALUE VALUE(d) GAINS LOSSES
--------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Long-term
State and municipal obligations (at amortized cost) . . . . . $733,321 $706,934 $4,028 $30,415
Preferred stock (at lower of aggregate cost or market) . . . 7,895 7,956 137 76
-------- -------- ------ -------
Total . . . . . . . . . . . . . . . . . . . . . . . . . $741,216 $714,890 $4,165 $30,491
======== ======== ====== =======
</TABLE>
The following is a maturity summary of available-for-sale and
held-to-maturity securities included in both portfolios as of December 31, 1994
(thousands):
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
------------------------- ---------------------
AMORTIZED FAIR CARRYING FAIR
COST VALUE(d) VALUE VALUE(d)
---------- ---------- -------- --------
<S> <C> <C> <C> <C>
Due within 1 year . . . . . . . . . . . . . . . . . . . . . $ 791,194 $ 790,881 $ 13,248 $ 13,339
Due after 1 year through 5 years . . . . . . . . . . . . . 574,846 574,636 66,379 67,545
Due after 5 years through 10 years . . . . . . . . . . . . 451,311 445,174 457,403 441,050
Due after 10 years . . . . . . . . . . . . . . . . . . . . 71,454 71,113 196,291 185,000
---------- ---------- -------- --------
1,888,805 1,881,804 733,321 706,934
Preferred stock . . . . . . . . . . . . . . . . . . . . . . 66,242 63,072 7,895 7,956
---------- ---------- -------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,955,047 $1,944,876 $741,216 $714,890
========== ========== ======== ========
</TABLE>
- -------------------
(a) Short-term investments include the Company's allocated portion of the
overall TRS short-term investment portfolio
(b) Backed by various U.S. government securities
(c) Variable rate put bonds represent state and municipal obligations with
short-term redemption features
(d) Estimated fair values were determined using dealer quotations
F-11
13
<PAGE> 14
FIRST DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Proceeds from the sale of available-for-sale securities for the year
ended December 31, 1994 were approximately $85 million. Gross realized gains
and losses on such sales were immaterial.
At December 31, 1993, investments owned and held by TRS consisted of the
following (thousands):
<TABLE>
<CAPTION>
GROSS GROSS
CARRYING FAIR UNREALIZED UNREALIZED
VALUE VALUE(d) GAINS LOSSES
--------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Short-term (at cost which approximates market)(a)
Time deposits . . . . . . . . . . . . . . . . . . . . . . $ 262 $ 262 $ - $-
Reverse repurchase agreements(b) . . . . . . . . . . . . 104,902 104,902 - -
Variable rate put bonds and other tax-exempt
investments(c) . . . . . . . . . . . . . . . . . . . . . 149,665 149,665 - -
---------- ---------- ------- ---
254,829 254,829 - -
========== ========== ======= ===
Long-term
State and municipal obligations (at amortized cost) . . . 1,350,620 1,440,331 89,751 40
Preferred stock (at lower of aggregate cost or
market) . . . . . . . . . . . . . . . . . . . . . . . . 36,251 37,941 1,692 2
---------- ---------- ------- ---
1,386,871 1,478,272 91,443 42
---------- ---------- ------- ---
Total . . . . . . . . . . . . . . . . . . . . . . $1,641,700 $1,733,101 $91,443 $42
========== ========== ======= ===
<CAPTION>
CARRYING FAIR
VALUE VALUE(d)
---------- ----------
<S> <C> <C>
Due within 1 year . . . . . . . . . . . . . . . . . . . . $ 270,904 $ 271,175
Due after 1 year through 5 years . . . . . . . . . . . . 324,273 343,378
Due after 5 years through 10 years . . . . . . . . . . . 840,603 903,605
Due after 10 years . . . . . . . . . . . . . . . . . . . 169,669 177,002
---------- ----------
1,605,449 1,695,160
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . 36,251 37,941
---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . $1,641,700 $1,733,101
========== ==========
</TABLE>
- ----------------
(a) Short-term investments represent the Company's allocated portion of the
overall TRS short-term investment portfolio
(b) Backed by various U.S. government securities
(c) Variable rate put bonds represent state and municipal obligations with
short-term redemption features
(d) Estimated fair values of the long-term portfolio were determined using
dealer quotations
Proceeds from sales of investments held at amortized cost were
approximately $229 million and $153 million during the years ended December 31,
1993 and 1992, respectively. The average portfolio balances during the years
ended December 31, 1994, 1993 and 1992 were $1,874 million, $1,556 million, and
$1,336 million, respectively, and average net yields thereon were 3.8 percent,
6.4 percent, and 5.4 percent, respectively.
"Liabilities relating to financial instruments sold" principally consist
of the liability for American Express Money Orders, American Express Official
Checks and the Company's own payment instruments outstanding while the
remaining $328 million and $311 million at December 31, 1994 and 1993,
respectively, are attributable to amounts due selling agents. At December 31,
1994, "Liabilities relating to financial instruments sold" include $2,130
million relating to TRS payment instruments and $939 million relating to the
Company's payment instruments.
F-12
14
<PAGE> 15
FIRST DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 3: RELATED PARTY TRANSACTIONS
On April 16, 1992, the Company and American Express closed the initial
public offering (IPO) of the Company's common stock, which consisted of primary
and secondary offerings of 4.0 million and 46.6 million shares, respectively.
The Company received net proceeds of $83 million from the primary offering,
which after prepayment of a $35 million loan payable to TRS, resulted in $48
million used for general corporate purposes. On March 29, 1993, the Company and
American Express completed a secondary offering of 35.2 million shares of FDC
common stock, further reducing the ownership interest of American Express which
at December 31, 1994 was approximately 21 percent.
On October 18, 1993, American Express completed an offering of 6 1/4%
Exchangeable Notes Due October 15, 1996 (DECS) for the principal amount of
approximately $868 million. At maturity, the DECS are exchangeable, at the
option of American Express, into a maximum of 23,618,500 shares of FDC common
stock.
The Company has entered into various transactions with American Express
and its subsidiaries. Revenues derived from American Express during 1994 are
mainly comprised of accounts receivable management fees charged to TRS.
Revenues derived from American Express during 1993 and 1992 were principally
comprised of shareholder servicing and record-keeping fees charged to mutual
funds managed by Shearson Lehman Brothers Inc. (Shearson) or affiliates thereof
through July 1993, accounts receivable management fees charged to TRS in 1993
and data processing fees charged to The Boston Company, Inc. (TBC), a Shearson
affiliate, through May 1993. American Express completed the spin-off of Lehman
Brothers Holdings Inc. in May 1994 and the sales of TBC in May 1993 and
Shearson in July 1993. Revenues earned by the Company from these former
American Express subsidiaries, and mutual funds advised thereby, subsequent to
these dates are reflected in "Fee revenues, net." American Express will
reimburse the Company for $10 million of costs incurred relating to the early
termination by TBC of its data processing contract with the Company. The
Company's accounts receivable management business, ACB Business Services, Inc.
(ACB), entered into a multi-year agreement containing renewal options with TRS
and American Express Centurion Bank, effective October 1994, and paid $8.5
million for the right to service a significant portion of delinquent accounts
receivable relating to the American Express(R) Card and the Optima(SM) Card.
The Company and American Express have an intercompany agreement
providing, among other things, for (i) the grant by American Express to the
Company of a license to use the American Express name and certain trademarks
through April 16, 1997, in connection with the Company's payment instruments
business as presently conducted for an annual license fee of $1.0 million; (ii)
American Express' agreement to reimburse the Company for (a) up to $3.0 million
of the expenses incurred through April 9, 1993 relating to the change of the
Company's name and its change in status to a publicly owned corporation (which
was fully reimbursed) and (b) up to $7.6 million of the expenses, relating to
the changes referred to in clause (ii)(a) above as well as to advertising of
Company payment instruments under a new name (which was fully reimbursed).
During 1993, American Express paid the Company $6.6 million in conjunction with
a $22 million settlement by the Company of a contract pricing matter.
The following table lists the fees paid by the Company to American
Express and its subsidiaries for the years ended December 31 (thousands):
<TABLE>
<CAPTION>
1994 1993 1992
------- ------ ------
<S> <C> <C> <C>
Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $4,532 $9,285
Insurance, benefits and incentives . . . . . . . . . . . . . . . . . 1,007 2,706 8,413
Hedging agreements . . . . . . . . . . . . . . . . . . . . . . . . . 7,568 3,500 8,734
Licensing fees and other . . . . . . . . . . . . . . . . . . . . . . 2,169 4,213 4,018
</TABLE>
F-13
15
<PAGE> 16
FIRST DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Management does not believe that, had the Company been operating other
than as an affiliate of American Express, there would have been a material
impact on net income.
NOTE 4: ACQUISITIONS/DISPOSITIONS
The Company completed several acquisitions during 1994, the most
significant of which was the acquisition of assets of the third-party mutual
fund administration business of TBC, a subsidiary of Mellon Bank Corporation,
for a cash purchase price of approximately $36 million. This business was
combined with the Company's mutual fund servicing business. In addition, the
Company purchased the assets of TeleMoney Services, a division of Ceridian
Corporation, which provides transaction services including credit and debit
card authorization, for a cash purchase price of $25 million.
The Company completed several acquisitions during 1993, the most
significant of which were the acquisitions of assets of ACB Sales & Service,
Inc., ACB Management Services, Inc. (collectively ACBS) and Ingram &
Associates, Inc. (Ingram) which expanded the Company's accounts receivable
management services. In consideration of the ACBS and Ingram acquisitions, the
Company paid approximately $72 million during 1993, of which $20 million was
paid using 581,500 shares of the Company's common stock purchased directly from
American Express, and will make additional cash payments of up to $14 million
through 1998, of which approximately $6.3 million is contingent upon the future
performance of the acquired entities, and additional payments totaling $5.0
million payable in the form of the Company's common stock, of which $1.7
million was paid during 1994.
The Company completed several acquisitions during 1992, the most
significant of which was the purchase of Gerber Alley & Associates, Inc. for a
cash purchase price of approximately $24 million.
A summary of the purchase price paid for acquisitions and the initial
allocation thereof to the tangible assets acquired less liabilities assumed is
as follows (thousands):
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Total consideration paid . . . . . . . . . . . . . . . . . . . . . . . . . $112,283 $123,504 $ 47,776
Tangible assets acquired less liabilities assumed at fair value . . . . . . (26,275) (19,368) (33,775)
-------- -------- --------
Excess of purchase price over tangible assets acquired less liabilities
assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $138,558 $142,872 $ 81,551
======== ======== ========
</TABLE>
Of the excess of purchase price over tangible assets acquired less
liabilities assumed for the 1994 and 1993 acquisitions, approximately $130
million is being amortized principally over 25 years, with the remainder over
periods ranging from 5 to 10 years. The excess of purchase price over tangible
assets acquired less liabilities assumed for the 1992 acquisitions is being
amortized over periods of 20 to 25 years. The pro forma impact of these
acquisitions was not material to 1994, 1993 or 1992 net income. The
acquisitions have been accounted for using the purchase method.
During the 1994 fourth quarter, the Company completed the disposition
of its cable services and hotel reservation businesses for cash proceeds of
$143 million, resulting in a net pretax gain of $40 million which has been
netted against "Advertising, professional and other, net" on the Company's
Consolidated Statement of Income. Revenues from these businesses accounted for
approximately 5 percent of the Company's consolidated revenues and a lesser
percentage of its consolidated operating income.
F-14
16
<PAGE> 17
FIRST DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
In November 1993, the Company sold the stock of its telemarketing
business, WATS Marketing of America, Inc., for cash proceeds of $63 million
resulting in a pretax gain of $22 million which was netted against
"Advertising, professional and other, net" on the Company's Consolidated
Statement of Income. The agreement also contained provisions for additional
proceeds if certain 1994 revenue levels were met, for which the Company
recognized $10 million in 1994. This business accounted for approximately 5
percent of the Company's consolidated revenues and a lesser percentage of its
consolidated operating income.
NOTE 5: FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET RISK
In the normal course of business, the Company is exposed to on-and
off-balance sheet credit and market risks due to its involvement with certain
financial instruments. Credit risk results from the possibility that a loss may
occur from the failure of another party to perform according to the terms of
the contract. The Company regularly monitors the credit and market risk
exposures and takes steps to mitigate the likelihood of these exposures
resulting in loss. The Company monitors the credit risk of the counterparties
to the hedging arrangements (discussed below) and the concentration of its
contracts with any individual counterparty. The counterparties to the contracts
are financial institutions that have a credit rating from a major rating agency
of A or better. Market risk arises from the possibility that market changes may
cause financial instruments to be less valuable.
By their nature, the portfolios, as described in Note 2, expose the
Company to certain credit risks, although the Company believes the high quality
of the investments (96 percent have credit ratings of A or better from a major
rating agency) reduces these risks substantially. In addition, the market risk
associated with the portfolios is substantially reduced through hedging
arrangements.
Hedging Arrangements
The Company pays variable rate commissions, which are generally based
upon short-term rates, to some of its payment instrument selling agents. The
Company has purchased variable rate cap agreements to protect itself from
increases in these commissions. During 1994, the Company held a series of these
variable rate cap agreements, with effective notional amounts totaling $1.4
billion ($848 million during 1993) which begin and expire at various dates
through 1998. These agreements principally serve to cap variable rates between
5.25 percent and 6.0 percent (5.5 and 8.0 percent during 1993) and in certain
instances provide for a minimum rate of 5.5 percent.
In addition, the Company has entered into currency swap agreements
expiring in 1996 to hedge a substantial portion of the foreign currency
translation risk attributable to its net investment in the U.K. The terms of
these agreements are such that on and through July 3, 1996 the Company will
receive $237 million and interest at a fixed rate of 8.4 percent and is
obligated to pay L.146 million and interest at a fixed rate of 10.79 percent.
The market risk associated with these agreements relates to the loss impact a
weakening U.S. dollar has on the net cash flows to be exchanged in the future
thereunder. Throughout virtually all of 1994 and 1993, the pound sterling to
U.S. dollar rate has been less than the forward rate of 1.625 set forth in the
agreements.
The Company also has purchased a series of forward foreign exchange
contracts to hedge certain identifiable firm foreign currency commitments
aggregating $28 million (L.18 million) at December 31, 1994 and expiring in
1995. At December 31, 1993, the Company had similar forward contracts
aggregating $27 million (L.18 million) that expired during 1994.
F-15
17
<PAGE> 18
FIRST DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following table lists carrying and fair values of financial
instruments held by the Company for the years ended December 31, 1994 and 1993
and provides cross-references to the locations of additional disclosures
(thousands):
<TABLE>
<CAPTION>
1994 1993
ADDITIONAL ------------------------ ------------------------
DISCLOSURE CARRYING FAIR CARRYING FAIR
IN NOTE VALUE VALUE(a) VALUE VALUE(a)
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents . . . . . . . . . . . . . . (1) $ 166,203 $ 166,203 $ 298,041 $ 298,041
Short-term investments . . . . . . . . . . . . . . . (1) 197,134 197,134 141,026 141,026
Portfolios . . . . . . . . . . . . . . . . . . . . . (1),(2) 2,686,092 2,659,766 1,641,700 1,733,101
Long-term debt . . . . . . . . . . . . . . . . . . . (6) 474,680 459,273 521,269 560,052
Hedging agreements (principally variable
rate cap agreements) . . . . . . . . . . . . . (1),(3) 36,394 78,463 12,933 (2,748)
Cross-currency contracts . . . . . . . . . . . . . . (1) 11,167 2,798 23,629 12,726
- ---------------------
</TABLE>
(a) Fair values were determined using dealer quotations
NOTE 6: DEBT AND BORROWING AGREEMENTS
Long-term debt at December 31 consists of (thousands):
<TABLE>
<CAPTION>
1994 1993
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE(a) VALUE VALUE(a)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Senior Notes,
Series A, 8.39% due 1996 . . . . . . . . . . . . . . . . . . . . $ 68,000 $ 68,388 $102,000 $108,127
Series B, 9.27% due 2001 . . . . . . . . . . . . . . . . . . . . 180,000 184,158 180,000 207,064
6 5/8% Notes due 2003 . . . . . . . . . . . . . . . . . . . . . . . . . 198,071 178,812 197,837 202,668
Term loan, 7.19% due 1997 . . . . . . . . . . . . . . . . . . . . . . . 17,800 17,106 20,250 21,011
Capital lease obligations, at various rates and maturities . . . . . . 4,485 4,485 6,506 6,506
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,324 6,324 14,676 14,676
-------- -------- -------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $474,680 $459,273 $521,269 $560,052
======== ======== ======== ========
</TABLE>
- ------------
(a) Fair values were determined using discounted cash flows at current
interest rates or dealer quotations
On April 2, 1993, the Company completed a $200 million public debt
offering of 6 5/8% Senior Unsecured Notes (Notes) due April 1, 2003. Interest on
the Notes is payable semi-annually in arrears. There is no sinking fund
obligation applicable to the Notes, nor are the Notes redeemable prior to
maturity. The Company received net proceeds of approximately $198 million,
which were used for general corporate purposes and acquisitions. The Series A
and Series B Senior Notes are payable in five equal annual installments. The
Series B installments will begin in July 1997. The term loan is payable in five
annual installments.
On December 20, 1993, the Company entered into a four-year revolving
credit facility of $250 million with a syndicate of U.S. and foreign banks.
Borrowings under the facility were available either on a daily basis at the
prime rate, or for fixed time periods at 0.25 percent over the "Eurodollar"
loan rate or 0.375 percent over the "Certificate of Deposit" loan rate.
Borrowings of $35 million were made under this facility during December 1994
and were outstanding at December 31, 1994. The weighted average interest rate
during the period was 8.5 percent for these short-term borrowings. No
borrowings were made under this facility during 1993.
F-16
18
<PAGE> 19
FIRST DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
In February 1995, the Company replaced the $250 million credit facility
discussed above with two new revolving credit facilities (the Facilities)
aggregating $400 million. The Facilities consist of a $100 million 364-day
facility and a $300 million 5-year facility. Borrowings under the Facilities
are available at rates which are tied to the Company's long-term senior
unsecured credit ratings.
The Facilities and the Senior Notes include various restrictions,
including the requirement that the Company maintain its consolidated net worth,
as defined, at a minimum level of $700 million plus 25 percent of consolidated
net income, as defined, earned subsequent to December 31, 1993. None of these
restrictions are presently significant to the Company.
Aggregate annual maturities of long-term debt and capital leases are as
follows (thousands): 1995, $45,666; 1996, $41,018; 1997, $45,588; 1998,
$36,128; 1999, $36,209; 2000 and beyond, $270,071.
Interest paid on debt during 1994, 1993 and 1992 was $41 million, $38
million and $35 million, respectively.
NOTE 7: INCOME TAXES
The provision for income taxes for the years ended December 31 consists
of the following (thousands):
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- -------
<S> <C> <C> <C>
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $126,729 $ 96,339 $72,585
State and local . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,818 12,704 9,762
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,424 8,769 7,785
-------- -------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $147,971 $117,812 $90,132
======== ======== =======
</TABLE>
For financial reporting purposes, pretax income includes the following
components (thousands):
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $345,721 $278,560 $215,630
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,396 12,299 15,927
-------- -------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $356,117 $290,859 $231,557
======== ======== ========
</TABLE>
Deferred income taxes result from the recognition of temporary
differences. Temporary differences are differences between the tax bases of
assets and liabilities and their reported amounts in the financial statements
that will result in differences between income for tax purposes and income for
financial statement purposes in future years. The provision for income taxes
for the years ended December 31 is comprised of the following (thousands):
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- -------
<S> <C> <C> <C>
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $153,948 $110,968 $87,133
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,977) 6,844 2,999
-------- -------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $147,971 $117,812 $90,132
======== ======== =======
</TABLE>
F-17
19
<PAGE> 20
FIRST DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
At December 31, 1994 and 1993, the Company's net deferred tax assets
consist of the following (thousands):
<TABLE>
<CAPTION>
1994 1993
-------- -------
<S> <C> <C>
Deferred tax assets:
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,015 $17,032
Employee-related liabilities . . . . . . . . . . . . . . . . . . . . 11,361 7,106
Accrued expenses, losses and other . . . . . . . . . . . . . . . . . 86,917 70,267
Unrealized securities losses . . . . . . . . . . . . . . . . . . . . 3,560 -
-------- -------
Total deferred tax assets . . . . . . . . . . . . . . . . . . 114,853 94,405
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
-------- -------
Deferred tax assets, net of valuation allowance . . . . . . . . . . . 114,853 94,405
-------- -------
Deferred tax liabilities:
Foreign currency transaction gains . . . . . . . . . . . . . . . . . 4,755 8,895
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 55,353 28,501
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,350 10,644
-------- -------
Total deferred tax liabilities . . . . . . . . . . . . . . . . 72,458 48,040
-------- -------
Net Deferred Tax Assets . . . . . . . . . . . . . . . . . $ 42,395 $46,365
======== =======
</TABLE>
In connection with the currency swap agreements described in Note 5, the
Company recorded tax benefits of $5.7 million and $0.8 million during the years
ended December 31, 1994 and 1993, respectively, and a tax provision of $25
million during the year ended December 31, 1992, which amounts were
credited/charged directly to the foreign currency translation adjustment
component of Stockholders' Equity.
