SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission file number 2-89213
CONCORD EFS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2462252
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2525 Horizon Lake Drive, Suite 120, Memphis, Tennessee 38133
(Address of principal executive offices) (Zip code)
Registrant's Telephone Number, Including Area Code: (901) 371-8000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.33 1/3 Par Value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant has
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___.
Disclosure of delinquent filings pursuant to Item 405 of Regulation S-K will be
contained in the registrant's proxy statement for its 1998 annual meeting of
shareholders, which statement is incorporated by reference in Part III of this
Form 10-K. Yes ___ No X
The aggregate market value of the voting stock held by non-affiliates of the
registrant on March 9, 1998 was $2,061,416,942.
The number of shares of the registrant's Common Stock outstanding as of March 9,
1998 was 61,997,502.
DOCUMENTS INCORPORATED BY REFERENCE
PART II
Portions of this Registrant's 1997 Annual Report to Shareholders are
incorporated by reference into Items 5, 6, 7 and 8.
PART III
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held May 14, 1998 are incorporated by reference into Items
10, 11, 12 and 13.
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CONCORD EFS, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Item No. Page
PART I
1. Business
Overview 1
Subsidiaries 2
Description of Business 3
Data Processing and Field Service Support 6
Marketing and Customers 6
Competition 7
Supervision and Regulation 8
Employees 9
2. Properties 9
3. Legal Proceedings 9
4. Submission of Matters to a Vote of Security Holders 9
PART II
5. Market for Registrant's Common Stock
and Related Stockholder Matters 9
6. Selected Financial Data 9
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
8. Financial Statements and Supplementary Data 10
9. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosures 10
PART III
10. Directors and Executive Officers of the Registrant 10
11. Executive Compensation 10
12. Security Ownership of Certain Beneficial Owners
and Management 10
13. Certain Relationships and Related Transactions 10
PART IV
14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 12
Index to Exhibits 12
Signatures 14
<PAGE>
PART I
This Annual Report on Form 10-K may contain or incorporate by reference
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. Prospective investors are cautioned
that any such forward-looking statements are not guarantees for future
performance and involve risks and uncertainties, and that 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 general
economic conditions, 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 operating results over time.
Item 1. BUSINESS
Overview
Concord EFS, Inc. and its subsidiaries (the Company or Concord) provide
electronic transaction authorization, processing, settlement and funds transfer
services in selected markets. The Company's primary activity is Card Services,
which involves the provision of integrated electronic transaction services for
credit card, debit card and electronic benefits transfer ("EBT") card
transactions to supermarket chains, grocery stores, convenience store merchants
and other retailers. The Company believes it is one of the few fully integrated
transaction processors, supplying electronic payment and verification terminals,
cash dispensing machines ("ATMs"), processing services, payment settlement,
depository services and transaction data compilation. In addition, the Company
is one of the few companies offering full credit and debit card processing on a
nationwide basis.
The Company also provides electronic payment and banking facilities to a large
customer base in the trucking industry for use at major truck stop chains
throughout the United States. In addition to maintaining a network of over 350
ATMs at truck stops nationwide, the Company provides fuel purchase cards, ATM
bank cards and general banking services to truck drivers. The Company offers
trucking companies payroll deposit and cash forwarding services, as well as
real-time data compilation with respect to fuel volume usage, fuel expenditures,
vehicle and driver tracking and truck routine maintenance schedules. In
addition, the Company provides check verification services to grocery and other
retail merchants.
Concord offers merchants a cost-effective, reliable, turnkey debit and credit
card processing system. The Company is able to provide its system on a
profitable basis because of its low-cost operational structure, which includes
efficient marketing, volume purchasing arrangements with equipment and
communications vendors, and direct membership by its subsidiary, EFS National
Bank, in bank card associations (such as VISA, and MasterCard) and national and
regional debit card networks (such as Interlink, MAC, Explore and NYCE). In
1992, Concord entered into an agreement with the National Grocers Association,
Inc. ("NGA") whereby Concord became the preferred vendor of the NGA for
electronic payment services for a range of applications, including both turnkey
packaged solutions and customized payment service agreements covering credit and
debit card transaction processing. The agreement has enabled Concord to increase
substantially its grocery store customer base. The Company believes a growing
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percentage of grocery transactions use credit, debit or EBT cards for payment.
The Company seeks to grow its funds transfer and payment transaction processing
business by providing a fully integrated range of transfer and processing
services at competitive prices. The principal elements of the Company's strategy
include the following:
1) The Company focuses on specific markets that historically have been under
served by the transaction processing industry, seeking a diverse group of
customers with low credit risk profiles.
2) The Company seeks to be a low-cost, highly reliable provider of electronic
payment processing services by providing a fully integrated range of relevant
services, including designing equipment solutions, selling and leasing
equipment, authorizing transactions, capturing information on its own host
computer, directly participating in all major credit and debit card associations
and networks, and effecting settlement of payment transactions and transfer of
funds.
3) The Company offers maximum technological versatility for the provisions of
equipment of different manufacturers, in order to provide a tailored solution to
the customer's specific needs.
4)The Company adheres to a balanced marketing approach through the use of
internal marketing specialists, independent sales representatives and a number
of independent sales organizations ("ISOs") in an effort to provide, at the most
efficient cost, broader access to new merchant customers and portfolio
acquisition opportunities nationwide.
Subsidiaries
EFS National Bank (EFSNB), the largest subsidiary of the Company, sells credit,
debit, and electronic benefits transfer (EBT) card authorization, data capture
and settlement services to retailers and grocery stores. It also sells cash card
and cash forwarding services to trucking companies through agreements with a
network of truck stops.
The services of EFSNB do not consist of material amounts of traditional banking
activities (i.e., consumer and commercial loans, demand and time deposits, real
estate, etc.). Therefore, the Company is not required to use the reporting
format and related disclosures normally required for bank holding companies.
Concord Computing Corporation's (CCC) primary activity is check authorization
and POS terminal driving, servicing and maintenance for grocery store chains. It
also owns and operates cash dispensing machines (ATMs) at truck stops and
grocery stores nationwide. Additionally, CCC provides certain processing
services for its affiliated companies.
CCC incorporated Concord Retail Services, Inc. (CRS), a wholly-owned Delaware
subsidiary. CRS provides POS terminal driving, servicing and maintenance to the
Company's customers in the northeast United States.
The Company incorporated Concord Equipment Sales, Inc. (CES), a wholly-owned
Tennessee subsidiary, on September 5, 1991. CES purchases from manufacturers
point-of-sale (POS) terminal products and communications equipment for use by
the Company's customers in connection with the Company's transaction processing
services.
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During 1997, the Company made two acquisitions that were immaterial to the
financial statements. The Company purchased a federal savings bank charter in
July 1997 and began operations as EFS Federal Savings Bank (EFSFSB) in August
1997 to facilitate the strategic deployment of cash dispensing machines and bank
branches at selected truckstops. The Company also merged with Pay Systems of
America, Inc. (PSA) in a pooling of interests on December 15, 1997. PSA is a
Nashville, Tennessee based payroll processing company.
Description of Business
The Company operates in the transaction processing and payment services
industry, providing targeted markets with a fully integrated range of services
and products for credit card, debit card and EBT card transactions, trucking
company services, check verification data compilation, payroll processing and
payment settlement.
The following table is a listing of revenues by service type for the three years
ended December 31:
1997 1996 1995
-------- -------- --------
(in thousands)
Card Services $185,918 $129,658 $ 95,906
Trucking Services 42,064 24,301 16,687
Check Verification Services 6,345 6,905 8,485
EFT and Terminal Services 5,677 5,836 6,684
-------- -------- --------
$240,004 $166,700 $127,762
======== ======== ========
As transaction service revenues are similar in nature, total operating expenses
are not directly attributable to any individual revenue type.
Card Services
Card services accounted for 77% of the Company's revenue for the year ended
December 31, 1997. The Company processes credit card transactions using VISA,
MasterCard, Discover, American Express, Diners Club and JCB cards. The Company
processes debit card transactions for banks issuing such cards, which permit
direct payment debit from the POS terminal against the cardholder's deposit
account. In addition, in those states where EBT programs have been implemented,
the Company similarly processes payments effected with EBT cards against funds
made available by public assistance benefit programs through the primary EBT
third-party providers.
The bank card (e.g., Visa and MasterCard) transaction process begins when the
consumer presents the card and the merchant "swipes" the card at the POS
terminal and enters the transaction amount. The Company processes the data from
the POS terminal through the relevant electronic communications network to the
card issuer. The transaction is approved or rejected by the issuer bank, and the
response is transmitted almost instantaneously back through the Company's
processing systems to the POS terminal. The purchase transaction is then
confirmed against the authorization data retained in the Company's system,
whereupon the Company (through its subsidiary, EFSNB) settles the payment by
crediting the merchant with the transaction amount, less the agreed discount
rate, and submits the transaction through the relevant network for crediting by
the issuing bank to EFSNB of the transaction amount less the interchange and/or
association fee. To complete the transaction, the issuing bank bills the
consumer for the transaction amount.
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The authorization process is similar for other credit cards (e.g., Discover and
American Express), debit card (e.g., Explore and NYCE) and EBT transactions. In
a credit card or EBT transaction, the credit card issuer or EBT primary provider
effects the payment settlement by crediting the merchant's account with the
issuer and credits the Company's account with the related processing service
fee. In a debit card transaction, the transaction is initiated by the consumer's
insertion of the personal identification number, and the transaction is settled
by directly debiting the cardholder's account in the payment amount plus the
surcharge (if any), crediting the merchant in the payment amount less the
processing service charge, paying the network fee and crediting the Company in
the amount of the processing service charge plus the surcharge (if applicable).
The Company's principal business is the provision of electronic payment services
to supermarket chains, grocery stores, convenience store merchants and other
retailers. The Company has been selective in the merchants to which it has
marketed its services and has historically chosen retailers whose businesses are
less economically volatile and involve less risk of chargeback and merchant
fraud. The Company will not, for instance, deal with merchants who book
transactions for delivery at a later date, such as mail-order retailers and
travel agents. No single customer of the Company accounts for a material portion
of the Company's revenues.
Trucking Services
The Company's trucking services accounted for 18% of its revenue for the year
ended December 31, 1997. The Company provides a variety of flexible payment
systems that enable truckers to use payment cards to purchase fuel and services
and to obtain cash advances at more than 4,000 truck stops. Through its national
bank subsidiary, EFSNB, the Company offers payroll and cash distribution
programs to trucking companies and truck drivers. In connection with the
issuance of ATM bank cards to truck drivers and payroll distribution programs,
EFSNB opens individual payroll deposit accounts and/or full service checking
accounts in the truck drivers' names. Payroll deposit accounts are special
purpose accounts for deposit by the trucking company of payments for the
drivers' accounts, with the drivers' benefits limited to the right of
withdrawal. Under this program, the trucking company transmits payment
instructions to EFSNB, and the specified funds are made available to the
designated drivers within minutes. A substantial number of truck drivers with
payroll deposit accounts choose to open full-service checking accounts with
EFSNB.
The Company also provides trucking companies with private label fuel cards for
use by their drivers. When such fuel cards are utilized, the Company gathers
fuel purchase and other trucking data at the same time as it processes the
payment transactions; the data gathered by the Company includes truck vehicle
and trailer identification numbers and odometer mileage, in addition to fuel
volume and expenditure information. The data gathered from aggregate
transactions of a trucking company provides current information with respect to
fuel volume usage, fuel expenditures, vehicle and driver tracking and truck
routine maintenance schedules. The trucking company customer has real-time
direct access to the Company's database for the trucking company's drivers and
operations.
The Company has established over 350 ATMs at selected locations of major truck
stop chains nationwide. As the Company and its competitors place ATM cards in
truck driver's hands, the Company's ATMs will be increasingly utilized, and the
Company will receive fees both from the use of its own ATM cards and those of
its competitors. The Company is a member of all major ATM networks, including
Cirrus and Plus.
