-----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, TVe1a1K7GQ0yUfMYKMlw/Ei4fs0PhvgiNBEjvHu9Gdm3zrEOVOYDpyzNRQZdOA2i hsu99oGAWjItvjV79dkzzw== 0000740112-01-000007.txt : 20010409 0000740112-01-000007.hdr.sgml : 20010409 ACCESSION NUMBER: 0000740112-01-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 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-K SEC ACT: SEC FILE NUMBER: 000-13848 FILM NUMBER: 1592200 BUSINESS ADDRESS: STREET 1: 2525 HORIZON LAKE DR STE 120 CITY: MEMPHIS STATE: TN ZIP: 38133 BUSINESS PHONE: 9013718000 MAIL ADDRESS: STREET 1: 2525 HORIZON LAKE DRIVE STREET 2: SUITE 120 CITY: MEMPHIS STATE: TN ZIP: 38133 FORMER COMPANY: FORMER CONFORMED NAME: CONCORD COMPUTING CORP DATE OF NAME CHANGE: 19920515 10-K 1 0001.txt 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, 2000 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 was 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 16, 2001 was $10,511,553,446. The number of shares of the registrant's Common Stock outstanding as of March 16, 2001 was 242,078,626. DOCUMENTS INCORPORATED BY REFERENCE Filings made by companies with the Securities and Exchange Commission (SEC) sometimes "incorporate information by reference." This means that the company is referring you to information that was previously filed with the SEC, and this information is considered to be part of the filing you are reading. The following materials are incorporated by reference into this Form 10-K: o Information contained in our Annual Report to Stockholders for the year ended December 31, 2000, is incorporated by reference in response to Items 1, 5, 6, 7, 7A, and 8. o Information contained in our Proxy Statement for the Annual Meeting of Stockholders to be held May 24, 2001 is incorporated by reference in response to 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 Operations by Business Segment 2 Marketing and Customers 2 Competition 3 Supervision and Regulation 4 Executive Officers of Concord 6 Employees 7 2. Properties 6 3. Legal Proceedings 8 4. Submission of Matters to a Vote of Security Holders 8 PART II 5. Market for Registrant's Common Stock and Related Stockholder Matters 8 6. Selected Financial Data 9 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 7a. Quantitative and Qualitative Disclosures About Market Risk 9 8. Financial Statements and Supplementary Data 9 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 9 PART III 10. Directors and Executive Officers 10 11. Executive Compensation 10 12. Security Ownership of Certain Beneficial Owners and Management 10 13. Certain Relationships and Related Transactions 10 PART IV 14. Exhibits, Financial Statement Schedules and Reports 10 on Form 8-K Signatures 13 PART I Item 1. BUSINESS Overview Concord EFS, Inc. (Concord) is a vertically-integrated electronic transaction processor. Concord acquires, routes, authorizes, captures, and settles all types of non-cash payment transactions for retailers and financial institutions nationwide. Concord's primary activities consist of (1) Payment Services (previously called merchant card services), which provides payment processing for supermarkets, major retailers, petroleum dealers, convenience stores, trucking companies, and independent retailers; and (2) Network Services (previously called ATM services), which provides automated teller machine (ATM) processing, debit card processing, and debit network access for financial institutions. Payment Services. Payment Services provides the systems and processing that allow retail clients to accept virtually any type of cashless payment, including all card types - credit, debit, electronic benefits transfer (EBT), fleet, prepaid, and automated clearing house (ACH) - and a variety of check-based options. We focus on providing payment processing services to selected segments, with specialized systems designed for supermarkets, gas stations, convenience stores, and restaurants. Payment Services also includes providing payment cards that enable drivers of trucking companies to purchase fuel and obtain cash advances at truck stops. Our services are completely turn-key, providing retailers with point of sale (POS) terminal equipment, transaction routing and authorization, settlement, funds movement, and sponsorship into all credit card associations (such as VISA and MasterCard) and major debit networks (such as STARsm, Pulse, and NYCE). Early in 2000 we completed two acquisitions in the Payment Services area. On January 31, 2000, we completed our acquisition of National Payment Systems Inc. d/b/a Card Payment Systems (referred to in this Form 10-K as Card Payment Systems), a New York-based reseller of payment processing services. Card Payment Systems provides card-based payment processing services to independent sales organizations, which in turn sell those services to retailers. The acquisition was accounted for as a pooling of interests transaction in which we exchanged 6.2 million shares of our stock for all the outstanding shares of Card Payment Systems' common stock. We incurred acquisition costs of $0.8 million related to this transaction during the first quarter of 2000. On February 7, 2000 we completed our acquisition of Virtual Cyber Systems, Inc., an internet software development company. This acquisition, for which we paid approximately $2 million, was accounted for as a purchase transaction and was immaterial to our financial statements. Network Services. Network Services include terminal driving and monitoring for ATMs, transaction routing and authorization via credit and debit network gateways, and real-time card management and authorization for on-line debit and signature debit cards. We also operate the switch that connects a coast-to-coast network of ATMs and POS locations that accept debit cards issued by our member financial institutions. Our network access services include transaction switching and settlement. We recently expanded our debit network in our Network Services area through two acquisitions. On August 21, 2000, we completed our acquisition of Cash Station, Inc., a leading Midwest debit network based in Chicago, Illinois. The acquisition was accounted for as a pooling of interests transaction in which we exchanged approximately 2.5 million shares of our stock for all of the outstanding common stock of Cash Station. On February 1, 2001, we completed our acquisition of Star Systems, Inc. (STARsm), the nation's largest PIN-secured debit network, based in Maitland, Florida. The merger was accounted for as a pooling of interests transaction in which we exchanged approximately 24.8 million shares of our stock for all of STAR's outstanding common stock. As a result of these two acquisitions, we also acquired a majority interest of 74% in Primary Payment Systems, Inc., a company providing risk management services to merchants and financial institutions. STAR and Cash Station own 67% and 7% of Primary Payment Systems, respectively. An example of the vertical integration of our services is our ownership of two financial institutions, EFS National Bank and EFS Federal Savings Bank. These banks allow us to provide our merchants with bank sponsorship into credit and debit card associations and to own and deploy ATMs. Traditional banking activities such as lending and deposit-taking are also provided. We seek to grow our Payment Services and Network Services businesses by providing a fully integrated range of transfer and processing services at competitive prices. The principal elements of our strategy include: 1) We focus our marketing efforts on industry segments that are moving rapidly to electronic commerce and therefore have above-market growth in the transactions that we process. We seek a diverse group of customers with low credit risk profiles. 2) We seek to be an efficient provider of electronic payment processing services through a combination of above-market transaction growth and downward management of operating cost per transaction. 3) We provide clients with complete outsourcing solutions, including designing equipment solutions, selling and leasing equipment, authorizing transactions, capturing information, directly participating in all major credit and debit card associations and networks, and effecting settlement of payment transactions and transfer of funds. 4) We use a balanced marketing approach through the use of internal marketing specialists, independent sales representatives, and independent sales organizations in an effort to efficiently provide broad access to new financial institution and merchant customers nationwide. Operations by Business Segment "Note Q - Operations By Business Segment," on pages 40 to 41 of our Annual Report to Stockholders for the year ended December 31, 2000 (Annual Report to Stockholders) contains information about the relative contribution of our Payment Services and Network Services segments to our earnings and is incorporated herein by reference. Marketing and Customers Sales Approach. We market our services and products on a nationwide basis to supermarkets, gas stations, convenience stores, restaurants, independent retailers, debit networks, financial institutions, and trucking companies. We market both directly through our internal sales force and indirectly through independent sales organizations and their representatives. Our strategy is to use our in-house marketing expertise to target the large to mid-sized companies within these selected industries and to use the extensive market penetration of independent sales organizations to extend our sales reach into the small, independent firms nationwide. Marketing Relationships. We have historically had success in marketing through key trade association relationships, such as our endorsement by the National Grocers Association as the recommended provider of electronic services to grocers and our partnership with the Food Marketing Institute to develop and promote new payment products to the supermarket industry. Management is committed to the cultivation of such trade association relationships and the development of arrangements with other service providers. We are also an authorized issuer of payment cards and processor of card transactions with the major truck stop chains, which provides a substantial advantage in selling our card payment systems to trucking companies. Our relationships with the truck stop owners also afforded us an opportunity to place ATMs at truck stops, which in turn provided a further advantage in selling our integrated processing and banking services to trucking companies and truck drivers. Our established presence in supermarket chains, grocery stores, convenience stores, and other small and mid-size retailers gives us an advantage in establishing relationships with EBT providers, whose benefits are primarily accessed at such retail locations. Cross-Selling Opportunities. As an integrated services provider, we have natural cross-selling opportunities within our client base. We acquired Electronic Payment Services in 1999, Cash Station in 2000, and STAR in 2001. These acquisitions collectively added 200,000 retail locations and 6,500 financial institution customers to our client base, affording us the opportunity to cross-sell settlement processing services to Electronic Payment Services' retail customers (who primarily received only authorization services from Electronic Payment Services) and to cross-sell ATM and card processing services to Cash Station and STAR financial institutions (who currently use third-party processors). Primary Offices. Our headquarters are located in Memphis, Tennessee, with other primary offices in Maitland, Florida; Atlanta, Georgia; and Wilmington, Delaware. Our executive officers actively participate in our marketing efforts. Competition The business of electronic payment processing and settlement, check authorization programs, ATM processing, debit card processing, and fuel card and cash forwarding services are all highly competitive. Our principal competitors include national and major regional banks, local processing banks, non-bank processors, and other independent service organizations, some of which have substantially greater capital, management, marketing, and technological resources than those of Concord. We also compete with other electronic payment processing organizations and debit networks 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 compete with us in the provision of processing services. In our Payment Services segment, we compete against other companies who have a dominant share of each business. Management estimates that: o the three largest payment processors, which we are not among, account for roughly 50% of the total credit and debit card sales volume; o a single competitor accounts for well in excess of 50% of the total dollar volume of payment processing for the trucking industry; and o another single competitor accounts for in excess of 50% of the total dollar volume of check verifications. There can be no assurance that we will continue to be able to compete successfully with such competitors. In our Network Services segment, management estimates that: o the three largest ATM processors, of which we are the largest, process for approximately 24% of total ATMs in the U.S.; and o Visa and MasterCard collectively account for approximately 60% of total annual POS switch transaction volume among the debit networks. While we compete with VISA and MasterCard in our Network Services business, we are at the same time reliant on VISA and MasterCard for the authority to process transactions in the VISA and MasterCard systems. Moreover, VISA and MasterCard have existing products and rules which could make it difficult for us to compete against them on a level playing field, which could further increase VISA/MasterCard's dominance in the debit network access portion of the Network Services business. In addition, the competitive pricing pressures that would result from any increase in competition could adversely affect our margins and may have a material adverse effect on our financial condition and results of operations. We compete in terms of price, quality, speed, and flexibility in customizing systems to meet the particular needs of customers. We believe that we are one of the few fully-integrated suppliers of a broad range of hardware, processing, banking, and data compilation services for use in transactions at retail locations. We also believe that we are one of the few processors that operates a nationwide debit network, permitting us to offer end-to-end debit transaction processing services. Supervision and Regulation Concord and its subsidiaries are subject to a number of federal and state laws. Concord is a financial holding company and a bank holding company registered with the Board of Governors of the Federal Reserve System (the "Board") under the Bank Holding Company Act of 1956, as amended, which is administered by the Board. As a financial holding company, Concord is subject to the Bank Holding Company Act, which generally prohibits it from o directly or indirectly engaging in any activities other than banking, managing or controlling banks, and certain other activities that the Board deems to be financial in nature, incidental to such a financial activity or complementary to a financial activity; and o acquiring, directly or indirectly, ownership or control of more than 5% of the voting shares of any company that is engaged in activities other than permissible financial activities, with certain exceptions. For Concord to qualify as a financial holding company, its depository institution subsidiaries needed to have at least a "satisfactory" Community Reinvestment Act rating on their most recent examination, and Concord was required to certify that its depository institution subsidiaries are well capitalized and well managed. If any of its depository institution subsidiaries ceases to be well capitalized or well managed, Concord will be required to enter into an agreement with the Board to bring that depository institution into compliance with applicable capital and management requirements. During the period of noncompliance, the Board may impose limitations on the activities of Concord and its affiliates, and Concord may not directly or indirectly engage in, or acquire shares of a company engaged in, additional activities permissible for financial holding companies but not bank holding companies, without the Board's prior approval. In addition, the Board may require divestiture of Concord's depository institution subsidiaries if the capital or management deficiency persists. Also, if any of its depository institution subsidiaries fails to maintain a "satisfactory" rating under the Community Reinvestment Act, Concord may not directly or indirectly engage in, or acquire shares of a company engaged in, additional activities permissible for financial holding companies but not bank holding companies until the subsidiary depository institution improves its rating to at least a "satisfactory" rating. Concord is required to file with the Board an annual report and such additional information which the Board may require. Concord also is required to obtain the prior approval of the Board before acquiring more than 5% of any class of voting stock of any bank that is not already controlled by Concord. The Board may examine Concord's and each of its subsidiaries' records, including a review of Concord's capital adequacy in relation to guidelines issued by the Board. The Board requires minimum capital levels as measured by three ratios: total capital to risk-weighted assets, tier one capital to risk-weighed assets, and tier one capital to average total assets. If the level of capital is deemed to be inadequate, the Board may restrict Concord's future expansion and operations and take certain other enforcement actions. The Board possesses cease and desist powers over Concord if, among other things, its actions or actions of its subsidiaries represent unsafe or unsound practices or violations of law. Federal law also regulates transactions among Concord and its affiliates, including the amount of loans or investments that the Concord banking affiliates, EFS National Bank and EFS Federal Savings Bank, may make to non-bank affiliates and the amount of advances that each may make to third parties collateralized by an affiliate's securities. In addition, various federal and state laws and regulations regulate the operations of EFS National Bank and EFS Federal Savings Bank, including laws and regulations requiring reserves against deposits, limiting the nature and pricing of loans, and restricting investments and other activities. Concord'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. EFS National Bank and EFS Federal Savings Bank also are generally prohibited from engaging in certain tie-in arrangements with their affiliates that condition the availability or price of their products and services on the customer also obtaining products or services from the affiliate or providing credit, property, or services to an affiliate. As a national bank, EFS National Bank operates under the rules and regulations of the Office of the Comptroller of the Currency, which is its primary regulator. EFS Federal Savings Bank is also a member of the Federal Reserve System, subject to provisions of the Federal Reserve Act. As a federal savings bank, EFS Federal Savings Bank operates under the regulatory and supervisory jurisdiction of the Office of Thrift Supervision. The Federal Deposit Insurance Corporation insures the domestic deposits of both banks. Each bank also is subject to periodic examination by, and must make regularly scheduled reports of financial condition to, its respective regulatory agencies. Concord's electronic funds transfer (EFT) services sold to financial institutions are regulated by certain state and federal banking laws. Material changes in federal or state regulation could increase Concord's cost of providing EFT services, change the competitive environment, or otherwise adversely affect Concord. Concord is not aware of any such change which is pending. In addition to regulation by federal and state laws and governmental agencies, Concord is subject to the rules and regulations of the various credit card associations and debit networks, including requirements for equity capital commensurate with transaction processing dollar volume. Executive Officers of Concord The following table sets forth certain information concerning our executive officers as of March 16, 2001: Name Age Position(s) - -------------------------------------------------------------------------------- Dan M. Palmer ..................... 