<PAGE>
UNITED STATES
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
DATE OF REPORT (DATE OR EARLIEST EVENT REPORTED): NOVEMBER 23, 1998
CONCORD EFS, INC.
------------------------------
(Exact name of registrant as specified in its charter)
Delaware 000-13848 04-2462252
- ------------------------------- ------------ ----------------------
(State or other jurisdiction or (Commission (I.R.S. Employer
Incorporation of Organization) File Number) Identification Number)
2525 Horizon Lake Drive, Suite 120, Memphis, Tennessee 38133
------------------------------------------------------ -----
(Address of Principal Executive Offices) (Zip Code)
(901) 371-8000
--------------
(Registrant's telephone number, including area code)
ITEM 5. OTHER EVENTS
The Boards of Directors of Concord EFS, Inc. (Concord) and Electronic Payment
Services, Inc. (EPS) announced the signing of an Agreement and Plan of Merger
dated November 23, 1998 (the "Merger Agreement") pursuant to which Concord will
acquire all of the outstanding common stock of EPS. At the consummation of the
Merger Concord will issue approximately 32,310,000 shares of Concord common
stock. The Merger is intended to be qualified as a tax-free reorganization and
recorded for accounting purposes as a pooling of interests. The Merger Agreement
is subject to approval of the Board of Governors of the Federal Reserve System
and the stockholders of Concord.
EPS owns and operates electronic data processing and data-capture networks that
process transactions originating at Automated Teller Machines (ATMs) as well as
Point of Sale (POS) terminals. EPS's main subsidiaries are the Buypass
Corporation and Money Access Service, Inc. (MAS). Buypass is a major third-party
POS processor and debit transaction acquirer. MAS is an ATM terminal driver and
operates the MAC EFT network. If the Merger is approved, EPS will continue to
operate its business as a wholly-owned subsidiary of Concord.
EPS is a private company principally owned by five bank holding companies. Due
to the fact the Merger Agreement is subject to regulatory and shareholder
approval, Concord does not at this time deem the transaction to be "probable"
under Rule 3-05 of Regulation S-X as promulgated by the Securities and Exchange
Commission. However, Concord is voluntarily providing the Audited Consolidated
Financial Statements of EPS included in Exhibit B and the Unaudited Consolidated
Selected Financial Information of EPS included in Exhibit C.
Assuming all regulatory and stockholder approvals are obtained and all other
conditions precedent to the Merger Agreement are satisfied, the Company
currently expects the transaction to be completed late in the first quarter of
1999.
LISTING OF EXHIBITS
Exhibit A: Press Release dated November 23, 1998, "Concord EFS, Inc. and
Electronic Payment Services, Inc. Execute Merger Agreement."
Exhibit B: Consolidated Financial Statements of Electronic Payment
Services, Inc.
Exhibit C: Unaudited Consolidated Selected Financial Information of Electronic
Payment Services, Inc. As of September 30, 1998 and for the nine
months ended September 30, 1998 and 1997.
Exhibit D: Consent of Independent Auditors
SIGNATURE
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 hereunto duly authorized.
CONCORD EFS, Inc
(Registrant)
Date November 23, 1998 By: /s/ Thomas J. Dowling
-----------------------
Thomas J. Dowling
Chief Financial Officer
<PAGE>
EXHIBIT A
CONCORD EFS, INC. AND ELECTRONIC PAYMENT SERVICES, INC.
EXECUTE MERGER AGREEMENT
Memphis, Tennessee--November 23, 1998 - (NADSAQ: CEFT) Concord EFS, Inc.
(Concord) and Electronic Payment Services, Inc. (EPS) are pleased to announce
that they have entered into an agreement and plan of merger. The acquisition is
structured as a tax-free reorganization in which Concord would issue 32.310
million shares of common stock for all of the outstanding shares of EPS common
stock. The transaction would be accounted for as a pooling of interests
transaction and is subject to the receipt of shareholder and regulatory
approvals and satisfaction of other closing conditions.
The transaction is expected to be accretive to Concord shareholders, consistent
with Concord's strategy to supplement its strong internal growth with additive
acquisitions.
Dan M. Palmer, Chairman and CEO of Concord stated, "We believe this merger will
combine two great internal growth companies. Traditionally Concord has been a
marketing and service company focusing on growth while EPS has tremendous
processing capabilities through the MAS, MAC and BUYPASS groups. Going forward
we can broaden each of our markets by expanding into new industry segments of
the transaction processing business. In summary, I truly believe this is a home
run for Concord because simply combining the two companies is accretive to
earnings per share before taking synergies into consideration."
