<PAGE>
As filed with the Securities and Exchange Commission on May 18, 1999
Registration No. 333-77829
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
Amendment No. 1
to
FORM S-3
REGISTRATION STATEMENT
Under
The Securities Act of 1933
--------------
Concord EFS, Inc.
(Exact name of the Registrant as specified in its charter)
Delaware 04-2462252
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2525 Horizon Lake Drive
Suite 120
Memphis, TN 38133
(901) 371-8000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
Dan M. Palmer
Chairman of the Board of Directors and Chief Executive Officer
2525 Horizon Lake Drive
Suite 120
Memphis, TN 38133
(901) 371-8000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
copies to:
Imad I. Qasim, Esq. John D. Brinitzer, Esq.
Sidley & Austin Cleary, Gottlieb, Steen & Hamilton
One First National Plaza One Liberty Plaza
Chicago, Illinois 60603 New York, New York 10006
--------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
--------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Securities and Exchange
Commission, acting pursuant to Section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two separate prospectuses. The first
prospectus relates to the offering of the shares in the United States and
Canada by a syndicate of U.S. underwriters (the "U.S. Tranche") and the second
prospectus relates to the offering of the shares outside the United States and
Canada by a syndicate of international underwriters (the "International
Tranche"). The prospectus for the International Tranche will be identical to
the prospectus for the U.S. Tranche except for the alternate front and back
cover pages which appear in this Registration Statement immediately following
the complete prospectus for the U.S. Tranche.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 18, 1999
PROSPECTUS
30,963,125 Shares
[Concord Logo]
Concord EFS, Inc.
Common Stock
--------
Concord EFS, Inc. is selling 2,000,000 shares of its common stock and the
selling stockholders named in this prospectus are selling 28,963,125 shares of
common stock for a total of 30,963,125 shares of common stock. Concord will not
receive any proceeds from the sale of the shares by the selling stockholders.
The underwriters named in this prospectus may purchase up to 4,640,000
additional shares of common stock from Concord under certain circumstances.
Of the 30,963,125 shares of common stock that Concord and the selling
stockholders are selling, 24,770,500 shares are being offered in the United
States and Canada by a syndicate of U.S. underwriters and 6,192,625 shares are
being offered concurrently outside the United States and Canada by a syndicate
of international underwriters.
The common stock is quoted on the Nasdaq National Market under the symbol
"CEFT." The last reported sale price of the common stock on the Nasdaq National
Market on May 14, 1999, was $28.625 per share.
--------
Investing in the common stock involves risks. See "Risk Factors" beginning on
page 6.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
--------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public Offering Price........................................... $ $
Underwriting Discount........................................... $ $
Proceeds to Concord (before expenses)........................... $ $
Proceeds to the Selling Stockholders (before expenses).......... $ $
</TABLE>
The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about ,
1999.
--------
<TABLE>
<S> <C> <C>
Salomon Smith Barney William Blair & Company Goldman, Sachs & Co.
Joint Book-Running Manager Joint Book-Running Manager Joint Lead Manager
</TABLE>
J.P. Morgan & Co. Morgan Keegan & Company, Inc.
, 1999
<PAGE>
[Concord logo/diagrams illustrating front-end processing and back-end
settlement operations]
<PAGE>
You should rely only on the information contained in or incorporated by
reference in this prospectus. We have not authorized anyone to provide you with
different information. We are not making an offer of any of these securities in
any state where the offer is not permitted. You should not assume that the
information contained or incorporated by reference in this prospectus is
accurate as of any date other than the date on the front of this prospectus.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 11
Price Range of Common Stock............................................... 12
Dividend Policy........................................................... 12
Capitalization............................................................ 13
Selected Consolidated Financial Data...................................... 14
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 16
Business.................................................................. 24
Management................................................................ 29
Principal and Selling Stockholders........................................ 31
United States Federal Tax Consequences to Non-United States Holders....... 33
Underwriting.............................................................. 35
Legal Matters............................................................. 38
Experts................................................................... 38
Where You Can Find More Information....................................... 39
Index to Consolidated Financial Statements................................ F-1
</TABLE>
i
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary with the more detailed information
about us, including the information set forth under the heading "Risk Factors,"
and our financial statements, with their accompanying notes, that are included
in this prospectus and in the documents incorporated by reference in this
prospectus. Unless otherwise indicated, the information contained in this
prospectus assumes that the underwriters do not exercise their over-allotment
option.
Concord EFS, Inc.
Concord EFS, Inc. is a fully integrated leading provider of electronic
transaction authorization, processing, settlement and funds transfer services
on a nationwide basis. We focus on marketing our services to supermarket chains
and multiple lane retailers, financial institutions, petroleum and convenience
stores, grocery stores, the trucking industry and other retailers. Our primary
activity is merchant card services, in which we provide integrated electronic
transaction services for credit card, debit card and electronic benefits
transfer (EBT) card transactions. These transaction services include data
capture, authorization and settlement services for over 400,000 point-of-sale
terminals. We also provide automated teller machine (ATM) services, consisting
of owning and operating the MAC(R)-branded electronic funds transfer (EFT)
network and processing for approximately 35,000 ATMs nationwide, of which we
own approximately 800.
We have a bank subsidiary, EFS National Bank, which provides us with a
number of competitive advantages.
. We are a member of the credit and debit card associations and therefore
do not have to pay another financial institution to sponsor us.
. We settle our transactions directly and thus do not have to pay a third-
party vendor.
. We perform services such as automated clearing house (ACH) and wire
transfer internally and therefore do not have to pay another financial
institution for such services.
In 1998 we processed approximately 3.2 billion transactions, our revenue was
$634.5 million and our operating income was $136.8 million. Between 1994 and
1998, our revenue and operating income grew at compound annual rates of 25.2%
and 35.0%, respectively. Over this same period, our operating profit margin
expanded from 15.9% to 21.6%.
Investment Highlights
We believe that the following factors are important in order to understand
the growth potential of our business:
Company Factors
. We are focused on select markets which are switching rapidly to
electronic transaction processing. We believe, therefore, that our
transaction volume will grow more rapidly than the overall market.
. We are a fully integrated company providing end-to-end payment services.
We believe this gives us a competitive advantage because it allows our
customers to acquire from us a full set of payment services required to
process transactions and allows us to price our services competitively.
. On February 26, 1999 we acquired Electronic Payment Services, Inc.,
which provides credit and debit card data capture and authorization
services, owns and operates the MAC(R)-branded EFT network and processes
ATM transactions on behalf of financial institutions and non-financial
organizations. We believe this acquisition will benefit our business in
a variety of ways, including, among other things, allowing us to offer
settlement services to Electronic Payment Services' customers currently
provided by others.
1
<PAGE>
Industry Factors
Key industry trends include:
. According to The Nilson Report, an independent industry newsletter,
consumer usage of the five major credit cards (VISA, MasterCard,
American Express, Discover and Diners Club) increased to $1,156 billion
in 1998 from $498 billion in 1993, a compound annual growth rate of
18.4%.
. According to The Nilson Report, ATM transaction volume grew at a
compound annual rate of 10.4% between 1995 and 1997 to a total of 10
billion transactions.
. According to The Nilson Report, EBT transaction volume increased from
$580 million in 1994 to $4.1 billion in 1997, representing a compound
annual growth rate of 91.9%.
Operating Strategy
Our operating strategy is to:
. focus on specific markets which are switching rapidly to electronic
payment cards
. provide a fully integrated range of services
. cross-sell services to existing clients
. maintain a high rate of recurring revenue through customer retention
. access new customers
. maintain a low-cost operating structure
. provide and support a wide range of technology solutions
. seek selective acquisitions
2
<PAGE>
The Offering
The following information regarding shares outstanding after the offering is
based on the number of shares outstanding as of May 14, 1999. It does not
include a total of 25,000,000 shares reserved for issuance under the Concord
EFS, Inc. 1993 Incentive Stock Option Plan, as amended, and the Electronic
Payment Services, Inc. 1995 Stock Option Plan, as amended. Under such plans,
options for the purchase of 14,842,613 shares were outstanding as of May 14,
1999, of which options for the purchase of 7,117,688 shares were exercisable at
that date. Throughout this prospectus, unless we have stated otherwise, we have
assumed that the underwriters' over-allotment option for an additional
4,640,000 shares of common stock has not been exercised.
<TABLE>
<C> <C> <S> <C>
Common stock offered:
U.S. offering.............. 24,770,500 shares
International offering..... 6,192,625 shares
-----------
Total.................. 30,963,125 shares
-----------
Common stock offered:
Concord.................... 2,000,000 shares
Selling stockholders....... 28,963,125 shares
-----------
Total.................. 30,963,125 shares
-----------
Common stock to be outstanding
after the offering........... 130,446,732 shares
How we will use our proceeds We intend to use the
proceeds that we will
receive from this
offering for general
corporate purposes,
including for working
capital, to augment our
equity capital in
accordance with the
guidelines of the
credit card
associations as our
processing transaction
volume increases and
potentially for debt
repayment. We will not
receive any of the
proceeds from the sale
of common stock by the
selling stockholders.
Nasdaq National Market symbol "CEFT"
</TABLE>
------------
Our principal executive offices are located at 2525 Horizon Lake Drive,
Suite 120, Memphis, Tennessee 38133 and our telephone number is (901) 371-8000.
------------
3
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The summary consolidated financial data presented below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and notes
to those financial statements included and incorporated by reference elsewhere
in this prospectus. The summary consolidated financial data as of December 31,
1997 and 1998 and for the years ended December 31, 1996, 1997 and 1998 have
been derived from our consolidated financial statements audited by Ernst &
Young LLP which are included in this prospectus. The summary consolidated
financial data as of December 31, 1994, 1995 and 1996 and for the years ended
December 31, 1994 and 1995 have been derived from financial statements audited
by Ernst & Young LLP which are not included in this prospectus. The summary
consolidated financial data as of March 31, 1999 and for the three months ended
March 31, 1998 and 1999 have been derived from our unaudited condensed
consolidated financial statements which are included in this prospectus. The
summary consolidated financial data has been restated for all periods presented
to reflect the business combination of Concord and Electronic Payment Services
on February 26, 1999, which was accounted for as a pooling of interests. The
summary consolidated financial data for 1998 and 1997 has also been restated to
reflect our acquisition in 1998 of Digital Merchant Systems of Illinois, Inc.
and American Bankcard International, Inc. which was accounted for as a pooling
of interests; prior periods were not restated because the results of the
acquired companies for those periods were immaterial. Net income per share has
been restated for all periods presented to reflect all stock splits through
December 31, 1998, as well as to conform to the requirements of Financial
Accounting Standards Board Statement No. 128, "Earnings Per Share." The
unaudited financial information includes all adjustments consisting of normal
recurring accruals that we consider necessary for a fair presentation of our
consolidated financial position and consolidated results of operations for the
periods reflected. The column "As Adjusted for the Offering" reflects the sale
of 2,000,000 shares by Concord at an assumed public offering price of $28.625,
after deducting underwriting discounts and commissions and estimated offering
expenses.
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
------------------------------------------------ -----------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
(in thousands) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Revenue................. $258,125 $295,552 $355,459 $490,030 $634,511 $134,666 $170,234
Cost of operations...... 184,958 197,394 241,273 340,770 446,515 95,029 120,849
Selling, general and
administrative
expenses............... 32,036 47,907 42,811 50,008 51,185 13,100 12,368
Acquisition expenses and
restructuring charges.. -- -- -- -- -- -- 34,810
-------- -------- -------- -------- -------- -------- --------
Operating income........ 41,131 50,251 71,375 99,252 136,811 26,537 2,207
Interest income
(expense), net......... (16,983) (13,766) (10,296) (1,789) 3,703 749 1,732
-------- -------- -------- -------- -------- -------- --------
Income before taxes..... 24,148 36,485 61,079 97,463 140,514 27,286 3,939
Income taxes............ 9,680 15,627 23,347 37,771 51,819 9,937 6,807
-------- -------- -------- -------- -------- -------- --------
Net income.............. $ 14,468 $ 20,858 $ 37,732 $ 59,692 $ 88,695 $ 17,349 $ (2,868)
======== ======== ======== ======== ======== ======== ========
Basic earnings per
share.................. $ 0.13 $ 0.18 $ 0.32 $ 0.47 $ 0.69 $ 0.14 $ (0.02)
Diluted earnings per
share.................. $ 0.13 $ 0.18 $ 0.31 $ 0.46 $ 0.67 $ 0.13 $ (0.02)
======== ======== ======== ======== ======== ======== ========
Weighted average shares. 111,542 113,081 116,291 126,592 127,693 127,486 128,014
Adjusted weighted
average shares and
assumed conversions.... 113,912 116,854 120,189 129,937 131,947 130,849 133,083
======== ======== ======== ======== ======== ======== ========
Other Data:
Number of transactions
processed (in
millions).............. 1,427 1,694 2,065 2,549 3,203 NA NA
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
As of March 31, 1999
--------------------
As Adjusted
for the
Actual Offering
-------- -----------
(in thousands,
unaudited)
<S> <C> <C>
Balance Sheet Data:
Working capital............................................ $290,255 $344,115
Total assets............................................... 819,637 873,497
Long-term debt, less current maturities.................... 173,750 173,750
Total stockholders' equity................................. 363,049 416,909
</TABLE>
5
<PAGE>
RISK FACTORS
Before you invest in our common stock, you should be aware that there are
various risks, including those described below, that could have a material
adverse effect on our business, including our operating results and financial
condition. The risk factors listed in this section, as well as any cautionary
language in this prospectus, provide examples of risks, uncertainties and
events that may cause our actual results to differ materially from the
expectations we describe in our forward-looking statements. You should
carefully consider these risk factors, together with all of the other
information included in this prospectus, before you decide whether to purchase
shares of our common stock.
If we lose key personnel or are unable to attract additional qualified
personnel as we grow, our business could be adversely affected
We are dependent upon the ability and experience of our Chief Executive
Officer, our President, the President of Electronic Payment Services and a
number of other key management personnel who have substantial experience with
our operations, the rapidly changing electronic payment processing industry and
the selected markets in which we offer our services. It is possible that the
loss of the services of one or a combination of our senior executives or key
managers would have an adverse effect on our operations. Our success also
depends on our ability to continue to attract, manage and retain other
qualified middle management and technical and clerical personnel as we grow. We
cannot assure you that we will continue to attract or retain such personnel.
See "Business--Employees."
If we are unsuccessful in fully integrating the operations of Electronic
Payment Services, our financial condition and operating results could be
adversely affected
We cannot assure you that we will be able to integrate the operations of
Electronic Payment Services without encountering difficulties or experiencing
the loss of key Electronic Payment Services employees or customers, or that the
benefits expected from such integration will be realized. If we are
unsuccessful in fully integrating the operations of Electronic Payment
Services, our financial condition and operating results could be adversely
affected. See "Business--Acquisition of Electronic Payment Services."
Changes in card association rules could adversely affect our business
EFS National Bank is a member of the VISA and MasterCard organizations and
is a registered processor of Discover, American Express and Diners Club
transactions. The rules of the credit card associations are set by member banks
or, in the case of Discover, American Express and Diners Club, by the card
issuers, and some of those banks and issuers are our competitors in the
provision of transaction processing services. Further, with respect to our EBT
business, the governmental issuers of the benefits set the rules and the
financial institutions or processors hired by the government administer them.
It is possible that the rules relating to our credit card, debit or EBT
operations will be changed or administered in such a way as to adversely affect
our operations.
Changes in card association fees could increase our costs
From time to time, VISA, MasterCard, Discover, American Express and Diners
Club increase the organization and/or processing fees (known as interchange
fees) that they charge. For example, in April 1999 VISA and MasterCard
increased their fees by up to 10%, which was the largest increase in recent
years. Most of our agreements with merchant customers permit fee increases to
us to be passed on to the merchants. However, it is possible that competitive
pressures will result in our absorbing a portion of such increases in the
future, which would increase our operating costs and reduce our profit margin.
6
<PAGE>
Revenue growth in ATM processing could slow because of restrictions on
surcharging or a decline in the deployment of ATMs
Revenue from "convenience fees" or "surcharges" imposed by owners of ATMs,
including Concord, has been a significant factor in the recent growth in our
ATM processing business since such fees have encouraged ATM owners to deploy
additional terminals. There have been initiatives at both the federal and state
levels to limit surcharges although restrictions have been implemented in only
a limited number of jurisdictions to date. To the extent that ATM deployment
declines due to the enactment of statutory restrictions on surcharges, fewer
favorable retail ATM locations being available or other factors, demand for our
ATM processing services may not continue to grow at recent rates or may
decline.
We are dependent on our VISA and MasterCard registrations
We are registered with VISA and MasterCard as a certified processor and a
member. In order to be designated as a certified processor with VISA and
MasterCard and to be a member, we must continue to adhere to the standards of
the VISA and MasterCard credit card associations. These standards are set by
the respective member financial institutions of VISA and MasterCard, some of
which are our competitors. In the event we fail to comply with these standards,
our designation as a certified processor or status as a member could be
suspended or terminated. We cannot assure you that VISA and MasterCard will
maintain our registrations or that the current VISA and MasterCard rules
allowing us to market and provide transaction processing services will remain
in effect. The termination of our member registration or our status as a
certified processor, or any changes in the VISA or MasterCard rules that
prevent our registration or limit our ability to provide transaction processing
and marketing services for VISA or MasterCard, would have an adverse effect on
our ability to operate and our financial performance.
We are subject to the credit risk of our merchant customers
In the event a billing dispute between a credit card holder and a merchant
is not resolved in favor of the merchant, the transaction is charged back to
the merchant, and the purchase price is refunded to the cardholder. If that
merchant files for bankruptcy or is otherwise unable or unwilling to pay, we
must bear the credit risk for the full transaction amount. We cannot assure you
that chargebacks will not increase in the future. Increases in chargebacks that
are not paid by merchants could have an adverse effect on our financial
condition and operating results.
We may be susceptible to fraud occurring at the merchant level
Merchant fraud includes recording false sales transactions or false credits
by the merchant or its customers. We attempt to minimize our exposure to
merchant fraud risk by conducting a credit review of a prospective merchant and
monitoring the merchant's practices on an ongoing basis. We are also able to
suspend a merchant's daily settlement if we suspect fraudulent activity.
Nonetheless, under some circumstances we bear the risk of incidents of merchant
fraud. It is possible that incidents of merchant fraud could increase in the
future. Increased incidents of merchant fraud could have an adverse effect on
our financial condition and operating results.
Any significant Year 2000 code problem which arises, if not managed
appropriately by us, our vendors, our customers, the networks or any other
entities with which we interface, could have an adverse effect on our business
The Year 2000 issue generally describes the various problems that may result
from the improper processing of dates and date-sensitive transactions by
computers and other equipment as a result of computer hardware and software
using two digits to identify the year in a date. The failure to properly
process dates could result in network and system failures or miscalculations
causing disruptions in operations including, among other things, a temporary
inability to process transactions, send invoices or engage in other routine
7
<PAGE>
business activities. A failure of our customers or vendors, particularly
telecommunications carriers, to cause their software and systems to be Year
2000 compliant could have a material adverse effect on us and on our ability to
meet our obligations. Until the Year 2000 occurs, we will not know for sure
that all systems will then function adequately. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Year 2000
Issues."
We face significant and increasing competition in each of our lines of business
The market for credit, debit and EBT card transaction processing services is
highly competitive. The level of competition has increased significantly in
recent years and this trend is expected to continue. Management estimates that
the three largest credit and debit card processors account for roughly 50% of
the total credit and debit card sales volume and that 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. In addition, competitors to our MAC(R) network, which consist of
other national and regional ATM networks, continue to consolidate as large
banks merge and combine their ATM networks and shared ATM networks continue to
combine into larger super-regional conglomerates. The continued expansion of
the national debit networks operated by VISA and MasterCard also places
increasing competitive pressure on other networks as banks seek to consolidate
their network affiliations. Several of our competitors and potential
competitors have greater capital, management, marketing and technological
resources than we have, and we cannot assure you that we will continue to be
able to compete successfully with such entities. In addition, increased
competitive pricing pressures, including a possible reduction in transaction
fees charged as a result of any increase in competition, would adversely affect
our margins and may have an adverse effect on our financial condition and
results of operations. See "Business--Competition."
We could lose network service business if a new VISA debit card product is
successful
In 1998, VISA announced the introduction of an on-line debit card product,
VISA Check Card II, that would compete with other on-line debit cards but would
bear a higher card issuer reimbursement fee than is provided by most other
networks, including the MAC(R) network we operate. The significant increase in
the issuer reimbursement fee may act as an incentive for bank debit card
issuers to issue the VISA Check Card II. Further, as proposed, the VISA product
would not permit some competing network brands, such as MAC(R), to also appear
on the card. If VISA successfully induces banks to issue this card in
replacement of debit cards participating in the MAC(R) network, we could
experience a loss of network service business.
Loss of key customers could reduce our revenue and net income
Like our competitors and as a result of our competitive business
environment, we experience some turnover of customers. Attrition is due to
several factors, including business closures and losses to competitors. Our
contracts for credit and debit card and/or ATM processing services typically
have terms of two to five years duration and renew automatically for successive
one-year terms unless expressly terminated. However, we cannot assure you that
any of these contracts will be allowed to renew or, if renewed, continued upon
favorable terms. If they are not renewed, it will be unlikely that we would be
able to reduce our costs in proportion to the lost revenue because many of our
costs are fixed. Increased attrition could have an adverse effect on our
revenue and net income.
Continued consolidation in the banking and retail industries could adversely
affect our growth
. Our ATM processing services business could be adversely affected. As
banks consolidate, our ability to successfully offer our ATM processing
services will depend in part on whether the institutions that survive
those consolidations are willing to outsource their ATM processing to
third-party vendors like us, and whether those institutions have pre-
existing relationships with any of our competitors. With respect to
network services, larger institutions with more geographically dispersed
customer bases
8
<PAGE>
may wish to consolidate their network participation with fewer networks
having the broadest geographic coverage and best service offerings. As
regional networks continue to consolidate, we may lose network business
if we are unable to continue to offer a range of products that is
competitive in terms of geographic distribution as well as quality and
breadth of service.
. We could lose customers and fee revenue could decrease. Continued
consolidation in the retail industry, which makes up a substantial
portion of our customer base, could impede our ability to grow as the
survivors of such consolidation may have relationships with competitors
or may be more interested in pursuing internal processing options due to
their increased scale. Larger merchants with larger transaction volumes
may also demand lower fees which could result in lower revenue for us.
Risks related to acquisitions
Since the beginning of 1998 we have completed three acquisitions. Through
these acquisitions and our other investments we have expanded our sales force
and strengthened our breadth of service offerings. We expect to continue to
seek selective acquisitions as an element of our growth strategy. It is
possible that recent or future acquisitions could have an adverse effect upon
our operating results, particularly in the fiscal quarters immediately
following the completion of such transactions, while the operations of the
acquired entities are being integrated into our operations. Acquisitions
involve risks that could cause our actual growth to differ from our
expectations. For example:
. We may not be able to continue to identify suitable acquisition
candidates or to complete acquisitions on favorable terms.
. We may not be able to successfully integrate acquired businesses in a
timely manner. We may also incur substantial costs, delays or other
operational or financial problems during the integration process and our
operating results could be adversely affected during the integration
process.
. We could incur additional indebtedness to finance acquisitions.
Changes in rules and regulations governing financial institutions could limit
our business
We are a bank holding company subject to regulation under the Bank Holding
Company Act of 1956 and to regulation by the Board of Governors of the Federal
Reserve System (Federal Reserve). EFS National Bank is a national banking
association established under the National Bank Act and is subject to
regulation by the Office of the Comptroller of the Currency as well as the
Federal Reserve. EFS Federal Savings Bank operates under the Home Owners' Loan
Act and the rules of the Office of Thrift Supervision, which has primary
regulatory and supervisory jurisdiction over it. The Federal Deposit Insurance
Corporation insures the domestic deposits of both banks. The restrictions
imposed by these and other laws governing the activities of national banks,
savings banks and their holding companies and related regulations and
restrictions imposed by these regulatory agencies limit our discretion and the
discretion of EFS National Bank, EFS Federal Savings Bank and their affiliates
in operating their businesses. These limitations include restrictions on:
. engaging in non-bank-related activities
. non-bank mergers and acquisitions
. dividends by banking entities
. intercompany transactions
Material changes in applicable federal or state regulation of financial
institutions could increase our operating costs, change the competitive
environment or otherwise adversely affect us. We cannot assure you that these
laws and regulations will not be amended, or interpreted differently by
regulatory authorities, or that new laws and regulations will not be adopted,
which could adversely affect our operations, financial condition and prospects.
Furthermore, we are subject to the rules and regulations of the various credit
card and debit card associations and networks which, among other things,
prescribe capital requirements.
9
<PAGE>
We must remain current with rapid technological change
Our ability to provide services is heavily dependent upon our use of and
access to computing and telecommunications technology. The transaction payment
processing business has been characterized by rapid technological change, and
our business has benefited from our ability to offer processing and payment
services in line with the most recent technological improvements. We are
committed to maintain our ability to customize processing and payment services
to a wide variety of merchant electronic payment equipment, communication
protocols, new technologies and customer processing needs. We cannot assure
you, however, that we will be able to continue to incorporate new developments
in payment processing technology, or that the costs involved in doing so will
not be substantial.
We are dependent on third-party vendors for our operations
Our processing services are dependent upon long-distance and local
telecommunications carriers and access to telecommunications facilities on a
24-hour basis. Telecommunications facilities are susceptible to interruption by
natural disasters. Although we maintain a disaster response plan which we
consider adequate and which we regularly review, and although we have operated
following natural disasters in the past without interruption of our processing
services, it is possible that a natural disaster could cause extensive or long-
term damage that interrupts our processing services or causes us to incur
substantial additional expense to avoid interruption of services, either of
which could have an adverse effect on our operations and financial condition.
If additional state taxes are imposed on us, our financial condition and
results of operations could be adversely affected
Transaction processing companies like us may be subject to state taxation of
certain portions of their fees charged to customers for their services.
Application of this tax is an ongoing issue in the industry and the states have
not yet adopted uniform guidelines implementing these regulations. If we are
required to pay these taxes and are unable to pass this tax expense through to
our customers, our financial condition and results of operations could be
adversely affected.
Shares eligible for future sale could adversely affect the market price of our
common stock
Sales of a substantial number of shares of our common stock in the public
market following this offering could adversely affect the prevailing market
price of the common stock and could impair Concord's ability to raise
additional equity capital in the future. Upon completion of this offering,
Concord will have 130,446,732 shares of common stock outstanding (based on
outstanding shares as of May 14, 1999, assuming the underwriters do not
exercise their over-allotment option and excluding 14,842,613 shares issuable
upon exercise of options outstanding as of May 14, 1999). Of these shares,
121,005,515 shares (assuming the selling stockholders sell all of their
28,963,125 shares offered in this offering) will be freely tradable without
restriction or further registration under the Securities Act of 1933 unless
purchased by affiliates of Concord, as that term is defined in Rule 144 under
the Securities Act.
Of the remaining shares, approximately 4,425,000 shares were issued in
connection with our acquisition of Digital Merchant Systems and American
Bankcard International to the sole stockholder of those entities without
registration under the Securities Act and are thus restricted shares as that
term is defined in Rule 144. We have previously registered those shares for
resale to the public. That person has not sold any of his shares under such
registration and has agreed that, during the period beginning from May 10, 1999
and continuing to and including the date 90 days after the date of this
prospectus, he will not, subject to limited exceptions, offer, sell or
otherwise dispose of those shares without the prior written consent of Salomon
Smith Barney. After the expiration of the lock-up period, those shares may be
resold freely to the public. An additional 4,320,217 shares are held by
directors and executive officers of Concord who have also agreed not to sell
these shares for 90 days after the date of this prospectus. Following the
expiration of the lock-up period, these shares will be eligible for sale in the
public market subject to compliance with the volume limitations and other
conditions of
10
<PAGE>
Rule 144 applicable to securities held by affiliates. In addition, each of the
selling stockholders has agreed not to sell or distribute any shares of our
common stock except under this offering within seven days prior to, or 90 days
after, the date of this prospectus. See "Underwriting."
Furthermore, an additional 24,100,102 shares that may be issued in the
future upon exercise of options granted and to be granted under our stock
option plans have been registered under the Securities Act and therefore will
be freely tradable when issued (subject to the volume limitations and other
conditions of Rule 144 in the case of shares to be sold by affiliates of
Concord). Options for the purchase of 14,842,613 shares were outstanding as of
May 14, 1999, of which options for 7,117,688 shares were exercisable at that
date. Of these exercisable options, 4,362,080 shares are covered by the lock-up
period referred to above.
The price of our common stock could be volatile
In recent years, there has been and may continue to be significant
volatility in the market price for our common stock, and there can be no
assurance that an active market for our common stock can be sustained. See
"Price Range of our Common Stock." Factors such as changes in quarterly
operating results, the gain or loss of significant contracts, the entry of new
competitors into our markets, changes in management, announcements of
technological innovations or new products by us or our competitors, and general
events and circumstances beyond our control could have a significant impact on
the future market price of our common stock and the relative volatility of such
market price. In the past, following periods of volatility in the market price
of a company's securities, securities class action litigation has often been
instituted against that company. If similar litigation were instituted against
us, it could result in substantial costs and a diversion of our management's
attention and resources, which could have an adverse effect on our business.
Forward-looking statements
This prospectus includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are not guarantees of future
performance and are subject to risks, uncertainties and assumptions, including
those set forth in this section and the following sections of this prospectus:
. ""Prospectus Summary--Investment Highlights"
. ""Management's Discussion and Analysis of Financial Condition and
Results of Operations"
. ""Business--Strategy" and "--Competition"
These forward-looking statements involve substantial risks and uncertainties
which we believe are within the meaning of the Private Securities Litigation
Reform Act of 1995.
Words such as "expect," "anticipate," "intend," "plan," "believe,"
"estimate" and variations of such words and similar expressions are intended to
identify such forward-looking statements. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise. In light of these risks,
uncertainties and assumptions, the forward-looking events discussed in this
prospectus might not occur.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of common stock by the
selling stockholders. The net proceeds to Concord from the sale of 2,000,000
shares of common stock in this offering at an assumed public offering price of
$28.625 per share are estimated to be approximately $54 million, or $181
million if the underwriters exercise their over-allotment option in full, after
deducting underwriting discounts and estimated offering expenses payable by
Concord. We intend to use the net proceeds from this offering for general
corporate purposes, including working capital, to augment our equity capital as
our processing transaction volume increases and potentially for debt repayment.
Pending application of the proceeds to the uses we have specified above, we
intend to invest the net proceeds of the offering in various securities,
including those issued by the United States government, its agencies and
instrumentalities and/or interest-bearing obligations of states and
municipalities.
11
<PAGE>
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the Nasdaq National Market under the symbol
"CEFT." The table below sets forth, for the periods presented, the range of
high and low sales prices for our common stock as reported on the Nasdaq
National Market.