58 Chairman of the Board and Chief Executive Officer Edward A. Labry III ............... 38 Director and President Edward T. Haslam .................. 48 Chief Financial Officer Vickie Brown ...................... 47 Senior Vice President, Chief Operating Officer, EFS National Bank Thomas J. Dowling ................. 35 Senior Vice President and Chief Financial Officer, EFS National Bank William E. Lucado ................. 60 Senior Vice President, Chief Investment and Compliance Officer Mr. Palmer has been a director of Concord since May 1987, and was appointed Chairman of the Board in 1991. He was named Chief Executive Officer of Concord in 1990, and Chief Executive Officer of EFS National Bank upon its formation in 1992. He joined Union Planters National Bank in 1982 and founded the bank's Electronic Fleet Systems (EFS) operation, which was later acquired by Concord. He continued as President and Chief Executive Officer of EFS following the acquisition in 1985. Mr. Labry was named President of Concord EFS, Inc. and EFS National Bank in 1994. Mr. Labry joined Concord in 1984 as a salesman in Concord's trucking services division, assuming responsibility for all sales and marketing in that unit in 1987. In 1990, Mr. Labry was named chief marketing officer for all Concord companies, and was appointed senior vice president in 1991. He is a member of the international Advisory Councils for Visa and MasterCard, and serves as director on the board of MS Carriers. Edward T. Haslam joined Concord in 1999. Previously, he was chief operating officer of Electronic Payment Services, Inc. (EPS). Prior positions during his 5-year tenure at EPS included chief financial officer and chief accounting officer. Mr. Haslam also held financial management positions at SEI Corporation and Manufacturers Hanover Financial Services, Inc. Vickie Brown joined Concord in 1979 as an accountant. She served as Treasurer from 1982 through 1991, was elected Vice President in April 1985 and was elected Senior Vice President in 1991. Ms. Brown served as Chief Operating Officer of Concord Computing Corporation from 1990 through 1992. Ms. Brown has been Chief Operating Officer of EFS National Bank since 1997. Thomas J. Dowling joined Concord in 1992 as Assistant Controller. He became Vice President and Controller of Concord in 1995 and Chief Financial Officer of Concord from 1998 to 2000, when Edward T. Haslam was appointed Chief Financial Officer of Concord. Mr. Dowling continues to serve as Chief Financial Officer of EFS National Bank. Prior to May 1992, he was a senior audit accountant and CPA at Ernst & Young LLP. William E. Lucado joined Concord in 1991 as a Vice President. He was named Senior Vice President, Compliance Officer for EFS National Bank in 1992, and in 1994 he was elected Senior Vice President of Concord. In 1995, he was elected Senior Vice President, Investment Officer and Compliance Officer, Corporate Secretary and Director of EFS National Bank and other subsidiary companies. In 1996, he was elected Assistant Secretary of Concord, and in 1997 he was elected President of EFS Federal Savings Bank. He was named Chief Investment and Compliance Officer of Concord in 1998. Employees As of December 31, 2000, we employed 2,119 full and part-time personnel, including 520 data processing and technical employees, 995 in operations, and 604 in sales and administration. Many of our employees are highly skilled, and we believe our future success will depend in large part on our ability to attract and retain such employees. We have incentive agreements with our Chief Executive Officer and our President; however, we do not have any material employment contracts with any other employees. None of our employees are represented by a labor union, and we have experienced no work stoppages. We consider our employee relations to be excellent. Item 2. PROPERTIES The following table sets forth certain information concerning our principal facilities: Area in Description/ Lease Expiration Location Square Feet Business Segment (if applicable) - --------------- ------------ ---------------------------- ------------------- Atlanta, GA 79,057 Offices and Operations, Month-to-month Payment Services Bartlett, TN 14,580 Distribution Center and October 15, 2004 Warehouse, Payment Services Bartlett, TN 6,480 Operations and Warehouse, August 15,2004 Payment Services Chicago, IL 17,798 Corporate Offices and December 31, 2007 Operations, Network Services Columbia, SC 6,314 Offices, Network Services August 31, 2004 Cordova, TN 48,119 Customer Service Center, May 1, 2006 Payment Services Cordova, TN 2,600 Federal Savings Bank Branch, June 30, 2003 Payment Services Eatonville, FL 6,750 Operations, Network Services June 30, 2003 Elk Grove, IL 18,300 Operations, Payment Services May 31, 2005 Ft. Wright, KY 3,902 Sales Office, Network Services September 30, 2003 Maitland, FL 119,589 Offices and Operations, August 31, 2011 under construction, Network Services Maitland, FL 69,989 Offices and Operations, May 31, 2003 Network Services Maitland, FL 30,792 Corporate Offices June 30, 2003 and Operations, Network Services Memphis, TN 50,910 Overall Corporate September 30, 2003 Headquarters, Offices and Operations, Payment Services Memphis, TN 14,691 Offices, Payment Services December 31, 2003 Nashville, TN 3,730 Corporate Offices and February 28, 2003 Operations, Payment Services N. Olmsted, OH 36,627 Data Processing Center, December 31, 2003 Network Services Oakland, TN 800 Federal Savings Bank Branch, April 30, 2001 Payment Services Pittsburgh, PA 2,316 Sales Office, August 31, 2003 Network Services Pleasanton, CA 10,083 Offices, Payment Services October 31, 2003 Reston, VA 5,369 Offices, under construction, Network Services May 31, 2005 Reston, VA 8,760 Offices, Network Services May 31, 2002 San Diego, CA 19,544 Offices and Operations, February 28, 2003 Network Services St. Louis, MO 2,239 Offices, Network Services December 31, 2003 Wilmington, DE 107,500 Corporate Offices and May 21, 2005 Operations, Network Services Wilmington, DE 70,000 Data Processing Center and not applicable Operations, Network Services We believe all facilities are adequate. Item 3. LEGAL PROCEEDINGS EFS National Bank has been named as a defendant in a purported class action lawsuit filed in September 2000 in the Circuit Court of Tennessee for the Thirtieth Judicial District at Memphis alleging that certain of EFS National Bank's rate and fee changes were improper under Tennessee law due to allegedly deficient notice. The plaintiffs recently filed an amended complaint alleging that the class consists of at least 60,000 merchants who were subjected to the allegedly improper rate and fee changes. The amended complaint seeks damages in excess of $15 million as well as injunctive relief and unspecified punitive damages, treble damages, attorney fees and costs. A class action complaint with similar allegations has been filed in St. Charles County, Missouri. Although these matters are in the preliminary stages, EFS National Bank believes that the claims against it are without merit and intends to vigorously defend against all claims. We are also a party to various routine lawsuits arising out of the conduct of our business, none of which are expected to have a material adverse effect upon our financial condition or results of operations. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of stockholders in the fourth quarter of fiscal 2000. PART II Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Market Price of and Dividends on Concord's Common Stock and Related Stockholder Matters Information included under the caption "Market Value" on page 3 of our Annual Report to Stockholders is incorporated herein by reference. Recent Issuances of Unregistered Securities In February 1999, in connection with its acquisition of Electronic Payment Services, Concord issued 45.1 million shares of its Common Stock, $0.33 1/3 par value per share, to the former stockholders of Electronic Payment Services in a transaction not registered under the Securities Act of 1933. The transaction was exempt from registration under Section 4(2) of the Securities Act. The unregistered shares were subsequently registered and resold in a transaction in June of 1999. In February 2001, in connection with its acquisition of STAR, Concord issued approximately 24.8 million shares of its Common Stock, $0.33 1/3 par value per share, to the former stockholders of STAR in a transaction not registered under the Securities Act of 1933. The transaction was exempt from registration under Section 4(2) of the Securities Act. Concord currently expects that it will engage in a disciplined process in 2001 to eliminate this stock overhang. Item 6. SELECTED FINANCIAL DATA Information included under the caption "Financial Highlights" on page 2 of our 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 caption "Management's Discussion & Analysis of Financial Condition and Results of Operations" on pages 8 to 18 of our Annual Report to Stockholders is incorporated herein by reference. Item 7 a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information included under the caption "Management's Discussion & Analysis of Financial Condition and Results of Operations -- Quantitative and Qualitative Disclosures About Market Risk" on page 18 of our 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 19 to 46 of our Annual Report to Stockholders and are incorporated herein by reference: o Report of Independent Auditors o Consolidated Balance Sheets as of December 31, 2000 and 1999 o Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998 o Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998 o Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 o Notes to Consolidated Financial Statements as of December 31, 2000 Quarterly results of operations for the years ended December 31, 2000 and 1999 under the caption "Note U - Quarterly Financial Results (Unaudited)" on page 45 of the Annual Report to Stockholders are incorporated herein by reference. 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 Information included under the captions "Election of Directors" and "Committees; Attendance" in our Proxy Statement for the Annual Meeting of Stockholders to be held on May 24, 2001 is incorporated herein by reference. See also the section captioned "Executive Officers of Concord" in Part I of this Form 10-K. Item 11. EXECUTIVE COMPENSATION Information included under the captions "Compensation of Directors," "Executive Compensation," "Compensation Committee Interlocks and Insider Participation," "Compensation Committee Report on Executive Compensation" and "Five Year Cumulative Stockholder Return" in our Proxy Statement for the Annual Meeting of Stockholders to be held on May 24, 2001 is incorporated herein by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information included under the caption "Beneficial Ownership of Common Stock" in our Proxy Statement for the Annual Meeting of Stockholders to be held on May 24, 2001 is incorporated herein by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information included under the caption "Certain Transactions" in our Proxy Statement for the Annual Meeting of Stockholders to be held on May 24, 2001 is incorporated herein by reference. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS The following financial statements are incorporated by reference from pages 19 to 46 of our Annual Report to Stockholders for the fiscal year ended December 31, 2000, as provided in Item 8 hereof: o Report of Independent Auditors o Consolidated Balance Sheets as of December 31, 2000 and 1999 o Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998 o Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998 o Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 o Notes to Consolidated Financial Statements as of December 31, 2000 Quarterly results of operations for the years ended December 31, 2000 and 1999 under the caption "Note U - Quarterly Financial Results (Unaudited)" on page 45 of the Annual Report to Stockholders are incorporated herein by reference. 2. FINANCIAL STATEMENT SCHEDULES All schedules are omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes. 3. EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K AND PARAGRAPH (C) BELOW See response to Item 14(c) below. (b) Reports on Form 8-K A report on Form 8-K was filed on October 10, 2000 reporting that Concord entered into an Agreement and Plan of Merger dated as of October 6, 2000 with Star Systems, Inc. and Orion Acquisition Corp. (c) Exhibits Exhibit Nos. 2.1 Agreement and Plan of Merger among Concord EFS, Inc., CEFT, Inc. and Electronic Payment Services, Inc., dated as of November 20, 1998, is incorporated herein by reference to Exhibit 2.1 to the current report on Form 8-K (File No. 000-13848), filed on March 10, 1999. 2.2 Agreement and Plan of Merger among Concord EFS, Inc., Orion Acquisition Corp. and Star Systems, Inc., dated as of October 6, 2000, is incorporated herein by reference to Exhibit 10 to Concord's quarterly report on Form 10-Q (File No. 000-13848), filed on November 14, 2000. 3.1 Restated Certificate of Incorporation of Concord EFS, Inc. is incorporated herein by reference to Exhibit 4.1 to Concord's registration statement on Form S-8 (File No. 333-74215), filed on March 10, 1999. 3.2 Certificate of Amendment to the Restated Certificate of Incorporation of Concord EFS, Inc. is incorporated herein by reference to Exhibit 3.3 to amendment No. 2 to Concord's registration statement on Form S-3 (File No. 333-77829), filed on June 14, 1999. 3.3 Amended and Restated Bylaws of Concord EFS, Inc. are incorporated herein by reference to Exhibit 4.2 to Concord's registration statement on Form S-8 (File No. 333-74215), filed on March 10, 1999. 10.1 Concord EFS, Inc. 1993 Incentive Stock Option Plan, as amended and restated, is incorporated herein by reference to Exhibit 99.1 to Concord's registration statement on Form S-8 (File No. 333-74215), filed on March 10, 1999. 10.2 Electronic Payment Services, Inc. 1995 Stock Option Plan, as amended, is incorporated herein by reference to Exhibit 99.1 to Concord's registration statement on Form S-8 (File No. 333-74213), filed on March 10, 1999. 10.3 Star Systems, Inc. 2000 Equity Incentive Plan is incorporated herein by reference to Exhibit 99.1 to Concord's registration statement on Form S-8 (File No. 333-56066), filed on February 23, 2001. 10.4*Incentive Agreement between Concord EFS, Inc. and Dan M. Palmer, dated as of February 26, 1998, is incorporated herein by reference to Exhibit 10.3 to Concord's annual report on Form 10-K (File No. 000-13848), filed on April 1, 1999. 10.5*Incentive Agreement between Concord EFS, Inc. and Edward A. Labry III, dated as of February 26, 1998, is incorporated herein by reference to Exhibit 10.2 to Concord's annual report on Form 10-K (File No. 000-13848), filed on April 1, 1999. 10.6*Employment Agreement between H&S Holding Company (renamed Star Systems, Inc.) and Ronald V. Congemi, dated as of March 1, 1999, and amendment thereto between Star Systems, Inc., Concord EFS, Inc. and Ronald V. Congemi, dated October 6, 2000. 10.7*Agreement Terminating Salary Continuation Agreement between Star Systems, Inc., Concord EFS, Inc. and Ronald V. Congemi, dated October 6, 2000. 10.8*Star Nonqualified Deferred Compensation Plan, effective as of January 1, 2000. 11 Statement Regarding Computation of Per Share Earnings is incorporated herein by reference to Concord's Annual Report to Stockholders for the year ended December 31, 2000, filed herewith as Exhibit 13, Notes to Consolidated Financial Statements, Note N. 13 Annual Report to Stockholders for the year ended December 31, 2000. 20 Notice of Annual Meeting of Stockholders. 21 List of Subsidiaries. 23 Consent of Independent Auditors. * Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this report. (d) Financial Statement Schedules All financial statement schedules are omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Concord EFS, Inc. By:/s/ Dan M. Palmer ----------------- Dan M. Palmer Chairman of the Board of Directors and Chief Executive Officer Date: March 30, 2001 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 March 30, 2001 Dan M. Palmer of Directors and Chief Executive Officer (Principal Executive Officer) /s/ Edward T. Haslam Chief Financial Officer March 30, 2001 Edward T. Haslam (Principal Financial and Accounting Officer) /s/ Edward A. Labry President March 30, 2001 Edward A. Labry III and Director /s/ Richard M. Harter Director and Secretary March 30, 2001 Richard M. Harter /s/ Douglas C. Altenbern Director March 30, 2001 Douglas C. Altenbern /s/ J. Richard Buchignani Director March 30, 2001 J. Richard Buchignani /s/ Ronald V. Congemi Director March 30, 2001 Ronald V. Congemi /s/ Richard P. Kiphart Director March 30, 2001 Richard P. Kiphart /s/ Jerry D. Mooney Director March 30, 2001 Jerry D. Mooney /s/ Paul L. Whittington Director March 30, 2001 Paul L. Whittington CONCORD EFS, INC AND SUBSIDIARIES FORM 10-K LISTING OF EXHIBITS Exhibit Nos. 2.1 Agreement and Plan of Merger among Concord EFS, Inc., CEFT, Inc. and Electronic Payment Services, Inc., dated as of November 20, 1998, is incorporated herein by reference to Exhibit 2.1 to the current report on Form 8-K (File No. 000-13848), filed on March 10, 1999. 2.2 Agreement and Plan of Merger among Concord EFS, Inc., Orion Acquisition Corp. and Star Systems, Inc., dated as of October 6, 2000, is incorporated herein by reference to Exhibit 10 to Concord's quarterly report on Form 10-Q (File No. 000-13848), filed on November 14, 2000. 3.1 Restated Certificate of Incorporation of Concord EFS, Inc. is incorporated herein by reference to Exhibit 4.1 to Concord's registration statement on Form S-8 (File No. 333-74215), filed on March 10, 1999. 3.2 Certificate of Amendment to the Restated Certificate of Incorporation of Concord EFS, Inc. is incorporated herein by reference to Exhibit 3.3 to amendment No. 2 to Concord's registration statement on Form S-3 (File No. 333-77829), filed on June 14, 1999. 3.3 Amended and Restated Bylaws of Concord EFS, Inc. are incorporated herein by reference to Exhibit 4.2 to Concord's registration statement on Form S-8 (File No. 333-74215), filed on March 10, 1999. 10.1 Concord EFS, Inc. 1993 Incentive Stock Option Plan, as amended and restated, is incorporated herein by reference to Exhibit 99.1 to Concord's registration statement on Form S-8 (File No. 333-74215), filed on March 10, 1999. 10.2 Electronic Payment Services, Inc. 1995 Stock Option Plan, as amended, is incorporated herein by reference to Exhibit 99.1 to Concord's registration statement on Form S-8 (File No. 333-74213), filed on March 10, 1999. 10.3 Star Systems, Inc. 2000 Equity Incentive Plan is incorporated herein by reference to Exhibit 99.1 to Concord's registration statement on Form S-8 (File No. 333-56066), filed on February 23, 2001. 10.4*Incentive Agreement between Concord EFS, Inc. and Dan M. Palmer, dated as of February 26, 1998, is incorporated herein by reference to Exhibit 10.3 to Concord's annual report on Form 10-K (File No. 000-13848), filed on April 1, 1999. 10.5*Incentive Agreement between Concord EFS, Inc. and Edward A. Labry III, dated as of February 26, 1998, is incorporated herein by reference to Exhibit 10.2 to Concord's annual report on Form 10-K (File No. 000-13848), filed on April 1, 1999. 10.6*Employment Agreement between H&S Holding Company (renamed Star Systems, Inc.) and Ronald V. Congemi, dated as of March 1, 1999, and amendment thereto between Star Systems, Inc., Concord EFS, Inc. and Ronald V. Congemi, dated October 6, 2000. 