SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended Commission file number 0-13848
March 31, 1999
___________________________
CONCORD EFS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2462252
______________________________ _____________________
(State or other jurisdiction of (I.R.S. Employer
Incorporation of Organization) Identification Number)
2525 Horizon Lake Drive, Suite 120, Memphis, Tennessee 38133
(Address of Principal Executive Offices)
(901) 371-8000
(Registrant's telephone number, including area code)
_________________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes[X] No[ ]
The number of shares of the registrant's Common Stock, $0.33 1/3 par value, as
of March 31, 1999 was 128,330,320.
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
INDEX
Page No.
--------
PART 1- Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets March 31, 1999
and December 31, 1998 1
Condensed Consolidated Statements of Income Three
Months ended March 31, 1999 and March 31, 1998 2
Condensed Consolidated Statements of Cash Flows
Three Months ended March 31, 1999 and March 31, 1998 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 12
PART II - Other Information
Item 2. Changes in Securities and Use of Proceeds 13
Item 4. Submission of Matters to a Vote of Stockholders 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 15
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31 December 31
1999 1998
---------- -----------
(In thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 77,285 $ 82,029
Securities available-for-sale 315,776 288,180
Accounts receivable, net 124,735 106,662
Inventories 11,324 11,396
Prepaid expenses and other 13,158 7,863
Deferred income taxes 6,305 5,977
-------- --------
TOTAL CURRENT ASSETS 548,583 502,107
OTHER ASSETS 18,270 23,615
PROPERTY AND EQUIPMENT 311,054 302,937
Less accumulated depreciation
and amortization (157,406) (148,447)
-------- --------
153,648 154,490
INTANGIBLE ASSETS 146,974 146,712
Less accumulated amortization (47,838) (42,806)
-------- --------
99,136 103,906
-------- --------
TOTAL ASSETS $819,637 $784,118
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other liabilities $125,307 $ 112,376
Accrued liabilities 71,532 47,641
Income taxes payable 19,489 10,148
Short-term borrowings 17,000 21,000
Current maturities of long-term debt 25,000 25,116
-------- --------
TOTAL CURRENT LIABILITIES 258,328 216,281
LONG-TERM DEBT, LESS CURRENT MATURITY 173,750 173,000
DEFERRED INCOME TAXES 15,605 21,336
OTHER LIABILITIES 8,905 12,966
STOCKHOLDERS' EQUITY:
Common Stock-par value $0.33 1/3 per
share; authorized 200,000 shares,
issued and outstanding 128,330
shares at March 31, 1999; issued and
outstanding 127,935 shares at
December 31, 1998 42,777 42,646
Other stockholders' equity 320,272 317,889
-------- --------
TOTAL STOCKHOLDERS' EQUITY 363,049 360,535
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $819,637 $784,118
======== ========
See Notes to Condensed Consolidated Financial Statements - Unaudited.
-1-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended
March 31
-----------------------
1999 1998
------- -------
(In thousands, except per share data)
Revenue $170,234 $134,666
Cost of operations 120,849 95,029
Selling, general and
administrative expenses 12,368 13,100
Acquisition expenses and
restructuring charges 34,810 -
------- -------
OPERATING INCOME 2,207 26,537
Other income (expense):
Interest income 5,265 4,095
Interest expense (3,533) (3,346)
------- -------
INCOME BEFORE
INCOME TAXES 3,939 27,286
Income taxes 6,807 9,937
------- -------
NET INCOME (LOSS) $(2,868) $17,349
======= =======
Per share data:
Weighted average shares 128,014 127,486
======= =======
Basic earnings (loss) ($0.02) $0.14
per share ======= =======
Adjusted weighted average
shares and assumed
conversions 133,083 130,849
======= =======
Diluted earnings (loss) ($0.02) $0.13
per share ======= =======
See Notes to Condensed Consolidated Financial Statements - Unaudited.
-2-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31
---------------------
1999 1998
-------- --------
(In thousands)
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 41,124 $ 19,521
INVESTING ACTIVITIES:
Acquisition of property and equipment (11,628) (11,255)
Purchases of securities available-for-sale (48,467) (43,795)
Purchase of securities held-to-maturity (4,539)
Sale of securities available-for-sale 13,575 12,667
Maturities of securities available-for-sale 5,564 8,851
Maturities of securities held-to-maturity 2,944
Merchants contracts purchased (4,896) (2,936)
Other (928)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (45,852) (38,991)
FINANCING ACTIVITIES:
Proceeds from sale of common stock 3,350 903
Proceeds from notes payable 7,000 26,275
Payments under credit agreement, net (4,000) (9,000)
Payments on notes payable (6,366) (6,272)
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (16) 11,606
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (4,744) (7,864)
Cash and cash equivalents at beginning
of period 82,029 82,592
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 77,285 $ 74,728
======== ========
For purposes of these statements, the Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents.
See Notes to Condensed Consolidated Financial Statements - Unaudited.
-3-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1999
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. Operating results for the
three month period ended March 31, 1999 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1999. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Registrant's annual report on Form 10-K for the year
ended December 31, 1998.
The balance sheet at December 31, 1998 has been derived from the consolidated
audited financial statements included in exhibit 99 of the Company's Form 10-K
for the year ended December 31, 1998. The balance sheet does not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements.
Restatement for Poolings
The historical financial information presented in this Form 10-Q has been re-
stated to include the results of Electronic Payment Services, Inc. ("EPS") and
Digital Merchant Systems of Illinois, Inc. and American Bankcard International,
Inc. (jointly named "DMS"). EPS and DMS were acquired in separate pooling-of-
interests transactions. In accordance with pooling-of-interests method of
accounting, no adjustments have been made to the historical carrying amounts of
assets and liabilities of either DMS or EPS. However, the financial information
has been restated to include the operating results of DMS and EPS for all stated
periods prior to the combinations.
On February 18, 1999, the stockholders approved the Company's issuance of shares
in connection with its acquisition of EPS. The Company completed the merger with
EPS on February 26, 1999 by exchanging 30,064,838 shares of the Company's common
stock for all of the outstanding common stock of EPS. EPS provides transaction
processing services to financial institutions and retailers throughout the
United States. EPS also owns and operates electronic data processing and
data-capture networks that process transactions originating at ATMs and
point-of-sale terminals.
On June 30, 1998, the Company merged with DMS. DMS is an independent sales
organization in the credit card industry. The Company exchanged 4,425,000 shares
of its common stock for all of the outstanding common stock of DMS.
-4-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
MARCH 31, 1999
Restatement for Pooling - continued
The following table presents selected financial information, in thousands, split
between the Company, EPS and DMS for the three months ended March 31, 1999 and
1998, respectively.
Three months ended
March 31
----------------------------
1999 1998
------------- -------------
(Unaudited) (Unaudited)
Revenue
Concord EFS, Inc. $124,129 $ 69,632
EPS (1) 46,105 58,399
DMS (2) 6,635
-------- --------
$170,234 $134,666
======== ========
Net income (loss)
Concord EFS, Inc. ($7,782) $ 11,367
EPS (1) 4,914 5,189
DMS (2) 793
-------- --------
($2,868) $ 17,349
======== ========
(1) The 1999 amounts reflect the results of operations from January 1, 1999
through February 28, 1999. The results of operations from March 1, 1999 to March
31, 1999 are included in Concord EFS, Inc. amounts.
(2) As the acquisition of DMS was completed on June 30, 1998, the 1999 amounts
are included in Concord EFS, Inc. amounts.
Stock Split
The Board of Directors approved a three-for-two stock split on May 14, 1998.
Shareholders of record as of June 1, 1998 were distributed additional shares on
June 8, 1998.
Comprehensive Income
As of January 1, 1998, the Company adopted Financial Accounting Standards Board
(FASB) Statement 130, "Reporting Comprehensive Income". Statement 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this Statement had no impact on the
Company's net income or stockholders' equity. Statement 130 requires unrealized
gains or losses on the Company's available-for-sale securities, which prior to
adoption were reported separately in stockholders' equity to be included in
other comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of Statement 130.
During the first quarter of 1999 and 1998, total comprehensive income (loss), in
thousands, amounted to ($3,747) and $17,485, respectively.
-5-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
MARCH 31, 1999
Earnings (Loss) Per Share
The following table sets forth the computation of basic and diluted earnings
(loss) per share (in thousands, except per share data):
Three Months Ended
March 31
1999 1998
------- -------
Numerator:
Net income (loss) $ (2,868) $17,349
====== ======
Denominator:
Denominator for basic earnings per
share, weighted-average shares 128,014 127,486
Effect of dilutive securities,
employee stock options 5,069 3,363
------- -------
Denominator for diluted earnings per
share adjusted for weighted-average
shares and assumed conversions 133,083 130,849
======= =======
Basic earnings (loss) per share ($0.02) $0.14
======= =======
Diluted earnings (loss) per share ($0.02) $0.13
======= =======
Excluding acquisition costs and restructuring charges described in management's
discussion and analysis of financial condition and results of operations, basic
and diluted earnings per share for the first quarter 1999 was $0.19 and $0.18,
respectively.
Earnings per share and related per share data have been restated to reflect all
stock splits.
Operations By Industry Segment
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," which establishes standards for reporting
financial information about operating segments in annual and interim financial
statements. SFAS No. 131 requires that financial information be reported on the
same basis that is reported internally for evaluating segment performance and
allocating resources to segments. SFAS No. 131 addresses how supplemental
financial information is disclosed in annual and interim reports; therefore, its
adoption in 1998 had no impact on the financial condition or operating results
of the Company.
-6-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
MARCH 31, 1999
Concord has two reportable segments: Merchant Card Services and ATM Services.
Merchant Card Services include the processing of credit card transactions for
all major credit card brands including VISA, MasterCard, American Express,
Discover and Diners Club; the processing of debit card transactions for
financial institutions issuing these and similar cards; and the provision of
electronic payment services to supermarket chains and multiple lane retailers,
financial institutions, petroleum and convenience stores, grocery stores,
trucking companies and other retailers.
ATM Services revenue consists of fee income and other surcharges charged for
proprietary ATMs and processing fees for third party ATMs. The balance of the
Company's revenue is derived principally from check verification and
authorization services, sales of point-of-sale terminals and payroll processing
services.
ATM Services include transactional fee income and other surcharges charges for
proprietary ATMs and processing fees for third party ATMs.
The remaining balance of the Company's revenue is derived principally from check
verification and authorization services, and sales of point-of-sale terminals.
The Company evaluates performance and allocates resources based on profit or
loss from operations. Items classified as "Other" include revenue not
identifiable with the two reportable segments described above and costs of
operations and selling, general and administrative expenses which are not
allocated to the reportable segments.
No single customer of the Company accounts for a material portion of the
Company's revenues.
Industry segment information, in thousands, for the three months ended March 31,
1999 and 1998 is presented below:
<TABLE>
<CAPTION>
Merchant ATM
Card Services Services Other Total
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Three months ended March 31, 1999
Revenue $112,326 $ 52,449 $ 5,459 $170,234
Cost of operations (63,564) (31,105) (26,180) (120,849)
Acquisition costs and restructuring
charges (34,810) (34,810)
Selling, general, & administrative
expenses (12,368) (12,368)
Taxes & interest, net (5,075) (5,075)
------------- ------------- ------------- -------------
Net income (loss) $ 48,762 $ 21,344 $(72,974) $ (2,868)
============= ============= ============= =============
Three months ended March 31, 1998
Revenue $ 85,203 $ 45,202 $ 4,261 $134,666
Cost of operations (46,654) (26,264) (22,111) (95,029)
Selling, general, & administrative
expenses (13,100) (13,100)
Taxes & interest, net (9,188) (9,188)
------------- ------------- ------------- -------------
Net income $ 38,549 $ 18,938 $(40,138) $ 17,349
============= ============= ============= =============
</TABLE>
-7-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Form 10-Q may contain or incorporate by reference statements which may
constitute "forward-looking" information, within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities Act of
1934, as amended. Any such statements are not guarantees for future performance
and involve risks and uncertainties, and actual results may differ materially
from those contemplated by such forward-looking statements. Important factors
that could cause actual results to differ materially from those in
forward-looking statements include (i) the loss of key personnel or inability to
attract additional qualified personnel, (ii) the failure to fully integrate the
operations of EPS, (iii) changes in card association rules, (iv) changes in card
association fees, (v) restrictions on surcharging or a decline in the deployment
of automated teller machines, (vi) dependence on VISA and MasterCard
registrations, (vii) the credit risk of merchant customers, (viii)
susceptibility to fraud at the merchant level, (ix) the failure of the Company,
its vendors or its customers to appropriately manage Year 2000 code problems,
(x) increasing competition, (xi) the success of a new VISA debit card product,
(xii) the loss of key customers, (xiii) continued consolidation in the banking
and retail industries, (xiv) risks related to acquisitions, (xv) changes in
rules and regulations governing financial institutions, (xvi) the inability to
remain current with rapid technological change, (xvii) dependence on third-party
vendors, (xviii) the imposition of additional state taxes, (xix) volatility of
the Company's common stock price and (xx) changes in interest rates. The Company
undertakes no obligation to update or revise forward-looking statements to
reflect changed assumptions, the occurrence of unanticipated events or changes
to future results over time. See the cautionary statements included as Exhibit
99 to this Form 10-Q for a more detailed discussion of the foregoing and other
factors.
Overview
Concord EFS, Inc. (the "Company") is a fully integrated leading provider of
electronic transaction authorization, processing, settlement and funds transfer
services on a nationwide basis. The Company focuses on marketing its services to
supermarket chains and multiple lane retailers, financial institutions,
petroleum and convenience stores, grocery stores, the trucking industry and
other retailers. The Company's primary activity is Merchant Card Services, in
which it provides integrated electronic transaction services for credit card,
debit card and electronic benefits transfer ("EBT") card transactions. These
transaction services include data capture, authorization and settlement services
for over 400,000 point-of-sale terminals. The Company also provides automated
teller machine ("ATM") Services, consisting of owning and operating the
MAC-branded electronic funds transfer network and processing for approximately
35,000 ATMs nationwide, of which it owns approximately 1,000.