<TABLE>
<CAPTION>
Common Stock Price
-------------------
High Low
--------- ---------
<S> <C> <C>
Year ended December 31, 1997:
First Quarter...................................... $ 19.33 $ 12.50
Second Quarter..................................... 17.92 10.83
Third Quarter...................................... 20.00 17.17
Fourth Quarter..................................... 21.75 14.00
Year ended December 31, 1998:
First Quarter...................................... 23.44 13.31
Second Quarter..................................... 26.50 19.00
Third Quarter...................................... 28.25 19.38
Fourth Quarter..................................... 42.38 19.00
Year ending December 31, 1999:
First Quarter...................................... 43.88 25.38
Second Quarter (through May 14, 1999).............. 36.50 28.19
</TABLE>
On May 14, 1999, the closing price of our common stock as reported on the
Nasdaq National Market was $28.625 per share. As of March 31, 1999, we had
approximately 337 holders of record of common stock.
DIVIDEND POLICY
We have never paid cash dividends on our capital stock. It is our present
policy to retain earnings to finance our operations and growth, and we do not
expect to pay dividends in the foreseeable future.
12
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999 and
as adjusted to reflect the sale of common stock offered by us in this offering
at an assumed public offering price of $28.625, after deducting underwriting
commissions and estimated offering expenses payable by us. At our annual
stockholders meeting which is scheduled to be held on May 20, 1999, our
stockholders will vote on whether to increase the authorized number of shares
of our common stock from 200 million shares to 500 million shares. You should
read this information in conjunction with our consolidated financial statements
and the notes to those financial statements appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
As of March 31, 1999
--------------------
As Adjusted
for the
Actual Offering
-------- -----------
(in thousands)
<S> <C> <C>
Short-term borrowings, including current portion of long-
term debt................................................ $ 42,000 $ 42,000
Long-term debt............................................ $173,750 $173,750
Stockholders' equity:
Common Stock, $0.33 1/3 par value per share, 200,000
shares authorized; 128,330 shares issued and
outstanding, actual; 130,330 shares issued and
outstanding, as adjusted............................... 42,777 43,444
Additional paid-in capital.............................. 61,388 114,581
Retained earnings and accumulated other comprehensive
income................................................. 258,884 258,884
-------- --------
Total stockholders' equity............................ 363,049 416,909
-------- --------
Total capitalization................................ $536,799 $590,659
======== ========
</TABLE>
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and notes
to those financial statements included and incorporated by reference elsewhere
in this prospectus. The selected consolidated financial data as of December 31,
1997 and 1998 and for the years ended December 31, 1996, 1997 and 1998 have
been derived from our consolidated financial statements audited by Ernst &
Young LLP, which are included in this prospectus. The selected consolidated
financial data as of December 31, 1994, 1995 and 1996 and for the years ended
December 31, 1994 and 1995 have been derived from financial statements audited
by Ernst & Young LLP, which are not included in this prospectus. The selected
consolidated financial data as of March 31, 1999 and for the three months ended
March 31, 1998 and 1999 have been derived from our unaudited condensed
consolidated financial statements which are included in this prospectus. The
selected consolidated financial data has been restated for all periods
presented to reflect the business combination of Concord and Electronic Payment
Services on February 26, 1999, which was accounted for as a pooling of
interests. The selected consolidated financial data for 1998 and 1997 has also
been restated to reflect our acquisition in 1998 of Digital Merchant Systems
and American Bankcard International which was accounted for as a pooling of
interests; prior periods were not restated because the results of the acquired
companies for those periods were immaterial. Net income per share has been
restated for all periods presented to reflect all stock splits through December
31, 1998, as well as to conform to the requirements of Financial Accounting
Standards Board Statement No. 128, "Earnings Per Share." The unaudited
financial information includes all adjustments, consisting of normal recurring
accruals, that we consider necessary for a fair presentation of our
consolidated financial position and consolidated results of operations for the
periods reflected.
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
------------------------------------------------ -------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- --------- ---------
(in thousands) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Revenue................. $258,125 $295,552 $355,459 $490,030 $634,511 $ 134,666 $ 170,234
Cost of operations...... 184,958 197,394 241,273 340,770 446,515 95,029 120,849
Selling, general and
administrative
expenses............... 32,036 47,907 42,811 50,008 51,185 13,100 12,368
Acquisition expenses and
restructuring charges.. -- -- -- -- -- -- 34,810
-------- -------- -------- -------- -------- --------- ---------
Operating income........ 41,131 50,251 71,375 99,252 136,811 26,537 2,207
Interest income
(expense), net......... (16,983) (13,766) (10,296) (1,789) 3,703 749 1,732
-------- -------- -------- -------- -------- --------- ---------
Income before taxes..... 24,148 36,485 61,079 97,463 140,514 27,286 3,939
Income taxes............ 9,680 15,627 23,347 37,771 51,819 9,937 6,807
-------- -------- -------- -------- -------- --------- ---------
Net income.............. $ 14,468 $ 20,858 $ 37,732 $ 59,692 $ 88,695 $ 17,349 $ (2,868)
======== ======== ======== ======== ======== ========= =========
Basic earnings per
share.................. $ 0.13 $ 0.18 $ 0.32 $ 0.47 $ 0.69 $ 0.14 $ (0.02)
Diluted earnings per
share.................. $ 0.13 $ 0.18 $ 0.31 $ 0.46 $ 0.67 $ 0.13 $ (0.02)
======== ======== ======== ======== ======== ========= =========
Weighted average shares. 111,542 113,081 116,291 126,592 127,693 127,486 128,014
Adjusted weighted
average shares and
assumed conversions.... 113,912 116,854 120,189 129,937 131,947 130,849 133,083
======== ======== ======== ======== ======== ========= =========
Other Data:
Number of transactions
processed (in
millions).............. 1,427 1,694 2,065 2,549 3,203 NA NA
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
As of December 31, As of
--------------------------------------------- March 31,
1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- -----------
(in thousands) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital......... $(33,519) $ 32,911 $ 69,860 $148,987 $285,826 $290,255
Total assets............ 314,366 396,144 554,462 619,196 784,118 819,637
Long-term debt, less
current maturities..... 201,371 175,978 150,561 153,329 173,000 173,750
Total stockholders'
equity (deficiency).... (73,450) 45,339 182,126 260,544 360,535 363,049
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with our consolidated
financial statements and the notes to those financial statements which are
attached to this prospectus. The following discussion reflects the business
combination of Concord and Electronic Payment Services on February 26, 1999
which was accounted for as a pooling of interests. This prospectus contains
forward-looking statements that reflect our plans, estimates and beliefs. Our
actual results could differ materially from those discussed in the forward-
looking statements. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed below and elsewhere in this
prospectus, particularly in "Risk Factors." In addition to the other
information in this prospectus, you should carefully consider the following
discussion and the information set forth under "Risk Factors" in evaluating us
and our business before purchasing our common stock in this offering.
Overview
Concord EFS, Inc. is a fully integrated leading provider of electronic
transaction authorization, processing, settlement and funds transfer services
on a nationwide basis. We focus on marketing our services to supermarket
chains and multiple lane retailers, financial institutions, petroleum and
convenience stores, grocery stores, the trucking industry and other retailers.
Our primary activity is merchant card services, in which we provide integrated
electronic transaction services for credit card, debit card and EBT card
transactions. These transaction services include data capture, authorization
and settlement services for over 400,000 point-of-sale terminals. We also
provide ATM services, consisting of owning and operating the MAC(R)-branded
EFT network and processing for approximately 35,000 ATMs nationwide, of which
we own approximately 800.
On June 30, 1998, we completed a merger with Digital Merchant Systems and
American Bankcard International, which are independent sales organizations for
the transaction processing industry. The merger was accounted for as a pooling
of interests in which we exchanged approximately 4.4 million of our shares for
all of the outstanding common stock of Digital Merchant Systems and American
Bankcard International. The financial statements of these acquired companies
prior to January 1, 1997 were immaterial for restatement; accordingly, the
results of these companies affected only our 1997 and 1998 financial
statements. See our consolidated financial statements and the notes to those
financial statements included in this prospectus.
On February 26, 1999 we completed our acquisition of Electronic Payment
Services, a company which provides transaction processing services to
financial institutions and retailers throughout the United States. See
"Business--Acquisition of Electronic Payment Services, Inc." The acquisition
was accounted for as a pooling of interests in which we exchanged 30.1 million
of our shares for all of the outstanding common stock of Electronic Payment
Services. We incurred $34.8 million of expenses related to the acquisition in
the first quarter of 1999. These expenses included communication conversion
costs, advisory fees and asset write-offs. Management continues to review
potential operational synergies from the acquisition, such as duplicate
facilities, computer hardware and software and other contractual
relationships. See our consolidated financial statements and the notes to
those financial statements included in this prospectus.
Components of Revenue and Expenses
The substantial majority of our revenue (66.7% in 1998 and 63.5% in 1997)
is generated from fee income related to merchant card services. These services
include:
. the processing of credit card transactions for all major credit card
brands including VISA, MasterCard, American Express, Discover and Diners
Club;
. the processing of debit card transactions for financial institutions
issuing these and similar cards; and
16
<PAGE>
. the provision of electronic payment services to supermarket chains and
multiple lane retailers, financial institutions, petroleum and convenience
stores, grocery stores, trucking companies and other retailers.
Revenue from merchant card services includes primarily discount fees charged
to merchants, which are a percentage of the dollar amount of each credit card
transaction we process, as well as a flat fee per transaction. The discount fee
is negotiated with each merchant and typically constitutes a bundled rate for
the transaction authorization, processing, settlement and funds transfer
services we provide. This revenue and fees from other transactions are
recognized at the time the merchants' transactions are processed.
The other principal component of our revenue derives from ATM services
(approximately 31.3% in 1998 and 34.0% in 1997). ATM services revenue consists
of fee income and other surcharges charged for proprietary ATMs and processing
fees for third party ATMs. The balance of our revenue is derived principally
from check verification and authorization services, sales of point-of-sale
terminals and payroll processing services.
The following table is a listing of revenue by service type for the periods
indicated:
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
-------------------------- ----------------
1996 1997 1998 1998 1999
-------- -------- -------- ------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Merchant card services.......... $207,211 $311,167 $423,267 $85,203 $112,326
ATM services.................... 135,507 166,841 198,398 45,202 52,449
Other........................... 12,741 12,022 12,846 4,261 5,459
</TABLE>
Cost of operations includes all costs directly attributable to our provision
of services to our customers. The most significant component of cost of
operations is interchange and assessment fees, which are amounts charged by the
credit and debit card associations. Interchange and assessment fees are billed
primarily as a percentage of dollar volume processed and, to a lesser extent,
as a per-transaction fee. Cost of operations also includes telecommunications
costs, occupancy costs, depreciation, the cost of equipment leased and sold,
the cost of operating our MAC(R) network and other miscellaneous merchant
supplies and services expenses.
Our selling, general and administrative expenses include salaries and wages
and other general administrative expenses (including certain amortization
costs).
Results of Operations
The following table sets forth for the periods indicated the percentage of
revenue represented by certain items on our consolidated statement of income.
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
------------------------- ----------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenue....................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of operations............ 67.9 69.5 70.4 70.6 71.0
Selling, general and
administrative expenses...... 12.0 10.2 8.1 9.7 7.3
Acquisition expenses and
restructuring charges........ -- -- -- -- 20.4
------- ------- ------- ------- -------
Operating income.............. 20.1 20.3 21.5 19.7 1.3
Interest income (expense),
net.......................... (2.9) (0.4) 0.6 0.6 1.0
------- ------- ------- ------- -------
Income before taxes........... 17.2 19.9 22.1 20.3 2.3
Income taxes.................. 6.6 7.7 8.2 7.4 4.0
------- ------- ------- ------- -------
Net income (loss)............. 10.6% 12.2% 14.0% 12.9% (1.7%)
======= ======= ======= ======= =======
</TABLE>
17
<PAGE>
First Quarter 1999 Compared to First Quarter 1998
Revenue increased 26.4% to $170.2 million in the first quarter of 1999 from
$134.7 million in the first quarter of 1998. Of first quarter 1999 revenue,
merchant card services, ATM services and other services accounted for 66.0%,
30.8% and 3.2%, respectively. Revenue from merchant card services increased
31.8%, due primarily to increased transactional volumes. Increased volumes
resulted from the addition of new merchants, the widening acceptance of debit
and EBT card transactions at new and existing merchants and higher credit card
transaction processing fees. The increase in fees was a pass-through to
customers of higher interchange processing fees that were assessed by the
credit card associations in April 1998. ATM services revenue increased 16.0%;
the placement of new ATMs, new ATM processing customers and increases in
transactional volumes accounted for the increase. Other revenue increased 28.1%
due to increased terminal sales primarily to our new merchants.
Cost of operations increased in the first quarter of 1999 to 71.0% of
revenue compared to 70.6% in the first quarter of 1998. While credit card
association interchange fees and certain other operating expenses were higher
as a percentage of revenue in the first quarter of 1999 than in the first
quarter of 1998, this was largely offset by a decrease, as a percentage of
revenue, in payroll expenses.
Excluding the acquisition expenses, restructuring charges and related tax
items, net income, as a percentage of revenue, increased to 14.1% in the first
quarter of 1999 compared to 12.9% in first quarter of 1998. The primary factor
in this increase was that selling, general and administrative expenses
decreased from $13.1 million or 9.7% of revenue in the first quarter of 1998 to
$12.4 million or 7.3% of revenue in 1999 due to certain non-recurring expenses
in the first quarter of 1998, as well as a decrease in personnel-related costs
in the first quarter of 1999.
Net loss as a percentage of revenue was (1.7)% in the first quarter of 1999.
Net income as a percentage of revenue was 12.9% in the first quarter of 1998.
The primary factor in the change was the acquisition expenses and restructuring
charges incurred in the first quarter of 1999 in connection with the
acquisition of Electronic Payment Services. The total pre-tax charges were
$34.8 million, as summarized below:
<TABLE>
<S> <C>
Acquisition-related expenses........................................ $10.5
Communication conversion costs ..................................... 12.4
Asset write-offs ................................................... 8.2
Off-line debit conversion........................................... 2.8
Severance and other................................................. 0.9
-----
$34.8
=====
</TABLE>
Acquisition-related expenses were $10.5 million, consisting primarily of
investment banking fees, as well as legal, accounting, registration and other
fees and expenses.
In order to create a single communication infrastructure for our transaction
processing businesses, we adopted a plan to convert Electronic Payment
Services' communication network to Concord's. As the plan is implemented over
the course of the next year, we expect to achieve operational and cost
efficiencies. The accrual for the plan of conversion was $12.4 million.
We incurred asset write-offs of $8.2 million. For competitive reasons, we
have deemphasized certain geographic areas of the MAC(R) network, causing
impairment to the related intangible assets of approximately $2.8 million.
After review of certain Electronic Payment Services' customer lists and the
undiscounted cash flows estimated to be generated by the related intangible
assets, we recognized an impairment loss of approximately $3.6 million. The
remainder of the write-off was for assets that are no longer used or supported
under revised marketing and business plans.
Electronic Payment Services currently uses a third-party bank for its off-
line debit processing. During the quarter, we adopted a plan to take this
process in-house and we accrued the related restructuring charges of $2.8
million.
18
<PAGE>
In addition to the pre-tax charges, we incurred a tax component write-off of
$1.3 million for impaired state tax net operating losses of Electronic Payment
Services. Combined with the non-tax deductibility of certain acquisition costs,
these items increased the effective tax rate in the first quarter of 1999.
Calendar 1998 Compared to Calendar 1997
Revenue increased 29.5% to $634.5 million in 1998 from $490.0 million in
1997. Merchant card services, ATM services and other services accounted for
66.7%, 31.3% and 2.0%, respectively, of 1998 revenue. Revenue from merchant
card services increased 36.0%, due primarily to increased transactional
volumes. Increased volumes resulted from the addition of new merchants and the
widening acceptance of debit and EBT card transactions at new and existing
merchants. Higher credit card transaction processing fees also contributed to
the increase in revenue. The increase in fees was a pass-through of higher
interchange fees that we were assessed by the credit card associations. ATM
services revenue increased 18.9%; the placement of new ATMs, new ATM processing
customers and increases in transactional volumes accounted for the increase.
Other revenue increased 6.9% in 1998.
Cost of operations increased in 1998 to 70.4% of revenue compared to 69.5%
in the prior year. While credit card association interchange fees were higher
as a percentage of revenue in 1998 than in 1997, this was largely offset by a
decrease, as a percentage of revenue, in payroll expenses, depreciation and
amortization and other operating expenses.
Net income as a percentage of revenue increased in 1998 to 14.0% from 12.2%
in the prior year. The primary component of the net margin improvement was due
to selling, general and administrative expenses increasing only 2.4% from $50.0
million in 1997 to $51.2 million in 1998. As a result of the slower growth rate
in these expenses, they were 8.1% of revenue in 1998 versus 10.2% in 1997.
A second component of the net margin improvement was the combination of net
interest income (expense) and income taxes. Net interest income increased to
$3.7 million in 1998 from a net interest expense of $1.8 million in 1997. This
resulted from an increase in our average investment securities portfolio, to
$227.8 million in 1998 from $154.2 million in 1997, partially offset by an
increase in our average total debt to $63.0 million in 1998 from $13.2 million
in 1997. The increases were related, since we incurred $45.0 million in new
debt, primarily notes payable to the Federal Home Loan Bank, to pay down $25.7
million of higher rate debt and purchase higher yielding investment securities.
We also increased our allocation of municipal investment securities within the
investment portfolio to 41.0% at year-end 1998 from 18.0% at year-end 1997.
Municipal investment securities are generally tax-exempt for federal income tax
purposes and have lower interest rates than taxable investment securities. This
largely explains the decrease in our overall effective tax rate to 36.9% in
1998 from 38.8% in 1997.
Calendar 1997 Compared to Calendar 1996
Revenue increased 37.9% to $490.0 million in 1997 from $355.5 million in
1996. Merchant card services, ATM services and other services accounted for
63.5%, 34.0% and 2.5%, respectively, of 1997 revenue. Merchant card services
revenue increased 50.2% in 1997, due primarily to increased transactional
volumes. Increased volumes resulted from the addition of new merchants and
increased credit and debit card usage at existing merchants. ATM services
revenue increased 23.1% in 1997 over 1996 due to an increase in the number of
ATMs for which we are the transaction processor and an increase in the
application of surcharges in ATM transactions. Other revenue decreased 5.6%.
Costs of operations increased to $340.8 million or 69.5% of revenue in 1997
compared to $241.3 million or 67.9% of revenue in 1996. The margin increase was
due primarily to the inclusion of the expenses of Digital Merchant Systems and
American Bankcard International, which had been immaterial in 1996. Selling,
general and administrative expenses were $50.0 million in 1997 compared to
$42.8 million in 1996 as we grew our transaction processing business. They
nonetheless decreased as a percentage of revenue to 10.2% in 1997 from 12.0% in
1996. Net interest expense decreased to $1.8 million in 1997 from $10.3 million
in 1996. This
19
<PAGE>
resulted from an increase in our average investment securities portfolio to
$154.2 million in 1997 from $51.9 million in 1996, only partially offset by
increased interest expense resulting from an increase in average total debt to
$13.2 million in 1997 from $1.2 million in 1996. Our overall effective tax rate
remained relatively constant. These were the primary factors for the increase
in net income as a percentage of revenue to 12.2% in 1997 from 10.6% in 1996.
Liquidity and Capital Resources
Concord has consistently generated significant resources from operating
activities. In 1998, 1997 and 1996 operating activities generated cash of
$167.6 million, $79.6 million, and $139.4 million, respectively. Cash generated
from operating activities can vary due to fluctuations in accounts receivable
and accounts payable balances which are impacted by increases in settlement
volume from one year to the next, as well as the timing of settlements. For
example, a one day timing issue amounted to a difference of $35.1 million
between 1996 and 1997.
We generally hold a significant amount of cash and securities because of the
equity requirements of the credit card associations which are calculated on
settlement dollar volume and because of the liquidity requirements associated
with conducting settlement operations and owning ATM machines. During fiscal
1998, we invested approximately $93.6 million in securities, net of sales and
maturities, and $65.2 million in capital expenditures, which were primarily for
communications equipment, point-of-sale terminals, new computer equipment and
capitalized software. Depending on the growth of our business, we currently
expect our capital expenditures in 1999 to be somewhat lower than 1998.
In addition to net cash provided by operating activities, we have financed
ourselves historically through issuances of equity, the exercise of stock
options and borrowings. We issued 3.45 million shares of common stock in
October 1996 and received proceeds of $87.7 million. Of those proceeds, $30
million was contributed to EFS National Bank in order for it to remain in
compliance with the guidelines of credit card associations as its processing
transaction volume increased in 1997 and 1998.
Stock issued upon exercises of options under Concord's incentive stock
option plan provided $6.6 million of additional capital in 1998. Although we
cannot estimate the timing or amount of future cash flows from the exercise of
stock options, we expect this to continue to be a source of funds.
We have lines of credit with financial institutions totaling $60 million. As
of March 31, 1999 and 1998, $17 million and $20 million, respectively, were
outstanding on our lines of credit. As of March 31, 1999, we had $80 million of
notes payable outstanding to the Federal Home Loan Bank. We also have a note
payable to a former stockholder of Electronic Payment Services, of which
$118.75 million remained due as of March 31, 1999, to be paid in equal
quarterly installments of $6.25 million through 2003. For a further discussion
of our debt financing, see Note F to the consolidated financial statements
included in this prospectus. As of March 31, 1999, we held securities with a
market value of approximately $229.8 million that are available for operating
needs or as collateral to obtain additional short-term financing, if needed.
We believe that our available credit and cash generated by operations are
adequate to meet our capital and operating needs.
Effects of Inflation
Our 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. We believe that replacement
costs of equipment, furniture and leasehold improvements will not materially
affect operations. However, the rate of inflation affects our expenses, such as
those for employee compensation and communications, which may not be readily
recoverable in the price of services offered by us.
20
<PAGE>
Year 2000 Issues
The following discussion of the cost, status and timing of implementation of
our Year 2000 project is based on our best estimates, which are derived using
numerous assumptions of future events. We cannot guarantee that these
assumptions will be correct or that these estimates will be accurate.
Therefore, actual results could materially differ from those described below.
Further, the discussion contains forward-looking statements which are all
inherently uncertain. Any number of events might cause different actual results
than those that we describe here. Some of the factors that could affect our
Year 2000 readiness include:
. loss of Concord personnel or outside consultants working on Year 2000
readiness;
. any non-Year 2000 readiness of our customers;
. any non-Year 2000 readiness of third-party networks and service
providers;
. failure to conduct or complete joint testing with third parties;
. telecommunication disruptions;
. failure to locate and correct all relevant application codes; and
. undiscovered mistakes in our own Year 2000 readiness planning or
implementation.
Our Year 2000 preparedness efforts cover both information technology (IT)
systems and non-IT systems. Non-IT systems are embedded systems used in the
daily operations of buildings and facilities, such as micro controllers in
lighting, heating/ventilation/air conditioning, security, elevator, fire,
uninterrupted power-supply and other infrastructure systems. IT systems include
computer hardware, software and related applications.
Our State of Readiness. We have instituted a five-phase plan, in accordance
with the Federal Financial Institutions Examination Council guidelines, with
the goal of making our IT and non-IT systems function properly with respect to
dates in the year 2000 and thereafter. Described below are simplified
explanations of these phases, as well as the status of each phase as of March
31, 1999.
. Awareness--During this phase we defined overall strategies, we initiated
project timelines, formed project teams, defined high level strategies,
and identified Year 2000 issues. The awareness phase is 100% complete
for all systems.
. Assessment--The assessment phase focused on assessing the size and
complexity of our Year 2000 problems. During this phase we developed and
used corporate inventory databases. We also identified and ranked the
inventory according to how mission critical it is to us based on the
overall business impact it could have in the event of a failure. Based
on these assessments, we then made decisions to modify or re-engineer
some systems or software programs. We then determined the activities
that would be required to make the modifications and documented those
activities using a project notebook, a project plan and a schedule. The
assessment phase is 100% complete for all systems.
. Renovation--The renovation phase encompassed the code remediation of in-
house developed software and third-party developed software. Software
code renovations were required on certain of our software systems.
During the renovation efforts the Year 2000 teams and committees
communicated routinely with the software programmers to monitor and
track their progress. The renovation phase is 100% complete for all
mission critical systems.
. Validation--The validation phase was designed to test the ability of
Year 2000 mission critical hardware and software to accurately process
date sensitive data (including, but not limited to, calculating,
comparing and sequencing) from, into and between the 20th and 21st
centuries, including leap year calculations. The testing methodology
used detailed test plans and appropriate supporting documentation to
facilitate validation for a component or subdivision of a system. Prior
to any testing activities we performed baseline processing in order to
gather results against which each test was measured. This generally
involved processing the individual system or component using current
dates
21
<PAGE>
and capturing results that we then compared to subsequent test results.
Validation of Year 2000 compliance includes an independent review of the
results by our internal audit staff and various regulatory agencies,
including the Office of the Comptroller of the Currency and the Federal
Reserve. We have internally completed the validation phase for all
internal mission critical systems, subject to on-going regulatory
review.
Our objective has always been to test not only all mission critical
systems, but also non-mission critical systems to the extent
appropriate. We have officially scheduled testing of non-mission
critical systems to begin after June 30, 1999. However, we have already
tested several non-mission critical systems during the course of
testing mission critical systems and we have found all of those tested
to be compliant. We estimate that more than 40% of the non-mission
critical systems have been tested to date.
. Implementation--The implementation phase placed any renovated/validated
hardware and software systems into production. The implementation phase
for our internal mission critical systems is 100% complete. However, our
processing systems also require testing for Year 2000 compliance by
external entities, including our customers, credit and debit networks
and vendors. As of March 31, 1999, approximately 80% of our external
mission critical testing phase was complete. The remaining 20% has been
delayed at the request of external entities, but we anticipate the
implementation phase for all external mission critical systems to be
substantially completed by June 30, 1999.
Costs to Address our Year 2000 Issues. We have spent approximately $6.4
million in 1998 and $1.1 million in the three months ended March 31, 1999 on
our Year 2000 project. We anticipate spending an additional $3.1 million to
substantially complete our Year 2000 compliance project in accordance with our
current schedule. These amounts exclude hardware expenditures needed for normal
business growth even if the timing of acquisition has been accelerated to
facilitate short-term Year 2000 testing or compliance.
Third-Party Year 2000 Risks. Although we test third-party mission critical
systems in connection with our five-phase Year 2000 plan, we are still subject
to risks associated with third-party non-compliance. Long distance
telecommunications carriers such as AT&T and MCI provide delivery of the
majority of our data and voice communications. If a single or multiple long
distance carriers fail, then the potential liability or the lost revenue under
this scenario could have an adverse effect on our financial condition and
results of operations. In addition, we cannot guarantee that the systems of
other companies on which we rely will be fully Year 2000 compliant, and any
failure or disruption of our external mission critical systems could also have
an adverse effect on our financial condition and results of operations. For
example, if a single or multiple credit networks such as VISA or MasterCard
experience a failure or severe degradation then we could also be adversely
affected since a significant percentage of our revenue are generated through
VISA and MasterCard transactions.
Our Contingency Plans. We have developed detailed contingency plans that
have focused on identifying, restoring, and continuing core business functions
and mission-critical systems that pose the greatest risk (including
telecommunications and power outage). For example, in the event that our major
telecommunications provider (AT&T) has an outage, then backup steps have been
outlined in our contingency plans that use a national 800 number portability
feature so that all data and voice calls will be routed through an alternate
telecommunications provider (MCI).
We have also developed contingency plans for all mission critical third
party providers and vendor products and services. For example, in the event
that a single credit network such as VISA experiences a failure, our
authorization process would be to "stand in" for the regional credit network
and provide authorizations based on certain predetermined limits. These plans
are continuing to be further enhanced, refined and tested during the second
quarter of 1999.
22
<PAGE>
Quantitative and Qualitative Disclosures About Market Risk
Concord's securities are subject to risk resulting from interest rate
fluctuations to the extent that there is a difference between the amount of our
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 75% of the market value of securities owned were funded
through equity rather than debt. The principal objective of our asset/liability
activities is to provide maximum levels of net interest income while
maintaining acceptable levels of interest rate and liquidity risk and
facilitating our funding needs. We utilize 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 tables provide comparative information about our financial
instruments that are sensitive to changes in interest rates. These tables
present principal cash flows and related weighted-average interest rates by
expected maturity dates. Additionally, we have assumed our securities are
similar enough to aggregate them for presentation purposes. If tax-equivalent
yields of municipal securities had been utilized, the weighted-average interest
rates would have been higher.
December 31, 1998
<TABLE>
<CAPTION>
Fair Value
at
1999 2000 2001 2002 2003 Thereafter Total 12/31/98
------- ------- ------- ------- ------- ---------- -------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Available-for-sale
securities............ $34,705 $ 8,354 $15,956 $ 8,309 $17,624 $191,640 $276,588 $278,398
Average interest rate.. 6.2% 6.5% 4.8% 5.1% 4.8% 5.8% -- --
Liabilities:
Short-term borrowings.. $21,000 -- -- -- -- -- $ 21,000 $ 21,000
Average interest rate.. 5.8% -- -- -- -- -- -- --
Long-term debt,
including current
portion............... $25,116 $25,000 $25,000 $53,000 $35,000 $ 35,000 $198,116 $196,652
Average interest rate.. 6.4% 6.4% 6.4% 6.1% 6.2% 5.4% -- --
</TABLE>
December 31, 1997
<TABLE>
<CAPTION>
Fair Value
at
1998 1999 2000 2001 2002 Thereafter Total 12/31/97
------- ------- ------- ------- ------- ---------- -------- ----------
(in thousands)
<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:
Short-term borrowings.. $29,000 -- -- -- -- -- $ 29,000 $ 29,000
Average interest rate.. 5.8% -- -- -- -- -- -- --
Long-term debt,
including current
portion............... $25,445 $25,329 $25,000 $25,000 $53,000 $25,000 $178,774 $178,666
Average interest rate.. 6.4% 6.4% 6.4% 6.4% 6.1% 6.4% -- --
</TABLE>
23
<PAGE>
BUSINESS
Overview
Concord EFS, Inc. is a fully integrated leading provider of electronic
transaction authorization, processing, settlement and funds transfer services
on a nationwide basis. We focus on marketing our services to supermarket chains
and multiple lane retailers, financial institutions, petroleum and convenience
stores, grocery stores, the trucking industry and other retailers. Our primary
activity is merchant card services, in which we provide integrated electronic
transaction services for credit card, debit card and EBT card transactions.
These transaction services include data capture, authorization and settlement
services for over 400,000 point-of-sale terminals. We also provide ATM
services, consisting of owning and operating the MAC(R)-branded EFT network and
processing for approximately 35,000 ATMs nationwide, of which we own
approximately 800.
We have a bank subsidiary, EFS National Bank, which provides us with a
number of competitive advantages.
. We are a member of the credit and debit card associations and therefore
do not have to pay another bank to sponsor us.
. We settle our transactions directly, and thus do not have to pay a
third-party vendor.
. We perform services such as ACH and wire transfer internally and
therefore do not have to pay another bank for such services.