10.7*Agreement Terminating Salary Continuation Agreement between Star Systems, Inc., Concord EFS, Inc. and Ronald V. Congemi, dated October 6, 2000. 10.8*Star Nonqualified Deferred Compensation Plan, effective as of January 1, 2000. 11 Statement Regarding Computation of Per Share Earnings is incorporated herein by reference to Concord's Annual Report to Stockholders for the year ended December 31, 2000, filed herewith as Exhibit 13, Notes to Consolidated Financial Statements, Note N. 13 Annual Report to Stockholders for the year ended December 31, 2000. 20 Notice of Annual Meeting to Stockholders. 21 List of Subsidiaries. 23 Consent of Independent Auditors. * Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this report. EX-10.6 2 0002.txt EMPLOYMENT AGREEMENT EX-10.6 Employment Agreement between H&S Holding Company (renamed Star Systems, Inc.) and Ronald V. Congemi, dated as of March 1, 1999, and amendment thereto between Star Systems, Inc., Concord EFS, Inc. and Ronald V. Congemi, dated October 6, 2000. EMPLOYMENT AGREEMENT AGREEMENT (this "Agreement") made as of March 1, 1999 by and between H&S Holding Company, a Delaware corporation (the "Company"), and Ronald V. Congemi (the "Executive"). WHEREAS, Star System, Inc., a Delaware corporation ("Star"), and HONOR Technologies, Inc., a Delaware corporation ("Honor"), have entered into an Agreement and Plan of Merger, dated as of October 2, 1998, as amended by the First Amendment, dated February 4, 1999 (the "Merger Agreement"), pursuant to which Star and Honor will become wholly owned subsidiaries (together with any other subsidiaries of the Company, the "Subsidiaries") of the Company as of the Closing Date (as defined in the Merger Agreement); WHEREAS, the Company wishes to employ the Executive as Pres- ident and Chief Executive Officer of the Company and its Subsidiaries; WHEREAS, the Executive is willing to commit himself to serve the Company and its Subsidiaries, on the terms and conditions herein provided; and WHEREAS, in order to effect the foregoing, the Company and the Executive wish to enter into an employment agreement on the terms and conditions set forth below. NOW, THEREFORE, in consideration of the premises and the respective covenants and agreements of the parties herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Employment. The Company hereby agrees to employ the Executive, and the Executive hereby agrees to serve the Company, on the terms and conditions set forth herein. 2. Term. The term of this Agreement (the "Term") shall commence on the Closing Date (hereinafter, the "Effective Date") and end on the last day of the month during which the fifth anniversary of the Closing Date occurs (the "Initial Termination Date"), provided that, one year prior to the Initial Termination Date, and each subsequent anniversary thereof during the Term, the Term shall be automatically extended for an additional one year period unless either party hereto gives notice to the other party 120 days prior to such time that such party does not wish to so extend the Term. 3. Position and Duties. (a) The Executive shall serve as President and Chief Executive Officer of the Company, and shall report only to the Board of Directors of the Company (the "Board"). The Executive shall devote substantially all his working time and efforts to the business and affairs of the Company and its Subsidiaries, provided that, during the Term, it shall not be a violation of this Agreement for the Executive to (i) serve on corporate, civic, industry or charitable boards or committees, (ii) deliver lectures, fulfill speaking engagements or teach at educational institutions, and (iii) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that the Executive may conduct activities that are generally accepted for an executive in his position. (b) Executive shall be appointed to serve as a member of the Board as of the Effective Date. In addition, during the Term, Executive shall be nominated for election to the Board at each meeting of stockholders at which directors are to be elected, and the Company shall use its best efforts to provide for Executive's election to the Board of Directors at each such meeting. Executive also agrees that effective upon notice being provided of his termination of employment with the Company, he shall immediately resign from his position as a member of the Board. 4. Compensation and Related Matters. (a) Salary. During the period of the Executive's employment hereunder, the Company shall pay to the Executive a salary at an annual rate of $300,000 ("Base Salary"). The Base Salary shall be payable in accordance with the Company's normal payroll practices, shall be reviewed at least annually and may be increased (but not decreased) upon review; provided, that the Base Salary shall be increased effective as of the first day of February during each calendar year of the Term by a percentage not less than the percentage increase in the Consumer Price Index for the Orlando metropolitan area for the immediately preceding calendar year. (b) Annual Bonus. The Company shall provide to the Executive an annual target bonus opportunity of no less than 70% of Base Salary, based upon the achievement of such corporate target performance goals as may be established from time to time for this purpose by the Board of Directors of the Company (the "Board"). The Executive shall also be entitled to a preestablished percentage of Base Salary if corresponding minimum or maximum performance goals are achieved. (c) Long-Term Incentive Plan. Executive shall be entitled to participate in Honor's existing Long-Term Incentive Plan, generally on terms in effect as of the Closing Date, at a level commensurate with Executive's position as President and Chief Executive Officer. (d) Deferred Compensation. The Company shall continue in effect Executive's existing deferred compensation and salary continuation arrangements maintained for his benefit while an employee of Star. (e) Life Insurance. The Company shall provide Executive with term life insurance with a face value not less than three times Executive's Base Salary as from time to time in effect. (f) Long-Term Disability. The Company shall provide Executive with long-term disability benefits in an amount not less than 80% of Executive's Base Salary as from time to time in effect. (g) Automobile Allowance. The Company shall provide Exec- utive with an automobile allowance in an amount not less than $750 per month. (h) Post-Retiree Medical Benefits. Following Executive's retirement or other termination of employment with the Company under any circumstances and for any reason, the Company shall, until Executive attains age 65, continue to provide Executive coverage under its group health plan (or shall purchase equivalent coverage outside of such plan) at the same level of coverage and benefits applicable from time to time to senior executives of the Company, provided, that the Company may require Executive to pay the standard employee group rate for such coverage, and provided, further, that such benefits shall be reduced to the extent comparable benefits are actually received by or made available to the Executive by a subsequent employer. Any such benefits actually received by or made available to the Executive shall be promptly reported to the Company by the Executive. (i) Country Club Dues. The Company shall reimburse Executive for the initiation fee (not to exceed $25,000) and the annual dues (not to exceed $6,000 per year) at a country club of Executive's choice in the Orlando metropolitan area. (j) Moving Expenses, Housing Costs. The Company shall reimburse Executive for the cost of all moving expenses incurred by Executive in relocating to the Orlando Metropolitan area, on terms consistent with Honor's policy regarding moving expenses prior to the Closing Date, provided, that the Company shall in addition provide Executive with a tax gross-up in an amount sufficient to offset in full any federal or state income tax liability resulting from such reimbursement. The Company shall also reimburse Executive for the monthly association fees payable with respect to his existing condominium in San Diego, on the understanding that such condominium shall be utilized for necessary business travel. (k) Other Benefits. The Executive shall be eligible, while performing services hereunder, to participate in or to receive benefits, at a level commensurate with the Executive's position with the Company and its Subsidiaries, under all other incentive bonus, fringe benefit and other employee benefit (including both welfare and retirement benefit) plans and arrangements made available by the Company or its Subsidiaries to similarly situated executives, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. (l) Expenses. The Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in performing services hereunder, including all expenses of travel and living expenses while away from home on business or at the request of and in the service of the Company, provided that such expenses are incurred and accounted for in accordance with the policies and procedures established by the Company. (m) Vacations. The Executive shall be entitled to 25 vacation days in each calendar year, and to compensation in respect of earned but unused vacation days, determined in accordance with the Company's vacation practices and policy. The Executive shall also be entitled to all paid holidays given by the Company to its executives. (n) Services Furnished. The Company shall furnish the Executive with office space, secretarial support and such other facilities and services, while the Executive is performing services hereunder, as shall be suitable to the Executive's position and adequate for the performance of his duties as set forth in Section 3 hereof. 5. Offices. The Executive agrees to serve without additional compensation, if elected or appointed thereto, as a director of any of the Company's direct or indirect subsidiaries or affiliates, provided that the Executive is indemnified for serving in any and all such capacities on a basis no less favorable than is currently provided to similarly situated executives of the Company. 6. Termination. The termination of the Executive's employment hereunder under the following circumstances shall not constitute a breach of this Agreement: (a) Death. The Executive's employment hereunder shall terminate upon his death. (b) Disability. If, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from his duties hereunder on a full-time basis for the entire period of 180 consecutive days, and within 30 days after written notice of termination is given (which may occur before or after the end of such 180-day period) shall not have returned to the performance of his duties hereunder on a full-time basis, the Company may terminate the Executive's employment hereunder. (c) Cause. The Company may terminate the Executive's employment hereunder for Cause. For purposes of this Agreement, the Company shall have "Cause" to terminate the Executive's employment hereunder upon (i) the Executive's conviction of or guilty plea to the commission of an act or acts constituting a felony under the laws of the United States or any state thereof, (ii) action by the Executive toward the Company involving personal dishonesty, theft or fraud in connection with the Executive's duties as an officer of the Company and its Subsidiaries and intended to result in personal gain, or (iii) the Executive's willful failure to abide by or follow lawful, reasonable written directions of the Board, which does not cease within thirty (30) business days after written notice regarding such refusal has been given to the Executive by the Company. For purposes of this Section 7(c), no act or failure to act by the Executive shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the act or failure to act was in the best interest of the Company. Notwithstanding the foregoing, the Company may terminate the Executive's employment for "Cause" only upon a vote of at least three-quarters of the members of the Board. (d) Termination by the Executive for Good Reason. The Executive may terminate his employment hereunder for Good Reason. For purposes of this Agreement, "Good Reason" shall mean (i) a material breach by the Company of the terms of this Agreement that has not been cured within thirty (30) business days after written notice of such noncompliance has been given by the Executive to the Company, (ii) action by the Company resulting in a substantial diminution of the nature, responsibility or character of Executive's titles, positions, duties, responsibilities or authorities with the Company, (iii) Executive's removal as President and Chief Executive Officer of the Company, (iv) Executive's being required to report to any person or entity other than the Company's Board of Directors, or (v) any reduction in the Executive's Base Salary or annual bonus opportunity. (e) Termination by the Executive for Ill Health. The Executive may terminate his employment hereunder if his health should become impaired to an extent that makes his continued performance of his duties hereunder hazardous to his physical or mental health or his life, provided that the Executive shall have furnished the Company with a written statement from a qualified doctor to such effect and provided, further, that, at the Company's request, the Executive shall submit to an examination by a doctor selected by the Company and such doctor shall have concurred in the conclusion of the Executive's doctor. (f) Date of Termination; Notice of Termination. Any termination of the Executive's employment by the Company or by the Executive (other than termination pursuant to subsection (a) hereof) shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. "Date of Termination" shall mean (i) if the Executive's employment is terminated by his death, the date of his death, (ii) if the Executive's employment is terminated for Disability pursuant to subsection (b) hereof, thirty (30) days after Notice of Termination is given (provided that the Executive shall not have returned to the performance of his duties on a full-time basis during such 30-day period), (iii) if the Executive's employment is terminated for Cause pursuant to subsection (c) hereof, the date specified in the Notice of Termination, and (iv) if the Executive's employment is terminated for any other reason, sixty (60) days after Notice of Termination is given. 7. Compensation During Disability or Upon Termination. (a) Disability. During any period that the Executive fails to perform his duties hereunder as a result of incapacity due to physical or mental illness (the "Disability Period"), the Executive shall continue to receive his full Base Salary at the rate then in effect for such period until his employment is terminated pursuant to Section 7(b) hereof, provided that payments so made to the Executive shall be reduced by the sum of the amounts, if any, payable to the Executive at or prior to the time of any such payment under disability benefit plans of the Company or under the Social Security disability insurance program, and which amounts were not previously applied to reduce any such payment. If the Company shall terminate the Executive's employment pursuant to Section 7(b) hereof, the Company shall pay the Executive: (i) his full Base Salary through the Date of Termination at the rate in effect at the time Notice of Termination is given ("Accrued Base Salary"); (ii) a pro rata Annual Bonus, in an amount equal to 70% of Base Salary at the rate in effect on the date Notice of Termination is given, multiplied by a fraction, the numerator of which is the number of days that have elapsed as of the Date of Termination in the fiscal year in which such Date of Termination occurs and the denominator of which is 365 ("Pro Rata Bonus"); (iii) an amount equal to the sum of (x) three (3) times the sum of Executive's Base Salary at the rate in effect on the date Notice of Termination is given and (y) the sum of the annual incentive bonuses paid to Executive by the Company or Star, as applicable, during the last three fiscal years ended prior to the date of termination ("Lump-Sum Severance Payment"); and (iv) in accordance with the terms of the applicable plan or program, all other unpaid amounts to which the Executive is then entitled under any compensation or benefit plan or program of the Company (collectively, "Accrued Benefit Obligations"),and the Company shall have no further obligations under this Agreement. (b) Death. If the Executive's employment is terminated by his death, the Company shall pay the Executive the Accrued Base Salary, a Pro Rata Bonus and the Accrued Benefit Obligations, and the Company shall have no further obligations to the Executive under this Agreement. (c) Cause. If the Executive's employment shall be terminated by the Company for Cause, the Company shall pay the Executive the Accrued Base Salary and Accrued Benefit Obligations, and the Company shall have no further obligations to the Executive under this Agreement. (d) Resignation. If the Executive's employment shall be terminated by the Executive other than for Good Reason or if the Executive shall resign for reasons of ill health pursuant to Section 7(e), the Company shall pay the Executive the Accrued Base Salary, a Pro Rata Bonus and the Accrued Benefit Obligations, and the Company shall have no further obligations to the Executive under this Agreement. (e) Termination by the Company other than for Disability or Cause or by the Executive for Good Reason. If the Company shall terminate the Executive's employment other than pursuant to Section 7(b) (Disability) or 7(c) (Cause) hereof (it being understood that a purported termination pursuant to Section 7(b) or 7(c) hereof which is disputed and finally determined not to have been proper shall be a termination by the Company other than pursuant to Section 7(b) or 7(c) hereof) or if the Executive shall terminate his employment hereunder pursuant to Section 7(d) (Good Reason) hereof, then the Company shall pay the Executive the Accrued Base Salary, a Pro Rata Bonus, the Lump-Sum Severance Payment and the Accrued Benefit Obligations, and the Company shall have no further obligations to the Executive under this Agreement. (f) Mitigation; Set-Off. The Executive shall not be under any obligation to seek employment by another employer. No amount of the Lump-Sum Severance Payment or Pro Rata Bonus shall be reduced by any salary, bonus or benefits earned by the Executive as the result of employment by another employer, and such amount may not be reduced by offset against any amount owed by the Executive to the Company. 