-----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, ILkjnJNRs44/iJtq1MYNXn23eYUN/EEhW7PGrNORefEvRVklw4v5YxA6uzFNUtRA 6I1x0ngSkXlq3AektjqRqA== 0000740112-00-000004.txt : 20000411 0000740112-00-000004.hdr.sgml : 20000411 ACCESSION NUMBER: 0000740112-00-000004 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONCORD EFS INC CENTRAL INDEX KEY: 0000740112 STANDARD INDUSTRIAL CLASSIFICATION: FUNCTIONS RELATED TO DEPOSITORY BANKING, NEC [6099] IRS NUMBER: 042462252 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-13848 FILM NUMBER: 583301 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-K405 1 ANNUAL REPORT ON 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, 1999 Commission file number 0-13848 CONCORD EFS, INC. (Exact name of registrant as specified in its charter) Delaware 04-2462252 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 2525 Horizon Lake Drive, Suite 120, Memphis, Tennessee 38133 (Address of principal executive offices) (Zip code) Registrant's Telephone Number, Including Area Code: (901) 371-8000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.33 1/3 Par Value Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant has required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___. Indicate by check mark if disclosure of delinquent files pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the voting stock held by non-affiliates of the registrant on March 17, 2000 was $4,495,880,736. The number of shares of the registrant's Common Stock outstanding as of March 17, 2000 was 212,194,961. DOCUMENTS INCORPORATED BY REFERENCE PART I and PART II Portions of this Registrant's Annual Report to Stockholders for the year ended December 31, 1999, are incorporated by reference into Items 1, 5, 6, 7 and 8. PART III Portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held May 25, 2000 are incorporated by reference into Items 10, 11, 12 and 13. CONCORD EFS, INC. FORM 10-K ANNUAL REPORT TABLE OF CONTENTS Item No. Page PART I 1. Business Overview 1 Subsidiaries 2 Operations by Industry Segment 3 Marketing and Customers 3 Competition 4 Supervision and Regulation 5 Employees 6 2. Properties 6 3. Legal Proceedings 7 4. Submission of Matters to a Vote of Security Holders 7 PART II 5. Market for Registrant's Common Stock and Related Stockholder Matters 8 6. Selected Financial Data 8 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 7A. Quantitative and Qualitative Disclosures About Market Risk 8 8. Financial Statements and Supplementary Data 8 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 9 PART III 10. Directors and Executive Officers of the Registrant 9 11. Executive Compensation 9 12. Security Ownership of Certain Beneficial Owners and Management 9 13. Certain Relationships and Related Transactions 9 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 9 Signatures 11 PART I Item 1. BUSINESS Overview Concord EFS, Inc. (the "Company") is a fully integrated leading provider of electronic transaction authorization, processing, settlement and funds transfer services on a nationwide basis. The Company focuses on marketing its services to supermarket chains and multiple lane retailers, financial institutions, petroleum and convenience stores, grocery stores, the trucking industry and other retailers. The Company's primary activity is Merchant Services, in which it provides integrated electronic transaction services for credit card, debit card and electronic benefits transfer ("EBT") card transactions. These transaction services include data capture, authorization and settlement services for over 400,000 point-of-sale terminals. The Company also provides automated teller machine ("ATM") Services, consisting of owning and operating the MAC- branded electronic funds transfer network and processing for approximately 39,000 ATMs nationwide, of which it owns approximately 1,000. Concord offers merchants a cost-effective, reliable, turnkey debit and credit card processing system. The Company is able to provide its system on a profitable basis because of its low-cost operational structure, which includes efficient marketing, volume purchasing arrangements with equipment and communications vendors, and direct membership by its subsidiary, EFS National Bank, in bank card associations (such as VISA and MasterCard) and national and regional debit card networks (such as Interlink, MAC, Explore and NYCE). In 1992, Concord entered into an agreement with the National Grocers Association, Inc. ("NGA") whereby Concord became the preferred vendor of the NGA for electronic payment services for a range of applications, including both turnkey packaged solutions and customized payment service agreements covering credit and debit card transaction processing. The agreement has enabled Concord to increase substantially its grocery store customer base. The Company believes a growing percentage of grocery transactions use credit, debit or EBT cards for payment. The Company seeks to grow its funds transfer and payment transaction processing business by providing a fully integrated range of transfer and processing services at competitive prices. The principal elements of the Company's strategy include the following: 1) The Company focuses on specific markets that historically have been under served by the transaction processing industry, seeking a diverse group of customers with low credit risk profiles. 2) The Company seeks to be a low-cost, highly reliable provider of electronic payment processing services by providing a fully integrated range of relevant services, including designing equipment solutions, selling and leasing equipment, authorizing transactions, capturing information on its own host computer, directly participating in all major credit and debit card associations and networks, and effecting settlement of payment transactions and transfer of funds. -1- 3) The Company offers maximum technological versatility for the provisions of equipment of different manufacturers, in order to provide a tailored solution to the customer's specific needs. 4) The Company adheres to a balanced marketing approach through the use of internal marketing specialists, independent sales representatives and a number of independent sales organizations ("ISOs") in an effort to provide, at the most efficient cost, broader access to new merchant customers and portfolio acquisition opportunities nationwide. Subsidiaries EFS National Bank (EFSNB), the largest subsidiary of the Company, sells credit, debit, and electronic benefits transfer (EBT) card authorization, data capture and settlement services to retailers and grocery stores. It also sells fuel card and cash forwarding services to trucking companies through agreements with a network of truck stops. The services of EFSNB do not consist of material amounts of traditional banking activities (i.e., consumer and commercial loans, demand and time deposits, real estate, etc.). Therefore, the Company is not required to use the reporting format and related disclosures normally required for bank holding companies. Electronic Payment Services, Inc. (EPS) provides transaction processing services to financial institutions and retailers throughout the United States. EPS also owns and operates electronic data processing and data-capture networks that process transactions originating at ATMs and point-of-sale terminals. Concord Computing Corporation's (CCC) primary activity is check authorization and POS terminal driving, servicing and maintenance for grocery store chains. Additionally, CCC provides certain processing services for its affiliated companies. Concord Retail Services, Inc. (CRS), is a wholly-owned Delaware subsidiary. CRS provides POS terminal driving, servicing and maintenance to the Company's customers in the northeast United States. Concord Equipment Sales, Inc. (CES) is a wholly-owned Tennessee subsidiary incorporated on September 5, 1991. CES purchases from manufacturers point-of-sale (POS) terminal products and communications equipment for use by the Company's customers in connection with the Company's transaction processing services. EFS Federal Savings Bank (EFSFSB) facilitates the strategic deployment of cash dispensing machines (ATMs) by allowing the deployment of ATMs anywhere in the country without the requirement of a bank branch location. It owns and operates ATMs at truck stops and grocery stores nationwide. Digital Merchant Systems, Inc. and American Bankcard International (collectively DMS) is a leading independent sales organization in the credit card industry and enhances the Company's ability to obtain new merchants and promote the continued growth of the Company. -2- Operations by Industry Segment Information appearing under the caption "Note N - Operations By Industry Segment," on pages 41 to 43 of the Company's Annual Report to Stockholders for the year ended December 31, 1999 (Annual Report to Stockholders), is incorporated herein by reference. Marketing and Customers The Company markets its services and products on a nationwide basis (directly through its internal sales force, and indirectly through Independent Sales Organizations (ISOs) and their representatives) to supermarket chains, grocery stores, convenience store merchants, other retailers, electronic funds transfer networks, financial institutions and trucking companies. The Company's strategy is to utilize its in-house marketing expertise in certain specialized market areas and broaden its access to growth opportunities nationwide by utilizing the broader market penetration of ISOs. The Company believes that the most promising growth opportunities currently exist in certain small retail merchant chains in specialized markets, and in the acquisition of merchant processing portfolios developed by smaller processing service providers. The Company has had success historically in marketing through key trade association relationships, such as its relationship with the NGA, as the recommended provider of electronic services to grocers, and through agreements with other payment service providers. Management is committed to the cultivation of such trade association relationships and the development of arrangements with other service providers. In 1998, the Company acquired DMS, a leading sales organization in the credit card industry. This added approximately 300 experienced sales representatives strategically located across the nation. As an integrated services provider, the Company has natural cross-selling marketing opportunities. In 1999 the Company merged with EPS. This provided the combined Company the ability to offer settlement processing services to EPS' customers who primarily received authorization services only from EPS. Additionally, EPS' merchant base of financial institutions provide the Company with additional marketing opportunities. When the Company established itself with the major truck stop chains as an authorized issuer of payment cards and processor of card transactions, the Company gained a substantial advantage in selling its card payment systems to trucking companies. The Company's established relationships with the truck stop owners also afforded an opportunity to sell the placement of ATMs at truck stops, which in turn provided a further advantage in selling the Company's integrated processing and banking services to trucking companies and truck drivers. The Company's established presence in grocery stores, grocery chains, convenience stores and other small and mid-size retailers gives it an advantage in establishing relationships with EBT providers, whose benefits are utilized largely at such retail locations. -3- The Company, through its 1997 acquisition of PSA, began selling payroll processing services to its retail, grocery store, trucking company and truckstop merchants. Management believes the payroll processing business is a large and growing market that will grow even faster as governmental requirements for electronic filings of reports increase the accounting burden for small businesses. As these businesses outsource the payroll process, growth opportunities in this market will increase further. The Company's main sales offices are located in suburbs of Memphis, Tennessee, Atlanta, Georgia and Wilmington, Delaware. Several of the Company's executive officers actively participate in the Company's marketing efforts. Competition The markets for electronic payment processing, credit and debit card payment settlement, check authorization programs, fuel card and cash forwarding services, and ATM services are all highly competitive. The Company's principal competitors include major national and regional banks, local processing banks, non-bank processors and other independent service organizations, many of which have substantially greater capital, management, marketing and technological resources than those of the Company. In each of the Company's largest service types, the Company competes against other companies who have a dominant share of each market. Management estimates the three largest credit and debit card processors account for roughly 50% of the total credit and debit card sales volume. Management estimates that a single competitor accounts for well in excess of 50% of the total dollar volume of payment transaction processing for the trucking industry. Another single competitor accounts for in excess of 50% of the total dollar volume of check verifications. There can be no assurance that the Company will continue to be able to compete successfully with such competitors. In addition, the competitive pricing pressures that would result from any increase in competition could adversely affect the Company's margins and may have a material adverse effect on the Company's financial condition and results of operations. The Company competes in its markets in terms of price, quality, speed and flexibility in customizing systems to meet the particular needs of customers. The Company believes that it is one of the few fully integrated suppliers of a broad range of hardware and processing, banking and data compilation services for use in transactions at retail locations. The Company also competes with other electronic payment processing organizations for growth opportunities. The recent trend of consolidation in the banking industry in the United States has resulted in fewer opportunities for merchant portfolio acquisitions, as many small banks have been acquired by large banks, some of which are competitors with the Company in the provision of processing services. -4- Supervision and Regulation Concord EFS, Inc. and its subsidiaries are subject to a number of federal and state laws. As a bank holding company, the Company is subject to regulation under the Bank Holding Company Act of 1956, as amended (the "Act") which is administered by the Federal Reserve Board (the "Board"). Under the Act, the Company is generally prohibited from directly engaging in any activities other than banking, managing or controlling banks, and bank-related activities. Also, the Act prohibits a bank holding company, with certain exceptions, from acquiring, directly or indirectly, ownership or control of 5% or more of the voting shares of any company which is not a bank or bank holding company. The primary exception to this prohibition involves activities which the Board determines are closely related to banking. A bank is also generally prohibited from engaging in certain tie-in arrangements with its bank holding company or affiliates with respect to the lease or sale of property, furnishing of services, or the extension of credit. The Act contains certain restrictions concerning future mergers with other bank holding companies and banks. Under the Act, a bank holding company is required to file with the Board an annual report and such additional information which the Board may require. The Board may examine the Company's and each of its subsidiaries' records, including a review of capital adequacy in relation to guidelines issued by the Board. If the level of capital is deemed to be inadequate, the board may restrict the future expansion and operations of the Company. The Board possesses cease and desist powers over a bank holding company if its actions or actions of any of its subsidiaries represent unsafe or unsound practices or violations of law. Federal law also regulates transactions among the Company and its affiliates, including the amount of a banking affiliate's loans to, or investments in, non-bank affiliates and the amount of advances to third parties collateralized by securities of an affiliate. In addition, various requirements and restrictions under federal and state laws regulate the operations of the Company's banking affiliates, requiring the maintenance of reserves against deposits, limiting the nature of loans and the interest that may be charged thereon, restricting investments and other activities. The Company's bank affiliates are also limited in the amount of dividends that they may declare. Prior regulatory approval must be obtained before declaring any dividends if the amount of capital, surplus and retained earnings is below certain statutory limits. As a national bank, EFSNB operates under the rules and regulations of the Office of the Comptroller of the Currency, which is its primary regulator and is also a member of the Federal Reserve System, subject to provisions of the Federal Reserve