-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WERQAv7GfaWFSmHogrDJCLr0erFyW3hZJ16HJndrOTCM5c5hsbrqr+q/bq6NyWR6 ntyPPyWM6A6opc6Qcl+V2w== 0000740112-97-000003.txt : 19970430 0000740112-97-000003.hdr.sgml : 19970430 ACCESSION NUMBER: 0000740112-97-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 DATE AS OF CHANGE: 19970409 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONCORD EFS INC CENTRAL INDEX KEY: 0000740112 STANDARD INDUSTRIAL CLASSIFICATION: 6099 IRS NUMBER: 042462252 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-13848 FILM NUMBER: 97571990 BUSINESS ADDRESS: STREET 1: 2525 HORIZON LAKE DR STE 120 CITY: MEMPHIS STATE: TN ZIP: 38133 BUSINESS PHONE: 9013718000 MAIL ADDRESS: STREET 1: 2525 HORIZON LAKE DRIVE STREET 2: SUITE 120 CITY: MEMPHIS STATE: TN ZIP: 38133 FORMER COMPANY: FORMER CONFORMED NAME: CONCORD COMPUTING CORP DATE OF NAME CHANGE: 19920515 10-K 1 FORM 10-K 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, 1996 Commission file number 2-89213 CONCORD EFS, INC. (Exact name of registrant as specified in its charter) Delaware 04-2462252 - - ------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 2525 Horizon Lake Drive, Suite 120, Memphis, Tennessee 38133 (Address of principal executive offices) (Zip code) Registrant's Telephone Number, Including Area Code: (901) 371-8000 ---------------------------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.33 1/3 Par Value ---------------------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant has required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Disclosure of delinquent filings pursuant to Item 405 of Regulation S-K will be contained in the registrant's proxy statement for its 1996 annual meeting of shareholders, which statement is incorporated by reference in Part III of this Form 10-K. Yes No X --- --- The aggregate market value of the voting stock held by non-affiliates of the registrant on March 10, 1997 was $1,399,004,693. The number of shares of the registrant's Common Stock outstanding as of March 10, 1997, was 60,826,291. DOCUMENTS INCORPORATED BY REFERENCE PART II Portions of this Registrant's 1996 Annual Report to Shareholders are incorporated by reference into Items 5, 6, 7 and 8. PART III Portions of the Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held May 15, 1997 are incorporated by reference into Items 10, 11, 12 and 13. CONCORD EFS, INC. FORM 10-K ANNUAL REPORT TABLE OF CONTENTS Item No. Page - - -------- PART I ---- 1. Business Overview 1 Subsidiaries 2 Description of Business 2 Data Processing and Field Service Support 6 Marketing and Customers 6 Competition 7 Supervision and Regulation 7 Employees 9 2. Properties 9 3. Legal Proceedings 9 4. Submission of Matters to a Vote of Security Holders 9 PART II 5. Market for Registrant's Common Stock and Related Stockholder Matters 9 6. Selected Financial Data 9 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 8. Financial Statements and Supplementary Data 10 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosures 11 PART III 10. Directors and Executive Officers of the Registrant 11 11. Executive Compensation 11 12. Security Ownership of Certain Beneficial Owners and Management 11 13. Certain Relationships and Related Transactions 11 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 11 Index to Exhibits 11 Signatures 13 PART I Item 1. BUSINESS Overview - - -------- Concord EFS, Inc. and its subsidiaries (the Company or Concord) provide electronic transaction authorization, processing, settlement and funds transfer services in selected markets. The Company's primary activity is Card Services, which involves the provision of integrated electronic transaction services for credit card, debit card and electronic benefits transfer ("EBT") card transactions to supermarket chains, grocery stores, convenience store merchants and other retailers. The Company believes it is one of the few fully integrated transaction processors, supplying electronic payment and verification terminals, cash dispensing machines ("ATMs"), processing services, payment settlement, depository services and transaction data compilation. In addition, the Company is one of the few companies offering full credit and debit card processing on a nationwide basis. The Company also provides electronic payment and banking facilities to a large customer base in the trucking industry for use at major truck stop chains throughout the United States. In addition to maintaining a network of over 350 ATMs at truck stops nationwide, the Company provides fuel purchase cards, ATM bank cards and general banking services to truck drivers. The Company offers trucking companies payroll deposit and cash forwarding services, as well as real-time data compilation with respect to fuel volume usage, fuel expenditures, vehicle and driver tracking and truck routine maintenance schedules. In addition, the Company provides check verification services to grocery and other retail merchants. Concord offers merchants a cost-effective, reliable, turnkey debit and credit card processing system. The Company is able to provide its system on a profitable basis because of its low-cost operational structure, which includes efficient marketing, volume purchasing arrangements with equipment and communications vendors, and direct membership by its subsidiary, EFS National Bank, in bank card associations (such as VISA, and MasterCard) and national and regional debit card networks (such as Interlink, MAC, Explore and NYCE). In 1992, Concord entered into an agreement with the National Grocers Association, Inc. ("NGA") whereby Concord became the preferred vendor of the NGA for electronic payment services for a range of applications, including both turnkey packaged solutions and customized payment service agreements covering credit and debit card transaction processing. The agreement has enabled Concord to increase substantially its grocery store customer base. Currently, 6% to 7% of grocery transactions use credit or debit card payment, and the Company believes that this percentage is growing rapidly. 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: The Company focuses on specific markets that historically have been underserved by the transaction processing industry, seeking a diverse group of customers with low credit risk profiles. -1- 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. The Company offers maximum technological versatility for the provisions of electronic processing services for a wide variety of communication protocols and processing equipment of different manufacturers, in order to provide a tailored solution to the customer's specific needs. 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 authori- zation, data capture and settlement services to retailers and grocery stores. It also sells cash card and cash forwarding services to trucking companies through agreements with a network of truck stops. The services of EFSNB do not consist of material amounts of traditional banking activities (i.e., consumer and commercial loans, demand and time deposits, real estate, etc.). Therefore, the Company is not required to use the reporting format and related disclosures normally required for bank holding companies. Concord Computing Corporation's (CCC) primary activity is check authorization and POS terminal driving, servicing and maintenance for grocery store chains. It also owns and operates cash dispensing machines (ATMs) at truck stops and grocery stores nationwide. Additionally, CCC provides certain processing services for its affiliated companies. CCC incorporated Concord Retail Services, Inc. (CRS), a wholly-owned Delaware subsidiary. CRS provides POS terminal driving, servicing and maintenance to the Company's customers in the northeast United States. The Company incorporated Concord Equipment Sales, Inc. (CES), a wholly- owned Tennessee subsidiary, on September 5, 1991. CES purchases from manufacturers point-of-sale (POS) terminal products and communications equipment for use by the Company's customers in connection with the Company's transaction processing services. Description of Business The Company operates in the transaction processing and payment services industry, providing targeted markets with a fully integrated range of services and products for credit card, debit card and EBT card trans- actions, trucking company services, check verification data compilation and payment settlement. -2- The following table is a listing of revenues by service type for the three years ended December 31: 1996 1995 1994 -------- -------- ------- (in thousands) Card Services $129,658 $ 95,906 $69,169 Trucking Services 24,301 16,687 12,853 Check Verification Services 6,905 8,485 7,744 EFT and Terminal Services 5,836 6,684 6,447 -------- -------- ------- $166,700 $127,762 $96,213 ======== ======== ======= As transaction service revenues are similar in nature, total operating expenses are not directly attributable to any individual revenue type. Card Services - - ------------- Card services accounted for 78% of the Company's revenue for the year ended December 31, 1996. The Company processes credit card transactions using VISA, MasterCard, Discover, American Express, Diners Club and JCB cards. The Company processes debit card transactions for banks issuing such cards, which permit direct payment debit from the POS terminal against the cardholder's deposit account. In addition, in those states where EBT programs have been implemented, the Company similarly processes payments effected with EBT cards against funds made available by public assistance benefit programs through the primary EBT third-party providers. The bank card (e.g., Visa and MasterCard) transaction process begins when the consumer presents the card and the merchant "swipes" the card at the POS terminal and enters the transaction amount. The Company processes the data from the POS terminal through the relevant electronic communications network to the card issuer. The transaction is approved or rejected by the issuer bank, and the response is transmitted almost instantaneously back through the Company's processing systems to the POS terminal. The purchase transaction is then confirmed against the authorization data retained in the Company's system, whereupon the Company (through its subsidiary, EFSNB) settles the payment by crediting the merchant with the transaction amount, less the agreed discount rate, and submits the transaction through the relevant network for crediting by the issuing bank to EFSNB of the transaction amount less the interchange and/or association fee. To complete the transaction, the issuing bank bills the consumer for the transaction amount. The authorization process is similar for other credit cards (e.g., Discover and American Express), debit card (e.g., Explore and NYCE) and EBT transactions. In a credit card or EBT transaction, the credit card issuer or EBT primary provider effects the payment settlement by crediting the merchant's account with the issuer and credits the Company's account with the related processing service fee. In a debit card transaction, the transaction is initiated by the consumer's insertion of the personal identification number, and the transaction is settled by directly debiting the cardholder's account in the payment amount plus the surcharge (if any), crediting the merchant in the payment amount less the processing service charge, paying the network fee and crediting the Company in the amount of the processing service charge plus the surcharge (if applicable). -3- The Company's principal business is the provision of electronic payment services to supermarket chains, grocery stores, convenience store merchants and other retailers. The Company has been selective in the merchants to which it has marketed its services and has