8. Confidentiality; Noncompetition. (a) The Executive shall hold in a fiduciary capacity for the benefit of the Company and its Subsidiaries all trade secrets and confidential information relating to the Company, its Subsidiaries and their respective businesses that shall have been obtained by the Executive during the Executive's employment by the Company and that shall not have been or now or hereafter have become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). The Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, knowingly communicate or divulge any such trade secrets or information to anyone other than the Company and those designated by the Company. Any termination of the Executive's employment or of this Agreement shall have no effect on the continuing operation of this Section 9(a). (b) The Executive shall not engage in any Competitive Activity while he is employed by the Company. In the event of the termination of the Executive's employment by (i) the Company for Cause or (ii) the Executive other than for Good Reason, the Executive shall not engage in any Competitive Activity for a period of twelve (12) months following the Date of Termination. For purposes of this Agreement, "Competitive Activity" shall mean (i) activity, without the written consent of an authorized officer of the Company, consisting of the Executive's participation in the management of, or his acting as a consultant for or employee of, any business operation of any enterprise if such operation (a "Competitive Operation") is then in substantial and direct competition with a Principal Business; (ii) the soliciation, on behalf of the Executive or for any Competitive Operation, directly or indirectly, of any customers (determined as of the Date of Termination) of the Company or its Subsidiaries; or (iii) the solicitation, enticement or encouragement of any employee (determined as of the Date of Termination) of the Company or its Subsidiaries to terminate such employee's employment. Notwithstanding the foregoing, Competitive Activity shall not include (x) the mere passive ownership of up to five percent (5%) of the outstanding securities in any enterprise, including without limitation a Competitive Operation; or (y) the participation in the management of, or acting as a consultant for or employee of, any enterprise or any business operation thereof, other than in connection with a Competitive Operation of such enterprise, provided that the Executive does not furnish advice to any Competitive Operation of such enterprise. If, at any time, the provisions of this Section 9(b) shall be determined to be invalid or unenforceable, by reason of being vague or unreasonable as to area, duration or scope of activity, this Section 9(b) shall be considered divisible and shall become and be immediately amended to only such area, duration and scope of activity as shall be determined to be reasonable and enforceable by the court or other body having jurisdiction over the matter; and the Executive agrees that this Section 9(b) as so amended shall be valid and binding as though any invalid or unenforceable provision had not been included herein. For purposes of this Agreement, "Principal Business" shall mean the furnishing of electronic funds transfer and related services consisting of automated teller machine, point of sale transactions and related services, data processing services related to terminal driving, card authorization and card production and other payment system services. (c) The Executive shall assign to the Company or its Subsidiaries or the designee thereof, without further compensation, his entire right, title and interest in all Developments. For purposes of this Agreement, "Developments" shall mean all inventions, discoveries, enhancements, improvements and ideas and all related patents, copyrights, patent applications and copyright applications, in the United States and elsewhere, created by the Executive, alone or with others (x) as a result of the material use of the Company or its Subsidiaries' time, materials or facilities or (y) resulting from or suggested by the Executive's work at the Company or its Subsidiaries, either (A) during his employment with the Company and its Subsidiaries or (B) for one year after the Date of Termination if conceived and reduced to practice as a result of, and attributable to, work done by the Executive during the Executive's employment in connection with the Principal Business. The Executive shall execute, at the Company's request and expense, specific assignments to any such Development as well as any documents that the Company or its Subsidiaries consider necessary or desirable to obtain or defend letters patent and to vest title in such Developments in the Company or its Subsidiaries or its assigns. (d) In the event that the Executive's employment is subject to the California Labor Code, this Agreement does not apply to a Development which qualifies as a nonassignable Invention under Section 2870 of the California Labor Code. The Executive acknowledges that the Executive has reviewed the Executive-Owned Invention Notification attached hereto as Exhibit A and agrees that the Executive's signature on that Notification acknowledges his or her receipt thereof. (e) In the event of a breach or threatened breach of subsections (a), (b) or (c) of this Section 9, the Executive agrees that the Company shall be entitled to injunctive relief in a court of appropriate jurisdiction to remedy any such breach or threatened breach, the Executive acknowledging that damages would be inadequate and insufficient. (f) Any termination of the Executive's employment or of this Agreement shall have no effect on the continuing operation of this Section 9. 9. Successors; Binding Agreement; Indemnification. (a) Neither this Agreement nor any rights hereunder shall be assignable or otherwise subject to hypothecation by the Executive (except by will or by operation of the laws of intestate succession) or by the Company, except that the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance reasonably satisfactory to the Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as herein before defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 10 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (b) This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts would still be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee, or other designee or, if there be no such designee, to the Executive's estate. (c) The Company shall indemnify, hold harmless and defend the Executive for all acts or omissions taken or not taken by him in good faith while performing services for the Company to the same extent and upon the same terms and conditions as other similarly situated officers and directors of the Company. If and to the extent that the Company maintains, at any time during the Term, an insurance policy covering the other officers and directors of the Company against lawsuits, the Company shall use its best efforts to cause the Executive to be covered under such policy upon the same terms and conditions as other similarly situated officers and directors. 10. Notice. For the purposes of this Agreement, notices, demands and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or (unless otherwise specified) mailed by United States registered mail, return receipt requested, postage prepaid, addressed, if to the Executive, to the address printed on the signature page of this Agreement, and if to the Company, as follows: If to the Company: H&S Holding Company 2600 Lake Lucien Drive, Ste. 180 Maitland, Florida 32751 Attn. Corporate Secretary or to such other address as any party may have furnished to the others in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 11. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and the Chairman of the Board or such other officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Florida without regard to its conflicts of law principles. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under this Agreement which by their nature may require either partial or total performance after the expiration of the Term shall survive such expiration. 12. Validity. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. Settlement of Disputes:Arbitration. (a) All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Board of Directors and shall be in writing. (b) Any further dispute or controversy arising under or in connection with this Agreement hereof) shall be settled exclusively by arbitration, conducted before a panel of three arbitrators in Orlando, Florida in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that the Company shall be entitled to seek a restraining order or injunction in any court of competent jurisdiction to prevent any anticipated or continued violation of the provisions of Section 9 hereof, and the Executive hereby consents that such restraining order or injunction may be granted without the necessity of the Company's posting any bond. (c) The Executive and the Company shall each pay its own legal fees and expenses incurred in connection with any dispute or controversy arising under this Agreement. 15. Entire Agreement. This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto; and any prior agreement of the parties hereto in respect of the subject matter contained herein is hereby terminated and cancelled. No agreements or representations, oral or otherwise express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement on the date and year first above written. H&S HOLDING COMPANY By: /s/ C.L. Wilson III C. Leon Wilson III Chairman of the Board of Directors /s/ Ronald V. Congemi Ronald V. Congemi Address: 1 A- Exhibit A EXECUTIVE-OWNED INVENTION NOTIFICATION This Executive-Owned Invention Notification ("Notification") is to inform the Executive in accordance with Section 2872 of the California Labor Code that the Agreement between the Company and the Executive does not require the Executive to assign or offer to assign to the Company any invention that the Executive developed or develops entirely on his or her own time without using the Company's equipment, supplies, facilities or trade secret information except for those inventions that either: (i) Relate at the time of conception or reduction to practice of the invention to the Company's business, or actual or demonstrably anticipated research or development of the Company; or (ii) Result from any work performed by the Executive for the Company. To the extent a provision in the Agreement purports to require the Executive to assign an invention otherwise excluded from the preceding paragraph, the provision is against the public policy of the State of California and is unenforceable. This Notification does not apply to any patent or invention covered by a contract between the Company and the United States or any of its agencies requiring full title to such patent or invention to be in the United States. The Executive acknowledges receipt of a copy of this Notification: By:_______________________________ (Printed Name of Executive) Date:______________________________ Witnessed By: - ------------------------------ (Printed Name of Representative) Dated:_________________________ FIRST AMENDMENT TO EMPLOYMENT AGREEMENT This Amendment (the "Amendment") is made and entered into as of this 6th day of October, 2000 by and between Star Systems, Inc., a Delaware corporation (the "Company"), Concord EFS, Inc., a Delaware corporation ("Parent"), and Ronald V. Congemi (the "Executive") as an amendment to the Employment Agreement between H&S Holding Company (renamed Star Systems, Inc.) and the Executive, dated as of March 1, 1999 (the "Agreement"). WHEREAS, concurrently with this Amendment, the Company, Parent and Orion Acquisition Corp., a Delaware corporation and a direct wholly-owned subsidiary of Parent ("Sub"), are entering into an Agreement and Plan of Merger (the "Merger Agreement") pursuant to which Sub will merge with and into the Company (the "Merger"); and WHEREAS, the Company, Parent and the Executive mutually desire to amend the Agreement as set forth herein. NOW, THEREFORE, in consideration of the mutual promises contained herein and other good and valuable consideration, the parties hereby agree to amend the Agreement as set forth herein. The provisions of this Amendment shall become effective immediately, provided, however, that if the Merger Agreement is terminated, then (i) this Amendment shall automatically terminate at the same time, (ii) each party's obligations hereunder shall automatically cease to be of any effect and (iii) the Agreement shall remain in effect as if it had not been amended by this Amendment. 1. The first sentence of Section 3(a) of the Agreement is hereby amended to read as follows: The Executive shall serve as President and Chief Executive Officer of the Company, and shall report to the Board of Directors of the Company; provided, however, that on and after the Effective Time of the Merger, as such terms are defined in the Agreement and Plan of Merger (the "Merger Agreement"), entered into concurrently with the First Amendment hereto, among the Company, Concord EFS, Inc., a Delaware corporation ("Parent"), and Orion Acquisition Corp., a Delaware corporation and a direct wholly-owned subsidiary of Parent ("Sub"), the Executive shall report to the President of Parent, and shall serve as President of the Star network and any successor thereto, including any network that is created by the combination of Parent's MAC network and the Star network (such position, the "Network President") or, subject to Section 6(d) hereof, in such other position or having such other responsibilities and authority as may from time to time be authorized or directed by Parent. 2. Clause (i) of the second sentence of Section 3(a) of the Agreement is hereby amended to read as follows: (i) serve on corporate, civic, industry or charitable boards or committees, provided that after the Effective Time such service is approved by the President of Parent, 3. Section 3(b) of the Agreement is hereby deleted in its entirety. 4. The second sentence of Section 4(a) of the Agreement is hereby amended to read as follows: The Base Salary shall be payable in accordance with the Company's normal payroll practices, shall be reviewed at least annually and may be increased (but not decreased) upon review. 5. Section 4(b) of the Agreement is hereby amended by adding the following at the end thereof: Notwithstanding the foregoing, on and after the Effective Time, as defined in the Merger Agreement, the Company shall provide to the Executive an annual incentive bonus in an amount commensurate with the Executive's senior management position, as determined by the Board of Directors of Parent. 6. Section 4(c) of the Agreement is hereby amended to read as follows: (c) Long-Term Incentive Plan. After the Effective Time, as defined in the Merger Agreement, the Executive shall be entitled to participate in an equity compensation plan maintained by Parent, at a level commensurate with the Executive's senior management position, taking into account the Option to be granted under Section 9 of this Agreement. 7. Section 6(c) of the Agreement is hereby amended to read as follows: (c) Cause. The Company may terminate the Executive's employment hereunder for Cause. For purposes of this Agreement, the Company shall have "Cause" to termi- nate the Executive's employment hereunder upon (i) the Executive's conviction of or guilty plea to the commission of an act or acts constituting a felony under the laws of the United States or any state thereof, (ii) action by the Executive toward the Company involving personal dishonesty, theft or fraud in connection with the Executive's duties as an officer of the Company and its Subsidiaries and intended to result in personal gain, (iii) the Executive's willful failure to abide by or follow lawful, reasonable written directions of the Board or Parent, which does not cease within fifteen (15) business days after written notice regarding such refusal has been given to the Executive by the Company or (iv) the Executive's breach of Section 8 hereof. For purposes of this Section 6(c), no act or failure to act by the Executive shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the act or failure to act was in the best interest of the Company. 8. The second sentence of Section 6(d) of the Agreement is hereby amended to read as follows: For purposes of this Agreement, "Good Reason" shall mean any of the following events which shall not have been cured within fifteen (15) business days after written notice of such event has been given by the Executive to the Company: (i) a material breach by the Company of the terms of this Agreement, (ii) action by the Company resulting in a substantial diminution of the nature, responsibility or character of the Executive's titles, positions, duties, responsibilities or authorities with the Company, as held by the Executive in his position as Network President, taking into account the fact that as a result of the Merger (A) the Company will be in the process of integrating its operations with those of Sub and Parent and that such integration process will likely result in certain changes in the Executive's duties, including that assistance with such integration may take priority over the Executive's customary job duties, and (B) the Company will cease to be an independent company and will become a subsidiary of Parent, and the duties and responsibilities of the Executive will change in accordance with this change in the ownership of the Company, or (iii) any reduction in the Executive's Base Salary. 9. Section 7(e) of the Agreement is hereby amended to read as follows: If the Company shall terminate the Executive's employment other than pursuant to Section 7(a) (Disability) or 7(c) (Cause) hereof (it being understood that a purported termination pursuant to Section 7(a) or 7(c) hereof which is disputed and finally determined not to have been proper shall be a termination by the Company other than pursuant to Section 7(a) or 7(c) hereof) or if the Executive shall terminate his employment hereunder pursuant to Section 7(d) (Good Reason) hereof, then the Company shall pay to the Executive the Accrued Base Salary, a Pro Rata Bonus and the Accrued Benefit Obligations. In addition, the Company shall pay to the Executive in equal payments on each of the Company's regular payroll dates during the 24-month period following the Date of Termination an amount which, when multiplied by the number of scheduled payroll dates during such period, is equal to the Lump-Sum Severance Payment; provided, however that no further payments shall be made on or after the first date on which the Executive breaches any of the covenants set forth in Section 8 hereof. Upon the payment of all amounts prescribed in this Section 7(e), the Company shall have no further obligations to the Executive under this Agreement. 10. All references in Section 8 to Section 9 shall be changed to references to Section 8. 11. All references in Section 8 to "Subsidiaries" shall be changed to references to "Parent and Subsidiaries of Parent." 12. The second sentence of Section 8(a) is hereby amended to read as follows: The Executive shall not, without the prior written consent of Parent or as may be required by law or legal process, use, communicate or divulge any such trade secrets or confidential information to anyone other than the Company and those designated by the Company. Immediately upon the Company's request or on the termination date of the Executive's employment, whichever occurs first, the Executive shall return to the Company all of the property of the Company, its affiliates, and the actual and prospective clients of any of them, including, without limitation, all documents and things containing any trade secrets or confidential information, computer programs and diskettes, files, forms, notes, records, charts, and all copies. 13. The first paragraph of Section 8(b) of the Agreement is hereby amended to read as follows: The Executive shall not engage in any Competitive Activity while he is employed by the Company or for a period of 24 months following the termination of his employment for any reason (the "Noncompetition Period"). In consideration for the Executive's agreements hereunder, the Company shall pay the Executive a lump sum of $600,000 in cash at the Effective Time, as defined in the Merger Agreement, subject to applicable tax withholding requirements, provided that the Executive is still employed by the Company at the Effective Time and has not breached the terms of this Agreement. 14. The second paragraph of Section 8(b) of the Agreement is hereby amended by deleting the phrase "without the written consent of an authorized officer of the Company," where it appears in the first sentence thereof, and by inserting the phrase "without the written consent of Parent" in lieu thereof. 