Act. As a federal savings bank, EFSFSB operates under the rules of the Office of Thrift Supervision, which has primary regulatory and supervisory jurisdiction over EFSFSB. The Federal Deposit Insurance Corporation insures the domestic deposits of both Banks. Periodic audits and regularly scheduled reports of financial information are required by all regulatory agencies. Federal laws also regulate certain transactions among EFSNB, EFSFSB and its affiliates, including Concord EFS, Inc. -5- The Company's EFT Services sold to financial institutions are regulated by certain State and Federal banking laws. Material changes in federal or state regulation could increase the cost to the Company of providing EFT Services, change the competitive environment or otherwise adversely affect the Company. The Company is not aware of any such change which is pending. In addition to regulation by federal and state laws and governmental agencies, the Company is subject to the rules and regulations of the various credit card and debit card associations and networks, including requirements for equity capital commensurate with processing transaction dollar volume. Employees As of December 31, 1999, the Company employed 2,265 full and part-time personnel, including 383 data processing and technical employees, 1,121 in operations, and 761 in sales and administration. Many of the Company's employees are highly skilled, and the Company believes its future success will depend in a large part on its ability to attract and retain such employees. The Company does have incentive agreements with the Chief Executive Officer and the President; however, the Company does not have any material employment contracts with other employees. None of the Company's employees are represented by a labor union and the Company has experienced no work stoppages. The Company considers its employee relations to be excellent. Item 2. PROPERTIES The following table sets forth certain information concerning the principal facilities of the Company, all of which are leased: Approximate Area In Lease Location Square Feet Primary Uses Expiration - ---------------- ----------- ---------------------- ----------------- Memphis, TN 43,375 Corporate Offices July 31, 2000 & EFSNB Operations Memphis, TN 6,480 EFSNB & CES Operations August 15, 2002 Bartlett, TN 14,580 EFSNB & CES Terminal October 15, 2004 Distribution Center Cordova, TN 48,119 EFSNB Customer May 1, 2006 Service Center Pleasanton, CA 10,083 Buypass Software October 31, 2000 Development Wilmington, DE 107,500 EPS & MAC Corporate May 21, 2005 Offices & Operations Bradenton, FL 1,680 DMS Sales Office December 31, 1999 Sarasota, FL 4,198 DMS Sales Office August 31, 1999 -6- Atlanta, GA 1,650 Buypass Operations February 29, 2000 Atlanta, GA 79,057 Buypass Operations February 22, 2001 & Data Processing Elk Grove, IL 20,330 Data Processing, May 31, 2000 Field Service, and CCC Operations Northfield, IL 21,622 DMS Operations November 30, 1999 Ft. Wright, KY 3,902 MAC Sales Office September 30, 2000 Tarrytown, NY 3,059 DMS Sales Office February 28, 2002 N. Olmstead, OH 36,627 MAC Data Processing December 31, 2003 Pittsburgh, PA 2,316 MAC Sales Office August 31, 2000 Columbia, TN 1,810 DMS Sales Office July 1, 2000 Cordova, TN 2,600 EFSFSB Branch June 30, 2003 Nashville, TN 3,730 PSA Operations February 28, 2003 Oakland, TN 800 EFSFSB Branch April 30, 1999 Addison, TX 2,204 DMS Sales Office March 31, 2000 The Company believes all facilities are adequate. Item 3. LEGAL PROCEEDINGS The Company is a party to various routine lawsuits arising out of the conduct of its business, none of which are expected to have a material adverse effect upon the Company's financial condition or results of operations. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of stockholders in the fourth quarter of fiscal 1999. -7- PART II Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Information included under the caption "Market for Registrant's Common Stock and Related Stockholder Matters" on pages 14 to 15 of the Annual Report to Stockholders is incorporated herein by reference. Item 6. SELECTED FINANCIAL DATA Information included under the caption "Selected Consolidated Financial Data" on page 1 of the Annual Report to Stockholders is incorporated herein by reference. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information included under the captions "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 4 to 15 of the Annual Report to Stockholders is incorporated herein by reference. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information appearing under the caption "Quantitative and Qualitative Disclosures About Market Risk" on pages 12 to 13 of the Annual Report to Stockholders is incorporated herein by reference. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The report of independent auditors and consolidated financial statements set forth below are included on pages 17 to 21 of the Annual Report to Stockholders, are incorporated herein by reference. Report of Independent Auditors. Consolidated Balance Sheets as of December 31, 1999 and 1998. Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997. Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997. Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997. Notes to Consolidated Financial Statements as of December 31, 1999. Quarterly results of operations for the years ended December 31, 1999 and 1998 on page 14 of the Annual Report to Stockholders are incorporated herein by reference. -8- All other schedules for which provision is made in the applicable accounting regulations of the Securities & Exchange Commission are not required under the related instructions and, therefore, have been omitted. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT See Item 13 below. Item 11. EXECUTIVE COMPENSATION See Item 13 below. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT See Item 13 below. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information with respect to Items 10, 11, 12, and 13 is included in the Company's Proxy Statement for the Annual Meeting of Stockholders to be held on May 25, 2000 under the captions "Election of Directors", "Executive Compensation", "Stock Options", Beneficial Ownership of Common Stock", and "Certain Transactions" and is incorporated herein by reference. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1)and (2) -- The response to this portion of Item 14 is submitted as a separate section of this report. (3) Listing of Exhibits: Exhibit Numbers 13 Annual Report to Stockholders 21 List of Subsidiaries 23 Consent of Independent Auditors 27 Financial Data Schedule * Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of this report -9- (b) Reports on Form 8-K: No reports on Form 8-K were filed during the last quarter of the period covered by this report. (c) Exhibits -- The response to this portion of Item 14 is submitted as a separate section of this report. (d) Financial Statement Schedules -- No financial statement schedules are required to be filed as part of this report on Form 10-K. -10- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has fully caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Concord EFS, Inc. By:/s/Dan M. Palmer By:/s/Thomas J. Dowling ----------------- -------------------- Dan M. Palmer Thomas J. Dowling Chief Executive Officer Chief Financial Officer Date: March 30, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date - ------------------------- ----------------------------- -------------- /s/ Dan M. Palmer Chairman of the Board and CEO March 30, 2000 Dan M. Palmer of the Company and EFS National Bank /s/ Edward A. Labry President of the Company and March 30, 2000 Edward A. Labry III EFS National Bank /s/ Richard M. Harter Director and Secretary of March 30, 2000 Richard M. Harter the Company /s/ Douglas C. Altenbern Director of the Company March 30, 2000 Douglas C. Altenbern /s/ David C. Anderson Director of the Company March 30, 2000 David C. Anderson /s/ J. Richard Buchignani Director of the Company and March 30, 2000 J. Richard Buchignani EFS National Bank /s/ Joyce Kelso Director of the Company and March 30, 2000 Joyce Kelso EFS National Bank /s/ Richard P. Kiphart Director of the Company March 30, 2000 Richard P. Kiphart /s/ Jerry D. Mooney Director of the Company March 30, 2000 Jerry D. Mooney /s/ Paul L. Whittington Director of the Company March 30, 2000 Paul L. Whittington /s/ Thomas J. Dowling Chief Financial Officer and March 30, 2000 Thomas J. Dowling Chief Accounting Officer of the Company CONCORD EFS, INC AND SUBSIDIARIES FORM 10-K LISTING OF EXHIBITS Exhibit Number Exhibit Description - -------- ---------------------------------------------------------------------- 13 Annual Report to Stockholders 21 List of Subsidiaries 23 Consent of Independent Auditors 27 Financial Data Schedule EX-13 2 ANNUAL REPORT TO STOCKHOLDERS CONCORD EFS, INC AND SUBSIDIARIES SELECTED FINANCIAL DATA The following selected financial data (in thousands, except per share data) should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere herein. Percentage of Revenue Percentage ----------------------- Change Year Ended --------------- Year Ended December 31 December 31 1999 1998 -------------------------------------------------------- ----------------------- Over Over 1999 1998 1997 1996 1995 1999 1998 1997 1998 1997 -------- -------- -------- -------- -------- ------ ------ ------ ------ ------ Income Statement Data: Revenue $830,059 $634,511 $490,030 $355,459 $295,552 100% 100% 100% 30.8% 29.5% Cost of Operations 592,299 446,515 340,770 241,273 197,394 71.4 70.4 69.5 32.6 31.0 Selling, General and Administrative Expenses 50,830 51,185 50,008 42,811 47,907 6.1 8.1 10.2 (0.7) 2.4 Acquisition and Restructuring Charges 36,189 - - - - 4.4 - - 100.0 - Operating Income 150,741 136,811 99,252 71,375 50,251 18.2 21.6 20.3 10.2 37.8 Interest Income (Expense), Net 16,092 3,703 (1,789) (10,296) (13,766) 1.9 0.6 (0.4) 334.6 307.0 Income Taxes 65,181 51,819 37,771 23,347 15,627 7.9 8.2 7.7 25.8 37.2 Net Income 101,652 88,695 59,692 37,732 20,858 12.2 14.0 12.2 14.6 48.6 Basic Earnings Per Share $0.51 $0.46 $0.31 $0.21 $0.12 Diluted Earnings Per Share $0.49 $0.45 $0.31 $0.21 $0.12 Basic Shares 199,147 191,539 189,888 174,437 169,622 Diluted Shares 206,392 197,921 194,906 180,284 175,281 Balance Sheet Data: Working Capital $ 509,756 $285,397 $148,987 $ 69,860 $ 32,911 Total Assets 1,096,865 784,118 619,196 554,462 396,144 Long Term Debt, Less Current Maturities 75,000 173,000 153,329 150,561 175,978 Total Stockholders' Equity 702,313 360,535 260,544 182,126 45,339
-1- Dear Stockholders: Concord has again produced another record year of financial results. For 1999, excluding acquisition and restructuring charges, revenue increased 31%, net income increased 46% and diluted earnings per share increased 40%. This was the Company's 13th consecutive year of earnings growth. In reviewing the Company's progress over the past decade there have been a number of key turning points. In the early part of the decade its principal subsidiary, EFS, Inc., was converted to EFS National Bank. This allowed the Company to provide its own sponsorship, to perform settlement services completing the vertical integration of its service offerings, and to connect into regional and national credit and debit networks, thus reducing transaction costs significantly. Additionally, the Company won the endorsement of the National Grocers Association as a recommended processor for electronic credit and debit card transactions to its members, thus accelerating revenue growth in a new market segment. In the mid 90's, it began placing automated teller machines (ATMs) in truckstops and became the largest provider of ATMs to large truckstop chains across the country. And finally in 1999, we completed the acquisition and integration of Electronic Payment Services, Inc. (EPS) and ended the year meeting management's goals for growth and earnings for the combined entity. Concord enjoyed steady growth from its core business lines in 1999, adding new merchants and benefiting from the shift to electronic transactions in the general retail, supermarket, petroleum, financial institution, and trucking distribution channels. With strong market share in these segments, Concord is well positioned for continued growth in virtually all types of cashless payment, including all card types -- credit, debit, electronic benefits transfer (EBT), fleet, prepaid, and ACH -- and a variety of check-based options. In June, we held a $1.1 billion common stock offering, which was the second largest in the history of the NASDAQ stock exchange up to that point. This offering principally allowed the former owners of EPS to sell the Concord common stock they received in the acquisition of EPS. In July, Concord announced that it had been selected by the Food Marketing Institute to be a strategic partner in developing electronic payment solutions to reduce costs in the supermarket industry. For its contribution to the partnership, Concord is developing and testing methods such as check conversion and pre-authorized debit to replace traditional paper checks. We anticipate that this will become a major new source of transaction revenue in the near future. In keeping with our mission to expedite cashless commerce with complete business solutions, we announced our strategy for facilitating business-to-consumer and business-to-business commerce on the Internet. Our three-tiered approach involves supplying the building blocks for e-commerce to companies of all sizes, from small "Main Street" stores without a presence on the World Wide Web, to large, sophisticated clients seeking a secure processing engine for high-volume sites. In November, we announced an agreement to acquire Virtual Cyber Systems (VCS), an Internet software development company. Its software will be a key element in helping small merchants manage their web sites efficiently and inexpensively. -2- And finally, in December we announced an agreement to acquire Card Payment Systems (CPS), a reseller specializing in providing card-based payment processing services to independent sales organizations, which in turn sell those services to retailers. CPS will form the foundation for an important new unbranded distribution channel for Concord's full range of cashless commerce services. Completion of these acquisitions was announced in February 2000. The outcome of this remarkable year is that an even stronger Company emerged. We ended the year as the nation's largest ATM processor, the largest acquirer of on-line debit and EBT transactions, and the leading point-of-sale provider to the supermarket and petroleum industries. We believe the Company will continue to grow revenue and earnings at a high rate into the future. Sincerely, Dan M. Palmer Edward A. Labry III Chairman of the Board President Chief Executive Officer -3- Concord EFS, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations This Annual Report may contain or incorporate by reference statements which may constitute "forward-looking" information, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended. Any such statements are not guarantees for future performance and involve risks and uncertainties, and actual results may differ materially from those contemplated by such forward-looking statements. Important factors that could cause actual results to differ materially from those in forward-looking statements include (i) the loss of key personnel or inability to attract additional qualified personnel, (ii) changes in card association rules, (iii) changes in card association fees, (iv) restrictions on surcharging or a decline in the deployment of automated teller machines, (v) dependence on VISA and MasterCard registrations, (vi) the credit risk of merchant customers, (vii) susceptibility to fraud at the merchant level, (viii) receiving lower price margins from higher volume merchants, (ix) increasing competition, (x) the success of a new VISA debit card product, (xi) the loss of key customers, (xii) continued consolidation in the banking and retail industries, (xiii) risks related to acquisitions, (xiv) changes in rules and regulations governing financial institutions, (xv) the inability to remain current with rapid technological change, (xvi) dependence on third-party vendors, (xvii) the imposition of additional state taxes, (xviii) volatility of the Company's common stock price and (xix) changes in interest rates. The Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future results over time. Recent Acquisitions On February 26, 1999, the Company completed its acquisition of EPS, a company which provides transaction processing services to financial institutions and retailers throughout the United States. The acquisition was accounted for as a pooling of interests in which the Company exchanged 45.1 million of its shares for all of the outstanding common stock of EPS. The Company incurred $36.2 million of expenses related to the acquisition in 1999. These expenses included communication conversion costs, advisory fees, severances and asset write-offs. Management continues to review potential operational synergies from the acquisition, such as duplicate facilities, computer hardware and software and other contractual relationships. On February 1, 2000, the Company announced completion of the