Recent Acquisitions
On June 30, 1998, the Company completed a merger with DMS, which is an
independent sales organizations for the transaction processing industry. The
merger was accounted for as a pooling of interests in which the Company
exchanged approximately 4.4 million of its shares for all of DMS.
On February 26, 1999 the Company completed its acquisition of EPS, a company
which provides transaction processing services to financial institutions and
retailers throughout the United States. The acquisition was accounted for as a
pooling of interests in which the Company exchanged 30.1 million of its shares
for all of the outstanding common stock of EPS. The Company incurred $34.8
million of expenses related to the acquisition in the first quarter of 1999.
These expenses included communication conversion costs, advisory fees and asset
write-offs. Management continues to review potential operational synergies from
the acquisition, such as duplicate facilities, computer hardware and software
and other contractual relationships.
-8-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Restatement for Poolings
The historical financial information presented in this Form 10-Q has been
restated to include the results of EPS and DMS. In accordance with the
pooling-of-interests method of accounting, no adjustments have been made to the
historical carrying amounts of assets and liabilities of either DMS or EPS.
However, the financial information has been restated to include the operating
results of EPS and DMS for all stated periods prior to the combination.
Components of Revenue and Expenses
The substantial majority of the Company's revenue (66% in the first quarter of
1999 and 63% in the first quarter of 1998) is generated from fee income related
to Merchant Card Services. These services include:
-- the processing of credit card transactions for all major credit card brands
including VISA, MasterCard, American Express, Discover and Diners Club;
-- the processing of debit card transactions for financial institutions
issuing these and similar cards; and
-- the provision of electronic payment services to supermarket chains and
multiple lane retailers, financial institutions, petroleum and convenience
stores, grocery stores, trucking companies and other retailers.
Revenue from Merchant Card Services includes primarily discount fees charged to
merchants, which are a percentage of the dollar amount of each credit card
transaction the Company processes, as well as a flat fee per transaction. The
discount fee is negotiated with each merchant and typically constitutes a
bundled rate for the transaction authorization, processing, settlement and funds
transfer services we provide. This revenue and fees from other transactions are
recognized at the time the merchants' transactions are processed.
The other principal component of the Company's revenue derives from ATM Services
(approximately 31% in the first quarter of 1999 and 34% in the first quarter of
1998). ATM Services revenue consists of fee income and other surcharges charged
for proprietary ATMs and processing fees for third party ATMs. The balance of
the Company's revenue is derived principally from check verification and
authorization services, sales of point-of-sale terminals and payroll processing
services.
Cost of operations includes all costs directly attributable to the provision of
services to the Company's customers. The most significant component of cost of
operations includes interchange and assessment fees, which are amounts charged
by the credit and debit card associations. Interchange and assessment fees are
billed primarily as a percentage of dollar volume processed and, to a lesser
extent, as a per-transaction fee. Cost of operations also includes
telecommunications costs, occupancy costs, depreciation, the cost of equipment
leased and sold, the cost of operating the Company's MAC network and other
miscellaneous merchant supplies and services expenses.
The Company's selling, general and administrative expenses include salaries and
wages, and other general administrative expenses (including certain amortization
costs).
Results of Operations
Revenue increased 26.4% to $170.2 million in the first quarter of 1999 from
$134.7 million in the first quarter of 1998. Of first quarter 1999 revenue,
merchant card services, ATM services and other services accounted for 66.0%,
30.8% and 3.2%, respectively. Revenue from merchant card services increased
31.8%, due primarily to increased transactional volumes. Increased volumes
-9-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Results of Operations - continued
resulted from the addition of new merchants, the widening acceptance of debit
and EBT card transactions at new and existing merchants and higher credit card
transaction processing fees. The increase in fees was a pass-through to
customers of higher interchange processing fees that were assessed by the credit
card associations in April 1998. ATM services revenue increased 16.0%; the
placement of new ATMs, new ATM processing customers and increases in
transactional volumes accounted for the increase. Other revenue increased 28.1%
due to increased terminal sales primarily to our new merchants.
Cost of operations increased in the first quarter of 1999 to 71.0% of revenue
compared to 70.6% in the first quarter of 1998. While credit card association
interchange fees and certain other operating expenses were higher as a
percentage of revenue in the first quarter of 1999 than in the first quarter of
1998, this was largely offset by a decrease, as a percentage of revenue, in
payroll expenses.
Excluding the acquisition expenses, restructuring charges and related tax items,
net income, as a percentage of revenue, increased to 14.1% in the first quarter
of 1999 compared to 12.9% in first quarter of 1998. The primary factor in this
increase was that selling, general and administrative expenses decreased from
$13.1 million or 9.7% of total revenue in the first quarter of 1998 to $12.4
million or 7.3% of total revenue in 1999 as personnel related costs were were
lower in the first quarter of 1999.
Net loss as a percentage of revenue was (1.7%) in the first quarter of 1999. Net
income as a percentage of revenue was 12.9% in the first quarter of 1998. The
primary factor in the change was the acquisition expenses and restructuring
charges incurred in the first quarter of 1999 in connection with the acquisition
of EPS. The total pretax charges were $34.8 million, as summarized below:
Acquisition expenses $10.5
Communication conversion costs 12.4
Asset write-offs 8.2
Off-line debit conversion 2.8
Severance and other 0.9
-----
$34.8
=====
Acquisition related expenses were $10.5 million consisting primarily of
investment banking fees, as well as legal, accounting, registration and other
fees and expenses were also incurred.
In order to create a single communication infrastructure for the Company's
transaction processing businesses, the Company adopted a plan to convert EPS's
communication network to Concord's. As the plan is implemented over the course
of the next year, the Company expects to achieve operational and cost
efficiencies. The accrual for the plan of conversion was $12.4 million.
Asset write-offs of $8.2 million were incurred. For competitive reasons, certain
geographic areas of the MAC network of EPS have been deemphacized by the
Company, causing impairment to the related intangible assets of approximately
$2.8 million. After review of certain EPS customer lists and the undiscounted
cash flows estimated to be generated by the related intangible assets, the
Company recognized an impairment loss of approximately $3.6 million. The
remainder of the write-off was for assets that are no longer used or supported
under revised marketing and business plans.
-10-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Results of Operations - continued
EPS currently uses a third party bank for its off-line debit processing. During
the quarter, the Company adopted a plan to take this process in-house and the
related restructuring charges of $2.8 million were accrued.
In addition to the pre-tax charges, a tax component write off of $1.3 million
for impaired state tax net operating losses of EPS was incurred. Combined with
the non-tax deductibility of certain acquisition costs, these items increased
the effective tax rate in the first quarter of 1999.
Liquidity and Capital Resources
In the first quarter of 1999, the Company generated $41.1 million net cash from
operating activities. The Company also received $7.0 million in proceeds from
notes payable, and $3.4 million from stock issued from exercises of options
under the Company's stock option plans. From cash provided from operating and
financing activities, $29.3 million was invested in securities, net of sales and
maturities, $11.6 million was spent on capital expenditures, $4.9 million was
spent to purchase merchant contracts, and long-term debt and short-term
borrowings were reduced by $6.4 million and $4.0 million, respectively. The
capital expenditures were primarily for communications equipment, point-of-sale
terminals, new computer equipment and capitalized software.
The Company believes that available credit and cash generated from operations
are adequate to meet the Company's capital needs. EFS National Bank and EFS
Federal Savings Bank, wholly-owned subsidiaries of the Company, exceed required
regulatory capital ratios.
Impact of Year 2000
The Year 2000 preparedness efforts of the Company cover both information
technologies ("IT") and non-IT systems. Non-IT systems include those systems
used in the daily operations of buildings and facilities. IT systems include
computer hardware, software and related applications.
The Company has instituted a five-phase plan with the goal of having its IT and
non-IT systems function properly with respect to dates in the year 2000 and
beyond. These five phases are: awareness, assessment, renovation, validation and
implementation. Based on progress to date, the Company has completed the
awareness and assessment phases for all systems. The renovation, validation and
implementation phases for internal and external mission critical systems and
entities have been instituted concurrently and are on schedule for completion.
The validation phase includes an independent review of results for all mission
critical applications by the Company's internal audit staff and various
regulatory agencies.
There is no guarantee that the systems of other companies on which the Company'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 to include business
resumption planning during the first two quarters of 1999 with completion to
coincide with the completion of the Year 2000 project. These plans will include
both the Company's internal mission critical systems and third-party exposures,
based on the evaluation of progress at that time.
-11-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Impact of Year 2000 - continued
Additional testing of new or remediated systems and applications will continue
as needed. If the Company 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 materially adverse effect on the Company's financial condition and
results of operations.
Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes to our disclosures on quantitative and
qualitative disclosures about market risk since December 31, 1998. For
additional information, refer to Exhibit 99 - Supplemental Consolidated
Financial Statements in our Form 10-K for the year ended December 31, 1998.
-12-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 2: Changes in Securities and Use of Proceeds
On February 26, 1999, the Company issued 30,064,835 shares of its common stock
in connection with the Company's acquisition of all of the outstanding common
stock of EPS. In the acquisition, EPS merged with a wholly owned subsidiary of
the Company, and the shares, and options to purchase shares, of common stock of
EPS outstanding at the time of the merger were converted into shares, and
options to purchase shares, of common stock of the Company at a ratio of 7.9091
shares of common stock of the Company for one share of common stock of EPS.
The 30,064,835 shares were issued to the 12 shareholders of EPS who held all of
the outstanding shares of EPS common stock at the time of the merger, without
registration under the Securities Act of 1933 in reliance on the exemption under
Section 4(2) of that Act. The Company believes that each of these persons was
either an accredited investor or had such knowledge and experience in financial
and business matters as to be capable of evaluating the merits and risks of the
investment in shares of the Company; was afforded access to material information
about the Company, understood that the shares of the Company acquired in the
merger were "restricted securities" and agreed not to transfer those shares
except pursuant to an effective registration statement under the Securities Act
of 1933 or an exemption from registration under that act.
On May 5, 1999, the Company filed with the Securities and Exchange Commission a
registration statement on Form S-3 to register a total of 35,607,525 shares of
its common stock for sale to the public. Of the 35,607,525 shares to be sold,
2,000,000 shares will be offered by the Company and 28,963,125 shares will be
offered by selling stockholders who acquired their shares in connection with the
acquisition by the Company of Electronic Payment Services, Inc. on February 26,
1999. An additional 4,644,400 shares will be offered by the Company to cover
over-allotments.
Item 4: Submission of Matters to a Vote of Security Holders
A special meeting of stockholders of the Company was held on February 18, 1999.
At that meeting, the stockholders voted on the following matters:
(1) A proposal to approve the Company's issuance of shares of common stock in
connection with the Company's acquisition of Electronic Payment Services, Inc.
There were a total of 64,417,855 votes were cast for, 171,221 votes were cast
against or withheld, and 228,867 abstentions and broker non-votes on this
proposal.
(2) A proposal to approve a proposed amendment to the Company's 1993 Incentive
Stock Option Plan to increase the number of shares of common stock that may be
issued under that plan from 13,668,750 shares to 25,000,000 shares and to add a
new method for payment of shares upon exercise of options. There were a total of
41,456,130 votes were cast for, 22,997,923 votes were cast against or withheld,
and 363,890 abstentions and broker non-votes on this proposal.
Item 6: Exhibits and Reports on Form 8-K.
(a) Exhibits
(a) Exhibits
Exhibit 10.1 - Employment Agreement, Richard N. Garman
Exhibit 10.2 - Employment Agreement, Ruth Ann Marshall
Exhibit 21 - Subsidiaries of the Registrant
Exhibit 27 - Financial Data Schedule
Exhibit 99 - Cautionary Statements
-13-
<PAGE>
PART II
OTHER INFORMATION - Continued
(b) Reports on Form 8-K
On March 10, 1999, the Company filed a Report on Form 8-K, dated February 26,
1999, to report, under Item 2 of that form, the Company's acquisition of all of
the outstanding common stock of Electronic Payment Services, Inc. The report of
independent auditors and audited consolidated financial statements of Electronic
Payment Services, Inc. set forth below were filed with that Form 8-K pursuant to
Item 7:
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Income for the years ended December 31, 1998,
1997, and 1996
Consolidated Statements of Changes in Stockholders' Equity (Deficiency) for
the years ended December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997, and 1996
Notes to the Consolidated Financial Statements
The unaudited pro forma consolidated financial statements as of and for the nine
months ended September 30, 1998 and 1997, and for the three years ended December
31, 1997, including the notes thereto, of the Company, reflecting its
acquisition of Electronic Payment Services, Inc., were incorporated by reference
in Item 7 of the Form 8-K.
-14-
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONCORD EFS, INC.
Date: May 10, 1999 By: /s/ Dan M. Palmer
---------------------------
Dan M. Palmer
Chairman of the Board and
Chief Executive Officer
Date: May 10, 1999 By: /s/ Thomas J. Dowling
---------------------------
Thomas J. Dowling
Vice President and Chief
Financial Officer
-15-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARIES
FORM 10-Q LISTING OF EXHIBITS
Exhibit Number Exhibit Description
- -------------- ---------------------------------------------------------------
Exhibit 10.1 Employment Agreement, Richard N. Garman
Exhibit 10.2 Employment Agreement, Ruth Ann Marshall
Exhibit 21 Subsidiaries of the Registrant
Exhibit 27 Financial Data Schedule
Exhibit 99 Cautionery Statements
-14-
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT is made effective as of the 26th day of February,
1998, by and between ELECTRONIC PAYMENT SERVICES, INC. (the "Company"), a
Delaware corporation, and Richard N. Garman ("Executive").