15. Sections 9 through 15 of the Agreement, and all references thereto, are hereby renumbered as Sections 10 through 16, respectively, and the following new Section 9 is hereby added thereto: 9. Option Grant. (a) In consideration for the Executive's agreements hereunder, including but not limited to Section 8 of this Agreement, Parent will grant the Executive the option as described in this Section. If, at the Effective Time, as defined in the Merger Agreement, the Executive is still employed by the Company and has not breached the terms of this Agreement, then Parent shall, immediately after the Effective Time, cause to be granted to the Executive an option to purchase 200,000 shares of Parent's common stock (the "Option") pursuant to the terms of Parent's 1993 Incentive Stock Option Plan, as amended (the "Plan"). Consistent with the Plan, the Option will have a 10-year term and an exercise price equal to the fair market value of Parent's common stock at the time of the grant. The Option will become vested with respect to 25% of the shares subject to the Option on each anniversary of the Effective Time as long as the Executive remains employed by the Company. (b) Notwithstanding the provisions of Section 9(a) above, if, prior to the last day of the Noncompetition Period, the Executive breaches any of the provisions of Section 8 of this Agreement or is terminated for Cause, then (i) the Option shall immediately terminate, and (ii) the Executive shall promptly pay to the Company an amount of cash equal to the Gain Realized (as defined below) on any shares acquired through the exercise of the Option (the "Option Shares") during the Restricted Period (as defined below). For purposes of this Section 9(b), "Restricted Period" shall refer to the period of time commencing 90 days prior to the termination of the Executive's employment and ending on the last day of the Noncompetition Period; and "Gain Realized" shall equal the difference between (x) the fair market value of the Option Shares on the date the Option is granted and (y) the greater of the fair market value of the Option Shares (A) on the date of acquisition of such Option Shares or (B) on the first date any of the provisions of Section 8 of this Agreement were breached or the Date of Termination if the Executive was terminated for Cause. IN WITNESS WHEREOF, the Company and Parent have caused this Amendment to be signed by their duly authorized representatives and the Executive has signed this Amendment as of the day and year first above written. STAR SYSTEMS, INC. By: /s/ E. Miles Kilburn Name: E. Miles Kilburn Title: Group EVP & CFO CONCORD EFS, INC. By: /s/ E. T. Haslam Name: Edward T. Haslam Title: CFO & CAO /s/ Ronald V. Congemi Ronald V. Congemi EX-10.7 3 0003.txt EMPLOYMENT AGREEMENT EX-10.7 Agreement Terminating Salary Continuation Agreement between Star Systems, Inc., Concord EFS, Inc. and Ronald V. Congemi, dated October 6, 2000. AGREEMENT TERMINATING SALARY CONTINUATION AGREEMENT This Agreement (the "Agreement") is made and entered into as of this 6th day of October, 2000 by and between Star Systems, Inc., a Delaware corporation (the "Company"), Concord EFS, Inc., a Delaware corporation ("Parent"), and Ronald V. Congemi (the "Executive") for the purpose of terminating the Salary Continuation Agreement between the Company and the Executive, dated February 1, 1997 (the "Salary Continuation Agreement"). WHEREAS, concurrently with this Agreement, the Company, Parent and Orion Acquisition Corp., a Delaware corporation and a direct wholly-owned subsidiary of Parent ("Sub"), are entering into an Agreement and Plan of Merger (the "Merger Agreement") pursuant to which Sub will merge with and into the Company (the "Merger"); and WHEREAS, the Company, Parent and the Executive mutually desire to terminate the Salary Continuation Agreement, and to pay out the benefit accrued thereunder in accordance with the terms of the Star Non-Qualified Deferred Compensation Plan, effective as of January 1, 2000 (the "Deferred Compensation Plan"). NOW, THEREFORE, in consideration of the mutual promises contained herein and other good and valuable consideration, the parties hereby agree as follows: 1. As of the Effective Time of the Merger, as defined in the Merger Agreement, the Salary Continuation Agreement shall terminate, and no further benefits shall accrue or be payable to the Executive thereunder. 2. As of the Effective Time of the Merger, the benefit accrued on behalf of the Executive under the Salary Continuation Agreement immediately prior to the Effective Time (the "Accrual Balance") shall be credited to the account maintained for the Executive under the Deferred Compensation Plan, and shall be credited with earnings or losses and shall be paid to the Executive pursuant to the terms of the Deferred Compensation Plan. For purposes of the preceding sentence, the Accrual Balance shall be determined in accordance with Schedule A to the Salary Continuation Agreement, except that it shall be calculated (i) on a monthly basis, and (ii) without regard to the provisions of the Salary Continuation Agreement applicable in the event of a Change of Control, including Section 2.4 thereof. 3. The amounts credited to the Executive's account under the Deferred Compensation Plan, including the amount credited pursuant to Section 2 of this Agreement, shall be payable to the Executive as if neither the Merger nor any of the transactions contemplated by the Merger Agreement constituted a Change of Control. 4. The provisions of this Agreement shall become effective immediately prior to the Effective Time, provided, however, that if the Merger Agreement is terminated, then this Agreement shall automatically terminate at the same time. IN WITNESS WHEREOF, the Company and Parent have caused this Agreement to be signed by their duly authorized representatives and the Executive has signed this Agreement as of the day and year first above written. STAR SYSTEMS, INC. By: /s/ E. Miles Kilburn Name: E. Miles Kilburn Title: Group EVP & CFO CONCORD EFS, INC. By: /s/ E. T. Haslam Name: Edward T. Haslam Title: Chief Financial Officer /s/ Ronald V. Congemi Ronald V. Congemi EX-10.8 4 0004.txt NONQUALIFIED DEFERRED COMPENSATION PLAN EX-10.8 Star Nonqualified Deferred Compensation Plan, effective as of January 1, 2000 STAR NONQUALIFIED DEFERRED COMPENSATION PLAN SECTION 1 Purpose and Administration 1.1 Name of Plan. Star Systems, Inc. (the "Company") has established the Star Nonqualified Deferred Compensation Plan (the "Plan"), as set forth herein. 1.2 Effective Date. The effective date of this Plan is January 1, 2000. 1.3 Purpose. The Company has established the Plan primarily for the purpose of providing deferred compensation to a select group of management or highly compensated employees of the Employers. With respect to the benefits provided hereunder to compensate for the limitations imposed by Code Section 415, the Plan is intended to be an excess benefit plan as described in Section 3(36) of ERISA. With respect to the other benefits provided hereunder, the Plan is intended to be a top-hat plan as described in Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA. The Company intends that the Plan (and any grantor trust described in Subsection 6.1) shall be treated as unfunded for tax purposes and for purposes of Title I of ERISA. The Plan is not intended to qualify under Code section 401(a). The Company's obligations hereunder, if any, to a Participant (or to a Participant's beneficiary) shall be unsecured and shall be a mere promise by the Company to make payments hereunder in the future. A Participant (or the Participant's beneficiary) shall be treated as a general unsecured creditor of the Company. 1.4 Administration. The Plan shall be administered by the Plan Administrator. The Plan Administrator shall serve at the pleasure of the Company's Chief Executive Officer, and the Plan Administrator (or any member of the committee acting as Plan Administrator) may be removed by the Company's Chief Executive Officer at any time upon written notice. The Plan Administrator (or any member of the committee acting as Plan Administrator) may resign upon 10 days' prior written notice to the Company's Chief Executive Officer. The Plan Administrator shall have the powers, rights and duties set forth in the Plan and shall have the power, in the Plan Administrator's sole and absolute discretion, to determine all questions arising under the Plan, including the determination of the rights of all persons with respect to the Plan and to interpret the provisions of the Plan and remedy any ambiguities, inconsistencies, or omissions. Subject to applicable law and Subsection 6.10, any decisions of the Plan Administrator shall be final and binding on all persons with respect to the Plan and the benefits provided under the Plan. The Plan Administrator may delegate the Plan Administrator's authority under the Plan to one or more officers or directors of the Employers; provided, however, (a) such delegation must be in writing, and (b) the officers or directors of the Employer to whom the Plan Administrator is delegating authority must accept such delegation in writing. If a Participant is serving as a member of the committee acting as Plan Administrator, the Participant may not decide or determine any matter or question concerning such Participant's benefits under the Plan that the Participant would not have the right to decide or determine if the Participant were not serving as a member of such committee. Any action by the Plan Administrator will be subject to the following provisions: (a) The committee may act by meeting (including a meeting from different locations by telephone conference) or by document signed without meeting, and documents may be signed through the use of a single document or concurrent documents; provided, action shall be taken only upon the vote or other affirmative expression of a majority of the committee members qualified to vote with respect to such action. (b) A committee member by writing may delegate part or all of his or her rights, powers, duties and discretion to any other committee member, with such other committee member's consent. (c) No member of the committee shall be liable or responsible for an act or omission of other committee members in which the former has not concurred. (d) The committee shall choose a secretary who shall keep minutes of the committee's proceedings and all records and documents pertaining to the administration of the Plan. The secretary may execute any certificate or other written direction on behalf of the committee. SECTION 2 Definitions For purposes of the Plan, the following words and phrases shall have the meanings set forth below, unless their context clearly requires a different meaning: 2.1 Affiliate. "Affiliate" means any corporation, partnership, limited liability company, joint venture, association or similar organization or entity that is required to be aggregated with the Company pursuant to Code section 414(b) or (c). 2.2 Change in Control. "Change in Control" means: (a) During any period of two consecutive years or less, individuals who at the beginning of such period constitute the entire Board of Directors of the Company shall cease for any reason to constitute a majority thereof unless the election of, or nomination for election by the Company's stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period; (b) The shareholders of the Company approve any merger or consolidation as a result of which the common stock of the Company shall be changed, converted or exchanged (other than a merger with a wholly-owned subsidiary of the Company) or liquidation of the Company or any sale or disposition of 50% or more of the assets or earning power of the Company; or (c) The shareholders of the Company approve any merger or consolidation to which the Company is a party as a result of which the persons who were shareholders of the Company immediately prior to the effective date of the merger or consolidation shall have beneficial ownership of less than 50% of the combined voting power for election of directors of the surviving corporation following the effective date of such merger or consolidation; provided, however, no Change in Control shall be deemed to have occurred if, prior to such time as a Change in Control would otherwise be deemed to have occurred, the Board of Directors of the Company deems otherwise. 2.3 Code. "Code" means the Internal Revenue Code of 1986, as amended from time to time. Any reference to a section of the Code includes any comparable section or sections of any future legislation that amends, supplements or supersedes that section. 2.4 Compensation. "Compensation" means total taxable base salary, bonuses and commissions paid to a Participant by the Employer (determined without regard to any amounts in the Participant's Deferred Compensation Account). 2.5 Deferred Compensation Account. "Deferred Compensation Account" means the bookkeeping account maintained under the Plan in the Participant's name to reflect amounts deferred under the Plan pursuant to Section 3 (as adjusted under Section 4) and any Company Contributions made on behalf of the Participant (as adjusted under Section 4). The Deferred Compensation Account shall be hypothetical in nature and shall be maintained for bookkeeping purposes only. Neither the Plan nor any of the Deferred Compensation Accounts shall hold any actual funds or assets. 2.6 Deferral Election. "Deferral Election" means a written notice filed by the Participant with the Employer specifying the Compensation to be deferred by the Participant or specifying the Performance Unit Plan payment to be deemed transferred to and deferred by the Participant under the Plan. 2.7 Distribution Date. "Distribution Date" means the date a Participant terminates employment with the Employers and all of their Affiliates for any reason. 2.8 Employee. "Employee" means an employee of an Employer who meets the eligibility criteria set forth in Subsection 3.1 of the Plan and who is a member of a select group of management or highly compensated employees of the Employers. 2.9 Employer. "Employer" means, individually, the Company, Star Networks, Inc. and each other Affiliate of the Company that has been designated by the Company. The Company, Star Networks, Inc. and such other designated Affiliates of the Company are sometimes collectively referred to herein as the "Employers". 2.10 ERISA. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. Any reference to a section of ERISA includes any comparable section or sections of any future legislation that amends, supplements or supersedes that section. 2.11 Normal Retirement Date. "Normal Retirement Date" means the date the Participant attains 59-1/2 years of age. 2.12 Participant. "Participant" means an Employee who meets the eligibility criteria set forth in Subsection 3.1 and who has made a Deferral Election in accordance with the terms of the Plan or whose Deferred Compensation Account has been credited with a Company Contribution. 2.13 Performance Unit Plan. "Performance Unit Plan" means the Honor Technologies, Inc. Performance Unit Plan, as amended and in effect. 2.14 Plan Administrator. The "Plan Administrator" means the Benefits Committee. 2.15 Plan Year. "Plan Year" means the calendar year. 2.16 Unforeseeable Financial Emergency. "Unforeseeable Financial Emergency" means a severe financial hardship of the Participant resulting from: (a) A sudden and unexpected illness or accident of the Participant or of a dependent (as defined in Code section 152(a)) of the Participant. (b) Loss of the Participant's property due to casualty; or (c) Such other similar extraordinary and unforeseeable circumstances resulting from events beyond the control of the Participant. Whether a Participant has an Unforeseeable Financial Emergency shall be determined in the sole discretion of the Plan Administrator. 2.17 Valuation Date. "Valuation Date" means each calendar day, unless the underlying hypothetical investment requires a less frequent valuation. 2.18 Other Definitions. In addition to the terms defined in this Section 2, other terms are defined when first used in Sections of this Plan. SECTION 3 Eligibility, Participation, Deferral Elections, and Company Contributions 3.1 Eligibility and Participation. Subject to the conditions and limitations of the Plan, the Plan Administrator, in its sole discretion, may select from time to time those Employees who are eligible to participate in the Plan. An Employee shall not be eligible to participate in the Plan until the date he or she is notified by the Plan Administrator that he or she is eligible to participate. An Employee eligible to participate in the Plan shall become a Participant upon the execution and filing with the Plan Administrator of a written Deferral Election or, if earlier, on the Valuation Date that a Company Contribution is credited to his or her Deferred Compensation Account. A Participant shall be considered an active Participant during any period when he or she is permitted to make Deferral Elections to the Plan. A Participant's active participation in the Plan shall cease as of the date his or her employment with the Employers terminates. In addition, the Plan Administrator may remove a Participant from active participation in the Plan if, as of any day during a Plan Year, he or she ceases to satisfy the criteria which qualified him or her as an eligible Employee. Upon cessation of, or removal from, active participation in the Plan, a Participant's Deferral Elections to the Plan shall cease, and such Participant shall cease to be eligible to have Company Contributions credited to his or her Account. Even if his or her active participation in the Plan ends, an Employee shall remain an inactive Participation in the Plan until the earlier of (i) the date the full amount of his or her vested Deferred Compensation Account is distributed from the Plan, or (ii) the date he or she again recommences active participation in the Plan as an eligible Employee by making Deferral Elections to the Plan pursuant to Subsection 3.2 or by having Company Contributions credited to his or her Account pursuant to Subsection 3.4. During the period of time that an Employee is an inactive Participant in the Plan, his or her Deferred Compensation Account shall continue to be adjusted under Section 4, and he or she shall continue to be eligible to direct the manner in which his or her Account shall be deemed invested pursuant to Subsection 4.4. If an eligible Employee terminates employment with the Employers (either before or after he or she becomes a Participant) and then is reemployed by an Employer, he or she shall become eligible to participate or to recommence participation in the Plan as of the date, on or after his or her reemployment date, that he or she is notified by the Plan Administrator that he or she has been reselected by the Plan Administrator as an eligible Employee and that he or she may make Deferral Elections to the Plan pursuant to Subsection 3.2 or that his or her Account has been credited with Company Contributions pursuant to Subsection 3.4. It is the intent of the Company that the portion of the Plan that is designed solely to provide benefits in excess of the limitations on benefits imposed by Code Section 415 be exempt from Title I of ERISA as an unfunded excess benefit plan. It is the further intent of the Company that the remaining portion of the Plan be exempt from Parts 2, 3, and 4 of Subtitle B of Title I of ERISA, as an unfunded plan that is maintained by the Company primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees (the "ERISA Exemption"). Notwithstanding anything to the contrary in this Section 3 or in any other provision of the Plan, the Plan Administrator may in its sole discretion exclude any one or more eligible Employees from eligibility to participate or from participation in the Plan, may exclude any Participant from continued participation in the Plan, and may take any further action it considers necessary or appropriate if the Plan Administrator reasonably determines in good faith that such exclusion or further action is necessary in order for the Plan to qualify for, or to continue to qualify for, the ERISA Exemption. 