acquisition of CPS, a New York-based reseller of payment processing services. The acquisition will be accounted for as a pooling of interests transaction in which Concord will issue 6.2 million shares of its common stock. CPS provides card-based payment processing services to independent sales organizations (ISOs), which in turn sell those services to retailers. The Company anticipates acquisition costs related to this transaction will be incurred during the first quarter of 2000; however, the impact to the results of operations is not expected to be significant. -4- Concord EFS, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Recent Acquisitions - continued On February 7, 2000 the Company announced completion of its acquisition of Virtual Cyber Systems (VCS), an internet software development company. The acquisition of VCS, for which the Company will pay approximately $2 million, will be accounted for as a purchase transaction and will be immaterial to the Company's financial statements. Restatement of Historical Financial Information The historical financial information presented herein has been restated in accordance with pooling of interests method of accounting for business combinations. The financial information reflects the financial position, operating results and cash flows of the respective companies as though the companies were combined for all periods presented. Overview Concord EFS, Inc. (the Company) is a fully integrated leading provider of electronic transaction authorization, processing, settlement and funds transfer services on a nationwide basis. The Company focuses on marketing its services to supermarket chains and multiple lane retailers, financial institutions, petroleum and convenience stores, grocery stores, the trucking industry and other retailers. The Company's primary activity is Merchant Services, in which it provides integrated electronic transaction services for credit card, debit card and electronic benefits transfer (EBT) card transactions. These transaction services include data capture, authorization and settlement services for over 400,000 point-of-sale terminals. The Company also provides automated teller machine (ATM) Services, consisting of owning and operating the MAC-branded electronic funds transfer network and processing for approximately 39,000 ATMs nationwide, of which it owns approximately 1,000. The substantial majority of the Company's revenue (68.0% in 1999 and 67.0% in 1998) is generated from fee income related to Merchant Services. These services include: -- the processing of credit card transactions for all major credit card brands including VISA, MasterCard, American Express, Discover and Diners Club; -- the processing of debit card transactions for financial institutions issuing these and similar cards; and -- the provision of electronic payment services to supermarket chains and multiple lane retailers, financial institutions, petroleum and convenience stores, grocery stores, trucking companies and other retailers. -5- Concord EFS, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Overview - continued Revenue from Merchant Services consists primarily of discount fees charged to merchants, which are a percentage of the dollar amount of each credit card transaction the Company processes, as well as a flat fee per transaction. The discount fee is negotiated with each merchant and typically constitutes a bundled rate for the transaction authorization, processing, settlement and funds transfer services we provide. This revenue and fees from other transactions are recognized at the time the merchants' transactions are processed. The other principal component of the Company's revenue derives from ATM Services (approximately 30.0% in 1999 and 31.0% in 1998). ATM Services revenue consists of fee income and other surcharges charged for proprietary ATMs, processing fees for third party ATMs and terminals, and other access, switching and card processing fees. The remaining balance of the Company's revenue is derived principally from check verification and authorization services and sales of point-of-sale terminals. Revenues related to ATM services are recognized at the time of the transaction. Cost of operations includes all costs directly attributable to the provision of services to the Company's customers. The most significant component of cost of operations includes interchange and assessment fees, which are amounts charged by the credit and debit card associations. Interchange and assessment fees are billed primarily as a percentage of dollar volume processed and, to a lesser extent, as a per-transaction fee. Cost of operations also includes telecommunications costs, occupancy costs, depreciation, the cost of equipment leased and sold, operating salaries and wages, amortization of merchant contracts and other intangibles, the cost of operating the Company's MAC network and other miscellaneous merchant supplies and services expenses. The Company's selling, general and administrative expenses include salaries and wages and other general administrative expenses (including certain amortization costs). Results of Operations 1999 Compared to 1998 Revenue increased 31% in 1999. Transaction processing revenue from Merchant Services, which includes credit, debit, EBT and fuel card transactions, increased 33% for the year. This additional revenue was the result of higher transaction processing volumes from adding new merchants, increasing acceptance of electronic payment cards and the cross-selling of settlement processing to several of EPS' higher volume merchants. Merchant Services was 68% of total revenue. ATM Services, which include ATM terminal driving, MAC network access, -6- Concord EFS, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations - continued processing, gateway and off-line debit fees, as well as ATM surcharges and processing fees, increased 26%. Increased transactional volumes and in-house processing of the EPS off-line debit product were the primary factors for the increase. ATM Services was 30% of total revenue. Other revenue, primarily Check and Terminal Services, was 2% of total revenue and increased 32% in 1999 on higher terminal sales in 1999. Net income as a percentage of revenue decreased in 1999 to 12.2% from 14.0% in the prior year. The primary component of the change in net income as a percentage of revenue was due to the one-time acquisition and restructuring charges related to the merger with EPS. Additionally, net income as a percentage of revenue decreased due to the Company's overall tax rate which increased from 36.9% in 1998 to 39.1% in 1999. The increase in the tax rate resulted from certain nondeductible acquisition costs and a tax component write-off of $1.3 million for impaired state tax net operating losses of EPS incurred after the one-time acquisition and restructuring charges related to the merger of EPS. Excluding the pre-tax charges and tax component write-off, the tax rate decreased from 36.9% in 1998 to 36.3% in 1999. Excluding the pre-tax charges and tax component write-off, net income as a percentage of revenue improved to 15.6% compared to 14.0% in 1998, an increase of 11% over the prior year. This net margin improvement was the result of a combination of factors. Improvements, as a percentage of revenue, were made in selling, general and administrative expenses and net interest income. These improvements were offset by an increase in the cost of operations as a percentage of revenue. Cost of operations increased in 1999 to 71.4% of revenue compared to 70.4% in the prior year. The increase in cost of operations, as a percentage of revenue, was primarily due to lower margin revenue, starting late in the third quarter of 1999, which was principally from larger, higher volume merchants who command and deserve lower transactional pricing. This lower margin revenue was primarily from the cross-selling of settlement processing to several higher volume EPS merchants and from bringing our off-line debit product in-house. The new lower margin revenue was partially offset by other operating costs such as payroll, depreciation and amortization and other certain operating costs, decreasing as a percentage of revenue. Selling, general and administrative expenses decreased from $51.2 million in 1998 to $50.8 million in 1999, a decrease of $0.4 million. These expenses were down slightly as higher salaries and wages were offset by lower legal and other expenses. As a result, selling, general and administrative expenses were 6.1% of revenue in 1999 versus 8.1% in 1998. -7- Concord EFS, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations - continued The Company incurred certain acquisition and restructuring charges in 1999 totaling $36.2 million as a result of its merger with EPS. These expenses included $10.5 million related to the acquisition of EPS. These expenses were primarily for investment banking fees; however, legal, accounting, registration and other fees and expenses were also incurred. In order to create a single communications infrastructure for the Company's transaction processing businesses, the Company adopted a plan to convert EPS' communications network and accrued $12.4 million related to the conversion plan. Asset write-offs of $8.2 million were incurred relating to the acquisition of EPS. For competitive reasons, resources were reallocated in certain geographic areas of the MAC network of EPS, causing impairment to the related intangible assets of approximately $2.8 million. Upon review of EPS contracts and the undiscounted cash flows estimated to be generated by the related customer list intangible assets of EPS, the Company recognized impairment loss of approximately $3.6 million. An additional $1.8 million was written off for assets that are no longer used or supported under restructured marketing and business plans adopted by the Company. EPS uses a third party bank for its off-line debit processing. During the year ended December 31, 1999, the Company adopted a plan to take this process in-house, and the applicable restructuring charge of $2.8 million was incurred. Related to the reallocated resources in certain geographic areas of the MAC network, EPS employees from those regions were terminated as the related facilities were closed for which approximately $0.2 million was charged. Additionally, certain employees of EPS were terminated due to the reorganization of management for the combined Company. The total cost charged for severance was $0.7 million. An additional severance cost of $1.4 million was accrued during the fourth quarter for the termination of an employee under contract by EPS. The Company has utilized all but $12.7 million of the $36.2 million liability. The Company anticipates that the remainder of the liability related to system restructuring will be extinguished by December 31, 2000. (See Notes to the Consolidated Financial Statements for a detailed rollforward of the $36.2 million liability for the year ended December 31, 1999.) In addition to the pre-tax charges, a tax component write-off of $1.3 million for impaired state tax net operating losses of EPS was incurred. -8- Concord EFS, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations - continued Net interest income improved as a percentage of total revenue to 1.9% in 1999 compared to 0.6% in 1998. A principal source of additional interest income each year is the investment of available cash flow from operations in securities available for sale. Approximately $61.7 million from the June 1999 offering of the Company's common stock was invested in securities available for sale. Increased transaction settlement volumes contributed to interest earned from overnight and short-term investments. These factors increased interest income by 50% over 1998. Total long and short-term debt was reduced approximately $146 million in June 1999 from the proceeds of the June 1999 common stock offering. As a result, interest expense decreased 22% in 1999 from 1998. The combination of these factors increased net interest income as a percentage of revenue. 1998 Compared to 1997 Revenue increased 30% in 1998. Transaction processing revenue from Merchant Services, which includes credit, debit, EBT and fuel card transactions increased 36% for the year. The addition of new merchants increased transactional volumes and related revenue. Higher credit card transaction processing rates also contributed to the increase in revenue. The increase in rates was a pass-through of higher interchange expenses assessed to the Company from the credit card associations. The widening acceptance of debit and EBT card transactions at new and existing merchants also contributed to the increase in revenue. Merchant Services was 67% of total revenue. ATM Services, which include ATM terminal driving, MAC network access, processing, gateway and off-line debit fees, as well as ATM surcharges and processing fees, increased 19%. The placement of new ATMs, new ATM processing customers and increases in transactional volumes accounted for the increase. ATM Services was 31% of total revenue. Other revenue, primarily Check and Terminal Services, was 2% of total revenue and increased 7% in 1998. Net income as a percentage of revenue increased in 1998 to 14.0% from 12.2% in the prior year. Cost of operations increased in 1998 to 70.4% of revenue compared to 69.5% in the prior year. Operational cost increases were due to the blended growth of several costs at varying rates. Interchange costs from credit card association increases and Year 2000 compliance and development expenses were balanced by other operating expenses such as depreciation and payroll growing at a slower rate than revenue. The primary component of the margin improvement was due to selling, general and administrative expenses increasing only $1.2 million or 2%, from $50.0 million in 1997 to $51.2 million in 1998. As a result of slower growth rate in these expenses, selling, general and administrative expenses were 8.1% of revenue in 1998 versus 10.2% in 1997. -9- Concord EFS, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations - continued A second component of the margin improvement was the combination of net interest income (expense) and income taxes. During 1998 the Company increased its allocation of municipal investment securities within the investment portfolio from 18% at year end 1997 to 41% at year end 1998. Municipal investment securities are generally tax-exempt for federal income tax purposes and have lower interest rates than taxable investment securities. While the total debt increased $19.3 million in 1998 to $198.1 million from $178.8 million in 1997, $45 million in new debt was used to purchase higher yielding investment securities while existing higher rate debt was paid down by $25.7 million. As a result of these factors, net interest income (expense) increased as a percentage of total revenue to 0.6% in 1998 from (0.4%) in 1997, and the Company's overall tax rate decreased from 38.8% in 1997 to 36.9% in 1998 due to the non-taxable interest income. Goodwill and Other Intangible Assets At December 31, 1999 and 1998, approximately $3.1 million and $3.9 million, respectively, were paid to customers under the Company's conversion assistance program. These payments were made to customers converting to the MAC network primarily for promotional sign replacements and card reissuance. Amortization expense associated with these assets was approximately $2.2 million, $3.1 million, and $3.0 million for the years ended December 31, 1999, 1998 and 1997, respectively. These payments are being amortized over five years. On July 25, 1997, the Company entered into an agreement with an unrelated third party whereby the Company granted perpetual licensing rights to the technology to the third party in exchange for $25.0 million. The agreement further grants the third party exclusive rights to the technology for a period of four years. The proceeds received from the licensing agreement have been deferred and are being earned over the exclusivity period of the agreement. The development costs capitalized are being amortized over the same period. The Company had goodwill and other intangible assets, net of accumulated amortization, of $110.7 million and $104.3 million at December 31, 1999 and 1998, respectively. These assets comprised 10.1% and 13.3% of total assets and 15.8% and 28.9% of stockholders' equity at December 31, 1999 and 1998, respectively. Goodwill arose primarily from a series of transactions that occurred related to EPS, prior to its merger with the Company in 1999. The majority of the goodwill was contributed to EPS as part of its formation in 1992. -10- Concord EFS, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations The carrying value of goodwill and other intangible assets is evaluated by management for impairment at each balance sheet date through review of actual attrition and cash flows generated by the acquired companies, purchased merchant contracts and customer lists in relation to the expected attrition and cash flows and the recorded amortization expense. If, upon review, actual attrition and cash flows indicate impairment in the value of the assets, an impairment loss would be recognized. Management has concluded, given the earnings and cash flows currently being generated by the acquired companies, purchased