Accordingly, our ownership of EFS National Bank allows us to capture all of the
fee revenue and margin generated by each transaction in the electronic payment
process.
We are one of the few companies offering full credit and debit card
processing on a nationwide basis. Our transaction processing services cover all
stages of the transaction, from the initial data capture at the point of sale
and account verification on our own host computer which permit the sale (known
as front-end services), to accounting, reporting and settlement activities
which permit billing to the customer (known as back-end services).
Acquisition of Electronic Payment Services, Inc.
In February 1999, we broadened our service offerings by acquiring Electronic
Payment Services, Inc., which owns and operates MAC(R), one of the country's
largest EFT networks, provides ATM services to five of the nation's largest
banks and is a leading provider of point-of-sale credit card, debit card and
EBT processing services to merchants. Electronic Payment Services has a client
base of approximately 2,500 customers, comprised of financial institutions and
retailers throughout the United States, including many of the largest banks,
petroleum companies and largest supermarkets. In 1998, Electronic Payment
Services processed over 2.7 billion transactions.
The addition of Electronic Payments Services' strong front-end point-of-sale
capabilities to our established back-end settlement business enables us to
offer a more comprehensive, fully integrated set of services to our customers.
Electronic Payment Services' ATM business brings to us strong relationships
with financial institutions which benefit our traditional merchant acquiring
business by providing us opportunities to purchase or serve in an agent
capacity for banks' merchant portfolios.
In addition to the revenue opportunities presented by the acquisition of
Electronic Payment Services, we believe that there are also significant
opportunities to reduce expenses. We incurred $34.8 million of expenses related
to the acquisition in the first quarter of 1999. These expenses included
communication conversion costs, advisory fees and asset write-offs. Management
continues to review potential operational synergies from the acquisition, such
as duplicate facilities, computer hardware and software and other contractual
relationships. We also believe that our enhanced scale should enable us to
receive better pricing in several areas of our business, including fees charged
by telecommunications and other technology vendors.
24
<PAGE>
The acquisition of Electronic Payment Services was accounted for as a
pooling-of-interests in connection with which we issued approximately 30.1
million shares of our common stock to former Electronic Payment Services
stockholders. The selling stockholders listed in the table under the heading
"Principal and Selling Stockholders--Beneficial Ownership" were all
stockholders of Electronic Payment Services and obtained their shares of our
common stock in connection with our acquisition of Electronic Payment Services.
Industry Overview
The transaction processing industry provides merchants with credit, debit
and EBT payment processing services and provides consumers and financial
institutions with ATM services. The following factors have contributed to the
rapid growth in the processing industry in recent years.
Increased Use of Credit and Debit Cards. According to annual reports by the
VISA and MasterCard associations, credit and debit card transactions are
projected to increase in relation to cash and check transactions for the
foreseeable future. According to the Nilson Report, consumer usage of the five
major credit cards (VISA, MasterCard, American Express, Discover and Diners
Club) increased to $1,156 billion in 1998 from $498.0 billion in 1993,
representing a compound annual growth rate of 18.4%. We believe that the
increased use of credit and debit cards as a payment vehicle will continue in
the retail markets, particularly supermarket chains, grocery stores and
petroleum and convenience stores.
ATM Usage. According to The Nilson Report, ATM transaction volume grew at a
compound annual rate of 10.4% between 1995 and 1997 to a total of 10.0 billion
transactions. This growth has been largely driven by the enhanced profit
potential at off-site locations resulting from ATM surcharging and the lower
cost of limited function machines installed off-site.
Growth of EBT Programs. According to The Nilson Report, EBT transaction
volume increased from $580 million in 1994 to $4.1 billion in 1997,
representing a compound annual growth rate of 91.9%. Because the federal
government has mandated that all food stamp payments be processed
electronically by October 2002, we believe that this market represents a
substantial growth opportunity.
Strategy
Our strategy is to provide a full range of transaction processing services
to markets with significant growth prospects. We have developed and continue to
pursue the following initiatives to capitalize on our competitive position in
the growing market for transaction processing services:
. Focus on markets that are switching rapidly to electronic payment cards.
We target markets in which the penetration of electronic payment systems
is relatively low. We believe that these markets will grow faster than
the overall electronic payment processing industry.
. Provide a fully integrated range of services. We believe that our fully
integrated structure allows us to be a low-cost provider of electronic
payment processing services. By providing a fully integrated range of
relevant services, we are able to customize services, to offer
competitive prices and to capitalize on the complete revenue opportunity
with each of our clients.
. Cross-sell services to existing clients. Following the acquisition of
Electronic Payment Services, we now offer a more comprehensive set of
electronic payment processing services. This creates an opportunity to
increase revenue by cross-selling services to pre-existing clients of
Concord and Electronic Payment Services. Specifically, settlement
services can be sold to Electronic Payment Services' front-end
customers.
. Maintain a high rate of recurring revenue through customer retention. We
focus on providing dependable service and competitive pricing in order
to retain our customers . We believe that our ability to provide
integrated multiple services also enhances customer retention.
25
<PAGE>
. Access new customers. We use a variety of marketing approaches to
develop our customer base, by having our senior executives focused on
marketing and through a 400-person direct sales force and independent
sales organizations. Our direct sales force is organized in part by
distribution channels along key customer industry lines. We believe that
this approach provides us with broad access to potential new customers.
. Maintain a low-cost operating structure. We strive to maintain a low-
cost operating structure, including an emphasis on low overhead and cost
control efforts. Additionally, through our banking subsidiary, EFS
National Bank, we are able to participate directly in bank card
associations and regional and national ATM and debit card networks, to
cost-effectively settle electronic transactions and to substantially
reduce our ACH and wire transfer fees.
. Provide and support a wide range of technology solutions. We provide and
support equipment manufactured by a variety of companies in order to
supply electronic processing services for the wide variety of systems
used by existing and potential customers. We also design systems for a
tailored solution to our customers' needs. Our own computer network
employs a host-based point-of-sale technology which permits us to
rapidly upgrade terminal software, deploy new products and maintain our
networks on a cost-effective basis from a central location.
. Seek selective acquisitions. We look for opportunities to grow our
business through selective acquisitions that will allow us to increase
our customer base, increase profitable transaction volume and reduce
costs.
Services
We provide a comprehensive set of transaction processing services and
products to supermarket chains, multiple lane retailers, trucking companies,
petroleum and convenience stores, grocery stores, financial institutions,
independent sales organizations and other retailers nationwide.
Merchant Card Services. Our merchant card services consist of processing
credit card transactions for all major credit card brands including VISA,
MasterCard, American Express, Discover and Diners Club. In addition, we process
debit card transactions for banks issuing these and similar cards. Debit card
transactions permit direct payment debit from a point-of-sale terminal against
the cardholder's deposit account. Merchant card services also include
electronic payment services in supermarket chains and multiple lane retailers,
grocery stores, petroleum and convenience stores and other retailers. We also
process payments effected with EBT cards against funds made available by public
assistance benefit programs through the primary EBT third-party providers.
Merchant card services also provide services to the trucking industry,
including a variety of flexible payment systems that enable drivers of trucking
companies to use payment cards to purchase fuel and to obtain cash advances at
truck stops. Point-of-sale services include point-of-sale terminal driving,
credit, debit and EBT gateway processing, network management, and settlement
and reporting services. Driving means providing the software and
telecommunications network which allows the machine to operate, capturing
customers' card information and authorizing individual transactions.
A credit, debit or EBT card transaction occurs in two stages. At the time of
the transaction, the data related to the purchase is collected; the card is
checked to verify that it is not expired, stolen or forged; and the
cardholders' account is accessed to check credit limits or available balances.
This is termed data capture and authorization, and the functions are
collectively referred to as front-end services. At a later time, generally
overnight, all the credit card purchases that took place at the merchant are
collected together, revalidated and reorganized, and submitted for settlement
of the funds, and the debit and EBT card transactions are settled by directly
debiting each cardholder's account on the basis of the initial instruction.
Merchant accounting, reporting and settlement activities are referred to as
back-end services which are performed primarily through our bank subsidiary,
EFS National Bank.
26
<PAGE>
ATM Services. Our ATM services include driving and monitoring ATMs and
processing the transactions generated at those ATMs, including providing access
to other networks through gateways. We also operate, and on a selective basis
own, ATMs located at truck stops and grocery stores nationwide. The federal
thrift charter held by our subsidiary, EFS Federal Savings Bank, facilitates
the strategic deployment of ATMs by allowing the deployment of ATMs anywhere in
the country without the requirement of a bank branch location.
We also own and operate a regional EFT network under the MAC(R) brand which
is a shared network of ATM and point-of-sale terminals. Our network provides
transaction switching, settlement and reporting to a wide range of financial
institutions, merchants and retail ATM deployers nationwide which join EFT
networks to enable customers to complete transactions at ATMs and point-of-sale
terminals that are not controlled by the card issuing institution. The network
switches transactions between an ATM or point-of-sale terminal and the issuing
institution so that a customer's account information can be retrieved to
authorize a transaction. In addition to the switching functions, the network
participates in the settlement and reporting of the transaction.
Other. We also provide check verification and authorization services and
sell point-of-sale terminals. We also sell payroll processing services to our
retail, grocery store, trucking company and truck stop merchants.
We recently entered into an agreement with E-Com Systems, Inc. to provide a
system to exchange secure Internet data and documents and process electronic
payments between food manufacturers, wholesalers, brokers and supermarkets. The
program utilizes a new Internet-based technology solution that allows companies
to implement the full range of electronic data interchange transactions with
their trading partners, regardless of their size. This is expected to result in
enhanced efficiencies and cost savings without compromising security.
Marketing
We have grown our merchant customer base nationwide primarily through the
efforts of our direct sales force, through independent sales organizations and
through key trade association relationships, including the National Grocers
Association. In 1998, we acquired Digital Merchant Systems and American
Bankcard International, which are independent sales organizations for the
transaction processing industry. Our direct sales force is organized in part by
industry distribution channel to facilitate maximum cross-selling. These
distribution channels include financial institution, petroleum/convenience
store and hospitality, supermarket/major retail and indirect channels.
We believe that our marketing opportunities should expand due to a number of
factors. First, as an integrated services provider, we believe we have cross-
selling marketing opportunities. Following the acquisition of Electronic
Payment Services, we now offer a more comprehensive set of electronic payment
processing services. This creates an opportunity to increase revenue by cross-
selling services to pre-existing clients of Concord and Electronic Payment
Services. Second, we expect EBT transaction volume to continue to grow rapidly
as the federal government has mandated that all food stamp programs be
converted to EBT by October 2002. Our established presence in grocery stores,
supermarket chains, multiple lane retailers, petroleum and convenience stores
and other small and mid-size retailers gives us an advantage in establishing
relationships with EBT providers, whose benefits are utilized largely at those
types of retail locations. Third, as an authorized issuer of payment cards and
processor of card transactions at the major truck stop chains, we have a
substantial advantage in selling our point-of-sale ATM and integrated
processing and banking services to trucking companies and truck drivers. Our
established relationships with the truck stop owners also afford an opportunity
to sell the placement of ATMs at truck stops.
Competition
The markets in which we operate are all highly competitive. Our principal
competitors include major national, regional and local banks, non-bank
processors and other independent service organizations, many of which have
substantially greater capital, management, marketing and technological
resources. While we are
27
<PAGE>
currently one of the largest processors in the electronic payment processing
market, we compete against other companies which have a substantial share of
each market. We estimate the three largest credit and debit card processors
account for roughly 50% of the total credit and debit card sales volume, and
that 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.
We own and operate the MAC(R)-branded EFT network, one of the largest
networks in the country. Key competitors are other national and regional EFT
networks, especially those that have high membership in markets overlapping
ours, as well as other processors and large financial institutions. These
competitors continue to consolidate as large banks merge and combine their EFT
networks into larger super-regional conglomerates. The continued expansion of
the national debit networks operated by VISA and MasterCard also increases
competitive pressures.
For all of our business lines, we compete on the basis of product, quality,
customer service, speed and flexibility in customizing systems to meet the
particular needs of customers, and price. We believe that we are one of the few
fully integrated suppliers of a broad range of processing, banking and data
compilation services for use in transactions at merchant and financial
institution locations. We also believe we have been able to successfully
compete in all business lines, but there are no assurances that this will
continue.
Supervision and Regulation
Concord and its subsidiaries are subject to a number of federal and state
laws. As a bank holding company, we are subject to regulation under the Bank
Holding Company Act of 1956 which is administered by the Board of Governors of
the Federal Reserve. Under the Bank Holding Company Act, we are generally
prohibited from:
. directly engaging in any activities other than banking, managing or
controlling banks, and bank-related activities;
. acquiring 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 Federal
Reserve determines are closely related to banking); and
. engaging in certain tie-in arrangements with our bank (or between our
bank and its affiliates) with respect to the lease or sale of property,
furnishing of services, or the extension of credit.
The Bank Holding Company Act also restricts, to some extent, future mergers
with other bank holding companies and banks.
Our bank subsidiaries, EFS National Bank and EFS Federal Savings Bank, are
also regulated by the Office of the Comptroller of the Currency and the Office
of Thrift Supervision, respectively.
Employees
As of March 31, 1999, Concord and its subsidiaries employed approximately
2,100 full and part-time personnel, including 325 data processing and technical
employees, 950 in operations, and 825 in sales and administration. Many of our
employees are highly skilled, and we believe our future success will depend in
a large part on our ability to attract and retain such employees. We have
incentive agreements with Dan M. Palmer and Edward A. Labry III, and we have
employment agreements with Richard N. Garman, Ruth Ann Marshall and two other
key employees of Electronic Payment Services. The employment agreements with
the employees of Electronic Payment Services have no fixed term but may be
terminated at any time with a fixed amount of severance to be paid only if the
employee is terminated or removed without cause (or in the case of Mr. Garman,
if he terminates his employment with good reason). If a release is signed,
severance and benefits will be paid to Mr. Garman, Ms. Marshall and the two
other key employees for one year (and benefits for an additional year in the
case of Mr. Garman) with options vesting. We do not have any material
employment contracts with other employees.
None of our employees are represented by a labor union and we have
experienced no work stoppages. We consider our employee relations to be
excellent.
28
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information concerning our directors
and executive officers as of March 31, 1999:
<TABLE>
<CAPTION>
Name Age Position(s)
---- --- ----------------------------------------------
<C> <C> <S>
Dan M. Palmer......... 56 Chairman of the Board and Chief Executive
Officer
Edward A. Labry III... 36 President and Director
Vickie Brown.......... 46 Senior Vice President, Chief Operating Officer
Thomas J. Dowling..... 33 Vice President, Chief Financial Officer
Richard N. Garman..... 42 President and Chief Executive Officer of
Electronic Payment Services
William E. Lucado..... 58 Senior Vice President, Chief Investment and
Compliance Officer
Ruth Ann Marshall..... 45 Executive Vice President of Electronic Payment
Services
Douglas C. Altenbern*. 61 Director
David C. Anderson*+... 56 Director
Richard Buchignani*... 50 Director
Richard M. Harter*.... 62 Director
Joyce Kelso........... 57 Director
Richard P. Kiphart*... 57 Director
Jerry D. Mooney*+..... 46 Director
Paul Whittington*+ .. 63 Director
</TABLE>
*Member of the Board's Audit Committee.
+Member of the Board's Compensation Committee.
Dan M. Palmer became Chairman of the Board in February 1991. Mr. Palmer has
been Chief Executive Officer of Concord since August 1989, and a director of
Concord 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.
Edward A. Labry III 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 Concord. In February 1991, he was elected
Senior Vice President of Concord. He became President of Concord in October
1994, and President of EFS National Bank in December 1994.
Vickie Brown joined Concord in 1979 as an accountant. She served as
Treasurer from 1982 through 1991, was elected Vice President in April 1985 and
Senior Vice President in February 1991. Ms. Brown served as Chief Operating
Officer of Concord Computing Corporation from 1990 through 1992. Ms. Brown has
been Chief Operating Officer of Concord since 1997.
Thomas J. Dowling joined Concord in May 1992 as Assistant Controller. Mr.
Dowling became Vice President and Controller of Concord in September 1995 and
Chief Financial Officer in September, 1998. Prior to May 1992, he was a senior
audit accountant and CPA at Ernst & Young LLP.
29
<PAGE>
Richard N. Garman joined Electronic Payment Services in 1995 as President
and Chief Operating Officer and assumed the role of Chief Executive Officer in
1997. Since Concord's acquisition of Electronic Payment Services on February
26, 1999, he has continued to serve as President and Chief Executive Officer of
Electronic Payment Services. Prior to joining Electronic Payment Services, Mr.
Garman was a partner in the investment banking firm of Montgomery Securities.
William E. Lucado joined Concord in 1991 as a Vice President. He was named
Senior Vice President, Compliance Officer for EFS National Bank in 1992, and in
1994 he was also elected Senior Vice President of Concord. In 1995, he was
elected a Senior Vice President, Investment Officer and Compliance Officer,
Corporate Secretary, and Director of EFS National Bank and other subsidiary
companies. In 1996, he was elected Assistant Secretary of Concord and in 1997
he was elected President of EFS Federal Savings Bank. He was named Chief
Investment and Compliance Officer of Concord in 1998.
Ruth Ann Marshall joined Electronic Payment Services in 1995 as Group
Executive responsible for its two subsidiaries, BUYPASS Corporation and Money
Access Services, Inc. In 1998 she was named Executive Vice President of
Electronic Payment Services. Prior to joining Electronic Payment Services, Ms.
Marshall served as Director of Customer Financing for IBM Credit Corporation,
where she previously held several management positions.
Douglas C. Altenbern has been a director of Concord since 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.
David C. Anderson has been a director of Concord 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 in Fort Worth, Texas for three
years prior to his retirement in 1995.
Richard Buchignani has been a director of Concord 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 Concord. 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.
Richard M. Harter has been Concord's Secretary and a director since
Concord's formation. He is a partner of Bingham Dana & Gould LLP, legal counsel
to Concord.
Joyce Kelso has been a director of Concord 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 Concord. On January 1, 1995,
Mrs. Kelso semi-retired, and on January 1, 1997, she became fully retired.
Richard P. Kiphart has been a director of Concord since March 1997. In 1972
he became a Principal of William Blair & Company, L.L.C. 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.
Jerry D. Mooney has been a director of Concord since August 1992. Since
August 1997, he had been President and CEO of ServiceMaster Employer Services,
Inc. He retired from this position in late 1998. 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.
Paul L. Whittington has been a director of Concord 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.
30
<PAGE>
Properties
Our principal executive offices, which are leased, are located at 2525
Horizon Lake Drive, Suite 120, Memphis, Tennessee 38133. We also own a building
in Wilmington, Delaware which is used as a data center, and we lease
approximately 20 other properties which are used for sales and support, data
processing field service and various other aspects of our operations.
PRINCIPAL AND SELLING STOCKHOLDERS
Beneficial Ownership
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of May 14, 1999, and as adjusted to reflect
the sale of the shares in this offering, of:
. each of the directors and executive officers of Concord;
. all the directors and executive officers as a group;
. each owner of more than 5% of the equity securities of Concord; and
. each selling stockholder.
The information in the table assumes that the underwriters will not exercise
their over-allotment option to purchase additional shares in this offering.
Unless otherwise indicated, the address for each director and executive
officer of Concord is 2525 Horizon Lake Drive, Suite 120, Memphis, Tennessee
38133.
<TABLE>
<CAPTION>
Shares Shares
Beneficially Beneficially
Owned Prior Owned After
to Offering Shares Offering
Name and Address of Beneficial ------------------ Being ------------------
Owner Number Percent Offered Number Percent
- ------------------------------ ---------- ------- --------- ---------- -------
<S> <C> <C> <C> <C> <C>
Dan M. Palmer(1)............... 2,300,622 1.8% -- 2,300,622 1.8%
Edward A. Labry III(2)......... 1,838,234 1.4 -- 1,838,234 1.4
Vickie Brown(1)................ 65,905 * -- 65,905 *
Thomas J. Dowling(1)........... 25,889 * -- 25,889 *
Richard N. Garman(3)........... 830,453 * -- 830,453 *
William E. Lucado(4)........... 55,128 * -- 55,128 *
Ruth Ann Marshall(5)........... 182,857 * -- 182,857 *
Joyce Kelso(6)................. 260,398 * -- 260,398 *
Richard P. Kiphart(6).......... 3,678,355 2.9 -- 3,678,355 2.8
Richard M. Harter(7)........... 86,366 * -- 86,366 *
Jerry D. Mooney(7)............. 41,916 * -- 41,916 *
David C. Anderson(7)........... 21,759 * -- 21,759 *
J. Richard Buchignani(7)....... 21,825 * -- 21,825 *
Paul Whittington(7)............ 19,228 * -- 19,228 *
Douglas C. Altenbern........... 12,000 * -- 12,000 *
All directors and executive
officers as a group
(15 persons)(8)............... 9,440,935 7.4 -- 9,440,935 7.2
William Blair & Company, 13,189,581 10.3 -- 13,189,581 10.1
L.L.C.(9).....................
222 West Adams Street
Chicago, IL 60606
AMVESCAP PLC and 7,439,355 5.8 -- 7,439,355 5.7
Subsidiaries(10)..............
11 Devonshire Square
London, England EC2M 4YR
Selling Stockholders(11):
BANK ONE CORPORATION......... 5,931,825 4.6 5,931,825 -- --
Corestates Holdings, Inc..... 5,931,825 4.6 5,931,825 -- --
KeyCorp...................... 5,931,825 4.6 5,235,825 696,000 *
National City Corporation.... 5,931,825 4.6 5,931,825 -- --
PNC Network Holdings
Corp.(12)................... 5,931,825 4.6 5,931,825 -- --
</TABLE>
- --------
31
<PAGE>
* Denotes less than 1%.
(1) Shares owned are unexercised stock options.
(2) Shares owned include 1,835,156 shares covered by unexercised stock
options.
(3) Shares owned include 625,806 shares covered by unexercised stock options.
(4) Shares owned include 54,678 shares covered by unexercised stock options.
(5) Shares owned include 132,832 shares covered by unexercised stock options.
(6) Shares owned include 4,500 shares covered by unexercised stock options.
(7) Shares owned include 14,166 shares covered by unexercised stock options.
(8) Shares owned include 4,215,608 shares covered by unexercised stock
options.
(9) Based on a Schedule 13G dated as of March 16, 1999, filed by William Blair
& Company, L.L.C. (Blair). Includes 1,794,903 shares as to which Blair has
sole voting power and 13,189,581 shares as to which Blair has sole
dispositive power. Blair disclaims beneficial ownership as to 11,394,678
of such shares.
(10) Based on a Schedule 13G dated as of February 10, 1999, filed by AMVESCAP
PLC and Subsidiaries.
(11) Based upon information provided by the selling stockholders.
(12) We have been advised by PNC Network Holdings Corp. that the selling
stockholder will be PNC Network Holdings Corp. and may also include one or
both of the following transferees: (i) the PNC Bank Foundation, and (ii) a
charitable remainder trust of which PNC Network Holdings Corp. or one of
its affiliates is the income beneficiary and the PNC Bank Foundation is
the remainder beneficiary.
32
<PAGE>
UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
This is a general discussion of United States federal tax consequences of
the acquisition, ownership and disposition of our common stock by a beneficial
holder that, for United States federal income tax purposes, is a nonresident
alien individual, a foreign corporation, a foreign partnership or a foreign
estate or trust (a "Non-United States Holder"). We have based this summary upon
the United States federal tax law in effect as of the date of this prospectus.
These laws may change, possibly retroactively.
We do not discuss all aspects of United States federal taxation that may be
important to you in light of your particular circumstances, such as special tax
rules that apply if you are a financial institution, insurance company, broker-
dealer, tax-exempt organization or investor holding our common stock as part of
a "straddle" or other integrated investment. We urge you to consult your tax
advisor about the United States federal tax consequences of acquiring, holding
and disposing of our common stock in your particular circumstances, as well as
any tax consequences that may arise under the laws of any foreign, state, local
or other taxing jurisdiction.
Dividends
Dividends paid to a Non-United States Holder will generally be subject to
withholding of United States federal income tax at the rate of 30%, or such
lower rate as may be provided by an applicable income tax treaty between the
United States and the country of which the Non-United States Holder is a tax
resident. If, however, the dividend is effectively connected with the conduct
of a trade or business in the United States by the Non-United States Holder,
the dividend will be exempt from withholding (subject to satisfaction of
applicable certification procedures) and will instead be subject to the United
States federal income tax imposed on net income on the same basis that applies
to United States persons generally (assuming, if required by an applicable tax
treaty, the dividends are attributable to a permanent establishment maintained
by such non-United States Holder within the United States), and, for corporate
holders and under some circumstances, the branch profits tax.
For purposes of determining whether tax is to be withheld at a reduced rate
as specified by a treaty, we generally will presume that dividends we pay on or
before December 31, 2000 to an address in a foreign country are paid to a
resident of that country. Under recently finalized Treasury regulations, which
in general are expected to apply to dividends that we pay after December 31,
2000, to obtain a reduced rate of withholding under a treaty, a Non-United
States Holder generally will be required to provide an Internal Revenue Service
Form W-8BEN certifying that Non-United States Holder's entitlement to treaty
benefits. In addition, in the case of common stock held by a foreign
partnership, the certification requirement generally will apply to the partners
of the partnership and the partnership must provide certain information,
including a United States taxpayer identification number.
33
<PAGE>
Gain on Disposition
A Non-United States Holder will generally not be subject to United States
federal income tax, including by way of withholding, on gain recognized on a
sale or other disposition of our common stock unless:
. the gain is effectively connected with the conduct of a trade or
business in the United States by the Non-United States Holder or
. in the case of a Non-United States Holder who is a nonresident alien
individual and who holds our common stock as a capital asset, that holder is
present in the United States for 183 or more days in the taxable year of the
disposition and certain other requirements are met.
Gain that is effectively connected with the conduct of a trade or business
in the United States by the Non-United States Holder will be subject to the
United States federal income tax imposed on net income on the same basis that
applies to United States persons generally, and, for corporate holders and
under some circumstances, the branch profits tax, but will not be subject to
withholding. Non-United States Holders should consult any applicable income tax
treaties that may provide for different rules.
United States Federal Estate Taxes
Our common stock that is owned or treated as owned by an individual who is
not a citizen or resident of the United States, as specially defined for United
States federal estate tax purposes, on the date of that person's death will be
included in his or her estate for United States federal estate tax purposes,
unless an applicable estate tax treaty provides otherwise.
Information Reporting and Backup Withholding
Generally, we must report annually to the United States Internal Revenue
Service and to each Non-United States Holder the amount of dividends that we
paid to a holder and the amount of tax that we withheld on such dividends. This
information may also be made available to the tax authorities of a country in
which the Non-United States Holder resides.
United States information reporting requirements and backup withholding tax
will generally not apply to dividends that we pay on our common stock to a Non-
United States Holder at an address outside the United States, except that, with
respect to payments made after December 31, 2000, a Non-United States Holder
will be entitled to this exemption only if it provides a Form W-8BEN (or
satisfies certain documentary evidence requirements for establishing that it is
a Non-United States Holder) or otherwise establishes an exemption. Payments by
a United States office of a broker of the proceeds of a sale of our common
stock are subject to both backup withholding at a rate of 31% and information
reporting, unless the holder certifies its Non-United States Holder status
under penalties of perjury or otherwise establishes an exemption.
Information reporting requirements, but not backup withholding, will also
apply to payments of the proceeds from sales of our common stock by foreign
offices of United States brokers, or foreign brokers with certain types of
relationships to the United States, unless the broker has documentary evidence
in its records that the holder is a Non-United States Holder and certain other
conditions are met, or the holder otherwise establishes an exemption.
Backup withholding is not an additional tax. Any amounts that we withhold
under the backup withholding rules will be refunded or credited against the
Non-United States Holder's United States federal income tax liability, if the
required information is furnished to the United States Internal Revenue
Service.
34
<PAGE>
UNDERWRITING
Subject to the terms and conditions stated in the U.S. underwriting
agreement dated the date hereof, each of the U.S. underwriters named below, for
whom Salomon Smith Barney Inc., William Blair & Company, L.L.C., Goldman, Sachs
& Co., J.P. Morgan Securities Inc. and Morgan Keegan & Company, Inc. are acting
as representatives, has severally agreed to purchase, and Concord and the
selling stockholders have agreed to sell to such U.S. underwriter, the number
of shares set forth opposite the name of such U.S. underwriter.
<TABLE>
<CAPTION>
Number of
U.S. Underwriter Shares
---------------- ----------
<S> <C>
Salomon Smith Barney Inc.......................................
William Blair & Company, L.L.C.................................
Goldman, Sachs & Co............................................
J.P. Morgan Securities Inc.....................................
Morgan Keegan & Company, Inc...................................
----------
Total...................................................... 24,770,500
==========
</TABLE>
Subject to the terms and conditions stated in the international underwriting
agreement dated the date hereof, each of the international underwriters named
below, for whom Salomon Brothers International Limited, William Blair &
Company, L.L.C., Goldman Sachs International, J.P. Morgan Securities Ltd. and
Morgan Keegan & Company, Inc. are acting as representatives, has severally
agreed to purchase, and Concord and the selling stockholders have agreed to
sell to such international underwriter, the number of shares set forth opposite
the name of such international underwriter.
<TABLE>
<CAPTION>
Number of
International Underwriter Shares
------------------------- ---------
<S> <C>
Salomon Brothers International Limited..........................
William Blair & Company, L.L.C..................................
Goldman Sachs International.....................................
J.P. Morgan Securities Ltd......................................
Morgan Keegan & Company, Inc....................................
---------
Total....................................................... 6,192,625
=========
</TABLE>
The U.S. underwriting agreement and the international underwriting agreement
provide that the obligations of the several underwriters to purchase the shares
included in this offering are subject to approval of certain legal matters by
counsel and to certain other conditions. The U.S. underwriting agreement and
the international underwriting agreement provide that the obligations of the
U.S. underwriters and the international underwriters are such that if any of
the shares are purchased by the U.S. underwriters pursuant to the U.S.
underwriting agreement, or by the international underwriters pursuant to the
international underwriting agreement, all the shares agreed to be purchased by
either the U.S. underwriters or the international underwriters, as the case may
be, pursuant to their respective agreements (other than those covered by the
over-allotment option described below) must be so purchased. The price to
public and underwriting discount per share for the U.S. offering and the
international offering will be identical. The closing of the international
offering is a condition to the closing of the U.S. offering and the closing of
the U.S. offering is a condition to the closing of the international offering.
The underwriters propose to offer some of the shares directly to the public
at the public offering price set forth on the cover page of this prospectus and
some of the shares to certain dealers at the public offering price less a
concession not in excess of $ per share. The underwriters may allow, and
such dealers may reallow, a concession not in excess of $ per share on
sales to certain other dealers. If all of the shares are not sold at the
initial offering price, the representatives may change the public offering
price and the other selling terms.
35
<PAGE>
Concord has granted to the U.S. underwriters an option, exercisable for 30
days from the date of this prospectus, to purchase up to 4,640,000 additional
shares of common stock from Concord at the public offering price less the
underwriting discount. The underwriters may exercise such option solely for the
purpose of covering over-allotments, if any, in connection with this offering.