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The Company also processes ATM transactions for ATM owners at casinos,
truckstops, grocery stores and other retail merchants. Fee income is generated
from the authorization and settlement of ATM withdrawals at these locations.
Check Verification Services
The Company provides check verification programs, which may be customized to a
particular merchant's needs or to a particular market. The Company's check
payment verification services accounted for approximately 3% of its revenue for
the year ended December 31, 1997.
The traditional check verification program, which is customized to the specific
merchant or merchant chain, consists of a positive and negative file based upon
the check writing history for the checking account party with the specific
merchant or merchant chain. Under the program's negative file, if a customer
tenders a check at any one store of a merchant chain that is returned for
insufficient funds, any additional checks tendered by such customer will be
rejected at all stores of the merchant chain. Under the positive file, if a
customer cashes a check at any one store in a chain, the amount of that check
reduces for the specified time period that customer's check-cashing limit for
further check presentation at any other store of the chain.
Beginning in the fall of 1995, the Company began to offer a new check
verification program for electronic comparison of a tendered check against a
nationwide multi-merchant database which aggregates the bad check experiences of
all participating merchants. The Company has entered into arrangements with two
providers of such nationwide check history databases. For check verification
utilizing a nationwide database, the merchant "swipes" the magnetic ink bank and
account identification ("MICR") line of the check using an electronic check
reader, and the check account number is immediately compared against the
nationwide database, which will not verify the tendered check while a previous
bad check on such account remains outstanding against any other merchant using
the database. The Company is able to customize a particular merchant's use of
the nationwide database to include checking against various identification
references in addition to the check MICR, such as the driver's license number
and social security number of the purchaser. Currently, the Company's fees
deriving from check verification, utilizing the nationwide databases, represent
an insignificant portion of total check verification revenues; however, the
Company believes merchant use of the nationwide verification databases will
increase as their benefits become more widely known.
Check verification programs provide more limited payment assurance than check
guarantee programs but at a substantially lower cost. Typically only
approximately 1% of checks tendered to merchants are rejected for insufficient
funds or other reasons. Guarantee charges typically range from 2.5% to 4% of the
face value of a check, while check verification charges amount to only pennies
per check. In addition, electronic check verification is virtually
instantaneous, while obtaining the payment benefit under a check guarantee for a
rejected check involves substantial delay and additional merchant effort. The
Company believes that its check verification services represent a valuable
add-on product which enhances the card processing and settlement services
offered by the Company to supermarket chains, grocery stores, convenience store
merchants and other retailers, and are of particular value in comparison to
check guarantee programs to high-volume, low-margin retailers.
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In addition, the Company provides Electronic Funds Transfer (EFT) services and
sells electronic terminal equipment to customers who are users of the services.
All of these services are sold directly to the end-user on a nationwide basis.
Data Processing and Field Service Support
The Company maintains a data processing facility in Elk Grove, Illinois,
primarily for the Company's Check Services and EFT Services, and a data
processing facility in Memphis, Tennessee for Trucking Services and Card
Services. These facilities utilize fully redundant computers which provide the
high levels of availability and the transaction speed necessary for processing
large numbers of financial transactions. Backup power is available to provide
service in the event of power failure at a computer center. The Company
maintains dedicated telephone networks, packet switching networks and In-Watts
networks connecting data processing centers to retail stores where transaction
and electronic funds transfer terminals are located.
The Company also provides field support and repair services for POS terminal
installations. The Company maintains field support and repair facilities in Elk
Grove, Illinois, Aurora, Colorado and West Chester, Pennsylvania.
Marketing and Customers
The Company markets its services and products on a nationwide basis directly and
through ISOs and independent sales representatives to supermarket chains,
grocery stores, convenience store merchants, other retailers, electronic funds
transfer networks, financial institutions and trucking companies. Historically,
the Company has grown its merchant customer base primarily through its in-house
telemarketing and sales force working with independent contractor sales
representatives nationwide. During 1996, the Company reorganized its sales and
marketing activities relating to its card services business by adding marketing
professionals focused upon multi-store merchants in certain specialized markets,
by reducing the Company's in-house telemarketing staff, and by outsourcing a
portion of its telemarketing activities to independent sales organizations and
by expanding its relationships with ISOs nationwide. The Company's strategy is
to increase its in-house marketing expertise in certain specialized market areas
and broaden its access to growth opportunities nationwide by utilizing the
broader market penetration of ISOs. The Company believes that the most promising
growth opportunities currently exist in certain small retail merchant chains in
specialized markets, and in the acquisition of merchant processing portfolios
developed by smaller processing services providers.
The Company has had success historically in marketing through key trade
association relationships, such as its relationship with the NGA, as the
recommended provider of electronic services to grocers, and through agreements
with other payment services providers. Management is committed to the
cultivation of such trade association relationships and the development of
arrangements with other service providers.
As an integrated services provider, the Company has natural cross-selling
marketing opportunities. When the Company established itself with the major
truck stop chains as an authorized issuer of payment cards and processor of card
transactions, the Company gained a substantial advantage in selling its card
payment systems to trucking companies. The Company's established relationships
with the truck stop owners also afforded an opportunity to sell the placement of
ATMs at truck stops, which in turn provided a further advantage in selling the
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Company's integrated processing and banking services to trucking companies and
truck drivers. The Company's established presence in grocery stores, grocery
chains, convenience stores and other small and mid-size retailers gives it an
advantage in establishing relationships with EBT providers, whose benefits are
utilized largely at such retail locations.
The Company, through its recent acquisition of PSA, will begin selling payroll
processing services to its retail, grocery store, trucking company and truckstop
merchants. Management believes the payroll processing business is a large and
growing market that will grow even faster as governmental requirements for
electronic filings of reports increase the accounting burden for small
businesses. As these businesses outsource the payroll process, growth
opportunities in this market will increase further.
The Company's sales offices are located in suburbs of Memphis, Tennessee and
Chicago, Illinois. The Company's executive officers actively participate in the
Company's marketing efforts.
Competition
The markets for electronic payment processing, credit and debit card payment
settlement, check authorization programs, fuel card and cash forwarding
services, and ATM services are all highly competitive. The Company's principal
competitors include major national and regional banks, local processing banks,
non-bank processors and other independent service organizations, many of which
have substantially greater capital, management, marketing and technological
resources than those of the Company. In each of the Company's largest service
types, the Company competes against other companies who have a dominate share of
each market. Management estimates the three largest credit and debit card
processors account for roughly 50% of the total credit and debit card sales
volume in 1997. Management estimates a single competitor accounts for well in
excess of 50% of the total dollar volume of payment transaction processing for
the trucking industry. Another single competitor accounts for in excess of 50%
of the total dollar volume of check verifications. There can be no assurance
that the Company will continue to be able to compete successfully with such
competitors.
In addition, the competitive pricing pressures that would result from any
increase in competition could adversely affect the Company's margins and may
have a material adverse effect on the Company's financial condition and results
of operations.
The Company competes in its markets in terms of price, quality, speed and
flexibility in customizing systems to meet the particular needs of customers.
The Company believes that it is one of the few fully integrated suppliers of a
broad range of hardware and processing, banking and data compilation services
for use in transactions at retail locations.
The Company also competes with other electronic payment processing organizations
for growth opportunities. The recent trend of consolidation in the banking
industry in the Untied States has resulted in fewer opportunities for merchant
portfolio acquisitions, as many small banks have been acquired by large banks,
some of which are competitors with the Company in the provision of processing
services.
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Supervision and Regulation
Concord EFS, Inc. and its subsidiaries are subject to a number of federal and
state laws. As a bank holding company, the Company is subject to regulation
under the Bank Holding Company Act of 1956, as amended (the "Act") which is
administered by the Federal Reserve Board (the "Board"). Under the Act, the
Company is generally prohibited from directly engaging in any activities other
than banking, managing or controlling banks, and bank-related activities. Also,
the Act prohibits a bank holding company, with certain exceptions, from
acquiring, directly or indirectly, ownership or control of 5% or more of the
voting shares of any company which is not a bank or bank holding company. The
primary exception to this prohibition involves activities which the Board
determines are closely related to banking. A bank is also generally prohibited
from engaging in certain tie-in arrangements with its bank holding company or
affiliates with respect to the lease or sale of property, furnishing of
services, or the extension of credit. The Act contains certain restrictions
concerning future mergers with other bank holding companies and banks. The
Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA)
contains certain merger restrictions with Savings and Loan Associations.
Under the Act, a bank holding company is required to file with the Board an
annual report and such additional information which the Board may require. The
Board may examine the Company's and each of its subsidiaries' records, including
a review of capital adequacy in relation to guidelines issued by the Board. If
the level of capital is deemed to be inadequate, the board may restrict the
future expansion and operations of the Company. The Board possesses cease and
desist powers over a bank holding company if its actions or actions of any of
its subsidiaries represent unsafe or unsound practices or violations of law.
Federal law also regulates transactions among the Company and its affiliates,
including the amount of a banking affiliate's loan to, or investments in,
non-bank affiliates and the amount of advances to third parties collateralized
by securities of an affiliate. In addition, various requirements and
restrictions under federal and state laws regulate the operations of the
Company's banking affiliates, requiring the maintenance of reserves against
deposits, limiting the nature of loans and the interest that may be charged
thereon, restricting investments and other activities. The Company's bank
affiliates are also limited in the amount of dividends that they may declare.
Prior regulatory approval must be obtained before declaring any dividends if the
amount of capital, surplus and retained earnings is below certain statutory
limits.
As a national bank, EFSNB operates under the rules and regulations of the Office
of the Comptroller of the Currency and is also a member of the Federal Reserve
System, subject to provisions of the Federal Reserve Act. The Federal Deposit
Insurance Corporation insures the domestic deposits of all the Banks. Periodic
audits and regularly scheduled reports of financial information are required by
all regulatory agencies. Federal laws also regulate certain transactions among
EFSNB and its affiliates, including Concord EFS, Inc.
The Company's EFT Services sold to financial institutions are regulated by
certain State and Federal banking laws. Material changes in federal or state
regulation could increase the cost to the Company of providing EFT Services,
change the competitive environment or otherwise adversely affect the Company.
The Company is not aware of any such change which is pending.
In addition to regulation by federal and state laws and governmental agencies,
the Company is subject to the rules and regulations of the various credit card
and debit card associations and networks, including requirements for equity
capital commensurate with processing transaction dollar volume.
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Employees
As of December 31, 1997, the Company employed 592 full and part-time personnel,
including 55 data processing and technical employees, 448 in operations, and 89
in sales and administration. Many of the Company's employees are highly skilled,
and the Company believes its future success will depend in a large part on its
ability to attract and retain such employees. The Company does not have
employment contracts with any of its personnel. None of the Company's employees
are represented by a labor union and the Company has experienced no work
stoppages. The Company considers its employee relations to be excellent.
Item 2. PROPERTIES
The following table sets forth certain information concerning the principal
facilities of the Company, all of which are leased:
Approximate
Area In Lease
Location Square Feet Primary Uses Expiration
- ---------------- ----------- ------------------ ---------------
Memphis, TN 43,375 Corporate Offices July 31, 2000
& EFSNB Operations
Elk Grove, IL 20,330 Data Processing, July 31, 1998
Field Service, and
CCC Operations
Aurora, CO 3,072 Field Service month to month
West Chester, PA 1,300 Field Service May 31, 1998
Oakland, TN 800 EFSFSB Branch April 30, 1999
Nashville, TN 3,202 PSA Operations month to month
The Company believes all facilities are adequate.
Item 3. LEGAL PROCEEDINGS
The Company is a party to various routine lawsuits arising out of the conduct of
its business, none of which are expected to have a material adverse effect upon
the Company's financial condition or results of operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of stockholders in the fourth quarter
of fiscal 1997.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
This information is included under the caption "Market Value For the
Registrant's Common Stock and Related Stockholder Matters" on page 8 of the
Company's Annual Report(the "Annual Report"),and is incorporated herein by
reference.
Item 6. SELECTED FINANCIAL DATA
This information is included under the caption "Selected Consolidated Financial
Data" on page 1 of the Annual Report and is incorporated herein by reference.
