SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission file number 0-13848
CONCORD EFS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2462252
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2525 Horizon Lake Drive, Suite 120, Memphis, Tennessee 38133
(Address of principal executive offices) (Zip code)
Registrant's Telephone Number, Including Area Code: (901) 371-8000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.33 1/3 Par Value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant has
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No___.
Indicate by check mark if disclosure of delinquent files pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant on March 17, 2000 was $4,495,880,736.
The number of shares of the registrant's Common Stock outstanding as of March
17, 2000 was 212,194,961.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
PART I and PART II
Portions of this Registrant's Annual Report to Stockholders for the year ended
December 31, 1999, are incorporated by reference into Items 1, 5, 6, 7 and 8.
PART III
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held May 25, 2000 are incorporated by reference into Items
10, 11, 12 and 13.
<PAGE>
CONCORD EFS, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Item No. Page
PART I
1. Business
Overview 1
Subsidiaries 2
Operations by Industry Segment 3
Marketing and Customers 3
Competition 4
Supervision and Regulation 5
Employees 6
2. Properties 6
3. Legal Proceedings 7
4. Submission of Matters to a Vote of Security Holders 7
PART II
5. Market for Registrant's Common Stock
and Related Stockholder Matters 8
6. Selected Financial Data 8
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
7A. Quantitative and Qualitative Disclosures About Market Risk 8
8. Financial Statements and Supplementary Data 8
9. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure 9
PART III
10. Directors and Executive Officers of the Registrant 9
11. Executive Compensation 9
12. Security Ownership of Certain Beneficial Owners
and Management 9
13. Certain Relationships and Related Transactions 9
PART IV
14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 9
Signatures 11
<PAGE>
PART I
Item 1. BUSINESS
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 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
39,000 ATMs nationwide, of which it owns approximately 1,000. Concord offers
merchants a cost-effective, reliable, turnkey debit and credit card processing
system. The Company is able to provide its system on a profitable basis because
of its low-cost operational structure, which includes efficient marketing,
volume purchasing arrangements with equipment and communications vendors, and
direct membership by its subsidiary, EFS National Bank, in bank card
associations (such as VISA and MasterCard) and national and regional debit card
networks (such as Interlink, MAC, Explore and NYCE). In 1992, Concord entered
into an agreement with the National Grocers Association, Inc. ("NGA") whereby
Concord became the preferred vendor of the NGA for electronic payment services
for a range of applications, including both turnkey packaged solutions and
customized payment service agreements covering credit and debit card transaction
processing. The agreement has enabled Concord to increase substantially its
grocery store customer base. The Company believes a growing percentage of
grocery transactions use credit, debit or EBT cards for payment.
The Company seeks to grow its funds transfer and payment transaction processing
business by providing a fully integrated range of transfer and processing
services at competitive prices. The principal elements of the Company's strategy
include the following:
1) The Company focuses on specific markets that historically have been under
served by the transaction processing industry, seeking a diverse group of
customers with low credit risk profiles.
2) The Company seeks to be a low-cost, highly reliable provider of electronic
payment processing services by providing a fully integrated range of
relevant services, including designing equipment solutions, selling and
leasing equipment, authorizing transactions, capturing information on its
own host computer, directly participating in all major credit and debit
card associations and networks, and effecting settlement of payment
transactions and transfer of funds.
-1-
<PAGE>
3) The Company offers maximum technological versatility for the provisions of
equipment of different manufacturers, in order to provide a tailored
solution to the customer's specific needs.
4) The Company adheres to a balanced marketing approach through the use of
internal marketing specialists, independent sales representatives and a
number of independent sales organizations ("ISOs") in an effort to provide,
at the most efficient cost, broader access to new merchant customers and
portfolio acquisition opportunities nationwide.
Subsidiaries
EFS National Bank (EFSNB), the largest subsidiary of the Company, sells credit,
debit, and electronic benefits transfer (EBT) card authorization, data capture
and settlement services to retailers and grocery stores. It also sells fuel card
and cash forwarding services to trucking companies through agreements with a
network of truck stops.
The services of EFSNB do not consist of material amounts of traditional banking
activities (i.e., consumer and commercial loans, demand and time deposits, real
estate, etc.). Therefore, the Company is not required to use the reporting
format and related disclosures normally required for bank holding companies.
Electronic Payment Services, Inc. (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.
Concord Computing Corporation's (CCC) primary activity is check authorization
and POS terminal driving, servicing and maintenance for grocery store chains.
Additionally, CCC provides certain processing services for its affiliated
companies.
Concord Retail Services, Inc. (CRS), is a wholly-owned Delaware subsidiary. CRS
provides POS terminal driving, servicing and maintenance to the Company's
customers in the northeast United States.
Concord Equipment Sales, Inc. (CES) is a wholly-owned Tennessee subsidiary
incorporated on September 5, 1991. CES purchases from manufacturers
point-of-sale (POS) terminal products and communications equipment for use by
the Company's customers in connection with the Company's transaction processing
services.
EFS Federal Savings Bank (EFSFSB) facilitates the strategic deployment of cash
dispensing machines (ATMs) by allowing the deployment of ATMs anywhere in the
country without the requirement of a bank branch location. It owns and operates
ATMs at truck stops and grocery stores nationwide.
Digital Merchant Systems, Inc. and American Bankcard International (collectively
DMS) is a leading independent sales organization in the credit card industry and
enhances the Company's ability to obtain new merchants and promote the continued
growth of the Company.
-2-
<PAGE>
Operations by Industry Segment
Information appearing under the caption "Note N - Operations By Industry
Segment," on pages 41 to 43 of the Company's Annual Report to Stockholders for
the year ended December 31, 1999 (Annual Report to Stockholders), is
incorporated herein by reference.
Marketing and Customers
The Company markets its services and products on a nationwide basis (directly
through its internal sales force, and indirectly through Independent Sales
Organizations (ISOs) and their representatives) to supermarket chains, grocery
stores, convenience store merchants, other retailers, electronic funds transfer
networks, financial institutions and trucking companies. The Company's strategy
is to utilize its in-house marketing expertise in certain specialized market
areas and broaden its access to growth opportunities nationwide by utilizing the
broader market penetration of ISOs. The Company believes that the most promising
growth opportunities currently exist in certain small retail merchant chains in
specialized markets, and in the acquisition of merchant processing portfolios
developed by smaller processing service providers.
The Company has had success historically in marketing through key trade
association relationships, such as its relationship with the NGA, as the
recommended provider of electronic services to grocers, and through agreements
with other payment service providers. Management is committed to the cultivation
of such trade association relationships and the development of arrangements with
other service providers.
In 1998, the Company acquired DMS, a leading sales organization in the credit
card industry. This added approximately 300 experienced sales representatives
strategically located across the nation.
As an integrated services provider, the Company has natural cross-selling
marketing opportunities. In 1999 the Company merged with EPS. This provided the
combined Company the ability to offer settlement processing services to EPS'
customers who primarily received authorization services only from EPS.
Additionally, EPS' merchant base of financial institutions provide the Company
with additional marketing opportunities.
When the Company established itself with the major truck stop chains as an
authorized issuer of payment cards and processor of card transactions, the
Company gained a substantial advantage in selling its card payment systems to
trucking companies. The Company's established relationships with the truck stop
owners also afforded an opportunity to sell the placement of ATMs at truck
stops, which in turn provided a further advantage in selling the Company's
integrated processing and banking services to trucking companies and truck
drivers.
The Company's established presence in grocery stores, grocery chains,
convenience stores and other small and mid-size retailers gives it an advantage
in establishing relationships with EBT providers, whose benefits are utilized
largely at such retail locations.
-3-
<PAGE>
The Company, through its 1997 acquisition of PSA, began selling payroll
processing services to its retail, grocery store, trucking company and truckstop
merchants. Management believes the payroll processing business is a large and
growing market that will grow even faster as governmental requirements for
electronic filings of reports increase the accounting burden for small
businesses. As these businesses outsource the payroll process, growth
opportunities in this market will increase further.
The Company's main sales offices are located in suburbs of Memphis, Tennessee,
Atlanta, Georgia and Wilmington, Delaware. Several of the Company's executive
officers actively participate in the Company's marketing efforts.
Competition
The markets for electronic payment processing, credit and debit card payment
settlement, check authorization programs, fuel card and cash forwarding
services, and ATM services are all highly competitive. The Company's principal
competitors include major national and regional banks, local processing banks,
non-bank processors and other independent service organizations, many of which
have substantially greater capital, management, marketing and technological
resources than those of the Company. In each of the Company's largest service
types, the Company competes against other companies who have a dominant share of
each market. Management estimates the three largest credit and debit card
processors account for roughly 50% of the total credit and debit card sales
volume. Management estimates 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. There can be no assurance
that the Company will continue to be able to compete successfully with such
competitors.
In addition, the competitive pricing pressures that would result from any
increase in competition could adversely affect the Company's margins and may
have a material adverse effect on the Company's financial condition and results
of operations.
The Company competes in its markets in terms of price, quality, speed and
flexibility in customizing systems to meet the particular needs of customers.
The Company believes that it is one of the few fully integrated suppliers of a
broad range of hardware and processing, banking and data compilation services
for use in transactions at retail locations.
The Company also competes with other electronic payment processing organizations
for growth opportunities. The recent trend of consolidation in the banking
industry in the United States has resulted in fewer opportunities for merchant
portfolio acquisitions, as many small banks have been acquired by large banks,
some of which are competitors with the Company in the provision of processing
services.
-4-
<PAGE>
Supervision and Regulation
Concord EFS, Inc. and its subsidiaries are subject to a number of federal and
state laws. As a bank holding company, the Company is subject to regulation
under the Bank Holding Company Act of 1956, as amended (the "Act") which is
administered by the Federal Reserve Board (the "Board"). Under the Act, the
Company is generally prohibited from directly engaging in any activities other
than banking, managing or controlling banks, and bank-related activities. Also,
the Act prohibits a bank holding company, with certain exceptions, from
acquiring, directly or indirectly, ownership or control of 5% or more of the
voting shares of any company which is not a bank or bank holding company. The
primary exception to this prohibition involves activities which the Board
determines are closely related to banking. A bank is also generally prohibited
from engaging in certain tie-in arrangements with its bank holding company or
affiliates with respect to the lease or sale of property, furnishing of
services, or the extension of credit. The Act contains certain restrictions
concerning future mergers with other bank holding companies and banks.
Under the Act, a bank holding company is required to file with the Board an
annual report and such additional information which the Board may require. The
Board may examine the Company's and each of its subsidiaries' records, including
a review of capital adequacy in relation to guidelines issued by the Board. If
the level of capital is deemed to be inadequate, the board may restrict the
future expansion and operations of the Company. The Board possesses cease and
desist powers over a bank holding company if its actions or actions of any of
its subsidiaries represent unsafe or unsound practices or violations of law.
Federal law also regulates transactions among the Company and its affiliates,
including the amount of a banking affiliate's loans to, or investments in,
non-bank affiliates and the amount of advances to third parties collateralized
by securities of an affiliate. In addition, various requirements and
restrictions under federal and state laws regulate the operations of the
Company's banking affiliates, requiring the maintenance of reserves against
deposits, limiting the nature of loans and the interest that may be charged
thereon, restricting investments and other activities. The Company's bank
affiliates are also limited in the amount of dividends that they may declare.
Prior regulatory approval must be obtained before declaring any dividends if the
amount of capital, surplus and retained earnings is below certain statutory
limits.
As a national bank, EFSNB operates under the rules and regulations of the Office
of the Comptroller of the Currency, which is its primary regulator and is also a
member of the Federal Reserve System, subject to provisions of the Federal
Reserve Act. As a federal savings bank, EFSFSB operates under the rules of the
Office of Thrift Supervision, which has primary regulatory and supervisory
jurisdiction over EFSFSB. The Federal Deposit Insurance Corporation insures the
domestic deposits of both Banks. Periodic audits and regularly scheduled reports
of financial information are required by all regulatory agencies. Federal laws
also regulate certain transactions among EFSNB, EFSFSB and its affiliates,
including Concord EFS, Inc.
-5-
<PAGE>
The Company's EFT Services sold to financial institutions are regulated by
certain State and Federal banking laws. Material changes in federal or state
regulation could increase the cost to the Company of providing EFT Services,
change the competitive environment or otherwise adversely affect the Company.
The Company is not aware of any such change which is pending.
In addition to regulation by federal and state laws and governmental agencies,
the Company is subject to the rules and regulations of the various credit card
and debit card associations and networks, including requirements for equity
capital commensurate with processing transaction dollar volume.
Employees
As of December 31, 1999, the Company employed 2,265 full and part-time
personnel, including 383 data processing and technical employees, 1,121 in
operations, and 761 in sales and administration. Many of the Company's employees
are highly skilled, and the Company believes its future success will depend in a
large part on its ability to attract and retain such employees. The Company does
have incentive agreements with the Chief Executive Officer and the President;
however, the Company does not have any material employment contracts with other
employees. None of the Company's employees are represented by a labor union and
the Company has experienced no work stoppages. The Company considers its
employee relations to be excellent.
Item 2. PROPERTIES
The following table sets forth certain information concerning the principal
facilities of the Company, all of which are leased:
Approximate
Area In Lease
Location Square Feet Primary Uses Expiration
- ---------------- ----------- ---------------------- -----------------
Memphis, TN 43,375 Corporate Offices July 31, 2000
& EFSNB Operations
Memphis, TN 6,480 EFSNB & CES Operations August 15, 2002
Bartlett, TN 14,580 EFSNB & CES Terminal October 15, 2004
Distribution Center
Cordova, TN 48,119 EFSNB Customer May 1, 2006
Service Center
Pleasanton, CA 10,083 Buypass Software October 31, 2000
Development
Wilmington, DE 107,500 EPS & MAC Corporate May 21, 2005
Offices & Operations
Bradenton, FL 1,680 DMS Sales Office December 31, 1999
Sarasota, FL 4,198 DMS Sales Office August 31, 1999
-6-
<PAGE>
Atlanta, GA 1,650 Buypass Operations February 29, 2000
Atlanta, GA 79,057 Buypass Operations February 22, 2001
& Data Processing
Elk Grove, IL 20,330 Data Processing, May 31, 2000
Field Service, and
CCC Operations
Northfield, IL 21,622 DMS Operations November 30, 1999
Ft. Wright, KY 3,902 MAC Sales Office September 30, 2000
Tarrytown, NY 3,059 DMS Sales Office February 28, 2002
N. Olmstead, OH 36,627 MAC Data Processing December 31, 2003
Pittsburgh, PA 2,316 MAC Sales Office August 31, 2000
Columbia, TN 1,810 DMS Sales Office July 1, 2000
Cordova, TN 2,600 EFSFSB Branch June 30, 2003
Nashville, TN 3,730 PSA Operations February 28, 2003
Oakland, TN 800 EFSFSB Branch April 30, 1999
Addison, TX 2,204 DMS Sales Office March 31, 2000
The Company believes all facilities are adequate.