WHEREAS the Company desires to retain Executive's services pursuant to the
terms of a written agreement, and Executive desires to provide such services to
the Company;
NOW, THEREFORE, the parties, intending to be legally bound, hereby agree as
follows:
1. Employment. The Company hereby agrees to continue to employ Executive,
and Executive hereby accepts such employment and agrees to perform Executive's
duties and responsibilities, in accordance with the terms, conditions and
provisions hereinafter set forth. This Agreement shall supersede and replace the
agreement entered into between Employee and the Company as of August 28, 1995,
which shall be void as of the date hereof.
1.1. Employment Term. The term of this Agreement shall commence on February
26, 1998 (the "Effective Date") and shall continue for an indefinite period
until terminated in accordance with Section 5 or Section 6 hereof. The period
commencing as of the Effective Date and ending on the date on which the term of
Executive's employment under the Agreement shall terminate is hereinafter
referred to as the "Employment Term".
1.2. Duties and Responsibilities. Executive shall serve as President and
Chief Executive Officer of the Company and in such other senior positions, if
any, to which Executive may be appointed during the Employment Term. During the
Employment Term, Executive shall perform all duties and accept all
responsibilities incident to such positions as may be assigned to Executive by
the Company's Board of Directors (the "Board"). Executive shall have the
authority and responsibility normally associated with such positions to which
Executive may be assigned, subject to the control of the Board.
1.3. Extent of Service. During the Employment Term, Executive agrees to use
Executive's best efforts to carry out Executive's duties and responsibilities
under Section 1.2 hereof and, consistent with the other provisions of this
Agreement, to devote substantially all Executive's business time, attention and
energy thereto. Except as provided in Section 3 hereof, the foregoing shall not
be construed as preventing Executive from making minority investments in other
businesses or enterprises, from serving on corporate or other business entity
boards of directors or from serving in any charitable or civic capacity provided
that Executive agrees not to become engaged in any other business activity
which, in the reasonable judgment of the Board, is likely to interfere with
Executive's ability to discharge Executive's duties and responsibilities to the
Company.
1.4. Base Salary. For all the services rendered by Executive hereunder, the
Company shall pay Executive a base salary ("Base Salary"), commencing on the
Effective Date, at the annual rate of $330,000, payable in installments at such
times as the Company customarily pays its other senior level executives (but in
any event no less often than monthly). Executive's Base Salary shall be reviewed
annually for appropriate adjustment (but shall not be reduced below that in
effect on the Effective Date without Executive's written consent) by the Board
pursuant to its normal performance review policies for senior level executives.
1.5. Retirement and Benefit Coverages. During the Employment Term,
Executive shall be entitled to participate in all (a) employee pension and
retirement plans and programs ("Retirement Plans") and (b) welfare benefit plans
and programs ("Benefit Coverages"), in each case made available to the Company's
senior level executives as a group or to its employees generally, as such
Retirement Plans or Benefit Coverages may be in effect from time to time.
Executive shall also be covered by an individual long-term disability insurance
policy providing at least the level of coverage in effect for Executive on the
Effective Date.
1.6. Reimbursement of Expenses and Dues; Vacation. Executive shall be
provided with reimbursement of expenses related to Executive's employment by the
Company on a basis no less favorable than that which may be authorized from time
to time for senior level executives as a group, and shall be entitled to annual
vacation and holidays in accordance with the Company's normal personnel policies
for senior level executives.
1.7. Short-Term and Long- Term Incentive Compensation. Executive shall be
entitled to participate in any short-term or long-term incentive compensation
programs established by the Company for its senior level executives generally,
depending upon achievement of certain individual or business performance
objectives specified and approved by the Board (or a Committee thereof) in its
sole discretion.
2. Confidential Information. All work products of Executive's efforts on
behalf of or in relation to the Company, either on or off the Company's
facilities, during the Employment Term shall be disclosed to the Company, shall
be exclusive property of the Company and shall be used for the Company's
exclusive benefit. This shall apply to all inventions, discoveries, designs,
processes and improvements, and Executive shall cooperate fully with the Company
in realizing such benefits, including but not limited to obtaining patents,
copyrights, confidential treatment or the means of protecting the Company's
exclusive rights to such work products.
Executive recognizes and acknowledges that, during the Employment Term,
Executive will also have access to, learn, be provided with and, in some cases,
will prepare and create certain confidential and proprietary business
information, work products and trade secrets of the Company, included but not
limited to client and customer information and lists for the Company, internal
organization or business structure of the Company, financial products and
services of the Company, and work assignments or capabilities of any employee of
the Company (herein collectively called the "Confidential Materials"), all of
which are of substantial value to the Company in its business. Executive agrees
not to use or cause to be used for Executive's own benefit or for the benefit of
any third parties or to disclose to any third party in any manner, directly or
indirectly, any of the Confidential Materials without the express prior written
consent of the Board, unless such information is in the public domain through no
fault of Executive or except when required to do so by a court of law, by any
governmental agency having supervisory authority over the business of the
Company or by any administrative or legislative body (including a committee
thereof) with apparent jurisdiction to order Executive to divulge, disclose or
make accessible such information, in which case Executive will inform the
Company in writing promptly of such required disclosure, but in any event at
least five business days prior to disclosure. All written Confidential
Information (including, without limitation, in any computer or other electronic
format) which comes into Executive's possession during the course of Executive's
employment shall remain the property of the Company. Executive agrees to return
to the Company either before or immediately upon the termination of Executive's
employment with the Company, any and all Confidential Materials which are in
tangible form including electronic or software, and any other documents,
equipment and materials of any kind relating in any way to the business of the
Company which are or may be in the possession, custody and control of Executive
and which are or may be the property of the Company, whether Confidential or
not, including any and all copies thereof which may have been made by or for
Executive. Except as required in the performance of Executive's duties for the
Company, or unless expressly authorized in writing by the Board, Executive shall
not remove any written Confidential Information from the Company's premises,
except in connection with the performance of Executive's duties for the Company
and in a manner consistent with the Company's policies regarding Confidential
Information. For the purposes of this Section 2, the term "Company" shall be
deemed to include the Company and all Affiliates, as defined in Section 6.1(a),
of the Company.
3. Non-Competition; Non-Solicitation.
(a) During Executive's employment by the Company and for a period of one
year after Executive's termination of employment for any reason, Executive will
not, except with the prior written consent of the Board, directly or indirectly,
own, manage, operate, join, control, finance or participate in the ownership,
management, operation, control or financing of, or be connected as an officer,
director, employee, partner, principal, agent, representative, consultant or
otherwise with, or use or permit Executive's name to be used in connection with,
any business or enterprise which is engaged in any business that is directly
competitive with any business or enterprise in which the Company is engaged at
the time of Executive's termination of employment. Executive acknowledges that
the Company operates on a national basis (in the United States) and that this
covenant of Executive can not be limited to a service area in which the Company
does business.
(b) The foregoing restrictions shall not be construed to prohibit the
ownership by Executive of less than five percent (5%) of any class of securities
of any corporation which is engaged in a competitive business having a class of
securities registered pursuant to the Securities Exchange Act of 1934 (the
"Exchange Act"), provided that such ownership represents a passive investment
and that neither Executive nor any group of persons including Executive in any
way, either directly or indirectly, manages or exercises control of any such
corporation, guarantees any of its financial obligations, otherwise takes any
part in its business, other than exercising Executive's rights as a shareholder,
or seeks to do any of the foregoing.
(c) Executive further covenants and agrees that during Executive's
employment by the Company and for the period of one year thereafter, Executive
will not, directly or indirectly, (i) solicit, divert, take away, or attempt to
solicit, divert or take away, any of the Company's customers, or (ii) encourage
any customer to reduce its patronage of the Company.
(d) Executive further covenants and agrees that during Executive's
employment by the Company and for the period of one year thereafter, Executive
will not, except with the prior written consent of the Board, directly or
indirectly, solicit or hire, or encourage the solicitation or hiring of, any
person who was a managerial or higher level employee of the Company at any time
during the term of Executive's employment by the Company by any employer other
than the Company for any position as an employee, independent contractor,
consultant or otherwise. The foregoing covenant of Executive shall not apply to
any person after 12 months have elapsed subsequent to the date on which such
person's employment by the Company has terminated.
(e) For the purposes of this Section 3, the term "Company" shall be deemed
to include the Company and the Affiliates, as defined in Section 6.1(a), of the
Company.
4. Equitable Relief.
(a) Executive acknowledges and agrees that the restrictions contained in
Sections 2 and 3 are reasonable and necessary to protect and preserve the
legitimate interests, properties, goodwill and business of the Company, that the
Company would not have entered into this Agreement in the absence of such
restrictions and that irreparable injury will be suffered by the Company should
Executive breach any of the provisions of those Sections. Executive represents
and acknowledges that (i) Executive has been advised by the Company to consult
Executive's own legal counsel in respect of this Agreement, and (ii) that
Executive has had full opportunity, prior to execution of this Agreement, to
review thoroughly this Agreement with Executive's counsel.
(b) Executive further acknowledges and agrees that a breach of any of the
restrictions in Sections 2 and 3 cannot be adequately compensated by monetary
damages. Executive agrees that the Company shall be entitled to preliminary and
permanent injunctive relief, without the necessity of proving actual damages, as
well as an equitable accounting of all earnings, profits and other benefits
arising from any violation of Sections 2 or 3 hereof, which rights shall be
cumulative and in addition to any other rights or remedies to which the Company
may be entitled. In the event that any of the provisions of Sections 2 or 3
hereof should ever be adjudicated to exceed the time, geographic, service, or
other limitations permitted by applicable law in any jurisdiction, it is the
intention of the parties that the provision shall be amended to the extent of
the maximum time, geographic, service, or other limitations permitted by
applicable law, that such amendment shall apply only within the jurisdiction of
the court that made such adjudication and that the provision otherwise be
enforced to the maximum extent permitted by law.
(c) If Executive breaches any of Executive's obligations under Sections 2
or 3 hereof, and such breach constitutes "cause," as defined in Section 5.3
hereof, or would constitute cause if it had occurred during the Employment Term,
the Company shall thereafter remain obligated only for any benefits due in
accordance with the terms of any applicable plans and programs of the Company.
(d) Executive irrevocably and unconditionally (i) agrees that any suit,
action or other legal proceeding arising out of Sections 2 or 3 hereof,
including without limitation, any action commenced by the Company for
preliminary and permanent injunctive relief and other equitable relief, may be
brought in the United States District Court for the District of Delaware, or if
such court does not have jurisdiction or will not accept jurisdiction, in any
court of general jurisdiction in Wilmington, Delaware, (ii) consents to the
non-exclusive jurisdiction of any such court in any such suit, action or
proceeding, and (iii) waives any objection which Executive may have to the
laying of venue of any such suit, action or proceeding in any such court.
Executive also irrevocably and unconditionally consents to the service of any
process, pleadings, notices or other papers in a manner permitted by the notice
provisions of Section 10 hereof.
(e) For the purposes of this Section 4, the term "Company" shall be deemed
to include the Company and the Affiliates, as defined in Section 6.1(a), of the
Company.
5. Termination. The Employment Term shall terminate upon the occurrence of
any one of the following events:
5.1. Disability. The Company may terminate the Employment Term if Executive
is unable substantially to perform Executive's duties and responsibilities
hereunder to the full extent required by the Board by reason of illness, injury
or incapacity for six consecutive months, or for more than six months in the
aggregate during any period of twelve calendar months; provided, however, that
the Company shall continue to pay Executive's Base Salary until the Company acts
to terminate the Employment Term. If the Company terminates the Employment Term,
Executive shall be entitled to receive (i) any amounts earned, accrued or owing
but not yet paid under Section 1 above, (ii) a pro rata portion of any
Short-Term or Long-Term Incentive Compensation provided under a program
described in Section 1.7 for the portion of the performance period under any
such program that Executive participated prior to the end of the Employment Term
and (iii) any other benefits in accordance with the terms of any applicable
plans and programs of the Company. Otherwise, the Company shall have no further
liability or obligation to Executive for compensation under this Agreement.
Executive agrees, in the event of a dispute under this Section 5.1, to submit to
a physical examination by a licensed physician selected by the Board.
5.2. Death. The Employment Term shall terminate in the event of Executive's
death. In such event, the Company shall pay to Executive's executors, legal
representatives or administrators, as applicable, an amount equal to the
installment of Executive's Base Salary set forth in Section 1.4 hereof for the
month in which Executive dies. In addition, Executive's estate shall be entitled
to receive (i) any other amounts earned, accrued or owing but not yet paid under
Section 1 above, (ii) a pro rata portion of any Short-Term or Long-Term
Incentive Compensation provided under a program described in Section 1.7 for the
portion of the performance period under any such program that Executive
participated prior to the end of the Employment Term and (iii) any other
benefits in accordance with the terms of any applicable plans and programs of
the Company. Otherwise, the Company shall have no further liability or
obligation under this Agreement to Executive's executors, legal representatives,
administrators, heirs or assigns or any other person claiming under or through
Executive.
5.3. Cause. The Company may terminate the Employment Term, at any time, for
"cause" upon written notice, in which event all payments under this Agreement
shall cease, except for Base Salary to the extent already accrued, but Executive
shall remain entitled to any other benefits in accordance with the terms of any
applicable plans and programs of the Company. For purposes of this Agreement,
Executive's employment may be terminated for "cause" if the Board determines, in
the exercise of good faith and reasonable judgment, that any of the following
has occurred:
(a) Gross negligence or willful misconduct by Executive in the performance
of Executive's duties for the Company; or
(b) Executive intentionally and materially breached this Agreement, which
breach has not been cured within 30 days after written notice of the breach was
given by the Board to Executive.