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This information is included under the captions "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 3 to 7 of
the Annual Report and is incorporated herein by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The report of independent auditors and consolidated financial statements set
forth below are included on pages 9 to 23 of the Annual Report, and are
incorporated herein by reference.
Report of Independent Auditors.
Consolidated Balance Sheets as of December 31, 1997 and 1996.
Consolidated Statements of Income for the years ended December 31, 1997,
1996 and 1995.
Consolidated Statements of Stockholders' Equity for the years ended December
31, 1997, 1996, and 1995.
Consolidated Statements of Cash Flows for the years ended December 31, 1997,
1996, and 1995.
Notes to Consolidated Financial Statements as of December 31, 1997.
Quarterly results of operations for the years ended December 31, 1997 and 1996
on page 8 of the Annual Report are incorporated herein by reference.
All other schedules for which provision is made in the applicable accounting
regulations of the Securities & Exchange Commission are not required under the
related instructions and, therefore, have been omitted.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See Item 13 below.
Item 11. EXECUTIVE COMPENSATION See Item 13 below.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See Item 13 below.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to Items 10, 11, 12, and 13 is included in the
Company's Proxy Statement for the Annual Meeting of Stockholders to be held on
May 14, 1998 under the captions "Election of Directors", "Executive
Compensation", "Stock Options", Beneficial Ownership of Common Stock", and
"Certain Transactions" and is incorporated herein by reference.
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PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1)and (2) -- The response to this portion of Item 14 is submitted as a
separate section of this report.
(3) Listing of Exhibits
Exhibit
Numbers
2 Agreement and Plan of Merger dated January 12, 1990 by and between
Concord Computing Corporation, a Massachusetts corporation , and
Concord Computing Corporation, a Delaware corporation *
3(A) Certificate of Incorporation of Concord Computing Corporation,
a Delaware corporation *
3(B) Bylaws of Concord Computing Corporation, a Delaware
corporation *
3(C) Certificate of Merger of Concord Computing Corporation, a Massachusetts
corporation, with and into Concord Computing Corporation, a Delaware
corporation, filed with the Secretary of State of Delaware March 22,
1990 *
3(D) Articles of Merger of Concord Computing Corporation, a Massachusetts
corporation, with and into Concord Computing Corporation, a Delaware
corporation, filed with the Secretary of State of Massachusetts March
22, 1990 *
10 1993 Incentive Stock Option Plan (incorporated by reference from
exhibit to the Registrant's Proxy Statement for the Annual Meeting of
Shareholders held on May 12, 1993.)
22 List of Subsidiaries Jurisdiction of
Company Organization Ownership
--------------------------- ---------------------------- ---------
Concord Computing Corp. Delaware 100%
EFS National Bank National Bank Charter 100%
Concord Equipment Sales Tennessee 100%
EFS Federal Savings Bank Federal Savings Bank Charter 100%
Pay Systems of America, Inc. Tennessee 100%
23 Consent of Independent Auditors
27 Financial Data Schedule
* Incorporated by reference from exhibits to the Registrant's Amendment No. 1 to
Form 10-Q for quarter ended March 31, 1990.
(b) Reports on Form 8-K -- No reports on Form 8-K were filed during the quarter
ended December 31, 1997.
-11-
<PAGE>
(c) Exhibits -- The response to this portion of Item 14 is submitted as a
separate section of this report.
(d) Financial Statement Schedules -- No financial statement schedules are
required to be filed as part of this report on Form 10-K.
For the purposes of complying with the amendments to the rules governing the
Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the
undersigned registrant hereby undertakes as follows,which undertaking shall be
incorporated by reference into registrant's Registration Statement on Form S-8
No. 33-60871.
-12-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has fully caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Concord EFS, Inc.
By:/s/ Dan M. Palmer By:/s/Thomas J. Dowling
----------------- --------------------
Dan M. Palmer Thomas J. Dowling
Chief Executive Officer Vice President and Controller
Date: March 31, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
- ------------------------ ----------------------------- --------------
/s/ Dan M. Palmer Chairman of the Board and CEO March 31, 1998
Dan M. Palmer of the Company and EFS
National Bank
/s/ Edward A. Labry President of the Company and March 31, 1998
Edward A. Labry III EFS National Bank
/s/ Richard M. Harter Director and Secretary of March 31, 1998
Richard M. Harter the Company
/s/ Douglas C. Altenbern Director of the Company March 31, 1998
Douglas C. Altenbern
/s/ David C. Anderson Director of the Company March 31, 1998
David C. Anderson
/s/J. Richard Buchignani Director of the Company and March 31, 1998
J. Richard Buchignani EFS National Bank
/s/ Joyce Kelso Director of the Company and March 31, 1998
Joyce Kelso EFS National Bank
/s/ Richard P. Kiphart Director of the Company March 31, 1998
Richard P. Kiphart
/s/ Jerry D. Mooney Director of the Company March 31, 1998
Jerry D. Mooney
/s/Paul L. Whittington Director of the Company March 31, 1998
Paul L. Whittington
-13-
<PAGE>
EXHIBIT 23
CONCORD EFS, INC.
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Concord EFS, Inc. of our report dated February 5, 1998, included in the 1997
Annual Report to Shareholders of Concord EFS, Inc.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-60871) pertaining to the Concord EFS, Inc. 1993 Incentive Stock
Option Plan of our report dated February 5, 1998, with respect to the
consolidated financial statements of Concord EFS, Inc. incorporated herein by
reference in this Annual Report (Form 10-K) for the year ended December 31,
1997.
/s/ Ernst & Young LLP
Memphis Tennessee
March 26, 1998
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data (in thousands, except per
share data) should be read in conjunction with the consolidated financial
statements and notes thereto appearing elsewhere herein.
Year Ended December 31
------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
INCOME STATEMENT DATA:
Revenues $240,004 $166,700 $127,762 $96,213 $75,443
Cost of Operations 176,008 119,675 90,579 69,840 53,188
Selling, General and
Administrative Expenses 8,406 9,724 10,913 8,312 7,861
Operating Income 55,590 37,301 26,270 18,061 14,394
Interest, Net 10,746 4,014 2,116 1,588 825
Income Taxes 23,590 14,526 10,146 6,979 5,357
Net Income 42,746 26,789 18,315 12,713 9,863
Basic Earnings Per Share* $0.70 $0.47 $0.33 $0.23 $0.18
Diluted Earnings Per Share* $0.68 $0.45 $0.32 $0.23 $0.18
Weighted Average Shares* 61,401 57,484 55,344 54,318 53,893
Weighted Average Shares and
Assumed Conversions* 63,313 59,935 57,859 55,898 55,676
BALANCE SHEET DATA:
Working Capital 202,917 130,606 68,212 45,717 34,655
Total Assets 360,673 292,813 156,887 99,462 71,033
Long-term Debt, Less
Current Maturities 28,329 561 978 1,371
Total Stockholders' Equity 271,069 215,148 89,544 61,935 50,251
Percentage Percentage
of Revenue Change
---------------------- --------------
Year Ended December 31 1997 1996
---------------------- Over Over
1997 1996 1995 1996 1995
------ ------ ------ ------ ------
INCOME STATEMENT DATA:
Revenues 100.0% 100.0% 100.0% 44.0% 30.5%
Cost of Operations 73.3 71.8 70.9 47.1 32.1
Selling, General and
Administrative Expenses 3.5 5.8 8.6 (13.6) (10.9)
Operating Income 23.2 22.4 20.5 49.0 42.0
Interest, Net 4.4 2.4 1.7 167.7 89.7
Income Taxes 9.8 8.7 7.9 62.4 43.2
Net Income 17.8 16.1 14.3 59.6 46.3
* Earnings per share and related per share data have been restated to reflect
all stock splits. Additionally, see discussion of the restatement of amounts
prior to 1997 in Management's Discussion and Analysis of Recently Issued
Accounting Standards and the Notes to the Consolidated Financial Statements.
-1-
<PAGE>
Dear Stockholders:
The financial results for 1997 summarized below are record increases for the
Company.
Revenues ----------------------- Up 44%
Net Income --------------------- Up 60%
Diluted Earnings Per Share ----- Up 51%
The major factors which resulted in these increases were a 43% increase in Card
Services revenue, which comprises 77% of total revenue, and a 73% increase in
Trucking Services revenue, which comprises 18% of total revenue. Included in
Trucking Services revenue are revenues from cash dispensing machines (ATMs)
which account for a major portion of the increase.
In achieving these results management has continued its long range focus on
niche markets within the broader transaction processing industry. Additionally,
for the first time since the mid-80s the Company has been actively seeking new
candidates for possible acquisition. In the third quarter the Company acquired a
federal savings bank charter and began operating as EFS Federal Savings Bank.
This acquisition helps the Company meet the legal requirements for the placement
of ATMs and branches in certain states. We believe this is a major step forward
in our pursuit of increasing ATM revenue and bank account service fees. In the
fourth quarter the Company acquired a small payroll processing firm, Pay Systems
of America, Inc. Our reasons for entering this market are twofold, revenue
diversification, and opportune entry time. We believe payroll processing is a
large and growing market that will grow even faster as governmental requirements
for electronic filings of reports increase the accounting burden for small
businesses. As these businesses outsource the payroll process, we believe there
will be even greater opportunities in this market.
In February of 1998, prior to the mailing of the 1997 Annual Report, we signed a
letter of intent to acquire Digital Merchant Systems, Inc. and affiliated
companies. Digital is one of the nation's largest and most successful
independent sales organizations. As we stated in a news release at the time, "We
believe this second acquisition in four months again demonstrates our ability to
grow outside our normal sales channels." We expect to finalize this acquisition
in the second quarter.
Besides our core strategy of acquiring transaction processing services for small
retailers and supermarkets, we are also actively pursuing other niche markets in
this industry. For competitive reasons we can not now disclose the details of
these market strategies. However, we believe that our long-range strategies,
coupled with certain target acquisitions being considered will allow the Company
to continue to have excellent future growth opportunities.
Thanks for your support.
Very truly yours,
/s/ Dan M. Palmer /s/ Ed Labry
Dan M. Palmer Edward A. Labry III
Chairman of the Board President
Chief Executive Officer
-2-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Calendar 1997 Compared to Calendar 1996
Revenue increased 44% in 1997 over 1996. Transaction processing revenue
from Card Services (77% of total revenue) increased 43% for the year. The
addition of new merchants was the primary reason behind the increase, although
increasing usage at existing merchants, primarily the Company's grocery store
niche, also generated increased revenue. Trucking Services (18% of total
revenue) increased 73%. Included in Trucking Services is processing and
surcharge revenue for cash dispensing machines (ATMs) which accounted for the
majority of the increase for the year. Additional trucking companies using the
Company's fuel and cash advance services also contributed to the revenue
increase. Check and Terminal Services (5% of total revenue) decreased 6%.
Net Income as a percentage of revenue increased in 1997 to 17.8% from 16.1%
in the prior year. Two factors that improved the percentage increase were lower
selling, general and administrative expenses offset by increased operational
costs for the amortization of purchased merchant contracts, and increased
interest income. First, the Company has historically generated sales through
senior management, commissioned telemarketing activities and outside sales
representatives; however, in 1996 the Company reorganized its marketing
activities to meet future growth objectives by increasing the direct marketing
staff, downsizing the telemarketing staff and entering into agreements with
independent sales organizations to purchase individual merchant contracts and
merchant portfolios. The reduction in selling, general and administrative
expenses offset by higher operational costs from the amortization of merchant
contracts purchased resulted in a decrease in expenses of approximately
$400,000. Secondly, interest income increased as a result of available cash
being invested in securities described in the notes to Consolidated Financial
Statements.
Offsetting the factors improving the percentage increase were lower margin
processing and increased taxes resulting from the pretax percentage of revenue
increase. A portion of the new merchants and services contributing to the
increased revenue discussed above were large volume merchants. Due to
competitive reasons, the Company offers these merchants lower rates and earns
less per transaction.