Cash payments for net income taxes during 1994, 1993 and 1992 were $119
million, $83 million and $103 million, respectively, including $3.0 million and
$47 million paid to American Express in 1993 and 1992, respectively.
The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rate to income tax expense is
(thousands):
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- -------
<S> <C> <C> <C>
Tax at U.S. statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . $124,640 $101,801 $78,729
Increases (reductions) in taxes resulting from:
State and local taxes, net of federal income tax benefit . . . . . . . 8,332 8,258 6,443
Amortization of goodwill . . . . . . . . . . . . . . . . . . . . . . . 8,971 8,422 6,398
Revaluation of deferred taxes . . . . . . . . . . . . . . . . . . . . . - (2,466) -
Divestitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,137 1,415 -
All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 891 382 (1,438)
-------- -------- -------
Income Tax Expense . . . . . . . . . . . . . . . . . . . . . . . $147,971 $117,812 $90,132
======== ======== =======
</TABLE>
NOTE 8: RETIREMENT PLANS
During 1994, the Company restructured its U.S. retirement plans to allow
certain employees to elect to cease accruing benefits under the defined benefit
plan in exchange for an enhanced benefit under the defined contribution plan.
New employees will not participate in the defined benefit plan. The
restructuring resulted in an immaterial curtailment gain and did not materially
change the aggregate amount the Company contributed towards the employees'
retirement benefits.
F-18
20
<PAGE> 21
FIRST DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Defined Benefit Plans
The Company has defined benefit pension plans covering certain full time
employees of the Company and its participating subsidiaries located in the U.S.
and certain employees located outside the U.S. The cost of retirement benefits
for eligible employees, measured by length of service, compensation and other
factors, is being funded through trusts established under the plans. Funding of
retirement costs for the U.S. plan complies with the minimum funding
requirements specified by the Employee Retirement Income Security Act of 1974,
as amended, and for the U.K. plans, with applicable U.K. regulations. Plan
assets consist principally of investments in U.S. and foreign equities and
fixed income securities. Net pension cost for the years ended December 31
consists of (thousands):
<TABLE>
<CAPTION>
1994 1993 1992
-------------------- -------------------- --------------------
U.S. U.K. U.S. U.K. U.S. U.K.
------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Service cost-benefit earned during period . . . . . $ 5,026 $ 5,816 $ 5,751 $ 6,364 $ 5,233 $ 6,637
Interest cost on projected benefit obligation . . . 5,002 7,262 4,688 7,351 3,730 6,692
Actual loss (return) on plan assets . . . . . . . . 833 (4,445) (4,771) (25,946) (3,773) (1,202)
Net amortization and deferral . . . . . . . . . . . (5,932) (4,410) 408 18,286 353 (6,131)
------- ------- ------- -------- ------- -------
Net Periodic Pension Cost . . . . . . . . $ 4,929 $ 4,223 $ 6,076 $ 6,055 $ 5,543 $ 5,996
======= ======= ======= ======== ======= =======
</TABLE>
The following table sets forth the funded status and amounts recognized
in the Consolidated Balance Sheet for the Company's defined benefit plans at
December 31 (thousands):
<TABLE>
<CAPTION>
1994 1993
--------------------- ---------------------
U.S. U.K. U.S. U.K.
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation . . . . . . . . . . . . . . . . . . . . . $(43,833) $ (94,013) $(37,722) $(93,773)
-------- --------- -------- --------
Accumulated benefit obligation . . . . . . . . . . . . . . . . . . $(49,936) $ (94,013) $(46,110) $(93,773)
-------- --------- -------- --------
Projected benefit obligation . . . . . . . . . . . . . . . . . . . $(63,498) $(107,443) $(66,485) $(97,171)
Plan assets at fair value . . . . . . . . . . . . . . . . . . . . . . . . 65,552 105,879 63,922 95,886
-------- --------- -------- --------
Plan assets in excess of (less than) projected benefit obligation . . . . 2,054 (1,564) (2,563) (1,285)
Unrecognized net loss (gain) . . . . . . . . . . . . . . . . . . . . . . 8,104 (2,515) 7,199 (5,615)
Unrecognized net asset at transition . . . . . . . . . . . . . . . . . . (1,157) - (1,571) -
Unrecognized prior service cost . . . . . . . . . . . . . . . . . . . . . 470 - 1,172 -
-------- --------- -------- --------
Pension Asset (Liability) Included in the
Consolidated Balance Sheet . . . . . . . . . . . . . . . . . $ 9,471 $ (4,079) $ 4,237 $ (6,900)
======== ========= ======== ========
</TABLE>
The range of assumptions used in the Company's plans at December 31 were:
<TABLE>
<CAPTION>
1994 1993 1992
----------------- ------------------ -----------------
U.S. U.K. U.S. U.K. U.S. U.K.
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Discount rates . . . . . . . . . . . . . . . . . . . . 8.25% 9.00% 7.50% 7.50% 8.00% 9.50%
Rates of increase in compensation levels . . . . . . . 5.50% 6.50% 5.50% 4.00% 6.50% 6.00%
Expected long-term rate of return on assets . . . . . . 9.00% 10.00% 9.00% 9.00% 9.00% 11.00%
</TABLE>
These assumptions were changed in 1994 to reflect a higher interest rate
environment in both the U.S. and the U.K. and a higher expected long-term rate
of return on plan assets and wage growth rate in the U.K. The impact of these
assumption changes is not anticipated to have a material impact on future
results of operations.
F-19
21
<PAGE> 22
FIRST DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Defined Contribution Plan
The Company has an incentive savings plan which allows eligible
employees to contribute a percentage of their compensation and provides for
certain Company matching, service-related and other contributions. The
Company's contributions were approximately $20.6 million, $12.3 million and
$7.5 million in 1994, 1993 and 1992, respectively.
NOTE 9: STOCK COMPENSATION PLANS
Long-Term Incentive Plan
The Company's 1992 Long-Term Incentive Plan (1992 Plan) provides for the
grant to key employees and other key individuals who perform services for the
Company of the following type of incentive awards: stock options, stock
appreciation rights, restricted stock, performance grants and other types of
awards the Compensation and Benefits Committee of the Board of Directors deems
to be consistent with the purposes of the 1992 Plan. The 1992 Plan provides for
stock options, which include nonqualified stock options, incentive options and
purchased stock options, to be granted at an option price less than, equal to
or greater than the fair market value of the underlying shares of the Company's
common stock, but in no event less than 50 percent of the fair market value on
the date of the grant. It is the Company's policy to grant such options at a
price equivalent to the fair market value at the date of grant. A total of
12,790,000 shares of common stock has been reserved for issuance under the 1992
Plan which is scheduled to terminate in April 2002, unless extended by action
of the Company's Board of Directors. The following table presents the stock
option activity for the years ended December 31, 1994, 1993 and 1992:
<TABLE>
<CAPTION>
OPTIONS PRICE PER OPTIONS
SHARE OUTSTANDING
----------------- -----------
<S> <C> <C>
Outstanding Balance at January 1, 1992 . . . . . . . . . . . . . . . . . . . . . - -
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $22.00-$29.75 4,157,500
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22.00 (36,350)
------------- ---------
Balance at December 31, 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . $22.00-$29.75 4,121,150
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $33.31-$41.75 4,548,338
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $22.00-$26.31 (351,858)
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $22.00-$36.06 (207,917)
------------- ---------
Balance at December 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . $22.00-$41.75 8,109,713
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $42.13-$50.06 2,290,911
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $22.00-$41.63 (320,538)
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $22.00-$50.06 (352,909)
------------- ---------
Balance at December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . $22.00-$50.06 9,727,177
============= =========
</TABLE>
There were 2,196,758 and 1,093,372 options exercisable at December 31,
1994 and 1993, respectively. There were no options exercisable at December 31,
1992.
Prior to the IPO, the Company's officers, key employees and other
individuals participated in various American Express incentive plans. Total
expenses recorded in connection with these plans were approximately $0.6
million, $1.3 million and $2.3 million for the years ended 1994, 1993 and 1992,
respectively. Such amounts have been reflected in the related party
transactions table in Note 3.
F-20
22
<PAGE> 23
FIRST DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Director's Stock Option Plan
The Company's 1993 Director's Stock Option Plan (DSOP) provides for the
grant of stock options to non-employee directors of the Company, which include
nonqualified and purchased stock options, to be granted at an option price
equal to the fair market value of the underlying shares of the Company's common
stock on the date of the grant. A total of 750,000 shares of common stock has
been reserved for issuance under the DSOP. At December 31, 1994, there were
85,977 options outstanding at option prices ranging from $40.75 to $50.00, of
which 6,250 options were exercisable. At December 31, 1993, there were 25,000
options outstanding at an option price of $40.75, none of which were
exercisable.
Employee Stock Purchase Plan
During 1992, the Company adopted a combination Save As You Earn (SAYE)
and Inland Revenue approved share option scheme (the First Data Resources
Sharesave Scheme) for its U.K. employees. Under the First Data Resources
Sharesave Scheme, employees electing to save monthly amounts through payroll
deductions are concurrently granted options to purchase the Company's common
stock at 80 percent of the fair market value on the date of grant. During 1994,
there was a total of 1,319 options exercised at an option price of $24.28.
Total expenses recorded in conjunction with this plan were not significant in
1994, 1993 and 1992.
NOTE 10: OPERATING LEASE COMMITMENTS
The Company leases certain office facilities and operating equipment
under cancelable and noncancelable agreements. Total rent expense was $83
million, $77 million and $67 million for the years ended December 31, 1994,
1993 and 1992, respectively. At December 31, 1994, the minimum aggregate rental
commitment under all noncancelable leases was (thousands): 1995, $59,050; 1996,
$56,059; 1997, $44,398; 1998, $26,541; 1999, $23,217; and $155,394 for years
thereafter. Most leases contain standard renewal clauses.
NOTE 11: GEOGRAPHIC OPERATIONS
The following table presents certain information regarding the Company's
operations in different geographic regions at December 31, 1994, 1993 and 1992
and for the years then ended (thousands):
<TABLE>
<CAPTION>
U.S. U.K. Other Consolidated
---------- -------- ------- ------------
<S> <C> <C> <C> <C>
1994
Revenues . . . . . . . . . . . . . . . . . . . . . . . $1,477,095 $153,296 $21,802 $1,652,193
Operating income . . . . . . . . . . . . . . . . . . . . 360,525 32,474(a) 4,375 397,374
Pretax income. . . . . . . . . . . . . . . . . . . . . . 344,597 8,931(a) 2,589 356,117
Identifiable assets . . . . . . . . . . . . . . . . . . 5,014,134 356,847 48,463 5,419,444
1993
Revenues . . . . . . . . . . . . . . . . . . . . . . . $1,325,181 $148,776 $16,386 $1,490,343
Operating income . . . . . . . . . . . . . . . . . . . 288,322 39,569 4,398 332,289
Pretax income . . . . . . . . . . . . . . . . . . . . . 276,531 12,028 2,300 290,859
Identifiable assets . . . . . . . . . . . . . . . . . . 3,554,814 359,149 40,701 3,954,664
1992
Revenues . . . . . . . . . . . . . . . . . . . . . . . $1,034,456 $167,587 $ 3,277 $1,205,320
Operating income . . . . . . . . . . . . . . . . . . . 223,562 41,524 443 265,529
Pretax income . . . . . . . . . . . . . . . . . . . . . 216,630 14,864 632 31,557
Identifiable assets . . . . . . . . . . . . . . . . . . 3,388,623 408,925 42,064 3,839,612
- ------------------------
</TABLE>
(a) Reflects the impact of the operations consolidation discussed in
"Management's Discussion and Analysis of Financial Condition and Results
of Operations."
F-21
23
<PAGE> 24
FIRST DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Operating income for non-U.S. operations excludes allocated corporate
expenses. Identifiable assets are those that are used or generated exclusively
by the respective operations.
The Company had a significant customer that contributed 10.7 percent of
the Company's consolidated revenues for the year ended December 31, 1992.
NOTE 12: CONTINGENCIES
The Company is involved in litigation primarily arising in the ormal
course of its business. In the opinion of management, the Company's recovery or
liability, if any, under any pending litigation, would not materially affect
its financial condition or operations.
NOTE 13: QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly results of operations for the two years ended
December 31, 1994 are as follows (thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------
March 31(a) June 30 September 30 December 31(a)
----------- ------- ------------ --------------
<S> <C> <C> <C> <C>
1994
Total revenues . . . . . . . . . . . . . . . . . . . $375,820 $409,585 $432,377 $434,411
Pretax income . . . . . . . . . . . . . . . . . . . . 73,818 78,499 91,017 112,783
Net income . . . . . . . . . . . . . . . . . . . . . 43,702 46,547 53,927 63,970
Net income per share . . . . . . . . . . . . . . . . 0.3 90.42 0.48 0.58
Dividends declared per share . . . . . . . . . . . . 0.03 -(b) 0.06 (b) 0.03
1993
Total revenues . . . . . . . . . . . . . . . . . . . $346,785 $379,131 $380,981 $383,446
Pretax income . . . . . . . . . . . . . . . . . . . . 60,622 65,331 74,062 90,844
Net income . . . . . . . . . . . . . . . . . . . . . 36,299 39,050 44,775 52,923
Net income per share . . . . . . . . . . . . . . . . 0.3 30.35 0.40 0.48
Dividends declared per share . . . . . . . . . . . . 0.03 0.03 0.03 0.03
</TABLE>
- --------------
(a) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of nonrecurring items included in
the fourth quarter 1994 and first and fourth quarter 1993 results
(b) FDC declared its regular quarterly cash dividend for the second quarter on
July 27, 1994 and for the third quarter on September 28, 1994
NOTE 14: SUBSEQUENT EVENTS
In 1994, the Company announced agreements to acquire CESI Holdings, Inc.
(CES) and its subsidiary, Card Establishment Services Inc. and the merchant
processing and point-of-sale unit of ENVOY Corporation (ENVOY). These
acquisitions are expected to close in the 1995 first quarter. In consideration
for the CES acquisition, the Company will pay approximately $500 million in the
form of FDC common stock. The ENVOY acquisition will require a payment of
approximately $156 million in the form of FDC common stock. In addition, under
the terms of the ENVOY acquisition, a contingent payment of up to $21 million
in the form of FDC common stock will be due over a one- to three-year period if
the ENVOY unit purchased attains certain performance objectives.
The following unaudited pro forma financial information is presented to
show the estimated effect on the Company of the CES acquisition as if it had
occurred at the beginning of 1994. The pro forma information does not give pro
forma effect to the acquisition of ENVOY, as it would have had an immaterial
effect on pro
F-22
24
<PAGE> 25
FIRST DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
forma earnings. The pro forma revenues, net income and net income per common
share for the year ended December 31, 1994 are (in thousands, except per share
amount) $1,862,284, $204,294, and $1.68, respectively.
Pro forma results present revenues net of interchange and association
fees. Interchange fees represent a standardized fee charged by the Visa and
Mastercard credit card associations to compensate card issuing banks for the
risk of transaction fraud, processing expenses and funding costs and are
settled with the card issuing banks. Historically, CES presented its revenues
on a gross basis. The Company believes it is appropriate to present revenues on
a net basis on its consolidated financial statements as generally there is no
risk to the Company associated with the interchange fees. If these fees were
included in CES' revenues in the pro forma financial information above,
revenues would increase by $587 million for 1994.
Adjustments made in arriving at pro forma unaudited results of
operations include the preliminary revaluation of CES assets to their fair
value, reduced interest expense on existing debt due to lower borrowing rates
of the Company, amortization of approximately $700 million of goodwill and
related tax adjustments. The pro forma results do not, however, include any
adjustments for cost savings or benefits from economies of scale that the
Company believes would have been achieved had the transaction occurred at the
beginning of 1994. The pro forma financial information is presented for
informational purposes and is not necessarily indicative of the future results
of operations of the combined companies.
In conjunction with the CES acquisition, the Company will be obligated
to provide cash to CES to retire CES' outstanding indebtedness under its senior
credit facility. As of January 31, 1995, the outstanding indebtedness under
this facility was approximately $76 million. The Company has sufficient funds
available under the Facilities to satisfy this obligation.
F-23
25
<PAGE> 26
INDEPENDENT ACCOUNTANTS REVIEW REPORT
The Stockholders and Board of Directors
First Data Corporation
We have reviewed the accompanying consolidated balance sheet of First Data
Corporation as of March 31, 1995, and the related consolidated statements of
income and cash flows for the three month periods ended March 31, 1995 and
1994. These financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data, and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, which will
be performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying consolidated financial statements referred
to above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of First Data Corporation as of
December 31, 1994, and the related consolidated statements of income,
stockholders' equity, and cash flows for the year then ended (not presented
herein) and in our report dated February 3, 1995, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 1994, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
ERNST & YOUNG LLP
New York, New York
May 8, 1995
26
<PAGE> 27
FIRST DATA CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-----------------------
1995 1994
---------- -----------
<TABLE>
<S> <C> <C>
REVENUES:
Fee revenues, net $ 383,341 $ 334,048
Fees related to sale of TRS financial
instruments, net 54,170 41,772
--------- -----------
Total 437,511 375,820
--------- -----------
EXPENSES:
Human resources 174,333 150,445
Equipment, supplies and facilities 67,260 53,391
Depreciation and amortization 42,902 31,081
Professional, advertising and other 62,310 56,266
--------- -----------
Total 346,805 291,183
--------- -----------
OPERATING INCOME 90,706 84,637
INTEREST EXPENSE 10,611 10,819
--------- -----------
PRETAX INCOME 80,095 73,818
INCOME TAXES 29,883 30,116
--------- -----------
NET INCOME $ 50,212 $ 43,702
========= ===========
NET INCOME PER COMMON SHARE $ 0.45 $ 0.39
========= ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 111,826 111,631
========= ===========
CASH DIVIDENDS DECLARED PER COMMON SHARE $ 0.03 $ 0.03
========= ===========
</TABLE>
See notes to consolidated financial statements.
1
27
<PAGE> 28
FIRST DATA CORPORATION
CONSOLIDATED BALANCE SHEET
($ IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1995 1994
------------- --------------
<S> <C> <C>
Cash and cash equivalents $ 63,360 $ 166,203
Short-term investments 94,093 197,134
Proceeds including proceeds due from financial instruments sold 3,365,758 3,058,829
Funds and funds due relating to merchant processing 245,156 --
Accounts receivable, less allowance: 1995, $7,165; 1994, $7,117 250,824 225,552
Land, buildings and equipment at cost, net of depreciation:
1995, $282,605; 1994, $262,590 341,301 303,294
Deferred income taxes 51,466 42,395
Goodwill, net of amortization: 1995, $166,699; 1994, $154,783 1,616,656 866,505
Other intangibles, net of amortization: 1995, $113,630; 1994, $100,016 348,611 296,339
Other assets 267,171 263,193
------------- -------------
$ 6,644,396 $ 5,419,444
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Drafts outstanding $ 94,012 $ 197,046
Liabilities relating to financial instruments sold 3,343,000 3,069,000
Liabilities relating to merchant processing 210,242 --
Short-term debt 150,000 35,000
Long-term debt 611,489 474,680
Accounts payable 97,718 90,358
Income taxes payable 75,536 60,019
Employee-related liabilities 73,378 84,356
Deferred revenue 47,003 50,366
Accrued and other liabilities 425,405 343,360
------------- -------------
Total liabilities 5,127,783 4,404,185
------------- -------------
Stockholders' equity:
Common stock, par value $.01 per share,
authorized 300,000,000 shares; issued 118,486,979
shares in 1995 and 110,352,000 in 1994 1,185 1,104
Capital surplus 861,039 412,779
Net unrealized securities gains (losses) 14,793 (6,611)
Foreign currency translation adjustment (16,751) (17,033)
Retained earnings 797,896 755,558
Less treasury stock at cost, 2,899,751 shares in 1995
and 2,710,360 in 1994 (141,549) (130,538)
------------- -------------
Total stockholders' equity 1,516,613 1,015,259
------------- -------------
$ 6,644,396 $ 5,419,444
============= =============
</TABLE>
See notes to consolidated financial statements.