For purposes of this Agreement, an act or omission on the part of Executive
shall be deemed "intentional" only if it was not due primarily to an error in
judgment or negligence and was done by Executive not in good faith and without
reasonable belief that the act or omission was in the best interest of the
Company.
5.4. Termination Without Cause and Non-Renewal.
(a) The Company may remove Executive, at any time, without cause from the
position in which Executive is employed hereunder and Executive may terminate
employment if Executive has "Good Reason," as defined in Section 6.1 below, to
terminate the Agreement (in either such case the Employment Term shall be deemed
to have ended) upon not less than 60 days' prior written notice to Executive or
to the Company, as applicable; provided, however, that, in the event that such
notice is given, Executive shall be under no obligation to render any additional
services to the Company and, subject to the provisions of Section 3 hereof,
shall be allowed to seek other employment. Upon any such removal or if Executive
has Good Reason to terminate the Agreement, Executive shall be entitled to
receive, as liquidated damages for the failure of the Company to continue to
employ Executive, only the amount due to Executive under the Company's then
current severance pay plan for employees. No other payments or benefits shall be
due under this Agreement to Executive, but Executive shall be entitled to any
other benefits in accordance with the terms of any applicable plans and programs
of the Company.
(b) Notwithstanding the provisions of Section 5.4(a), in the event that
Executive offers to execute, and executes and does not revoke if offered, a
written release upon such removal, termination or non-renewal, substantially in
the form attached hereto as Annex 1, (the "Release"), of any and all claims
against the Company and all related parties with respect to all matters arising
out of Executive's employment by the Company (other than any entitlements under
the terms of this Agreement or under any other plans or programs of the Company
in which Executive participated and under which Executive has accrued a
benefit), or the termination thereof, Executive shall be entitled to receive, in
lieu of the payment described in Section 5.4(a), which Executive agrees to
waive,
(i) as liquidated damages for the failure of the Company to continue to
employ Executive, 12 monthly cash payments, commencing within 30 days after the
effective date of the removal or non-renewal, equal to one-twelfth of
Executive's Base Compensation, as defined in Section 6.1 below;
(ii) for a period equal to two years following the end of the Employment
Term, Executive and Executive's spouse and dependents shall be eligible for a
continuation of those Benefit Coverages, as in effect at the time of such
termination or removal, and as the same may be changed from time to time, as if
Executive had been continued in employment during said period or to receive cash
in lieu of such benefits or premiums, as applicable, where such Benefit
Coverages may not be continued (or where such continuation would adversely
affect the tax status of the plan pursuant to which the Benefit Coverage is
provided) under applicable law or regulations;
(iii) any other amounts earned, accrued or owing but not yet paid under
Section 1 above;
(iv) any other benefits in accordance with the terms of any applicable
plans and programs of the Company; and
(v) all options to purchase shares of common stock of the Company
previously granted to Executive shall be 100% vested and nonforfeitable and
shall be exercisable until the earlier of (a) the last day of the 36th month
following the removal, termination or non-renewal or (b) the expiration of the
original term of the option.
(vi) as additional consideration for the non-competition and
non-solicitation covenant contained in Section 3, a single cash payment, within
30 days after the effective date of the removal or non-renewal, equal to
Executive's Base Compensation, as defined in Section 6.1 below.
5.5. Voluntary Termination. Executive may voluntarily terminate the
Employment Term upon 30 days' prior written notice for any reason. In such
event, after the effective date of such termination, no further payments shall
be due under this Agreement except that Executive shall be entitled to any
benefits due in accordance with the terms of any applicable plan and programs of
the Company.
6. Other Payments and Definitions.
6.1. Definitions. For all purposes of this Section 6, the following terms
shall have the meanings specified in this Section 6.1 unless the context
otherwise clearly requires:
(a) "Affiliate" shall mean an "affiliate" as defined in Rule 12b-2 of the
General Rules and Regulations under the Exchange Act.
(b) "Base Compensation" shall mean, for the calendar year immediately
preceding Executive's Termination of Employment, Executive's Base Salary and
Short-Term Incentive Compensation, as reported for federal income tax purposes
on Form W-2 for such calendar year, together with any and all salary reduction
authorized amounts under any of the Company's benefit plans or programs for such
calendar year. "Base Compensation" shall not include the value of any Long-Term
Incentive Compensation, any stock options or any exercise thereunder.
(c) "Change of Control" shall mean the happening of any of the following:
1. Prior to any registration of the Company's shares of common stock under
Section 12 of the Securities Act of 1933:
(i) When any "person," as such term is used in Sections 13(d) and 14(d) of
the Exchange Act, other than the Company, its Affiliates, or any Company
employee benefit plan (including any trustee of such plan acting as trustee), is
or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Company representing more
than 50% of the combined voting power of either (i) the then outstanding shares
of common stock of the Company (the "Outstanding Common Stock") or (ii) the then
outstanding voting securities of the Company entitled to vote generally in the
election of directors (the "Voting Securities"); or
(ii) Consummation by the Company of a reorganization, merger or
consolidation (a "Business Combination"), in each case, with respect to which
all or substantially all of the individuals and entities who were the respective
beneficial owners of the Outstanding Common Stock and Voting Securities
immediately prior to such Business Combination do not, following such Business
Combination, beneficially own, directly or indirectly, more than 50% of,
respectively, the then outstanding shares of common stock and the combined
voting power of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the corporation,
business trust or other entity resulting from or being the surviving entity in
such Business Combination in substantially the same proportion as their
ownership immediately prior to such Business Combination of the Outstanding
Common Stock and Voting Securities, as the case may be; or
(iii) Consummation of a complete liquidation or dissolution of the Company
or sale or other disposition of all or substantially all of the assets of the
Company other than to a corporation, business trust or other entity with respect
to which, following such sale or disposition, more than 50% of, respectively,
the then outstanding shares of common stock and the combined voting power of the
then outstanding voting securities entitled to vote generally in the election of
directors, as the case may be, is then owned beneficially, directly or
indirectly, by all or substantially all of the individuals and entities who were
the beneficial owners, respectively, of the Outstanding Common Stock and Voting
Securities immediately prior to such sale or disposition in substantially the
same proportion as their ownership of the Outstanding Common Stock and Voting
Securities, as the case may be, immediately prior to such sale or disposition.
2. After any registration of the Company's shares of common stock under
Section 12 of the Securities Act of 1933:
(i) An event described in 1(i) above but substituting 20% for 50%;
(ii) An event described in 1(ii) or (iii) above; or
(iii) Individuals who, as of the beginning of any twenty-four month period,
constitute the Board (the "Incumbent Directors") cease for any reason to
constitute at least a majority of the Board or cease to be able to exercise the
powers of the majority of the Board, provided that any individual becoming a
director subsequent to the beginning of such period whose election or nomination
for election by the Company's stockholders was approved by a vote of at least a
majority of the directors then comprising the Incumbent Directors shall be
considered as though such individual were a member of the Incumbent Directors,
but excluding, for this purpose, any such individual whose initial assumption of
office is in connection with an actual or threatened election contest relating
to the election of the Board (as such terms are used in Rule 14a-11 of
Regulation 14A promulgated under the Exchange Act).
(d) "Exchange Act" shall mean the Securities Exchange Act of 1934.
(e) "Good Reason" shall mean grounds for Executive to institute a
Termination of Employment with the Company (1) upon any failure of the Company
materially to comply with and satisfy any of the terms of this Agreement,
including any reduction by the Company of the authority, duties or
responsibilities or reporting lines of Executive, any reduction of Executive's
compensation or benefits due hereunder, or the assignment to Executive of duties
which are materially inconsistent with the duties of Executive's position as
defined in Section 1.2 above or (2) if Executive is transferred, without
Executive's written consent, to a location that is more than 50 miles from
Executive's principal place of business immediately preceding the Change of
Control.
(f) "Termination Date" shall mean the date of receipt of a Notice of
Termination of this Agreement or any later date specified therein.
(g) "Termination of Employment" shall mean the termination of Executive's
actual employment relationship with the Company occasioned by the Company's
action.
(h) "Termination upon a Change of Control" shall mean a Termination of
Employment upon or within two years after a Change of Control either (i)
initiated by the Company for any reason other than Executive's (w) disability,
as defined in Section 5.1 hereof, (x) death, (y) retirement on or after
attaining age 65, or (z) "cause," as defined in Section 5.3 hereof, or
(ii) initiated by Executive for Good Reason.
6.2. Notice of Termination. Any Termination upon a Change of Control shall
be communicated by a Notice of Termination to the other party hereto given in
accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of
Termination" means a written notice which (i) indicates the specific termination
provision in this Agreement relied upon, (ii) briefly summarizes the facts and
circumstances deemed to provide a basis for a Termination of Employment and the
applicable provision hereof, and (iii) if the Termination Date is other than the
date of receipt of such notice, specifies the Termination Date (which date shall
not be more than 15 days after the giving of such notice).
6.3. Payments upon Termination. Subject to the provisions of Section 6.6
hereof, in the event of Executive's Termination upon a Change of Control, the
Company agrees (a) in the event Executive executes the Release required by
Section 5.4(b), to pay to Executive, in a single cash payment, within thirty
days after the Termination Date, (i) Executive's Base Compensation, as defined
in Section 6.1(b), and, in addition, all amounts, benefits and Benefit Coverages
described in Section 5.4(b)(ii), (iii), (iv), (v) and (vi) or (b) in the event
Executive fails or refuses to execute the Release required by Section 5.4(b), to
pay to Executive, in a single cash payment, within thirty days after the
Termination Date, the amount due under Section 5.4(a) above and, in addition,
all other amounts and benefits described in Section 5.4(a).
6.4. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent or
limit Executive's continuing or future participation in or rights under any
benefit, bonus, incentive or other plan or program provided by the Company and
for which Executive may qualify; provided, however, that if Executive becomes
entitled to and receives all of the payments provided for in this Agreement,
Executive hereby waives Executive's right to receive payments under any
severance plan or similar program applicable to all employees of the Company.
6.5 Shareholder Approval. In the event that a Change of Control occurs
prior to any registration of the Company's shares of common stock under Section
12 of the Securities Act of 1933, the Company covenants and agrees that it shall
obtain a favorable vote of more than 75% of its stockholders in order to satisfy
the requirements of Section 280G(b)(5)(B) of the Internal Revenue Code of 1986,
as amended (the "Code"), in order to preclude the limitations of Section 280G
and the excise tax of Section 4999 from applying.
6.6. Certain Increase in Payments.
After any registration of the Company's shares of common stock under
Section 12 of the Securities Act of 1933 or in the event the Company is breaches
its obligation under Section 6.5:
(a) Anything in this Agreement to the contrary notwithstanding, in the
event that it shall be determined that any payment or distribution by the
Company to or for the benefit of Executive, whether paid or payable or
distributed or distributable pursuant to the terms of this Agreement or
otherwise (the "Payment"), would constitute an "excess parachute payment" within
the meaning of Section 280G of the Internal Revenue Code of 1986, as amended
(the "Code"), Executive shall be paid an additional amount (the "Gross-Up
Payment") such that the net amount retained by Executive after deduction of any
excise tax imposed under Section 4999 of the Code, and any federal, state and
local income and employment tax and excise tax imposed upon the Gross-Up Payment
shall be equal to the Payment. For purposes of determining the amount of the
Gross-Up Payment, Executive shall be deemed to pay federal income tax and
employment taxes at the highest marginal rate of federal income and employment
taxation in the calendar year in which the Gross-Up Payment is to be made and
state and local income taxes at the highest marginal rate of taxation in the
state and locality of Executive's residence on the Termination Date, net of the
maximum reduction in federal income taxes that may be obtained from the
deduction of such state and local taxes.
(b) All determinations to be made under this Section 6 shall be made by the
Company's independent public accountant immediately prior to the Change of
Control (the "Accounting Firm"), which firm shall provide its determinations and
any supporting calculations both to the Company and Executive within 10 days of
the Termination Date. Any such determination by the Accounting Firm shall be
binding upon the Company and Executive. Within five days after the Accounting
Firm's determination, the Company shall pay (or cause to be paid) or distribute
(or cause to be distributed) to or for the benefit of Executive such amounts as
are then due to Executive under this Agreement.
(c) In the event that upon any audit by the Internal Revenue Service, or by
a state or local taxing authority, of the Payment or Gross-Up Payment, a change
is finally determined to be required in the amount of taxes paid by Executive,
appropriate adjustments shall be made under this Agreement such that the net
amount which is payable to Executive after taking into account the provisions of
Section 4999 of the Code shall reflect the intent of the parties as expressed in
subsection (a) above, in the manner determined by the Accounting Firm.
(d) All of the fees and expenses of the Accounting Firm in performing the
determinations referred to in subsections (b) and (c) above shall be borne
solely by the Company. The Company agrees to indemnify and hold harmless the
Accounting Firm of and from any and all claims, damages and expenses resulting
from or relating to its determinations pursuant to subsections (b) and (c)
above, except for claims, damages or expenses resulting from the gross
negligence or wilful misconduct of the Accounting Firm.
7. Survivorship. The respective rights and obligations of the parties under
this Agreement shall survive any termination of Executive's employment to the
extent necessary to the intended preservation of such rights and obligations.
8. Mitigation. Executive shall not be required to mitigate the amount of
any payment or benefit provided for in this Agreement by seeking other
employment or otherwise and there shall be no offset against amounts due
Executive under this Agreement on account of any remuneration attributable to
any subsequent employment that Executive may obtain.