Item 3. LEGAL PROCEEDINGS
The Company is a party to various routine lawsuits arising out of the conduct of
its business, none of which are expected to have a material adverse effect upon
the Company's financial condition or results of operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of stockholders in the fourth quarter
of fiscal 1999.
-7-
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Information included under the caption "Market for Registrant's Common Stock and
Related Stockholder Matters" on pages 14 to 15 of the Annual Report to
Stockholders is incorporated herein by reference.
Item 6. SELECTED FINANCIAL DATA
Information included under the caption "Selected Consolidated Financial Data" on
page 1 of the Annual Report to Stockholders is incorporated herein by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information included under the captions "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 4 to 15 of the Annual
Report to Stockholders is incorporated herein by reference.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information appearing under the caption "Quantitative and Qualitative
Disclosures About Market Risk" on pages 12 to 13 of the Annual Report to
Stockholders is incorporated herein by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The report of independent auditors and consolidated financial statements set
forth below are included on pages 17 to 21 of the Annual Report to Stockholders,
are incorporated herein by reference.
Report of Independent Auditors.
Consolidated Balance Sheets as of December 31, 1999 and 1998.
Consolidated Statements of Income for the years ended December 31, 1999,
1998 and 1997.
Consolidated Statements of Stockholders' Equity for the years ended December
31, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the years ended December 31, 1999,
1998 and 1997.
Notes to Consolidated Financial Statements as of December 31, 1999.
Quarterly results of operations for the years ended December 31, 1999 and 1998
on page 14 of the Annual Report to Stockholders are incorporated herein by
reference.
-8-
<PAGE>
All other schedules for which provision is made in the applicable accounting
regulations of the Securities & Exchange Commission are not required under the
related instructions and, therefore, have been omitted.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See Item 13 below.
Item 11. EXECUTIVE COMPENSATION
See Item 13 below.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See Item 13 below.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to Items 10, 11, 12, and 13 is included in the
Company's Proxy Statement for the Annual Meeting of Stockholders to be held on
May 25, 2000 under the captions "Election of Directors", "Executive
Compensation", "Stock Options", Beneficial Ownership of Common Stock", and
"Certain Transactions" and is incorporated herein by reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1)and (2) -- The response to this portion of Item 14 is submitted as a
separate section of this report.
(3) Listing of Exhibits:
Exhibit
Numbers
13 Annual Report to Stockholders
21 List of Subsidiaries
23 Consent of Independent Auditors
27 Financial Data Schedule
* Denotes management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of this report
-9-
<PAGE>
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
(c) Exhibits -- The response to this portion of Item 14 is submitted as a
separate section of this report.
(d) Financial Statement Schedules -- No financial statement schedules are
required to be filed as part of this report on Form 10-K.
-10-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has fully caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Concord EFS, Inc.
By:/s/Dan M. Palmer By:/s/Thomas J. Dowling
----------------- --------------------
Dan M. Palmer Thomas J. Dowling
Chief Executive Officer Chief Financial Officer
Date: March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
- ------------------------- ----------------------------- --------------
/s/ Dan M. Palmer Chairman of the Board and CEO March 30, 2000
Dan M. Palmer of the Company and EFS
National Bank
/s/ Edward A. Labry President of the Company and March 30, 2000
Edward A. Labry III EFS National Bank
/s/ Richard M. Harter Director and Secretary of March 30, 2000
Richard M. Harter the Company
/s/ Douglas C. Altenbern Director of the Company March 30, 2000
Douglas C. Altenbern
/s/ David C. Anderson Director of the Company March 30, 2000
David C. Anderson
/s/ J. Richard Buchignani Director of the Company and March 30, 2000
J. Richard Buchignani EFS National Bank
/s/ Joyce Kelso Director of the Company and March 30, 2000
Joyce Kelso EFS National Bank
/s/ Richard P. Kiphart Director of the Company March 30, 2000
Richard P. Kiphart
/s/ Jerry D. Mooney Director of the Company March 30, 2000
Jerry D. Mooney
/s/ Paul L. Whittington Director of the Company March 30, 2000
Paul L. Whittington
/s/ Thomas J. Dowling Chief Financial Officer and March 30, 2000
Thomas J. Dowling Chief Accounting Officer
of the Company
<PAGE>
CONCORD EFS, INC AND SUBSIDIARIES
FORM 10-K LISTING OF EXHIBITS
Exhibit
Number Exhibit Description
- -------- ----------------------------------------------------------------------
13 Annual Report to Stockholders
21 List of Subsidiaries
23 Consent of Independent Auditors
27 Financial Data Schedule
CONCORD EFS, INC AND SUBSIDIARIES
SELECTED FINANCIAL DATA
The following selected financial data (in thousands, except per share data)
should be read in conjunction with the consolidated financial statements and
notes thereto appearing elsewhere herein.
<TABLE> <S> <C>
Percentage of
Revenue Percentage
----------------------- Change
Year Ended ---------------
Year Ended December 31 December 31 1999 1998
-------------------------------------------------------- ----------------------- Over Over
1999 1998 1997 1996 1995 1999 1998 1997 1998 1997
-------- -------- -------- -------- -------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Revenue $830,059 $634,511 $490,030 $355,459 $295,552 100% 100% 100% 30.8% 29.5%
Cost of Operations 592,299 446,515 340,770 241,273 197,394 71.4 70.4 69.5 32.6 31.0
Selling, General and
Administrative Expenses 50,830 51,185 50,008 42,811 47,907 6.1 8.1 10.2 (0.7) 2.4
Acquisition and
Restructuring Charges 36,189 - - - - 4.4 - - 100.0 -
Operating Income 150,741 136,811 99,252 71,375 50,251 18.2 21.6 20.3 10.2 37.8
Interest Income (Expense), Net 16,092 3,703 (1,789) (10,296) (13,766) 1.9 0.6 (0.4) 334.6 307.0
Income Taxes 65,181 51,819 37,771 23,347 15,627 7.9 8.2 7.7 25.8 37.2
Net Income 101,652 88,695 59,692 37,732 20,858 12.2 14.0 12.2 14.6 48.6
Basic Earnings Per Share $0.51 $0.46 $0.31 $0.21 $0.12
Diluted Earnings Per Share $0.49 $0.45 $0.31 $0.21 $0.12
Basic Shares 199,147 191,539 189,888 174,437 169,622
Diluted Shares 206,392 197,921 194,906 180,284 175,281
Balance Sheet Data:
Working Capital $ 509,756 $285,397 $148,987 $ 69,860 $ 32,911
Total Assets 1,096,865 784,118 619,196 554,462 396,144
Long Term Debt, Less
Current Maturities 75,000 173,000 153,329 150,561 175,978
Total Stockholders' Equity 702,313 360,535 260,544 182,126 45,339
</TABLE>
-1-
<PAGE>
Dear Stockholders:
Concord has again produced another record year of financial results. For 1999,
excluding acquisition and restructuring charges, revenue increased 31%, net
income increased 46% and diluted earnings per share increased 40%. This was the
Company's 13th consecutive year of earnings growth.
In reviewing the Company's progress over the past decade there have been a
number of key turning points. In the early part of the decade its principal
subsidiary, EFS, Inc., was converted to EFS National Bank. This allowed the
Company to provide its own sponsorship, to perform settlement services
completing the vertical integration of its service offerings, and to connect
into regional and national credit and debit networks, thus reducing transaction
costs significantly. Additionally, the Company won the endorsement of the
National Grocers Association as a recommended processor for electronic credit
and debit card transactions to its members, thus accelerating revenue growth in
a new market segment. In the mid 90's, it began placing automated teller
machines (ATMs) in truckstops and became the largest provider of ATMs to large
truckstop chains across the country. And finally in 1999, we completed the
acquisition and integration of Electronic Payment Services, Inc. (EPS) and ended
the year meeting management's goals for growth and earnings for the combined
entity.
Concord enjoyed steady growth from its core business lines in 1999, adding new
merchants and benefiting from the shift to electronic transactions in the
general retail, supermarket, petroleum, financial institution, and trucking
distribution channels. With strong market share in these segments, Concord is
well positioned for continued growth in virtually all types of cashless payment,
including all card types -- credit, debit, electronic benefits transfer (EBT),
fleet, prepaid, and ACH -- and a variety of check-based options.
In June, we held a $1.1 billion common stock offering, which was the second
largest in the history of the NASDAQ stock exchange up to that point. This
offering principally allowed the former owners of EPS to sell the Concord common
stock they received in the acquisition of EPS.
In July, Concord announced that it had been selected by the Food Marketing
Institute to be a strategic partner in developing electronic payment solutions
to reduce costs in the supermarket industry. For its contribution to the
partnership, Concord is developing and testing methods such as check conversion
and pre-authorized debit to replace traditional paper checks. We anticipate that
this will become a major new source of transaction revenue in the near future.
In keeping with our mission to expedite cashless commerce with complete business
solutions, we announced our strategy for facilitating business-to-consumer and
business-to-business commerce on the Internet. Our three-tiered approach
involves supplying the building blocks for e-commerce to companies of all sizes,
from small "Main Street" stores without a presence on the World Wide Web, to
large, sophisticated clients seeking a secure processing engine for high-volume
sites. In November, we announced an agreement to acquire Virtual Cyber Systems
(VCS), an Internet software development company. Its software will be a key
element in helping small merchants manage their web sites efficiently and
inexpensively.
-2-
<PAGE>
And finally, in December we announced an agreement to acquire Card Payment
Systems (CPS), a reseller specializing in providing card-based payment
processing services to independent sales organizations, which in turn sell those
services to retailers. CPS will form the foundation for an important new
unbranded distribution channel for Concord's full range of cashless commerce
services. Completion of these acquisitions was announced in February 2000.
The outcome of this remarkable year is that an even stronger Company emerged. We
ended the year as the nation's largest ATM processor, the largest acquirer of
on-line debit and EBT transactions, and the leading point-of-sale provider to
the supermarket and petroleum industries. We believe the Company will continue
to grow revenue and earnings at a high rate into the future.
Sincerely,
Dan M. Palmer Edward A. Labry III
Chairman of the Board President
Chief Executive Officer
-3-
<PAGE>
Concord EFS, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
This Annual Report 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) changes in card association rules,
(iii) changes in card association fees, (iv) restrictions on surcharging or a
decline in the deployment of automated teller machines, (v) dependence on VISA
and MasterCard registrations, (vi) the credit risk of merchant customers, (vii)
susceptibility to fraud at the merchant level, (viii) receiving lower price
margins from higher volume merchants, (ix) increasing competition, (x) the
success of a new VISA debit card product, (xi) the loss of key customers, (xii)
continued consolidation in the banking and retail industries, (xiii) risks
related to acquisitions, (xiv) changes in rules and regulations governing
financial institutions, (xv) the inability to remain current with rapid
technological change, (xvi) dependence on third-party vendors, (xvii) the
imposition of additional state taxes, (xviii) volatility of the Company's common
stock price and (xix) 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.
Recent Acquisitions
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 45.1 million of its shares
for all of the outstanding common stock of EPS. The Company incurred $36.2
million of expenses related to the acquisition in 1999. These expenses included
communication conversion costs, advisory fees, severances 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.
On February 1, 2000, the Company announced completion of the acquisition of CPS,
a New York-based reseller of payment processing services. The acquisition will
be accounted for as a pooling of interests transaction in which Concord will
issue 6.2 million shares of its common stock. CPS provides card-based payment
processing services to independent sales organizations (ISOs), which in turn
sell those services to retailers. The Company anticipates acquisition costs
related to this transaction will be incurred during the first quarter of 2000;
however, the impact to the results of operations is not expected to be
significant.
-4-
<PAGE>
Concord EFS, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Recent Acquisitions - continued
On February 7, 2000 the Company announced completion of its acquisition of
Virtual Cyber Systems (VCS), an internet software development company. The
acquisition of VCS, for which the Company will pay approximately $2 million,
will be accounted for as a purchase transaction and will be immaterial to the
Company's financial statements.
Restatement of Historical Financial Information
The historical financial information presented herein has been restated in
accordance with pooling of interests method of accounting for business
combinations. The financial information reflects the financial position,
operating results and cash flows of the respective companies as though the
companies were combined for all periods presented.
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 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 39,000 ATMs
nationwide, of which it owns approximately 1,000.
The substantial majority of the Company's revenue (68.0% in 1999 and 67.0% in
1998) is generated from fee income related to Merchant 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.
-5-
<PAGE>
Concord EFS, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Overview - continued
Revenue from Merchant Services consists primarily of 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 30.0% in 1999 and 31.0% in 1998). ATM Services revenue consists
of fee income and other surcharges charged for proprietary ATMs, processing fees
for third party ATMs and terminals, and other access, switching and card
processing fees. The remaining balance of the Company's revenue is derived
principally from check verification and authorization services and sales of
point-of-sale terminals. Revenues related to ATM services are recognized at the
time of the transaction.
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, operating salaries and wages, amortization of merchant
contracts and other intangibles, 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
1999 Compared to 1998
Revenue increased 31% in 1999. Transaction processing revenue from Merchant
Services, which includes credit, debit, EBT and fuel card transactions,
increased 33% for the year. This additional revenue was the result of higher
transaction processing volumes from adding new merchants, increasing acceptance
of electronic payment cards and the cross-selling of settlement processing to
several of EPS' higher volume merchants. Merchant Services was 68% of total
revenue. ATM Services, which include ATM terminal driving, MAC network access,
-6-
<PAGE>
Concord EFS, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations - continued
processing, gateway and off-line debit fees, as well as ATM surcharges and
processing fees, increased 26%. Increased transactional volumes and in-house
processing of the EPS off-line debit product were the primary factors for the
increase. ATM Services was 30% of total revenue. Other revenue, primarily Check
and Terminal Services, was 2% of total revenue and increased 32% in 1999 on
higher terminal sales in 1999.
Net income as a percentage of revenue decreased in 1999 to 12.2% from 14.0% in
the prior year. The primary component of the change in net income as a
percentage of revenue was due to the one-time acquisition and restructuring
charges related to the merger with EPS.
Additionally, net income as a percentage of revenue decreased due to the
Company's overall tax rate which increased from 36.9% in 1998 to 39.1% in 1999.