historically chosen retailers whose businesses are less economically volatile and involve less risk of chargeback and merchant fraud. The Company will not, for instance, deal with merchants who book transactions for delivery at a later date, such as mail-order retailers and travel agents. No single customer of the Company accounts for a material portion of the Company's revenues. Trucking Services - - ----------------- The Company's trucking services accounted for 15% of its revenue for the year ended December 31, 1996. The Company provides a variety of flexible payment systems that enable truckers to use payment cards to purchase fuel and services and to obtain cash advances at more than 4,000 truck stops. Through its national bank subsidiary, EFSNB, the Company offers payroll and cash distribution programs to trucking companies and truck drivers. In connection with the issuance of ATM bank cards to truck drivers and payroll distribution programs, EFSNB opens individual payroll deposit accounts and/or full service checking accounts in the truck drivers' names. Payroll deposit accounts are special purpose accounts for deposit by the trucking company of payments for the drivers' accounts, with the drivers' benefits limited to the right of withdrawal. Under this program, the trucking company transmits payment instructions to EFSNB, and the specified funds are made available to the designated drivers within minutes. A substantial number of truck drivers with payroll deposit accounts choose to open full-service checking accounts with EFSNB. The Company also provides trucking companies with private label fuel cards for use by their drivers. When such fuel cards are utilized, the Company gathers fuel purchase and other trucking data at the same time as it processes the payment transactions; the data gathered by the Company include truck vehicle and trailer identification numbers and odometer mileage, in addition to fuel volume and expenditure information. The data gathered from aggregate transactions of a trucking company provide current information with respect to fuel volume usage, fuel expenditures, vehicle and driver tracking and truck routine maintenance schedules. The trucking company customer has real- time direct access to the Company's database for the trucking company's drivers and operations. The Company has established over 350 ATMs at selected locations of major truck stop chains nationwide. As the Company and its competitors place ATM cards in truck driver's hands, the Company's ATMs will be increasingly utilized, and the Company will receive fees both from the use of its own ATM cards and those of its competitors. The Company is a member of all major ATM networks, including Cirrus and Plus. Check Verification Services - - --------------------------- The Company provides check verification programs, which may be customized to a particular merchant's needs or to a particular market. The Company's check payment verification services accounted for approximately 4% of its revenue for the year ended December 31, 1996. -4- The traditional check verification program, which is customized to the specific merchant or merchant chain, consists of a positive and negative file based upon the check writing history for the checking account party with the specific merchant or merchant chain. Under the program's negative file, if a customer tenders a check at any one store of a merchant chain that is returned for insufficient funds, any additional checks tendered by such customer will be rejected at all stores of the merchant chain. Under the positive file, if a customer cashes a check at any one store in a chain, the amount of that check reduces for the specified time period that customer's check-cashing limit for further check presentation at any other store of the chain. Beginning in the fall of 1995, the Company began to offer a new check verification program for electronic comparison of a tendered check against a nationwide multi-merchant database which aggregates the bad check experiences of all participating merchants. The Company has entered into arrangements with two providers of such nationwide check history databases. For check verification utilizing a nationwide database, the merchant "swipes" the magnetic ink bank and account identification ("MICR") line of the check using an electronic check reader, and the check account number is immediately compared against the nationwide database, which will not verify the tendered check while a previous bad check on such account remains outstanding against any other merchant using the database. The Company is able to customize a particular merchant's use of the nationwide database to include checking against various identification references in addition to the check MICR, such as the driver's license number and social security number of the purchaser. Currently, the Company's fees deriving from check verification utilizing the nationwide databases represent an insignificant portion of total check verification revenues; however, the Company believes merchant use of the nationwide verification databases will increase as their benefits become more widely known. Check verification programs provide more limited payment assurance than check guarantee programs but at a substantially lower cost. Typically only approximately 1% of checks tendered to merchants are rejected for insufficient funds or other reasons. Guarantee charges typically range from 2.5% to 4% of the face value of a check, while check verification charges amount to only pennies per check. In addition, electronic check verification is virtually instantaneous, while obtaining the payment benefit under a check guarantee for a rejected check involves substantial delay and additional merchant effort. The Company believes that its check verification services represent a valuable add-on product which enhances the card processing and settlement services offered by the Company to supermarket chains, grocery stores, convenience store merchants and other retailers, and are of particular value in comparison to check guarantee programs to high-volume, low- margin retailers. In addition, the Company provides Electronic Funds Transfer (EFT) services and sells electronic terminal equipment to customers who are users of the services. All of these services are sold directly to the end-user on a nationwide basis. -5- Data Processing and Field Service Support - - ----------------------------------------- The Company maintains a data processing facility in Elk Grove,Illinois, primarily for the Company's Check Services and EFT Services, and a data processing facility in Memphis, Tennessee for Trucking Services and Card Services. These facilities utilize fully redundant computers which provide the high levels of availability and the transaction speed necessary for processing large numbers of financial transactions. Backup power is available to provide service in the event of power failure at a computer center. The Company maintains dedicated telephone networks, packet switching networks and In-Watts networks connecting data processing centers to retail stores where transaction and electronic funds transfer terminals are located. The Company also provides field support and repair services for POS terminal installations. The Company maintains field support and repair facilities in Elk Grove, Illinois, Aurora, Colorado and West Chester, Pennsylvania. Marketing and Customers - - ----------------------- The Company markets its services and products on a nationwide basis directly and through ISOs and independent sales representatives to supermarket chains, grocery stores, convenience store merchants, and other retailers, electronic funds transfer networks, financial institutions and trucking companies. Historically, the Company has grown its merchant customer base primarily through its in-house telemarketing and sales force working with independent contractor sales representatives nationwide. During 1996, the Company has reorganized its sales and marketing activities relating to its card services business by adding marketing professionals focused upon multi-store merchants in certain specialized markets, by reducing the Company's in- house telemarketing staff, and by outsourcing a portion of its telemarketing activities to independent sales organizations and by expanding its relationships with ISOs nationwide. The Company's strategy is to increase its in-house marketing expertise in certain specialized market areas and broaden its access to growth opportunities nationwide by utilizing the broader market penetration of ISOs. The Company believes that the most promising growth opportunities currently exist in certain small retail merchant chains in specialized markets, and in the acquisition of merchant processing portfolios developed by smaller processing services providers. The Company has had success historically in marketing through key trade association relationships, such as its relationship with the NGA, as the recommended provider of electronic services to grocers, and through agreements with other payment services providers. Management is committed to the cultivation of such trade association relationships and the development of arrangements with other service providers. As an integrated services provider, the Company has natural cross- selling marketing opportunities. When the Company established itself with the major truck stop chains as an authorized issuer of payment cards and processor of card transactions, the Company gained a substantial advantage in selling its card payment systems to trucking companies. The Company's established relationships with the truck stop owners also afforded an opportunity to sell the placement of ATMs at truck stops, which in turn provided a further advantage in selling the -6- Company's integrated processing and banking services to trucking companies and truck drivers. The Company's established presence in grocery stores, grocery chains, convenience stores and other small and mid-size retailers gives it an advantage in establishing relationships with EBT providers, whose benefits are utilized largely at such retail locations. The Company's sales offices are located in suburbs of Memphis, Tennessee and Chicago, Illinois. The Company's executive officers actively participate in the Company's marketing efforts. Competition - - ----------- The markets for electronic payment processing, credit and debit card payment settlement, check authorization programs, fuel card and cash forwarding services, and ATM services are all highly competitive. The Company's principal competitors include major national and regional banks, local processing banks, non-bank processors and other independent service organizations, many of which have substantially greater capital, management, marketing and technological resources than those of the Company. The three largest credit and debit card processors accounted for 49.5% of the total credit and debit card sales volume in 1995 (The Nilson Report, April 1996). A single competitor accounted for 58.6% of the total dollar volume of payment transaction processing for the trucking industry in 1995 (The Nilson Report, February 1996). A single competitor accounted for 66.6% of the total dollar volume of check verifications in the United States in 1995 (The Nilson Report, April 1996). 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 consolidation in banking in the Untied States has resulted in fewer opportunities for merchant portfolio acquisitions, as many small banks have been acquired by large banks, some of which are competitors with the Company in the provision of processing services. 