Richard N. Garman, President and CEO of EPS has stated openly in recent years
that he was seeking public capitalization for EPS, either through an initial
public offering (IPO) or through a merger with a public company. "This merger
has important advantages over an IPO," he said. "Both EPS and Concord are
acquirers and outsourcers, serving similar markets, and our respective product
lines are complementary. This combination will enhance the products we offer
today to our respective clients, and will open new markets for our services."
Edward A. Labry III, President of Concord stated, "This merger allows the two
companies to combine their experience and expertise in providing processing
solutions to the fastest growing payment niches including supermarkets, oil and
gas, and convenience store locations. We believe our current and future
customers will benefit substantially by utilizing Concord's traditional
vertically integrated processing approach. Combined, Concord gains many
front-end certifications through EPS and EPS gains a settlement bank for a
fully integrated processing solution."
EPS, currently owned by Bank One Corporation, First Union Corporation, KeyCorp,
National City Corporation and PNC Bank Corporation, will become a wholly-owned
subsidiary of Concord. EPS currently operates BUYPASS Corporation and MONEY
ACCESS SERVICE INC. which will continue as EPS subsidiaries.
Concord provides electronic transaction authorization, processing, settlement
and funds transfer services in selected markets. Concord's primary activity is
card services, including credit, debit card and electronic benefit transfer
(EBT) card transactions to supermarket chains, grocery stores, convenience store
merchants and other retailers. Concord also provides electronic payment, banking
products and payroll services to trucking companies, truck stops and other niche
segments of the market.
Electronic Payment Services, Inc. (EPS), a privately-held company headquartered
in Wilimington, Delaware, is a leading electronic funds transfer (EFT) processor
in the United States, with approximately 2.7 billion transactions annually. EPS
is the holding company for BUYPASS Corporation, a major third-party POS
processor and debit transaction acquirer with annual transaction volume of
almost 1.2 billion; and MONEY ACCESS SERVICE INC. (MAS), an EFT processor and
the nation's leading ATM terminal driver, with over 32,000 ATMs driven in all 50
states. MAS is operator of the MAC EFT network, the largest EFT network in the
United States based on almost 1.5 billion switch transactions annually. MONEY
ACCESS SERVICE INC. controls the license rights for the registered trademark
MAC.
The release may contain statements which may constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of 1934, as amended.
Investors are cautioned that any such statements are not guarantees for future
performance and involve risks and uncertainties, and the actual results may
differ materially from those contemplated by such forward-looking statements.
Important factors currently known to management that could cause actual results
to differ materially from those in forward-looking statements include
significant fluctuations in interest rates, inflation, economic recession,
significant changes in the federal and state legal and regulatory environment,
and competition in the Company's markets. The Company undertakes no obligation
to update or revise forward-looking statements to reflect changed assumptions,
the occurrence of unanticipated events or changes to future results over time.
For more information, a conference call is scheduled for 10:00am Central
Standard Time on November 24, 1998 at (800) 730-6105 (reference Concord EFS).
The call will be a listen only type call with comments on the acquisition from
Dan Palmer and Edward Labry.
Contact: Edward A. Labry
Concord EFS, Inc.
(901) 371-8000
<PAGE>
Exhibit B - Consolidated Financial Statements of
Electronic Payment Services, Inc.
Electronic Payment Services, Inc.
Consolidated Financial Statements
As of December 31, 1997 and 1996 and
for each of the three years
in the period ended December 31, 1997
Contents
Report of Independent Auditors.............................................. 1
Audited Consolidated Financial Statements
Consolidated Balance Sheets................................................. 2
Consolidated Statements of Income........................................... 4
Consolidated Statements of Changes in Stockholders' Equity (Deficiency)..... 5
Consolidated Statements of Cash Flows....................................... 6
Notes to Consolidated Financial Statements.................................. 8
<PAGE>
Report of Independent Auditors
The Board of Directors
Electronic Payment Services, Inc.
We have audited the accompanying consolidated balance sheets of Electronic
Payment Services, Inc. as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in stockholders equity (deficiency),
and cash flows for each of the three years in the period ended December 31,
1997. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Electronic Payment
Services, Inc. at December 31, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
---------------------------
Philadelphia, Pennsylvania
February 3, 1998
<PAGE>
Electronic Payment Services, Inc.
Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
December 31
1997 1996
-----------------------
<S> <C> <C>
Assets
Current assets:
Cash and equivalents $ 18,797 $ 24,793
Accounts receivable, less allowance of $1,907
and $2,933 in 1997 and 1996, respectively 24,137 22,493
Deferred income taxes 3,410 4,397
Due from stockholders 4,164 5,691
Inventory and supplies 639 1,254
Prepaid expenses and other current assets 1,409 2,015
-----------------------
Total current assets 52,556 60,643
Property and equipment 151,434 131,365
Accumulated depreciation and amortization (57,187) (44,990)
-----------------------
94,247 86,375
Intangible assets:
Goodwill 82,071 82,071
Customer lists and other 25,046 23,796
-----------------------
107,117 105,867
Accumulated amortization (30,133) (23,860)
-----------------------
76,984 82,007
Capitalized software development costs 20,404 23,609
Other assets 6,566 9,015
Total assets $250,757 $261,649
=======================
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
December 31
1997 1996
------------------------
<S> <C> <C>
Liabilities and stockholders' equity (deficiency)
Current liabilities:
Borrowings under credit agreement $ 29,000 $ 50,000
Current portion of long-term debt 25,000 25,000
Accounts payable 20,328 17,626
Due to stockholders 677 4,065
Accrued liabilities 21,398 21,415
Deferred income 5,961 282
Income taxes payable 8,426 3,001
------------------------
Total current liabilities 110,790 121,389
Long-term debt, net of current portion 125,000 150,000
Deferred income, net of current portion 14,710 --
Deferred income taxes 15,269 23,282
Stockholders' equity (deficiency):
Preferred stock, par value $163.60; 4,600
shares authorized, issued and outstanding 752 752
Common stock, par value $.01; 10,000,000 shares
authorized; 3,750,000 shares issued and
outstanding 38 38
Paid-in capital 196,001 196,001
Deemed dividend (245,400) (245,400)
Retained earnings 33,597 15,587
------------------------
Total stockholders' equity (deficiency) (15,012) (33,022)
------------------------
Total liabilities and stockholders' equity
(deficiency) $ 250,757 $ 261,649
========================
</TABLE>
See accompanying notes.
3
<PAGE>
Electronic Payment Services, Inc.
Consolidated Statements of Income
(dollars in thousands except per share data)
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
----------------------------------------
<S> <C> <C> <C>
Revenues $ 202,310 $ 179,490 $ 163,379
Expenses:
Processing and equipment 72,341 64,257 58,079
Customer and product support 30,956 26,900 24,693
Selling, general and administrative 33,267 32,847 35,755
Product development 14,654 14,861 13,479
Amortization of intangible assets 6,273 6,273 6,115
Interest expense, net of $556, $364
and $333 interest income in 1997,
1996 and 1995, respectively 12,590 14,310 15,882
----------------------------------------
Total expenses 170,081 159,448 154,003
----------------------------------------
Income before income taxes and
minority interest 32,229 20,042 9,376
Provision for income taxes 14,181 8,821 5,481
----------------------------------------
Net income before minority interest 18,048 11,221 3,895
Minority interest in earnings of
subsidiaries -- 240 1,314
----------------------------------------
Net income 18,048 10,981 2,581
Dividend on preferred stock 38 38 38
----------------------------------------
Net income available for common stock $ 18,010 $ 10,943 $ 2,543
========================================
Net income per common share $ 4.80 $ 3.20 $ 1.05
========================================
Average common shares outstanding 3,750,000 3,417,404 2,419,615
</TABLE>
See accompanying notes.
4
<PAGE>
Electronic Payment Services, Inc.
Consolidated Statements of Changes in Stockholders' Equity (Deficiency)
(dollars in thousands)
<TABLE>
<CAPTION>
Preferred Common Paid-in Deemed Retained
Stock Stock Capital Dividend Earnings Total
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1994 $752 $24 $107,138 $(245,400) $ 2,101 $(135,385)
Net income 2,581 2,581
Dividend on preferred stock (38) (38)
Minority interest investment in
subsidiaries, inclusive of
their interest in earnings
from March 2, 1995 88,637 88,637
- ----------------------------------------------------------------------------------------------------------
December 31, 1995 752 24 195,775 (245,400) 4,644 (44,205)
Net income 10,981 10,981
Dividend on preferred stock (38) (38)
Common stock issued in exchange
for minority interest 14 (14) --
Minority interest investment in
subsidiaries, inclusive of
their interest in earnings
through April 1, 1996 240 240
- ----------------------------------------------------------------------------------------------------------
December 31, 1996 752 38 196,001 (245,400) 15,587 (33,022)
Net income 18,048 18,048
Dividend on preferred stock (38) (38)
- ----------------------------------------------------------------------------------------------------------
December 31, 1997 $752 $38 $196,001 $(245,400) $33,597 $ (15,012)
==========================================================================================================
</TABLE>
See accompanying notes.