2
28
<PAGE> 29
FIRST DATA CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
($ IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1995 1994
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 50,212 $ 43,702
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 22,472 16,088
Amortization (1995 and 1994 include charges
of $7,887 and $4,957, respectively, against revenues) 28,317 19,950
Other non-cash credits, net (4,677) (2,103)
Changes in operating assets and liabilities:
Short-term investments 103,041 8,571
Proceeds including proceeds due from
financial instruments sold (274,000) 3,000
Funds and funds due relating to merchant processing 21,038 --
Accounts receivable (9,761) 5,642
Other assets 13,524 1,735
Drafts outstanding (103,034) (8,507)
Liabilities relating to financial
instruments sold 274,000 (3,000)
Liabilities relating to merchant processing (21,799) --
Accounts payable and other liabilities (35,855) 25,081
----------- ---------
Net cash provided by operating activities 63,478 110,159
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of variable rate cap agreements (28,850)
Deferred contract costs (28,993) (8,873)
Purchase of land, buildings and equipment (41,174) (25,425)
Acquisition-related expenditures (201,099) (33,706)
Divestitures 10,535 433
----------- ---------
Net cash used by investing activities (260,731) (96,421)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term debt, net 115,000 --
Principal payments of long-term debt (2,295) (1,842)
Proceeds from exercise of stock options 7,040 1,700
Purchase of treasury stock (22,405) (9,391)
Dividends paid (3,226) (3,307)
----------- ---------
Net cash provided (used) by financing activities 94,114 (12,840)
----------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 296 382
----------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (102,843) 1,280
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 166,203 298,041
----------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 63,360 $ 299,321
=========== =========
</TABLE>
See notes to consolidated financial statements.
3
29
<PAGE> 30
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements of First Data Corporation (the Company or
FDC) should be read in conjunction with the Company's consolidated financial
statements for the year ended December 31, 1994. Significant accounting
policies disclosed therein have not changed. Certain prior year amounts have
been reclassified to conform to the current year presentation.
The 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 March 31,
1995 and the consolidated results of its operations and cash flows for the
three months ended March 31, 1995 and 1994. Results of operations reported for
interim periods are not necessarily indicative of results for the entire year.
2. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Net income taxes paid during the three months ended March 31, 1995 were
approximately $3.7 million. Net income taxes paid during the same period in
1994 were approximately $1.2 million, net of a $1.1 million refund from
American Express Company. Interest paid during the three months ended March
31, 1995 and 1994 was approximately $13 million.
3. ACQUISITION
On March 9, 1995, the Company completed the acquisition of CESI Holdings, Inc.
and its subsidiary, Card Establishment Services Inc., (CES) a leading merchant
transaction processor. CES was combined with the Company's U.S. transaction
card processing unit to strengthen both front-end and back-office merchant
transaction processing capabilities and is reflected in the accompanying
financial statements from its date of acquisition.
4
30
<PAGE> 31
A summary of the purchase price paid and the preliminary allocation thereof to
liabilities assumed in excess of tangible assets acquired is as follows
(thousands):
<TABLE>
<S> <C>
Total consideration paid $539,709
Liabilities assumed in excess of tangible
assets acquired at fair value 205,065
--------
Purchase price plus liabilities assumed
in excess of tangible assets acquired $744,774
========
</TABLE>
Of the total consideration paid, 8.1 million shares of FDC common stock were
issued to CES shareholders valued at $419 million with an additional 0.6
million shares in the form of common stock options valued at approximately $27
million. The remainder of the consideration represents cash paid at the time
of closing and acquisition costs. In conjunction with the CES acquisition, the
Company provided cash of $76 million to CES to retire its outstanding
indebtedness under its senior credit facility.
Of the purchase price plus liabilities assumed in excess of tangible assets
acquired, approximately $725 million is being amortized over 30 years, with the
remainder over a period of 10 years. This acquisition has been accounted for
using the purchase method.
The unaudited pro forma financial information reflects the estimated effect on
the Company of the CES acquisition as if it had occurred at the beginning of
each of 1995 and 1994. The pro forma revenues, net income and net income per
common share for the three months ending March 31, 1994 were (in thousands,
except per share amounts) $422,558, $41,012 and $0.34, respectively. The pro
forma revenues, net income and net income per common share for the three months
ending March 31, 1995 were (in thousands, except per share amounts) $475,883,
$45,525 and $0.39, respectively. The 1995 pro forma results reflect certain
acquisition-related expenses, as well as start-up expenses associated with the
bank alliance program.
Adjustments made in arriving at pro forma unaudited results of operations
include the preliminary revaluation of CES assets to their fair value, reduced
interest expense on existing debt due to lower borrowing rates of the Company,
amortization of goodwill and related tax adjustments. The pro forma results do
not, however, include any adjustments for cost savings or benefits from
economies of scale that the Company believes would have been achieved had the
transaction occurred at the beginning of each of 1995 and 1994. The pro forma
financial information is presented for informational purposes and is not
necessarily indicative of the future results of operations of the combined
companies.
Pro forma results present revenues net of interchange and association fees.
Interchange fees represent a standardized fee charged by the Visa and
Mastercard credit card associations to compensate card issuing banks for the
risk of transaction fraud, processing expenses and funding costs and are
settled with the card issuing banks. Historically, CES presented its revenues
on a gross basis. The Company believes it is appropriate to present revenues
on a net basis on its consolidated financial statements as generally there is
no risk to the Company associated with the interchange fees. If these fees
were
5
31
<PAGE> 32
included in CES' revenues in the pro forma financial information above,
revenues would increase by $142 million and $118 million for 1995 and 1994,
respectively.
6
32
<PAGE> 33
(LOGO) ERNST & YOUNG LLP --395 North Service Road --Phone: 516 752 6100
Melville, New York 11747
Report of Independent Auditors
The Board of Directors
CESI Holdings, Inc.
We have audited the accompanying consolidated balance sheets of CESI Holdings,
Inc. and subsidiaries as of June 30, 1993 and 1994, the related consolidated
statements of stockholders' equity (capital deficiency) and cash flows for the
period from June 17, 1992 (date of incorporation of CESI Holdings, Inc.) to
June 30, 1992 (not separately presented herein) and the related consolidated
statements of operations, stockholders' equity (capital deficiency) and cash
flows for each of the two years in the period ended June 30, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the consolidated financial statements of HMS
Holdings Corporation and subsidiaries, which statements reflect total assets of
$68,905,000 at June 30, 1993, and total revenues and net (loss) of $100,881,000
and $(47,904,000), respectively, for the year ended June 30, 1993.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of CESI Holdings, Inc. and
subsidiaries at June 30, 1993 and 1994 and the consolidated results of their
operations for each of the two years in the period ended June 30, 1994, and
their cash flows for the period from June 17, 1992 to June 30, 1992 and each of
the two years in the period ended June 30, 1994, in conformity with generally
accepted accounting principles.
F-2
33
<PAGE> 34
As discussed in Note 12 to the consolidated financial statements, in 1994 the
Company changed its method of accounting for postemployment benefits.
We also have audited, as to combination only, the accompanying consolidated
statements of stockholders' equity (capital deficiency) and cash flows of CESI
Holdings, Inc. and subsidiaries for the three months ended June 30, 1992. As
described in Note 1 to such statements, these statements have been combined
from the consolidated statements of CESI Holdings, Inc. and subsidiaries and
HMS Holdings Corporation and subsidiaries, which statements are not presented
separately herein. The report of the other auditors who have audited HMS
Holdings Corporation and subsidiaries appears elsewhere herein. In our opinion,
the accompanying consolidated statements of stockholders' equity (capital
deficiency) and cash flows for the three months ended June 30, 1992 have been
properly combined on the basis described in Note 1.
ERNST & YOUNG LLP
Melville, New York
August 26, 1994
F-3
34
<PAGE> 35
CESI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
1993 1994
--------- ---------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 45,882 $ 80,777
Restricted cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,570 10,681
Receivables, net of allowance of $5,257 and $1,977 . . . . . . . . . . . . . . . . . . . . 193,383 174,045
Terminal inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,371 3,918
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . 3,390 3,964
--------- ---------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254,596 273,385
Property and equipment:
Land and building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 650
Terminals at merchants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,218 6,859
Computers and other equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,800 20,356
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,198 4,007
Purchased computer software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,128 49,065
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,546 2,189
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176 3,857
--------- ---------
83,066 86,983
Less: accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . (37,893) (48,105)
--------- ---------
Net property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,173 38,878
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 792 1,356
Note receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,155 -
Acquired intangibles, net of accumulated amortization of $92,140 and $58,924 . . . . . . . . 101,868 71,339
Deferred financing costs, net of accumulated amortization of $1,230 and $562 . . . . . . . . 3,030 6,191
--------- ---------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 407,614 $ 391,149
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Current liabilities:
Merchant payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 196,313 $ 187,907
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 44,976 61,516
Accrued salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . 7,381 5,799
Restructuring and other reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,347 5,376
Merchant collateral and deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,488 17,906
Current portion of bank debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,500 7,750
Current portion of subordinated notes payable . . . . . . . . . . . . . . . . . . . . . . 5,678 5,500
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 1,601
--------- ---------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 282,763 293,355
Bank debt, net of current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,376 37,000
Senior notes payable, net of current portion . . . . . . . . . . . . . . . . . . . . . . . . 243 -
Revolving note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 30,000
Subordinated notes payable, net of current portion . . . . . . . . . . . . . . . . . . . . . 107,874 125,000
Restructuring and other reserves, net of current portion . . . . . . . . . . . . . . . . . . 6,795 5,044
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 509
Series A Redeemable Preferred Stock, including accrued dividends . . . . . . . . . . . . . . 20,922 22,844
Commitments and contingencies (Note 13)
Stockholders' equity (capital deficiency):
Common Stock, $.01 par value, 40,000,000 shares authorized, 31,024,099 and
31,130,099 shares issued and outstanding in 1993 and 1994, respectively . . . . . . . . 310 311
Additional paid in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82,357 80,491
Deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (140,184) (202,807)
Unearned compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (842) (598)
--------- ---------
Total stockholders' equity (capital deficiency) . . . . . . . . . . . . . . . . . . (58,359) (122,603)
--------- ---------
Total liabilities and stockholders' equity (capital deficiency) . . . . . . . . . . $ 407,614 $ 391,149
========= =========
</TABLE>
See accompanying notes.
F-12
35
<PAGE> 36
CESI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
MARCH 31, JUNE 30, JUNE 30, JUNE 30,
1992 1992 1993 1994
---------- ------------ ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Processing operations and continued leasing operations:
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $107,311 $28,310 $685,046 $724,944
Expenses:
Interchange and association fees . . . . . . . . . . . . . . . . . . . . 52,014 13,380 514,490 534,706
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . 15,450 2,452 43,965 46,185
Provision for possible credit and chargeback losses . . . . . . . . . . . 12,858 2,739 9,078 5,904
Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . 33,931 7,404 65,433 84,083
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 26,390 6,420 101,280 62,898
Impairment of acquired intangibles . . . . . . . . . . . . . . . . . . . - - - 24,643
Restructuring and other charges . . . . . . . . . . . . . . . . . . . . 4,115 - 20,509 -
-------- ------- -------- --------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 144,758 32,395 754,755 758,419
-------- ------- -------- --------
Operating (loss) from processing operations and
continued leasing operations . . . . . . . . . . . . . . . . . . . . . . . (37,447) (4,085) (69,709) (33,475)
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,933 2,148 22,087 18,475
-------- ------- -------- --------
(Loss) from processing operations and continued leasing
operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (43,380) (6,233) (91,796) (51,950)
-------- ------- -------- --------
Discontinued leasing operations:
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,387 3,116 5,583 -
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,112 3,153 10,442 -
-------- ------- -------- --------
Income (loss) from discontinued leasing operations . . . . . . . . . . . . . 7,275 (37) (4,859) -
-------- ------- -------- --------
(Loss) before extraordinary item and cumulative effect
of accounting change . . . . . . . . . . . . . . . . . . . . . . . . . . . (36,105) (6,270) (96,655) (51,950)
Extraordinary (loss) on extinguishment of debt . . . . . . . . . . . . . . . - - - (10,136)
-------- ------- -------- --------
(Loss) before cumulative effect of accounting change . . . . . . . . . . . . (36,105) (6,270) (96,655) (62,086)
Cumulative effect of accounting change . . . . . . . . . . . . . . . . . . . - - - (537)
-------- ------- -------- --------
Net (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (36,105) (6,270) (96,655) (62,623)
Dividends on redeemable preferred stock . . . . . . . . . . . . . . . . . . . - - (1,250) (1,250)
Accretion of redeemable preferred stock . . . . . . . . . . . . . . . . . . . - - (672) (672)
-------- ------- -------- --------
Net (loss) applicable to common stock . . . . . . . . . . . . . . . . . . . . $(36,105) $(6,270) $(98,577) $(64,545)
======== ======= ======== ========
(Loss) per common share:
(Loss) before extraordinary item and cumulative effect
of accounting change (net of preferred stock
dividends and accretion) . . . . . . . . . . . . . . . . . . . . . . . . $ (3.69) $ (1.73)
Extraordinary (loss) on extinguishment of debt . . . . . . . . . . . . . . - (.33)
Cumulative effect of accounting change . . . . . . . . . . . . . . . . . . - (.02)
-------- --------
Net (loss) applicable to common stock . . . . . . . . . . . . . . . . . . $ (3.69) $ (2.08)
======== ========
</TABLE>
See accompanying notes.
F-13
36
<PAGE> 37
CESI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
YEAR ENDED MARCH 31, 1992, THREE MONTHS ENDED JUNE 30, 1992 AND YEARS ENDED
JUNE 30, 1993 AND 1994
<TABLE>
<CAPTION>
CESI HOLDINGS, INC HMS HOLDINGS CORPORATION
------------------------------ -------------------------------------------
COMMON STOCK COMMON STOCK PREFERRED STOCK
------------------ -------------------- -------------------
ADDITIONAL SERIES A
PAID-IN -------------------
SHARES AMOUNT CAPITAL SHARES AMOUNT SHARES AMOUNT
--------- ------ ---------- ---------- ------ --------- ------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1991 . . . . . . . . . . . . - $ - $ - 4,600,000 $ 46 250,000 $ 250
Issuance of preferred stock . . . . . . . . . - - - - - 4,375 4
Issuance of common stock . . . . . . . . . . . - - - 91,000 1 - -
Net loss . . . . . . . . . . . . . . . . . . . - - - - - - -
Preferred stock dividends . . . . . . . . . . - - - - - - -
---------- ---- ------- ---------- ---- ------- -----
Balance at March 31, 1992 . . . . . . . . . . . . - - - 4,691,000 47 254,375 254
Issuance of common stock . . . . . . . . . . . 26,024,099 260 33,571 - - - -
Issuance of warrants . . . . . . . . . . . . . - - 300 - - - -
Net loss . . . . . . . . . . . . . . . . . . . - - - - - - -
Preferred stock dividends . . . . . . . . . . - - - - - - -
---------- ---- ------- ---------- ---- ------- -----
Balance at June 30, 1992 . . . . . . . . . . . . 26,024,099 260 33,871 4,691,000 47 254,375 254
Issuance of preferred stock . . . . . . . . . - - - - - -
Issuance of common stock . . . . . . . . . . - - - 240,000 2 - -
Issuance of warrants for guarantees of debt . - - - - - - -
Conversion of warrants . . . . . . . . . . . . - - - 475,883 4 - -
Issuance of stock options . . . . . . . . . . - - 1,052 - - - -
Dividend of Claridge . . . . . . . . . . . . - - - - - - -
Purchase of treasury stock . . . . . . . . . . - - - - - - -
Exercise of stock options . . . . . . . . . . - - - 76,935 1 - -
Conversion of preferred stock . . . . . . . . - - - 2,000,000 20 - -
Preferred stock dividends . . . . . . . . . . - - - - - - -
Write off of dividends payable . . . . . . . - - - - - - -
Issuance of stock for debt extinguishment . . - - - 186,169 2 - -
Retirement of treasury stock . . . . . . . . . - - - (44,670) - (2,708) (3)
Exchange of HMS Holdings Corporation
stock for CESI Holdings, Inc. stock . . . . 5,000,000 50 49,356 (7,625,317) (76) (251,667) (251)
Net loss . . . . . . . . . . . . . . . . . . . - - - - - - -
Accretion of redeemable preferred stock . . . - - (672) - - - -
Dividends on redeemable preferred stock . . . - - (1,250) - - - -
---------- ---- ------- ---------- ---- ------- -----
Balance at June 30, 1993 . . . . . . . . . . . . 31,024,099 310 82,357 - - - -
Exercise of stock options . . . . . . . . . . 106,000 1 105 - - - -
Expired options . . . . . . . . . . . . . . . - - (49) - - - -
Compensation expense . . . . . . . . . . . . - - - - - - -
Net loss . . . . . . . . . . . . . . . . . . . - - - - - - -
Accretion of redeemable preferred stock . . . - - (672) - - - -
Dividends on redeemable preferred stock . . . - - (1,250) - - - -
---------- ---- ------- ---------- ---- ------- -----
Balance at June 30, 1994 . . . . . . . . . . . . 31,130,099 $311 $80,491 - $ - - $ -
========== ==== ======= ========== ==== ======= =====
<CAPTION>
HMS HOLDINGS CORPORATION
--------------------------------------
PREFERRED STOCK
---------------
SERIES B ADDITIONAL
-------- PAID-IN TREASURY UNEARNED
SHARES AMOUNT CAPITAL STOCK DEFICIT COMPENSATION TOTAL
------ ------ ------- ----- ------- ------------ -----
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1991 . . . . . . . . . . . . - $ - $ 41,954 $ - $ - $ - $ 42,250
Issuance of preferred stock . . . . . . . . . - - 433 - - - 437
Issuance of common stock . . . . . . . . . . . - - 340 - - - 341
Net loss . . . . . . . . . . . . . . . . . . . - - - - (36,105) - (36,105)
Preferred stock dividends . . . . . . . . . . - - - - (2,524) - (2,524)
------- ---- -------- ----- --------- ----- ---------
Balance at March 31, 1992 . . . . . . . . . . . . - - 42,727 - (38,629) - 4,399
Issuance of common stock . . . . . . . . . . . - - - - - - 33,831
Issuance of warrants . . . . . . . . . . . . . - - - - - - 300
Net loss . . . . . . . . . . . . . . . . . . . - - - - (6,270) - (6,270)
Preferred stock dividends . . . . . . . . . . - - - - (700) - (700)
------- ---- -------- ----- --------- ----- ---------
Balance at June 30, 1992 . . . . . . . . . . . . - - 42,727 - (45,599) - 31,560
Issuance of preferred stock . . . . . . . . . 50,000 50 4,950 - - - 5,000
Issuance of common stock . . . . . . . . . . - - 598 - - - 600
Issuance of warrants for guarantees of debt . - - 648 - - - 648
Conversion of warrants . . . . . . . . . . . . - - (4) - - - -
Issuance of stock options . . . . . . . . . . - - - - - (842) 210
Dividend of Claridge . . . . . . . . . . . . - - - - (1,154) - (1,154)
Purchase of treasury stock . . . . . . . . . . - - - (440) - - (440)
Exercise of stock options . . . . . . . . . . - - 319 - - - 320
Conversion of preferred stock . . . . . . . . (50,000) (50) 30 - - - -
Preferred stock dividends . . . . . . . . . . - - - - (2,590) - (2,590)
Write off of dividends payable . . . . . . . - - - - 5,814 - 5,814
Issuance of stock for debt extinguishment . . - - 248 - - - 250
Retirement of treasury stock . . . . . . . . . - - (437) 440 - - -
Exchange of HMS Holdings Corporation
stock for CESI Holdings, Inc. stock . . . . - - (49,079) - - - -
Net loss . . . . . . . . . . . . . . . . . . . - - - - (96,655) - (96,655)
Accretion of redeemable preferred stock . . . - - - - - - (672)
Dividends on redeemable preferred stock . . . - - - - - - (1,250)
------- ---- -------- ----- --------- ----- ---------
Balance at June 30, 1993 . . . . . . . . . . . . - - - - (140,184) (842) (58,359)
Exercise of stock options . . . . . . . . . . - - - - - - 106
Expired options . . . . . . . . . . . . . . . - - - - - 34 (15)
Compensation expense . . . . . . . . . . . . - - - - - 210 210
Net loss . . . . . . . . . . . . . . . . . . . - - - - (62,623) - (62,623)
Accretion of redeemable preferred stock . . . - - - - - - (672)
Dividends on redeemable preferred stock . . . - - - - - - (1,250)
------- ---- -------- ----- --------- ----- ---------
Balance at June 30, 1994 . . . . . . . . . . . . - $ - $ - $ - $(202,807) $(598) $(122,603)
======= ==== ======== ===== ========= ===== =========
</TABLE>
See accompanying notes.
