<PAGE> 1
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to
Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. 1)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2)
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss.240.14a-11(c)
or ss.240.14a-12
Concord EFS, Inc.
-----------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules
14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
Common Stock, par value $0.33-1/3
------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
38,771,999 shares (maximum number issuable in transaction,
---------------------------------------------------------------
subject to adjustment for anti-dilution provisions contained in
---------------------------------------------------------------
the Agreement and Plan of Merger, dated November 20, 1998,
---------------------------------------------------------------
between Registrant, CEFT, Inc. and Electronic Payment Services,
---------------------------------------------------------------
Inc.)
---------------------------------------------------------------
<PAGE> 2
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing
fee is calculated and state how it was determined):
$0.207. The price is based on (1) the maximum number of shares
issuable in the transaction and (2) the book value of the shares to be acquired
in the proposed transaction as of November 30, 1998, the latest practicable
date prior to the date preliminary proxy materials were filed. There is no
market for the shares to be acquired.
4) Proposed maximum aggregate value of transaction:
$8,026,025
5) Total fee paid:
$1,605.21
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
___________________________________________________________________
2) Form, Schedule or Registration Statement No.:
___________________________________________________________________
3) Filing Party:
___________________________________________________________________
4) Date Filed:
___________________________________________________________________
<PAGE> 3
CONCORD EFS, INC.
2525 HORIZON LAKE DRIVE, SUITE 120.
MEMPHIS, TENNESSEE 38133
January 14, 1999
Dear Stockholder:
You are cordially invited to attend a special meeting of stockholders
of Concord EFS, Inc. (the "Special Meeting") to be held at 10:00 a.m., local
time, on February 18, 1999 at Colonial Country Club, 2736 Countrywood Parkway,
Memphis, Tennessee.
At the Special Meeting you will be asked to vote on a proposal (the
"Share Issuance Proposal") for Concord to issue shares of Concord Common Stock
in connection with its acquisition of Electronic Payment Services, Inc.
("EPS"). Concord's acquisition of EPS will be accomplished pursuant to an
Agreement and Plan of Merger dated as of November 20, 1998 (the "Agreement"), a
copy of which is included in the attached proxy statement. Upon completion of
the merger of EPS with a subsidiary of Concord pursuant to the Agreement,
Concord will issue 7.9091 shares of Concord Common Stock for each issued and
outstanding share of EPS Common Stock (the "Exchange Ratio"), and options to
acquire shares of EPS Common Stock will be converted into options to acquire
Concord Common Stock based upon the Exchange Ratio. Concord may increase the
Exchange Ratio under certain limited conditions involving a decline in the
market price of Concord Common Stock, as more particularly described in the
accompanying proxy statement. Based on the 7.9091 Exchange Ratio and the number
of currently outstanding shares of EPS, and assuming the exercise of currently
outstanding options to acquire shares of EPS, a total of approximately
32,310,000 shares of Concord Common Stock will be issued pursuant to the
Agreement. If we were to elect to adjust the Exchange Ratio under the
conditions in the Agreement involving a decline in the market price of Concord
Common Stock, the total number of shares could be increased to as much as
38,771,999 shares of Concord Common Stock.
At the Special Meeting you also will be asked to approve a proposal
(the "Plan Amendment Proposal") to amend Concord's 1993 Incentive Stock Option
Plan (the "Plan") as described in the accompanying proxy statement. The
proposed amendments increase the number of shares of Concord Common Stock
issuable pursuant to the Plan to 25,000,000 shares from 13,668,750 shares and
permit an additional method of payment for shares upon exercise of options. As
of the date hereof, Concord may grant options to purchase only another
1,079,188 shares under the Plan. Concord anticipates that it will grant options
to purchase approximately 900,000 shares of Concord Common Stock under the Plan
to EPS's management and employees after the merger is consummated. Assuming the
additional options will be granted to EPS's management and employees, options
only for an additional 179,188 shares could be granted under the Plan unless it
is amended.
THE ACCOMPANYING PROXY STATEMENT CONTAINS DETAILED INFORMATION ABOUT
THE SHARE ISSUANCE PROPOSAL AND THE PLAN AMENDMENT PROPOSAL. YOU SHOULD READ
THE PROXY STATEMENT CAREFULLY WHEN CONSIDERING THE MANNER IN WHICH YOU WANT TO
VOTE ON EACH OF THESE PROPOSALS. A COPY OF THE AGREEMENT, AND CERTAIN OTHER
AGREEMENTS RELATED THERETO, AND CERTAIN FINANCIAL INFORMATION RELATING TO EPS
ARE ATTACHED AS EXHIBITS TO THE PROXY STATEMENT.
<PAGE> 4
After careful consideration, your board of directors has unanimously
approved the Agreement and the Share Issuance Proposal and believes that the
acquisition of EPS is in the best interests of Concord and its stockholders.
Your board of directors has also approved the Plan Amendment Proposal.
Accordingly, your board of directors unanimously recommends that all
stockholders of Concord vote "FOR" approval of the Share Issuance Proposal and
"FOR" approval of the Plan Amendment Proposal. The reasons for the board of
directors' recommendation are stated in the accompanying proxy statement.
Concord's financial adviser, William Blair & Company, L.L.C., has issued its
written opinion, dated November 20, 1998, a copy of which is included in the
attached proxy statement, to the effect that, as of such date, and based upon
and subject to various considerations set forth in its opinion, the Exchange
Ratio of Concord Common Stock for EPS Common Stock in the merger is fair, from
a financial point of view, to Concord's stockholders.
The acquisition of EPS presents an exceptional opportunity for Concord
to expand its market lines and coverage, and increases the combined entity's
ability to compete in the ever-changing and always competitive transaction
processing business. We urge you to read the enclosed materials carefully so
that you can evaluate both proposals for yourself.
All stockholders are invited to attend the Special Meeting in person.
However, in order to ensure that your shares will be represented at the Special
Meeting, please date, sign and promptly return the enclosed proxy card in the
enclosed postage-paid envelope, whether or not you plan to attend the Special
Meeting. If you attend the Special Meeting in person, you may, if you wish,
vote personally on all matters brought before the Special Meeting.
Very truly yours,
Dan M. Palmer
Chairman of the Board and CEO
YOUR VOTE IS IMPORTANT
PLEASE SIGN, DATE AND RETURN YOUR PROXY
<PAGE> 5
CONCORD EFS, INC.
NOTICE OF SPECIAL MEETING
OF STOCKHOLDERS
TO BE HELD ON THURSDAY, FEBRUARY 18, 1999
To the Stockholders of
Concord EFS, Inc.
Notice is hereby given that a Special Meeting of stockholders of
Concord EFS, Inc. ("Concord") will be held at Colonial Country Club, 2736
Countrywood Parkway, Memphis, Tennessee on Thursday, February 18, 1999
beginning at 10:00 a.m. local time, for the following purposes:
1. To approve Concord's issuance of shares of common stock in
connection with its acquisition of Electronic Payment
Services, Inc. (the "Share Issuance Proposal"); and
2. To approve a proposed amendment to Concord's 1993 Incentive
Stock Option Plan to increase the number of shares of common
stock that may be issued under the Plan from 13,668,750
shares currently authorized to a new total of 25,000,000
shares and to add a new method for payment of shares upon
exercise of options; and
3. To transact such other business as may properly come before
the Special Meeting and any adjournments thereof.
The Board of Directors has fixed the close of business on January 12,
1999 as the record date for determination of the shareholders entitled to
notice of and to vote at the Special Meeting. The By-Laws of Concord require
that the holders of a majority of all stock issued, outstanding and entitled to
vote be present in person or represented by proxy at the meeting in order to
constitute a quorum. In order to receive the requisite shareholder approvals,
at least a majority of the shares present in person or by proxy at the Special
Meeting must approve each proposal.
By Order of the Board of Directors
Richard M. Harter
Secretary
January 14, 1999
WHETHER OR NOT YOU PLAN TO ATTEND THIS MEETING,
PLEASE SIGN AND RETURN THE ENCLOSED PROXY.
NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
<PAGE> 6
PROXY STATEMENT
FOR THE SPECIAL MEETING
OF STOCKHOLDERS OF
CONCORD EFS, INC.
This proxy statement is furnished in connection with the solicitation
by the board of directors of Concord EFS, Inc. ("Concord") of proxies for use
at the Special Meeting of Stockholders to be held on February 18, 1999, and at
any adjournment thereof. At the Special Meeting, Concord's stockholders will be
asked to vote on two separate proposals. The first proposal, referred to herein
as the "Share Issuance Proposal", seeks stockholder approval for Concord to
issue up to 32,310,000 (subject to adjustment as set forth herein) shares of
Concord Common Stock in connection with its acquisition of Electronic Payment
Services, Inc. ("EPS"). The second proposal, referred to herein as the "Plan
Amendment Proposal", seeks stockholder approval of a proposed amendment to
Concord's 1993 Incentive Stock Option Plan (the "Plan") to increase the number
of shares of Concord Common Stock which can be issued under the Plan from
13,668,750 shares to 25,000,000 shares and to permit an additional method of
payment for shares upon exercise of options. Both proposals are more fully
discussed herein.
This proxy statement provides you with detailed information about each
of the proposals to be considered and voted upon at the Special Meeting. In
addition, you may obtain information about Concord from documents filed with
the Securities and Exchange Commission (the "SEC"). We encourage you to read
carefully this entire document and the other documents that we refer you to in
this document.
The approximate date on which this proxy statement is first being
mailed to stockholders is January 14, 1999.
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
SUMMARY ............................................................................................ 1
Special Meeting of Stockholders .................................................................... 1
Voting Rights at the Special Meeting ............................................................... 1
Vote Required ...................................................................................... 2
Share Ownership of Management and Certain Stockholders; Voting Agreement ........................... 2
Recommendation of Concord's Board .................................................................. 2
The Plan ........................................................................................... 3
The Plan Amendment ................................................................................. 3
The Companies ...................................................................................... 3
The Acquisition of EPS ............................................................................. 4
Number of Shares of Concord Common Stock to be Issued in Connection with the Merger ................ 5
Potential Adjustment to Exchange Ratio Based Upon the Market Price of Concord Common
Stock ............................................................................................ 5
Ownership of Concord After the Merger .............................................................. 6
Certain Obligations of Concord with Respect to Concord Common Stock Issued in the
Merger ........................................................................................... 6
Fairness Opinion of Concord's Financial Adviser .................................................... 7
Interests of Certain Persons in the Merger That May Be Different From Yours ........................ 7
Termination Fee .................................................................................... 7
Regulatory Approval and Other Conditions To the Merger ............................................. 8
Certain Federal Income Tax Consequences of the Merger .............................................. 8
Differences in Stockholders' Rights ................................................................ 8
Accounting Treatment of the Merger ................................................................. 8
Effective Time of the Merger ....................................................................... 9
Comparative Market Prices of Common Stock .......................................................... 9
Historical and Pro Forma Comparative Per Share Data ................................................ 9
Selected Financial Data ............................................................................ 10
RISK FACTORS ....................................................................................... 15
Risk Relating to EPS's ATM Business ................................................................ 15
Integration of Operations .......................................................................... 16
Dependence on Key Management ....................................................................... 16
Reliance on Key Customers........................................................................... 16
Shares Eligible for Future Sale; Registration Rights ............................................... 16
INTRODUCTION ....................................................................................... 17
SPECIAL MEETING OF CONCORD STOCKHOLDERS ............................................................ 18
Date, Place, Time, and Purpose ..................................................................... 18
Record Date, Voting Rights, Required Vote, and Revocability Of Proxies ............................. 19
Solicitation of Proxies ............................................................................ 20
Recommendation ..................................................................................... 21
</TABLE>
-iv-
<PAGE> 8
<TABLE>
<S> <C>
DESCRIPTION OF THE MERGER AND RESULTING SHARE ISSUANCE ............................................. 21
General ............................................................................................ 21
Possible Adjustment of Exchange Ratio Based Upon the Market Price of Concord Common
Stock ............................................................................................ 23
Background of and Reasons for the Merger ........................................................... 24
Background ......................................................................................... 24
Concord's Reasons for the Merger ................................................................... 26
EPS's Reasons for the Merger ....................................................................... 28
Opinion of Concord's Financial Adviser ............................................................. 29
Interest of William Blair and Affiliates in Concord ................................................ 34
Effective Time of the Merger ....................................................................... 34
Termination Fee .................................................................................... 34
Conditions to Consummation of the Merger ........................................................... 35
Regulatory Approval ................................................................................ 36
Waiver, Amendment, and Termination ................................................................. 36
Conduct of Business Pending the Merger ............................................................. 37
Management and Operations After the Merger ......................................................... 38
Interests of Certain Persons in the Merger ......................................................... 38
Accounting Treatment ............................................................................... 39
Expenses and Fees .................................................................................. 39
Resales of Concord Common Stock .................................................................... 39
COMPARATIVE MARKET PRICES AND DIVIDENDS ............................................................ 41
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS, DIRECTORS & EXECUTIVE OFFICERS OF CONCORD ............ 42
PRO FORMA COMBINED CONDENSED FINANCIAL DATA ........................................................ 44
BUSINESS OF EPS .................................................................................... 52
Business of EPS .................................................................................... 52
Competition ........................................................................................ 53
Property ........................................................................................... 53
Management; Employees .............................................................................. 54
ELECTRONIC PAYMENT SERVICES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS .......................................................................... 55
Impact of Year 2000 ................................................................................ 55
Interest Rate Risk ................................................................................. 56
Results of Operations .............................................................................. 57
Liquidity and Capital Resources .................................................................... 59
AMENDMENT TO THE 1993 INCENTIVE STOCK OPTION PLAN .................................................. 60
Purpose of the Plan ................................................................................ 60
Administration of the Plan ......................................................................... 60
Eligibility to Participate in Plan ................................................................. 61
Shares Subject to the Plan ......................................................................... 61
Stock Options Granted Under the Plan ............................................................... 61
</TABLE>
-v-
<PAGE> 9
<TABLE>
<S> <C>
Amendments to the Plan ............................................................................. 62
Federal Income Tax Consequences of Grants and Exercises Under the Plan ............................. 62
Payments of Withholding Taxes ...................................................................... 62
Expiration of the Plan ............................................................................. 62
Recommendation of the Board ........................................................................ 63
DIRECTOR AND EXECUTIVE COMPENSATION ................................................................ 63
Compensation of Directors of Concord ............................................................... 63
Executive Compensation ............................................................................. 63
Summary Compensation Table ......................................................................... 63
Stock Options ...................................................................................... 64
Incentive Agreements ............................................................................... 65
OTHER MATTERS ...................................................................................... 66
STOCKHOLDER PROPOSALS .............................................................................. 66
EXPERTS ............................................................................................ 67
WHERE YOU CAN FIND MORE INFORMATION ................................................................ 67
APPENDICES
Appendix A - Agreement and Plan of Merger dated as of November 20, 1998
between Concord EFS, Inc., CEFT, Inc. and Electronic
Payment Services, Inc.
Appendix B - Form of Registration Rights Agreement
Appendix C - EPS Financial Statements
Appendix D - Fairness Opinion of William Blair & Company, L.L.C. dated
as of November 20, 1998
Appendix E - Concord's 1993 Incentive Stock Option Plan, as amended for
proposed changes
</TABLE>
PLEASE NOTE
We have not authorized anyone to provide you with any information other
than the information included in this document and the documents we refer you
to. If someone provides you with other information, please do not rely on it as
being authorized by us.
This proxy statement has been prepared as of January 14, 1999. There
may be changes in the affairs of Concord or EPS after that date which are not
reflected in this document.
As used in this proxy statement, the terms "Concord" and "EPS" refer to
Concord EFS, Inc. and Electronic Payment Services, Inc., respectively, and,
where the context requires, to Concord and EPS and their respective
subsidiaries.
-vi-
<PAGE> 10
SUMMARY
This summary highlights selected information from this proxy statement
and may not contain all of the information that you would consider important
under the circumstances in coming to a decision on how you want to vote on
either of the proposals to be considered and voted on at the Special Meeting.
You should carefully read this entire document and the other documents we refer
you to in this document. See "Where You Can Find More Information" (page 67).
These documents will give you a more complete description of the proposed
acquisition of EPS and the proposed amendment to the Plan. We have included
page references in parentheses to direct you to a more complete description of
the topics presented in this Summary.
GENERAL INFORMATION REGARDING THE SPECIAL MEETING
SPECIAL MEETING OF STOCKHOLDERS (PAGE 18)
The Special Meeting will be held at 10:00 a.m., local time, on February
18, 1999. The meeting will be held at Colonial Country Club, 2736 Countrywood
Parkway, Memphis, Tennessee. At the Special Meeting, we will ask you:
1. to approve the issuance of shares of Concord Common Stock
pursuant to the agreement and plan of merger (the "Agreement")
between Concord, CEFT, Inc. and EPS dated as of November 20,
1998 (the "Share Issuance Proposal");
2. to approve an amendment to Concord's 1993 Incentive Stock Option
Plan (the "Plan") to increase the number of shares of Concord
Common Stock which could be issued under the Plan from
13,668,750 shares to 25,000,000 shares and to permit an
additional method of payment for shares purchased upon exercise
of options (the "Plan Amendment Proposal"); and
3. to act on any other matters that may be put to a vote at the
Special Meeting.
See "SPECIAL MEETING OF CONCORD STOCKHOLDERS- - Date, Place, Time and Purpose."
VOTING RIGHTS AT THE SPECIAL MEETING (PAGE 19)
You are entitled to vote at the Special Meeting if you owned shares of
Concord Common Stock as of the close of business on January 12, 1999. On that
date there were 97,870,757 shares of Concord Common Stock outstanding. You will
be entitled to one vote for each share of Concord Common Stock you owned on
January 12, 1999. You may vote either by attending the Special Meeting and
voting your shares in person or by completing the enclosed proxy card and
mailing it to us in the enclosed envelope.
1
<PAGE> 11
We are seeking your proxy for use at the Special Meeting. We have
prepared this proxy statement to assist you in deciding how to vote and whether
or not to grant your proxy to us. If you sign a proxy, you may revoke it at any
time before the vote at the Special Meeting. If you have elected not to attend
the Special Meeting, please indicate on your proxy card how you want to vote.
Then sign, date and mail it to us as soon as possible so that your shares will
be represented at the Special Meeting. If you sign, date and mail your proxy
card without indicating how you wish to vote on the proposals, or either of
them, then your proxy will be counted as a vote "FOR" the Share Issuance
Proposal and "FOR" the Plan Amendment Proposal, as the case may be. If you sign
a proxy, you may change it or revoke it at any time before the Special Meeting
by submitting a properly completed later dated proxy or by attending and voting
at the Special Meeting. You cannot vote shares held in "street name"; only your
broker can. If you do not provide your broker with instructions on how to vote
your shares, your broker will not be permitted to vote them. See "SPECIAL
MEETING OF CONCORD STOCKHOLDERS - - Record Date, Voting Rights, Required Vote
and Revocability of Proxies."
VOTE REQUIRED (PAGE 19)
A majority of the shares of Concord Common Stock outstanding on January
12, 1999 must be present in person or by proxy at the Special Meeting in order
to constitute a quorum for the transaction of business. If a quorum is present,
the approval of the Share Issuance Proposal and the Plan Amendment Proposal
each requires the affirmative vote of a majority of the shares of Concord
Common Stock present in person or by proxy at the Special Meeting. The approval
of either proposal is not dependent upon approval of the other proposal.
SHARE OWNERSHIP OF MANAGEMENT AND CERTAIN STOCKHOLDERS; VOTING AGREEMENT
(PAGE 42)
On January 12, 1999, Concord's directors and executive officers
beneficially owned 4,106,859 shares of Concord Common Stock, or approximately
4.2%, of the outstanding shares. As a condition to EPS entering into the
Agreement with Concord, each director of Concord executed a voting agreement
agreeing to vote all shares of Concord Common Stock over which he or she has
beneficial ownership "FOR" approval of the Share Issuance Proposal. See
"Security Ownership of Principal Stockholders, Directors & Executive Officers
of Concord."
RECOMMENDATION OF CONCORD'S BOARD (PAGE 21)
Concord's board of directors unanimously recommends that you vote "FOR"
approval of the Share Issuance Proposal and Concord's acquisition of EPS, and
"FOR" approval of the Plan Amendment Proposal.
2
<PAGE> 12
GENERAL INFORMATION REGARDING THE PLAN AMENDMENT PROPOSAL
THE PLAN
The Plan currently authorizes your directors, or a committee of
directors, to issue up to 13,668,750 shares of Concord Common Stock upon the
exercise of options granted under the Plan. The purpose of the Plan is to
encourage ownership of Concord Common Stock by employees and directors and to
provide additional incentive for them to promote the success of Concord's
business.
THE PLAN AMENDMENT (PAGE 60)
At the Special Meeting you will be asked to vote on a proposal to amend
the Plan to increase the number of shares of Concord Common Stock which may be
issued thereunder from 13,668,750 shares to 25,000,000 shares. As of January
12, 1999, Concord could only grant options for 1,079,188 additional shares of
Concord Common Stock under the Plan. Concord anticipates that it will grant
options for approximately 900,000 shares to EPS's management and employees
after its acquisition of EPS. Assuming the additional options will be issued
under the Plan after the acquisition of EPS, Concord will only have the ability
to issue up to 179,188 additional options under the Plan unless the proposed
amendment is approved. In addition, the proposed plan amendment would permit
optionees to pay for purchased shares by directing a broker to sell sufficient
purchased shares to pay for all shares then to be purchased plus applicable
taxes. A copy of the Plan, as amended to reflect the proposed changes, is
attached hereto as Appendix E.
Your board of directors believes that the ability to grant options
under the Plan, with customary option exercise procedures, is an integral
component of its ability to attract, retain and provide incentives to its
management and employees and unanimously recommends that you vote "FOR"
approval of the Plan Amendment Proposal.
GENERAL INFORMATION REGARDING THE SHARE ISSUANCE PROPOSAL
THE COMPANIES
Electronic Payment Services, Inc. (Page 55)
1100 Carr Road
Wilmington, Delaware 19809
(302) 791-8000
EPS provides transaction processing services to financial institutions,
retailers and incentive sales organizations throughout the United States.
Services in EPS's electronic funds transfer ("EFT") business lines include
automated teller machine ("ATM") terminal driving and monitoring, debit card
processing, authorization, and debit, credit and electronic benefit transfer
("EBT") gateway services. Additionally, EPS owns and operates a regional EFT
network,
3
<PAGE> 13
MAC(R), which is a shared network of ATM and point of sale ("POS") terminals
using the common brand of MAC(R). Services provided by this network include
transaction switching, settlement and reporting to financial institutions
located principally in Middle Atlantic and Midwest states. Services in EPS's POS
business line include POS terminal driving, transaction authorization, credit,
debit and EBT gateway processing, telecommunications network management, and
settlement and reporting services. POS services are provided directly to the
petroleum, grocery and hospitality segments as well as directly and indirectly
to other clients and retailers.
Concord EFS, Inc.
2525 Horizon Lake Drive, Suite 120
Memphis, Tennessee 38133
(901)371-8000
Concord, through its subsidiaries, provides electronic transaction
authorization, processing, settlement and funds transfer services in selected
markets within the United States. Concord's primary activity is card services,
which involves the provision of integrated electronic transaction services for
credit card, debit card and EBT card transactions to supermarket chains,
grocery stores, convenience store merchants and other retailers. Concord also
provides electronic payment and banking facilities to the trucking industry for
use at major truck stop chains throughout the United States. In addition to
maintaining a network of approximately 1200 ATMs at truck stops, grocery stores
and other locations nationwide, Concord provides fuel purchase cards, ATM bank
cards and general banking services to truck drivers. Concord offers trucking
companies payroll deposit and cash forwarding services, as well as real-time
data compilation with respect to fuel volume usage, fuel expenditures, vehicle
and driver tracking and truck routine maintenance schedules. In addition,
Concord provides payroll services to a wide-range of companies on a nationwide
basis.
THE ACQUISITION OF EPS (PAGE 21)
Concord will acquire all of the outstanding common stock of EPS by
means of merging CEFT, Inc., a wholly owned subsidiary of Concord, with and
into EPS (the "Merger"). EPS will survive the Merger and become a subsidiary of
Concord. EPS has 4,600 shares of preferred stock outstanding, all of which are
owned by First Union Corporation, which Concord will not acquire in the Merger.
The shares of preferred stock will continue to be owned by First Union
Corporation after completion of the Merger and will continue to have the same
terms as currently in effect. A copy of the Agreement between Concord and EPS
which governs the acquisition of EPS is attached hereto as Appendix A. You
should read the Agreement carefully for a complete understanding of the terms
and conditions of the Merger.
4
<PAGE> 14
NUMBER OF SHARES OF CONCORD COMMON STOCK TO BE ISSUED IN CONNECTION WITH THE
MERGER (PAGE 21)
If the Merger is completed, Concord will issue 7.9091 shares of Concord
Common Stock for each outstanding share of EPS Common Stock. This is referred
to as the "Exchange Ratio." In addition, options currently outstanding to
acquire EPS Common Stock will be converted into options to acquire shares of
Concord Common Stock, adjusted to give effect to the Exchange Ratio. As of
January 12, 1999, there were 3,801,297 shares of EPS Common Stock outstanding
and options to acquire 283,830 shares of EPS Common Stock were also
outstanding. If all outstanding options to acquire EPS Common Stock were to be
exercised prior to the completion of the Merger, there would be a total of
4,085,127 shares of EPS Common Stock outstanding and Concord would, therefore,
issue in the aggregate approximately 32,309,677 shares of Concord Common Stock
for all of the outstanding shares of EPS Common Stock, based on the 7.9091
Exchange Ratio.
The Exchange Ratio is subject to a downward adjustment if the number of
shares of EPS Common Stock outstanding (assuming the exercise of all
outstanding options to acquire EPS Common Stock) increases prior to the
completion of the Merger to ensure that, except as described under "-- Potential
Adjustment to the Exchange Ratio Based Upon the Market Price of Concord Common
Stock," the number of shares of Concord Common Stock issued pursuant to the
Agreement will not exceed 32,310,000. The Exchange Ratio of 7.9091 reflects an
adjustment for the issuance by EPS of options to purchase 1,000 shares of EPS
Common Stock that was not reflected in the Exchange Ratio originally included in
the Agreement.
POTENTIAL ADJUSTMENT TO EXCHANGE RATIO BASED UPON THE MARKET PRICE OF CONCORD
COMMON STOCK (PAGE 23)
The Exchange Ratio, and therefore the number of shares of Concord
Common Stock to be issued in connection with the Merger, might be increased if
the following two conditions are met:
(1) The average closing price of Concord Common Stock during the 10
trading days ending on the third business day prior to the date
of the completion of the Merger falls below $22.355 per share;
and
(2) Based on that average closing price, the price of Concord Common
Stock must have underperformed the average of the common stock
prices of a specified group of comparable companies by more than
15% since November 20, 1998.
If both of these conditions exist, then EPS may terminate the Agreement
and not complete the Merger unless Concord increases the Exchange Ratio to a
certain level determined by a formula set forth in the Agreement. If that
situation arises, Concord will consult its financial and legal advisers and
evaluate the financial condition of Concord and EPS and all relevant facts and
circumstances that exist at the time in determining whether or not to increase
5
<PAGE> 15
the Exchange Ratio. If Concord chooses not to increase the Exchange Ratio under
those circumstances, or if the adjustment to the Exchange Ratio would result in
Concord issuing, or being obligated to issue, more than 38,771,999 shares of
common stock in connection with the Merger, the Agreement will be terminated
unless EPS withdraws its termination of the Agreement within the 10-day period
after EPS first gives notice of its intent to terminate the Agreement.
If Concord elects to increase the Exchange Ratio under the above
scenario, regulatory approvals may need to be obtained in order to complete the
Merger as a result of the percentage of Concord Common Stock to be acquired by
one or more of EPS's stockholders upon completion of the Merger. Such
regulatory approvals would be in addition to those described under the heading
"-- Regulatory Approvals and Other Conditions to the Merger."
The Agreement does not have a provision which will allow Concord to
reduce the Exchange Ratio, and therefore reduce the total number of shares of
Concord Common Stock it will issue in the Merger, based on the market price of
Concord Common Stock. Consequently, should the market price of Concord Common
Stock increase, the number of shares of Concord Common Stock to be issued in
the Merger will not decrease.
OWNERSHIP OF CONCORD AFTER THE MERGER (PAGE 22)
As of January 12, 1999, there were 3,801,297 shares of EPS Common Stock
outstanding and options to acquire 283,830 shares of EPS Common Stock were also
outstanding. Based on the 7.9091 Exchange Ratio, and assuming no options to
acquire EPS Common Stock are exercised prior to the time the Merger is
completed, Concord will issue 30,064,838 shares of Concord Common Stock upon
the closing of the Merger. Based on that number, immediately after the Merger,
EPS stockholders will own in the aggregate approximately 23% of the outstanding
shares of Concord Common Stock. Bank One Corporation ("Bank One"), First Union
Corporation ("First Union"), PNC Bank Corp. ("PNC"), Key Corp and National City
Corporation ("National City") each owns, directly or through a wholly owned
subsidiary, 750,000 shares of EPS Common Stock. When the Merger closes, based
upon the 7.9091 Exchange Ratio, they will each receive 5,931,825 shares of
Concord Common Stock which will represent approximately 4.6% of the then
outstanding shares of Concord Common Stock. This information is based on the
number of shares of EPS and Concord Common Stock outstanding on January 12,
1999. It does not reflect shares Concord may issue due to the exercise of
Concord stock options (including stock options assumed in the Merger) or for
other purposes.
CERTAIN OBLIGATIONS OF CONCORD WITH RESPECT TO CONCORD COMMON STOCK ISSUED IN
THE MERGER (PAGE 39)
The shares of Concord Common Stock to be issued in the Merger have not,
and at the time of completion of the Merger will not have been, registered with
the SEC or with any state securities administrator. Therefore, there will be
restrictions on the method and ability of the EPS stockholders to sell the
shares of Concord Common Stock they receive in the Merger.
6
<PAGE> 16
Concord has agreed to register the shares of Concord Common Stock issued in the
Merger on behalf of the EPS stockholders pursuant to a registration rights
agreement which will be entered into between Concord and the EPS stockholders
prior to the completion of the Merger. A copy of the registration rights
agreement is attached hereto as Appendix B. Generally, upon request of EPS
stockholders, Concord will register shares issued to the EPS stockholders when
Concord registers additional shares of Concord Common Stock for sale to the
public, subject to certain limitations. Further, EPS stockholders can require
Concord to register the shares they receive in the Merger for resale, subject to
certain limitations.
FAIRNESS OPINION OF CONCORD'S FINANCIAL ADVISER (PAGE 29)
In deciding to approve the Merger, your board of directors considered
an opinion from our financial adviser, William Blair & Company, L.L.C.
("William Blair"), dated November 20, 1998,to the effect that, as of such date,
and based upon and subject to various considerations set forth in its opinion,
the Exchange Ratio of Concord Common Stock for EPS Common Stock in the Merger
was fair to holders of Concord Common Stock from a financial point of view. The
full text of this opinion is attached as Appendix D to this proxy statement. We
encourage you to read this opinion in its entirety to understand the procedures
followed, assumptions made and matters considered by William Blair in providing
its opinion. Stockholders should be aware that Richard Kiphart, a director of
Concord, is a principal of William Blair. Both Mr. Kiphart and William Blair own
or control a significant number of shares of Concord Common Stock. Further,
other principals and employees of, and mutual funds advised by, William Blair
also own shares of Concord Common Stock.
INTERESTS OF CERTAIN PERSONS IN THE MERGER THAT MAY BE DIFFERENT FROM YOURS
(PAGE 38)
Richard Kiphart, a director of Concord and owner of 3,715,619 shares
of Concord Common Stock, is a principal of William Blair. William Blair has
been engaged to provide, and has in fact provided, Concord with its fairness
opinion dated as of November 20, 1998, with respect to the Merger. Concord will
pay William Blair a fee of $2,000,000, payable at and contingent upon,
completion of the Merger. Your board of directors was aware of the various
interests of Mr. Kiphart and William Blair in the Merger and considered them in
approving the Agreement and recommending that Concord's stockholders vote "FOR"
the Share Issuance Proposal.
TERMINATION FEE (PAGE 34)
EPS has the right to terminate the Agreement if Concord's stockholders
do not approve the Share Issuance Proposal at the Special Meeting. If Concord's
stockholders do not approve the Share Issuance Proposal and EPS terminates the
Agreement for that reason, Concord will be required to pay a $5,000,000
termination fee to EPS.
7
<PAGE> 17
REGULATORY APPROVAL AND OTHER CONDITIONS TO THE MERGER (PAGE 35)
Concord is required to notify and obtain approval from the Board of
Governors of the Federal Reserve System (the "Federal Reserve") before the
Merger may be completed. An application for approval has been filed with the
Federal Reserve, but as of January 12, 1999, the Federal Reserve had not ruled
on such application. Concord currently has no reason to believe that such
approval will not be forthcoming.
In addition to the required regulatory approvals, the Merger will be
completed only if certain other conditions precedent are met, including without
limitation: (i) the receipt of your approval of the Share Issuance Proposal;
(ii) receipt by each of EPS and Concord of an opinion of its respective counsel
that the Merger will qualify as a tax-free reorganization for federal income
tax purposes; (iii) the receipt by each of Concord and EPS of a letter from its
respective independent accountants concerning the pooling-of-interests
accounting treatment of the Merger (discussed below under "Accounting
Treatment"); and (iv) neither Concord nor EPS may have materially breached any
of its representations or obligations under the Agreement.
The Agreement is attached to this proxy statement as Appendix A. The
Agreement contains other conditions that must be met before the Merger may be
completed. Unless prohibited by law, either Concord or EPS could elect to waive
a condition that has not been satisfied and complete the Merger anyway. We
cannot be certain whether or when any of these conditions will be satisfied, or
waived where permissible, or that we will complete the Merger.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
We expect that, for federal income tax purposes, the EPS stockholders
will not recognize any gain or loss upon the exchange of their shares of EPS
Common Stock for shares of Concord Common Stock. The Merger will have no tax
impact on Concord's stockholders.
DIFFERENCES IN STOCKHOLDERS' RIGHTS
The Merger will have no impact on the rights of holders of Concord
Common Stock, other than with respect to the voting dilution accompanying any
increase in the number of outstanding shares of Concord Common Stock.
ACCOUNTING TREATMENT OF THE MERGER (PAGE 39)
Concord intends to account for the Merger as a pooling-of-interests
transaction for accounting and financial reporting purposes.
Pooling-of-interests is an accounting method that assumes that each company's
stockholders have combined their ownership interests in such a manner that each
group becomes an owner of the combined, enlarged business. The key differences
between this method of accounting and the more common purchase accounting
method fall into two areas: income measurement and asset valuation. Under
pooling-of-interests, the earnings of each company are combined as though the
combination had occurred at
8
<PAGE> 18
the beginning of the earliest financial period presented. Under purchase
accounting, the earnings of the acquired company are included only after the
closing of the merger. Under pooling-of-interests, the assets of the acquired
company are valued at their historical cost. Under the purchase method, the
assets are valued at their fair value. The excess of the consideration the
acquiring company pays over the fair value of the target's assets is recorded as
goodwill.
EFFECTIVE TIME OF THE MERGER (PAGE 34)
The Merger will become final when a Certificate of Merger is filed with
Secretary of State of the State of Delaware. We currently anticipate that the
Merger will be completed on or about the end of February 1999, although delays
could occur.
COMPARATIVE MARKET PRICES OF COMMON STOCK
Shares of Concord Common Stock are traded on the Nasdaq National Market
System ("NASDAQ") under the symbol "CEFT". Shares of EPS Common Stock are not
traded on any exchange or in any other established trading market. On November
23, 1998, the last trading day before we announced our agreement to acquire
EPS, Concord Common Stock closed at $28.4375 per share. On January 11, 1999,
the latest practicable date before the mailing of this proxy statement, Concord
Common Stock closed at $40.4375 per share.
The market value of 32,310,000 shares of Concord Common Stock would be
$918,815,625 based on Concord's November 23, 1998 closing price and
$1,306,535,625 based on Concord's January 11, 1999 closing price. As described
above under "-- Potential Adjustment to Exchange Ratio Based Upon the Market
Price of Concord Common Stock," the number of shares of Concord Common Stock to
be issued in the Merger may be subject to adjustment under certain limited
circumstances.
HISTORICAL AND PRO FORMA COMPARATIVE PER SHARE DATA
The following table contains certain comparative per share data
relating to earnings, cash dividends, and book value. The equivalent pro forma
information assumes an exchange ratio of 7.9091 shares of Concord Common Stock
for each share of EPS Common Stock. The Merger is expected to be accounted for
using the pooling-of-interests method of accounting.
We present the pro forma and equivalent pro forma data for your
information only. It does not necessarily indicate the results of operations or
combined financial position that would have resulted had Concord completed the
Merger at the times indicated, and it does not necessarily indicate what future
results of operations or combined financial position will be. You should read
the information shown below in conjunction with the historical consolidated
financial statements of Concord and EPS and the notes provided with them. See
"WHERE YOU CAN FIND MORE INFORMATION," "-- Selected Financial Data," "BUSINESS
OF EPS," and EPS's financial statements attached hereto as Appendix C.
9
<PAGE> 19
CONCORD EFS, INC.
AND ELECTRONIC PAYMENT SERVICES, INC.
HISTORICAL AND PRO FORMA COMPARATIVE PER SHARE DATA
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended September
1995 1996 1997 30, 1998
---------------------------------------------- ----------------------
<S> <C> <C> <C> <C>
EARNINGS PER COMMON SHARE
Concord
Basic $0.22 $0.31 $0.43 $0.45
Diluted 0.21 0.30 0.42 0.44
EPS
Basic 1.05 3.20 4.80 4.95
Diluted 1.05 3.20 4.80 4.95
Pro forma combined
Basic 0.18 0.32 0.46 0.48
Diluted 0.18 0.31 0.45 0.47
EPS equivalent pro forma (1)
Basic 1.42 2.53 3.64 3.80
Diluted 1.42 2.45 3.56 3.72
CASH DIVIDENDS PER COMMON SHARE * * * *
<CAPTION>
December 31, 1997 September 30, 1998
----------------- ------------------
<S> <C> <C>
BOOK VALUE PER COMMON SHARE
Concord $ 2.81 $ 3.34
EPS (4.00) 0.99
Pro forma combined 2.00 2.54
EPS equivalent pro forma (1) 15.82 20.09
</TABLE>
(1) The equivalent pro forma per share data for EPS is computed by
multiplying the pro forma combined information by an exchange ratio of
7.9091.
* No cash dividends have been paid on either the Concord Common Stock or
the EPS Common Stock.
SELECTED FINANCIAL DATA
The following tables present selected consolidated historical data for
Concord and EPS. The information regarding Concord is based on the historical
financial information that is contained in reports Concord has previously filed
with the SEC, including, without limitation, its September 30, 1998 Quarterly
Report on Form 10-Q. See "WHERE YOU CAN FIND MORE INFORMATION."
The 1997 selected consolidated financial data of Concord has been
restated to include the results of Digital Merchants Systems ("DMS"). As
discussed in Concord's Form 10-Q for the quarter ended September 30, 1998, DMS
was acquired in a pooling-of-interests transaction completed on June 30, 1998.
In accordance with pooling-of-interests method of accounting, no adjustments
have been made to the historical carrying amounts of assets and liabilities of
DMS.
10
<PAGE> 20
However, the selected consolidated financial data has been restated to include
the operating results of DMS for 1997. The selected financial data of DMS prior
to January 1, 1997 was immaterial for restatement.
The information for EPS is based on its historical financial
statements, including its unaudited consolidated financial statements for the
nine months ended September 30, 1998 and 1997, and its audited consolidated
financial statements for the years ended December 31, 1997 and December 31,
1996, all of which are included in Appendix C to this proxy statement. See
"FINANCIAL STATEMENTS OF EPS" attached as Appendix C and "WHERE YOU CAN FIND
MORE INFORMATION."
You should read the information shown below in conjunction with the
historical consolidated financial statements of Concord and EPS and the notes
provided with them.
Historical results do not necessarily indicate the results that you
can expect for any future period. Concord and EPS believe that they have
included all adjustments (which include only normal recurring adjustments)
necessary to arrive at a fair statement of interim results of operations of
Concord and EPS. With respect to Concord and EPS, results for the nine months
ended September 30, 1998 do not necessarily indicate the results which you can
expect for any other interim period or for the year as a whole.
11
<PAGE> 21
SELECTED CONSOLIDATED FINANCIAL DATA--CONCORD EFS, INC.
<TABLE>
<CAPTION>
(In thousands, except per share data)
9 Months
Year Ended December 31 Ended
September
1993 1994 1995 1996 1997 30, 1998
--------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue $ 73,443 $ 96,213 $127,762 $166,700 $270,074 $266,570
Cost of Operations 53,188 69,840 90,579 119,675 198,939 197,042
Selling, General and
Administrative Expenses 7,861 8,312 10,913 9,724 16,664 12,373
Operating Income 14,394 18,061 26,270 37,301 54,571 57,155
Interest, Net 825 1,588 2,116 4,014 10,801 9,517
Income Taxes 5,357 6,979 10,146 14,526 23,590 22,789
Net Income 9,863 12,713 18,315 26,789 41,682 43,883
Basic Earnings Per Share $0.12 $0.16 $0.22 $0.31 $0.43 $0.45
Diluted Earnings Per Share $0.12 $0.15 $0.21 $0.30 $0.42 $0.44
Weighted Average Shares 80,840 81,477 83,016 86,266 96,527 97,563
Weighted Average Shares and
Assumed Conversions 83,514 83,847 86,789 89,903 99,395 100,168
BALANCE SHEET DATA:
Working Capital $ 34,655 $ 45,717 $ 68,212 $130,606 $205,595 $336,481
Total Assets 71,033 99,462 156,887 292,813 368,439 472,693
Long-term Debt, Less Current
Maturities 1,371 978 561 28,329 73,000
Total Stockholders' Equity 50,251 61,935 89,544 215,148 273,930 326,641
</TABLE>
12
<PAGE> 22
SELECTED CONSOLIDATED FINANCIAL DATA - ELECTRONIC PAYMENT SERVICES, INC.
<TABLE>
<CAPTION>
(In thousands, except per share data)
9 Months
Year Ended December 31 Ended
September
1993 1994 1995 1996 1997 30, 1998
--------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue $162,171 $160,174 $163,379 $179,490 $202,310 $172,371
Cost of Operations 101,222 98,172 102,366 112,291 124,224 106,710
Selling, General and
Administrative Expenses 37,295 38,937 35,755 32,847 33,267 25,884
Operating Income 23,654 23,065 25,258 34,352 44,819 39,777
Interest, Net (1,607) (18,571) (15,882) (14,310) (12,590) (7,725)
Income Taxes 10,018 2,701 5,481 8,821 14,181 13,462
Minority Interest in Earnings
Of Subsidiaries 1,314 240
Dividend on Preferred Stock 12,002 38 38 38 38 28
Net Income 27 1,755 2,543 10,943 18,010 18,562
Earnings Per Share $0.01 $0.73 $1.05 $3.20 $4.80 $4.95
Weighted Average Shares 2,420 2,420 2,420 3,417 3,750 3,750
BALANCE SHEET DATA:
Working Capital Deficiency ($36,669) ($75,039) ($35,301) ($60,746) ($58,234) ($66,716)
Total Assets 194,949 214,904 239,257 261,649 250,757 259,777
Long-term Debt, Less Current
Maturities 225,171 200,000 175,000 150,000 125,000 106,250
Total Stockholders' Equity
(Deficiency) (137,140) (135,385) (44,205) (33,022) (15,012) 3,712
</TABLE>
Unaudited pro forma combined condensed selected financial data is also
presented. The pro forma combined condensed financial data assumes a business
combination between Concord and EPS accounted for as a pooling of interests and
is based on each company's respective historical audited and unaudited
consolidated financial statements and notes thereto, which are included in this
proxy statement or incorporated herein by reference. The unaudited pro forma
combined balance sheet data combines Concord's and EPS's Condensed Consolidated
Balance Sheets as of September 30, 1998, giving effect to the Merger as if it
had occurred on September 30, 1998. The unaudited pro forma condensed combined
income statement data combines Concord's historical results for the nine months
13
<PAGE> 23
ended September 30, 1998 and the years ended December 31, 1997, 1996 and 1995,
with EPS's historical results for the same periods, giving effect to the Merger
as if it had occurred on January 1, 1995.
The pro forma data is for your information only. It does not
necessarily indicate the results of operations or combined financial position
that would have resulted had Concord completed the Merger at the times
indicated, and it does not necessarily indicate what future results of
operations or combined financial position will be. You should read the
information shown below in conjunction with the historical consolidated
financial statements of Concord and EPS and the notes provided with them.
SELECTED CONSOLIDATED FINANCIAL DATA - PRO FORMA COMBINED CONDENSED
<TABLE>
<CAPTION>
(In thousands, except per share data)
Nine Months
Year Ended December 31 Ended
September
1995 1996 1997 30, 1998
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue 295,552 354,475 488,849 456,474
Cost of Operations 197,356 240,251 339,628 321,285
Selling, General and
Administrative Expenses 46,668 42,571 49,931 38,257
Operating Income 51,528 71,653 99,290 96,932
Interest, Net (13,766) (10,296) (1,789) 1,792
Income taxes 15,627 23,347 37,771 36,251
Net Income 20,858 37,732 59,692 62,445
Basic earnings per share 0.18 0.32 0.46 0.48
Diluted earnings per share 0.18 0.31 0.45 0.47
Weighted Average Shares 115,326 118,536 128,837 129,873
Weighted Average Shares and
Assumed Conversions 119,099 122,213 131,705 132,478
BALANCE SHEET DATA:
Working Capital 269,765
Total Assets 732,470
Long-term Debt, Less Current
Maturities 179,250
Total Stockholders' Equity 330,353
</TABLE>
14
<PAGE> 24
RISK FACTORS
In addition to the other information included or incorporated by
reference in this proxy statement, you should consider carefully the following
risk factors in determining how you want to vote with respect to the Share
Issuance Proposal and Concord's resulting acquisition of EPS. Some of the risks
and uncertainties relate to economic conditions generally and would affect
other entities engaged in the transaction processing business in similar ways.