9. Arbitration; Expenses. In the event of any dispute under the provisions
of this Agreement other than a dispute in which the primary relief sought is an
equitable remedy such as an injunction, the parties shall be required to have
the dispute, controversy or claim settled by arbitration in the City of
Wilmington, Delaware accordance with National Rules for the Resolution of
Employment Disputes then in effect of the American Arbitration Association,
before a panel of three arbitrators, two of whom shall be selected by the
Company and Executive, respectively, and the third of whom shall be selected by
the other two arbitrators. Any award entered by the arbitrators shall be final,
binding and nonappealable and judgment may be entered thereon by either party in
accordance with applicable law in any court of competent jurisdiction. This
arbitration provision shall be specifically enforceable. The arbitrators shall
have no authority to modify any provision of this Agreement or to award a remedy
for a dispute involving this Agreement other than a benefit specifically
provided under or by virtue of the Agreement. If Executive prevails on any
material issue which is the subject of such arbitration or lawsuit, the Company
shall be responsible for all of the fees of the American Arbitration Association
and the arbitrators and any expenses relating to the conduct of the arbitration
(including the Company's and Executive's reasonable attorneys' fees and
expenses). Otherwise, each party shall be responsible for its own expenses
relating to the conduct of the arbitration (including reasonable attorneys' fees
and expenses) and shall share the fees of the American Arbitration Association.
10. Notices. All notices and other communications required or permitted
under this Agreement or necessary or convenient in connection herewith shall be
in writing and shall be deemed to have been given when hand delivered or mailed
by registered or certified mail, as follows (provided that notice of change of
address shall be deemed given only when received):
If to the Company, to:
Marcia E. Heister, General Counsel
Electronic Payment Services, Inc.
1100 Carr Road
Wilmington, DE 19808
With a required copy to:
Morgan, Lewis & Bockius
2000 One Logan Square
Philadelphia, PA 19103-6993
Attention: Robert J. Lichtenstein, Esquire
If to Executive, to:
Richard N. Garman
4208 Kennett Pike
Greenville, DE 19807
or to such other names or addresses as the Company or Executive, as the
case may be, shall designate by notice to each other person entitled to receive
notices in the manner specified in this Section.
11. Contents of Agreement; Amendment and Assignment.
(a) This Agreement sets forth the entire understanding between the parties
hereto with respect to the subject matter hereof and cannot be changed,
modified, extended or terminated except upon written amendment approved by the
Board and executed on its behalf by a duly authorized officer and by Executive.
(b) All of the terms and provisions of this Agreement shall be binding upon
and inure to the benefit of and be enforceable by the respective heirs,
executors, administrators, legal representatives, successors and assigns of the
parties hereto, except that the duties and responsibilities of Executive under
this Agreement are of a personal nature and shall not be assignable or
delegatable in whole or in part by Executive. The Company shall require any
successor (whether direct or indirect, by purchase, merger, consolidation,
reorganization or otherwise) to all or substantially all of the business or
assets of the Company, by agreement in form and substance satisfactory to
Executive, expressly to assume and agree to perform this Agreement in the same
manner and to the extent the Company would be required to perform if no such
succession had taken place.
12. Severability. If any provision of this Agreement or application thereof
to anyone or under any circumstances is adjudicated to be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect any other provision or application of this Agreement which can be given
effect without the invalid or unenforceable provision or application and shall
not invalidate or render unenforceable such provision or application in any
other jurisdiction. If any provision is held void, invalid or unenforceable with
respect to particular circumstances, it shall nevertheless remain in full force
and effect in all other circumstances.
13. Remedies Cumulative; No Waiver. No remedy conferred upon a party by
this Agreement is intended to be exclusive of any other remedy, and each and
every such remedy shall be cumulative and shall be in addition to any other
remedy given under this Agreement or now or hereafter existing at law or in
equity. No delay or omission by a party in exercising any right, remedy or power
under this Agreement or existing at law or in equity shall be construed as a
waiver thereof, and any such right, remedy or power may be exercised by such
party from time to time and as often as may be deemed expedient or necessary by
such party in its sole discretion.
14. Beneficiaries/References. Executive shall be entitled, to the extent
permitted under any applicable law, to select and change a beneficiary or
beneficiaries to receive any compensation or benefit payable under this
Agreement following Executive's death by giving the Company written notice
thereof. In the event of Executive's death or a judicial determination of
Executive's incompetence, reference in this Agreement to Executive shall be
deemed, where appropriate, to refer to Executive's beneficiary, estate or other
legal representative.
15. Miscellaneous. All section headings used in this Agreement are for
convenience only. This Agreement may be executed in counterparts, each of which
is an original. It shall not be necessary in making proof of this Agreement or
any counterpart hereof to produce or account for any of the other counterparts.
16. Withholding. The Company may withhold from any payments under this
Agreement all federal, state and local taxes as the Company is required to
withhold pursuant to any law or governmental rule or regulation. Executive shall
bear all expense of, and be solely responsible for, all federal, state and local
taxes due with respect to any payment received under this Agreement.
17. Governing Law. This Agreement shall be governed by and interpreted
under the laws of the state of Delaware without giving effect to any conflict of
laws provisions.
18. Establishment of Trust. The Company has established an irrevocable
trust fund pursuant to a trust agreement to hold assets to satisfy any of its
obligations under certain employee benefit plans and shall use such trust, in
the event of a Change of Control or in the event that a Change of Control is
imminent, as defined in that trust, to satisfy its obligations under this
Agreement. Funding of such trust fund shall be subject to the terms of the
agreement pursuant to which the trust was established.
IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have
executed this Agreement as of the date first above written.
Attest: ELECTRONIC PAYMENT SERVICES, INC.
By:/s/Mary Beth Lis By:/s/Marcia E. Heister
------------------------------- ---------------------------------
Asst. Secretary Marcia E. Heister
General Counsel
Accepted:/s/Richard N. Garman
---------------------------
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT is made effective as of the 26th day of
February, 1998, by and between ELECTRONIC PAYMENT SERVICES, INC. (the
"Company"), a Delaware corporation, and Ruth Ann Marshall ("Executive").
WHEREAS the Company desires to retain Executive's services pursuant to
the terms of a written agreement, and Executive desires to provide such services
to the Company;
NOW, THEREFORE, the parties, intending to be legally bound, hereby
agree as follows: 1. Employment. The Company hereby agrees to continue to employ
Executive, and Executive hereby accepts such employment and agrees to perform
Executive's duties and responsibilities, in accordance with the terms,
conditions and provisions hereinafter set forth. 1.1. Employment Term. The term
of this Agreement shall commence on February 26, 1998 (the "Effective Date") and
shall continue for an indefinite period until terminated in accordance with
Section 5 or Section 6 hereof. The period commencing as of the Effective Date
and ending on the date on which the term of Executive's employment under the
Agreement shall terminate is hereinafter referred to as the "Employment Term".
1.2. Duties and Responsibilities. Executive shall serve as Executive
Vice President and Group Executive of the Company and in such other senior
positions, if any, to which Executive may be appointed during the Employment
Term. During the Employment Term, Executive shall perform all duties and accept
all responsibilities incident to such positions as may be assigned to Executive
by the Company's Board of Directors (the "Board") or the Company's Chief
Executive Officer (the "CEO"). Executive shall have the authority and
responsibility normally associated with such positions to which Executive may be
assigned, subject to the control of the Board and the CEO.
1.3. Extent of Service. During the Employment Term, Executive agrees to
use Executive's best efforts to carry out Executive's duties and
responsibilities under Section 1.2 hereof and, consistent with the other
provisions of this Agreement, to devote substantially all Executive's business
time, attention and energy thereto. Except as provided in Section 3 hereof, the
foregoing shall not be construed as preventing Executive from making minority
investments in other businesses or enterprises, from serving on corporate or
other business entity boards of directors or from serving in any charitable or
civic capacity provided that Executive agrees not to become engaged in any other
business activity which, in the reasonable judgment of the Board or the CEO, is
likely to interfere with Executive's ability to discharge Executive's duties and
responsibilities to the Company.
1.4. Base Salary. For all the services rendered by Executive hereunder,
the Company shall pay Executive a base salary ("Base Salary"), commencing on the
Effective Date, at the annual rate of $200,000, payable in installments at such
times as the Company customarily pays its other senior level executives (but in
any event no less often than monthly). Executive's Base Salary shall be reviewed
annually for appropriate adjustment (but shall not be reduced below that in
effect on the Effective Date without Executive's written consent) by the Board
pursuant to its normal performance review policies for senior level executives.
1.5. Retirement and Benefit Coverages. During the Employment Term,
Executive shall be entitled to participate in all (a) employee pension and
retirement plans and programs ("Retirement Plans") and (b) welfare benefit plans
and programs ("Benefit Coverages"), in each case made available to the Company's
senior level executives as a group or to its employees generally, as such
Retirement Plans or Benefit Coverages may be in effect from time to time.
Executive shall also be covered by an individual long-term disability insurance
policy providing at least the level of coverage in effect for Executive on the
Effective Date.
1.6. Reimbursement of Expenses and Dues; Vacation. Executive shall be
provided with reimbursement of expenses related to Executive's employment by the
Company on a basis no less favorable than that which may be authorized from time
to time for senior level executives as a group, and shall be entitled to annual
vacation and holidays in accordance with the Company's normal personnel policies
for senior level executives.
1.7. Short-Term and Long-Term Incentive Compensation. Executive shall
be entitled to participate in any short-term or long-term incentive compensation
programs established by the Company for its senior level executives generally,
depending upon achievement of certain individual or business performance
objectives specified and approved by the Board (or a Committee thereof) in its
sole discretion.
2. Confidential Information. All work products of Executive's efforts
on behalf of or in relation to the Company, either on or off the Company's
facilities, during the Employment Term shall be disclosed to the Company, shall
be exclusive property of the Company and shall be used for the Company's
exclusive benefit. This shall apply to all inventions, discoveries, designs,
processes and improvements, and Executive shall cooperate fully with the Company
in realizing such benefits, including but not limited to obtaining patents,
copyrights, confidential treatment or the means of protecting the Company's
exclusive rights to such work products.
Executive recognizes and acknowledges that, during the Employment Term,
Executive will also have access to, learn, be provided with and, in some cases,
will prepare and create certain confidential and proprietary business
information, work products and trade secrets of the Company, included but not
limited to client and customer information and lists for the Company, internal
organization or business structure of the Company, financial products and
services of the Company, and work assignments or capabilities of any employee of
the Company (herein collectively called the "Confidential Materials"), all of
which are of substantial value to the Company in its business. Executive agrees
not to use or cause to be used for Executive's own benefit or for the benefit of
any third parties or to disclose to any third party in any manner, directly or
indirectly, any of the Confidential Materials without the express prior written
consent of the Board, unless such information is in the public domain through no
fault of Executive or except when required to do so by a court of law, by any
governmental agency having supervisory authority over the business of the
Company or by any administrative or legislative body (including a committee
thereof) with apparent jurisdiction to order Executive to divulge, disclose or
make accessible such information, in which case Executive will inform the
Company in writing promptly of such required disclosure, but in any event at
least five business days prior to disclosure. All written Confidential
Information (including, without limitation, in any computer or other electronic
format) which comes into Executive's possession during the course of Executive's
employment shall remain the property of the Company. Executive agrees to return
to the Company either before or immediately upon the termination of Executive's
employment with the Company, any and all Confidential Materials which are in
tangible form including electronic or software, and any other documents,
equipment and materials of any kind relating in any way to the business of the
Company which are or may be in the possession, custody and control of Executive
and which are or may be the property of the Company, whether Confidential or
not, including any and all copies thereof which may have been made by or for
Executive. Except as required in the performance of Executive's duties for the
Company, or unless expressly authorized in writing by the Board, Executive shall
not remove any written Confidential Information from the Company's premises,
except in connection with the performance of Executive's duties for the Company
and in a manner consistent with the Company's policies regarding Confidential
Information. For the purposes of this Section 2, the term "Company" shall be
deemed to include the Company and all Affiliates, as defined in Section 6.1(a),
of the Company.
3. Non-Competition; Non-Solicitation.
(a) During Executive's employment by the Company and for a
period of one year after Executive's termination of employment for any reason,
Executive will not, except with the prior written consent of the Board, directly
or indirectly, own, manage, operate, join, control, finance or participate in
the ownership, management, operation, control or financing of, or be connected
as an officer, director, employee, partner, principal, agent, representative,
consultant or otherwise with, or use or permit Executive's name to be used in
connection with, any business or enterprise which is engaged in any business
that is directly competitive with any business or enterprise in which the
Company is engaged at the time of Executive's termination of employment.
Executive acknowledges that the Company operates on a national basis (in the
United States) and that this covenant of Executive can not be limited to a
service area in which the Company does business.
(b) The foregoing restrictions shall not be construed to
prohibit the ownership by Executive of less than five percent (5%) of any class
of securities of any corporation which is engaged in a competitive business
having a class of securities registered pursuant to the Securities Exchange Act
of 1934 (the "Exchange Act"), provided that such ownership represents a passive
investment and that neither Executive nor any group of persons including
Executive in any way, either directly or indirectly, manages or exercises
control of any such corporation, guarantees any of its financial obligations,
otherwise takes any part in its business, other than exercising Executive's
rights as a shareholder, or seeks to do any of the foregoing.
(c) Executive further covenants and agrees that during
Executive's employment by the Company and for the period of one year thereafter,
Executive will not, directly or indirectly, (i) solicit, divert, take away, or
attempt to solicit, divert or take away, any of the Company's customers, or (ii)
encourage any customer to reduce its patronage of the Company.