F-14
37
<PAGE> 38
CESI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR THREE MONTHS YEAR YEAR
ENDED ENDED ENDED ENDED
MARCH 31, JUNE 30, JUNE 30, JUNE 30,
1992 1992 1993 1994
--------- ------------ -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Operating activities
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (36,105) $ (6,270) $ (96,655) $ (62,623)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Extraordinary loss . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - 10,136
Cumulative effect of accounting change . . . . . . . . . . . . . . . . . - - - 537
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 26,390 6,420 101,280 62,898
Impairment of acquired intangibles . . . . . . . . . . . . . . . . . . . - - - 24,643
Amortization of deferred financing costs and original issue
discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 2,014 1,105
Provision for possible credit and chargeback losses . . . . . . . . . . . 12,858 2,739 9,078 5,904
Provision for lease losses . . . . . . . . . . . . . . . . . . . . . . . 14,379 400 4,305 -
Provision for restructuring and other charges . . . . . . . . . . . . . . 4,115 - 20,509 -
Loss on disposal of property and equipment . . . . . . . . . . . . . . . 1,252 - - 519
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 463 - 951 (496)
Changes in operating assets and liabilities:
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (26,497) (22,565) (147,357) 16,996
Terminal inventories . . . . . . . . . . . . . . . . . . . . . . . . . (275) 415 (407) (1,522)
Prepaid expenses and other current assets . . . . . . . . . . . . . . . 1,913 22 (503) 1,585
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - (792) (321)
Merchant payables . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,467 20,362 147,737 (8,406)
Accounts payable, accrued expenses and employee benefits . . . . . . . 1,467 1,749 26,979 13,263
Merchant collateral and deposits . . . . . . . . . . . . . . . . . . . - 68 7,420 10,418
Restructuring and other reserves . . . . . . . . . . . . . . . . . . . - - - (7,255)
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - 1,157
---------- --------- ---------- ----------
Net cash provided by operating activities . . . . . . . . . . . . 8,427 3,340 74,559 68,538
Investing activities
Investment in joint venture . . . . . . . . . . . . . . . . . . . . . . . . . - - - (17,500)
Acquisitions of healthcare information services companies, net of
cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - (23,555)
Acquisition of Citicorp Establishment Services . . . . . . . . . . . . . . . - (175,978) - -
(Increase) in restricted cash and cash equivalents . . . . . . . . . . . . . (3,484) (891) (4,277) (1,111)
Purchase of property and equipment . . . . . . . . . . . . . . . . . . . . . (4,059) (174) (7,435) (13,782)
Additions to lease receivables . . . . . . . . . . . . . . . . . . . . . . . (57,938) (3,960) (3,166) -
Payments received on leases . . . . . . . . . . . . . . . . . . . . . . . . . 7,380 4,757 17,757 -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (109) - - (497)
---------- --------- ---------- ----------
Net cash (used in) provided by investing activities . . . . . . . (58,210) (176,246) 2,879 (56,445)
Financing activities
Repayment of notes payable . . . . . . . . . . . . . . . . . . . . . . . . . (1,822) (3,206) (38,653) (115,323)
Proceeds from notes payable . . . . . . . . . . . . . . . . . . . . . . . . . 16,820 71,354 - 125,000
Proceeds from bank debt . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,364 71,850 16,206 50,000
Repayment of bank debt . . . . . . . . . . . . . . . . . . . . . . . . . . . (11,130) (210) (18,850) (60,250)
Proceeds from revolving note payable . . . . . . . . . . . . . . . . . . . . - - - 30,000
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . 266 26,000 - 106
Issuance of preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . 312 19,000 2,000 -
Costs to obtain financing . . . . . . . . . . . . . . . . . . . . . . . . . . - (4,260) - (6,753)
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . - - (440) -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - 22
---------- --------- ---------- ----------
Net cash provided by (used in) financing activities . . . . . . . 43,810 180,528 (39,737) 22,802
---------- --------- ---------- ----------
Net (decrease) increase in cash and cash equivalents . . . . . . . . . . . . (5,973) 7,622 37,701 34,895
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . 6,532 559 8,181 45,882
---------- --------- ---------- ----------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . $ 559 $ 8,181 $ 45,882 $ 80,777
========== ========= ========== ==========
Supplemental disclosures of cash flow information . . . . . . . . . . . . . .
Cash paid during the year for: . . . . . . . . . . . . . . . . . . . . . . .
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,308 $ - $ 21,311 $ 14,066
========== ========= ========== ==========
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ - $ 63 $ 115
========== ========= ========== ==========
</TABLE>
See accompanying notes.
F-15
38
<PAGE> 39
CESI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 1992, THREE MONTHS ENDED JUNE 30, 1992
AND YEARS ENDED JUNE 30, 1993 AND 1994
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying financial statements include the consolidated
accounts of CESI Holdings, Inc. ("Holdings") and its wholly-owned operating
subsidiaries, Card Establishment Services, Inc. ("CES") and HMS Holdings
Corporation ("HMS"), (collectively, the "Company"). Holdings and CES were
formed in 1992 by an investor group to acquire the merchant processing business
of Citicorp Establishment Services, a division of Citicorp Credit Services,
Inc.("CCSI" or the "CCSI Business"), a wholly-owned subsidiary of Citicorp (the
"CCSI Acquisition"). HMS was formed in 1991 by an investor group, comprised
principally of the same investors who formed Holdings, to acquire all of the
outstanding common stock of Peach Tree Bancard Corporation ("Peach Tree") in
exchange for cash, notes payable, and an obligation to deliver leases to the
seller under the terms of a lease substitution agreement (the "Peach Tree
Acquisition"). Peach Tree was also a provider of merchant processing services.
Both the CCSI Acquisition and the Peach Tree Acquisition were accounted for as
purchases and, accordingly, the acquired assets and liabilities were recorded
at their estimated fair values at their respective acquisition dates.
As described in Note 3, in May 1993 Holdings issued common and
preferred stock in exchange for the outstanding common and preferred stock of
HMS (the "HMS Merger"). This transaction was accounted for in a manner similar
to the pooling-of-interests method due to the common investor group's control
over both Holdings and HMS. The accompanying financial statements have been
prepared to reflect the accounts of Holdings, CES, HMS and their wholly-owned
subsidiaries on a combined basis since their respective acquisition dates. In
September 1993, Holdings contributed the common stock of HMS to CES. The
accompanying statements of operations for the year ended March 31, 1992, and
the three months ended June 30, 1992 and the related statements of
stockholders' equity (capital deficiency) and cash flows for the year ended
March 31, 1992, pertain solely to HMS.
In 1991, HMS formed a wholly-owned subsidiary, Claridge Capital
Corporation ("Claridge") to engage in leasing electronic point of sale ("POS")
terminals to merchants and lease securitization transactions with recourse. In
connection with the HMS Merger, prior to the stock exchange, HMS disposed of
Claridge on May 11, 1993 through a dividend of all Claridge stock to HMS'
common stockholders on that date (see Note 5).
The Company is one of the largest full service providers of credit
card processing services for merchants in the United States. The Company's
operations consist primarily of processing and settlement services for
merchants accepting all major credit cards, including VISA, MasterCard,
American Express, Discover, and Diners Club as payment for goods or services.
The Company also provides processing services to merchants for debit and
private label cards, as well as check verification services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION PRINCIPLES
The financial statements include the accounts of all majority owned
subsidiaries and entities over which the Company has a controlling financial
interest. All significant intercompany transactions have been eliminated.
Certain 1993 items have been reclassified to conform to the June 30, 1994
presentation.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, cash and cash equivalents
include unrestricted cash on hand and in banks and all highly liquid debt
instruments with maturities when purchased of three months or less.
F-16
39
<PAGE> 40
CESI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
RESTRICTED CASH AND CASH EQUIVALENTS
Restricted cash and cash equivalents consist of cash and U.S.
Government securities that the Company maintains under various banking
agreements as collateral for uncollected merchant chargebacks and certain notes
payable.
TERMINAL INVENTORIES
The Company maintains an inventory of POS terminals that are sold or
rented to merchants. These terminals are valued at the lower of cost or market
on a first-in, first-out basis. When rented under operating leases, the
terminals are reclassified to fixed assets and depreciated over their estimated
useful life. Used terminals returned from merchants are valued at the lower of
depreciated cost or net realizable value.
TERMINAL LEASES
Leases which are cancelable by the merchant, generally upon giving
one-month prior notice, are accounted for as operating leases. Income from the
rental of POS terminals under operating leases is recorded in accordance with
the terms of the rental agreements.
Noncancelable leases, which generally cover periods from two to four
years, are accounted for as sales-type leases. Accordingly, the present value
of all payments due under the lease contract is recorded as revenue at the
inception of the lease, and the related costs, including the cost of the
terminal, are expensed. Interest income is recorded over the lease term (see
Note 5).
REVENUE RECOGNITION
Fees from merchants related to the processing of transactions
(including merchant discount fees) are recorded as services are performed.
INTERCHANGE AND ASSOCIATION FEES
Interchange fees payable to credit card issuing institutions and fees
payable to credit card associations are charged to expense as the related
revenue is recorded.
SALES COMMISSIONS
Sales commissions incurred in connection with rentals and sales of
terminals are charged to expense as incurred.
INCOME TAXES
The Company accounts for income taxes under the liability method in
accordance with Statement of Financial Accounting Standards No. 109. Under this
method, deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
SOFTWARE DEVELOPMENT COSTS
The cost of certain software packages purchased from independent
vendors and software development costs incurred by independent consultants are
capitalized and amortized on a straight-line basis over two to three years.
Software acquired in the CCSI Acquisition was recorded at its estimated fair
value at the date of acquisition and is being amortized on a sum-of-the-months
digits method over a period of 5 years.
Internal costs of developing software are expensed as incurred.
F-17
40
<PAGE> 41
CESI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
PROPERTY AND EQUIPMENT
Property, equipment and leasehold improvements are stated at cost and
depreciation and amortization are calculated on straight-line and accelerated
methods over their estimated useful lives, as follows:
<TABLE>
<S> <C>
Building . . . . . . . . . . . . . . . . . 25 years
Terminals at merchants . . . . . . . . . . 4 years
Computers and other equipment . . . . . . 3 - 5 years
Furniture and fixtures . . . . . . . . . . 5 years
Purchased computer software . . . . . . . 2 - 5 years
Leasehold improvements . . . . . . . . . . 10 years or life of lease, if less
</TABLE>
Maintenance and repairs are charged to expense as incurred.
DEFERRED FINANCING COSTS
Deferred financing costs associated with various debt issuances are
being amortized over the terms of the related debt based on the amount of
outstanding indebtedness using the interest method.
ACQUIRED INTANGIBLES
Intangible assets are amortized on a straight-line basis over periods
up to thirty years, except for merchant contracts and the CES non-compete
covenants which are being amortized using accelerated methods over their
contractual lives which range from five to ten years. The carrying values of
goodwill and other acquired intangible assets are periodically reviewed by
management and if the facts and circumstances suggest that there is an
impairment in value, the carrying value or amortization period is adjusted.
Facts and circumstances include the Company's contract retention experience
with merchants, the discounted cash flows estimated to be realized from the
operations directly relating to the acquired businesses, and industry trends.
ORIGINAL ISSUE DISCOUNTS
Original issue discounts, which represent the differences between the
amount borrowed on long term debt and the maturity amount of the debt issue,
are amortized over the terms of the related debt based on the amount of
outstanding indebtedness using the interest method. With the early termination
of debt, as discussed in Note 8, all unamortized original issue discounts were
written off during the year ended June 30, 1994.
CUSTOMER SUPPLIES
The cost of customer supplies, which consists principally of
preprinted sales tickets for use by merchants, is expensed when shipped to
merchants.
CHARGEBACKS, CREDITS AND CONCENTRATION OF CREDIT RISK
When a cardholder or a credit card issuing institution disputes a
transaction, within credit card association guidelines, the Company's merchant
customers have liability for the disputed charges. The request for a chargeback
or credit could be the result of cancellation of the transaction by the
cardholder, improper documentation for the transaction or the inability of the
merchant to provide the goods or service. The Company may also be liable for
such charges. This liability may arise from merchant fraud, insolvency or
bankruptcy, particularly where there exists a time lag between processing of
the payment transaction and delivery of the goods or services by the merchant
(such as an airline).
The Company mitigates risk against potential losses that result from
uncollectible chargebacks by monitoring credit risk, obtaining collateral from
certain merchants (typically cash, securities or letters of
F-18
41
<PAGE> 42
CESI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
credit) and by other means. An allowance for possible chargeback transactions
is provided at the time of the original transaction. Accounts payable and
accrued expenses include an accrual for such transactions approximating
$1,504,000 and $2,328,000 at June 30, 1993 and 1994, respectively.
While substantially all of the Company's revenues are derived from
processing card based payment transactions and performing related settlement
and other services for various merchants principally located throughout the
United States, the Company believes that the diversification and monitoring of
its merchant portfolio minimizes its risk of loss. Based on its historical loss
experience, the Company has established reserves for estimated losses on
processed transactions and, in the opinion of management, such reserves for
losses are adequate.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
balance sheet for cash and short-term instruments approximate the fair
values of such assets.
Restricted cash and cash equivalents: The carrying amounts
reported in the balance sheet for cash and short-term instruments
approximate the fair values of such assets.
Long-term debt and Holdings Series A Redeemable Preferred Stock:
The fair values of long-term debt and Holdings Series A Redeemable
Preferred Stock are estimated using discounted cash flow analyses
based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements or quoted market prices of these or
similar instruments, where available.
LOSS PER COMMON SHARE
Loss per common share data is based on the weighted average number of
common shares outstanding and does not include common stock equivalents since
their effect would be antidilutive. The weighted average number of common
shares outstanding for the years ended June 30, 1993 and 1994 were 26,709,031
and 31,029,051, respectively. No loss per common share data is included for
periods prior to July 1, 1992, the date Holdings commenced operations, as it is
not meaningful.
3. BUSINESS COMBINATIONS
THE CCSI ACQUISITION
On June 30, 1992, CES acquired the merchant processing business of
Citicorp Establishment Services, Inc., a division of CCSI, for $175 million in
cash, plus acquisition and related costs, and warrants to purchase up to
265,552 shares of Holdings Common Stock. Assets acquired included all
intangible assets of the business plus terminal inventories and property and
equipment, including computer software; CES did not acquire receivables nor did
it assume the accounts payable or accrued expenses of the business. The
acquisition and related costs were financed through the issuance of Holdings
Common and Preferred Stock, bank borrowings, and senior and junior subordinated
notes payable.
This acquisition has been accounted for as a purchase transaction and,
accordingly, the purchase price was allocated to the purchased assets and
liabilities based upon their estimated fair values as of the acquisition date.
The excess of the consideration paid over the estimated fair value of the net
assets acquired has been recorded as goodwill and is being amortized on a
straight-line basis over 20 years. The results of operations of CES have been
included in these financial statements from July 1, 1992.
F-19
42
<PAGE> 43
CESI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The purchase price and estimated fair values of assets and liabilities
acquired are summarized as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Total acquisition costs . . . . . . . . . . . . . . $176,128
Estimated fair value of assets acquired . . . . . . $163,803
Estimated fair value of liabilities assumed . . . . 758
--------
Net assets acquired . . . . . . . . . . . . . . . . 163,045
--------
Amount recorded as goodwill . . . . . . . . . . . . $ 13,083
========
</TABLE>
In connection with this sale, CCSI agreed to indemnify CES for (i) all
taxes applicable to the Company which relate to periods prior to the date of
sale, and (ii) damages arising out of (A) pending or threatened litigation
specifically identified in the contract of sale and (B) other litigation to the
extent based on an event occurring or claim arising prior to June 30, 1992
(subject to an aggregate $1,000,000 deductible with respect to claims arising
from breaches of representations and warranties made by CCSI). All such
indemnification is subject to notification and other terms and conditions set
forth in the contract of sale.
THE PEACH TREE ACQUISITION
Effective March 31, 1991, HMS' wholly-owned subsidiary, PT Acquisition
Corporation, acquired all of the outstanding common stock of Peach Tree Bancard
Corporation, an Illinois corporation, in exchange for cash, notes payable and
an obligation to deliver leases to the seller under terms of a lease
substitution agreement. This acquisition has been accounted for as a purchase
and, accordingly, the acquired assets and liabilities have been recorded at
their estimated fair values at the date of acquisition. The excess of the
consideration paid over the estimated fair value of the net assets acquired has
been recorded as goodwill and, until June 1994, was being amortized on a
straight-line basis over 15 years (see Note 7). The results of operations of
HMS have been included in these financial statements from April 1, 1991. On
December 4, 1991, Peach Tree changed its name to Harbridge Merchant Services,
Inc., a wholly-owned subsidiary of HMS.
The purchase price and estimated fair values of assets and liabilities
acquired are summarized as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Total acquisition costs . . . . . . . . . . . . . . $71,973
Estimated fair value of assets acquired . . . . . . $72,060
Estimated fair value of liabilities assumed . . . . 18,834
-------
Net assets acquired . . . . . . . . . . . . . . . . 53,226
-------
Amount recorded as goodwill . . . . . . . . . . . . $18,747
=======
</TABLE>
THE MERGER WITH HMS
On May 11, 1993, Holdings issued 5,000,000 shares of its common stock
to the shareholders of HMS and 25,000,000 shares of its Series B Preferred
Stock to an escrow agent for the benefit of the shareholders of HMS in exchange
for all of the outstanding common and preferred stock of HMS (see Note 1). The
actual amount of shares of Holdings Series B Preferred Stock to be distributed
by the escrow agent is subject to reduction in whole or in part, based upon the
achievement of certain earnings levels for the year ended June 30, 1994, and
other financial targets of the Company and the resolution of certain contingent
liabilities of HMS. In connection with the HMS Merger, 44,670 shares of HMS
common stock and 2,708 shares of HMS Series A Preferred stock held in treasury,
with an aggregate cost of $440,000, and 534,266 stock options were retired. The
fiscal year-end of HMS has been changed from March 31 to June 30. On September
30, 1993, Holdings contributed all of the outstanding stock of HMS to CES. The
Company has instructed the escrow
F-20
43
<PAGE> 44
CESI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
agent to cancel approximately 21.1 million shares of the Holdings Series B
Preferred Stock as certain earnings levels and other financial targets were not
achieved (see Note 9).
INVESTMENT IN JOINT VENTURE
Effective November 1, 1993 CES formed a joint venture with Wells Fargo
Bank, N.A. ("Bank") by which CES would provide transaction processing and
operational support services for the Bank's merchant portfolio. As part of the
joint venture agreement, the Company acquired a 60% economic interest in such
portfolio. Minority interest in the operations of the joint venture since
November 1, 1993 has been included in other operating expenses in the Statement
of Operations. The Company, pursuant to the joint venture agreement with Wells
Fargo, paid Wells Fargo $17.5 million in fiscal 1994.
The Company may be obligated to make contingent payments to Wells
Fargo through fiscal 1998 not to exceed $12 million based on the occurrence of
certain future events, plus certain additional payments not to exceed $13.5
million based upon the achievement of certain earnings targets.