5
<PAGE>
Electronic Payment Services, Inc.
Consolidated Statements of Cash Flows
(dollars in thousands)
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
-------------------------------------
<S> <C> <C> <C>
Operating activities
Net income before minority interest $18,048 $11,221 $ 3,895
Adjustments to reconcile net income
before minority interest to net
cash provided by operating
activities:
Depreciation and amortization 29,364 25,687 21,232
Deferred tax provision (benefit) (7,017) 6,683 4,941
Other noncash income and
expense items (9) (204) 213
Changes in:
Accounts receivable (1,644) 573 243
Inventory and supplies 615 (251) 372
Prepaid expenses and other
current assets 606 (311) 853
Accounts payable 2,702 6,755 (2,611)
Due to (from) stockholders (1,861) 3,069 58
Accrued liabilities (17) 2,810 (35)
Deferred income 5,679 178 (176)
Income taxes payable 5,425 3,669 (1,265)
-------------------------------------
Cash provided by operating activities $51,891 $59,879 $27,720
-------------------------------------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
--------------------------------------
<S> <C> <C> <C>
Investing activities
Acquisition of property and equipment $(28,892) $(31,658) $(29,786)
Proceeds from licensing agreement 25,000 -- --
Other investing activity, net (7,957) (12,972) (7,182)
--------------------------------------
Cash used for investing activities (11,849) (44,630) (36,968)
--------------------------------------
Financing activities
Borrowings (repayments) under credit
agreement, net (21,000) 15,000 (500)
Long-term debt repayments (25,000) (25,000) (50,171)
Payments on notes payable to
stockholders -- -- (23,263)
Proceeds of minority investment in
subsidiaries -- -- 74,539
Dividends paid on preferred stock (38) (38) (38)
--------------------------------------
Cash (used for) provided by financing
activities (46,038) (10,038) 567
--------------------------------------
Change in cash and equivalents (5,996) 5,211 (8,681)
Cash and equivalents, beginning of
year 24,793 19,582 28,263
--------------------------------------
Cash and equivalents, end of year $ 18,797 $ 24,793 $ 19,582
======================================
</TABLE>
See accompanying notes.
7
<PAGE>
Electronic Payment Services, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands)
1. Organization, Nature of Business and Equity Transactions
Electronic Payment Services, Inc. (the "Company") owns and operates electronic
data processing and data-capture networks that process transactions originating
at Automated Teller Machines ("ATM") as well as Point of Sale ("POS") terminals.
The majority of customers of ATM processing services are commercial banks,
savings and loan institutions, credit unions, independent sales organizations
and other financial services providers. Geographically, ATM customers are in all
50 states and are concentrated in the eastern half of the United States. POS
transaction processing customers are a wide variety of retailers, commercial
banks and other credit card processors. POS customers of the Company are located
in all 50 states. The Company is indirectly subject to fluctuations in retail
activity and experiences seasonal variability in ATM and POS transaction levels.
The Company was formed on December 4, 1992 through a Corporate Joint Venture
Agreement between CoreStates Financial Corp, Banc One Corporation, PNC Financial
Corp and KeyCorp ("Original Stockholders"). The authorized capital stock of the
Company at inception consisted of 3,000,000 shares of common stock and 1,500,000
shares of mandatory redeemable preferred stock. In exchange for common stock,
preferred stock and/or cash, the Original Stockholders contributed certain
assets, liabilities, wholly owned processing subsidiaries and/or cash. The
assets and liabilities contributed were recorded at the Original Stockholders'
net book value as of December 1, 1992. The cash paid and preferred stock issued
upon formation were recorded as dividends. In connection with the
recapitalization of the Company in December 1993, the number of authorized
shares of capital stock was increased to 10,000,000 shares.
In December 1993, the Company and the Original Stockholders entered into a
recapitalization agreement whereby 1,495,400 shares of mandatory redeemable
preferred stock with a par value of $163.60 were exchanged for a promissory note
in the principal amount of $250,000. As part of the transaction, the redemption
feature of the preferred stock was eliminated. The premium associated with this
exchange was charged directly to stockholders' equity.