The increase in the tax rate resulted from certain nondeductible acquisition
costs and a tax component write-off of $1.3 million for impaired state tax net
operating losses of EPS incurred after the one-time acquisition and
restructuring charges related to the merger of EPS. Excluding the pre-tax
charges and tax component write-off, the tax rate decreased from 36.9% in 1998
to 36.3% in 1999.
Excluding the pre-tax charges and tax component write-off, net income as a
percentage of revenue improved to 15.6% compared to 14.0% in 1998, an increase
of 11% over the prior year. This net margin improvement was the result of a
combination of factors. Improvements, as a percentage of revenue, were made in
selling, general and administrative expenses and net interest income. These
improvements were offset by an increase in the cost of operations as a
percentage of revenue.
Cost of operations increased in 1999 to 71.4% of revenue compared to 70.4% in
the prior year. The increase in cost of operations, as a percentage of revenue,
was primarily due to lower margin revenue, starting late in the third quarter of
1999, which was principally from larger, higher volume merchants who command and
deserve lower transactional pricing. This lower margin revenue was primarily
from the cross-selling of settlement processing to several higher volume EPS
merchants and from bringing our off-line debit product in-house. The new lower
margin revenue was partially offset by other operating costs such as payroll,
depreciation and amortization and other certain operating costs, decreasing as a
percentage of revenue.
Selling, general and administrative expenses decreased from $51.2 million in
1998 to $50.8 million in 1999, a decrease of $0.4 million. These expenses were
down slightly as higher salaries and wages were offset by lower legal and other
expenses. As a result, selling, general and administrative expenses were 6.1% of
revenue in 1999 versus 8.1% in 1998.
-7-
<PAGE>
Concord EFS, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations - continued
The Company incurred certain acquisition and restructuring charges in 1999
totaling $36.2 million as a result of its merger with EPS. These expenses
included $10.5 million related to the acquisition of EPS. These expenses were
primarily for investment banking fees; however, legal, accounting, registration
and other fees and expenses were also incurred.
In order to create a single communications infrastructure for the Company's
transaction processing businesses, the Company adopted a plan to convert EPS'
communications network and accrued $12.4 million related to the conversion plan.
Asset write-offs of $8.2 million were incurred relating to the acquisition of
EPS. For competitive reasons, resources were reallocated in certain geographic
areas of the MAC network of EPS, causing impairment to the related intangible
assets of approximately $2.8 million. Upon review of EPS contracts and the
undiscounted cash flows estimated to be generated by the related customer list
intangible assets of EPS, the Company recognized impairment loss of
approximately $3.6 million. An additional $1.8 million was written off for
assets that are no longer used or supported under restructured marketing and
business plans adopted by the Company.
EPS uses a third party bank for its off-line debit processing. During the year
ended December 31, 1999, the Company adopted a plan to take this process
in-house, and the applicable restructuring charge of $2.8 million was incurred.
Related to the reallocated resources in certain geographic areas of the MAC
network, EPS employees from those regions were terminated as the related
facilities were closed for which approximately $0.2 million was charged.
Additionally, certain employees of EPS were terminated due to the reorganization
of management for the combined Company. The total cost charged for severance was
$0.7 million. An additional severance cost of $1.4 million was accrued during
the fourth quarter for the termination of an employee under contract by EPS.
The Company has utilized all but $12.7 million of the $36.2 million liability.
The Company anticipates that the remainder of the liability related to system
restructuring will be extinguished by December 31, 2000. (See Notes to the
Consolidated Financial Statements for a detailed rollforward of the $36.2
million liability for the year ended December 31, 1999.)
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.
-8-
<PAGE>
Concord EFS, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations - continued
Net interest income improved as a percentage of total revenue to 1.9% in 1999
compared to 0.6% in 1998. A principal source of additional interest income each
year is the investment of available cash flow from operations in securities
available for sale. Approximately $61.7 million from the June 1999 offering of
the Company's common stock was invested in securities available for sale.
Increased transaction settlement volumes contributed to interest earned from
overnight and short-term investments. These factors increased interest income by
50% over 1998. Total long and short-term debt was reduced approximately $146
million in June 1999 from the proceeds of the June 1999 common stock offering.
As a result, interest expense decreased 22% in 1999 from 1998. The combination
of these factors increased net interest income as a percentage of revenue.
1998 Compared to 1997
Revenue increased 30% in 1998. Transaction processing revenue from Merchant
Services, which includes credit, debit, EBT and fuel card transactions increased
36% for the year. The addition of new merchants increased transactional volumes
and related revenue. Higher credit card transaction processing rates also
contributed to the increase in revenue. The increase in rates was a pass-through
of higher interchange expenses assessed to the Company from the credit card
associations. The widening acceptance of debit and EBT card transactions at new
and existing merchants also contributed to the increase in revenue. Merchant
Services was 67% of total revenue. ATM Services, which include ATM terminal
driving, MAC network access, processing, gateway and off-line debit fees, as
well as ATM surcharges and processing fees, increased 19%. The placement of new
ATMs, new ATM processing customers and increases in transactional volumes
accounted for the increase. ATM Services was 31% of total revenue. Other
revenue, primarily Check and Terminal Services, was 2% of total revenue and
increased 7% in 1998.
Net income as a percentage of revenue increased in 1998 to 14.0% from 12.2% in
the prior year. Cost of operations increased in 1998 to 70.4% of revenue
compared to 69.5% in the prior year. Operational cost increases were due to the
blended growth of several costs at varying rates. Interchange costs from credit
card association increases and Year 2000 compliance and development expenses
were balanced by other operating expenses such as depreciation and payroll
growing at a slower rate than revenue.
The primary component of the margin improvement was due to selling, general and
administrative expenses increasing only $1.2 million or 2%, from $50.0 million
in 1997 to $51.2 million in 1998. As a result of slower growth rate in these
expenses, selling, general and administrative expenses were 8.1% of revenue in
1998 versus 10.2% in 1997.
-9-
<PAGE>
Concord EFS, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations - continued
A second component of the margin improvement was the combination of net interest
income (expense) and income taxes. During 1998 the Company increased its
allocation of municipal investment securities within the investment portfolio
from 18% at year end 1997 to 41% at year end 1998. Municipal investment
securities are generally tax-exempt for federal income tax purposes and have
lower interest rates than taxable investment securities. While the total debt
increased $19.3 million in 1998 to $198.1 million from $178.8 million in 1997,
$45 million in new debt was used to purchase higher yielding investment
securities while existing higher rate debt was paid down by $25.7 million. As a
result of these factors, net interest income (expense) increased as a percentage
of total revenue to 0.6% in 1998 from (0.4%) in 1997, and the Company's overall
tax rate decreased from 38.8% in 1997 to 36.9% in 1998 due to the non-taxable
interest income.
Goodwill and Other Intangible Assets
At December 31, 1999 and 1998, approximately $3.1 million and $3.9 million,
respectively, were paid to customers under the Company's conversion assistance
program. These payments were made to customers converting to the MAC network
primarily for promotional sign replacements and card reissuance. Amortization
expense associated with these assets was approximately $2.2 million, $3.1
million, and $3.0 million for the years ended December 31, 1999, 1998 and 1997,
respectively. These payments are being amortized over five years.
On July 25, 1997, the Company entered into an agreement with an unrelated third
party whereby the Company granted perpetual licensing rights to the technology
to the third party in exchange for $25.0 million. The agreement further grants
the third party exclusive rights to the technology for a period of four years.
The proceeds received from the licensing agreement have been deferred and are
being earned over the exclusivity period of the agreement. The development costs
capitalized are being amortized over the same period.
The Company had goodwill and other intangible assets, net of accumulated
amortization, of $110.7 million and $104.3 million at December 31, 1999 and
1998, respectively. These assets comprised 10.1% and 13.3% of total assets and
15.8% and 28.9% of stockholders' equity at December 31, 1999 and 1998,
respectively.
Goodwill arose primarily from a series of transactions that occurred related to
EPS, prior to its merger with the Company in 1999. The majority of the goodwill
was contributed to EPS as part of its formation in 1992.
-10-
<PAGE>
Concord EFS, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The carrying value of goodwill and other intangible assets is evaluated by
management for impairment at each balance sheet date through review of actual
attrition and cash flows generated by the acquired companies, purchased merchant
contracts and customer lists in relation to the expected attrition and cash
flows and the recorded amortization expense. If, upon review, actual attrition
and cash flows indicate impairment in the value of the assets, an impairment
loss would be recognized. Management has concluded, given the earnings and cash
flows currently being generated by the acquired companies, purchased merchant
contracts and customer lists, that no impairment of goodwill or the other
intangible assets existed at December 31, 1999.
Liquidity and Capital Resources
The Company consistently generates significant resources from operating
activities. Over the past three years operating activities generated cash of
$175.4 million, $155.8 million, and $75.4 million for the years ended December
31, 1999, 1998, and 1997, respectively.
Significant changes in accounts receivable and accounts payable result from the
day of the week the calendar year end falls combined with the increases in
settlement volume from one year to the next, impacting cash generated from
operations.
The Company completed an offering of common stock in June 1999. Proceeds from
the 10.1 million shares issued were $207.8 million. Approximately $146 million
of these proceeds were used to repay the long-term debt and short-term
borrowings of EPS. The balance of the net proceeds held by the Company will be
available for working capital and general corporate purposes, including the
possible acquisition of transaction processing businesses and use in other
subsidiaries of the Company.
Stock issued upon exercises of options under the Company's Incentive Stock
Option Plan provided $22.6 million in additional capital in 1999. The
disqualifying disposition of the options also reduced corporate income taxes
paid by $23.4 million. Management cannot estimate the timing or amount of future
cash flows from exercise of options; however, this is expected to continue to be
a source of funds to the Company. Common stock issuances and the related
proceeds and income tax benefits were higher in 1999 than previous years due to
the merger of the Company with EPS. EPS stock options were converted into
Company stock options as a function of the merger and would have terminated on
November 23, 1999 if not exercised. Therefore, nearly 100% of these options were
exercised in the current year.
During fiscal 1999, the Company invested approximately $189.4 million in
securities in short and medium-term, interest-bearing obligations, net of sales
and maturities, described in the Notes to the Consolidated Financial Statements.
-11-
<PAGE>
Concord EFS, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources - continued
The Company invested $58.3 million in capital additions and $26.3 million to
acquire processing rights to merchant contracts. These investing activities were
funded primarily through operating activities and proceeds from the offering
(see Notes to Consolidated Financial Statements).
The Company has available credit of $55.0 million with financial institutions.
As of December 31, 1998, $21.0 million was outstanding on these lines of credit.
The Company holds securities with a market value of approximately $351.2 million
that are available for operating needs or as collateral to obtain short-term
financing, if needed.
The Company continues to have adequate available credit and strong cash
generation. The Company is in sound financial condition and expects to fund
continued growth from currently available resources. Both financial institution
subsidiaries exceed all required capital ratios. The Company's ability to pay
dividends to its stockholders is restricted due to its ownership of two
federally insured depository institutions. The regulatory bodies that monitor
the capital levels of the institutions require certain minimum capital levels be
maintained as required by law.
Effects of Inflation
The Company's assets are primarily monetary, consisting of cash, assets
convertible into cash, securities owned and receivables. Because of their
liquidity, these assets are not significantly affected by inflation. Management
believes that replacement costs of property and equipment will not materially
affect operations.
The rate of inflation does affect the Company's expenses, such as those for
employee compensation and communications, which may not be readily recoverable
in the price of services offered by the Company.
Quantitative and Qualitative Disclosures About Market Risk
The securities of the Company are subject to risk resulting from interest rate
fluctuations to the extent that there is a difference between the amount of the
Company's interest-bearing assets and the amount of interest-bearing liabilities
that are prepaid, mature or reprice in specific periods. This risk is mitigated
by the fact that approximately 84% of the market value of securities owned were
funded through equity rather than debt. The principal objective of the Company's
asset/liability activities is to provide maximum levels of net interest income
while maintaining acceptable levels of interest rate and liquidity risk and
facilitating the funding needs of the Company. The Company utilizes an interest
rate sensitivity model as the primary quantitative tool in measuring the amount
of interest rate risk that is present at the end of each month.
-12-
<PAGE>
Concord EFS, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk - continued
The following provides comparative information in tabular form about the
Company's financial instruments that are sensitive to changes in interest rates.
This table presents principal cash flows and related weighted-average interest
rates by expected maturity dates. Additionally, the Company has assumed its
securities, described in the Notes to Consolidated Financial Statements, are
similar enough to aggregate those securities for presentation purposes. If tax
equivalent yields of municipal securities had been utilized, the
weighted-average interest rates would have been higher.
<TABLE> <S> <C>
December 31, 1999 2000 2001 2002 2003 2004 Thereafter Total Fair Value
(in thousands) ------- ------- ------- ------- ------- ---------- -------- ----------
Assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available-for-sale securities $69,770 $38,885 $32,494 $22,259 $24,999 $290,663 $479,070 $445,407
Average interest rate 6.6% 6.7% 6.7% 6.2% 6.4% 5.9%
Liabilities:
Deposits $90,827 $ 6,495 $ 2,609 $ 218 $ 326 $100,475 $100,557
Average interest rate 4.2% 5.7% 5.6% 5.3% 5.8%
Long-term debt $18,000 $10,000 $47,000 $75,000 $72,099
Average interest rate 6.1% 5.6% 5.4%
December 31, 1998 1999 2000 2001 2002 2003 Thereafter Total Fair Value
(in thousands) ------- ------- ------- ------- ------- ---------- -------- ----------
Assets:
Available-for-sale securities $34,705 $ 8,354 $15,956 $ 8,309 $17,624 $191,640 $276,588 $278,398
Average interest rate 6.2% 6.5% 4.8% 5.1% 4.8% 5.8%
Liabilities:
Deposits $32,153 $ 2,098 $ 777 $ 31 $ 34,907 $ 34,903
Average interest rate 2.9% 5.4% 5.4% 5.5%
Short-term borrowings $21,000 $21,000 $21,000
Average interest rate 5.8%
Long-term debt, including
current portion $25,116 $25,000 $25,000 $53,000 $35,000 $35,000 $198,116 $196,652
Average interest rate 6.4% 6.4% 6.4% 6.1% 6.2% 5.4%
</TABLE>
-13-
<PAGE>
Concord EFS, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Recent Quarterly Results
The following table presents an unaudited summary of quarterly results for the
quarters of the calendar years 1999 and 1998.