This acquisition has been accounted for as a purchase transaction and,
accordingly, the purchase price was allocated to the purchased assets based
upon their estimated fair values as of the acquisition date. Through June 30,
1994, no goodwill has been recorded relating to this transaction. If contingent
payments as discussed above are required to be paid, then any excess of the
consideration paid over the estimated fair value of the net assets acquired
will be recorded as goodwill which will be amortized on a straight-line basis
over 10 years, or the remaining term of the joint venture agreement, whichever
is less. The Company has included the operations of the joint venture in its
consolidated financial statements from the date of its acquisition.
ACQUISITION OF HEALTHCARE INFORMATION SERVICES COMPANIES
During the fourth quarter of fiscal 1994, the Company acquired the
outstanding common stock of three unrelated healthcare information services
companies that provide processing services to the healthcare industry. The
aggregate price for these acquisitions was approximately $24 million in cash,
including acquisition and related costs.
The Company may be obligated to make contingent payments to the former
stockholders of one of the acquired companies through December 31, 1996 based
on the performance of the acquired company. These payments are not to be
subject to any cap, but will be based upon the achievement of certain earnings
targets set forth in the purchase agreement.
These acquisitions, which are not material to the Company for
financial reporting purposes, have been accounted for individually as purchase
transactions, and the results of operations of these companies have been
included in the accompanying consolidated financial statements since their
respective dates of acquisition. The cost of these acquisitions have been
allocated on the basis of the estimated fair value of the assets acquired and
the liabilities assumed. The excess, which amounted to approximately $17
million, of the consideration paid over the estimated fair value of the net
assets acquired has been recorded as goodwill and is being amortized on a
straight-line basis over 30 years.
4. RESTRUCTURING AND OTHER CHARGES
In fiscal 1993, various expenses were incurred related to the
integration of the HMS operations with the CES operations. The most significant
of these costs were applicable to the vacating of the former HMS headquarters,
write-offs of fixed assets (which were a direct result of the decision by HMS
to vacate the HMS headquarters in Chicago and move to New York), employee
severance and other non-recurring charges related to HMS litigation.
F-21
44
<PAGE> 45
CESI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In the year ended March 31, 1992, HMS incurred costs relating to the
reduction and integration of facilities and personnel. These costs primarily
related to severance pay, the closing of offices and contract termination
charges attributable to the reorganization of the HMS business.
5. DISCONTINUED LEASING OPERATIONS
HMS had been engaged in sales-type leasing activities of POS terminals
through Claridge. In 1993, the Company formalized a plan to dispose of its
Claridge leasing operations. This plan contemplated spinning off Claridge to
the shareholders of HMS. The Claridge operations were disposed through a
dividend to shareholders on May 11, 1993. The financial disclosures in the
following tables present the results of operations of Claridge and the HMS
transactions with Claridge.
The results of operations related to these activities for the year
ended March 31, 1992, the three months ended June 30, 1992 and the period from
July 1, 1992 to May 11, 1993 were as follows:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30, MAY 11,
1992 1992 1993
-------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Equipment sales . . . . . . . . . . . . . $57,305 $ 2,074 $ 3,166
Interest income . . . . . . . . . . . . . 2,963 1,042 2,417
Other income . . . . . . . . . . . . . . . 119 - -
------- ------- -------
Total revenue . . . . . . . . . . . . 60,387 3,116 5,583
------- ------- -------
Cost of equipment sales . . . . . . . . . 31,261 2,040 3,598
Provision for lease losses . . . . . . . . 14,379 400 4,305
Interest expense . . . . . . . . . . . . . 1,526 331 1,529
Other expense . . . . . . . . . . . . . . 5,946 382 1,010
------- ------- -------
Total cost and expenses . . . . . . . 53,112 3,153 10,442
------- ------- -------
Income (loss) before income taxes . . . . $ 7,275 $ (37) $(4,859)
======= ======= =======
</TABLE>
The dividend of Claridge was recorded based upon the net book value of
Claridge at the date of distribution, as follows
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Cash and cash equivalents (including restricted cash) . . . . . $ 1,978
Leases receivable (net) . . . . . . . . . . . . . . . . . . . . 7,607
Net miscellaneous assets and liabilities . . . . . . . . . . . . 997
Senior and subordinated notes payable . . . . . . . . . . . . . (9,428)
-------
Net Claridge assets distributed to shareholders . . . . . . . . $ 1,154
=======
</TABLE>
6. INCOME TAXES
CES and, from their respective business combination dates, HMS and the
healthcare information services companies are included in the consolidated tax
return of Holdings.
F-22
45
<PAGE> 46
CESI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1993 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards . . . . . . . . . . $ 17,637 $ 32,416
Depreciation . . . . . . . . . . . . . . . . . . . . 5,637 6,088
Amortization . . . . . . . . . . . . . . . . . . . . 13,983 17,374
Restructuring and other charges . . . . . . . . . . . 8,362 3,978
Accrued liabilities . . . . . . . . . . . . . . . . . 5,425 2,006
Benefit plans . . . . . . . . . . . . . . . . . . . . 310 848
Other . . . . . . . . . . . . . . . . . . . . . . . 693 162
-------- --------
Total deferred tax assets . . . . . . . . . . . 52,047 62,872
Valuation allowance (principally non-current) . . (51,924) (62,814)
-------- --------
Net deferred tax assets . . . . . . . . . . . . . . . . . 123 58
Deferred tax liabilities:
Other . . . . . . . . . . . . . . . . . . . . . . . 123 58
-------- --------
Total deferred tax liabilities . . . . . . . . 123 58
-------- --------
Net deferred taxes . . . . . . . . . . . . . . . . . . . . $ - $ -
======== ========
</TABLE>
At June 30, 1994, the Company has net operating loss carryforwards of
approximately $85 million for income tax purposes, of which approximately $33
million are applicable to the operations of HMS prior to the HMS Merger and
thus may be offset only against HMS' portion of future consolidated taxable
income. These carryforwards expire in fiscal years 2007 through 2009.
The following is a reconciliation of tax benefit at the federal
statutory rate to the provision for taxes:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
MARCH 31, JUNE 30, JUNE 30, JUNE 30,
1992 1992 1993 1994
---------- ------------ ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Tax (benefit) at federal statutory rate . . . . . . . . . . . $(12,276) $(2,132) $(32,863) $(21,292)
Operating losses not currently realizable . . . . . . . . . . 11,822 2,016 31,966 15,608
Goodwill amortization . . . . . . . . . . . . . . . . . . . . 416 106 644 5,646
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 10 253 38
-------- ------- -------- --------
$ - $ - $ - $ -
======== ======= ======== ========
</TABLE>
F-23
46
<PAGE> 47
CESI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. ACQUIRED INTANGIBLE ASSETS
Acquired intangible assets consist of the following:
<TABLE>
<CAPTION>
JUNE 30
--------------------
1993 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Merchant contracts . . . . . . . . . . . . . . . . . . $ 48,950 $ 11,524
Non-compete covenants . . . . . . . . . . . . . . . . 100,000 76,667
Goodwill . . . . . . . . . . . . . . . . . . . . . . . 31,830 30,207
Favorable Citicorp agreements . . . . . . . . . . . . 13,228 7,231
Other . . . . . . . . . . . . . . . . . . . . . . . . - 4,634
-------- --------
194,008 130,263
Less accumulated amortization . . . . . . . . . . . . 92,140 58,924
-------- --------
$101,868 $ 71,339
======== ========
</TABLE>
Merchant contracts comprise the value attributable to the portfolio of
processing merchants and the related non-cancelable contracts existing at the
date of the Peach Tree Acquisition. Under the provisions of the Peach Tree
purchase agreement, HMS obtained for $25,000,000 a covenant which limits the
sellers' ability to solicit HMS' customers. CES obtained a similar covenant for
$75,000,000 under the provisions of the CCSI Acquisition (see Notes 1 and 3).
At June 30, 1994, merchant contracts also includes approximately $10 million
related to the merchant portfolio of the joint venture with Wells Fargo and
goodwill also includes approximately $17 million related to the acquisition of
the healthcare information services companies (see Note 3).
Favorable Citicorp agreements consist of data processing, leasehold,
network and merchant processing agreements at terms less than fair value which
were consummated in conjunction with the CCSI Acquisition.
The merger agreement with HMS contemplated certain earnings levels
which, as discussed in Note 3, were not achieved. Based on the completion of
the restructuring effort by the Company, HMS did not achieve certain financial
targets as contemplated in the HMS merger agreement in certain areas. The
merchant base and merchant sales force that were acquired in the purchase
transaction had a higher level of attrition than originally planned. In
addition, efficiencies that were expected to be realized as a result of the
restructuring effort in terms of lower processing expenses and credit losses,
as compared to other processors of similar size, did not materialize. As a
result, the Company analyzed the contract retention experience with merchants,
the discounted cash flows estimated to be realized from the operations directly
related to the 1991 Peach Tree acquisition and industry trends and concluded
that the values of merchant contracts and goodwill were impaired. Accordingly,
in the fourth quarter of fiscal 1994, the Company wrote off the unamortized
balance of these assets, which was approximately $25 million.
F-24
47
<PAGE> 48
CESI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. LONG-TERM DEBT
BANK DEBT
<TABLE>
<CAPTION>
JUNE 30
-------------------
1993 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Term loan facility . . . . . . . . . . . . . . . . . . $55,000 $44,750
Revolving credit facilities . . . . . . . . . . . . . - 30,000
------- -------
55,000 74,750
Less current portion . . . . . . . . . . . . . . . . . (7,500) (7,750)
Less original issue discount . . . . . . . . . . . . . (124) -
------- -------
$47,376 $67,000
======= =======
</TABLE>
In connection with the CCSI Acquisition, CES obtained a $70 million
credit facility from a group of banks. CES used all of the proceeds of the term
loan together with $15 million of revolving credit loans to acquire the CCSI
Business. Loans under these credit facilities bear interest at either (i)
Morgan Guaranty Trust Company of New York's base rate plus 1.75% per annum, or
(ii) the London Interbank Offered Rate ("LIBOR") plus 2.75% per annum, at the
option of CES. CES was also required to pay a commitment fee of 1/2% per annum
on all unused committed amounts.
In September 1993, CES replaced its existing bank credit facility with
a $115 million bank credit facility ("Senior Credit Facility"). Pursuant to the
Senior Credit Facility, a group of banks provide a $50 million five year term
loan, a six year $40 million revolving line of credit that converts to a three
year term loan on the third anniversary of the facility, and a six year $25
million letter of credit facility. Proceeds from the revolving credit line are
intended to be used to provide funding for permitted acquisitions and to
finance the working capital needs of the Company. The letter of credit facility
is intended to provide credit support in the form of standby letters of credit
to the banks that provide clearing and settlement services to the Company. As
of June 30, 1994, the Company used $30 million of the revolving facility to
make installment payments required by the Company's joint venture with Wells
Fargo, to make payments required by its acquisitions of companies that provide
processing services to the healthcare industry, and to support short-term
working capital needs. As of June 30, 1994, the Company pledged $21.5 million
of the $25 million letter of credit facility to two clearing banks. The
remaining $3.5 million is available to provide credit support to acquiring
banks that provide clearing and settlement services to CES. The Senior Credit
Facility is guaranteed by Holdings and is secured by the stock of CES and its
subsidiaries together with a security interest in substantially all of the
assets of Holdings and its subsidiaries. The Senior Credit Facility permits
certain bank accounts (those that are established with any clearing bank for
the purpose of holding and/or investing merchant funds prior to the Company's
payment of those funds to merchants) to be used to provide security to clearing
banks.
The loans under the Senior Credit Facility are, at the election of
CES, domestic loans or Eurodollar loans. During the first year of the facility,
loans bear interest (i) in the case of domestic loans, at 1.0% per annum plus a
reference rate (which is the prime rate) and (ii) in the case of Eurodollar
loans, at 2.0% per annum plus a reference Eurodollar loan rate. For the
remaining term of the Senior Credit Facility, the applicable percentages above
the reference rates may be increased or decreased quarterly depending upon the
Company's debt to operating cash flow ratio. The applicable percentages above
the referenced rates may range between 1.50% and 0.50% for domestic loans and
between 2.5% and 1.5% for Eurodollar loans. The Company will also be required
to pay a commitment fee of 1/2% per annum for all unused committed amounts
under the Senior Credit Facility.
The term loan under the Senior Credit Facility is required to be
repaid in quarterly installments aggregating $7.75, $9.5, $11.5, $12.75 and
$3.25 million, respectively, in the fiscal years 1995 through 1999. As of June
30, 1994, the Company has paid three quarterly payments totalling $5.25
million. Commencing with
F-25
48
<PAGE> 49
CESI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
the third anniversary of the Senior Credit Facility, outstanding revolving
credit loans will be converted into a term loan that will be repaid in equal
quarterly installments over a three year period. The Company is permitted to
prepay or reduce at any time upon three days' notice the commitments under the
Senior Credit Facility, provided that no prepayments of the revolving credit
loans are permitted until the term loan is repaid in full. The Senior Credit
Facility also provides for certain mandatory prepayments upon the receipt of
proceeds from the sale of assets or from debt and equity financing.
The Senior Credit Facility contains restrictive covenants that, among
other things, impose limitations on Holdings and its subsidiaries with respect
to the Company's ability to incur indebtedness, transfer assets and make
investments. Additionally, financial covenants include the maintenance of
specified financial ratios and minimum amounts of tangible net worth, as
defined.
NOTES PAYABLE
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1993 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Senior notes:
HMS:
Other . . . . . . . . . . . . . . . . . . . . . . . . . . $ 323 $ -
-------- --------
323 -
Less current portion . . . . . . . . . . . . . . . . . . . (80) -
-------- --------
$ 243 $ -
======== ========
Subordinated notes:
HMS:
Notes payable to certain stockholders of
Holdings due June 30, 2000, bearing annual
interest at 10.5% . . . . . . . . . . . . . . . . . . . . $ 45,000 $ -
Notes payable to a former stockholder of
Peach Tree due in three installments beginning
April 1, 1992 through April 1, 1994; bearing
annual interest at 12% . . . . . . . . . . . . . . . . . 5,678 5,500
CES:
Senior subordinated notes payable due on
October 1, 2003, bearing annual interest
at 10% . . . . . . . . . . . . . . . . . . . . . . . . . - 125,000
Senior subordinated notes payable due on
June 30, 1999; bearing annual interest at 11% . . . . . . 25,000 -
Junior subordinated notes payable to stockholders
of Holdings due on June 30, 2000; bearing
annual interest at 10.5% . . . . . . . . . . . . . . . . 45,000 -
-------- --------
120,678 130,500
Less original issue discount . . . . . . . . . . . . . . . . . (7,126) -
-------- --------
Subtotal . . . . . . . . . . . . . . . . . . . . . 113,552 130,500
Less current portion . . . . . . . . . . . . . . . . . . . . . (5,678) (5,500)
-------- --------
$107,874 $125,000
======== ========
</TABLE>
HMS has a $7 million note payable to a former stockholder of Peach
Tree. Management had cumulatively reduced the note by $1.5 million at June 30,
1993, which represents claims paid by HMS on matters on which HMS believes it
has the indemnification of the former stockholder based on the indemnification
provision contained in the purchase agreement for Peach Tree. Additionally, in
connection with the acquisition of Peach Tree, HMS acquired a $3.2 million
non-interest bearing note receivable due in February 1995, which is included in
other current assets, from this former stockholder of Peach Tree. HMS
F-26
49
<PAGE> 50
CESI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
discounted the note receivable to its estimated fair value using an implicit
annual interest rate of 12 percent. HMS has not accreted income on the note as
collectibility of the interest is uncertain. On March 31, 1994, HMS asserted a
claim to offset this receivable against the note payable as management believes
the legal right of offset exists.
During the year ended June 30, 1993, HMS defaulted on installments due
on notes payable to investors of $1.5 million. Subsequent to the default, but
during the year ended June 30, 1993, HMS made payments of $625,000 and issued
186,169 shares of HMS common stock to the note holders in satisfaction of the
remaining debt at a value agreed upon by HMS and the note holders. No gain was
recognized on this transaction because this transaction was between related
parties.
Certain major stockholders guaranteed HMS' notes payable to banks.
These guarantees expired on April 30, 1993, when the notes were repaid. As
consideration for the guarantees, HMS awarded the guarantors 704,000 and
750,000 warrants to purchase HMS' common stock, which were exercisable at $3.75
and $2.50 per share, respectively. Prior to the HMS Merger, none of the
warrants granted had been exercised. In connection with the HMS Merger, HMS
issued 475,883 shares of its common stock to redeem all warrants. In fiscal
1993, HMS recorded $648,000 as interest expense in connection with the granting
of these warrants. HMS's management calculated the value of the stock issued to
redeem the warrants based on the corresponding value of the Holdings Common
Stock received in the HMS Merger.
Pursuant to a July 1992 refinancing arrangement, HMS renegotiated its
subordinated notes payable to investors. HMS had been in default of certain
covenants during fiscal 1992 due to the nonpayment of interest on the notes.
The cumulative unpaid interest was transferred to subordinated payment-in-kind
notes. In addition, an interest rate on the notes was established at a rate
which was less than the rate contained in the default provisions of the debt
agreement and the original debt covenants were waived. In exchange for
renegotiating terms, HMS issued 240,000 shares of common stock to the
subordinated noteholders. The estimated fair value of the common shares at the
date of issuance of $600,000 was recorded as a discount on the subordinated
notes payable to investors and was being amortized to interest expense over the
term of the subordinated notes. Harbridge's Board of Directors assigned a value
of $2.50 per share for the shares of common stock issued to the subordinated
noteholders based on a calculation of its fair value giving consideration to
the exercise price of stock options granted to management in July 1992, the
exercise value of certain warrants and the conversion price of HMS's Series B
Preferred Stock.
In connection with the HMS Merger, HMS exchanged subordinated notes
payable to investors of $40 million and subordinated payment-in-kind notes
payable to investors of $5.6 million for subordinated notes payable of $45
million bearing interest at lower rates. As a result of these transactions, HMS
wrote off the unamortized original issue discount related to the notes payable
as an immaterial charge to interest expense in fiscal 1993.
The valuation of the HMS common stock issued in satisfaction of
liabilities, or to repurchase outstanding stock warrants and options, was
determined by management, based on a variety of considerations, including
discussions with investment bankers, investors and cash prices paid to purchase
or sell HMS common stock.
CES issued $25 million aggregate principal amount of Senior
Subordinated Notes and $45 million Junior Subordinated Notes as part of the
financing for the CCSI Acquisition. The original issue discount on the CES
notes arose from the issuance of 1,667,000 and 4,357,099 common shares of
Holdings (with a fair value of $2,167,100 and $5,664,229, respectively) to the
holders of the Senior and Junior Subordinated Notes, respectively. These notes
were repurchased by the Company through the issuance of Senior Subordinated
Notes Payable ("Old Notes").
In October 1993, the Company issued Old Notes due 2003, bearing
interest at 10% per annum, and a maturity value of $125 million. Net proceeds
of the issuance were used to repurchase various subordinated notes prior to
their scheduled maturities. In fiscal 1994, the Company incurred extraordinary
charges of
F-27
50
<PAGE> 51
CESI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
approximately $10.1 million attributable to the write-off of unamortized debt
issuance costs and unamortized original issue discounts associated with the
early termination of the aforementioned bank credit facility and the
subordinated notes.
The Old Notes were senior unsecured obligations of the Company,
subordinated in right of payment to all senior indebtedness including
indebtedness under the Senior Credit Facility. The Old Notes were redeemable at
the option of the Company, in whole or part, on or after October 1, 1998 at
specified redemption prices. In addition, at any time on or prior to October 1,
1996, the Company could have redeemed up to $50,000,000 aggregate principal
amount of Old Notes, at a redemption price equal to 109.0% of the principal
amount thereof, with the net proceeds from any offering of common stock of the
Company.
In May 1994, the Company issued $125 million of Senior Subordinated
Notes ("New Notes") in exchange for the Old Notes. The New Notes are identical
in all material respects to the Old Notes.
The New Notes contain various financial and operating covenants
limiting, among other things, the Company's ability to incur indebtedness,
transfer assets and make investments.