To the extent such option is exercised, each underwriter will be obligated,
subject to certain conditions, to purchase a number of additional shares
approximately proportionate to such underwriter's initial purchase commitment.
Each U.S. underwriter has severally agreed that, as part of the distribution
of 24,770,500 shares offered by the U.S. underwriters, (i) it is not purchasing
any such shares for the account of anyone other than a United States or
Canadian person and (ii) it has not offered or sold, and will not offer or
sell, directly or indirectly, any such shares or distribute any U.S. prospectus
to any person outside the United States or Canada, or to anyone other than a
United States or Canadian person. Each international underwriter has severally
agreed that, as part of the distribution of 6,192,625 shares by the
international underwriters, (i) it is not purchasing any such shares for the
account of any United States or Canadian person and (ii) it has not offered or
sold, and will not offer or sell, directly or indirectly, any such shares or
distribute any international prospectus to any person in the United States or
Canada, or to any United States or Canadian person.
The foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the U.S. underwriting agreement, the
international underwriting agreement and the agreement between U.S.
underwriters and international underwriters, including: (i) certain purchases
and sales between the U.S. underwriters and the international underwriters;
(ii) certain offers, sales, resales, deliveries or distributions to or through
investment advisors or other persons exercising investment discretion; (iii)
purchases, offers or sales by a U.S. underwriter who is also acting as an
international underwriter; and (iv) other transactions specifically approved by
the representatives. As used herein, "United States or Canadian person" means
any person who is a national or resident of the United States or Canada, any
corporation, partnership or other entity created or organized in or under the
laws of the United States or Canada or of any political subdivision thereof,
and any estate or trust the income of which is subject to United States or
Canadian Federal income taxation, regardless of its source (other than any non-
United States or non-Canadian branch of any United States or Canadian person),
and includes any United States or Canadian branch of a person other than a
United States or Canadian person.
Pursuant to the agreement between U.S. underwriters and international
underwriters, sales may be made between the U.S. underwriters and the
international underwriters of such number of shares as may be mutually agreed.
The price of any shares so sold shall be the public offering price less an
amount not greater than the concession to securities dealers. To the extent
that there are sales between the U.S. underwriters and the international
underwriters, the number of shares initially available for sale by the U.S.
underwriters or by the international underwriters may be more or less than the
amount specified on the cover page of this prospectus.
Any offer of the shares in Canada will be made only pursuant to an exemption
from the registration and qualification requirements in any jurisdiction in
Canada in which such offer is made.
Each international underwriter has severally represented and agreed that it
(i) has not offered or sold, and prior to the expiration of six months from the
closing date, will not offer or sell in the United Kingdom any shares other
than to persons whose ordinary activities involve them in acquiring, holding,
managing or disposing of investments (whether as principal or agent) for the
purpose of their business or in circumstances which constitute an offer to the
public in the United Kingdom for the purposes of the Public Offers of
Securities Regulation 1995, (ii) has complied and will comply with all
applicable provisions of the Financial Services Act 1986 with respect to
anything done by it in relation to the international securities, in, from or
otherwise involving the United Kingdom and (iii) has only issued or passed on
and will only issue or pass onto any person in the United Kingdom any document
received by it in connection with the issue of the shares if that person is of
a kind described in Article 11(3) of the Financial Services Act of 1986
(Investment Advertisements) (Exemptions) Order 1996 (as amended) or is a person
to whom the document may otherwise lawfully be issued or passed on.
36
<PAGE>
No action has been or will be taken in any jurisdiction by Concord, the
selling stockholders, the U.S. underwriters or the international underwriters
that would permit any offering to the general public of the shares offered
hereby in any jurisdiction other than the United States.
Purchasers of the shares offered hereby may be required to pay stamp taxes
and other charges in accordance with the laws and practices of the country of
purchase in addition to the offering price set forth on the cover page of this
prospectus.
In connection with the offering, Concord, Concord's executive officers and
directors, and an additional existing stockholder of Concord have agreed that
they will not, directly or indirectly, during the period ending 90 days after
the date of this prospectus, in each case without the prior written consent of
Salomon Smith Barney Inc. and William Blair & Company, L.L.C. on behalf of the
underwriters:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend, or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
. enter into any swap or other arrangement that transfers to another
person, in whole or in part, any of the economic consequences of
ownership of the common stock, whether any transaction described above
is to be settled by delivery of common stock or other securities, in
cash, or otherwise.
The restrictions described in the previous paragraph do not apply to:
. the sale of the shares to the underwriters;
. the issuance of shares in connection with future acquisition
transactions;
. the issuance by Concord of options to purchase shares under its existing
option plans, the issuance by Concord of shares of common stock upon the
exercise of an option or a warrant or the conversion of a security
outstanding on the date of this prospectus or the sale or transfer of
shares of common stock upon the exercise of certain options; or
. certain other limited circumstances in the case of the additional
existing stockholder of Concord.
In addition, each of the selling stockholders has agreed not to sell or
distribute any shares of common stock of Concord except under this offering
within seven days prior to, or 90 days after, the date of this prospectus.
Salomon Smith Barney Inc. and William Blair & Company, L.L.C. in their sole
discretion may release any of the securities subject to these lock-up
agreements at any time without notice.
The common stock is quoted on the Nasdaq National Market under the symbol
"CEFT."
The following table shows the underwriting discounts and commissions to be
paid to the underwriters by Concord and the selling stockholders in connection
with this offering. These amounts are shown assuming both no exercise and full
exercise of the underwriters' option to purchase additional shares of common
stock.
<TABLE>
<CAPTION>
Paid by Concord Paid by Selling Stockholders
------------------------- --------------------------------
No Exercise Full Exercise No Exercise Full Exercise
----------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
Per share..... $ $ $ $
Total......... $ $ $ $
</TABLE>
In connection with the offering, Salomon Smith Barney Inc., on behalf of the
underwriters, may purchase and sell shares of common stock in the open market.
These transactions may include over-allotment, syndicate covering transactions
and stabilizing transactions. Over-allotment involves syndicate sales of common
stock in excess of the number of shares to be purchased by the underwriters in
the offering, which creates a syndicate short position. Syndicate covering
transactions involve purchases of the common stock in the open market after
37
<PAGE>
the distribution has been completed in order to cover syndicate short
positions. Stabilizing transactions consist of certain bids or purchases of
common stock made for the purpose of preventing or retarding a decline in the
market price of the common stock while the offering is in progress.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Salomon Smith Barney Inc., in covering syndicate short positions or making
stabilizing purchases, repurchases shares originally sold by that syndicate
member.
Any of these activities may cause the price of the common stock to be higher
than the price that otherwise would exist in the open market in the absence of
such transactions. These transactions may be effected on the Nasdaq National
Market or in the over-the-counter market or otherwise and, if commenced, may be
discontinued at any time.
In addition, in connection with this offering, certain of the underwriters
and selling group members may engage in passive market making transactions in
the common stock on the Nasdaq National Market prior to the pricing and
completion of the offering. Passive market making consists of displaying bids
on the Nasdaq National Market no higher than the bid prices of independent
market makers and making purchases at prices no higher than those independent
bids and effected in response to order flow. Net purchases by a passive market
maker on each day are limited to a specified percentage of the passive market
maker's average daily trading volume in the common stock during a specified
period and must be discontinued when such limit is reached. Passive market
making may cause the price of the common stock to be higher than the price that
otherwise would exist in the open market in the absence of such transactions.
If passive market making is commenced, it may be discontinued at any time.
Concord estimates that its total expenses related to this offering will be
$1,100,000.
The representatives have performed certain investment banking and advisory
services for Concord and the selling stockholders from time to time for which
they have received customary fees and expenses. The representatives may, from
time to time, engage in transactions with and perform services for Concord in
the ordinary course of their business.
As of May 11, 1999, certain principals (including Richard P. Kiphart, a
director of Concord) of William Blair & Company, L.L.C., one of the
underwriters, beneficially own an aggregate of 5,579,537 shares of Concord's
common stock, which will represent 4.3% of the outstanding common stock of
Concord upon the closing of this offering. In addition, certain mutual funds
affiliated with, and certain discretionary accounts advised by, William Blair &
Company, L.L.C., beneficially own shares of common stock. Accordingly, this
offering is being made in conformity with certain applicable provisions of Rule
2720 of the Conduct Rules of the National Association of Securities Dealers,
Inc.
Concord and each of the selling stockholders have agreed to indemnify the
underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, or to contribute to payments the underwriters may be
required to make in respect of any of those liabilities.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
Concord by Sidley & Austin, Chicago, Illinois, and for the underwriters by
Cleary, Gottlieb, Steen & Hamilton, New York, New York.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1998 and 1997 and for each of the three
years in the period ended December 31, 1998, as set forth in their report. We
have included our consolidated financial statements in this prospectus and
elsewhere in the registration statement in reliance on Ernst & Young LLP's
report, given on their authority as experts in accounting and auditing.
38
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities Exchange Commission (SEC). You may read and
copy any document we file at the public reference facilities of the SEC in
Washington, D.C., Chicago, Illinois and New York, New York. Please call the
SEC at 1-800-SEC-0330 for further information on the public reference rooms.
Our SEC filings are also available to the public from the SEC's web site at
http://www.sec.gov.
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus and any later information that we
file with the SEC will automatically update and supersede this information. We
incorporate by reference the documents listed below and any additional
documents we file with the SEC until the offering of the common stock is
terminated. This prospectus is part of a registration statement on Form S-3
that we filed with the SEC. The documents we incorporate by reference are:
. Our Annual Report on Form 10-K for the year ended December 31, 1998.
. Our Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.
. Our Current Report on Form 8-K filed on March 10, 1999.
. Our Current Report on Form 8-K filed on May 6, 1999.
. The description of our common stock that is contained in our
Registration Statement on Form 8-A filed on September 4, 1985 together
with any and all amendments and reports filed for the purpose of
updating such description.
Any statement contained in this prospectus or in a document incorporated by
reference is modified or superseded for purposes of this prospectus to the
extent that a statement contained in any such document modifies or supersedes
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
prospectus.
You may request a copy of these filings, at no cost, by writing or
telephoning us at the following address:
Concord EFS, Inc.
Attn: Investor Relations
2525 Horizon Lake Drive
Suite 120
Memphis, Tennessee 38133
(901) 371-8000
39
<PAGE>
CONCORD EFS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Financial Statements at December 31, 1998 and December 31, 1997 and for
each of the three years in the period ended December 31, 1998
Consolidated Balance Sheets............................................ F-2
Consolidated Statements of Income...................................... F-3
Consolidated Statements of Stockholders' Equity........................ F-4
Consolidated Statements of Cash Flows.................................. F-5
Notes to Consolidated Financial Statements............................. F-6
Report of Independent Auditors......................................... F-20
Financial Statements at March 31, 1999 and for each of the three-month
periods ended March 31, 1999 and March 31, 1998
Condensed Consolidated Balance Sheets (unaudited)...................... F-21
Condensed Consolidated Statements of Income (unaudited)................ F-22
Condensed Consolidated Statements of Cash Flows (unaudited)............ F-23
Notes to Condensed Consolidated Financial Statements (unaudited)....... F-24
</TABLE>
F-1
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
--------------------
ASSETS 1998 1997
------ --------- ---------
(in thousands)
<S> <C> <C>
Current assets
Cash and cash equivalents.............................. $ 82,029 $ 82,592
Securities available-for-sale (amortized cost of
$286,370 at December 31, 1998 and $140,038 at December
31, 1997)............................................. 288,180 140,199
Accounts receivable, less allowance of $2,324 at
December 31, 1998 and $3,340 at December 31, 1997..... 106,662 82,467
Inventories............................................ 11,396 5,898
Prepaid expenses and other current assets.............. 7,863 5,984
Deferred income taxes.................................. 5,977 4,600
--------- ---------
Total current assets................................. 502,107 321,740
Securities held-to-maturity (fair value of $53,634 at
December 31, 1997)...................................... 52,508
Other assets............................................. 23,615 27,656
Property and equipment................................... 302,937 240,954
Accumulated depreciation and amortization.............. (148,447) (114,438)
--------- ---------
154,490 126,516
--------- ---------
Intangible assets........................................ 146,712 122,982
Accumulated amortization............................... (42,806) (32,206)
--------- ---------
103,906 90,776
--------- ---------
Total assets......................................... $ 784,118 $ 619,196
========= =========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities
Accounts payable and other liabilities................. $ 112,376 $ 70,403
Accrued liabilities.................................... 47,641 38,489
Income taxes payable................................... 10,148 9,416
Short-term borrowings.................................. 21,000 29,000
Current maturities of long-term debt................... 25,116 25,445
--------- ---------
Total current liabilities............................ 216,281 172,753
--------- ---------
Long-term debt, less current maturities.................. 173,000 153,329
Deferred income taxes.................................... 21,336 17,860
Other liabilities........................................ 12,966 14,710
Stockholders' equity
Common stock, $0.33 1/3 par value; authorized 200,000
shares, Issued and outstanding 127,935 shares at
December 31, 1998 and 86,447 shares at December 31,
1997.................................................. 42,646 28,816
Additional paid-in capital............................. 55,018 58,622
Retained earnings...................................... 261,702 173,007
Accumulated other comprehensive income................. 1,169 99
--------- ---------
Total stockholders' equity........................... 360,535 260,544
--------- ---------
Total liabilities and stockholders' equity........... $ 784,118 $ 619,196
========= =========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For Year Ended December 31
----------------------------
1998 1997 1996
-------- -------- --------
(in thousands, except per
share data)
<S> <C> <C> <C>
Revenue.......................................... $634,511 $490,030 $355,459
Cost of operations............................... 446,515 340,770 241,273
Selling, general and administrative expenses..... 51,185 50,008 42,811
-------- -------- --------
Operating income................................. 136,811 99,252 71,375
Other income (expense):
Interest income................................ 18,379 12,287 4,468
Interest expense............................... (14,676) (14,076) (14,764)
-------- -------- --------
Income before taxes.............................. 140,514 97,463 61,079
Income taxes................................... 51,819 37,771 23,347
-------- -------- --------
Net income....................................... $ 88,695 $ 59,692 $ 37,732
======== ======== ========
Per share data:
Basic earnings per share....................... $ 0.69 $ 0.47 $ 0.32
======== ======== ========
Diluted earnings per share..................... $ 0.67 $ 0.46 $ 0.31
======== ======== ========
Weighted average shares........................ 127,693 126,592 116,291
======== ======== ========
Adjusted weighted average shares and assumed
conversions 131,947 129,937 120,189
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other
--------------- Paid-In Retained Comprehensive
Shares Amount Capital Earnings Income Total
------- ------- ---------- -------- ------------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1996................... 33,848 $11,282 $(41,326) $ 75,583 $ (200) $ 45,339
Exercise of stock
options.............. 1,074 358 4,496 4,854
Secondary offering of
common stock......... 3,450 1,150 86,761 87,911
Tax benefit of
disqualifying
disposition of
incentive stock
option shares........ 6,586 6,586
Three for two stock
splits............... 42,488 14,163 (14,163)
Net income............ 37,732 37,732
Net unrealized losses
on securities, net of
tax.................. (296) (296)
--------
Comprehensive income.. 37,436
------- ------- -------- -------- ------ --------
Balance at December 31,
1996................... 80,860 26,953 42,354 113,315 (496) 182,126
Restatement for
poolings of
interests............ 4,511 1,504 4,110 5,614
------- ------- -------- -------- ------ --------
Restated balance at
January 1, 1997........ 85,371 28,457 46,464 113,315 (496) 187,740
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
Net income............ 59,692 59,692
Net unrealized gains
on securities, net of
tax.................. 595 595
--------
Comprehensive income.. 60,287
------- ------- -------- -------- ------ --------
Balance at December 31
1997................... 86,447 28,816 58,622 173,007 99 260,544
Exercise of stock
options.............. 413 138 6,458 6,596
Three for two stock
split................ 41,075 13,692 (13,692)
Tax benefit of
disqualifying
disposition of
incentive stock
option shares........ 3,630 3,630
Net income............ 88,695 88,695
Cumulative effect of
accounting change.... 776 776
Net unrealized gains
on securities, net of
tax.................. 294 294
--------
Comprehensive income.. 89,765
------- ------- -------- -------- ------ --------
Balance at December 31,
1998................... 127,935 $42,646 $ 55,018 $261,702 $1,169 $360,535
======= ======= ======== ======== ====== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------
1998 1997 1996
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Operating activities
Net income.................................. $ 88,695 $ 59,692 $ 37,732
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.............. 55,390 41,566 34,827
Provision for losses on accounts
receivable................................ 3,654 1,445 817
Deferred income taxes (benefit)............ 1,520 (7,330) 6,896
Changes in operating assets and
liabilities:
Accounts receivable....................... (27,849) (17,489) 25,581
Inventories............................... (5,498) (291) 161
Other current assets...................... (1,879) (1,024) (342)
Accounts payable and other liabilities.... 41,973 (22,425) 20,084
Accrued liabilities....................... 13,310 25,414 13,636
Other liabilities......................... (1,744) -- --
--------- --------- ---------
Net cash provided by operating activities..... 167,572 79,558 139,392
Investing activities
Acquisition of property and equipment....... (65,205) (44,042) (47,727)
Securities held-to-maturity:
Acquisition of securities.................. (9,630) (17,141) (57,135)
Proceeds from maturity of securities....... 4,843 21,347 809
Securities available-for-sale:
Acquisition of securities.................. (241,314) (156,515) (36,054)
Proceeds from sales of securities.......... 104,383 48,401 --
Proceeds from maturity of securities....... 48,098 32,178 173
Merchant contracts purchased................ (16,946) (12,986) (3,565)
Acquisition of business..................... (6,000) -- --
Proceeds from licensing agreement........... -- 25,000 --
Other....................................... (4,302) (2,406) (13,464)
--------- --------- ---------
Net cash used in investing activities......... (186,073) (106,164) (156,963)
Financing activities
Proceeds from exercise of stock options..... 6,596 6,659 4,854
Proceeds from secondary offering of common
stock...................................... -- -- 87,911
Proceeds from notes payable................. 45,000 28,000 --
Borrowing (repayment) under credit agreement
(net)...................................... (8,000) (21,000) 15,000
Payments on notes payable................... (25,658) (25,418) (25,392)
--------- --------- ---------
Net cash provided by (used in) financing
activities................................... 17,938 (11,759) 82,373
--------- --------- ---------
Net (decrease) increase in cash and cash
equivalents.................................. (563) (38,365) 64,802
Cash and cash equivalents at beginning of
period....................................... 82,592 120,957 56,155
--------- --------- ---------
Cash and cash equivalents at end of period.... $ 82,029 $ 82,592 $ 120,957
========= ========= =========
Disclosures of cash flow information:
Cash paid during the period for:
Interest.................................... $ 14,346 $ 13,725 $ 14,768
========= ========= =========
Income taxes................................ $ 46,346 $ 32,940 $ 9,326
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
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.), Pay Systems of America, Inc. (PSA), Digital Merchant
Systems, Inc. (DMS), and Electronic Payment Services, Inc. (EPS),
(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.
Basis of Presentation: These consolidated financial statements give
retroactive effect to the merger of the Parent and EPS on February 26, 1999,
which has been accounted for using the pooling of interests method as described
in Note L to the consolidated financial statements.
Operations: The Company provides transaction processing, authorization and
settlement services, throughout the United States. The primary components of
these services are Merchant Card Services and ATM Services, comprising
approximately 98% of revenues in 1998. The Company requires certain 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 when purchased 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 as a
component of accumulated other comprehensive income in 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.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities". Although the Statement is
effective for years beginning after June 15, 1999, the Company adopted the
statement early on July 1, 1998. Under provisions of the Statement, the Company
reclassified all securities held-to-maturity to securities available-for-sale
as of July 1, 1998. The adoption of SFAS No. 133 resulted in the cumulative
effect of an accounting change of $776,000 being recognized as an increase in
other comprehensive income.
Inventories: Inventories are stated at the lower of cost (first-in, first-
out method) or market.
Other Assets: Included in other assets at December 31, 1998 and 1997 are
approximately $3,888,000 and $6,021,000, respectively, of payments made to
customers under the Company's conversion assistance program.
F-6
<PAGE>
These payments, which were primarily for promotional sign replacements and card
reissuance, were made to customers converting to the MAC network and are being
amortized over five years. Amortization expense associated with these assets
was approximately $3,105,000, $3,037,000 and $2,907,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
During 1994, after technological feasibility was established, the Company
began capitalizing software development costs incurred in connection with the
planned introduction of a stored value electronic payment card. The Company
capitalized approximately $667,000 and $11,584,000 in 1997 and 1996,
respectively, related to the development of the stored value card.
On July 25, 1997, the Company entered into an agreement with an unrelated
third party whereby the Company granted perpetual licensing rights to the
technology to the third party in exchange for $25,000,000. The agreement
further grants the third party exclusive rights to the technology for a period
of four years. The proceeds received from the licensing agreement have been
deferred and are being earned over the exclusivity period of the agreement. The
development costs capitalized are being amortized over the same period.
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.
Intangible Assets: Intangible assets consist of the following at December
31:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
Goodwill............................................... $ 82,071 $ 82,071
Purchased merchant contracts........................... 33,497 15,865
Customer lists and other............................... 31,144 25,046
-------- --------
$146,712 $122,982
======== ========
</TABLE>
Goodwill and amounts assigned to the customer lists are being amortized by
the straight-line method over 15-25 years. Agreements not to compete are
amortized over the life of the agreements.
Purchased merchant contracts are recorded at cost and 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
purchased merchant contracts, an impairment loss would be recognized.
Amortization expense was recognized on a straight-line basis over an estimated
useful life of five years through December 31, 1997. Effective January 1, 1998,
the Company changed the estimated useful life of its purchased merchant
contracts to six years. This change in accounting estimate is accounted for
under the provisions of Accounting Principles Board (APB) Opinion No. 20,
"Accounting Changes." Accordingly, the net book value of purchased merchant
contracts as of January 1, 1998 is amortized over the remaining useful life of
the contracts (using six years). Additionally, all purchased merchant contracts
capitalized in 1998 are being amortized over a period of six years. The effect
of the change in accounting estimate in 1998 was an increase to net income of
approximately $583,000.
On July 20, 1998, the Company acquired the terminal driving business of a
certain entity. The acquisition was accounted for under the purchase method;
accordingly, results of operations from this business have been included in the
consolidated statements of income since the date of acquisition. The total cost
of the acquisition was approximately $6 million and substantially all of the
purchase price was allocated to customer lists based upon the fair value of the
assets acquired. The customer lists are being amortized by the straight-line
method over 15 years.
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.
F-7
<PAGE>
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: Basic and diluted earnings per share are calculated in
accordance with SFAS No. 128, "Earnings Per Share." All earnings per share
amounts for all periods have been presented to conform to the Statement 128
requirements. Earnings per share, related per share data, stock options and
stock option prices have been restated to reflect all stock splits through
December 31, 1998.
Stock-based Compensation: The Company grants options for a fixed number of
shares to employees with an exercise price equal to the fair value of the
shares 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.
Comprehensive Income: In 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, the adoption of this
statement in 1998 had 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, to be included in accumulated other
comprehensive income in stockholders' equity. Prior year financial statements
have been reclassified to conform to the requirements of SFAS No. 130.
F-8
<PAGE>
Note B--Securities
The following is a summary of securities available-for-sale and held-to-
maturity:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Securities Available-for-sale
December 31, 1998
U.S. Government and agency
Securities...................... $ 29,603 $ 281 $ (74) $ 29,810
Mortgage-backed securities....... 130,355 395 (370) 130,380
Municipal securities............. 116,630 1,972 (394) 118,208
-------- ------ ----- --------
Total debt securities.......... 276,588 2,648 (838) 278,398
Equity securities................ 9,782 9,782
-------- ------ ----- --------
$286,370 $2,648 $(838) $288,180
======== ====== ===== ========
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
======== ====== ===== ========
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
======== ====== ===== ========
</TABLE>
There were no material gains or losses on securities sold during the three
years ended December 31, 1998.
The scheduled maturities of securities available-for-sale, excluding equity
securities, at December 31, 1998, was as follows:
<TABLE>
<CAPTION>
Available-for-Sale
------------------
Amortized Fair
Cost Value
--------- --------
(in thousands)
<S> <C> <C>
Due in one year or less............................... $ 34,705 $ 34,631
Due in one to five years.............................. 50,243 51,038
Due in five to ten years.............................. 109,563 110,683
Due after ten years................................... 82,077 82,046
-------- --------
$276,588 $278,398
======== ========
</TABLE>
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.
F-9
<PAGE>
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 $95 million and $52 million at December
31, 1998 and December 31, 1997, respectively, were pledged to secure notes
payable to the Federal Home Loan Bank.
Note C--Inventories
At December 31, inventories consisted of:
<TABLE>
<CAPTION>
1998 1997
------- ------
(in thousands)
<S> <C> <C>
Point of sale equipment................................... $10,457 $5,745
Repair parts.............................................. 939 153
------- ------
$11,396 $5,898
======= ======
</TABLE>
Note D--Property and Equipment
At December 31, property and equipment consisted of:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
Land................................................... $ 1,050 $ 1,050
Building & improvements................................ 15,101 14,591
Computer facilities and equipment...................... 254,378 199,833
Office furniture and equipment......................... 21,855 16,582
Leasehold improvements................................. 10,553 8,898
-------- --------
$302,937 $240,954
======== ========
</TABLE>
Depreciation expense was approximately $39.1 million, $33.5 million and
$28.4 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
Note E--Short-Term Borrowings
The Company maintains a credit agreement with a third-party bank which
provides for short-term borrowings through March 1999 of up to $75 million.
Borrowings under the agreement are unsecured and bear interest at variable
rates. Borrowings of $21 million and $29 million, which approximated fair
value, were outstanding under the agreement at December 31, 1998 and 1997,
respectively. Average borrowings under this agreement during 1998 were $29.4
million at an effective interest rate of 5.81%. During 1997, average borrowings
were approximately $41.3 million at an effective interest rate of 5.84% and,
during 1996, average borrowings were approximately $39.9 million at an
effective interest rate of 5.82%. The agreement requires the Company to
maintain certain financial ratios and to comply with certain covenants as
defined, including limitations as to debt to be incurred and prepayments on the
Company's long-term debt.
The Company also has available $20 million in unsecured lines of credit with
other financial institutions, which expire on various dates throughout 1999. No
amounts were outstanding on these lines at December 31, 1998 or 1997.
F-10
<PAGE>
Note F--Long-Term Debt and Leases
At December 31, long-term debt consisted of:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
Notes payable to the Federal Home Loan Bank........... $ 73,000 $ 28,000
Note payable to bank for ATMs......................... 116 561
Note payable to stockholder........................... 125,000 150,213
-------- --------
198,116 178,774
Less current maturities............................... (25,116) (25,445)
-------- --------
$173,000 $153,329
======== ========
</TABLE>
Notes payable to the Federal Home Loan Bank are adjustable rate advances due
between May 20, 2002 and September 11, 2008. Current interest rates range from
5.41% to 6.08% and are secured by securities available-for-sale with a market
value of approximately $95 million and $52 million at December 31, 1998 and
1997, respectively.
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 $701,034 at
December 31, 1998 and $981,445 at December 31, 1997.
Note payable to stockholder represents an unsecured promissory note payable
due in equal quarterly installments through 2003, which bears interest at
6.40%. Annual maturities of the note are $25 million per year through 2003.
The Company rents office facilities and equipment under noncancelable
operating leases expiring at various dates through 2005. Rental expense for
operating leases amounted to approximately $5.1 million, $4.8 million and $5.1
million for the years ended December 31, 1998, 1997 and 1996, respectively.
On May 22, 1998, the Company entered into a $15 million operating lease
agreement replacing the remainder of the original subrental agreement on EPS's
headquarters. The terms for the operating lease provide for initial seven-year
term through 2005 with an option to renew for two additional five year terms.
Future maturities of notes payable and minimum lease payments for operating
leases with initial or remaining terms in excess of one year are as follows:
<TABLE>
<CAPTION>
Notes Operating
Payable Leases
-------- ---------
(in thousands)
<S> <C> <C>
Year ending December 31:
1999................................................. $ 25,116 $ 4,994
2000................................................. 25,000 3,642
2001................................................. 25,000 2,879
2002................................................. 53,000 2,400
2003................................................. 35,000 1,969
Thereafter........................................... 35,000 1,632
-------- -------
Total future payments................................ $198,116 $17,516
======== =======
</TABLE>
Note G--Employee Benefit Plans
Effective March 1, 1998, the Company established the Concord EFS Savings
Plan (the Plan). Employees who have reached the age of 21 and completed one
year of service with the Company are eligible to participate in the Plan. The
Plan provides for voluntary tax-deferred contributions by eligible employees
and discretionary Company contributions. The Company's cost related to the Plan
in 1998 was approximately $114,000.
F-11
<PAGE>
The Electronic Payment Services, Inc. Retirement Savings Plan (the EPS Plan)
covers substantially all employees of EPS. Under the terms of the EPS Plan,
each qualified employee receives a company retirement contribution of 2% of
compensation as defined, based upon employment status at December 31 of the
plan year. In addition, the EPS Plan includes a Section 401(k) savings feature
wherein EPS will match employee contributions up to 4.5% of compensation as
defined, and additionally, contains a discretionary profit-sharing contribution
of up to 1.5% of compensation as defined. Total 1998, 1997 and 1996 expenses
under the EPS Plan were approximately $3,685,000, $3,095,000 and $2,687,000,
respectively.
Note H--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 at December 31, are as
follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
(in thousands)
<S> <C> <C>
Deferred tax liabilities:
Property and equipment................................. $ 3,976 $ 6,113
Intangibles............................................ 4,460 4,923
Securities available-for-sale.......................... 641 62
Capitalization of research & development costs......... 13,994 8,619
Other.................................................. 1,284 1,132
------- -------
Total deferred tax liabilities........................... 24,355 20,849
------- -------
Deferred tax assets:
Net operating loss carryforward........................ $ 2,003 $ 2,626
Nondeductible reserves................................. 5,311 3,762
Bad debt allowance..................................... 248 502
Inventory.............................................. 37 57
Merchant contracts purchased........................... 1,361 488
Other.................................................. 36 154
------- -------
Total deferred tax assets................................ 8,996 7,589
------- -------
Net deferred tax liabilities............................. $15,359 $13,260
======= =======
</TABLE>
F-12
<PAGE>
The components of the provision (benefit) for income taxes for the three
years ended December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Allocated to net income:
Current
Federal.................................... $47,622 $41,005 $15,706
State...................................... 2,677 4,096 745
------- ------- -------
50,299 45,101 16,451
Deferred
Federal.................................... 435 (6,297) 6,797
State...................................... 1,085 (1,033) 99
------- ------- -------
1,520 (7,330) 6,896
------- ------- -------
$51,819 $37,771 $23,347
======= ======= =======
Allocated to other comprehensive income:
Deferred
Federal.................................... $ 504 $ 281 $ (138)
State...................................... 75 42 (20)
------- ------- -------
$ 579 $ 323 $ (158)
======= ======= =======
</TABLE>
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 are
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Tax at statutory rate.......................... $49,180 $34,112 $21,378
State income taxes, net of federal benefit..... 2,461 1,989 538
Nondeductible amortization of goodwill......... 1,076 1,031 1,042
Tax exempt interest income..................... (1,175) (511) (124)
Other, net..................................... 277 1,150 513
------- ------- -------
$51,819 $37,771 $23,347
======= ======= =======
</TABLE>
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.