(d) Executive further covenants and agrees that during
Executive's employment by the Company and for the period of one year thereafter,
Executive will not, except with the prior written consent of the Board or the
CEO, directly or indirectly, solicit or hire, or encourage the solicitation or
hiring of, any person who was a managerial or higher level employee of the
Company at any time during the term of Executive's employment by the Company by
any employer other than the Company for any position as an employee, independent
contractor, consultant or otherwise. The foregoing covenant of Executive shall
not apply to any person after 12 months have elapsed subsequent to the date on
which such person's employment by the Company has terminated.
(e) For the purposes of this Section 3, the term "Company"
shall be deemed to include the Company and the Affiliates, as defined in Section
6.1(a), of the Company.
4. Equitable Relief.
(a) Executive acknowledges and agrees that the restrictions
contained in Sections 2 and 3 are reasonable and necessary to protect and
preserve the legitimate interests, properties, goodwill and business of the
Company, that the Company would not have entered into this Agreement in the
absence of such restrictions and that irreparable injury will be suffered by the
Company should Executive breach any of the provisions of those Sections.
Executive represents and acknowledges that (i) Executive has been advised by the
Company to consult Executive's own legal counsel in respect of this Agreement,
and (ii) that Executive has had full opportunity, prior to execution of this
Agreement, to review thoroughly this Agreement with Executive's counsel.
(b) Executive further acknowledges and agrees that a breach of
any of the restrictions in Sections 2 and 3 cannot be adequately compensated by
monetary damages. Executive agrees that the Company shall be entitled to
preliminary and permanent injunctive relief, without the necessity of proving
actual damages, as well as an equitable accounting of all earnings, profits and
other benefits arising from any violation of Sections 2 or 3 hereof, which
rights shall be cumulative and in addition to any other rights or remedies to
which the Company may be entitled. In the event that any of the provisions of
Sections 2 or 3 hereof should ever be adjudicated to exceed the time,
geographic, service, or other limitations permitted by applicable law in any
jurisdiction, it is the intention of the parties that the provision shall be
amended to the extent of the maximum time, geographic, service, or other
limitations permitted by applicable law, that such amendment shall apply only
within the jurisdiction of the court that made such adjudication and that the
provision otherwise be enforced to the maximum extent permitted by law.
(c) If Executive breaches any of Executive's obligations under
Sections 2 or 3 hereof, and such breach constitutes "cause," as defined in
Section 5.3 hereof, or would constitute cause if it had occurred during the
Employment Term, the Company shall thereafter remain obligated only for any
benefits due in accordance with the terms of any applicable plans and programs
of the Company.
(d) Executive irrevocably and unconditionally (i) agrees that
any suit, action or other legal proceeding arising out of Sections 2 or 3
hereof, including without limitation, any action commenced by the Company for
preliminary and permanent injunctive relief and other equitable relief, may be
brought in the United States District Court for the District of Delaware, or if
such court does not have jurisdiction or will not accept jurisdiction, in any
court of general jurisdiction in Wilmington, Delaware, (ii) consents to the
non-exclusive jurisdiction of any such court in any such suit, action or
proceeding, and (iii) waives any objection which Executive may have to the
laying of venue of any such suit, action or proceeding in any such court.
Executive also irrevocably and unconditionally consents to the service of any
process, pleadings, notices or other papers in a manner permitted by the notice
provisions of Section 10 hereof.
(e) For the purposes of this Section 4, the term "Company"
shall be deemed to include the Company and the Affiliates, as defined in Section
6.1(a), of the Company.
5. Termination. The Employment Term shall terminate upon the occurrence
of any one of the following events:
5.1. Disability. The Company may terminate the Employment Term if
Executive is unable substantially to perform Executive's duties and
responsibilities hereunder to the full extent required by the Board by reason of
illness, injury or incapacity for six consecutive months, or for more than six
months in the aggregate during any period of twelve calendar months; provided,
however, that the Company shall continue to pay Executive's Base Salary until
the Company acts to terminate the Employment Term. If the Company terminates the
Employment Term, Executive shall be entitled to receive (i) any amounts earned,
accrued or owing but not yet paid under Section 1 above, (ii) a pro rata portion
of any Short-Term or Long-Term Incentive Compensation provided under a program
described in Section 1.7 for the portion of the performance period under any
such program that Executive participated prior to the end of the Employment Term
and (iii) any other benefits in accordance with the terms of any applicable
plans and programs of the Company. Otherwise, the Company shall have no further
liability or obligation to Executive for compensation under this Agreement.
Executive agrees, in the event of a dispute under this Section 5.1, to submit to
a physical examination by a licensed physician selected by the Board.
5.2. Death. The Employment Term shall terminate in the event of
Executive's death. In such event, the Company shall pay to Executive's
executors, legal representatives or administrators, as applicable, an amount
equal to the installment of Executive's Base Salary set forth in Section 1.4
hereof for the month in which Executive dies. In addition, Executive's estate
shall be entitled to receive (i) any other amounts earned, accrued or owing but
not yet paid under Section 1 above, (ii) a pro rata portion of any Short-Term or
Long-Term Incentive Compensation provided under a program described in Section
1.7 for the portion of the performance period under any such program that
Executive participated prior to the end of the Employment Term and (iii) any
other benefits in accordance with the terms of any applicable plans and programs
of the Company. Otherwise, the Company shall have no further liability or
obligation under this Agreement to Executive's executors, legal representatives,
administrators, heirs or assigns or any other person claiming under or through
Executive.
5.3. Cause. The Company may terminate the Employment Term, at any time,
for "cause" upon written notice, in which event all payments under this
Agreement shall cease, except for Base Salary to the extent already accrued, but
Executive shall remain entitled to any other benefits in accordance with the
terms of any applicable plans and programs of the Company. For purposes of this
Agreement, Executive's employment may be terminated for "cause" if the Board
determines, in the exercise of good faith and reasonable judgment, that any of
the following has occurred:
(a) Gross negligence or willful misconduct by Executive in
the performance of Executive's duties for the Company; or
(b) Executive intentionally and materially breached this
Agreement, which breach has not been cured within 30 days after written notice
of the breach was given by the Board to Executive. For purposes of this
Agreement, an act or omission on the part of Executive shall be deemed
"intentional" only if it was not due primarily to an error in judgment or
negligence and was done by Executive not in good faith and without reasonable
belief that the act or omission was in the best interest of the Company.
5.4. Termination Without Cause and Non-Renewal.
(a) The Company may remove Executive, at any time, without
cause from the position in which Executive is employed hereunder (in such case
the Employment Term shall be deemed to have ended) upon not less than 60 days'
prior written notice to Executive; provided, however, that, in the event that
such notice is given, Executive shall be under no obligation to render any
additional services to the Company and, subject to the provisions of Section 3
hereof, shall be allowed to seek other employment. Upon any such removal,
Executive shall be entitled to receive, as liquidated damages for the failure of
the Company to continue to employ Executive, only the amount due to Executive
under the Company's then current severance pay plan for employees. No other
payments or benefits shall be due under this Agreement to Executive, but
Executive shall be entitled to any other benefits in accordance with the terms
of any applicable plans and programs of the Company.
(b) Notwithstanding the provisions of Section 5.4(a), in the
event that Executive offers to execute, and executes and does not revoke if
offered, a written release upon such removal, termination or non-renewal,
substantially in the form attached hereto as Annex 1, (the "Release"), of any
and all claims against the Company and all related parties with respect to all
matters arising out of Executive's employment by the Company (other than any
entitlements under the terms of this Agreement or under any other plans or
programs of the Company in which Executive participated and under which
Executive has accrued a benefit), or the termination thereof, Executive shall be
entitled to receive, in lieu of the payment described in Section 5.4(a), which
Executive agrees to waive,
(i) as liquidated damages for the failure of the
Company to continue to employ Executive, 12 monthly cash payments, commencing
within 30 days after the effective date of the removal or non-renewal, equal to
one-twelfth of Executive's Base Compensation, as defined in Section 6.1 below;
(ii) for a period equal to one year following the
end of the Employment Term, Executive and Executive's spouse and dependents
shall be eligible for a continuation of those Benefit Coverages, as in effect at
the time of such termination or removal, and as the same may be changed from
time to time, as if Executive had been continued in employment during said
period or to receive cash in lieu of such benefits or premiums, as applicable,
where such Benefit Coverages may not be continued (or where such continuation
would adversely affect the tax status of the plan pursuant to which the Benefit
Coverage is provided) under applicable law or regulations;
(iii) any other amounts earned, accrued or owing but
not yet paid under Section 1 above; (iv) any other benefits in accordance with
the terms of any applicable plans and programs of the Company; and
(v) all options to purchase shares of common stock
of the Company previously granted to Executive shall be 100% vested and
nonforfeitable and shall be exercisable until the earlier of (a) the last day of
the 36th month following the removal, termination or non-renewal or (b) the
expiration of the original term of the option.
5.5. Voluntary Termination. Executive may voluntarily terminate the
Employment Term upon 30 days' prior written notice for any reason. In such
event, after the effective date of such termination, no further payments shall
be due under this Agreement except that Executive shall be entitled to any
benefits due in accordance with the terms of any applicable plan and programs of
the Company.
6. Other Payments and Definitions.
6.1. Definitions. For all purposes of this Section 6, the following
terms shall have the meanings specified in this Section 6.1 unless the context
otherwise clearly requires:
(a) "Affiliate" shall mean an "affiliate" as defined in Rule
12b-2 of the General Rules and Regulations under the Exchange Act.
(b) "Base Compensation" shall mean, for the calendar year
immediately preceding Executive's Termination of Employment, Executive's Base
Salary and Short-Term Incentive Compensation, as reported for federal income tax
purposes on Form W-2 for such calendar year, together with any and all salary
reduction authorized amounts under any of the Company's benefit plans or
programs for such calendar year. "Base Compensation" shall not include the value
of any Long-Term Incentive Compensation, any stock options or any exercise
thereunder.
(c) "Change of Control" shall mean the happening of any of the
following: 1. Prior to any registration of the Company's shares of common stock
under Section 12 of the Securities Act of 1933:
(i) When any "person," as such term is used in Sections 13(d)
and 14(d) of the Exchange Act, other than the Company, its Affiliates, or any
Company employee benefit plan (including any trustee of such plan acting as
trustee), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of securities of the Company
representing more than 50% of the combined voting power of either (i) the then
outstanding shares of common stock of the Company (the "Outstanding Common
Stock") or (ii) the then outstanding voting securities of the Company entitled
to vote generally in the election of directors (the "Voting Securities"); or
(ii) Consummation by the Company of a reorganization, merger
or consolidation (a "Business Combination"), in each case, with respect to which
all or substantially all of the individuals and entities who were the respective
beneficial owners of the Outstanding Common Stock and Voting Securities
immediately prior to such Business Combination do not, following such Business
Combination, beneficially own, directly or indirectly, more than 50% of,
respectively, the then outstanding shares of common stock and the combined
voting power of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the corporation,
business trust or other entity resulting from or being the surviving entity in
such Business Combination in substantially the same proportion as their
ownership immediately prior to such Business Combination of the Outstanding
Common Stock and Voting Securities, as the case may be; or
(iii) Consummation of a complete liquidation or dissolution of
the Company or sale or other disposition of all or substantially all of the
assets of the Company other than to a corporation, business trust or other
entity with respect to which, following such sale or disposition, more than 50%
of, respectively, the then outstanding shares of common stock and the combined
voting power of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, is then owned
beneficially, directly or indirectly, by all or substantially all of the
individuals and entities who were the beneficial owners, respectively, of the
Outstanding Common Stock and Voting Securities immediately prior to such sale or
disposition in substantially the same proportion as their ownership of the
Outstanding Common Stock and Voting Securities, as the case may be, immediately
prior to such sale or disposition.
2. After any registration of the Company's shares of common stock under
Section 12 of the Securities Act of 1933:
(i) An event described in 1(i) above but substituting 20%
for 50%;
(ii) An event described in 1(ii) or (iii) above; or
(iii) Individuals who, as of the beginning of any twenty-four
month period, constitute the Board (the "Incumbent Directors") cease for any
reason to constitute at least a majority of the Board or cease to be able to
exercise the powers of the majority of the Board, provided that any individual
becoming a director subsequent to the beginning of such period whose election or
nomination for election by the Company's stockholders was approved by a vote of
at least a majority of the directors then comprising the Incumbent Directors
shall be considered as though such individual were a member of the Incumbent
Directors, but excluding, for this purpose, any such individual whose initial
assumption of office is in connection with an actual or threatened election
contest relating to the election of the Board (as such terms are used in Rule
14a-11 of Regulation 14A promulgated under the Exchange Act).
(d) "Exchange Act" shall mean the Securities Exchange Act of
1934.
(e) "Good Reason" shall mean grounds for Executive to
institute a Termination of Employment with the Company (1) upon any reduction
(from the level in effect on the date of the Change of Control) of Executive's
compensation or benefits due hereunder or (2) after a Change of Control, if
Executive is transferred, without Executive's written consent, to a location
that is more than 50 miles from Executive's principal place of business
immediately preceding the Change of Control.
(f) "Termination Date" shall mean the date of receipt of a
Notice of Termination of this Agreement or any later date specified therein.
(g) "Termination of Employment" shall mean the termination of
Executive's actual employment relationship with the Company occasioned by the
Company's action.
(h) "Termination upon a Change of Control" shall mean a
Termination of Employment upon or within two years after a Change of Control
either (i) initiated by the Company for any reason other than Executive's (w)
disability, as defined in Section 5.1 hereof, (x) death, (y) retirement on or
after attaining age 65, or (z) "cause," as defined in Section 5.3 hereof, or
(ii) initiated by Executive for Good Reason.
6.2. Notice of Termination. Any Termination upon a Change of Control
shall be communicated by a Notice of Termination to the other party hereto given
in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice
of Termination" means a written notice which (i) indicates the specific
termination provision in this Agreement relied upon, (ii) briefly summarizes the
facts and circumstances deemed to provide a basis for a Termination of
Employment and the applicable provision hereof, and (iii) if the Termination
Date is other than the date of receipt of such notice, specifies the Termination
Date (which date shall not be more than 15 days after the giving of such
notice).