The aggregate principal installments of notes payable required for the
years ending June 30, are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,500
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . -
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . -
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . -
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . -
Thereafter . . . . . . . . . . . . . . . . . . . . . . . 125,000
--------
Total . . . . . . . . . . . . . . . . . . . . . . $130,500
========
</TABLE>
The carrying amounts and estimated fair values of the Company's
indebtedness are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1993 JUNE 30, 1994
-------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Subordinated Notes . . . . . . . . . . . . . . . . $113,552 $121,112 $ 5,500 $ 5,500
Senior Subordinated Notes . . . . . . . . . . . . - - 125,000 122,500
Bank debt . . . . . . . . . . . . . . . . . . . 54,876 55,932 74,750 74,750
Senior Notes . . . . . . . . . . . . . . . . . . . 323 323 - -
-------- -------- -------- --------
$168,751 $177,367 $205,250 $202,750
======== ======== ======== ========
</TABLE>
9. PREFERRED STOCK
HMS
The HMS Series A and B preferred stocks were nonparticipating and
entitled stockholders to an annual dividend of $10 per share. The cumulative
annual dividend was to increase to $11 per share if any dividends were in
arrears. Such stock was redeemable at the option of HMS for $100 per share. The
shares were preferred to the extent of unpaid cumulative dividends plus
redemption value in the event of dissolution of HMS. HMS Series A preferred
stock had common stock voting rights. Each share of HMS Series B preferred
stock was convertible into 40 shares of HMS common stock at the stockholder's
option. In connection with the HMS Merger, each share of HMS Series A preferred
stock was exchanged for 99.3376 shares of Holdings Series B preferred stock
(see Note 3) and all outstanding HMS Series B Preferred Stock was converted
into
F-28
51
<PAGE> 52
CESI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2,000,000 HMS common shares. All accrued and unpaid dividends on HMS Series A
and B preferred stock were canceled pursuant to the HMS Merger.
HOLDINGS
Series A Preferred Stock
As part of the financing for the CCSI acquisition, Holdings issued
25,000,000 shares of Series A Cumulative Redeemable Preferred Stock with an
annual dividend of $.05 per share. The Holdings Series A Preferred Stock shall
be redeemed at the redemption price of $1.00 per share, plus accrued but unpaid
dividends, in the following manner: (i) one-third of the outstanding shares on
June 30, 2000, (ii) one-half of the remaining outstanding shares on June 30,
2001, and (iii) all of the remaining outstanding shares on June 30, 2002.
Holdings, at its option, may redeem any portion of the Holdings Series A
Preferred Stock at any time. In addition, subject to certain debt covenants,
Holdings is required to redeem the outstanding shares of Holdings Series A
Preferred Stock upon the public offering of its common stock resulting in net
proceeds in excess of $15 million. The excess of the preference value over the
carrying value is being accreted by periodic charges to stockholders' equity
(capital deficiency) over the life of the issue ($672,000 for each of the years
ended June 30, 1993 and 1994). The Holdings Series A Preferred Stock is
nonEvoting except for certain matters, as defined in the Holdings Certificate
of Incorporation. The fair value of the Holdings Series A Preferred Stock at
June 30, 1994 approximates fair value.
Dividends in arrears at June 30, 1994 on the Holdings Series A
Preferred Stock was $2,500,000.
Series B Preferred Stock
In anticipation of the HMS Merger, Holdings authorized the issuance of
up to 25,000,000 shares of Holdings Series B Cumulative Redeemable Preferred
Stock with terms similar to the Holdings Series A Preferred Stock. These shares
of Holdings Series B Preferred Stock were placed in escrow for the benefit of
the shareholders of HMS. As described in Note 3, the exact number of shares of
Holdings Series B Preferred Stock to be issued will be determined upon the
achievement of certain financial targets of the Company for the year ended June
30, 1994 and the resolution of certain contingent liabilities of HMS. The
holders of Holdings Series B Preferred Stock are entitled to limited voting
rights, as defined in the Holdings Certificate of Incorporation.
In connection with the HMS merger agreement, the Company has
instructed the escrow agent to cancel approximately 21.1 million shares of
Holdings Series B Preferred Stock issued. As contemplated in the HMS merger
agreement, certain earnings levels and other financial targets were not
achieved resulting in cancellation of such shares issued in escrow. The Company
has determined, based upon the HMS merger agreement, that a maximum of
approximately 3.9 million shares of Holdings Series B Preferred Stock may be
issued and therefore remain in escrow subject to the achievement of certain
other financial targets as defined in the HMS merger agreement.
For both the Holdings Series A and Series B Preferred Stock, Holdings
is required to pay in full all dividend arrearages and all mandatory
redemptions prior to the declaration and payment of Holdings Common Stock
dividends, other than dividends payable in shares of Holdings Common Stock. In
addition, Holdings is not permitted to purchase and redeem any shares of its
Common Stock unless the aforementioned dividend and redemption requirements
have been met.
10. STOCK OPTIONS
HMS' Stock Option and Restricted Stock Purchase Plan (the "HMS Plan")
provided for the granting of stock options and restricted stock to selected
employees, officers and employees as determined by the Board of
F-29
52
<PAGE> 53
CESI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Directors. Under the HMS Plan 715,000 shares of common stock were authorized
for use. Shares to be used under the HMS Plan were to be either authorized and
unissued shares or shares reacquired by HMS.
The HMS Plan allowed the Board of Directors to grant nonqualified
stock options or restricted stock awards at their sole discretion at times, in
amounts, and subject to terms as they determined. Options issued to date were
to become exercisable over periods of up to ten years. The following table
summarizes changes in common stock under options for the year ended March
31,1992, the three months ended June 30, 1992 and the year ended June 30, 1993:
<TABLE>
<CAPTION>
NUMBER OF
SHARES PRICE RANGE
--------- -----------
<S> <C> <C>
Outstanding options at April 1, 1991 . . . . . . . . . . . . . . . . . . . . . . . . -
Options -- granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 395,600 $3.75
-- canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -
-- exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -
--------
Outstanding options at March 31, 1992 . . . . . . . . . . . . . . . . . . . . . . . 395,600 3.75
Options -- granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -
-- exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -
-- canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -
--------
Outstanding options at June 30, 1992 . . . . . . . . . . . . . . . . . . . . . . . . 395,600 3.75
Options -- granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215,601 2.50-3.75
-- exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (76,935) 2.50-3.75
-- canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (534,266) 2.50-3.75
--------
Outstanding options at June 30, 1993 . . . . . . . . . . . . . . . . . . . . . . . . -
========
</TABLE>
In connection with the HMS Merger, all HMS stock options were either
exercised or canceled and the HMS Plan was terminated.
In July 1992, the Board of Directors of Holdings (the "Board") adopted
a Stock Option and Restricted Stock Purchase Plan (the "Plan"). The Plan
provides for the granting of incentive stock options ("ISOGs"), nonqualified
stock options ("NQOGs") and restricted stock awards for the purchase of up to a
total of 3,650,000 shares of Holdings Common Stock. In connection therewith,
Holdings reserved 3,650,000 shares of Common Stock for issuance to the terms of
the Plan. The stock options are exercisable at prices and over periods
determined by the Board. The Board of Directors of Holdings determined the fair
value of the stock options by taking EBITDA (earnings before interest, taxes,
depreciation, amortization, restructuring and other non-recurring charges) of
Holdings for the twelve month period prior to the date of grant and multiplying
such number by a multiple to obtain the enterprise value. Holdings' debt and
Preferred Stock were then subtracted from the enterprise value to obtain the
equity value, which was then divided by the number of shares of Holdings Common
Stock outstanding to obtain the price per share.
These options become exercisable over a five year period beginning in
fiscal 1998, with a provision to accelerate such vesting period based on the
achievement of certain Company earnings targets, as defined. As of July 1, 1993
and 1994, 593,787 and 1,246,573, respectively, of the granted options were
exercisable. No restricted stock awards have been granted under the Plan. In
fiscal 1993, the Company recorded $1,051,745 of unearned compensation as a
reduction of stockholders' equity (capital deficiency) related to certain of
these options granted at prices below fair market value at the date of grant,
of which approximately $210,000 and $195,000 was charged to compensation
expense in fiscal 1993 and 1994, respectively. At June 30, 1994, unearned
compensation was adjusted to reflect employees' options that were canceled
which were previously granted at prices below fair market value.
F-30
53
<PAGE> 54
CESI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table summarizes changes in common stock under options
for the years ended June 30, 1993 and 1994 for Holdings' stock option plan:
<TABLE>
<CAPTION>
INCENTIVE NON-QUALIFIED PRICE RANGE
--------- ------------- -----------
<S> <C> <C> <C>
Options -- granted . . . . . . . . . . . . . . . . . . . . . . . . . 315,000 2,653,933 $1.00-2.00
-- exercised . . . . . . . . . . . . . . . . . . . . . . . . - -
-- canceled . . . . . . . . . . . . . . . . . . . . . . . . . - -
------- ---------
Outstanding options June 30, 1993 . . . . . . . . . . . . . . . . . . 315,000 2,653,933 1.00-2.00
Options -- granted . . . . . . . . . . . . . . . . . . . . . . . . . 410,000 390,000 2.50
-- exercised . . . . . . . . . . . . . . . . . . . . . . . . (6,000) (100,000) 1.00-2.00
-- canceled . . . . . . . . . . . . . . . . . . . . . . . . . (69,000) - 1.00-2.00
------- ---------
Outstanding options June 30, 1994 . . . . . . . . . . . . . . . . . . 650,000 2,943,933 1.00-2.50
======= =========
</TABLE>
In July 1994, 349,891 options previously granted were cancelled upon
the termination of employment of certain employees. These options therefore
became available for grants under the Plan.
11. OPERATING LEASES
Future minimum payments under noncancelable operating leases with
initial terms of one year or more consisted of the following at June 30, 1994:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,847
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . 5,056
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . 3,882
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . 3,554
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . 3,577
Thereafter . . . . . . . . . . . . . . . . . . . . . . . 34,302
-------
Total . . . . . . . . . . . . . . . . . . . . . $56,218
=======
</TABLE>
In July 1993, the Company entered into an operating lease for a new
data processing facility in Hagerstown, Maryland, which commenced in July 1994.
Minimum payments under this lease are included in the table above.
Rental expense for the year ended March 31, 1992, the three months
ended June 30, 1992 and the years ended June 30, 1993 and 1994, was $6,161,000,
$574,000, $5,747,000 and $3,900,000, respectively.
12. EMPLOYEE BENEFIT PLANS
In July 1992, the Company adopted a defined contribution 401(k) plan.
Participation in this plan is available to substantially all employees. At its
discretion, the Company may make contributions to the plan based upon a
percentage of employee contributions. Also at its discretion, the Company may
make profit sharing contributions of up to 6% of participants' salaries (as
defined) based upon the achievement of certain Company financial targets. The
cost of this plan charged to expense for the years ended June 30, 1993 and 1994
was approximately $1,250,000 and $1,462,000, respectively.
In the fourth quarter of fiscal 1994, the Company adopted, retroactive
to July 1, 1993, Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits." Prior to July 1, 1993,
postemployment benefit expenses were recognized on a pay-as-you-go basis. The
Company recognized the cumulative effect of the change in accounting for
postemployment benefits of approximately
F-31
54
<PAGE> 55
CESI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
$537,000 which represents the unfunded accumulated postemployment benefit
obligation as of July 1, 1993. The effect of this change on fiscal 1994
operating results was not material.
13. COMMITMENTS AND CONTINGENCIES
Various legal actions are pending against the Company, many involving
litigation incidental to the conduct of the business. Other matters include
actions related to the acquisition of Peach Tree and its former stockholder.
Management, after consultation with counsel, believes that the ultimate
liability, if any, in excess of the amounts currently recorded will not have a
material adverse effect upon the consolidated results of operations or
financial position of the Company.
14. NON-CASH TRANSACTIONS
HMS
Exchange of $9,000,000 in lease receivables in satisfaction of lease
substitution -- March 31, 1992.
Exchange of $200,000 note receivable for $75,000 of common stock and
$125,000 of preferred stock -- March 31, 1992.
Preferred stock dividends declared but not paid: March 31, 1992 --
$2,524,000; June 30, 1992 -- $700,000; June 30, 1993 -- $2,590,000; all
forgiven -- June 30, 1993.
Exchange of $600,000 in common stock as an incentive for renegotiating
the terms of the exchanged debt -- June 30, 1993.
Exchange of $3,000,000 in subordinated debt for $3,000,000 of
preferred stock -- June 30, 1993.
HOLDINGS
Issuance of $300,000 of warrants to purchase Holdings Common Stock in
connection with the CCSI Acquisition and related financing -- June 30, 1992.
F-32
55
<PAGE> 56
CESI HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1994
--------- -------------
(NOTE) (UNAUDITED)
(DOLLARS IN THOUSANDS,
EXCEPT SHARE AMOUNTS)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................................. $ 80,777 $ 45,700
Restricted cash and cash equivalents................................... 10,681 5,692
Receivables, net....................................................... 174,045 347,208
Terminal inventories................................................... 3,918 6,611
Prepaid expenses and other current assets.............................. 3,964 6,112
--------- ---------
Total current assets............................................ 273,385 411,323
Property and equipment................................................... 86,983 95,001
Less: accumulated depreciation and amortization.......................... (48,105) (58,628)
--------- ---------
Net property and equipment............................................... 38,878 36,373
Other assets............................................................. 1,356 1,431
Acquired intangibles, net of accumulated amortization of $58,924 and
$67,857................................................................ 71,339 62,010
Deferred financing costs, net of accumulated amortization of $562 and
$965................................................................... 6,191 5,788
--------- ---------
Total assets.................................................... $ 391,149 $ 516,925
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Current liabilities:
Merchant payables...................................................... $ 187,907 $ 321,002
Accounts payable and accrued expenses.................................. 61,516 56,675
Accrued salaries and employee benefits................................. 5,799 4,467
Restructuring and other reserves....................................... 5,376 3,659
Merchant collateral and deposits....................................... 17,906 16,823
Current portion of bank debt........................................... 7,750 8,500
Current portion of subordinated notes payable.......................... 5,500 5,500
Other current liabilities.............................................. 1,601 1,857
--------- ---------
Total current liabilities....................................... 293,355 418,483
Bank debt, net of current portion........................................ 37,000 32,500
Revolving note payable................................................... 30,000 35,000
Subordinated notes payable, net of current portion....................... 125,000 125,000
Restructuring and other reserves, net of current portion................. 5,044 4,595
Other liabilities........................................................ 509 525
Series A Redeemable Preferred Stock, including accrued dividends......... 22,844 23,805
Stockholders' equity (capital deficiency):
Common Stock, $.01 par value, 40,000,000 shares authorized, 31,130,099
and 31,555,945 shares issued and outstanding at June 30, 1994 and
December 31, 1994, respectively...................................... 311 315
Additional paid in capital............................................. 80,491 79,835
Deficit................................................................ (202,807) (202,757)
Unearned compensation.................................................. (598) (376)
--------- ---------
Total stockholders' equity (capital deficiency)................. (122,603) (122,983)
--------- ---------
Total liabilities and stockholders' equity (capital
deficiency)................................................... $ 391,149 $ 516,925
========= =========
</TABLE>
Note: The balance sheet at June 30, 1994 has been derived from the audited
financial statements at that date, and condensed.
See notes to condensed consolidated financial statements
F-33
56
<PAGE> 57
CESI HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1993 1994
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Revenue....................................................... $ 365,940 $ 445,638
Expenses:
Interchange and association fees............................ 276,230 328,543
Salaries and employee benefits.............................. 21,993 28,176
Provision for possible credit and chargeback losses......... 2,999 2,985
Other operating expenses.................................... 36,557 56,214
Depreciation and amortization............................... 33,880 19,567
--------- ---------
Total expenses........................................... 371,659 435,485
--------- ---------
Operating (loss) income from processing operations............ (5,719) 10,153
Interest expense.............................................. 9,855 10,085
--------- ---------
(Loss) income from processing operations before income taxes,
extraordinary item and cumulative effect of accounting
change...................................................... (15,574) 68
Provision for income taxes.................................... -- 18
--------- ---------
(Loss) income before extraordinary item and cumulative effect
of accounting change........................................ (15,574) 50
Extraordinary (loss) on extinguishment of debt................ (10,136) --
--------- ---------
(Loss) income before cumulative effect of accounting change... (25,710) 50
Cumulative effect of accounting change........................ (537) --
--------- ---------
Net (loss) income............................................. (26,247) 50
Dividends on redeemable preferred stock....................... (625) (625)
Accretion of redeemable preferred stock....................... (336) (336)
--------- ---------
Net (loss) applicable to common stock......................... $ (27,208) $ (911)
========= =========
(Loss) per common share:
(Loss) before extraordinary item and cumulative effect of
accounting change (net of preferred stock dividends and
accretion)............................................... $ (.53) $ (.03)
Extraordinary (loss) on extinguishment of debt.............. (.33) --
Cumulative effect of accounting change...................... (.02) --
--------- ---------
Net (loss) per common share................................. $ (.88) $ (.03)
========= =========
</TABLE>
See notes to condensed consolidated financial statements
F-34
57
<PAGE> 58
CESI HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX SIX
MONTHS ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1993 1994
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Operating activities:
Net (loss) income................................................ $(26,247) $ 50
Adjustments to reconcile net (loss) income to net cash provided
by (used in) operating activities:
Extraordinary loss............................................ 10,136 --
Cumulative effect of accounting change........................ 537 --
Depreciation and amortization................................. 33,880 19,567
Amortization of deferred financing costs and original issue
discounts.................................................... 376 403
Provision for credit and chargeback losses.................... 2,999 2,985
Gain on sale of property and equipment........................ -- (91)
Other......................................................... 961 (20)
Changes in operating assets and liabilities:
Receivables................................................. 40,848 (176,148)
Terminal inventories........................................ (205) (2,693)
Prepaid expenses and other current assets................... 2,148 (2,148)
Other assets................................................ (260) (75)
Merchant payables........................................... (52,849) 133,095
Accounts payable, accrued expenses and employee benefits.... 4,744 (6,173)
Merchant collateral and deposits............................ 4,166 (1,083)
Restructuring and other reserves............................ (3,592) (2,166)
Other liabilities........................................... -- 272
-------- --------
Net cash provided by (used in) operating activities...... 17,642 (34,225)
-------- --------
Investing activities:
Investment in joint venture...................................... (9,000) --
Decrease in restricted cash and cash equivalents................. 3,567 4,989
Purchase of property and equipment............................... (6,339) (8,018)
Other............................................................ (402) 396
-------- --------
Net cash (used in) investing activities.................. (12,174) (2,633)
-------- --------
Financing activities:
Proceeds from notes payable...................................... 125,000 --
Repayment of notes payable....................................... (115,323) --
Proceeds from bank debt.......................................... 50,000 --
Repayment of bank debt........................................... (56,750) (3,750)
Proceeds from revolving note payable............................. -- 10,000
Repayment of revolving note payable.............................. -- (5,000)
Costs to obtain financing........................................ (6,095) --
Issuance of common stock......................................... -- 460
Other............................................................ (15) 71
-------- --------
Net cash (used in) provided by financing activities................ (3,183) 1,781
-------- --------
Net increase (decrease) in cash and cash equivalents............... 2,285 (35,077)
Cash and cash equivalents at beginning of period................... 45,882 80,777
-------- --------
Cash and cash equivalents at end of period......................... $ 48,167 $ 45,700
======== ========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest...................................................... $ 5,117 $ 9,796
======== ========
Income taxes.................................................. $ 82 $ 82
======== ========
</TABLE>
Note: The statement of cash flows for the six months ended December 31,
1993 has been derived from the audited financial statements at that
date, and condensed.
See notes to condensed consolidated financial statements
F-35
58
<PAGE> 59
CESI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 1994
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions of Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments and accruals) considered necessary for a fair
presentation have been included. Operating results for the six month period
ended December 31, 1994 are not necessarily indicative of the results that may
be expected for the full year. For further information, refer to the
consolidated financial statements included herein.
Certain 1993 amounts have been reclassified to conform with 1994
classifications.
Results of operations for the six months ended December 31, 1993 have been
adjusted to reflect the cumulative effect of adopting Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits" in the fourth quarter of fiscal 1994, retroactive to July 1, 1993.