These aspects are discussed above under the heading "A WARNING ABOUT
FORWARD-LOOKING STATEMENTS." This section addresses particular risks and
uncertainties that are specific to Concord and EPS.
RISK RELATING TO EPS'S ATM BUSINESS
Upon completion of the Merger, Concord will become exposed to
additional risks relating to EPS's ATM processing and network services
businesses, which are currently not material to Concord's business. Revenue
from "convenience fees" or "surcharges" imposed by owners of ATMs has been a
significant factor in the recent growth in EPS's ATM processing business, as
such fees have encouraged ATM owners to deploy additional terminals. To the
extent that new or existing ATM deployment declines due to the enactment of
statutory restrictions on surcharges, decreased availability of favorable
retail locations for ATM deployment or other factors, demand for EPS's ATM
processing services may not continue to grow at recent rates or may decline. In
addition, consolidation within the banking industry also may have an adverse
effect on the ATM processing and network services business of EPS. As banks
consolidate, the ability of EPS to successfully offer its ATM processing
services will depend in part upon whether the institutions that survive such
consolidation are willing to outsource their ATM processing to third party
vendors such as Concord and EPS, and on whether such institutions have
pre-existing alliances with competitors of EPS and Concord. With respect to
network services, larger institutions with more geographically disbursed
customer bases 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, EPS may lose network business if it
is 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.
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 network operated by EPS. 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. Moreover, as proposed the VISA
product would not permit certain competing network brands, such as MAC, to also
appear on the card. If VISA successfully induces banks to issue this card in
replacement of debit cards participating in the MAC network and other similarly
situated networks, EPS may experience a loss of network service business.
15
<PAGE> 25
INTEGRATION OF OPERATIONS
After the Merger is completed, it is currently planned that Concord
and EPS will essentially operate as they did before the Merger. No significant
changes in the management and personnel of the two separate entities are
expected. There are no current plans for significant integration of the Concord
and EPS's computer facilities, computer processing or accounting systems. The
combined companies do plan to jointly market several of the individual
company's products. However, processing of any new business is expected to be
processed through existing channels. No assurance can be given that Concord
will be able to integrate the operations of EPS without encountering
difficulties or experiencing the loss of key EPS employees or customers, or
that the benefits expected from such integration will be realized.
DEPENDENCE ON KEY MANAGEMENT
The development of Concord's and EPS's business and operations has
been materially dependent upon the active participation of their respective
executive officers and other key employees. The loss of one or more of its
executive officers or other key employees may have a material adverse effect on
the combined companies' financial condition and results of operations. See "The
Proposed Merger--Management and Operations After the Merger" and "Business of
EPS-- Management, Employees."
RELIANCE ON KEY CUSTOMERS
A substantial portion (approximately 24%) of EPS's revenue is derived
from services performed for its five major stockholders. EPS has contracts to
provide such services for these stockholders through December 31, 2004, but
there are certain limited circumstances under which one or more of the
stockholders may terminate their processing contracts with EPS. The loss of one
or more of the current stockholders as customers of EPS could have a material
adverse effect on the revenue and net income of EPS. See "Business of EPS."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of a substantial number of shares of Concord Common Stock in the
public market after the Merger is completed could adversely affect the
prevailing market price of the Concord Common Stock and could impair Concord's
ability to raise additional equity capital. Following the Merger, Concord will
have outstanding approximately 127,935,595 shares of Concord Common Stock,
based on the number of outstanding shares of Concord Common Stock and EPS
Common Stock at January 12, 1999 and a 7.9091 Exchange Ratio. Of these shares,
the approximately 30,064,838 shares to be issued in the Merger (assuming no
exercise of EPS stock options prior to the completion of the Merger) will not
be freely tradable but instead will be subject to various resale restrictions.
Prior to the completion of the Merger, Concord will enter into a registration
rights agreement with the EPS stockholders, a copy of which is attached hereto
as Appendix B (the "Registration Rights Agreement"). Pursuant to the
Registration Rights
16
<PAGE> 26
Agreement, the EPS stockholders will have the right to require Concord to
register all or some portion of the shares of Concord Common Stock they receive
in the Merger on two occasions after the Merger is completed. Further, for three
years after the Merger is completed the holders of such Concord Common Stock
will have the right to require Concord to include all or some portion of such
shares in any registration of shares of Concord Common Stock for resale to the
public for cash. Approximately 2,244,839 additional shares of Concord Common
Stock that may be issued in the future upon exercise of options to acquire EPS
Common Stock to be assumed by Concord in the Merger (assuming no exercise of EPS
stock options prior to the completion of the Merger) will have been registered
under the Securities Act of 1933, as amended, and will be freely tradable when
issued (subject to the volume and certain other conditions of Rule 144 in the
case of shares to be sold by affiliates of Concord). In addition to the options
to acquire EPS Common Stock to be assumed by Concord in the Merger, Concord
itself had, as of January 12, 1999, options currently outstanding under its Plan
for the purchase of approximately 10,091,840 shares of Concord Common Stock, of
which options for 5,500,187 shares were exercisable on or within six months of
such date.
INTRODUCTION
At the Special Meeting, holders of Concord Common Stock will be asked
to vote upon two separate proposals. The first proposal is referred herein to
as the "Share Issuance Proposal" and seeks stockholder approval for Concord to
issue shares of Concord Common Stock in connection with its proposed
acquisition of all of the outstanding common stock of EPS. The second proposal
is referred to as the "Plan Amendment Proposal" and seeks stockholder approval
of a proposed amendment to Concord's 1993 Incentive Stock Option Plan (the
"Plan") to increase the number of shares of Concord Common Stock which may be
issued under the Plan from 13,668,750 shares to 25,000,000 shares and to permit
an additional method of payment for shares upon exercise of options. The
approval of one proposal is not dependent upon the approval of the other
proposal.
At the Special Meeting, Concord's stockholders will be asked to
approve the Share Issuance Proposal in order to enable Concord to issue shares
of Concord Common Stock in connection with its acquisition of EPS. Concord's
acquisition of EPS, and the resulting share issuance, will be made pursuant to
the Agreement and Plan of Merger dated as of November 20, 1998 (the
"Agreement"), between Concord, CEFT, Inc., a wholly owned subsidiary of
Concord, and EPS. Pursuant to the Agreement, CEFT, Inc. will merge with and
into EPS, with EPS surviving the merger (the "Merger"). In the Merger, Concord
will issue 7.9091 shares of Concord Common Stock for each share of EPS Common
Stock outstanding at the time the Merger is completed (the "Exchange Ratio"),
and options then outstanding to acquire shares of EPS Common Stock would be
automatically converted into options to acquire shares of Concord Common Stock,
adjusted to give effect to the Exchange Ratio. The Exchange Ratio is subject to
adjustment in certain limited circumstances described herein.
17
<PAGE> 27
If all of the currently outstanding options to acquire EPS Common
Stock were to be exercised prior to the time the Merger is completed, there
would be 4,085,127 shares of EPS Common Stock outstanding at the time the
Merger is completed, and Concord would issue, in the aggregate, approximately
32,309,677 shares of Concord Common Stock for all of the issued and outstanding
shares of EPS Common Stock. There are 4,600 shares of preferred stock of EPS
outstanding that Concord will not acquire in the Merger. Those shares of
preferred stock are owned by First Union Corporation. The shares of EPS's
preferred stock will remain outstanding and continue to be owned by First Union
Corporation after the Merger is completed with the same terms currently in
effect, and neither Concord nor EPS will have the right to redeem or otherwise
acquire those shares. Notwithstanding the presence of the EPS preferred stock,
Concord will have voting control over EPS.
At the Special Meeting, Concord's stockholders will also be asked to
approve the Plan Amendment Proposal, which relates to the proposed amendment to
the Plan to increase the number of shares of Concord Common Stock that may be
issued under the Plan from 13,668,750 shares to 25,000,000 shares. The Plan
currently authorizes the issuance of 13,668,750 shares of Concord Common Stock
under the Plan. As of January 12, 1999, Concord could grant options to purchase
up to an additional 1,079,188 shares of Concord Common Stock under the Plan,
assuming no options currently outstanding under the Plan are forfeited. It is
anticipated that after the Merger is completed, Concord will grant options to
management and employees of EPS under the Plan to acquire, in the aggregate,
approximately 900,000 shares of Concord Common Stock (see "Amendment to the
1993 Incentive Stock Option Plan" ). With the grant of those additional
options, Concord will only be able to grant options under the Plan for
approximately 179,188 shares of Concord Common Stock, unless the proposed
amendment to the Plan is approved by Concord stockholders. At the present time
options may be exercised only by paying cash or exchanging previously-purchased
shares of Concord Common Stock. The proposed amendment would permit optionees
to pay for shares by giving instructions to a broker to sell a sufficient
number of shares to pay for the shares to be purchased, whether sold or
retained, plus applicable taxes.
The board of directors of Concord unanimously recommends that
Concord's stockholders vote "FOR" approval of the Share Issuance Proposal and
"FOR" approval of the Plan Amendment Proposal.
SPECIAL MEETING OF CONCORD STOCKHOLDERS
DATE, PLACE, TIME, AND PURPOSE
Concord is furnishing this proxy statement to holders of Concord
Common Stock in connection with the solicitation by Concord's board of
directors of proxies for use at a Special Meeting of stockholders of Concord to
be held at 10:00 a.m., local time, on Thursday, February 18, 1999 at Colonial
Country Club, 2736 Countrywood Parkway, Memphis, Tennessee, and at any
adjournment or postponement thereof.
18
<PAGE> 28
At the Special Meeting, Concord's stockholders will consider and vote
upon the Share Issuance Proposal and the Plan Amendment Proposal. The Share
Issuance Proposal requests the approval of Concord's stockholders for Concord
to issue shares of Concord Common Stock in connection with its acquisition of
EPS. The Plan Amendment Proposal requests the approval of Concord's stockholders
for Concord to amend the Plan to increase the number of shares of Concord Common
Stock which may be issued under the Plan from 13,668,750 shares to 25,000,000
shares and to permit an additional method of payment for shares upon exercise of
options.
The principal executive office of Concord is located at 2525 Horizon
Lake Drive, Memphis, Tennessee 38133, and its telephone number is (901)
371-8000. The principal executive office of EPS is located at 1100 Carr Road,
Wilmington, Delaware, and its telephone number is (302) 791-8000. As used in
this proxy statement, the terms "Concord" and "EPS" refer to Concord EFS, Inc.
and Electronic Payment Services, Inc., respectively, and where the context
requires, to Concord and EPS and their respective subsidiaries.
This proxy statement is first being mailed to holders of Concord
Common Stock on or about January 14, 1999.
RECORD DATE, VOTING RIGHTS, REQUIRED VOTE, AND REVOCABILITY OF PROXIES
Concord's board of directors has fixed the close of business on
January 12, 1999 as the record date (the "Record Date") for determining holders
of outstanding shares of Concord Common Stock entitled to notice of and to vote
at the Special Meeting. Only holders of Concord Common Stock of record on the
books of Concord at the close of business on the Record Date are entitled to
vote at the Special Meeting or at any adjournment or postponement of the
Special Meeting. As of the Record Date, there were 97,870,757 shares of Concord
Common Stock issued and outstanding, each of which is entitled to one vote on
each matter submitted to a stockholder vote at the Special Meeting. The
presence, in person or by proxy, of a majority of the outstanding shares of
Concord Common Stock is necessary to constitute a quorum of the stockholders to
take action at the Special Meeting.
The Share Issuance Proposal is being submitted to stockholders
pursuant to the requirements of NASDAQ, which mandates stockholder approval of
issuances of stock equaling 20% or more of the previously outstanding shares.
The Share Issuance Proposal and the Plan Amendment Proposal each must
be approved by the affirmative vote of a majority of the shares of Concord
Common Stock present in person or by proxy at the Special Meeting. An
abstention by a Concord stockholder present at the Special Meeting in person or
by proxy will have the same effect as a vote against both the Share Issuance
Proposal and the Plan Amendment Proposal, but failure to return a properly
executed proxy, or a broker submitting a proxy without exercising discretionary
authority with respect to the proposals will not.
19
<PAGE> 29
Shares of Concord Common Stock represented by properly executed
proxies will be voted in accordance with the instructions indicated on the
proxies or, if no instructions are indicated, will be voted FOR the Share
Issuance Proposal and FOR the Plan Amendment Proposal, and otherwise in the
discretion of the proxy holders as to any other matter which may properly
come before the Special Meeting or any adjournment or postponement thereof.
Concord is not currently aware of any other business to be considered at the
Special Meeting.
A Concord stockholder who has given a proxy may revoke it at any time
before it is voted by (a) filing with the Secretary of Concord a notice in
writing at the address of Concord's principal executive offices set forth
herein revoking it or a duly executed proxy bearing a later date, or (b) voting
in person at the Special Meeting.
On the Record Date, Concord's directors and executive officers,
including their immediate family members and affiliated entities owned
4,106,859 shares or approximately 4.2% of the outstanding shares of Concord
Common Stock. This does not include shares of Concord Common Stock owned or
controlled, directly or indirectly, by William Blair & Company, L.L.C.
("William Blair"), a registered investment adviser and broker/dealer, of which
Richard Kiphart, a director of Concord, is a principal. It also does not
include shares of Concord Common Stock owned or controlled by other employees
or principals of, or mutual funds advised by, William Blair. On the Record
Date, Concord's directors and executive officers owned no shares of EPS Common
Stock.
As a condition to EPS agreeing to enter into the Agreement, each
director of Concord has executed a voting agreement in which he or she agreed
to vote all shares over which such person had beneficial ownership FOR approval
of the Share Issuance Proposal. As of the Record Date, such directors
beneficially own 4,106,859 shares (4.2%) of the then outstanding shares of
Concord Common Stock. The stockholders of EPS have already approved the
Agreement.
SOLICITATION OF PROXIES
Concord will bear the costs of soliciting proxies. In addition to the
use of the mail, proxies may be solicited by the directors, officers and
employees of Concord in person, or by telephone, telecopier or telegram.
Directors, officers and employees will not be additionally compensated for
solicitation but may be reimbursed for out-of-pocket expenses incurred in
connection with solicitation. Arrangements will also be made with custodians,
nominees and fiduciaries for the forwarding of solicitation material to the
beneficial owners of Concord Common Stock held of record by such persons, and
Concord may reimburse custodians, nominees and fiduciaries for reasonable
out-of-pocket expenses incurred for these services.
20
<PAGE> 30
RECOMMENDATION
Concord's board of directors has unanimously approved the Agreement,
and believes that the acquisition of EPS and the issuance of the shares of
Concord Common Stock for the EPS Common Stock in connection therewith is in the
best interests of Concord and its stockholders. Concord's board of directors
unanimously recommends that the Concord stockholders vote FOR approval of the
Share Issuance Proposal. Concord's board of directors has also unanimously
approved the amendment to Concord's 1993 Incentive Stock Option Plan which would
increase the number of shares of Concord Common Stock which may be issued under
the Plan from 13,668,750 shares to 25,000,000 shares and to permit an additional
method of payment for shares upon exercise of options. Concord's board of
directors unanimously recommends that the Concord stockholders vote FOR approval
of the Plan Amendment Proposal.
DESCRIPTION OF THE MERGER AND RESULTING SHARE ISSUANCE
The following information describes material aspects of Concord's
proposed acquisition of EPS which would be accomplished when CEFT, Inc., a
wholly owned subsidiary of Concord, is merged with and into EPS. Upon
consummation of the Merger, the shares of EPS Common Stock will be converted
into shares of Concord Common Stock, which Concord will issue. By virtue of the
Merger, Concord will own all of the outstanding shares of EPS Common Stock. EPS
currently has 4,600 shares of voting preferred stock outstanding which will not
be acquired by Concord in the Merger. Those shares, all of which are owned by
First Union Corporation, will remain outstanding and continue to be owned by
First Union Corporation after the Merger is completed with the same terms
currently in effect, and neither Concord nor EPS will have the right to acquire
or redeem those such shares. This description of the Merger does not provide a
complete description of all the terms and conditions of the Agreement which
governs the Merger. The description herein is qualified in its entirety by the
Appendices hereto, including the text of the Agreement which is attached as
Appendix A to this proxy statement. The Agreement is incorporated herein by
reference. You are urged to read the Agreement and each of the Appendices in
their entirety.
GENERAL
The Agreement provides for the acquisition of EPS by Concord pursuant
to the Merger in which CEFT, Inc, a wholly owned subsidiary of Concord, will be
merged with and into EPS. CEFT, Inc. was formed by Concord solely for the
purposes of the Merger. EPS will be the surviving corporation resulting from
the Merger. At the time the Merger becomes effective, each share of EPS Common
Stock then issued and outstanding will be converted into and exchanged for the
right to receive from Concord shares of Concord Common Stock in an amount equal
to the Exchange Ratio. Additionally, each option outstanding to purchase shares
of EPS Common
21
<PAGE> 31
Stock will be converted automatically into options to purchase that number of
shares of Concord Common Stock equal to (A) the number of shares of EPS Common
Stock issuable upon exercise of the option multiplied by (B) the Exchange Ratio
(7.9091) at a price per share of Concord Common Stock equal to the per share
option exercise price specified in the respective option divided by the Exchange
Ratio (rounded to the nearest whole cent). The Exchange Ratio is subject to
possible adjustment as described below.
No fractional shares of Concord Common Stock will be issued. Rather,
Concord will pay cash (without interest) in an amount equal to such fractional
part of a share of Concord Common Stock multiplied by the closing price of
Concord Common Stock on the NASDAQ on the date the Merger is completed.
As of the Record Date, there were 3,801,297 shares of EPS Common Stock
issued and outstanding and there were options to acquire 283,830 shares of EPS
Common Stock issued and outstanding. Based on an Exchange Ratio of 7.9091
shares of Concord Common Stock for each share of EPS Common Stock, upon
completion of the Merger and assuming no options to acquire EPS Common Stock
are exercised prior to that time, Concord will issue approximately 30,064,838
shares of Concord Common Stock to EPS stockholders and the options to acquire
EPS Common Stock would be converted into options to acquire approximately
2,244,839 shares of Concord Common Stock at an average exercise price of
approximately $8.48 per share.
EPS has 4,600 shares of preferred stock outstanding which will not be
acquired by Concord in the Merger, but instead those shares of preferred stock
will thereafter continue to be held by First Union Corporation. Although EPS's
preferred shares vote with EPS Common Stock on all matters subject to
stockholder vote, since Concord would hold at a minimum 3,801,297 shares of EPS
Common Stock after the Merger, Concord will have voting control of EPS.
After the Merger, Concord would then have outstanding approximately
127,935,595 shares of Concord Common Stock, based on the number of shares of
Concord Common Stock outstanding on January 12, 1999 (not including shares
Concord Common Stock which may be issued pursuant to the exercise of options
granted under the Plan, or for other purposes). The five principal stockholders
of EPS are Bank One, First Union, PNC, KeyCorp and National City, each of
which, directly or through a wholly owned subsidiary, owns 750,000 shares of
EPS Common Stock. Based upon the 7.9091 Exchange Ratio, upon consummation of
the Merger each of those entities would own at least 5,931,825 shares of
Concord Common Stock. In that instance, each of those entities would own at
least approximately 4.6% of the then outstanding shares of Concord Common
Stock; collectively, their percentage ownership would be approximately 23%.
Based on their ownership of EPS Common Stock as of the Record Date, each EPS
director, individually, and all directors and officers of EPS as a group will
own less than 1% of the Concord Common Stock outstanding upon completion of the
Merger.
22
<PAGE> 32
The Exchange Ratio is subject to a downward adjustment if the number
of shares of EPS Common Stock outstanding (assuming the exercise of all
outstanding options to acquire EPS Common Stock) increases prior to the
completion of the Merger to insure that, except as described under "--
Potential Adjustment to the Exchange Ratio Based Upon the Market Price of
Concord Common Stock," the number of shares of Concord Common Stock issued
pursuant to the Agreement will not exceed 32,310,000. The Exchange Ratio of
7.9091 reflects an adjustment for the issuance by EPS of options to purchase
1,000 shares of EPS Common Stock that was not reflected in the Exchange Ratio
originally included in the Agreement.
POSSIBLE ADJUSTMENT OF EXCHANGE RATIO BASED UPON THE MARKET PRICE OF CONCORD
COMMON STOCK
Under certain circumstances, the Exchange Ratio could be adjusted
upward pursuant to Section 7.1(i) of the Agreement, in which case the total
number of shares of Concord Common Stock to be issued in connection with the
Merger would likewise increase. An upward adjustment to the Exchange Ratio
could occur only if EPS elects to terminate the Agreement as a result of a
decline in the market price of Concord Common Stock prior to the completion of
the Merger, and if Concord then elects to avoid EPS's termination of the
Agreement by increasing the Exchange Ratio.
EPS may elect to terminate the Agreement if both:
(1) the Average Closing Price (as defined below) is less than
$22.355; and
(2) (a) the number obtained by dividing the Average Closing
Price by $27.94375 (the "Concord Ratio")
is less than
(b) the number obtained by dividing (X) the average of
the closing prices of the common stock of the six
comparable companies defined as the "Index Group" in
the Agreement (the "Index Price") on the third
business day prior to the date of the completion of
the Merger, by (Y) the Index Price on November 20,
1998 (the "Starting Date"), less 15% (the "Index
Ratio").
Concord has the option to avoid termination of the Agreement by EPS by
increasing the Exchange Ratio to equal the lesser of (1) the number obtained by
dividing the product of $22.355 and the Exchange Ratio by the Average Closing
Price or (2) the number obtained by dividing the product of the Index Ratio and
the Exchange Ratio by the Concord Ratio. However, if this increase in the
Exchange Ratio would result in Concord issuing, or being obligated to issue,
38,772,000 or more shares of Concord Common Stock in connection with the
Merger, Concord will not have the option to increase the Exchange Ratio and the
Agreement will terminate unless EPS withdraws its termination notice within the
10-day period after EPS first gave notice of its intent to terminate the
Agreement.
23
<PAGE> 33
The Average Closing Price is the average of the daily last sales
prices of Concord Common Stock as reported on NASDAQ for 10 consecutive full
trading days in which such shares are traded on NASDAQ ending at the close of
trading on the third business day prior to the date the Merger is completed.
These conditions reflect Concord's and EPS's agreement that EPS's
stockholders will assume the risk of declines in the market price of Concord
Common Stock to $22.355 per share. Any adjustment of the Exchange Ratio related
to a decline in the market price of Concord Common Stock below $22.355 would
depend on whether the Average Closing Price of Concord Common Stock performs
below the average market prices of a group of comparable companies common stocks
(the Index Group referenced above) by more than 15%.
In making its determination of whether to increase the Exchange Ratio
under these circumstances, Concord's board of directors will take into account,
consistent with its fiduciary duties, all relevant facts and circumstances that
exist at such time. These factors may include information concerning the
business, financial condition, results of operations, and prospects of EPS and
Concord (including the recent performance of Concord Common Stock, the
historical financial data of EPS, customary statistical measurements of
Concord's and EPS's financial performance and the future prospects for Concord
Common Stock following the Merger), the projected effect of the Merger on
Concord's pro forma earnings per share, whether Concord's assessment of EPS's
earning potential as part of Concord justifies the issuance of an increased
number of shares of Concord Common Stock, and the advice of its financial
advisers and legal counsel. CONCORD IS UNDER NO OBLIGATION TO ADJUST THE
EXCHANGE RATIO UNDER THESE CIRCUMSTANCES. If Concord elects to increase the
Exchange Ratio under this scenario, regulatory approvals may need to be
obtained as a result of the percentage of Concord Common Stock to be owned by
one or more of the EPS stockholders upon completion of the Merger. Such
regulatory approvals would be in addition to those described under "--
Regulatory Approval."
Based on the $28.4375 closing price of Concord Common Stock on
November 23, 1998, the last trading day prior to the announcement of the
Merger, the Exchange Ratio represents a value of $224.92 per share of EPS
Common Stock, and a total transaction value of $918,815,625. Based on the
$40.4375 closing price of Concord Common Stock on January 11, 1999, the
Exchange Ratio represents a value of $319.82 per share of EPS Common Stock, and
a total transaction value of $1,306,535,625.
BACKGROUND OF AND REASONS FOR THE MERGER
BACKGROUND
In early August 1998, Concord's senior management was contacted by
Salomon Smith Barney Inc. ("SSB") to determine whether Concord would be
interested in discussing the potential acquisition of EPS. Concord was familiar
with EPS and its subsidiaries, particularly
24
<PAGE> 34
BUYPASS, and the MAC network. This initial contact led to a meeting on August
11, 1998 at which representatives of SSB met with Concord's senior management to
discuss in general the potential acquisition of EPS and the methods SSB intended
to use to obtain indications of interest for EPS.
On August 26, 1998 Concord's senior management received a copy of
EPS's confidential offering memorandum. On October 2, 1998, a letter was sent,
outlining the procedures EPS intended to use in receiving and considering
acquisition proposals. The letter indicated that EPS sought to receive
non-binding indications of interest from potential acquisition partners such as
Concord by October 9, 1998. Concord's senior management, with assistance and
advice from its legal, accounting and financial advisers, prepared and
submitted its non-binding indication of interest to EPS on October 9, 1998.
Concord's senior management was subsequently informed by SSB that it
was one of several potential acquisition partners with which the board of
directors of EPS had authorized EPS management and its legal and financial
advisers to continue negotiations. Concord's senior management commenced
arrangements for due diligence reviews of EPS and its business in the later
part of October. On October 22, 1998, Concord's senior management received
instructions from EPS's senior management concerning the submission of final
proposals. These instructions set November 5, 1998 as the deadline EPS had
established for the receipt of final proposals and other matters related
thereto; they were accompanied by a draft of a merger agreement prepared by
EPS's counsel.
After due diligence meetings with EPS's senior management in
Wilmington, Delaware on October 28 and 29, 1998, Concord submitted its proposal
for EPS along with its general comments regarding the proposed merger agreement
on November 5, 1998.
EPS's board of directors met on November 10, 1998 to consider the
proposals submitted by Concord and the other potential acquisition partners.
Following the meeting, EPS informed Concord's senior management that the EPS
board of directors had authorized EPS's management and financial and legal
advisers to negotiate a final merger agreement with Concord on the basis of
Concord's proposal.
On November 12, 1998, Concord's financial adviser, William Blair, sent
copies of its preliminary fairness opinion and report to the members of
Concord's board of directors. On November 13, 1998, Concord's board of
directors met in a telephone conference to discuss the potential acquisition,
the latest draft of the proposed agreement, major unresolved issues and the
William Blair preliminary fairness opinion and report. Representatives of
William Blair reviewed the preliminary report and answered questions asked by
Concord's board of directors and management with respect thereto. At the
conclusion of the telephone conference, Concord's board of directors scheduled
a special board meeting to be held on November 18, 1998 for further
deliberations concerning the proposed transaction.
25
<PAGE> 35
On November 16, 1998, representatives of EPS and its legal and
financial advisers conducted their on-site due diligence of Concord at
Concord's main offices. During this session, negotiations continued with
respect to the terms of the definitive agreement and related agreements.
On November 18, 1998, Concord's board of directors met to further
consider the acquisition. Presentations were made by Concord's legal,
accounting and financial advisers and senior management, and the board of
directors was provided with an updated preliminary fairness opinion and report
and the most recent draft of the proposed merger agreement and related
documents. The deliberations of the board of directors were continued on
November 19, 1998, at Concord's regularly scheduled board meeting. It was
determined that a telephone conference would be held the next day to further
consider the transaction and to vote thereon if agreement on the final
unresolved matters relating to the agreements had been reached.
Concord's board of directors held a telephone conference on Friday,
November 20, 1998 to consider the transaction once again. William Blair
reported that it had delivered its opinion, dated November 20, 1998, to the
effect that, as of such date, and based upon and subject to various
considerations set forth in its opinion, the Exchange Ratio was fair to
Concord's stockholders from a financial point of view. After further
discussion, the Concord board of directors voted unanimously to approve the
Agreement and to recommend to Concord's stockholders that they vote in favor of
the Agreement and the issuance of shares of Concord Common Stock for EPS Common
Stock in accordance with the Agreement.
On November 23, 1998, officers of Concord and EPS exchanged executed
copies of the Agreement and related documents and EPS held a special
stockholders' meeting to consider and vote on the proposed Merger. EPS's
stockholders approved the Merger at that meeting. The transaction was publicly
announced that day.
CONCORD'S REASONS FOR THE MERGER
Concord's board of directors believes that the Merger is fair to, and
in the best interests of, Concord and its stockholders. Accordingly, after
consideration of relevant business, financial, legal and market factors,
Concord's board of directors approved the Agreement and the transactions
contemplated thereby by unanimous vote and unanimously voted to recommend that
Concord's stockholders vote "FOR" the approval of the Share Issuance Proposal.
In reaching its determination to approve the Agreement and the transactions
contemplated thereby, Concord's board of directors consulted with its
management and its financial, accounting and legal advisers, and considered a
number of factors. The following include all of the material factors
considered:
(i) the board's review, based in part on presentations by its
financial advisers and Concord's management, of the business, operations,
financial condition and earnings of Concord and EPS on an historical and a
prospective basis and of the combined company on a pro forma basis, the
historical stock price performance of the Concord Common Stock as a multiple of
earnings per share, and the resulting relative interests of the five principal
stockholders of EPS
26
<PAGE> 36
and the impact the resale of such shares would have on the market for Concord
Common Stock in light of the registration rights granted in connection with the
Agreement;
(ii) the transaction would not immediately reduce Concord's
reported earnings per share and would, accordingly, be accretive;
(iii) the presentations of William Blair to the board members at
the meetings of the board of directors on November 13, 18, 19 and 20, 1998, and
the written opinion of William Blair, dated November 20, 1998, to the effect
that, as of such date and based upon and subject to the procedures followed,
assumptions made, matters considered, and limitations on the analyses undertaken
as set forth in such opinion, the Exchange Ratio was fair to Concord's
stockholders from a financial point of view (see "--Opinion of Financial
Adviser"). A copy of the written opinion of William Blair, which sets forth the
procedures followed, assumptions made, matters considered and limitations on the
analyses undertaken by William Blair, is attached as Appendix D and is
incorporated herein by reference. STOCKHOLDERS ARE URGED TO, AND SHOULD, READ
THE OPINION OF WILLIAM BLAIR CAREFULLY IN ITS ENTIRETY;
(iv) the terms of the Agreement, including the Exchange Ratio;
(v) the current and prospective economic and competitive
environment facing the transaction processing industry generally, and Concord
and EPS in particular, including the continued rapid consolidation in the
industry and the increasing importance of operational scale and financial
resources in maintaining efficiencies and remaining competitive and in being
able to capitalize on technological developments which significantly impact
industry competition;
(vi) the expectation that the Merger would be accounted for as a
pooling of interests for accounting and financial reporting purposes (see
"--Accounting Treatment");
(vii) the potential cost savings, operating efficiencies and other
synergies that may be available to the combined company from the Merger, and
the likelihood of the foregoing being achieved following consummation of the
Merger;
(viii) the belief that EPS's senior management would remain in place
after the Merger and would be provided with additional incentives to further
the growth and prosperity of Concord and EPS as a combined entity through the
issuance to management and employees of EPS of options under Concord's Plan to
acquire, in the aggregate, approximately 900,000 shares of Concord Common
Stock;
(ix) the fact that First Union had agreed to waive its rights to
terminate its minimum payment obligation to EPS at the end of 1999, thereby
effectively extending such obligation until December 31, 2004;
(x) the fact that a majority of the EPS stockholders had entered
into agreements to vote for and otherwise support the Merger, thereby assuring
the receipt of EPS stockholder approval of the Merger; and
27
<PAGE> 37
(xi) the results of the due diligence investigation of EPS
conducted by Concord's management, accounting, financial and legal advisers.
The foregoing discussion of the information and factors considered by
the board of directors of Concord is not intended to be exhaustive, but
includes all of the material factors considered by Concord's board of
directors. In the course of its deliberations with respect to the Merger,
Concord's board of directors discussed the anticipated impact of the Merger on
Concord and Concord's stockholders. In reaching its determination to approve
and recommend the Merger, Concord's board of directors generally viewed each of
the foregoing factors as supporting its approval and recommendation of the
Agreement and the resulting share issuance, but the board of directors did not
assign any relative or specific weight to the factors considered in reaching
such determination, and individual directors may have given differing weights
to different factors.
BASED ON THE FOREGOING, THE BOARD OF DIRECTORS OF CONCORD UNANIMOUSLY
APPROVED THE AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF CONCORD
COMMON STOCK VOTE "FOR" APPROVAL OF THE SHARE ISSUANCE PROPOSAL.
EPS'S REASONS FOR THE MERGER
At a meeting held on November 20, 1998, the EPS board of directors
approved the Agreement and resolved to recommend that the EPS stockholders
approve the Agreement. In reaching these conclusions, the EPS board of
directors considered, with the assistance of management and EPS's financial and
legal advisers, a number of factors, including the following:
(i) the results of operations, financial condition, business and
competitive position of EPS, both on a historical and prospective basis;
(ii) the current and prospective economic and competitive
environment facing the payment processing industry generally, and EPS in
particular, including the rapid consolidation in the industry and the ability
of a publicly traded company to use its equity securities to accomplish
strategic acquisitions and the benefits of operational scale and being an
integrated provider of processing services in maintaining efficiencies and
remaining competitive in the industry;
(iii) the results of operations, financial condition, business and
competitive position of Concord, both on a historical and prospective basis,
and the historical market price of the Concord Common Stock;
(iv) the potential revenue and expense synergies from a
combination of EPS and Concord due to the opportunities to cross-sell the
complementary products offered by each company and the ability to combine
certain functions and operations;
(v) the terms of the Agreement and the Registration Rights
Agreement;
28
<PAGE> 38
(vi) the benefits to the EPS stockholders of acquiring publicly
traded Concord Common Stock, including the increased liquidity of the Concord
Common Stock as compared to the EPS Common Stock;
(vii) the expectation that the Merger would constitute a tax-free
reorganization for federal income tax purposes and be accounted for by Concord
as a pooling of interests;
(viii) the presentations of SSB to the EPS board of directors on
August 18, 1998, November 10, 1998 and November 20, 1998 and the opinion of SSB
rendered on November 20, 1998 that, as of the date of such opinion, the
consideration to be received by the EPS stockholders in the Merger was fair to
such stockholders from a financial point of view; and
(ix) the likelihood of obtaining required regulatory approvals and
satisfying other conditions to the consummation of the Merger.
The foregoing discussion of the information and factors considered and
given weight by the EPS board of directors is not intended to be exhaustive. In
view of the variety of factors considered in connection with its evaluation of
the Merger, the EPS board of directors did not find it practicable to and did
not quantify or otherwise assign relative weights to the specific factors
considered in reaching its determination. In addition, individual members of
the EPS board of directors may have given different weights to different
factors.
OPINION OF CONCORD'S FINANCIAL ADVISER
William Blair has rendered to Concord's board of directors its written
opinion dated November 20, 1998, to the effect that, as of such date, and based
upon and subject to various considerations set forth in its opinion, the
Exchange Ratio was fair to the holders of Concord Common Stock from a financial
point of view.
THE FULL TEXT OF THE WRITTEN OPINION OF WILLIAM BLAIR, WHICH SETS
FORTH ASSUMPTIONS MADE, MATTERS CONSIDERED AND THE REVIEW UNDERTAKEN WITH
REGARD TO SUCH OPINION, IS ATTACHED AS APPENDIX D TO THIS PROXY STATEMENT.
CONCORD STOCKHOLDERS ARE URGED TO, AND SHOULD, READ THE OPINION CAREFULLY AND
IN ITS ENTIRETY. WILLIAM BLAIR'S OPINION IS DIRECTED ONLY TO THE EXCHANGE RATIO
AS OF THE DATE OF THE OPINION AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY
STOCKHOLDER OF CONCORD AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE MEETING.
THE SUMMARY OF THE OPINION OF WILLIAM BLAIR SET FORTH IN THIS PROXY STATEMENT
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In rendering its opinion, William Blair examined, among other things,
(a) the Agreement; (b) certain audited financial statements of Concord for the
five fiscal years ended December 31, 1997 and certain audited financial
statements of EPS for the four fiscal years ended December 31, 1997; (c) the
unaudited financial statements of Concord for the quarter ended September 30,
1998 and the unaudited financial statements of EPS for the nine months ended
September 30, 1998; (d) certain projected financial results for Concord
prepared by Wall Street analysts and certain internal business, operating and
financial information and forecasts of EPS prepared by the senior management of
EPS (collectively, the "Financial Forecasts"); (e) the
29
<PAGE> 39
pro forma impact of the Merger on the earnings per share of Concord based on the
Financial Forecasts and certain pro forma financial information prepared by the
senior management of Concord and EPS; (f) historical revenue, operating
earnings, operating cash flows, net income and capitalization, as to Concord,
EPS and certain publicly held companies in businesses William Blair believed to
be comparable to the businesses of Concord and EPS, respectively; (g)
information regarding publicly available financial terms of certain
recently-completed transactions which William Blair believed to be relevant; (h)
current and historical market prices and trading volumes of the Concord Common
Stock; and (i) certain other publicly available information on Concord. William
Blair also held discussions with members of the senior management of Concord and
EPS to discuss the foregoing, considered other matters which it deemed relevant
to its inquiry and took into account such accepted financial and investment
procedures and considerations as it deemed relevant.
In connection with its review, William Blair relied upon the accuracy
and completeness of the financial and other information provided by Concord and
EPS to it and did not undertake any independent verification of such information
or any independent valuation or appraisal of any of the assets of Concord or
EPS. With respect to the Financial Forecasts, William Blair assumed that such
forecasts had been reasonably prepared on bases reflecting the best then
currently available estimates and judgments of the managements of Concord and
EPS as to the future financial performance of the Concord and EPS businesses. In
addition, William Blair assumed that obtaining the necessary regulatory and
governmental approvals for the Merger will not delay the consummation of the
Merger, and that, in the course of obtaining such approvals, no restriction will
be imposed that will have a material adverse effect on the contemplated benefits
of the Merger to Concord. William Blair's opinion stated that such opinion was
also based on economic, monetary, market and other conditions as in effect on,
and the information made available to William Blair as of, the date of such
opinion. William Blair has not been asked to perform, not has it in fact
performed, any analyses with respect to the fairness of the Exchange Ratio or
any other matters respecting the Merger after delivery of its written opinion
dated November 20, 1998.
The following is a brief summary of the analyses performed by William
Blair in connection with rendering its November 20, 1998 opinion and discussed
with Concord's board of directors at its meeting on such date.
Relative Contribution Analysis
William Blair analyzed the pro forma contributions from each of
Concord and EPS to the combined company if the Merger were to be consummated as
set forth in the Agreement. Among the various income and cash flow statement
items analyzed were the relative contributions to the pro forma company of each
of Concord's and EPS' revenue, earnings before interest expense, interest
income and taxes ("EBIT") and net income available to common stockholders for
the years ended December 31, 1998 and 1999. The projections were based on the
Financial Forecasts. The relative contribution analysis showed that EPS would
contribute approximately 37.9% and 34.4% of the revenue, approximately 38.3%
and 35.5% of the EBIT and approximately 27.5% and 28.0% of the net income
available to common stockholders to the
30
<PAGE> 40
combined company, before taking into account any of the possible benefits that
may be realized following the Merger, for the years ended December 31, 1998 and
1999, respectively. These contribution ratios may be compared to EPS's relative
share of the total enterprise value (i.e., the market value of common equity
plus estimated market value of debt less cash and cash equivalents) of the
combined company of 29.0% and the pro forma fully diluted ownership interest of
23.9% that EPS stockholders would receive if the Merger were to be consummated.
Discounted Cash Flow Analysis
William Blair performed a discounted cash flow analysis of EPS using
financial forecasts furnished by EPS' management and reviewed by Concord's
management. Based on such forecasts, William Blair calculated a net present
value of free cash flows for EPS for the years 1999 through 2001 using discount
rates ranging from 10.0% to 14.0%. William Blair calculated EPS's terminal
values in the year 2001 based on multiples ranging from 16.0x EBIT to 22.0x
EBIT. These terminal values were then discounted to present value using discount
rates ranging from 10.0% to 14.0%. Such analysis resulted in implied values of
EPS Common Stock that ranged from $1.17 billion to $1.79 billion, as compared
with an implied equity value for the transaction of $923 million based upon the
Exchange Ratio and a closing price of Concord Common Stock on NASDAQ on November
16, 1998 of $27.56.
Comparable Publicly Traded Company Analysis
William Blair reviewed and compared certain financial information
relating to EPS to corresponding financial information, ratios and public
market multiples for ten publicly-traded corporations in the transaction
processing industry: Affiliated Computer Services; Automatic Data Processing;
Bisys Group Inc.; Envoy Corp.; First Data Corp.; FIserv Inc.; National Data
Corp.; Nova Corp.; Paymentech Inc.; and Total System Services Inc. (the
"Selected Companies"). William Blair calculated and compared various financial
multiples and ratios. The multiples of EPS were calculated using the implied
net equity value of $923 million and a total enterprise value of $1.03 billion,
each of which is based upon a closing price of Concord Common Stock on NASDAQ
on November 16, 1998 of $27.56.
William Blair reviewed a range of multiples for the Selected
Companies, but focused its analysis on the price-to-earnings multiples for the
1998 ("1998E P/E Multiple") and 1999 ("1999E P/E Multiple") calendar years.
William Blair's analysis of the Selected Companies indicated that 1998E P/E
Multiples ranged from 16.9x to 77.7x, with a median of 29.0x and a top quartile
multiple of 39.9x, compared to 35.7x for EPS; (d) 1999E P/E Multiples ranged
from 15.0x to 62.1x, with a median of 23.4x and a top quartile multiple of
30.8x, compared to 25.4x for EPS. William Blair also considered total
enterprise value as a multiple of sales for the latest twelve months ("LTM")
and LTM EBIT. William Blair's analysis of the Selected Companies indicated that
multiples of LTM sales ranged from 1.6x to 10.9x, with a median of 3.1x and a
top quartile multiple of 4.7x, compared to 4.6x for EPS, and multiples of LTM
EBIT ranged from 9.1x to 55.2x, with a median of 18.6x and a top quartile
multiple of 32.9x, compared to 19.4x for EPS.
31
<PAGE> 41
Comparable Transaction Analysis
William Blair reviewed certain financial aspects of selected mergers
and acquisitions transactions in the U.S. transaction processing industry,
including BankAmerica Corp.'s pending acquisition of BA Merchant Services, Nova
Corp.'s acquisition of PMT Services Inc., Associates First Capital Corp.'s
acquisition of SPS Payment Systems Inc., National Data Corp.'s acquisition of
Physician Support Systems Inc., FIserv Inc.'s acquisition of BHC Financial
Inc., First USA Paymentech Inc.'s acquisition of GENSAR Holdings Inc.,
Affiliated Computer Services Inc.'s acquisition of The Genix Group, First USA
Paymentech Inc.'s acquisition of Little & Company, Ceridian Corp.'s acquisition
of Comdata Holdings Corp., First Data Corp.'s acquisition of First Financial
Management Corp., First Data Corp.'s acquisition of Card Establishment Services
and First Data Corp.'s acquisition of Envoy Corp.'s merchant processing and
point of sale unit (collectively, the "Comparable Transactions"). Among the
ratios reviewed by William Blair were total enterprise value as a multiple of,
among other things, historical net sales and historical EBIT. The historical
net sales multiples of the Comparable Transactions based upon the total
enterprise values ranged from 1.6x to 7.0x, with a median of 3.2x and a top
quartile multiple of 4.1x. The historical EBIT multiples of the Comparable
Transactions based upon the total enterprise values ranged from 7.5x to 38.5x,
with a median of 12.2x and a top quartile multiple of 29.1x. These multiples may
be compared with the implied total enterprise multiples of the Merger of 4.6x
historical net sales and 19.4x historical EBIT.
No company or transaction used in the comparable analyses is identical
to EPS or the Merger. Accordingly, an analysis of the results of the foregoing
is not entirely mathematical; rather it involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the comparable companies and mergers and acquisitions transactions and other
factors that could affect the acquisition or public trading values of the
companies analyzed.
Pro Forma Merger Consequences Analysis
William Blair analyzed certain pro forma effects of the Merger on the
earnings and capitalization of the combined company based on the Financial
Forecasts. William Blair looked at the pro forma effects both with and without
the estimates by the management of Concord of the possible benefits (in the
form of cost savings and revenue enhancements) (the "Synergies") that might be
realized following the Merger. The Concord management estimates of the possible
(pre-tax) Synergies used by William Blair were as follows: approximately $6.9
million benefit to operating income during the first year following the Merger,
approximately $17.8 million benefit during the second year following the Merger
and approximately $30.9 million benefit during the third year following the
Merger. William Blair expressed no view on whether the Synergies could be
realized. In addition, William Blair assumed, after consultation with Concord
management, that the Merger, among other things, would be accounted for under
the pooling method of accounting. Based on various assumptions including those
described above, William Blair observed that, without the Synergies, the Merger
would result in accretion in earnings per share on a pro forma basis of
approximately 4.0% in 1998, 5.0% in 1999, and 6.5% in 2000 from Concord's
stockholders' point of view. With the Synergies, William Blair observed
32
<PAGE> 42
that the Merger would result in accretion in earnings per share on a pro forma
basis of approximately 8.8% in 1998, 8.5% in 1999, and 13.3% in 2000 from
Concord's stockholders' point of view.