6.3. Payments upon Termination. Subject to the provisions of Section
6.6 hereof, in the event of Executive's Termination upon a Change of Control,
the Company agrees (a) in the event Executive executes the Release required by
Section 5.4(b), to pay to Executive, in a single cash payment, within thirty
days after the Termination Date, (i) Executive's Base Compensation, as defined
in Section 6.1(b), and, in addition, all amounts, benefits and Benefit Coverages
described in Section 5.4(b)(ii), (iii), (iv), and (v) or (b) in the event
Executive fails or refuses to execute the Release required by Section 5.4(b), to
pay to Executive, in a single cash payment, within thirty days after the
Termination Date, the amount due under Section 5.4(a) above and, in addition,
all other amounts and benefits described in Section 5.4(a).
6.4. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent
or limit Executive's continuing or future participation in or rights under any
benefit, bonus, incentive or other plan or program provided by the Company and
for which Executive may qualify; provided, however, that if Executive becomes
entitled to and receives all of the payments provided for in this Agreement,
Executive hereby waives Executive's right to receive payments under any
severance plan or similar program applicable to all employees of the Company.
6.5 Shareholder Approval. In the event that a Change of Control occurs
prior to any registration of the Company's shares of common stock under Section
12 of the Securities Act of 1933, the Company covenants and agrees that it shall
obtain a favorable vote of more than 75% of its stockholders in order to satisfy
the requirements of Section 280G(b)(5)(B) of the Internal Revenue Code of 1986,
as amended (the "Code"), in order to preclude the limitations of Section 280G
and the excise tax of Section 4999 from applying.
6.6. Certain Increase in Payments.
After any registration of the Company's shares of common stock under Section 12
of the Securities Act of 1933 or in the event the Company is breaches its
obligation under Section 6.5:
(a) Anything in this Agreement to the contrary
notwithstanding, in the event that it shall be determined that any payment or
distribution by the Company to or for the benefit of Executive, whether paid or
payable or distributed or distributable pursuant to the terms of this Agreement
or otherwise (the "Payment"), would constitute an "excess parachute payment"
within the meaning of Section 280G of the Internal Revenue Code of 1986, as
amended (the "Code"), Executive shall be paid an additional amount (the
"Gross-Up Payment") such that the net amount retained by Executive after
deduction of any excise tax imposed under Section 4999 of the Code, and any
federal, state and local income and employment tax and excise tax imposed upon
the Gross-Up Payment shall be equal to the Payment. For purposes of determining
the amount of the Gross-Up Payment, Executive shall be deemed to pay federal
income tax and employment taxes at the highest marginal rate of federal income
and employment taxation in the calendar year in which the Gross-Up Payment is to
be made and state and local income taxes at the highest marginal rate of
taxation in the state and locality of Executive's residence on the Termination
Date, net of the maximum reduction in federal income taxes that may be obtained
from the deduction of such state and local taxes.
(b) All determinations to be made under this Section 6 shall
be made by the Company's independent public accountant immediately prior to the
Change of Control (the "Accounting Firm"), which firm shall provide its
determinations and any supporting calculations both to the Company and Executive
within 10 days of the Termination Date. Any such determination by the Accounting
Firm shall be binding upon the Company and Executive. Within five days after the
Accounting Firm's determination, the Company shall pay (or cause to be paid) or
distribute (or cause to be distributed) to or for the benefit of Executive such
amounts as are then due to Executive under this Agreement.
(c) In the event that upon any audit by the Internal Revenue
Service, or by a state or local taxing authority, of the Payment or Gross-Up
Payment, a change is finally determined to be required in the amount of taxes
paid by Executive, appropriate adjustments shall be made under this Agreement
such that the net amount which is payable to Executive after taking into account
the provisions of Section 4999 of the Code shall reflect the intent of the
parties as expressed in subsection (a) above, in the manner determined by the
Accounting Firm.
(d) All of the fees and expenses of the Accounting Firm in
performing the determinations referred to in subsections (b) and (c) above shall
be borne solely by the Company. The Company agrees to indemnify and hold
harmless the Accounting Firm of and from any and all claims, damages and
expenses resulting from or relating to its determinations pursuant to
subsections (b) and (c) above, except for claims, damages or expenses resulting
from the gross negligence or willful misconduct of the Accounting Firm.
7. Survivorship. The respective rights and obligations of the parties
under this Agreement shall survive any termination of Executive's employment to
the extent necessary to the intended preservation of such rights and
obligations.
8. Mitigation. Executive shall not be required to mitigate the amount
of any payment or benefit provided for in this Agreement by seeking other
employment or otherwise and there shall be no offset against amounts due
Executive under this Agreement on account of any remuneration attributable to
any subsequent employment that Executive may obtain.
9. Arbitration; Expenses. In the event of any dispute under the
provisions of this Agreement other than a dispute in which the primary relief
sought is an equitable remedy such as an injunction, the parties shall be
required to have the dispute, controversy or claim settled by arbitration in the
City of Wilmington, Delaware accordance with National Rules for the Resolution
of Employment Disputes then in effect of the American Arbitration Association,
before a panel of three arbitrators, two of whom shall be selected by the
Company and Executive, respectively, and the third of whom shall be selected by
the other two arbitrators. Any award entered by the arbitrators shall be final,
binding and nonappealable and judgment may be entered thereon by either party in
accordance with applicable law in any court of competent jurisdiction. This
arbitration provision shall be specifically enforceable. The arbitrators shall
have no authority to modify any provision of this Agreement or to award a remedy
for a dispute involving this Agreement other than a benefit specifically
provided under or by virtue of the Agreement. If Executive prevails on any
material issue which is the subject of such arbitration or lawsuit, the Company
shall be responsible for all of the fees of the American Arbitration Association
and the arbitrators and any expenses relating to the conduct of the arbitration
(including the Company's and Executive's reasonable attorneys' fees and
expenses). Otherwise, each party shall be responsible for its own expenses
relating to the conduct of the arbitration (including reasonable attorneys' fees
and expenses) and shall share the fees of the American Arbitration Association.
10. Notices. All notices and other communications required or permitted
under this Agreement or necessary or convenient in connection herewith shall be
in writing and shall be deemed to have been given when hand delivered or mailed
by registered or certified mail, as follows (provided that notice of change of
address shall be deemed given only when received):
If to the Company, to:
Marcia E. Heister, General Counsel
Electronic Payment Services, Inc.
1100 Carr Road
Wilmington, DE 19809
With a required copy to:
Morgan, Lewis & Bockius
2000 One Logan Square
Philadelphia, PA 19103-6993
Attention: Robert J. Lichtenstein, Esquire
If to Executive, to:
Ruth Ann Marshall
500 Rock Springs Road
Atlanta, GA 30324
or to such other names or addresses as the Company or Executive, as the case may
be, shall designate by notice to each other person entitled to receive notices
in the manner specified in this Section.
11. Contents of Agreement; Amendment and Assignment.
(a) This Agreement sets forth the entire understanding between
the parties hereto with respect to the subject matter hereof and cannot be
changed, modified, extended or terminated except upon written amendment approved
by the Board and executed on its behalf by a duly authorized officer and by
Executive.
(b) All of the terms and provisions of this Agreement shall be
binding upon and inure to the benefit of and be enforceable by the respective
heirs, executors, administrators, legal representatives, successors and assigns
of the parties hereto, except that the duties and responsibilities of Executive
under this Agreement are of a personal nature and shall not be assignable or
delegatable in whole or in part by Executive. The Company shall require any
successor (whether direct or indirect, by purchase, merger, consolidation,
reorganization or otherwise) to all or substantially all of the business or
assets of the Company, by agreement in form and substance satisfactory to
Executive, expressly to assume and agree to perform this Agreement in the same
manner and to the extent the Company would be required to perform if no such
succession had taken place.
12. Severability. If any provision of this Agreement or application
thereof to anyone or under any circumstances is adjudicated to be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect any other provision or application of this Agreement which can be given
effect without the invalid or unenforceable provision or application and shall
not invalidate or render unenforceable such provision or application in any
other jurisdiction. If any provision is held void, invalid or unenforceable with
respect to particular circumstances, it shall nevertheless remain in full force
and effect in all other circumstances.
13. Remedies Cumulative; No Waiver. No remedy conferred upon a party by
this Agreement is intended to be exclusive of any other remedy, and each and
every such remedy shall be cumulative and shall be in addition to any other
remedy given under this Agreement or now or hereafter existing at law or in
equity. No delay or omission by a party in exercising any right, remedy or power
under this Agreement or existing at law or in equity shall be construed as a
waiver thereof, and any such right, remedy or power may be exercised by such
party from time to time and as often as may be deemed expedient or necessary by
such party in its sole discretion.
14. Beneficiaries/References. Executive shall be entitled, to the
extent permitted under any applicable law, to select and change a beneficiary or
beneficiaries to receive any compensation or benefit payable under this
Agreement following Executive's death by giving the Company written notice
thereof. In the event of Executive's death or a judicial determination of
Executive's incompetence, reference in this Agreement to Executive shall be
deemed, where appropriate, to refer to Executive's beneficiary, estate or other
legal representative.
15. Miscellaneous. All section headings used in this Agreement are for
convenience only. This Agreement may be executed in counterparts, each of which
is an original. It shall not be necessary in making proof of this Agreement or
any counterpart hereof to produce or account for any of the other counterparts.
16. Withholding. The Company may withhold from any payments under this
Agreement all federal, state and local taxes as the Company is required to
withhold pursuant to any law or governmental rule or regulation. Executive shall
bear all expense of, and be solely responsible for, all federal, state and local
taxes due with respect to any payment received under this Agreement.
17. Governing Law. This Agreement shall be governed by and interpreted
under the laws of the state of Delaware without giving effect to any conflict of
laws provisions.
18. Establishment of Trust. The Company has established an irrevocable
trust fund pursuant to a trust agreement to hold assets to satisfy any of its
obligations under certain employee benefit plans and shall use such trust, in
the event of a Change of Control or in the event that a Change of Control is
imminent, as defined in that trust, to satisfy its obligations under this
Agreement. Funding of such trust fund shall be subject to the terms of the
agreement pursuant to which the trust was established.
19. Prior Agreements. Any prior agreement between the Company and
Executive regarding Executive's employment by the Company is superseded by this
Agreement and shall be terminated and of no further force or effect.
IN WITNESS WHEREOF, the undersigned, intending to be legally bound,
have executed this Agreement as of the date first above written.
Attest: ELECTRONIC PAYMENT SERVICES, INC.
By:/s/Marcia E. Heister By:/s/Richard N. Garman
---------------------------------- ----------------------------------
Secretary Richard N. Garman
President and Chief Executive Officer
Accepted:/s/Ruth Ann Marshall
----------------------------
Ruth Ann Marshall
EXHIBIT 21
CONCORD EFS, INC.
FOR THE QUARTER ENDED MARCH 31, 1999
SUBSIDIARIES OF THE REGISTRANT
Jurisdiction of
Company Organization Ownership
- ------------------------------- ---------------------------- ----------
EFS National Bank National Bank Charter 100%
EFS Federal Savings Bank Federal Savings Bank Charter 100%
Concord Computing Corporation Delaware 100%
Concord Retail Services, Inc. Delaware 100%
Concord Equipment Sales Tennessee 100%
Pay Systems of America, Inc. Tennessee 100%
Digital Merchants Systems of
Illinois, Inc. Illinois 100%
American Bankcard, Intl, Inc. Illinois 100%
Electronic Payment Services, Inc. Delaware 100%
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<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 77285 74728
<SECURITIES> 315776 159051
<RECEIVABLES> 127495 92182
<ALLOWANCES> 2760 2785
<INVENTORY> 11324 7023
<CURRENT-ASSETS> 548583 352858
<PP&E> 311054 251693
<DEPRECIATION> 157406 122301
<TOTAL-ASSETS> 819637 654647
<CURRENT-LIABILITIES> 258328 166435
<BONDS> 0 0
0 0
0 0
<COMMON> 42777 27364
<OTHER-SE> 320272 255217
<TOTAL-LIABILITY-AND-EQUITY> 819637 654647
<SALES> 170234 134666
<TOTAL-REVENUES> 170234 134666
<CGS> 120849 95029
<TOTAL-COSTS> 133217 108129
<OTHER-EXPENSES> 34810 0
<LOSS-PROVISION> 1312 957
<INTEREST-EXPENSE> 3533 3346
<INCOME-PRETAX> 3939 27286
<INCOME-TAX> 6807 9937
<INCOME-CONTINUING> (2868) 17349
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2868) 17349
<EPS-PRIMARY> (0.02) 0.14
<EPS-DILUTED> (0.02) 0.13
</TABLE>
EXHIBIT 99
CONCORD EFS, INC. AND SUBSIDIARIES
CAUTIONARY STATEMENTS
This Form 10-Q may contain or incorporate by reference statements which may
constitute "forward-looking" information, within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Prospective investors are cautioned that any
such statements are not guarantees of future performance and involve substantial
risks and uncertainties, and that actual results may differ materially from
those contemplated by such forward-looking statements. Important factors that
could cause actual results to differ materially from those in forward-looking
statements include the following. Concord EFS, Inc. (the "Company") undertakes
no obligation to update or revise forward-looking statements to reflect changed
assumptions, the occurrence of unanticipated events or changes to future results
over time.
1. If the Company loses key personnel or is unable to attract additional
qualified personnel as it grows, our business could be adversely affected
The Company is dependent upon the ability and experience of its Chief
Executive Officer, its President, the President of its subsidiary,
Electronic Payment Services, Inc. ("Electronic Payment Services"), and a
number of other key management personnel who have substantial experience
with its operations, the rapidly changing electronic payment processing
industry and the selected markets in which the Company offers its services.