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
(in thousands, except per share data)
1999
Revenue $170,234 $193,724 $216,147 $249,954
Operating Income 2,207 43,864 50,149 54,521
Net Income (Loss) (2,868) 29,266 35,584 39,670
Per Share:
Basic Earnings (Loss) ($0.01) $0.15 $0.17 $0.20
Diluted Earnings (Loss) ($0.01) $0.14 $0.17 $0.19
1998
Revenue $134,666 $155,258 $167,555 $177,032
Operating Income 26,537 33,421 36,946 39,907
Net Income 17,349 21,331 23,765 26,250
Per Share:
Basic Earnings $0.09 $0.11 $0.13 $0.14
Diluted Earnings $0.09 $0.11 $0.12 $0.13
The quarterly information reported previously on Form 10-Q for the quarters
indicated above has been restated to reflect mergers accounted for as poolings
of interests, including the retroactive effect of the merger with EPS on
February 26, 1999.
Market Value
The Company's common stock trades on The NASDAQ Stock Market under the symbol
"CEFT". The following table sets forth the range of high and low sales price per
share of the Company's common stock through December 31, 1999, as reported by
NASDAQ.
High Low
-------------- -------------
1999
First Quarter $27.25 $17.00
Second Quarter 28.21 19.08
Third Quarter 27.38 20.25
Fourth Quarter 33.00 20.06
1998
First Quarter $15.63 $ 8.87
Second Quarter 17.67 12.67
Third Quarter 18.83 12.92
Fourth Quarter 28.25 12.67
-14-
<PAGE>
Concord EFS, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
As of March 17, 2000 there were approximately 33,700 stockholders, which was
determined by reference to the number of record holders. The Company has never
paid cash dividends. It is the present policy of the Company's Board of
Directors to retain earnings to finance expansion in the foreseeable future.
Year 2000 Issues
During 1999, the Company successfully implemented its Year 2000 preparedness
plan which included both IT and Non-IT systems. The date change event had no
significant or material adverse impact to the Company's financial condition,
liquidity, or results of operations. The Company will continue monitoring and
support activities related to the Year 2000 preparedness plan to ensure
continued functionality and to minimize unanticipated risks.
To complete its Year 2000 preparedness plan the Company incurred expense of
approximately $6.4 million in 1998 and $3.7 million in 1999. The Company
expensed all costs associated with its Year 2000 preparedness plan. Any
additional expense which might be incurred for ongoing monitoring and support of
the Year 2000 preparedness plan is not expected to have a material impact on the
Company's financial condition, liquidity, or results of operations.
-15-
<PAGE>
Concord EFS, Inc. and Subsidiaries
Report of Independent Auditors
Board of Directors and Stockholders Concord EFS, Inc.
We have audited the accompanying consolidated balance sheets of Concord EFS,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Concord EFS, Inc.
and subsidiaries at December 31, 1999 and 1998, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
Memphis, Tennessee
February 10, 2000
<PAGE>
Concord EFS, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31
1999 1998
--------------------------
(in thousands)
Assets
Current assets
Cash and cash equivalents $ 119,824 $ 82,029
Securities available for sale 456,209 288,180
Accounts receivable, less allowance
of $3,181 at December 31, 1999 and
$2,324 at December 31, 1998 188,671 106,662
Inventories 17,892 11,396
Prepaid expenses and other current assets 11,369 7,434
Deferred income taxes 9,108 5,977
------------ -----------
Total current assets 803,073 501,678
Property and equipment, net 167,368 154,490
Goodwill, net 54,046 60,570
Other intangible assets, net 56,620 43,765
Other assets 15,758 23,615
------------ -----------
Total assets $ 1,096,865 $ 784,118
============ ===========
See notes to consolidated financial statements.
-17-
<PAGE>
Concord EFS, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31
1999 1998
---------------------------
(in thousands)
Liabilities and stockholders' equity
Current liabilities
Accounts payable and other liabilities $ 126,991 $ 77,469
Deposits 100,475 34,907
Accrued liabilities 50,131 47,641
Income taxes payable 15,720 10,148
Short-term borrowings - 21,000
Current maturities of long-term debt - 25,116
------------ -----------
Total current liabilities 293,317 216,281
------------ -----------
Long-term debt, less current maturities 75,000 173,000
Deferred income taxes 16,566 21,336
Other liabilities 9,669 12,966
------------ -----------
Total liabilities 394,552 423,583
------------ -----------
Commitments and contingent liabilities
Stockholders' equity
Common stock, $0.33 1/3 par value;
authorized 500,000 shares, issued
and outstanding 205,882 shares at
December 31, 1999 and 127,935
shares at December 31, 1998 68,628 42,646
Additional paid-in capital 282,863 55,018
Retained earnings 363,354 261,702
Accumulated other comprehensive income (loss) (12,532) 1,169
------------ -----------
Total stockholders' equity 702,313 360,535
------------ -----------
Total liabilities and stockholders' equity $ 1,096,865 $ 784,118
============ ===========
See notes to consolidated financial statements.
-18-
<PAGE>
Concord EFS, Inc. and Subsidiaries
Consolidated Statements of Income
For Year Ended December 31
----------------------------------------
1999 1998 1997
----------- ----------- -----------
(in thousands, except per share data)
Revenue $830,059 $634,511 $490,030
Cost of operations 592,299 446,515 340,770
Selling, general and
administrative expenses 50,830 51,185 50,008
Acquisition and
restructuring charges 36,189 - -
----------- ----------- -----------
Operating income 150,741 136,811 99,252
Other income (expense):
Interest income 27,501 18,379 12,287
Interest expense (11,409) (14,676) (14,076)
----------- ----------- -----------
Income before taxes 166,833 140,514 97,463
Income taxes 65,181 51,819 37,771
----------- ----------- -----------
Net income $ 101,652 $ 88,695 $ 59,692
=========== =========== ===========
Per share data:
Basic earnings per share $0.51 $0.46 $0.31
=========== =========== ===========
Diluted earnings per share $0.49 $0.45 $0.31
=========== =========== ===========
Average shares outstanding:
Basic shares 199,147 191,539 189,888
=========== =========== ===========
Diluted shares 206,392 197,921 194,906
=========== =========== ===========
See notes to consolidated financial statements.
-19-
<PAGE>
Concord EFS, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE> <S> <C>
Accumulated
Additional Other
Common Stock Paid-In Retained Comprehensive
Shares Amount Capital Earnings Income (Loss) Total
----------- ------------ ------------- ------------ ------------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 85,371 $28,457 $ 46,464 $113,315 ($496) $187,740
Exercise of stock options 1,076 359 6,300 6,659
Tax benefit of nonqualifying
stock option exercises 5,858 5,858
Net income 59,692 59,692
Change in net unrealized loss on
securities available for sale,
net of tax of $323 595 595
------------
Comprehensive income 60,287
----------- ------------ ------------- ------------ ------------------ ------------
Balance at December 31 1997 86,447 28,816 58,622 173,007 99 260,544
Exercise of stock options 413 138 6,458 6,596
Three for two stock split 41,075 13,692 (13,692)
Tax benefit of nonqualifying
stock option exercises 3,630 3,630
Net income 88,695 88,695
Cumulative effect of accounting
change, net of tax of $421 776 776
Change in net unrealized gain on
securities available for sale,
net of tax of $158 294 294
------------
Comprehensive income 89,765
----------- ------------ ------------- ------------ ------------------ ------------
Balance at December 31, 1998 127,935 42,646 55,018 261,702 1,169 360,535
Exercise of stock options 2,664 888 21,714 22,602
Three for two stock split 68,535 22,845 (22,845)
Offering of common stock 6,748 2,249 205,569 207,818
Tax benefit of nonqualifying
stock option exercises 23,407 23,407
Net income 101,652 101,652
Change in net unrealized gain on
securities available for sale,
net of tax of $7,764 (13,701) (13,701)
------------
Comprehensive income 87,951
----------- ------------ ------------- ------------ ------------------ ------------
Balance at December 31, 1999 205,882 $68,628 $282,863 $363,354 ($12,532) $702,313
=========== ============ ============= ============ ================== ============
</TABLE>
See notes to consolidated financial statements.
-20-
<PAGE>
Concord EFS, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE> <S> <C>
Year ended December 31
---------------------------------------
1999 1998 1997
------------ ------------ -----------
Operating activities (in thousands)
<S> <C> <C> <C>
Net income $ 101,652 $ 88,695 $ 59,692
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for losses on accounts receivable 3,474 3,654 1,445
Depreciation and amortization 65,110 55,390 41,566
Deferred income taxes (136) 1,520 (7,330)
Net realized gain on sales of
securities available for sale (230) (1,234) (522)
Restructuring charges 8,152 - -
Changes in operating assets and liabilities:
Accounts receivable (70,098) (14,021) (17,446)
Inventories (6,496) (5,498) (291)
Prepaid expenses and other current assets (3,935) (1,879) (1,024)
Accounts payable and other liabilities 77,693 28,770 (440)
Other, net 183 384 (293)
---------- ---------- ----------
Net cash provided by operating activities 175,369 155,781 75,357
Investing activities
Acquisition of securities available for sale (271,603) (240,783) (156,390)
Proceeds from sales of securities available for sale 51,051 105,617 48,923
Proceeds from maturity of securities available for sale 31,105 47,183 32,346
Acquisition of securities held to maturity - (9,630) (17,141)
Proceeds from maturity of securities held to maturity - 4,843 21,347
Acquisition of property and equipment (58,324) (65,205) (44,042)
Purchased merchant contracts (26,289) (16,946) (12,986)
Proceeds from licensing agreement - - 25,000
Other investing activity (15,386) (24,130) (2,449)
---------- ---------- ----------
Net cash used in investing activities (289,446) (199,051) (105,392)
Financing activities
Net increase in deposits 65,568 24,769 3,429
Borrowing (repayment) under credit agreement (net) (21,000) (8,000) (21,000)
Proceeds from notes payable 12,000 45,000 28,000
Payments on notes payable (135,116) (25,658) (25,418)
Proceeds from exercise of stock options 22,602 6,596 6,659
Proceeds from offering of common stock 207,818 - -
---------- ---------- ----------
Net cash provided by (used in) financing activities 151,872 42,707 (8,330)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 37,795 (563) (38,365)
Cash and cash equivalents at beginning of year 82,029 82,592 120,957
---------- ---------- ----------
Cash and cash equivalents at end of year $ 119,824 $ 82,029 $ 82,592
========== ========== ==========
Supplemental disclosure of cash flow information:
Interest paid $ 11,363 $ 14,346 $ 13,725
========== ========== =========
Income taxes paid $ 35,709 $ 46,346 $ 32,940
========== ========== =========
</TABLE>
See notes to consolidated financial statements.
-21-
<PAGE>
Concord EFS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
Note A - Significant Accounting Policies
Nature of Operations: Concord EFS, Inc. (Company or Parent) is a fully
integrated provider of electronic transaction authorization, processing,
settlement and funds transfer services on a nationwide basis. The Company's
primary activity is Merchant Services, in which it provides integrated
electronic transaction services for credit card, debit card and electronic
benefits transfer card transactions. The Company also operates a network of
automated teller machines (ATM), some of which the Company owns and others for
which the Company provides network and processing services.
Principles of Consolidation: The consolidated financial statements include the
accounts of the Company and its subsidiaries after elimination of all material
intercompany balances and transactions.
Business Combinations: The consolidated financial statements have been restated
for all transactions accounted for as poolings of interests to reflect the
financial position, results of operations and cash flows of the respective
companies as though the companies were combined for all periods presented.
Transactions accounted for under the purchase method of accounting reflect the
net assets of the acquired company at fair value on the date of acquisition.
Goodwill is amortized on a straight-line basis over 15-25 years. The results of
operations of the purchased company are included since the date of acquisition.
Use of Estimates: The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash Equivalents: The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
Securities Available for Sale: Management determines the appropriate
classification of debt securities at the time of purchase and evaluates such
designation as of each balance sheet date.
Securities available for sale are stated at fair value, with the unrealized
gains and losses, net of tax, reported as a component of accumulated other
comprehensive income (loss) in stockholders' equity.
The amortized cost of debt securities is adjusted for amortization of premiums
and accretion of discounts to maturity, or in the case of mortgage-backed
securities, over the estimated life of the security. Such amortization, interest
and dividends are included in interest income from investments. The cost of
securities sold is based on the specific identification method.
-22-
<PAGE>
Concord EFS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
Note A - Significant Accounting Policies, continued
Inventories: Inventories are stated at the lower of cost (first-in, first-out
method) or market.
Property and Equipment: Property and equipment are stated at cost. Depreciation
is computed using the straight-line method over the estimated useful lives of
the assets.
Other Intangible Assets: Purchased merchant contracts are recorded at cost and
are evaluated by management for impairment at each balance sheet date through
review of actual attrition and cash flows generated by the contracts in relation
to the expected attrition and cash flows and the recorded amortization expense.
If, upon review, actual attrition and cash flows indicate impairment of the
value of the purchased merchant contracts, an impairment loss would be
recognized. Amortization expense was recognized on a straight-line basis over an
estimated useful life of five years through December 31, 1997. Effective January
1, 1998, the Company changed the estimated useful life of its purchased merchant
contracts to six years. This change in accounting estimate is accounted for
under the provisions of Accounting Principles Board (APB) Opinion No. 20,
"Accounting Changes." Accordingly, the net book value of purchased merchant
contracts as of January 1, 1998 is amortized over the remaining useful life of
the contracts (using six years). Additionally, all purchased merchant contracts
capitalized in 1998 and thereafter are being amortized over a period of six
years. The effect of the change in accounting estimate in 1998 was an increase
to net income of approximately $583,000. Intangibles other than purchased
merchant contracts, such as customer lists, are amortized over 5 to 15 years.
Income Taxes: The Company and its wholly-owned subsidiaries file a consolidated
federal tax return. Each subsidiary provides for income taxes using the
liability method on a separate-return basis and remits to or receives from the
Company amounts currently payable or receivable.
Revenue Recognition: Revenue from credit card and other transaction processing
activities is recorded when the service is provided, gross of interchange and
network fees charged to the Company, which are recorded as a cost of operations
when the transactions have been settled.
Revenues from service contracts and product sales are recognized when the
service is provided or the equipment is shipped. Service contracts and related
sales include all revenues under system service contracts, including revenues
from sales of terminal hardware when the contract included such sales.
-23-
<PAGE>
Concord EFS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
Note A - Significant Accounting Policies, continued
Stock-based Compensation: The Company grants options for a fixed number of
shares to employees with an exercise price equal to the fair value of the shares
at the date of the grant. These stock option grants are accounted for in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees;"
accordingly, the Company recognizes no compensation expense for the stock option
grants.