Calendar 1996 Compared to Calendar 1995
Revenue increased 30% in 1996 over 1995. Transaction processing revenue
from Card Services (78% of total revenue) increased 35% for the year as new
merchants were added and usage at existing merchants increased. Trucking
Services (15% of total revenue) was up 46%, driven by surcharge revenue at ATMs
and additional trucking companies using the Company's fuel and cash advance
services. Check, EFT and Terminal Services (7% of total revenue) offset these
increases, declining 16%, net. The decrease was primarily attributable to
competitive repricing in Check Services and the gradual elimination of EFT
Services.
Net income as a percentage of revenue increased in 1996 to 16.1% from 14.3%
in the prior year. The primary factor was lower selling, general and
administrative expenses due to the marketing activities explained above. As the
cost of merchant contracts and portfolio acquisitions are amortized over the
average life of the contracts, current year selling, general and administrative
expenses decreased by approximately $3.4 million.
-3-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Calendar 1995 Compared to Calendar 1994
Net income increased 44% in 1995 over net income in 1994 due to increased
revenues in all three of the Company's core businesses and decreases in
telephone and maintenance operating costs. Revenue from Card Services increased
38% as a result of the addition of grocery and retail merchants and volume
increases in credit and debit card usage. Continued marketing efforts combined
with merchant association endorsements were responsible for the new customers.
Trucking Services revenues rose 30% due to the growth in ATM revenues and
increases in the number of trucking customers. Revenues from Check Verification
Services rose 22% on the addition of new merchants utilizing such services.
Net income as a percentage of revenue increased in 1995 to 14.3% from 13.2%
in 1994 as operational costs grew at a slower rate than transaction revenue.
Savings of approximately $2.3 million in telephone and maintenance expenses were
achieved in 1995.
Selling, general and administrative expenses in the year ended December 31,
1994 were significantly affected by costs associated with the Company's
antitrust lawsuit against Deluxe Data Systems, Inc. ("Deluxe"). The lawsuit,
initiated in January 1993, alleged that Deluxe was monopolizing electronic
benefits transfer business in the state of Maryland. The dispute with Deluxe was
settled in July 1995, and the terms of the settlement had no material financial
statement impact in the fiscal year 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company consistently generates significant resources from operating
activities. Over the past three years operating activities generated cash of
$27.8, $80.0 and $28.3 million, respectively.
Significant changes in accounts receivable and accounts payable result from
the day of the week the calendar year end falls combined with the increases in
settlement volume from one year to the next, impacting cash generated from
operations. At December 31, 1996, approximately $35.1 million was received from
credit card associations prior to disbursement of the funds to the Company's
card service customers. Under a typical two day settlement cycle, these funds
would have been paid to the customers prior to December 31, 1996, and cash
generated from operating activities would have been $44.9 million for the year
ended December 31, 1996 and $62.9 million for the year ended December 31, 1997.
The Company completed a secondary offering of common stock in October 1996.
Proceeds from the 3.45 million shares issued were $87.7 million. $30 million was
used as a capital contribution to EFS National Bank (EFSNB), a wholly-owned
subsidiary of the Company, in order for it to remain in compliance with the
guidelines of credit card associations as its processing transaction volume
increases. It is expected that portions of this additional EFSNB equity will be
utilized from time to time to acquire selected merchant payment processing
portfolios from banks and other processing organizations. The balance of the net
proceeds held by the Company will be available for working capital and general
corporate purposes, including placing additional ATMs, the possible acquisition
of transaction processing businesses and use in other subsidiaries of the
Company. The Company invested the net proceeds of the offering in short- and
medium-term, interest-bearing obligations described in Note B - Securities.
-4-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (continued)
During fiscal 1997, the Company invested $71.7 million in securities, net
of sales and maturities, and $14.9 million in capital additions. Capital
additions were primarily for new computer equipment. These investing activities
were funded primarily through operating activities and $28 million in proceeds
from notes payable to the Federal Home Loan Bank (see notes to Consolidated
Financial Statements).
Stock issued upon exercises of options under the Company's Incentive Stock
Option Plan provided $6.7 million in additional capital in 1997. The
disqualifying disposition of the options also reduced corporate income taxes
paid by $5.9 million. Management cannot estimate the timing or amount of future
cash flows from exercise of options, however, this is expected to continue to be
a source of funds to the Company.
The Company has unused unsecured lines of credit of $10 million with
financial institutions. The Company holds securities with a market value of
approximately $87.8 million that are available for operating needs or as
collateral to obtain short-term financing, if needed.
With adequate available credit and strong cash generation, the Company is
in sound financial condition and expects to fund continued growth from currently
available resources. EFSNB exceeds required capital ratios.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share", which required adoption in both interim and annual financial statements
for periods ending after December 15, 1997. The Company has changed the method
presently used to compute earnings per share and restated all prior period
amounts. Statement 128 replaced primary and fully diluted earnings per share
with basic and diluted earnings per share. Under the new requirements for
calculating earnings per share, the dilutive effect of stock options is excluded
from basic earnings per share but is included in the computation of diluted
earnings per share. See further discussion of earnings per share in significant
accounting policies and Note H - Earnings Per Share.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" which established new rules for the reporting and display of
comprehensive income and its components; however, adoption in 1998 will have no
impact on the Company's net income or stockholders' equity. SFAS No. 130
requires unrealized gains or losses on the company's available-for-sale
securities, which currently are reported in stockholders' equity, to be included
in other comprehensive income and the disclosure of total comprehensive income.
The Company does not believe that the adoption of this statement will have a
material effect on its consolidated financial condition or results of
operations.
Also , in June 1997, the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which established standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about products
and services, geographic area and major customers. SFAS No. 131 is effective for
financial statements for fiscal years beginning after December 15, 1997, and
therefore the Company will adopt the new requirements retroactively in 1998.
Management has not completed its review of the statement, but does not
anticipate that its adoption will have a significant effect on the Company's
annual and interim reporting.
-5-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
EFFECTS OF INFLATION
The Company's assets are primarily monetary, consisting of cash, assets
convertible into cash, securities owned and receivables. Because of their
liquidity, these assets are not significantly affected by inflation. Management
believes that replacement costs of equipment, furniture and leasehold
improvements will not materially affect operations. However, the rate of
inflation affects the Company's expenses, such as those for employee
compensation and communications, which may not be readily recoverable in the
price of services offered by the Company.
IMPACT OF YEAR 2000
Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time-sensitive software that recognize a date using "00" as the
year 1900 rather than the Year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send statements and
invoices, or engage in similar normal business activities.
The Company has completed an assessment and will have to modify portions of
its software so that its computer systems will function properly with respect to
dates in the Year 2000 and thereafter. The total Year 2000 project cost is not
expected to be material to the Company's financial position or operating results
and will be expensed as incurred. To date, the Company has expensed all cost
associated with its Year 2000 assessment and related modifications of its
software.
The project is estimated to be completed not later than December 31, 1998,
which is prior to any anticipated impact on its operating systems. The Company
believes that with modifications to existing software, the Year 2000 Issue will
not pose significant operational problems for its computer systems. However, if
such modifications and conversions are not made, or are not completed timely,
the Year 2000 Issue could have a material impact on the operations of the
Company. The Company has initiated formal communications with all of its
significant suppliers and large customers to determine the extent to which the
Company's interface systems are vulnerable to those third parties' failure to
remediate their own Year 2000 Issues. There is no guarantee that the systems of
other companies on which the Company's systems rely will be timely converted and
would not have an adverse effect on the Company's systems.
The cost of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
-6-
<PAGE>
<TABLE>
CONCORD EFS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTEREST RATE RISK MANAGEMENT
The securities of the Company are subject to risk resulting from interest
rate fluctuations to the extent that there is a difference between the amount of
the Company's interest-bearing assets and the amount of interest-bearing
liabilities that are prepaid, mature or reprice in specific periods. This risk
is mitigated by the fact that approximately 86% of the market value of
securities owned were funded through equity rather than debt. The principal
objective of the Company's asset/liability activities is to provide maximum
levels of net interest income while maintaining acceptable levels of interest
rate and liquidity risk and facilitating the funding needs of the Company. The
Company utilizes an interest rate sensitivity model as the primary quantitative
tool in measuring the amount of interest rate risk that is present at the end of
each month.
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. The table presents
principal cash flows and related weighted-average interest rates by expected
maturity dates. Additionally, the Company has assumed its securities, described
in detail in Note B of the Notes to Consolidated Financial Statements, are
similar enough to aggregate those securities for presentation purposes. If tax
equivalent yields of municipal securities had been utilized, the
weighted-average interest rates would have been higher.
<CAPTION>
There- Value at
1998 1999 2000 2001 2002 after Total 12/31/97
------- ------ ------- ------ ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Available-for-sale securities $13,987 $8,014 $12,306 $7,437 $4,461 $87,968 $134,173 $134,334
Average interest rate 6.6% 6.5% 6.6% 6.6% 6.5% 6.9%
Held-to-maturity securities $1,717 $4,000 $232 $7,121 $3,375 $36,063 $52,508 $53,634
Average interest rate 7.8% 6.3% 5.4% 6.6% 5.1% 6.9%
Liabilities:
Long-term debt, including
current portion $445 $329 $28,000 $28,774 $28,666
Average interest rate 8.0% 6.3% 5.9%
</TABLE>
-7-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RECENT QUARTERLY RESULTS
The following table presents an unaudited summary of quarterly results for the
quarters of the calendar years 1997 and 1996.
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
------- ------- ------- -------
(in thousands except per share data)
1997
Revenues $47,045 $56,759 $64,716 $71,484
Operating Income 10,076 13,344 14,690 17,480
Net Income 7,933 10,130 11,422 13,261
Basic Earnings Per Share* $0.13 $0.17 $0.19 $0.21
Diluted Earnings Per Share* $0.13 $0.16 $0.18 $0.21
1996
Revenues $33,895 $40,858 $44,051 $47,896
Operating Income 6,627 9,130 10,158 11,386
Net Income 4,659 6,271 7,149 8,710
Basic Earnings Per Share* $0.08 $0.11 $0.13 $0.15
Diluted Earnings Per Share* $0.08 $0.11 $0.12 $0.14
*Earnings per share have been restated to reflect all splits. The 1996 and first
three quarters of 1997 earnings per share amounts have been restated to comply
with Statement No. 128 "Earnings Per Share."
MARKET VALUE FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock trades on the Nasdaq National Market tier of the
Nasdaq Stock Market (NASDAQ) under the symbol "CEFT". The following table sets
forth the range of high and low bid quotations per share of the Company's Common
Stock through December 31, 1997, as reported by NASDAQ.
High Low
------ ------
1997
First Quarter $29.00 $18.75
Second Quarter 26.88 16.25
Third Quarter 30.00 25.75
Fourth Quarter 32.63 21.00
1996
First Quarter $19.83 $12.56
Second Quarter 24.25 17.33
Third Quarter 28.50 21.50
Fourth Quarter 31.50 22.25
As of March 9, 1998 there were approximately 13,650 shareholders. The Company
has never paid cash dividends. It is the present policy of the Company's Board
of Directors to retain earnings to finance expansion in the foreseeable future.