2. MERGER WITH FIRST DATA CORPORATION
On November 2, 1994, Holdings entered into a merger agreement (the "Merger
Agreement") with First Data Corporation ("First Data"), a leading transaction
processor. Under the terms of the Merger Agreement, First Data agreed to acquire
Holdings and its subsidiaries; however, First Data will not acquire the three
subsidiaries of Holdings engaged in healthcare information services. The parties
anticipate closing the transaction in March 1995. The Merger Agreement requires
payment at closing of First Data Common Stock or cash with a value in the range
of $500 million to $550 million, depending upon the market price of First Data's
Common Stock during a specified valuation period. Holdings has the right to
terminate the agreement if the average price of First Data's Common Stock during
the valuation period is above or below specified maximum or minimum prices.
3. LOSS PER COMMON SHARE
Loss per common share amounts are based on the weighted average number
of common shares outstanding and does not include common stock equivalents since
their effect would be antidilutive. The weighted average number of common shares
outstanding for the six months ended December 31, 1993 and 1994 were 31,027,072
and 31,256,920, respectively.
4. EXTRAORDINARY LOSS
Extraordinary loss in the six months ended December 31, 1993, represents
the write-off of unamortized debt issuance costs associated with the early
termination of the Company's bank credit facility.
F-36
59
<PAGE> 60
FIRST DATA CORPORATION AND
FIRST FINANCIAL MANAGEMENT CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements give
effect to the proposed merger ("the Merger") of a wholly owned subsidiary of
First Data Corporation ("First Data") with First Financial Management
Corporation ("First Financial") under the pooling of interests method of
accounting. A pro forma condensed combined balance sheet is provided as of
March 31, 1995, giving effect to the Merger as though it had been consummated
on that date. Pro forma condensed combined income statements are provided for
the years ended December 31, 1992, 1993 and 1994, and the three-month periods
ended March 31, 1994 and 1995 giving effect to the Merger as though it had
occurred at the beginning of the earliest period presented. The pro forma
information is based on the historical consolidated financial statements of
each of First Data and First Financial and has been prepared under the
assumptions and adjustments set forth below and in the accompanying notes to
the pro forma condensed combined financial statements.
The unaudited pro forma condensed combined financial statements have been
prepared by the managements of First Data and First Financial based upon their
respective consolidated financial statements, as well as available information
and certain assumptions which the managements believe are reasonable. Pro
forma per share amounts are based on a conversion ratio of 1.5859 shares of
First Data Common Stock for each share of First Financial Common Stock ("the
Conversion Number"). The unaudited pro forma condensed combined income
statements, which include results of operations as if the Merger had been
consummated on January 1, 1992, do not reflect the merger expenses anticipated
to be incurred or the effects of potential increased revenues or operating
synergies and cost savings anticipated to result from the Merger. These pro
forma financial statements are presented for illustrative purposes only, and
therefore, are not necessarily indicative of the operating results and
financial position that might have been achieved had the Merger occurred as of
an earlier date, nor are they necessarily indicative of operating results and
financial position which may occur in the future.
The unaudited pro forma condensed combined financial statements should be read
in conjunction with the historical consolidated financial statements and notes
thereto of First Data, which are included herein, and of First Financial, which
are included in First Financial's 1994 Annual Report on Form 10-K and Quarterly
Report on Form 10-Q for the quarter ended March 31, 1995.
Supplemental pro forma condensed combined income statement information is
presented to give pro forma effect to First Data's acquisition of CESI
Holdings, Inc.
60
<PAGE> 61
("CESI Holdings") in March 1995 and First Financial's acquisition of Western
Union Financial Services, Inc. ("Western Union") in November 1994, both of
which were accounted for as purchases, as if such acquisitions had taken place
as of January 1, 1994.
61
<PAGE> 62
FIRST DATA CORPORATION AND
FIRST FINANCIAL MANAGEMENT CORPORATION
PRO FORMA CONDENSED COMBINED BALANCE SHEET
MARCH 31, 1995
(MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
FIRST FIRST PRO FORMA PRO FORMA
DATA FINANCIAL ADJUSTMENTS COMBINED
----------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 63.4 $ 178.3 $ $ 241.7
Short-term investments 94.1 - 94.1
Proceeds including proceeds due from financial
instruments sold 3,365.8 100.0 3,465.8
Funds and funds due relating to merchant processing 245.2 184.9 430.1
Accounts receivable, less allowance 250.8 194.6 445.4
Land, buildings and equipment at cost, net
of depreciation 341.3 159.6 500.9
Goodwill and other intangibles, net of amortization 1,965.3 2,018.5 3,983.8
Other assets 318.5 181.4 499.9
----------- ------------ ----------- -----------
$ 6,644.4 $ 3,017.3 $ - $ 9,661.7
=========== ============ =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Drafts outstanding $ 94.0 $ - $ $ 94.0
Liabilities relating to financial instruments sold 3,343.0 100.0 3,443.0
Liabilities relating to merchant processing 210.2 171.3 381.5
Short-term debt 150.0 0.1 150.1
Long-term debt 611.5 182.4 793.9
Senior convertible debentures - 447.1 447.1
Pension obligations assumed (a) - 266.0 266.0
Accounts payable, accrued expenses and other liabilities 719.1 378.6 142.3 1,240.0
----------- ------------ ----------- -----------
Total liabilities 5,127.8 1,545.5 142.3 6,815.6
----------- ------------ ----------- -----------
Stockholders' equity:
Common stock 1.2 6.2 (5.3) 2.1
Capital surplus 861.0 918.6 4.6 1,784.2
Retained earnings 797.9 600.8 (195.4) 1,203.3
Treasury stock, at cost (141.5) (0.7) 0.7 (141.5)
Other (2.0) (53.1) 53.1 (2.0)
----------- ------------ ----------- -----------
Total stockholders' equity 1,516.6 1,471.8 (142.3) 2,846.1
----------- ------------ ----------- -----------
$ 6,644.4 $ 3,017.3 $ - $ 9,661.7
=========== ============ =========== ===========
</TABLE>
(a) Subsequent to March 31, 1995, First Financial has funded $154
million of this obligation.
See "Notes to Unaudited Pro Forma Condensed Combined Financial Statements."
62
<PAGE> 63
FIRST DATA CORPORATION AND
FIRST FINANCIAL MANAGEMENT CORPORATION
PRO FORMA CONDENSED COMBINED
STATEMENTS OF INCOME
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1992 YEAR ENDED DECEMBER 31, 1993
---------------------------- ----------------------------
FIRST FIRST PRO FORMA FIRST FIRST PRO FORMA
DATA FINANCIAL COMBINED DATA FINANCIAL COMBINED
---------- --------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUES, NET $ 1,205.3 $ 924.1 $ 2,129.4 $ 1,490.3 $ 1,025.2 $ 2,515.5
EXPENSES:
Human resources 494.3 366.3 860.6 618.5 401.2 1,019.7
Equipment, supplies and facilities 184.7 175.2 359.9 213.6 177.5 391.1
Depreciation and amortization 97.5 84.5 182.0 117.8 77.8 195.6
Professional, advertising and other, net 163.3 141.0 304.3 208.1 143.9 352.0
Loss in business unit sold -- 79.6 79.6 -- -- --
----------- ------- ---------- ---------- ---------- ----------
939.8 846.6 1,786.4 1,158.0 800.4 1,958.4
----------- ------- ---------- ---------- ---------- ----------
Operating income 265.5 77.5 343.0 332.3 224.8 557.1
Interest expense 33.9 9.6 43.5 41.4 4.6 46.0
----------- ------- ---------- ---------- ---------- ----------
Pretax income from continuing operations 231.6 67.9 299.5 290.9 220.2 511.1
Income taxes 90.2 46.5 136.7 117.9 88.4 206.3
----------- ------- ---------- ---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS $ 141.4 $ 21.4 $ 162.8 $ 173.0 $ 131.8 $ 304.8
=========== ======= ========== ========== ========== ==========
Weighted average number of common shares
and common stock equivalents 108.9 60.1 204.2 111.1 62.0 209.4
INCOME FROM CONTINUING OPERATIONS
PER COMMON SHARE $ 1.30 $ 0.35 $ 0.80 $ 1.56 $ 2.12 $ 1.46
</TABLE>
See "Notes to Unaudited Pro Forma Condensed Combined Financial Statements."
63
<PAGE> 64
FIRST DATA CORPORATION AND
FIRST FINANCIAL MANAGEMENT CORPORATION
PRO FORMA CONDENSED COMBINED
STATEMENT OF INCOME
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
---------------------------------
FIRST FIRST PRO FORMA
DATA FINANCIAL COMBINED
----------- ---------- -----------
<S> <C> <C> <C>
REVENUES, NET $ 1,652.2 $ 1,231.8 $ 2,884.0
EXPENSES:
Human resources 649.6 448.7 1,098.3
Equipment, supplies and facilities 245.7 209.3 455.0
Depreciation and amortization 143.6 97.7 241.3
Professional, advertising and other, net 215.9 196.7 412.6
----------- ---------- ----------
1,254.8 952.4 2,207.2
----------- ---------- ----------
Operating income 397.4 279.4 676.8
Interest expense 41.3 8.8 50.1
Western Union pension cost -- 2.3 2.3
----------- ---------- ----------
Pretax income from continuing operations 356.1 268.3 624.4
Income taxes 148.0 108.1 256.1
----------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS $ 208.1 $ 160.2 $ 368.3
=========== ========== ==========
Weighted average number of common shares
and common stock equivalents 111.2 62.9 211.0
INCOME FROM CONTINUING OPERATIONS
PER COMMON SHARE $ 1.87 $ 2.56 $ 1.75
</TABLE>
See "Notes to Unaudited Pro Forma Condensed Combined Financial Statements."
64
<PAGE> 65
FIRST DATA CORPORATION AND
FIRST FINANCIAL MANAGEMENT CORPORATION
PRO FORMA CONDENSED COMBINED
STATEMENTS OF INCOME
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1994 THREE MONTHS ENDED MARCH 31, 1995
--------------------------------- ---------------------------------
FIRST FIRST PRO FORMA FIRST FIRST PRO FORMA
DATA FINANCIAL COMBINED DATA FINANCIAL COMBINED
---------- --------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES, NET $ 375.8 $ 266.1 $ 641.9 $ 437.5 $ 386.4 $ 823.9
EXPENSES:
Human resources 150.4 103.1 253.5 174.3 132.1 306.4
Equipment, supplies and facilities 53.4 47.4 100.8 67.3 61.3 128.6
Depreciation and amortization 31.1 22.3 53.4 42.9 32.5 75.4
Professional, advertising and
other, net 56.3 43.0 99.3 62.3 84.2 146.5
--------- --------- --------- ---------- --------- ------------
291.2 215.8 507.0 346.8 310.1 656.9
--------- --------- --------- ---------- --------- ------------
Operating income 84.6 50.3 134.9 90.7 76.3 167.0
Interest expense 10.8 0.7 11.5 10.6 11.0 21.6
Western Union pension cost -- -- -- -- 5.3 5.3
--------- --------- --------- ---------- --------- ------------
Pretax income from continuing
operations 73.8 49.6 123.4 80.1 60.0 140.1
Income taxes 30.1 20.1 50.2 29.9 24.6 54.5
--------- --------- --------- ---------- --------- ------------
INCOME FROM CONTINUING
OPERATIONS $ 43.7 $ 29.5 $ 73.2 $ 50.2 $ 35.4 $ 85.6
========= ========= ========= ========== ========= ============
Weighted average number of common
shares and common stock equivalents 111.6 62.4 210.6 111.8 69.4 221.9
INCOME FROM CONTINUING OPERATIONS
PER COMMON SHARE $ 0.39 $ 0.47 $ 0.35 $ 0.45 $ 0.56 $ 0.40
</TABLE>
See "Notes to Unaudited Pro Forma Condensed Combined Financial Statements."
65
<PAGE> 66
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited pro forma condensed combined financial statements give effect to
the Merger of First Data and First Financial under the pooling of interests
accounting method. In accordance with the Securities and Exchange Commission's
("the Commission") reporting rules, the pro forma condensed combined statements
of income, and the historical statements from which they are derived, present
only income from continuing operations, and therefore do not include income
attributable to First Financial's discontinued operations of $30.1 million in
1992.
The pro forma condensed combined statements of income exclude: (i) anticipated
positive effects of potential increased revenues or operating synergies and
cost savings which may be achieved upon combining the resources of the
companies; (ii) investment banking, legal and miscellaneous transaction costs
of the Merger, currently estimated to be $52.3 million on an after-tax basis;
(iii) costs associated with termination benefits of certain employees of First
Financial, currently estimated to be $143.1 million on an after-tax basis, and
(iv) costs associated with the integration and consolidation of the companies.
The estimate of costs associated with termination benefits assumes a market
value for First Financial Common Stock of $90 per share, which approximates the
equivalent combined market value per share of First Financial Common Stock on
the date of the Merger Agreement, June 12, 1995, reflecting the Conversion
Number of 1.5859. Plans for integration and consolidation of the companies'
operations are currently being developed, but the associated costs are not
presently estimable. The accounting policies utilized by First Data and First
Financial are currently being studied from a conformity perspective; however,
the impact of any potential adjustment is not presently estimated to be
material.
The pro forma condensed combined balance sheet as of March 31, 1995 includes,
in accordance with the Commission's reporting rules, the impact of all
transactions, whether of a recurring or nonrecurring nature, that can be
reasonably estimated and should be reflected as of that date. Therefore, the
pro forma condensed combined balance sheet reflects a pro forma adjustment, net
of related taxes, of $195.4 million, for the current estimated amounts for
transaction and termination costs related to the Merger, as discussed above.
The First Financial historical income statement and balance sheet
classifications presented herein were reclassified to be consistent with the
presentation used by First Data. Historically, First Financial presented its
revenues on a gross basis including interchange fees. Interchange fees
represent a standardized fee charged by the Visa and MasterCard credit card
associations to compensate card issuing banks for the risk of transaction
fraud, processing expenses and funding costs and are settled net with the
66
<PAGE> 67
card issuing banks. First Data presents revenues on a net basis in its
consolidated financial statements as generally there is no risk to a merchant
acquirer associated with the interchange fees. First Financial's interchange
fees were $506.6 million, $639.0 million and $869.1 million for the years ended
December 31, 1992, 1993 and 1994, respectively, and $171.9 million and $216.4
million for the three months ended March 31, 1994 and 1995, respectively.
2. PRO FORMA ADJUSTMENTS
Stockholders' Equity
Stockholders' equity as of March 31, 1995 has been adjusted to reflect the
following:
Common stock is adjusted for the assumed issuance of approximately 99
million shares of First Data Common Stock in exchange for approximately
62 million shares of First Financial Common Stock issued and outstanding
as of March 31, 1995, utilizing the Conversion Number of 1.5859. The
number of shares of First Data Common Stock to be issued at consummation
of the Merger will be based upon the actual number of shares of First
Financial Common Stock outstanding at that time.
Capital surplus is adjusted for: (i) the effects of the aforementioned
issuance of shares of First Data Common Stock having a par value of $.01
per share in exchange for First Financial Common Stock having a par value
of $.10 per share and (ii) the assumed cancellation of 20,000 shares of
First Financial Common Stock held in treasury as of March 31, 1995.
Other stockholders' equity is adjusted for the recognition of
approximately $53.1 million of deferred compensation associated with the
accelerated vesting of restricted stock awards.
As of the effective date of the Merger, all rights with respect to shares of
First Financial Common Stock potentially issuable pursuant to First Financial
stock option plans and convertible debentures shall immediately convert to
equivalent rights with respect to First Data Common Stock utilizing the
Conversion Number.
Income per Common Share
Pro forma weighted average shares and common stock equivalents for each of the
three years in the period ended December 31, 1994 and the three-month periods
ended March 31, 1994 and 1995 reflect the conversion of each share of
outstanding First Financial Common Stock and each common stock equivalent that
is dilutive to net income per share computations to 1.5859 shares of First Data
Common Stock.
67
<PAGE> 68
Common stock equivalents consist of shares issuable under each of the
companies' stock option plans, shares issuable in connection with First
Financial's warrants outstanding at March 31, 1995 and an assumed conversion
into common stock of First Financial's senior convertible debentures issued in
December 1994.
68
<PAGE> 69
FIRST DATA CORPORATION, CESI HOLDINGS, INC.,
FIRST FINANCIAL MANAGEMENT CORPORATION, AND
WESTERN UNION FINANCIAL SERVICES, INC.
SUPPLEMENTAL PRO FORMA CONDENSED COMBINED
STATEMENTS OF INCOME
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994 THREE MONTHS ENDED MARCH 31, 1995
---------------------------------- ---------------------------------
PRO FORMA
PRO FORMA FIRST PRO FORMA
FIRST DATA FINANCIAL & FIRST DATA
& CESI WESTERN PRO FORMA & CESI FIRST PRO FORMA
HOLDINGS UNION COMBINED HOLDINGS FINANCIAL COMBINED
----------- ---------- ----------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES, NET $ 1,862.3 $ 1,514.2 $ 3,376.5 $ 475.9 $ 386.4 $ 862.3
EXPENSES:
Human resources 697.2 522.4 1,219.6 184.5 132.1 316.6
Equipment, supplies and facilities 284.4 261.4 545.8 75.0 61.3 136.3
Depreciation and amortization 178.4 130.7 309.1 49.7 32.5 82.2
Professional, advertising and other, net 283.7 256.6 540.3 78.0 84.2 162.2
----------- --------- ----------- ---------- ---------- ----------
1,443.7 1,171.1 2,614.8 387.2 310.1 697.3
----------- --------- ----------- ---------- ---------- ----------
Operating income 418.6 343.1 761.7 88.7 76.3 165.0
Interest expense 57.4 54.4 111.8 13.8 11.0 24.8
Western Union pension cost -- 18.3 18.3 -- 5.3 5.3
----------- --------- ----------- ---------- ---------- ----------
Pretax income from continuing operations 361.2 270.4 631.6 74.9 60.0 134.9
Income taxes 157.4 110.4 267.8 29.4 24.6 54.0
----------- --------- ----------- ---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS $ 203.8 $ 160.0 $ 363.8 $ 45.5 $ 35.4 $ 80.9
=========== ========= =========== ========== ========== ==========
Weighted average number of common shares
and common stock equivalents 121.4 69.0 230.8 118.1 69.4 228.2
INCOME FROM CONTINUING OPERATIONS
PER COMMON SHARE $ 1.68 $ 2.49 $ 1.63 $ 0.39 $ 0.56 $ 0.37
</TABLE>
See "Notes to Unaudited Pro Forma Condensed Combined Financial Statements" and
"Notes to Unaudited Supplemental Pro Forma Condensed Combined Financial
Statements"
69
<PAGE> 70
NOTES TO UNAUDITED SUPPLEMENTAL PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
The First Data, CESI Holdings, First Financial and Western Union supplemental
pro forma condensed combined statements of income are presented to give pro
forma effect to First Data's acquisition of CESI Holdings in March 1995 and
First Financial's acquisition of Western Union in November 1994 as if such
acquisitions had taken place as of January 1, 1994. For further detail
relating to First Data's acquisition of CESI Holdings for the year ended
December 31, 1994 and the three months ended March 31, 1995, see First Data and
CESI Holdings' Consolidated Unaudited Pro Forma Condensed Combined Statements
of Income included herein. For further detail relating to First Financial's
acquisition of Western Union for the year ended December 31, 1994, see First
Financial Management Corporation's Current Reports on Form 8-K dated March 28,
1995 and November 4, 1994. The data presented for the year ended December 31,
1994 combine CESI Holdings' results of operations and First Data's results of
operations for the year ended December 31, 1994; Western Union's results of
operations for the period January 1, 1994 to October 31, 1994; and First
Financial's results of operations for the year ended December 31, 1994 which
included Western Union's results of operations from November 1, 1994. The data
presented for the three months ended March 31, 1995 combine CESI Holdings'
results of operations for the period January 1, 1995 through March 8, 1995;
First Data's results of operations for the three months ended March 31, 1995
which included CESI Holdings' results of operations from March 9, 1995; and
First Financial's results of operations for the three months ended March 31,
1995.
In addition to the assumptions contained herein relating to the Merger of First
Data and First Financial, the supplemental pro forma condensed combined
statements of income also reflect a number of assumptions related to the
amortization of goodwill, the issuance of common stock and convertible debt and
other adjustments related to the preliminary purchase price allocations, as
further explained in First Financial's Current Reports cited above and the
Notes to First Data's Pro Forma Combined Statement of Income included herein.