Recently Issued Accounting Pronouncements: In June 1998, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement establishes new accounting and reporting
requirements for derivative instruments, including certain derivative
instruments embedded in other contracts and hedging activities. The Company is
required to adopt this statement as of January 1, 2001. Adoption of SFAS No. 133
is not expected to result in a material financial impact.
Reclassification: Certain 1998 and 1997 amounts have been reclassified to
conform to the 1999 presentation.
Note B - Business Combinations
The Company completed the merger with EPS on February 26, 1999 by issuing 45.1
million shares of the Company's common stock for all of the outstanding common
stock of EPS. The acquisition was accounted for using the pooling of interests
method of accounting. 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 Digital Merchant Systems of Illinois,
Inc. and American Bankcard International, Inc. (jointly named DMS). DMS is a
leading independent sales organization in the credit card industry. The mergers
were accounted for using the pooling of interests method of accounting. The
Company exchanged 6.6 million shares of its common stock for all of the
outstanding common stock of DMS.
-24-
<PAGE>
Concord EFS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
Note B - Business Combinations, continued
The following table presents selected financial information in thousands, split
between the Company, EPS and DMS:
Year ended December 31
-------------------------------------------
1999 1998 1997
------------- ------------- -------------
Revenue:
Concord EFS, Inc. $783,954 $361,604 $240,004
EPS (1) 46,105 258,773 219,956
DMS (2) - 14,134 30,070
-------- -------- --------
$830,059 $634,511 $490,030
======== ======== ========
Net income (loss):
Concord EFS, Inc. $ 96,738 $ 61,857 $ 42,746
EPS (1) 4,914 24,924 18,010
DMS (2) - 1,914 (1,064)
-------- -------- --------
$101,652 $ 88,695 $ 59,692
======== ======== ========
(1) The 1999 amounts reflect the results of operations from January 1, 1999
through February 28, 1999 (unaudited). The results of operations from March
1, 1999 to December 31, 1999 are included in Concord EFS, Inc. amounts.
(2) The 1998 amounts reflect the results of operations from January 1, 1998
through June 30, 1998 (unaudited). The results of operations from July 1,
1998 to December 31, 1999 are included in Concord EFS, Inc. amounts.
-25-
<PAGE>
Concord EFS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
Note B - Business Combinations, continued
Pre-tax acquisition and restructuring charges of $36.2 million were accrued
during the year ended December 31, 1999 relating to the acquisition of EPS. The
following discussion explains the various components of these charges.
The Company incurred acquisition expenses of $10.5 million. These expenses were
primarily for investment banking fees; however, legal, accounting, registration
and other fees and expenses were also incurred.
In order to create a single communications infrastructure for the Company's
transaction processing businesses, the Company adopted a plan to convert EPS'
communication network and accrued $12.4 million related to the conversion plan.
Asset write-offs of $8.2 million were incurred relating to the acquisition of
EPS. For competitive reasons, resources were reallocated in certain geographic
areas of the MAC network of EPS, causing impairment to the related intangible
assets of approximately $2.8 million. Upon review of EPS contracts and the
undiscounted cash flows estimated to be generated by the related customer list
intangible assets of EPS, the Company recognized impairment loss of
approximately $3.6 million. An additional $1.8 million was written off for
assets that are no longer used or supported under restructured marketing and
business plans adopted by the Company.
EPS uses a third party bank for its off-line debit processing. During the year
ended December 31, 1999, the Company adopted a plan to take this process
in-house and the applicable restructuring charge of $2.8 million was incurred.
Related to the reallocated resources in certain geographic areas of the MAC
network, EPS employees from those regions were terminated as the related
facilities were closed for which approximately $0.2 million was charged.
Additionally, certain employees of EPS were terminated due to the reorganization
of management for the combined Company. The total cost charged for severance was
$0.7 million. An additional severance cost of $1.4 million was accrued during
the fourth quarter for the termination of an employee under contract by EPS.
-26-
<PAGE>
Concord EFS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
Note B - Business Combinations, continued
The pretax expenses and charges incurred in 1999 and remaining reserve balances
at December 31, 1999, in millions, are summarized as follows:
Acquisition
Expenses and
Cash or Restructuring Reserve
Description Non-cash Charges Activity Balance
-------------------- -------- ------------- -------- -----------
Acquisition expenses cash $10.5 $10.5 $ -
Communication
conversion costs cash 12.4 1.1 11.3
Asset write-offs non-cash 8.2 8.2 -
Off-line debit
conversion cash 2.8 2.8 -
Severance and other cash 2.3 0.9 1.4
----- ----- -----
$36.2 $23.5 $12.7
===== ===== =====
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.
On July 20, 1998, the Company acquired the terminal driving business of a
certain entity. The acquisition was accounted for under the purchase method. The
total cost of the acquisition was approximately $6 million and substantially all
of the purchase price was allocated to customer lists based upon the fair value
of the assets acquired.
On February 1, 2000, the Company acquired Card Payment Systems (CPS), a New
York-based reseller of payment processing services. The acquisition will be
accounted for as a pooling of interests transaction in which Concord issued 6.2
million shares of its common stock. CPS provides card-based payment processing
services to independent sales organizations (ISOs), which in turn sell those
services to retailers.
-27-
<PAGE>
Concord EFS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
Note B - Business Combinations, continued
The following table represents selected unaudited financial information, in
thousands, split between the Company and CPS:
Year ended December 31
------------------------------------------
1999 1998 1997
------------- ------------- -------------
(Unaudited) (Unaudited) (Unaudited)
Pro forma revenue
Concord EFS, Inc. $830,059 $634,511 $490,030
CPS 41,909 15,915 3,939
-------- -------- --------
Combined $871,968 $650,426 $493,969
======== ======== ========
Pro forma net income (loss)
Concord EFS, Inc. $101,652 $ 88,695 $ 59,692
CPS 7,096 1,309 (280)
Pro forma (provision) benefit
for CPS income taxes (2,484) (458) 98
-------- -------- --------
Combined $106,264 $ 89,546 $ 59,510
======== ======== ========
Pro forma basic earnings per share
combined $0.52 $0.45 $ 0.30
======== ======== ========
Pro forma diluted earnings per share
combined $0.50 $0.44 $ 0.30
======== ======== ========
As a result of the merger in 2000, CPS will terminate its S-Corporation
election. The pro forma provision for income taxes presents tax expense as if
CPS had been a C-Corporation during the years presented.
On February 7, 2000 the Company announced completion of its acquisition of
Virtual Cyber Systems (VCS), an internet software development company. The
acquisition of VCS, for which the Company will pay approximately $2 million,
will be accounted for as a purchase transaction and will be immaterial to the
Company's financial statements.
-28-
<PAGE>
Concord EFS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
Note C - Securities Available for Sale
The following is a summary of securities available for sale:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- -------------- -------------- -------------
(in thousands)
December 31, 1999
U.S. Government and
agency securities $ 71,526 $ 49 $ (3,388) $ 68,187
Mortgage-backed
securities 167,356 (7,830) 159,526
Corporate securities 68,934 (1,123) 67,811
Municipal securities 157,246 109 (7,472) 149,883
------------- -------------- -------------- -------------
Total debt securities 465,062 158 (19,813) 445,407
Equity securities 10,802 10,802
------------- -------------- -------------- -------------
$475,864 $ 158 $(19,813) $456,209
============= ============== ============== =============
December 31, 1998
U.S. Government and
agency securities $ 29,603 $ 281 $ (74) $ 29,810
Mortgage-backed
securities 130,355 395 (370) 130,380
Municipal securities 116,630 1,972 (394) 118,208
------------- -------------- -------------- -------------
Total debt securities 276,588 2,648 (838) 278,398
Equity securities 9,782 9,782
------------- -------------- -------------- -------------
$286,370 $ 2,648 $ (838) $288,180
============= ============== ============== =============
-29-
<PAGE>
Concord EFS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
Note C - Securities Available for Sale, continued
The scheduled maturities of debt securities at December 31, 1999 were as
follows:
Amortized Fair
Cost Value
--------------------------
(in thousands)
Due in one year or less $ 61,767 $ 59,204
Due in one to five years 115,047 112,354
Due in five to ten years 89,804 86,536
Due after ten years 198,444 187,313
----------- -----------
$ 465,062 $ 445,407
=========== ===========
Expected maturities on other securities may differ from contractual maturities
because the issuers of the securities may have the right to prepay obligations
without prepayment penalties. Securities carried at approximately $105 million
at December 31, 1999 were pledged as collateral for the Federal Home Loan Bank
advances.
Note D - Property and Equipment
The following table summarizes property and equipment at December 31:
1999 1998
--------- ----------
(in thousands)
Land $ 1,050 $ 1,050
Building & improvements 15,862 15,101
Computer facilities and equipment 250,574 254,378
Office furniture and equipment 61,119 21,855
Leasehold improvements 11,810 10,553
---------- ----------
340,415 302,937
Accumulated Depreciation (173,047) (148,447)
---------- ----------
$167,368 $154,490
========== ==========
Depreciation expense was approximately $43.7 million, $39.1 million, and $33.5
million for the years ended December 31, 1999, 1998 and 1997, respectively.
-30-
<PAGE>
Concord EFS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
Note E - Goodwill and Other Intangible Assets
Goodwill consists of the following at December 31:
1999 1998
----------- -----------
(in thousands)
Goodwill $ 77,936 $ 82,571
Accumulated amortization (23,890) (22,001)
----------- -----------
$ 54,046 $ 60,570
=========== ===========
Amortization expense related to goodwill was $3.7 million $3.9 million and $3.7
million for the years ended December 31, 1999, 1998 and 1997, respectively.
Other intangible assets consist of the following:
December 31, 1999
-----------------------------------
Accumulated
Gross Amortization Net
---------- ------------- ----------
(in thousands)
Purchased merchant contracts $59,788 ($13,766) $46,022
Customer lists and other 31,144 ( 20,546) 10,598
---------- ----------- ---------
$90,932 ($34,312) $56,620
========== =========== =========
December 31, 1998
-----------------------------------
Accumulated
Gross Amortization Net
---------- ------------- ----------
(in thousands)
Purchased merchant contracts $33,498 ($6,103) $27,395
Customer lists and other 31,144 (14,774) 16,370
---------- ----------- ---------
$64,642 ($20,877) $43,765
========== =========== =========
Amortization expense related to other intangible assets was $9.8 million $6.7
million and $4.5 million for the years ended December 31, 1999, 1998 and 1997,
respectively.
-31-
<PAGE>
Concord EFS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
Note F - Short-Term Borrowings
Borrowings of $21 million were outstanding at December 31, 1998 under a credit
agreement which the Company maintained with a third-party bank. The credit
agreement provided for unsecured short-term borrowings of up to $75 million
bearing interest at variable rates. Average borrowings under this agreement
during 1998 were $29.4 million at an effective interest rate of 5.81%.
The Company also has available $55 million in unsecured lines of credit with
other financial institutions, which expire on various dates throughout 2005. No
amounts were outstanding on these lines at December 31, 1999 or 1998.
Note G - Long-Term Debt and Leases
At December 31, long-term debt consisted of:
1999 1998
---------- ----------
(in thousands)
Advances from Federal Home Loan Bank (FHLB) $ 75,000 $ 73,000
Note payable to bank for ATMs - 116
Note payable to former stockholder - 125,000
---------- ----------
75,000 198,116
Less current maturities - (25,116)
---------- ----------
$ 75,000 $173,000
========== ==========
The FHLB advances are at fixed rates ranging from 4.75% to 6.08% at December 31,
1999. The Company had approximately $25 million available on unused lines of
credit with the FHLB at December 31, 1999.
The Company repaid the unsecured note to a former stockholder during 1999 in the
amount of $125 million. The interest rate on the debt was 6.40%.
The Company rents office facilities and equipment under noncancelable operating
leases expiring at various dates through 2006. Rental expense for operating
leases amounted to approximately $5.5 million, $5.1 million, and $4.8 million
for the years ended December 31, 1999, 1998, and 1997, respectively.
-32-
<PAGE>
Concord EFS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
Note G - Long-Term Debt and Leases, continued
On May 22, 1998, the Company entered into a $15 million operating lease
agreement replacing the remainder of the original subrental agreement on EPS'
headquarters. The terms for the operating lease provide for an initial
seven-year term through 2005 with an option to renew for two additional five
year terms.
Future maturities of FHLB advances and minimum lease payments for operating
leases with initial or remaining terms in excess of one year are as follows:
FHLB Operating
Advances Leases
---------- ---------
Year ending December 31: (in thousands)
2000 $ - $ 4,559
2001 - 3,062
2002 18,000 3,124
2003 10,000 2,908
2004 - 1,942
Thereafter 47,000 1,510
---------- ---------
Total future payments $ 75,000 $17,105
========== =========
Note H - Employee Benefit Plans
Effective March 1, 1998, the Company established the Concord EFS Retirement
Savings Plan (the Plan). Employees who have reached the age of 21 and completed
one year of service with the Company are eligible to participate in the Plan.
The Plan provides for voluntary tax-deferred contributions by eligible employees
and discretionary contributions by the Company. The Company's cost related to
the Plan was approximately $1,998,000 and $114,000 in 1999 and 1998,
respectively.
The Electronic Payment Services, Inc. Retirement Savings Plan (the EPS Plan)
covered substantially all employees of EPS. Prior to February 26, 1999, when the
EPS Plan was terminated, each qualified employee received a discretionary
company profit-sharing contribution of 2% of compensation as defined, based upon
employment status at December 31 of the plan year. In addition, the EPS Plan
included a Section 401(k) savings feature wherein EPS matched employee
contributions up to 4.5% of compensation as defined, and additionally, contained
a discretionary contribution of up to 1.5% of compensation as defined. Total
1999, 1998 and 1997 expenses under the EPS Plan were approximately $0.5 million,
$3.7 million and $3.1 million, respectively.