-8-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31
---------------------
1997 1996
-------- --------
ASSETS (in thousands)
CURRENT ASSETS
Cash and cash equivalents $ 58,518 $ 96,164
Securities available-for-sale (amortized cost of
$140,038 at December 31, 1997 and $64,102
at December 31, 1996) 140,199 63,345
Accounts receivable, less allowance of $1,433 at
December 31, 1997 and $885 at December 31, 1996 52,970 38,248
Inventories 4,835 4,353
Prepaid expenses and other current assets 3,889 2,945
Deferred income taxes 1,190 632
-------- --------
TOTAL CURRENT ASSETS 261,601 205,687
SECURITIES HELD-TO-MATURITY (fair value of
$53,634 at December 31, 1997 and $56,950 at
December 31, 1996) 52,508 56,714
OTHER ASSETS 14,478 3,375
PROPERTY AND EQUIPMENT 89,302 73,819
Accumulated depreciation and amortization (57,216) (46,782)
-------- --------
32,086 27,037
-------- --------
TOTAL ASSETS $360,673 $292,813
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other liabilities $46,810 $71,814
Accrued liabilities 10,439 2,849
Income taxes payable 990
Current maturities of long-term debt 445 418
-------- --------
TOTAL CURRENT LIABILITIES 58,684 75,081
LONG-TERM DEBT, LESS CURRENT MATURITIES 28,329 561
DEFERRED INCOME TAXES 2,591 2,023
STOCKHOLDERS' EQUITY
Common Stock, $.33 1/3 par value; authorized
100,000 shares, issued and outstanding
61,979 shares at December 31, 1997 and
60,817 shares at December 31, 1996 20,660 20,272
Additional paid-in capital 109,836 97,644
Retained earnings 140,474 97,728
Unrealized gain (loss) on securities, net of taxes 99 (496)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 271,069 215,148
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $360,673 $292,813
======== ========
See notes to consolidated financial statements.
-9-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31
----------------------------------
1997 1996 1995
-------- -------- --------
(in thousands, except earnings per share)
Revenue $240,004 $166,700 $127,762
Cost of operations 176,008 119,675 90,579
Selling, general and
administrative expenses 8,406 9,724 10,913
-------- -------- --------
OPERATING INCOME 55,590 37,301 26,270
Other income (expense):
Interest income 11,589 4,104 2,219
Interest expense (843) (90) (103)
-------- -------- --------
INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST 66,336 41,315 28,386
Income taxes 23,590 14,526 10,146
-------- -------- --------
INCOME BEFORE MINORITY INTEREST 42,746 26,789 18,240
Minority interest 75
-------- -------- --------
NET INCOME $42,746 $26,789 $18,315
======== ======== ========
Per share data:
Basic earnings per share $0.70 $0.47 $0.33
======== ======== ========
Diluted earnings per share $0.68 $0.45 $0.32
======== ======== ========
Weighted average shares 61,401 57,484 55,344
======== ======== ========
Adjusted weighted average shares and
assumed conversions 63,313 59,935 57,859
======== ======== ========
See notes to consolidated financial statements.
-10-
<PAGE>
<TABLE>
CONCORD EFS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
Unrealized
Common Additional Gains
Stock Common Paid-In Retained (Losses)on
Shares Stock Capital Earnings Securities Total
---------- ---------- ------------ ---------- ------------ -----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1995 16,105 $ 5,368 $ 5,184 $ 52,624 ($1,242) $ 61,934
Exercise of stock options 632 211 3,915 4,126
Tax benefit of disqualifying
disposition of incentive
stock option shares 4,127 4,127
Stock split 8,203 2,734 (2,734)
Change in unrealized gains and
losses on securities, net of
taxes 1,042 1,042
Net income 18,315 18,315
---------- ---------- ------------ ---------- ------------ -----------
BALANCE AT DECEMBER 31, 1995 24,940 8,313 10,492 70,939 (200) 89,544
Exercise of stock options 1,074 358 4,496 4,854
Secondary offering of common
stock 3,450 1,150 86,521 87,671
Tax benefit of disqualifying
disposition of incentive stock
option shares 6,586 6,586
Stock splits 31,353 10,451 (10,451)
Change in unrealized gains and
losses on securities, net of
taxes (296) (296)
Net income 26,789 26,789
---------- ---------- ------------ ---------- ------------ -----------
BALANCE AT DECEMBER 31, 1996 60,817 20,272 97,644 97,728 (496) 215,148
Restatement for pooling of interests 86 29 34 63
---------- ---------- ------------ ---------- ------------ -----------
RESTATED BALANCE AT DECEMBER 31,1996 60,903 20,301 97,678 97,728 (496) 215,211
Exercise of stock options 1,076 359 6,300 6,659
Tax benefit of disqualifying
disposition of incentive stock
option shares 5,858 5,858
Change in unrealized gains and
losses on securities, net of
taxes 595 595
Net income 42,746 42,746
---------- ---------- ------------ ---------- ------------ -----------
BALANCE AT DECEMBER 31, 1997 61,979 $20,660 $109,836 $140,474 $99 $271,069
========== ========== ============ ========== ============ ===========
</TABLE>
See notes to consolidated financial statements.
-11-
<PAGE>
<TABLE>
CONCORD EFS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Year Ended December 31
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES (in thousands)
Net income $ 42,746 $ 26,789 $ 18,315
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 12,167 9,140 7,796
Provision for losses on accounts receivable 1,445 817 500
Minority interest (75)
Deferred income taxes (313) 213 457
Changes in operating assets and liabilities
Accounts receivable (16,167) 24,625 (30,426)
Inventories (482) 412 (1,858)
Other current assets (945) (31) 9
Accounts payable and other liabilities (25,004) 10,847 30,458
Accrued liabilities 14,314 7,219 3,100
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 27,761 80,031 28,276
INVESTING ACTIVITIES
Acquisition of property and equipment (14,932) (16,069) (8,075)
Securities held-to-maturity:
Acquisition of securities (17,141) (57,135) (2,360)
Proceeds from maturity of securities 21,347 809 1,047
Securities avialable-for-sale:
Acquisition of securities (156,515) (36,054) (11,347)
Proceeds from sales of securities 48,401 247
Proceeds from maturity of securities 32,178 173 1,997
Merchant contracts purchased (12,986) (3,565)
Buyout of minority shareholders (732)
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (99,648) (112,573) (18,491)
FINANCING ACTIVITIES
Proceeds from exercise of stock options 6,659 4,854 4,126
Proceeds from secondary offering of common stock 87,671
Proceeds from notes payable 28,000
Payments on notes payable (418) (392) (368)
-------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 34,241 92,133 3,758
-------- -------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (37,646) 59,591 13,543
Cash and cash equivalents at beginning of period 96,164 36,573 23,030
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $58,518 $96,164 $36,573
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $692 $82 $104
======== ======== ========
Income taxes $16,861 $8,036 $6,472
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
-12-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the
accounts of Concord EFS, Inc. (Parent) and its wholly-owned subsidiaries,
Concord Computing Corporation (Concord), EFS National Bank (EFSNB), EFS Federal
Savings Bank (EFSFSB), Concord Retail Services, Inc., Concord Equipment Sales,
Inc. (formerly VMT, Inc.) and Pay Systems of America, Inc. (PSA) (collectively,
the Company). The Company repurchased the minority interest in Network EFT, Inc.
during 1996 and transferred its residual business and operational assets to
Concord. All material intercompany balances and transactions have been
eliminated in consolidation.
Operations: The Company provides transaction processing, authorization and
settlement services, throughout the United States. The primary components of
these services are Card Services and Trucking Services, comprising 95% of
revenues in 1997. The Company requires certain Trucking Services customers to
provide letters of credit, surety bonds or cash deposits as collateral for
outstanding accounts receivable.
Cash Equivalents: The Company considers all highly liquid investments with a
maturity of three months or less to be cash equivalents.
Securities Held-to-Maturity and Available-for-Sale: Management determines the
appropriate classification of debt securities at the time of purchase and
re-evaluates 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
stated at amortized cost.
Debt and equity securities not classified as held-to-maturity or trading are
classified as available-for-sale. Available-for-sale securities are stated at
fair value, with the unrealized gains and losses, net of tax, reported in a
separate component of stockholders' equity.
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, or in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization is included in interest income
from investments. Interest and dividends are included in interest income from
investments. Realized gains and losses, and declines in value judged to be
other-than-temporary are included in net securities gains (losses). The cost of
securities sold is based on the specific identification method.
Inventories: Inventories are stated at the lower of cost (first-in, first-out
method) or market.
Other Assets: Noncurrent other assets consist primarily of purchased merchant
contracts recorded at cost. Amortization expense is recognized on a straight
line basis over five years. Purchased merchant contracts are evaluated by
management for impairment at each balance sheet date through review of actual
attrition and cash flows generated by the contracts in relation to the expected
attrition and cash flows and the recorded amortization expense. If, upon review,
actual attrition and cash flows indicate impairment of the value of the
-13-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE A - SIGNIFICANT ACCOUNTING POLICIES - continued
purchased merchant contracts, an impairment loss would be recognized. The
amounts shown on the balance sheet as of December 31, 1997 and December 31, 1996
are net of accumulated amortization of approximately $2,100,000 and $200,000,
respectively.
Property and Equipment: Property and equipment are stated at cost. Depreciation
is computed using the straight-line method over the estimated useful lives of
the assets.
Use of Estimates: The preparation of the consolidated 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.
Income Taxes: The Company and its wholly-owned subsidiaries file a consolidated
Federal tax return. Each subsidiary provides for income taxes using the
liability method on a separate-return basis and remits to or receives from the
Company amounts currently payable or receivable.
Revenue Recognition: Revenue from credit card and other transaction processing
activities are recorded when the service is provided, gross of interchange and
network fees charged to the Company, which are recorded as a cost of operations
when the transactions have been settled.
Revenues from service contracts and product sales are recognized when the
service is provided or the equipment is shipped. Service contracts and related
sales include all revenues under system service contracts, including revenues
from sales of terminal hardware when the contract included such sales.
Earnings Per Share: In 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share". Statement 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 share is very
similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented, and where
appropriate, restated to conform to the Statement 128 requirements.
Stock-based Compensation: The Company grants options for a fixed number of
shares to employees with an exercise price equal to the fair value at the date
of the grant. These stock option grants are accounted for in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and accordingly, the
Company recognizes no compensation expense for the stock option grants.
Recent Accounting Pronouncements: In June 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income" which established new rules for the reporting
and display of comprehensive income and its components; however, adoption in
1998 will have no impact on the company's net income or stockholders' equity.
SFAS No. 130 requires unrealized gains or losses on the company's
available-for-sale securities, which currently are reported in stockholders'
equity, to be included in other comprehensive income and the disclosure of total
comprehensive income. The Company does not believe that the adoption of this
statement will have a material effect on its consolidated financial condition or
results of operations.
-14-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE A - SIGNIFICANT ACCOUNTING POLICIES - continued
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information," which established standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic area and major customers. SFAS No. 131 is effective for financial
statements for fiscal years beginning after December 15, 1997, and therefore the
Company will adopt the new requirements retroactively in 1998. Management has
not completed its review of the statement, but does not anticipate that its
adoption will have a significant effect on the Company's annual and interim
reporting.
NOTE B - SECURITIES
The following is a summary of securities available-for-sale and held-to-
maturity (in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Securities Available-for-Sale: --------- ----------- ---------- ---------
December 31, 1997:
U.S. Treasury securities $ 4,003 $ 2 $ $ 4,005
U.S. Government and agency
securities 41,338 (131) 41,207
Mortgage-backed securities 77,638 387 (180) 77,845
Municipal securities 11,194 87 (4) 11,277
-------- ---- ----- --------
Total debt securities 134,173 476 (315) 134,334
Equity securities 5,865 5,865
-------- ---- ----- --------
$140,038 $476 ($315) $140,199
======== ==== ===== ========
December 31, 1996:
U.S. Treasury securities $4,012 $ 2 $0 $4,014
U.S. Government and agency
securities 48,100 38 (616) 47,522
Mortgage-backed securities 8,143 (236) 7,907
Municipal securities 3,241 55 3,296
-------- ---- ----- --------
Total debt securities 63,496 95 (852) 62,739
Equity securities 606 606
-------- ---- ----- --------
$64,102 $95 ($852) $63,345
======== ==== ===== ========
Securities Held-to-Maturity:
December 31, 1997:
U.S. Government and agency
securities $9,256 $60 $ $9,316
Mortgage-backed securities 19,818 187 20,005
Municipal securities 23,434 879 24,313
-------- ------- ----- --------
$52,508 $1,126 $ $53,634
======== ======= ===== ========
December 31, 1996:
U.S. Government and agency
Securities $10,999 $ 19 $ $11,018
Mortgage-backed securities 26,320 34 (247) 26,107
Municipal securities 19,395 430 19,825
-------- ------- ----- --------
$56,714 $483 ($247) $56,950
======== ======= ===== ========
-15-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE B - SECURITIES - Continued
There were no material gains or losses on securities sold during the three years
ended December 31, 1997.