The data are presented for informational purposes only and are not indicative
of the results of operations that actually would have occurred if the Merger,
First Data's acquisition of CESI Holdings and First Financial's acquisition of
Western Union had been completed as described above. The supplemental pro
forma condensed combined statements of income do not give pro forma effect to
the November 30, 1994 disposition of First Data's Cable Services Group, Inc.
subsidiary, the June 6, 1995 acquisition of ENVOY Corporation by First Data or
the June 17, 1995 disposition of First Data's subsidiary First Data Health
Systems Corporation, as they would have had less than a 5% effect on pro forma
earnings in the aggregate. It also does not give effect to the pending
acquisition of Employee Benefit Plans, Inc. by First Financial as the effect on
pro forma earnings in the aggregate would be immaterial.
70
<PAGE> 71
FIRST DATA AND HOLDINGS CONSOLIDATED
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The unaudited pro forma financial information set forth below is presented to
show the estimated effect on First Data Corporation ("First Data") of the
proposed merger (the "Holdings Merger") with CESI Holdings, Inc. ("Holdings,"
and "Holdings Consolidated" when referencing Holdings together with its wholly
owned subsidiary Card Establishment Services, Inc. ("CES") and its
subsidiaries) and the distribution, as a dividend to Holdings' stockholders, of
the capital stock of a healthcare information services company (formed from the
acquisition of three unrelated health care information services companies
acquired in the fourth quarter of Holdings 1994 fiscal year) as if they had
occurred on December 31, 1994 for balance sheet presentation purposes and as of
the beginning of the period presented for income statement presentation
purposes. The historical income statement information of Holdings
Consolidated, which has a June 30 fiscal year end, has been conformed to First
Data's calendar year end. In addition, certain amounts in the historical
financial statements of Holdings Consolidated have been reclassified to conform
to First Data's presentation. The accretion of dividends on Holdings Series A
Preferred Stock has been excluded from the accompanying pro forma financial
information pursuant to SEC rules governing the preparation thereof. The pro
forma financial information does not give pro forma effect to the acquisition
of ENVOY Corporation or disposition of First Data's Cable Services Group, Inc.
subsidiary, as they would have less than a 5% effect on pro forma earnings in
the aggregate.
The Holdings Merger will be accounted for under the purchase method of
accounting by First Data and the pro forma financial information has been
prepared on such basis of accounting utilizing estimates and assumptions as set
forth below and in the notes thereto. For purposes of this presentation, it is
assumed that the entire purchase price will be paid in the form of First Data
Common Stock. The pro forma adjustments are based upon available information
and certain assumptions which First Data's management believes are reasonable.
The pro forma adjustments do not, however, include any adjustments for cost
savings or benefits from economies of scale that First Data's management
believes would have been achieved had the transaction occurred at the beginning
of the period presented. Based upon information currently available to First
Data and certain assumptions regarding achievement of business plans, First
Data does not anticipate dilution of its prospective earnings per share for the
full year 1995 as a result of the Holdings Merger, although minimal dilution in
the first half of the year is possible. The pro forma financial information is
presented for informational purposes and is not necessarily indicative of the
future financial position or results of operations of the combined companies,
or of the financial position or the results of operations of the combined
companies that would have actually occurred had the transactions been
consummated as of the periods described above.
71
<PAGE> 72
FIRST DATA AND HOLDINGS CONSOLIDATED
PRO FORMA CONDENSED COMBINED
BALANCE SHEET
($ IN THOUSANDS)
(UNAUDITED)
DECEMBER 31, 1994
<TABLE>
<CAPTION>
FIRST HOLDINGS PRO FORMA PRO FORMA
DATA CONSOLIDATED ADJUSTMENTS COMBINED
---------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 166,203 $ 54,236 ($1,076)(1) $ 166,203
(53,160)(2)
Short-term investments 197,134 0 53,160 (2) 250,294
Proceeds including proceeds due from
financial instruments sold 3,058,829 0 3,058,829
Accounts receivable, less allowance 225,552 0 225,552
Merchant receivables, net 0 347,208 (3,903)(1) 343,305
Receivables from affiliates 49,072 0 49,072
Land, buildings and equipment at cost, net 303,294 36,373 (3,526)(1) 323,733
(12,408)(3(c))
Deferred income taxes 42,395 0 20,825 (3(e) 63,220
Goodwill, net 866,505 27,795 718,837 (3(g) 1,585,342
(11,835)(3(c))
(15,960)(1)
Other intangibles, net 296,339 40,003 (1,089)(1) 316,339
(38,914)(3(c))
20,000 (3(f))
Other assets 214,121 19,846 (639)(1) 233,328
---------- -------- -------- ----------
$5,419,444 $525,461 $670,312 $6,615,217
========== ======== ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Drafts outstanding $ 197,046 $ 0 $ 197,046
Liabilities relating to financial
instruments sold 3,069,000 0 3,069,000
Short-term debt 35,000 0 76,000 (4) 111,000
Long-term debt 474,680 206,500 (76,000)(4) 617,680
12,500 (3(d))
Accounts payable 90,358 8,536 98,894
Merchant payables 0 321,002 321,002
Payables to affiliates 2,112 0 2,112
Income taxes payable 60,019 0 60,019
Employee-related liabilities 84,356 4,467 (509)(1) 88,314
Deferred revenue 50,366 0 50,366
Accrued and other liabilities 341,248 84,134 (934)(1) 454,448
30,000 (3(a))
---------- -------- -------- ----------
Total liabilities 4,404,185 624,639 41,057 5,069,881
---------- -------- -------- ----------
Series A Redeemable Preferred Stock, including
accrued dividends 0 23,805 (23,805)(3(b) 0
Stockholders' equity (capital deficiency) 1,015,259 (122,983) (24,750)(1) 1,545,336
147,733 (3(b))
516,250 (3(a))
13,827 (3(a))
---------- -------- -------- ----------
$5,419,444 $525,461 $670,312 $6,615,217
========== ======== ======== ==========
</TABLE>
See accompanying notes to pro forma condensed combined financial information.
72
<PAGE> 73
FIRST DATA AND HOLDINGS CONSOLIDATED
PRO FORMA CONDENSED COMBINED
STATEMENT OF INCOME
($ IN THOUSANDS)
(UNAUDITED)
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
FIRST HOLDINGS PRO FORMA PRO FORMA
DATA CONSOLIDATED ADJUSTMENTS COMBINED
---------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
REVENUES, NET $1,652,193 $217,598 ($7,507)(1) $1,862,284
EXPENSES:
HUMAN RESOURCES 649,599 52,367 (4,736)(1) 697,230
EQUIPMENT, SUPPLIES AND FACILITIES 245,660 40,232 (1,460)(1) 284,432
ADVERTISING, PROFESSIONAL AND OTHER
OTHER, NET 215,963 69,374 (1,645)(1) 283,692
DEPRECIATION AND AMORTIZATION 143,597 48,586 (1,142)(1) 178,363
(38,639)(5)
25,961 (6)
WRITE-OFF OF IMPAIRED INTANGIBLES 0 24,643 (24,643)(5) 0
---------- -------- ------- ----------
1,254,819 235,202 (46,304) 1,443,717
OPERATING INCOME (LOSS) FROM
CONTINUING OPERATIONS 397,374 (17,604) 38,797 418,567
INTEREST EXPENSE 41,257 18,705 (32)(1) 57,406
(4,934)(7)
3,471 (8)
(1,061)(9)
---------- -------- ------- ----------
PRETAX INCOME (LOSS) FROM CONTINUING
OPERATIONS 356,117 (36,309) 41,353 361,161
INCOME TAXES 147,971 18 9,327 (10) 157,316
---------- -------- ------- ----------
NET INCOME (LOSS) FROM CONTINUING
OPERATIONS $ 208,146 ($36,327) $32,026 $ 203,845
========== ======== ======= ==========
NET INCOME FROM CONTINUING OPERATIONS
PER COMMON SHARE $ 1.87 $ 1.68 (12)
========== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 111,232 10,169 (11) 121,401
========== ======= ==========
</TABLE>
See accompanying notes to pro forma condensed combined financial information.
73
<PAGE> 74
FIRST DATA AND HOLDINGS CONSOLIDATED
NOTES TO PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION
(UNAUDITED)
1. Adjustment to remove the results of operations and assets and liabilities
of the Healthcare Information Services Companies acquired by Holdings
Consolidated in 1994.
2. Adjustment to reclassify funds held on behalf of, and payable to,
merchants, which are invested.
3. Adjustment to record the Merger and First Data's preliminary allocation
of the purchase price to the acquired assets and assumed liabilities.
First Data is acquiring CES to take advantage of its breadth of merchant
relationships and services. The amount of purchase price allocated to
goodwill is reflective of the market penetration and recognition as well
as product synergies that will be derived from the transaction.
<TABLE>
<CAPTION>
$000's
------
Purchase price:
<S> <C>
(a) Financed through issuance of 10 million
shares of First Data Common Stock (market value
at closing date) $ 516,250
Value assigned to Assumed Options 13,827
Acquisition-related costs financed internally 30,000
---------
$ 560,077
=========
Allocation of purchase price:
(b) Net liabilities assumed (historical) ($123,928)
(c) Eliminate Holdings Consolidated's (excluding the
Healthcare Information Services Companies)
intangible assets (historical) (63,157)
(d) Adjustment to record the Subordinated Notes at
fair value, based upon First Data's borrowing rates (12,500)
(e) Deferred tax adjustment 20,825
(f) Other intangibles 20,000
(g) Goodwill 718,837
---------
$ 560,077
=========
</TABLE>
74
<PAGE> 75
4. Adjustment to reflect the repayment of the Senior Credit Facility
using borrowings on First Data's revolving line of credit.
5. Adjustment to eliminate Holdings Consolidated's (excluding the
Healthcare Information Services Companies) historical intangible
asset amortization expense and the charge relating to the impairment
of certain intangible assets.
6. Adjustment to record amortization of acquired intangibles and
goodwill over their estimated lives of ten years and thirty years,
respectively, based upon First Data's preliminary allocation of the
purchase price.
7. Adjustment to eliminate Holdings' historical interest expense under
the Senior Credit Facility.
8. Adjustment to reflect interest expense on First Data's assumed
borrowings under its revolving credit facility.
9. Adjustment to reflect amortization of debt premium on the
Subordinated Notes resulting from the preliminary purchase price
allocation.
10. Adjustment to reflect income tax effects of pretax pro forma
adjustments and to provide tax benefit on Holdings Consolidated's
(excluding the Healthcare Information Services Companies) pre-tax
losses.
11. Adjustment to reflect the issuance of 10 million shares of First Data
Common Stock as well as the dilutive effect of the Assumed Options.
12. At the election of holders of Holdings Common Stock, such holders are
entitled, subject to certain limitations, to receive cash in lieu of
any or all shares of First Data Common Stock. As a result of the
Merger, holders of Holdings Preferred Stock are entitled to redeem
any or all of their shares at a price of $1 per share plus accrued
and unpaid dividends in lieu of receiving First Data Common Stock.
The maximum cash payment by First Data for the Holdings Common Stock
and the Holdings Preferred Stock would be approximately $124 million.
This payment would be financed internally and consequently, could
reduce net income by a maximum of $4.0 million for the year ended
December 31, 1994 due to the foregone interest income and cash
expended. This payment would not result in dilution to First Data's
earnings per share.
13. Historically, Holdings Consolidated presented its revenues on a gross
basis including interchange and association fees. Interchange fees
represent a standardized fee charged by the Visa and MasterCard
credit card associations to compensate card issuing banks for the
risk of transaction fraud, processing expenses and funding costs and
are settled net with the card issuing banks. First Data believes it
is appropriate to present revenues on a net basis in its consolidated
financial statements as generally there is no risk to First Data
associated with the interchange fees. If these fees were included in
Holdings Consolidated's revenues in the Pro Forma Condensed Combined
Statement of Income, revenues would increase by $587 million for the
year ended December 31, 1994.
75
<PAGE> 76
FIRST DATA AND HOLDINGS CONSOLIDATED
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF INCOME
The unaudited pro forma condensed combined statement of income set forth below
is presented to show the estimated effect on First Data Corporation ("First
Data") of the March 9, 1995 merger (the "Holdings Merger") with CESI Holdings,
Inc. ("Holdings," and "Holdings Consolidated" when referencing Holdings
together with its wholly owned subsidiary Card Establishment Services, Inc.
("CES") and its subsidiaries) as if it had occurred as of January 1, 1995. In
addition, certain amounts in the historical financial statements of Holdings
Consolidated have been reclassified to conform to First Data's presentation.
The accretion of dividends on Holdings Series A Preferred Stock, has been
excluded from the accompanying pro forma condensed combined statement of income
pursuant to SEC rules governing the preparation thereof. The pro forma
condensed combined statement of income does not give pro forma effect to the
June 6, 1995 acquisition of ENVOY Corporation or the June 17, 1995 disposition
of First Data's Health Systems Corporation subsidiary, as they would have less
than a 5% effect on pro forma earnings in the aggregate.
The Holdings Merger is being accounted for under the purchase method of
accounting by First Data and the pro forma condensed combined statement of
income has been prepared on such basis of accounting utilizing estimates and
assumptions as set forth below and in the notes thereto. The pro forma
adjustments are based upon available information and certain assumptions which
First Data's management believes are reasonable. The pro forma adjustments do
not, however, include any adjustments for cost savings or benefits from
economies of scale that First Data's management believes would have been
achieved had the transaction occurred as of January 1, 1995. In addition, the
1995 pro forma results reflect certain acquisition-related expenses, as well as
start-up expenses associated with the formation of certain bank alliances.
Based upon information currently available to First Data and certain
assumptions regarding achievement of business plans, First Data does not
anticipate dilution of its prospective earnings per share for the full year
1995 as a result of the Holdings Merger, although minimal dilution in the first
half of the year is possible. The pro forma condensed combined statement of
income is presented for informational purposes and is not necessarily
indicative of the future results of operations of the combined companies, or of
the results of operations of the combined companies that would have actually
occurred had the transactions been consummated as of January 1, 1995.
76
<PAGE> 77
FIRST DATA AND HOLDINGS CONSOLIDATED
PRO FORMA CONDENSED COMBINED
STATEMENT OF INCOME
($ IN THOUSANDS)
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995
<TABLE>
<CAPTION>
FIRST HOLDINGS PRO FORMA PRO FORMA
DATA CONSOLIDATED (9) ADJUSTMENTS COMBINED
--------- ------------- ----------- ----------
<S> <C> <C> <C> <C>
REVENUES, NET (8) $ 437,511 $ 38,372 $ $ 475,883
EXPENSES:
HUMAN RESOURCES 174,333 10,132 184,465
EQUIPMENT, SUPPLIES AND
FACILITIES 67,260 7,772 75,032
PROFESSIONAL, ADVERTISING
AND OTHER 62,310 15,685 77,995
DEPRECIATION AND 42,902 6,524 (4,540)(1) 49,688
AMORTIZATION 4,802 (2)
--------- -------------- ------------- ---------
346,805 40,113 262 387,180
OPERATING INCOME (LOSS)
FROM CONTINUING OPERATIONS 90,706 (1,741) (262) 88,703
INTEREST EXPENSE 10,611 3,732 (1,246)(3) 13,786
901 (4)
(212)(5)
--------- -------------- ------------- ---------
PRETAX INCOME (LOSS) FROM
CONTINUING OPERATIONS 80,095 (5,473) 295 74,917
INCOME TAXES 29,883 (491)(6) 29,392
--------- -------------- ------------- ---------
NET INCOME (LOSS) FROM
CONTINUING OPERATIONS $ 50,212 $ (5,473) $ 786 $ 45,525
========= ============== ============= =========
NET INCOME FROM CONTINUING
OPERATIONS PER COMMON
SHARE $ 0.45 $ 0.39
========= =========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 111,826 6,301 (7) 118,127
========= ============= =========
</TABLE>
77
<PAGE> 78
FIRST DATA AND HOLDINGS CONSOLIDATED
NOTES TO PRO FORMA CONDENSED COMBINED
STATEMENT OF INCOME
(UNAUDITED)
1. Adjustment to eliminate Holdings Consolidated's historical intangible
asset amortization expense.
2. Adjustment to record amortization of acquired intangibles and goodwill
over their estimated lives of ten years and thirty years, respectively,
based upon First Data's preliminary allocation of the purchase price for
the Holdings Merger.
3. Adjustment to eliminate Holdings' historical interest expense under its
senior credit facility.
4. Adjustment to reflect interest expense on First Data's assumed borrowings
under its revolving credit facility.
5. Adjustment to reflect amortization of debt premium on the Holdings
Consolidated subordinated notes resulting from the preliminary purchase
price allocation.
6. Adjustment to reflect income tax effects of pre-tax pro forma adjustments
and to provide tax benefit on Holdings Consolidated's pre-tax losses.
7. Adjustment to reflect the issuance of 8.1 million shares of First Data
Common Stock as well as the dilutive effect of the assumed options.
8. Historically, Holdings Consolidated presented its revenues on a gross
basis including interchange and association fees. Interchange fees
represent a standardized fee charged by the Visa and MasterCard credit
card associations to compensate card issuing banks for the risk of
transaction fraud, processing expenses and funding costs and are settled
net with the card issuing banks. First Data believes it is appropriate
to present revenues on a net basis in its consolidated financial
statements as generally there is no risk to First Data associated with
the interchange fees. If these fees were included in Holdings
Consolidated's revenues in the Pro Forma Condensed Combined Statement of
Income, revenues would increase by $142 million for the three months
ended March 31, 1995.
9. Holdings Consolidated's results are for the period January 1, 1995
through March 8, 1995.
78
<PAGE> 79
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: July 25, 1995 By /s/ M. Tarlton Pittard
---------------- --------------------------------------
Vice Chairman, Chief Financial Officer
and Treasurer
Date: July 25, 1995 By /s/ Richard Macchia
---------------- --------------------------------------
Executive Vice President
and Principal Accounting Officer
-79-
<PAGE> 80
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page
- ----------- ------------------------------------------------------------------------------- ----
<S> <C> <C>
23.1 Consent of Ernst & Young, LLP 81
23.2 Consent of Ernst & Young, LLP 82
23.3 Letter of Ernst & Young, LLP 83
</TABLE>
-80-
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 33-56327 and Forms S-8 No. 2-84870, 2-96064, 33-10711, 33-17834,
33-18541, 33-21675, 33-32555, 33-31915 (Post-Effective Amendment No. 1),
33-37532, 33-40891, 33-46669 and 33-48619) of First Financial Management
Corporation of our report dated February 3, 1995, with respect to the
consolidated financial statements of First Data Corporation included in this
Current Report on Form 8-K of First Financial Management Corporation dated July
25, 1995.
ERNST & YOUNG LLP
New York, New York
July 21, 1995
-81-
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 33-56327 and Forms S-8 No. 2-84870, 2-96064, 33-10711, 33-17834,
33-18541, 33-21675, 33-32555, 33-31915 (Post-Effective Amendment No. 1),
33-37532, 33-40891, 33-46669 and 33-48619) of First Financial Management
Corporation of our report dated August 26, 1994, with respect to the
consolidated financial statements of CESI Holdings, Inc. included in this
Current Report on Form 8-K of First Financial Management Corporation dated July
25, 1995.
ERNST & YOUNG LLP
Melville, New York
July 21, 1995
-82-
<PAGE> 1
EXHIBIT 23.3
July 21, 1995
First Financial Management Corporation
We are aware of the incorporation by reference in the Registration Statements
(Form S-3 No. 33-56327 and Forms S-8 No. 2-84870, 2-96064, 33-10711, 33-17834,
33-18541, 33-21675, 33-32555, 33-31915 (Post-Effective Amendment No. 1),
33-37532, 33-40891, 33-46669 and 33-48619) of First Financial Management
Corporation of our report dated May 8, 1995 relating to the unaudited
consolidated interim financial statements of First Data Corporation included in
this Current Report on Form 8-K of First Financial Management Corporation dated
July 25, 1995.
Pursuant to Rule 436(c) of the Securities Act of 1933 our report is not a part
of the registration statement prepared or certified by accountants within the
meaning of Section 7 or 11 of the Securities Act of 1933.
ERNST & YOUNG LLP
New York, New York
-83-