Other Factors and Analyses
In rendering its opinion, William Blair considered various other
factors and conducted certain additional analyses, including, among other
things, a review of the effect of the transaction on Concord's revenue and
earnings per share growth rates as estimated by Wall Street analysts and
reviewed by Concord's management. On a stand-alone basis, Concord's revenue was
projected to grow 39.6% in 1998, 33.6% in 1999 and at a compound annual growth
rate of 36.1% from 1997 to 2000 while its earnings per share were projected to
grow 56.3% in 1998, 36.6% in 1999 and at a compound annual growth rate of 41.3%
from 1997 to 2000. The revenue of the combined company, without the Synergies,
is projected to grow, on a pro forma basis, at 28.5% in 1998, 26.5% in 1999 and
at a compound annual growth rate of 27.8% from 1997 to 2000, while its earnings
per share, on a pro forma basis, are projected to grow 50.4% in 1998, 37.9% in
1999 and at a compound annual growth rate of 40.5% from 1997 to 2000. Including
the Synergies, the combined company's revenue is projected to grow, on a pro
forma basis, at 28.5% in 1998, 37.1% in 1999 and at a compound annual growth
rate of 34.4% from 1997 to 2000 while its earnings per share, on a pro forma
basis, are projected to grow 50.4% in 1998, 42.4% in 1999 and at a compound
annual growth rate of 43.5% from 1997 to 2000.
In arriving at its written opinion dated November 20, 1998, and in
discussing its November 20, 1998 opinion with Concord's board of directors,
William Blair performed various financial analyses, portions of which are
summarized above. The summary set forth above does not purport to be a complete
description of William Blair's analyses. William Blair believes that its
analyses must be considered as a whole and that selecting portions of its
analyses, without considering all analyses, could create an incomplete view of
the process underlying the opinion. In performing its analyses, William Blair
made numerous assumptions with respect to industry performance, general
business and economic conditions and other matters, many of which are beyond
the control of Concord or EPS. The analyses performed by William Blair are not
necessarily indicative of actual values or actual future results, which may be
significantly more or less favorable than suggested by such analyses. In
addition, analyses relating to the values of businesses do not purport to be
appraisals or to reflect actual market valuations or trading ranges, which may
vary significantly from amounts set forth above.
Concord retained William Blair to act as its exclusive financial
adviser in connection with the Merger and related matters based upon its
qualifications, expertise, and reputation in investment banking in general and
mergers and acquisitions specifically. William Blair is a nationally recognized
investment banking firm and is regularly engaged in the valuation of businesses
and their securities in connection with mergers and acquisitions and for other
purposes.
In consideration for William Blair's services in connection with the
Merger, Concord has agreed to pay William Blair a fee of $2 million, payable
at, and contingent upon, closing of the
33
<PAGE> 43
Merger. In addition, Concord has agreed to indemnify William Blair and its
affiliates, and their respective members, principals, partners, directors,
officers, employees, agents, controlling persons and successors against certain
expenses and liabilities, including liabilities under the Federal securities
laws.
INTEREST OF WILLIAM BLAIR AND AFFILIATES IN CONCORD
Richard P. Kiphart, a Principal of William Blair and a Director of
Concord, holds 3,716,744 shares of Concord Common Stock, representing 3.8% of
the outstanding common stock of Concord as of the Record Date. Certain other
principals of William Blair beneficially own an aggregate of 2,854,847 shares
of Concord Common Stock, representing 2.9% of the outstanding common stock of
Concord prior to the Merger. In addition, certain mutual funds affiliated with,
and certain discretionary accounts advised by, William Blair beneficially own
shares of Concord's Common Stock.
EFFECTIVE TIME OF THE MERGER
Subject to the conditions to the obligations of the parties to
complete the Merger, the Merger will become effective when a Certificate of
Merger reflecting the Merger is filed with the Secretary of State of the State
of Delaware. Concord cannot assure that the necessary stockholder and
regulatory approvals of the Merger will be obtained or that other conditions
precedent to the Merger can or will be satisfied. Concord anticipates that all
conditions to consummation of the Merger will be satisfied so that the Merger
can be completed on or about the end of February 1999. However, completion of
the Merger could be delayed.
Either EPS or Concord may terminate the Agreement if the Merger is not
completed by August 30, 1999, unless it is not completed because of the willful
breach of the Agreement by the party seeking termination. This date may also be
extended by either party to no later than November 20, 1999 if necessary to
obtain all required regulatory approvals. See "-- Conditions to Consummation of
the Merger" and "-- Waiver, Amendment, and Termination."
TERMINATION FEE
The Agreement requires Concord to pay EPS $5,000,000 as liquidated
damages if the stockholders of Concord do not approve the Share Issuance
Proposal. However, if the Agreement is terminated by either Concord or EPS for
any other reason, Concord will not be obligated to pay a termination fee to
EPS.
There is no provision in the Agreement for EPS to pay Concord a
termination fee in the event the Merger is not consummated. The EPS
stockholders have already approved the Agreement and the Merger. It was a
condition precedent to Concord entering into the Agreement that First Union,
KeyCorp, PNC and National City enter into agreements to support the Merger.
34
<PAGE> 44
CONDITIONS TO CONSUMMATION OF THE MERGER
Concord and EPS are required to complete the Merger only after the
satisfaction of various conditions set forth in Article VI of the Agreement.
These conditions include, without limitation:
(i) the holders of a majority of the voting power of Concord
present at the Special Meeting must approve the issuance of
shares of Concord Common Stock pursuant to the Agreement;
(ii) Concord and EPS must receive certain required regulatory
approvals;
(iii) Each of Concord and EPS must receive the written opinion of
its respective counsel that the Merger will qualify as a
tax-free reorganization for federal income tax purposes;
(iv) the representations and warranties of EPS and Concord as set
forth in the Agreement must be accurate in all material
respects as of the date of the Agreement and as of the date
the Merger becomes effective;
(v) EPS and Concord must perform all of their respective
agreements and comply with all of their respective covenants
as set forth in the Agreement;
(vi) EPS and Concord must receive all other consents that may be
required to complete the Merger or to prevent any default
under any contract or permit which would be reasonably likely
to have, individually or in the aggregate, a material adverse
effect on EPS or Concord;
(vii) EPS must receive a letter from its independent accountants as
to its ability to be a party to a business combination
accounted for as a pooling-of-interests and Concord must
receive a letter from its independent accountants to the
effect that the Merger will qualify for pooling-of-interests
accounting treatment;
(viii) the absence of any law or order or any action taken by any
court, governmental, or regulatory authority of competent
jurisdiction prohibiting or restricting the Merger or making
it illegal; and
(ix) certain other conditions must be satisfied, including the
receipt of various certificates from the officers of EPS and
Concord.
Neither Concord nor EPS can assure Concord's stockholders as to when
or if all of the conditions to the Merger can or will be satisfied or waived by
the party permitted to do so. If the Merger is not completed on or before
August 30, 1999, either EPS or Concord may terminate the Agreement and abandon
the Merger, unless the failure to complete the Merger was due to willful breach
of the Agreement by the party seeking such termination. Under certain
circumstances,
35
<PAGE> 45
such date may be extended by either party if all regulatory approvals have not
been obtained by that date. See "-- Waiver, Amendment, and Termination."
REGULATORY APPROVAL
Concord must receive the prior approval of the Federal Reserve to
acquire EPS. There is no assurance that such regulatory approval will be
obtained or when it will be obtained. On December 24, 1998, Concord filed an
application for prior approval to acquire EPS with the Federal Reserve. As of
the Record Date, the Federal Reserve had not passed on such application.
It is a condition to the completion of the Merger that Concord and EPS
receive all necessary regulatory approvals to the Merger.
WAIVER, AMENDMENT, AND TERMINATION
To the extent permitted by law, Concord and EPS may agree in writing
to amend the Agreement, whether before or after either party's stockholders
have approved the Agreement. In addition, before or at the time the Merger
becomes effective, either EPS or Concord, or both, may waive any default in the
performance of any term of the Agreement by the other party or may waive or
extend the time for the compliance or fulfillment by the other party of any and
all of its obligations under the Agreement. In addition, either Concord or EPS
may waive any of the conditions precedent to its obligations under the
Agreement, unless a violation of any law or governmental regulation would
result. To be effective, a waiver must be in writing and signed by a duly
authorized officer of EPS or Concord, as the case may be.
At any time before the Merger becomes effective, Concord and EPS may
agree to terminate the Agreement. In addition, either EPS or Concord may
terminate the Agreement in the following circumstances:
(i) in certain circumstances, upon the inaccuracy of any
representation or warranty of a party contained in the
Agreement if the inaccuracy cannot be or has not been cured
within 30 days after the giving of written notice to the
breaching party of such inaccuracy (provided that the
terminating party is not itself in breach of the Agreement);
(ii) if a material breach by the other party of any covenant or
agreement contained in the Agreement cannot be or has not
been cured within 30 days after the giving of written notice
to the breaching party of such breach (provided that the
terminating party is not itself in breach of the Agreement);
(iii) if any court or other governmental entity having jurisdiction
over Concord or EPS shall have issued an order, decree or
ruling or taken any other action permanently enjoining,
restraining or otherwise prohibiting the Merger, and such
order, decree, ruling or other action shall have become final
and non-appealable;
36
<PAGE> 46
(iv) if the stockholders of Concord fail to approve the Share
Issuance Proposal at the Special Meeting; provided, however,
that Concord cannot terminate the Agreement under this
condition if it has not complied with its obligations under
the Agreement relating to the holding of the Special Meeting
and the recommendation of Concord's board of directors that
Concord's stockholders approve the Share Issuance Proposal;
(v) if Concord's board of directors resolves not to recommend
that the Concord stockholders vote "FOR" approval of the
Share Issuance Proposal or if Concord's board of directors
shall have qualified, modified or withdrawn such
recommendation, EPS may terminate the Agreement; and
(vi) if the Merger is not consummated by August 30, 1999, provided
that the failure to consummate is not caused by any willful
breach of the Agreement by the party electing to terminate,
and provided further that such date may be extended by either
party to a date not later than November 20, 1999 if necessary
to obtain all regulatory approvals; and
EPS may also terminate the Agreement pursuant to the relevant
provisions of the Agreement described in " -- Possible Adjustment of Exchange
Ratio Based Upon the Market Price of Concord Common Stock" on page 23 hereof.
Article VII of the Agreement contains the provisions regarding the termination,
amendment and waiver of the Agreement and provisions thereof.
If the Merger is terminated, the Agreement will become void and have
no effect, except that certain provisions of the Agreement, including those
relating to the obligations to share certain expenses and maintain the
confidentiality of certain information obtained, will survive. Termination of
the Agreement will not relieve any breaching party from liability for any
uncured willful breach of a representation, warranty, covenant, or agreement.
See "-- Expenses and Fees."
CONDUCT OF BUSINESS PENDING THE MERGER
Article IV of the Agreement contains various covenants of Concord and
EPS regarding the manner in which they will operate their respective businesses
pending completion of the Merger. In general, these covenants are designed to
ensure that EPS and Concord continue to conduct their respective businesses
only in the usual, regular, and ordinary course before the Merger becomes
effective and to impose certain limitations on the operations of EPS and its
subsidiaries during such time period. The covenants also limit Concord's
ability, while the transaction is pending, to change its capital structure,
amend its charter or by-laws or engage in an acquisition transaction which
could reasonably be expected to adversely effect Concord's ability to complete
the Merger or to delay or impede any regulatory approvals or consents required
for the Merger.
37
<PAGE> 47
Concord and EPS have also agreed not to take any action that would
jeopardize the treatment of the Merger as a pooling-of-interests for accounting
purposes or as a tax-free reorganization under the Internal Revenue Code.
Concord and EPS have each agreed to use reasonable best efforts to take all
actions necessary to complete the Merger and the other transactions
contemplated by the Agreement and to use reasonable best efforts not to take
any action which would cause any of its respective representations and
warranties to be untrue or result in a breach of any covenant made by it in the
Agreement.
MANAGEMENT AND OPERATIONS AFTER THE MERGER
The Merger will not change the present management team or board of
directors of Concord. Information concerning the management of Concord is
included in the documents incorporated by reference in this proxy statement.
See "Where You Can Find More Information."
In the Merger, the board of directors of CEFT, Inc., all of whom are
executive officers of Concord, will become the members of the board of
directors of EPS as the corporation surviving the Merger. The officers of EPS
shall continue to be the officers of EPS after the Merger.
Concord believes that it is vitally important to the integration of
the respective businesses of Concord and EPS, and to the future profitability
and operations of the combined entities that senior management of EPS continue
their employment by EPS or Concord after the Merger is completed. Accordingly,
Concord anticipates that after the Merger is completed, it will issue to senior
executives and employees of EPS options to acquire approximately 900,000 shares
of Concord Common Stock under the Plan. The options would be granted at the
fair market value of Concord Common Stock on the date of the grant.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Richard P. Kiphart, a Principal of William Blair and a Director of
Concord, holds 3,716,744 shares of Concord Common Stock, representing 3.8% of
the outstanding common stock of Concord prior to the Merger. Certain other
principals of William Blair beneficially own an aggregate of 2,854,847 shares
of Concord Common Stock, representing 2.9% of the outstanding Concord Common
Stock prior to the Merger. In addition, certain mutual funds affiliated with,
and certain discretionary accounts advised by, William Blair beneficially own
shares of Concord's Common Stock. William Blair will be paid a fee of
$2,000,000 in the event the Merger is consummated. If the Merger is not
consummated, Concord would pay William Blair an amount necessary to reimburse
William Blair for all out-of-pocket expenses incurred in connection with the
Merger.
Concord's board of directors was aware of the interests of Mr. Kiphart
and William Blair when considering the fairness opinion delivered by William
Blair. See "-- Interest of William Blair and Affiliates in Concord."
38
<PAGE> 48
ACCOUNTING TREATMENT
It is anticipated that the Merger will be accounted for as a
pooling-of-interests. Under the pooling-of-interests method of accounting, the
recorded amounts of the assets and liabilities of EPS will be carried forward
at their previously recorded amounts, and EPS's historic operating results will
be combined with Concord's results.
In order for the Merger to qualify for pooling-of-interests accounting
treatment, substantially all (90% or more) of the outstanding voting stock of
EPS must be exchanged for Concord Common Stock with substantially similar
terms. There are certain other criteria that must be satisfied in order for the
Merger to qualify as a pooling-of-interests. Some of the criteria cannot be
satisfied until after the Merger becomes effective. In addition, it is a
condition to closing the Merger that Concord's independent accountants deliver
a letter to Concord to the effect the Merger will qualify for
pooling-of-interests accounting treatment. Likewise, it is a condition
precedent to EPS's obligation to consummate the Merger that it shall have
received a letter of its independent accountants to the effect that it can be a
party to a business combination to be accounted for as a pooling-of-interests.
Certain conditions will be imposed on the exchange of EPS Common Stock
for Concord Common Stock in the Merger by affiliates of EPS and Concord.
Certain restrictions will also be imposed on the transferability of the Concord
Common Stock received by affiliates of EPS in the Merger. These conditions and
restrictions will be imposed in order, among other things, to ensure the
availability of pooling-of-interests accounting treatment.
EXPENSES AND FEES
Concord and EPS will each pay its own expenses in connection with the
merger, including filing, registration and application fees, printing fees, and
fees and expenses of its own financial or other consultants, investment
bankers, accountants, and counsel.
RESALES OF CONCORD COMMON STOCK: REGISTRATION RIGHTS
Concord Common Stock to be issued to stockholders of EPS in the Merger
will not have been registered under the Securities Act of 1933, as amended, or
with any state securities administrator. All shares of Concord Common Stock
received by stockholders of EPS in the merger will be "restricted securities"
after the Merger and will, therefore, be subject to various restrictions on
resale.
Since the shares of Concord Common Stock received in the Merger will
be restricted securities and, therefore, less liquid than if they had been
registered with the SEC and could be sold on NASDAQ, and since the number of
shares to be received by the stockholders of EPS, particularly the five
principal stockholders, would be a significant number of shares, it was a
condition to EPS entering into the Agreement that Concord agree to register the
shares of Concord Common Stock issued in the Merger on behalf of the EPS
stockholders. Concord's obligations to register such shares are set forth in
the Registration Rights Agreement, a copy of which is attached hereto as
Appendix B. You should read the entire Registration Rights
39
<PAGE> 49
Agreement. The following is a brief summary of material terms of the
Registration Rights Agreement.
Pursuant to the Registration Rights Agreement, Concord has agreed to
register the shares of Concord Common Stock issued in the Merger under certain
conditions and subject to certain conditions. First, those persons who hold
Concord Common Stock issued in the Merger will have the right to require
Concord to file a registration statement with the SEC to register for resale
for cash some or all of the shares they own, and for Concord to pay
substantially all of the expenses associated with such registrations. This is
commonly referred to as a "demand registration right." Such holders have the
right to demand two separate registrations; however, the first demand cannot be
made prior to the later of (i) April 30, 1999, or (ii) 15 days following the
first full calendar month of combined business operations after the Merger is
completed. Further, no demand for registration may be made for 180 days
following the earlier of the sale of shares of Concord Common Stock having a
market value of at least $200,000,000 by the former EPS stockholders pursuant
to a "piggyback registration" referred to below or the termination of such
piggyback registration prior to such sale. In addition, no demand for
registration may be made for 180 days after the earlier of the completion or
termination prior to completion of a registration pursuant to a demand for
registration under the Registration Rights Agreement.
In addition, for three years after completion of the Merger, should
Concord register shares of Concord Common Stock for sale to the public for
cash, except for certain registrations for matters such as acquisitions or for
employee benefit purposes, then the holders of Concord Common Stock received by
the EPS stockholders in the Merger can require Concord to include all or some
portion of their unsold shares in those registrations. These are commonly
referred to as "piggyback registration rights." Concord would be able to carve
back the number of shares to be registered by the holders exercising piggyback
rights to the extent deemed necessary by Concord's underwriters to ensure that
the additional shares would not adversely impact Concord's ability to sell the
shares it proposed to sell in the registration in the first place.
The registration and sale in the public market of such a large number
of shares of Concord Common Stock over the next three years could have an
adverse impact on the market price of Concord Common Stock and on the ability
of Concord to raise additional capital through the sale of additional shares of
authorized but unissued common stock. While Concord believes that it has
certain protections under the Registration Rights Agreement, such as the
provision prohibiting the exercise of a demand registration right within 180
days of the completion of a previous registered offering pursuant to a demand
registration and the right to reduce the number of shares it would have to
register in a given piggyback registration, the fact still remains that it will
more than likely be required to register and participate in the selling efforts
of a significant number of shares of Concord Common Stock over the next three
years.
In addition to the foregoing, SEC guidelines regarding qualifying for
the "pooling-of-interests" method of accounting treatment limit sales of shares
of Concord Common Stock and EPS Common Stock by their respective "affiliates"
in connection with the Merger. SEC guidelines indicate that the
"pooling-of-interests" method of accounting generally will not be challenged on
the basis of sales by "affiliates" of the acquiring or acquired company if such
40
<PAGE> 50
affiliates do not dispose of any of the shares of the corporation they own, or
shares of a corporation they receive in connection with a merger, during the
period beginning 30 days before the merger is consummated and ending when
financial results covering at least 30 days of post-merger operations of the
combined companies have been published.
EPS and Concord have agreed to use their reasonable best efforts to
cause each person who may be deemed to be an affiliate of such party to execute
and deliver to the other, an agreement intended to ensure compliance with the
Securities Act of 1933, as amended, and to preserve the ability of the Merger
to be accounted for as a "pooling-of-interests." Each such affiliate must agree
not to sell, pledge, transfer, or otherwise dispose of any shares of Concord or
EPS Common Stock held by the affiliate except as contemplated by the Agreement
or the affiliate agreement. In addition, each affiliate must agree not to sell,
pledge, transfer or otherwise dispose of any Concord Common Stock received in
the Merger (1) except in compliance with the Securities Act of 1933, as
amended, and the rules and regulations under the Securities Act of 1933, as
amended, and (2) until such time as financial results covering 30 days of
combined operations of Concord and EPS have been published. Prior to
publication of such results, Concord will not transfer on its books any shares
of Concord Common Stock received by an affiliate of EPS in the Merger. The
stock certificates representing Concord Common Stock issued to affiliates in
the Merger may bear a legend summarizing these restrictions on transfer.
COMPARATIVE MARKET PRICES AND DIVIDENDS
Concord Common Stock is traded on NASDAQ under the symbol "CEFT". EPS
Common Stock is not traded on any exchange or in any other established market.
There are no bid or asked prices available for EPS Common Stock. As of January
12, 1999, there were 12 holders of EPS Common Stock. The following table sets
forth, for the indicated periods, the high and low closing sale prices for the
Concord Common Stock as reported by NASDAQ. Concord has not paid any cash
dividends on Concord Common Stock. The stock prices have been restated to give
effect to stock splits and stock dividends. The stock prices do not include
retail mark-ups, mark-downs or commissions.
<TABLE>
<CAPTION>
Price Range
High Low
------ ------
<S> <C> <C> <C>
1996 First Quarter $13.22 $ 8.37
Second Quarter 16.17 11.55
Third Quarter 19.00 14.33
Fourth Quarter 21.00 14.83
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
</TABLE>
41
<PAGE> 51
<TABLE>
<CAPTION>
Price Range
High Low
------ ------
<S> <C> <C> <C>
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
</TABLE>
On November 23, 1998, the last trading day prior to the public
announcement of the Merger, the last sale price of Concord Common Stock as
reported on NASDAQ was $28.4375 per share. On January 11, 1999, the last sale
price of the Concord Common Stock as reported by NASDAQ was $40.4375.
EPS has paid dividends aggregating $37,628 per year on the outstanding
EPS preferred stock. EPS has not paid any dividends on its outstanding common
stock. The Agreement provides that EPS may not declare and pay cash dividends
on the shares of EPS Common Stock without the consent of Concord. EPS may pay
its regular cash dividends on its outstanding preferred stock.
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS,
DIRECTORS & EXECUTIVE OFFICERS OF CONCORD
Concord's only issued and outstanding class of voting securities is
its Common Stock, par value $0.33 1/3 per share. Each stockholder of record on
January 12, 1999, the Record Date, is entitled to one vote on each proposal
submitted for a stockholder vote at the Special Meeting for each share
registered in such stockholder's name.
The following table sets forth the ownership of the Company's Common
Stock by each person who is known by the Company to own beneficially more than
5% of the outstanding Concord Common Stock, by each director who owns shares
and by all directors and officers of Concord as a group. The information in the
table is presented as of the Record Date, except where noted otherwise. The
number of shares owned by each such person or entity on the Record Date does
not include the number of shares of Concord Common Stock subject to options
exercisable within 60 days from the Record Date by the person or the aggregation
of persons for which such percentage ownership is being determined. As of the
Record Date there were 97,870,757 shares of Concord Common Stock issued and
outstanding and the percentage ownership reflected in the following table is
based on that number.
42
<PAGE> 52
<TABLE>
<CAPTION>
PERCENT OF
OUTSTANDING
BENEFICIAL OWNER(1) SHARES OWNED SHARES
-------------------- ------------ -----------
<S> <C> <C>
Dan M. Palmer, Chairman & CEO and Director(2) 0 0
Edward A. Labry III, President & Director(3) 3,078 0
Joyce Kelso, Director 255,898 0
Richard P. Kiphart, Director(4) 3,715,619 3.8%
Richard M. Harter, Director(5) 72,200 0
Jerry D. Mooney, Director(5) 27,750 0
Douglas C. Altenbern, Director 12,000 0
David C. Anderson, Director(5) 7,593 0
J. Richard Buchignani, Director(5) 7,659 0
Paul Whittington, Director(5) 5,062 0
---------------------------
All executive officers and directors
as a group (10 persons) 4,106,859 4.2%
===========================
William Blair & Company, L.L.C
22 West Adams Street
Chicago, IL 60606(6) 15,132,362 15.5%
AMVESCAPP PLC and Subsidiaries
11 Devonshire Square
London EC2M 4YR England(7) 6,641,755 6.8%
Capital Research and Management Company
333 South Hope Street
Los Angeles, CA 90071(8) 6,674,850 6.8%
</TABLE>
- ---------------------
(1) The address of each beneficial owner who is also a director, is the
same as Concord's.
(2) Shares owned does not include 1,479,373 shares covered by unexercised
stock options. If these options were exercised, Mr. Palmer would own
1.5% of the outstanding shares of Concord Common Stock.
(3) Shares owned does not include 1,026,563 shares covered by unexercised
stock options. If these options were exercised, Mr. Labry would own
1.1% of the outstanding shares of Concord Common Stock.
(4) Shares owned does not include shares of Concord Common Stock owned by
other principals of William Blair, Concord's investment adviser in
connection with the proposed acquisition of EPS, nor does it include
shares beneficially owned or controlled by William Blair.
43
<PAGE> 53
(5) Shares owned does not include 9,666 shares covered by unexercised stock
options.
(6) Based on telephone conversation with the Compliance Department of
William Blair. Includes 5,037,760 shares as to which William Blair has
sole voting power and 15,132,362 shares as to which William Blair has
sole dispositive power. William Blair disclaims beneficial ownership as
to 10,094,602 of such shares.
(7) Based on a Schedule 13G dated as of February 11, 1998, filed by
AMVESCAP PLC and Subsidiaries, as adjusted for Concord's 3 for 2 stock
split in June, 1998.
(8) Based on a Schedule 13G dated as of July 9, 1998, filed by Capital
Research and Management Company (Capital), as adjusted for Concord's 3
for 2 stock split in June, 1998. Capital, acting as investment
advisers, disclaims beneficial ownership of these shares pursuant to
Rule 13d-4.
PRO FORMA COMBINED CONDENSED FINANCIAL DATA
The following Unaudited Pro Forma Combined Condensed Financial
Statements, including the notes thereto, are qualified in their entirety by
reference to and should be read in conjunction with the historical consolidated
statements of Concord and EPS, including the notes thereto, which are included
in this proxy statement or are incorporated herein by reference.
The Unaudited Pro Forma Combined Condensed Financial Statements assume
a business combination between Concord and EPS accounted for as a pooling of
interests and are based on each company's respective historical audited and
unaudited consolidated financial statements and notes thereto, which are
included in this proxy statement or incorporated herein by reference. The
Unaudited Pro Forma Combined Condensed Balance Sheet as of September 30, 1998,
combines Concord's and EPS's Condensed Consolidated Balance Sheets as of
September 30, 1998, giving effect to the Merger as if it had occurred on
September 30, 1998.
The Unaudited Pro Forma Condensed Combined Statements of Income combine
Concord's historical results for the nine months ended September 30, 1998 and
the years ended December 31, 1997, 1996 and 1995, with EPS's historical results
for the same periods, giving effect to the Merger as if it had occurred on
January 1, 1995.
Certain data and notes normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. The Unaudited Pro Forma Combined Condensed Financial
Statements provide information about the impact of the Merger by showing how it
might have affected the financial condition and results of operations of Concord
had the Merger actually been completed as of the dates indicated. The Unaudited
Pro Forma Combined Condensed Financial Statements are provided for informational
purposes only and are not necessarily indicative of actual results that would
have been achieved had the Merger been consummated at the beginning of the
periods presented or of future results.
44
<PAGE> 54
PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1998
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Pro Forma Combined
Concord EPS Adjustments Pro Forma
--------- --------- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 68,164 $ 16,425 $ 84,589
Securities available-for-sale 246,079 246,079
Accounts receivable 77,632 27,412 105,044
Due from stockholders 3,462 3,462
Inventories 7,554 578 8,132
Prepaid expenses and other current assets 5,640 2,448 8,088
Deferred income taxes 587 3,022 3,609
--------- --------- --------- --------
TOTAL CURRENT ASSETS 405,656 53,347 459,003
PROPERTY AND EQUIPMENT 109,629 180,870 290,499
Accumulated depreciation and amortization (65,950) (73,394) (139,344)
--------- --------- --------- ---------
43,679 107,476 151,155
OTHER ASSETS
Capitalized software development costs 16,133 16,133
Merchant contracts purchased, net 23,358 23,358
Other 4,781 4,781
INTANGIBLE ASSETS
Goodwill 82,071 82,071
Customer lists and other 30,970 30,970
--------- --------- --------- ---------
113,041 113,041
Accumulated amortization (35,001) (35,001)
--------- --------- --------- ---------
78,040 78,040
--------- --------- --------- ---------
TOTAL ASSETS $ 472,693 $ 259,777 $ -- $ 732,470
========= ========= ========= =========
</TABLE>
45
<PAGE> 55
PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1998
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Pro Forma Combined
Concord EPS Adjustments Pro Forma
-------- --------- ----------- ----------
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other liabilities $ 61,062 $ 21,125 $ 82,187
Accrued liabilities 7,883 35,380 43,263
Due to stockholders 1,153 1,153
Income taxes payable 9,405 9,405
Current maturities of long-term debt 230 25,000 25,230
Borrowings under credit arrangement 28,000 28,000
-------- -------- ----------- ---------
TOTAL CURRENT LIABILITIES 69,175 120,063 189,238
LONG-TERM DEBT, LESS CURRENT MATURITIES 73,000 106,250 179,250
OTHER LONG-TERM LIABILITIES 14,544 14,544
DEFERRED INCOME TAXES 3,877 15,208 19,085
STOCKHOLDERS' EQUITY
Common stock 32,599 38 $ (38)
10,770 43,369
Preferred stock 752 (752)
Additional paid-in capital 108,606 196,162 752
(10,770)
38
(245,400) 49,388
Deemed dividend (245,400) 245,400
Retained earnings 183,292 52,160 235,452
Unrealized gain (loss) on securities, net of taxes 2,144 2,144
-------- -------- ----------- ---------
TOTAL STOCKHOLDERS' EQUITY 326,641 3,712 330,353
-------- -------- ----------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $472,693 $259,777 $ -- $ 732,470
======== ======== =========== =========
</TABLE>
46
<PAGE> 56
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma Combined
Concord EPS Adjustments Pro Forma
------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Revenue $ 266,570 $ 172,371 $ 18,169
(636) $ 456,474
Cost of Operations 197,042 106,710 18,169
(636) 321,285
Selling, General & Administrative 12,373 25,884 38,257
---------- --------- ---------- ---------
Operating income 57,155 39,777 96,932
Other (28) (28)
Interest income 12,209 544 12,753
Interest expense (2,692) (8,269) (10,961)
---------- --------- ---------- ---------
Income before taxes 66,672 32,024 98,696
Income taxes 22,789 13,462 36,251
---------- --------- ---------- ---------
Net income $ 43,883 $ 18,562 $ -- $ 62,445
========== ========= ========== =========
Basic earnings per share $ 0.45 $ 4.95 $ 0.48
========== ========= =========
Diluted earnings per share $ 0.44 $ 4.95 $ 0.47
========== ========= =========
Weighted average common shares 97,563 3,750 129,873
========== ========= =========
Weighted average shares and
assumed conversions 100,168 3,750 132,478
========== ========= =========
</TABLE>
47
<PAGE> 57
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma Combined
Concord EPS Adjustments Pro Forma
--------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Revenue $ 270,074 $ 202,310 $ 16,978
(513) $ 488,849
Cost of Operations 198,939 124,224 16,978
(513) 339,628
Selling, General & Administrative 16,664 33,267 49,931
--------- --------- ---------- ---------
Operating income 54,471 44,819 - 99,290
Other (38) (38)
Interest income 11,731 556 12,287
Interest expense (930) (13,146) (14,076)
--------- --------- ---------- ---------
Income before taxes 65,272 32,191 - 97,463
Income taxes 23,590 14,181 37,771
--------- --------- ---------- ---------
Net income $ 41,682 $ 18,010 $ - $ 59,692
========= ========= ========== =========
Basic earnings per share $ 0.43 $ 4.80 $ 0.46
========= ========= =========
Diluted earnings per share $ 0.42 $ 4.80 $ 0.45
========= ========= =========
Weighted average common shares 96,527 3,750 128,837
========= ========= =========
Weighted average shares and
assumed conversions 99,395 3,750 131,705
========= ========= =========
</TABLE>
48
<PAGE> 58
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma Combined
Concord EPS Adjustments Pro Forma
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Revenue $ 166,700 $ 179,490 $ 8,650
(365) $ 354,475
Cost of operations 119,675 112,291 8,650
(365) 240,251
Selling, general & administrative 9,724 32,847 42,571
--------- --------- --------- ---------
Operating income 37,301 34,352 - 71,653
Other (38) (38)
Interest income 4,104 364 4,468
Interest expense (90) (14,674) (14,764)
--------- --------- --------- ---------
Income before taxes and minority interest 41,315 20,004 - 61,319
Income taxes 14,526 8,821 23,347
--------- --------- --------- ---------
Net income before minority interest 26,789 11,183 37,972
Minority interest 240 240
-------- --------- --------- ---------
Net income $ 26,789 $ 10,943 $ - $ 37,732
======== ========= ========= =========
Basic earnings per share $ 0.31 $ 3.20 $ 0.32
======== ========= =========
Diluted earnings per share $ 0.30 $ 3.20 $ 0.31
======== ========= =========
Weighted average common shares 86,226 3,417 118,536
======== ========= =========
Weighted average shares and
assumed conversions 89,903 3,417 122,213
======== ========= =========
</TABLE>
49
<PAGE> 59
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma Combined
Concord EPS Adjustments Pro Forma
--------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Revenue $ 127,762 $ 163,379 $ 4,735
(324) $ 295,552
Cost of operations 90,579 102,366 4,735
(324) 197,356
Selling, general & administrative 10,913 35,755 46,668
--------- --------- ---------- ---------
Operating income 26,270 25,258 -- 51,528
Other (38) (38)
Interest income 2,219 333 2,552
Interest expense (103) (16,215) (16,318)
--------- --------- ---------- ---------
Income before taxes and minority interest 28,386 9,338 -- 37,724
Income taxes 10,146 5,481 15,627
--------- --------- ---------- ---------
Net income before minority interest 18,240 3,857 -- 22,097
Minority interest (75) 1,314 1,239
--------- --------- ---------- ---------
Net income $ 18,315 $ 2,543 $ -- $ 20,858
========= ========= ========== =========
Basic earnings per share $ 0.22 $ 1.05 $ 0.18
========= ========= =========
Diluted earnings per share $ 0.21 $ 1.05 $ 0.18
========= ========= =========
Weighted average common shares 83,016 2,420 115,326
========= ========= =========
Weighted average shares and
assumed conversions 86,789 2,420 119,099
========= ========= ========
</TABLE>
50
<PAGE> 60
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS
BASIS OF PRESENTATION
The Unaudited Pro Forma Combined Condensed Financial Statements present the pro
forma effect of the assumed combination of Concord and EPS using the pooling of
interests method of accounting and, as a result, the unaudited pro forma
combined condensed balance sheet and statements of operations are presented as
if the combining companies had been combined for all periods presented.
The Unaudited Pro Forma Combined Condensed Financial Statements, including the
notes thereto, should be read in conjunction with the historical consolidated
financial statements of Concord and EPS, which are included in this proxy
statement or are incorporated herein by reference. The pro forma combining
financial statements are presented for comparative purposes only and are not
intended to be indicative of actual results had the Merger occurred as of the
dates indicated above nor do they purport to indicate results which may be
obtained in the future.
STOCKHOLDERS' EQUITY
Stockholders' equity components of common stock and additional paid-in capital
of Concord as of September 30, 1998, have been adjusted to reflect the assumed
issuance of approximately 32,310,000 shares of Concord Common Stock in exchange
for all the issued and outstanding EPS Common Stock based upon the Exchange
Ratio of 7.9091 shares of Concord Common Stock for each share of EPS Common
Stock. The actual number of shares of Concord Common Stock to be issued will be
determined at the time of completion of the Merger based on the Exchange Ratio
and the number of shares of EPS Common Stock then outstanding. Additionally,
other equity components of EPS, namely the deemed dividend and preferred stock
resulting from the original formation of EPS, have been appropriately
reclassified against additional paid-in capital.
REVENUE AND COSTS OF OPERATIONS PRO FORMA ADJUSTMENTS
Two adjustments to the Pro Forma Combined Condensed Statements of Income for all
periods presented were necessary to properly reflect the revenue and cost of
operations components on a combined pro forma basis. In EPS's historical
financial statements, certain pass through customer billings were netted against
the corresponding operational expenses. To be consistent with Concord's revenue
recognition, the combined pro forma revenue and cost of operations have been
grossed up to reflect the total revenue received from customers and expenses
paid to vendors. Additionally, Concord currently pays transaction processing
expenses to both the MAC network and to the BUYPASS Corporation. As both
entities revenues are included in EPS's historical financial statements, the
revenue to EPS and expense to Concord were eliminated.
51
<PAGE> 61
MERGER-RELATED EXPENSES
The unaudited pro forma data are presented for informational purposes only and
do not give effect to any synergy that may occur due to the combining of
Concord's and EPS's existing operations. No detailed analysis of operations of
Concord and EPS has been completed to determine whether or to what extent any
restructuring charges may be necessary if the Merger is approved.
Correspondingly, no adjustments to the combined pro forma financial statements
have been included. However, if the Merger is approved, it is expected that such
an analysis may occur and restructuring charges may be incurred.
NET INCOME PER SHARE
Pro forma earnings per basic and diluted share for each period are based on the
combined weighted average number of shares of common stock outstanding (and
dilutive securities for diluted earnings per share), after adjusting Concord's
historical amounts for the conversion of outstanding shares of EPS Common Stock
into Concord Common Stock at the Exchange Ratio.
BUSINESS OF EPS
BUSINESS OF EPS
EPS provides electronic funds transfer ("EFT") processing services to
financial institutions and retailers throughout the United States, with 2.7
billion transactions expected to be processed in 1998. EPS operates principally
on the acquiring side of the payment processing business; that is, EPS acquires
and processes transactions that have been initiated by a consumer's action.
EPS's revenues are transaction and card based. Revenue is generated when a
consumer uses a plastic card (debit, credit or electronic benefits transfer), to
perform a financial transaction at an automated teller machine ("ATM") or
point-of-sale ("POS") device that receives services provided by EPS. EPS also
generates revenue from debit card processing, software, and support services.
EPS operates three business lines (EFT processing, operation of the MAC
ATM network and POS processing) through two operating subsidiaries, MONEY ACCESS
SERVICE INC. ("MAS") and BUYPASS Corporation ("BUYPASS"). Each subsidiary
services customers throughout all 50 states. EPS's standard customer contracts
are typically three to five years.
MAS performs EFT processing and operates the MAC EFT network. EFT
processing services include ATM terminal driving and monitoring, debit card
processing, authorization, and debit gateway services. The MAC EFT network is a
shared network of ATM and POS terminals that are branded MAC. Services include
transaction switching, settlement and reporting.
BUYPASS performs POS processing, which includes POS terminal driving,
transaction authorization, credit and debit gateways, telecommunications network
management, and settlement and reporting. All types of plastic cards are
acquired at the merchant location, but for
52
<PAGE> 62
credit cards BUYPASS offers a front-end solution, whereby the transaction is
authorized, captured, and then sent to a merchant bank processor for settlement
and funding of the merchant's account.
EPS was formed in 1992 as a joint venture between four major bank
holding companies: Bank One Corporation, CoreStates Financial Corp. (since
acquired by First Union Corporation), KeyCorp and PNC Bank Corp. A fifth
investor, National City Corporation, joined in 1995. Each organization now owns
approximately 20% of EPS and in aggregate they contribute approximately 24% of
EPS's 1998 revenue. EPS is headquartered in Wilmington, Delaware, with major
operations located in Wilmington, North Olmsted, Ohio, and Atlanta, Georgia.
COMPETITION
Although EPS operates in the transaction industry, the three business
lines of EPS are in different competitive environments. In EFT processing, EPS
competes to provide services principally for financial institutions and
independent service organizations that have chosen to outsource all or a portion
of their ATM and/or debit card processing. Principal competitors are other
non-bank processors. EPS is currently one of the largest processors in this
market, driving over 32,000 ATMs and providing gateway services to all major
credit and debit networks.
The MAC EFT network is a branded network that allows sharing of data
from financial institution members' ATMs, or from merchant locations, to
members' customer bank accounts. EPS operates one of the largest shared ATM
networks in the country under its MAC brand. Although there are ATMs that
display the MAC brand in all 50 states, the principal strength of the brand is
in the Middle Atlantic and Midwest states. Key competitors are other national
and regional ATM networks, especially those that have high membership in markets
overlapping the markets of EPS.
The market for POS processing is highly competitive, with national
banks, regional banks, non-bank processors, and independent service
organizations being the main competitors. Many of these competitors have greater
market shares, capital resources and integrated product lines than EPS.
For all business lines, EPS competes on the basis of price, quality,
customer service, and product functionality. EPS believes it has been able to
successfully compete in all business lines, but there are no assurances that
this will continue. Factors that can limit EPS's ability to successfully compete
in the future include, but are not limited to, competitive price pressure, new
technologies in these payment processing markets, and continuing consolidation
in the banking and retail industries, which make up the majority of EPS's
customer base.
PROPERTY
The following table sets forth certain information concerning the
principal facilities of EPS. The Data Center building in Wilmington is owned,
while all other facilities are leased.
53
<PAGE> 63
<TABLE>
<CAPTION>
Approximate
Area In Lease
Location Square Feet Primary Uses Expires
-------- ----------- --------------- --------
<S> <C> <C> <C>
Wilmington, Delaware 104,000 Corporate Offices; ATM 5/22/2005
Sales, Support and
Operations
Wilmington, Delaware 75,000 ATM Data Center and
Operations n/a
North Olmsted, Ohio 35,968 ATM Sales, Operations, 12/31/2003
and Data Center
Atlanta, Georgia 72,000 POS Sales, Operations, 2/29/2000
and Data Center
Pleasanton, California 10,083 POS Development 10/31/2000
Tampa, Florida 8,935 ATM Development 11/13/1999
Buffalo, New York 2,523 ATM Sales and support 9/13/2002
Burlington, Massachusetts 1,724 ATM Sales and support 3/31/2001
Ft. Wright, Kentucky 3,902 ATM Sales and support 9/30/2000
Pittsburgh, Pennsylvania 2,316 ATM Sales and support 8/31/2000
</TABLE>
MANAGEMENT; EMPLOYEES
EPS's senior management is comprised of Richard N. Garman, the
President and Chief Executive Officer of EPS, and seven other professionals with
extensive experience (an average of 24 years) in the financial services and
computer processing industries. The organization has been fully integrated
across subsidiaries and business lines, with key organizational areas being
technology, finance, legal and administrative functions, and sales and client
support functions.
Employment agreements are in effect for Mr. Garman 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 Mr. Garman). If a
release is signed, severance and benefits will be paid for one year (and for an
additional one year in the case of Mr. Garman) with options vesting.
As of October 31, 1998, EPS had 987 employees. The functional breakdown
of these employees is: Computer operations and telecommunications, 269; System
development and support, 163; Customer service and support, 340; and Sales,
general and administrative, 215.
54
<PAGE> 64
None of EPS's employees are represented by a labor union. EPS considers
its employee relations to be excellent.
ELECTRONIC PAYMENT SERVICES, INC.
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with EPS's financial
statements and footnotes which are attached to this proxy statement as Appendix
C.
IMPACT OF YEAR 2000
The Year 2000 preparedness efforts of EPS cover both information
technology ("IT") systems and non-IT systems. Non-IT systems are embedded
systems, 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 and software
and related systems.
EPS has instituted a five phase plan to resolve the Year 2000 issue so
that its IT and non- IT systems will function properly with respect to dates in
the year 2000 and thereafter. These five phases are: awareness, assessment,
renovation, validation and implementation. Based on progress to date, EPS has
substantially completed the awareness phase and the assessment phase for all
systems, as well as the renovation phase and validation phase for each of its
mission- critical systems. The validation phase includes an independent review
of results for all mission- critical systems by EPS's internal audit staff.
As of December 17, 1998, approximately 90% of the implementation phase
for mission critical systems had been completed. It is anticipated that all
mission critical systems will be implemented by January 31, 1999.
EPS's management believes that it has a plan in place to resolve the
Year 2000 issue in a timely and effective manner. If EPS does not complete the
phases of its plan that are now underway, then its ability to process
transactions for its customers could be adversely affected. The potential
liability or lost revenue under this scenario could have a material adverse
affect on EPS's financial condition and results of operations.
EPS's processing systems also require testing for Year 2000 compliance
with external entities including its customers, credit and debit networks, and
suppliers. As of December 17, 1998, approximately 30% of this customer and
network certification is complete. EPS has initiated formal communications with
all of its mission critical suppliers, to determine the extent to which EPS's
interface systems are vulnerable to those third parties' failure to remediate
their own Year 2000 issues. Responses have been received from all of these
mission critical suppliers, with approximately 78% reporting current Year 2000
compliance. It is estimated that
55
<PAGE> 65
third party certification testing will be substantially complete by June 30,
1999. The entire Year 2000 project is estimated to be completed no later than
September 30, 1999, which is prior to any anticipated impact on EPS. It is
anticipated that additional testing will take place after this date to insure
continued Year 2000 compliance.
There is no guarantee that the systems of other companies on which
EPS's systems rely will be converted in a timely manner. However, contingency
plans have been created for all mission critical vendor products and services.
The contingency plans will be further enhanced and expanded during the first
quarter of 1999, for both EPS's systems and third party exposures, based on an
evaluation of progress at that time.
EPS has spent approximately $4.0 million to date and anticipates
spending an additional $3.5 million to substantially complete its Year 2000
compliance program in accordance with its current schedule. These amounts
exclude hardware expenditures needed for normal business growth if timing of
acquisition has been accelerated to facilitate short-term Year 2000 testing. To
date, EPS has expensed all costs associated with its Year 2000 assessment and
related modifications of its software.
The costs and timing of this project are based on management's best
estimates, which were derived using numerous assumptions of future events. There
are no guarantees that these assumptions will prove to be correct, and therefore
actual results might differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to,
dependencies on third parties to complete their Year 2000 readiness and schedule
joint testing, and the availability and cost of appropriately trained personnel.
INTEREST RATE RISK
EPS has a $250 million unsecured promissory note payable to a
stockholder due in equal quarterly installments through 2003, which bears
interest at a fixed rate of 6.40%. Annual maturities of the note are $25 million
per year. As of September 30, 1998, the outstanding balance was $131.2 million.
Interest expense was $6.9 million in the first nine months of 1998. Risk exists
to the extent the fixed rate is materially above market rates, which EPS
believes is not currently the case.
EPS maintains a credit agreement with a third-party bank that provides
for short-term borrowings of up to $75 million. Borrowings under the agreement
are unsecured and bear interest at variable rates that EPS believes approximates
market rates. As of September 30, 1998, the outstanding balance was $28 million.