The scheduled maturities of securities held-to-maturity and available-for-sale,
excluding equity securities, at December 31, 1997 was as follows:
Held-to-Maturity Available-for-Sale
------------------ -------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ------- --------- --------
(in thousands)
Due in one year or less $ 2,968 $ 3,009 $ 43,529 $ 43,178
Due in one to five years 29,968 30,739 26,536 26,704
Due in five to ten years 19,572 19,886 25,675 25,758
Due after ten years 38,433 38,694
------- ------- -------- --------
$52,508 $53,634 $134,173 $134,334
======= ======= ======== ========
For purposes of the maturity table, mortgage-backed securities, which are not
due at a single maturity date, have been allocated over maturity groupings based
on the weighted-average contractual maturities of underlying collateral. The
mortgage-backed securities may mature earlier than their weighted-average
contractual maturities because of principal prepayments.
Expected maturities on other securities may differ from contractual maturities
because the issuers of the securities may have the right to prepay obligations
without prepayment penalties.
Securities carried at approximately $52.4 million at December 31, 1997 were
pledged to the Federal Home Loan Bank to secure notes payable to the Federal
Home Loan Bank. Securities carried at approximately $2.5 million at December 31,
1996 were pledged to a major credit card association to secure settlement
liabilities. This pledge was released in 1997.
NOTE C - INVENTORIES
At December 31, inventories (in thousands) consisted of:
1997 1996
------ ------
Point of sale equipment $4,682 $3,989
Repair parts 153 364
------ ------
$4,835 $4,353
====== ======
NOTE D - PROPERTY AND EQUIPMENT
At December 31, property and equipment (in thousands) consisted of:
1997 1996
------- -------
Computer facilities and equipment $83,631 $70,066
Office furniture and equipment 5,064 3,382
Leasehold improvements 607 371
------- -------
$89,302 $73,819
======= =======
-16-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE D - PROPERTY AND EQUIPMENT - Continued
Depreciation expense was $10,275,266, $8,950,374 and $7,796,210 for the years
ended December 31, 1997, 1996 and 1995, respectively. Maintenance and repair
expense was $1,266,772, $1,500,203, and $906,537 for the years ended December
31, 1997, 1996 and 1995, respectively.
NOTE E - LONG-TERM DEBT AND LEASES
At December 31, long-term debt (in thousands) consisted of:
1997 1996
------- ------
Note payable to bank for ATMs $ 561 $979
Notes payable, other 213
Notes payable to the Federal Home Loan Bank 28,000
------- ------
28,774 979
Less current maturities 445 418
------- ------
$28,329 $561
======= ======
The note payable to bank to purchase cash dispensing machines (ATMs) is payable
through March 1, 1999 in monthly installments of $38,969 including interest at
6.25% and is secured by ATMs with a net book value of $981,445 at December 31,
1997 and $1,261,856 at December 31, 1996.
Notes payable to the Federal Home Loan Bank are adjustable rate advances due
between May 20, 2002 and October 15, 2002. Current interest rates range from
5.66% to 6.08% and are secured by securities available-for-sale with a market
value of $52.4 million at December 31, 1997.
The Company rents office facilities under agreements classified as operating
leases which expire in various years through 2000 and generally contain renewal
options. Rental expense for operating leases amounted to $540,385, $483,632, and
$416,510 for the years ended December 31, 1997, 1996, and 1995, respectively.
Future maturities (in thousands) of notes payable and minimum lease payments for
operating leases with initial or remaining terms in excess of one year are as
follows:
Notes Operating
Payable Leases
Year ending December 31: ------- ---------
1998 $ 445 $ 505
1999 329 438
2000 454
2001 476
2002 28,000 478
Thereafter 530
------- ------
Total future payments $28,774 $2,881
======= ======
NOTE F - UNUSED LINES OF CREDIT
At December 31, 1997 the Company had available $10 million in unsecured lines of
credit with other financial institutions. The lines of credit are contractual in
nature, require no compensating balances or fees, expire at various dates
through May 1998 and are subject to renewal at the discretion of the
institutions. No borrowing occurred in 1997 under these lines.
-17-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE G - INCOME TAXES
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 liabilities and assets (in thousands) at December 31,
are as follows:
1997 1996
Deferred tax liabilities: ------ ------
Property and equipment $2,442 $1,996
Securities available-for-sale 62
Other 87 27
------ ------
Total deferred tax liabilities 2,591 2,023
------ ------
Deferred tax assets:
Securities available-for-sale 261
Bad debt allowance 502 311
Inventory 57 9
Merchant contracts purchased 488 51
Other 143
------ ------
Total deferred tax assets 1,190 632
------ ------
Net deferred tax liabilities $1,401 $1,391
====== ======
The components of the provision (benefit) for income taxes (in thousands) for
the three years ended December 31 are as follows:
1997 1996 1995
Current ------- ------- -------
- Federal $23,478 $14,221 $ 9,463
- State 425 92 226
------- ------- -------
23,903 14,313 9,689
------- ------- -------
Deferred
- Federal (320) 187 421
- State 7 26 36
------- ------- -------
(313) 213 457
------- ------- -------
$23,590 $14,526 $10,146
======= ======= =======
The reconciliation of income taxes computed at the U. S. federal statutory tax
rate of 35% to income tax expense for the three years ended December 31 (in
thousands) are as follows:
1997 1996 1995
------- ------- -------
Tax at statutory rate $23,217 $14,460 $ 9,935
State income taxes, net of
federal benefit 281 77 170
Tax exempt interest income (511) (124)
Other, net 603 113 41
------- ------- -------
$23,590 $14,526 $10,146
======= ======= =======
-18-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE G - INCOME TAXES - Continued
Income tax benefits resulting from the disqualifying dispositions of certain
employee incentive stock option shares were credited to additional paid-in
capital because no compensation expense was charged to income for financial
reporting purposes related to the exercise of such options.
NOTE H - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except earnings per share):
1997 1996 1995
------- ------- -------
Numerator:
Net income $42,746 $26,789 $18,315
======= ======= =======
Denominator:
Denominator for basic earnings per share,
weighted-average shares 61,401 57,484 55,344
Effect of dilutive securities
Employee stock options 1,912 2,451 2,515
------- ------- -------
Denominator of diluted earnings per share,
adjusted weighted-average shares and
assumed conversions 63,313 59,935 57,859
======= ======= =======
Basic earnings per share $0.70 $0.47 $0.33
======= ======= =======
Diluted earnings per share $0.68 $0.45 $0.32
======= ======= =======
NOTE I- STOCKHOLDERS' EQUITY
On October 24, 1996, the Company filed a prospectus with the Securities and
Exchange Commission offering 3.45 million shares of common stock (including
underwriters' over-allotment shares of 450,000). The net proceeds to the Company
from the offering was $87.7 million.
Earnings per share, related per share data, stock options and stock option
prices have been restated to reflect stock splits. The following table
summarizes recent stock splits approved by the Board of Directors:
Split Ratio Distribution Date
----------- -----------------
3 for 2 June 28, 1996
3 for 2 January 18, 1996
3 for 2 May 22, 1995
NOTE J- INCENTIVE STOCK OPTION PLAN
The Company has an Incentive Stock Option Plan allowing for the grant of up to
9,112,500 shares of Common Stock for the benefit of the Company's key employees.
Options are granted at not less than 100% of the market value on the date of the
grant (110% in the case of a holder of more than 10% of the outstanding shares)
and generally become exercisable within four years of the date of the grant.
-19-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE J- INCENTIVE STOCK OPTION PLAN - Continued
Information pertaining to the Incentive Stock Option Plan is summarized below,
in thousands, except price per share:
Weighted
Weighted Average
Number of Shares Average Aggregate Options
Under Option Exercise Price Price Exercisable
---------------- -------------- ---------- -----------
Outstanding at
January 1, 1996 4,215 $ 5.52 $23,283 1,935
======= =====
Granted 872 $20.59
Exercised (1,251) $ 3.88
Terminated (334) $ 6.39
-----
Outstanding at
December 31, 1996 3,502 $ 9.77 $34,203 1,587
======= =====
Granted 2,086 $22.83
Exercised (1,076) 6.19
Terminated (27) 16.30
-----
Outstanding at
December 31, 1997 4,485 $16.66 $74,732 1,240
===== ======= =====
The weighted average grant date fair value of options granted during 1997 and
1996 was $7.00 and $5.47, respectively.
The following table provides additional information regarding options
outstanding as of December 31, 1997:
Weighted Weighted
Average Average
Weighted Remaining Exercise
Option Options Average Contractual Number of Price of
Exercise Out- Exercise Life of Options Options
Price Range standing Price Options in Years Exercisable Exercisable
- ------------- -------- -------- ---------------- ----------- -----------
$ 4.10-$ 5.23 932 $ 5.08 6.0 790 $ 5.03
7.19- 12.00 676 9.07 7.3 263 9.06
19.50- 28.75 2,877 22.20 8.9 187 20.37
----- -----
$ 4.10-$28.75 4,485 $16.66 8.1 1,240 $ 8.25
===== =====
-20-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE J - INCENTIVE STOCK OPTION PLAN -continued
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB No. 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB No. 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions for 1997,
1996 and 1995, respectively, risk-free interest rate of 6.25%, 6.5%, and 6.0%,
and volatility factors of the expected market price of the Company's common
stock of .344, .265 and .282. Assumptions that remained constant for all years
were dividend yields of 0% and a weighted average expected life of the options
of three years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. For purposes of pro
forma disclosures, the estimated fair value of the options is amortized to
expense over the options' vesting period. The Company's pro forma information
follows for the years ended December 31 (in thousands, except for earnings per
share):
1997 1996 1995
------- ------- -------
Pro forma net income $39,695 $25,883 $18,033
Pro forma basic earnings per share $0.65 $0.45 $0.33
Pro forma diluted earnings per share $0.63 $0.43 $0.31
Pro forma disclosures are not likely to be representative of the effects of
reported pro forma net income and earnings per share in future years as
additional options may be granted in future years and the vesting of options
already granted will impact the pro forma disclosures.
NOTE K - COMMITMENTS AND CONTINGENCIES
The Company is a party to various claims and litigation in the normal course of
business, none of which is expected to have a material effect on the
consolidated financial statements.
-21-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE L - DEBT AND DIVIDEND RESTRICTIONS
In accordance with federal banking laws, certain restrictions exist regarding
the ability of the banking subsidiary to transfer funds to the Parent in the
form of cash dividends, loans or advances. The approval of certain regulatory
authorities is required to pay dividends in excess of earnings retained in the
current year plus retained net earnings for the preceding two years. As of
December 31, 1997, $86,164,985 of undistributed earnings of EFSNB, included in
consolidated retained earnings, was available for distribution to the Parent as
dividends without prior regulatory approval. Under Federal Reserve regulations,
the banking subsidiary is also limited as to the amount it may loan to
affiliates, including the Parent, unless such loans are collateralized by
specific obligations. At December 31, 1997, the maximum amount available for
transfer from EFSNB to the Parent in the form of loans approximated 5.8% of
consolidated net assets.
NOTE M - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value. These fair values are provided for disclosure purposes only, and do not
impact carrying values of financial statement amounts.
Cash and Cash Equivalents: The carrying amounts reported in the balance sheet
for cash and cash equivalents approximate those assets' fair values.
Securities (Including Mortgage-backed Securities): Fair values for securities
are based on quoted market prices, where available. If quoted market prices are
not available, fair values are based on quoted market prices of comparable
instruments.
Long-term Borrowings: The fair values of the Company's long-term borrowings are
estimated using discounted cash flow analyses based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements.