merchant contracts and customer lists, that no impairment of goodwill or the other intangible assets existed at December 31, 1999. Liquidity and Capital Resources The Company consistently generates significant resources from operating activities. Over the past three years operating activities generated cash of $175.4 million, $155.8 million, and $75.4 million for the years ended December 31, 1999, 1998, and 1997, respectively. Significant changes in accounts receivable and accounts payable result from the day of the week the calendar year end falls combined with the increases in settlement volume from one year to the next, impacting cash generated from operations. The Company completed an offering of common stock in June 1999. Proceeds from the 10.1 million shares issued were $207.8 million. Approximately $146 million of these proceeds were used to repay the long-term debt and short-term borrowings of EPS. The balance of the net proceeds held by the Company will be available for working capital and general corporate purposes, including the possible acquisition of transaction processing businesses and use in other subsidiaries of the Company. Stock issued upon exercises of options under the Company's Incentive Stock Option Plan provided $22.6 million in additional capital in 1999. The disqualifying disposition of the options also reduced corporate income taxes paid by $23.4 million. Management cannot estimate the timing or amount of future cash flows from exercise of options; however, this is expected to continue to be a source of funds to the Company. Common stock issuances and the related proceeds and income tax benefits were higher in 1999 than previous years due to the merger of the Company with EPS. EPS stock options were converted into Company stock options as a function of the merger and would have terminated on November 23, 1999 if not exercised. Therefore, nearly 100% of these options were exercised in the current year. During fiscal 1999, the Company invested approximately $189.4 million in securities in short and medium-term, interest-bearing obligations, net of sales and maturities, described in the Notes to the Consolidated Financial Statements. -11- Concord EFS, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources - continued The Company invested $58.3 million in capital additions and $26.3 million to acquire processing rights to merchant contracts. These investing activities were funded primarily through operating activities and proceeds from the offering (see Notes to Consolidated Financial Statements). The Company has available credit of $55.0 million with financial institutions. As of December 31, 1998, $21.0 million was outstanding on these lines of credit. The Company holds securities with a market value of approximately $351.2 million that are available for operating needs or as collateral to obtain short-term financing, if needed. The Company continues to have adequate available credit and strong cash generation. The Company is in sound financial condition and expects to fund continued growth from currently available resources. Both financial institution subsidiaries exceed all required capital ratios. The Company's ability to pay dividends to its stockholders is restricted due to its ownership of two federally insured depository institutions. The regulatory bodies that monitor the capital levels of the institutions require certain minimum capital levels be maintained as required by law. Effects of Inflation The Company's assets are primarily monetary, consisting of cash, assets convertible into cash, securities owned and receivables. Because of their liquidity, these assets are not significantly affected by inflation. Management believes that replacement costs of property and equipment will not materially affect operations. The rate of inflation does affect the Company's expenses, such as those for employee compensation and communications, which may not be readily recoverable in the price of services offered by the Company. Quantitative and Qualitative Disclosures About Market Risk The securities of the Company are subject to risk resulting from interest rate fluctuations to the extent that there is a difference between the amount of the Company's interest-bearing assets and the amount of interest-bearing liabilities that are prepaid, mature or reprice in specific periods. This risk is mitigated by the fact that approximately 84% of the market value of securities owned were funded through equity rather than debt. The principal objective of the Company's asset/liability activities is to provide maximum levels of net interest income while maintaining acceptable levels of interest rate and liquidity risk and facilitating the funding needs of the Company. The Company utilizes an interest rate sensitivity model as the primary quantitative tool in measuring the amount of interest rate risk that is present at the end of each month. -12- Concord EFS, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk - continued The following provides comparative information in tabular form about the Company's financial instruments that are sensitive to changes in interest rates. This table presents principal cash flows and related weighted-average interest rates by expected maturity dates. Additionally, the Company has assumed its securities, described in the Notes to Consolidated Financial Statements, are similar enough to aggregate those securities for presentation purposes. If tax equivalent yields of municipal securities had been utilized, the weighted-average interest rates would have been higher. December 31, 1999 2000 2001 2002 2003 2004 Thereafter Total Fair Value (in thousands) ------- ------- ------- ------- ------- ---------- -------- ---------- Assets: Available-for-sale securities $69,770 $38,885 $32,494 $22,259 $24,999 $290,663 $479,070 $445,407 Average interest rate 6.6% 6.7% 6.7% 6.2% 6.4% 5.9% Liabilities: Deposits $90,827 $ 6,495 $ 2,609 $ 218 $ 326 $100,475 $100,557 Average interest rate 4.2% 5.7% 5.6% 5.3% 5.8% Long-term debt $18,000 $10,000 $47,000 $75,000 $72,099 Average interest rate 6.1% 5.6% 5.4% December 31, 1998 1999 2000 2001 2002 2003 Thereafter Total Fair Value (in thousands) ------- ------- ------- ------- ------- ---------- -------- ---------- Assets: Available-for-sale securities $34,705 $ 8,354 $15,956 $ 8,309 $17,624 $191,640 $276,588 $278,398 Average interest rate 6.2% 6.5% 4.8% 5.1% 4.8% 5.8% Liabilities: Deposits $32,153 $ 2,098 $ 777 $ 31 $ 34,907 $ 34,903 Average interest rate 2.9% 5.4% 5.4% 5.5% Short-term borrowings $21,000 $21,000 $21,000 Average interest rate 5.8% Long-term debt, including current portion $25,116 $25,000 $25,000 $53,000 $35,000 $35,000 $198,116 $196,652 Average interest rate 6.4% 6.4% 6.4% 6.1% 6.2% 5.4%
-13- Concord EFS, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Recent Quarterly Results The following table presents an unaudited summary of quarterly results for the quarters of the calendar years 1999 and 1998. 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ----------- ----------- ----------- ----------- (in thousands, except per share data) 1999 Revenue $170,234 $193,724 $216,147 $249,954 Operating Income 2,207 43,864 50,149 54,521 Net Income (Loss) (2,868) 29,266 35,584 39,670 Per Share: Basic Earnings (Loss) ($0.01) $0.15 $0.17 $0.20 Diluted Earnings (Loss) ($0.01) $0.14 $0.17 $0.19 1998 Revenue $134,666 $155,258 $167,555 $177,032 Operating Income 26,537 33,421 36,946 39,907 Net Income 17,349 21,331 23,765 26,250 Per Share: Basic Earnings $0.09 $0.11 $0.13 $0.14 Diluted Earnings $0.09 $0.11 $0.12 $0.13 The quarterly information reported previously on Form 10-Q for the quarters indicated above has been restated to reflect mergers accounted for as poolings of interests, including the retroactive effect of the merger with EPS on February 26, 1999. Market Value The Company's common stock trades on The NASDAQ Stock Market under the symbol "CEFT". The following table sets forth the range of high and low sales price per share of the Company's common stock through December 31, 1999, as reported by NASDAQ. High Low -------------- ------------- 1999 First Quarter $27.25 $17.00 Second Quarter 28.21 19.08 Third Quarter 27.38 20.25 Fourth Quarter 33.00 20.06 1998 First Quarter $15.63 $ 8.87 Second Quarter 17.67 12.67 Third Quarter 18.83 12.92 Fourth Quarter 28.25 12.67 -14- Concord EFS, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations As of March 17, 2000 there were approximately 33,700 stockholders, which was determined by reference to the number of record holders. The Company has never paid cash dividends. It is the present policy of the Company's Board of Directors to retain earnings to finance expansion in the foreseeable future. Year 2000 Issues During 1999, the Company successfully implemented its Year 2000 preparedness plan which included both IT and Non-IT systems. The date change event had no significant or material adverse impact to the Company's financial condition, liquidity, or results of operations. The Company will continue monitoring and support activities related to the Year 2000 preparedness plan to ensure continued functionality and to minimize unanticipated risks. To complete its Year 2000 preparedness plan the Company incurred expense of approximately $6.4 million in 1998 and $3.7 million in 1999. The Company expensed all costs associated with its Year 2000 preparedness plan. Any additional expense which might be incurred for ongoing monitoring and support of the Year 2000 preparedness plan is not expected to have a material impact on the Company's financial condition, liquidity, or results of operations. -15- Concord EFS, Inc. and Subsidiaries Report of Independent Auditors Board of Directors and Stockholders Concord EFS, Inc. We have audited the accompanying consolidated balance sheets of Concord EFS, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Concord EFS, Inc. and subsidiaries at December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Memphis, Tennessee February 10, 2000 Concord EFS, Inc. and Subsidiaries Consolidated Balance Sheets December 31 1999 1998 -------------------------- (in thousands) Assets Current assets Cash and cash equivalents $ 119,824 $ 82,029 Securities available for sale 456,209 288,180 Accounts receivable, less allowance of $3,181 at December 31, 1999 and $2,324 at December 31, 1998 188,671 106,662 Inventories 17,892 11,396 Prepaid expenses and other current assets 11,369 7,434 Deferred income taxes 9,108 5,977 ------------ ----------- Total current assets 803,073 501,678 Property and equipment, net 167,368 154,490 Goodwill, net 54,046 60,570 Other intangible assets, net 56,620 43,765 Other assets 15,758 23,615 ------------ ----------- Total assets $ 1,096,865 $ 784,118 ============ =========== See notes to consolidated financial statements. -17- Concord EFS, Inc. and Subsidiaries Consolidated Balance Sheets December 31 1999 1998 --------------------------- (in thousands) Liabilities and stockholders' equity Current liabilities Accounts payable and other liabilities $ 126,991 $ 77,469 Deposits 100,475 34,907 Accrued liabilities 50,131 47,641 Income taxes payable 15,720 10,148 Short-term borrowings - 21,000 Current maturities of long-term debt - 25,116 ------------ ----------- Total current liabilities 293,317 216,281 ------------ ----------- Long-term debt, less current maturities 75,000 173,000 Deferred income taxes 16,566 21,336 Other liabilities 9,669 12,966 ------------ ----------- Total liabilities 394,552 423,583 ------------ ----------- Commitments and contingent liabilities Stockholders' equity Common stock, $0.33 1/3 par value; authorized 500,000 shares, issued and outstanding 205,882 shares at December 31, 1999 and 127,935 shares at December 31, 1998 68,628 42,646 Additional paid-in capital 282,863 55,018 Retained earnings 363,354 261,702 Accumulated other comprehensive income (loss) (12,532) 1,169 ------------ ----------- Total stockholders' equity 702,313 360,535 ------------ ----------- Total liabilities and stockholders' equity $ 1,096,865 $ 784,118 ============ =========== See notes to consolidated financial statements. -18- Concord EFS, Inc. and Subsidiaries Consolidated Statements of Income For Year Ended December 31 ---------------------------------------- 1999 1998 1997 ----------- ----------- ----------- (in thousands, except per share data) Revenue $830,059 $634,511 $490,030 Cost of operations 592,299 446,515 340,770 Selling, general and administrative expenses 50,830 51,185 50,008 Acquisition and restructuring charges 36,189 - - ----------- ----------- ----------- Operating income 150,741 136,811 99,252 Other income (expense): Interest income 27,501 18,379 12,287 Interest expense (11,409) (14,676) (14,076) ----------- ----------- ----------- Income before taxes 166,833 140,514 97,463 Income taxes 65,181 51,819 37,771 ----------- ----------- ----------- Net income $ 101,652 $ 88,695 $ 59,692 =========== =========== =========== Per share data: Basic earnings per share $0.51 $0.46 $0.31 =========== =========== =========== Diluted earnings per share $0.49 $0.45 $0.31 =========== =========== =========== Average shares outstanding: Basic shares 199,147 191,539 189,888 =========== =========== =========== Diluted shares 206,392 197,921 194,906 =========== =========== =========== See notes to consolidated financial statements. -19- Concord EFS, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity Accumulated Additional Other Common Stock Paid-In Retained Comprehensive Shares Amount Capital Earnings Income (Loss) Total ----------- ------------ ------------- ------------ ------------------ ------------ (in thousands) Balance at January 1, 1997 85,371 $28,457 $ 46,464 $113,315 ($496) $187,740 Exercise of stock options 1,076 359 6,300 6,659 Tax benefit of nonqualifying stock option exercises 5,858 5,858 Net income 59,692 59,692 Change in net unrealized loss on securities available for sale, net of tax of $323 595 595 ------------ Comprehensive income 60,287 ----------- ------------ ------------- ------------ ------------------ ------------ Balance at December 31 1997 86,447 28,816 58,622 173,007 99 260,544 Exercise of stock options 413 138 6,458 6,596 Three for two stock split 41,075 13,692 (13,692) Tax benefit of nonqualifying stock option exercises 3,630 3,630 Net income 88,695 88,695 Cumulative effect of accounting change, net of tax of $421 776 776 Change in net unrealized gain on securities available for sale, net of tax of $158 294 294 ------------ Comprehensive income 89,765 ----------- ------------ ------------- ------------ ------------------ ------------ Balance at December 31, 1998 127,935 42,646 55,018 261,702 1,169 360,535 Exercise of stock options 2,664 888 21,714 22,602 Three for two stock split 68,535 22,845 (22,845) Offering of common stock 6,748 2,249 205,569 207,818 Tax benefit of nonqualifying stock option exercises 23,407 23,407 Net income 101,652 101,652 Change in net unrealized gain on securities available for sale, net of tax of $7,764 (13,701) (13,701) ------------ Comprehensive income 87,951 ----------- ------------ ------------- ------------ ------------------ ------------ Balance at December 31, 1999 205,882 $68,628 $282,863 $363,354 ($12,532) $702,313 =========== ============ ============= ============ ================== ============
See notes to consolidated financial statements. -20- Concord EFS, Inc. and Subsidiaries Consolidated Statements of Cash Flows Year ended December 31 --------------------------------------- 1999 1998 1997 ------------ ------------ ----------- Operating activities (in thousands) Net income $ 101,652 $ 88,695 $ 59,692 Adjustments to reconcile net income to net cash provided by operating activities: Provision for losses on accounts receivable 3,474 3,654 1,445 Depreciation and amortization 65,110 55,390 41,566 Deferred income taxes (136) 1,520 (7,330) Net realized gain on sales of securities available for sale (230) (1,234) (522) Restructuring charges 8,152 - - Changes in operating assets and liabilities: Accounts receivable (70,098) (14,021) (17,446) Inventories (6,496) (5,498) (291) Prepaid expenses and other current assets (3,935) (1,879) (1,024) Accounts payable and other liabilities 77,693 28,770 (440) Other, net 183 384 (293) ---------- ---------- ---------- Net cash provided by operating activities 175,369 155,781 75,357 Investing activities Acquisition of securities available for sale (271,603) (240,783) (156,390) Proceeds from sales of securities available for sale 51,051 105,617 48,923 Proceeds from maturity of securities available for sale 31,105 47,183 32,346 Acquisition of securities held to maturity - (9,630) (17,141) Proceeds from maturity of securities held to maturity - 4,843 21,347 Acquisition of property and equipment (58,324) (65,205) (44,042) Purchased merchant contracts (26,289) (16,946) (12,986) Proceeds from licensing agreement - - 25,000 Other investing activity (15,386) (24,130) (2,449) ---------- ---------- ---------- Net cash used in investing activities (289,446) (199,051) (105,392) Financing activities Net increase in deposits 65,568 24,769 3,429 Borrowing (repayment) under credit agreement (net) (21,000) (8,000) (21,000) Proceeds from notes payable 12,000 45,000 28,000 Payments on notes payable (135,116) (25,658) (25,418) Proceeds from exercise of stock options 22,602 6,596 6,659 Proceeds from offering of common stock 207,818 - - ---------- ---------- ---------- Net cash provided by (used in) financing activities 151,872 42,707 (8,330) ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents 37,795 (563) (38,365) Cash and cash equivalents at beginning of year 82,029 82,592 120,957 ---------- ---------- ---------- Cash and cash equivalents at end of year $ 119,824 $ 82,029 $ 82,592 ========== ========== ========== Supplemental disclosure of cash flow information: Interest paid $ 11,363 $ 14,346 $ 13,725 ========== ========== ========= Income taxes paid $ 35,709 $ 46,346 $ 32,940 ========== ========== =========