Interest expense was $1.4 million in the first nine months of 1998. Risk exists
to the extent the rates significantly increase, such that EPS materially exceeds
its plans for interest expense.
56
<PAGE> 66
RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 Compared to Three Months Ended September
30, 1997
For the quarter ending September 30, 1998, revenue increased 15.6%, or
$8.2 million, when compared to the same period of the prior year. This was
primarily due to a 22.1 million increase in transaction volume company-wide, and
an increase of 69% in ATM terminals driven.
Processing costs increased $5.6 million from this quarter in 1998
compared to 1997. As a percent of revenue, Processing costs rose slightly, from
58% to 59%, due to Year 2000 expenses. Selling, General and Administrative costs
were approximately flat comparing the third quarter of 1998 to the same period
in 1997.
For the third quarter of 1998, net income increased by 34.9%, or $1.8
million, when compared to the same quarter in 1997. This is attributed to
limiting overall expense growth in spite of the aforementioned volume growth.
During the third quarter, EPS signed contracts with four of its five
owners to extend their ATM processing contracts through the year 2004 and an
agreement with First Union Corporation to make certain minimum payments over the
same period. In 1998, these contracts in aggregate represent approximately 24%
of the annual revenue of EPS. These contracts are not impacted by a change of
control of either party.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
1997
For the first nine months of 1998, revenues increased 16.1% or $23.9
million, when compared to the same period of the prior year. ATM revenues
increased $18.1 million or 17% primarily due to a 16.7% increase in volume and
an increase in ATM terminals driven from 18,455 to 31,257. POS revenues
increased by $5.8 million or 13.9% due to a 27.4% increase in transaction
volume.
Processing costs increased $14.9 million for the first nine months of
1998 compared to the same period of the prior year. This increase is attributed
to Year 2000 compliance expenses, development expenses incurred in transitioning
to a single processing platform and expenses in support of the increased
volumes. Selling, General and Administrative costs were approximately flat
during this period.
Net income increased by $6.5 million or 54%, to a level of $18.6
million, during the first nine months of 1998 compared to the same period of the
prior year. This was primarily due to a lower rate of growth of operating
expenses compared to the rate of growth of revenues, and lower interest expense
due to a reduction by $20 million of total debt outstanding since December 31,
1997.
57
<PAGE> 67
Year Ended December 31, 1997 compared with Year Ended December 31, 1996
Revenues increased 12.7% to $202.3 million for the year ended December
31, 1997 compared with $179.5 million in 1996. The increase primarily resulted
from a 20.6% increase in billable ATM and POS transactions to 2.26 billion for
1997, compared to 1.87 billion in 1996. Of this increase, $5.0 million in
revenue resulted from the full year impact of 1996 sales, and revenues from
converted 1997 sales to new customers. The remaining $17.8 million of revenue
growth resulted from the sale of additional products and services and the
transaction growth of existing customers.
Processing costs increased 11.3% to $117.9 million for the year ended
December 31, 1997, compared with $106.0 million in 1996. The increase resulted
from additional off-line debit, telecommunications and other operating costs
associated with the higher volume of transactions. Also included in this is
depreciation expense, which increased 22% to $19.9 million for 1997, compared to
$16.3 million in 1996. This increase is attributed to increased depreciation
from the significant investments in EPS's transition to a single processing
platform. Processing costs as a percentage of revenues declined from 59.1% to
58.3%, reflecting continuing cost efficiencies as well as increased economies of
scale.
Selling, General and Administrative Expenses increased 1.3% to $33.3
million for the year ended December 31, 1997, compared with $32.8 million for
the same period in 1996. Selling, General and Administrative Expenses declined
to 16.4% of revenues for the year ended December 31, 1997, compared with 18.3%
in 1996, reflecting operational efficiencies.
Net interest expense decreased to $12.6 million for the year ended
December 31, 1997, compared with $14.3 million in 1996. This decrease relates to
the reduction of total debt outstanding to $179 million at year-end 1997,
compared to $225 million at year-end 1996.
Net Income before minority interest increased $6.8 million to $18.0
million for the year ended December 31, 1997, compared with net income of $11.2
million for the same period in 1996, due to the factors discussed above.
Year Ended December 31, 1996 compared with Year Ended December 31, 1995
Revenues increased by $16.1 million, to $179.5 million for the year
ended December 31, 1996 compared with $163.4 million in 1995. The increase
primarily resulted from a 19.9% increase to 1.87 billion in billable ATM and POS
transactions in 1996, compared to 1.56 billion in 1995. The transaction impact
was partially offset by price compression in the POS business line.
Processing costs increased 10.1% to $106.0 million for the year ended
December 31, 1996, compared with $96.3 million in 1995. The increase resulted
from telecommunications and other operating costs associated with the higher
volume of transactions. Processing costs as a percentage of revenues were steady
from 1995 to 1996.
58
<PAGE> 68
Selling, General and Administrative Expenses decreased 8.1% to $32.8
million for the year ended December 31, 1996, compared with $35.8 million for
the same period in 1995. Selling, General and Administrative Expenses declined
to 18.3% of revenues for the year ended December 31, 1996, compared with 21.9%
in 1995. This decrease was the result of a company-wide evaluation of
expenditures in these areas.
Net interest expense decreased to $14.3 million for the year ended
December 31, 1996, compared with $15.9 million in 1995. This decrease relates to
the reduction of total debt outstanding to $225 million at year-end 1996,
compared to $235 million at year-end 1995.
Net Income before minority interest increased $7.3 million to $11.2
million for the year ended December 31, 1996, compared with net income of $3.9
million for the same period in 1995, due to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
EPS's primary uses of its capital resources include the repayment of
short and long term debt, capital expenditures and the funding of current
operations. In general EPS's sources of cash are from operations and use of its
credit agreement (see discussion of Interest Rate Risk).
Net cash provided by operating activities was $55.6 million for the
first nine months of 1998, compared to $36.4 million for the same period in the
prior year. This increase is generally attributed to the growth in operations.
Net cash used in investing activities was $38.2 million for the first
nine months of 1998, compared to $5.4 million that was provided by investing
activities during the same period in the prior year. 1998 includes $31.4 million
in capital expenditures and $6.0 million used for the acquisition of long-term
ATM processing contracts. 1997 includes $19.5 of capital expenditures and $25.0
million in proceeds received in exchange for EPS granting exclusive licensing
rights to technology EPS developed.
Since 1995 EPS has capitalized software and software development of
approximately $40 million on transitioning to a single processing platform. Upon
the substantial completion of this initiative in 1998, EPS expects to incur
materially lower capital expenditures in 1999.
Net cash used in financing activities was $19.8 million for the first
nine months of 1998, compared to $42.8 million during the same period in the
prior year. Net cash used in financing activities represents repayments under
EPS's promissory note payable ($25.0 million per year) and use of short-term
borrowings under its revolving credit agreement with a third party bank. During
the first nine months of 1997 EPS repaid $1.0 million under its credit
arrangement and repaid $24.0 million under this arrangement during the same
period of the prior year.
This discussion and analysis of EPS's financial condition and results
of operations may contain statements which may constitute "forward looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities
59
<PAGE> 69
Exchange Act of 1934, as amended. Concord's stockholders are cautioned that any
such statements are not guarantees for future performance and involve risks and
uncertainties, and that actual results may differ materially from those
contemplated by such forward-looking statements. Important factors currently
known to EPS management that could cause actual results to differ materially
from those in forward-looking statements include significant fluctuations in
interest rates, inflation, economic recession, significant changes in the
federal and state legal and regulatory environment, successful implementation of
EPS's Year 2000 compliance project, and competition in EPS's markets. EPS
undertakes no obligation to update or revise forward-looking statements to
reflect changed assumptions, the occurrence of unanticipated events or changes
to future results over time.
AMENDMENT TO THE 1993 INCENTIVE STOCK OPTION PLAN
Concord's board of directors has adopted, subject to stockholder
approval, an amendment to Concord's 1993 Incentive Stock Option Plan (the
"Plan") to increase the number of shares of Concord Common Stock that may be
issued thereunder from 13,668,750 shares to 25,000,000 shares, and to permit an
additional method for optionees to pay for shares purchased upon exercise of
options granted thereunder. A copy of the Plan, as amended to reflect the
proposed amendments, is attached hereto as Appendix E.
Concord could only grant options to purchase up to 1,079,188 shares of
Concord Common Stock under the Plan as it presently exists. The number reflects
the grant of 375,000 options to each of Dan Palmer and Ed Labry under existing
incentive agreements. Under these agreements, Concord agreed to grant up to an
additional 375,000 options under the Plan to each of Messrs. Palmer and Labry
upon Concord's stock price reaching and maintaining a market price of $32.00 per
share for twenty consecutive trading days. This condition was met on January 4,
1999. Concord also expects to grant options for approximately 900,000 shares to
officers and employees of EPS after the Merger is consummated.
PURPOSE OF THE PLAN
The purpose of the Plan is to encourage ownership of Concord Common
Stock by employees and directors and to provide additional incentive for them to
promote the success of Concord's business.
ADMINISTRATION OF THE PLAN
The Plan is administered by the Compensation Committee (the
"Committee") of Concord's board of directors. The Committee consists exclusively
of non-employee directors. Subject to the provisions of the Plan, the Committee
has discretion to determine which employees shall be granted options, the time
of grant, the number of shares subject to each option, the exercise price of
each option and all other relevant terms of the grants. The Committee also has
broad discretion to construe and interpret the Plan and to adopt rules and
regulations thereunder.
60
<PAGE> 70
ELIGIBILITY TO PARTICIPATE IN PLAN
Awards may be granted under the Plan to employees of Concord and its
subsidiaries. Non-employee directors automatically receive each year options to
purchase 4,500 shares of Concord Common Stock.
SHARES SUBJECT TO THE PLAN
The shares issued under the Plan are shares of Concord Common Stock,
which may be authorized but unissued shares or shares held by Concord in its
treasury. The Plan initially provided for the issuance of up to 1.8 million
shares; however, due to the stock splits effectuated by Concord since the date
the Plan was approved, the aggregate number of shares that can be issued under
the Plan as it presently exists is 13,668,750 shares. If the proposed amendment
to the Plan is approved by Concord's stockholders at the Special Meeting, then
up to 25,000,000 shares could be issued under the Plan, subject to adjustment
for stock dividends, stock splits or other like changes in Concord's
capitalization. In the event that any option expires or terminates for any
reason without being exercised in full, the shares not purchased will be
available for subsequent grants under the Plan.
STOCK OPTIONS GRANTED UNDER THE PLAN
Options will normally be incentive options within the meaning of
Section 422 of the Internal Revenue Code. During any calendar year, the
aggregate fair market value of incentive stock options (determined as of the
dates of grant) held by an employee which first become exercisable in that year
may not exceed $100,000. To the extent that any option exceeds this limit, it
will be a nonstatutory option. No stock option may be exercised more than 10
years after it is granted or, for any option granted to a "Major Stockholder"
(as defined below), more than five years after the date of grant. The exercise
price under each option shall be not less than 100% of the fair market value of
Concord Common Stock on the date of grant, except for options granted to a Major
Stockholder, the exercise price for which shall be not less than 110% of fair
market value. "Major Stockholder" means a person beneficially owning stock with
voting power over 10% of the combined voting power of all classes of stock of
the Company.
Payment for shares of Concord Common Stock purchased upon exercise of
any option must be made in full by (a) cash or check, (b) by delivery of shares
of Concord Common Stock with a current fair market value equal to the option
purchase price, or (c) by irrevocable instructions to a brokerage firm to sell a
sufficient number of shares to generate the option price and applicable
withholding taxes (a "cashless exercise"). Options shall not be transferable
except by will or the laws of descent and distribution and, during, the
optionee's lifetime, may be exercised only by the optionee. If a "change in
control" (as defined in the Plan) occurs, all options will become fully
exercisable. If an optionee ceases to be an employee of Concord or any
subsidiary other than by reason of death, options may, to the extent exercisable
at the time of termination of employment be exercised any time within three
months after the date of termination, unless terminated earlier by their terms.
In the case of death of the employee,
61
<PAGE> 71
options may, to the extent exercisable at the date of death, be exercised any
time within one year after the date of death, unless terminated earlier by their
terms.
AMENDMENTS TO THE PLAN
The Committee may terminate or amend the Plan at any time, provided
that no such action shall adversely affect or impair the rights of any optionee
under any outstanding option without such optionee's consent. The Committee may
not, without the approval of the holders of Concord Common Stock, amend the Plan
in any manner that: (i) increases the maximum number of shares that may be
issued under the Plan (except for adjustments by reason of stock splits and like
changes), (ii) changes the class of persons eligible to participate in the Plan
or (iii) extends the period during which options may be granted or exercised.
FEDERAL INCOME TAX CONSEQUENCES OF GRANTS AND EXERCISES UNDER THE PLAN
Neither the granting nor the exercise of an incentive stock option will
be a taxable event for the optionee or for Concord. If an optionee holds shares
of stock purchased pursuant to the exercise of an incentive option for at least
two years after the date the option was granted and at least one year after the
exercise of the option, the subsequent sale of the shares will give rise to a
long-term capital gain or loss to the optionee, and no deduction will be
available to Concord. If the optionee sells the shares within two years after
the date an incentive option is granted or within one year after the exercise of
an option (such as in a "cashless exercise"), the optionee will recognize
ordinary income in an amount equal to the difference between the fair market
value at the exercise date and the option exercise price, and Concord will be
entitled to an equivalent deduction. The granting of a nonstatutory option is
not a taxable event. If an optionee exercises a nonstatutory option, the
optionee will, on exercise, recognize ordinary income equal to the amount by
which the fair market value of the shares purchased on the exercise date exceeds
the exercise price, and a sale of the shares so acquired will give rise to a
capital gain equal to the difference between the fair market value of the shares
on the sale and exercise dates. Some optionees may also be subject to a minimum
tax in the year of exercise on the difference between the fair market value at
the exercise date and the exercise price. Where already-owned shares are used to
exercise a stock option, special rules will apply in determining the tax basis
of the shares received upon exercise.
PAYMENTS OF WITHHOLDING TAXES
Concord may require persons exercising an option to report to Concord
any disposition of shares so purchased prior to the expiration of certain
holding periods. To the extent that such disposition imposes upon Concord any
withholding tax requirements, or any withholding is required to secure for
Concord an otherwise available tax deduction, Concord may require that such
optionee pay such amounts to Concord.
EXPIRATION OF THE PLAN
No awards may be granted under the Plan after February 16, 2003.
62
<PAGE> 72
RECOMMENDATION OF THE BOARD
Concord's board of directors has unanimously approved the proposed
amendment to the Plan to increase the number of shares of Concord Common Stock
that may be issued under the Plan to 25,000,000 shares and to permit a new way
for optionees to pay for shares purchased upon exercise of options granted
thereunder, and recommends that Concord's stockholders vote "FOR" such proposed
amendment.
DIRECTOR AND EXECUTIVE COMPENSATION
The following information regarding the compensation paid to Concord's
directors and executive officers is presented for your consideration when
determining how you want to vote with respect to the Plan Amendment Proposal.
COMPENSATION OF DIRECTORS OF CONCORD
Concord currently pays its directors an annual fee of $8,000 plus an
additional fee of $2,000 for each meeting attended by each non-employee director
of Concord. There are normally four meetings per year. In addition, non-employee
directors are granted options to purchase 3,000 shares of Concord Common Stock
at closing market value on the date of Concord's annual meeting of stockholders.
Concord's directors are also reimbursed for expenses incurred in attending
meetings of the board of directors. Ed Labry and Dan Palmer are the only
employees of Concord who also are directors, and neither Mr. Palmer nor Mr.
Labry is compensated for serving as a director.
EXECUTIVE COMPENSATION
The following summary compensation table is intended to provide an
overview of Concord's executive pay practices. It includes the cash compensation
paid by the Company and its subsidiaries for services in all capacities through
December 31, 1998. Named executives include Dan M. Palmer, Chairman of the Board
and Chief Executive Officer of Concord, and Edward A. Labry III, the President
of Concord.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------ -----------------------
OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) AWARDED*
--------------------------- ---- --------- -------- --------
<S> <C> <C> <C> <C>
Dan M. Palmer 1998 466,538 331,250 1,125,000
Chairman of the Board
Chief Executive Officer of 1997 427,392 262,000 1,200,000
the Company and
EFS National Bank 1996 425,000 125,000 356,250
</TABLE>
63
<PAGE> 73
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------ -----------------------
OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) AWARDED*
--------------------------- ---- --------- -------- --------
<S> <C> <C> <C> <C>
Edward A. Labry III 1998 466,538 331,250 1,125,000
President of the Company
and EFS National Bank
1997 417,777 262,000 1,200,000
1996 392,308 125,000 356,250
</TABLE>
* Options awarded have been restated to reflect stock splits.
STOCK OPTIONS
The following tables present the following types of information for
options granted to Concord's named executives under Concord's 1993 Incentive
Stock Option Plan during calendar year 1998 prior to the Record Date. Concord
does not anticipate that any further additional options will be granted under
the Plan in calendar year 1998. Table 1 - options granted and the potential
realizable value of such options, and Table II - options exercised in the latest
fiscal year and the number of unexercised options held.
64
<PAGE> 74
Table I
Options Granted in 1998
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
% of Total Annual Rates of Stock
Options Price Appreciation
Granted to Exercise for Option Term
Options Employees in price Expiration
Name Granted 1998 ($/Share) Date 5%($) 10%($)
---- ------- ---- --------- ---- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Dan M. Palmer 1,125,000 37.5% $20.25 2/26/08 14,327,006 36,307,445
Edward A. Labry 1,125,000 37.5% $20.25 2/26/08 14,327,006 36,307,445
</TABLE>
Table II
Options Exercised in 1998 and 1998 Option Values as of December 31, 1998
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Shares Acquired Value ($) Unexercised In-the-Money
Name on Exercise (#) Realized (1) Options (#) Options($) (2)
---- --------------- ------------ ----------- --------------
<S> <C> <C> <C> <C>
Dan M. Palmer -0- -0- 1,385,623(E) 48,153,680(E)
2,286,563(U) 57,246,231(U)
Edward A. Labry III -0- -0- 932,813(E) 30,489,419(E)
2,273,906(U) 56,784,892(U)
</TABLE>
(1) Values are calculated by subtracting the exercise price from the fair
market value of the stock as of the exercise date.
(2) Values are calculated by subtracting the exercise price from the fair
market value of the stock on December 31, 1998.
(E) Exercisable at December 31, 1998
(U) Unexercisable at December 31, 1998
The above stock option tables do not include options to purchase
375,000 shares of Concord Common Stock, at an option price of $32.00 per share,
which were granted to each of Messrs. Palmer and Labry under the Incentive
Agreements discussed below, based on conditions which were not met until January
4, 1999.
INCENTIVE AGREEMENTS
Concord is a party to Incentive Agreements, dated February 26, 1998,
with each of Messrs. Palmer and Labry, pursuant to which Mr. Palmer is employed
as Chief Executive Officer and Chairman of the Board, and Mr. Labry is employed
as President of Concord. The term of each Incentive Agreement extends until
February 23, 2003. Each agreement sets out the executive's base salary (at least
$475,000 per annum), provides for the establishment of an incentive compensation
program under which each executive will have a bonus potential of 50%
65
<PAGE> 75
of 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 Common Stock reaching and maintaining, for 20
consecutive trading days, certain levels. Under the Incentive Agreements, each
of Messrs. Palmer and Labry was granted a special option to purchase 750,000
shares, with the vesting of one-half of the option accelerated if the closing
market price of Concord's Common Stock averages $32.00 per share or more for 20
consecutive trading days prior to February 26, 2003, the scheduled vesting date.
In addition, if the condition that the 20 trading day average closing market
price reach $32.00 was met, Concord also agreed that each of Messrs. Palmer and
Labry would be entitled to a special option to purchase an additional 375,000
shares, at a price of $32.00 per share. This condition was met on January 4,
1999. Under the Incentive Agreements, each of Messrs. Palmer and Labry is also
entitled to an additional special option to purchase 187,500 shares, if the
closing market price of Concord's Common Stock stayed above $42 2/3 per share
for 20 consecutive trading days. The Incentive Agreements contain non-compete
agreements extending three years following termination, absent a change in
control, and provide for the acceleration of outstanding stock options and the
payment of the full bonus potential for the year if there is a change in control
of Concord, as defined in the agreements.
OTHER MATTERS
As of the Record Date, Concord's board of directors knows of no
matters that will be presented for consideration at the Special Meeting other
than as described in this proxy statement. However, if any other matters
properly come before the Special Meeting or any adjournment or postponement of
the Special Meeting and are voted upon, the enclosed proxy will be deemed to
confer discretionary authority to the individuals named as proxies to vote the
shares represented by such proxy as to any such matters.
STOCKHOLDER PROPOSALS
Concord expects to hold its next annual meeting of stockholders in May
1999, after the Merger. Under SEC rules, proposals of Concord stockholders
intended to be presented at its annual meeting were required to be received by
Concord at its principal executive offices no later than December 11, 1998, in
order to be considered for inclusion in Concord's proxy statement for such
meeting. Stockholder proposals submitted after February 25, 1999, will be
considered untimely, and the proxy solicited by Concord for the annual meeting
may confer discretionary authority to vote on any such matters without a
description of them in the proxy statement for that meeting.
66
<PAGE> 76
EXPERTS
The consolidated financial statements of Concord and subsidiaries,
incorporated by reference in Concord's Annual Report (Form 10-K), have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon included therein and incorporated herein by reference. Such consolidated
financial statements are incorporated herein by reference in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
Representatives of Ernst & Young LLP are expected to be present at the
Special Meeting, will have the opportunity to make a statement if they desire to
do so and are expected to be available to respond to appropriate questions.
The audited consolidated financial statements of EPS and its
subsidiaries included in this proxy statement have been audited by Ernst & Young
LLP, independent accountants, as indicated in their report with respect thereto,
and have been included herein in reliance upon the authority of such firm as
experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
Concord files annual, quarterly and current reports, proxy and
information statements, and other information with the SEC under the Securities
Exchange Act of 1934. You may read and copy this information at the Public
Reference Section at the SEC at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549. You may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an
Internet site that contains reports, proxy and information statements, and other
information about issuers that file electronically with the SEC. The address of
that site is http://www.sec.gov. In addition, you can read and copy this
information at the regional offices of the SEC at 7 World Trade Center, 13th
Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. You can also inspect reports, proxy and
information statements, and other information about Concord at the offices of
the National Association of Securities Dealers, Inc., 1735 K. Street, N.W.,
Washington, D.C. 20006.
This proxy statement incorporates important business and financial
information about Concord that is not included in or delivered with this proxy
statement. The following documents filed with the SEC by Concord are
incorporated by reference in this proxy statement (SEC File No. 0-13848):
(1) Concord's Annual Report on Form 10-K for the year ended
December 31, 1997 (provided that any information included or
incorporated by reference in response to Items 402(a)(8), (i),
(k), or (l) of Regulation S-K of the SEC shall not be deemed
to be incorporated herein and is not part of the proxy
statement);
67
<PAGE> 77
(2) Concord's Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1998, June 30, 1998, and September 30, 1998;
(3) Concord's Current Report on Form 8-K dated November 23, 1998;
(4) The description of the current management and board of
directors of Concord contained in the proxy statement of
Concord filed pursuant to Section 14(a) of the Exchange Act
for Concord's Annual Meeting of Stockholders held on May 14,
1998; and
(5) The description of the Concord Common Stock contained in
Concord's registration statement under Section 12(b) of the
Exchange Act and any amendment or report filed for the purpose
of updating such description.
Concord also incorporates by reference additional documents filed by it
pursuant to Sections 13(a), 13(c), 14, or 15(d) of the Exchange Act after
January 14, 1999 and prior to the date of the Special Meeting. Any statement
contained in this proxy statement or in a document incorporated or deemed to be
incorporated by reference in this proxy statement shall be deemed to be modified
or superseded to the extent that a statement contained herein or in any
subsequently filed document which also is, or is deemed to be, incorporated by
reference herein modifies or supersedes such statement.
You may obtain free copies of the information incorporated by reference
in this proxy statement upon written or oral request. Requests for such
information should be made by writing or calling:
Charlene Kraft
Executive Secretary
Concord EFS, Inc.
2525 Horizon Lake Drive, Suite 120
Memphis, Tennessee 38133
(Telephone (901) 371-8000).
In order to obtain timely delivery of the documents, you must request
the information by February 11, 1999.
All information contained in this proxy statement or incorporated
herein by reference with respect to Concord was supplied by Concord, and all
information contained in this proxy statement or incorporated herein by
reference with respect to EPS was supplied by EPS.
68
<PAGE> 78
APPENDIX A
AGREEMENT AND PLAN OF MERGER
AMONG
CONCORD EFS, INC.,
CEFT, INC.
AND
ELECTRONIC PAYMENT SERVICES, INC.
DATED AS OF NOVEMBER 20, 1998
<PAGE> 79
AGREEMENT OF PLAN AND MERGER
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE I
Page
<S> <C>
THE MERGER.......................................................................................2
Section 1.1 The Merger.............................................................................2
Section 1.2 Effective Time.........................................................................2
Section 1.3 Effects of the Merger..................................................................2
Section 1.4 Charter and Bylaws; Directors and Officers.............................................2
Section 1.5 Conversion of Securities...............................................................3
Section 1.6 Parent to Make Certificates Available..................................................3
Section 1.7 Dividends; Transfer Taxes; Withholding.................................................4
Section 1.8 No Fractional Securities...............................................................5
Section 1.9 Return of Exchange Fund................................................................5
Section 1.10 Adjustment of Exchange Ratio...........................................................5
Section 1.11 No Further Ownership Rights in Company Common Stock....................................6
Section 1.12 Closing of Company Transfer Books......................................................6
Section 1.13 Lost Certificates......................................................................6
Section 1.14 Further Assurances.....................................................................6
Section 1.15 Closing; Closing Deliveries............................................................6
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB.................................................8
Section 2.1 Organization, Standing and Power.......................................................8
Section 2.2 Capital Structure......................................................................9
Section 2.3 Authority.............................................................................10
Section 2.4 Consents and Approvals; No Violation..................................................10
Section 2.5 SEC Documents and Other Reports.......................................................11
Section 2.6 Joint Proxy Statement.................................................................12
Section 2.7 Absence of Certain Changes or Events..................................................12
Section 2.8 Permits and Compliance; Defaults......................................................12
Section 2.9 Tax Matters...........................................................................13
Section 2.10 Actions and Proceedings...............................................................13
Section 2.11 Certain Agreements....................................................................14
Section 2.12 ERISA.................................................................................14
Section 2.13 Compliance with Worker Safety and Environmental Laws..................................15
Section 2.14 Labor Matters.........................................................................15
Section 2.15 Intellectual Property.................................................................16
Section 2.16 Opinion of Financial Advisor..........................................................16
Section 2.17 Required Vote of Parent Stockholders..................................................16
Section 2.18 Pooling of Interests; Reorganization..................................................16
</TABLE>
A-i
<PAGE> 80
<TABLE>
<CAPTION>
ARTICLE III
<S> <C>
Section 2.19 Brokers...............................................................................16
Section 2.20 Operations of Sub.....................................................................16
REPRESENTATIONS AND WARRANTIES OF THE COMPANY...................................................17
Section 3.1 Organization, Standing and Power......................................................17
Section 3.2 Capital Structure.....................................................................17
Section 3.3 Authority.............................................................................18
Section 3.4 Consents and Approvals; No Violation..................................................18
Section 3.5 Financial Statements..................................................................19
Section 3.6 Joint Proxy Statement.................................................................19
Section 3.7 Absence of Certain Changes or Events..................................................20
Section 3.8 Permits and Compliance; Defaults......................................................20
Section 3.9 Tax Matters...........................................................................20
Section 3.10 Actions and Proceedings...............................................................21
Section 3.11 Certain Agreements....................................................................22
Section 3.12 ERISA.................................................................................22
Section 3.13 Compliance with Worker Safety and Environmental Laws..................................23
Section 3.14 Labor Matters.........................................................................23
Section 3.15 Intellectual Property.................................................................23
Section 3.16 Opinion of Financial Advisor..........................................................24
Section 3.17 Required Vote of Company Stockholders.................................................24
Section 3.18 Pooling of Interests; Reorganization..................................................24
Section 3.19 Brokers...............................................................................24
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS.......................................................24
Section 4.1 Conduct of Business Pending the Merger................................................24
Section 4.2 Pooling of Interests; Reorganization..................................................27
ARTICLE V
ADDITIONAL AGREEMENTS...........................................................................27
Section 5.1 Stockholder Meetings..................................................................27
Section 5.2 Preparation of the Joint Proxy Statement..............................................27
Section 5.3 Access to Information.................................................................28
Section 5.4 Compliance with the Securities Act....................................................28
Section 5.5 Listing of Parent Common Stock........................................................29
Section 5.6 Fees and Expenses.....................................................................29
Section 5.7 Company Stock Plan. .................................................................29
Section 5.8 Reasonable Best Efforts...............................................................30
Section 5.9 Public Announcements..................................................................31
Section 5.10 Real Estate Transfer and Gains Tax....................................................31
</TABLE>
A-ii
<PAGE> 81
<TABLE>
<S> <C> <C>
Section 5.11 Indemnification; Directors and Officers Insurance.....................................31
Section 5.12 Notification of Certain Matters.......................................................32
Section 5.13 Employee Matters......................................................................32
Section 5.14 Registration Rights Agreement.........................................................33
ARTICLE VI
CONDITIONS PRECEDENT TO THE MERGER..............................................................33
Section 6.1 Conditions to Each Party's Obligation to Effect the Merger............................33
Section 6.2 Conditions to Obligation of the Company to Effect the Merger..........................34
Section 6.3 Conditions to Obligations of Parent and Sub to Effect the Merger......................35
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER...............................................................37
Section 7.1 Termination...........................................................................37
Section 7.2 Effect of Termination.................................................................40
Section 7.3 Amendment.............................................................................40
Section 7.4 Waiver................................................................................40
ARTICLE VIII
GENERAL PROVISIONS..............................................................................40
Section 8.1 Non-Survival of Representations and Warranties........................................40
Section 8.2 Notices...............................................................................40
Section 8.3 Interpretation........................................................................41
Section 8.4 Counterparts..........................................................................42
Section 8.5 Entire Agreement; No Third-Party Beneficiaries........................................42
Section 8.6 Governing Law.........................................................................42
Section 8.7 Assignment............................................................................42
Section 8.8 Severability..........................................................................42
Section 8.9 Enforcement of this Agreement.........................................................42
Exhibits
Exhibit A Form of Company Voting Agreement
Exhibit B Form of Parent Voting Agreement
Exhibit C Form of Company Affiliate Letter
Exhibit D Form of Parent Affiliate Letter
Exhibit E Form of Registration Rights Agreement
</TABLE>
A-iii
<PAGE> 82
TABLE OF DEFINED TERMS
<TABLE>
<S> <C>
Defined Term Section
Agreement..................................................................................................Forepart
Bank Act........................................................................................................2.4
Blue Sky Laws...................................................................................................2.4
Certificate of Merger...........................................................................................1.2
Certificates.................................................................................................1.6(b)
Closing.....................................................................................................1.15(c)
Closing Date................................................................................................1.15(a)
Code.......................................................................................................Recitals
Company....................................................................................................Forepart
Company Affiliate Letter.....................................................................................5.4(a)
Company Business Personnel.....................................................................................3.14
Company Bylaws...............................................................................................1.4(a)
Company Charter..............................................................................................1.4(a)
Company Common Stock.......................................................................................Recitals
Company Contract...............................................................................................3.11
Company Diluted Share Amount.................................................................................1.5(c)
Company Letter...............................................................................................3.2(a)
Company Permits..............................................................................................3.8(a)
Company Plan................................................................................................3.12(c)
Company Preferred Stock......................................................................................3.2(a)
Company Stock Options........................................................................................3.2(a)
Company Stock Plan...........................................................................................3.2(a)
Company Stockholder Meeting.....................................................................................5.1
Company Voting Agreement...................................................................................Recitals
Confidentiality Agreement.......................................................................................5.3
Constituent Corporations...................................................................................Forepart
Coordination Agreement.....................................................................................Recitals
D&O Insurance..................................................................................................5.11
DGCL............................................................................................................1.1
Effective Time..................................................................................................1.2
Environmental Laws.............................................................................................2.13
ERISA.......................................................................................................2.12(a)
ERISA Affiliate.............................................................................................2.12(c)
Exchange Act....................................................................................................2.4
Exchange Agent...............................................................................................1.6(a)
Exchange Fund................................................................................................1.6(a)
Exchange Ratio...............................................................................................1.5(c)
Gains Taxes....................................................................................................5.10
Governmental Entity.............................................................................................2.4
HSR Act.........................................................................................................3.4
Intellectual Property Rights................................................................................2.15(a)
IRS.............................................................................................................2.9
</TABLE>
A-iv
<PAGE> 83
<TABLE>
<S> <C>
Joint Proxy Statement...........................................................................................2.6
Knowledge of Parent............................................................................................2.10
Knowledge of Company...........................................................................................3.10
Material Adverse Change.........................................................................................2.1
Material Adverse Effect.........................................................................................2.1
Merger.....................................................................................................Recitals
Parent.....................................................................................................Forepart
Parent Affiliate Letter......................................................................................5.4(b)
Parent Annual Report.........................................................................................2.2(c)
Parent Business Personnel......................................................................................2.14
Parent Bylaws...............................................................................................1.15(b)
Parent Charter..............................................................................................1.15(b)
Parent Common Stock........................................................................................Recitals
Parent Letter...................................................................................................2.2
Parent Multiemployer Plan...................................................................................2.12(c)
Parent Permits...............................................................................................2.8(a)
Parent Plan.................................................................................................2.12(c)
Parent Preferred Stock.......................................................................................2.2(a)
Parent SEC Documents............................................................................................2.5
Parent Stock Plans...........................................................................................2.2(a)
Parent Stockholder Meeting......................................................................................5.1
Parent Voting Agreement....................................................................................Recitals
Registration Rights Agreement..................................................................................5.14
Rule 145 Affiliates..........................................................................................5.4(a)
SEC..........................................................................................................2.2(c)
Securities Act..................................................................................................2.3
Share Issuance..................................................................................................2.3
Stay Bonuses...................................................................................................5.13
Stockholder Meetings............................................................................................5.1
Sub........................................................................................................Forepart
Subsidiary......................................................................................................2.1
Substitute Option...............................................................................................5.7
Surviving Corporation...........................................................................................1.1
Tax Return......................................................................................................2.9
Taxes...........................................................................................................2.9
Worker Safety Laws.............................................................................................2.13
</TABLE>
A-v
<PAGE> 84
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of November 20, 1998
(this "Agreement"), among Concord EFS, Inc., a Delaware corporation ("Parent"),
CEFT, Inc., a Delaware corporation and a wholly owned subsidiary of Parent
("Sub"), and Electronic Payment Services, Inc., a Delaware corporation (the
"Company") (Sub and the Company being hereinafter collectively referred to as
the "Constituent Corporations").
W I T N E S S E T H:
WHEREAS, the respective Boards of Directors of Parent, Sub and
the Company have approved and declared advisable the merger of Sub and the
Company (the "Merger"), upon the terms and subject to the conditions set forth
herein, whereby each issued and outstanding share of common stock, par value
$.01 per share, of the Company ("Company Common Stock") not owned directly or
indirectly by the Company will be converted into shares of Common Stock, par
value $.33 1/3 per share, of Parent ("Parent Common Stock");
WHEREAS, the respective Boards of Directors of Parent and the
Company have determined that the Merger is in furtherance of and consistent with
their respective long-term business strategies and is in the best interest of
their respective stockholders;
WHEREAS, in order to induce Parent and Sub to enter into this
Agreement, concurrently herewith certain of the stockholders of the Company and
Parent are entering into a Voting Agreement dated as of the date hereof (the
"Company Voting Agreement") in the form attached as Exhibit A;
WHEREAS, in order to induce Parent and Sub to enter into this
Agreement and to set forth in writing certain matters relating to the Merger,
certain of the stockholders of the Company, the Company and Parent are entering
into a Coordination Agreement dated as of the date hereof (the "Coordination
Agreement");
WHEREAS, in order to induce the Company to enter into this
Agreement, concurrently herewith certain of the stockholders of Parent and the
Company are entering into a Voting Agreement dated as of the date hereof (the
"Parent Voting Agreement") in the form attached as Exhibit B;
WHEREAS, for federal income tax purposes, it is intended that
the Merger shall qualify as a reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, it is intended that the Merger shall be recorded for
accounting purposes as a pooling of interests.
<PAGE> 85
NOW, THEREFORE, in consideration of the premises,
representations, warranties and agreements herein contained, the parties agree
as follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger. Upon the terms and subject to the
conditions hereof, and in accordance with the Delaware General Corporation Law
(the "DGCL"), Sub shall be merged with and into the Company at the Effective
Time (as hereinafter defined). Following the Merger, the separate corporate
existence of Sub shall cease and the Company shall continue as the surviving
corporation (the "Surviving Corporation") and shall succeed to and assume all
the rights and obligations of Sub in accordance with the DGCL.
Section 1.2 Effective Time. The Merger shall become effective
when a Certificate of Merger (the "Certificate of Merger"), executed in
accordance with the relevant provisions of the DGCL, is filed with the Secretary
of State of the State of Delaware; provided, however, that, upon mutual written
consent of the Constituent Corporations, the Certificate of Merger may provide
for a later date of effectiveness of the Merger not more than 30 days after the
date the Certificate of Merger is filed. When used in this Agreement, the term
"Effective Time" shall mean the date and time at which the Certificate of Merger
is accepted for recording or such later time established by the Certificate of
Merger. The filing of the Certificate of Merger shall be made on the date of the
Closing.
Section 1.3 Effects of the Merger. The Merger shall have the
effects set forth in Section 259 of the DGCL.
Section 1.4 Charter and Bylaws; Directors and Officers. (a) At
the Effective Time, the Amended and Restated Certificate of Incorporation of the
Company (the "Company Charter"), as in effect immediately prior to the Effective
Time, shall be the Certificate of Incorporation of the Surviving Corporation
until thereafter changed or amended as provided therein or by applicable law. At
the Effective Time, the Amended and Restated By-laws of the Company (the
"Company Bylaws"), as in effect immediately prior to the Effective Time, shall
be the Bylaws of the Surviving Corporation until thereafter changed or amended
as provided therein or by the Company Charter.
(b) The directors of Sub at the Effective Time of the Merger
shall be the directors of the Surviving Corporation, until the earlier of their
resignation or removal or until their respective successors are duly elected and
qualified, as the case may be. The officers of the Company at the Effective Time
of the Merger shall be the officers of the Surviving Corporation, until the
earlier of their resignation or removal or until their respective successors are
duly elected and qualified, as the case may be.
A-2
<PAGE> 86
Section 1.5 Conversion of Securities. As of the Effective
Time, by virtue of the Merger and without any action on the part of Sub, the
Company or the holders of any securities of the Constituent Corporations:
(a) Each issued and outstanding share of common stock, par
value $.01 per share, of Sub shall be converted into one validly issued, fully
paid and nonassessable share of common stock of the Surviving Corporation.
(b) All shares of Company Common Stock that are held in the
treasury of the Company or by any wholly owned Subsidiary of the Company shall
be canceled and no capital stock of Parent or other consideration shall be
delivered in exchange therefor.
(c) Subject to the provisions of Sections 1.8, 1.10 and 7.1(i)
hereof, each share of Company Common Stock issued and outstanding immediately
prior to the Effective Time (other than shares to be canceled in accordance with
Section 1.5(b)) shall be converted into 7.9111 (such number being the "Exchange
Ratio") validly issued, fully paid and nonassessable shares of Parent Common
Stock (the Exchange Ratio being determined by dividing (i) 32,310,000 by (ii)
the aggregate number of shares of Company Common Stock outstanding as of the
date hereof determined on a fully diluted basis assuming all options obligating
the Company to issue, sell, deliver or cause to be issued, delivered or sold any
additional shares of Company Common Stock or any other capital stock (or other
voting securities or equity equivalents) of the Company had been fully exercised
as of the date hereof (the "Company Diluted Share Amount")). In the event the
Company Diluted Share Amount immediately prior to the Effective Time shall
exceed 4,084,127, the Exchange Ratio shall be appropriately adjusted. All shares
of Company Common Stock outstanding immediately prior to the Effective Time,
when so converted, shall no longer be outstanding and shall automatically be
canceled and retired and each holder of a certificate representing any such
shares shall cease to have any rights with respect thereto, except the right to
receive any dividends and other distributions in accordance with Section 1.7,
certificates representing the shares of Parent Common Stock into which such
shares are converted and any cash, without interest, in lieu of fractional
shares to be issued or paid in consideration therefor upon the surrender of such
certificate in accordance with Section 1.6. At the Effective Time, each Company
Stock Option (as defined herein) shall become and represent a Substitute Option
(as defined herein) in accordance with Section 5.7.
(d) Each issued and outstanding share of Company Preferred
Stock (as defined herein) shall remain issued and outstanding as a share of
capital stock of the Surviving Corporation.
Section 1.6 Parent to Make Certificates Available. (a)
Exchange of Certificates. Parent shall authorize such person or persons as shall
be reasonably acceptable to Parent and the Company to act as Exchange Agent
hereunder (the "Exchange Agent"). Prior to the Effective Time, Parent shall
deposit with the Exchange Agent certificates representing the shares of Parent
Common Stock issuable pursuant to Section 1.5(c) for exchange with outstanding
shares of Company Common Stock, and cash as required to make payments in lieu of
any fractional shares pursuant to Section 1.8 (such cash and shares of Parent
Common Stock, together with any dividends or distributions with respect thereto,
being hereinafter referred to as
A-3
<PAGE> 87
the "Exchange Fund"). The Exchange Agent shall deliver the Parent Common Stock
contemplated to be issued pursuant to Section 1.5(c) out of the Exchange Fund.
(b) Exchange Procedures. Parent shall instruct the Exchange
Agent, as soon as practicable after the Effective Time, to mail to each record
holder of a certificate or certificates which immediately prior to the Effective
Time represented outstanding shares of Company Common Stock converted in the
Merger (the "Certificates") a letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates shall
pass, only upon actual delivery of the Certificates to the Exchange Agent, and
shall contain instructions for use in effecting the surrender of the
Certificates in exchange for certificates representing shares of Parent Common
Stock and cash in lieu of fractional shares). If requested by the Company prior
to the Closing Date, Parent shall instruct the Exchange Agent to make such
letters of transmittal available at the location of the Closing, and shall cause
the Exchange Agent to be available at such location to receive, from record
holders of Certificates wishing to surrender them, such letters of transmittal
along with the related Certificates. Upon surrender for cancellation to the
Exchange Agent of all Certificates held by any record holder of a Certificate,
together with such letter of transmittal, duly executed, the holder of such
Certificate shall be entitled to receive in exchange therefor a certificate
representing that number of whole shares of Parent Common Stock into which the
shares represented by the surrendered Certificate shall have been converted at
the Effective Time pursuant to this Article I, cash in lieu of any fractional
share in accordance with Section 1.8 and certain dividends and other
distributions in accordance with Section 1.7, and any Certificate so surrendered
shall forthwith be canceled.
Section 1.7 Dividends; Transfer Taxes; Withholding. No
dividends or other distributions that are declared on or after the Effective
Time on Parent Common Stock, or are payable to the holders of record thereof on
or after the Effective Time, will be paid to any person entitled by reason of
the Merger to receive a certificate representing Parent Common Stock until such
person surrenders the related Certificate or Certificates, as provided in
Section 1.6, and no cash payment in lieu of fractional shares will be paid to
any such person pursuant to Section 1.8 until such person shall so surrender the
related Certificate or Certificates. Subject to the effect of applicable law,
there shall be paid to each record holder of a new certificate representing such
Parent Common Stock: (i) at the time of such surrender or as promptly as
practicable thereafter, the amount of any dividends or other distributions
theretofore paid with respect to the shares of Parent Common Stock represented
by such new certificate and having a record date on or after the Effective Time
and a payment date prior to such surrender; (ii) at the appropriate payment date
or as promptly as practicable thereafter, the amount of any dividends or other
distributions payable with respect to such shares of Parent Common Stock and
having a record date on or after the Effective Time but prior to such surrender
and a payment date on or subsequent to such surrender; and (iii) at the time of
such surrender or as promptly as practicable thereafter, the amount of any cash
payable with respect to a fractional share of Parent Common Stock to which such
holder is entitled pursuant to Section 1.8. In no event shall the person
entitled to receive such dividends or other distributions or cash in lieu of
fractional shares be entitled to receive interest on such dividends or other
distributions or cash in lieu of fractional shares. If any cash or certificate
representing shares of Parent Common Stock is to be paid to or issued in a name
other than that in which the Certificate surrendered in exchange therefor is
registered, it shall be a condition of such exchange that the Certificate so
surrendered shall be properly endorsed and
A-4
<PAGE> 88
otherwise in proper form for transfer and that the person requesting such
exchange shall pay to the Exchange Agent any transfer or other taxes required by
reason of the issuance of certificates for such shares of Parent Common Stock in
a name other than that of the registered holder of the Certificate surrendered,
or shall establish to the satisfaction of the Exchange Agent that such tax has
been paid or is not applicable. Parent or the Exchange Agent shall be entitled
to deduct and withhold from the consideration otherwise payable pursuant to this
Agreement to any holder of shares of Company Common Stock such amounts as Parent
or the Exchange Agent is required to deduct and withhold with respect to the
making of such payment under the Code or under any provision of state, local or
foreign tax law. To the extent that amounts are so withheld by Parent or the
Exchange Agent, such withheld amounts shall be treated for all purposes of this
Agreement as having been paid to the holder of shares of Company Common Stock in
respect of which such deduction and withholding was made by Parent or the
Exchange Agent.