The Company has federal and state net operating loss carryforwards that
expire on various dates through 2006 and are subject to annual limitations.
F-13
<PAGE>
Note I--Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------
1998 1997 1996
-------- -------- --------
(in thousands,
except per share data)
<S> <C> <C> <C>
Numerator:
Net income........................................ $ 88,695 $ 59,692 $ 37,732
======== ======== ========
Denominator:
Denominator for basic earnings per share,
weighted-average shares.......................... 127,693 126,592 116,291
Effect of dilutive securities, employee stock
options.......................................... 4,254 3,345 3,898
-------- -------- --------
Denominator for diluted earnings per share--
adjusted weighted-average shares and assumed
conversions...................................... 131,947 129,937 120,189
======== ======== ========
Basic earnings per share............................ $ 0.69 $ 0.47 $ 0.32
======== ======== ========
Diluted earnings per share.......................... $ 0.67 $ 0.46 $ 0.31
======== ======== ========
</TABLE>
Note J--Incentive Stock Option Plans
The Concord EFS, Inc. 1993 Incentive Stock Option Plan, as amended, (the
Concord Plan) allows for the grant of up to 13,668,750 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. Information pertaining
to the Concord Plan is summarized below, in thousands, except price per share:
<TABLE>
<CAPTION>
Number of Weighted Weighted
Shares Average Average Options
Under Option Exercise Price Aggregate Price Exercisable
------------ -------------- --------------- -----------
<S> <C> <C> <C> <C>
Outstanding at January
1, 1996................ 6,323 $ 3.68 $ 23,283 2,903
======== =====
Granted............... 1,308 13.73
Exercised............. (1,877) 2.59
Terminated............ (501) 4.26
------
Outstanding at December
31, 1996............... 5,253 6.51 $ 34,203 2,380
======== =====
Granted............... 3,129 15.22
Exercised............. (1,614) 4.13
Terminated............ (40) 10.87
------
Outstanding at December
31, 1997............... 6,728 11.11 $ 74,732 1,860
======== =====
Granted............... 2,989 20.37
Exercised............. (477) 6.52
Terminated............ (34) 14.60
------
9,206 $14.34 $132,006 2,988
====== ======== =====
</TABLE>
The weighted average grant date fair value of options granted during 1998,
1997 and 1996 was $6.15, $4.67 and $3.65, respectively.
F-14
<PAGE>
The following table provides additional information regarding options
outstanding as of December 31, 1998:
<TABLE>
<CAPTION>
Weighted Average
Remaining Weighted Average
Contractual Life Number of Exercise Price
Option Exercise Options Weighted Average of Options Options of Options
Price Range Outstanding Exercise Price in Years Exercisable Exercisable
- --------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 2.73-
$ 4.79 1,162 $ 3.31 4.92 1,155 $ 3.30
5.93-
13.00 1,882 9.73 6.82 1,029 9.06
15.08-
26.13 6,162 17.83 8.66 804 15.55
$ 2.73-
$26.13 9,206 $14.34 7.81 2,988 $ 8.58
</TABLE>
In 1995, EPS adopted the Electronic Payment Services, Inc. 1995 Stock Option
Plan, as amended (the EPS Plan). In connection with the merger of EPS with the
Parent as discussed in Note L, all outstanding options in the EPS Plan
accelerated and vested in November 1998. The total amount of option shares
(after conversion to Concord EFS, Inc. shares) at December 31, 1998 was
2,244,795, at a weighted average exercise price of $8.48.
The Company has elected to follow 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 SFAS 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 SFAS No. 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 1998, 1997, and 1996, respectively: risk-free interest rates of
6.0%, 6.25%, and 6.5%, and volatility factors of the expected market price of
the Company's common stock of .358, .344, and .265. 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
is as follows for the years ended December 31 (in thousands, except for
earnings per share):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Pro forma net income............................. $77,327 $55,137 $36,647
Pro forma basic earnings per share............... $ 0.61 $ 0.44 $ 0.32
Pro forma diluted earnings per share............. $ 0.59 $ 0.42 $ 0.30
</TABLE>
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.
On February 18, 1999, the shareholders approved an amendment to the Concord
Plan to increase the shares issuable under the plan from 13,668,750 to
25,000,000 shares.
F-15
<PAGE>
Note K--Employment Agreements
In February 1998, the Company entered into incentive agreements with its CEO
and President, each for a term of five years expiring February 2003. Each
agreement sets out the executive's annual base pay, provides for the
establishment of an incentive compensation program under which each executive
will have a bonus potential of 50% of annual base salary, and provides for
grants of stock options, including regular stock options of up to 375,000
shares a year based on performance and special stock options contingent upon,
or providing accelerated vesting upon, the average market price of Concord
stock reaching and maintaining certain levels. The agreements contain certain
non-compete provisions and change in control provisions regarding the
acceleration of outstanding stock options and the payment of bonuses.
Employment agreements are also in effect for the President and Chief
Executive Officer of EPS and four of his direct reports. The agreements have no
fixed term but are terminable at any time with a fixed amount of severance to
be paid only in the event of termination or removal without cause (or with
"good cause" in the case of the President and Chief Executive Officer).
Note L--Mergers and Acquisitions
On June 30, 1998, the Company merged with Digital Merchant Systems of
Illinois, Inc. and American Bankcard International, Inc. (jointly named DMS).
DMS is a leading independent sales organization in the credit card industry.
The mergers were accounted for using the pooling of interests method of
accounting. The Company exchanged 4,425,000 shares of its common stock for all
of the outstanding common stock of DMS. In accordance with pooling of interests
accounting, no adjustments have been made to the historical carrying value of
the assets and liabilities of DMS.
The following table presents selected financial information, split between
the Company, EPS and DMS:
<TABLE>
<CAPTION>
Year ended December 31
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
Revenue:
Concord EFS, Inc............................... $ 361,604 $ 240,004
EPS............................................ 258,773 219,956
DMS(1)......................................... 14,134 30,070
----------- -----------
$ 634,511 $ 490,030
=========== ===========
Net income:
Concord EFS, Inc............................... $ 61,857 $ 42,746
EPS............................................ 24,924 18,010
DMS(1)......................................... 1,914 (1,064)
----------- -----------
$ 88,695 $ 59,692
=========== ===========
</TABLE>
- --------
(1) The 1998 amounts reflect the results of operations from January 1, 1998
through June 30, 1998. The results of operations from July 1, 1998 through
December 31, 1998 are included in Concord EFS, Inc. amounts.
The financial statements of DMS prior to January 1, 1997, were immaterial
for restatement.
On February 18, 1999, the shareholders approved the Company's issuance of
shares in connection with its acquisition of EPS. The Company completed the
merger with EPS on February 26, 1999 by issuing 30,064,838 shares of the
Company's common stock for all of the outstanding common stock of EPS. The
acquisition was accounted for using the pooling of interests method of
accounting. The consolidated financial statements present financial information
restated for all years presented. EPS provides transaction processing services
to financial institutions, and retailers throughout the United States. EPS also
owns and operates electronic data processing and data-capture networks that
process transactions originating at ATMs and point-of-sale terminals.
F-16
<PAGE>
In connection with the acquisition of EPS, the Company expects to incur
approximately $10.5 million in acquisition related expenses in the first
quarter of 1999. These expenses are primarily investment banking, legal and
accounting fees. Although no definite plan has been adopted, management is
currently reviewing operational synergies, such as duplicate facilities,
computer and communication hardware and software and other contractual
relationships including severance that may require additional charges in the
second quarter of 1999 and beyond. Management plans to complete this analysis
by May 31, 1999.
Note M--Operations By Industry Segment
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information," which establishes standards for
reporting financial information about operating segments in annual and interim
financial statements. SFAS No. 131 requires that financial information be
reported on the same basis that is reported internally for evaluating segment
performance and allocating resources to segments. SFAS No. 131 addresses how
financial information is disclosed in annual and interim reports; therefore,
its adoption in 1998 had no impact on the financial condition or operating
results of the Company.
Concord has two reportable segments: Merchant Card Services and ATM
Services.
The Company's revenue from Merchant Card Services results from processing
credit card transactions using VISA, MasterCard, Discover, American Express and
Diner's Club Cards. In addition, the Company processes debit card transactions
for banks issuing such cards. Merchant Card Services provides electronic
payment services to supermarket chains, grocery stores, convenience store
merchants and other retailers. Merchant Card Services also includes trucking
services providing a variety of flexible payment systems that enable drivers of
trucking companies to use payment cards to purchase fuel and services and to
obtain cash advances at truck stops.
ATM Services include transactional fee income and surcharge revenue from
ATMs owned by the Company as well as ATM transaction processing for ATMs owned
by the Company's merchants.
The Company evaluates performance and allocates resources based on profit or
loss from operations. Items classified as "Other" include revenue not
identifiable with the two reportable segments described above and costs of
operations and selling, general and administrative expenses which are not
allocated to the reportable segments. The accounting policies of the reportable
segments are the same as those described in Note A Significant Accounting
Policies.
F-17
<PAGE>
The Company's reportable segments are business units that offer different
products. The reportable segments are each managed separately because they are
distinct products for different end users. No single customer of the Company
accounts for a material portion of the Company's revenues.
Industry segment information for the years ended December 31, 1998, 1997,
and 1996 is presented below:
<TABLE>
<CAPTION>
Merchant ATM
Card Services Services Other Total
------------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Year ended December 31, 1998
Revenue....................... $ 423,267 $ 198,398 $ 12,846 $ 634,511
Cost of operations............ (231,616) (118,968) (95,931) (446,515)
Selling, general, &
administrative expenses...... (51,185) (51,185)
Taxes & interest, net......... (48,116) (48,116)
--------- --------- --------- ---------
Net income.................... $ 191,651 $ 79,430 $(182,386) $ 88,695
========= ========= ========= =========
Year ended December 31, 1997
Revenue....................... $ 311,167 $ 166,841 $ 12,022 $ 490,030
Cost of operations............ (164,366) (95,311) (81,093) (340,770)
Selling, general, &
administrative expenses...... (50,008) (50,008)
Taxes & interest, net......... (39,560) (39,560)
--------- --------- --------- ---------
Net income.................... $ 146,801 $ 71,530 $(158,639) $ 59,692
========= ========= ========= =========
Year ended December 31, 1996
Revenue....................... $ 207,211 $ 135,507 $ 12,741 $ 355,459
Cost of operations............ (121,183) (71,423) (48,667) (241,273)
Selling, general, &
administrative expenses...... (42,811) (42,811)
Taxes & interest, net......... (33,643) (33,643)
--------- --------- --------- ---------
Net income.................... $ 86,028 $ 64,084 $(112,380) $ 37,732
========= ========= ========= =========
</TABLE>
Note N--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.
Note O--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, 1998, approximately $128,521,000 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, 1998, the maximum amount available for transfer from EFSNB to the
Parent in the form of loans approximated 5.99% of consolidated net assets.
Note P--Related Party Transactions
The former stockholders of EPS are also customers of the Company and
services are billed to them at rates comparable to nonrelated customers.
Approximately 10%, 11%, and 14% of revenues were billed to these stockholders
during 1998, 1997 and 1996, respectively.
F-18
<PAGE>
Note Q--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.
<TABLE>
<CAPTION>
Carrying Amount Fair Value
--------------- ----------
<S> <C> <C>
December 31, 1998
Financial Assets:
Cash and cash equivalents........................ $ 82,029 $ 82,029
Available-for-sale securities.................... 288,180 288,180
Financial liabilities:
Notes payable.................................... 198,116 196,652
December 31, 1997
Financial Assets:
Cash and cash equivalents........................ $ 82,592 $ 82,592
Available-for-sale securities.................... 140,199 140,199
Held-to-maturity securities...................... 52,508 53,634
Financial liabilities:
Notes payable.................................... 178,774 178,666
</TABLE>
F-19
<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, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Memphis, Tennessee
February 26, 1999
F-20
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31 December 31
1999 1998
--------- -----------
(in thousands)
ASSETS
------
<S> <C> <C>
Current assets
Cash and cash equivalents............................. $ 77,285 $ 82,029
Securities available-for-sale......................... 315,776 288,180
Accounts receivable, net.............................. 124,735 106,662
Inventories........................................... 11,324 11,396
Prepaid expenses and other current assets............. 13,158 7,863
Deferred income taxes................................. 6,305 5,977
--------- ---------
Total current assets................................ 548,583 502,107
Other assets............................................ 18,270 23,615
Property and equipment.................................. 311,054 302,937
Accumulated depreciation and amortization............. (157,406) (148,447)
--------- ---------
153,648 154,490
--------- ---------
Intangible assets....................................... 146,974 146,712
Accumulated amortization.............................. (47,838) (42,806)
--------- ---------
99,136 103,906
--------- ---------
Total assets........................................ $ 819,637 $ 784,118
========= =========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities
Accounts payable and other liabilities................ $ 125,307 $ 112,376
Accrued liabilities................................... 71,532 47,641
Income taxes payable.................................. 19,489 10,148
Short-term borrowings................................. 17,000 21,000
Current maturities of long-term debt.................. 25,000 25,116
--------- ---------
Total current liabilities........................... 258,328 216,281
--------- ---------
Long-term debt, less current maturities................. 173,750 173,000
Deferred income taxes................................... 15,605 21,336
Other liabilities....................................... 8,905 12,966
Stockholders' equity
Common Stock, $0.33 1/3 par value; authorized 200,000
shares, issued and outstanding 128,330 shares at
March 31, 1999 and 127,935 shares at December 31,
1998................................................. 42,777 42,646
Additional paid-in capital............................ 61,388 55,018
Retained earnings and accumulated other comprehensive
income............................................... 258,884 262,871
--------- ---------
Total stockholders' equity.......................... 363,049 360,535
--------- ---------
Total liabilities and stockholders' equity.......... $ 819,637 $ 784,118
========= =========
</TABLE>
See notes to condensed consolidated financial statements--unaudited.
F-21
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
For Three Months Ended
March 31
------------------------
1999 1998
----------- -----------
(in thousands, except
per share data)
<S> <C> <C>
Revenue.............................................. $ 170,234 $ 134,666
Cost of operations................................... 120,849 95,029
Selling, general and administrative expenses......... 12,368 13,100
Acquisition expenses and restructuring charges....... 34,810 --
----------- -----------
Operating income..................................... 2,207 26,537
Other income (expense):
Interest income.................................... 5,265 4,095
Interest expense................................... (3,533) (3,346)
----------- -----------
Income before income taxes........................... 3,939 27,286
Income taxes....................................... 6,807 9,937
----------- -----------
Net income (loss).................................... $ (2,868) $ 17,349
=========== ===========
Per share data:
Basic earnings (loss) per share ................... $ (0.02) $ 0.14
=========== ===========
Diluted earnings (loss) per share ................. $ (0.02) $ 0.13
=========== ===========
Weighted average shares............................ 128,014 127,486
=========== ===========
Adjusted weighted average shares and assumed
conversions....................................... 133,083 130,849
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements--unaudited.
F-22
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months
Ended
March 31
------------------
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
Net cash provided by operating activities................... $ 41,124 $ 19,521
Investing activities
Acquisition of property and equipment..................... (11,628) (11,255)
Securities held-to-maturity:
Acquisition of securities............................... (4,539)
Proceeds from maturity of securities.................... 2,944
Securities available-for-sale:
Acquisition of securities............................... (48,467) (43,795)
Proceeds from sales of securities....................... 13,575 12,667
Proceeds from maturity of securities.................... 5,564 8,851
Merchants contracts purchased............................. (4,896) (2,936)
Other..................................................... (928)
-------- --------
Net cash used in investing activities....................... (45,852) (38,991)
Financing activities
Proceeds from sale of common stock........................ 3,350 903
Proceeds from notes payable............................... 7,000 26,275
Repayment under credit agreement (net).................... (4,000) (9,000)
Payments on notes payable................................. (6,366) (6,572)
-------- --------
Net cash provided by (used in) financing activities......... (16) 11,606
-------- --------
Net decrease in cash and cash equivalents................... (4,744) (7,864)
Cash and cash equivalents at beginning of period............ 82,029 82,592
-------- --------
Cash and cash equivalents at end of period.................. $ 77,285 $ 74,728
======== ========
</TABLE>
For purposes of these statements, the Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents.
See notes to condensed consolidated financial statements--unaudited.
F-23
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1999
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation have been included.
Operating results for the three month period ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Registrant's annual report on
Form 10-K for the year ended December 31, 1998.
The balance sheet at December 31, 1998 has been derived from the
consolidated audited financial statements included in Exhibit 99 of the
Company's Form 10-K for the year ended December 31, 1998. The balance sheet
does not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
Restatement for Poolings
The historical financial information presented herein has been restated to
include the results of Electronic Payment Services, Inc. ("EPS") and Digital
Merchant Systems of Illinois, Inc. and American Bankcard International, Inc.
(jointly named "DMS"). EPS and DMS were acquired in separate pooling-of-
interests transactions. In accordance with pooling-of-interests method of
accounting, no adjustments have been made to the historical carrying amounts of
assets and liabilities of either DMS or EPS. However, the financial information
has been restated to include the operating results of DMS and EPS for all
stated periods prior to the combinations.
On February 18, 1999, the stockholders approved the Company's issuance of
shares in connection with its acquisition of EPS. The Company completed the
merger with EPS on February 26, 1999 by exchanging 30,064,838 shares of the
Company's common stock for all of the outstanding common stock of EPS. EPS
provides transaction processing services to financial institutions and
retailers throughout the United States. EPS also owns and operates electronic
data processing and data-capture networks that process transactions originating
at ATMs and point-of-sale terminals.
On June 30, 1998, the Company merged with DMS. DMS is an independent sales
organization in the credit card industry. The Company exchanged 4,425,000
shares of its common stock for all of the outstanding common stock of DMS.
F-24
<PAGE>
The following table presents selected financial information, in thousands,
split between the Company, EPS and DMS for the three months ended March 31,
1999 and 1998, respectively.
<TABLE>
<CAPTION>
Three months
ended
March 31
------------------
1999 1998
-------- --------
(Unaudited)
<S> <C> <C>
Revenue
Concord EFS, Inc........................................... $124,129 $ 69,632
EPS (1).................................................... 46,105 58,399
DMS (2).................................................... 6,635
-------- --------
$170,234 $134,666
======== ========
Net income (loss)
Concord EFS, Inc........................................... $ (7,782) $ 11,367
EPS (1).................................................... 4,914 5,189
DMS (2).................................................... 793
-------- --------
$ (2,868) $ 17,349
======== ========
</TABLE>
- --------
(1) The 1999 amounts reflect the results of operations from January 1, 1999
through February 28, 1999. The results of operations from March 1, 1999 to
March 31, 1999 are included in Concord EFS, Inc. amounts.
(2) As the acquisition of DMS was completed on June 30, 1998, the 1999 amounts
are included in Concord EFS, Inc. amounts.
Stock Split
The Board of Directors approved a three-for-two stock split on May 14, 1998.
Shareholders of record as of June 1, 1998 were distributed additional shares on
June 8, 1998.
Comprehensive Income
As of January 1, 1998, the Company adopted Financial Accounting Standards
Board (FASB) Statement 130, "Reporting Comprehensive Income." Statement 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this Statement had no impact on the
Company's net income or stockholders' equity. Statement 130 requires unrealized
gains or losses on the Company's available-for-sale securities, which prior to
adoption were reported separately in stockholders' equity to be included in
other comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of Statement 130.
During the first quarter of 1999 and 1998, total comprehensive income
(loss), in thousands, amounted to ($3,747) and $17,485, respectively.
F-25
<PAGE>
Earnings (Loss) Per Share
The following table sets forth the computation of basic and diluted earnings
(loss) per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended
March 31
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Numerator:
Net income (loss)................................. $ (2,868) $ 17,349
========= =========
Denominator:
Denominator for basic earnings per share,
weighted-average shares.......................... 128,014 127,486
Effect of dilutive securities, employee stock
options.......................................... 5,069 3,363
--------- ---------
Denominator for diluted earnings per share
adjusted for weighted-average shares and assumed
conversions...................................... 133,083 130,849
========= =========
Basic earnings (loss) per share..................... $ (0.02) $ 0.14
========= =========
Diluted earnings (loss) per share................... $ (0.02) $ 0.13
========= =========
</TABLE>
Excluding acquisition costs and restructuring charges described in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, basic and diluted earnings per share for the first quarter 1999 was
$0.19 and $0.18, respectively.
Earnings per share and related per share data have been restated to reflect
all stock splits.
Operations By Industry Segment
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information," which establishes standards for
reporting financial information about operating segments in annual and interim
financial statements. SFAS No. 131 requires that financial information be
reported on the same basis that is reported internally for evaluating segment
performance and allocating resources to segments. SFAS No. 131 addresses how
supplemental financial information is disclosed in annual and interim reports;
therefore, its adoption in 1998 had no impact on the financial condition or
operating results of the Company.
Concord has two reportable segments: Merchant Card Services and ATM
Services. Merchant Card Services include the processing of credit card
transactions for all major credit card brands including VISA, MasterCard,
American Express, Discover and Diners Club; the processing of debit card
transactions for financial institutions issuing these and similar cards; and
the provision of electronic payment services to supermarket chains and multiple
lane retailers, financial institutions, petroleum and convenience stores,
grocery stores, trucking companies and other retailers.
ATM Services revenue consists of fee income and other surcharges charged for
proprietary ATMs and processing fees for third-party ATMs. The balance of the
Company's revenue is derived principally from check verification and
authorization services, sales of point-of-sale terminals and payroll processing
services.
F-26
<PAGE>
ATM Services include transactional fee income and other surcharges charged
for proprietary ATMs and processing fees for third party ATMs.
The remaining balance of the Company's revenue is derived principally from
check verification and authorization services, sales of point-of-sale terminals
and payroll processing services. The Company evaluates performance and
allocates resources based on profit or loss from operations. Items classified
as "Other" include revenue not identifiable with the two reportable segments
described above and costs of operations and selling, general and administrative
expenses which are not allocated to the reportable segments.
No single customer of the Company accounts for a material portion of the
Company's revenues.
Industry segment information, in thousands, for the three months ended March
31, 1999 and 1998 is presented below:
<TABLE>
<CAPTION>
Merchant ATM
Card Services Services Other Total
------------- -------- --------- ---------
<S> <C> <C> <C> <C>
Three months ended March 31, 1999
Revenue........................ $112,326 $ 52,449 $ 5,459 $ 170,234
Cost of operations............. (63,564) (31,105) (26,180) (120,849)
Selling, general, & administra-
tive expenses................. (12,368) (12,368)
Acquisition costs and restruc-
turing charges................ (34,810) (34,810)
Taxes & interest, net.......... (5,075) (5,075)
-------- -------- --------- ---------
Net income (loss).............. $ 48,762 $ 21,344 $ (72,974) $ (2,868)
======== ======== ========= =========
Three months ended March 31, 1998
Revenue........................ $ 85,203 $ 45,202 $ 4,261 $ 134,666
Cost of operations............. (46,654) (26,264) (22,111) (95,029)
Selling, general, &
administrative expenses....... (13,100) (13,100)
Taxes & interest, net.......... (9,188) (9,188)
-------- -------- --------- ---------
Net income..................... $ 38,549 $ 18,938 $ (40,138) $ 17,349
======== ======== ========= =========
</TABLE>
F-27
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
30,963,125 Shares
Concord EFS, Inc.
Common Stock
[CONCORD LOGO]
--------
PROSPECTUS
, 1999
--------
Salomon Smith Barney
William Blair & Company
Goldman, Sachs & Co.
J. P. Morgan & Co.
Morgan Keegan & Company, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
ALTERNATE INTERNATIONAL COVER PAGE
SUBJECT TO COMPLETION, DATED MAY 18, 1999
PROSPECTUS
30,963,125 Shares
[CONCORD LOGO]
Concord EFS, Inc.
Common Stock
--------
Concord EFS, Inc. is selling 2,000,000 shares of its common stock and the
selling stockholders named in this prospectus are selling 28,963,125 shares of
common stock for a total of 30,963,125 shares of common stock. Concord will not
receive any proceeds from the sale of the shares by the selling stockholders.
The underwriters named in this prospectus may purchase up to 4,640,000
additional shares of common stock from Concord under certain circumstances.
Of the 30,963,125 shares of common stock that Concord and the selling
stockholders are selling, 24,770,500 shares are being offered in the United
States and Canada by a syndicate of U.S. underwriters and 6,192,625 shares are
being offered concurrently outside the United States and Canada by a syndicate
of international underwriters.
The common stock is quoted on the Nasdaq National Market under the symbol
"CEFT." The last reported sale price of the common stock on the Nasdaq National
Market on May 14, 1999, was $28.625 per share.
--------
Investing in the common stock involves risks. See "Risk Factors" beginning on
page 6.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
--------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public Offering Price........................................... $ $
Underwriting Discount........................................... $ $
Proceeds to Concord (before expenses)........................... $ $
Proceeds to the Selling Stockholders (before expenses).......... $ $
</TABLE>
The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about ,
1999.
--------
<TABLE>
<S> <C> <C>
Salomon Smith Barney Goldman Sachs
International William Blair & Company International
Joint Book-Running Manager Joint Book-Running Manager Joint Lead Manager
</TABLE>
J.P. Morgan Securities Ltd. Morgan Keegan & Company, Inc.
, 1999
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ALTERNATE INTERNATIONAL
BACK COVER PAGE
30,963,125 Shares
Concord EFS, Inc.
Common Stock
[CONCORD LOGO]
--------
PROSPECTUS
, 1999
--------
Salomon Smith Barney International
William Blair & Company
Goldman Sachs International
J. P. Morgan Securities Ltd.
Morgan Keegan & Company, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
<TABLE>
<S> <C>
SEC registration fee.......................................... $ 325,386
The Nasdaq National Market fee................................ 17,500
National Association of Securities Dealers fee................ 30,500
Legal fees and expenses....................................... 250,000
Accounting fees and expenses.................................. 150,000
Printing and engraving expenses............................... 210,000
Blue Sky fees................................................. 5,000
Miscellaneous................................................. 111,614
----------
Total..................................................... $1,100,000
==========
</TABLE>
- --------
All of the above expenses will be borne by the Registrant.
Item 15. Indemnification of Officers and Directors
Section 145 of the DGCL empowers a Delaware corporation to indemnify any
persons who are, or are threatened to be made, parties to any threatened,
pending or completed legal action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of
such corporation), by reason of the fact that such person was an officer or
director of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation or
enterprise. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding,
provided that such officer or director acted in good faith and in a manner he
reasonably believed to be in or not opposed to the corporation's best
interests, and, for criminal proceedings, had no reasonable cause to believe
his conduct was illegal. A Delaware corporation may indemnify officers and
directors in an action by or in the right of the corporation under the same
conditions, except that no indemnification is permitted without judicial
approval if the officer or director is adjudged to be liable to the corporation
in the performance of his duty. Where an officer or director is successful on
the merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which such officer or
director actually and reasonably incurred.
In accordance with the DGCL, the Registrant's Restated Certificate of
Incorporation contains a provision to limit the personal liability of the
Registrant's directors for violations of their fiduciary duty. This provision
eliminates each director's liability to the Registrant or its stockholders for
monetary damages except to the extent provided by the DGCL (i) for any breach
of the director's duty of loyalty to the Registrant or its stockholders, (ii)
for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) under section 174 of the DGCL providing
for liability of directors for unlawful payment of dividends or unlawful stock
purchases or redemptions, or (iv) for any transactions from which a director
derived an improper personal benefit. The effect of this provision is to
eliminate the personal liability of directors for monetary damages for actions
involving a breach of their fiduciary duty of care, including any such actions
involving gross negligence.
The Registrant's Restated Certificate of Incorporation and By-Laws provide
for indemnification of the Registrant's officers and directors to the fullest
extent permitted by applicable law. In addition, the Registrant maintains
insurance policies which provide coverage for its officers and directors in
certain situations where the Registrant cannot directly indemnify such officers
or directors.
II-1
<PAGE>
Item 16. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Restated Certificate of Incorporation of the Registrant is
incorporated herein by reference to Exhibit 4.1 to the
Registrant's Registration Statement on Form S-8 (File No. 333-
74215), filed on March 10, 1999.
3.2 By-Laws of the Registrant are incorporated herein by reference to
Exhibit 4.2 to the Registrant's Registration Statement on Form S-8
(File No. 333-74215), filed on March 10, 1999.
5.1 Opinion of Sidley & Austin.
23.1 Consent of Sidley & Austin (included in Exhibit 5.1 hereto).
23.2 Consent of Ernst & Young LLP.
24.1 Powers of Attorney.
</TABLE>
Item 17. Undertakings
(a) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this amendment to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Memphis, State of Tennessee, on May 18, 1999.
Concord EFS, Inc.
/s/ Dan M. Palmer
By: _________________________________
Dan M. Palmer
Chairman of the Board of Directors
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<S> <C> <C>
/s/ Dan M. Palmer Chairman of the Board of Dated: May 18,
____________________________________ Directors and Chief 1999
Dan M. Palmer Executive Officer
(Principal Executive
Officer)
/s/ Thomas J. Dowling Vice President, Chief Dated: May 18,
____________________________________ Financial Officer 1999
Thomas J. Dowling (Principal Financial and
Accounting Officer)
/s/ Edward A. Labry III President and Director Dated: May 18,
____________________________________ 1999
Edward A. Labry III
* Director
____________________________________
Douglas C. Altenbern
* Director
____________________________________
David C. Anderson
* Director
____________________________________
Richard Buchignani
* Director
____________________________________
Richard M. Harter
* Director
____________________________________
Joyce Kelso
* Director
____________________________________
Richard P. Kiphart
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C> <C>
* Director
____________________________________
Jerry D. Mooney
* Director
____________________________________
Paul Whittington
</TABLE>
/s/ William E. Lucado Dated: May 18, 1999
*By: _____________________
William E. Lucado Attorney-
in-fact
II-4
<PAGE>
EXHIBIT INDEX
TO REGISTRATION STATEMENT
ON FORM S-3
CONCORD EFS, INC.
Item 16. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Restated Certificate of Incorporation of the Registrant is
incorporated herein by reference to Exhibit 4.1 to the Registrant's
Registration Statement on Form S-8 (File No. 333-74215),
filed on March 10, 1999.
3.2 By-Laws of the Registrant are incorporated herein by reference to
Exhibit 4.2 to the Registrant's Registration Statement on Form S-8
(File No. 333-74215), filed on March 10, 1999.
5.1 Opinion of Sidley & Austin.
23.1 Consent of Sidley & Austin (included in Exhibit 5.1 hereto).
23.2 Consent of Ernst & Young LLP.
24.1 Powers of Attorney.
</TABLE>
<PAGE>
Exhibit 1.1
CGSH draft: 5/14/99
Concord EFS, Inc.