It is possible that the loss of the services of one or a combination of
these senior executives or key managers would have an adverse effect on the
Company's operations. The Company's success also depends on its ability to
continue to attract, manage and retain other qualified middle management
and technical and clerical personnel as it grows. The Company cannot assure
you that it will continue to attract or retain such personnel.
2. If the Company is unsuccessful in fully integrating the operations of
Electronic Payment Services, its financial condition and operating results
could be adversely affected
The Company cannot assure you that it will be able to integrate the
operations of Electronic Payment Services without encountering difficulties
or experiencing the loss of key Electronic Payment Services employees or
customers, or that the benefits expected from such integration will be
realized. If the Company is unsuccessful in fully integrating the
operations of Electronic Payment Services, its financial condition and
operating results could be adversely affected.
3. Changes in card association rules could adversely affect the Company's
business
One of the Company's bank subsidiaries, EFS National Bank, is a member of
the VISA and MasterCard organizations and is a registered processor of
Discover, American Express and Diners Club transactions. The rules of the
credit card associations are set by member banks or, in the case of
Discover, American Express and Diners Club, by the card issuers, and some
of those banks and issuers compete with the Company in the provision of
transaction processing services. Further, with respect to the Company's
electronic benefits transfer ("EBT") business, the governmental issuers of
the benefits set the rules and the financial institutions or processors
hired by the government administer them. It is possible that the rules
relating to the Company's credit card, debit or EBT operations will be
changed or administered in such a way as to adversely affect its
operations.
4. Changes in card association fees could increase the Company's costs
From time to time, VISA, MasterCard, Discover, American Express and Diners
Club increase the organization and/or processing fees (known as interchange
fees) that they charge. For example, in April 1999 VISA and MasterCard
increased their fees by up to 10%, which was the largest increase in recent
years. Most of the Company's agreements with merchant customers permit
these fee increases to be passed on to the merchants. However, it is
possible that competitive pressures will result in the Company absorbing a
portion of such increases in the future, which would increase its operating
costs and reduce its profit margin.
5. Revenue growth in automated teller machine ("ATM") processing could slow
because of restrictions on surcharging or a decline in the deployment of
ATMs
Revenue from "convenience fees" or "surcharges" imposed by owners of ATMs,
including the Company, has been a significant factor in the recent growth
in the Company's ATM processing business since such fees have encouraged
ATM owners to deploy additional terminals. There have been initiatives at
both the federal and state levels to limit surcharges, although
restrictions have been implemented in only a limited number of
jurisdictions to date. To the extent that ATM deployment declines due to
the enactment of statutory restrictions on surcharges, fewer favorable
retail ATM locations being available or other factors, demand for the
Company's ATM processing services may not continue to grow at recent rates
or may decline.
6. The Company is dependent on its VISA and MasterCard registrations
The Company is registered with VISA and MasterCard as a certified processor
and a member. In order to be designated as a certified processor with VISA
and MasterCard and to be a member, the Company must continue to adhere to
the standards of the VISA and MasterCard credit card associations. These
standards are set by the respective member financial institutions of VISA
and MasterCard, some of which are the Company's competitors. In the event
the Company fails to comply with these standards, its designation as a
certified processor or status as a member could be suspended or terminated.
The Company cannot assure you that VISA and MasterCard will maintain the
Company's registrations or that the current VISA and MasterCard rules
allowing it to market and provide transaction processing services will
remain in effect. The termination of the Company's member registration or
its status as a certified processor, or any changes in the VISA or
MasterCard rules that prevent its registration or limit its ability to
provide transaction processing and marketing services for VISA or
MasterCard, would have an adverse effect on the Company's ability to
operate and its financial performance.
7. The Company is subject to the credit risk of its merchant customers
In the event a billing dispute between a credit card holder and a merchant
is not resolved in favor of the merchant, the transaction is charged back
to the merchant, and the purchase price is refunded to the cardholder. If
that merchant files for bankruptcy or is otherwise unable or unwilling to
pay, the Company must bear the credit risk for the full transaction amount.
The Company cannot assure you that chargebacks will not increase in the
future. Increases in chargebacks that are not paid by merchants could have
an adverse effect on the Company's financial condition and operating
results.
8. The Company may be susceptible to fraud occurring at the merchant level
Merchant fraud includes recording false sales transactions or false credits
by the merchant or its customers. The Company attempts to minimize its
exposure to merchant fraud risk by conducting a credit review of a
prospective merchant and monitoring the merchant's practices on an ongoing
basis. The Company is also able to suspend a merchant's daily settlement if
it suspects fraudulent activity. Nonetheless, under some circumstances the
Company bears the risk of incidents of merchant fraud. It is possible that
incidents of merchant fraud could increase in the future. Increased
incidents of merchant fraud could have an adverse effect on the Company's
financial condition and operating results.
9. Any significant Year 2000 code problem which arises, if not managed
appropriately by the Company, its vendors, its customers, the networks or
any other entities with which the Company interfaces, could have an adverse
effect on the Company's business
The Year 2000 issue generally describes the various problems that may
result from the improper processing of dates and date-sensitive
transactions by computers and other equipment as a result of computer
hardware and software using two digits to identify the year in a date. The
failure to properly process dates could result in network and system
failures or miscalculations causing disruptions in operations including,
among other things, a temporary inability to process transactions, send
invoices or engage in other routine business activities. A failure of the
Company's customers or vendors, particularly telecommunications carriers,
to cause their software and systems to be Year 2000 compliant could have a
material adverse effect on the Company and on its ability to meet its
obligations. Until the Year 2000 occurs, the Company will not know for sure
that all systems will then function adequately.
10. The Company faces significant and increasing competition in each of its
lines of business
The market for credit, debit and EBT card transaction processing services
is highly competitive. The level of competition has increased significantly
in recent years and this trend is expected to continue. Management
estimates that the three largest credit and debit card processors account
for roughly 50% of the total credit and debit card sales volume and that a
single competitor accounts for well in excess of 50% of the total dollar
volume of payment transaction processing for the trucking industry. Another
single competitor accounts for in excess of 50% of the total dollar volume
of check verifications. In addition, competitors to the Company's MAC
network, which consist of other national and regional ATM networks,
continue to consolidate as large banks merge and combine their ATM networks
and shared ATM networks continue to combine into larger super-regional
conglomerates. The continued expansion of the national debit networks
operated by VISA and MasterCard also places increasing competitive pressure
on other networks as banks seek to consolidate their network affiliations.
Several of the Company's competitors and potential competitors have greater
capital, management, marketing and technological resources than the Company
has, and the Company cannot assure you that it will continue to be able to
compete successfully with such entities. In addition, increased competitive
pricing pressures, including a possible reduction in transaction fees
charged as a result of any increase in competition, would adversely affect
the Company's margins and may have an adverse effect on its financial
condition and results of operations.
11. The Company could lose network service business if a new VISA debit card
product is successful
In 1998, VISA announced the introduction of an on-line debit card product,
VISA Check Card II, that would compete with other on-line debit cards but
would bear a higher card issuer reimbursement fee than is provided by most
other networks, including the MAC network the Company operates. The
significant increase in the issuer reimbursement fee may act as an
incentive for bank debit card issuers to issue the VISA Check Card II.
Further, as proposed, the VISA product would not permit some competing
network brands, such as MAC, 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, the Company could experience a loss of
network service business.
12. Loss of key customers could reduce the Company's revenue and net income
Like its competitors and as a result of its competitive business
environment, the Company experiences some turnover of customers. Attrition
is due to several factors, including business closures and losses to
competitors. The Company's contracts for credit and debit card and/or ATM
processing services typically have terms of two to five years duration and
renew automatically for successive one-year terms unless expressly
terminated. However, the Company cannot assure you that any of these
contracts will be allowed to renew or, if renewed, continued upon favorable
terms. If they are not renewed, it will be unlikely that the Company would
be able to reduce its costs in proportion to the lost revenue because many
of its costs are fixed. Increased attrition could have an adverse effect on
the Company's revenue and net income.
13. Continued consolidation in the banking and retail industries could
adversely affect the Company's growth
-- The Company's ATM processing services business could be adversely
affected. As banks consolidate, the Company's ability to successfully
offer its ATM processing services will depend in part on whether the
institutions that survive those consolidations are willing to
outsource their ATM processing to third-party vendors like the
Company, and whether those institutions have pre-existing alliances
with any of the Company's competitors. With respect to network
services, larger institutions with more geographically dispersed
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, the
Company 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.
-- The Company could lose customers and fee revenue could decrease.
Continued consolidation in the retail industry, which makes up a
substantial portion of the Company's customer base, could impede its
ability to grow as the survivors of such consolidation may have
relationships with competitors or may be more interested in pursuing
internal processing options due to their increased scale. Larger
merchants with larger transaction volumes may also demand lower fees
which could result in lower revenue for the Company.
14. Risks related to acquisitions
Since the beginning of 1998 the Company has completed three acquisitions.
Through these acquisitions and its other investments the Company has
expanded its sales force and strengthened its breadth of service offerings.
The Company expects to continue to seek selective acquisitions as an
element of its growth strategy. It is possible that recent or future
acquisitions could have an adverse effect upon the Company's operating
results, particularly in the fiscal quarters immediately following the
completion of such transactions, while the operations of the acquired
entities are being integrated into its operations. Acquisitions involve
risks that could cause the Company's actual growth to differ from our
expectations. For example:
-- The Company may not be able to continue to identify suitable
acquisition candidates or to complete acquisitions on favorable terms.
-- The Company may not be able to successfully integrate acquired
businesses in a timely manner. The Company may also incur substantial
costs, delays or other operational or financial problems during the
integration process and its operating results could be adversely
affected during the integration process.
-- The Company could incur additional indebtedness to finance
acquisitions.
15. Changes in rules and regulations governing financial institutions could
limit the Company's business
The Company is a bank holding company subject to regulation under the Bank
Holding Company Act of 1956 and to regulation by the Board of Governors of
the Federal Reserve System. EFS National Bank is a national banking
association established under the National Bank Act and is subject to
regulation by the Office of the Comptroller of the Currency as well as the
Federal Reserve. The Company's other bank subsidiary, EFS Federal Savings
Bank, operates under the Home Owners Loan Act and the rules of the Office
of Thrift Supervision, which has primary regulatory and supervisory
jurisdiction over it. The Federal Deposit Insurance Corporation insures the
domestic deposits of both banks. The restrictions imposed by these and
other laws governing the activities of national banks, savings banks and
their holding companies and related regulations and restrictions imposed by
these regulatory agencies limit the Company's discretion and the discretion
of EFS National Bank, EFS Federal Savings Bank and their affiliates in
operating their businesses. These limitations include restrictions on:
-- engaging in non-bank-related activities
-- non-bank mergers and acquisitions
-- dividends by banking entities
-- intercompany transactions
Material changes in applicable federal or state regulation of financial
institutions could increase the Company's operating costs, change the
competitive environment or otherwise adversely affect the Company. The
Company cannot assure you that these laws and regulations will not be
amended, or interpreted differently by regulatory authorities, or that new
laws and regulations will not be adopted, which could adversely affect its
operations, financial condition and prospects. Furthermore, the Company is
subject to the rules and regulations of the various credit card and debit
card associations and networks which, among other things, prescribe capital
requirements.
16. The Company must remain current with rapid technological change
The Company's ability to provide services is heavily dependent upon its use
of and access to computing and telecommunications technology. The
transaction payment processing business has been characterized by rapid
technological change, and the Company's business has benefitted from its
ability to offer processing and payment services in line with the most
recent technological improvements. The Company is committed to maintain its
ability to customize processing and payment services to a wide variety of
merchant electronic payment equipment, communication protocols, new
technologies and customer processing needs. The Company cannot assure you,
however, that it will be able to continue to incorporate new developments
in payment processing technology, or that the costs involved in doing so
will not be substantial.
17. The Company is dependent on third-party vendors for its operations
The Company's processing services are dependent upon long-distance and
local telecommunications carriers and access to telecommunications
facilities on a 24-hour basis. Telecommunications facilities are
susceptible to interruption by natural disasters. Although the Company
maintains a disaster response plan which it considers adequate and which it
regularly reviews, and although the Company has operated following natural
disasters in the past without interruption of its processing services, it
is possible that a natural disaster could cause extensive or long-term
damage that interrupts the Company's processing services or causes it to
incur substantial additional expense to avoid interruption of services,
either of which could have an adverse effect on the Company's operations
and financial condition.
18. If additional state taxes are imposed on the Company, its financial
condition and results of operations could be adversely affected
Transaction processing companies like the Company may be subject to state
taxation of certain portions of their fees charged to merchants for their
services. Application of this tax is an ongoing issue in the industry and
the states have not yet adopted uniform guidelines implementing these
regulations. If the Company is required to pay these taxes and is unable to
pass this tax expense through to its merchant customers, its financial
condition and results of operations could be adversely affected.
19. The price of the Company's common stock could be volatile
In recent years, there has been and may continue to be significant
volatility in the market price for the Company's common stock, and there
can be no assurance that an active market for the common stock can be
sustained. Factors such as changes in quarterly operating results, the gain
or loss of significant contracts, the entry of new competitors into the
Company's markets, changes in management, announcements of technological
innovations or new products by the Company or its competitors, and general
events and circumstances beyond the Company's control could have a
significant impact on the future market price of the Company's common stock
and the relative volatility of such market price. In the past, following
periods of volatility in the market price of a company's securities,
securities class action litigation has often been instituted against that
company. If similar litigation were instituted against the Company, it
could result in substantial costs and a diversion of management's attention
and resources, which could have an adverse effect on the Company's
business.