Section 1.8 No Fractional Securities. No certificates or
scrip representing fractional shares of Parent Common Stock shall be issued upon
the surrender for exchange of Certificates pursuant to this Article I, and no
Parent dividend or other distribution or stock split shall relate to any
fractional share, and no fractional share shall entitle the owner thereof to
vote or to any other rights of a security holder of Parent. In lieu of any such
fractional share, each holder of shares of Company Common Stock who would
otherwise have been entitled to a fraction of a share of Parent Common Stock
upon surrender of Certificates for exchange pursuant to this Article I will be
paid an amount in cash (without interest), rounded to the nearest cent,
determined by multiplying (i) the last reported sale price per share of Parent
Common Stock on the Nasdaq National Market System ("Nasdaq") on the Closing Date
(or, if the shares of Parent Common Stock do not trade on Nasdaq on such date,
the trading day immediately preceding the Closing Date) by (ii) the fractional
interest to which such holder would otherwise be entitled. As promptly as
practicable after the determination of the amount of cash, if any, to be paid to
holders of fractional share interests, the Exchange Agent shall so notify
Parent, and Parent shall deposit such amount with the Exchange Agent and shall
cause the Exchange Agent to forward payments to such holders of fractional share
interests subject to and in accordance with the terms of Section 1.7 and this
Section 1.8.
Section 1.9 Return of Exchange Fund. Any portion of the
Exchange Fund which remains undistributed to the former stockholders of the
Company for 60 days after the Effective Time shall be delivered to Parent, upon
demand of Parent, and any such former stockholders who have not theretofore
complied with this Article I shall thereafter look only to Parent for payment of
their claim for Parent Common Stock, any cash in lieu of fractional shares of
Parent Common Stock and any dividends or distributions with respect to Parent
Common Stock. Neither Parent nor the Surviving Corporation shall be liable to
any former holder of shares of Company Common Stock for any such shares of
Parent Common Stock, cash and dividends and distributions held in the Exchange
Fund which is delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law.
Section 1.10 Adjustment of Exchange Ratio. In the event of any
reclassification, stock split or stock dividend with respect to Parent Common
Stock or any change or conversion of Parent Common Stock into other securities
(or if a record date with
A-5
<PAGE> 89
respect to any of the foregoing should occur) prior to the Effective Time,
appropriate and proportionate adjustments, if any, shall be made to the Exchange
Ratio, and all references to the Exchange Ratio in this Agreement shall be
deemed to be to the Exchange Ratio, as so adjusted.
Section 1.11 No Further Ownership Rights in Company Common
Stock. All shares of Parent Common Stock issued upon the surrender for exchange
of Certificates in accordance with the terms hereof (including any cash paid
pursuant to Section 1.8) shall be deemed to have been issued in full
satisfaction of all rights pertaining to the shares of Company Common Stock
represented by such Certificates.
Section 1.12 Closing of Company Transfer Books. At the
Effective Time, the stock transfer books of the Company shall be closed and no
transfer of shares of Company Common Stock shall thereafter be made on the
records of the Company. If, after the Effective Time, Certificates are presented
to the Surviving Corporation, the Exchange Agent or Parent, such Certificates
shall be canceled and exchanged as provided in this Article I.
Section 1.13 Lost Certificates. If any Certificate shall have
been lost, stolen or destroyed, upon the making of an affidavit of that fact by
the person claiming such Certificate to be lost, stolen or destroyed, the
Exchange Agent will issue in exchange for such lost, stolen or destroyed
Certificate the shares of Parent Common Stock, any cash in lieu of fractional
shares of Parent Common Stock to which the holders thereof are entitled pursuant
to Section 1.8 and any dividends or other distributions to which the holders
thereof are entitled pursuant to Section 1.7.
Section 1.14 Further Assurances. If at any time after the
Effective Time the Surviving Corporation shall consider or be advised that any
deeds, bills of sale, assignments or assurances or any other acts or things are
necessary, desirable or proper (a) to vest, perfect or confirm, of record or
otherwise, in the Surviving Corporation its right, title or interest in, to or
under any of the rights, privileges, powers, franchises, properties or assets of
either of the Constituent Corporations, or (b) otherwise to carry out the
purposes of this Agreement, the Surviving Corporation and its proper officers
and directors or their designees shall be authorized to execute and deliver, in
the name and on behalf of either of the Constituent Corporations, all such
deeds, bills of sale, assignments and assurances and to do, in the name and on
behalf of either Constituent Corporation, all such other acts and things as may
be necessary, desirable or proper to vest, perfect or confirm the Surviving
Corporation's right, title or interest in, to or under any of the rights,
privileges, powers, franchises, properties or assets of such Constituent
Corporation and otherwise to carry out the purposes of this Agreement.
Section 1.15 Closing; Closing Deliveries. (a) The closing of
the transactions contemplated by this Agreement (the "Closing") and all actions
specified in this Agreement to occur at the Closing shall take place at the
offices of Sidley & Austin, One First National Plaza, Chicago, Illinois, at
10:00 a.m., local time, no later than the fifth business day following the day
on which the last of the conditions set forth in Article VI shall have been
fulfilled or waived (if permissible) or at such other time and place as Parent
and the Company shall agree (the date of the Closing is referred to herein as
the "Closing Date").
A-6
<PAGE> 90
(b) Subject to fulfillment or waiver of the conditions set
forth in Article VI, at the Closing Parent shall deliver to the Company all of
the following:
(i) a copy of the Certificate of Incorporation of Parent
(the "Parent Charter"), certified as of a recent date by the Secretary
of State of the State of Delaware;
(ii) a certificate of good standing of Parent, issued as of a
recent date by the Secretary of State of the State of Delaware;
(iii) a certificate of the Secretary or an Assistant Secretary
of Parent, dated as of the Closing Date, in form and substance
reasonably satisfactory to the Company, as to (A) no amendments to the
Parent Charter since a specified date; (B) the Bylaws of Parent (the
"Parent Bylaws"); (C) the resolutions of the Board of Directors of
Parent; authorizing the execution and performance of this Agreement and
the transactions contemplated herein; (D) the resolutions of the
stockholders of Parent approving the Share Issuance (as hereinafter
defined); and (E) the incumbency and signatures of the officers of
Parent executing this Agreement;
(iv) the certificates contemplated by Section 6.2(a), duly
executed by the Chief Executive Officer and the Chief Financial Officer
of Parent;
(v) all consents, waivers or approvals obtained by Parent
with respect to the consummation of the transactions contemplated by
this Agreement; and
(vi) the Registration Rights Agreement (as hereinafter
defined), duly executed by Parent.
(c) Subject to fulfillment or waiver of the conditions set
forth in Article VI, at the Closing Sub shall deliver to the Company all of the
following:
(i) a copy of the Certificate of Incorporation of Sub
certified as of a recent date by the Secretary of State of the State of
Delaware;
(ii) a certificate of good standing of Sub, issued as of a
recent date by the Secretary of State of the State of Delaware; and
(iii) a certificate of the Secretary or an Assistant Secretary
of Sub, dated as of the Closing Date, in form and substance reasonably
satisfactory to the Company, as to (A) no amendments to the Certificate
of Incorporation of Sub since a specified date; (B) the Bylaws of Sub;
(C) the resolutions of the Board of Directors of Sub authorizing the
execution and performance of this Agreement and the transactions
contemplated herein and the written consent of Parent in its capacity
as sole stockholder of Sub adopting this Agreement in accordance with
Section 251 of the DGCL; and (D) the incumbency and signatures of the
officers of Sub executing this Agreement.
A-7
<PAGE> 91
(d) Subject to fulfillment or waiver of the conditions set
forth in Article VI, at the Closing the Company shall deliver to parent all of
the following:
(i) a copy of the Company Charter, certified as of a recent
date by the Secretary of State of the State of Delaware;
(ii) a certificate of good standing of the Company, issued as
of a recent date by the Secretary of State of the State of Delaware;
(iii) a certificate of the Secretary or an Assistant Secretary
of the Company, dated as of the Closing Date, in form and substance
reasonably satisfactory to Parent, as to (A) no amendments to the
Company Charter since a specified date; (B) the Company Bylaws; (C) the
resolutions of the Board of Directors of the Company authorizing the
execution and performance of this Agreement and the transactions
contemplated herein and the resolutions of the stockholders of the
Company adopting this Agreement in accordance with Section 251 of the
DGCL; and (D) the incumbency and signatures of the officers of the
Company executing this Agreement;
(iv) all consents, waivers or approvals obtained by the
Company with respect to the consummation of the transactions
contemplated by this Agreement; and
(v) the certificates contemplated by Section 6.3(a) duly
executed by the Chief Executive Officer and the Chief Financial Officer
of the Company.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Parent and Sub represent and warrant to the Company as
follows:
Section 2.1 Organization, Standing and Power. Parent is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and Sub is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. Each of
Parent and Sub has the requisite corporate power and authority to carry on its
business as now being conducted. Each Subsidiary (as hereinafter defined) of
Parent is duly organized, validly existing and in good standing under the laws
of the jurisdiction in which it is organized and has the requisite corporate
power and authority to carry on its business as now being conducted, except
where the failure to be so organized, existing or in good standing or to have
such power or authority would not, individually or in the aggregate, have a
Material Adverse Effect (as hereinafter defined) on Parent. Parent and each of
its Subsidiaries are duly qualified to do business, and are in good standing, in
each jurisdiction where the character of their properties owned or held under
lease or the nature of their activities makes such qualification necessary,
except where the failure to be so qualified would not, individually or in the
aggregate, have a Material Adverse Effect on Parent. For purposes of this
Agreement (a)
A-8
<PAGE> 92
"Material Adverse Change" or "Material Adverse Effect" means, when used with
respect to Parent or the Company, as the case may be, any event, change or
effect that is materially adverse to the business, financial condition or
results of operations of Parent and its Subsidiaries, taken as a whole, or the
Company and its Subsidiaries, taken as a whole, as the case may be; provided,
however, that in determining whether a Material Adverse Change or Material
Adverse Effect has occurred with respect to either referenced party, any change
or effect, to the extent it is attributable to (A) any change in general
economic conditions, (B) matters affecting companies in the same or similar
industries to the industries in which the Company and its Subsidiaries or Parent
and its Subsidiaries, as the case may be, operate or (C) the execution, public
announcement or existence of this Agreement, shall not be considered when
determining whether a Material Adverse Change or Material Adverse Effect has
occurred; and (b) "Subsidiary" means any corporation, partnership, limited
liability company, joint venture or other legal entity of which Parent or the
Company, as the case may be (either alone or through or together with any other
Subsidiary), owns, directly or indirectly, 50% or more of the stock or other
equity interests the holders of which are generally entitled to vote for the
election of the board of directors or other governing body of such corporation,
partnership, limited liability company, joint venture or other legal entity.
Section 2.2 Capital Structure. (a) As of the date hereof, the
authorized capital stock of Parent consists of 200,000,000 shares of Parent
Common Stock. At the close of business on November 11, 1998, (i) 97,815,178
shares of Parent Common Stock were issued and outstanding, all of which were
validly issued, fully paid and nonassessable and free of preemptive rights, (ii)
no shares of Parent Common Stock were held in treasury of Parent or by
Subsidiaries of Parent, and (iii) 9,388,319 shares of Parent Common Stock were
reserved for issuance pursuant to outstanding options ("Parent Stock Options")
to purchase or otherwise acquire shares of Parent Common Stock under Parent's
benefit plans or arrangements or pursuant to any plans assumed by Parent in
connection with any acquisition, business combination or similar transaction,
other than the Merger (collectively, the "Parent Stock Plans"), except as set
forth in Section 2.2 of the letter dated as of the date hereof from Parent to
the Company, which letter relates to this Agreement and is designated therein as
the Parent Letter (the "Parent Letter"). As of the date of this Agreement,
except as set forth in Section 2.2 of the Parent Letter, except as set forth
above and except for the issuance of shares of Parent Common Stock pursuant to
the Parent Stock Plans, no shares of capital stock or other voting securities of
Parent were issued, reserved for issuance or outstanding. All of the shares of
Parent Common Stock issuable in exchange for Company Common Stock at the
Effective Time in accordance with this Agreement will be, when so issued, duly
authorized, validly issued, fully paid and nonassessable and free of preemptive
rights. As of the date of this Agreement, except for (i) this Agreement and (ii)
as set forth above, there are no options, warrants, calls, rights, puts or
agreements to which Parent or any of its Subsidiaries is a party or by which any
of them is bound obligating Parent or any of its Subsidiaries to issue, deliver,
sell or redeem, or cause to be issued, delivered, sold or redeemed, any
additional shares of capital stock (or other voting securities or equity
equivalents) of Parent or any of its Subsidiaries or obligating Parent or any of
its Subsidiaries to grant, extend or enter into any such option, warrant, call,
right, put or agreement.
A-9
<PAGE> 93
(b) As of the date of this Agreement, each outstanding share
of capital stock (or other voting security or equity equivalent) of each
Subsidiary of Parent is duly authorized, validly issued, fully paid and
nonassessable and each such share (or other voting security or equity
equivalent) is owned by Parent or another Subsidiary of Parent, free and clear
of all security interests, liens, claims, pledges, options, rights of first
refusal, agreements, limitations on voting rights, charges and other
encumbrances of any nature whatsoever.
(c) Except as set forth in Section 2.2 of the Parent Letter,
Exhibit 21 to Parent's Annual Report on Form 10-K for the year ended December
31, 1997 (the "Parent Annual Report", as filed with the Securities and Exchange
Commission (the "SEC"), is a true, accurate and correct statement in all
material respects of all of the information required to be set forth therein by
the regulations of the SEC.
Section 2.3 Authority. On or prior to the date of this
Agreement, the Boards of Directors of Parent and Sub declared the Merger
advisable and fair to and in the best interest of Parent and Sub, respectively,
and their respective stockholders, and approved and adopted this Agreement in
accordance with the DGCL, and the Board of Directors of Parent has resolved to
recommend the approval by Parent's stockholders of the issuance of Parent Common
Stock in connection with the Merger (the "Share Issuance"). Each of Parent and
Sub has all requisite corporate power and authority to enter into this
Agreement, and, subject to approval by the stockholders of Parent of the Share
Issuance, to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement by Parent and Sub and the consummation by Parent and
Sub of the transactions contemplated hereby have been duly authorized by all
necessary corporate action on the part of Parent and Sub, subject to (x)
approval by the stockholders of Parent of the Share Issuance and (y) the filing
of appropriate Merger documents as required by the DGCL. This Agreement and the
consummation of the transactions contemplated hereby have been approved by the
sole stockholder of Sub. This Agreement has been duly executed and delivered by
Parent and Sub, and (assuming the valid authorization, execution and delivery of
this Agreement by the Company and the validity and binding effect hereof on the
Company) this Agreement constitutes the valid and binding obligation of Parent
and Sub enforceable against each of them in accordance with its terms. The Share
Issuance has been duly authorized by Parent's Board of Directors.
Section 2.4 Consents and Approvals; No Violation. Except as
set forth in Section 2.4 of the Parent Letter, the execution and delivery of
this Agreement do not, and the consummation of the transactions contemplated
hereby and compliance with the provisions hereof will not, result in any
violation of, or default (with or without notice or lapse of time, or both)
under, or give to others a right of termination, cancellation or acceleration of
any obligation or the loss of a material benefit under, or result in the
creation of any lien, security interest, charge or encumbrance upon any of the
properties or assets of Parent or any of its Subsidiaries under, any provision
of (i) the Parent Charter or the Parent Bylaws or the Certificate of
Incorporation or Bylaws of Sub, (ii) any provision of the comparable charter or
organization documents of any of Parent's Subsidiaries, (iii) any loan or credit
agreement, note, bond, mortgage, indenture, lease or other agreement,
instrument, permit, concession, franchise or license applicable to Parent or any
of its Subsidiaries or (iv) any judgment, order, decree, statute,
A-10
<PAGE> 94
law, ordinance, rule or regulation applicable to Parent or any of its
Subsidiaries or any of their respective properties or assets, other than, in the
case of clauses (ii), (iii) or (iv), any such violations, defaults, rights,
liens, security interests, charges or encumbrances that, individually or in the
aggregate, would not have a Material Adverse Effect on Parent, materially impair
the ability of Parent or Sub to perform their respective obligations hereunder
or prevent the consummation of any of the transactions contemplated hereby. No
filing or registration with, or authorization, consent or approval of, any
domestic (federal and state), foreign or supranational court, commission,
governmental body, regulatory agency, authority or tribunal (a "Governmental
Entity") is required by or with respect to Parent or any of its Subsidiaries in
connection with the execution and delivery of this Agreement by Parent or Sub or
is necessary for the consummation of the Merger and the other transactions
contemplated by this Agreement, except for (i) in connection, or in compliance,
with the provisions of the Bank Holding Company Act of 1956, as amended (the
"Bank Act"), the Securities Act of 1933, as amended (together with the rules and
regulations promulgated thereunder the "Securities Act"), and the Securities
Exchange Act of 1934, as amended (together with the rules and regulations
promulgated thereunder, the "Exchange Act"), (ii) the filing of the Certificate
of Merger with the Secretary of State of the State of Delaware and appropriate
documents with the relevant authorities of other states in which the Company or
any of its Subsidiaries is qualified to do business, (iii) such filings as may
be required in connection with the taxes described in Section 5.10, (iv)
applicable requirements, if any, of state securities or "blue sky" laws ("Blue
Sky Laws") and Nasdaq, and (v) such other consents, orders, authorizations,
registrations, declarations and filings the failure of which to be obtained or
made would not, individually or in the aggregate, have a Material Adverse Effect
on Parent, materially impair the ability of Parent or Sub to perform its
obligations hereunder or prevent the consummation of any of the transactions
contemplated hereby.
Section 2.5 SEC Documents and Other Reports. Parent has filed
all required documents with the SEC since January 1, 1996 (the "Parent SEC
Documents"). As of their respective dates, the Parent SEC Documents complied in
all material respects with the requirements of the Securities Act or the
Exchange Act, as the case may be, and, at the respective times they were filed,
none of the Parent SEC Documents contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. The consolidated financial statements
(including, in each case, any notes thereto) of Parent included in the Parent
SEC Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, were prepared in accordance with generally accepted accounting
principles (except, in the case of the unaudited statements, as permitted by
Form 10-Q of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated therein or in the notes thereto) and fairly
presented in all material respects the consolidated financial position of Parent
and its consolidated Subsidiaries as at the respective dates thereof and the
consolidated results of their operations and their consolidated cash flows for
the periods then ended (subject, in the case of unaudited statements, to normal
year-end audit adjustments and to any other adjustments described therein).
Except as disclosed in the Parent SEC Documents or as required by generally
accepted accounting principles, Parent has not, since December 31, 1997, made
any change in the accounting practices or policies applied in the preparation of
financial statements.
A-11
<PAGE> 95
Section 2.6 Joint Proxy Statement. None of the information to
be supplied by Parent or Sub for inclusion or incorporation by reference in the
joint proxy statement relating to the Stockholder Meetings (as hereinafter
defined) (together with any amendments or supplements thereto, the "Joint Proxy
Statement") will, at the time of the mailing of the Joint Proxy Statement and at
the time of each of the Stockholder Meetings, 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, in light of the
circumstances under which they are made, not misleading. If at any time prior to
the Stockholder Meetings any event with respect to Parent, its officers and
directors or any of its Subsidiaries shall occur which is required to be
described in the Joint Proxy Statement, such event shall be so described, and an
appropriate amendment or supplement shall be promptly filed with the SEC and, as
required by law, disseminated to the stockholders of Parent and the Company. The
Joint Proxy Statement will comply as to form in all material respects with the
provisions of the Exchange Act.
Section 2.7 Absence of Certain Changes or Events. Except as
disclosed in Parent SEC Documents filed with the SEC prior to the date of this
Agreement or as disclosed in Section 2.7 of the Parent Letter, since December
31, 1997 Parent and its Subsidiaries have not incurred any liability or
obligation (indirect, direct or contingent) that would result in a Material
Adverse Effect on Parent. Since December 31, 1997, there has been no Material
Adverse Effect on Parent.
Section 2.8 Permits and Compliance; Defaults. (a) Each of
Parent and its Subsidiaries is in possession of all franchises, grants,
authorizations, licenses, permits, charters, easements, variances, exceptions,
consents, certificates, approvals and orders of any Governmental Entity
necessary for Parent or any of its Subsidiaries to own, lease and operate its
properties or to carry on its business as it is now being conducted (the "Parent
Permits"), and all such Parent Permits are valid and in full force and effect,
except where the failure to be in possession of any of the Parent Permits or the
failure of any such Parent Permit to be in full force and effect would not,
individually or in the aggregate, have a Material Adverse Effect on Parent.
Parent and its Subsidiaries are in compliance in all material respects with
their respective obligations under the Parent Permits, with only such exceptions
as, individually or in the aggregate, would not reasonably be expected to have a
Material Adverse Effect on Parent.
(b) Neither Parent nor any of its Subsidiaries is in violation
of (A) its charter, by-laws or other organizational documents, (B) any
applicable law, ordinance, administrative or governmental rule or regulation or
(C) any order, decree or judgment of any Governmental Entity having jurisdiction
over Parent or any of its Subsidiaries, except, in the case of clauses (A), (B)
and (C), for any violations that, individually or in the aggregate, would not
have a Material Adverse Effect on Parent. Except as set forth in the Parent SEC
Documents filed prior to the date of this Agreement or Section 2.8 of the Parent
Letter, no event of default or event that, but for the giving of notice or the
lapse of time or both, would constitute an event of default exists or, upon the
consummation by Parent or Sub of the transactions contemplated by this
Agreement, will exist under any indenture, mortgage, loan agreement, note or
other agreement or instrument for borrowed money, any guarantee of any agreement
or instrument for borrowed money or any lease, contractual license or other
agreement or instrument to which Parent or any of its
A-12
<PAGE> 96
Subsidiaries is a party or by which Parent or any such Subsidiary is bound or to
which any of the properties, assets or operations of Parent or any such
Subsidiary is subject, other than any defaults that, individually or in the
aggregate, would not have a Material Adverse Effect on Parent.
Section 2.9 Tax Matters. Except as otherwise set forth in
Section 2.9 of the Parent Letter, (i) Parent and each of its Subsidiaries have
filed all federal, and all material state, local and foreign, Tax Returns (as
hereinafter defined) required to have been filed or appropriate extensions
therefor have been properly obtained, and such Tax Returns are correct and
complete, except to the extent that any failure to so file or any failure to be
correct and complete would not, individually or in the aggregate, have a
Material Adverse Effect on Parent; (ii) all Taxes (as hereinafter defined) shown
to be due on such Tax Returns have been timely paid or extensions for payment
have been properly obtained, except to the extent that any failure to so pay or
so obtain such an extension would not, individually or in the aggregate, have a
Material Adverse Effect on Parent, (iii) Parent and each of its Subsidiaries
have complied in all material respects with all rules and regulations relating
to the withholding of Taxes except to the extent that any failure to comply with
such rules and regulations would not, individually or in the aggregate, have a
Material Adverse Effect on Parent; (iv) any Tax Returns referred to in clause
(i) relating to federal income Taxes have been examined by the Internal Revenue
Service (the "IRS") or the period for assessment of the Taxes in respect of
which such Tax Returns were required to be filed has expired; (v) no material
issues that have been raised in writing by the relevant taxing authority in
connection with the examination of the Tax Returns referred to in clause (i) are
currently pending; and (vi) all deficiencies asserted or assessments made as a
result of any examination of such Tax Returns by any taxing authority have been
paid in full or are being timely and properly contested. For purposes of this
Agreement: (i) "Taxes" means any federal, state, local or foreign income, gross
receipts, property, sales, use, license, excise, franchise, employment, payroll,
withholding, alternative or added minimum, ad valorem, value-added, transfer or
excise tax, or other tax, custom, duty, governmental fee or other like
assessment or charge of any kind whatsoever, together with any interest or
penalty imposed by any Governmental Entity, and (ii) "Tax Return" means any
return, report or similar statement (including the attached schedules) required
to be filed with respect to any Tax, including, without limitation, any
information return, claim for refund, amended return or declaration of estimated
Tax.
Section 2.10 Actions and Proceedings. Except as set forth in
the Parent SEC Documents filed prior to the date of this Agreement and except as
set forth in Section 2.10 of the Parent Letter, there are no outstanding orders,
judgments, injunctions, awards or decrees of any Governmental Entity against
Parent or any of its Subsidiaries, or, to the Knowledge of Parent, against any
of the present or former directors or officers of Parent or any of its
Subsidiaries, as such, or any of its or their properties, assets or business
that, individually or in the aggregate, would have a Material Adverse Effect on
Parent. Except as set forth in Section 2.10 of the Parent Letter, there are no
actions, suits or claims or legal, administrative or arbitration proceedings or
investigations pending or, to the Knowledge of Parent, threatened against Parent
or any of its Subsidiaries or, to the Knowledge of Parent, any of its or their
present or former directors or officers, as such, or any of its or their
properties, assets or business or any Parent
A-13
<PAGE> 97
Plan that, individually or in the aggregate, would have a Material Adverse
Effect on Parent or materially impair the ability of Parent to perform its
obligations hereunder. As of the date hereof, there are no actions, suits, labor
disputes or other litigation, legal or administrative proceedings or
governmental investigations pending or, to the Knowledge of Parent, threatened
against or affecting Parent or any of its Subsidiaries or, to the Knowledge of
Parent, any of its or their present or former officers or directors, as such, or
any of its or their properties, assets or business or any Parent Plan relating
to the transactions contemplated by this Agreement. For purposes of this
Agreement, "Knowledge of Parent" means the actual knowledge of the individuals
identified in Section 2.10 of the Parent Letter.
Section 2.11 Certain Agreements. Neither Parent nor any of its
Subsidiaries is a party to any contract, agreement or arrangement which is a
"material contract" (as such term is defined in Item 601(b)(10) of Regulation
S-K under the Securities Act) to be performed after the date of this Agreement
that has not been filed or incorporated by reference in the Parent SEC
Documents. Each contract, agreement or arrangement of Parent or its Subsidiaries
which is a "material contract" (as such term is defined in Item 601(b)(10) of
Regulation S-K under the Securities Act) is valid and binding on Parent or its
respective Subsidiary, as applicable, and in full force and effect and Parent
and each Subsidiary has performed all obligations required to be performed by it
to the date hereof under each such contract, agreement or arrangement in all
material respects, except where the failure of such contracts to be valid and
binding or the failure of any such obligation to have been performed would not,
individually or in the aggregate, have a Material Adverse Effect on Parent.
Section 2.12 ERISA. (a) Except as would not have a Material
Adverse Effect on Parent, (i) each Parent Plan complies in all respects with the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), the Code
and all other applicable statutes and governmental rules and regulations, and
(ii) no "reportable event" (within the meaning of Section 4043 of ERISA) has
occurred with respect to any Parent Plan. Neither Parent nor any of its ERISA
Affiliates (as hereinafter defined) has withdrawn from any Parent Multiemployer
Plan (as hereinafter defined) or instituted, or is currently considering taking,
any action to do so. Except as would not have a Material Adverse Effect on
Parent, no Parent Plan, nor any trust created thereunder, has incurred any
"accumulated funding deficiency" (as defined in Section 302 of ERISA), whether
or not waived.
(b) With respect to the Parent Plans, no event has occurred
and, to the Knowledge of Parent, there exists no condition or set of
circumstances in connection with which Parent or any ERISA Affiliate or Parent
Plan fiduciary could be subject to any liability under the terms of such Parent
Plans, ERISA, the Code or any other applicable law, other than liabilities for
benefits payable in the normal course, and other than any liability which would
not have a Material Adverse Effect on Parent. Neither Parent nor any of its
ERISA Affiliates has been notified by any Parent Multiemployer Plan that such
Parent Multiemployer Plan is currently in reorganization or insolvency under and
within the meaning of Section 4241 or 4245 of ERISA or that such Parent
Multiemployer Plan intends to terminate or has been terminated under Section
4041A of ERISA. Except as disclosed in Section 2.12 of the Parent Letter,
neither the Parent nor any of its ERISA Affiliates has any material liability or
obligation under any welfare plan to
A-14
<PAGE> 98
provide benefits after termination of employment to any employee or dependent
other than as required by Section 4980B of the Code.
(c) As used herein, (i) "Parent Plan" means a "pension plan"
(as defined in Section 3(2) of ERISA (other than a Parent Multiemployer Plan)),
a "welfare plan" (as defined in Section 3(1) of ERISA), or any bonus, profit
sharing, deferred compensation, incentive compensation, stock ownership, stock
purchase, stock option, phantom stock, holiday pay, vacation, severance, death
benefit, sick leave, fringe benefit, insurance or other plan, arrangement or
understanding, in each case established or maintained by Parent or any of its
ERISA Affiliates or as to which Parent or any of its ERISA Affiliates has
contributed or otherwise may have any liability, (ii) "Parent Multiemployer
Plan" means a "multiemployer plan" (as defined in Section 4001(a)(3) of ERISA)
to which Parent or any of its ERISA Affiliates is or has been obligated to
contribute or otherwise may have any liability, and (iii) with respect to any
person, "ERISA Affiliate" means any trade or business (whether or not
incorporated) which is under common control or would be considered a single
employer with such person pursuant to Section 414(b), (c), (m) or (o) of the
Code and the regulations promulgated under those sections or pursuant to Section
4001(b) of ERISA and the regulations promulgated thereunder.
Section 2.13 Compliance with Worker Safety and Environmental
Laws. To the Knowledge of Parent, the properties, assets and operations of
Parent and its Subsidiaries are in compliance with all applicable federal,
state, local and foreign laws, rules and regulations, orders, decrees,
judgments, permits and licenses relating to public and worker health and safety
(collectively, "Worker Safety Laws") and the protection and clean-up of the
environment and activities or conditions related thereto, including, without
limitation, those relating to the generation, handling, disposal, transportation
or release of hazardous materials (collectively, "Environmental Laws"), except
for any violations that, individually or in the aggregate, would not have a
Material Adverse Effect on Parent. With respect to such properties, assets and
operations, including any previously owned, leased or operated properties,
assets or operations, there are no events, conditions, circumstances,
activities, practices, incidents, actions or plans of Parent or any of its
Subsidiaries that interfere with or prevent compliance or continued compliance
with applicable Worker Safety Laws and Environmental Laws, other than any such
interference or prevention as would not, individually or in the aggregate, have
a Material Adverse Effect on Parent.
Section 2.14 Labor Matters. Neither Parent nor any of its
Subsidiaries is a party to any collective bargaining agreement or labor
contract. To the Knowledge of Parent, neither Parent nor any of its Subsidiaries
has engaged in any unfair labor practice with respect to any persons employed by
or otherwise performing services primarily for Parent or any of its Subsidiaries
(the "Parent Business Personnel"), and there is no unfair labor practice
complaint or grievance against Parent or any of its Subsidiaries by the National
Labor Relations Board or any comparable state agency pending or, to the
Knowledge of Parent, threatened in writing with respect to Parent Business
Personnel, except where such unfair labor practice, complaint or grievance would
not have a Material Adverse Effect on Parent. There is no labor strike, dispute,
slowdown or stoppage pending or, to the Knowledge of Parent, threatened against
or affecting Parent or any of its Subsidiaries which may interfere with the
respective business activities of
A-15
<PAGE> 99
Parent or any of its Subsidiaries, except where such dispute, strike or work
stoppage would not have a Material Adverse Effect on Parent.
Section 2.15 Intellectual Property. (a) Parent and its
Subsidiaries have, through ownership or licensing, all patents, trademarks,
trade names, service marks, trade secrets, copyrights and other proprietary
intellectual property rights (collectively, "Intellectual Property Rights") as
are necessary to conduct the business of Parent and its Subsidiaries as
currently conducted by Parent and its Subsidiaries, taken as a whole, except
where the failure to have such Intellectual Property Rights would not have a
Material Adverse Effect on Parent. To the Knowledge of Parent, neither Parent
nor any of its Subsidiaries has infringed any Intellectual Property Rights of
any third party other than any infringements that, individually or in the
aggregate, would not have a Material Adverse Effect on Parent.
(b) Except as set forth in the Parent SEC Documents filed
prior to the date of this Agreement or in Section 2.15 of the Parent Letter,
there are no actions, suits or claims or administrative proceedings or
investigations pending or, to the Knowledge of Parent, threatened that challenge
or question Parent's Intellectual Property Rights and that, individually or in
the aggregate, would have a Material Adverse Effect on Parent.
Section 2.16 Opinion of Financial Advisor. Parent has received
the written opinion of William Blair & Company L.L.C., dated the date hereof, to
the effect that, as of the date hereof, the Exchange Ratio is fair to Parent
from a financial point of view.
Section 2.17 Required Vote of Parent Stockholders. The
affirmative vote of a majority of the shares present in person or by proxy at
the Parent Stockholder Meeting (as hereinafter defined) and entitled to vote on
the Share Issuance is required to approve the Share Issuance. No other vote of
the securityholders of Parent is required by law, the Parent Charter or the
Parent Bylaws or otherwise in order for Parent to consummate the Merger and the
transactions contemplated hereby.
Section 2.18 Pooling of Interests; Reorganization. To the
Knowledge of Parent, neither Parent nor any of its Subsidiaries has (i) taken
any action or failed to take any action which action or failure would jeopardize
the treatment of the Merger as a pooling of interests for accounting purposes or
(ii) taken any action or failed to take any action which action or failure would
jeopardize the qualification of the Merger as a reorganization within the
meaning of Section 368(a) of the Code.
Section 2.19 Brokers. No broker, investment banker or other
person, other than William Blair & Company L.L.C., the fees and expenses of
which will be paid by Parent, is entitled to any broker's, finder's or other
similar fee or commission in connection with the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of Parent.
Section 2.20 Operations of Sub. Sub is a direct, wholly owned
subsidiary of Parent, was formed solely for the purpose of engaging in the
transactions contemplated hereby,
A-16
<PAGE> 100
has engaged in no other business activities and has conducted its operations
only as contemplated hereby.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Sub as
follows:
Section 3.1 Organization, Standing and Power. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has the requisite corporate power and authority to
carry on its business as now being conducted. Each Subsidiary of the Company is
duly organized, validly existing and in good standing under the laws of the
jurisdiction in which it is organized and has the requisite corporate power and
authority to carry on its business as now being conducted, except where the
failure to be so organized, existing or in good standing or to have such power
or authority would not, individually or in the aggregate, have a Material
Adverse Effect on the Company. The Company and each of its Subsidiaries are duly
qualified to do business, and are in good standing, in each jurisdiction where
the character of their properties owned or held under lease or the nature of
their activities makes such qualification necessary, except where the failure to
be so qualified would not, individually or in the aggregate, have a Material
Adverse Effect on the Company.
Section 3.2 Capital Structure. (a) As of the date hereof, the
authorized capital stock of the Company consists of 10,000,000 shares of Company
Common Stock and 1,500,000 shares of preferred stock, par value $163.60 per
share ("Company Preferred Stock"). As of the close of business on November 18,
1998, (i) 3,752,375 shares of Company Common Stock were issued and outstanding,
all of which were validly issued, fully paid and nonassessable and free of
preemptive rights except as set forth in Section 3.2 of the letter dated the
date hereof from the Company to Parent which relates to this Agreement and is
designated therein as the Company Letter (the "Company Letter"), (ii) 4,600
shares of Company Preferred Stock were issued and outstanding, all of which were
validly issued, fully paid, nonassessable and free of preemptive rights, (iii)
no shares of Company Common Stock or Company Preferred Stock were held in the
treasury of the Company or by Subsidiaries of the Company, and (iv) 331,752
shares of Company Common Stock were reserved for issuance pursuant to
outstanding options (the "Company Stock Options") to purchase shares of Company
Common Stock pursuant to the Company's Amended and Restated 1995 Stock Option
Plan (the "Company Stock Plan"). As of the date of this Agreement, except as set
forth above and except for the issuance of shares of Company Common Stock
pursuant to the Company Stock Plan in accordance with the terms thereof, no
shares of capital stock or other voting securities of the Company were issued,
reserved for issuance or outstanding. Section 3.2 of the Company Letter sets
forth a list of each holder of Company Common Stock or Company Preferred Stock
as of the close of business on November 18, 1998 and the number of shares of
Company Common Stock and Company Preferred Stock held by each such holder as of
such date. Except as set forth in Section 3.2 of the Company Letter and except
as set forth above, as of the date of this Agreement, there are no options,
warrants, calls,
A-17
<PAGE> 101
rights, puts or agreements to which the Company or any of its Subsidiaries is a
party or by which any of them is bound obligating the Company or any of its
Subsidiaries to issue, deliver, sell or redeem, or cause to be issued,
delivered, sold or redeemed, any additional shares of capital stock (or other
voting securities or equity equivalents) of the Company or any of its
Subsidiaries or obligating the Company or any of its Subsidiaries to grant,
extend or enter into any such option, warrant, call, right, put or agreement. As
of the date hereof, there are no dividends on the Company Preferred Stock that
are past due.
(b) Each outstanding share of capital stock (or other voting
security or equity equivalent, as the case may be) of each Subsidiary of the
Company is duly authorized, validly issued, fully paid and nonassessable, and
each such share (or other voting security or equity equivalent, as the case may
be) is owned by the Company or another Subsidiary of the Company, free and clear
of all security interests, liens, claims, pledges, options, rights of first
refusal, agreements, limitations on voting rights, charges and other
encumbrances of any nature whatsoever.
(c) Section 3.2 of the Company Letter sets forth a list of all
Subsidiaries of the Company and the jurisdiction in which each such Subsidiary
is organized.
Section 3.3 Authority. On or prior to the date of this
Agreement, the Board of Directors of the Company declared the Merger advisable
and fair to and in the best interest of the Company and its stockholders,
approved and adopted this Agreement in accordance with the DGCL, resolved to
recommend the approval and adoption of this Agreement by the Company's
stockholders and directed that this Agreement be submitted to the Company's
stockholders for approval and adoption. The Company has all requisite corporate
power and authority to enter into this Agreement and, subject to approval by the
stockholders of the Company of this Agreement, to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement by the Company
and the consummation by the Company of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of
the Company, subject, in the case of this Agreement, to (x) approval of this
Agreement by the stockholders of the Company and (y) the filing of appropriate
Merger documents as required by the DGCL. This Agreement has been duly executed
and delivered by the Company and (assuming the valid authorization, execution
and delivery of this Agreement by Parent and Sub and the validity and binding
effect of the Agreement on Parent and Sub) constitutes the valid and binding
obligation of the Company enforceable against the Company in accordance with its
terms.
Section 3.4 Consents and Approvals; No Violation. Except as
set forth in Section 3.4 of the Company Letter, the execution and delivery of
this Agreement do not, and the consummation of the transactions contemplated
hereby and compliance with the provisions hereof will not, result in any
violation of, or default (with or without notice or lapse of time, or both)
under, or give to others a right of termination, cancellation or acceleration of
any obligation or the loss of a material benefit under, or result in the
creation of any lien, security interest, charge or encumbrance upon any of the
properties or assets of the Company or any of its Subsidiaries under, any
provision of (i) the Company Charter or the Company Bylaws, (ii) any
A-18
<PAGE> 102
provision of the comparable charter or organization documents of any of the
Company's Subsidiaries, (iii) any loan or credit agreement, note, bond,
mortgage, indenture, lease or other agreement, instrument, permit, concession,
franchise or license applicable to the Company or any of its Subsidiaries or
(iv) any judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to the Company or any of its Subsidiaries or any of their respective
properties or assets, other than, in the case of clauses (ii), (iii) or (iv),
any such violations, defaults, rights, liens, security interests, charges or
encumbrances that, individually or in the aggregate, would not have a Material
Adverse Effect on the Company, materially impair the ability of the Company to
perform its obligations hereunder or prevent the consummation of any of the
transactions contemplated hereby. No filing or registration with, or
authorization, consent or approval of, any Governmental Entity is required by or
with respect to the Company or any of its Subsidiaries in connection with the
execution and delivery of this Agreement or is necessary for the consummation of
the Merger and the other transactions contemplated by this Agreement, except for
(i) in connection, or in compliance, with the provisions of the Hart Scott
Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), or the
Bank Act, (ii) the filing of the Certificate of Merger with the Secretary of
State of the State of Delaware and appropriate documents with the relevant
authorities of other states in which the Company or any of its Subsidiaries is
qualified to do business, (iii) such filings as may be required in connection
with the taxes described in Section 5.10, (iv) applicable requirements, if any,
of Blue Sky Laws, and (v) such other consents, orders, authorizations,
registrations, declarations and filings the failure of which to be obtained or
made would not, individually or in the aggregate, have a Material Adverse Effect
on the Company, materially impair the ability of the Company to perform its
obligations hereunder or prevent the consummation of any of the transactions
contemplated hereby.
Section 3.5 Financial Statements. Section 3.5 of the Company
Letter contains (i) the audited consolidated balance sheets of the Company as of
December 31, 1997 and 1996 and the audited consolidated statements of income,
changes in stockholders' equity and cash flows of the Company for the years
ended December 31, 1997 and 1996 and (ii) the unaudited consolidated balance
sheet of the Company as of September 30, 1998 and the related consolidated
statements of income, changes in stockholders' equity and cash flows for the
nine months then ended. Except as set forth therein, such financial statements
have been prepared in conformity with generally accepted accounting principles
applied on a consistent basis during the periods involved (except that the
unaudited financial statements do not contain footnotes and are subject to
normal year-end adjustments), and such financial statements present fairly, in
all material respects, in accordance with generally accepted accounting
principles the consolidated financial position and results of operations of the
Company, as of their respective dates and for the respective periods covered
thereby. Except as disclosed in such financial statements or as required by
generally accepted accounting principles, the Company has not, since December
31, 1997, made any change in the accounting practices or policies applied in the
preparation of financial statements.
Section 3.6 Joint Proxy Statement. None of the information to
be supplied by the Company for inclusion or incorporation by reference in the
Joint Proxy Statement will, at the time of the mailing of the Joint Proxy
Statement and at the time of each of the Stockholder Meetings, 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, in
light of the
A-19
<PAGE> 103
circumstances under which they are made, not misleading. If at any time prior to
the Stockholder Meetings any event with respect to the Company, its officers and
directors or any of its Subsidiaries shall occur which is required at that time
to be described in the Joint Proxy Statement, the Company will provide to Parent
the needed information so that Parent may describe such event.
Section 3.7 Absence of Certain Changes or Events. Except as
disclosed in Section 3.7 of the Company Letter, since December 31, 1997, the
Company and its Subsidiaries have not incurred any liability or obligation
(indirect, direct or contingent), that would result in a Material Adverse Effect
on the Company. Since December 31, 1997 there has been no Material Adverse
Effect on the Company.
Section 3.8 Permits and Compliance; Defaults. (a) Each of the
Company and its Subsidiaries is in possession of all franchises, grants,
authorizations, licenses, permits, easements, variances, exceptions, consents,
certificates, approvals and orders of any Governmental Entity necessary for the
Company or any of its Subsidiaries to own, lease and operate its properties or
to carry on its business as it is now being conducted (the "Company Permits"),
and all such Company Permits are valid and in full force and effect, except
where the failure to be in possession of any of the Company Permits or the
failure of any such Company Permits to be in full force and effect would not,
individually or in the aggregate, have a Material Adverse Effect on the Company.
The Company and its Subsidiaries are in compliance in all material respects with
their respective obligations under the Company Permits, with only such
exceptions, as, individually or in the aggregate, would not reasonably be
expected to have a Material Adverse Effect on the Company.
(b) Except as set forth in Section 3.8 of the Company Letter,
neither the Company nor any of its Subsidiaries is in violation of (A) its
charter, bylaws or other organizational documents, (B) any applicable law,
ordinance, administrative or governmental rule or regulation or (C) any order,
decree or judgment of any Governmental Entity having jurisdiction over the
Company or any of its Subsidiaries, except in the case of clauses (A), (B) and
(C), for any violations that, individually or in the aggregate, would not have a
Material Adverse Effect on the Company. Except as set forth in Section 3.8 of
the Company Letter, no event of default or event that, but for the giving of
notice or the lapse of time or both, would constitute an event of default exists
or, upon the consummation by the Company of the transactions contemplated by
this Agreement, will exist under any indenture, mortgage, loan agreement, note
or other agreement or instrument for borrowed money, any guarantee of any
agreement or instrument for borrowed money or any lease, contractual license or
other agreement or instrument to which the Company or any of its Subsidiaries is
a party or by which the Company or any such Subsidiary is bound or to which any
of the properties, assets or operations of the Company or any such Subsidiary is
subject, other than any defaults that, individually or in the aggregate, would
not have a Material Adverse Effect on the Company.
Section 3.9 Tax Matters. Except as otherwise set forth in
Section 3.9 of the Company Letter, (i) the Company and each of its Subsidiaries
have filed all federal, and all material state, local and foreign, Tax Returns
required to have been filed or appropriate extensions therefor have been
properly obtained, and such Tax Returns are correct and complete, except to the
extent that any failure to so file or any failure to be correct and complete
would not,
A-20
<PAGE> 104
individually or in the aggregate, have a Material Adverse Effect on the Company;
(ii) all Taxes shown to be due on such Tax Returns have been timely paid or
extensions for payment have been properly obtained, except to the extent that
any failure to so pay or so obtain such an extension would not, individually or
in the aggregate, have a Material Adverse Effect on the Company; (iii) the
Company and each of its Subsidiaries have complied in all material respects with
all rules and regulations relating to the withholding of Taxes except to the
extent that any failure to comply with such rules and regulations would not,
individually or in the aggregate, have a Material Adverse Effect on the Company;
(iv) any Tax Returns referred to in clause (i) relating to federal income Taxes
have been examined by the IRS or the period for assessment of the Taxes in
respect of which such Tax Returns were required to be filed has expired; (v) no
material issues that have been raised in writing by the relevant taxing
authority in connection with the examination of the Tax Returns referred to in
clause (i) are currently pending; (vi) all deficiencies asserted or assessments
made as a result of any examination of such Tax Returns by any taxing authority
have been paid in full or are being timely and properly contested; (vii) no
withholding is required under Section 1445 of the Code in connection with the
Merger; (viii) neither the Company nor any of its Subsidiaries has made any
payments, is obligated to make any payments, or is a party to any contract or
agreement, whether written or oral, that could obligate it to make any payments
that would be disallowed as a deduction under Section 280G or Section 162(m) of
the Code; (ix) there has not been an ownership change, as defined in Section
382(g) of the Code, of the Company or any of its Subsidiaries that occurred
during or after any taxable period in which the Company or any of its
Subsidiaries incurred a net operating loss that carries over to any taxable
period ending after December 31, 1997, except in connection with the
transactions contemplated pursuant to this Agreement; and (x) neither the
Company nor any of its Subsidiaries is a party to any tax allocation or sharing
agreement and neither the Company nor any of its Subsidiaries has been a member
of an affiliated group filing a consolidated federal income tax return (other
than a group the common parent of which was the Company) or has any material
liability for taxes of any person (other than the Company and its Subsidiaries)
under Treasury Regulation Section 1.1502-6 (or any similar provision of state,
local or foreign law) as a transferee or successor or by contract or otherwise.