Carrying Amount Fair Value
--------------- ----------
(in thousands)
December 31, 1997 Financial assets:
Cash and cash equivalents $ 58,518 $ 58,518
Available-for-sale securities 140,199 140,199
Held-to-maturity securities 52,508 53,634
Financial liabilities:
Notes payable to banks 28,774 28,666
December 31, 1996 Financial assets:
Cash and cash equivalents $96,164 $96,164
Available-for-sale securities 63,345 63,345
Held-to-maturity securities 56,714 56,950
Financial liabilities:
Note payable to bank 979 965
-22-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Concord EFS, Inc.
We have audited the accompanying consolidated balance sheets of Concord EFS,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity, 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 Concord EFS, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the consolidated results
of their operations and their 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
Memphis, Tennessee
February 5, 1998
-23-
<PAGE>
CORPORATE DIRECTORY SEC Form 10-K
Chairman Emeritus Copies of the Company's Annual Report
Victor M. Tyler on Form 10-K as filed with The
Board of Directors Securities and Exchange Commission
(and their principal occupation) may be obtained without charge upon
request to:
Dan M. Palmer Investor Relations
Chairman and Chief Executive Officer Concord EFS, Inc.
Concord EFS, Inc. and 2525 Horizon Lake Drive
EFS National Bank Suite 120
Memphis, Tennessee 38133
Douglas C. Altenbern +
Retired Chairman and CEO of Market for Common Stock
Pay Systems of America, Inc. NASDAQ National Market
Ticker Symbol: CEFT
David C. Anderson *
Retired Executive Vice President and Annual Meeting
CFO, Burlington Northern, Inc. May 14, 1998
J. Richard Buchignani, Esq. * Transfer Agent & Registror
Partner, Wyatt, Tarrant & Combs State Street Bank and Trust Company
Boston, Massachusetts
Richard M. Harter, Esq. *
Partner, Bingham Dana LLP Corporate Counsel
Bingham Dana LLP
Joyce Kelso Boston, Massachusetts
Retired Senior Vice President,
Concord EFS, Inc. and EFS National Auditors
Bank Ernst & Young LLP
Memphis, Tennessee
Richard P. Kiphart *
Head of Corporate Finance Department Corporate Office
William Blair & Company LLC 2525 Horizon Lake Drive
Suite 120
Edward A. Labry III Memphis, Tennessee 38133
President, Concord EFS, Inc. 1-800-238-7675
and EFS National Bank
+ Voted Director of Company in
Jerry D. Mooney * February 1998
President and CEO, ServiceMaster
Employer Services, Inc. * Audit Committee Member
Paul L. Whittington *
Retired Partner Ernst & Young LLP
EXECUTIVE MANAGEMENT GROUP
Dan M. Palmer, Chairman and CEO, Edward A. Labry III, President,
Concord EFS, Inc. and Concord EFS, Inc., EFS National Bank
EFS National Bank and Concord Computing Corporation
Thomas J. Dowling, Vice President Vickie Brown, Senior Vice President
and Controller, Concord EFS, Inc. and Chief Operating Officer, Concord
and EFS National Bank EFS, Inc. and EFS National Bank
William E. Lucado, Senior Vice President,
Investment and Compliance Officer,
Concord EFS, Inc. and EFS National Bank, and
President, EFS Federal Savings Bank
-24-
CONCORD EFS, INC.
NOTICE OF ANNUAL MEETING
OF STOCKHOLDERS
To Be Held on May 14, 1998
To the Stockholders of
Concord EFS, Inc.
Notice is hereby given that the Annual Meeting of Stockholders of Concord
EFS, Inc. ("Concord" or the "Company") will be held at Colonial Country Club,
2736 Countrywood Parkway, Memphis Tennessee on May 14, 1998 beginning at 9:30
a.m. local time, for the following purposes:
1. To elect directors to serve for the ensuing year;
2. To approve the Amendment to the Certificate of Incorporation to increase
the Number of Authorized Shares of Common Stock;
3. To transact such other business as may properly come before the annual
meeting and any adjournments thereof.
The Board of Directors has fixed the close of business on March 9, 1998 as
the record date for determination of the stockholders entitled to notice of and
to vote at the Annual Meeting. The By-Laws of the Company require that the
holders of a majority of all stock issued, outstanding and entitled to vote be
present in person or represented by proxy at the meeting in order to constitute
a quorum.
By Order of the Board of Directors
Richard M. Harter
Secretary
April 10, 1998
WHETHER OR NOT YOU PLAN TO ATTEND THIS MEETING,
PLEASE SIGN AND RETURN THE ENCLOSED PROXY.
No postage is required if mailed in the United States.
<PAGE>
CONCORD EFS, INC.
PROXY STATEMENT
April 10, 1998
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of Concord EFS, Inc. ("Concord" or the "Company") of
proxies for use at the Annual Meeting of Stockholders to be held on May 14, 1998
and any adjournments thereof. Shares as to which proxies have been executed will
be voted as specified in the proxies. A proxy may be revoked at any time by
notice in writing received by the Secretary of the Company before it is voted. A
majority in interest of the outstanding shares represented at the meeting in
person or by proxy shall constitute a quorum for the transaction of business.
Votes withheld from any nominee, abstentions and broker "non-votes" are counted
as present or represented for purposes of determining the presence of absence of
a quorum for the meeting. A "non-vote" occurs when a nominee holding shares for
a beneficial owner votes on one proposal, but does not vote on another proposal
because the nominee does not have discretionary voting power and has not
received instructions from the beneficial owner. Abstentions are included in the
number of shares present or represented and voting on each matter. Broker
"non-votes" are not so included.
BENEFICIAL OWNERSHIP OF COMMON STOCK
The Company's only issued and outstanding class of voting securities is its
Common Stock, par value $.33 1/3 per share. Each stockholder of record on March
9, 1998 is entitled to one vote for each share registered in such stockholder's
name. As of that date, the Company's Common Stock was held by approximately
13,650 stockholders.
The following table sets forth, as of March 9, 1998, the ownership of the
Company's Common Stock by each person who is known by the Company to own
beneficially more than 5% of the Company's outstanding Common Stock, by each
director who owns shares and by all directors and officers of the Company as a
group.
Percent of
Shares Outstanding
Beneficial Owner (1) Owned Shares (2)
- ---------------------------------- ---------- -----------
Dan M. Palmer (3), Chairman 859,454 1.4%
Edward A. Labry III (4), Director 565,960 0.9%
Joyce Kelso, Director 217,099 0.4%
Richard P. Kiphart, Director 2,477,080 4.0%
Richard M. Harter (5), Director 56,844 0.1%
Jerry D. Mooney (5), Director 24,944 0.0%
Douglas C. Altenbern(6), Director 8,000 0.0%
David C. Anderson (5), Director 11,506 0.0%
J. Richard Buchignani (5), Director 9,648 0.0%
Paul Whittington (5), Director 9,819 0.0%
All officers, directors and nominees
as a group (10 persons) (7) 4,239,354 6.7%
<PAGE>
William Blair & Company, LLC
222 West Adams Street
Chicago, IL 60606 (8) 8,715,161 14.1%
Pilgrim Baxter & Associates, Ltd.
1255 Drummers Lane, Suite 300
Wayne, Pennsylvania 19087 (9) 4,324,434 7.0%
AMVESCAPP PLC and Subsidiaries
11 Devonshire Square
London EC2M 4YR England (10) 4,438,637 7.2%
The Capital Group Companies Inc. and
Capital Research and Management Company
333 South Hope Street
Los Angeles, CA. 90071 (11) 4,449,900 7.2%
(1) The address of each beneficial owner that is also a director, is the same as
the Company's.
(2) Percentage ownership is based on 61,997,502 shares issued and outstanding,
plus the number of shares subject to options exercisable within 60 days from the
record date by the person or the aggregation of persons for which such
percentage ownership is being determined.
(3) Shares owned are unexercised stock options.
(4) Shares owned include 563,908 shares covered by unexercised stock options.
(5) Shares owned include 6,444 shares covered by unexercised stock options.
(6) Shares owned include 50 June 25, 1998 option contracts.
(7) Shares owned include 1,455,582 shares covered by unexercised stock options.
(8) Based on a Schedule 13G dated as of February 14, 1998, filed by William
Blair & Company, LLP (Blair). Includes 1,328,658 shares as to which Blair has
sole voting power and 8,715,161 shares as to which Blair has sole dispositive
power. Blair disclaims beneficial ownership as to 7,386,503 of such shares.
(9) Based on a Schedule 13G dated as of January 20, 1998, filed by Pilgrim
Baxter & Associates.
(10) Based on a Schedule 13G dated as of February 9, 1998, filed by AMVESCAP PLC
and Subsidiaries.
(11) Based on a Schedule 13G dated as of February 10, 1998, filed by The Capital
Group Companies, Inc. and Capital Research and Management Company (Capital).
Capital, acting as investment advisers, disclaims beneficial ownership of these
shares pursuant to Rule 13d-4.
ELECTION OF DIRECTORS
Ten directors are to be elected to hold office until the next annual
meeting of stockholders and until their successors are elected and qualified.
Unless a proxy is executed to withhold authority for the election of any or all
of the directors, then the persons named in the proxy will vote the shares
represented by the proxy for the election of the following ten nominees. If the
proxy indicates that the stockholder wishes to withhold a vote from one or more
nominees for director, such instruction will be followed by the persons named in
the proxy. All ten of the nominees are now members of the Board of Directors.
The Board of Directors has no reason to believe that any of the nominees will be
<PAGE>
unable to serve. In the event that any nominee should not be available, the
persons named in the proxies will vote for the others and may vote for a
substitute for such nominee. An affirmative vote of a majority of the Company's
Common Stock represented in person or by proxy at the meeting is necessary for
the election of the individuals named below.
Recommended Vote
The Board of Directors recommends that you vote "FOR" the election of these
ten individuals as directors.
The following table lists the name of each proposed nominee; his/her age;
his/her business experience during at least the past five years, including
principal offices with the Company or a subsidiary of the Company; and the year
since which he/she has served as a director of the Company. There are no family
relationships among the nominees.
Office With the Company, Business
Nominees and Ages Experience and Year First Elected Director
- -------------------------- ----------------------------------------------------
Dan M. Palmer (55) Mr. Palmer became Chairman of the Board in February
1991. Mr. Palmer has been Chief Executive Officer
of the Company since August 1989, and a Director of
the Company since May 1987. Mr. Palmer has been
the Chief Executive Officer of EFS National Bank
(formerly EFS, Inc.) since its inception in 1982.
He joined Union Planters National Bank in June 1982
and founded the EFS operations within the bank. He
continued as President and Chief Executive Officer
of EFS when it was acquired by Concord in March
1985.
Joyce Kelso (56) Mrs. Kelso has been a Director since May 1991. She
was Vice President in charge of Customer Service
when EFS began operations. In August 1990, she was
elected Senior Vice President of the Company.
January 1, 1995, Mrs. Kelso semi-retired and on
January 1, 1997, she became fully retired.
Edward A. Labry III (35) Mr. Labry joined EFS in 1984. He was made Director
of Marketing in March 1987 and Vice President of
Sales in February 1988. In August 1990, he was
elected to Chief Marketing Officer of the Company.
In February 1991, he was elected Senior Vice
President of the Company. He became President of the
Company in October 1994, and President of EFS
National Bank in December 1994.
Richard M. Harter (61)* Mr. Harter has been the Company's Secretary and a
Director since the Company's formation. He is a
partner of Bingham Dana LLP, legal counsel to the
Company.
Jerry D. Mooney (45)* + Mr. Mooney has been a Director of the Company since
August 1992. Since August 1997, he has been
President and CEO of ServiceMaster Employer
Services, Inc. Prior to then he was President of
Healthcare New Business Initiatives and formerly
served as Chairman, President and CEO of Service-
Master Diversified Health Services, Inc. (formerly
VHA Long Term Care) since 1981.
<PAGE>
David C. Anderson (55)* + Mr. Anderson has been a Director of the Company
since August 1992. Mr. Anderson was Senior Vice
President and Chief Financial Officer with Federal
Express in Memphis, Tennessee for seven years
and Executive Vice President and Chief Financial
Officer at Burlington Northern, Fort Worth, Texas
for three years prior to his retirement in 1995.