3.2 Rules for Deferral Elections. Any Employee who is selected by the Plan Administrator as eligible to participate in the Plan pursuant to Subsection 3.1 may make a Deferral Election in accordance with the rules set forth below: (a) All Deferral Elections must be made in writing on the form prescribed by the Plan Administrator and will be effective only when filed with the Plan Administrator no later than the date specified by the Plan Administrator. In no event may a Deferral Election be made later than the last day of the Plan Year preceding the Plan Year in which the Compensation being deferred is earned and is made available to the Participant. However, in the case of a Participant's initial year of employment with an Employer, the Participant may make a Deferral Election with respect to Compensation for services to be performed sub- sequent to such Deferral Election, provided such election is made no later than 30 days after the date the Participant is first notified by the Plan Administrator that he or she is eligible for the Plan. (b) A Participant must make a new Deferral Election in accordance with the procedures described in paragraph (a) above in order to defer Compensation with respect to each Plan Year following the Participant's initial Plan Year of participation in the Plan. Failure to complete a Deferral Election with respect to a subsequent Plan Year shall constitute a waiver of the Participant's right to defer Compensation for such Plan Year. (c) A Deferral Election to defer Compensation that is in effect for a Plan Year may not be modified during the Plan Year, except that the Plan Administrator shall terminate the Participant's Deferral Election during a Plan Year in the event of a distribution pursuant to Subsection 5.4 or 5.5. 3.3 Amounts Deferred. Commencing on the Effective Date, a Participant may elect to defer Compensation as follows: (a) up to 50% of the Participant's Compensation (other than bonus) for a Plan Year and (b) up to 100% of the Participant's bonus attributable to services performed in the Plan Year. Notwithstanding anything to the contrary in this Section 3, for the Plan Year commencing on the Effective Date, the Participant may also elect to defer up to 100% of the Participant's bonus payable in such Plan Year. The amount of Compensation deferred by a Participant shall be credited to the Participant's Deferred Compensation Account as of the Valuation Date coincident with or immediately following the date such Compensation would, but for the Participant's Deferral Election, be payable to the Participant. A Participant may also elect to defer receipt of his or her payment for a "performance cycle" (as such term is defined in the Performance Unit Plan) under the Performance Unit Plan, which performance cycle ends after the Effective Date, by filing a written election with the Employer, in accordance with the terms of the Performance Unit Plan, to have such deferral deemed transferred to and deferred under the Plan. The amount of his or her Performance Unit Plan payment deferred by a Participant under the Plan shall be credited to the Participant's Deferred Compensation Account as of the Valuation Date coincident with or immediately following the date such amount would, but for the Participant's deferral election, be payable to the Participant. The amount deferred hereunder shall be subject to the terms and conditions of the Plan. Deferral Elections may only be made while the Participant is actively employed by the Employer. For purposes of the Plan, a Participant will be considered actively employed during a period of paid leave of absence or salary continuation. A Participant will not be considered actively employed during a period of unpaid leave of absence. Notwithstanding the foregoing, the amount of Compensation elected to be deferred by a Participant shall be reduced by the Plan Administrator, in its sole discretion, to the extent necessary to provide the Participant with sufficient Compensation to satisfy his or her employment tax deductions, wage withholding and any other payroll deductions. 3.4 Company Contributions. The Company may, in its sole discretion, credit to the Deferred Compensation Account of any Participant employed by an Employer an amount determined by the Company in its sole discretion (a "Company Contribution") for a Plan Year. Any Company Contribution for a Plan Year will be credited to a Participant's Deferred Compensation Account as of the Valuation Date specified by the Company. If a Participant's account under any qualified defined contribution plan maintained by an Employer is subject to the limitations described in Code section 415(c) for the "limitation year" (as described in Code section 415) ending in or coinciding with the Plan Year (or, with respect to the initial Plan Year, for the limitation year immediately preceding such Plan Year), the Company intends, except as otherwise provided in Subsections 5.4 and 5.5, to credit the Deferred Compensation Account of such Participant with a Company Contribution for such Plan Year in an amount equal to the aggregate amount of the "annual additions" (as defined in Code section 415(c)(2), but excluding annual additions attributable to employee contributions and elective deferrals (within the meaning of Code section 402(g)(3)) that could not be credited to the Participant's account under the qualified defined contribution plan for the limitation year ending in or coinciding with such Plan Year (or, with respect to the initial Plan Year, for the limitation year immediately preceding such Plan Year) due solely to the operation of the limitations set forth in Code section 415(c). In the Company's discretion, an additional discretionary Company Contribution for a Plan Year may also be determined for each Participant in any amount equal to the product of (i) the amount equal to the percentage (chosen by the Company but not to exceed 6 percent) of the Compensation (other than bonus) the Participant elects to defer for the Plan Year under the Plan, multiplied by (ii) the matching contribution rate chosen by the Company for the Plan Year. SECTION 4 Deferred Compensation Accounts 4.1 Deferred Compensation Accounts. All amounts deferred by a Participant pursuant to one or more Deferral Elections under the Plan and any Company Contributions credited to such Participant shall be credited to such Participant's Deferred Compensation Account and shall be adjusted under Subsection 4.2. 4.2 Deferral Account Adjustments and Investment Options. As of each Valuation Date, the Plan Administrator shall adjust amounts credited to a Participant's Deferred Compensation Account to reflect earnings (or losses) in the Investment Options (as defined in Subsection 4.4) in which the Participant's Deferred Compensation Account is deemed to be invested. Earnings (or losses) shall be credited to a Participant's Deferred Compensation Account based on the realized rate of return on the Investment Options in which the Participant's Deferred Compensation Account is deemed to be invested. 4.3 Vesting. A Participant shall be fully vested in the amounts credited to the Participant's Deferred Compensation Account attributable to the Participant's Deferral Elections. A Participant shall be vested in the amounts credited to the Participant's Deferred Compensation Account attributable to Company Contributions, if any, in accordance with the following: If the Participant's His or her vested number of full Years percentage of Service equals: shall be: Less than 1 0% 1 but less than 2 50% 2 or more 100% Notwithstanding the foregoing vesting schedule, the balance credited to a Participant's Deferred Compensation Account attributable to Company Contributions will be fully vested upon a Change in Control. For the purposes of determining a Participant's vested benefit with respect to Company Contributions, a "Year of Service" means a twelve-month period of employment with the Employer or any of its Affiliates, commencing on the Participant's employment date and each anniversary thereof, in which the Participant works 500 or more hours of service. Notwithstanding the foregoing, a Participant shall be fully vested in the entire balance credited to the Participant's Deferred Compensation Account upon the Participant's Normal Retirement Date, death or becoming disabled (as defined in Subsection 5.1 below), provided the date on which the Participant dies or becomes disabled occurs while the Participant is actively employed by the Employers or their Affiliates. The portion of a Participant's Deferred Compensation Account in which the Participant is not fully vested shall be forfeited to the Company by the Participant. Notwithstanding anything to the contrary in this Subsection 4.3, the balance in a Participant's Deferred Compensation Account attributable to Company Contributions will be forfeited (and neither the Participant nor the Participant's beneficiaries will have any rights thereto) if the Participant's employment with the Employer or any of its Affiliates is terminated for Good Cause. "Good Cause" means willful gross negligence, fraud, dishonesty, willful violation of any law or willful violation of any significant policy of the Employer or any of its Affiliates that would have a material adverse effect on the business, finances or prospects of the Employer or such Affiliates that would have a material adverse effect on the business, finances or prospects of the Employer or such Affiliates and that is committed in connection with the Participant's employment by the Employer or such Affiliate. Whether a Participant has been terminated for Good Cause shall be determined in good faith by the Plan Administrator in its sole discretion. 4.4 Investment Options. From time to time, the Plan Administrator shall select two or more investment funds (the "Investment Options") for purposes of determining the rate of return on amounts deemed invested in accordance with the terms of the Plan. The Plan Administrator will notify Participants in writing prior to the beginning of each Plan Year and at such other times as the Plan Administrator deems necessary or desirable of the Investment Options available under the Plan for such Plan Year. With respect to the Plan Year beginning on the Effective Date, amounts deemed invested under the terms of the Plan shall be deemed to earn the money market rate of return selected by the Plan Administrator, in its sole discretion, until such time as the Plan Administrator elects to implement the Investment Option selections made by Participants. The Plan Administrator may change, add or remove Investment Options on a prospective basis at any time and in any manner it deems appropriate. Participant selections of Investment Options must be made to the Plan Administrator or designated agent thereof in a form and manner, and at such time, as prescribed by the Plan Administrator. Except as otherwise provided herein in connection with the first Plan Year, such selections will be effective within a reasonable period of time after communication to the Plan Administrator or designated agent thereof as determined by the means used to communicate such selections and generally accepted business practices. The Plan Administrator shall designate the Investment Options available for selection under this Subsection 4.4 and shall establish procedures regarding elections of Investment Options. Investment Options are selected solely for purposes of determining hypothetical gains and/or losses to be credited to a Participant's Deferred Compensation Account. Neither the Plan nor any of the Deferred Compensation Accounts shall hold any actual funds or assets. 4.5 Errors in Accounts. If an error or omission is discovered in the Deferred Compensation Account of a Participant, in the amount of a Participant's Deferral Election, or in the amount of Company Contributions credited to the Participant's Deferred Compensation Account, the Plan Administrator, in its sole discretion, shall cause appropriate, equitable adjustments to be made as soon as administratively practicable following the discovery of such error or omission. SECTION 5 Payment of Benefits 5.1 Time and Method of Payment. If the Participant's termination of employment with the Employers and all of their Affiliates is for a reason other than his or her death, payment of the vested portion of a Participant's Deferred Compensation Account shall be made as soon as reasonably practicable following the last business day of the month in which the Participant's Distribution Date occurs in the form of a lump sum payment. The amount payable, as adjusted under Section 4, shall be determined as of the business day on which such distribution is processed. A Participant may elect, at the time he or she makes his or her initial Deferral Election, or at any later time that is at least one year before his or her Distribution Date, to have payment of the vested portion of his or her Deferred Compensation Account made in the form of annual installments over a ten year period in lieu of a lump sum payment; provided, if the Participant's vested Account balance is less than $50,000 on his or her Distribution Date, his or her entire vested Account balance shall be paid in the form of a lump sum payment. In the event a Participant elects to have his or her benefit paid in the form of ten annual installments, such Participant may elect, at any time that is at least one year before his or her Distribution Date, to have his or her benefit paid in the form of a lump sum payment. The installment method of distribution shall be subject to the following: (a) The installment payments shall be made in ten annual installments (as adjusted under Section 4), commencing as soon as reasonably practicable following the last business day of the month in which the Participant's Distribution Date occurs and continuing on each successive anniversary of the initial installment payment date. (b) (b) If a Participant dies after payment of his or her vested Deferred Compensation Account balance from the Plan has begun, but before his entire vested Account balance has been distributed, the remaining amount of his or her vested Account balance shall be distributed to the Participant's beneficiary (designated in accordance with Subsection 5.3) in the form of a lump sum payment on the Participant's next scheduled payment date as determined in accordance with paragraph (a) above. (c) If the Plan Administrator, in its sole discretion, determines that a Participant is disabled at the time his or her employment terminates, his or her entire vested Deferred Compensation Account shall be paid in the form of a lump sum payment. For purposes of the Plan, a Participant shall be considered disabled if the Participant is unable to engage in any substantially gainful activity by reason of any medically determined physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than twelve months. Whether a Participant is disabled for purposes of the Plan shall be determined by the Plan Administrator, and in making such determination, the Plan Administration may rely on the opinion of a physician(s) selected by the Plan Administrator for such purposes. (d) 5.2 Payment Upon Death of a Participant. If the Participant's termination of employment with the Employers and all of their Affiliates is due to his or her death, the Participant's Deferred Compensation Account shall be paid to the Participant's beneficiary (designated in accordance with Subsection 5.3) in a lump sum payment as soon as reasonably practicable following the last business day of the month in which the Participant's Distribution Date occurs. The amount payable, as adjusted under Section 4, shall be determined as of the business day on which such distribution is processed. (e) 5.3 Beneficiary. The Participant may name a beneficiary or beneficiaries to receive the vested balance of the Participant's Deferred Compensation Account in the event of the Participant's death prior to the payment of the Participant's entire Deferred Compensation Account. To be effective, any beneficiary designation must be filed in writing with the Plan Administrator in accordance with rules and procedures adopted by the Plan Administrator for that purpose. A Participant may revoke an existing beneficiary designation by filing another written beneficiary designation with the Plan Administrator. The latest beneficiary designation received by the Plan Administrator shall be controlling. If no beneficiary is named by a Participant, or if the Participant survives all of the Participant's named beneficiaries and does not designate another beneficiary, the vested portion of the Participant's Deferred Compensation Account shall be paid in the following order of precedence: (a) The Participant's surviving spouse; (b) The Participant's children (including adopted children) per stirpes; or (c) The Participant's estate. 5.4 Unforeseeable Financial Emergency. If the Plan Administrator determines that a Participant has incurred an Unforeseeable Financial Emergency, the Participant may receive an in-service payment of the vested portion of the Participant's Deferred Compensation Account to the extent needed to satisfy the Unforeseeable Financial Emergency, but only if the Unforeseeable Financial Emergency may not be relieved (a) through reimbursement or compensation by insurance or otherwise or (b) by liquidation of the Participant's assets to the extent the liquidation of such assets would not itself cause severe financial hardship or (c) by cessation of Deferral Elections under the Plan. A payment on account of an Unforeseeable Financial Emergency shall not be in excess of the lesser of (i) the amount needed to relieve such Unforeseeable Financial Emergency and (ii) the vested portion of the Participant's Deferred Compensation Account (as adjusted under Section 4) determined as of the business day on which such distribution is processed. A payment on account of Unforeseeable Financial Emergency shall be made as soon as reasonably practicable following the date on which the Plan Administrator approves such payment. A Participant who receives an in-service payment due to an Unforeseeable Financial Emergency shall not be eligible to make Deferral Elections under the Plan or be credited with any Company Contributions for the remainder of the Plan Year in which such payment is made and for the next following Plan Year, and such Participant's current Deferral Election, if any, shall be automatically revoked. When such Participant is again eligible to make Deferral Elections, such Participant may resume active participation in the Plan by making a new Deferral Election and satisfying any other procedures for participation under Section 3. 5.5 Distributions with Forfeiture. A Participant may elect, in writing, at any time prior to the complete distribution of his or her vested Deferred Compensation Account, to receive a distribution of 90 percent of the vested portion of his or her Deferred Compensation Account, as adjusted under Section 4, determined as of the business day on which such distribution is processed. Such distribution shall be made as soon as reasonably practicable after the date of the Participant's distribution election under this Subsection 5.5. Effective as of the business day on which such distribution is processed, an amount equal to ten percent of such Participant's total Deferred Compensation Account balance determined as of the business day on which such distribution is processed, both vested and nonvested portions, shall be permanently and irrevocably forfeited, and such Participant shall not be eligible to make Deferral Elections under the Plan or be credited with any Company Contributions for the remainder of the Plan Year in which such distribution is made and for the next following Plan Year, and such Participant's current Deferral Election, if any, shall be automatically revoked. When such Participant is again eligible to make Deferral Elections, such Participant may resume active participation in the Plan by making a new Deferral Election and satisfying any other procedures for participation under Section 3. 5.6 Withholding of Taxes. In connection with the Plan, the Employers shall withhold any applicable federal, state or local income tax or employment taxes, including Social Security taxes, at such time and in such amounts as is necessary to comply with applicable laws and regulations. SECTION 6 Miscellaneous 6.1 No Funding. The Company may establish and maintain one or more grantor trusts to hold assets to satisfy the obligations incurred by the Company under the Plan. The assets of such grantor trusts shall remain the assets of the Company subject to the claims of its general creditors. Any payments by a grantor trust of benefits provided to a Participant under the Plan shall be considered payment by the Company and shall discharge the Company from any further liability under the Plan for such payments. 