Section 3.10 Actions and Proceedings. Except as set forth in
Section 3.10 of the Company Letter, there are no outstanding orders, judgments,
injunctions, awards or decrees of any Governmental Entity against the Company or
any of its Subsidiaries, or, to the Knowledge of the Company, against any of the
present or former directors or officers of the Company or any of its
Subsidiaries, as such, or any of its or their properties, assets or business or
any Company Plan (as hereinafter defined) that, individually or in the
aggregate, would have a Material Adverse Effect on the Company. Except as set
forth in Section 3.10 of the Company Letter, there are no actions, suits or
claims or legal, administrative or arbitration proceedings or investigations
pending or, to the Knowledge of the Company, threatened against the Company or
any of its Subsidiaries or, to the Knowledge of the Company, any of its or their
present or former directors or officers, as such, or any of its or their
properties, assets or business or any Company Plan that, individually or in the
aggregate, would have a Material Adverse Effect on the Company or materially
impair the ability of the Company to perform its obligations hereunder. As of
the date hereof, there are no actions, suits, labor disputes or other
litigation, legal or administrative proceedings or governmental investigations
pending or, to the Knowledge of the Company,
A-21
<PAGE> 105
threatened against the Company or any of its Subsidiaries or, to the Knowledge
of the Company, any of its or their present or former officers or directors, as
such, or any of its or their properties, assets or business or any Company Plan
relating to the transactions contemplated by this Agreement. For purposes of
this Agreement, "Knowledge of the Company" means the actual knowledge of the
individuals identified on Section 3.10 of the Company Letter.
Section 3.11 Certain Agreements. Except as set forth in
Section 3.11 of the Company Letter, neither the Company nor any of its
Subsidiaries is a party to or bound by (i) any oral or written agreement or
plan, including any employment agreement, severance agreement, stock option
plan, stock appreciation rights plan, restricted stock plan or stock purchase
plan, any of the benefits of which will be increased, or the vesting of the
benefits of which will be accelerated, by the occurrence of any of the
transactions contemplated by this Agreement, or (ii) as of the date of this
Agreement, any contract, agreement or arrangement that is material to the
business, properties, assets, liabilities, financial condition or results of
operations of the Company and its subsidiaries, taken as a whole ("Company
Contract"). Each Company Contract is valid and binding on the Company or its
Subsidiary, as applicable, and in full force and effect and the Company and each
Subsidiary has performed the obligations required to be performed by it to the
date hereof under each Company Contract in all material respects, except where
the failure of such contracts to be valid and binding or the failure of such
obligations to have been performed would not, individually or in the aggregate,
have a Material Adverse Effect on the Company.
Section 3.12 ERISA. (a) Each Company Plan is listed in Section
3.12 of the Company Letter, and true and complete copies of each Company Plan
have heretofore been made available to Parent. Except as would not have a
Material Adverse Effect on the Company, each Company Plan complies in all
respects with ERISA, the Code and all other applicable statutes and governmental
rules and regulations. Neither the Company nor any of its ERISA Affiliates has
maintained, contributed to, or had any liability under, any pension plan subject
to Title IV of ERISA or Section 302 of the Code.
(b) With respect to the Company Plans, no event has occurred
and, to the Knowledge of the Company, there exists no condition or set of
circumstances in connection with which the Company or any ERISA Affiliate or
Company Plan fiduciary could be subject to any liability under the terms of such
Company Plans, ERISA, the Code or any other applicable law, other than
liabilities for benefits payable in the normal course, and other than any
liability which would not have a Material Adverse Effect on the Company. Except
as disclosed in Section 3.12 of the Company Letter, neither the Company nor any
of its ERISA Affiliates has any material liability or obligation under any
welfare plan to provide benefits after termination of employment to any employee
or dependent other than as required by Section 4980B of the Code.
(c) As used herein, "Company Plan" means a "pension plan" (as
defined in Section 3(2) of ERISA), a "welfare plan" (as defined in Section 3(1)
of ERISA), or any bonus, profit sharing, deferred compensation, incentive
compensation, stock ownership, stock purchase, stock option, phantom stock,
holiday pay, vacation, severance, death benefit, sick leave, fringe benefit,
insurance or other plan, arrangement or understanding, in each case established
or
A-22
<PAGE> 106
maintained by the Company or any of its ERISA Affiliates or as to which the
Company or any of its ERISA Affiliates has contributed or otherwise may have any
liability.
(d) Section 3.12 of the Company Letter contains a list, and
the Company has heretofore made available to Parent a true and complete copy, of
all employment agreements with employees of the Company and each of its
Subsidiaries.
Section 3.13 Compliance with Worker Safety and Environmental
Laws. To the Knowledge of the Company, the properties, assets and operations of
the Company and its Subsidiaries are in compliance with all applicable Worker
Safety Laws and Environmental Laws, except for any violations that, individually
or in the aggregate, would not have a Material Adverse Effect on the Company.
With respect to such properties, assets and operations, including any previously
owned, leased or operated properties, assets or operations, there are no events,
conditions, circumstances, activities, practices, incidents, actions or plans of
the Company or any of its Subsidiaries that interfere with or prevent compliance
or continued compliance with applicable Worker Safety Laws and Environmental
Laws, other than any such interference or prevention as would not, individually
or in the aggregate, have a Material Adverse Effect on the Company.
Section 3.14 Labor Matters. Neither the Company nor any of its
Subsidiaries is a party to any collective bargaining agreement or labor
contract. To the Knowledge of the Company, neither the Company nor any of its
Subsidiaries has engaged in any unfair labor practice with respect to any
persons employed by or otherwise performing services primarily for the Company
or any of its Subsidiaries (the "Company Business Personnel"), and there is no
unfair labor practice complaint or grievance against the Company or any of its
Subsidiaries by the National Labor Relations Board or any comparable state
agency pending or, to the Knowledge of the Company, threatened in writing with
respect to the Company Business Personnel, except where such unfair labor
practice, complaint or grievance would not have a Material Adverse Effect on the
Company. There is no labor strike, dispute, slowdown or stoppage pending or, to
the Knowledge of the Company, threatened against or affecting the Company or any
of its Subsidiaries which may interfere with the respective business activities
of the Company or any of its Subsidiaries, except where such dispute, strike or
work stoppage would not have a Material Adverse Effect on the Company.
Section 3.15 Intellectual Property. (a) The Company and its
Subsidiaries have, through ownership or licensing, all Intellectual Property
Rights as are necessary to conduct the business of the Company and its
Subsidiaries as currently conducted by the Company and its Subsidiaries, taken
as a whole, except where the failure to have such Intellectual Property Rights
would not have a Material Adverse Effect on the Company. To the Knowledge of the
Company, neither the Company nor any of its Subsidiaries has infringed any
Intellectual Property Rights of any third party other than any infringements
that, individually and in the aggregate, would not have a Material Adverse
Effect on the Company.
(b) Except as set forth in Section 3.15 of the Company Letter,
there are no actions, suits or claims or administrative proceedings or
investigations pending or, to the
A-23
<PAGE> 107
Knowledge of the Company, threatened that challenge or question the Company's
Intellectual Property Rights and that, individually or in the aggregate, would
have a Material Adverse Effect on the Company.
Section 3.16 Opinion of Financial Advisor. The Company has
received the written opinion of Salomon Smith Barney Inc., dated the date
hereof, to the effect that, as of the date hereof, the Exchange Ratio is fair to
the Company's stockholders from a financial point of view, a copy of which
opinion has been delivered to Parent.
Section 3.17 Required Vote of Company Stockholders. The
affirmative vote of the holders of a majority of the outstanding shares of
Company Common Stock and Company Preferred Stock voting together as a single
class is required to adopt this Agreement. No other vote of the securityholders
of the Company is required by law, the Company Charter or the Company Bylaws or
otherwise in order for the Company to consummate the Merger and the transactions
contemplated hereby.
Section 3.18 Pooling of Interests; Reorganization. To the
Knowledge of the Company, neither it nor any of its Subsidiaries has (i) taken
any action or failed to take any action which action or failure would jeopardize
the treatment of the Merger as a pooling of interests for accounting purposes or
(ii) taken any action or failed to take any action which action or failure would
jeopardize the qualification of the Merger as a reorganization within the
meaning of Section 368(a) of the Code.
Section 3.19 Brokers. No broker, investment banker or other
person, other than Salomon Smith Barney Inc., the fees and expenses of which
will be paid by the Company, is entitled to any broker's, finder's or other
similar fee or commission in connection with the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of the Company.
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
Section 4.1 Conduct of Business Pending the Merger. (a) Except
as expressly permitted by clauses (i) through (x) of this Section 4.1(a), during
the period from the date of this Agreement through the Effective Time, the
Company shall, and shall cause each of its Subsidiaries to, in all material
respects carry on its business in the ordinary course of its business as
currently conducted and, to the extent consistent therewith, use reasonable best
efforts to preserve intact its current business organization, keep available the
services of its current officers and employees and preserve its relationships
with customers, suppliers and others having business dealings with it. Without
limiting the generality of the foregoing, and except as otherwise contemplated
by this Agreement or as set forth in Section 4.1 of the Company Letter, the
Company shall not, and shall not permit any of its Subsidiaries to, without the
prior written consent of Parent, which shall not be unreasonably withheld:
A-24
<PAGE> 108
(i) (A) declare, set aside or pay any dividends on, or make
any other actual, constructive or deemed distributions in respect of,
any of its capital stock, or otherwise make any payments to its
stockholders in their capacity as such, other than (1) quarterly
dividends by the Company on its outstanding Company Preferred Stock in
accordance with the terms thereof or (2) dividends by the Company's
Subsidiaries to the Company or another Subsidiary of the Company, (B)
split, combine or reclassify any of its capital stock or issue or
authorize the issuance of any other securities in respect of, in lieu
of or in substitution for shares of its capital stock or (C) purchase,
redeem or otherwise acquire any shares of capital stock of the Company
or any other securities thereof or any rights, warrants or options to
acquire any such shares or other securities;
(ii) issue, deliver, sell, pledge, dispose of or otherwise
encumber any shares of its capital stock, any other voting securities
or equity equivalent or any securities convertible into, or any rights,
warrants or options to acquire any such shares, voting securities,
equity equivalent or convertible securities, other than the issuance of
shares of Company Common Stock pursuant to the Company Stock Plan in
accordance with its current terms;
(iii) amend its charter or by-laws or other comparable charter
or organizational documents;
(iv) acquire or agree to acquire by merging or consolidating
with, or by purchasing a substantial portion of the assets of or equity
in, or by any other manner, any business or any corporation, limited
liability company, partnership, association or other business
organization or division thereof or otherwise acquire or agree to
acquire any assets, other than asset acquisitions that are in the
ordinary course of business consistent with past practice and not
material to the Company and its Subsidiaries taken as a whole;
(v) sell, lease, license, mortgage, encumber or otherwise
dispose of any of its properties or assets, other than sales, leases or
licenses in the ordinary course of business consistent with past
practice;
(vi) incur any indebtedness for borrowed money, guarantee any
such indebtedness or make any loans, advances or capital contributions
to, or other investments in, any other person, other than (A)
indebtedness for borrowed money not exceeding $75,000,000 in aggregate
principal amount outstanding at any one time, (B) indebtedness,
guarantees, loans, advances, capital contributions and investments
between the Company and any of its Subsidiaries or between any of such
Subsidiaries, and (C) cash management activities carried on in the
ordinary course of business consistent with past practice;
(vii) increase the compensation payable or to become payable
to its, officers or employees (except for increases in the ordinary
course of business
A-25
<PAGE> 109
consistent with past practice) or, grant any severance or termination
pay (other than in the ordinary course of business consistent with past
practice) to, or enter into or amend any employment agreement with, any
current or former director or officer of the Company or any of its
Subsidiaries, or establish, adopt, enter into, or, except as may be
required to comply with applicable law, amend or take action to enhance
or accelerate any rights or benefits under, any bonus, profit sharing,
thrift, compensation, stock option, restricted stock, pension,
retirement, deferred compensation, employment, termination, severance
or other plan, agreement, trust, fund, policy or arrangement for the
benefit of any current or former director, officer or employee, other
than payment of bonuses for the year ended December 31, 1998 in the
aggregate amount accrued prior to the date of this Agreement pursuant
to the Company's 1998 Incentive Compensation Plan;
(viii) make any change to accounting policies or procedures
(other than actions required to be taken by generally accepted
accounting principles);
(ix) make or agree to make any new capital expenditure or
expenditures which, individually, is in excess of $2,000,000 or, in the
aggregate, are in excess of $25,000,000; or
(x) authorize, recommend, propose or announce an intention
to do any of the foregoing, or enter into any contract, agreement,
commitment or arrangement to do any of the foregoing.
(b) Except as expressly permitted by clauses (i) through
(iv) of this Section 4.1(b), during the period from the date of this Agreement
through the Effective Time, Parent shall, and shall cause each of its
Subsidiaries to, in all material respects carry on its business in the ordinary
course of its business as currently conducted and, to the extent consistent
therewith, use reasonable best efforts to preserve intact its current business
organizations, keep available the services of its current officers and employees
and preserve its relationships with customers, suppliers and others having
business dealings with it. Without limiting the generality of the foregoing, and
except as otherwise contemplated by this Agreement or as set forth in Section
4.1 of the Parent Letter, Parent shall not, and shall not permit any of its
Subsidiaries to, without the prior written consent of the Company, which shall
not be unreasonably withheld:
(i) (A) combine or reclassify any of its capital stock or
issue or authorize the issuance of any other securities in respect of,
in lieu of or in substitution for shares of its capital stock or (B)
purchase, redeem or otherwise acquire any shares of capital stock of
Parent or any other securities thereof or any rights, warrants or
options to acquire any such shares or other securities, other than
pursuant to any Parent Plan or in connection with the cashless exercise
of options by employees to purchase shares of Parent Common Stock;
(ii) amend its charter or by-laws or other comparable charter
or organizational documents;
A-26
<PAGE> 110
Section 5.3 Access to Information. (a) Subject to contractual
and legal restrictions applicable to the Company or any of its Subsidiaries, the
Company shall, and shall cause each of its Subsidiaries to, afford to the
accountants, counsel, financial advisors and other representatives of Parent
reasonable access to, and permit them to make such inspections as they may
reasonably require of, during normal business hours during the period from the
date of this Agreement through the Effective Time, its properties, books,
contracts, commitments and records (including, without limitation, the work
papers of independent accountants, if available and subject to the consent of
such independent accountants) and, during such period, the Company shall, and
shall cause each of its Subsidiaries to, furnish promptly to Parent (i) a copy
of each report, schedule, statement and other document filed by it during such
period pursuant to the requirements of federal or state banking laws and (ii)
all other information concerning its business, properties and personnel as
Parent may reasonably request; provided, that the Company may provide
information which is of a sensitive competitive nature in a form which minimizes
the potential detriment to the Company from such disclosure while addressing the
legitimate business objectives of Parent in seeking such information.
(b) Subject to contractual and legal restrictions applicable
to Parent or any of its Subsidiaries, Parent shall, and shall cause each of its
Subsidiaries to, afford to the accountants, counsel, financial advisors and
other representatives of the Company reasonable access to, and permit them to
make such inspections as they may reasonably require of, during normal business
hours during the period from the date of this Agreement through the Effective
Time, its properties, books, contracts, commitments and records (including,
without limitation, the work papers of independent accountants, if available and
subject to the consent of such independent accountants) and, during such period,
Parent shall, and shall cause each of its Subsidiaries to, furnish promptly to
Parent (i) a copy of each report, schedule, registration statement and other
document filed by it during such period pursuant to the requirements of federal
or state securities or banking laws and (ii) all other information concerning
its business, properties and personnel as the Company may reasonably request;
provided, that Parent may provide information which is of a sensitive
competitive nature in a form which minimizes the potential detriment to Parent
from such disclosure while addressing the legitimate business objectives of the
Company in seeking such information.
(c) No investigation pursuant to this Section 5.3 shall affect
any representation or warranty in this Agreement of any party hereto or any
condition to the obligations of the parties hereto. All information obtained
pursuant to this Section 5.3 shall be kept confidential in accordance with the
Confidentiality Agreement, dated August 26, 1998 between Parent and the Company
(the "Confidentiality Agreement"), all of the terms of which shall remain in
full force and effect after the date hereof.
Section 5.4 Compliance with the Securities Act. (a) Section
5.4 of the Company Letter contains a list identifying all persons who, at the
time of the Company Stockholder Meeting, may be deemed to be "affiliates" of the
Company as that term is used in paragraphs (c) and (d) of Rule 145 under the
Securities Act (the "Rule 145 Affiliates"). The Company shall use its reasonable
best efforts to cause each person who is identified as a Rule 145 Affiliate in
such list to deliver to Parent within 30 days of the date hereof a written
A-27
<PAGE> 111
agreement in substantially the form of Exhibit C hereto (the "Company Affiliate
Letter"), executed by each of such persons identified in the foregoing list.
Prior to the Effective Time, the Company shall amend and supplement Section 5.4
of the Company Letter and use its reasonable best efforts to cause each
additional person who is identified as a Rule 145 Affiliate of the Company to
execute the Company Affiliate Letter.
(b) Section 5.4 of the Parent Letter contains a list
identifying those persons who may be, at the time of the Parent Stockholder
Meeting, affiliates of Parent under applicable SEC accounting releases with
respect to pooling of interests accounting treatment. Parent shall use its
reasonable best efforts to enter into a written agreement in substantially the
form of Exhibit D hereto (the "Parent Affiliate Letter") within 30 days of the
date hereof with each of such persons identified in the foregoing list, copies
of which shall be delivered to the Company. Prior to the Effective Time, Parent
shall amend and supplement Section 5.4 of the Parent Letter and use its
reasonable best efforts to cause each additional person who is identified as an
affiliate of Parent to execute the Parent Affiliate Letter.
Section 5.5 Listing of Parent Common Stock. Parent shall use
its best efforts to continue the listing of the Parent Common Stock on Nasdaq
during the term of this Agreement. Parent shall use its best efforts to list on
Nasdaq, upon official notice of issuance, the shares of Parent Common Stock to
be issued in connection with the Merger or pursuant to the Company Stock
Options.
Section 5.6 Fees and Expenses. (a) Except as provided in this
Section 5.6 and Section 5.10, whether or not the Merger is consummated, all
costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby including, without limitation, the fees and
disbursements of counsel, financial advisors and accountants, shall be paid by
the party incurring such costs and expenses.
(b) Notwithstanding any provision in this Agreement to the
contrary, if this Agreement is terminated by the Company pursuant to Section
7.1(f), then and only then Parent shall (without prejudice to any other rights
the Company may have against Parent for breach of this Agreement) promptly pay
to the Company a fee of $5,000,000.
Section 5.7 Company Stock Plan. At the Effective Time, each
Company Stock Option which is outstanding immediately prior to the Effective
Time pursuant to the Company Stock Plan shall become and represent an option to
purchase the number of shares of Parent Common Stock (a "Substitute Option")
(decreased to the nearest full share) determined by multiplying (i) the number
of shares of Company Common Stock subject to such Company Stock Option
immediately prior to the Effective Time by (ii) the Exchange Ratio, at an
exercise price per share of Parent Common Stock (rounded up to the nearest tenth
of a cent) equal to the exercise price per share of Company Common Stock
immediately prior to the Effective Time divided by the Exchange Ratio. Parent
shall pay cash to holders of Company Stock Options in lieu of issuing fractional
shares of Parent Common Stock upon the exercise of Substitute Options for shares
of Parent Common Stock, unless in the reasonable judgment of Parent, based upon
the advice of its independent public accountants, such payment would adversely
affect the ability to
A-28
<PAGE> 112
account for the Merger under the pooling of interests method. After the
Effective Time, except as provided above in this Section 5.7, each Substitute
Option shall be exercisable upon the same terms and conditions as were
applicable under the related Company Stock Option immediately prior to or at the
Effective Time. Within 15 days after the Effective Time, Parent shall file a
registration statement on Form S-8 with respect to the shares of Parent Common
Stock to be issued upon exercise of the Substitute Options and shall use its
reasonable best efforts to maintain the effectiveness of such registration
statement (and maintain the current status of the prospectus or prospectuses
contained therein) for so long as such Substitute Options remain outstanding.
Section 5.8 Reasonable Best Efforts. (a) Upon the terms and
subject to the conditions set forth in this Agreement, each of the parties
agrees to use reasonable best efforts to take, or cause to be taken, all
actions, and to do, or cause to be done, and to assist and cooperate with the
other parties in doing all things necessary, proper or advisable to consummate
and make effective, in the most expeditious manner practicable, the Merger and
the other transactions contemplated by this Agreement, including but not limited
to: (i) obtaining all necessary actions or non-actions, waivers, consents and
approvals from all Governmental Entities and making all necessary registrations
and filings (including filings with Governmental Entities) and taking all steps
as may be necessary to obtain an approval or waiver from, or to avoid an action
or proceeding by, any Governmental Entity (including those in connection with
the HSR Act and the Bank Act), (ii) defending any lawsuits or other legal
proceedings, whether judicial or administrative, challenging this Agreement or
the consummation of the transactions contemplated hereby, including seeking to
have any stay or temporary restraining order entered into by any court or other
Governmental Entity vacated or reversed, (iii) in the case of Parent, promptly,
if required by any Governmental Entity in order to consummate Merger, taking all
steps and making all undertakings to secure antitrust and bank regulatory
clearance (including steps to effect the sale or other disposition of particular
properties of Parent, its Subsidiaries and/or the Company and its Subsidiaries
and to hold separate such properties pending such sale or other disposition),
(iv) keeping the other party informed in all material respects of any material
communication received by such party from, or given by such party to, any
Governmental Entity and of any material communication received or given in
connection with any proceeding by a private party, in each case relating to the
Merger or the transactions contemplated by this Agreement, (v) permitting the
other party to review any material communication delivered to, and consulting
with the other party in advance of any meeting or conference with, any
Governmental Entity relating to the Merger or the transactions contemplated by
this Agreement or in connection with any proceeding by a private party, and
giving the other party the opportunity to attend and participate in such
meetings and conferences (to the extent permitted by such Governmental Entity or
private party), (vi) obtaining of all necessary consents, approvals or waivers
from third parties, and (vii) executing and delivering any additional
instruments necessary to consummate the transactions contemplated by this
Agreement. No party to this Agreement shall consent to any voluntary delay of
the consummation of the Merger at the behest of any Governmental Entity without
the consent of the other parties to this Agreement, which consent shall not be
unreasonably withheld.
A-29
<PAGE> 113
(b) Each party shall use all reasonable best efforts to not
take any action, or enter into any transaction, which would cause any of its
representations or warranties contained in this Agreement to be untrue or result
in a breach of any covenant made by it in this Agreement.
Section 5.9 Public Announcements. Parent and the Company will
not issue any press release with respect to the transactions contemplated by
this Agreement or otherwise issue any written public statements with respect to
such transactions without prior consultation with and the approval of the other
party, except as may be required by applicable law or by obligations pursuant to
any listing agreement with any national securities exchange.
Section 5.10 Real Estate Transfer and Gains Tax. Parent and
the Company agree that either the Company or the Surviving Corporation will pay
any state or local tax which is attributable to the transfer of the beneficial
ownership of the Company's or its Subsidiaries' real property, if any
(collectively, the "Gains Taxes"), and any penalties or interest with respect to
the Gains Taxes, payable in connection with the consummation of the Merger. The
Company and Parent agree to cooperate with the other in the filing of any
returns with respect to the Gains Taxes, including supplying in a timely manner
a complete list of all real property interests held by the Company and its
Subsidiaries and any information with respect to such property that is
reasonably necessary to complete such returns. The portion of the consideration
allocable to the real property of the Company and its Subsidiaries shall be
determined by Parent in its reasonable discretion.
Section 5.11 Indemnification; Directors and Officers
Insurance. For six years from and after the Effective Time, Parent shall, and
shall cause the Surviving Corporation to, indemnify and hold harmless all past
and present directors, officers, employees or agents of the Company and of its
Subsidiaries to the full extent permitted by law, any outstanding
indemnification agreements, the Company Charter or the Company Bylaws, in each
case for all acts or omissions occurring at or prior to the Effective Time, and
shall periodically advance litigation expenses incurred by each such person in
connection with defending any claim, action or investigation arising out of such
acts or omissions (including the cost of any investigation and preparation
incurred in connection therewith). Parent shall provide, or shall cause the
Surviving Corporation to provide, for an aggregate period of not less than six
years from the Effective Time, the Company's current and former directors and
officers an insurance and indemnification policy that provides coverage for
events occurring prior to the Effective Time (the "D&O Insurance") that is no
less favorable than the Company's existing policy or, if substantially
equivalent insurance coverage is unavailable, the best available coverage;
provided, however, that the Surviving Corporation shall not be required to pay
an annual premium for the D&O Insurance in excess of 150% of the last annual
premium paid by the Company prior to the date hereof, but in such case shall
purchase as much coverage as possible for such amount.
(b) In the event Parent or any of its successors or assigns
(i) consolidates with or merges into any other person and is not the continuing
or surviving corporation or entity of such consolidation or merger or (ii)
conveys all or substantially all of its properties and assets to any
A-30
<PAGE> 114
person then, and in each case, proper provision shall be made so that the
successors and assigns of Parent assume the obligations set forth in this
Section 5.11.
Section 5.12 Notification of Certain Matters. Parent shall
use its reasonable best efforts to give prompt notice to the Company, and the
Company shall use its reasonable best efforts to give prompt notice to Parent,
of: (i) the occurrence, or non-occurrence, of any event the occurrence, or
non-occurrence, of which it is aware and which would be reasonably likely to
cause (x) any representation or warranty contained in this Agreement to be
untrue or inaccurate in any material respect or (y) any covenant, condition or
agreement contained in this Agreement not to be complied with or satisfied in
all material respects, (ii) any failure of Parent or the Company, as the case
may be, to comply in a timely manner with or satisfy any covenant, condition or
agreement to be complied with or satisfied by it hereunder or (iii) any change
or event which would be reasonably likely to have a Material Adverse Effect on
Parent or the Company, as the case may be; provided, however, that the delivery
of any notice pursuant to this Section 5.12 shall not limit or otherwise affect
the remedies available hereunder to the party receiving such notice.
Section 5.13 Employee Matters. (a) Parent shall cause the
Surviving Corporation to honor all employment, severance and indemnification
agreements to which the Company or its Subsidiaries is a party as of the
Effective Time.
(b) Immediately prior to the Effective Time, the Company shall
use its reasonable best efforts to take all action required to terminate its
Retirement Savings Plan such that all employees of the Company shall be entitled
to receive a distribution therefrom without violating the terms of Section
401(k)(2)(B) of the Code and be eligible to roll over that distribution (or the
otherwise eligible portion thereof), at their election, to an individual
retirement account or to a comparable plan of the Parent or the Surviving
Corporation which meets all of the requirements for qualification under Sections
401(a) and (k) of the Code. To the extent any Parent Plan (or any plan of the
Surviving Corporation) shall be made applicable to any employee or former
employee of the Company, Parent shall, or shall cause the Surviving Corporation
to, grant to employees and former employees of the Company credit for service
with the Company and its Subsidiaries (or service credited by the Company and
its Subsidiaries) for the purposes of determining eligibility to participate in
such plan and the employee's nonforfeitable interest in benefits thereunder and
for purposes of calculating benefits thereunder (but subject to offset, if
necessary, to avoid duplication of benefits). Parent shall (i) waive (or cause
to be waived) any pre-existing condition limitations that might otherwise apply
to employees or former employees of the Company and its Subsidiaries unless not
waived under the Company's equivalent plan and (ii) recognize (or cause to be
recognized) the dollar amount of all expenses incurred by employees or former
employees of the Company and its Subsidiaries during the calendar year in which
the Effective Time occurs for purposes of satisfying the calendar year
deductions and co-payment limitations for such year, under the relevant welfare
benefit plans of Parent or the Surviving Corporation. Nothing in this Agreement
shall be interpreted as limiting the power of the Surviving Corporation to amend
or terminate any Company Plan or any other employee benefit plan, program,
agreement or policy in accordance with its terms or as requiring the
A-31
<PAGE> 115
Surviving Corporation or Parent to offer to continue (other than as required by
its terms) any written employment contract.
Section 5.14 Registration Rights Agreement. At or prior to the
Effective Time, Parent shall enter into the Registration Rights Agreement,
substantially in the form of Exhibit E (the "Registration Rights Agreement"),
with each of the stockholders of the Company who or which elects to become a
party thereto.
ARTICLE VI
CONDITIONS PRECEDENT TO THE MERGER
Section 6.1 Conditions to Each Party's Obligation to Effect
the Merger. The respective obligations of each party to effect the Merger shall
be subject to the fulfillment at or prior to the Effective Time of the following
conditions:
(a) Stockholder Approval. This Agreement shall have been duly
approved by the requisite vote of stockholders of the Company in accordance with
applicable law and the Company Charter and the Company Bylaws, and the Share
Issuance shall have been approved by the requisite vote of the stockholders of
Parent in accordance with applicable rules of Nasdaq, applicable law and the
Parent Charter and the Parent Bylaws.
(b) Other Approvals. (i) The waiting period (and any extension
thereof) applicable to the consummation of the Merger under the HSR Act and the
Bank Act shall have expired or been terminated.
(ii) All authorizations, consents, orders, declarations or
approvals of, or filings with, or terminations or expirations of waiting periods
imposed by, any Governmental Entity, which the failure to obtain, make or occur
would have the effect of making the Merger or any of the transactions
contemplated hereby illegal shall have been obtained, shall have been made or
shall have occurred.
(c) No Order. No court or other Governmental Entity having
jurisdiction over the Company or Parent, or any of their respective
Subsidiaries, shall have enacted, issued, promulgated, enforced or entered any
law, rule, regulation, executive order, decree, injunction or other order
(whether temporary, preliminary or permanent) which is then in effect and has
the effect of making the Merger or any of the transactions contemplated hereby
illegal.
(d) Litigation. There shall not be instituted or pending any
suit, action or proceeding by any Governmental Entity relating to this Agreement
or any of the transactions contemplated hereby which would have a Material
Adverse Effect on the Company or Parent.
(e) Pooling. The Company shall have received the written
opinion, dated as of the Effective Time, of the Philadelphia, Pennsylvania
office of Ernst & Young LLP that Ernst
A-32
<PAGE> 116
& Young LLP concurs with management's conclusion that the Company is eligible to
be a party to a business combination accounted for as a pooling of interests in
accordance with generally accepted accounting principles and applicable
published rules and regulations of the SEC. Parent shall have received the
written opinion, dated as of the Effective Time, of the Memphis, Tennessee
office of Ernst & Young LLP that Ernst & Young LLP concurs with management's
conclusion that Parent is eligible to be a party to a business combination
accounted for as a pooling of interests in accordance with generally accepted
accounting principles and applicable published rules and regulations of the SEC,
and that the Merger will qualify for pooling of interests accounting. Each of
such written opinions shall be in form and substance reasonably satisfactory to
the Company and Parent.
Section 6.2 Conditions to Obligation of the Company to Effect
the Merger. The obligation of the Company to effect the Merger shall be subject
to the fulfillment at or prior to the Effective Time of the following additional
conditions:
(a) Performance of Obligations; Representations and
Warranties. Each of Parent and Sub shall have performed in all material respects
each of its covenants and agreements contained in this Agreement required to be
performed on or prior to the Effective Time, each of the representations and
warranties of Parent and Sub contained in this Agreement that is qualified by
materiality shall be true and correct on and as of the Effective Time as if made
on and as of such date (other than representations and warranties which address
matters only as of a certain date which shall be true and correct as of such
certain date) and each of such representations and warranties that is not so
qualified shall be true and correct in all material respects on and as of the
Effective Time as if made on and as of such date (other than representations and
warranties which address matters only as of a certain date which shall be true
and correct in all material respects as of such certain date), in each case
except as contemplated or permitted by this Agreement, and the Company shall
have received a certificate signed on behalf of Parent by its Chief Executive
Officer and its Chief Financial Officer to such effect.
(b) Tax Opinion. The Company shall have received an opinion
of Sidley & Austin in form and substance reasonably satisfactory to the Company,
dated the Effective Time, substantially to the effect that on the basis of
facts, representations and assumptions set forth in such opinion which are
consistent with the state of facts existing as of the Effective Time, for
federal income tax purposes:
(i) the Merger will constitute a "reorganization" within the
meaning of Section 368(a) of the Code, and the Company, Sub and Parent
will each be a party to that reorganization within the meaning of
Section 368(b) of the Code;
(ii) no gain or loss will be recognized by Parent, Sub or the
Company as a result of the Merger;
(iii) no gain or loss will be recognized by the stockholders
of the Company upon the conversion of their shares of Company Common
Stock into shares of Parent Common
A-33
<PAGE> 117
Stock pursuant to the Merger, except with respect to cash, if any,
received in lieu of fractional shares of Parent Common Stock;
(iv) the aggregate tax basis of the shares of Parent Common
Stock received in exchange for shares of Company Common Stock pursuant
to the Merger (including a fractional share of Parent Common Stock for
which cash is received) will be the same as the aggregate tax basis of
such shares of Company Common Stock;
(v) the holding period for shares of Parent Common Stock
received in exchange for shares of Company Common Stock pursuant to the
Merger will include the holder's holding period for such shares of
Company Common Stock, provided such shares of Company Common Stock were
held as capital assets by the holder at the Effective Time; and
(vi) a stockholder of the Company who receives cash in lieu
of a fractional share of Parent Common Stock will recognize gain or
loss equal to the difference, if any, between such stockholder's basis
in the fractional share (determined under clause (iv) above) and the
amount of cash received.
In rendering such opinion, Sidley & Austin may rely upon the representations
contained herein and may receive and rely upon representations from Parent, the
Company, and others, including representations from Parent substantially similar
to the representations in the Parent Tax Certificate attached to the Parent
Letter and representations from the Company substantially similar to the
representations in the Company Tax Certificate attached to the Company Letter.
(c) Registration Rights Agreement. The Registration Rights
Agreement shall have been duly executed and delivered by Parent.
Section 6.3 Conditions to Obligations of Parent and Sub to
Effect the Merger. The obligations of Parent and Sub to effect the Merger shall
be subject to the fulfillment at or prior to the Effective Time of the following
additional conditions:
(a) Performance of Obligations; Representations and
Warranties. The Company shall have performed in all material respects each of
its covenants and agreements contained in this Agreement required to be
performed on or prior to the Effective Time, each of the representations and
warranties of the Company contained in this Agreement that is qualified by
materiality shall be true and correct on and as of the Effective Time as if made
on and as of such date (other than representations and warranties which address
matters only as of a certain date which shall be true and correct as of such
certain date) and each of the representations and warranties that is not so
qualified shall be true and correct in all material respects on and as of the
Effective Time as if made on and as of such date (other than representations and
warranties which address matters only as of a certain date which shall be true
and correct in all material respects as of such certain date), in each case
except as contemplated or permitted by this Agreement, and Parent shall have
received a certificate signed on behalf of the Company by its Chief Executive
Officer and its Chief Financial Officer to such effect.
A-34
<PAGE> 118
(b) Tax Opinion. Parent shall have received an opinion of
Wyatt, Tarrant & Combs, in form and substance reasonably satisfactory to Parent,
dated the Effective Time, substantially to the effect that on the basis of
facts, representations and assumptions set forth in such opinion which are
consistent with the state of facts existing as of the Effective Time, for
federal income tax purposes:
(i) the Merger will constitute a "reorganization" within the
meaning of Section 368(a) of the Code, and the Company, Sub and Parent
will each be a party to that reorganization within the meaning of
Section 368(b) of the Code;
(ii) no gain or loss will be recognized by Parent, Sub or the
Company as a result of the Merger;
(iii) no gain or loss will be recognized by the stockholders
of the Company upon the conversion of their shares of Company Common
Stock into shares of Parent Common Stock pursuant to the Merger, except
with respect to cash, if any, received in lieu of fractional shares of
Parent Common Stock;
(iv) the aggregate tax basis of the shares of Parent Common
Stock received in exchange for shares of Company Common Stock pursuant
to the Merger (including a fractional share of Parent Common Stock for
which cash is received) will be the same as the aggregate tax basis of
such shares of Company Common Stock;
(v) the holding period for shares of Parent Common Stock
received in exchange for shares of Company Common Stock pursuant to the
Merger will include the holder's holding period for such shares of
Company Common Stock, provided such shares of Company Common Stock were
held as capital assets by the holder at the Effective Time; and
(vi) a stockholder of the Company who receives cash in lieu
of a fractional share of Parent Common Stock will recognize gain or
loss equal to the difference, if any, between such stockholder's basis
in the fractional share (determined under clause (iv) above) and the
amount of cash received.
In rendering such opinion, Wyatt, Tarrant & Combs may rely upon representations
contained herein and may receive and rely upon representations from Parent, the
Company, and others, including representations from Parent substantially similar
to the representations in the Parent Tax Certificate attached to the Parent
Letter and representations from the Company substantially similar to the
representations in the Company Tax Certificate attached to the Company Letter.
A-35
<PAGE> 119
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
Section 7.1 Termination. This Agreement may be terminated at
any time prior to the Effective Time, whether before or after any approval of
the matters presented in connection with the Merger by the stockholders of the
Company or Parent:
(a) by mutual written consent of Parent and the Company;
(b) by either Parent or the Company if the other party shall
have failed to comply in any material respect with any of its material covenants
or agreements contained in this Agreement required to be complied with prior to
the date of such termination, which failure to comply has not been cured within
30 business days following receipt by such other party of written notice from
the non-breaching party of such failure to comply;
(c) by either Parent or the Company if there has been (i) a
breach by the other party (in the case of Parent, including any breach by Sub)
of any representation or warranty that is not qualified as to materiality which
has the effect of making such representation or warranty not true and correct in
all material respects or (ii) a breach by the other party (in the case of
Parent, including any breach by Sub) of any representation or warranty that is
qualified as to materiality, in each case which breach has not been cured within
30 business days following receipt by the breaching party from the non-breaching
party of written notice of the breach;
(d) by Parent or the Company if: (i) the Merger has not been
effected on or prior to the close of business on August 30, 1999; provided,
however, that either party may by written notice to the other party delivered on
or prior to August 30, 1999 extend such date until the day immediately preceding
the first anniversary hereof if the failure of the Merger to be effected on or
prior to August 30, 1999 shall have resulted from the failure of the conditions
set forth in Section 6.1(b) to be satisfied; and provided, further, that the
right to terminate this Agreement pursuant to this Section 7.1(d)(i) shall not
be available to any party whose failure to fulfill any of its obligations
contained in this Agreement has been the cause of, or resulted in, the failure
of the Merger to have occurred on or prior to the aforesaid date; or (ii) any
court or other Governmental Entity having jurisdiction over a party hereto shall
have issued an order, decree or ruling or taken any other action permanently
enjoining, restraining or otherwise prohibiting the transactions contemplated by
this Agreement and such order, decree, ruling or other action shall have become
final and nonappealable;
(e) by Parent if the stockholders of the Company do not
approve this Agreement at the Company Stockholder Meeting or at any adjournment
or postponement thereof;
(f) by Parent or the Company if the stockholders of Parent do
not approve the Share Issuance at the Parent Stockholder Meeting or at any
adjournment or postponement thereof; provided, however, that Parent may not
terminate this Agreement pursuant to this Section 7.1(f) if Parent has not
complied with its obligations under Sections 5.1 and 5.2;
A-36
<PAGE> 120
(g) by Parent if the Board of Directors of the Company shall
not have recommended, or shall have resolved not to recommend, or shall have
qualified or modified or withdrawn its recommendation of the Merger or
declaration that the Merger is advisable and fair to and in the best interest of
the Company and its stockholders, or shall have resolved to do so;
(h) by the Company if the Board of Directors of Parent shall
not have recommended, or shall have resolved not to recommend, or shall have
qualified or modified or withdrawn its recommendation of the Share Issuance or
declaration that the Share Issuance is advisable and fair to and in the best
interest of Parent and its stockholders, or shall have resolved to do so; or
(i) by the Company, upon written notice to Parent, at any time
during the 10-day period after the Determination Date, if both of the following
conditions are satisfied:
(1) the Average Closing Price shall be less than the
product of (A) 0.80 and (B) the Starting Price; and
(2)(i) the number obtained by dividing the Average Closing
Price by the Starting Price (such number being referred to herein as
the "Parent Ratio") shall be less than (ii) the number obtained by
dividing the Index Price on the Determination Date by the Index Price
on the Starting Date and subtracting 0.15 from the quotient in this
clause (2)(ii) (such number being referred to herein as the "Index
Ratio");
subject, however, to the following provisions. The Company may withdraw such
notice of termination at any time within the aforementioned 10-day period.
During the five-day period commencing with its receipt of such notice, Parent
shall have the option to elect to increase the Exchange Ratio to equal the
lesser of (i) the number obtained by dividing (1) the product of 0.80, the
Starting Price, and the Exchange Ratio (as then in effect) by (2) the Average
Closing Price, and (ii) the number obtained by dividing (1) the product of the
Index Ratio and the Exchange Ratio (as then in effect) by (2) the Parent Ratio;
provided, however, that Parent shall not have such option and may not make such
election if the Exchange Ratio as adjusted pursuant to clause (i) or (ii) above
would cause the total number of shares of Parent Common Stock (i) into which the
shares of Company Common Stock are converted by virtue of the Merger and (ii)
issuable upon exercise of all substitute Options, to be greater than or equal to
38,772,000. Any election by Parent pursuant to the preceding sentence shall be
made by delivery of a written notice to the Company within such five-day period
and shall specify the revised Exchange Ratio. Upon delivery of such notice by
Parent, no termination shall be deemed to have occurred pursuant to this Section
7.1(i) and this Agreement shall remain in effect in accordance with its terms
(except as the Exchange Ratio shall have been so modified), and any references
in this Agreement to "Exchange Ratio" shall thereafter be deemed to refer to the
Exchange Ratio as adjusted pursuant to this Section 7.1(i). Promptly after
Parent gives notice of its election to adjust the Exchange Ratio hereunder,
Parent and Company shall agree on a date to be the Closing Date under this
Agreement, which date shall be not more than five business days after the date
of delivery of such notice by Parent.
A-37
<PAGE> 121
For purposes of this Section 7.1(i), the following terms shall
have the meanings indicated:
"Average Closing Price" shall mean the average of the daily
last sales price of Parent Common Stock as reported on the Nasdaq (as reported
by The Wall Street Journal or, if not reported thereby, another authoritative
source as reasonably selected by Parent and the Company) for the 10 consecutive
full trading days in which such shares are traded on the Nasdaq ending at the
close of trading on the Determination Date.
"Determination Date" shall mean the third trading day prior to
the Closing Date.
"Index Group" shall mean the six companies listed in Section
7.1 of the Parent Letter, the common stocks of all of which shall be publicly
traded and as to which there shall not have been, since the Starting Date and
before the Determination Date, any public announcement of a proposal for such
company to be acquired or for such company to acquire another company or
companies in transactions with a value exceeding 25% of the acquiror's market
capitalization as of the Starting Date. In the event that any such company or
companies are removed from the Index Group as a result of any of the events
described in the preceding sentence, the weights (which shall be determined
based upon the number of outstanding shares of common stock) listed opposite
such Company in Section 7.1 of the Parent Letter shall be redistributed
proportionately for purposes of determining the Index Price.
"Index Price" on a given date shall mean the weighted average
(weighted in accordance with the factors listed in Section 7.1 of the Parent
Letter) of the average closing prices of the common stock of the companies
composing the Index Group as reported in the consolidated transaction reporting
system for the market or exchange on which such common stock is principally
traded during the period of 10 consecutive full trading days immediately
preceding the date in question.
"Starting Date" shall mean the date of this Agreement.
"Starting Price" shall mean the average of the daily last
sales price of Parent Common Stock as reported on the Nasdaq (as reported by The
Wall Street Journal or, if not reported thereby, another authoritative source as
reasonably selected by Parent and the Company) for the 10 consecutive full
trading days ending at the close of trading on the date hereof.
If Parent or any company belonging to the Index Group declares
or effects a stock dividend, reclassification, recapitalization, split-up,
combination, exchange of shares, or similar transaction between the date of this
Agreement and the Determination Date, the prices for the common stock of such
company or Parent shall be appropriately adjusted for the purposes of applying
this Section 7.1(i).
The right of any party hereto to terminate this Agreement
pursuant to this Section 7.1 shall remain operative and in full force and effect
regardless of any investigation made by or
A-38
<PAGE> 122
on behalf of any party hereto, any person controlling any such party or any of
their respective officers or directors, whether prior to or after the execution
of this Agreement.
Section 7.2 Effect of Termination. In the event of termination
of this Agreement by either Parent or the Company, as provided in Section 7.1,
this Agreement shall forthwith become void and there shall be no liability
hereunder on the part of the Company, Parent, Sub or their respective officers
or directors (except for the last sentence of Section 5.3(c) and the entirety of
Section 5.6, which shall survive the termination); provided, however, that
nothing contained in this Section 7.2 shall relieve any party hereto from any
liability for any willful breach of a representation or warranty contained in
this Agreement or the breach of any covenant contained in this Agreement. The
Confidentiality Agreement shall remain in full force and effect notwithstanding
the termination of this Agreement.