8
<PAGE>
Electronic Payment Services, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands)
1. Organization, Nature of Business and Equity Transactions (continued)
The preferred stockholder has limited voting rights and the preferred stock
provides for a 5% cumulative dividend, payable quarterly, plus an additional
performance dividend. The performance dividend is equal to a percentage of the
Company's net income that exceeds a threshold amount. No performance dividends
have been paid or incurred since inception.
On March 2, 1995, the Company entered into a series of transactions with KeyCorp
and National City Corporation (together with the Original Stockholders, the
"Stockholders") whereby these banks made cash capital contributions totaling
$74,539 to two subsidiaries of the Company, contributed assets to a subsidiary
of the Company and sold assets to a subsidiary of the Company. As a result of
the transactions, equity of the Company was increased by a total of $87,323 and
goodwill was recognized totaling $13,352. At December 31, 1995, the consolidated
minority stockholders' share in the equity (deficit) of the subsidiaries was
$16,046. Effective April 1, 1996, the minority stockholders agreed to merge
their ownership interest in the subsidiaries into the Company. In connection
with the merger, the Company issued 1,330,385 shares of common stock and
adjusted paid-in capital for the par value of the common stock issued.
The minority stockholders' share of earnings in the subsidiaries of $240 in 1996
and $1,314 in 1995 has been deducted from earnings to determine net income of
the Company and has adjusted the minority interest share of the consolidated
deficiency in assets.
2. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All material intercompany balances and
transactions have been eliminated in consolidation. Certain reclassifications
have been made to prior-year amounts to conform with current-year presentation.
9
<PAGE>
Electronic Payment Services, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands)
2. Significant Accounting Policies (continued)
Cash and Equivalents
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents. Included in cash and equivalents at
December 31, 1997 and 1996 is $1,023 and $1,486, respectively, of cash
maintained in automated teller machines.
Property and Equipment
Property and equipment are stated at cost and depreciated over their estimated
useful lives using the straight-line method. Major classes of property and
equipment and their estimated useful lives are as follows:
<TABLE>
<CAPTION>
December 31 Estimated
1997 1996 Useful Lives
-------------------------------------
<S> <C> <C> <C>
Land $ 1,050 $ 1,050 Indefinite
Building and improvements 14,591 14,081 40 years
Leasehold improvements 8,291 7,407 Lease term
Software costs 38,045 28,418 5 years
Computer and
communication equipment 77,950 71,521 3-5 years
Furniture and equipment 11,507 8,888 3-10 years
-----------------------
$151,434 $131,365
=======================
</TABLE>
Included in property and equipment at December 31, 1997 and 1996 are $31,043 and
$21,924, respectively, of capitalized software costs incurred to develop
computer systems and programming. Software costs of $9,119 and $11,696 were
capitalized during 1997 and 1996, respectively. Capitalized software costs
placed in service during 1997 and 1996 were $7,569 and $4,630, respectively.
Amortization expense related to the assets placed in service totaled $2,084 and
$982 in 1997 and 1996, respectively.
10
<PAGE>
Electronic Payment Services, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands)
2. Significant Accounting Policies (continued)
Inventory and Supplies
Inventory is valued at the lower of cost (first-in, first-out) or market and
consists of terminals, printers and other related equipment held for resale and
plastic ATM cards.
Intangible Assets
Intangible assets, which were contributed as part of the formation of the
Company, consist of goodwill, agreements not to compete and values ascribed to
customer lists. As described in Note 1, $13,352 of goodwill was recorded in 1995
as a result of the equity transactions. Goodwill and amounts assigned to the
customer lists are being amortized by the straight-line method over 15-25 years
and 10 years, respectively. Agreements not to compete are amortized over the
life of the agreements.
Other Assets
Included in other assets at December 31, 1997 and 1996 are $6,021 and $8,434,
respectively, of payments made to customers under the Company's conversion
assistance program. These payments, which were primarily for promotional sign
replacements and card reissuance, were made to customers converting to the MAC
network and are being amortized over five years. Amortization expense associated
with these assets was $3,037, $2,907 and $2,333 for the year ended December 31,
1997, 1996 and 1995, respectively.
Capitalized Software Development Costs
During 1994, the Company capitalized $4,365 of software development costs
incurred after technological feasibility was established in connection with the
planned introduction of a stored value electronic payment card. The Company
capitalized $8,384, $11,584 and $667 in 1995, 1996 and 1997, respectively,
related to the development of the stored value card.