24,770,500 Shares/a/
Common Stock
($0.33 1/3 par value)
U.S. Underwriting Agreement
New York, New York
., 1999
Salomon Smith Barney Inc.
William Blair & Company, L.L.C.
Goldman, Sachs & Co.
J.P. Morgan Securities Inc.
Morgan Keegan & Company, Inc.
As U.S. Representatives of the several
U.S. Underwriters,
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
Concord EFS, Inc., a corporation organized under the laws of Delaware
(the "Company"), proposes to sell to the several U.S. Underwriters, for whom the
U.S. Representatives are acting as representatives, 1,600,000 shares of Common
Stock, $0.33 1/3 par value ("Common Stock") of the Company, and the Selling
Stockholders propose to sell to the several U.S. Underwriters 23,170,500 shares
of Common Stock (said shares to be issued and sold by the Company and shares to
be sold by the Selling Stockholders collectively being hereinafter called the
"U.S. Underwritten Securities"). The Company also proposes to grant to the U.S.
Underwriters an option to purchase up to 3,712,000 shares of Common Stock to
cover over-allotments (the "U.S. Option Securities" and together with the U.S.
Underwritten Securities, the "U.S. Securities"). It is understood that the
Company and the Selling Stockholders are concurrently entering into the
International Underwriting Agreement providing for the sale by the Company and
the Selling Stockholders of an aggregate of 6,192,625 shares of Common Stock
(said shares to be sold by the Company and the Selling Stockholders pursuant to
the International Underwriting Agreement being hereinafter called the
"International Underwritten Securities") and providing for the grant to the
International Underwriters of an option to purchase from the Company up to
928,000 shares of Common Stock (the "International Option Securities" and
together with the International Underwritten Securities, the "International
- ------------
/a/ Plus an option to purchase from the Company up to 3,712,000 additional
U.S. Securities to cover over-allotments.
<PAGE>
Securities"). It is further understood and agreed that the International
Underwriters and the U.S. Underwriters have entered into an Agreement Between
U.S. Underwriters and International Underwriters dated the date hereof (the
"Agreement Between U.S. Underwriters and International Underwriters"), pursuant
to which, among other things, the International Underwriters may purchase from
the U.S. Underwriters a portion of the U.S. Securities to be sold pursuant to
this U.S. Underwriting Agreement and the U.S. Underwriters may purchase from the
International Underwriters a portion of the International Securities to be sold
pursuant to the International Underwriting Agreement. The use of the neuter in
this U.S. Underwriting Agreement shall include the feminine and masculine
wherever appropriate. Any reference herein to the Registration Statement, the
Preliminary Prospectuses or the Prospectuses shall be deemed to refer to and
include the documents incorporated by reference therein pursuant to Item 12 of
Form S-3 which were filed under the Exchange Act on or before the Effective Date
of the Registration Statement or the issue date of such Preliminary Prospectuses
or the Prospectuses, as the case may be; and any reference herein to the terms
"amend", "amendment" or "supplement" with respect to the Registration Statement,
any Preliminary Prospectuses or the Prospectuses shall be deemed to refer to and
include the filing of any document under the Exchange Act after the Effective
Date of the Registration Statement, or the issue date of any Preliminary
Prospectuses or the Prospectuses, as the case may be, deemed to be incorporated
therein by reference. Certain terms used in this U.S. Underwriting Agreement
are defined in Section 17 hereof.
1. Representations and Warranties.
(i) The Company represents and warrants to, and agrees with, each U.S.
Underwriter as set forth below in this Section 1.
(a) The Company meets the requirements for use of Form-3 under the Act
and has prepared and filed with the Commission a registration statement
(file number 333-77829) on Form S-3, including related preliminary
prospectuses, for registration under the Act of the offering and sale of
the Securities. The Company may have filed one or more amendments thereto,
including the related preliminary prospectuses, each of which has
previously been furnished to you. The Company will next file with the
Commission either (1) prior to the Effective Date of such registration
statement, a further amendment to such registration statement (including
the form of final prospectuses) or (2) after the Effective Date of such
registration statement, final prospectuses in accordance with Rules 430A
and 424(b). In the case of clause (2), the Company has included in such
registration statement, as amended at the Effective Date, all information
(other than Rule 430A Information) required by the Act and the rules
thereunder to be included in such registration statement and the
Prospectuses. As filed, such amendment and form of final prospectuses, or
such final prospectuses, shall contain all Rule 430A Information, together
with all other such required information, and, except to the extent the
U.S. Representatives shall agree in writing to a modification, shall be in
all substantive respects in the form furnished to you prior to the
Execution Time or, to the extent not completed at the Execution Time, shall
contain only such specific additional information and other changes (beyond
that contained in the latest Preliminary Prospectuses) as the Company has
advised you, prior to the Execution Time, will be included or made therein.
2
<PAGE>
It is understood that two forms of prospectuses are to be used in
connection with the offering and sale of the Securities: one form of
prospectus relating to the U.S. Securities, which are to be offered and
sold to United States and Canadian Persons, and one form of prospectus
relating to the International Securities, which are to be offered and sold
to persons other than United States and Canadian Persons. The U.S.
Prospectus and the International Prospectus are identical except for the
outside front cover page and the outside back cover page.
(b) On the Effective Date, the Registration Statement did or will, and
when the Prospectuses are first filed (if required) in accordance with Rule
424(b) and on the Closing Date (as defined in this U.S. Underwriting
Agreement) and on any date on which Option Securities are purchased, if
such date is not the Closing Date (a "settlement date"), each Prospectus
(and any supplements thereto) will, comply in all material respects with
the applicable requirements of the Act and the Exchange Act and the
respective rules thereunder; on the Effective Date and at the Execution
Time, the Registration Statement did not or will not contain any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary in order to make the statements therein not
misleading; and, on the Effective Date, each Prospectus, if not filed
pursuant to Rule 424(b), will not, and on the date of any filing pursuant
to Rule 424(b) and on the Closing Date and any settlement date, each
Prospectus (together with any supplement thereto) will not, include any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that the Company makes no representations or warranties as to the
information contained in or omitted from the Registration Statement, or the
Prospectuses (or any supplement thereto) in reliance upon and in conformity
with information furnished in writing to the Company by or on behalf of any
Underwriter through the Representatives specifically for inclusion in the
Registration Statement or the Prospectuses (or any supplement thereto).
(c) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction in which it is chartered or organized
with full corporate power and authority to own or lease, as the case may
be, and to operate its properties and conduct its business as described in
the Prospectuses, and is duly qualified to do business as a foreign
corporation and is in good standing under the laws of each jurisdiction
which requires such qualification;
(d) All the outstanding shares of capital stock of each Subsidiary
have been duly and validly authorized and issued and are fully paid and
nonassessable, and, except as otherwise set forth in the Prospectuses, all
outstanding shares of capital stock of the Subsidiaries are owned by the
Company either directly or through wholly owned subsidiaries free and clear
of any perfected security interest or any other security interests, claims,
liens or encumbrances;
(e) the Company's authorized equity capitalization is as set forth in
the Prospectuses; the capital stock of the Company conforms in all material
respects to the description thereof contained in the Prospectuses; the
outstanding shares of Common Stock (including the Securities being sold
under the Underwriting Agreements by the
3
<PAGE>
Selling Stockholders) have been duly and validly authorized and issued and
are fully paid and nonassessable; the Securities being sold under the
Underwriting Agreements by the Company have been duly and validly
authorized, and, when issued and delivered to and paid for by the U.S.
Underwriters pursuant to this U.S. Underwriting Agreement and by the
International Underwriters pursuant to the International Underwriting
Agreement, will be fully paid and nonassessable; the Securities being sold
by the Selling Stockholders are duly quoted, and admitted and authorized
for trading on the Nasdaq National Market and the Securities being sold
hereunder by the Company are duly quoted, and admitted and authorized for
trading, subject to official notice of issuance, on the Nasdaq National
Market; the certificates for the Securities are in valid and sufficient
form; the holders of outstanding shares of capital stock of the Company are
not entitled to preemptive or other rights to subscribe for the Securities;
and, except as set forth in the Prospectuses, no options, warrants or other
rights to purchase, agreements or other obligations to issue, or rights to
convert any obligations into or exchange any securities for, shares of
capital stock of or ownership interests in the Company are outstanding;
(f) There is no franchise, contract or other document of a character
required to be described in the Registration Statement or Prospectuses, or
to be filed as an exhibit thereto, which is not described or filed as
required; and the statements in the Prospectuses under the headings "United
States Federal Tax Consequences to Non-United States Holders" and "Business
Supervision and Regulation" fairly summarize the matters therein described.
(g) This Agreement has been duly authorized, executed and delivered by
the Company and constitutes a valid and binding obligation of the Company,
enforceable in accordance with its terms.
(h) The Company is not and, after giving effect to the offering and
sale of the Securities and the application of the proceeds thereof as
described in the Prospectuses, will not be an "investment company" as
defined in the Investment Company Act of 1940, as amended.
(i) No consent, approval, authorization, filing with or order of any
court or governmental agency or body is required in connection with the
transactions contemplated herein, except such as have been obtained under
the Act and such as may be required under the blue sky laws of any
jurisdiction in connection with the purchase and distribution of the
Securities by the U.S. Underwriters in the manner contemplated herein and
in the Prospectuses.
(j) Neither the issue and sale of the Securities nor the consummation
of any other of the transactions herein contemplated nor the fulfillment of
the terms hereof will conflict with, result in a breach or violation or
imposition of any lien, charge or encumbrance upon any property or assets
of the Company or any of its subsidiaries pursuant to, (i) the charter or
by-laws of the Company or any of its subsidiaries, (ii) the terms of any
indenture, contract, lease, mortgage, deed of trust, note agreement, loan
agreement or other agreement, obligation, condition, covenant or instrument
to which the Company or any of its subsidiaries is a party or bound or to
which its or their property is
4
<PAGE>
subject, or (iii) any statute, law, rule, regulation, judgment, order or
decree applicable to the Company or any of its subsidiaries of any court,
regulatory body, administrative agency, governmental body, arbitrator or
other authority having jurisdiction over the Company or any of its
subsidiaries or any of its or their properties.
(k) No holders of securities of the Company have rights to the
registration of such securities under the Registration Statement, except
for the registration rights of the Selling Stockholders.
(l) The consolidated historical financial statements and schedules of
the Company and its consolidated subsidiaries included in the Prospectuses
and the Registration Statement present fairly in all material respects the
financial condition, results of operations and cash flows of the Company as
of the dates and for the periods indicated, comply as to form with the
applicable accounting requirements of the Act and have been prepared in
conformity with generally accepted accounting principles applied on a
consistent basis throughout the periods involved (except as otherwise noted
therein). The selected financial data set forth under the caption "Selected
Consolidated Financial Data" in the Prospectuses and Registration Statement
fairly present, on the basis stated in the Prospectuses and the
Registration Statement, the information included therein.
(m) Neither the Company nor any of its subsidiaries has sustained
since the date of the latest audited financial statements included and
incorporated by reference in the Prospectuses any material loss or
interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree, otherwise than as set forth
or contemplated in the Prospectuses; and, since the respective dates as of
which information is given in the Registration Statement and the
Prospectuses, there has not been any change in the capital stock or long-
term debt of the Company or any of its subsidiaries or any material adverse
change, or any development involving a prospective material adverse change,
in or affecting the condition (financial or otherwise), earnings, business
or properties of the Company and its subsidiaries, taken as a whole,
whether or not arising from transactions in the ordinary course of
business, except as set forth in or contemplated in the Prospectuses
(exclusive of any supplement thereto).
(n) No action, suit or proceeding by or before any court or
governmental agency, authority or body or any arbitrator involving the
Company or any of its subsidiaries or its or their property is pending or,
to the best knowledge of the Company, threatened that (i) could reasonably
be expected to have a material adverse effect on the performance of this
Agreement or the consummation of any of the transactions contemplated
hereby or (ii) could reasonably be expected to have a material adverse
effect on the condition (financial or otherwise), prospects, earnings,
business or properties of the Company and its subsidiaries, taken as a
whole, whether or not arising from transactions in the ordinary course of
business.
(o) Each of the Company and each of its subsidiaries owns or leases
all such properties as are necessary to the conduct of its operations as
presently conducted.
5
<PAGE>
(p) Neither the Company nor any subsidiary is in violation or default
of (i) any provision of its charter or bylaws, (ii) the terms of any
indenture, contract, lease, mortgage, deed of trust, note agreement, loan
agreement or other agreement, obligation, condition, covenant or instrument
to which it is a party or bound or to which its property is subject, or
(iii) any statute, law, rule, regulation, judgment, order or decree of any
court, regulatory body, administrative agency, governmental body,
arbitrator or other authority having jurisdiction over the Company or such
subsidiary or any of its properties, as applicable.
(q) Ernst & Young LLP, who have certified certain financial
statements of the Company and its consolidated subsidiaries and delivered
their report with respect to the audited consolidated financial statements
and schedules included in the Prospectuses, are independent public
accountants with respect to the Company within the meaning of the Act and
the applicable published rules and regulations thereunder.
(r) There are no transfer taxes or other similar fees or charges
under Federal law or the laws of any state, or any political subdivision
thereof, required to be paid in connection with the execution and delivery
of this Agreement or the issuance by the Company or sale by the Company of
the Securities.
(s) The Company has filed all foreign, federal, state and local tax
returns that are required to be filed or has requested extensions thereof
(except in any case in which the failure so to file would not have a
material adverse effect on the condition (financial or otherwise),
prospects, earnings, business or properties of the Company and its
subsidiaries, taken as a whole, whether or not arising from transactions in
the ordinary course of business, except as set forth in or contemplated in
the Prospectuses (exclusive of any supplement thereto) and has paid all
taxes required to be paid by it and any other assessment, fine or penalty
levied against it, to the extent that any of the foregoing is due and
payable, except for any such assessment, fine or penalty that is currently
being contested in good faith or as would not have a material adverse
effect on the condition (financial or otherwise), prospects, earnings,
business or properties of the Company and its subsidiaries, taken as a
whole, whether or not arising from transactions in the ordinary course of
business, except as set forth in or contemplated in the Prospectuses
(exclusive of any supplement thereto).
(t) No labor problem or dispute with the employees of the Company or
any of its subsidiaries exists or is threatened or imminent, and the
Company is not aware of any existing or imminent labor disturbance by the
employees of any of its or its subsidiaries' principal suppliers,
contractors or customers, that could have a material adverse effect on the
condition (financial or otherwise), prospects, earnings, business or
properties of the Company and its subsidiaries, taken as a whole, whether
or not arising from transactions in the ordinary course of business, except
as set forth in or contemplated in the Prospectuses (exclusive of any
supplement thereto).
(u) The Company and each of its subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and in
such amounts as are prudent and customary in the businesses in which they
are engaged; all policies of
6
<PAGE>
insurance insuring the Company or any of its subsidiaries or their
respective businesses, assets, employees, officers and directors are in
full force and effect; the Company and its subsidiaries are in compliance
with the terms of such policies and instruments in all material respects;
and there are no claims by the Company or any of its subsidiaries under any
such policy or instrument as to which any insurance company is denying
liability or defending under a reservation of rights clause; neither the
Company nor any such subsidiary has been refused any insurance coverage
sought or applied for; and neither the Company nor any such subsidiary has
any reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to continue its business
at a cost that would not have a material adverse effect on the condition
(financial or otherwise), prospects, earnings, business or properties of
the Company and its subsidiaries, taken as a whole, whether or not arising
from transactions in the ordinary course of business, except as set forth
in or contemplated in the Prospectuses (exclusive of any supplement
thereto).
(v) No subsidiary of the Company is currently prohibited, directly or
indirectly, from paying any dividends to the Company, from making any other
distribution on such subsidiary's capital stock, from repaying to the
Company any loans or advances to such subsidiary from the Company or from
transferring any of such subsidiary's property or assets to the Company or
any other subsidiary of the Company, except as described in or contemplated
by the Prospectuses.
(w) The Company and its subsidiaries possess all licenses,
certificates, permits and other authorizations issued by the appropriate
federal, state or foreign regulatory authorities necessary to conduct their
respective businesses, and neither the Company nor any such subsidiary has
received any notice of proceedings relating to the revocation or
modification of any such certificate, authorization or permit which, singly
or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, would have a material adverse effect on the condition (financial
or otherwise), prospects, earnings, business or properties of the Company
and its subsidiaries, taken as a whole, whether or not arising from
transactions in the ordinary course of business, except as set forth in or
contemplated in the Prospectuses (exclusive of any supplement thereto).
(x) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance
that (i) transactions are executed in accordance with management's general
or specific authorizations; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability; (iii)
access to assets is permitted only in accordance with management's general
or specific authorization; and (iv) the recorded accountability for assets
is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(y) The Company has not taken, directly or indirectly, any action
designed to or which has constituted or which might reasonably be expected
to cause or result, under the
7
<PAGE>
Exchange Act or otherwise, in stabilization or manipulation of the price of
any security of the Company to facilitate the sale or resale of the
Securities.
(z) The Company and its subsidiaries are (i) in compliance with any
and all applicable foreign, federal, state and local laws and regulations
relating to the protection of human health and safety, the environment or
hazardous or toxic substances or wastes, pollutants or contaminants
("Environmental Laws"), (ii) have received and are in compliance with all
permits, licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses and (iii) have
not received notice of any actual or potential liability for the
investigation or remediation of any disposal or release of hazardous or
toxic substances or wastes, pollutants or contaminants, except where such
non-compliance with Environmental Laws, failure to receive required
permits, licenses or other approvals, or liability would not, individually
or in the aggregate, have a material adverse change in the condition
(financial or otherwise), prospects, earnings, business or properties of
the Company and its subsidiaries, taken as a whole, whether or not arising
from transactions in the ordinary course of business, except as set forth
in or contemplated in the Prospectuses (exclusive of any supplement
thereto). Neither the Company nor any of the subsidiaries has been named as
a "potentially responsible party" under the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended.
(aa) Each of the Company and its subsidiaries has fulfilled its
obligations, if any, under the minimum funding standards of Section 302 of
the United States Employee Retirement Income Security Act of 1974 ("ERISA")
and the regulations and published interpretations thereunder with respect
to each "plan" (as defined in Section 3(3) of ERISA and such regulations
and published interpretations) in which employees of the Company and its
subsidiaries are eligible to participate and each such plan is in
compliance in all material respects with the presently applicable
provisions of ERISA and such regulations and published interpretations. The
Company and its subsidiaries have not incurred any unpaid liability to the
Pension Benefit Guaranty Corporation (other than for the payment of
premiums in the ordinary course) or to any such plan under Title IV of
ERISA.
(bb) The subsidiaries listed on Annex A attached hereto are the only
significant subsidiaries of the Company as defined by Rule 1-02 of
Regulation S-X (the "Subsidiaries").
(cc) The Company and its subsidiaries own, possess, license or have
other rights to use, on reasonable terms, all patents, patent applications,
trade and service marks, trade and service mark registrations, trade names,
copyrights, licenses, inventions, trade secrets, technology, know-how and
other intellectual property (collectively, the "Intellectual Property")
necessary for the conduct of the Company's business as now conducted or as
proposed in the Prospectuses to be conducted, and (a) to the Company's
knowledge, there are no rights of third parties to any such Intellectual
Property; (b) to the Company's best knowledge, there is no material
infringement by third parties of any such Intellectual Property; (c) there
is no pending or, to the Company's best knowledge, threatened action, suit,
proceeding or claim by others challenging the Company's rights
8
<PAGE>
in or to any such Intellectual Property, and the Company is unaware of any
facts which would form a reasonable basis for any such claim; (d) to the
Company's best knowledge, there is no pending or threatened action, suit,
proceeding or claim by others challenging the validity or scope of any such
Intellectual Property, and the Company is unaware of any facts which would
form a reasonable basis for any such claim; (e) there is no pending or, to
the Company's knowledge, threatened action, suit, proceeding or claim by
others that the Company infringes or otherwise violates any patent,
trademark, copyright, trade secret or other proprietary rights of others,
and the Company is unaware of any other fact which would form a reasonable
basis for any such claim; (f) to the Company's knowledge, there is no U.S.
patent or published U.S. patent application which contains claims that
dominate or may dominate any Intellectual Property described in the
Prospectuses as being owned by or licensed to the Company or that
interferes with the issued or pending claims of any such Intellectual
Property; and (g) there is no prior art of which the Company is aware that
may render any U.S. patent held by the Company invalid or any U.S. patent
application held by the Company unpatentable which has not been disclosed
to the U.S. Patent and Trademark Office.
(dd) The Company and its subsidiaries do not have any material lending
or other relationship with any bank or lending affiliate of the
Underwriters and the Company does not intend to use any of the proceeds
from the sale of the Securities hereunder to repay any outstanding debt
owed to any affiliate of the Underwriters.
(ee) The Company and its subsidiaries have implemented a
comprehensive, detailed program to analyze and address the risk that the
computer hardware and software used by them may be unable to recognize and
properly execute date-sensitive functions involving certain dates prior to
and any dates after December 31, 1999 (the "Year 2000 Problem"), and have
determined that such risk will be remedied on a timely basis without
material expense and will not have a material adverse effect upon the
financial condition and results of operations of the Company and its
subsidiaries, taken as a whole; and the Company believes, after due
inquiry, that each supplier, vendor, customer or financial service
organization used or serviced by the Company and its subsidiaries has
remedied or will remedy on a timely basis the Year 2000 Problem, except to
the extent that a failure to remedy by any such supplier, vendor, customer
or financial service organization would not have a material adverse effect
on the Company and its subsidiaries, taken as a whole. The Company is in
compliance with the Commission's staff legal bulletin No. 5 dated January
12, 1998 related to Year 2000 compliance, as amended to date.
Any certificate signed by any officer of the Company and
delivered to the Representatives or counsel for the Underwriters in
connection with the offering of the Securities shall be deemed a
representation and warranty by the Company, as to matters covered thereby,
to each U.S. Underwriter.
(ii) Each Selling Stockholder represents and warrants to, and
agrees with, each U.S. Underwriter that:
(a) Such Selling Stockholder is the lawful owner of the U.S.
Securities to be sold by such Selling Stockholder under this U.S.
Underwriting Agreement and upon sale and
9
<PAGE>
delivery of, and payment for, such U.S. Securities, as provided in this
U.S. Underwriting Agreement, such Selling Stockholder will convey to the
U.S. Underwriters good and marketable title to such U.S. Securities, free
and clear of all liens, encumbrances, equities and claims whatsoever.
(b) Such Selling Stockholder has not taken, directly or indirectly,
any action designed to or which has constituted or which might reasonably
be expected to cause or result, under the Exchange Act or otherwise, in
stabilization or manipulation of the price of any security of the Company
to facilitate the sale or resale of the U.S. Securities.
(c) Certificates in negotiable form for such Selling Stockholder's
U.S. Securities have been placed in custody, for delivery pursuant to the
terms of this U.S. Underwriting Agreement, under a Custody Agreement and
Power of Attorney duly authorized (if applicable) executed and delivered by
such Selling Stockholder, in the form heretofore furnished to you (the
"Custody Agreement") with _______________, as Custodian (the "Custodian");
the U.S. Securities represented by the certificates so held in custody for
each Selling Stockholder are subject to the interests under this U.S.
Underwriting Agreement of the U.S. Underwriters; the arrangements for
custody and delivery of such certificates, made by such Selling Stockholder
under this U.S. Underwriting Agreement and under the Custody Agreement, are
not subject to termination by any acts of such Selling Stockholder, or by
operation of law, whether by the death or incapacity of such Selling
Stockholder or the occurrence of any other event; and if any such death,
incapacity or any other such event shall occur before the delivery of such
U.S. Securities under this U.S. Underwriting Agreement, certificates for
the U.S. Securities will be delivered by the Custodian in accordance with
the terms and conditions of this U.S. Underwriting Agreement and the
Custody Agreement as if such death, incapacity or other event had not
occurred, regardless of whether or not the Custodian shall have received
notice of such death, incapacity or other event.
(d) No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation by such
Selling Stockholder of the transactions contemplated in this U.S.
Underwriting Agreement, except such as may have been obtained under the Act
and such as may be required under the blue sky laws of any jurisdiction and
the securities laws of any jurisdiction outside the United States in
connection with the purchase and distribution of the U.S. Securities by the
U.S. Underwriters and such other approvals as have been obtained.
(e) Neither the sale of the U.S. Securities being sold by such
Selling Stockholder nor the consummation of any other of the transactions
in this U.S. Underwriting Agreement contemplated by such Selling
Stockholder or the fulfillment of the terms hereof by such Selling
Stockholder will conflict with, result in a breach or violation of, or
constitute a default under any law or the charter or by-laws of such
Selling Stockholder or the terms of any indenture or other agreement or
instrument to which such Selling Stockholder or any of its subsidiaries is
a party or bound, or any judgment, order or decree applicable to such
Selling Stockholder or any of its subsidiaries of any court, regulatory
body, administrative agency, governmental body or arbitrator having
jurisdiction over such Selling Stockholder or any of its subsidiaries.
10
<PAGE>
(f) Such Selling Stockholder has no reason to believe that the
representations and warranties of the Company contained in this Section 1
are not true and correct, is familiar with the Registration Statement and
has no knowledge of any material fact, condition or information not
disclosed in the Prospectuses or any supplement thereto which has adversely
affected or may adversely affect the business of the Company or any of its
subsidiaries; and the sale of Securities by such Selling Stockholder
pursuant hereto is not prompted by any information concerning the Company
or any of its subsidiaries which is not set forth in the Prospectuses or
any supplement thereto.
(g) In respect of any statements in or omissions from the
Registration Statement or the Prospectuses or any supplements thereto made
in reliance upon and in conformity with information furnished in writing to
the Company by any Selling Stockholder specifically for use in connection
with the preparation thereof, such Selling Stockholder hereby makes the
same representations and warranties to each U.S. Underwriter as the Company
makes to such U.S. Underwriter under paragraph (i)(b) of this Section.
Any certificate signed by any officer of any Selling Stockholder and
delivered to the Representatives or counsel for the Underwriters in connection
with the offering of the Securities shall be deemed a representation and
warranty by such Selling Stockholder, as to matters covered thereby, to each
U.S. Underwriter.
2. Purchase and Sale. (a) Subject to the terms and conditions and in
reliance upon the representations and warranties set forth in this U.S.
Underwriting Agreement, the Company and the Selling Stockholders agree,
severally and not jointly, to sell to each U.S. Underwriter, and each U.S.
Underwriter agrees, severally and not jointly, to purchase from the Company and
the Selling Stockholders, at a purchase price of $ . per share, the amount of
the U.S. Underwritten Securities set forth opposite such U.S. Underwriter's name
in Schedule I to this U.S. Underwriting Agreement.
(b) Subject to the terms and conditions and in reliance upon the
representations and warranties set forth in this U.S. Underwriting Agreement,
the Company hereby grants an option to the several U.S. Underwriters to purchase
up to 3,712,000 U.S. Option Securities at the same purchase price per share as
the U.S. Underwriters shall pay for the U.S. Underwritten Securities. Said
option may be exercised only to cover over-allotments in the sale of the U.S.
Underwritten Securities by the U.S. Underwriters. Said option may be exercised
in whole or in part at any time (but not more than once) on or before the 30th
day after the date of the U.S. Prospectus upon written or telegraphic notice by
the U.S. Representatives to the Company setting forth the number of shares of
the U.S. Option Securities as to which the several U.S. Underwriters are
exercising the option and the settlement date. The number of U.S. Option
Securities to be purchased by each U.S. Underwriter shall be the same percentage
of the total number of shares of the U.S. Option Securities to be purchased by
the several U.S. Underwriters as such U.S. Underwriter is purchasing of the U.S.
Underwritten Securities, subject to such adjustments as you in your absolute
discretion shall make to eliminate any fractional shares.
3. Delivery and Payment. Delivery of and payment for the U.S.
Underwritten Securities and the U.S. Option Securities (if the option provided
for in Section 2(b) hereof shall have been exercised on or before the third
Business Day prior to the Closing Date) shall be made
11
<PAGE>
at 10:00 AM, New York City time, on . , 1999, or at such time on such later date
not more than three Business Days after the foregoing date as the U.S.
Representatives and the International Representatives shall designate, which
date and time may be postponed by agreement among the U.S. Representatives, the
International Representatives, the Selling Stockholders and the Company or as
provided in Section 9 hereof (such date and time of delivery and payment for the
U.S. Securities being called in this U.S. Underwriting Agreement the "Closing
Date"). Delivery of the U.S. Securities shall be made to the U.S.
Representatives for the respective accounts of the several U.S. Underwriters
against payment by the several U.S. Underwriters through the U.S.
Representatives of the respective aggregate purchase prices of the U.S.
Securities being sold by the Company and each of the Selling Stockholders to or
upon the order of the Company and the Selling Stockholders by wire transfer
payable in same-day funds to the accounts specified by the Company and the
Selling Stockholders. Delivery of the U.S. Underwritten Securities and the U.S.
Option Securities shall be made through the facilities of The Depository Trust
Company unless the U.S. Representatives shall otherwise instruct.
Each Selling Stockholder will pay all applicable state transfer taxes,
if any, involved in the transfer to the several U.S. Underwriters of the U.S.
Securities to be purchased by them from such Selling Stockholder and the
respective U.S. Underwriters will pay any additional stock transfer taxes
involved in further transfers.
If the option provided for in Section 2(b) hereof is exercised after
the third Business Day prior to the Closing Date, the Company will deliver the
U.S. Option Securities (at the expense of the Company) to the U.S.
Representatives, at 388 Greenwich Street, New York, New York, on the date
specified by the U.S. Representatives (which shall be within three Business Days
after exercise of said option) for the respective accounts of the several U.S.
Underwriters, against payment by the several U.S. Underwriters through the U.S.
Representatives of the purchase price thereof to or upon the order of the
Company by wire transfer payable in same-day funds to the accounts specified by
the Company. If settlement for the U.S. Option Securities occurs after the
Closing Date, the Company will deliver to the U.S. Representatives on the
settlement date for the U.S. Option Securities, and the obligation of the U.S.
Underwriters to purchase the U.S. Option Securities shall be conditioned upon
receipt of, supplemental opinions, certificates and letters confirming as of
such date the opinions, certificates and letters delivered on the Closing Date
pursuant to Section 6 hereof.
It is understood and agreed that the Closing Date shall occur
simultaneously with the "Closing Date" under the International Underwriting
Agreement, and that the settlement date, if any, shall occur simultaneously with
the "settlement date" under the International Underwriting Agreement.
4. Offering by Underwriters. It is understood that the several U.S.
Underwriters propose to offer the U.S. Securities for sale to the public as set
forth in the U.S. Prospectus.