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 -7- of the voting shares of any company which is not a bank or bank holding company. The primary exception to this prohibition involves activities which the Board determines are closely related to banking. A bank is also generally prohibited from engaging in certain tie-in arrangements with its bank holding company or affiliates with respect to the lease or sale of property, furnishing of services, or the extension of credit. The Act contains certain restrictions concerning future mergers with other bank holding companies and banks. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) contains certain merger restrictions with Savings and Loan Associations. Under the Act, a bank holding company is required to file with the Board an annual report and such additional information which the Board may require. The Board may examine the Company's and each of its sub- sidiaries' 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 oper- ations of the Company. The Board possesses cease and desist powers over a bank holding company if its actions or actions of any of its subsidi- aries represent unsafe or unsound practices or violations of law. Federal law also regulates transactions among the Company and its affiliates, including the amount of a banking affiliate's loan to, or investments in, non-bank affiliates and the amount of advances to third parties collateralized by securities of an affiliate. In addition, various requirements and restrictions under federal and state laws regulate the operations of the Company's banking affiliates, requiring the maintenance of reserves against deposits, limiting the nature of loans and the interest that may be charged thereon, restricting investments and other activities. The Company's bank affiliates are also limited in the amount of dividends that they may declare. Prior regulatory approval must be obtained before declaring any dividends if the amount of capital, surplus and retained earnings is below certain statutory limits. As a national bank, EFSNB operates under the rules and regulations of the Comptroller of the Currency and is also a member of the Federal Reserve System, subject to provisions of the Federal Reserve Act. The Federal Deposit Insurance Corporation insures the domestic deposits of all the Banks. Periodic audits and regularly scheduled reports of financial information are required by all regulatory agencies. Federal laws also regulate certain transactions among EFSNB and its affiliates, including Concord EFS,Inc. The Company's EFT Services sold to financial institutions are regulated by certain State and Federal banking laws. Material changes in federal or state regulation could increase the cost to the Company of providing EFT Services, change the competitive environment or otherwise adversely affect the Company. The Company is not aware of any such change which is pending. In addition to regulation by federal and state laws and governmental agencies, the Company is subject to the rules and regulations of the various credit card and debit card associations and networks, including requirements for equity capital commensurate with processing transaction dollar volume. -8- Employees - - --------- As of December 31, 1996, the Company employed 447 full and part-time personnel, including 53 data processing and technical employees, 320 in operations, and 74 in sales and administration. Many of the Company's employees are highly skilled, and the Company believes its future success will depend in a large part on its ability to attract and retain such employees. The Company does not have employment contracts with any of its personnel. None of the Company's employees are represented by a labor union and the Company has experienced no work stoppages. The Company considers its employee relations to be excellent. Item 2. PROPERTIES The following table sets forth certain information concerning the principal facilities of the Company, all of which are leased: Approximate Area In Location Square Feet Primary Uses Expiration - - ----------- ----------- ----------------- ------------- Memphis, TN 43,375 Corporate Offices July 31, 2000 & EFSNB Operations Elk Grove, IL 20,330 Data Processing, July 31, 1997 Field Service, Concord Operations Aurora, Co 3,072 Field Service month to month West Chester, Pennsylvania 1,300 Field Service May 31, 1997 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 1996. PART II Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS This information is included under the caption "Market Value For the Registrant's Common Stock and Related Stockholders Matters" on page 6 of the Company's Annual Report(the "Annual Report"),and is incorporated herein by reference. Item 6. SELECTED FINANCIAL DATA This information is included under the caption "Selected Consolidated Financial Data" on page 1 of the Annual Report and is incorporated herein by reference. -9- Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This information is included under the captions "Management's Discus- sion and Analysis of Financial Condition and Results of Operations" on pages 3 and 4 of the Annual Report and is incorporated herein by reference. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The report of independent auditors and consolidated financial state- ments set forth below are included on pages 7 - 20 of the Annual Report, and are incorporated herein by reference. Report of Independent Auditors. Consolidated Balance Sheets as of December 31, 1996 and 1995. Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994. Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1995, and 1994. Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995, and 1994. Notes to Consolidated Financial Statements as of December 31, 1996. Quarterly results of operations for the years ended December 31, 1996 and 1995 on page 5 of the Annual Report are incorporated herein by reference. Schedule II, Valuation and Qualifying Accounts, is listed below. All 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. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNT CONCORD EFS, INC. Balance Charged to Balance Beginning Costs and * End of Period Expenses Deductions of Period --------- ---------- ---------- --------- Year ended December 31, 1996 Allowance for uncollectible accounts $759,435 $816,786 $691,470 $884,751 ======== ======== ======== ======== Year ended December 31, 1995 Allowance for uncollectible accounts $750,206 $500,000 $490,771 $759,435 ======== ======== ======== ======== Year ended December 31, 1994 Allowance for uncollectible accounts $605,247 $480,000 $355,041 $750,206 ======== ======== ======== ======== * Uncollectible accounts written off, net of recoveries. -10- 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 Shareholders to be held on May 15, 1997 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 2 Agreement and Plan of Merger dated January 12, 1990 by and between Concord Computing Corporation, a Massachusetts corporation , and Concord Computing Corporation, a Delaware corporation * 3(A) Certificate of Incorporation of Concord Computing Corporation, a Delaware corporation * 3(B) Bylaws of Concord Computing Corporation, a Delaware corporation * 3(C) Certificate of Merger of Concord Computing Corporation, a Massachusetts corporation, with and into Concord Computing Corporation, a Delaware corporation, filed with the Secretary of State of Delaware March 22, 1990 * 3(D) Articles of Merger of Concord Computing Corporation, a Massachusetts corporation, with and into Concord Computing Corporation, a Delaware corporation, filed with the Secretary of State of Massachusetts March 22, 1990 * 10 1993 Incentive Stock Option Plan (incorporated by reference from exhibit to the Registrant's Proxy Statement for the Annual Meeting of Shareholders held on May 12, 1993.) 11 Statement Re: Computation of Per-share Earnings. -11- 22 List of Subsidiaries Jurisdiction of Company Organization Ownership ------- --------------- --------- Concord Computing Corp. Delaware 100% EFS National Bank National Bank Charter 100% Concord Equipment Sales Tennessee 100% 23 Consent of Independent Auditors 27 Financial Data Schedule * Incorporated by reference from exhibits to the Registrant's Amendment No. 1 to Form 10-Q for quarter ended March 31, 1990. (b) Reports on Form 8-K -- No reports on Form 8-K were filed during the quarter ended December 31, 1996. (c) Exhibits -- The response to this portion of Item 14 is submitted as a separate section of this report. (d) Financial Statement Schedules -- The response to this portion of Item 14 is submitted as a seperate section of this report. For the purposes of complying with the amendments to the rules governing the Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into registrant's Registration Statement on Form S-8 No. 33-60871. -12- 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 ----------------- Dan M. Palmer Chief Executive Officer Date: March 31, 1997 /s/ Thomas J. Dowling --------------------- Thomas J. Dowling Vice President and Controller Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date - - ------------------------ ----------------------------- -------------- /s/ Dan M. Palmer Chairman of the Board and CEO March 31, 1997 - - ----------------- of the Company and EFS Dan M. Palmer National Bank /s/ Edward A. Labry President of the Company and March 31, 1997 - - ------------------- EFS National Bank Edward A. Labry III /s/ Richard M. Harter Director and Secretary of March 31, 1997 - - --------------------- the Company Richard M. Harter /s/ David C. Anderson Director of the Company March 31, 1997 - - --------------------- David C. Anderson /s/J. Richard Buchignani Director of the Company and March 31, 1997 - - ------------------------ EFS National Bank J. Richard Buchignani /s/ Joyce Kelso Director of the Company and March 31, 1997 - - ---------------- EFS National Bank Joyce Kelso /s/ Richard P. Kiphart Director of the Company March 31, 1997 - - ----------------------- Richard P. Kiphart /s/ Jerry D. Mooney Director of the Company March 31, 1997 - - -------------------- Jerry D. Mooney /s/Paul L. Whittington Director of the Company March 31, 1997 - - ---------------------- Paul L. Whittington -13- EX-11 2 COMPUTATION OF PER-SHARE EARNINGS EXHIBIT 11 - STATEMENT RE: COMPUTATION OF PER-SHARE EARNINGS * CONCORD EFS, INC. Year Ended December 31 1996 1995 1994 -------- -------- --------- (in thousands, except earnings per share) For primary earnings per share: Weighted average of common shares outstanding net of treasury shares 57,484 55,344 54,318 Weighted average common stock equivalents for stock options by treasury stock method 2,451 2,515 1,580 ------ ------ ------ Weighted average common and common equivalent shares 59,935 57,859 55,898 ====== ====== ====== Net income $26,789 $18,315 $12,713 ======= ======= ======= Per-share amount $0.45 $0.32 $0.23 ===== ===== ===== For fully diluted earnings per share: Weighted average common and common equivalent shares for primary earnings per share 59,935 57,859 55,898 Add shares representing additional shares for stock options based on period-end market price 40 312 787 ------ ------ ------ Weighted average common and common equivalent shares-fully diluted basis 59,975 58,171 56,685 ====== ====== ====== Net income $26,789 $18,315 $12,713 ======= ======= ======= Per-share amount $0.45 $0.31 $0.22 ===== ===== ===== * Earnings per share and related per share data have been restated to reflect stock splits issued through June 28, 1996. EX-13 3 ANNUAL REPORT SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere herein. Fiscal Year Ending 1996 1995 1994 1993 1992 -------- -------- -------- ------- ------- (in thousands except per share data) INCOME STATEMENT DATA: Revenues $166,700 $127,762 $96,213 $75,443 $65,562 Cost of Operations 119,675 90,579 69,840 53,188 46,024 Selling, General and Administrative Expenses 9,724 10,913 8,312 7,861 