11
<PAGE>
Electronic Payment Services, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands)
2. Significant Accounting Policies (continued)
Capitalized Software Development Costs (continued)
On July 25, 1997, the Company entered into an agreement with an unrelated third
party whereby the Company granted perpetual licensing rights to the technology
to the third party in exchange for $25 million. The agreement further grants the
third party exclusive rights to the technology for a period of four years. The
proceeds received from the licensing agreement have been deferred and are being
earned over the exclusivity period of the agreement. The development costs
capitalized are being amortized over the same period.
Revenue Recognition
Revenue for processing fees is recognized and billed when the services are
performed. Revenue related to equipment sales is recognized upon the
installation of the equipment.
Income Taxes
The Company accounts for income taxes under the liability method whereby
deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Such temporary
differences result in deferred income taxes computed at rates estimated to be in
effect when the underlying differences will be reported in the Company's federal
and state income tax returns. The Company and its subsidiaries file a
consolidated federal income tax return.
Supplemental Cash Flow Information
Total interest paid was $13,033, $14,686 and $18,277 during 1997, 1996 and 1995,
respectively.
12
<PAGE>
Electronic Payment Services, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands)
2. Significant Accounting Policies (continued)
Per Share Data
In 1997, the Financial Accounting Standards Board issued Statement Number 128,
"Earnings per Share" ("FAS 128"). FAS 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per common share is the same as basic earnings per common share for
1997, 1996 and 1995.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
3. Income Taxes
The components of deferred tax liabilities and assets as of December 31 are as
follows:
<TABLE>
<CAPTION>
1997 1996
----------------------
<S> <C> <C>
Deferred tax liabilities:
Depreciation $ 3,671 $ 3,433
Intangibles 4,923 5,845
Research and development capitalized costs 8,619 15,558
Other 1,045 1,062
----------------------
18,258 25,898
----------------------
Deferred tax assets:
Net operating loss carryforward 2,626 3,113
Nondeductible reserves 3,762 3,897
Other 11 11
----------------------
6,399 7,021
----------------------
Net deferred tax liabilities $11,859 $18,877
======================
</TABLE>
13
<PAGE>
Electronic Payment Services, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands)
3. Income Taxes (continued)
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
----------------------------------------
<S> <C> <C> <C>
Current:
Federal $17,527 $1,485 $ 381
State 3,671 653 159
----------------------------------------
21,198 2,138 540
----------------------------------------
Deferred:
Federal (5,977) 6,610 5,170
State (1,040) 73 (229)
----------------------------------------
(7,017) 6,683 4,941
----------------------------------------
Provision for income taxes $14,181 $8,821 $5,481
========================================
</TABLE>
Following is a reconciliation of the effective income tax rate with the
statutory federal income tax rate:
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
----------------------------------
<S> <C> <C> <C>
Federal tax rate 35.0% 35.0% 34.0%
State taxes, net of federal benefit 5.3 2.3 14.4
Nondeductible amortization of
goodwill 3.2 5.2 9.8
Other 0.5 1.5 0.2
----------------------------------
Effective income tax rate 44.0% 44.0% 58.4%
==================================
</TABLE>
During 1997, 1996 and 1995, income taxes of $16,079, $1,290 and $3,459,
respectively, were paid to various state and federal agencies. As of December
31, 1997, various subsidiaries of the Company have federal and state net
operating loss carryforwards that expire on various dates through 2006 and are
subject to annual limitations.
14
<PAGE>
Electronic Payment Services, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands)
4. Short-Term Borrowings
The Company maintains a credit agreement with a third-party bank which provides
for short-term borrowings through March 1999 of up to $75,000. Borrowings under
the agreement are unsecured and bear interest at variable rates. Borrowings of
$29,000 and $50,000, which approximated fair value, were outstanding under the
agreement at December 31, 1997 and 1996, respectively. Average borrowings during
1997 were $41,266 at an effective interest rate of 5.84%. During 1996, average
borrowings were $39,913 at an effective interest rate of 5.82% and during 1995,
average borrowings were $31,630 at an effective interest rate of 6.86%. The
agreement requires the Company to maintain certain financial ratios and to
comply with certain covenants as defined, including limitations as to debt to be
incurred and prepayments on the Company's long-term debt.
5. Long-Term Debt
The Company has a $250,000 unsecured promissory note payable to a stockholder
due in equal quarterly installments through 2003, which bears interest at 6.40%.