See notes to consolidated financial statements. -21- Concord EFS, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 1999 Note A - Significant Accounting Policies Nature of Operations: Concord EFS, Inc. (Company or Parent) is a fully integrated provider of electronic transaction authorization, processing, settlement and funds transfer services on a nationwide basis. The Company's primary activity is Merchant Services, in which it provides integrated electronic transaction services for credit card, debit card and electronic benefits transfer card transactions. The Company also operates a network of automated teller machines (ATM), some of which the Company owns and others for which the Company provides network and processing services. Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its subsidiaries after elimination of all material intercompany balances and transactions. Business Combinations: The consolidated financial statements have been restated for all transactions accounted for as poolings of interests to reflect the financial position, results of operations and cash flows of the respective companies as though the companies were combined for all periods presented. Transactions accounted for under the purchase method of accounting reflect the net assets of the acquired company at fair value on the date of acquisition. Goodwill is amortized on a straight-line basis over 15-25 years. The results of operations of the purchased company are included since the date of acquisition. Use of Estimates: The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash Equivalents: The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Securities Available for Sale: Management determines the appropriate classification of debt securities at the time of purchase and evaluates such designation as of each balance sheet date. Securities available for sale are stated at fair value, with the unrealized gains and losses, net of tax, reported as a component of accumulated other comprehensive income (loss) in stockholders' equity. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of mortgage-backed securities, over the estimated life of the security. Such amortization, interest and dividends are included in interest income from investments. The cost of securities sold is based on the specific identification method. -22- Concord EFS, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 1999 Note A - Significant Accounting Policies, continued Inventories: Inventories are stated at the lower of cost (first-in, first-out method) or market. Property and Equipment: Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Other Intangible Assets: Purchased merchant contracts are recorded at cost and are evaluated by management for impairment at each balance sheet date through review of actual attrition and cash flows generated by the contracts in relation to the expected attrition and cash flows and the recorded amortization expense. If, upon review, actual attrition and cash flows indicate impairment of the value of the purchased merchant contracts, an impairment loss would be recognized. Amortization expense was recognized on a straight-line basis over an estimated useful life of five years through December 31, 1997. Effective January 1, 1998, the Company changed the estimated useful life of its purchased merchant contracts to six years. This change in accounting estimate is accounted for under the provisions of Accounting Principles Board (APB) Opinion No. 20, "Accounting Changes." Accordingly, the net book value of purchased merchant contracts as of January 1, 1998 is amortized over the remaining useful life of the contracts (using six years). Additionally, all purchased merchant contracts capitalized in 1998 and thereafter are being amortized over a period of six years. The effect of the change in accounting estimate in 1998 was an increase to net income of approximately $583,000. Intangibles other than purchased merchant contracts, such as customer lists, are amortized over 5 to 15 years. Income Taxes: The Company and its wholly-owned subsidiaries file a consolidated federal tax return. Each subsidiary provides for income taxes using the liability method on a separate-return basis and remits to or receives from the Company amounts currently payable or receivable. Revenue Recognition: Revenue from credit card and other transaction processing activities is recorded when the service is provided, gross of interchange and network fees charged to the Company, which are recorded as a cost of operations when the transactions have been settled. Revenues from service contracts and product sales are recognized when the service is provided or the equipment is shipped. Service contracts and related sales include all revenues under system service contracts, including revenues from sales of terminal hardware when the contract included such sales. -23- Concord EFS, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 1999 Note A - Significant Accounting Policies, continued Stock-based Compensation: The Company grants options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of the grant. These stock option grants are accounted for in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees;" accordingly, the Company recognizes no compensation expense for the stock option grants. Recently Issued Accounting Pronouncements: In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes new accounting and reporting requirements for derivative instruments, including certain derivative instruments embedded in other contracts and hedging activities. The Company is required to adopt this statement as of January 1, 2001. Adoption of SFAS No. 133 is not expected to result in a material financial impact. Reclassification: Certain 1998 and 1997 amounts have been reclassified to conform to the 1999 presentation. Note B - Business Combinations The Company completed the merger with EPS on February 26, 1999 by issuing 45.1 million shares of the Company's common stock for all of the outstanding common stock of EPS. The acquisition was accounted for using the pooling of interests method of accounting. EPS provides transaction processing services to financial institutions and retailers throughout the United States. EPS also owns and operates electronic data processing and data-capture networks that process transactions originating at ATMs and point-of-sale terminals. On June 30, 1998, the Company merged with Digital Merchant Systems of Illinois, Inc. and American Bankcard International, Inc. (jointly named DMS). DMS is a leading independent sales organization in the credit card industry. The mergers were accounted for using the pooling of interests method of accounting. The Company exchanged 6.6 million shares of its common stock for all of the outstanding common stock of DMS. -24- Concord EFS, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 1999 Note B - Business Combinations, continued The following table presents selected financial information in thousands, split between the Company, EPS and DMS: Year ended December 31 ------------------------------------------- 1999 1998 1997 ------------- ------------- ------------- Revenue: Concord EFS, Inc. $783,954 $361,604 $240,004 EPS (1) 46,105 258,773 219,956 DMS (2) - 14,134 30,070 -------- -------- -------- $830,059 $634,511 $490,030 ======== ======== ======== Net income (loss): Concord EFS, Inc. $ 96,738 $ 61,857 $ 42,746 EPS (1) 4,914 24,924 18,010 DMS (2) - 1,914 (1,064) -------- -------- -------- $101,652 $ 88,695 $ 59,692 ======== ======== ======== (1) The 1999 amounts reflect the results of operations from January 1, 1999 through February 28, 1999 (unaudited). The results of operations from March 1, 1999 to December 31, 1999 are included in Concord EFS, Inc. amounts. (2) The 1998 amounts reflect the results of operations from January 1, 1998 through June 30, 1998 (unaudited). The results of operations from July 1, 1998 to December 31, 1999 are included in Concord EFS, Inc. amounts. -25- Concord EFS, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 1999 Note B - Business Combinations, continued Pre-tax acquisition and restructuring charges of $36.2 million were accrued during the year ended December 31, 1999 relating to the acquisition of EPS. The following discussion explains the various components of these charges. The Company incurred acquisition expenses of $10.5 million. These expenses were primarily for investment banking fees; however, legal, accounting, registration and other fees and expenses were also incurred. In order to create a single communications infrastructure for the Company's transaction processing businesses, the Company adopted a plan to convert EPS' communication network and accrued $12.4 million related to the conversion plan. Asset write-offs of $8.2 million were incurred relating to the acquisition of EPS. For competitive reasons, resources were reallocated in certain geographic areas of the MAC network of EPS, causing impairment to the related intangible assets of approximately $2.8 million. Upon review of EPS contracts and the undiscounted cash flows estimated to be generated by the related customer list intangible assets of EPS, the Company recognized impairment loss of approximately $3.6 million. An additional $1.8 million was written off for assets that are no longer used or supported under restructured marketing and business plans adopted by the Company. EPS uses a third party bank for its off-line debit processing. During the year ended December 31, 1999, the Company adopted a plan to take this process in-house and the applicable restructuring charge of $2.8 million was incurred. Related to the reallocated resources in certain geographic areas of the MAC network, EPS employees from those regions were terminated as the related facilities were closed for which approximately $0.2 million was charged. Additionally, certain employees of EPS were terminated due to the reorganization of management for the combined Company. The total cost charged for severance was $0.7 million. An additional severance cost of $1.4 million was accrued during the fourth quarter for the termination of an employee under contract by EPS. -26- Concord EFS, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 1999 Note B - Business Combinations, continued The pretax expenses and charges incurred in 1999 and remaining reserve balances at December 31, 1999, in millions, are summarized as follows: Acquisition Expenses and Cash or Restructuring Reserve Description Non-cash Charges Activity Balance -------------------- -------- ------------- -------- ----------- Acquisition expenses cash $10.5 $10.5 $ - Communication conversion costs cash 12.4 1.1 11.3 Asset write-offs non-cash 8.2 8.2 - Off-line debit conversion cash 2.8 2.8 - Severance and other cash 2.3 0.9 1.4 ----- ----- ----- $36.2 $23.5 $12.7 ===== ===== ===== In addition to the pre-tax charges, a tax component write off of $1.3 million for impaired state tax net operating losses of EPS was incurred. On July 20, 1998, the Company acquired the terminal driving business of a certain entity. The acquisition was accounted for under the purchase method. The total cost of the acquisition was approximately $6 million and substantially all of the purchase price was allocated to customer lists based upon the fair value of the assets acquired. On February 1, 2000, the Company acquired Card Payment Systems (CPS), a New York-based reseller of payment processing services. The acquisition will be accounted for as a pooling of interests transaction in which Concord issued 6.2 million shares of its common stock. CPS provides card-based payment processing services to independent sales organizations (ISOs), which in turn sell those services to retailers. -27- Concord EFS, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 1999 Note B - Business Combinations, continued The following table represents selected unaudited financial information, in thousands, split between the Company and CPS: Year ended December 31 ------------------------------------------ 1999 1998 1997 ------------- ------------- ------------- (Unaudited) (Unaudited) (Unaudited) Pro forma revenue Concord EFS, Inc. $830,059 $634,511 $490,030 CPS 41,909 15,915 3,939 -------- -------- -------- Combined $871,968 $650,426 $493,969 ======== ======== ======== Pro forma net income (loss) Concord EFS, Inc. $101,652 $ 88,695 $ 59,692 CPS 7,096 1,309 (280) Pro forma (provision) benefit for CPS income taxes (2,484) (458) 98 -------- -------- -------- Combined $106,264 $ 89,546 $ 59,510 ======== ======== ======== Pro forma basic earnings per share combined $0.52 $0.45 $ 0.30 ======== ======== ======== Pro forma diluted earnings per share combined $0.50 $0.44 $ 0.30 ======== ======== ======== As a result of the merger in 2000, CPS will terminate its S-Corporation election. The pro forma provision for income taxes presents tax expense as if CPS had been a C-Corporation during the years presented. On February 7, 2000 the Company announced completion of its acquisition of Virtual Cyber Systems (VCS), an internet software development company. The acquisition of VCS, for which the Company will pay approximately $2 million, will be accounted for as a purchase transaction and will be immaterial to the Company's financial statements. -28- Concord EFS, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 1999 Note C - Securities Available for Sale The following is a summary of securities available for sale: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------- -------------- -------------- ------------- (in thousands) December 31, 1999 U.S. Government and agency securities $ 71,526 $ 49 $ (3,388) $ 68,187 Mortgage-backed securities 167,356 (7,830) 159,526 Corporate securities 68,934 (1,123) 67,811 Municipal securities 157,246 109 (7,472) 149,883 ------------- -------------- -------------- ------------- Total debt securities 465,062 158 (19,813) 445,407 Equity securities 10,802 10,802 ------------- -------------- -------------- ------------- $475,864 $ 158 $(19,813) $456,209 ============= ============== ============== ============= December 31, 1998 U.S. Government and agency securities $ 29,603 $ 281 $ (74) $ 29,810 Mortgage-backed securities 130,355 395 (370) 130,380 Municipal securities 116,630 1,972 (394) 118,208 ------------- -------------- -------------- ------------- Total debt securities 276,588 2,648 (838) 278,398 Equity securities 9,782 9,782 ------------- -------------- -------------- ------------- $286,370 $ 2,648 $ (838) $288,180 ============= ============== ============== ============= -29- Concord EFS, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 1999 Note C - Securities Available for Sale, continued The scheduled maturities of debt securities at December 31, 1999 were as follows: Amortized Fair Cost Value -------------------------- (in thousands) Due in one year or less $ 61,767 $ 59,204 Due in one to five years 115,047 112,354 Due in five to ten years 89,804 86,536 Due after ten years 198,444 187,313 ----------- ----------- $ 465,062 $ 445,407 =========== =========== Expected maturities on other securities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties. Securities carried at approximately $105 million at December 31, 1999 were pledged as collateral for the Federal Home Loan Bank advances. Note D - Property and Equipment The following table summarizes property and equipment at December 31: 1999 1998 --------- ---------- (in thousands) Land $ 1,050 $ 1,050 Building & improvements 15,862 15,101 Computer facilities and equipment 250,574 254,378 Office furniture and equipment 61,119 21,855 Leasehold improvements 11,810 10,553 ---------- ---------- 340,415 302,937 Accumulated Depreciation (173,047) (148,447) ---------- ---------- $167,368 $154,490 ========== ========== Depreciation expense was approximately $43.7 million, $39.1 million, and $33.5 million for the years ended December 31, 1999, 1998 and 1997, respectively. -30- Concord EFS, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 1999 Note E - Goodwill and Other Intangible Assets Goodwill consists of the following at December 31: 1999 1998 ----------- ----------- (in thousands) Goodwill $ 77,936 $ 82,571 Accumulated amortization (23,890) (22,001) ----------- ----------- $ 54,046 $ 60,570 =========== =========== Amortization expense related to goodwill was $3.7 million $3.9 million and $3.7 million for the years ended December 31, 1999, 1998 and 1997, respectively. Other intangible assets consist of the following: December 31, 1999 ----------------------------------- Accumulated Gross Amortization Net ---------- ------------- ---------- (in thousands) Purchased merchant contracts $59,788 ($13,766) $46,022 Customer lists and other 31,144 ( 20,546) 10,598 ---------- ----------- --------- $90,932 ($34,312) $56,620 ========== =========== ========= December 31, 1998 ----------------------------------- Accumulated Gross Amortization Net ---------- ------------- ---------- (in thousands) Purchased merchant contracts $33,498 ($6,103) $27,395 Customer lists and other 31,144 (14,774) 16,370 ---------- ----------- --------- $64,642 ($20,877) $43,765 ========== =========== ========= Amortization expense related to other intangible assets was $9.8 million $6.7 million and $4.5 million for the years ended December 31, 1999, 1998 and 1997, respectively. -31- Concord EFS, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 1999 Note F - Short-Term Borrowings Borrowings of $21 million were outstanding at December 31, 1998 under a credit agreement which the Company maintained with a third-party bank. The credit agreement provided for unsecured short-term borrowings of up to $75 million bearing interest at variable rates. Average borrowings under this agreement during 1998 were $29.4 million at an effective interest rate of 5.81%. The Company also has available $55 million in unsecured lines of credit with other financial institutions, which expire on various dates throughout 2005. No amounts were outstanding on these lines at December 31, 1999 or 1998. Note G - Long-Term Debt and Leases At December 31, long-term debt consisted of: 1999 1998 ---------- ---------- (in thousands) Advances from Federal Home Loan Bank (FHLB) $ 75,000 $ 73,000 Note payable to bank for ATMs - 116 Note payable to former stockholder - 125,000 ---------- ---------- 75,000 198,116 Less current maturities - (25,116) ---------- ---------- $ 75,000 $173,000 ========== ========== The FHLB advances are at fixed rates ranging from 4.75% to 6.08% at December 31, 1999. The Company had approximately $25 million available on unused lines of credit with the FHLB at December 31, 1999. The Company repaid the unsecured note to a former stockholder during 1999 in the amount of $125 million. The interest rate on the debt was 6.40%. The Company rents office facilities and equipment under noncancelable operating leases expiring at various dates through 2006. Rental expense for operating leases amounted to approximately $5.5 million, $5.1 million, and $4.8 million for the years ended December 31, 1999, 1998, and 1997, respectively. -32- Concord EFS, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 1999 Note G - Long-Term Debt and Leases, continued On May 22, 1998, the Company entered into a $15 million operating lease agreement replacing the remainder of the original subrental agreement on EPS' headquarters. The terms for the operating lease provide for an initial seven-year term through 2005 with an option to renew for two additional five year terms. Future maturities of FHLB advances and minimum lease payments for operating leases with initial or remaining terms in excess of one year are as follows: FHLB Operating Advances Leases ---------- --------- Year ending December 31: (in thousands) 2000 $ - $ 4,559 2001 - 3,062 2002 18,000 3,124 2003 10,000 2,908 2004 - 1,942 Thereafter 47,000 1,510 ---------- --------- Total future payments $ 75,000 $17,105 ========== ========= Note H - Employee Benefit Plans Effective March 1, 1998, the Company established the Concord EFS Retirement Savings Plan (the Plan). Employees who have reached the age of 21 and completed one year of service with the Company are eligible to participate in the Plan. The Plan provides for voluntary tax-deferred contributions by eligible employees and discretionary contributions by the Company. The Company's cost related to the Plan was approximately $1,998,000 and $114,000 in 1999 and 1998, respectively. The Electronic Payment Services, Inc. Retirement Savings Plan (the EPS Plan) covered substantially all employees of EPS. Prior to February 26, 1999, when the EPS Plan was terminated, each qualified employee received a discretionary company profit-sharing contribution of 2% of compensation as defined, based upon employment status at December 31 of the plan year. In addition, the EPS Plan included a Section 401(k) savings feature wherein EPS matched employee contributions up to 4.5% of compensation as defined, and additionally, contained a discretionary contribution of up to 1.5% of compensation as defined. Total 1999, 1998 and 1997 expenses under the EPS Plan were approximately $0.5 million, $3.7 million and $3.1 million, respectively. -33- Concord EFS, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 1999 Note I - Income Taxes Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets at December 31, are as follows: 1999 1998 --------- --------- (in thousands) Deferred tax liabilities: Capitalization of research & development costs $17,060 $13,994 Net unrealized loss on securities available for sale - 641 Restructuring charges (6,007) - Depreciation 4,000 3,976 Intangible amortization 3,775 4,460 Purchased merchant contracts 387 - Other (2,649) (1,735) --------- --------- Total deferred tax liabilities 16,566 21,336 --------- --------- Deferred tax assets: Net operating loss carryforward - 2,003 Net unrealized loss on securities available for sale 7,123 - Purchased merchant contracts - 1,361 Nondeductible reserves 1,802 3,072 Bad debt allowance 730 248 Inventory 44 37 Other (591) (744) --------- --------- Total deferred tax assets 9,108 5,977 --------- --------- Net deferred tax liability $ 7,458 $15,359 ========= ========= -34- Concord EFS, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 1999 Note I - Income Taxes, continued The components of the provision (benefit) for income taxes for the three years ended December 31 are as follows: 1999 1998 1997 ---------- --------- --------- (in thousands) Current Federal $ 58,862 $ 47,622 $41,005 State 6,455 2,677 4,096 ---------- --------- --------- 65,317 50,299 45,101 Deferred Federal (1,301) 435 (6,297) State 1,165 1,085 (1,033) ---------- --------- --------- (136) 1,520 (7,330) ---------- --------- --------- $ 65,181 $ 51,819 $37,771 ========== ========= ========= The reconciliation of income taxes computed at the U. S. federal statutory tax rate of 35% to income tax expense for the three years ended December 31 are as follows: 1999 1998 1997 ---------- ---------- ---------- (in thousands) Tax at statutory rate $ 58,392 $ 49,180 $ 34,112 State income taxes, net of federal benefit 4,953 2,461 1,989 Acquisition costs 2,292 - - Nondeductible amortization of goodwill 1,021 1,076 1,031 Tax exempt interest income (2,319) (1,175) (511) Other, net 842 277 1,150 ---------- ---------- ---------- $ 65,181 $ 51,819 $ 37,771 ========== ========== ========== Income tax benefits resulting from the disqualifying dispositions of certain employee incentive stock option shares were credited to additional paid-in capital because no compensation expense was charged to income for financial reporting purposes related to the exercise of such options. -35- Concord EFS, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 1999 Note J - Stockholders' Equity The Company completed an offering of 10.1 million shares of its common stock, and within the same offering, an additional 44.5 million shares of common stock were sold by the previous owners of EPS for a total of 54.6 million shares of common stock. Net of the underwriting discount and estimated other expenses of the offering, the Company received $207.8 million for the 10.1 million shares of common stock issued. The previous owners of EPS had received unregistered common stock of the Company in connection with the February 26, 1999 acquisition. The Company did not receive any proceeds from the sale of shares by the previous owners of EPS. The Board of Directors approved a three-for-two stock split on August 26, 1999. Shareholders of record as of September 15, 1999 were distributed additional shares on September 22, 1999. The Board of Directors approved a three-for-two stock split on May 14, 1998. Shareholders of record as of June 1, 1998 were distributed additional shares on June 8, 1998. -36- Concord EFS, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 1999 Note K - Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share: Year ended December 31 1999 1998 1997 ---------- ---------- ---------- (in thousands, except per share data) Numerator: Net income $101,652 $ 88,695 $ 59,692 ========== ========== ========== Denominator: Denominator for basic earnings per share, weighted-average shares 199,147 191,539 189,888 Effect of dilutive securities, employee stock options 7,245 6,382 5,018 ---------- ---------- ---------- Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions 206,392 197,921 194,906 ========== ========== ========== Basic earnings per share $0.51 $0.46 $0.31 ========== ========== ========== Diluted earnings per share $0.49 $0.45 $0.31 ========== ========== ========== Earnings per share and related share data have been restated to reflect all stock splits. -37- Concord EFS, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 1999 Note L - Incentive Stock Option Plans The Concord EFS, Inc. 1993 Incentive Stock Option Plan, as amended, (the Concord Plan) allows for the grant of up to 37.5 million shares of Common Stock for the benefit of the Company's key employees. Options are granted at not less than 100% of the market value on the date of the grant (110% in the case of a holder of more than 10% of the outstanding shares) and generally become exercisable within four years of the date of the grant. Information pertaining to the Concord Plan is summarized below, in thousands, except price per share: Number of Weighted Weighted Shares Average Average Options Under Option Exercise Price Aggregate Price Exercisable ------------ -------------- --------------- ----------- Outstanding at December 31, 1996 8,710 $ 4.49 $ 39,122 4,400 ========== ======= Granted 5,959 9.17 Exercised (2,421) 2.75 Terminated (60) 7.25 -------- Outstanding at December 31, 1997 12,188 7.11 $ 86,696 4,886 ========== ======= Granted 6,404 11.14 Exercised (1,324) 4.91 Terminated (51) 9.73 -------- Outstanding at December 31, 1998 17,217 8.77 $151,041 7,825 ========== ======= Granted 6,672 21.63 Exercised (3,857) 5.87 Terminated (618) 20.66 -------- Outstanding at December 31, 1999 19,414 $13.43 $260,818 7,720 ======== ========== ======= The weighted average fair value of options granted during 1999, 1998, and 1997 was $9.29, $4.10, and $3.11, respectively. -38- Concord EFS, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 1999 Note L - Incentive Stock Option Plans, continued Additional information regarding options outstanding as of December 31, 1999 is summarized below: Weighted Average Weighted Weighted Remaining Average Average Contractual Life Number of Exercise Price Option Exercise Options Exercise of Options in Options of Options Price Range Outstanding Price Years Exercisable Exercisable - ----------------- ----------- --------- ---------------- ----------- ------------- $ 1.82 - $ 5.57 2,857 $ 2.98 4.54 2,836 $ 2.96 8.67 - 12.78 6,099 9.93 6.98 3,270 9.84 13.50 - 19.00 4,339 13.64 8.18 1,606 13.57 20.75 - 26.67 6,119 21.67 9.22 8 22.79 ----------- ----------- 1.82 - 26.67 19,414 13.43 7.60 7,720 8.10 =========== ===========
In 1995, EPS adopted the Electronic Payment Services, Inc. 1995 Stock Option Plan, as amended, (the EPS Plan). In connection with the merger of EPS with the Company, all outstanding options in the EPS Plan were accelerated and vested in February 1999. The total amount of option shares (after conversion to Concord EFS, Inc. shares) at December 31, 1998 was approximately 3.4 million, at a weighted average exercise price of $5.65. All outstanding options in the EPS Plan had been exercised by the expiration date of November 23, 1999. The Company has elected to follow APB No. 25 and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under SFAS No. 123, "Accounting for Stock Based Compensation," requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB No. 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 1999, 1998, and 1997, respectively: risk-free interest rates of 5.0%, 6.0%, and 6.25%, and volatility factors of the expected market price of the Company's common stock of .582, .358, and .344. Assumptions that remained constant for all years were dividend yields of 0% and a weighted average expected life of the options of three years. -39- Concord EFS, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 1999 Note L - Incentive Stock Option Plans, continued The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information is as follows for the years ended December 31 (in thousands, except for earnings per share): 1999 1998 1997 --------- --------- --------- Pro forma net income $86,050 $79,995 $56,216 Pro forma basic earnings per share $0.43 $0.42 $0.30 Pro forma diluted earnings per share $0.42 $0.40 $0.29 Pro forma disclosures are not likely to be representative of the effects of reported pro forma net income and earnings per share in future years as additional options may be granted in future years and the vesting of options already granted will impact the pro forma disclosures. Note M - Employment Agreements In February 1998, the Company entered into incentive agreements with its CEO and President, each for a term of five years expiring February 2003. Each agreement sets out the executive's annual base pay, provides for the establishment of an incentive compensation program under which each executive will have a bonus potential of 50% of annual base salary, and provides for grants of stock options, including regular stock options of up to 562,500 shares a year based on performance and special stock options contingent upon, or providing accelerated vesting upon, the average market price of Concord stock reaching and maintaining certain levels. The agreements contain certain non-compete provisions and change in control provisions regarding the acceleration of outstanding stock options and the payment of bonuses. -40- Concord EFS, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 1999 Note N - Operations By Industry Segment In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which establishes standards for reporting financial information about operating segments in annual and interim financial statements. SFAS No. 131 requires that financial information be reported on the same basis that is reported internally for evaluating segment performance and allocating resources to segments. SFAS No. 131 addresses how supplemental financial information is disclosed in annual and interim reports; therefore, its adoption in 1998 had no impact on the financial condition or operating results of the Company. Concord has two reportable segments: Merchant Services and ATM Services. The Company's revenue from Merchant Services results from processing credit card transactions using VISA, MasterCard, Discover, American Express and Diner's Club Cards. In addition, the Company processes debit card transactions for banks issuing such cards. Merchant Services provides electronic payment services to supermarket chains, grocery stores, convenience store merchants and other retailers. Merchant Services also includes trucking services providing a variety of flexible payment systems that enable drivers of trucking companies to use payment cards to purchase fuel and services and to obtain cash advances at truck stops. ATM Services include transactional fee income and surcharge revenue from ATMs owned by the Company as well as ATM transaction processing for ATMs owned by the Company's customers. The Company evaluates performance and allocates resources based on profit or loss from operations. Items classified as "Other" include revenue not identifiable with the two reported segments described above and costs of operations and selling, general and administrative expenses which are not allocated to the reportable segments. The accounting policies of the reportable segments are the same as those described in Note A - Significant Accounting Policies. Assets are allocated between Merchant Services and ATM Services based upon Company's evaluation of the revenue earned by the particular assets. Assets classified as "Other" include assets not identifiable with the two reported segments. The Company's reportable segments are business units that offer different products. The reportable segments are each managed separately because they are distinct products for different end users. No single customer of the Company accounts for a material portion of the Company's revenues. -41- Concord EFS, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 1999 Note N - Operations by Industry Segment, continued The operating segments for the year ended December 31, 1999 are the same as prior years. However, the Company changed its internal reporting mechanism to more closely match expenses with the revenues generated by each subsidiary according to the segment allocations noted above. Accordingly, prior periods' segment information has been adjusted to reflect the current method of management reporting as though it had been in place for all periods presented. Industry segment information for the years ended December 31, 1999, 1998, and 1997 is presented below in thousands: Merchant ATM Services Services Other Total ---------- ---------- ---------- ----------- 1999 Revenue $563,342 $ 249,735 $ 16,982 $ 830,059 Cost of operations (431,641) (151,729) (8,929) (592,299) Selling, general, & administrative expenses (50,830) (50,830) Acquisition & restructuring charges (6,436) (19,253) (10,500) (36,189) Taxes & interest, net (49,089) (49,089) ---------- ---------- ---------- ----------- Net income (loss) $ 125,265 $ 78,753 $ (102,366) $ 101,652 ========== ========== ========== =========== Assets by Segment $ 560,257 $ 326,604 $ 210,004 $1,096,865 ========== ========== ========== =========== -42- Concord EFS, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 1999 Note N - Operations by Industry Segment, continued 1998 Revenue $ 423,267 $ 198,398 $ 12,846 $ 634,511 Cost of operations (316,215) (122,959) (7,341) (446,515) Selling, general, & administrative expenses (51,185) (51,185) Taxes & interest, net (48,116) (48,116) ---------- ---------- ---------- ---------- Net income (loss) $ 107,052 $ 75,439 $ (93,796) $ 88,695 ========== ========== ========== ========== Assets by Segment $ 422,559 $ 267,567 $ 93,992 $ 784,118 ========== ========== ========== ========== 1997 Revenue $ 311,167 $166,841 $ 12,022 $ 490,030 Cost of operations (234,260) (97,514) (8,996) (340,770) Selling, general, & administrative expenses (50,008) (50,008) Taxes & interest, net (39,560) (39,560) ---------- ---------- ---------- ---------- Net income (loss) $ 76,907 $ 69,327 $ (86,542) $ 59,692 ========== ========== ========== ========== Assets by Segment $ 336,229 $ 186,565 $ 96,402 $ 619,196 ========== ========== ========== ========== -43- Concord EFS, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 1999 Note O - Commitments and Contingent Liabilities The Company is a party to various claims and litigation in the normal course of business. None of these claims is expected to have a material effect on the financial position or results of operations of the Company. Note P - Debt and Dividend Restrictions In accordance with federal banking laws, certain restrictions exist regarding the ability of the Company's financial institution subsidiaries to transfer funds to the Parent in the form of cash dividends, loans or advances. The approval of certain regulatory authorities is required to pay dividends in excess of earnings retained in the current year plus retained net earnings for the preceding two years. As of December 31, 1999, approximately $171.3 million and $5.6 million of undistributed earnings of EFS National Bank (EFSNB) and EFS Federal Savings Bank (EFS FSB), respectively, included in consolidated retained earnings, were available for distribution to the Parent as dividends without prior regulatory approval. Under Federal Reserve regulations, these subsidiaries are also limited as to the amount they may loan to affiliates, including the Parent, unless such loans are collateralized by specific obligations. At December 31, 1999, the maximum amount available for transfer in the form of loans to the Parent from EFSNB and EFS FSB, respectively, approximated 3.41% and 0.67% of the Company's consolidated net assets. Note Q - Disclosures About Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments. These fair values are provided for disclosure purposes only, and do not necessarily indicate the amount the Company would pay or receive in a market transaction with an unrelated third party. Cash and Cash Equivalents: The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets' fair values. Securities Available for Sale: Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Deposits: Fair values of fixed-rate, fixed-maturity deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on similar deposits to a schedule of aggregated expected monthly maturities on time deposits. The fair values disclosed for deposits other than fixed maturity, fixed-rate deposits approximate their respective carrying values at the reporting date. -44- Concord EFS, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 1999 Note Q - Disclosures About Fair Value of Financial Instruments, continued Short-Term Borrowings: The interest rates on short-term borrowings are variable rates; accordingly, fair value approximates the outstanding balance. Advances from the FHLB and Notes Payable: The fair values of the Company's long-term borrowings are estimated using discounted cash flow analyses based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. The following table summarizes the carrying amount compared to the fair value of financial instruments, in thousands, according to the methods and assumptions listed above: Carrying Amount Fair Value --------------- ---------------- December 31, 1999 Financial Assets: Cash and cash equivalents $ 119,824 $ 119,824 Securities available for sale 456,209 456,209 Financial liabilities: Deposits 100,475 100,557 Advances from the FHLB 75,000 72,099 December 31, 1998 Financial Assets: Cash and cash equivalents $ 82,029 $ 82,029 Securities available for sale 288,180 288,180 Financial liabilities: Deposits 34,907 34,903 Short-term borrowings 21,000 21,000 Advances from the FHLB and Notes Payable 198,116 196,652 -45- CONCORD EFS, INC. AND SUBSIDIARES CORPORATE DIRECTORY Chairman Emeritus Victor M. Tyler Board of Directors (and their principal occupation) Dan M. Palmer Chairman and Chief Executive Officer Concord EFS, Inc. and EFS National Bank Douglas C. Altenbern * Retired Chairman and CEO of Pay Systems of America, Inc. David C. Anderson * Retired Executive Vice President and CFO, Burlington Northern, Inc. J. Richard Buchignani, Esq. * Partner, Wyatt, Tarrant & Combs Richard M. Harter, Esq. * Partner, Bingham Dana LLP Joyce Kelso Retired Senior Vice President Concord EFS, Inc. and EFS National Bank Richard P. Kiphart * Head of Corporate Finance Department William Blair & Company LLC Edward A. Labry III President, Concord EFS, Inc. and EFS National Bank Jerry D. Mooney * Retired President Healthcare New Business Initiatives section of ServiceMaster Co. Paul L. Whittington * Retired Partner Ernst & Young LLP * Audit Committee Member -46- EXECUTIVE MANAGEMENT GROUP Dan M. Palmer, Chairman and CEO Concord EFS, Inc. and EFS National Bank Edward A. Labry III, President, Concord EFS, Inc., and EFS National Bank Thomas J. Dowling, Chief Financial Officer Concord EFS, Inc. and EFS National Bank Vickie Brown, Chief Operating Officer Concord EFS, Inc. and EFS National Bank Edward T. Haslam, Chief Administrative Officer Concord EFS, Inc. Steve A. Lynch, Chief Information Officer Concord EFS, Inc. William E. Lucado, Senior Vice President Chief Investment and Compliance Officer Concord EFS, Inc. and EFS National Bank Philip A. Valvardi III, President MAC Network Christopher Reckert, Senior Vice President Sales, Concord EFS, Inc. Vicki Birdsong, Senior Vice President Product Management, Concord EFS, Inc. Andre Blythe, Senior Vice President Customer Support, Concord EFS, Inc. Transfer Agent & Registrar State Street Bank and Trust Company C/O EquiServe Limited Partnership Boston, Massachusetts Corporate Counsel Bingham Dana LLP Boston, Massachusetts Independent Auditors Ernst & Young LLP Memphis, Tennessee Annual Meeting May 25, 2000 -47- EX-20 3 NOTICE OF ANNUAL MEETING OF STOCKHOLDERS CONCORD EFS, INC. NOTICE OF ANNUAL MEETING OF STOCKHOLDERS To the Stockholders of Concord EFS, Inc. Notice is hereby given that the Annual Meeting of Stockholders of Concord EFS, Inc. ("Concord" or the "Company") will be held at Colonial Country Club, 2736 Countrywood Parkway, Memphis Tennessee on May 25, 2000 beginning at 9:30 a.m. CST, for the following purposes: 1. To elect directors to serve for the ensuing year; 2. To transact such other business as may properly come before the annual meeting and any adjournments thereof. The Board of Directors has fixed the close of business on March 17, 2000 as the record date for determination of the stockholders entitled to notice of and to vote at the Annual Meeting. The By-Laws of the Company require that the holders of a majority of all stock issued, outstanding and entitled to vote be present in person or represented by proxy at the meeting in order to constitute a quorum. By Order of the Board of Directors Richard M. Harter Secretary April 7, 2000 WHETHER OR NOT YOU PLAN TO ATTEND THIS MEETING, PLEASE SIGN AND RETURN THE ENCLOSED PROXY. No postage is required if mailed in the United States. CONCORD EFS, INC. PROXY STATEMENT April 7, 2000 This Proxy Statement is furnished in connection with the solicitation by the Board of Directors of Concord EFS, Inc. ("Concord" or the "Company") of proxies for use at the Annual Meeting of Stockholders to be held on May 25, 2000 and any adjournments thereof. Shares as to which proxies have been executed will be voted as specified in the proxies. A proxy may be revoked at any time by notice in writing received by the Secretary of the Company before it is voted. A majority in interest of the outstanding shares represented at the meeting in person or by proxy shall constitute a quorum for the transaction of business. Votes withheld from any nominee, abstentions and broker "non-votes" are counted as present or represented for purposes of determining the presence or absence of a quorum for the meeting. A "non-vote" occurs when a nominee holding shares for a beneficial owner votes on one proposal, but does not vote on another proposal because the nominee does not have discretionary voting power and has not received instructions from the beneficial owner. Abstentions are included in the number of shares present or represented and voting on each matter. Broker "non-votes" are not so included. BENEFICIAL OWNERSHIP OF COMMON STOCK The Company's only issued and outstanding class of voting securities is its Common Stock, par value $0.33 1/3 per share. Each stockholder of record on March 17, 2000 is entitled to one vote for each share registered in such stockholder's name. As of that date, the Company's Common Stock was held by approximately 33,700 stockholders. The following table sets forth, as of March 17, 2000, the ownership of the Company's Common Stock by each person who is known by the Company to own beneficially more than 5% of the Company's outstanding Common Stock, by each director who owns shares and by all directors and officers of the Company as a group. Percent of Shares Outstanding Beneficial Owner (1) Owned Shares (2) - --------------------------------------------- ---------- ----------- Dan M. Palmer (3), Chairman & CEO 4,387,807 2.1% Edward A. Labry III (4), President 3,091,099 1.5% Vickie Brown (5), Sr. Vice-President 153,702 0.1% Christopher Reckert (6), Sr. Vice-President 82,101 0.0% Edward T. Haslam (7), Sr. Vice-President 41,500 0.0% Joyce Kelso (8), Director 397,347 0.2% Richard P. Kiphart (8), Director 5,239,282 2.5% Richard M. Harter (9), Director 134,550 0.1% Jerry D. Mooney (9), Director 60,612 0.0% David C. Anderson (9), Director 64,389 0.0% J. Richard Buchignani (9), Director 40,274 0.0% Paul Whittington (9), Director 34,593 0.0% Douglas C. Altenbern (10), Director 44,750 0.0% All officers, directors and nominees as a group (13 persons) (11) 13,772,006 6.5% William Blair & Company, LLC (12) 24,554,352 11.6% 222 West Adams Street Chicago, IL 60606 AMVESCAPP PLC and Subsidiaries (13) 16,193,312 7.6% 11 Devonshire Square London EC2M 4YR England Putnam Investment Management, Inc. (14) 13,654,658 6.4% One Post Office Square Boston, MA 02109 (1) The address of each beneficial owner that is also a director is the same as the Company's. (2) Percentage ownership is based on 212,194,961 shares issued and outstanding, plus the number of shares subject to options exercisable within 60 days from the record date by the person or the aggregation of persons for which such percentage ownership is being determined. (3) Shares owned include 4,367,807 shares covered by unexercised stock options. (4) Shares owned include 3,056,482 shares covered by unexercised stock options. (5) Shares owned include 153,701 shares covered by unexercised stock options. (6) Shares owned include 77,101 shares covered by unexercised stock options. (7) Shares owned include 37,500 shares covered by unexercised stock options. (8) Shares owned include 13,500 shares covered by unexercised stock options. (9) Shares owned include 28,000 shares covered by unexercised stock options. (10) Shares owned include 6,750 shares covered by unexercised stock options. (11) Shares owned include 7,866,341 shares covered by unexercised stock options. (12) Based on a Schedule 13G/A dated as of June 11, 1999, filed by William Blair & Company, LLP ("Blair"). Includes 2,693,420 shares as to which Blair has sole voting power and 24,554,352 shares as to which Blair has sole dispositive power. Blair disclaims beneficial ownership as to 16,113,746 of such shares. (13) Based on a Schedule 13G/A dated as of February 4, 2000, filed by AMVESCAP PLC and Subsidiaries. (14) Based on a Schedule 13G/A dated as of February 11, 2000, filed by Putnam Investment Management, Inc. ELECTION OF DIRECTORS Nine directors are to be elected to hold office until the next annual meeting of stockholders and until their successors are elected and qualified. Unless a proxy is executed to withhold authority for the election of any or all of the directors, then the persons named in the proxy will vote the shares represented by the proxy for the election of the following nine nominees. If the proxy indicates that the stockholder wishes to withhold a vote from one or more nominees for director, such instruction will be followed by the persons named in the proxy. All nine of the nominees are now members of the Board of Directors. The Board of Directors has no reason to believe that any of the nominees will be unable to serve. In the event that any nominee should not be available, the persons named in the proxies will vote for the others and may vote for a substitute for such nominee. An affirmative vote of a majority of the Company's Common Stock represented in person or by proxy at the meeting is necessary for the election of the individuals named below. Recommended Vote The Board of Directors recommends that you vote "FOR" the election of these nine individuals as directors. The following table lists the name of each proposed nominee; his/her age; his/her business experience during at least the past five years, including principal offices with the Company or a subsidiary of the Company; and the year since which he/she has served as a director of the Company. There are no family relationships among the nominees. Office With the Company, Business Nominees and Ages Experience and Year First Elected Director - -------------------------- ---------------------------------------------------- Dan M. Palmer (57) Mr. Palmer became Chairman of the Board in February 1991. Mr. Palmer has been Chief Executive Officer of the Company since August 1989, and a Director of the Company since May 1987. Mr. Palmer has been the Chief Executive Officer of EFS National Bank (formerly EFS, Inc.) since its inception in 1982. He joined Union Planters National Bank in June 1982 and founded the EFS operations within the bank. He continued as President and Chief Executive Officer of EFS when it was acquired by Concord in March 1985. Joyce Kelso (58) Mrs. Kelso has been a Director since May 1991. She was Vice President in charge of Customer Service when EFS began operations. In August 1990, she was elected Senior Vice President of the Company. January 1, 1995, Mrs. Kelso semi-retired and on January 1, 1997, she became fully retired. Edward A. Labry III (37) Mr. Labry joined EFS in 1984. He was made Director of Marketing in March 1987 and Vice President of Sales in February 1988. In August 1990, he was elected to Chief Marketing Officer of the Company. In February 1991, he was elected Senior Vice President of the Company. He became President of the Company in October 1994, and President of EFS National Bank in December 1994. Richard M. Harter (63)* Mr. Harter has been the Company's Secretary and a Director since the Company's formation. He is a partner of Bingham Dana LLP, legal counsel to the Company. Jerry D. Mooney (47)* + Mr. Mooney has been a Director of the Company since August 1992. He was the founder, President and Chief Executive Officer of VHA Long Term Care and its predecessor company from 1981 through 1995. He also served as a Senior Board Advisor from 1994 to April 1998 to The Service Master Company and as President of its Healthcare New Business Initiatives section or PEO division during this time. He retired in 1998. Richard Buchignani (51)* Mr. Buchignani has been a Director of the Company since August 1992. He is a partner in the Memphis, Tennessee office of the law firm of Wyatt, Tarrant & Combs, who also serves as local counsel to the Company. Mr. Buchignani has been affiliated with the law firm since 1995 when most of the members of his firm of 18 years joined Wyatt, Tarrant & Combs. Paul L. Whittington (64)* + Mr. Whittington has been a Director of the Company since May 1993. Mr. Whittington had been the Managing Partner of the Memphis, Tennessee and Jackson, Mississippi offices of Ernst & Young from 1988 until his retirement in 1991. Since 1979, he had been the partner in charge of consulting at various Ernst & Young offices. Richard P. Kiphart (57)* Mr. Kiphart has been a Director of the Company since March 1997. In 1972 he became a General Partner of William Blair & Company, LLC. He served as head of Equity Trading from 1972 to 1980. He joined the