-33-
<PAGE>
Concord EFS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
Note I - Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets at December 31, are as
follows:
1999 1998
--------- ---------
(in thousands)
Deferred tax liabilities:
Capitalization of research &
development costs $17,060 $13,994
Net unrealized loss on
securities available for sale - 641
Restructuring charges (6,007) -
Depreciation 4,000 3,976
Intangible amortization 3,775 4,460
Purchased merchant contracts 387 -
Other (2,649) (1,735)
--------- ---------
Total deferred tax liabilities 16,566 21,336
--------- ---------
Deferred tax assets:
Net operating loss carryforward - 2,003
Net unrealized loss on
securities available for sale 7,123 -
Purchased merchant contracts - 1,361
Nondeductible reserves 1,802 3,072
Bad debt allowance 730 248
Inventory 44 37
Other (591) (744)
--------- ---------
Total deferred tax assets 9,108 5,977
--------- ---------
Net deferred tax liability $ 7,458 $15,359
========= =========
-34-
<PAGE>
Concord EFS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
Note I - Income Taxes, continued
The components of the provision (benefit) for income taxes for the three years
ended December 31 are as follows:
1999 1998 1997
---------- --------- ---------
(in thousands)
Current
Federal $ 58,862 $ 47,622 $41,005
State 6,455 2,677 4,096
---------- --------- ---------
65,317 50,299 45,101
Deferred
Federal (1,301) 435 (6,297)
State 1,165 1,085 (1,033)
---------- --------- ---------
(136) 1,520 (7,330)
---------- --------- ---------
$ 65,181 $ 51,819 $37,771
========== ========= =========
The reconciliation of income taxes computed at the U. S. federal statutory tax
rate of 35% to income tax expense for the three years ended December 31 are as
follows:
1999 1998 1997
---------- ---------- ----------
(in thousands)
Tax at statutory rate $ 58,392 $ 49,180 $ 34,112
State income taxes, net of
federal benefit 4,953 2,461 1,989
Acquisition costs 2,292 - -
Nondeductible amortization
of goodwill 1,021 1,076 1,031
Tax exempt interest income (2,319) (1,175) (511)
Other, net 842 277 1,150
---------- ---------- ----------
$ 65,181 $ 51,819 $ 37,771
========== ========== ==========
Income tax benefits resulting from the disqualifying dispositions of certain
employee incentive stock option shares were credited to additional paid-in
capital because no compensation expense was charged to income for financial
reporting purposes related to the exercise of such options.
-35-
<PAGE>
Concord EFS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
Note J - Stockholders' Equity
The Company completed an offering of 10.1 million shares of its common stock,
and within the same offering, an additional 44.5 million shares of common stock
were sold by the previous owners of EPS for a total of 54.6 million shares of
common stock. Net of the underwriting discount and estimated other expenses of
the offering, the Company received $207.8 million for the 10.1 million shares of
common stock issued. The previous owners of EPS had received unregistered common
stock of the Company in connection with the February 26, 1999 acquisition. The
Company did not receive any proceeds from the sale of shares by the previous
owners of EPS.
The Board of Directors approved a three-for-two stock split on August 26, 1999.
Shareholders of record as of September 15, 1999 were distributed additional
shares on September 22, 1999.
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.
-36-
<PAGE>
Concord EFS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
Note K - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
Year ended December 31
1999 1998 1997
---------- ---------- ----------
(in thousands, except per share data)
Numerator:
Net income $101,652 $ 88,695 $ 59,692
========== ========== ==========
Denominator:
Denominator for basic earnings per share,
weighted-average shares 199,147 191,539 189,888
Effect of dilutive securities, employee
stock options 7,245 6,382 5,018
---------- ---------- ----------
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 206,392 197,921 194,906
========== ========== ==========
Basic earnings per share $0.51 $0.46 $0.31
========== ========== ==========
Diluted earnings per share $0.49 $0.45 $0.31
========== ========== ==========
Earnings per share and related share data have been restated to reflect all
stock splits.
-37-
<PAGE>
Concord EFS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
Note L - Incentive Stock Option Plans
The Concord EFS, Inc. 1993 Incentive Stock Option Plan, as amended, (the Concord
Plan) allows for the grant of up to 37.5 million shares of Common Stock for the
benefit of the Company's key employees. Options are granted at not less than
100% of the market value on the date of the grant (110% in the case of a holder
of more than 10% of the outstanding shares) and generally become exercisable
within four years of the date of the grant. Information pertaining to the
Concord Plan is summarized below, in thousands, except price per share:
Number of Weighted Weighted
Shares Average Average Options
Under Option Exercise Price Aggregate Price Exercisable
------------ -------------- --------------- -----------
Outstanding at
December 31, 1996 8,710 $ 4.49 $ 39,122 4,400
========== =======
Granted 5,959 9.17
Exercised (2,421) 2.75
Terminated (60) 7.25
--------
Outstanding at
December 31, 1997 12,188 7.11 $ 86,696 4,886
========== =======
Granted 6,404 11.14
Exercised (1,324) 4.91
Terminated (51) 9.73
--------
Outstanding at
December 31, 1998 17,217 8.77 $151,041 7,825
========== =======
Granted 6,672 21.63
Exercised (3,857) 5.87
Terminated (618) 20.66
--------
Outstanding at
December 31, 1999 19,414 $13.43 $260,818 7,720
======== ========== =======
The weighted average fair value of options granted during 1999, 1998, and 1997
was $9.29, $4.10, and $3.11, respectively.
-38-
<PAGE>
Concord EFS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
Note L - Incentive Stock Option Plans, continued
Additional information regarding options outstanding as of December 31, 1999 is
summarized below:
<TABLE> <S> <C>
Weighted Average Weighted
Weighted Remaining Average
Average Contractual Life Number of Exercise Price
Option Exercise Options Exercise of Options in Options of Options
Price Range Outstanding Price Years Exercisable Exercisable
- ----------------- ----------- --------- ---------------- ----------- -------------
<C> <C> <C> <C> <C> <C>
$ 1.82 - $ 5.57 2,857 $ 2.98 4.54 2,836 $ 2.96
8.67 - 12.78 6,099 9.93 6.98 3,270 9.84
13.50 - 19.00 4,339 13.64 8.18 1,606 13.57
20.75 - 26.67 6,119 21.67 9.22 8 22.79
----------- -----------
1.82 - 26.67 19,414 13.43 7.60 7,720 8.10
=========== ===========
</TABLE>
In 1995, EPS adopted the Electronic Payment Services, Inc. 1995 Stock Option
Plan, as amended, (the EPS Plan). In connection with the merger of EPS with the
Company, all outstanding options in the EPS Plan were accelerated and vested in
February 1999. The total amount of option shares (after conversion to Concord
EFS, Inc. shares) at December 31, 1998 was approximately 3.4 million, at a
weighted average exercise price of $5.65. All outstanding options in the EPS
Plan had been exercised by the expiration date of November 23, 1999.
The Company has elected to follow APB No. 25 and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS No. 123, "Accounting
for Stock Based Compensation," requires use of option valuation models that were
not developed for use in valuing employee stock options. Under APB No. 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions for 1999,
1998, and 1997, respectively: risk-free interest rates of 5.0%, 6.0%, and 6.25%,
and volatility factors of the expected market price of the Company's common
stock of .582, .358, and .344. Assumptions that remained constant for all years
were dividend yields of 0% and a weighted average expected life of the options
of three years.
-39-
<PAGE>
Concord EFS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
Note L - Incentive Stock Option Plans, continued
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. For purposes of pro
forma disclosures, the estimated fair value of the options is amortized to
expense over the options' vesting period. The Company's pro forma information is
as follows for the years ended December 31 (in thousands, except for earnings
per share):
1999 1998 1997
--------- --------- ---------
Pro forma net income $86,050 $79,995 $56,216
Pro forma basic earnings per share $0.43 $0.42 $0.30
Pro forma diluted earnings per share $0.42 $0.40 $0.29
Pro forma disclosures are not likely to be representative of the effects of
reported pro forma net income and earnings per share in future years as
additional options may be granted in future years and the vesting of options
already granted will impact the pro forma disclosures.
Note M - Employment Agreements
In February 1998, the Company entered into incentive agreements with its CEO and
President, each for a term of five years expiring February 2003. Each agreement
sets out the executive's annual base pay, provides for the establishment of an
incentive compensation program under which each executive will have a bonus
potential of 50% of annual base salary, and provides for grants of stock
options, including regular stock options of up to 562,500 shares a year based on
performance and special stock options contingent upon, or providing accelerated
vesting upon, the average market price of Concord stock reaching and maintaining
certain levels. The agreements contain certain non-compete provisions and change
in control provisions regarding the acceleration of outstanding stock options
and the payment of bonuses.
-40-
<PAGE>
Concord EFS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
Note N - Operations By Industry Segment
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," which establishes standards for reporting
financial information about operating segments in annual and interim financial
statements. SFAS No. 131 requires that financial information be reported on the
same basis that is reported internally for evaluating segment performance and
allocating resources to segments. SFAS No. 131 addresses how supplemental
financial information is disclosed in annual and interim reports; therefore, its
adoption in 1998 had no impact on the financial condition or operating results
of the Company.
Concord has two reportable segments: Merchant Services and ATM Services.
The Company's revenue from Merchant Services results from processing credit card
transactions using VISA, MasterCard, Discover, American Express and Diner's Club
Cards. In addition, the Company processes debit card transactions for banks
issuing such cards. Merchant Services provides electronic payment services to
supermarket chains, grocery stores, convenience store merchants and other
retailers. Merchant Services also includes trucking services providing a variety
of flexible payment systems that enable drivers of trucking companies to use
payment cards to purchase fuel and services and to obtain cash advances at truck
stops.
ATM Services include transactional fee income and surcharge revenue from ATMs
owned by the Company as well as ATM transaction processing for ATMs owned by the
Company's customers.
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 reported segments described above and costs of
operations and selling, general and administrative expenses which are not
allocated to the reportable segments. The accounting policies of the reportable
segments are the same as those described in Note A - Significant Accounting
Policies.
Assets are allocated between Merchant Services and ATM Services based upon
Company's evaluation of the revenue earned by the particular assets. Assets
classified as "Other" include assets not identifiable with the two reported
segments.
The Company's reportable segments are business units that offer different
products. The reportable segments are each managed separately because they are
distinct products for different end users. No single customer of the Company
accounts for a material portion of the Company's revenues.
-41-
<PAGE>
Concord EFS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
Note N - Operations by Industry Segment, continued
The operating segments for the year ended December 31, 1999 are the same as
prior years. However, the Company changed its internal reporting mechanism to
more closely match expenses with the revenues generated by each subsidiary
according to the segment allocations noted above. Accordingly, prior periods'
segment information has been adjusted to reflect the current method of
management reporting as though it had been in place for all periods presented.
Industry segment information for the years ended December 31, 1999, 1998, and
1997 is presented below in thousands:
Merchant ATM
Services Services Other Total
---------- ---------- ---------- -----------
1999
Revenue $563,342 $ 249,735 $ 16,982 $ 830,059
Cost of operations (431,641) (151,729) (8,929) (592,299)
Selling, general, &
administrative expenses (50,830) (50,830)
Acquisition &
restructuring charges (6,436) (19,253) (10,500) (36,189)
Taxes & interest, net (49,089) (49,089)
---------- ---------- ---------- -----------
Net income (loss) $ 125,265 $ 78,753 $ (102,366) $ 101,652
========== ========== ========== ===========
Assets by Segment $ 560,257 $ 326,604 $ 210,004 $1,096,865
========== ========== ========== ===========
-42-
<PAGE>
Concord EFS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
Note N - Operations by Industry Segment, continued
1998
Revenue $ 423,267 $ 198,398 $ 12,846 $ 634,511
Cost of operations (316,215) (122,959) (7,341) (446,515)
Selling, general, &
administrative expenses (51,185) (51,185)
Taxes & interest, net (48,116) (48,116)
---------- ---------- ---------- ----------
Net income (loss) $ 107,052 $ 75,439 $ (93,796) $ 88,695
========== ========== ========== ==========
Assets by Segment $ 422,559 $ 267,567 $ 93,992 $ 784,118
========== ========== ========== ==========
1997
Revenue $ 311,167 $166,841 $ 12,022 $ 490,030
Cost of operations (234,260) (97,514) (8,996) (340,770)
Selling, general, &
administrative expenses (50,008) (50,008)
Taxes & interest, net (39,560) (39,560)
---------- ---------- ---------- ----------
Net income (loss) $ 76,907 $ 69,327 $ (86,542) $ 59,692
========== ========== ========== ==========
Assets by Segment $ 336,229 $ 186,565 $ 96,402 $ 619,196
========== ========== ========== ==========
-43-
<PAGE>
Concord EFS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
Note O - Commitments and Contingent Liabilities
The Company is a party to various claims and litigation in the normal course of
business. None of these claims is expected to have a material effect on the
financial position or results of operations of the Company.
Note P - Debt and Dividend Restrictions
In accordance with federal banking laws, certain restrictions exist regarding
the ability of the Company's financial institution subsidiaries to transfer
funds to the Parent in the form of cash dividends, loans or advances. The
approval of certain regulatory authorities is required to pay dividends in
excess of earnings retained in the current year plus retained net earnings for
the preceding two years. As of December 31, 1999, approximately $171.3 million
and $5.6 million of undistributed earnings of EFS National Bank (EFSNB) and EFS
Federal Savings Bank (EFS FSB), respectively, included in consolidated retained
earnings, were available for distribution to the Parent as dividends without
prior regulatory approval. Under Federal Reserve regulations, these subsidiaries
are also limited as to the amount they may loan to affiliates, including the
Parent, unless such loans are collateralized by specific obligations. At
December 31, 1999, the maximum amount available for transfer in the form of
loans to the Parent from EFSNB and EFS FSB, respectively, approximated 3.41% and
0.67% of the Company's consolidated net assets.
Note Q - Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments. These fair values are provided for
disclosure purposes only, and do not necessarily indicate the amount the Company
would pay or receive in a market transaction with an unrelated third party.
Cash and Cash Equivalents: The carrying amounts reported in the balance sheet
for cash and cash equivalents approximate those assets' fair values.
Securities Available for Sale: Fair values for securities are based on quoted
market prices, where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments.
Deposits: Fair values of fixed-rate, fixed-maturity deposits are estimated using
a discounted cash flow calculation that applies interest rates currently being
offered on similar deposits to a schedule of aggregated expected monthly
maturities on time deposits. The fair values disclosed for deposits other than
fixed maturity, fixed-rate deposits approximate their respective carrying values
at the reporting date.
-44-
<PAGE>
Concord EFS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
Note Q - Disclosures About Fair Value of Financial Instruments, continued
Short-Term Borrowings: The interest rates on short-term borrowings are variable
rates; accordingly, fair value approximates the outstanding balance.
Advances from the FHLB and Notes Payable: The fair values of the Company's
long-term borrowings are estimated using discounted cash flow analyses based on
the Company's current incremental borrowing rates for similar types of borrowing
arrangements.