Annual maturities of the note are $25,000 per year through 2003. The stockholder
promissory note was issued on December 23, 1993 in connection with the
recapitalization of the Company.
6. Commitments and Contingencies
The Company leases office space and equipment under noncancelable operating
leases expiring at various dates through 2008. Certain leases obligate the
Company to pay property taxes, insurance and maintenance expenses. Total rental
expense under operating leases was $3,953 in 1997, $4,607 in 1996 and $5,043 in
1995.
15
<PAGE>
Electronic Payment Services, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands)
6. Commitments and Contingencies (continued)
Future minimum rental commitments as of December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998 $ 4,066
1999 4,035
2000 2,771
2001 2,350
2002 2,008
2003 and thereafter 7,296
-------
Total minimum rental commitments $22,526
=======
</TABLE>
In the normal course of business, the Company is party to various claims and
legal proceedings. Although the ultimate outcome of these matters is presently
not determinable, management, after consultation with legal counsel, does not
believe that the resolution of these matters will have a material adverse effect
upon the Company's financial position.
7. Employee Benefit Plans
The Electronic Payment Services, Inc. Retirement Savings Plan covers
substantially all employees of the Company. Under the terms of the plan, each
qualified employee receives a company retirement contribution of 2% of
compensation, as defined, based upon employment status at December 31 of the
plan year. In addition, the plan includes a Section 401(k) savings feature
wherein the Company will match employee contributions up to 4.5% of compensation
as defined, and additionally, contains a discretionary profit-sharing
contribution of up to 1.5% of compensation as defined. Total 1997, 1996 and 1995
expenses under the plan were $3,095, $2,687 and $2,533, respectively.
16
<PAGE>
Electronic Payment Services, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands)
8. Stock Option Plan
In 1995, the Company adopted a stock option plan under which designated
employees may be granted options to purchase shares of the Company including
Incentive Stock Options and Non-qualified Stock Options as defined in the
Internal Revenue Code of 1986 as amended. The maximum number of shares of common
stock with respect to which options may be granted is 500,000 shares. The plan
was amended and restated effective October 1, 1996. Under the terms of the plan,
the exercise price of the option is determined by the Company. All options
granted to date have been at a price equal to the estimated fair market value at
the date of the grant.
The exercise period for the options may not exceed ten years from the date of
the grant; however, options granted under the plan before October 22, 1996 have
a term of five years from the date of the grant. The Company has the right but
not the obligation to purchase any shares issued under the plan at an appraised
price determined in accordance with the terms of the plan as of the end of the
preceding year.
Options become vested in 25% increments on each March 31 of the year following
the year in which the option was granted. Vesting may be accelerated based upon
death or retirement of the employee or a change in the control of the Company.
At December 31, 1997, options for 39,557 shares were exercisable at an average
price of $67.50. The weighted average remaining term of options outstanding at
December 31, 1997 is 8.8 years.
17
<PAGE>
Electronic Payment Services, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands)
8. Stock Option Plan (continued)
Following is a summary of options granted under the plan:
<TABLE>
<CAPTION>
Number of Weighted
Shares Option Price
----------------------------
<S> <C> <C>
Granted during 1994 47,822 $60.00
Granted during 1995 52,397 $60.00
-------
Outstanding at December 31, 1995 100,219 $60.00
Granted during 1996 95,676 $73.00
Forfeited during 1996 (26,199)
Options transferred in exchange for cash (8,070)
-------
Outstanding at December 31, 1996 161,626 $67.70
Granted during 1997 80,500 $66.00
Forfeited during 1997 (41,574)
-------
Outstanding at December 31, 1997 200,552 $68.27
=======
</TABLE>
The fair value of options granted during 1997, 1996 and 1995 was $16.68, $18.45
and $8.13, respectively, and was calculated using the Black-Scholes pricing
model adjusted to reflect the lower volatility associated with a private
company. The assumptions used to value the options were: expected life of 5
years, risk-free interest rate of 6.0%, no expected dividends and volatility of
1%. The Company uses the provisions of Accounting Principles Board Opinion
Number 25, "Accounting for Stock Issued to Employees" to account for option
activity. No compensation expense has been recognized for the value of the
options at the grant date as the grant price was equal to the estimated value of
the Company's stock. If the provisions of Financial Accounting Standards Board
Statement
18
<PAGE>
Electronic Payment Services, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands)
8. Stock Option Plan (continued)
Number 123, "Accounting for Stock Based Compensation" ("FAS 123"), had been
applied in determining net income for 1997, reported net income would have been
$17,643 and net income per common share would have been $4.70. Under FAS 123,
reported net income for 1996 and 1995 would have been $10,861 and $2,515,
respectively, and net income per common share would have been $3.18 and $1.04,
respectively. The effects of applying the provisions of FAS 123 are not
indicative of future amounts as FAS 123 has not been applied to options issued
before January 1, 1995 and additional awards are anticipated in future years.