Corporate Finance Department in 1980, and was made head of that department in January 1995. Douglas C. Altenbern (63)* Mr. Altenbern has been a Director of the Company since February 1998. Mr. Altenbern served as Vice Chairman of First Financial Management Corporation until 1989, at which time he resigned to found Argosy Network Corporation, of which he served as Chairman and CEO. In 1992 he sold his interest in Argosy and in 1993 founded Pay Systems of America, of which he served as Chairman and CEO through December 1996. He currently is a private investor and serves as a Director on the Boards of The Bradford Funds, Inc., OPTS, Inc., Interlogics, Inc. CSM, Inc. and Equitas. * Member of the Board's Audit Committee. + Member of the Board's Compensation Committee. Compensation of Directors The Company currently pays to each non-employee director of the Company $8,000 cash director fee each year for attending scheduled board meetings. Each non-employee director receives $1,000 for any special teleconference meetings attended. In addition, non-employee directors are granted options to purchase 10,875 shares of the Company's common stock at market value on the date of the annual meeting of stockholders. One director receives an annual fee of $8,000 plus $2,000 for each meeting attended. This director is granted options to purchase only 9,000 shares of the Company's stock in the same manner as the other non-employee directors. Directors are reimbursed for expenses incurred in attending meetings of the Board of Directors. Two of the nine nominees are employees of the Company and are not separately compensated for serving as directors. Executive Compensation The following summary compensation table is intended to provide a comprehensive overview of the Company's executive pay practices. It includes the cash compensation paid or accrued by the Company and its subsidiaries for services in all capacities during the fiscal year ended December 31, 1999, to or on behalf of each of the Company's named executives. Named executives include the Chief Executive Officer and the President of the Company. Summary Compensation Table Annual Compensation Name and Salary Bonus Other Long-Term Compensation Principal Position Year ($) ($) ($) Options Awarded* - ------------------------ ---- -------- ------- ------- ---------------------- Dan M. Palmer 1999 538,750 393,750 1,687,500 Chairman of the Board 1998 466,538 331,250 1,687,500 Chief Executive Officer 1997 427,392 262,000 1,800,000 of the Company and EFS National Bank Edward A. Labry III 1999 538,750 393,750 1,687,500 President of the Company 1998 466,538 331,250 1,687,500 and EFS National Bank 1997 417,777 262,000 1,800,000 Christopher Reckert 1999 225,481 40,000 160,000 Senior Vice President 1998 163,942 20,000 56,250 of the Company and 1997 132,693 15,000 56,250 EFS National Bank Vickie Brown 1999 203,462 40,000 77,500 Chief Operations Officer 1998 184,519 20,000 56,250 of the Company and 1997 165,770 15,000 67,498 EFS National Bank Edward T. Haslam 1999 186,200 237,500 11,313 185,000 Chief Administrative 1998 178,150 85,000 7,005 55,363 Officer of the Company 1997 155,950 76,000 5,000 31,636
* Options awarded have been restated to reflect all stock splits. Stock Options The following tables present the following types of information for options granted to the Company's named executives under the Company's 1993 Incentive Stock Option Plan. Table I - options granted and the potential realizable value of such options, and Table II - options exercised in the latest fiscal year and the number of unexercised options held. Table I Options Granted in 1999 Individual Grants ---------------------------------------------- Potential Realizable % 0f Total Value at Assumed Options Annual Rates of Stock Granted to Exercise Price Appreciation Options Employees in price Expiration for Option Term Name Granted 1999 ($/Share) Date 5% ($) 10% ($) - ------------------- ---------- ------------ ---------- ---------- ----------- ----------- Dan M. Palmer 1,687,500 37.5% $21.14 1/4/2009 22,435,030 56,854,770 Edward A. Labry III 1,687,500 37.5% $21.14 1/4/2009 22,435,030 56,854,770 Christopher Reckert 160,000 3.6% $21.34 2/18/2009 2,147,675 5,442,630 Vickie Brown 77,500 1.7% $21.73 2/18/2009 1,059,106 2,683,982 Edward T. Haslam 185,000 4.1% $21.50 2/18/2009 2,501,428 6,339,111
Table II Options Exercised in 1999 and 1999 Year End Option Values Value of Number of Unexercised Shares Acquired Value ($) Unexercised In-the-Money Name on Exercise (#) Realized(1) Options(#) Options($)(2) - ------------------- --------------- ----------- ----------- ------------- Dan M. Palmer -0- -0- 3,473,432(E) 63,159,967(E) 3,722,344(U) 36,250,363(U) Edward A. Labry III -0- -0- 2,775,232(E) 46,779,921(E) 3,722,344(U) 36,250,363(U) Christopher Reckert -0- 1,883,853 -0-(E) -0-(E) 224,530(U) 1,739,628(U) Vickie Brown -0- -0- 98,856(E) 1,632,849(E) 166,093(U) 1,577,682(U) Edward T. Haslam -0- 2,309,253 -0-(E) -0-(E) 185,000(U) 793,745(U) (1) Values are calculated by subtracting the exercise price from the fair market value of the stock as of the exercise date. (2) Values are calculated by subtracting the exercise price from the fair market value of the stock on December 31, 1999. (E) Exercisable at December 31, 1999. (U) Unexercisable at December 31, 1999. Committees; Attendance The Board of Directors held four regular meetings during the fiscal year ended December 31, 1999. Each of the directors attended at least 75% of the total number of meetings of the Board. The Audit Committee, consisting of Messrs. Anderson, Buchignani, Harter, Mooney, Whittington and Kiphart met three times during the fiscal year ended December 31, 1999. The Audit Committee reviewed the results of the audit conducted by outside auditors and management's response to the management letter prepared by outside auditors. The Audit Committee also monitored the Company's compliance with the Year 2000 computer issues. The Board of Directors has no Nominating Committee. Compensation Committee Report on Executive Compensation Committee Composition The Board of Directors has a Compensation Committee of Messrs. Anderson, Mooney and Whittington (the "Committee"), who are not employees of the Company or any of its affiliates and have never been employees of the Company or any of its affiliates. General Policy It is the policy of the Committee to establish base salaries, award bonuses and grant stock options to executive officers in such amounts as will assure the continued availability to the Company of the services of the executives and will recognize the contributions made by the executives to the success of the Company's business and the growth over time in the market capitalization of the Company. To achieve these goals, the Committee establishes base salaries at levels which it believes to be below the mid-point for comparable executives in companies of comparable size and scope. The Committee then awards cash bonuses reflecting individual performance during the year for which the awards are made. For executives other than the Chief Executive Officer and President, the Committee receives bonus award recommendations from the Chief Executive Officer. The Committee grants stock options to senior and middle management executives of the Company and its affiliates at levels which it believes to be higher than average for comparable companies in order to give the executives significant incentive to improve the revenue of the Company and its market capitalization. Section 162(m) of the Internal Revenue Code limits the tax deduction to $1 million for compensation paid to certain executives of public companies. The Committee has considered these requirements and believes that the Company's 1993 Incentive Stock Option Plan meets the requirement that it be "performance based" and, therefore, exempt from the limitations on deductibility. Historically, the combined salaries and bonuses of the Company's executive officers have been well under the $1 million limit. The Committee's present intention to comply with Section 162(m) unless the Committee feels that required changes would not be in the best interest of the Company or its stockholders. Specific Arrangements for CEO and President During 1998, Concord entered into five-year incentive agreements with its Chief Executive Officer and with its President. Each incentive agreement provides for base salary of $550,000 with annual reviews, for a bonus opportunity equal to 50% of base salary with growth in earnings per share being a significant factor in awarding the bonuses and for option grants of 562,500 shares per year. In addition, each incentive agreement provided for a one-time option grant for 1,125,000 shares with a "reload" feature: after the stock market price reaches $21.33 per share for a stated period, a new option for 562,500 shares will be granted at $21.33; and after the stock market price reaches $28.45, a new option for 281,250 shares will be granted at $28.45. The first of these milestones has already been reached. The Chief Executive Officer and President's base salary, cash bonus and option grants were established by the Committee based upon its members' own experience in their companies and in other companies which they serve as directors or advisors. In addition, the Committee received advice from a compensation consulting firm in setting compensation levels for executive officers. In setting the base salary, bonus and option grants for 1998 for the Chief Executive Officer and President, the Committee considered the 39% increase in revenues and the 50% increase in diluted earnings per share in 1998 over 1997. Additionally, the Committee noted that for the preceding three years the Company's revenue growth averaged approximately 44% per year, that its market capitalization growth averaged approximately 71% per year and that these individuals were responsible for past growth and uniquely situated to contribute to the future growth of the Company. David C. Anderson Jerry D. Mooney Paul L. Whittington Five Year Cumulative Stockholder Return Below is a performance table which compares the Company's cumulative total stockholder return during the previous five years with the NASDAQ stock market, and the NASDAQ financial stocks (the Company's peer group). NASDAQ NASDAQ Date Concord EFS, Inc. Stock Market Financial Stocks - -------- ----------------- ------------ ---------------- 12/31/94 100.00 100.00 100.00 12/31/95 253.52 141.34 150.97 12/31/96 381.41 173.90 193.82 12/31/97 335.84 213.07 296.48 12/31/98 858.14 300.43 287.78 12/31/99 782.20 555.99 284.64 OTHER MATTERS The Board of Directors knows of no matters which are likely to be presented for action at the Annual Meeting other than the proposals specifically set forth in the Notice and referred to herein. If any other matter properly comes before the Annual Meeting for action, it is intended that the persons named in the accompanying proxy and acting thereunder will vote or refrain from voting in accordance with their best judgment pursuant to the discretionary authority conferred by the proxy. CERTAIN TRANSACTIONS Bingham Dana LLP serves as legal counsel to the Company. Richard M. Harter, Secretary and Director of the Company, is a partner of that firm. Wyatt, Tarrant and Combs also serves as legal counsel to the Company. J. Richard Buchignani, Director of the Company, is a partner of that firm. INFORMATION CONCERNING AUDITORS Representatives of Ernst & Young LLP are expected to be at the Annual Meeting and will have an opportunity to make a statement if they desire to do so. Such representatives are also expected to be available to respond to appropriate questions. STOCKHOLDERS PROPOSALS Stockholder proposals to be submitted for vote at the 2001 Annual Meeting must be delivered to the Company on or before December 8, 2000. EXPENSES OF SOLICITATION Solicitations of proxies by mail is expected to commence on April 7, 2000, and the cost thereof will be borne by the Company. Copies of solicitation materials will also be furnished to brokerage firms, fiduciaries and custodians to forward to their principals, and the Company will reimburse them for their reasonable expenses. By Order of the Board of Directors Richard M. Harter Secretary ANNUAL REPORT ON FORM 10-K The Company will deliver without charge to each of its stockholders, upon their written request, a copy of the Company's most recent annual report on Form 10-K and any information contained in any subsequent reports filed with The Securities and Exchange Commission. Request for such information should be directed to Investor Relations, Concord EFS, Inc., 2525 Horizon Lake Drive, Suite 120, Memphis, Tennessee 38133. EXHIBIT 1 - PROXY CARD CONCORD EFS, INC. 2525 Horizon Lake Drive, Suite 120 Memphis, Tennessee 38133 THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS The undersigned hereby appoints Dan M. Palmer and Thomas J. Dowling or either of them as Proxies, each with the power to appoint his substitute, and hereby authorizes them to represent and to vote as designated below, all the shares of Common Stock of Concord EFS, Inc. (Concord) held by the undersigned on March 17, 2000, at the Annual Meeting of Stockholders to be held on Thursday, May 25, 2000 at Colonial Country Club, 2735 Countrywood Parkway, Memphis, Tennessee beginning at 9:30 a.m. local time, or any adjournment thereof. WHETHER OR NOT YOU PLAN TO ATTEND THIS MEETING, PLEASE SIGN AND RETURN THIS PROXY. - -------------------------------------------------------------------------------- PLEASE VOTE, DATE AND SIGN ON REVERSE AND RETURN PROMPTLY IN THE ENCLOSED ENVLELOPE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Please sign exactly as your name(s) appear(s) hereon. When shares are held by joint tenants, both should sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title, as such. If a corporation, please sign in full corporate name by president or other authorized officer. If a partnership, please sign in partnership name by authorized person and state title. - -------------------------------------------------------------------------------- [X] PLEASE MARK VOTES AS IN THIS EXAMPLE This proxy, when properly executed will be voted in the manner directed by the undersigned stockholder. If no direction is made, this proxy will be voted FOR the actions described in Item 1. In their direction, the Proxies are authorized to vote upon such other business as may properly come before the Annual Meeting or any adjournment thereof 1. To elect directors to serve for the ensuing year. For all With- For All Nominees hold Except Douglas C. Altenbern Richard P. Kiphart [ ] [ ] [ ] Joyce Kelso Edward A. Labry J. Richard Buchignani Jerry D. Mooney Richard M. Harter Dan M. Palmer Paul L. Whittington NOTE: If you do not wish your shares voted "For" a particular nominee mark the "For All Except" box and strike a line through the nominee(s) name(s). Your shares will be voted "For" the remaining nominee(s). 2. To transact such other business as may properly come before the annual meeting and any adjournments thereof. CONCORD EFS, INC. Mark box at right if an address change or comment has been noted on the reverse side of this card. [ ] CONTROL NUMBER: RECORD DATE SHARES: Please be sure to sign and date this Proxy. Date: ----------------------- - ----------------------------------------- -------------------------------------- Stockholder sign here Co-Owner sign here DETACH CARD DETACH CARD EX-21 4 LISTING OF SUBSIDIARIES EXHIBIT 21 CONCORD EFS, INC. LISTING OF SUBSIDIARIES Jurisdiction of Company Organization Ownership ----------------------------- ---------------------------- --------- EFS National Bank National Bank Charter 100% EFS Federal Savings Bank Federal Savings Bank Charter 100% Concord Computing Corp. Delaware 100% Concord Retail Services, Inc. Delaware 100% Concord Equipment Sales Tennessee 100% Pay Systems of America, Inc. Tennessee 100% Digital Merchant Systems of Illinois, Inc. Illinois 100% American Bankcard Int'l. Illinois 100% Electronic Payment Systems Delaware 100% Buypass, Inc. Georgia 100% MAC Corporation Delaware 100% EX-23 5 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 CONCORD EFS, INC. CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Concord EFS, Inc. of our report dated February 10, 2000, included in the 1999 Annual Report to Stockholders of Concord EFS, Inc. We consent to the incorporation by reference in the Registration Statements (Form S-3: Nos. 333-62069 and 333-77829; Form S-8: Nos. 33-60871, 333-74213 and 333-74215) of Concord EFS, Inc. and in the related Prospectuses of our report dated February 10, 2000, with respect to the consolidated financial statements of Concord EFS, Inc. incorporated by reference in this Annual Report (Form 10-K) for the year ended December 31, 1999. Ernst & Young LLP Memphis, Tennessee March 27, 2000 EX-27 6 FINANCIAL DATA SCHEDULE
5 1,000 USD YEAR YEAR DEC-31-1999 DEC-31-1998 DEC-31-1999 DEC-31-1998 1 1 119824 82029 456209 288180 191852 108986 3181 2324 17892 11396 803073 501678 340415 302937 173047 148447 1096865 784118 293317 216281 0 0 0 0 0 0 68628 42646 633685 317889 1096865 784118 830059 634511 830059 634511 592299 446515 643129 497700 36189 0 3474 3654 11409 14676 166833 140514 65181 51819 101652 88695 0 0 0 0 0 0 101652 88695 0.51 0.46 0.49 0.45
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