5. Agreements.
(i) The Company agrees with the several U.S. Underwriters that:
12
<PAGE>
(a) The Company will use its best efforts to cause the Registration
Statement, if not effective at the Execution Time, and any amendment
thereof, to become effective. Prior to the termination of the offering of
the Securities, the Company will not file any amendment of the Registration
Statement or supplement to the Prospectuses or any Rule 462(b) Registration
Statement unless the Company has furnished you a copy for your review prior
to filing and will not file any such proposed amendment or supplement to
which you reasonably object. Subject to the foregoing sentence, if the
Registration Statement has become or becomes effective pursuant to Rule
430A, or filing of the Prospectuses is otherwise required under Rule
424(b), the Company will cause the Prospectuses, properly completed, and
any supplement thereto to be filed with the Commission pursuant to the
applicable paragraph of Rule 424(b) within the time period prescribed and
will provide evidence satisfactory to the U.S. Representatives of such
timely filing. The Company will promptly advise the U.S. Representatives
(1) when the Registration Statement, if not effective at the Execution
Time, shall have become effective, (2) when the Prospectuses, and any
supplement thereto, shall have been filed (if required) with the Commission
pursuant to Rule 424(b) or when any Rule 462(b) Registration Statement
shall have been filed with the Commission, (3) when, prior to termination
of the offering of the Securities, any amendment to the Registration
Statement shall have been filed or become effective, (4) of any request by
the Commission or its staff for any amendment of the Registration
Statement, or any Rule 462(b) Registration Statement, or for any supplement
to the Prospectuses or for any additional information, (5) of the issuance
by the Commission of any stop order suspending the effectiveness of the
Registration Statement or the institution or threatening of any proceeding
for that purpose and (6) of the receipt by the Company of any notification
with respect to the suspension of the qualification of the Securities for
sale in any jurisdiction or the institution or threatening of any
proceeding for such purpose. The Company will use its best efforts to
prevent the issuance of any such stop order or the suspension of any such
qualification and, if issued, to obtain as soon as possible the withdrawal
thereof.
(b) If, at any time when a prospectus relating to the Securities is
required to be delivered under the Act, any event occurs as a result of
which either of the Prospectuses as then supplemented would include any
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein in the light of the circumstances
under which they were made not misleading, or if it shall be necessary to
amend the Registration Statement or supplement either of the Prospectuses
to comply with the Act or the rules thereunder, the Company promptly will
(1) notify the U.S. Representatives of any such event; (2) prepare and file
with the Commission, subject to the second sentence of paragraph (i)(a) of
this Section 5, an amendment or supplement which will correct such
statement or omission or effect such compliance; and (3) supply any
supplemented Prospectuses to you in such quantities as you may reasonably
request.
(c) As soon as practicable, the Company will make generally available
to its security holders and to the U.S. Representatives an earnings
statement or statements of the Company and its subsidiaries which will
satisfy the provisions of Section 11(a) of the Act and Rule 158 under the
Act.
13
<PAGE>
(d) The Company will furnish to the U.S. Representatives and counsel
for the U.S. Underwriters, without charge, signed copies of the
Registration Statement (including exhibits thereto) and to each other U.S.
Underwriter a copy of the Registration Statement (without exhibits thereto)
and, so long as delivery of a prospectus by a U.S. Underwriter or dealer
may be required by the Act, as many copies of each U.S. Preliminary
Prospectus and the U.S. Prospectus and any supplement thereto as the U.S.
Representatives may reasonably request.
(e) The Company will arrange, if necessary, for the qualification of
the Securities for sale under the laws of such jurisdictions as the U.S.
Representatives may designate and will maintain such qualifications in
effect so long as required for the distribution of the U.S. Securities;
provided that in no event shall the Company be obligated to qualify to do
business in any jurisdiction where it is not now so qualified or to take
any action that would subject it to service of process in suits, other than
those arising out of the offering or sale of the Securities, in any
jurisdiction where it is not now so subject.
(f) The Company will not, without the prior written consent of
Salomon Smith Barney Inc. and William Blair & Company, L.L.C., offer, sell,
contract to sell, pledge, or otherwise dispose of, (or enter into any
transaction which is designed to, or might reasonably be expected to,
result in the disposition (whether by actual disposition or effective
economic disposition due to cash settlement or otherwise) by the Company or
any affiliate of the Company or any person in privity with the Company or
any affiliate of the Company) directly or indirectly, including the filing
(or participation in the filing) of a registration statement with the
Commission in respect of, or establish or increase a put equivalent
position or liquidate or decrease a call equivalent position within the
meaning of Section 16 of the Exchange Act, any other shares of Common Stock
or any securities convertible into, or exercisable, or exchangeable for,
shares of Common Stock, or publicly announce an intention to effect any
such transaction, for a period of 90 days after the date of the
Underwriting Agreement; provided, however, that the Company may issue and
sell Common Stock (i) in connection with acquisition transactions (ii)
pursuant to any employee stock option plan, stock ownership plan or
dividend reinvestment plan of the Company in effect at the Execution Time,
or (iii) issuable upon the conversion of securities or the exercise of
warrants outstanding at the Execution Time.
(g) The Company will not take, directly or indirectly, any action
designed to or which has constituted or which might reasonably be expected
to cause or result, under the Exchange Act or otherwise, in stabilization
or manipulation of the price of any security of the Company to facilitate
the sale or resale of the Securities.
(h) The Company agrees to pay the costs and expenses relating to the
following matters: (i) the preparation, printing or reproduction and filing
with the Commission of the Registration Statement (including financial
statements and exhibits thereto), each Preliminary Prospectus, each
Prospectus, and each amendment or supplement to any of them; (ii) the
printing (or reproduction) and delivery (including postage, air freight
charges and charges for counting and packaging) of such copies of the
Registration Statement, each Preliminary Prospectus, each Prospectus, and
all amendments or supplements to any of them, as may, in each case, be
reasonably requested for use in
14
<PAGE>
connection with the offering and sale of the Securities; (iii) the
preparation, printing, authentication, issuance and delivery of
certificates for the Securities, including any stamp or transfer taxes in
connection with the original issuance and sale of the Securities; (iv) the
printing (or reproduction) and delivery of this U.S. Underwriting Agreement
and the International Underwriting Agreement, any blue sky memorandum and
all other agreements or documents printed (or reproduced) and delivered in
connection with the offering of the Securities; (v) the registration of the
Securities under the Exchange Act and the listing of the Securities on the
Nasdaq National Market; (vi) any registration or qualification of the
Securities for offer and sale under the securities or blue sky laws of the
several states (including filing fees and the reasonable fees and expenses
of counsel for the Underwriters relating to such registration and
qualification); (vii) any filings required to be made with the National
Association of Securities Dealers, Inc. (including filing fees and the
reasonable fees and expenses of counsel for the Underwriters relating to
such filings); (viii) the transportation and other expenses incurred by or
on behalf of Company representatives in connection with presentations to
prospective purchasers of the Securities; (ix) the fees and expenses of the
Company's accountants and the fees and expenses of counsel (including local
and special counsel) for the Company; and (x) all other costs and expenses
incident to the performance by the Company and the Selling Stockholders of
their obligations under the Underwriting Agreements.
(ii) Each U.S. Underwriter agrees that (i) it is not purchasing any
of the U.S. Securities for the account of anyone other than a United States or
Canadian Person, (ii) it has not offered or sold, and will not offer or sell,
directly or indirectly, any of the U.S. Securities or distribute any U.S.
Prospectus to any person outside the United States or Canada, or to anyone other
than a United States or Canadian Person, and (iii) any dealer to whom it may
sell any of the U.S. Securities will represent that it is not purchasing for the
account of anyone other than a United States or Canadian Person and agree that
it will not offer or resell, directly or indirectly, any of the U.S. Securities
outside the United States or Canada, or to anyone other than a United States or
Canadian Person or to any other dealer who does not so represent and agree;
provided, however, that the foregoing shall not restrict (A) purchases and sales
between the International Underwriters on the one hand and the U.S. Underwriters
on the other hand pursuant to the Agreement Between U.S. Underwriters and
International Underwriters, (B) stabilization transactions contemplated under
the Agreement Between U.S. Underwriters and International Underwriters,
conducted through Salomon Smith Barney Inc. (or through the U.S. Representatives
and International Representatives) as part of the distribution of the
Securities, and (C) sales to or through (or distributions of U.S. Prospectuses
or U.S. Preliminary Prospectuses to) United States or Canadian Persons who are
investment advisors, or who otherwise exercise investment discretion, and who
are purchasing for the account of anyone other than a United States or Canadian
Person.
(iii) The agreements of the U.S. Underwriters set forth in paragraph
(ii) of this Section 5 shall terminate upon the earlier of the following events:
(a) a mutual agreement of the U.S. Representatives and the
International Representatives to terminate the selling restrictions set
forth in paragraph (ii) of this Section 5 and in Section 5(ii) of the
International Underwriting Agreement; or
15
<PAGE>
(b) the expiration of a period of 30 days after the Closing Date,
unless (A) the U.S. Representatives shall have given notice to the Company
and the International Representatives that the distribution of the U.S.
Securities by the U.S. Underwriters has not yet been completed, or (B) the
International Representatives shall have given notice to the Company and
the U.S. Representatives that the distribution of the International
Securities by the International Underwriters has not yet been completed. If
such notice by the U.S. Representatives or the International
Representatives is given, the agreements set forth in such paragraph (ii)
shall survive until the earlier of (1) the event referred to in clause (a)
of this subsection (iii) or (2) the expiration of an additional period of
30 days from the date of any such notice.
(iv) Each Selling Stockholder agrees with the several Underwriters
that:
(a) Such Selling Stockholder will not, without the prior written
consent of Salomon Smith Barney Inc. and William Blair & Company, L.L.C.,
offer, sell, contract to sell, pledge or otherwise dispose of, (or enter
into any transaction which is designed to, or might reasonably be expected
to, result in the disposition (whether by actual disposition or effective
economic disposition due to cash settlement or otherwise) by the Company or
any affiliate of the Company or any person in privity with the Company or
any affiliate of the Company) directly or indirectly, or file (or
participate in the filing of) a registration statement with the Commission
in respect of, or establish or increase a put equivalent position or
liquidate or decrease a call equivalent position within the meaning of
Section 16 of the Exchange Act with respect to, any shares of capital stock
of the Company or any securities convertible into or exercisable or
exchangeable for such capital stock, or publicly announce an intention to
effect any such transaction, for a period of 90 days after the date of this
U.S. Underwriting Agreement, other than shares of Common Stock disposed of
as bona fide gifts approved by Salomon Smith Barney Inc. and William Blair
& Company, L.L.C.
(b) Such Selling Stockholder will not take any action designed to or
which has constituted or which might reasonably be expected to cause or
result, under the Exchange Act or otherwise, in stabilization or
manipulation of the price of any security of the Company to facilitate the
sale or resale of the Securities.
(c) Such Selling Stockholder will advise you promptly, and if
requested by you, will confirm such advice in writing, so long as delivery
of a prospectus relating to the Securities by an underwriter or dealer may
be required under the Act, of (i) any material change in the Company's
condition (financial or otherwise), prospects, earnings, business or
properties, (ii) any change in information in the Registration Statement or
the Prospectuses relating to such Selling Stockholder or (iii) any new
material information relating to the Company or relating to any matter
stated in the Prospectuses which come to the attention of such Selling
Stockholder.
(d) Such Selling Stockholder agrees to pay the fees and expenses of
counsel (including local and special counsel) for such Selling Stockholder.
16
<PAGE>
6. Conditions to the Obligations of the U.S. Underwriters. The
obligations of the U.S. Underwriters to purchase the U.S. Underwritten
Securities and the U.S. Option Securities, as the case may be, shall be subject
to the accuracy of the representations and warranties on the part of the Company
and the Selling Stockholders contained in this U.S. Underwriting Agreement as of
the Execution Time, the Closing Date and any settlement date pursuant to Section
3 hereof, to the accuracy of the statements of the Company and the Selling
Stockholders made in any certificates pursuant to the provisions hereof, to the
performance by the Company and the Selling Stockholders of their respective
obligations under this U.S. Underwriting Agreement and to the following
additional conditions:
(a) If the Registration Statement has not become effective prior to
the Execution Time, unless the U.S. Representatives and the International
Representatives agree in writing to a later time, the Registration Statement
will become effective not later than (i) 6:00 PM New York City time on the date
of determination of the public offering price, if such determination occurred at
or prior to 3:00 PM New York City time on such date or (ii) 9:30 AM on the
Business Day following the day on which the public offering price was
determined, if such determination occurred after 3:00 PM New York City time on
such date; if filing of either of the Prospectuses, or any supplement thereto,
is required pursuant to Rule 424(b), the Prospectuses, and any such supplement,
will be filed in the manner and within the time period required by Rule 424(b);
and no stop order suspending the effectiveness of the Registration Statement
shall have been issued and no proceedings for that purpose shall have been
instituted or threatened.
(b) The Company shall have requested and caused Sidley & Austin,
counsel for the Company, to have furnished to the Representatives their opinion,
dated the Closing Date and addressed to the Representatives, to the effect that:
(i) each of the Company and EFS National Bank, EFS Federal Savings
Bank, Concord Computing Corporation, Concord Retail Services, Inc., Concord
Equipment Sales, Pay Systems of America, Inc., Digital Merchants Systems of
Illinois, Inc., American Bankcard, International, Inc. and Electronic
Payment Services, Inc. (individually a "Subsidiary" and collectively the
"Subsidiaries") has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction in which it
is chartered or organized, with full corporate power and authority to own
or lease, as the case may be, and to operate its properties and conduct its
business as described in the Prospectuses, and is duly qualified to do
business as a foreign corporation and is in good standing under the laws of
each jurisdiction which requires such qualification, and the Company is
duly registered as a bank holding company under the Bank Holding Company
Act of 1956, as amended;
(ii) all the outstanding shares of capital stock of each Subsidiary
have been duly and validly authorized and issued and are fully paid and
nonassessable, and, except as otherwise set forth in the Prospectuses, all
outstanding shares of capital stock of the Subsidiaries are owned by the
Company either directly or through wholly owned subsidiaries free and clear
of any perfected security interest and, to the knowledge of such counsel,
after due inquiry, any other security interest, claim, lien or encumbrance;
17
<PAGE>
(iii) the Company's authorized equity capitalization is as set forth
in the Prospectuses; the capital stock of the Company conforms in all
material respects to the description thereof contained in the Prospectuses;
the outstanding shares of Common Stock (including the Securities being sold
under the Underwriting Agreements by the Selling Stockholders) have been
duly and validly authorized and issued and are fully paid and
nonassessable; the Securities being sold under the Underwriting Agreements
by the Company have been duly and validly authorized, and, when issued and
delivered to and paid for by the U.S. Underwriters pursuant to this U.S.
Underwriting Agreement and by the International Underwriters pursuant to
the International Underwriting Agreement, will be fully paid and
nonassessable; the Securities being sold by the Selling Stockholders are
duly quoted, and admitted and authorized for trading on the Nasdaq National
Market and the Securities being sold hereunder by the Company are duly
quoted, and admitted and authorized for trading, subject to official notice
of issuance, on the Nasdaq National Market; the certificates for the
Securities are in valid and sufficient form; the holders of outstanding
shares of capital stock of the Company are not entitled to preemptive or
other rights to subscribe for the Securities; and, except as set forth in
the Prospectuses, no options, warrants or other rights to purchase,
agreements or other obligations to issue, or rights to convert any
obligations into or exchange any securities for, shares of capital stock of
or ownership interests in the Company are outstanding;
(iv) to the knowledge of such counsel, there is no pending or
threatened action, suit or proceeding by or before any court or
governmental agency, authority or body or any arbitrator involving the
Company or any of its subsidiaries or its or their property of a character
required to be disclosed in the Registration Statement which is not
adequately disclosed in the Prospectuses, and there is no franchise,
contract or other document of a character required to be described in the
Registration Statement or Prospectuses, or to be filed as an exhibit
thereto, which is not described or filed as required; the descriptions
contained in the Prospectuses under the heading "United States Federal Tax
Consequences to Non-United States Holders" constitute fair summaries of
those statutes and regulations discussed therein applicable to the offering
of the Securities; and the statements in the Prospectuses under the heading
"Business Supervision and Regulation" fairly summarize the matters therein
described;
(v) the Registration Statement has become effective under the Act; any
required filing of the Prospectuses, and any supplements thereto, pursuant
to Rule 424(b) has been made in the manner and within the time period
required by Rule 424(b); to the knowledge of such counsel, no stop order
suspending the effectiveness of the Registration Statement has been issued,
no proceedings for that purpose have been instituted or threatened and the
Registration Statement and each of the Prospectuses (other than the
financial statements and other financial information contained therein, as
to which such counsel need express no opinion) comply as to form in all
material respects with the applicable requirements of the Act and the
Exchange Act and the respective rules thereunder; and such counsel has no
reason to believe that on the Effective Date or at the Execution Time the
Registration Statement contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or
necessary to make the statements therein not misleading or that the
Prospectuses as of the date thereof and on the Closing Date included or
include any untrue statement of a
18
<PAGE>
material fact or omitted or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which they
were made, not misleading (in each case, other than the financial
statements and other financial information contained therein, as to which
such counsel need express no opinion);
(vi) the Underwriting Agreements have been duly authorized, executed
and delivered by the Company;
(vii) the Company is not and, after giving effect to the offering and
sale of the Securities and the application of the proceeds thereof as
described in the Prospectuses, will not be, an "investment company" as
defined in the Investment Company Act of 1940, as amended;
(viii) no consent, approval, authorization, filing with or order of
any court or governmental agency or body is required in connection with the
transactions contemplated in the Underwriting Agreements, except such as
have been obtained under the Act and such as may be required under the blue
sky laws of any jurisdiction in connection with the purchase and
distribution of the Securities by the Underwriters in the manner
contemplated in and the Underwriting Agreements and in the Prospectuses and
such other approvals (specified in such opinion) as have been obtained;
(ix) neither the issue and sale of the Securities, nor the
consummation of any other of the transactions contemplated in the
Underwriting Agreements nor the fulfillment of the terms of the
Underwriting Agreements will conflict with, result in a breach or violation
of or imposition of any lien, charge or encumbrance upon any property or
assets of the Company or its subsidiaries pursuant to, (i) the charter or
by-laws of the Company or its subsidiaries, (ii) the terms of any
indenture, contract, lease, mortgage, deed of trust, note agreement, loan
agreement or other agreement, obligation, condition, covenant or instrument
to which the Company or its subsidiaries is a party or bound or to which
its or their property is subject, or (iii) any statute, law, rule,
regulation, judgment, order or decree applicable to the Company or its
subsidiaries of any court, regulatory body, administrative agency,
governmental body, arbitrator or other authority having jurisdiction over
the Company or its subsidiaries or any of its or their properties; and
(x) no holders of securities of the Company have rights to the
registration of such securities under the Registration Statement except for
such rights of the Selling Stockholders.
In rendering such opinion, such counsel may rely (A) as to matters involving the
application of laws of any jurisdiction other than the State of Illinois or the
Federal laws of the United States, to the extent they deem proper and specified
in such opinion, upon the opinion of other counsel of good standing whom they
believe to be reliable and who are satisfactory to counsel for the Underwriters
and (B) as to matters of fact, to the extent they deem proper, on certificates
of responsible officers of the Company and public officials. Reference to the
Prospectuses in this paragraph (b) include any supplements thereto at the
Closing Date.
19
<PAGE>
(c) The Selling Stockholders shall have requested and caused
___________, counsel for the Selling Stockholders, to have furnished to the
Representatives their opinion dated the Closing Date and addressed to the
Representatives, to the effect that:
(i) the Underwriting Agreements, and the Custody Agreement and Power-
of-Attorney have been duly authorized, executed and delivered by the
Selling Stockholders, the Custody Agreement is valid and binding on the
Selling Stockholders and each Selling Stockholder has full legal right and
authority to sell, transfer and deliver in the manner provided in the
Underwriting Agreements and the Custody Agreement the Securities being sold
by such Selling Stockholder under the Underwriting Agreements;
(ii) the delivery by each Selling Stockholder to the several
Underwriters of certificates for the Securities being sold under the
Underwriting Agreements by such Selling Stockholder against payment
therefor as provided in the Underwriting Agreements, will pass good and
marketable title to such Securities to the several Underwriters, free and
clear of all liens, encumbrances, equities and claims whatsoever;
(iii) no consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation by any Selling
Stockholder of the transactions contemplated in the Underwriting
Agreements, except such as may have been obtained under the Act and such as
may be required under the blue sky laws of any jurisdiction and the
securities laws of any jurisdiction outside the United States in connection
with the purchase and distribution of the Securities by the Underwriters
and such other approvals (specified in such opinion) as have been obtained;
and
(iv) neither the sale of the Securities being sold by any Selling
Stockholder nor the consummation of any other of the transactions
contemplated in the Underwriting Agreements by any Selling Stockholder or
the fulfillment of the terms hereof by any Selling Stockholder will
conflict with, result in a breach or violation of, or constitute a default
under any law or the charter or By-laws of the Selling Stockholder or the
terms of any indenture or other agreement or instrument known to such
counsel and to which any Selling Stockholder or any of its subsidiaries is
a party or bound, or any judgment, order or decree known to such counsel to
be applicable to any Selling Stockholder or any of its subsidiaries of any
court, regulatory body, administrative agency, governmental body or
arbitrator having jurisdiction over any Selling Stockholder or any of its
subsidiaries.
In rendering such opinion, such counsel may rely (A) as to matters involving the
application of laws of any jurisdiction other than the State of ______________
or the Federal laws of the United States, to the extent they deem proper and
specified in such opinion, upon the opinion of other counsel of good standing
whom they believe to be reliable and who are satisfactory to counsel for the
U.S. Underwriters and the International Underwriters, and (B) as to matters of
fact, to the extent they deem proper, on certificates of responsible officers of
the Selling Stockholders and public officials.
(d) The Representatives shall have received from Cleary, Gottlieb,
Steen & Hamilton, counsel for the Underwriters, such opinion or opinions,
dated the Closing Date and addressed to the Representatives, with respect
to the issuance and sale of the Securities, the
20
<PAGE>
Registration Statement, the Prospectuses (together with any supplement thereto)
and other related matters as the Representatives may reasonably require, and the
Company and each Selling Stockholder shall have furnished to such counsel such
documents as they request for the purpose of enabling them to pass upon such
matters.
(e) The Company shall have furnished to the Representatives a
certificate of the Company, signed by the Chairman of the Board or the President
and the principal financial or accounting officer of the Company, dated the
Closing Date, to the effect that the signers of such certificate have carefully
examined the Registration Statement, the Prospectuses, any supplements to the
Prospectuses and the Underwriting Agreements and that:
(i) the representations and warranties of the Company in the
Underwriting Agreements are true and correct in all material respects on
and as of the Closing Date with the same effect as if made on the Closing
Date and the Company has complied with all the agreements and satisfied all
the conditions on its part to be performed or satisfied at or prior to the
Closing Date;
(ii) no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or, to the Company's knowledge, threatened; and
(iii) since the date of the most recent financial statements included
in the Prospectuses (exclusive of any supplement thereto), there has been
no material adverse effect on the condition (financial or otherwise),
prospects, earnings, business or properties of the Company and its
subsidiaries, taken as a whole, whether or not arising from transactions in
the ordinary course of business, except as set forth in or contemplated in
the Prospectuses (exclusive of any supplement thereto).
(f) Each Selling Stockholder shall have furnished to the
Representatives a certificate, signed by the Chairman of the Board or the
President and the principal financial or accounting officer of such Selling
Stockholder, dated the Closing Date, to the effect that the signers of such
certificate have carefully examined the Registration Statement, the
Prospectuses, any supplement to either of the Prospectuses and this U.S.
Underwriting Agreement and the International Underwriting Agreement and that the
representations and warranties of such Selling Stockholder in this U.S.
Underwriting Agreement and the International Underwriting Agreement are true and
correct in all material respects on and as of the Closing Date to the same
effect as if made on the Closing Date.
(g) The Company shall have requested and caused Ernst & Young LLP
to have furnished to the Representatives letters, dated respectively as of the
Execution Time and as of the Closing Date, in form and substance satisfactory to
the Representatives, confirming that they are independent accountants within the
meaning of the Act and the applicable rules and regulations adopted by the
Commission thereunder and that they have performed a review of the unaudited
interim financial information of the Company for the three-month period ended
March 31, 1999 and as at March 31, 1999, in accordance with Statement on
Auditing Standards No. 71, and stating in effect that:
21
<PAGE>
(i) in their opinion the audited financial statements and financial
statement schedules included and incorporated by reference in the
Registration Statement and the Prospectuses and reported on by them comply
as to form in all material respects with the applicable accounting
requirements of the Act and the Exchange Act and the related rules and
regulations adopted by the Commission;
(ii) on the basis of a reading of the latest unaudited financial
statements made available by the Company and its subsidiaries; their
limited review, in accordance with standards established under Statement on
Auditing Standards No. 71, of the unaudited interim financial information
for the three-month period ended March 31, 1999, and as at March 31, 1999
[, as indicated in their report dated _______________, 1999
included/incorporated by reference in the Registration Statement and the
Prospectuses]; carrying out certain specified procedures (but not an
examination in accordance with generally accepted auditing standards) which
would not necessarily reveal matters of significance with respect to the
comments set forth in such letter; a reading of the minutes of the meetings
of the stockholders, directors, board of directors' audit committee and
compensation committee of the Company and the Subsidiaries; and inquiries
of certain officials of the Company who have responsibility for financial
and accounting matters of the Company and its subsidiaries as to
transactions and events subsequent to December 31, 1998, nothing came to
their attention which caused them to believe that:
(1) any unaudited financial statements included or incorporated
by reference in the Registration Statement and the Prospectuses do not
comply as to form in all material respects with applicable accounting
requirements of the Act and with the related rules and regulations
adopted by the Commission with respect to financial statements
included or incorporated by reference in quarterly reports on Form
10-Q under the Exchange Act; and said unaudited financial statements
are not in conformity with generally accepted accounting principles
applied on a basis substantially consistent with that of the audited
financial statements included or incorporated by reference in the
Registration Statement and the Prospectuses;
(2) with respect to the period subsequent to March 31, 1999,
there were any changes, at a specified date not more than five days
prior to the date of the letter, in the long-term debt of the Company
and its subsidiaries or capital stock of the Company or decreases in
the stockholders' equity of the Company or decreases in working
capital of the Company and its subsidiaries as compared with the
amounts shown on the March 31, 1999 consolidated balance sheet
included or incorporated by reference in the Registration Statement
and the Prospectuses, or for the period from April 1, 1999 to such
specified date there were any decreases, as compared with the
corresponding period in the preceding quarter, in revenue, operating
income or income before taxes or in total or per share amounts of net
income of the Company and its subsidiaries except in all instances for
changes or decreases set forth in such letter, in which case the
letter shall be accompanied by an explanation by the Company as to the
significance thereof unless said explanation is not deemed necessary
by the Representatives;
22
<PAGE>
(3) the information included or incorporated by reference in the
Registration Statement and Prospectuses in response to Regulation S-K,
Item 301 (Selected Financial Data), Item 302 (Supplementary Financial
Information) and Item 402 (Executive Compensation) is not in
conformity with the applicable disclosure requirements of Regulation
S-K; and
(iii) they have performed certain other specified procedures as a
result of which they determined that certain information of an accounting,
financial or statistical nature (which is limited to accounting, financial
or statistical information derived from the general accounting records of
the Company and its subsidiaries) set forth in the Registration Statement
and the Prospectuses, including the information set forth under the
captions "Capitalization", "Selected Consolidated Financial Data",
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" and "Business" in the Prospectuses, the information included or
incorporated by reference in Items 1, 2, 6, 7 and 11 of the Company's
Annual Report on Form 10-K, incorporated by reference in the Registration
Statement and the Prospectuses, and the information included in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in the Company's Quarterly Report on Form 10-Q,
incorporated by reference in the Registration Statement and the
Prospectuses, agrees with the accounting records of the Company and its
subsidiaries, excluding any questions of legal interpretation.
References to the Prospectuses in this paragraph (g) include any supplement
thereto at the date of the letter.
(h) Subsequent to the Execution Time or, if earlier, the dates as of
which information is given in the Registration Statement (exclusive of any
amendment thereof) and the Prospectuses (exclusive of any supplement thereto),
there shall not have been (i) any change or decrease specified in the letter or
letters referred to in paragraph (g) of this Section 6 or (ii) any change, or
any development involving a prospective change, in or affecting the condition
(financial or otherwise), earnings, business or properties of the Company and
its subsidiaries, taken as a whole, whether or not arising from transactions in
the ordinary course of business, except as set forth in or contemplated in the
Prospectuses (exclusive of any supplement thereto) the effect of which, in any
case referred to in clause (i) or (ii) above, is, in the sole judgment of the
U.S. Representatives, so material and adverse as to make it impractical or
inadvisable to proceed with the offering or delivery of the U.S. Securities as
contemplated by the Registration Statement (exclusive of any amendment thereof)
and the Prospectuses (exclusive of any supplement thereto).
(i) The closing of the purchase of the U.S. Underwritten Securities
to be issued and sold by the Company and the Selling Stockholders pursuant to
the U.S. Underwriting Agreement shall occur concurrently with the closing of the
International Underwritten Securities to be issued and sold by the Company and
the Selling Stockholders pursuant to the International Underwriting Agreement.
23
<PAGE>
(j) Prior to the Closing Date, the Company and the Selling
Stockholders shall have furnished to the Representatives such further
information, certificates and documents as the Representatives may reasonably
request.
(k) The Securities shall have been listed and admitted and
authorized for trading on the Nasdaq National Market, and satisfactory evidence
of such actions shall have been provided to the Representatives.
(l) At the Execution Time, the Company shall have furnished to the
Representatives a letter substantially in the form of Exhibit A hereto (and in
the case of Richard N. Garman and Ruth Ann Marshall, substantially in the form
of Exhibit B hereto) from each executive officer and director of the Company,
which persons are listed on Schedule III hereto, KeyCorp and Sam Buchbinder, all
addressed to the Representatives.
If any of the conditions specified in this Section 6 shall not have
been fulfilled in all material respects when and as provided in this U.S.
Underwriting Agreement and the International Underwriting Agreement, or if any
of the opinions and certificates mentioned above or elsewhere in this U.S.
Underwriting Agreement shall not be in all material respects reasonably
satisfactory in form and substance to the U.S. Representatives and counsel for
the Underwriters, this U.S. Underwriting Agreement and all obligations of the
U.S. Underwriters under this U.S. Underwriting Agreement may be canceled at, or
at any time prior to, the Closing Date by the U.S. Representatives. Notice of
such cancellation shall be given to the Company and each Selling Stockholder in
writing or by telephone or facsimile confirmed in writing.
The documents required to be delivered by this Section 6 shall be
delivered at the office of Cleary, Gottlieb, Steen & Hamilton, counsel for the
Underwriters, at One Liberty Plaza, New York, New York 10006, on the Closing
Date.