J. Richard Buchignani (49)* Mr. Buchignani has been a Director of the Company
since August 1992. He is a partner in the Memphis,
Tennessee office of the law firm of Wyatt, Tarrant
& Combs, who also serves as local counsel to the
Company. Mr. Buchignani has been affiliated with
the law firm since 1995 when most of the members of
his firm of 18 years joined Wyatt, Tarrant & Combs.
Paul L. Whittington (62)* + Mr. Whittington has been a Director of the Company
since May 1993. Mr. Whittington had been the
Managing Partner of the Memphis, Tennessee and
Jackson, Mississippi offices of Ernst & Young from
1988 until his retirement in 1991. Since 1979, he
had been the partner in charge of consulting at
various Ernst & Young offices.
Richard P. Kiphart (55)* Mr. Kiphart was voted a Director of the Company in
November 1996 and assumed responsibilities in March
1997. In 1972 he became a General Partner of William
Blair & Company, LLC. He served as head of Equity
Trading from 1972 to 1980. He joined the Corporate
Finance Department in 1980, and was made head of
that department in January 1995.
Douglas C. Altenbern (61) Mr. Altenbern was voted a Director of the Company in
February 1998. Mr. Altenbern served as Vice Chairman
of First Financial Management Corporation until
1989, at which time he resigned to found Argosy
Network Corporation, of which he served as Chairman
and CEO. In 1992 he sold his interest in Argosy and
in 1993 founded Pay Systems of America, of which he
served as Chairman and CEO through December 1996.
He currently is a private investor and serves as a
Director on the Boards of The Bradford Funds, Inc.,
OPTS, Inc., Interlogics, Inc., CSM, Inc., and
Equitas.
* Member of the Board's Audit Committee.
+ Member of the Board's Compensation Committee.
Compensation of Directors
The Company currently pays an annual fee of $8,000 plus $2,000 for each
meeting attended to each non-employee Director of the Company. There are
normally four meetings per year. In addition, non-employee directors are granted
options to purchase 3,000 shares of the Company's common stock at closing market
value on the date of the annual meeting of stockholders. Directors are
reimbursed for expenses incurred in attending meetings of the Board of
Directors. Two of the ten nominees are employees of the Company and are not
separately compensated for serving as directors.
Executive Compensation
The following summary compensation table is intended to provide a
comprehensive overview of the Company's executive pay practices. It includes the
cash compensation paid or accrued by the Company and its subsidiaries for
services in all capacities during the fiscal year ended December 31, 1997, to or
on behalf of each of the Company's named executives. Named executives include
the Chief Executive Officer and the President of the Company.
<PAGE>
Summary Compensation Table
Annual Compensation Long-Term Compensation
Name and Salary Bonus
Principal Position Year ($) ($) Options Awarded*
- ------------------------ ---- -------- ------- ----------------------
Dan M. Palmer 1997 427,392 262,000 800,000
Chairman of the Board 1996 425,000 125,000 237,500
Chief Executive Officer 1995 363,738 80,000 202,500
of the Company and
EFS National Bank
Edward A. Labry III 1997 417,777 262,000 800,000
President of the Company 1996 392,308 125,000 237,500
and EFS National Bank 1995 279,315 100,000 168,750
* Options awarded have been restated to reflect all stock splits.
Stock Options
The following tables present the following types of information for options
granted to the Company's named executives under the Company's 1993 Incentive
Stock Option Plan. Table I - options granted and the potential realizable value
of such options, and Table II - options exercised in the latest fiscal year and
the number of unexercised options held.
<TABLE>
Table I
Options Granted in 1997
<CAPTION>
Individual Grants
----------------------------------------- Potential Realizable
% 0f Total Value at Assumed
Options Annual Rates of Stock
Granted to Exercise Price Appreciation
Options Employees in price Expiration for Option Term
Name Granted 1997 ($/Share) Date 5% ($) 10% ($)
- ------------------- ------- ------------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Dan M. Palmer 800,000 41% $22.88 3/6/2007 11,508,772 29,165,487
Edward A. Labry III 800,000 41% $22.88 3/6/2007 11,508,772 29,165,487
</TABLE>
Table II
Options Exercised in 1997 and 1997 Year End Option Values
Value of
Number of Unexercised
Shares Acquired Value ($) Unexercised In-the-money
Name on Exercise (#) Realized(1) Options(#) Options($)(2)
- ------------------- --------------- ----------- ----------- -------------
Dan M. Palmer 200,000 4,743,443 859,454(E) 11,619,100(E)
788,672(U) 3,387,813(U)
Edward A. Labry III 200,000 4,950,644 563,908(E) 5,758,056(E)
773,906(U) 3,128,409(U)
(1) Values are calculated by subtracting the exercise price from the fair
market value of the stock as of the exercise date.
(2) Values are calculated by subtracting the exercise price from the fair
market value of the stock on December 31, 1997.
(E) = Exercisable at December 31, 1997
(U) = Unexercisable at December 31, 1997
<PAGE>
Committees; Attendance
The Board of Directors held four meetings during the fiscal year ended
December 31, 1997. Each of the directors attended at least 75% of the total
number of meetings of the Board.
The Audit Committee, consisting of Messrs. Anderson, Buchignani, Harter,
Mooney, Whittington and Kiphart met twice during the fiscal year ended December
31, 1997. The Audit Committee reviewed the results of the audit conducted by
outside auditors and management's response to the management letter prepared by
outside auditors.
The Board of Directors has no Nominating Committee.
Compensation Committee Report on Executive Compensation
The Board of Directors has a Compensation Committee consisting of Messrs.
Anderson, Mooney and Whittington who are not employees of the Company or any of
its affiliates and have never been employees of the Company or any of its
affiliates. It is the policy of the Compensation Committee to establish base
salaries, award bonuses and grant stock options to such executives and in such
amounts as will assure the continued availability to the Company of the services
of the executives and will recognize the contributions made by the executives to
the success of the Company's business and the growth over time in the market
capitalization of the Company. To achieve these goals, the Committee establishes
base salaries at levels it believes to be below the mid-point for comparable
executives in companies of comparable size and scope. The Committee then awards
cash bonuses reflecting individual performance during the year for which the
awards are made. For executives other than the Chief Executive Officer, the
Committee receives bonus award recommendations from the Chief Executive Officer.
The Committee grants stock options to senior and middle management executives of
the Company and its affiliates at levels which it believes to be slightly higher
than average for comparable companies in order to give the executives
significant incentive to improve the business of the Company and its market
capitalization. Section 162(m) of the Internal Revenue Code limits the tax
deduction to $1 million for compensation paid to certain executives of public
companies. The Committee has considered these new requirements and believes that
the Company's 1993 Incentive Stock Option Plan meets the requirement that it be
"performance based" and, therefore, exempt from the limitations on
deductibility. Historically, the combined salaries and bonuses of the Company's
executive officers have been well under the $1 million limit. The Committee's
present intention is to comply with Section 162(m) unless the Committee feels
that required changes would not be in the best interest of the Company or its
stockholders.
The Chief Executive Officer's base salary, cash bonus and option grants are
established by the Committee based upon its members' own experience in their
companies and in other companies which they serve as directors or advisors. In
addition, the committee received advice from a compensation consulting firm in
setting compensation levels for executive officers.
David C. Anderson
Jerry D. Mooney
Paul L. Whittington
<PAGE>
Five Year Cummulative Stockholder Return
Below is a performance table which compares the Company's cumulative total
stockholder return during the previous five years with NASDAQ stock market, and
NASDAQ financial stocks (the Company's peer group).
NASDAQ NASDAQ
Date Concord EFS, Inc. Stock Market Financial Stocks
- -------- ----------------- ------------ ----------------
12/31/92 100.00 100.00 100.00
12/31/93 75.00 114.80 116.23
12/31/94 127.12 112.21 116.50
12/31/95 322.25 158.70 169.67
12/31/96 484.80 195.19 217.50
12/31/97 426.88 239.53 333.81
<PAGE>
AMEND CERTIFICATE OF INCORPORATION TO INCREASE THE
NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
The Company's authorized capital stock consists of 100,000,000 shares of
Common Stock, $.33 1/3 par value. The Board of Directors finds advisable that
the Company's Certificate of Incorporation be amended to increase the number of
authorized shares of Common Stock to 200,000,000 shares, $.33 1/3 par value.
The holders of Common Stock are not entitled to preemptive rights to
purchase Common Stock of the Company.
The authorized shares of Common Stock can be issued without stockholder
approval upon such terms and in consideration of such amounts as the Board of
Directors determines is in the best interest of the Company. The Board presently
has no plans to issue any of the authorized shares of Common Stock.
Recommended Vote
An affirmative vote of a majority of the Company's outstanding Common Stock
is necessary to adopt the amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of Common Stock to
200,000,000 shares. The Board of Directors recommends that you vote "FOR" the
proposal.
OTHER MATTERS
The Board of Directors knows of no matters which are likely to be presented
for action at the Annual Meeting other than the proposals specifically set forth
in the Notice and referred to herein. If any other matter properly comes before
the Annual Meeting for action, it is intended that the persons named in the
accompanying proxy and acting thereunder will vote or refrain from voting in
accordance with their best judgment pursuant to the discretionary authority
conferred by the proxy.
CERTAIN TRANSACTIONS
Bingham Dana LLP serves as legal counsel to the Company. Richard M. Harter,
Secretary and Director of the Company, is a partner of that firm. Wyatt, Tarrant
and Combs also serves as legal counsel to the Company. J. Richard Buchignani,
Director of the Company, is a partner of that firm.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under Section 16(a) of the Securities Exchange Act of 1934, as amended, the
Company's directors and certain of its officers and persons holding more than
ten percent of the Company's common stock are required to report their ownership
of the common stock and any changes in such ownership to the Securities and
Exchange Commission and the Company. The Company believes that Jerry D. Mooney,
one of the directors, filed one Form 4 later than the date required.
INFORMATION CONCERNING AUDITORS
Representatives of Ernst & Young LLP are expected to be at the Annual
Meeting and will have an opportunity to make a statement if they desire to do
so. Such representatives are also expected to be available to respond to
appropriate questions.
STOCKHOLDERS PROPOSALS
Stockholder proposals to be submitted for vote at the 1999 Annual Meeting
must be delivered to the Company on or before December 9, 1998.
<PAGE>
EXPENSES OF SOLICITATION
Solicitations of proxies by mail is expected to commence on April 10, 1998,
and the cost thereof will be borne by the Company. Copies of solicitation
materials will also be furnished to brokerage firms, fiduciaries and custodians
to forward to their principals, and the Company will reimburse them for their
reasonable expenses.
By Order of the Board of Directors
Richard M. Harter
Secretarty
ANNUAL REPORT ON FORM 10-K
The Company will deliver without charge to each of its stockholders, upon
their written request, a copy of the Company's most recent annual report on Form
10-K and any information contained in any subsequent reports filed with The
Securities and Exchange Commission. Request for such information should be
directed to Investor Relations, Concord EFS, Inc., 2525 Horizon Lake Drive,
Suite 120, Memphis, Tennessee 38133.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 58518
<SECURITIES> 192707
<RECEIVABLES> 54403
<ALLOWANCES> 1433
<INVENTORY> 4835
<CURRENT-ASSETS> 261601
<PP&E> 89302
<DEPRECIATION> 57216
<TOTAL-ASSETS> 360673
<CURRENT-LIABILITIES> 58684
<BONDS> 0
0
0
<COMMON> 20660
<OTHER-SE> 250409
<TOTAL-LIABILITY-AND-EQUITY> 360673
<SALES> 240004
<TOTAL-REVENUES> 240004
<CGS> 176008
<TOTAL-COSTS> 184414
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1445
<INTEREST-EXPENSE> 843
<INCOME-PRETAX> 66336
<INCOME-TAX> 23590
<INCOME-CONTINUING> 42746
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 42746
<EPS-PRIMARY> 0.70
<EPS-DILUTED> 0.68
</TABLE>