The following table summarizes the carrying amount compared to the fair value of
financial instruments, in thousands, according to the methods and assumptions
listed above:
Carrying Amount Fair Value
--------------- ----------------
December 31, 1999
Financial Assets:
Cash and cash equivalents $ 119,824 $ 119,824
Securities available for sale 456,209 456,209
Financial liabilities:
Deposits 100,475 100,557
Advances from the FHLB 75,000 72,099
December 31, 1998
Financial Assets:
Cash and cash equivalents $ 82,029 $ 82,029
Securities available for sale 288,180 288,180
Financial liabilities:
Deposits 34,907 34,903
Short-term borrowings 21,000 21,000
Advances from the FHLB
and Notes Payable 198,116 196,652
-45-
<PAGE>
CONCORD EFS, INC. AND SUBSIDIARES
CORPORATE DIRECTORY
Chairman Emeritus
Victor M. Tyler
Board of Directors
(and their principal occupation)
Dan M. Palmer
Chairman and Chief Executive Officer
Concord EFS, Inc. and EFS National Bank
Douglas C. Altenbern *
Retired Chairman and CEO of
Pay Systems of America, Inc.
David C. Anderson *
Retired Executive Vice President and
CFO, Burlington Northern, Inc.
J. Richard Buchignani, Esq. *
Partner, Wyatt, Tarrant & Combs
Richard M. Harter, Esq. *
Partner, Bingham Dana LLP
Joyce Kelso
Retired Senior Vice President
Concord EFS, Inc. and EFS National Bank
Richard P. Kiphart *
Head of Corporate Finance Department
William Blair & Company LLC
Edward A. Labry III
President, Concord EFS, Inc.
and EFS National Bank
Jerry D. Mooney *
Retired President Healthcare New
Business Initiatives section of ServiceMaster Co.
Paul L. Whittington *
Retired Partner Ernst & Young LLP
* Audit Committee Member
-46-
<PAGE>
EXECUTIVE MANAGEMENT GROUP
Dan M. Palmer, Chairman and CEO
Concord EFS, Inc. and EFS National Bank
Edward A. Labry III, President,
Concord EFS, Inc., and EFS National Bank
Thomas J. Dowling, Chief Financial Officer
Concord EFS, Inc. and EFS National Bank
Vickie Brown, Chief Operating Officer
Concord EFS, Inc. and EFS National Bank
Edward T. Haslam, Chief Administrative Officer
Concord EFS, Inc.
Steve A. Lynch, Chief Information Officer
Concord EFS, Inc.
William E. Lucado, Senior Vice President
Chief Investment and Compliance Officer
Concord EFS, Inc. and EFS National Bank
Philip A. Valvardi III, President
MAC Network
Christopher Reckert, Senior Vice President
Sales, Concord EFS, Inc.
Vicki Birdsong, Senior Vice President
Product Management, Concord EFS, Inc.
Andre Blythe, Senior Vice President
Customer Support, Concord EFS, Inc.
Transfer Agent & Registrar
State Street Bank and Trust Company
C/O EquiServe Limited Partnership
Boston, Massachusetts
Corporate Counsel
Bingham Dana LLP
Boston, Massachusetts
Independent Auditors
Ernst & Young LLP
Memphis, Tennessee
Annual Meeting
May 25, 2000
-47-
<PAGE>
CONCORD EFS, INC.
NOTICE OF ANNUAL MEETING
OF STOCKHOLDERS
To the Stockholders of
Concord EFS, Inc.
Notice is hereby given that the Annual Meeting of Stockholders of Concord
EFS, Inc. ("Concord" or the "Company") will be held at Colonial Country Club,
2736 Countrywood Parkway, Memphis Tennessee on May 25, 2000 beginning at 9:30
a.m. CST, for the following purposes:
1. To elect directors to serve for the ensuing year;
2. To transact such other business as may properly come before the annual
meeting and any adjournments thereof.
The Board of Directors has fixed the close of business on March 17, 2000 as
the record date for determination of the stockholders entitled to notice of and
to vote at the Annual Meeting. The By-Laws of the Company require that the
holders of a majority of all stock issued, outstanding and entitled to vote be
present in person or represented by proxy at the meeting in order to constitute
a quorum.
By Order of the Board of Directors
Richard M. Harter
Secretary
April 7, 2000
WHETHER OR NOT YOU PLAN TO ATTEND THIS MEETING,
PLEASE SIGN AND RETURN THE ENCLOSED PROXY.
No postage is required if mailed in the United States.
<PAGE>
CONCORD EFS, INC.
PROXY STATEMENT
April 7, 2000
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of Concord EFS, Inc. ("Concord" or the "Company") of
proxies for use at the Annual Meeting of Stockholders to be held on May 25, 2000
and any adjournments thereof. Shares as to which proxies have been executed will
be voted as specified in the proxies. A proxy may be revoked at any time by
notice in writing received by the Secretary of the Company before it is voted. A
majority in interest of the outstanding shares represented at the meeting in
person or by proxy shall constitute a quorum for the transaction of business.
Votes withheld from any nominee, abstentions and broker "non-votes" are counted
as present or represented for purposes of determining the presence or absence of
a quorum for the meeting. A "non-vote" occurs when a nominee holding shares for
a beneficial owner votes on one proposal, but does not vote on another proposal
because the nominee does not have discretionary voting power and has not
received instructions from the beneficial owner. Abstentions are included in the
number of shares present or represented and voting on each matter. Broker
"non-votes" are not so included.
BENEFICIAL OWNERSHIP OF COMMON STOCK
The Company's only issued and outstanding class of voting securities is its
Common Stock, par value $0.33 1/3 per share. Each stockholder of record on March
17, 2000 is entitled to one vote for each share registered in such stockholder's
name. As of that date, the Company's Common Stock was held by approximately
33,700 stockholders.
The following table sets forth, as of March 17, 2000, the ownership of the
Company's Common Stock by each person who is known by the Company to own
beneficially more than 5% of the Company's outstanding Common Stock, by each
director who owns shares and by all directors and officers of the Company as a
group.
Percent of
Shares Outstanding
Beneficial Owner (1) Owned Shares (2)
- --------------------------------------------- ---------- -----------
Dan M. Palmer (3), Chairman & CEO 4,387,807 2.1%
Edward A. Labry III (4), President 3,091,099 1.5%
Vickie Brown (5), Sr. Vice-President 153,702 0.1%
Christopher Reckert (6), Sr. Vice-President 82,101 0.0%
Edward T. Haslam (7), Sr. Vice-President 41,500 0.0%
Joyce Kelso (8), Director 397,347 0.2%
Richard P. Kiphart (8), Director 5,239,282 2.5%
Richard M. Harter (9), Director 134,550 0.1%
Jerry D. Mooney (9), Director 60,612 0.0%
David C. Anderson (9), Director 64,389 0.0%
J. Richard Buchignani (9), Director 40,274 0.0%
Paul Whittington (9), Director 34,593 0.0%
Douglas C. Altenbern (10), Director 44,750 0.0%
All officers, directors and nominees
as a group (13 persons) (11) 13,772,006 6.5%
William Blair & Company, LLC (12) 24,554,352 11.6%
222 West Adams Street
Chicago, IL 60606
AMVESCAPP PLC and Subsidiaries (13) 16,193,312 7.6%
11 Devonshire Square
London EC2M 4YR England
Putnam Investment Management, Inc. (14) 13,654,658 6.4%
One Post Office Square
Boston, MA 02109
(1) The address of each beneficial owner that is also a director is the same as
the Company's.
(2) Percentage ownership is based on 212,194,961 shares issued and outstanding,
plus the number of shares subject to options exercisable within 60 days
from the record date by the person or the aggregation of persons for which
such percentage ownership is being determined.
(3) Shares owned include 4,367,807 shares covered by unexercised stock options.
(4) Shares owned include 3,056,482 shares covered by unexercised stock options.
(5) Shares owned include 153,701 shares covered by unexercised stock options.
(6) Shares owned include 77,101 shares covered by unexercised stock options.
(7) Shares owned include 37,500 shares covered by unexercised stock options.
(8) Shares owned include 13,500 shares covered by unexercised stock options.
(9) Shares owned include 28,000 shares covered by unexercised stock options.
(10) Shares owned include 6,750 shares covered by unexercised stock options.
(11) Shares owned include 7,866,341 shares covered by unexercised stock options.
<PAGE>
(12) Based on a Schedule 13G/A dated as of June 11, 1999, filed by William Blair
& Company, LLP ("Blair"). Includes 2,693,420 shares as to which Blair has
sole voting power and 24,554,352 shares as to which Blair has sole
dispositive power. Blair disclaims beneficial ownership as to 16,113,746 of
such shares.
(13) Based on a Schedule 13G/A dated as of February 4, 2000, filed by AMVESCAP
PLC and Subsidiaries.
(14) Based on a Schedule 13G/A dated as of February 11, 2000, filed by Putnam
Investment Management, Inc.
ELECTION OF DIRECTORS
Nine directors are to be elected to hold office until the next annual
meeting of stockholders and until their successors are elected and qualified.
Unless a proxy is executed to withhold authority for the election of any or all
of the directors, then the persons named in the proxy will vote the shares
represented by the proxy for the election of the following nine nominees. If the
proxy indicates that the stockholder wishes to withhold a vote from one or more
nominees for director, such instruction will be followed by the persons named in
the proxy. All nine of the nominees are now members of the Board of Directors.
The Board of Directors has no reason to believe that any of the nominees will be
unable to serve. In the event that any nominee should not be available, the
persons named in the proxies will vote for the others and may vote for a
substitute for such nominee. An affirmative vote of a majority of the Company's
Common Stock represented in person or by proxy at the meeting is necessary for
the election of the individuals named below.
Recommended Vote
The Board of Directors recommends that you vote "FOR" the election of these
nine individuals as directors.
The following table lists the name of each proposed nominee; his/her age;
his/her business experience during at least the past five years, including
principal offices with the Company or a subsidiary of the Company; and the year
since which he/she has served as a director of the Company. There are no family
relationships among the nominees.
Office With the Company, Business
Nominees and Ages Experience and Year First Elected Director
- -------------------------- ----------------------------------------------------
Dan M. Palmer (57) Mr. Palmer became Chairman of the Board in February
1991. Mr. Palmer has been Chief Executive Officer
of the Company since August 1989, and a Director of
the Company since May 1987. Mr. Palmer has been
the Chief Executive Officer of EFS National Bank
(formerly EFS, Inc.) since its inception in 1982.
He joined Union Planters National Bank in June 1982
and founded the EFS operations within the bank. He
continued as President and Chief Executive Officer
of EFS when it was acquired by Concord in March
1985.
Joyce Kelso (58) Mrs. Kelso has been a Director since May 1991. She
was Vice President in charge of Customer Service
when EFS began operations. In August 1990, she was
elected Senior Vice President of the Company.
January 1, 1995, Mrs. Kelso semi-retired and on
January 1, 1997, she became fully retired.
Edward A. Labry III (37) Mr. Labry joined EFS in 1984. He was made Director
of Marketing in March 1987 and Vice President of
Sales in February 1988. In August 1990, he was
elected to Chief Marketing Officer of the Company.
In February 1991, he was elected Senior Vice
President of the Company. He became President of the
Company in October 1994, and President of EFS
National Bank in December 1994.
Richard M. Harter (63)* Mr. Harter has been the Company's Secretary and a
Director since the Company's formation. He is a
partner of Bingham Dana LLP, legal counsel to the
Company.
Jerry D. Mooney (47)* + Mr. Mooney has been a Director of the Company since
August 1992. He was the founder, President and
Chief Executive Officer of VHA Long Term Care and
its predecessor company from 1981 through 1995. He
also served as a Senior Board Advisor from 1994 to
April 1998 to The Service Master Company and as
President of its Healthcare New Business Initiatives
section or PEO division during this time. He retired
in 1998.
Richard Buchignani (51)* Mr. Buchignani has been a Director of the Company
since August 1992. He is a partner in the Memphis,
Tennessee office of the law firm of Wyatt, Tarrant &
Combs, who also serves as local counsel to the
Company. Mr. Buchignani has been affiliated with
the law firm since 1995 when most of the members of
his firm of 18 years joined Wyatt, Tarrant & Combs.
Paul L. Whittington (64)* + Mr. Whittington has been a Director of the Company
since May 1993. Mr. Whittington had been the
Managing Partner of the Memphis, Tennessee and
Jackson, Mississippi offices of Ernst & Young from
1988 until his retirement in 1991. Since 1979, he
had been the partner in charge of consulting at
various Ernst & Young offices.
Richard P. Kiphart (57)* Mr. Kiphart has been a Director of the Company since
March 1997. In 1972 he became a General Partner of
William Blair & Company, LLC. He served as head of
Equity Trading from 1972 to 1980. He joined the
Corporate Finance Department in 1980, and was made
head of that department in January 1995.
Douglas C. Altenbern (63)* Mr. Altenbern has been a Director of the Company
since February 1998. Mr. Altenbern served as Vice
Chairman of First Financial Management Corporation
until 1989, at which time he resigned to found
Argosy Network Corporation, of which he served as
Chairman and CEO. In 1992 he sold his interest in
Argosy and in 1993 founded Pay Systems of America,
of which he served as Chairman and CEO through
December 1996. He currently is a private investor
and serves as a Director on the Boards of The
Bradford Funds, Inc., OPTS, Inc., Interlogics, Inc.
CSM, Inc. and Equitas.
* Member of the Board's Audit Committee.
+ Member of the Board's Compensation Committee.
Compensation of Directors
The Company currently pays to each non-employee director of the Company
$8,000 cash director fee each year for attending scheduled board meetings. Each
non-employee director receives $1,000 for any special teleconference meetings
attended. In addition, non-employee directors are granted options to purchase
10,875 shares of the Company's common stock at market value on the date of the
annual meeting of stockholders. One director receives an annual fee of $8,000
plus $2,000 for each meeting attended. This director is granted options to
purchase only 9,000 shares of the Company's stock in the same manner as the
other non-employee directors. Directors are reimbursed for expenses incurred in
attending meetings of the Board of Directors. Two of the nine nominees are
employees of the Company and are not separately compensated for serving as
directors.
Executive Compensation
The following summary compensation table is intended to provide a
comprehensive overview of the Company's executive pay practices. It includes the
cash compensation paid or accrued by the Company and its subsidiaries for
services in all capacities during the fiscal year ended December 31, 1999, to or
on behalf of each of the Company's named executives. Named executives include
the Chief Executive Officer and the President of the Company.