Section 7.3 Amendment. This Agreement may be amended by the
parties hereto, by or pursuant to action taken by their respective Boards of
Directors, at any time before or after approval of the matters presented in
connection with the Merger by the stockholders of Parent and the Company, but,
after any such approval, no amendment shall be made which by law requires
further approval by such stockholders without such further approval. This
Agreement may not be amended except by an instrument in writing signed on behalf
of each of the parties hereto.
Section 7.4 Waiver. At any time prior to the Effective Time,
the parties hereto may (i) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (ii) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant hereto and (iii) waive compliance with any of the
agreements or conditions contained herein which may legally be waived. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party.
ARTICLE VIII
GENERAL PROVISIONS
Section 8.1 Non-Survival of Representations and Warranties.
The representations and warranties in this Agreement or in any instrument
delivered pursuant to this Agreement shall terminate at the Effective Time.
Section 8.2 Notices. All notices and other communications
hereunder shall be in writing and shall be deemed given when delivered
personally, one day after being delivered to an overnight courier or when
telecopied (with a confirmatory copy sent by overnight courier) to the parties
at the following addresses (or at such other address for a party as shall be
specified by like notice):
A-39
<PAGE> 123
(a) if to Parent or Sub, to
Concord EFS, Inc.
2525 Horizon Lake Drive
Suite 120
Memphis, TN 38133
Attention: Edward A. Labry, III, President
Facsimile No.: (901) 371-8157
with a copy to:
Wyatt, Tarrant & Combs
6075 Poplar Avenue, Suite 650
Memphis, Tennessee 38119
Attention: R. Nash Neyland
Facsimile No.: (901) 537-1010
(b) if to the Company, to
Electronic Payment Services, Inc.
1100 Carr Road
Wilmington, DE 19809
Attention: Marcia E. Heister
Facsimile No.: (302) 791-8762
with a copy to:
Sidley & Austin
1722 Eye Street, N.W.
Washington, D.C. 20006
Attention: David E. Teitelbaum
Facsimile No.: (202) 736-8711
and:
Sidley & Austin
One First National Plaza
Chicago, Illinois 60603
Attention: Imad I. Qasim
Facsimile No.: (312) 853-7036
Section 8.3 Interpretation. When a reference is made in this
Agreement to a Section, such reference shall be to a Section of this Agreement
unless otherwise indicated. The table of contents, table of defined terms and
headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this
A-40
<PAGE> 124
Agreement. Whenever the words "include," "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation."
Section 8.4 Counterparts. This Agreement may be executed in
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties.
Section 8.5 Entire Agreement; No Third-Party Beneficiaries.
This Agreement, the Confidentiality Agreement and the Coordination Agreement
constitute the entire agreement and supersede all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof. This Agreement, except for the provisions of Article I
and Sections 5.7, 5.11 and 5.13, is not intended to confer upon any person other
than the parties hereto any rights or remedies hereunder.
Section 8.6 Governing Law. This Agreement shall be governed
by, and construed in accordance with, the laws of the State of Delaware,
regardless of the laws that might otherwise govern under applicable principles
of conflicts of laws thereof.
Section 8.7 Assignment. Neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. Any attempted assignment in violation of
this Section 8.7 shall be deemed to be void and of no force or effect.
Section 8.8 Severability. If any term or other provision of
this Agreement is invalid, illegal or incapable of being enforced by any rule of
law, or public policy, all other terms, conditions and provisions of this
Agreement shall nevertheless remain in full force and effect so long as the
economic and legal substance of the transactions contemplated hereby are not
affected in any manner materially adverse to any party. Upon such determination
that any term or other provision is invalid, illegal or incapable of being
enforced, the parties shall negotiate in good faith to modify this Agreement so
as to effect the original intent of the parties as closely as possible in a
mutually acceptable manner in order that the transactions contemplated by this
Agreement may be consummated as originally contemplated to the fullest extent
possible.
Section 8.9 Enforcement of this Agreement. The parties hereto
agree that irreparable damage would occur in the event that any of the
provisions of this Agreement or the Confidentiality Agreement were not performed
in accordance with their specific wording or were otherwise breached. It is
accordingly agreed that the parties hereto shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement or the Confidentiality
Agreement and to enforce specifically the terms and provisions hereof and
thereof in any court of the United States or any state having jurisdiction, such
remedy being in addition to any other remedy to which any party is entitled at
law or in equity.
A-41
<PAGE> 125
IN WITNESS WHEREOF, Parent, Sub and the Company have caused
this Agreement to be signed by their respective officers thereunto duly
authorized all as of the date first written above.
CONCORD EFS, INC.
By: /s/ Edward A. Labry III
-----------------------------------------------
Name: Edward A. Labry III
Title: President
CEFT, INC.
By: /s/ Edward A. Labry III
-----------------------------------------------
Name: Edward A. Labry III
Title: Vice President and Treasurer
ELECTRONIC PAYMENT SERVICES, INC.
By: /s/ Richard N. Garman
-----------------------------------------------
Name: Richard N. Garman
Title: President and Chief Executive Officer
<PAGE> 126
APPENDIX B
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT dated as of __________, 199_
among Concord EFS, Inc., a Delaware corporation (the "Issuer"), and the
Investors (as defined herein).
WHEREAS, execution of this Agreement is a condition to the
consummation of the merger of CEFT, Inc., a Delaware corporation ("Sub"), with
and into Electronic Payment Services, Inc., a Delaware corporation (the
"Company"), pursuant to the Agreement and Plan of Merger dated as of November
20, 1998 (the "Merger Agreement") among the Issuer, Sub and the Company.
NOW, THEREFORE, in consideration of the foregoing and the
mutual promises, representations, warranties, covenants and agreements contained
herein, the parties hereto, intending to be legally bound hereby, agree as
follows:
ARTICLE 1
DEFINITIONS
Section 1.1 Definitions. Terms used herein and not defined
shall have the meaning given to such terms in the Merger Agreement. In addition,
the following terms, as used herein, shall have the following respective
meanings:
"Commission" means the Securities and Exchange Commission or
any successor governmental body or agency.
"Common Stock" means the common stock, par value $.33 1/3 per
share, of the Issuer.
"Demand Registration" has the meaning ascribed thereto in
Section 2.1(a).
"Demand Request" has the meaning ascribed thereto in Section
2.1(a).
"Disadvantageous Condition" has the meaning ascribed thereto
in Section 2.4.
"Holder" means a person who owns Registrable Securities and
is either (i) an Investor or (ii) a person that (A) is a transferee of an
Investor's Registrable Securities or a successor or assignee of an Investor and
(B) agrees in writing to be bound by the terms of this Agreement as if such
person were an Investor.
<PAGE> 127
"Investors" means the parties listed as "Investors" on the
signature pages hereto.
"Registrable Securities" means Common Stock acquired by the
Holders pursuant to the Merger (and any shares of stock or other securities into
which or for which such Common Stock may hereafter be changed, converted or
exchanged and any other shares or securities issued to Holders of such Common
Stock (or such shares of stock or other securities into which or for which such
shares are so changed, converted or exchanged) upon any reclassification, share
combination, share subdivision, share dividend, share exchange, merger,
consolidation or similar transaction or event) or otherwise. As to any
particular Registrable Securities, such Registrable Securities shall cease to be
Registrable Securities as soon as (i) such Registrable Securities have been sold
or otherwise disposed of pursuant to a registration statement that was filed
with the Commission in accordance with this Agreement and declared effective
under the Securities Act, (ii) the Issuer delivers to the Holders of such shares
of Common Stock requesting registration pursuant to Section 2.1 or Section 2.2
hereof an opinion of counsel in form and substance reasonably satisfactory to
such Holders and their counsel to the effect that the proposed sale or
disposition of all Registrable Securities for which registration was requested
does not require registration under the Securities Act for a sale or disposition
in a single public sale, (iii) they shall have been otherwise sold, transferred
or disposed of by a Holder to any Person that is not a Holder, or (iv) they
shall have ceased to be outstanding.
"Registration Expenses" means any and all expenses incident
to performance of or compliance with any registration of securities pursuant to
Article II, including, without limitation, (i) the fees, disbursements and
expenses of the Issuer's counsel and accountants (including in connection with
the delivery of opinions and/or comfort letters) in connection with this
Agreement and the performance of the Issuer's obligations hereunder; (ii) all
expenses, including filing fees, in connection with the preparation, printing
and filing of one or more registration statements hereunder; (iii) the cost of
printing or producing any agreements among underwriters, underwriting
agreements, and blue sky or legal investment memoranda; (iv) the filing fees
incident to securing any required review by the National Association of
Securities Dealers, Inc. of the terms of the sale of the securities to be
disposed of; (v) transfer agents' and registrars' fees and expenses in
connection with such offering; (vi) all security engraving and security printing
expenses; (vii) all fees and expenses payable in connection with the listing of
the Registrable Securities on any securities exchange or automated interdealer
quotation system on which the Common Stock is then listed; and (viii) all
reasonable fees and expenses of one legal counsel for the Holders in connection
with each Demand Registration and each Piggyback Registration, which legal
counsel shall be selected by Holders owning a majority of the Registrable
Securities then being registered; provided, that Registration Expenses shall
exclude (x) all underwriting discounts and commissions, selling or placement
agent or broker fees and commissions, and transfer taxes, if any, in connection
with the sale of any securities, and (y) the fees and expenses of counsel for
any Holder (other than pursuant to clause (viii)).
"Rule 144" means Rule 144 (or any successor rule to similar
effect) promulgated under the Securities Act.
B-2
<PAGE> 128
"Rule 415 Offering" means an offering on a delayed or
continuous basis pursuant to Rule 415 (or any successor rule to similar effect)
promulgated under the Securities Act.
"Securities Act" means the Securities Act of 1933, as
amended.
"Selling Holder" means any Holder who sells Registrable
Securities pursuant to a public offering registered hereunder.
Section 1.2. Internal References. Unless the context
indicates otherwise, references to Articles, Sections and paragraphs shall refer
to the corresponding articles, sections and paragraphs in this Agreement, and
references to the parties shall mean the parties to this Agreement.
ARTICLE 2
REGISTRATION RIGHTS
Section 2.1. Demand Registration. (a) Subject to Section
2.1(b), upon written notice to the Issuer from a Holder or Holders holding a
majority in interest of the Registrable Securities (the "Demand Request")
requesting, pursuant to this Section 2.1, that the Issuer effect the
registration under the Securities Act of any or all of the Registrable
Securities held by such requesting Holders, which notice shall specify the
intended method or methods of disposition of such Registrable Securities (each
such registration being referred to herein, individually as a "Demand
Registration" and collectively as the "Demand Registrations"), the Issuer shall
prepare as soon as practicable and, within 15 days after such request, file with
the Commission a registration statement with respect to such Registrable
Securities and thereafter use its reasonable best efforts to cause such
registration statement to be declared effective under the Securities Act for
purposes of dispositions in accordance with the intended method or methods of
disposition stated in such request within the later to occur of the first public
release by the Issuer of 30 days of combined financial results of the Issuer and
the Company and 30 days after the filing of such registration statement.
(b) The Holders shall collectively have the right to request
two Demand Registrations after the date hereof; provided, however, that (i) the
Holders may not make a Demand Request for 180 days following the earlier of (x)
the sale of Registrable Securities having a market value at the time of the
filing of the related registration statement of at least $200,000,000 pursuant
to a Piggyback Registration, or (y) the termination of such offering prior to
such sale; (ii) the Holders may not make a Demand Request before the later of
(x) April 30, 1999 or (y) 15 days following the first full calender month of
combined operations by the Issuer and the Company; and (iii) the Holders may not
make a Demand Request for 180 days following the earlier of (x) the sale of any
Registrable Securities pursuant to a Demand Registration or (y) the termination
of such offering prior to such sale. The method of disposition requested by
Holders in connection with any Demand Registration may not, without the Issuer's
written consent, be a Rule 415 Offering.
B-3
<PAGE> 129
(c) Notwithstanding any other provision of this Agreement to
the contrary, a Demand Registration requested by Holders pursuant to this
Section 2.1 shall not be deemed to have been effected, and, therefore, not
requested and the rights of each Holder shall be deemed not to have been
exercised for purposes of paragraph (a) above, (i) if such Demand Registration
has not become effective under the Securities Act or (ii) if such Demand
Registration, after it became effective under the Securities Act, was not
maintained effective under the Securities Act (other than as a result of any
stop order, injunction or other order or requirement of the Commission or other
government agency or court solely on the account of a material misrepresentation
or omission of a Holder) for at least 30 days (or such shorter period ending
when all the Registrable Securities covered thereby have been disposed of
pursuant thereto) and, as a result thereof, the Registrable Securities requested
to be registered cannot be distributed in accordance with the plan of
distribution set forth in the related registration statement. The Holders shall
not lose their right to a Demand Registration under Section 2.1 if the Demand
Registration related to such Demand Request is delayed or not effected in the
circumstances set forth in this clause (c).
(d) The Issuer shall have the right to cause the registration
of additional equity securities for sale for the account of the Issuer (but not
any other person) in the registration of Registrable Securities requested by the
Holders pursuant to Section 2.1(a) above, provided, that if such Holders are
advised in writing (with a copy to the Issuer) by the lead or managing
underwriter referred to in Section 2.3 that, in such underwriters' good faith
view, all or a part of such Registrable Securities and additional equity
securities cannot be sold and the inclusion of such Registrable Securities and
additional equity securities in such registration would be likely to have an
adverse effect on the price, timing or distribution of the offering and sale of
the Registrable Securities and additional equity securities then contemplated,
then the number of securities that can, in the good faith view of such
underwriter, be sold in such offering without so adversely affecting such
offering shall be allocated first, to the Registrable Securities proposed to be
included in the Demand Registration by the Holders and second, to the securities
of the Issuer proposed to be included in such registration by the Issuer for
sale for its own account. The Holders of the Registrable Securities to be
offered pursuant to paragraph (a) above may require that any such additional
equity securities be included by the Issuer in the offering proposed by such
Holders on the same conditions as the Registrable Securities that are included
therein.
(e) Within seven days after delivery of a Demand Request by a
Holder, the Issuer shall provide a written notice to each Holder, advising such
Holder of its right to include any or all of the Registrable Securities held by
such Holder for sale pursuant to the Demand Registration and advising such
Holder of procedures to enable such Holder to elect to so include Registrable
Securities for sale in such Demand Registration. Any Holder may, within seven
days of delivery to such Holder of a notice pursuant to this Section 2.1(e),
elect to so include Registrable Securities in such Demand Registration by
written notice to such effect to the Issuer specifying the number of Registrable
Securities desired to be so included by such Holder. Any Holder who elects to
include Registrable Securities in a Demand Registration may elect not to sell
its Registrable Securities in such Demand Registration.
B-4
<PAGE> 130
(f) If, in connection with a Demand Registration, the Holders
who have requested to include their Registrable Securities in such Demand
Registration are advised in writing by the lead or managing underwriter referred
to in Section 2.3 that, in such underwriter's good faith view, all or a part of
such Registrable Securities cannot be sold and the inclusion of such Registrable
Securities would be likely to have an adverse effect on the price, timing or
distribution of the offering and sale of the Registrable Securities then
contemplated, then the number of securities that can, in the good faith view of
such underwriter, be sold in such offering without so adversely affecting such
offering shall be allocated among the Holders who have requested to include
their Registrable Securities in such Demand Registration, pro-rata, based on the
number of Registrable Securities requested to be included in such Demand
Registration by Holders. Any securities so excluded shall be withdrawn from and
shall not be included in such Demand Registration.
Section 2.2. Piggyback Registrations. (a) Notwithstanding any
limitation contained in Section 2.1, if the Issuer at any time after the date
hereof and prior to the third anniversary of the date hereof proposes to effect
any registration of Common Stock under the Securities Act (other than a
registration on Form S-4 or Form S-8 promulgated by the Commission), whether for
sale for the account of the Issuer or for the account of any holder of
securities of the Issuer (other than Registrable Securities) (a "Piggyback
Registration"), it will each such time give prompt written notice (a "Notice of
Piggyback Registration") to all Holders of its intention to do so and of such
Holders' rights under this Section 2.2, which Notice of Piggyback Registration
shall include a description of the intended method of disposition of such
securities. If any Holder delivers a written request for registration of
Registrable Securities specifying the Registrable Securities intended to be
disposed of to the Issuer within 15 days after such Holder receives a Notice of
Piggyback Registration, the Issuer will include in the registration statement
relating to such Piggyback Registration all Registrable Securities which the
Issuer has been so requested to register. Notwithstanding the foregoing, if, at
any time after giving a Notice of Piggyback Registration and prior to the
effective date of the registration statement filed in connection with such
registration, the Issuer shall determine for any reason not to register or to
delay registration of such securities, the Issuer may, at its election, give
written notice of such determination to each Holder and, thereupon, (i) in the
case of a determination not to register, shall be relieved of its obligation to
register any Registrable Securities in connection with such registration (but
not from its obligation to pay the Registration Expenses in connection
therewith), without prejudice, however, to the rights of any Holder entitled to
do so to demand that such registration be effected as a Demand Registration
under Section 2.1 (without the applicability of the waiting period referred to
in Section 2.1(b)(i)), and (ii) in the case of a determination to delay
registering, shall be permitted to delay registering any Registrable Securities
for the same period as the delay in registering such other securities. No
registration effected under this Section 2.2 shall relieve the Issuer of its
obligations to effect Demand Registrations under Section 2.1.
(b) If, in connection with a Piggyback Registration, the
Holders who have requested to include their Registrable Securities in such
Piggyback Registration, are advised in writing (with a copy to the Issuer) by
the lead or managing underwriter referred to in Section 2.3 that, in such
underwriter's good faith view, all or a part of such Registrable
B-5
<PAGE> 131
Securities and additional shares of Common Stock cannot be sold and the
inclusion of such Registrable Securities and additional shares of Common Stock
would be likely to have an adverse effect on the price, timing or distribution
of the offering and sale of the Registrable Securities and additional shares of
Common Stock then contemplated, then the number of securities that can, in the
good faith view of such underwriter, be sold in such offering without so
adversely affecting such offering shall be allocated first, to the securities
proposed by the Issuer to be sold for its own account, and second, to the
Registrable Securities requested to be included in such Piggyback Registration
by Holders. Any securities so excluded shall be withdrawn from and shall not be
included in such Piggyback Registration.
Section 2.3. Other Matters In Connection With Registrations.
In the event that any public offering pursuant to this Agreement shall involve,
in whole or in part, an underwritten offering, the Issuer shall have the right
to designate an underwriter or underwriters as the lead or managing underwriters
of such underwritten offering; provided, that in the case of a Demand
Registration, such lead or managing underwriters must be reasonably acceptable
to Holders holding a majority in interest of the Registrable Securities being
registered in such offering.
Section 2.4. Certain Delay Rights. Notwithstanding anything
else contained in this Agreement, with respect to any registration statement
filed, or to be filed, pursuant to Section 2.1, if the Issuer provides written
notice to each Holder that in the Issuer's good faith and reasonable judgment it
would be materially disadvantageous to the Issuer (because the sale of
Registrable Securities covered by such registration statement or the disclosure
of information therein or in any related prospectus would materially interfere
with any acquisition, financing or other material event or transaction in
connection with which a registration of securities under the Securities Act for
the account of the Issuer is then intended or the public disclosure of which at
the time would be materially prejudicial to the Issuer (a "Disadvantageous
Condition")) for such a registration statement to be maintained effective, or to
be filed and become effective, and setting forth the general reasons for such
judgment, the Issuer shall be entitled to cause such registration statement to
be withdrawn or the effectiveness of such registration statement terminated, or,
in the event no registration statement has yet been filed, shall be entitled not
to file any such registration statement, until such Disadvantageous Condition no
longer exists (notice of which the Issuer shall promptly deliver to each
Holder). With respect to each Holder, upon the receipt by such Holder of any
such notice of a Disadvantageous Condition in connection with a Demand
Registration if so directed by the Issuer by notice as aforesaid, such Holder
will deliver to the Issuer all copies, other than permanent filed copies then in
such Holder's possession, of the prospectus then covering such Registrable
Securities at the time of receipt of such notice as aforesaid. Notwithstanding
anything else contained in this Agreement, neither the filing nor the
effectiveness of any registration statement under Section 2.1 may be delayed for
more than a total of 60 days pursuant to this Section 2.4.
Section 2.5. Expenses. Except as provided herein, the Issuer
shall pay all Registration Expenses with respect to each registration hereunder.
Notwithstanding the foregoing, (i) each Holder and the Issuer shall be
responsible for its own internal administrative and similar costs, which shall
not constitute Registration Expenses, (ii) each Holder shall be responsible for
the legal fees and expenses of its own counsel (except as provided in clause
(viii) of the definition of Registration Expenses), and (iii) each Holder shall
be responsible for all
B-6
<PAGE> 132
underwriting discounts and commissions, selling or placement agent or broker
fees and commissions, and transfer taxes, if any, in connection with the sale of
securities by such Holder.
Section 2.6. Registration and Qualification. If and whenever
the Issuer is required to effect the registration of any Registrable Securities
under the Securities Act as provided in Sections 2.1 or 2.2, the Issuer shall as
promptly as practicable (but subject to the provisions of Sections 2.1 and 2.2):
(a) prepare, file and cause to become effective a
registration statement under the Securities Act relating to the Registrable
Securities to be offered in accordance with the Holders' intended methods of
disposition thereof;
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective and
to comply with the provisions of the Securities Act with respect to the
disposition of all Registrable Securities until the earlier of (A) such time as
all Registrable Securities proposed to be sold therein have been disposed of in
accordance with the intended methods of disposition set forth in such
registration statement and (B) the expiration of 30 days after such registration
statement becomes effective, provided, that such 30-day period shall be extended
for such number of days that equals the number of days elapsing from (x) the
date the written notice contemplated by paragraph (e) below is given by the
Issuer to (y) the date on which the Issuer delivers to the Holders of
Registrable Securities the supplement or amendment contemplated by paragraph (e)
below;
(c) furnish to the Holders of Registrable Securities and to
any underwriter of such Registrable Securities such number of conformed copies
of such registration statement and of each such amendment and supplement thereto
(in each case including all exhibits), such number of copies of the prospectus
included in such registration statement (including each preliminary prospectus),
in conformity with the requirements of the Securities Act, and such documents
incorporated by reference in such registration statement or prospectus, as the
Holders of Registrable Securities or such underwriter may reasonably request;
(d) furnish to any underwriter of such Registrable Securities
an opinion of counsel for the Issuer and a "cold comfort" letter signed by the
independent public accountants who have audited the financial statements of the
Issuer included in the applicable registration statement, in each such case
covering substantially such matters with respect to such registration statement
(and the prospectus included therein) and the related offering as are
customarily covered in opinions of issuer's counsel with respect thereto and in
accountants' letters delivered to underwriters in underwritten public offerings
of securities and such other matters as such underwriters may reasonably
request;
(e) promptly notify the Selling Holders in writing (i) at any
time when a prospectus relating to a registration pursuant to Section 2.1 or 2.2
is required to be delivered under the Securities Act of the happening of any
event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a
B-7
<PAGE> 133
material fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, and (ii) of any request by the Commission
or any other regulatory body or other body having jurisdiction for any amendment
or supplement to any registration statement or other document relating to such
offering, and in either such case, at the request of the Selling Holders prepare
and furnish to the Selling Holders a reasonable number of copies of a supplement
to or an amendment of such prospectus as may be necessary so that, as thereafter
delivered to the purchasers of such Registrable Securities, such prospectus
shall not include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they are made, not
misleading;
(f) use its reasonable best efforts to list all such
Registrable Securities covered by such registration on each securities exchange
and automated interdealer quotation system on which the Common Stock is then
listed;
(g) use reasonable efforts to assist the Holders in the
marketing of Common Stock in connection with underwritten offerings hereunder
(including using reasonable best efforts to have officers of the Issuer attend
"road shows" and analyst or investor presentations scheduled in connection with
such registration); and
(h) furnish for delivery in connection with the closing of
any offering of Registrable Securities pursuant to a registration effected
pursuant to Section 2.1 or 2.2 unlegended certificates representing ownership of
the Registrable Securities being sold in such denominations as shall be
requested by the Selling Holders or the underwriters.
Section 2.7. Underwriting; Due Diligence. (a) If requested by
the underwriters for any underwritten offering of Registrable Securities
pursuant to a registration requested under this Article II, the Issuer shall
enter into an underwriting agreement with such underwriters for such offering,
which agreement will contain such representations and warranties by the Issuer
and such other terms and provisions as are customarily contained in underwriting
agreements with respect to secondary distributions, including, without
limitation, indemnification and contribution provisions substantially to the
effect and to the extent provided in Section 2.8, and agreements as to the
provision of opinions of counsel and accountants' letters to the effect and to
the extent provided in Section 2.6(d). Such underwriting agreement shall also
contain such representations and warranties by such Selling Holders and such
other terms and provisions as are customarily contained in underwriting
agreements with respect to secondary distributions, including, without
limitation, indemnification and contribution provisions substantially to the
effect and to the extent provided in Section 2.8.
(b) In connection with the preparation and filing of each
registration statement registering Registrable Securities under the Securities
Act pursuant to this Article II, the Issuer shall give the Holders of such
Registrable Securities and the underwriters, if any, and their respective
counsel and accountants (the identity and number of whom shall be reasonably
acceptable to the Issuer), such reasonable and customary access to its books,
records and
B-8
<PAGE> 134
properties and such opportunities to discuss the business and affairs of the
Issuer with its officers and the independent public accountants who have
certified the financial statements of the Issuer as shall be necessary, in the
opinion of such Holders and such underwriters or their respective counsel, to
conduct a reasonable investigation within the meaning of the Securities Act.
Section 2.8. Indemnification and Contribution. (a) The Issuer
agrees to indemnify and hold harmless each Selling Holder and each person, if
any, who controls each Selling Holder within the meaning of either Section 15 of
the Securities Act or Section 20 of the Exchange Act from and against any and
all losses, claims, damages and liabilities (including, without limitation, any
legal or other expenses reasonably incurred in connection with defending or
investigating any such action or claim) insofar as such losses, claims, damages
or liabilities are caused by any untrue statement or alleged untrue statement of
a material fact contained in any registration statement or any amendment
thereof, any preliminary prospectus or prospectus (as amended or supplemented if
the Issuer shall have furnished any amendments or supplements thereto) relating
to the Registrable Securities, or caused by any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, except insofar as such losses, claims,
damages or liabilities are caused by any such untrue statement or omission or
alleged untrue statement or omission based upon information furnished to the
Issuer in writing by a Selling Holder expressly for use therein. The Issuer also
agrees to indemnify any underwriter of the Registrable Securities so offered and
each person, if any, who controls such underwriter on substantially the same
basis as that of the indemnification by the Issuer of the Selling Holder
provided in this Section 2.8(a).
(b) Each Selling Holder agrees to indemnify and hold harmless
the Issuer, its directors, the officers who sign the registration statement and
each person, if any who controls the Issuer within the meaning of either Section
15 of the Securities Act or Section 20 of the Exchange Act, from and against any
and all losses, claims, damages, liabilities (including, without limitation, any
legal or other expenses reasonably incurred in connection with defending or
investigating any such action or claim) insofar as such losses, claims, damages
or liabilities are caused by any untrue statement or alleged untrue statement of
a material fact contained in any registration statement or any amendment
thereof, any preliminary prospectus or prospectus (as amended or supplemented if
the Issuer shall have furnished any amendments or supplements thereto) relating
to the Registrable Securities, or caused by any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, but only with reference to information
furnished in writing by such Selling Holder (or any representative thereof)
expressly for use in a registration statement, any preliminary prospectus,
prospectus or any amendments or supplements thereto. Each Selling Holder also
agrees to indemnify any underwriter of the Registrable Securities so offered and
each person, if any, who controls such underwriter on substantially the same
basis as that of the indemnification by such Selling Holder of the Issuer
provided in this Section 2.8(b).
(c) Each party indemnified under paragraph (a) or (b) above
shall, promptly after receipt of notice of a claim or action against such
indemnified party in respect of which indemnity may be sought hereunder, notify
the indemnifying party in writing of the claim or action; provided that the
failure to notify the indemnifying party shall not relieve it from any
B-9
<PAGE> 135
liability that it may have to an indemnified party on account of the indemnity
agreement contained in paragraph (a) or (b) above except to the extent that the
indemnifying party was actually prejudiced by such failure, and in no event
shall such failure relieve the indemnifying party from any other liability that
it may have to such indemnified party. If any such claim or action shall be
brought against an indemnified party, and it shall have notified the
indemnifying party thereof, unless based on the written advice of counsel to
such indemnified party a conflict of interest between such indemnified party and
indemnifying parties may exist in respect of such claim, the indemnifying party
shall be entitled to participate therein, and, to the extent that it wishes,
jointly with any other similarly notified indemnifying party, to assume the
defense thereof. After notice from the indemnifying party to the indemnified
party of its election to assume the defense of such claim or action, the
indemnifying party shall not be liable to the indemnified party under this
Section 2.8 for any legal or other expenses subsequently incurred by the
indemnified party in connection with the defense thereof. Any indemnifying party
against whom indemnity may be sought under this Section 2.8 shall not be liable
to indemnify an indemnified party if such indemnified party settles such claim
or action without the consent of the indemnifying party. The indemnifying party
may not agree to any settlement of any such claim or action, other than solely
for monetary damages for which the indemnifying party shall be responsible
hereunder, the result of which any remedy or relief shall be applied to or
against the indemnified party, without the prior written consent of the
indemnified party, which consent shall not be unreasonably withheld. In any
action hereunder as to which the indemnifying party has assumed the defense
thereof, the indemnified party shall continue to be entitled to participate in
the defense thereof, with counsel of its own choice, but the indemnifying party
shall not be obligated hereunder to reimburse the indemnified party for the
costs thereof.
(d) If the indemnification provided for in this Section 2.8
shall for any reason be unavailable (other than in accordance with its terms) to
an indemnified party in respect of any loss, liability, cost, claim or damage
referred to herein, then each indemnifying party shall, in lieu of indemnifying
such indemnified party, contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, cost, claim or damage in
such proportion as is appropriate to reflect the relative fault of the
indemnifying party or parties on the one hand and of the indemnified party or
parties on the other hand in connection with the statements or omissions that
resulted in such losses, claims, damages or liabilities, as well as any other
relevant equitable considerations. The relative fault of the Issuer on the one
hand and the Selling Holders on the other hand shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Issuer or a Selling Holder and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The amount paid or payable by an
indemnified party as a result of the loss, cost, claim, damage or liability, or
action in respect thereof, referred to above in this paragraph (d) shall be
deemed to include, for purposes of this paragraph (d), any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. The Issuer and the Selling
Holders agree that it would not be just and equitable if contribution pursuant
to this Section 2.8 were determined by pro rata allocation or by any other
method of allocation which does not take account of the equitable considerations
referred to in this paragraph. Notwithstanding any other provision of this
Section 2.8, no Selling Holder shall
B-10
<PAGE> 136
be required to contribute any amount in excess of the amount by which the total
price at which the Registrable Securities of such Selling Holder were offered to
the public exceeds the amount of any damages which such Selling Holder has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
(e) The obligations of the parties under this Section 2.8
shall be in addition to any liability which any party may otherwise have to any
other party.
Section 2.9. Holdback Agreement. If a Demand Registration or
Piggyback Registration pursuant to this Article II shall be in connection with
an underwritten public offering of Registrable Securities, each Holder agrees
not to effect any sale or distribution, including any sale under Rule 144, of
any equity security of the Issuer (otherwise than through the registered public
offering then being made), within 7 days prior to or 90 days (or such lesser
period as the lead or managing underwriters may permit) after the effective date
of the applicable registration statement.
ARTICLE 3
MISCELLANEOUS
Section 3.1. Entire Agreement. This Agreement constitutes the
entire agreement between the parties with respect to the subject matter hereof
and supersedes all other prior agreements and understandings, both written and
oral, among the parties with respect to the subject matter hereof.
Section 3.2. Assignment. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their successors and assigns.
Section 3.3. Amendments, Waivers, Etc. This Agreement may not
be amended, changed, supplemented, waived or otherwise modified or terminated,
except upon the execution and delivery of a written agreement executed by the
Issuer and Holders representing a majority of the Registrable Securities then
held by all Holders.
Section 3.4. Notices. All notices, requests, claims, demands
and other communications hereunder shall be in writing and shall be given (and
shall be deemed to have been duly received if given) by hand delivery or
telecopy, or by any courier service, such as Federal Express, providing proof of
delivery. All communications hereunder shall be delivered to the respective
parties at the address or telecopy number set forth on the signature pages
hereto or such other address as any party shall give the other parties hereto
notice of in writing.
Section 3.5. Severability. Whenever possible, each provision
or portion of any provision of this Agreement will be interpreted in such manner
as to be effective and valid under
B-11
<PAGE> 137
applicable law but if any provision or portion of any provision of this
Agreement is held to be invalid, illegal or unenforceable in any respect under
any applicable law or rule in any jurisdiction, such invalidity, illegality or
unenforceability will not affect any other provision or portion of any provision
in such jurisdiction, and this Agreement will be reformed, construed and
enforced in such jurisdiction as if such invalid, illegal or unenforceable
provision or portion of any provision had never been contained herein.
Section 3.6. No Waiver. The failure of any party hereto to
exercise any right, power or remedy provided under this Agreement or otherwise
available in respect hereof at law or in equity, or to insist upon compliance by
any other party hereto with its obligations hereunder, and any custom or
practice of the parties at variance with the terms hereof, shall not constitute
a waiver by such party of its right to exercise any such or other right, power
or remedy or to demand such compliance.
Section 3.7. No Third Party Beneficiaries. This Agreement is
not intended to be for the benefit of, and shall not be enforceable by, any
Person who or which is not a party hereto, other than any Holder.
Section 3.8. Governing Law. This Agreement shall be governed
and construed in accordance with the laws of the State of Delaware, without
giving effect to the principles of conflicts of law thereof.
Section 3.9. Jurisdiction. Each party hereby irrevocably
submits to the exclusive jurisdiction of any United States District Court
sitting in the State of Delaware or any state court sitting in the City of
Wilmington, Delaware in any action, suit or proceeding arising in connection
with this Agreement, and agrees that any such action, suit or proceeding shall
be brought only in such courts (and waives any objection based on forum non
conveniens or any other objection to venue therein); provided, however, that
such consent to jurisdiction is solely for the purpose referred to in this
Section 3.9 and shall not be deemed to be a general submission to the
jurisdiction of said Courts or in the State of Delaware other than for such
purposes. Each party hereto hereby waives any right to a trial by jury in
connection with any such action, suit or proceeding.
Section 3.10. Descriptive Headings. The descriptive headings
used herein are inserted for convenience of reference only and are not intended
to be part of or to affect the meaning or interpretation of this Agreement.
Section 3.11. Counterparts. This Agreement may be executed in
counterpart, each of which shall be deemed to be an original, but all of which,
taken together, shall constitute one and the same Agreement.
B-12
<PAGE> 138
IN WITNESS WHEREOF, the Issuer and the Investors have caused
this Agreement to be duly executed as of the day and year first above written.
CONCORD EFS, INC.
2525 Horizon Lake Drive
Suite 120
Memphis, TN 38133
By:
--------------------------------------
Name:
Title:
[INVESTORS]
[Insert Names and Addresses of Investors]
B-13
<PAGE> 139
APPENDIX C
Consolidated Financial Statements of
Electronic Payment Services, Inc.
As of December 31, 1997 and 1996 and
for each of the three years
ended December 31, 1997
with Report of Independent Auditors
<PAGE> 140
Electronic Payment Services, Inc.
Consolidated Financial Statements
As of December 31, 1997 and 1996 and
for each of the three years
in the period ended December 31, 1997
Contents
Report of Independent Auditors.............................................. 1
Audited Consolidated Financial Statements
Consolidated Balance Sheets................................................. 2
Consolidated Statements of Income........................................... 4
Consolidated Statements of Changes in Stockholders' Equity (Deficiency)..... 5
Consolidated Statements of Cash Flows....................................... 6
Notes to Consolidated Financial Statements.................................. 8
<PAGE> 141
Report of Independent Auditors
The Board of Directors
Electronic Payment Services, Inc.
We have audited the accompanying consolidated balance sheets of Electronic
Payment Services, Inc. as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in stockholders equity (deficiency),
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Electronic Payment
Services, Inc. at December 31, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
---------------------------
Philadelphia, Pennsylvania
February 3, 1998
<PAGE> 142
Electronic Payment Services, Inc.
Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
December 31
1997 1996
-----------------------
<S> <C> <C>
Assets
Current assets:
Cash and equivalents $ 18,797 $ 24,793
Accounts receivable, less allowance of $1,907
and $2,933 in 1997 and 1996, respectively 24,137 22,493
Deferred income taxes 3,410 4,397
Due from stockholders 4,164 5,691
Inventory and supplies 639 1,254
Prepaid expenses and other current assets 1,409 2,015
-----------------------
Total current assets 52,556 60,643
Property and equipment 151,434 131,365
Accumulated depreciation and amortization (57,187) (44,990)
-----------------------
94,247 86,375
Intangible assets:
Goodwill 82,071 82,071
Customer lists and other 25,046 23,796
-----------------------
107,117 105,867
Accumulated amortization (30,133) (23,860)
-----------------------
76,984 82,007
Capitalized software development costs 20,404 23,609
Other assets 6,566 9,015
Total assets $250,757 $261,649
=======================
</TABLE>
2
<PAGE> 143
<TABLE>
<CAPTION>
December 31
1997 1996
------------------------
<S> <C> <C>
Liabilities and stockholders' equity (deficiency)
Current liabilities:
Borrowings under credit agreement $ 29,000 $ 50,000
Current portion of long-term debt 25,000 25,000
Accounts payable 20,328 17,626
Due to stockholders 677 4,065
Accrued liabilities 21,398 21,415
Deferred income 5,961 282
Income taxes payable 8,426 3,001
------------------------
Total current liabilities 110,790 121,389
Long-term debt, net of current portion 125,000 150,000
Deferred income, net of current portion 14,710 --
Deferred income taxes 15,269 23,282
Stockholders' equity (deficiency):
Preferred stock, par value $163.60; 4,600
shares authorized, issued and outstanding 752 752
Common stock, par value $.01; 10,000,000 shares
authorized; 3,750,000 shares issued and
outstanding 38 38
Paid-in capital 196,001 196,001
Deemed dividend (245,400) (245,400)
Retained earnings 33,597 15,587
------------------------
Total stockholders' equity (deficiency) (15,012) (33,022)
------------------------
Total liabilities and stockholders' equity
(deficiency) $ 250,757 $ 261,649
========================
</TABLE>
See accompanying notes.
3
<PAGE> 144
Electronic Payment Services, Inc.
Consolidated Statements of Income
(dollars in thousands except per share data)
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
----------------------------------------
<S> <C> <C> <C>
Revenues $ 202,310 $ 179,490 $ 163,379
Expenses:
Processing and equipment 72,341 64,257 58,079
Customer and product support 30,956 26,900 24,693
Selling, general and administrative 33,267 32,847 35,755
Product development 14,654 14,861 13,479
Amortization of intangible assets 6,273 6,273 6,115
Interest expense, net of $556, $364
and $333 interest income in 1997,
1996 and 1995, respectively 12,590 14,310 15,882
----------------------------------------
Total expenses 170,081 159,448 154,003
----------------------------------------
Income before income taxes and
minority interest 32,229 20,042 9,376
Provision for income taxes 14,181 8,821 5,481
----------------------------------------
Net income before minority interest 18,048 11,221 3,895
Minority interest in earnings of
subsidiaries -- 240 1,314
----------------------------------------
Net income 18,048 10,981 2,581
Dividend on preferred stock 38 38 38
----------------------------------------
Net income available for common stock $ 18,010 $ 10,943 $ 2,543
========================================
Net income per common share $ 4.80 $ 3.20 $ 1.05
========================================
Average common shares outstanding 3,750,000 3,417,404 2,419,615
</TABLE>
See accompanying notes.
4
<PAGE> 145
Electronic Payment Services, Inc.
Consolidated Statements of Changes in Stockholders' Equity (Deficiency)
(dollars in thousands)
<TABLE>
<CAPTION>
Preferred Common Paid-in Deemed Retained
Stock Stock Capital Dividend Earnings Total
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1994 $752 $24 $107,138 $(245,400) $ 2,101 $(135,385)
Net income 2,581 2,581
Dividend on preferred stock (38) (38)
Minority interest investment in
subsidiaries, inclusive of
their interest in earnings
from March 2, 1995 88,637 88,637
- -----------------------------------------------------------------------------------------------------------
December 31, 1995 752 24 195,775 (245,400) 4,644 (44,205)
Net income 10,981 10,981
Dividend on preferred stock (38) (38)
Common stock issued in exchange
for minority interest 14 (14) --
Minority interest investment in
subsidiaries, inclusive of
their interest in earnings
through April 1, 1996 240 240
- -----------------------------------------------------------------------------------------------------------
December 31, 1996 752 38 196,001 (245,400) 15,587 (33,022)
Net income 18,048 18,048
Dividend on preferred stock (38) (38)
- -----------------------------------------------------------------------------------------------------------
December 31, 1997 $752 $38 $196,001 $(245,400) $33,597 $ (15,012)
==========================================================================================================
</TABLE>
See accompanying notes.
5
<PAGE> 146
Electronic Payment Services, Inc.
Consolidated Statements of Cash Flows
(dollars in thousands)
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
-------------------------------------
<S> <C> <C> <C>
Operating activities
Net income before minority interest $18,048 $11,221 $ 3,895
Adjustments to reconcile net income
before minority interest to net
cash provided by operating
activities:
Depreciation and amortization 29,364 25,687 21,232
Deferred tax provision (benefit) (7,017) 6,683 4,941
Other noncash income and
expense items (9) (204) 213
Changes in:
Accounts receivable (1,644) 573 243
Inventory and supplies 615 (251) 372
Prepaid expenses and other
current assets 606 (311) 853
Accounts payable 2,702 6,755 (2,611)
Due to (from) stockholders (1,861) 3,069 58
Accrued liabilities (17) 2,810 (35)
Deferred income 5,679 178 (176)
Income taxes payable 5,425 3,669 (1,265)
-------------------------------------
Cash provided by operating activities $51,891 $59,879 $27,720
-------------------------------------
</TABLE>
6
<PAGE> 147
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
--------------------------------------
<S> <C> <C> <C>
Investing activities
Acquisition of property and equipment $(28,892) $(31,658) $(29,786)
Proceeds from licensing agreement 25,000 -- --
Other investing activity, net (7,957) (12,972) (7,182)
--------------------------------------
Cash used for investing activities (11,849) (44,630) (36,968)
--------------------------------------
Financing activities
Borrowings (repayments) under credit
agreement, net (21,000) 15,000 (500)
Long-term debt repayments (25,000) (25,000) (50,171)
Payments on notes payable to
stockholders -- -- (23,263)
Proceeds of minority investment in
subsidiaries -- -- 74,539
Dividends paid on preferred stock (38) (38) (38)
--------------------------------------
Cash (used for) provided by financing
activities (46,038) (10,038) 567
--------------------------------------
Change in cash and equivalents (5,996) 5,211 (8,681)
Cash and equivalents, beginning of
year 24,793 19,582 28,263
--------------------------------------
Cash and equivalents, end of year $ 18,797 $ 24,793 $ 19,582
======================================
</TABLE>
See accompanying notes.
7
<PAGE> 148
Electronic Payment Services, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands)
1. Organization, Nature of Business and Equity Transactions
Electronic Payment Services, Inc. (the "Company") owns and operates electronic
data processing and data-capture networks that process transactions originating
at Automated Teller Machines ("ATM") as well as Point of Sale ("POS") terminals.
The majority of customers of ATM processing services are commercial banks,
savings and loan institutions, credit unions, independent sales organizations
and other financial services providers. Geographically, ATM customers are in all
50 states and are concentrated in the eastern half of the United States. POS
transaction processing customers are a wide variety of retailers, commercial
banks and other credit card processors. POS customers of the Company are located
in all 50 states. The Company is indirectly subject to fluctuations in retail
activity and experiences seasonal variability in ATM and POS transaction levels.
The Company was formed on December 4, 1992 through a Corporate Joint Venture
Agreement between CoreStates Financial Corp, Banc One Corporation, PNC Financial
Corp and KeyCorp ("Original Stockholders"). The authorized capital stock of the
Company at inception consisted of 3,000,000 shares of common stock and 1,500,000
shares of mandatory redeemable preferred stock. In exchange for common stock,
preferred stock and/or cash, the Original Stockholders contributed certain
assets, liabilities, wholly owned processing subsidiaries and/or cash. The
assets and liabilities contributed were recorded at the Original Stockholders'
net book value as of December 1, 1992. The cash paid and preferred stock issued
upon formation were recorded as dividends. In connection with the
recapitalization of the Company in December 1993, the number of authorized
shares of capital stock was increased to 10,000,000 shares.
In December 1993, the Company and the Original Stockholders entered into a
recapitalization agreement whereby 1,495,400 shares of mandatory redeemable
preferred stock with a par value of $163.60 were exchanged for a promissory note
in the principal amount of $250,000. As part of the transaction, the redemption
feature of the preferred stock was eliminated. The premium associated with this
exchange was charged directly to stockholders' equity.
8
<PAGE> 149
Electronic Payment Services, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands)
1. Organization, Nature of Business and Equity Transactions (continued)
The preferred stockholder has limited voting rights and the preferred stock
provides for a 5% cumulative dividend, payable quarterly, plus an additional
performance dividend. The performance dividend is equal to a percentage of the
Company's net income that exceeds a threshold amount. No performance dividends
have been paid or incurred since inception.
On March 2, 1995, the Company entered into a series of transactions with KeyCorp
and National City Corporation (together with the Original Stockholders, the
"Stockholders") whereby these banks made cash capital contributions totaling
$74,539 to two subsidiaries of the Company, contributed assets to a subsidiary
of the Company and sold assets to a subsidiary of the Company. As a result of
the transactions, equity of the Company was increased by a total of $87,323 and
goodwill was recognized totaling $13,352. At December 31, 1995, the consolidated
minority stockholders' share in the equity (deficit) of the subsidiaries was
$16,046. Effective April 1, 1996, the minority stockholders agreed to merge
their ownership interest in the subsidiaries into the Company. In connection
with the merger, the Company issued 1,330,385 shares of common stock and
adjusted paid-in capital for the par value of the common stock issued.