5,969 -------- -------- ------- ------- ------- OPERATING INCOME 37,301 26,270 18,061 14,394 13,569 Interest, Net 4,014 2,116 1,588 825 503 -------- -------- ------- ------- ------- INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 41,315 28,386 19,649 15,219 14,072 Income Taxes 14,526 10,146 6,979 5,357 5,011 -------- -------- ------- ------- ------- INCOME BEFORE MINORITY INTEREST 26,789 18,240 12,670 9,862 9,061 Minority Interest 75 43 1 (87) -------- -------- ------- ------- ------- NET INCOME $ 26,789 $ 18,315 $12,713 $ 9,863 $ 8,974 ======== ======== ======= ======= ======= Weighted Average Common and Common Equivalent Shares Outstanding ** 59,935 57,859 55,898 55,676 55,169 ====== ====== ====== ====== ====== Earnings Per Share ** $0.45 $0.32 $0.23 $0.18 $0.16 ===== ===== ===== ===== ===== BALANCE SHEET DATA: Working Capital $130,606 $68,212 $45,717 $34,655 $26,240 Total Assets 292,813 156,887 99,462 71,033 56,316 Long Term Debt,Less Current Maturities 561 978 1,371 Total Stockholders' Equity 215,148 89,544 61,935 50,251 39,573 Percentage of Revenue Percentage Change Year End FY96 FY95 ------------------------ Over Over 1996 1995 1994 FY95 FY94 INCOME STATEMENT DATA: ------ ------ ------ ------ ------ Revenues 100.0% 100.0% 100.0% 30.5% 32.8% Cost of Operations 71.8 70.9 72.6 32.1 29.7 Selling, General and Administrative Expenses 5.8 8.6 8.6 (10.9) 31.3 ----- ----- ----- OPERATING INCOME 22.4 20.5 18.8 42.0 45.4 Interest, Net 2.4 1.7 1.7 89.7 33.2 ----- ----- ----- INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 24.8 22.2 20.5 45.5 44.5 Income Taxes 8.7 7.9 7.3 43.2 45.4 ----- ----- ----- INCOME BEFORE MINORITY INTEREST 16.1 14.3 13.2 46.9 44.0 Minority Interest 0.0 0.0 0.0 0.0 74.4 ----- ----- ----- NET INCOME 16.1 14.3 13.2 46.3 44.1 ===== ===== ===== ** Earnings per share and related per share data have been restated to reflect stock splits issued through June 28, 1996. -1- Dear Stockholders: All of us at the Company are proud of the financial results for 1996. The continuing trend of strong year-to-year increases in revenues and profits enhances shareholders' returns and keeps the Company in a strong position for growth and prosperity in the years ahead. The financial results are summarized as follows: Revenues up 30%, Net Income up 46% and Earnings Per Share up 41%. Revenues for Card Services (78% of total revenues) were up 35% and Trucking Services revenues (15% of total revenues) were up 46%, driven by surcharge revenue at ATMs in truckstops. Check, EFT and Terminal Services, (7% of total revenues) declined 16%. These decreases were due to lower Check Services fee rates and the gradual phase out of EFT Services in the current year. In addition to its financial returns from profits, the Company completed a secondary offering of common stock in October. Proceeds from the 3.45 million shares issued were $87.7 million, which will be used to further enhance the growth of the Company. In mid-1996, we refocused our marketing plans and sales department organization to better meet our growth objectives. We increased our internal direct marketing staff, which sells to larger merchants, and simultaneously downsized our internal telemarketing staff. We entered into agreements with several ISOs (independent sales organizations) whereby the Company purchases merchant contracts individually or in portfolios. In the latter part of 1996 this strategy was fully implemented and by the end of the year we began to see results in line with our expectations. The Company continues to focus on its supermarket strategy, concentrating on increased credit card usage, debit card acceptance, and Electronic Benefit Transfer (EBT). We also have begun to implement additional sales efforts in other market niches to complete our new marketing strategy. These new efforts, combined with our core strategies could make 1997 another strong year of growth for the Company. At this point we would like to thank all of you for the numerous phone calls, letters and faxes congratulating management and employees for the very positive article that appeared in the February 27, 1997, edition of The Wall Street Journal. In the article the Company was shown to have provided the best total return to shareholders, over the last ten years, of the 1,000 corporations tracked in Shareholder Scoreboard. We are so proud of this accomplishment that we have included the text of the article* in this year's Annual Report following this letter (in case some of you missed it!). Again thanks for your continued support. Very truly yours, /s/ Dan M. Palmer /s/ Ed Labry ----------------- ------------ Dan M. Palmer Edward A. Labry III Chairman of the Board President Chief Executive Officer * Not included in Annual Report filed electronically with the Securities and Exchange Commission. -2- CONCORD EFS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Calendar 1996 Compared to Calendar 1995 - - --------------------------------------- Revenues increased 30% in 1996 over 1995. Transaction processing revenue from Card Services (78% of total revenues) increased 35% for the year as new merchants were added and usage at existing merchants increased. Trucking Services (15% of total revenues) was up 46%, driven by surcharge revenue at cash dispensing machines and additional trucking companies using the Company's fuel and cash advance services. Check, EFT and Terminal Services (7% of total revenues) offset these increases, declining 16%, net. The decrease was primarily attributable to competitive repricing in Check Services and the gradual elimination of EFT Services. Net income as a percentage of revenue increased in 1996 to 16.1% from 14.3% in the prior year. The primary factor was lower selling, general and administrative expenses. Historically, the Company has generated sales through senior management, commissioned telemarketing activities and outside sales representatives; however, in 1996 the Company reorganized its marketing activities to meet future growth objectives by increasing the direct marketing staff, downsizing the telemarketing staff and entering into agreements with independent sales organizations to purchase individual merchant contracts and merchant portfolios. As the cost of merchant contracts and portfolio acquisitions are amortized over the average life of the contracts, current year selling, general and administrative expenses decreased by approximately $3.4 million. Calendar 1995 Compared to Calendar 1994 - - --------------------------------------- Net income increased 44% in 1995 over net income in 1994 due to increased revenues in all three of the Company's core businesses and decreases in telephone and maintenance operating costs. Revenues from Card Services increased 38% as a result of the addition of grocery and retail merchants and volume increases in credit and debit card usage. Continued marketing efforts combined with merchant association endorsements were responsible for the new customers. Trucking Services revenues rose 30% due to the growth in ATM revenues and increases in the number of trucking customers. Revenues from Check Verification Services rose 22% on the addition of new merchants utilizing such services. Net income as a percentage of revenue increased in 1995 to 14.3% from 13.2% in 1994 as operational costs grew at a slower rate than transaction revenue. Savings of approximately $2.3 million in telephone and maintenance expenses were recognized in 1995. Selling, general and administrative expenses in the year ended December 31, 1994 were significantly affected by costs associated with the Company's antitrust lawsuit against Deluxe Data Systems, Inc. ("Deluxe"). The lawsuit, initiated in January 1993, alleged that Deluxe was monopolizing electronic benefits transfer business in the state of Maryland. The dispute with Deluxe was settled in July 1995, and the terms of the settlement had no material financial statement impact in the fiscal year 1995. Calendar 1994 Compared to Calendar 1993 - - --------------------------------------- Net income increased by 29% in 1994 over net income in 1993 due to increased revenues in Card Services, Trucking Services and Check -3- CONCORD EFS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Calendar 1994 Compared to Calendar 1993- Continued - - -------------------------------------------------- Verification Services. Card Services revenues increased 41%, while Trucking Services and Check Services revenues increased 7%. The increase in these revenues was due to additional volume from existing customers and the addition of new customers. Continuing marketing efforts were responsible for the new customers. Profit margins remained consistent with the prior year as incremental operational costs related to service volume growth and new services were offset by increased interest income. LIQUIDITY AND CAPITAL RESOURCES The Company consistently generates significant resources from operating activities. Over the past three years operating activities generated cash of $80.0, $28.3 and $19.9 million, respectively. Significant changes in accounts receivable and accounts payable result from the day of the week the calendar year end falls combined with the increases in settlement volume from one year to the next, impacting cash generated from operations. At December 31, 1996, approximately $35.1 million was received from credit card associations prior to disbursement of the funds to the Company's card service customers. Under normal circumstances, these funds would have been paid to the customers prior to December 31, 1996, and cash generated from operating activities would have been $44.9 million. The Company completed a secondary offering of common stock in October 1996. Proceeds from the 3.45 million shares issued were $87.7 million. $30 million was used as a capital contribution to EFS National Bank (EFSNB), a wholly-owned subsidiary of the Company, in order for it to remain in compliance with the guidelines of credit card associations as its processing transaction volume increases. It is expected that portions of this additional EFSNB equity will be utilized from time to time to acquire selected merchant payment processing portfolios from banks and other pro- cessing organizations. The balance of the net proceeds held by the Company will be available for working capital and general corporate purposes, including placing additional ATMs, the possible acquisition of transaction processing businesses and use in other subsidiaries of the Company. The Company invested the net proceeds of the offering in short- and medium-term, interest bearing obligations described in Note B - Securities. During fiscal 1996, the Company invested $92.2 million in securities, net of maturities, and $16.0 million in capital additions. Capital additions were primarily for new computer equipment. These investing activities were funded primarily through operating activities and the secondary offering of the Company's stock. Stock issued upon exercises of options under the Company's Incentive Stock Option Plan provided $4.9 million in additional capital in 1996. The disqualifying disposition of the options also reduced corporate income -4- CONCORD EFS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES - Continued taxes paid by $6.6 million. Management cannot estimate the timing or amount of future cash flows from exercise of options, however, this is expected to continue to be a source of funds to the Company. The Company has unused unsecured lines of credit of $10 million with financial institutions. The Company holds securities with a market value of approximately $63.3 million that are available for operating needs or as collateral to obtain short term financing if needed. With adequate available credit and strong cash generation, the Company is in sound financial condition and expects to fund continued growth from currently available resources. EFSNB exceeds required capital ratios. The Company's working capital ratio was approximately 2.7 to 1 and 2.1 to 1 at December 31, 1996 and 1995, respectively. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In March 1995, the FASB issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". The Company adopted Statement 121 in the first quarter of 1996 with no material effect to the financial statements. In October 1995, the FASB issued Statement No. 123, "Accounting for Stock- based Compensation," which provides an alternative to APB Opinion No. 25 in accounting for stock-based compensation issued to employees. The statement allows for a fair value based method of accounting for employee stock options and similar equity instruments. However, for companies that continue to account for stock-based compensation arrangements under Opinion No. 25, Statement No. 123 requires disclosure of the pro forma effect on net income and earnings per share of its fair value based accounting for those arrangements. These disclosures are included in Note I -Incentive Stock Option Plan as the Company continues to account for stock options under APB Opinion No. 25. EFFECTS OF INFLATION The Company's assets are primarily monetary, consisting of cash, assets convertible into cash, securities owned and receivables. Because of their liquidity, these assets are not significantly affected by inflation. Management believes that replacement costs of equipment, furniture and leasehold improvements will not materially affect operations. However, the rate of inflation affects the Company's expenses, such as those for employee compensation and communications, which may not be readily recoverable in the price of services offered by the Company. RECENT QUARTERLY RESULTS The following table presents an unaudited summary of quarterly results for the quarters of the calendar years 1996 and 1995. Earnings per share have been restated to reflect stock splits issued through June 28, 1996. First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- 1996 (in thousands except per share data) Revenues $33,895 $40,858 $44,051 $47,896 Operating Income 6,627 9,130 10,158 11,386 Net Income 4,659 6,271 7,149 8,710 Earnings Per Share $0.08 $0.11 $0.12 $0.14 -5- CONCORD EFS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RECENT QUARTERLY RESULTS - Continued 1995 Revenues $25,928 $29,897 $33,945 $37,992 Operating Income 4,920 5,919 6,956 8,475 Net Income 3,459 4,081 4,840 5,935 Earnings Per Share $0.06 $0.07 $0.08 $0.10 MARKET VALUE FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDERS' MATTERS The Company's Common Stock trades on the Nasdaq National Market tier of the Nasdaq Stock Market (NASDAQ) under the symbol "CEFT". The following table sets forth the range of high and low bid quotations per share of the Company's Common Stock through December 31, 1996, as reported by NASDAQ. Quotes have been restated to reflect stock splits issued through June 28, 1996. HIGH LOW YEAR ENDED DECEMBER 31, 1996: First Quarter................. $19.83 $12.56 Second Quarter................ 24.25 17.33 Third Quarter................. 28.50 21.50 Fourth Quarter................ 31.50 22.25 YEAR ENDED DECEMBER 31, 1995: First Quarter ................ $ 8.52 $ 6.52 Second Quarter................ 11.89 8.00 Third Quarter................. 14.22 10.67 Fourth Quarter................ 20.00 11.11 As of March 10, 1997 there were approximately 11,500 stockholders. 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 of the Company's operations, and the Company does not expect to pay dividends in the foreseeable future. -6- CONCORD EFS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31 --------------------- 1996 1995 -------- -------- ASSETS (in thousands) CURRENT ASSETS Cash and cash equivalents $ 96,164 $36,573 Securities available-for-sale (amortized cost of $64,102 at December 31, 1996 and $23,742 at December 31, 1995) 63,345 23,439 Accounts receivable, less allowance of $885 at December 31, 1996 and $759 at December 31, 1995 38,248 63,690 Inventories 4,353 4,765 Prepaid expenses and other current assets 2,931 2,900 Deferred income taxes 632 407 Refundable income taxes 14 328 -------- -------- TOTAL CURRENT ASSETS 205,687 132,102 SECURITIES HELD-TO-MATURITY (Fair value of $56,950 at December 31, 1996 and $4,736 at December 31, 1995) 56,714 4,866 OTHER ASSETS 3,375 PROPERTY AND EQUIPMENT 73,819 57,750 Accumulated depreciation and amortization (46,782) (37,831) -------- -------- 27,037 19,919 -------- -------- TOTAL ASSETS $292,813 $156,887 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and other liabilities $ 71,814 $ 60,967 Accrued liabilities 2,849 2,531 Current maturities of long-term debt 418 392 -------- -------- TOTAL CURRENT LIABILITIES 75,081 63,890 LONG-TERM DEBT, LESS CURRENT MATURITIES 561 978 DEFERRED INCOME TAXES 2,023 1,743 MINORITY INTEREST IN SUBSIDIARY 732 STOCKHOLDERS' EQUITY Common Stock, $.33 1/3 par value; authorized 80,000 shares, issued and outstanding 60,817 shares at December 31, 1996 and 24,940 shares at December 31, 1995. 20,272 8,313 Additional paid-in capital 97,644 10,492 Retained earnings 97,728 70,939 Unrealized losses on securities, net of taxes (496) (200) -------- -------- TOTAL STOCKHOLDERS' EQUITY 215,148 89,544 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $292,813 $156,887 ======== ======== See notes to consolidated financial statements. -7- CONCORD EFS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31 --------------------------------- 1996 1995 1994 -------- -------- ------- (in thousands, except earnings per share) Revenues $166,700 $127,762 $96,213 Cost of operations 119,675 90,579 69,840 Selling, general and administrative expenses 9,724 10,913 8,312 -------- -------- ------- OPERATING INCOME 37,301 26,270 18,061 Other income (expense): Interest income 4,104 2,219 1,688 Interest expense (90) (103) (100) -------- -------- ------- INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 41,315 28,386 19,649 Income taxes 14,526 10,146 6,979 -------- -------- ------- INCOME BEFORE MINORITY INTEREST 26,789 18,240 12,670 Minority interest 75 43 -------- -------- ------- NET INCOME $26,789 $18,315 $12,713 ======= ======= ======= Per share data: Weighted average common and common equivalent shares outstanding 59,935 57,859 55,898 ====== ====== ====== Earnings per share $0.45 $0.32 $0.23 ===== ===== ===== See notes to consolidated financial statements. -8- CONCORD EFS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Unrealized Common Addn'l Gains Stock Common Paid-In Retained Treasury(Losses)on Shares Stock Capital Earnings Stock Securities Total ------ ------- ------- ------- ------- ---------- -------- (In thousands) BALANCE AT JANUARY 1, 1994 11,136 $3,712 $7,717 $39,911 ($1,090) $50,250 Exercise of stock options 51 17 163 180 Tax benefit of disqualifying dispositions of incentive stock option shares 33 33 Cancellation of treasury stock (450) (150) (940) 1,090 Stock split 5,368 1,789 (1,789) Unrealized losses on securities, net of taxes (1,242) (1,242) Net income 12,713 12,713 ------ ------ ------ ------- ------ ----- -------- BALANCE AT DECEMBER 31, 1994 16,105 5,368 5,184 52,624 (1,242) 61,934 Exercise of stock options 632 211 3,915 4,126 Tax benefit of disqualifying dispositions of incentive stock option shares 4,127 4,127 Stock split 8,203 2,734 (2,734) Change in un- realized losses on securities, net of taxes 1,042 1,042 Net income 18,315 18,315 ------- ------ ------- ------- ------ ----- -------- BALANCE AT DECEMBER 31, 1995 24,940 8,313 10,492 70,939 (200) 89,544 Exercise of stock options 1,074 358 4,496 4,854 Secondary offering of common stock 3,450 1,150 86,521 87,671 Tax benefit of disqualifying dispositions of incentive stock option shares 6,586 6,586 Stock splits 31,353 10,451 (10,451) Change in un- realized losses on securities, net of taxes (296) (296) Net income 26,789 26,789 ------ ------- ------- ------- ------ ----- -------- BALANCE AT DECEMBER 31, 1996 60,817 $20,272 $97,644 $97,728 ($496) $215,148 ====== ======= ======= ======= ====== ===== ======== See notes to consolidated financial statements. -9- CONCORD EFS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31 ------------------------ 1996 1995 1994 ------- ------- ------- OPERATING ACTIVITIES (In thousands) Net income $26,789 $18,315 $12,713 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 9,140 7,796 7,424 Provision for losses on accounts receivable 817 500 480 Minority interest (75) (43) Deferred income taxes 213 457 (12) Changes in operating assets and liabilities: Accounts receivable 24,625 (30,426 )(15,742) Inventories 412 (1,858) 442 Other current assets (31) 9 (590) Accounts payable and other liabilities 10,847 30,458 13,667 Accrued liabilities 7,219 3,100 1,522 ------- ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES 80,031 28,276 19,861 INVESTING ACTIVITIES Acquisition of property and equipment (16,069) (8,075) (9,451) Securities held-to-maturity: Acquisition of securities (57,135) (2,360) Proceeds from maturity of securities 809 1,047 769 Securities available-for-sale: Acquisition of securities (36,054) (11,347) (6,869) Proceeds from sales of securities 247 4,169 Proceeds from maturity of securities 173 1,997 167 Purchased merchant contracts (3,565) Buyout of minority shareholders (732) ------- ------- ------- NET CASH USED IN INVESTING ACTIVITIES (112,573) (18,491) (11,215) FINANCING ACTIVITIES Proceeds from exercise of stock options 4,854 4,126 180 Proceeds from secondary offering of common stock 87,671 Proceeds from note payable 2,000 Payments on notes payable (392) (368) (262) ------- ------- ------- NET CASH PROVIDED BY FINANCING ACTIVITIES 92,133 3,758 1,918 ------- ------- ------- NET INCREASE IN CASH AND CASH EQUIVALENTS 59,591 13,543 10,564 Cash and cash equivalents at beginning of period 36,573 23,030 12,466 ------- ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $96,164 $36,573 $23,030 ======= ======= ======= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 82 $ 104 $ 90 ======= ======= ======= Income taxes $ 8,036 $ 6,472 $ 6,861 ======= ======= ======= See notes to consolidated financial statements. -10- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 NOTE A - SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The consolidated financial statements include the accounts of Concord EFS, Inc. (Parent) and its wholly-owned subsidiaries, Concord Computing Corporation (Concord), EFS National Bank (EFSNB), Concord Retail Services, Inc. and Concord Equipment Sales, Inc. (formerly VMT, Inc.) (collectively, the Company). The Company repurchased the minority interest in Network EFT, Inc. during the year and transferred its residual business and operational assets to Concord. All material intercompany balances and transactions have been eliminated in consolidation. Operations: The Company provides transaction processing, authorization and settlement services, throughout the United States. The primary components of these services are Card Services, Trucking Services and Check Verification Services, comprising 96% of revenues in 1996. The Company requires certain Trucking Services customers to provide letters of credit, surety bonds or cash deposits as collateral for outstanding accounts receivable. Cash Equivalents: The Company considers all highly liquid investments with a maturity of three months or less to be cash equivalents. Change of Method of Accounting for Securities: The Company adopted the pro- visions of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," on January 1, 1994. As a result, securities have been classified as either held-to-maturity, trading, or available-for-sale. Securities Held-to-Maturity and Available-for-Sale: Management determines the appropriate classification of debt securities at the time of purchase and re- evaluates such designation as of each balance sheet date. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost. Debt and equity securities not classified as held-to-maturity or trading are classified as available-for-sale. Available-for-sale securities are stated at fair value, with the unrealized gains and losses, net of tax, reported in a separate component of stockholders' equity. The amortized cost of debt securities classified as held-to-maturity or available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of mortgage-backed securities, over the estimated life of the security. Such amortization is included in interest income from investments. Interest and dividends are included in interest income from investments. Realized gains and losses, and declines in value judged to be other-than-temporary are included in net securities gains (losses). The cost of securities sold is based on the specific identification method. Inventories: Inventories are stated at the lower of cost (first-in, first-out method) or market. -11- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE A - SIGNIFICANT ACCOUNTING POLICIES - Continued Purchased Merchant Contracts: Noncurrent other assets are purchased merchant contracts recorded at cost. Amortization expense is recognized on a straight line basis over five years. Purchased merchant contracts are evaluated by management for impairment at each balance sheet date through review of actual attrition and cash flows generated by the contracts in relation to the expected attrition and cash flows and the recorded amortization expense. If, upon review, actual attrition and cash flows indicate impairment of the value of the purchased merchant contracts, an impairment loss would be recognized. The balance of purchased merchant contracts at December 31, 1996 was $3,375,370, net of accumulated amortization of $189,867. Property and Equipment: Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Use of Estimates: The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Income Taxes: The Company and its wholly-owned subsidiaries file a consolidated Federal tax return. Each subsidiary provides for income taxes using the liability method on a separate-return basis and remits to or receives from the Company amounts currently payable or receivable. Revenue Recognition: Credit card and other transaction processing activities are recorded when the service is provided, gross of interchange and network fees charged to the Company, which are recorded as a cost of operations when the transactions have been settled. Revenues from service contracts and product sales are recognized when the service is provided or the equipment is shipped. Service contracts and related sales include all revenues under system service contracts, including revenues from sales of terminal hardware when the contract included such sales. Earnings Per Share: Earnings per share are calculated using the weighted average number of common and common equivalent shares outstanding. Common equivalent shares result from the assumed exercise of common stock options using the "treasury stock" method. Earnings per share and related per share data have been restated to reflect stock splits issued through June 28, 1996. Stock-based Compensation: The Company grants options for a fixed number of shares to employees with an exercise price equal to the fair value at the date of the grant. These stock option grants are accounted for in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees," and accordingly, the Company recognizes no compensation expense for the stock option grants. -12- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE B - SECURITIES The following is a summary of securities available-for-sale and held-to- maturity: Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ------- Available-for-Sale (in thousands) December 31, 1996: U.S. Treasury securities $ 4,012 $ 2 $ $ 4,014 U.S. Government and agency securities 48,100 38 ( 616) 47,522 Mortgage-backed securities 8.143 ( 236) 7,907 Municipal securities 3,241 55 3,296 ------- ---- ---- ------- Total debt securities 63,496 95 ( 852) 62,739 Equity securities 606 606 ------- ---- ---- ------- $64,102 $ 95 ($852) $63,345 ======= ==== ==== ======= December 31, 1995 Mortgage-backed securities $22,636 $ 48 ($351) $22,333 Municipal securities 500 500 ------- ---- ---- ------- Total debt securities 23,136 48 ( 351) 22,833 Equity securities 606 606 ------- ---- ---- ------- $23,742 $ 48 ($351) $23,439 ======= ==== ==== ======= Held-to-Maturity December 31, 1996 U.S. Government and agency securities $10,999 $ 19 $ $11,018 Municipal securities 19,395 430 19,825 Mortgage-backed securities 26,320 34 ( 247) 26,107 ------- ---- ---- ------- $56,714 $483 ($247) $56,950 ======= ==== ==== ======= December 31, 1995 Mortgage-backed securities $ 4,866 $ ($130) $4,736 ======= ==== ==== ====== There were no gains or losses on securities sold during the three years ended December 31, 1996. The scheduled maturities of securities held-to-maturity and available-for- sale, excluding equity securities, at December 31, 1996 was as follows: Held-to-maturity Available-for-sale Amortized Fair Amortized Fair Cost Value Cost Value ------- ------- ------- ------- (in thousands) Due in one year or less $ 9,993 $10,014 $36,840 $36,560 Due from one to five years 17,384 17,417 16,095 15,824 Due from five to ten years 22,092 22,278 10,561 10,355 Due after ten years 7,245 7,241 ------- ------- ------- ------- $56,714 $56,950 $63,496 $62,739 ======= ======= ======= ======= -13- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE B - SECURITIES - Continued For purposes of the maturity table, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the weighted-average contractual maturities of underlying collateral. The mortgage-backed securities may mature earlier than their weighted-average contractual maturities because of principal prepayments. Expected maturities on other securities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties. Securities carried at approximately $2.5 million at December 31, 1996 were pledged to a major credit card association to secure settlement liabilities. NOTE C - INVENTORIES At December 31, inventories consists of: 1996 1995 ------ ------ (in thousands) Point of sale equipment $3,989 $4,559 Repair parts 364 206 ------ ------ $4,353 $4,765 ====== ====== NOTE D - PROPERTY AND EQUIPMENT At December 31, property and equipment consists of: 1996 1995 ------ ------ (in thousands) Computer facilities and equipment $70,066 $54,924 Office furniture and equipment 3,382 2,459 Leasehold improvements 371 367 ------- ------- $73,819 $57,750 ======= ======= Maintenance and repair expense amounted to $1,500,203, $906,537, and $1,408,206 for the years ended December 31, 1996, 1995, and 1994, respectively. NOTE E - LONG-TERM DEBT AND LEASES At December 31, long-term debt consists of: 1996 1995 ------ ------ (in thousands) Note payable to bank $ 978 $1,370 Less current maturities 417 392 ------ ------ $ 561 $ 978 ====== ====== The note payable to bank is payable through March 1, 1999 in monthly installments of $38,969 including interest at 6.25% and is secured by cash dispensing machines (ATMs) with a net book value of $1,261,856 at December 31, 1996 and $1,542,269 at December 31, 1995. The Company rents office facilities under agreements classified as operating leases which expire in various years through 2000 and generally contain renewal options. Rental expense for operating leases amounted to $483,632 $416,510, and $391,188, for the years ended December 31, 1996, 1995, and 1994, respectively. -14- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE E - LONG-TERM DEBT AND LEASES - Continued Future maturities of notes payable and minimum lease payments for operating leases with initial or remaining terms in excess of one year are as follows: Note Operating Payable Leases ------- --------- (in thousands) Year ending December 31: 1997 $ 417 $ 411 1998 445 323 1999 116 323 2000 189 ------ ------ Total future payments $ 978 $1,246 ====== ====== NOTE F - UNUSED LINES OF CREDIT At December 31, 1996 the Company had available $10 million in unsecured lines of credit with other financial institutions. The lines of credit are con- tractual in nature, require no compensating balances or fees, expire at various dates through May 1997 and are subject to renewal at the discretion of the institutions. No borrowing occurred in 1996 under these lines. NOTE G - INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets at December 31, are as follows: 1996 1995 ------ ------ Deferred tax liabilities: (in thousands) Property and equipment $1,996 $1,677 Other 27 66 ------ ------ Total deferred tax liabilities $2,023 $1,743 Deferred tax assets: Securities available-for-sale $ 261 $ 103 Bad debt allowance 311 288 Inventory 9 16 Merchant contracts purchased 51 ------ ------ Total deferred tax assets 632 407 ------ ------ Net deferred tax liabilities $1,391 $1,336 ====== ====== The components of the provision (benefit) for income taxes for the three years ended December 31 are as follows: 1996 1995 1994 ------- ------- ------- Current (in thousands) - Federal $14,221 $ 9,463 $6,742 - State 92 226 249 ------- ------- ------- 14,313 9,689 6,991 Deferred - Federal 187 421 (22) - State 26 36 10 ------- ------- ------- 213 457 (12) ------- ------- ------- $14,526 $10,146 $6,979 ======= ======= ====== -15- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE G -INCOME TAXES - Continued 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: 1996 1995 1994 ------- ------- ------ (in thousands) Tax at statutory rate $14,460 $ 9,935 $6,892 State income taxes, net of federal benefit 77 170 172 Tax exempt interest income 124 Other, net (135) 41 (85) ------- ------- ------ $14,526 $10,146 $6,979 ======= ======= ====== Income tax benefits resulting from the disqualifying dispositions of certain employee incentive stock option shares were credited to additional paid-in capital because no compensation expense was charged to income for financial reporting purposes related to the exercise of such options. NOTE H - STOCKHOLDERS' EQUITY On October 24, 1996, the Company filed a prospectus with the Securities and Exchange Commission offering 3.45 million shares of common stock (including underwriters' over-allotment shares of 450,000). The net proceeds to the Company from the offering was $87.7 million. Earnings per share, related per share data, stock options and stock option prices have been restated to reflect stock splits. The following table summarizes recent stock splits approved by the Board of Directors: Split Ratio Distribution Date ----------- ----------------- 3 for 2 June 28, 1996 3 for 2 January 18, 1996 3 for 2 May 22, 1995 NOTE I - INCENTIVE STOCK OPTION PLAN The Company has an Incentive Stock Option Plan allowing for the grant of up to 9,112,500 shares of Common Stock for the benefit of the Company's key employees. Options are granted at not less than 100% of the market value on the date of the grant (110% in the case of a holder of more than 10% of the outstanding shares) and generally become exercisable within four years of the date of the grant. -16- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE I - INCENTIVE STOCK OPTION PLAN - Continued Information pertaining to the Incentive Stock Option Plan is summarized below in thousands, except price per share: Weighted Weighted Average Number of Shares Average Aggregate Options Under Option Exercise Price Price Exercisable ---------------- -------------- --------- ----------- Outstanding at January 1, 1995 4,982 $ 3.67 $18,289 2,768 ======= ===== Granted 1,026 $ 9.03 Exercised (1,761) $ 2.34 Terminated (32) $ 4.44 ----- Outstanding at December 31, 1995 4,215 $ 5.52 $23,283 1,935 ======= ===== Granted 872 $20.59 Exercised (1,251) $ 3.88 Terminated (334) $ 6.39 ----- Outstanding at December 31, 1996 3,502 $ 9.77 $34,203 1,587 ===== ======= ===== The weighted average grant date fair value of options granted during 1996 and 1995 was $5.47 and $2.47, respectively. The following table provides additional information regarding options out- standing as of December 31, 1996: Weighted Weighted Average Average Remaining Exercise Option Options Weighted Contractual Number of Price of Exercise Out- Average Life of Options Options Price Range standing Exercise Price Options in Years Exercisable Exercisable - - ------------ -------- -------------- ---------------- ----------- ----------- $ 1.58- 5.23 1,831 $ 4.98 6.3 1,376 $ 4.88 7.19-12.00 800 9.08 8.3 171 9.10 19.50-28.75 871 20.46 9.3 40 19.35 $ 1.58-28.75 3,502 $ 9.77 7.5 1,587 $ 5.70 ===== ===== The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25) and related Inter- pretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB State- ment No. 123, "Accounting for Stock-Based Compensation," requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB No. 