6.2 No Employment Rights. Establishment of the Plan shall not be construed to give any Employee the right to be retained by the Employers or to any benefits not specifically provided by the Plan. Any liability of the Company to any Participant, former Participant, or Participant's beneficiary with respect to a right to payment under the Plan shall be based solely upon contractual obligations created by the Plan. 6.3 Interests Not Transferable. Except for withholding of any tax under the laws of the United States or any state or locality and the provisions of Subsections 6.4 and 6.8, no benefit payable at any time under the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, or any other encumbrance of any kind or to any attachment, garnishment, or other legal process of any kind. Any attempt by a person (including a Participant or a Participant's beneficiary) to anticipate, alienate, sell, transfer, assign, pledge, or otherwise encumber any benefits under the Plan, whether currently or thereafter payable, shall be void. If any person shall attempt to, or shall alienate, sell, transfer, assign, pledge or otherwise encumber such person's benefits under the Plan, or if by any reason of such person's bankruptcy or other event happening at any time, such benefits would devolve upon any other person or would not be enjoyed by the person entitled thereto under the Plan, then the Plan Administrator, in the Plan Administrator's sole discretion, may terminate the interest in any such benefits of the person otherwise entitled thereto under the Plan and may hold or apply such benefits in such manner as the Plan Administrator may deem proper. 6.4 Forfeitures and Unclaimed Amounts. Unclaimed amounts shall consist of the amounts in the Deferred Compensation Account of a Participant that cannot be distributed because of the Plan Administrator's inability, after a reasonable search, to locate a Participant or the Participant's beneficiary, as applicable, within a period of two years after the Distribution Date upon which the payment of benefits became due. Unclaimed amounts shall be forfeited at the end of such two-year period. These forfeitures will reduce the obligations of the Company, if any, under the Plan. After an unclaimed amount has been forfeited, the Participant or beneficiary, as applicable, shall have no further right to amounts in the Participant's Deferred Compensation Account. 6.5 Controlling Law. The law of the state of Florida, without giving effect to any principles of conflicts of law, shall be controlling in all matters relating to the Plan to the extent not preempted by federal law. 6.6 Gender and Number. Words denoting the masculine gender shall include the feminine gender, and words denoting the feminine gender shall include the masculine gender. Words in the plural shall include the singular, and the singular shall include the plural. 6.7 Action by the Company. Except as otherwise specifically provided herein, any action required of or permitted to be taken by the Company under the Plan shall be by resolution of its Board of Directors or by resolution of a duly authorized committee of its Board of Directors or by action of a person or persons authorized by resolution of such Board of Directors or such committee. 6.8 Offset for Obligations to the Company. If, at such time as a Participant or a Participant's beneficiary becomes entitled to benefit payments hereunder, the Participant has any debt, obligation or other liability representing an amount owing to an Employer or any Affiliate of an Employer, the Company may offset the amount owing such Employer or Affiliate against the amount of benefits otherwise distributable hereunder. 6.9 No Fiduciary Relationship. Nothing contained in this Plan, and no action taken pursuant to its provisions by the Company, the Plan Administrator or the Participants shall create, or be construed to create, a fiduciary relationship between the Company and the Participant, a designated beneficiary, other beneficiaries of the Participant, or any other person. 6.10 Claims Procedures. Any person (hereinafter referred to as a "Claimant") who believes that he or she is being denied a benefit to which he or she may be entitled under the Plan may file a written request for such benefit with the Plan Administrator. Such written request must set forth the Claimant's claim and must be addressed to the Plan Administrator, at the Company's principal place of business. Upon receipt of a claim, the Plan Administrator shall advise the Claimant that a reply will be forthcoming within ninety days and shall deliver a reply within ninety days. The Plan Administrator may, however, extend the reply period for an additional ninety days for reasonable cause. If the claim is denied in whole or in part, the Plan Administrator shall issue a written determination setting forth: (a) The specific reason or reasons for such denial; (b) The specific reference to pertinent provisions of the Plan upon which such denial is based; (c) A description of any additional material or information necessary for the Claimant to perfect the Claimant's claim and an explanation why such material or such information is necessary; and (d) Appropriate information as to the steps to be taken if the Claimant wishes to submit the claim for review, and the time limits for requesting such a review. Within sixty days after the receipt by the Claimant of the written determination described above, the Claimant may request in writing that the Plan Administrator review the Plan Administrator's determination. The request must be addressed to the Plan Administrator, at the Company's principal place of business. The Claimant or the Claimant's duly authorized representative may, but need not, review the pertinent documents and submit issues and comments in writing for consideration by the Plan Administrator. If the Claimant does not request a review of the Plan Administrator's determination within such sixty day period, the Claimant shall be barred and estopped from challenging the Plan Administrator's determination. Within sixty days after the Plan Administrator's receipt of a request for review, the Plan Administrator will review the determination. After considering all materials presented by the Claimant, the Plan Administrator will render a written determination setting forth the specific reasons for the decision and containing specific references to the pertinent provisions of the Plan on which the decision is based. If special circumstances require that the sixty day time period be extended, the Plan Administrator will so notify the Claimant and will render the decision as soon as practicable but no later than one hundred twenty days after receipt of the request for review. 6.11 Satisfaction of Claims. Any payment to a Participant or beneficiary shall to the extent thereof be in full satisfaction of all claims hereunder against the Plan Administrator and the Company, either of whom may require such Participant or beneficiary, as a condition to such payment, to execute a receipt and release therefor in such form as shall be determined by the Plan Administrator or the Company. If receipt and release is required but the Participant or beneficiary (as applicable ) does not provide such receipt and release in a timely enough manner to permit a timely distribution in accordance with the general timing of distribution provisions in the Plan, the payment of any affected distribution may be delayed until the Plan Administrator or the Company receives a proper receipt and release. 6.12 Notice. Any notice required or permitted to be given under the provisions of the Plan shall be in writing and shall be signed by the party giving or making the same. If such notice is mailed, it shall be sent by United States certified mail, postage prepaid, addressed to the Participant's last known address as shown on the records of the Employers or, in the case of the Plan Administrator, addressed to the Plan Administrator in care of the Company at the Company's principal place of business. The date of such mailing shall be deemed the date of notice. Notice of a change in the address to which notice is to be sent shall be given in the manner set forth above. 6.13 Indemnification. No person (including any present or former Plan Administrator or committee member thereof, and any present or former director, officer or employee of an Employer) shall be personally liable for any act done or omitted to be done in good faith in the administration of the Plan. Each present or former director, officer or employee of an Employer to whom the Plan Administrator or the Company has delegated any portion of its responsibilities under the Plan and each present or former Plan Administrator or committee member thereof shall be indemnified and saved harmless by the Company (to the extent not indemnified or saved harmless under any liability insurance or other indemnification arrangement with respect to the Plan) from and against any and all claims of liability to which they are subjected by reason of any act done or omitted to be done in good faith in connection with the administration of the Plan, including all expenses reasonably incurred in their defense if the Company fails to provide such defense. No member of the committee acting as Plan Administrator shall be liable for any act or omission of any other member of the committee, nor for any act or omission upon his or her own part, excepting his or her own willful misconduct. 6.14 Payment with Respect to Incapacitated Persons. If any person entitled to benefits under the Plan is under a legal disability or, in the Plan Administrator's opinion, is incapacitated in any way so as to be unable to manage his or her financial affairs, the Plan Administrator may direct the payment of such benefits to such person's legal representative or to a relative or friend of such person for such person's benefit, or the Plan Administrator may direct the application of such benefit for the benefit of such person in any manner which the Plan Administrator may select that is consistent with the Plan. Any payments made in accordance with the foregoing provisions of this Subsection shall be a full and complete discharge of any liability for such payments. 6.15 Litigation. In any action or proceeding regarding any Plan benefits or the administration of the Plan, employees or former employees of the Employers, their beneficiaries and any other persons claiming to have an interest in the Plan shall not be necessary parties and shall not be entitled to any notice of process. Any final judgment which is not appealed or appealable and which may be entered in any such action or proceeding shall be binding and conclusive on the parties hereto and on all persons having or claiming to have any interest in the Plan. Acceptance of participation in the Plan shall constitute a release of the Company, the Plan Administrator and their agents from any and all liability and obligation not involving willful misconduct or gross neglect. 6.16 Headings. The headings of the various Sections and Subsections in the Plan are solely for convenience and shall not be relied upon in construing any provisions hereof. Any reference to a Section or Subsection shall refer to a Section or Subsection of the Plan unless specified otherwise. 6.17 Evidence. Evidence required of anyone under the Plan shall be signed, made or presented by the proper party or parties and may be by certificate, affidavit, document or other information which the person acting thereon considers pertinent and reliable. 6.18 Waiver of Notice. Any notice required under the Plan may be waived by the person entitled to notice. 6.19 Severability. Whenever possible, each provision of the Plan shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of the Plan is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision or any other jurisdiction, and the Plan shall be reformed, construed and enforced in such jurisdiction so as to best give effect to the intent of the Company under the Plan. 6.20 Successors. The Plan is binding on all persons entitled to benefits hereunder and their respective heirs and legal representatives, on the Plan Administrator and its successor and on the Company and its successor, whether by way or merger, consolidation, purchase or otherwise. 6.21 Effect on Other Employee Benefit Plans. Any benefit paid or payable under this Plan shall not be included in a Participant's or Employee's compensation for purposes of computing benefits under any employee benefit plan maintained or contributed to by an Employer or any Affiliate of an Employer except as may otherwise be required under the terms of such employee benefit plan. SECTION 7 Amendment and Termination The Company intends the Plan to be permanent but reserves the right at any time to modify, amend or terminate the Plan. Notwithstanding the preceding sentence, the Plan Administrator may amend the Plan in the following respects without the approval of the Board of Directors of the Company: (i) amendments required by law; (ii) amendments that relate to the administration of the Plan and that do not materially change the cost of the Plan; and (iii) amendments that are designed to resolve possible ambiguities, inconsistencies, or omissions in the Plan and that do not materially increase the cost of the Plan. Except as provided below, no amendment or termination of the Plan shall reduce or eliminate any vested balance (as subsequently adjusted under Section 4) credited to a Participant's Deferred Compensation Account through the date of such amendment or termination. Upon termination of the Plan, the Company may provide that notwithstanding the Participant's Distribution Date, all Deferred Compensation Account balances will be distributed in the form of a lump sum payment on a date selected by the Company. EX-13 5 0005.txt ANNUAL REPORT TO STOCKHOLDERS EX-13 ANNUAL REPORT TO STOCKHOLDERS Financial Highlights 2 Stockholders' Letter 4 Corporate Overview 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Consolidated Balance Sheets 19 Consolidated Statements of Income 20 Consolidated Statements of Stockholders' Equity 21 Consolidated Statements of Cash Flows 22 Notes to Consolidated Financial Statements 23 Report of Independent Auditors 46 Corporate Directory 47 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 contained in this document. Percentage Change Percentage of Revenue 2000 1999 Year ended Year ended over over December 31 December 31 INCOME STATEMENT DATA 2000 1999 1998 1997 1996 2000 1999 1998 1999 1998 Revenue $1,229,434 $889,941 $666,547 $507,736 $366,347 100% 100% 100% 38.1% 33.5% Cost of Operations 903,979 631,741 466,207 350,313 245,297 73.5 70.9 69.9 43.1 35.5 Selling, General and 57,284 61,325 60,069 56,296 47,759 4.7 6.9 9.0 (6.6) 2.1 Administrative Expenses Acquisition and 11,691 36,189 - - - 1.0 4.1 - (67.7) - Restructuring Charges Operating Income 256,480 160,686 140,271 101,127 73,291 20.8 18.1 21.1 59.6 14.6 Interest Income (Expense), Net 35,218 16,321 3,480 (1,690) (10,230) 2.9 1.8 0.5 115.8 369.0 Income Taxes 104,223 67,037 52,695 38,674 24,131 8.5 7.5 7.9 55.5 27.2 Net Income 187,475 109,970 91,056 60,763 38,930 15.2 12.4 13.7 70.5 20.8 Basic Earnings per Share $0.87 $0.53 $0.45 $0.31 $0.21 Diluted Earnings per Share $0.84 $0.51 $0.44 $0.30 $0.21 Basic Shares 215,208 207,872 200,264 198,613 183,162 Diluted Shares 223,247 215,117 206,646 203,631 189,009 BALANCE SHEET DATA Working Capital $695,906 $485,954 $275,651 $151,491 $71,611 Total Assets 1,553,642 1,111,644 793,200 626,379 559,093 Long-Term Debt, 99,000 75,000 173,000 153,329 150,561 Less Current Maturities Total Stockholders' Equity 965,470 711,350 365,665 264,311 184,877
-2- CONCORD EFS, INC AND SUBSIDIARIES MARKET VALUE Our common stock trades on The Nasdaq National Market under the symbol "CEFT." The following table sets forth, for the periods presented, the range of high and low sales prices per share of our common stock, as reported on The Nasdaq National Market. HIGH LOW Year ended December 31, 2000 First Quarter $28.00 $15.31 Second Quarter 29.13 18.63 Third Quarter 36.50 25.69 Fourth Quarter 48.13 33.00 Year ended December 31, 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 As of March 16, 2001 we had approximately 54,000 holders of record of common stock. We have never paid cash dividends on our capital stock. It is our present policy to retain earnings to finance our operations and growth and we do not expect to pay any dividends in the foreseeable future. -3- Dear Stockholders: Throughout Concord's 30-year history, there have been key turning points where we sharpened our focus and expanded our product line to capitalize early on emerging payment trends. This past year was such a defining moment for Concord, as we expanded beyond our historic role as a payment solutions company to create a broad-based network services business. As of February 2001, Concord operates the largest national PIN-secured debit network in the U.S., with over 6,500 financial institution members and 124 million debit cardholders coast to coast. PIN-secured debit cards access money in a cardholder's deposit account using a personal identification number as the equivalent of an electronic signature. These transactions are then authorized via debit networks that are connected to financial institutions. One of the fastest-growing payment types in the industry, PIN-secured debit transactions grew 35% annually over the last five years. They are also the fastest, most secure, and lowest-cost transactions, according to studies by the Food Marketing Institute. Through its Payment Services division, Concord is currently the largest acquirer of PIN-secured debit payments in the U.S. With our expansion into Network Services, Concord enjoys a unique end-to-end position in these fast-growing transactions, from front-end transaction acquisition at the point of sale through network switching, transaction authorization, and settlement. Concord's move into the Network Services business started in February, 1999 with our acquisition of Electronic Payment Services, Inc., owner of the MAC(R) debit network. In August, 2000, we acquired Cash Station, Inc., a Midwest debit network. This was followed in October, 2000 with an agreement to acquire Star Systems, Inc. (STARsm), the largest PIN-secured debit network in the U.S. The STAR acquisition was completed in February, 2001. Combined, these networks connect almost one million ATMs and point of sale locations coast to coast. Over half of all debit cards nationwide carry the MAC, Cash Station(R), or STAR marks. We believe that this national base provides the critical mass needed to bring exciting new PIN-secured products to the marketplace, such as person-to-person payments, check electronification, and secure debit payment on the Internet. The unifying brand for these new debit products will be the bold, highly-recognizable "STAR." Concord Network Services employs the same vertical-integration model that is the trademark of Concord's Payment Services business. In addition to the branded network business, Network Services includes ATM driving, online and signature debit card processing, gateways, and comprehensive merchant acquirer services. In 2000, we expanded ATM terminal driving to include over 48,000 ATMs nationwide, maintaining our position as the nation's largest ATM processor. We also extended our debit card processing to include business signature debit cards, a new service for financial institutions to provide to their commercial customers. Including the STAR acquisition, Network Services would have processed 5.0 billion transactions in 2000. In our Payment Services business, revenue grew 37% year over year. We launched the pre-authorized debit card, a lower-cost alternative to check payments which targets the 18 billion checks written in retail stores each year. We also completed the acquisition of