The minority stockholders' share of earnings in the subsidiaries of $240 in 1996
and $1,314 in 1995 has been deducted from earnings to determine net income of
the Company and has adjusted the minority interest share of the consolidated
deficiency in assets.
2. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All material intercompany balances and
transactions have been eliminated in consolidation. Certain reclassifications
have been made to prior-year amounts to conform with current-year presentation.
9
<PAGE> 150
Electronic Payment Services, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands)
2. Significant Accounting Policies (continued)
Cash and Equivalents
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents. Included in cash and equivalents at
December 31, 1997 and 1996 is $1,023 and $1,486, respectively, of cash
maintained in automated teller machines.
Property and Equipment
Property and equipment are stated at cost and depreciated over their estimated
useful lives using the straight-line method. Major classes of property and
equipment and their estimated useful lives are as follows:
<TABLE>
<CAPTION>
December 31 Estimated
1997 1996 Useful Lives
-------------------------------------
<S> <C> <C> <C>
Land $ 1,050 $ 1,050 Indefinite
Building and improvements 14,591 14,081 40 years
Leasehold improvements 8,291 7,407 Lease term
Software costs 38,045 28,418 5 years
Computer and
communication equipment 77,950 71,521 3-5 years
Furniture and equipment 11,507 8,888 3-10 years
-----------------------
$151,434 $131,365
=======================
</TABLE>
Included in property and equipment at December 31, 1997 and 1996 are $31,043 and
$21,924, respectively, of capitalized software costs incurred to develop
computer systems and programming. Software costs of $9,119 and $11,696 were
capitalized during 1997 and 1996, respectively. Capitalized software costs
placed in service during 1997 and 1996 were $7,569 and $4,630, respectively.
Amortization expense related to the assets placed in service totaled $2,084 and
$982 in 1997 and 1996, respectively.
10
<PAGE> 151
Electronic Payment Services, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands)
2. Significant Accounting Policies (continued)
Inventory and Supplies
Inventory is valued at the lower of cost (first-in, first-out) or market and
consists of terminals, printers and other related equipment held for resale and
plastic ATM cards.
Intangible Assets
Intangible assets, which were contributed as part of the formation of the
Company, consist of goodwill, agreements not to compete and values ascribed to
customer lists. As described in Note 1, $13,352 of goodwill was recorded in 1995
as a result of the equity transactions. Goodwill and amounts assigned to the
customer lists are being amortized by the straight-line method over 15-25 years
and 10 years, respectively. Agreements not to compete are amortized over the
life of the agreements.
Other Assets
Included in other assets at December 31, 1997 and 1996 are $6,021 and $8,434,
respectively, of payments made to customers under the Company's conversion
assistance program. These payments, which were primarily for promotional sign
replacements and card reissuance, were made to customers converting to the MAC
network and are being amortized over five years. Amortization expense associated
with these assets was $3,037, $2,907 and $2,333 for the year ended December 31,
1997, 1996 and 1995, respectively.
Capitalized Software Development Costs
During 1994, the Company capitalized $4,365 of software development costs
incurred after technological feasibility was established in connection with the
planned introduction of a stored value electronic payment card. The Company
capitalized $8,384, $11,584 and $667 in 1995, 1996 and 1997, respectively,
related to the development of the stored value card.
11
<PAGE> 152
Electronic Payment Services, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands)
2. Significant Accounting Policies (continued)
Capitalized Software Development Costs (continued)
On July 25, 1997, the Company entered into an agreement with an unrelated third
party whereby the Company granted perpetual licensing rights to the technology
to the third party in exchange for $25 million. The agreement further grants the
third party exclusive rights to the technology for a period of four years. The
proceeds received from the licensing agreement have been deferred and are being
earned over the exclusivity period of the agreement. The development costs
capitalized are being amortized over the same period.
Revenue Recognition
Revenue for processing fees is recognized and billed when the services are
performed. Revenue related to equipment sales is recognized upon the
installation of the equipment.
Income Taxes
The Company accounts for income taxes under the liability method whereby
deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Such temporary
differences result in deferred income taxes computed at rates estimated to be in
effect when the underlying differences will be reported in the Company's federal
and state income tax returns. The Company and its subsidiaries file a
consolidated federal income tax return.
Supplemental Cash Flow Information
Total interest paid was $13,033, $14,686 and $18,277 during 1997, 1996 and 1995,
respectively.
12
<PAGE> 153
Electronic Payment Services, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands)
2. Significant Accounting Policies (continued)
Per Share Data
In 1997, the Financial Accounting Standards Board issued Statement Number 128,
"Earnings per Share" ("FAS 128"). FAS 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per common share is the same as basic earnings per common share for
1997, 1996 and 1995.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
3. Income Taxes
The components of deferred tax liabilities and assets as of December 31 are as
follows:
<TABLE>
<CAPTION>
1997 1996
----------------------
<S> <C> <C>
Deferred tax liabilities:
Depreciation $ 3,671 $ 3,433
Intangibles 4,923 5,845
Research and development capitalized costs 8,619 15,558
Other 1,045 1,062
----------------------
18,258 25,898
----------------------
Deferred tax assets:
Net operating loss carryforward 2,626 3,113
Nondeductible reserves 3,762 3,897
Other 11 11
----------------------
6,399 7,021
----------------------
Net deferred tax liabilities $11,859 $18,877
======================
</TABLE>
13
<PAGE> 154
Electronic Payment Services, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands)
3. Income Taxes (continued)
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
----------------------------------------
<S> <C> <C> <C>
Current:
Federal $17,527 $1,485 $ 381
State 3,671 653 159
----------------------------------------
21,198 2,138 540
----------------------------------------
Deferred:
Federal (5,977) 6,610 5,170
State (1,040) 73 (229)
----------------------------------------
(7,017) 6,683 4,941
----------------------------------------
Provision for income taxes $14,181 $8,821 $5,481
========================================
</TABLE>
Following is a reconciliation of the effective income tax rate with the
statutory federal income tax rate:
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
----------------------------------
<S> <C> <C> <C>
Federal tax rate 35.0% 35.0% 34.0%
State taxes, net of federal benefit 5.3 2.3 14.4
Nondeductible amortization of
goodwill 3.2 5.2 9.8
Other 0.5 1.5 0.2
----------------------------------
Effective income tax rate 44.0% 44.0% 58.4%
==================================
</TABLE>
During 1997, 1996 and 1995, income taxes of $16,079, $1,290 and $3,459,
respectively, were paid to various state and federal agencies. As of December
31, 1997, various subsidiaries of the Company have federal and state net
operating loss carryforwards that expire on various dates through 2006 and are
subject to annual limitations.
14
<PAGE> 155
Electronic Payment Services, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands)
4. Short-Term Borrowings
The Company maintains a credit agreement with a third-party bank which provides
for short-term borrowings through March 1999 of up to $75,000. Borrowings under
the agreement are unsecured and bear interest at variable rates. Borrowings of
$29,000 and $50,000, which approximated fair value, were outstanding under the
agreement at December 31, 1997 and 1996, respectively. Average borrowings during
1997 were $41,266 at an effective interest rate of 5.84%. During 1996, average
borrowings were $39,913 at an effective interest rate of 5.82% and during 1995,
average borrowings were $31,630 at an effective interest rate of 6.86%. The
agreement requires the Company to maintain certain financial ratios and to
comply with certain covenants as defined, including limitations as to debt to be
incurred and prepayments on the Company's long-term debt.
5. Long-Term Debt
The Company has a $250,000 unsecured promissory note payable to a stockholder
due in equal quarterly installments through 2003, which bears interest at 6.40%.
Annual maturities of the note are $25,000 per year through 2003. The stockholder
promissory note was issued on December 23, 1993 in connection with the
recapitalization of the Company.
6. Commitments and Contingencies
The Company leases office space and equipment under noncancelable operating
leases expiring at various dates through 2008. Certain leases obligate the
Company to pay property taxes, insurance and maintenance expenses. Total rental
expense under operating leases was $3,953 in 1997, $4,607 in 1996 and $5,043 in
1995.
15
<PAGE> 156
Electronic Payment Services, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands)
6. Commitments and Contingencies (continued)
Future minimum rental commitments as of December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998 $ 4,066
1999 4,035
2000 2,771
2001 2,350
2002 2,008
2003 and thereafter 7,296
-------
Total minimum rental commitments $22,526
=======
</TABLE>
In the normal course of business, the Company is party to various claims and
legal proceedings. Although the ultimate outcome of these matters is presently
not determinable, management, after consultation with legal counsel, does not
believe that the resolution of these matters will have a material adverse effect
upon the Company's financial position.
7. Employee Benefit Plans
The Electronic Payment Services, Inc. Retirement Savings Plan covers
substantially all employees of the Company. Under the terms of the plan, each
qualified employee receives a company retirement contribution of 2% of
compensation, as defined, based upon employment status at December 31 of the
plan year. In addition, the plan includes a Section 401(k) savings feature
wherein the Company will match employee contributions up to 4.5% of compensation
as defined, and additionally, contains a discretionary profit-sharing
contribution of up to 1.5% of compensation as defined. Total 1997, 1996 and 1995
expenses under the plan were $3,095, $2,687 and $2,533, respectively.
16
<PAGE> 157
Electronic Payment Services, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands)
8. Stock Option Plan
In 1995, the Company adopted a stock option plan under which designated
employees may be granted options to purchase shares of the Company including
Incentive Stock Options and Non-qualified Stock Options as defined in the
Internal Revenue Code of 1986 as amended. The maximum number of shares of common
stock with respect to which options may be granted is 500,000 shares. The plan
was amended and restated effective October 1, 1996. Under the terms of the plan,
the exercise price of the option is determined by the Company. All options
granted to date have been at a price equal to the estimated fair market value at
the date of the grant.
The exercise period for the options may not exceed ten years from the date of
the grant; however, options granted under the plan before October 22, 1996 have
a term of five years from the date of the grant. The Company has the right but
not the obligation to purchase any shares issued under the plan at an appraised
price determined in accordance with the terms of the plan as of the end of the
preceding year.
Options become vested in 25% increments on each March 31 of the year following
the year in which the option was granted. Vesting may be accelerated based upon
death or retirement of the employee or a change in the control of the Company.
At December 31, 1997, options for 39,557 shares were exercisable at an average
price of $67.50. The weighted average remaining term of options outstanding at
December 31, 1997 is 8.8 years.
17
<PAGE> 158
Electronic Payment Services, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands)
8. Stock Option Plan (continued)
Following is a summary of options granted under the plan:
<TABLE>
<CAPTION>
Number of Weighted
Shares Option Price
----------------------------
<S> <C> <C>
Granted during 1994 47,822 $60.00
Granted during 1995 52,397 $60.00
-------
Outstanding at December 31, 1995 100,219 $60.00
Granted during 1996 95,676 $73.00
Forfeited during 1996 (26,199)
Options transferred in exchange for cash (8,070)
-------
Outstanding at December 31, 1996 161,626 $67.70
Granted during 1997 80,500 $66.00
Forfeited during 1997 (41,574)
-------
Outstanding at December 31, 1997 200,552 $68.27
=======
</TABLE>
The fair value of options granted during 1997, 1996 and 1995 was $16.68, $18.45
and $8.13, respectively, and was calculated using the Black-Scholes pricing
model adjusted to reflect the lower volatility associated with a private
company. The assumptions used to value the options were: expected life of 5
years, risk-free interest rate of 6.0%, no expected dividends and volatility of
1%. The Company uses the provisions of Accounting Principles Board Opinion
Number 25, "Accounting for Stock Issued to Employees" to account for option
activity. No compensation expense has been recognized for the value of the
options at the grant date as the grant price was equal to the estimated value of
the Company's stock. If the provisions of Financial Accounting Standards Board
Statement
18
<PAGE> 159
Electronic Payment Services, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands)
8. Stock Option Plan (continued)
Number 123, "Accounting for Stock Based Compensation" ("FAS 123"), had been
applied in determining net income for 1997, reported net income would have been
$17,643 and net income per common share would have been $4.70. Under FAS 123,
reported net income for 1996 and 1995 would have been $10,861 and $2,515,
respectively, and net income per common share would have been $3.18 and $1.04,
respectively. The effects of applying the provisions of FAS 123 are not
indicative of future amounts as FAS 123 has not been applied to options issued
before January 1, 1995 and additional awards are anticipated in future years.
9. Related Party Transactions
In connection with its formation and the 1995 equity transaction, the Company
entered into transitional services agreements with the Stockholders and their
affiliates whereby they agreed to provide, at cost, certain processing and other
services until such time as the Company was able to provide its own services.
Charges for these services were $4,300, $6,400 and $10,200 during 1997, 1996 and
1995, respectively.
The Stockholders are also customers of the Company and services are billed to
them at rates comparable to nonrelated customers. Approximately 27%, 27% and 20%
of revenues were billed to the Stockholders during 1997, 1996 and 1995,
respectively.
19
<PAGE> 160
Interim Unaudited Financial Statements
Electronic Payment Services, Inc.
For the quarter ended September 30, 1998
<PAGE> 161
ELECTRONIC PAYMENT SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
September 30 December 31
-----------------------------
1998 1997
-------- --------
(dollars in thousands)
<S> <C> <C>
ASSETS
Current assets
Cash and equivalents $ 16,425 $ 18,797
Accounts receivable, less allowance of $1,829
and $1,907 in 1998 and 1997, respectively 27,412 24,137
Deferred income taxes 3,022 3,410
Due from stockholders 3,462 4,164
Inventory and supplies 578 639
Prepaid expenses and other current assets 2,448 1,409
-------- --------
Total current assets 53,347 52,556
Property and equipment 180,870 151,434
Accumulated depreciation and amortization (73,394) (57,187)
-------- --------
107,476 94,247
Intangible assets
Goodwill 82,071 82,071
Customer lists and other 30,970 25,046
-------- --------
113,041 107,117
Accumulated amortization (35,001) (30,133)
-------- --------
78,040 76,984
Capitalized software development costs 16,133 20,404
Other assets 4,781 6,566
-------- --------
Total assets $259,777 $250,757
======== ========
</TABLE>
<PAGE> 162
ELECTRONIC PAYMENT SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
September 30 December 31
------------------------------
1998 1997
--------- ---------
(dollars in thousands)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities
Borrowings under credit agreement $ 28,000 $ 29,000
Current portion of long-term debt 25,000 25,000
Accounts payable 21,125 20,328
Due to stockholders 1,153 677
Accrued liabilities 27,510 21,398
Deferred income 7,870 5,961
Income taxes payable 9,405 8,426
--------- ---------
Total current liabilities 120,063 110,790
Long-term debt, net of current portion 106,250 125,000
Other liabilities 14,544 14,710
Deferred income taxes 15,208 15,269
Stockholders' equity (deficiency)
Preferred stock, par value $163.60; 4,600 shares
authorized, issued and outstanding 752 752
Common stock, par value $.01; 10,000,000 shares
authorized; 3,752,375 and 3,750,000 shares issued and outstanding 38 38
Paid-in capital 196,162 196,001
Deemed dividend (245,400) (245,400)
Retained earnings 52,160 33,597
--------- ---------
Total stockholders' equity (deficiency) 3,712 (15,012)
--------- ---------
Total liabilities and stockholders' equity (deficiency) $ 259,777 $ 250,757
========= =========
</TABLE>
<PAGE> 163
ELECTRONIC PAYMENT SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter ended Quarter ended Year to date Year to date
September 30 September 30 September 30 September 30
------------- ------------- ------------ ------------
1998 1997 1998 1997
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 61,121 $ 52,862 $ 172,371 $ 148,425
Expenses:
Processing and equipment 22,746 18,061 62,263 51,962
Customer and product support 8,557 8,289 25,086 23,345
Selling, general and administrative 8,589 8,318 25,884 25,440
Product development 4,844 4,247 14,495 11,582
Amortization of intangible assets 1,668 1,569 4,866 4,707
Interest expense, net of $168 and $152 interest income for
3rd quarter 1998 and 1997, and net of $544 and $391 interest
income for year to date 1998 and 1997, respectively 2,536 3,026 7,725 9,860
---------- ---------- ---------- ----------
Total expenses 48,940 43,510 140,319 126,896
---------- ---------- ---------- ----------
Income before income taxes 12,181 9,352 32,052 21,529
Provision for income taxes 5,116 4,115 13,462 9,473
---------- ---------- ---------- ----------
Net income 7,065 5,237 18,590 12,056
Dividend on preferred stock 9 9 28 28
---------- ---------- ---------- ----------
Net income available for common stock $ 7,056 $ 5,228 $ 18,562 $ 12,028
========== ========== ========== ==========
Net income per common share $ 1.88 $ 1.39 $ 4.95 $ 3.21
========== ========== ========== ==========
Average common shares outstanding 3,751,110 3,750,000 3,750,374 3,750,000
</TABLE>
<PAGE> 164
ELECTRONIC PAYMENT SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Period ended
September 30 September 30
------------ ------------
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 18,590 $ 12,056
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 24,366 21,591
Deferred tax provision (benefit) 61 675
Other noncash income and expense items 5,480 (333)
Changes in:
Accounts receivable (3,275) (2,967)
Inventory and supplies 61 451
Prepaid expenses and other current assets (1,039) 666
Accounts payable 797 (1,988)
Due to (from) stockholders 1,178 1,123
Accrued liabilities 6,112 1,241
Deferred income 1,909 (9)
Income taxes payable 1,367 2,905
-------- --------
Cash provided by operating activities 55,607 35,411
-------- --------
INVESTING ACTIVITIES:
Acquisition of property and equipment (31,462) (19,460)
Proceeds from licensing agreement -- 25,000
Acquisition of business (6,000) --
Other investing activity, net (739) 483
-------- --------
Cash used for investing activities (38,201) 6,023
-------- --------
FINANCING ACTIVITIES:
Borrowings (repayments) under credit agreement, net (1,000) (24,000)
Long-term debt repayments (18,750) (18,750)
Dividends paid on preferred stock (28) (28)
-------- --------
Cash used for financing activities (19,778) (42,778)
-------- --------
Change in cash and equivalents (2,372) (1,344)
Cash and equivalents, beginning of period 18,797 24,793
-------- --------
Cash and equivalents, end of period $ 16,425 $ 23,449
======== ========
</TABLE>
<PAGE> 165
ELECTRONIC PAYMENT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
SUPPLEMENTAL CASH FLOW INFORMATION
Total interest paid was $8,268 and $10,198 during the nine months ended 1998 and
1997, respectively.
PER SHARE DATA
In 1997, the Financial Accounting Standards Board issued Statement Number 128,
"Earnings per Share" ("FAS 128"). FAS 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per common share is the same as basic earnings per common share for
1997 and 1998.
FOR FURTHER INFORMATION REFER TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR
DECEMBER 31, 1997.
<PAGE> 166
APPENDIX D
[Letterhead of William Blair & Company]
November 20, 1998
Board of Directors
Concord EFS, Inc.
2525 Horizon Lake Drive
Memphis, Tennessee 38133
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to the holders of common stock of Concord EFS, Inc. (the "Company") of the
Exchange Ratio (as defined below) to be paid by the Company pursuant to the
terms and subject to the conditions set forth in the Agreement and Plan of
Merger dated as of November 20, 1998 (the "Merger Agreement") by and among, the
Company, a wholly-owned subsidiary of the Company ("Merger Sub"), and
Electronics Payment Services, Inc. ("EPS"). Pursuant to the terms of and subject
to the conditions set forth in the Merger Agreement, Merger Sub will be merged
into EPS (the "Merger") and each share of common stock of EPS, par value $.01
per share, will be converted into 7.911 shares (the "Exchange Ratio") of common
stock, $.33 1/3 par value per share, of the Company.
In connection with our review of the proposed Merger and the preparation of our
opinion herein, we have examined: (a) the Merger Agreement; (b) certain audited
financial statements of the Company for the five fiscal years ended December 31,
1997 and certain audited financial statements of EPS for the four years ended
December 31, 1997; (c) the unaudited financial statements of the Company for the
quarter ended September 30, 1998 and the unaudited financial statements of EPS
for the nine months ended September 30, 1998; (d) certain internal business,
operating and financial information and forecasts of EPS ("Forecasts"), prepared
by the senior management of EPS; (e) the pro forma impact of the Merger on the
earnings per share of the Company based on certain pro forma financial
information prepared by the senior management of the Company and EPS,
respectively; (f) historical revenues, operating earnings, operating cash flows,
net income and capitalization, as to the Company, EPS and certain publicly held
companies in businesses we believe to be comparable to the businesses of the
Company and EPS, respectively; (g) information regarding publicly available
financial terms of certain recently-completed transactions which we believed to
be relevant; (h) current and historical market prices and trading volumes of the
common stock of the Company; and (i) certain other publicly available
information on the Company. We also have held discussions with members of the
senior management of the Company and EPS to discuss the foregoing, have
considered other matters which we have deemed relevant to our inquiry and have
taken into account such accepted financial and investment procedures and
considerations as we have deemed relevant.
In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all the information examined
by or otherwise reviewed or discussed with us for purposes of this opinion. We
have not attempted to verify independently any of such information, nor have we
made or obtained an independent valuation or appraisal of assets, liabilities or
solvency of the
<PAGE> 167
Company or EPS. We have been advised by the management of the Company and EPS
that the Forecasts examined by us have been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
managements of the Company and EPS. We express no opinion with respect to the
Forecasts or the estimates and judgments on which they are based. Our opinion
herein is based upon economic, market, financial and other conditions existing
on, and other information disclosed to us as of, the date of this letter. It
should be understood that, although subsequent developments may affect this
opinion, we do not have any obligation to update, revise or reaffirm this
opinion. We have further assumed, with your consent, that the Merger will be
accounted for as a pooling of interests under generally accepted accounting
principles and that it will qualify as a tax-free reorganization for U.S.
federal income tax purposes. We have relied as to all legal matters on advice of
counsel to the Company, and we have assumed that the Merger will be consummated
on the terms described in the Merger Agreement, without any waiver of any
material terms or conditions by the Company.
William Blair & Company, L.L.C. has been engaged in the investment banking
business since 1935. We continually undertake the valuation of investment
securities in connection with public offerings, private placements, business
combinations, estate and gift tax valuations and similar transactions. We have
acted as investment banker to the Company in connection with the Merger and will
receive a fee from the Company for our services. Such fee is contingent upon
completion of the Merger. In the past, we have also performed investment banking
and other services for the Company and have received usual and customary
compensation for our services including underwriting fees. In addition, the
Company has agreed to indemnify us against certain liabilities arising out of
our engagement. Richard P. Kiphart, a Principal of William Blair & Company,
L.L.C., holds 3,716,744 shares of the Common Stock and is a Director of the
Company. Certain other principals of William Blair & Company, L.L.C.
beneficially own an aggregate of 2,854,847 shares of common stock of the
Company, which represents 2.8% of the outstanding common stock of the Company
prior to the Merger. In addition, certain mutual funds affiliated with, and
certain discretionary accounts advised by, William Blair & Company, L.L.C.
beneficially own shares of the Company's common stock.
We are expressing no opinion herein at which the price of the common stock of
the Company will trade at any future time or as to the effect of the Merger on
the trading price of the common stock of the Company. Such trading price may be
affected by a number of factors, including, but not limited to (i) dispositions
of the common stock of the Company by stockholders within a short period of time
after the effective time of the Merger, (ii) changes in prevailing interest
rates and other factors which generally influence the price of securities, (iii)
adverse changes in the current capital markets, (iv) the occurrence of adverse
changes in the financial condition, business, assets, results of operations or
prospects of the Company or of EPS or in the markets for their services, (v) any
necessary actions by or restrictions of federal, state or other governmental
agencies or regulatory authorities, and (vi) timely completion of the Merger on
terms and conditions that are acceptable to all parties at interest.
Our investment banking services and our opinion were provided for the use and
benefit of the Board of Directors of the Company in connection with its
consideration of the transaction contemplated by the Merger Agreement. Our
opinion is limited to the fairness, from a financial point of view, of the
Merger Consideration to be paid by the Company, in connection with the Merger,
and we do not address the merits of the underlying decision by the Company to
engage in the Merger and this opinion does not constitute a recommendation to
any stockholder as to how such stockholder should vote on the proposed Merger.
It is understood that this letter may not be disclosed or otherwise referred to,
without prior written consent, except that the opinion may be included in its
entirety in a proxy statement mailed to the stockholders by the Company with
respect to the Merger.
<PAGE> 168
Based upon and subject to the foregoing, it is our opinion as investment bankers
that, as of the date hereof, the Exchange Ratio to be paid by the Company is
fair, from a financial point of view, to the holders of the common stock of the
Company.
Very truly yours,
/s/ WILLIAM BLAIR & COMPANY, L.L.C.
--------------------------------------
WILLIAM BLAIR & COMPANY, L.L.C.
<PAGE> 169
APPENDIX E
CONCORD EFS, INC.
1993 INCENTIVE STOCK OPTION PLAN
(1999 Restatement)
1. Definitions. As used in this 1993 Incentive Stock Option Plan
of Concord EFS, Inc., the following terms shall have the following meanings:
1.1 Awarded Options means all options other than Formula
Options.
1.2 Change in Corporate Control means the date on which
any individual, corporation, partnership or other person or entity
(together with its "Affiliates" and "Associates," as defined in Rule
12b-2 under the Securities Exchange Act of 1934) "beneficially owns"
(as defined in Rule 13d-3 under the Securities Exchange Act of 1934) in
the aggregate 20% or more of the outstanding shares of capital stock of
the Company entitled to vote generally in the election of directors of
the Company.
1.3 Code means the Internal Revenue Code of 1986, as
amended.
1.4 Committee means the Compensation Committee of the
Company's Board of Directors, consisting exclusively of directors who
at the relevant time are "outside directors" within the meaning of
ss.162(m) of the Code.
1.5 Company means Concord EFS, Inc., a Delaware
corporation.
1.6 Fair Market Value means the value of a share of Stock
of the Company on any date as determined by the Board.
1.7 Formula Grant means a grant of options pursuant to
Section 11.
1.8 Formula Grant Date shall have the meaning specified
in Section 11.
1.9 Formula Options means options granted pursuant to
Section 11.
1.10 Grant Date means the date on which an Option is
granted, as specified in Section 7.
1.11 Major Shareholder means a person who, within the
meaning of Section 422(b)(6) of the Code, is deemed to own stock
possessing more than 10% of the total combined voting power of all
classes of stock of the Company (or of its parent or subsidiary
corporations).
1.12 Option means an option to purchase shares of the
Stock granted under the Plan.
E-1
<PAGE> 170
1.13 Option Agreement means an agreement between the
Company and an Optionee, setting forth the terms and conditions of an
Option.
1.14 Option Period means the period from the date of the
grant of an Option to the date when the Option expires as stated in the
terms of the Option Agreement.
1.15 Option Price means the price paid by an Optionee for
an Option under this Plan.
1.16 Option Share means any share of Stock of the Company
transferred to an Optionee upon exercise of an Option pursuant to this
Plan.
1.17 Optionee means a person eligible to receive an
Option, as provided in Section 6, to whom an Option shall have been
granted under the Plan.
1.18 Plan means this 1993 Incentive Stock Option Plan of
the Company.
1.19 Related Corporation means a Parent Corporation or a
Subsidiary Corporation, each as defined in Section 424 of the Code.
1.20 Stock means common stock, $.33 1/3 par value, of the
Company
1.21 Vested Shares, as of any date, means those shares of
stock available at that date for purchase by exercise of a Formula
Option pursuant to Section 11.
2. Purpose. This 1993 Incentive Stock Option Plan is intended to
encourage ownership of the Stock by key employees and directors of the Company
and its Related Corporations and to provide additional incentive for them to
promote the success of the Company's business. The Plan is intended to be an
incentive stock option plan within the meaning of Section 422 of the Code.
3. Term of the Plan. Options under the Plan may be granted not
later than February 16, 2003.
4. Stock Subject to the Plan. At no time shall the number of
shares of the Stock then outstanding which are attributable to the exercise of
Options granted under the Plan, plus the number of shares then issuable upon
exercise of outstanding options granted under the Plan exceed 25,000,000 shares,
subject, however, to the provisions of Section 16 of the Plan. No Optionee may
be granted in any year Options to purchase more than 1,500,000 shares of Stock,
subject to adjustment pursuant to Section 16. Shares to be issued upon the
exercise of Options granted under the Plan may be either authorized but unissued
shares or shares held by the Company in its treasury. If any Option expires or
terminates for any reason without having been exercised in full, the shares not
purchased thereunder shall again be available for Options thereafter to be
granted.
5. Administration. The Plan shall be administered by the
Committee. Subject to the provisions of the Plan (including, without limitation,
the provisions of Sections 11 and
E-2
<PAGE> 171
20), the Committee shall have complete
authority, in its discretion, to make the following determinations with respect
to each Awarded Option to be granted by the Company: (a) the key employee to
receive the Awarded Option; (b) the time of granting the Awarded Option; (c) the
number of shares subject thereto; (d) the Option Price; and (e) the Option
period. In making such determinations, the Committee may take into account the
nature of the services rendered by the respective employees, their present and
potential contributions to the success of the Company and its subsidiaries, and
such other factors as the Committee in its discretion shall deem relevant.
Subject to the provisions of the Plan, the Committee shall also have complete
authority to interpret the Plan, to prescribe, amend and rescind rules and
regulations relating to it, to determine the terms and provisions of the
respective Option Agreements (which need not be identical) other than Option
Agreements for Formula Options, and to make all other determinations necessary
or advisable for the administration of the Plan. The Committee's determinations
on the matters referred to in this Section 5 shall be conclusive.
6. Eligibility. An Awarded Option may be granted only to a key
employee of one or more of the Company and its subsidiaries. A director of one
or more of the Company and its subsidiaries who is not also an employee of one
or more of the Company and its subsidiaries shall not be eligible to receive
Awarded Options but shall receive Formula Options pursuant to Section 11. A
Major Shareholder shall be eligible to receive an Awarded Option only if the
Option Price is at least 110% of the Fair Market Value on the Grant Date and
only if the Awarded Option expires, to the extent not theretofore exercised, on
the fifth anniversary of the Grant Date.
7. Time of Granting Awarded Options. The granting of an Awarded
Option shall take place at the time specified by the Committee. Only if
expressly so provided by the Committee, shall the Grant Date be the date on
which an Option Agreement shall have been duly executed and delivered by the
Company and the Optionee.
8. Awarded Option Price. The Option Price under each Awarded
Option shall be not less than 100% of the Fair Market Value of the Stock on the
Grant Date except that the Option Price under an Awarded Option granted to a
Major Shareholder must be not less than 110% of the Fair Market Value.
9. Awarded Option Period. No Awarded Option may be exercised
later than the tenth anniversary of the Grant Date, or for an Awarded Option
granted to a Major Shareholder, the fifth anniversary of the Grant Date. An
Awarded Option may become exercisable in such installments, cumulative or
non-cumulative, as the Committee may determine.
10. Maximum Size of Awarded Option as Incentive Option. To the
extent that the aggregate Fair Market Value of Stock for which an Awarded Option
becomes exercisable by an Optionee for the first time in any calendar year
exceeds $100,000, the Awarded Option shall be treated as a nonstatutory option,
and not an incentive option under Section 422 of the Code. For purposes of this
Section 10, all Awarded Options granted to an Optionee by the Company shall be
considered in the order in which they were granted, and the Fair Market Value
shall be determined as of the Grant Dates.
E-3
<PAGE> 172
11. Formula Grants of Options to Certain Directors.
(a) Directors Elected or Re-Elected at Annual
Stockholders Meeting, Special Meeting in Lieu of Annual Meeting or at Other
Times. Commencing in 1994, each individual who is not, immediately prior to his
or her election or re-election to the Board of Directors, either an officer or
employee of the Company or any subsidiary of the Company, and who is elected or
re-elected to the Board of Directors during the term of the Plan (whether
elected at an annual or special stockholders' meeting or by action of the Board
of Directors) shall be granted, on the date of such meeting or other appointment
(as used in or with reference to this Section 11(a), a "Formula Grant Date"), a
nonstatutory Stock Option to purchase 4,500 shares of Stock, subject to
adjustment pursuant to Section 16.
(b) Terms of Formula Options. Each Formula Option granted
to an Optionee under this Section 18 shall (i) have an exercise price equal to
100% of the Fair Market Value of the Stock on the applicable Formula Grant Date,
and (ii) become exercisable for Vested Shares on the second anniversary of the
Formula Grant Date if the Optionee remains a director of the Company on that
date. No Formula Option granted pursuant to this Section 11 is intended to
qualify as an incentive stock option within the meaning of Section 422 of the
Code. The Formula Grants shall be evidenced by Option Agreements. The Option
Agreements shall contain provisions consistent with this Section 11 and shall
contain identical terms and conditions, except (i) as otherwise required by this
Section 11 and (ii) for any restrictions imposed with respect to Formula Grants
granted prior to the receipt of any stockholders' approval required pursuant to
Rule 16b-3(b) under the Securities Exchange Act of 1934, as amended.
(c) Option Period. The Option Period for any Formula
Option granted pursuant to this Section 11 shall be ten years from the date of
grant.
12. Exercise of Option. An Option may be exercised only by giving
written notice, in the manner provided in Section 21 hereof, specifying the
number of shares as to which the Option is being exercised, accompanied by (a)
full payment for such shares in the form of (X) a check or bank draft payable to
the order of the Company, (Y) certificates representing shares of the Stock with
a current Fair Market Value equal to the Option Price of the shares to be
purchased, or (Z) irrevocable instructions to a brokerage firm to sell a
sufficient number of the Option Shares to generate the full exercise price plus
all applicable withholding taxes and to pay over to the Company such proceeds of
sale, and (b) such additional amount in one or more of the foregoing forms as
the Company may reasonably require to permit the Company to comply with
applicable withholding tax requirements. Receipt by the Company of such notice
and payment shall constitute the exercise of the Option or a part thereof.
Within 20 days thereafter, the Company shall deliver or cause to be delivered to
the Optionee a certificate or certificates for the number of shares then being
purchased by him. Such shares shall be fully paid and nonassessable. If any law
or applicable regulation of the Securities and Exchange Commission or other
public regulatory authority shall require the Company or the Optionee to
register or qualify under the Securities Act of 1933, as amended, any similar
federal statute then in force or any state law regulating the sale of
securities, any Option Shares with respect to which notice of intent to exercise
shall have been delivered to the Company or to take any other action in
connection with such shares, the delivery of the certificate or certificates for
such shares shall be postponed until
E-4
<PAGE> 173
completion of the necessary action, which the Company shall take in good faith
and without delay. All such action shall be taken by the Company at its own
expense. Upon each exercise of the Option, the Optionee may be required to give
a representation in form satisfactory to counsel for the Company that he or she
is acquiring shares purchased pursuant to such exercise for investment and not
with a view to distribution and that he or she will make no transfers of the
shares in violation of the Securities Act of 1933, as amended, and the
regulations of the Securities and Exchange Commission thereunder. The Company
may, at its discretion, make a notation on any certificate delivered upon
exercise of the Option to the effect that the shares represented by the
certificate may not be transferred except after receipt by the Company of an
opinion of counsel satisfactory to it to the effect that such transfer will not
violate such Act and such regulations, and may issue "stop transfer"
instructions to its transfer agent, if any, and make a "stop transfer" notation
on its books, as appropriate. Notwithstanding the foregoing, the Company may
release the Optionee from the investment representation if the shares of the
Stock subject to the Option have been registered with the Securities and
Exchange Commission under such Act.
13. Notice of Disposition of Stock Prior to Expiration of
Specified Holding Period. The Company may require that the person exercising an
Option give a written representation to the Company, satisfactory in form and
substance to its counsel and upon which the Company may reasonably rely, that he
or she will report to the Company any disposition of shares purchased upon
exercise prior to the expiration of the holding periods specified by Section
422(a)(1) of the Code. If and to the extent that the disposition imposes upon
the Company federal, state, local or other withholding tax requirements, or any
such withholding is required to secure for the Company an otherwise available
tax deduction, the Company shall have the right to require that the person
making the disposition remit to the Company an amount sufficient to satisfy
those requirements.
14. Transferability of Options. Awarded Options and, unless
otherwise provided in all of the Option Agreements for Formula Options, Formula
Options shall not be transferable, otherwise than by will or the laws of descent
and distribution, and may be exercised during the life of the Optionee only by
the Optionee.
15. Termination of Employment or Service. With respect to Awarded
Options, in the event that the Optionee's employment is terminated for any
reason other than death or the Optionee's employer is no longer the Company or a
Related Corporation, the Awarded Option, to the extent exercisable at
termination, may be exercised by the Optionee at any time within three months
after termination unless terminated earlier by its terms. If termination results
from the death of the Optionee, the Awarded Option, to the extent exercisable at
the date of death, may be exercised by the person to whom the Awarded Option is
transferred by will or the applicable laws of descent and distribution, at any
time within one year after the date of death, unless terminated earlier by its
terms. Military or sick leave shall not be deemed a termination of employment
provided that it does not exceed the longer of 90 days or the period during
which the absent employee's re-employment rights are guaranteed by statute or by
contract. With respect to Formula Options, in the event that the Optionee's
service is terminated for any reason, the Formula Option, to the extent
exercisable
E-5
<PAGE> 174
at termination, may be exercised at any time within five years after the
termination of service, unless terminated earlier by its terms.
16. Adjustment of Number of Shares. Each Option Agreement shall
provide that in the event of any stock dividend payable in the Stock or any
split-up or contraction in the number of shares of the Stock occurring after the
date of the Agreement and prior to the exercise in full of the Option, the
number of shares subject to such Agreement shall be proportionately adjusted and
the price to be paid for each share subject to the Option shall be
proportionately adjusted. Each such Agreement shall also provide that in case of
any reclassification or change of outstanding shares of the Stock or in case of
any consolidation or merger of the Company with or into another company or in
the case of any sale or conveyance to another company or entity of the property
of the Company as a whole or substantially as a whole, shares of Stock or other
securities shall be delivered equivalent in kind and value to those shares or
other securities an Optionee would have received if the Option had been
exercised in full prior to such reclassification, change, consolidation, merger,
sale or conveyance and no disposition had subsequently been made. Each Agreement
shall further provide that upon dissolution or liquidation of the Company, the
Option shall terminate, but the Optionee (if at the time in the employ of the
Company or any of its subsidiaries) shall have the right, immediately prior to
such dissolution or liquidation, to exercise the Option to the extent not
theretofore exercised. No fraction of a share shall be purchasable or
deliverable upon exercise, but in the event any adjustment hereunder of the
number of shares covered by the Option shall cause such number to include a
fraction of a share, such fraction shall be adjusted to the nearest smaller
whole number of shares. In the event of changes in the outstanding Stock by
reason of any stock dividend, split-up, contraction, reclassification, or change
of outstanding shares of the Stock of the nature contemplated by this Section
15, the number of shares of the Stock available for the purpose of the Plan as
stated in Section 4 shall be correspondingly adjusted and the maximum number of
shares available for any one Option as stated in Section 4 and the number of
shares to be granted to each director as stated in Section 11 shall be
correspondingly adjusted.
17. Change in Corporate Control. Upon a Change in Corporate
Control, each outstanding Option shall immediately become fully exercisable, and
a registration statement under the Securities Act of 1933, as amended, with
respect to shares covered by all outstanding Options, whether to be issued by
the Company or by any successor corporation, shall be effective at all times
during which the Options may be exercised and, to facilitate resale of the
shares, during the twelve months after the last exercise of the Options.
18. Reservation of Stock. The Company shall at all times during
the term of the Option reserve and keep available such number of shares of the
Stock as will be sufficient to satisfy the requirements of this Plan and shall
pay all fees and expenses necessarily incurred by the Company in connection
therewith.
19. Limitation of Rights in the Option Shares. The Optionee shall
not be deemed for any purpose to be a stockholder of the Company with respect to
any of the Option Shares except to the extent that the Option shall have been
exercised with respect thereto and, in addition, a certificate shall have been
issued therefor and delivered to the Optionee.
E-6
<PAGE> 175
20. Termination and Amendment of the Plan. The Committee may at
any time terminate the Plan or make such amendment to the Plan as it shall deem
advisable, provided that, except as provided in Section 15, the Committee may
not, without the approval by the holders of a majority of the Stock, change the
classes of persons eligible to receive Options, increase the maximum number of
shares available for option under the Plan or extend the period during which
Options may be granted or exercised. Notwithstanding the preceding sentence, the
provision of Sections 1, 5 and 6, insofar as they relate to Formula Options, and
Section 11 shall not be amended more often than once every six months, other
than to comport with changes in the Code and regulations thereunder. No
termination or amendment of the Plan may, without the consent of the Optionee to
whom any Option shall theretofore have been granted, adversely affect the rights
of such Optionee under such Option.
21. Notices. Any communication or notice required or permitted to
be given under the Plan shall be in writing, and mailed by registered or
certified mail or delivered in hand, if to the Company, to its Treasurer at
Concord EFS, Inc., 2525 Horizon Lake Drive, Suite 120, Memphis, Tennessee 38133
and, if to the Optionee, to the address as the Optionee shall last have
furnished to the communicating party.
E-7
<PAGE> 176
SUPPLEMENT TO THE
PROXY STATEMENT OF
CONCORD EFS, INC.
DATED JANUARY 14, 1999
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
This proxy statement contains forward-looking statements about Concord
and EPS and about Concord following the acquisition of EPS. These statements can
be identified by our use of words like "expect", "may", "could", "intend",
"project", "estimate" or "anticipate". These forward-looking statements reflect
our current views, but they are based on assumptions and are subject to risks,
uncertainties and other factors, including those discussed under the heading
"RISK FACTORS" on page 15 and those discussed on page 59 under the heading
"ELECTRONIC PAYMENT SERVICES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS." These factors include the
possibility that:
(1) we may not fully realize the expected cost savings from the
acquisition of EPS or any such cost savings will not be realized
within the time periods contemplated;
(2) customer loss or revenue loss following the acquisition of EPS
may be greater than we expect;
(3) competitive pressure in the transaction processing industry
increases significantly, either because of the entrance of new
data processing providers or due to further consolidations
within this industry or the banking industry;
(4) costs or difficulties related to the integration of the
businesses of Concord and EPS may be greater than we expect;
(5) reductions in the amount we can charge for ATM services and for
non-ATM transaction processing may reduce earnings;
(6) general economic conditions, either nationally or regionally,
may be less favorable than we expect, resulting in, among other
things, a reduced use of credit and debit cards;
(7) changes may occur in the regulatory environment in which we
operate;
(8) changes may occur in business conditions and inflation;
(9) changes may occur in the securities markets; and
(10) disruptions of the operations of Concord, EPS or any of their
subsidiaries, or other governmental or private entities may
occur as a result of the "Year 2000 Problem."
The forward-looking earnings estimates included in this proxy statement
have not been examined or compiled by the independent public accountants of
Concord and EPS, nor have our independent accountants applied any procedures to
our estimates. Accordingly, such accountants do not express an opinion or any
other form of assurance on them. Further information on other factors that
could affect the financial results of Concord after its acquisition of EPS is
included in the SEC filings incorporated by reference in this proxy statement.
<PAGE> 177
Appendix to Definitive Proxy Materials
of Concord EFS, Inc.
<PAGE> 178
CONCORD EFS, INC.
2525 Horizon Lake Drive, Suite 120
Memphis, Tennessee 38133
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Dan M. Palmer and Thomas J. Dowling or either of
them as Proxies, each with the power to appoint his substitute, and hereby
authorizes them to represent and to vote as designated below, all the shares of
Common Stock of Concord EFS, Inc. (Concord) held by the undersigned on January
12, 1999, at the Special Meeting of Stockholders to be held on Thursday,
February 18, 1999 at Colonial Country Club, 2736 Countrywood Parkway, Memphis,
Tennessee beginning at 10:00 a.m. local time, or any adjournment thereof.
WHETHER OR NOT YOU PLAN TO ATTEND THIS MEETING,
PLEASE SIGN AND RETURN THIS PROXY.
- --------------------------------------------------------------------------------
PLEASE VOTE, DATE AND SIGN ON REVERSE AND RETURN PROMPTLY
IN THE ENCLOSED ENVELOPE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Please sign exactly as your name(s) appear(s) hereon. When shares are held by
joint tenants, both should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by president or other
authorized officer. If a partnership, please sign in partnership name by
authorized person and state title.
- --------------------------------------------------------------------------------
[X] PLEASE MARK VOTES
AS IN THIS EXAMPLE
This proxy, when properly executed, will be voted in the manner directed by the
undersigned stockholder. If no direction is made, this proxy will be voted FOR
the actions described in Item Nos. 1 and 2. In their discretion, the Proxies
are authorized to vote upon such other business as may properly come before the
Special Meeting or any adjournment thereof.
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C> <C> <C>
- --------------------------------------- 1. To approve the issuance of shares of common stock of [ ] [ ] [ ]
CONCORD EFS, INC. Concord as contemplated by Agreement and Plan of
- --------------------------------------- Merger, dated November 20, 1998 between Concord,
CEFT, Inc. and Electronic Payment Services, Inc.
For Against Abstain
RECORD DATE SHARES: 2. To approve a proposed amendment to Concord's 1993 [ ] [ ] [ ]
Incentive Stock Option Plan to increase the number of
shares of common stock that may be issued under the
Plan from 13,668,750 shares currently authorized to a
new total of 25,000,000 shares and to add a new method
for payment of shares upon exercise of options.
</TABLE>
---------------------
Please be sure to sign and date this Proxy. Date
- --------------------------------------------------------------------------------
- ---------Stockholder sign here-----------------------------Co-owner sign here---
DETACH CARD
DETACH CARD
<PAGE> 179
[Letterhead of Ernst & Young LLP]
Report of Independent Auditors
Board of Directors and Stockholders
Concord EFS, Inc.
We have audited the accompanying consolidated balance sheets of Concord EFS,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material aspects, the consolidated financial position of Concord EFS, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Memphis, Tennessee
February 5, 1998