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 1996 and 1995, respectively, risk-free interest rate of 6.5% and 6.0%,and volatility factors of the expected market price of the Company's -17- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE I - INCENTIVE STOCK OPTION PLAN - Continued common stock of .265 and .282. Assumptions that remained constant for both years were dividend yields of 0% and a weighted average expected life of the options of three years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price vol- atility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows for the years ended December 31 (in thousands, except for earnings per share): 1996 1995 ------- ------- Pro forma net income $25,883 $18,033 Pro forma earnings per share $0.43 $0.31 Pro forma disclosures are not likely to be representative of the effects of reported pro forma net income and earnings per share in future years as ad- ditional options may be granted in future years and the vesting of options already granted will impact the pro forma disclosures. NOTE J - COMMITMENTS AND CONTINGENCIES The Company is a party to various claims and litigation in the normal course of business, none of which is expected to have a material effect on the con- solidated financial statements. NOTE K - DEBT AND DIVIDEND RESTRICTIONS In accordance with federal banking laws, certain restrictions exist regarding the ability of the banking subsidiary to transfer funds to the Parent in the form of cash dividends, loans or advances. The approval of certain regula- tory 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, 1996, $54,533,230 of undistributed earnings of EFSNB, included in consolidated retained earnings, was available for distribution to the Parent as dividends without prior regulatory approval. Under Federal Reserve regulations, the banking subsidiary is also limited as to the amount it may loan to affiliates, including the Parent, unless such loans are collateralized by specific obligations. At December 31, 1996, the maximum amount available for transfer from EFSNB to the Parent in the form of loans approximated 5.3% of consolidated net assets. NOTE L - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. These fair values are provided for disclosure purposes only, and do not impact carrying values of financial statement amounts. -18- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE L - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued Cash and Cash Equivalents The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets' fair values Securities (Including Mortgage-backed Securities) Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Long-term Borrowings The fair values of the Company's long-term borrowings are estimated using discounted cash flow analyses based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. Carrying Amount Fair Value --------------- ---------- (in thousands) December 31, 1996 Financial assets: Cash and cash equivalents $96,164 $96,164 Available-for-sale securities 63,345 63,345 Held-to-maturity securities 56,714 56,950 Financial liabilities: Note payable to bank 978 965 December 31, 1995 Financial assets: Cash and cash equivalents $36,573 $36,573 Available-for-sale securities 23,439 23,439 Held-to-maturity securities 4,866 4,736 Financial liabilities: Note payable to bank 1,371 1,323 -19- CONCORD EFS, INC. AND SUBSIDIARIES REPORT OF INDEPENDENT AUDITORS We have audited the accompanying consolidated balance sheets of Concord EFS, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Concord EFS, Inc. and subsidiaries as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. As discussed in Note A to the Consolidated Financial Statements, in 1994 the Company changed its method of accounting for certain securities. /s/ Ernst & Young LLP --------------------- Memphis, Tennessee January 31, 1997 -20- CORPORATE DIRECTORY Board of Directors SEC Form 10-K (and their principal occupation) Copies of the Company's Annual Report on Form 10-K as filed with The Dan M. Palmer Securities and Exchange Commission may Chairman and Chief Executive Officer be obtained without charge upon Concord EFS, Inc. and request to: EFS National Bank Investor Relations Concord EFS, Inc. Victor M. Tyler 2525 Horizon Lake Drive, Chairman Emeritus, Concord EFS, Inc. Suite 120 Memphis, Tennessee 38133 David C. Anderson* Retired Executive Vice President and Market for Common Stock CFO, Burlington Northern, Inc. NASDAQ National Market Ticker Symbol: CEFT J. Richard Buchignani, Esq.* Partner, Wyatt, Tarrant & Combs Annual Meeting May 15, 1997 Richard M. Harter, Esq.* Partner, Bingham, Dana & Gould Transfer Agent & Registrar State Street Bank and Trust Company Joyce Kelso Boston, Massachusetts Retired Senior Vice President, Concord EFS, Inc. and EFS National Corporate Counsel Bank Bingham Dana & Gould Boston, Massachusetts Richard P. Kiphart* Head of Corporate Finance Department Auditors William Blair & Company LLC Ernst & Young LLP Memphis, Tennessee Edward A. Labry III President, Concord EFS, Inc. Corporate Office and EFS National Bank 2525 Horizon Lake Drive Suite 120 Jerry D. Mooney* Memphis, Tennessee 38133 President and CEO (800) 238-7675 ServiceMaster Diversified Health Services, Inc. Paul L. Whittington* Retired Partner Ernst & Young LLP * Audit Committee Member EXECUTIVE MANAGEMENT GROUP Dan M. Palmer, Chairman and CEO William E. Lucado, Senior Vice President, Concord EFS, Inc. and Investment and Compliance Officer, EFS National Bank Concord EFS, Inc. and EFS National Bank Edward A. Labry III, President, Vickie Brown, Senior Vice President Concord EFS,Inc., EFS National Bank and Chief Operating Officer, and Concord Computing Corporation Concord EFS, Inc. and EFS National Bank Thomas J. Dowling, Vice President and Controller, Concord EFS, Inc. and EFS National Bank -21- EX-20 4 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS CONCORD EFS, INC. NOTICE OF ANNUAL MEETING OF SHAREHOLDERS To Be Held on May 15, 1997 To the Shareholders of Concord EFS, Inc. Notice is hereby given that the Annual Meeting of Shareholders of Concord EFS, Inc. ("Concord" or the "Company") will be held at Colonial Country Club, 2736 Countrywood Parkway, Memphis Tennessee on May 15, 1997 beginning at 9:30 a.m. local time, for the following purposes: 1. To elect directors to serve for the ensuing year; 2. To approve the Amendment to the Certificate of Incorporation to Increase Number of Authorized Shares of Common Stock; 3. To transact such other business as may properly come before the annual meeting and any adjournments thereof. The Board of Directors has fixed the close of business on March 10, 1997 as the record date for determination of the shareholders 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 11, 1997 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. CONCORD EFS, INC. PROXY STATEMENT April 11, 1997 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 Shareholders to be held on May 15, 1997 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. BENEFICIAL OWNERSHIP OF COMMON STOCK The Company's only issued and outstanding class of voting securities is its Common Stock, par value $.33 1/3 per share. Each shareholder of record on March 10, 1997 is entitled to one vote for each share registered in such shareholders's name. As of that date, the Company's Common Stock was held by approximately 11,500 shareholders. The following table sets forth, as of March 10, 1997, 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 679,688 1.1% Edward A. Labry III (4), Director 407,288 0.7% Joyce Kelso (5), Director 338,099 0.6% Richard P. Kiphart, (6) Director 2,477,830 4.1% Richard M. Harter (6), Director 59,386 0.1% Jerry D. Mooney (6), Director 13,896 - David C. Anderson (6), Director 5,458 - J. Richard Buchignani (6), Director 5,502 - Paul Whittington (6), Director 3,771 - All officers, directors and nominees as a group (9 persons) (7) 3,990,918 6.4% William Blair & Company, LLC 222 West Adams Street Chicago,IL 60606 (8)(9) 8,230,283 13.5% Pilgrim Baxter & Associates, Ltd. 1255 Drummers Lane, Suite 300 Wayne, Pennsylvania 19087 (10) 3,509,347 5.8% (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 60,826,291 shares issued and outstanding, plus the number of shares subject to options exercisable within 60 days from the record date by the person or the aggregation of persons for which such percentage ownership is being determined. (3) Shares owned are unexercised stock options. (4) Shares owned include 405,236 shares covered by unexercised stock options. (5) Shares owned include 337,501 shares covered by unexercised stock options. (6) Shares owned include 396 shares covered by unexercised stock options. (7) Shares owned include 1,424,405 shares covered by unexercised stock options. (8) Based on a Schedule 13G dated as of February 14, 1997, filed by Blair. Includes 759,722 shares as to which Blair has sole voting power and 8,230,283 shares as to which Blair has sole dispositive power. (9) Blair disclaims beneficial ownership as to 7,470,561 of such shares. (10) Based on a Schedule 13G dated as of February 14, 1997, filed by Pilgrim Baxter & Associates. ELECTION OF DIRECTORS Nine directors are to be elected to hold office until the next annual meeting of shareholders 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 shareholder 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 (54) 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 Joyce Kelso (55) Mrs. Kelso has been a Director since May 1991, and Vice President in charge of Customer Service since 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 (34) 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 (60)* Mr. Harter has been the Company's Secretary and a Director since the Company's formation. He is a partner of Bingham, Dana and Gould, LLP, legal counsel to the Company. Jerry D. Mooney (44)* Mr. Mooney has been a Director of the Company since August 1992. He is President and CEO of ServiceMaster Diversified Health Services, Inc. formerly VHA Long Term Care since 1981. David C. Anderson (54)* Mr. Anderson has been a Director of the Company since August 1992. Mr. Anderson was with Federal Express in Memphis, Tennessee for seven years as Senior Vice President and Chief Financial Officer and Burlington Northern, Fort Worth, Texas as Executive Vice President and Chief Financial Officer for three years prior to his retirement in 1995. J. Richard Buchignani (48)* Mr. Buchignani has been a Director of the Company since August 1992. He is a partner in the Memphis office of the law firm of Wyatt, Tarrant & Combs in Memphis, Tennessee 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 (61)* Mr. Whittington has been a Director of the Company since May 1993. Mr. Whittington had been the Managing Partner of the Memphis, Tennessee and Jackson, Mississippi offices of Ernst & Young from 1988 until his retirement in 1991. Since 1979, he had been the partner in charge of consulting at various Ernst & Young offices. Richard P. Kiphart (55)* Mr. Kiphart was voted a Director of the Company in November 1996 to assume responsibilities in March 1997. In 1972 he became a General Partner of William Blair & Company, LLC. He served as head of Equity Trading from 1972 to 1980. He joined the Corporate Finance Department in 1980, and was made head of that department in January 1995. * Member of the Board's Compensation and Audit Committees. Compensation of Directors The Company currently pays an annual fee of $8,000 plus $2,000 for each meeting attended to each non-employee Director of the Company. There are normally four meetings per year. In addition, non-employee directors are granted options to purchase Company common stock. See page 8. Directors are reimbursed for expenses incurred in attending meetings of the Board of Directors. Three of the nine nominees are employees of the Company and are not separately compensated for serving as directors. Executive Compensation The following summary compensation table is intended to provide a comprehensive overview of the Company's executive pay practices. It includes the cash compensation paid or accrued by the Company and its subsidiaries for services in all capacities during the fiscal year ended December 31, 1996, to or on behalf of each of the Company's named executives. Named executives include the Chief Executive Officer and the President of the Company. Summary Compensation Table Long Term Annual Compensation Compensation ------------------------ ---------------- Name and Principal Salary Bonus Position Year ($) ($) Options Awarded* - - ----------------------------- ---- ------- ------- ---------------- Dan M. Palmer 1996 425,000 125,000 237,500 Chairman of the Board, 1995 363,738 80,000 202,500 Chief Executive Officer 1994 342,335 70,000 177,188 of the Company and EFS National Bank Edward A. Labry III 1996 392,308 125,000 237,500 President of the Company 1995 279,315 100,000 168,750 and EFS National Bank 1994 255,912 50,000 151,875 * Options awarded have been restated to reflect stock splits issued through June 28, 1996. STOCK OPTIONS The following tables present the following types of information for options granted to the Company's named executives under the Company's 1993 Incentive Stock Option Plan. Table I - options granted and the potential realizable value of such options, and Table II - options exercised in the latest fiscal year and the number of unexercised options held. Table I Options Granted in 1996 Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation Individual Grants for Option Term -------------------------------------------------------------- % of Total Options Granted to Exercise Options Employees in price Expiration Name Granted 1996 ($/Share) Date 5% ($) 10% ($) - - ---------------- ------- ------------ --------- ---------- --------- --------- Dan M. Palmer 187,500 28% $19.50 4/13/2007 2,299,396 5,827,121 50,000 50% $28.75 11/20/2007 904,036 2,291,005 Edward A. Labry 187,500 28% $19.50 8/18/2007 2,299,396 5,827,121 50,000 50% $28.75 11/20/2007 904,036 2,291,005 Table II Options Exercised in 1996 and 1996 Year End Option Values Value of Number of Unexercised Shares Acquired Value ($) Unexercised In-the-money Name on Exercise (#) Realized(1) Options (#) Options($)(2) - - --------------- --------------- ----------- ----------- ------------- Dan M. Palmer 354,375 6,582,187 582,188(E) 13,429,938(E) 515,938(U) 7,478,371(U) Edward A. Labry 150,000 1,971,008 316,173(E) 7,180,064(E) 471,641(U) 6,549,673(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, 1996. (E) = Exercisable at December 31, 1996 (U) = Unexercisable at December 31, 1996 Committees; Attendance The Board of Directors held five meetings during the fiscal year ended December 31, 1996. Each of the directors attended at least 75% of the total number of meetings of the Board. The Audit Committee, consisting of Messrs. Anderson, Buchignani, Harter, Mooney, Whittington and Kiphart met twice during the fiscal year ended December 31, 1996. The Audit Committee reviewed the results of the audit conducted by outside auditors and management's response to the management letter prepared by outside auditors. The Board of Directors has no Nominating Committee. The Board of Directors has a Compensation Committee consisting of directors who are not employees of the Company or any of its affiliates and have never been employees of the Company or any of its affiliates. It is the policy of the Compensation Committee to establish base salaries, award bonuses and grant stock options to such executives and in such amounts as will assure the continued availability to the Company of the services of the executives and will recognize the contributions made by the executives to the success of the Company's business and the growth over time in the market capitalization of the Company. To achieve these goals, the Committee establishes base salaries at levels 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 slightly higher than average for comparable companies in order to give the executives significant incentive to improve the business of the Company and its market capitalization. Section 162(m) of the Internal Revenue Code limits the tax deduction to $1 million for compensation paid to certain executives of public companies. The Committee has considered these new requirements and believes that the Company's 1993 Incentive Stock Option Plan meets the requirement that it be "performance based" and, therefore, exempt from the limitations on deductibility. Historically, the combined salaries and bonuses of the Company's executive officers have been well under the $1 million limit. The Committee's present intention is to comply with Section 162(m) unless the Committee feels that required changes would not be in the best interest of the Company or its shareholders. The Chief Executive Officer and President's base salary, cash bonus and option grants are established by the Committee based upon its members' own experience in their companies and in other companies which they serve as directors or advisors. For 1996, the compensation, bonus and options for the Chief Executive Officer and the President were believed by the Committee to be, in the aggregate, lower than the aggregate value of such arrangements for similar officers of comparable companies. David C. Anderson J. Richard Buchignani Richard M. Harter Richard P. Kiphart Jerry D. Mooney Paul L. Whittington Below is a performance table which compares the Company's cumulative total shareholder return during the previous five years with NASDAQ stock market, and NASDAQ financial stocks (the Company's peer group). NASDAQ NASDAQ Year Concord EFS, Inc. Stock Market Financial Stocks - - -------- ----------------- ------------ ---------------- 09/30/91 100.00 100.00 100.00 12/31/92 110.28 116.38 143.03 12/31/93 82.73 133.60 166.23 12/31/94 140.19 130.59 166.62 12/31/95 355.37 184.67 242.62 12/31/96 534.64 227.16 311.08 AMEND CERTIFICATE OF INCORPORATION TO INCREASE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK The Company's authorized capital stock consists of 80,000,000 shares of Common Stock, $.33 1/3 par value. The Board of Directors finds advisable that the Company's Certificate of Incorporation be amended to increase the number of authorized shares of Common Stock to 100,000,000 shares, $.33 1/3 par value. The holders of Common Stock are not entitled to preemptive rights to purchase Common Stock of the Company. The authorized shares of Common Stock can be issued without shareholder approval upon such terms and in consideration of such amounts as the Board of Directors determines is in the best interest of the Company. The Board presently has no plans to issue any of the authorized shares of Common Stock. Recommended Vote An affirmative vote of a majority of the Company's outstanding Common Stock is necessary to adopt the amendment to the Company's Certificate of Incorporation to increase the number of authorized shares of Common Stock to 100,000,000 shares. The Board of Directors recommends that you vote "FOR" the proposal. OTHER MATTERS The Board of Directors knows of no matters which are likely to be presented for action at the Annual Meeting other than the proposals specifically set forth in the Notice and referred to herein. If any other matter properly comes before the Annual Meeting for action, it is intended that the persons named in the accompanying proxy and acting thereunder will vote or refrain from voting in accordance with their best judgement pursuant to the discretionary authority conferred by the proxy. CERTAIN TRANSACTIONS Bingham, Dana & Gould 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. SHAREHOLDERS PROPOSALS Shareholder proposals to be submitted for vote at the 1998 Annual Meeting must be delivered to the Company on or before December 8, 1997. EXPENSES OF SOLICITATION Solicitations of proxies by mail is expected to commence on April 11, 1997, 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 shareholders, 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. (This is the front side of the 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. held of record by the undersigned on March 10, 1997, at the Annual Meeting of Shareholders to be held on May 15, 1997 or any adjournment thereof. 1. To elect directors. ___ FOR all nominees (except as marked to the contrary below) ___ WITHHOLD AUTHORITY for all nominees listed below Dan M. Palmer Edward A. Labry III Richard M. Harter Joyce Kelso David C. Anderson Jerry D. Mooney J. Richard Buchignani Paul L. Whittington Richard P. Kiphart (Instruction: To withhold authority to vote for any individual(s), write the name(s) of such nominee(s) on the space provided below.) _____________________________________________________________________ 2. To approve the Amendment of the Certificate of Incorporation to Increase Number of Authorized Shares of Common Stock. ____FOR ____AGAINST ____ABSTAIN (This is the back side of the proxy card.) This proxy, when properly executed, will be voted in the manner directed by the undersigned shareholder. If no direction is made, this proxy will be voted FOR all nominees for director and FOR the action described in Item No. 2. In their discretion, the Proxies are authorized to vote upon such other business as may properly come before the Annual Meeting or any adjournment thereof. Please sign exactly as the name appears. When shares are held by joint tenants, both should sign. Dated___________________________________ Signature_______________________________ Signature_______________________________ EX-23 5 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 - 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 January 31, 1997, included in the 1996 Annual Report to Shareholders of Concord EFS, Inc. Our audit also included the financial statement schedule of Concord EFS, Inc. listed in Item 8. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-60871) pertaining to the Concord EFS, Inc. 1993 Incentive Stock Option Plan of our report dated January 31, 1997, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) of Concord EFS, Inc. /s/ Ernst & Young LLP --------------------- Memphis Tennessee March 26, 1997 EX-27 6 FINANCIAL DATA SCHEDULE
5 1000 12-MOS DEC-31-1996 DEC-31-1996 96164 120059 39133 885 4353 205687 73819 46782 292813 75081 0 0 0 20272 194876 292813 166700 166700 119675 129399 0 817 90 41315 14526 26789 0 0 0 26789 0.45 0.45
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