Summary Compensation Table
<TABLE> <S> <C>
Annual Compensation
Name and Salary Bonus Other Long-Term Compensation
Principal Position Year ($) ($) ($) Options Awarded*
- ------------------------ ---- -------- ------- ------- ----------------------
<S> <C> <C> <C> <C> <C>
Dan M. Palmer 1999 538,750 393,750 1,687,500
Chairman of the Board 1998 466,538 331,250 1,687,500
Chief Executive Officer 1997 427,392 262,000 1,800,000
of the Company and
EFS National Bank
Edward A. Labry III 1999 538,750 393,750 1,687,500
President of the Company 1998 466,538 331,250 1,687,500
and EFS National Bank 1997 417,777 262,000 1,800,000
Christopher Reckert 1999 225,481 40,000 160,000
Senior Vice President 1998 163,942 20,000 56,250
of the Company and 1997 132,693 15,000 56,250
EFS National Bank
Vickie Brown 1999 203,462 40,000 77,500
Chief Operations Officer 1998 184,519 20,000 56,250
of the Company and 1997 165,770 15,000 67,498
EFS National Bank
Edward T. Haslam 1999 186,200 237,500 11,313 185,000
Chief Administrative 1998 178,150 85,000 7,005 55,363
Officer of the Company 1997 155,950 76,000 5,000 31,636
</TABLE>
* Options awarded have been restated to reflect all stock splits.
Stock Options
The following tables present the following types of information for options
granted to the Company's named executives under the Company's 1993 Incentive
Stock Option Plan. Table I - options granted and the potential realizable value
of such options, and Table II - options exercised in the latest fiscal year and
the number of unexercised options held.
Table I
Options Granted in 1999
<TABLE> <S> <C>
Individual Grants
---------------------------------------------- Potential Realizable
% 0f Total Value at Assumed
Options Annual Rates of Stock
Granted to Exercise Price Appreciation
Options Employees in price Expiration for Option Term
Name Granted 1999 ($/Share) Date 5% ($) 10% ($)
- ------------------- ---------- ------------ ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Dan M. Palmer 1,687,500 37.5% $21.14 1/4/2009 22,435,030 56,854,770
Edward A. Labry III 1,687,500 37.5% $21.14 1/4/2009 22,435,030 56,854,770
Christopher Reckert 160,000 3.6% $21.34 2/18/2009 2,147,675 5,442,630
Vickie Brown 77,500 1.7% $21.73 2/18/2009 1,059,106 2,683,982
Edward T. Haslam 185,000 4.1% $21.50 2/18/2009 2,501,428 6,339,111
</TABLE>
Table II
Options Exercised in 1999 and 1999 Year End Option Values
Value of
Number of Unexercised
Shares Acquired Value ($) Unexercised In-the-Money
Name on Exercise (#) Realized(1) Options(#) Options($)(2)
- ------------------- --------------- ----------- ----------- -------------
Dan M. Palmer -0- -0- 3,473,432(E) 63,159,967(E)
3,722,344(U) 36,250,363(U)
Edward A. Labry III -0- -0- 2,775,232(E) 46,779,921(E)
3,722,344(U) 36,250,363(U)
Christopher Reckert -0- 1,883,853 -0-(E) -0-(E)
224,530(U) 1,739,628(U)
Vickie Brown -0- -0- 98,856(E) 1,632,849(E)
166,093(U) 1,577,682(U)
Edward T. Haslam -0- 2,309,253 -0-(E) -0-(E)
185,000(U) 793,745(U)
(1) Values are calculated by subtracting the exercise price from the fair
market value of the stock as of the exercise date.
(2) Values are calculated by subtracting the exercise price from the fair
market value of the stock on December 31, 1999.
(E) Exercisable at December 31, 1999.
(U) Unexercisable at December 31, 1999.
Committees; Attendance
The Board of Directors held four regular meetings during the fiscal year
ended December 31, 1999. Each of the directors attended at least 75% of the
total number of meetings of the Board.
The Audit Committee, consisting of Messrs. Anderson, Buchignani, Harter,
Mooney, Whittington and Kiphart met three times during the fiscal year ended
December 31, 1999. The Audit Committee reviewed the results of the audit
conducted by outside auditors and management's response to the management letter
prepared by outside auditors. The Audit Committee also monitored the Company's
compliance with the Year 2000 computer issues.
The Board of Directors has no Nominating Committee.
Compensation Committee Report on Executive Compensation
Committee Composition
The Board of Directors has a Compensation Committee of Messrs. Anderson,
Mooney and Whittington (the "Committee"), who are not employees of the Company
or any of its affiliates and have never been employees of the Company or any of
its affiliates.
General Policy
It is the policy of the Committee to establish base salaries, award bonuses
and grant stock options to executive officers in such amounts as will assure the
continued availability to the Company of the services of the executives and will
recognize the contributions made by the executives to the success of the
Company's business and the growth over time in the market capitalization of the
Company. To achieve these goals, the Committee establishes base salaries at
levels which it believes to be below the mid-point for comparable executives in
companies of comparable size and scope. The Committee then awards cash bonuses
reflecting individual performance during the year for which the awards are made.
For executives other than the Chief Executive Officer and President, the
Committee receives bonus award recommendations from the Chief Executive Officer.
The Committee grants stock options to senior and middle management executives of
the Company and its affiliates at levels which it believes to be higher than
average for comparable companies in order to give the executives significant
incentive to improve the revenue of the Company and its market capitalization.
Section 162(m) of the Internal Revenue Code limits the tax deduction to $1
million for compensation paid to certain executives of public companies. The
Committee has considered these requirements and believes that the Company's 1993
Incentive Stock Option Plan meets the requirement that it be "performance based"
and, therefore, exempt from the limitations on deductibility. Historically, the
combined salaries and bonuses of the Company's executive officers have been well
under the $1 million limit. The Committee's present intention to comply with
Section 162(m) unless the Committee feels that required changes would not be in
the best interest of the Company or its stockholders.
Specific Arrangements for CEO and President
During 1998, Concord entered into five-year incentive agreements with its
Chief Executive Officer and with its President. Each incentive agreement
provides for base salary of $550,000 with annual reviews, for a bonus
opportunity equal to 50% of base salary with growth in earnings per share being
a significant factor in awarding the bonuses and for option grants of 562,500
shares per year. In addition, each incentive agreement provided for a one-time
option grant for 1,125,000 shares with a "reload" feature: after the stock
market price reaches $21.33 per share for a stated period, a new option for
562,500 shares will be granted at $21.33; and after the stock market price
reaches $28.45, a new option for 281,250 shares will be granted at $28.45. The
first of these milestones has already been reached.
The Chief Executive Officer and President's base salary, cash bonus and
option grants were established by the Committee based upon its members' own
experience in their companies and in other companies which they serve as
directors or advisors. In addition, the Committee received advice from a
compensation consulting firm in setting compensation levels for executive
officers. In setting the base salary, bonus and option grants for 1998 for the
Chief Executive Officer and President, the Committee considered the 39% increase
in revenues and the 50% increase in diluted earnings per share in 1998 over
1997. Additionally, the Committee noted that for the preceding three years the
Company's revenue growth averaged approximately 44% per year, that its market
capitalization growth averaged approximately 71% per year and that these
individuals were responsible for past growth and uniquely situated to contribute
to the future growth of the Company.
David C. Anderson
Jerry D. Mooney
Paul L. Whittington
<PAGE>
Five Year Cumulative Stockholder Return
Below is a performance table which compares the Company's cumulative total
stockholder return during the previous five years with the NASDAQ stock market,
and the NASDAQ financial stocks (the Company's peer group).
NASDAQ NASDAQ
Date Concord EFS, Inc. Stock Market Financial Stocks
- -------- ----------------- ------------ ----------------
12/31/94 100.00 100.00 100.00
12/31/95 253.52 141.34 150.97
12/31/96 381.41 173.90 193.82
12/31/97 335.84 213.07 296.48
12/31/98 858.14 300.43 287.78
12/31/99 782.20 555.99 284.64
OTHER MATTERS
The Board of Directors knows of no matters which are likely to be presented
for action at the Annual Meeting other than the proposals specifically set forth
in the Notice and referred to herein. If any other matter properly comes before
the Annual Meeting for action, it is intended that the persons named in the
accompanying proxy and acting thereunder will vote or refrain from voting in
accordance with their best judgment pursuant to the discretionary authority
conferred by the proxy.
CERTAIN TRANSACTIONS
Bingham Dana LLP serves as legal counsel to the Company. Richard M. Harter,
Secretary and Director of the Company, is a partner of that firm. Wyatt, Tarrant
and Combs also serves as legal counsel to the Company. J. Richard Buchignani,
Director of the Company, is a partner of that firm.
INFORMATION CONCERNING AUDITORS
Representatives of Ernst & Young LLP are expected to be at the Annual Meeting
and will have an opportunity to make a statement if they desire to do so. Such
representatives are also expected to be available to respond to appropriate
questions.
STOCKHOLDERS PROPOSALS
Stockholder proposals to be submitted for vote at the 2001 Annual Meeting
must be delivered to the Company on or before December 8, 2000.
EXPENSES OF SOLICITATION
Solicitations of proxies by mail is expected to commence on April 7, 2000,
and the cost thereof will be borne by the Company. Copies of solicitation
materials will also be furnished to brokerage firms, fiduciaries and custodians
to forward to their principals, and the Company will reimburse them for their
reasonable expenses.
By Order of the Board of Directors
Richard M. Harter
Secretary
ANNUAL REPORT ON FORM 10-K
The Company will deliver without charge to each of its stockholders, upon
their written request, a copy of the Company's most recent annual report on Form
10-K and any information contained in any subsequent reports filed with The
Securities and Exchange Commission. Request for such information should be
directed to Investor Relations, Concord EFS, Inc., 2525 Horizon Lake Drive,
Suite 120, Memphis, Tennessee 38133.
<PAGE>
EXHIBIT 1 - PROXY CARD
CONCORD EFS, INC.
2525 Horizon Lake Drive, Suite 120
Memphis, Tennessee 38133
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Dan M. Palmer and Thomas J. Dowling or either of
them as Proxies, each with the power to appoint his substitute, and hereby
authorizes them to represent and to vote as designated below, all the shares of
Common Stock of Concord EFS, Inc. (Concord) held by the undersigned on March 17,
2000, at the Annual Meeting of Stockholders to be held on Thursday, May 25, 2000
at Colonial Country Club, 2735 Countrywood Parkway, Memphis, Tennessee beginning
at 9:30 a.m. local time, or any adjournment thereof.
WHETHER OR NOT YOU PLAN TO ATTEND THIS MEETING,
PLEASE SIGN AND RETURN THIS PROXY.
- --------------------------------------------------------------------------------
PLEASE VOTE, DATE AND SIGN ON REVERSE AND RETURN
PROMPTLY IN THE ENCLOSED ENVLELOPE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Please sign exactly as your name(s) appear(s) hereon. When shares are held by
joint tenants, both should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title, as such. If a
corporation, please sign in full corporate name by president or other authorized
officer. If a partnership, please sign in partnership name by authorized person
and state title.
- --------------------------------------------------------------------------------
[X] PLEASE MARK VOTES
AS IN THIS EXAMPLE
This proxy, when properly executed will be voted in the manner directed by the
undersigned stockholder. If no direction is made, this proxy will be voted FOR
the actions described in Item 1. In their direction, the Proxies are authorized
to vote upon such other business as may properly come before the Annual Meeting
or any adjournment thereof
1. To elect directors to serve for the ensuing year.
For all With- For All
Nominees hold Except
Douglas C. Altenbern Richard P. Kiphart [ ] [ ] [ ]
Joyce Kelso Edward A. Labry
J. Richard Buchignani Jerry D. Mooney
Richard M. Harter Dan M. Palmer
Paul L. Whittington
NOTE: If you do not wish your shares voted "For" a particular nominee mark the
"For All Except" box and strike a line through the nominee(s) name(s). Your
shares will be voted "For" the remaining nominee(s).
2. To transact such other business as may properly come before the annual
meeting and any adjournments thereof.
CONCORD EFS, INC.
Mark box at right if an address change or comment has been noted on the reverse
side of this card. [ ]
CONTROL NUMBER:
RECORD DATE SHARES:
Please be sure to sign and date this Proxy. Date:
-----------------------
- ----------------------------------------- --------------------------------------
Stockholder sign here Co-Owner sign here
DETACH CARD DETACH CARD
<PAGE>
EXHIBIT 21
CONCORD EFS, INC.
LISTING OF SUBSIDIARIES
Jurisdiction of
Company Organization Ownership
----------------------------- ---------------------------- ---------
EFS National Bank National Bank Charter 100%
EFS Federal Savings Bank Federal Savings Bank Charter 100%
Concord Computing Corp. Delaware 100%
Concord Retail Services, Inc. Delaware 100%
Concord Equipment Sales Tennessee 100%
Pay Systems of America, Inc. Tennessee 100%
Digital Merchant Systems of
Illinois, Inc. Illinois 100%
American Bankcard Int'l. Illinois 100%
Electronic Payment Systems Delaware 100%
Buypass, Inc. Georgia 100%
MAC Corporation Delaware 100%
EXHIBIT 23
CONCORD EFS, INC.
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of Concord EFS, Inc. of our report dated February 10, 2000, included in
the 1999 Annual Report to Stockholders of Concord EFS, Inc.
We consent to the incorporation by reference in the Registration Statements
(Form S-3: Nos. 333-62069 and 333-77829; Form S-8: Nos. 33-60871, 333-74213 and
333-74215) of Concord EFS, Inc. and in the related Prospectuses of our report
dated February 10, 2000, with respect to the consolidated financial statements
of Concord EFS, Inc. incorporated by reference in this Annual Report (Form 10-K)
for the year ended December 31, 1999.
Ernst & Young LLP
Memphis, Tennessee
March 27, 2000
<TABLE> <S> <C>
<ARTICLE>5
<MULTIPLIER> 1,000
<CURRENCY>USD
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<EXCHANGE-RATE> 1 1
<CASH> 119824 82029
<SECURITIES> 456209 288180
<RECEIVABLES> 191852 108986
<ALLOWANCES> 3181 2324
<INVENTORY> 17892 11396
<CURRENT-ASSETS> 803073 501678
<PP&E> 340415 302937
<DEPRECIATION> 173047 148447
<TOTAL-ASSETS> 1096865 784118
<CURRENT-LIABILITIES> 293317 216281
<BONDS> 0 0
0 0
0 0
<COMMON> 68628 42646
<OTHER-SE> 633685 317889
<TOTAL-LIABILITY-AND-EQUITY> 1096865 784118
<SALES> 830059 634511
<TOTAL-REVENUES> 830059 634511
<CGS> 592299 446515
<TOTAL-COSTS> 643129 497700
<OTHER-EXPENSES> 36189 0
<LOSS-PROVISION> 3474 3654
<INTEREST-EXPENSE> 11409 14676
<INCOME-PRETAX> 166833 140514
<INCOME-TAX> 65181 51819
<INCOME-CONTINUING> 101652 88695
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 101652 88695
<EPS-BASIC> 0.51 0.46
<EPS-DILUTED> 0.49 0.45
</TABLE>