7. Reimbursement of U.S. Underwriters' Expenses. If the sale of
the U.S. Securities provided for in this U.S. Underwriting Agreement is not
consummated because any condition to the obligations of the U.S. Underwriters
set forth in Section 6 hereof is not satisfied, because of any termination
pursuant to Section 10 hereof or because of any refusal, inability or failure on
the part of the Company or any Selling Stockholders to perform any agreement in
this U.S. Underwriting Agreement or comply with any provision hereof other than
by reason of a default by any of the U.S. Underwriters, the Company will
reimburse the U.S. Underwriters severally through Salomon Smith Barney Inc. on
demand for all out-of-pocket expenses (including reasonable fees and
disbursements of counsel) that shall have been incurred by them in connection
with the proposed purchase and sale of the Securities. If the Company is
required to make any payments to the Underwriters under this Section 7 because
of any Selling Stockholder's refusal, inability or failure to satisfy any
condition to the obligations of the Underwriters set forth in Section 6, the
Selling Stockholders pro rata in proportion to the percentage of Securities to
be sold by each shall reimburse the Company on demand for all amounts so paid.
8. Indemnification and Contribution. (a) The Company agrees to
indemnify and hold harmless each U.S. Underwriter, the directors, officers,
employees and agents of each U.S. Underwriter and each person who controls any
U.S. Underwriter within the meaning of either the
24
<PAGE>
Act or the Exchange Act against any and all losses, claims, damages or
liabilities, joint or several, to which they or any of them may become subject
under the Act, the Exchange Act or other Federal or state statutory law or
regulation, at common law or otherwise, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement of a material fact contained in
the registration statement for the registration of the Securities as originally
filed or in any amendment thereof, or in any U.S. or International Preliminary
Prospectus or in either of the Prospectuses, or in any amendment thereof or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and agrees to reimburse
each such indemnified party, as incurred, for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action; provided, however, that the
Company will not be liable in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon any such untrue
statement or alleged untrue statement or omission or alleged omission made
therein in reliance upon and in conformity with written information furnished to
the Company by or on behalf of any U.S. Underwriter through the U.S.
Representatives specifically for inclusion therein. This indemnity agreement
will be in addition to any liability which the Company may otherwise have.
(b) Each Selling Stockholder severally agrees to indemnify and hold
harmless the Company, each of its directors, each of its officers who signs the
Registration Statement, each U.S. Underwriter, the directors, officers,
employees and agents of each U.S. Underwriter and each person who controls the
Company or any U.S. Underwriter within the meaning of either the Act or the
Exchange Act and each other Selling Stockholder, if any, to the same extent as
the foregoing indemnity from the Company to each U.S. Underwriter, but only with
reference to written information furnished to the Company by or on behalf of
such Selling Stockholder specifically for inclusion in the documents referred to
in the foregoing indemnity. This indemnity agreement will be in addition to any
liability which any Selling Stockholder may otherwise have.
(c) Each U.S. Underwriter severally and not jointly agrees to indemnify and
hold harmless the Company, each of its directors, each of its officers who signs
the Registration Statement, and each person who controls the Company within the
meaning of either the Act or the Exchange Act and each Selling Stockholder, to
the same extent as the foregoing indemnity to each U.S. Underwriter, but only
with reference to written information relating to such U.S. Underwriter
furnished to the Company by or on behalf of such U.S. Underwriter through the
U.S. Representatives specifically for inclusion in the documents referred to in
the foregoing indemnity. This indemnity agreement will be in addition to any
liability which any U.S. Underwriter may otherwise have. The Company and each
Selling Stockholder acknowledge that the statements set forth in the last
paragraph of the cover page regarding delivery of the Securities and, under the
heading "Underwriting", (i) the sentences related to concessions and
reallowances and (ii) the paragraph related to stabilization, syndicate covering
transactions and penalty bids in any U.S. or International Preliminary
Prospectuses and the Prospectuses constitute the only information furnished in
writing by or on behalf of the several U.S. Underwriters for inclusion in any
U.S. or International Preliminary Prospectus or the Prospectuses.
25
<PAGE>
(d) Promptly after receipt by an indemnified party under this Section
8 of notice of the commencement of any action, such indemnified party will,
if a claim in respect thereof is to be made against the indemnifying party
under this Section 8, notify the indemnifying party in writing of the
commencement thereof; but the failure so to notify the indemnifying party
(i) will not relieve it from liability under paragraph (a), (b) or (c)
above unless and to the extent it did not otherwise learn of such action
and such failure results in the forfeiture by the indemnifying party of
substantial rights and defenses and (ii) will not, in any event, relieve
the indemnifying party from any obligations to any indemnified party other
than the indemnification obligation provided in paragraph (a), (b) or (c)
above. The indemnifying party shall be entitled to appoint counsel of the
indemnifying party's choice at the indemnifying party's expense to
represent the indemnified party in any action for which indemnification is
sought (in which case the indemnifying party shall not thereafter be
responsible for the fees and expenses of any separate counsel retained by
the indemnified party or parties except as set forth below); provided,
however, that such counsel shall be satisfactory to the indemnified party.
Notwithstanding the indemnifying party's election to appoint counsel to
represent the indemnified party in an action, the indemnified party shall
have the right to employ separate counsel (including local counsel), and
the indemnifying party shall bear the reasonable fees, costs and expenses
of such separate counsel if (i) the use of counsel chosen by the
indemnifying party to represent the indemnified party would present such
counsel with a conflict of interest, (ii) the actual or potential
defendants in, or targets of, any such action include both the indemnified
party and the indemnifying party and the indemnified party shall have
reasonably concluded that there may be legal defenses available to it
and/or other indemnified parties which are different from or additional to
those available to the indemnifying party, (iii) the indemnifying party
shall not have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
the institution of such action or (iv) the indemnifying party shall
authorize the indemnified party to employ separate counsel at the expense
of the indemnifying party. An indemnifying party will not, without the
prior written consent of the indemnified parties, settle or compromise or
consent to the entry of any judgment with respect to any pending or
threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified parties are actual or potential parties to such claim or
action) unless such settlement, compromise or consent includes an
unconditional release of each indemnified party from all liability arising
out of such claim, action, suit or proceeding.
(e) In the event that the indemnity provided in paragraph (a), (b) or
(c) of this Section 8 is unavailable to or insufficient to hold harmless an
indemnified party for any reason, the Company, the Selling Stockholders and
the U.S. Underwriters agree to contribute to the aggregate losses, claims,
damages and liabilities (including legal or other expenses reasonably
incurred in connection with investigating or defending same) (collectively
"Losses") to which the Company, one or more of the Selling Stockholders and
one or more of the U.S. Underwriters may be subject in such proportion as
is appropriate to reflect the relative benefits received by the Company, by
the Selling Stockholders and by the U.S. Underwriters from the offering of
the U.S. Securities; provided, however, that in no case shall any U.S.
Underwriter (except as may be provided in any agreement among underwriters
relating to the offering of the U.S. Securities) be responsible for any
amount in excess of the underwriting discount or commission applicable to
the Securities purchased by such U.S. Underwriter hereunder. If the
allocation provided by the immediately preceding sentence is unavailable
for any reason, the Company, the Selling Stockholders and the U.S.
Underwriters shall contribute in such proportion as is appropriate to
26
<PAGE>
reflect not only such relative benefits but also the relative fault of the
Company, of the Selling Stockholders and of the U.S. Underwriters in connection
with the statements or omissions which resulted in such Losses as well as any
other relevant equitable considerations. Benefits received by the Company and by
the Selling Stockholders shall be deemed to be equal to the total net proceeds
from the offering (before deducting expenses) received by each of them, and
benefits received by the U.S. Underwriters shall be deemed to be equal to the
total underwriting discounts and commissions, in each case as set forth on the
cover page of the U.S. Prospectus. Relative fault shall be determined by
reference to, among other things, whether any untrue or any alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information provided by the Company, the Selling
Stockholders on the one hand or the U.S. Underwriters on the other, the intent
of the parties and their relative knowledge, access to information and
opportunity to correct or prevent such untrue statement or omission. The
Company, the Selling Stockholders and the U.S. Underwriters agree that it would
not be just and equitable if contribution were determined by pro rata allocation
or any other method of allocation which does not take account of the equitable
considerations referred to above. Notwithstanding the provisions of this
paragraph (e), no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. For purposes of
this Section 8, each person who controls a U.S. Underwriter within the meaning
of either the Act or the Exchange Act and each director, officer, employee and
agent of a U.S. Underwriter shall have the same rights to contribution as such
U.S. Underwriter, and each person who controls the Company within the meaning of
either the Act or the Exchange Act, each officer of the Company who shall have
signed the Registration Statement and each director of the Company shall have
the same rights to contribution as the Company, subject in each case to the
applicable terms and conditions of this paragraph (e).
9. Default by a U.S. Underwriter. If any one or more U.S. Underwriters
shall fail to purchase and pay for any of the U.S. Securities agreed to be
purchased by such U.S. Underwriter or U.S. Underwriters under this U.S.
Underwriting Agreement and such failure to purchase shall constitute a default
in the performance of its or their obligations under this U.S. Underwriting
Agreement, the remaining U.S. Underwriters shall be obligated severally to take
up and pay for (in the respective proportions which the amount of U.S.
Securities set forth opposite their names in Schedule I hereto bears to the
aggregate amount of U.S. Securities set forth opposite the names of all the
remaining U.S. Underwriters) the U.S. Securities which the defaulting U.S.
Underwriter or U.S. Underwriters agreed but failed to purchase; provided,
however, that in the event that the aggregate amount of U.S. Securities which
the defaulting U.S. Underwriter or U.S. Underwriters agreed but failed to
purchase shall exceed 10% of the aggregate amount of U.S. Securities set forth
in Schedule I hereto, the remaining U.S. Underwriters shall have the right to
purchase all, but shall not be under any obligation to purchase any, of the U.S.
Securities, and if such nondefaulting U.S. Underwriters do not purchase all the
U.S. Securities, this U.S. Underwriting Agreement will terminate without
liability to any nondefaulting U.S. Underwriter, the Selling Stockholders or the
Company. In the event of a default by any U.S. Underwriter as set forth in this
Section 9, the Closing Date shall be postponed for such period, not exceeding
five Business Days, as the U.S. Representatives shall determine in order that
the required changes in the Registration Statement and the Prospectuses or in
any other documents or arrangements may be effected. Nothing contained in this
U.S. Underwriting Agreement shall relieve any defaulting U.S. Underwriter of its
liability, if any, to
27
<PAGE>
the Company, the Selling Stockholders and any nondefaulting U.S. Underwriter for
damages occasioned by its default under this U.S. Underwriting Agreement.
10. Termination. This U.S. Underwriting Agreement shall be subject to
termination in the absolute discretion of the U.S. Representatives, by notice
given to the Company prior to delivery of and payment for the U.S. Securities,
if at any time prior to such time (i) trading in the Company's Common Stock
shall have been suspended by the Commission or the Nasdaq National Market or
trading in securities generally on the New York Stock Exchange or the Nasdaq
National Market shall have been suspended or limited or minimum prices shall
have been established on such Exchange or the Nasdaq National Market, (ii) a
banking moratorium shall have been declared either by federal or new york state
authorities or (iii) there shall have occurred any outbreak or escalation of
hostilities, declaration by the united states of a national emergency or war, or
other calamity or crisis the effect of which on financial markets is such as to
make it, in the sole judgment of the U.S. Representatives, impractical or
inadvisable to proceed with the offering or delivery of the Securities as
contemplated by the U.S. Prospectus (exclusive of any supplement thereto).
11. Representations and Indemnities to Survive. The respective
agreements, representations, warranties, indemnities and other statements of the
Company or its officers, of each Selling Stockholder and of the U.S.
Underwriters set forth in or made pursuant to this U.S. Underwriting Agreement
will remain in full force and effect, regardless of any investigation made by or
on behalf of any U.S. Underwriter, any Selling Stockholder or the Company or any
of the officers, directors, employees, agents or controlling persons referred to
in section 8 hereof, and will survive delivery of and payment for the U.S.
Securities. The provisions of Sections 7 and 8 hereof shall survive the
termination or cancellation of this U.S. Underwriting Agreement.
12. Notices. All communications under this U.S. Underwriting Agreement
will be in writing and effective only on receipt, and, if sent to the U.S.
Representatives, will be mailed, delivered or telefaxed to the Salomon Smith
Barney Inc. General Counsel (fax no.:(212) 816-7912) and confirmed to such
General Counsel at Salomon Smith Barney Inc., 388 Greenwich Street, New York,
New York, 10013, Attention: General Counsel; or, if sent to the Company, will be
mailed, delivered or telefaxed to [facsimile number] and confirmed to it at
, attention of _________; or if sent to any Selling Stockholder,
will be mailed, delivered or telefaxed and confirmed to it at the address set
forth in Schedule II hereto.
13. Successors. This U.S. Underwriting Agreement will inure to the
benefit of and be binding upon the parties hereto and their respective
successors and the officers, directors, employees, agents and controlling
persons referred to in Section 8 hereof, and no other person will have any right
or obligation under this U.S. Underwriting Agreement.
14. Applicable Law. This U.S. Underwriting Agreement will be governed
by and construed in accordance with the laws of the State of New York applicable
to contracts made and to be performed within the State of New York.
15. Counterparts. This U.S. Underwriting Agreement may be signed in
one or more counterparts, each of which shall constitute an original and all of
which together shall constitute one and the same agreement.
28
<PAGE>
16. Headings. The Section headings used in this U.S. Underwriting
Agreement are for convenience only and shall not affect the construction hereof.
17. Definitions. The terms which follow, when used in this U.S.
Underwiting Agreement, shall have the meanings indicated.
"Act" shall mean the Securities Act of 1933, as amended, and the rules
and regulations of the Commission promulgated thereunder.
"Business Day" shall mean any day other than a Saturday, a Sunday or a
legal holiday or a day on which banking institutions or trust companies are
authorized or obligated by law to close in New York City.
"Commission" shall mean the Securities and Exchange Commission.
"Effective Date" shall mean each date and time that the Registration
Statement, any post-effective amendment or amendments thereto and any Rule
462(b) Registration Statement became or become effective.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission promulgated
thereunder.
"Execution Time" shall mean the date and time that this U.S.
Underwriting Agreement is executed and delivered by the parties hereto.
"International Preliminary Prospectus" shall have the meaning set
forth under "U.S. Preliminary Prospectus."
"International Prospectus" shall mean such form of prospectus relating
to the International Securities as first filed pursuant to Rule 424(b)
after the Execution Time or, if no filing pursuant to Rule 424(b) is made,
such form of prospectus included in the Registration Statement at the
Effective Date.
"International Representatives" shall mean the addressees of the
International Underwriting Agreement.
"International Securities" shall mean the International Underwritten
Securities and the International Option Securities.
"International Underwriters" shall mean the several underwriters named
in Schedule I to the International Underwriting Agreement.
"International Underwriting Agreement" shall mean the International
Underwriting Agreement dated the date hereof related to the sale of the
International Securities by the Company and the Selling Stockholders to the
International Underwriters.
29
<PAGE>
"Option Securities" shall mean the U.S. Option Securities and the
International Option Securities.
"Preliminary Prospectus" shall have the meaning set forth under "U.S.
Preliminary Prospectus.""Prospectuses" and "each Prospectus" shall mean the
U.S. Prospectus and the International Prospectus.
"Registration Statement" shall mean the registration statement
referred to in paragraph 1(i)(a) above, including exhibits and financial
statements, as amended at the Execution Time (or, if not effective at the
Execution Time, in the form in which it shall become effective) and, in the
event any post-effective amendment thereto or any Rule 462(b) Registration
Statement becomes effective prior to the Closing Date, shall also mean such
registration statement as so amended or such Rule 462(b) Registration
Statement, as the case may be. Such term shall include any Rule 430A
Information deemed to be included therein in the Effective Date as provided
by Rule 430A.
"Representatives" shall mean the U.S. Representatives and the
International Representatives.
"Rule 424", "Rule 430A" and "Rule 462" refer to such rules under the
Act.
"Rule 430A Information" shall mean information with respect to the
Securities and the offering thereof permitted to be omitted from the
Registration Statement when it becomes effective pursuant to Rule 430A.
"Rule 462(b) Registration Statement" shall mean a registration
statement and any amendments thereto filed pursuant to Rule 462(b) relating
to the offering covered by the registration statement referred to in
Section 1(a)(i) hereof.
"Securities" shall mean the U.S. Securities and the International
Securities.
"Selling Stockholders" shall mean the persons named on Schedule II to
the U.S. Underwriting Agreement and the International Underwriting
Agreement.
"Underwriter" and "Underwriters" shall mean the U.S. Underwriters and
the International Underwriters.
"Underwriting Agreements" still mean the U.S. Underwriting Agreement
and the International Underwriting Agreement.
"Underwritten Securities" shall mean the International Underwritten
Securities and the U.S. Underwritten Securities.
"U.S. Preliminary Prospectus" and the "International Preliminary
Prospectus", respectively, shall mean any preliminary prospectus with
respect to the offering of the U.S. Securities and the International
Securities, as the case may be, referred to in paragraph 1(i)(a) above and
any preliminary prospectus with respect to the offering of the U.S.
Securities and the International Securities, as the case may be, included
in the Registration Statement at the Effective Date that omits Rule 430A
Information; and the U.S. Preliminary Prospectus and the International
Preliminary Prospectus are hereinafter collectively called the "Preliminary
Prospectuses".
30
<PAGE>
"U.S. Prospectus" shall mean the prospectus relating to the Securities that
is first filed pursuant to Rule 424(b) after the Execution Time or, if no filing
pursuant to Rule 424(b) is required, shall mean the form of final prospectus
relating to the Securities included in the Registration Statement at the
Effective Date.
"U.S. Representatives" shall mean the addressees of the U.S. Underwriting
Agreement.
"U.S. Securities" shall mean the U.S. Underwritten Securities and the U.S.
Option Securities.
"U.S. Underwriting Agreement" shall mean this agreement relating to the
sale of the U.S. Securities by the Company and the Selling Stockholders to the
U.S. Underwriters.
"U.S. Underwriters" shall mean the several underwriters named in Schedule I
to the U.S. Underwriting Agreement.
"United States or Canadian Person" shall mean any person who is a national
or resident of the United States or Canada, any corporation, partnership, or
other entity created or organized in or under the laws of the United States or
Canada or of any political subdivision thereof, or any estate or trust the
income of which is subject to United States or Canadian Federal income taxation,
regardless of its source (other than any non-United States or non-Canadian
branch of any United States or Canadian Person), and shall include any United
States or Canadian branch of a person other than a United States or Canadian
Person.
"U.S." or "United States" shall mean the United States of America
(including the states thereof and the District of Columbia), its territories,
its possessions and other areas subject to its jurisdiction.
31
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to us the enclosed duplicate hereof, whereupon this
letter and your acceptance shall represent a binding agreement among the
Company, the Selling Stockholders, and the several U.S. Underwriters.
Very truly yours,
Concord EFS, Inc.
By:
------------------------------------
Name:
Title:
Bank One Corporation
By:
------------------------------------
Name:
Title:
Corestates Holdings, Inc.
By:
------------------------------------
Name:
Title:
KeyCorp.
By:
------------------------------------
Name:
Title:
National City Corporation
By:
------------------------------------
Name:
Title:
PNC Network Holdings Corp.
By:
------------------------------------
Name:
Title:
32
<PAGE>
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written.
By: Salomon Smith Barney Inc.
By:
---------------------------------------
Name:
Title:
By: William Blair & Company, L.L.C.
By:
---------------------------------------
Name:
Title:
By: Goldman, Sachs & Co.
By:
---------------------------------------
For themselves and the other several U.S. Underwriters named in Schedule I to
the foregoing Agreement.
33
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Number of Underwritten
Securities to be
Underwriters Purchased
- ------------ ----------------------
<S> <C>
Salomon Smith Barney Inc..................
William Blair & Company, L.L.C............
Goldman, Sachs & Co.......................
J.P. Morgan Securities Inc................
Morgan Keegan & Company, Inc..............
[Additional Underwriters]
-------------------
Total...........................
===================
</TABLE>
34
<PAGE>
SCHEDULE II
-----------
<TABLE>
<CAPTION>
Number of Underwritten Securities
---------------------------------
Selling Stockholders: to be Sold
- --------------------- ----------
<S> <C>
Bank One Corporation
[address, fax no.]
Corestates Holdings, Inc.
[address, fax no.]
KeyCorp.
[address, fax no.]
National City Corporation
[address, fax no.]
PNC Network Holdings Corp.
[address, fax no.]
----------
Total.....................
==========
</TABLE>
35
<PAGE>
SCHEDULE III
------------
List of Executive Officers and Directors
----------------------------------------
Dan M. Palmer
Edward A. Labry
Vickie Brown
Thomas J. Dowling
Richard N. Garman
William E. Lucado
Ruth Ann Marshall
Joyce Kelso
Richard P. Kiphart
Richard M. Harter
Jerry D. Mooney
David C. Anderson
J. Richard Buchignani
Paul Whittington
Douglas C. Altenbern
36
<PAGE>
CGSH draft: 5/14/99
[Form of Lock-Up Agreement] EXHIBIT A
[Letterhead of officer, director or major stockholder of]
Concord EFS, Inc.
Concord EFS, Inc.
Public Offering of Common Stock
-------------------------------
, 1999
Salomon Brothers International Limited
Salomon Smith Barney Inc.
William Blair & Company, L.L.C.
Goldman, Sachs & Co.
Goldman Sachs International
J.P. Morgan Securities Ltd.
J.P. Morgan Securities Inc.
Morgan Keegan & Company, Inc.
As Representatives of the several U.S. Underwriters
and International Underwriters,
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
This letter is being delivered to you in connection with the proposed
U.S. Underwriting Agreement and International Underwriting Agreement (the
"Underwriting Agreements"), among Concord EFS, Inc., a Delaware corporation (the
"Company"), each of the Selling Stockholders named therein and each of you as
representatives of a group of U.S. Underwriters and International Underwriters
named therein, relating to an underwritten public offering of Common Stock,
$0.33 1/3 par value (the "Common Stock"), of the Company.
In order to induce you and the other U.S. Underwriters and
International Underwriters to enter into the Underwriting Agreements, the
undersigned will not, without the prior written consent of Salomon Smith Barney
Inc. and William Blair & Company, L.L.C., offer, sell, contract to sell, pledge
or otherwise dispose of, (or enter into any transaction which is designed to, or
might reasonably be expected to, result in the disposition (whether by actual
disposition or effective economic disposition due to cash settlement or
otherwise) by the Company or any affiliate of the Company or any person in
privity with the Company or any affiliate of the Company) directly or
indirectly, including the filing (or participation in the filing of) a
registration statement with the Securities and Exchange Commission in respect
of, or establish or increase a put equivalent position or liquidate or decrease
a call equivalent position within the meaning of Section 16 of the Securities
Exchange Act of 1934, as amended, and the rules and regulations of the
Securities and Exchange Commission promulgated thereunder with respect to, any
shares of capital stock of the Company or any securities convertible into, or
37
<PAGE>
exercisable or exchangeable for such capital stock, or publicly announce an
intention to effect any such transaction, for a period of 90 days after the date
of the Underwriting Agreements, other than shares of Common Stock disposed of as
bona fide gifts approved by Salomon Smith Barney Inc. and William Blair &
Company L.L.C.
If for any reason the Underwriting Agreements shall be terminated
prior to the Closing Date (as defined in the Underwriting Agreements), the
agreement set forth above shall likewise be terminated.
Yours very truly,
[Signature of officer, director or major
stockholder]
[Name and address of officer, director or
major stockholder]
38
<PAGE>
CGSH draft: 5/14/99
[Form of Lock-Up Agreement for Richard Garman and Ruth Ann Marshall]
EXHIBIT B
[Letterhead]
Concord EFS, Inc.
Concord EFS, Inc.
Public Offering of Common Stock
-------------------------------
, 1999
Salomon Brothers International Limited
Salomon Smith Barney Inc.
William Blair & Company, L.L.C.
Goldman, Sachs & Co.
Goldman Sachs International
J.P. Morgan Securities Ltd.
J.P. Morgan Securities Inc.
Morgan Keegan & Company, Inc.
As Representatives of the several U.S. Underwriters
and International Underwriters,
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
This letter is being delivered to you in connection with the proposed
U.S. Underwriting Agreement and International Underwriting Agreement (the
"Underwriting Agreements"), among Concord EFS, Inc., a Delaware corporation (the
"Company"), each of the Selling Stockholders named therein and each of you as
representatives of a group of U.S. Underwriters and International Underwriters
named therein, relating to an underwritten public offering of Common Stock,
$0.33 1/3 par value (the "Common Stock"), of the Company.
In order to induce you and the other U.S. Underwriters and
International Underwriters to enter into the Underwriting Agreements, the
undersigned will not, without the prior written consent of Salomon Smith Barney
Inc. and William Blair & Company, L.L.C., offer, sell, contract to sell, pledge
or otherwise dispose of, (or enter into any transaction which is designed to, or
might reasonably be expected to, result in the disposition (whether by actual
disposition or effective economic disposition due to cash settlement or
otherwise) by the Company or any affiliate of the Company or any person in
privity with the Company or any affiliate of the Company) directly or
indirectly, including the filing (or participation in the filing of) a
registration statement with the Securities and Exchange Commission in respect
of, or establish or increase a put equivalent position or liquidate or decrease
a call equivalent position within the meaning of Section 16 of the Securities
Exchange Act of 1934, as amended, and the rules and regulations of the
Securities and Exchange Commission promulgated thereunder with
39
<PAGE>
respect to, any shares of capital stock of the Company or any securities
convertible into, or exercisable or exchangeable for such capital stock, or
publicly announce an intention to effect any such transaction, for a period of
90 days after the date of the Underwriting Agreements, other than shares of
Common Stock (i) issued after the date of the Underwriting Agreements under the
Electronic Payment Services, Inc. 1995 Stock Option Plan, as amended effective
at the date of the Underwriting Agreements or (ii) disposed of as bona fide
gifts approved by Salomon Smith Barney Inc. and William Blair & Company L.L.C.
If for any reason the Underwriting Agreements shall be terminated
prior to the Closing Date (as defined in the Underwriting Agreements), the
agreement set forth above shall likewise be terminated.
Yours very truly,
[Signature]
[Name and address]
40
<PAGE>
Annex A
Subsidiaries
EFS National Bank
EFS Federal Savings Bank
Concord Computing Corporation
Concord Retail Services, Inc.
Concord Equipment Sales
Pay Systems of America, Inc.
Digital Merchants Systems of Illinois, Inc.
American Bankcard, International, Inc.
Electronic Payment Services, Inc.
<PAGE>
EXHIBIT 5.1
[Sidley & Austin letterhead]
May 18, 1999
Board of Directors
Concord EFS, Inc.
25252 Horizon Lake Drive
Suite 120
Memphis, TN 38133
Re: Registration Statement on Form S-3 (No. 333-77829)
Ladies and Gentlemen:
We refer to the Registration Statement on Form S-3, Registration No. 333-
77829 (the "Registration Statement") filed by Concord EFS, Inc., a Delaware
corporation (the "Company"), with the Securities and Exchange Commission under
the Securities Act of 1933, as amended (the "Securities Act"), relating to the
registration of 35,603,125 shares of common stock, par value $.33 1/3 per
share, of which 2,000,000 shares are being offered by the Company and up to an
additional 4,640,000 shares are being offered by the Company to cover over-
allotments (collectively, the "New Shares") and 28,963,125 shares are being
offered by the selling stockholders named therein (the "Selling Stockholder
Shares").
In rendering this opinion, we have examined and relied upon a copy of the
Registration Statement. We have also examined or caused to be examined
originals, or copies of originals certified to our satisfaction, of such
agreements, documents, certificates and statements of government officials and
other instruments, and have examined such questions of law and have satisfied
ourselves as to such matters of fact, as we have considered relevant and
necessary as a basis for this opinion. We have assumed the authenticity of all
documents submitted to us as originals, the genuineness of all signatures, the
legal capacity of all natural persons and the conformity with the original
documents of any copies thereof submitted to us for examination.
Based on the foregoing, and subject to the qualifications and limitations
hereinafter set forth, we are of the opinion that:
1. The Company is a validly existing corporation under the laws of the
State of Delaware.
2. The New Shares will be legally issued, fully paid and nonassessable
when (i) the Registration Statement, as finally amended (including any
necessary post-effective amendments), shall have become effective under the
Securities Act; (ii) the Company's Board of Directors or duly authorized
committee thereof shall have duly adopted final resolutions authorizing the
issuance and sale of the New Shares as contemplated by the Registration
Statement; and (iii) certificates representing the New Shares shall have
been duly executed, countersigned and registered and duly delivered to the
purchasers thereof against payment of the agreed consideration therefor.
3. The Selling Stockholder Shares have been legally issued and are fully
paid and nonassessable.
<PAGE>
We do not find it necessary for the purposes of this opinion to cover, and
accordingly we express no opinion as to, the application of the securities or
"Blue Sky" laws of the various states to the sale of the securities to be
registered pursuant to the Registration Statement. Without limiting the
generality of the foregoing, we express no opinion in connection with the
matters contemplated by the Registration Statement, and no opinion may be
implied or inferred, except as expressly set forth herein.
This opinion is limited to the Delaware General Corporation Law and the
Securities Act.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to all references to our firm in the Registration
Statement or the Prospectus included therein.
Very truly yours,
/s/ Sidley & Austin
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in
Amendment No. 1 to the Registration Statement (Form S-3, No. 333-77829) and
related Prospectus of Concord EFS, Inc. for the registration of 35,603,125
shares of its common stock and to the inclusion and incorporation by reference
therein of our report dated February 26, 1999, with respect to the consolidated
financial statements of Concord EFS, Inc. included in the Registration
Statement and included as Exhibit 99 to its Annual Report on Form 10-K for the
year ended December 31, 1998, filed with the Securities and Exchange
Commission.
/s/ Ernst & Young LLP
Memphis, Tennessee
May 14, 1999
<PAGE>
Exhibit 24.1
POWER OF ATTORNEY
Know All Men By These Presents, that each person whose signature appears
below does hereby constitute and appoint Thomas J. Dowling and William E.
Lucado, and each of them, his or her true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him or her and
in his or her name, place and stead, in any and all capacities, to execute the
Registration Statement on Form S-3 relating to the sale of common stock of
Concord EFS, Inc. and any and all amendments thereto, and to file the same,
together with all exhibits thereto, and other documents in connection
therewith with the Securities and Exchange Commission, granting unto each of
said attorneys full power and authority to do and perform each and every act
and thing requisite and necessary to be done in and about the premises, as
fully as and to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that each of said attorneys, or
his substitute, may lawfully do and cause to be done by virtue hereof.
In Witness Whereof, each of the undersigned has executed this instrument
this 3rd day of May, 1999.
/s/ Edward A. Labry III
/s/ Dan M. Palmer
_____________________________________ ______________________________________
Edward A. Labry III
Dan M. Palmer
/s/ Douglas C. Altenbern /s/ David C. Anderson
_____________________________________ ______________________________________
Douglas C. Altenbern David C. Anderson
/s/ Richard Buchignani /s/ Richard M. Harter
_____________________________________ ______________________________________
Richard Buchignani Richard M. Harter
/s/ Joyce Kelso /s/ Richard P. Kiphart
_____________________________________ ______________________________________
Joyce Kelso Richard P. Kiphart
/s/ Jerry D. Mooney /s/ Paul L. Whittington
_____________________________________ ______________________________________
Jerry D. Mooney Paul L. Whittington