9. Related Party Transactions
In connection with its formation and the 1995 equity transaction, the Company
entered into transitional services agreements with the Stockholders and their
affiliates whereby they agreed to provide, at cost, certain processing and other
services until such time as the Company was able to provide its own services.
Charges for these services were $4,300, $6,400 and $10,200 during 1997, 1996 and
1995, respectively.
The Stockholders are also customers of the Company and services are billed to
them at rates comparable to nonrelated customers. Approximately 27%, 27% and 20%
of revenues were billed to the Stockholders during 1997, 1996 and 1995,
respectively.
19
<PAGE>
Exhibit C - Unaudited Consolidated Selected Financial Information of
Electronic Payment Services, Inc.
Electronic Payment Services, Inc.
Consolidated Balance Sheet--Unaudited (In thousands)
As of September 30, 1998
<TABLE>
<S> <C>
Assets
Current assets
Cash and equivalents $ 16,425
Accounts receivable, less allowance of $1,829
and $1,907 in 1998 and 1997, respectively 27,412
Deferred income taxes 3,022
Due from stockholders 3,462
Inventory and supplies 578
Prepaid expenses and other current assets 2,448
--------
Total current assets 53,347
Property and equipment 180,870
Accumulated depreciation and amortization (73,394)
--------
107,476
Intangible assets
Goodwill 82,071
Customer lists and other 30,970
--------
113,041
Accumulated amortization (35,001)
--------
78,040
Capitalized software development costs 16,133
Other assets 4,781
--------
Total assets $259,777
========
</TABLE>
<PAGE>
Electronic Payment Services, Inc.
Consolidated Balance Sheet - Unaudited (in thousands)
As of September 30, 1998
<TABLE>
<S> <C>
Liabilities and stockholders' equity
Current liabilities
Borrowings under credit agreement $ 28,000
Current portion of long-term debt 25,000
Accounts payable 21,125
Due to stockholders 1,153
Accrued liabilities 27,510
Deferred income 7,870
Income taxes payable 9,405
---------
Total current liabilities 120,063
Long-term debt, net of current portion 106,250
Other liabilities 14,544
Deferred income taxes 15,208
Stockholders' equity (deficiency)
Preferred stock, par value $163.60; 4,600 shares authorized,
issued and outstanding 752
Common stock, par value $.01; 10,000,000 shares authorized;
3,752,375 and 3,750,000 shares issued and outstanding 38
Paid-in capital 196,162
Deemed dividend (245,400)
Retained earnings 52,160
---------
Total stockholders' equity 3,712
---------
Total liabilities and stockholders' equity $ 259,777
=========
</TABLE>
<PAGE>
Electronic Payment Services, Inc.
Consolidated Statements of Income - Unaudited
(in thousands except per share data)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Revenues $ 172,371 $ 148,425
Expenses:
Processing and equipment 62,263 51,962
Customer and product support 25,086 23,345
Selling, general and administrative 25,884 25,440
Product development 14,495 11,582
Amortization of intangible assets 4,866 4,707
Interest expense, net of $544 and $391 interest income
in 1998 and 1997, respectively 7,725 9,860
---------- ----------
Total expenses 140,319 126,896
---------- ----------
Income before income taxes 32,052 21,529
Provision for income taxes 13,462 9,473
---------- ----------
Net income 18,590 12,056
Dividend on preferred stock 28 28
---------- ----------
Net income available for common stock $ 18,562 $ 12,028
========== ==========
Net income per common share $ 4.95 $ 3.21
========== ==========
Average common shares outstanding 3,750,374 3,750,000
</TABLE>
<PAGE>
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference, in the Registration Statement
(Form S-3 No. 333-62069) and related Prospectus of Concord EFS, Inc. for the
registration of 4,554,342 shares of its common stock, of our report dated
February 3, 1998 with respect to the consolidated financial statements of
Electronic Payment Services, Inc. for the three years in the period ended
December 31, 1997, included in its Current Report on Form 8-K dated November 23,
1998, filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
----------------------------
Philadelphia, Pennsylvania
November 23, 1998