Virtual Cyber Systems, Inc., an Internet software company that has formed the centerpiece of Concord's comprehensive e-commerce services for retailers. And we completed the acquisition of Card Payment Systems, a payment processing reseller that has significantly increased our sales through independent sales organizations. -4- Looking ahead, we are highly optimistic about the opportunities that continue to exist in the industries we serve. Supermarkets are increasingly offering petroleum services, while petroleum retailers are expanding their convenience store capabilities. As the leading payments provider in both these industries, Concord is well-positioned to help each add the specialized payment technology needed for expansion. Online debit payments will continue to drive transaction growth at Concord, which will benefit both the Payment Services and Network Services segments of our business. And the national platform that we've created in the financial services industry creates opportunities to take secure payments from deposit accounts in important new directions. These are exciting times to be in the business of cashless commerce. Perhaps most exciting of all is that the industry is still young, and Concord is already a leader--and well-positioned for growth in the future. Sincerely, /s/ Dan M. Palmer /s/ Edward A. Labry III Dan M. Palmer Edward A. Labry III Chairman and CEO President -5- CONCORD EFS, INC AND SUBSIDIARIES CORPORATE OVERVIEW PAYMENT SERVICES Since its founding thirty years ago, Concord's history has been distinguished by pioneering reinvention. At key points in the evolution of electronic payments, Concord has made timely strategic moves that sharpened the company's focus, expanded product lines, and helped to change the way people pay. From its early beginnings as a point of sale equipment manufacturer in 1970, Concord shifted to the recurring revenue of credit card payment processing in the mid-80's. Rather than compete across the broad retail marketplace, Concord chose to focus on payment solutions for grocery and petroleum, two industry segments that were poised to move rapidly to card-based payments. In the early 90's, Concord recognized the potential for secure payments from deposit accounts, and led the industry in adding online debit to its portfolio of payment alternatives. And as states began testing the cost-saving benefits of electronic benefits transfer in the mid-90's, Concord led the industry in establishing links to all magnetic-stripe EBT programs in the country. The outcome of these strategic moves is that today Concord's Payment Services division is the largest payment processor in the supermarket and petroleum/convenience store industries, and the largest acquirer of online debit and EBT transactions in the U.S. Now, at the beginning of a new century, Concord is once again reinventing itself and leading the payments industry in new directions. Combining its acquisitions of the MAC(R), Cash Station(R), and STARsm debit networks, Concord has created a coast to coast network of ATMs and point of sale locations. This national network, which will be unified by the STAR brand, provides the critical mass necessary to bring exciting new products to the financial services industry, including person-to-person payments, check electronification, and secure debit payment on the Internet. With Concord's leading ATM and debit card processing services, plus its comprehensive payment services for merchant acquirers, Concord Network Services offers a family of products for the financial institution industry that is unsurpassed. NETWORK SERVICES Consumers want secure, reliable, on-demand access to their deposit accounts. Providing financial institutions with complete solutions to deliver such dependable, ubiquitous access is the business of Concord Network Services. Through the STAR network, Concord provides the card services, networks, authorization, terminal driving, and funds movement that connect consumers with their money--any time, any place. Concord Network Services employs the vertical-integration model that is the trademark of Concord's Payment Services business. For cards to access deposit accounts, Concord provides card production, debit card management, authorization, and risk management services. For places to move money, Concord provides ATM terminal driving and monitoring, gateway connections to all major debit and credit networks, and fee-generating value-added services. And for places to pay, Concord provides a comprehensive merchant acquirer program, from payment processing to settlement and reporting, to put a bank's retail clients in the business of cashless payments, in-store or online. -6- CONCORD EFS, INC AND SUBSIDIARIES CORPORATE OVERVIEW NETWORK SERVICES, continued Connecting it all is the STAR network, which provides STAR, MAC and Cash Station cardholders with almost one million places nationwide to use their cards to obtain cash, make retail payments, or both. Cardholder transactions acquired by Concord (or by other processors that connect to the network) are sent to the STAR switch for authorization routing and settlement. STAR helps network participants put all these services into a consumer-friendly package, and provides the brand expertise and marketing support to build consumer awareness, usage, and loyalty. For many years, Concord has shaped the direction and pace of change in the payment services industry. With Network Services, Concord brings to the financial institution industry its vision, focus, and commitment to continue leading commerce into tomorrow. -7- CONCORD EFS, INC AND SUBSIDIARIES MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS December 31, 2000 You should read the following discussion together with our consolidated financial statements and the notes to those financial statements which are included in this annual report. This report contains forward-looking statements that reflect our plans, estimates, and beliefs about future events. These forward-looking statements are not guarantees of future performance and involve risks, uncertainties, and assumptions, including those set forth in this paragraph. Important factors that could cause actual results to differ materially from those discussed in the forward-looking statements include, but are not limited to, (i) the loss of key personnel or inability to attract additional qualified personnel, (ii) risks related to acquisitions (including the acquisition of Star Systems, Inc.), (iii) changes in card association rules, products, or practices, (iv) changes in card association fees, (v) restrictions on surcharging or a decline in the deployment of automated teller machines, (vi) dependence on VISA and MasterCard registrations, (vii) the credit risk of merchant customers, (viii) susceptibility to fraud at the merchant level, (ix) increasing competition, (x) the loss of key customers, (xi) continued consolidation in the banking and retail industries, (xii) changes in rules and regulations governing financial institutions, (xiii) the inability to remain current with rapid technological change, (xiv) dependence on third-party vendors, (xv) the imposition of additional state taxes, (xvi) the adverse impact of shares eligible for future sale, (xvii) volatility of our common stock price, and (xviii) changes in interest rates. These forward-looking statements involve substantial risks and uncertainties which we believe are within the meaning of the Private Litigation Reform Act of 1995. Words such as "expect," "anticipate," "intend," "plan," "believe," "estimate" and variations of such words and similar expressions are intended to identify such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this annual report might not occur. Overview Concord EFS, Inc. is a vertically-integrated electronic transaction processor. Concord acquires, routes, authorizes, captures, and settles all types of non-cash payment transactions for retailers and financial institutions nationwide. Concord's primary activities consist of (1) Payment Services (previously called merchant card services), which provides payment processing for supermarkets, major retailers, petroleum dealers, convenience stores, trucking companies, and independent retailers; and (2) Network Services (previously called ATM services), which provides automated teller machine (ATM) processing, debit card processing, and debit network access for financial institutions. Payment Services provides the systems and processing that allow retail clients to accept virtually any type of cashless payment, including all card types--credit, debit, electronic benefits transfer (EBT), fleet, prepaid and automated -8- CONCORD EFS, INC AND SUBSIDIARIES MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS December 31, 2000 Overview, continued designed for supermarkets, gas stations, convenience stores, and restaurants. Payment Services also includes providing payment cards that enable drivers of clearing house (ACH)--and a variety of check-based options. We focus on providing payment processing services to selected segments, with specialized systems trucking companies to purchase fuel and obtain cash advances at truck stops. Our services are completely turn-key, providing retailers with point of sale (POS) terminal equipment, transaction routing and authorization, settlement, funds movement, and sponsorship into all credit card associations (such as VISA and MasterCard) and major debit networks (such as STARsm, Pulse, and NYCE). Early in 2000 we completed two acquisitions in the Payment Services area. On January 31, 2000 we completed our acquisition of National Payment Systems Inc. d/b/a Card Payment Systems, a New York-based reseller of payment processing services. Card Payment Systems provides card-based payment processing services to independent sales organizations (ISOs), which in turn sell those services to retailers. The acquisition was accounted for as a pooling of interests transaction in which we exchanged 6.2 million shares of our stock for all the outstanding shares of Card Payment Systems' common stock. We incurred acquisition costs of $0.8 million related to this transaction during the first quarter of 2000. On February 7, 2000 we completed our acquisition of Virtual Cyber Systems, Inc., an Internet software development company. This acquisition, for which we paid approximately $2.0 million, was accounted for as a purchase transaction and was immaterial to our financial statements. Network Services includes terminal driving and monitoring for ATMs, transaction routing and authorization via credit and debit network gateways, and real-time card management and authorization for online debit and signature debit cards. We also operate the switch that connects a coast to coast network of ATMs and POS locations that accept debit cards issued by our member financial institutions. Our network access services include transaction switching and settlement. We recently expanded our debit network in our Network Services area through two acquisitions. On August 21, 2000 we completed our acquisition of Cash Station, Inc., a leading Midwest debit network based in Chicago, Illinois. The acquisition was accounted for as a pooling of interests transaction in which we exchanged approximately 2.5 million shares of our stock for all of the outstanding common stock of Cash Station(R). On February 1, 2001 we completed our acquisition of Star Systems, Inc. (STAR), the nation's largest PIN-secured debit network, based in Maitland, Florida. The merger was accounted for as a pooling of interests transaction in which we exchanged approximately 24.8 million shares of our stock for all of STAR's outstanding common stock. As a result of these two acquisitions, we also acquired a majority interest of 74% in Primary Payment Systems, Inc., a company providing risk management services to merchants and financial institutions. STAR and Cash Station own 67% and 7% of Primary Payment Systems, respectively. -9- CONCORD EFS, INC AND SUBSIDIARIES MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS December 31, 2000 Overview, continued An example of the vertical integration of our services is our ownership of two financial institutions, EFS National Bank and EFS Federal Savings Bank. These banks allow us to provide our merchants with bank sponsorship into credit and debit card associations, and to own and deploy ATMs. Traditional banking activities such as lending and deposit-taking are also provided. Restatement of Historical Financial Information The historical financial information presented below and elsewhere in this report has been restated to include the results of Card Payment Systems and Cash Station in accordance with the 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 for all periods presented. STAR's financial results are not reflected in the restated financial information (except as discussed in Note T - Subsequent Event) because the acquisition was completed in 2001. Components of Revenue and Expenses The substantial majority of our revenue (72.4% in 2000 and 73.2% in 1999) is generated from fee income related to Payment Services. Revenue from Payment Services includes primarily discount fees charged to merchants, which are a percentage of the dollar amount of each credit card transaction we process, 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. The remainder of Payment Services revenue is derived from transaction fees for processing debit card and EBT card transactions, check verification and authorization services, and sales of POS terminals. The other principal component of our revenue derives from Network Services (27.6% in 2000 and 26.8% in 1999). Network Services revenue consists of processing fees for driving and monitoring ATMs, processing fees for managing debit card records, and access and switching fees for network access. We recognize this revenue at the time of the transaction. Payment Services and Network Services are our two reportable business segments. These business units are managed separately because they offer distinct products for different end users. All of our revenue is attributed to the United States, and no single customer of Concord accounts for a material portion of our revenue. Over 75% percent of our revenue and transaction volume from both segments is tied to contracts with terms of between three and five years. -10- CONCORD EFS, INC AND SUBSIDIARIES MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS December 31, 2000 Components of Revenue and Expenses, continued The following table is a listing of revenue by segment for the periods indicated: Year ended December 31 2000 1999 1998 ---------------------------------------------------- (in thousands) Payment Services $ 889,941 $ 651,233 $ 482,842 Network Services 339,493 238,708 183,705 ---------- --------- --------- Total $1,229,434 $ 889,941 $ 666,547 Cost of operations includes all costs directly attributable to our providing services to our customers. The most significant component of cost of operations is 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 transaction fee. Cost of operations also includes telecommunications costs, personnel costs, occupancy costs, depreciation, the cost of equipment leased and sold, the cost of operating our debit networks, and other miscellaneous merchant supplies and services expenses. We strive to maintain a highly efficient operational structure, which includes efficient marketing, volume purchasing arrangements with equipment and communications vendors, and direct membership by our subsidiary, EFS National Bank, in bank card associations and major debit card networks. The following table lists cost of operations by segment for the periods indicated: Year ended December 31 2000 1999 1998 ---------------------------------------------------- (in thousands) Payment Services $ 711,108 $ 493,306 $ 361,559 Network Services 192,871 138,435 104,648 ---------- ---------- ---------- Total $ 903,979 $ 631,741 $ 466,207 Our selling, general and administrative expenses include certain salaries and wages and other general administrative expenses (including certain amortization costs). These costs are not allocated to the reportable segments. -11- CONCORD EFS, INC AND SUBSIDIARIES MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS December 31, 2000 Results of Operations The following table shows, for the periods indicated, the percent of revenue represented by certain items on our consolidated statements of income: Year ended December 31 2000 1999 1998 ----------------------------------- Revenue 100% 100% 100% Cost of operations 73.5 70.9 69.9 Selling, general and administrative expenses 4.7 6.9 9.0 Acquisition and restructuring charges 1.0 4.1 - -------- -------- -------- Operating income 20.8 18.1 21.1 Interest income, net 2.9 1.8 0.5 -------- -------- -------- Income before taxes 23.7 19.9 21.6 Income taxes 8.5 7.5 7.9 -------- -------- -------- Net income 15.2 12.4 13.7 ======== ======== ======== Calendar 2000 Compared to Calendar 1999 Revenue increased 38.1% to $1,229.4 million in 2000 from $889.9 million in 1999. In 2000 Payment Services accounted for 72.4% of revenue, and Network Services accounted for 27.6%. Revenue from Payment Services increased 36.7%, due primarily to increased transaction volumes and cross-selling settlement processing to several of our higher volume merchants who were previously using only front-end processing services. The increased volumes resulted from the addition of new merchants and the widening acceptance of debit and EBT card transactions at new and existing merchants. Network Services revenue increased 42.2% over 1999 as a result of an increase in the number of ATMs driven, the addition of new network and processing customers, increases in transaction volumes, and the full year impact of in-house processing of our signature debit service. The increased transaction volumes resulted primarily from increased use of our network debit cards for payment at the point of sale. Cost of operations increased in 2000 to 73.5% of revenue compared to 70.9% in 1999. This increase was due primarily to the addition of lower-margin revenue beginning in the fourth quarter of 1999 and continuing through the third quarter of 2000. This lower-margin revenue resulted principally from cross-selling settlement processing to several of our higher volume merchants who command lower transaction pricing. Lower-margin revenue was also the result of additional interchange fees due to this cross-selling and processing our signature debit service in-house. This new lower-margin revenue was partially offset by a decrease, as a percent of revenue, in certain other operating costs, such as payroll expenses and depreciation and amortization expenses. -12- CONCORD EFS, INC AND SUBSIDIARIES MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS December 31, 2000 Calendar 2000 Compared to Calendar 1999, continued Selling, general and administrative expenses decreased to $57.3 million or 4.7% of revenue in 2000 from $61.3 million or 6.9% of revenue in 1999, as lower legal and other expenses more than offset higher salaries and wages. One-time acquisition expenses and restructuring charges decreased to $11.7 million in 2000 from $36.2 million in 1999. The charges incurred in 2000 included $3.0 million in advisory, legal, and accounting fees incurred in the acquisitions of Card Payment Systems and Cash Station. An additional $4.2 million in compensation and severance costs and $4.5 million in network de-conversion costs were incurred in the Cash Station acquisition. Excluding acquisition and restructuring charges, operating income as a percent of revenue declined slightly to 21.8% in 2000 from 22.2% in 1999 due to lower-margin revenue. This lower-margin revenue, which resulted from lower revenue per transaction and additional interchange fees, partially masked an increase in operating income per transaction, which resulted from improved economies of scale and declining selling, general and administrative expenses. Operating income per transaction increased to $0.051 per transaction in 2000 from $0.047 per transaction in 1999, an increase of 8.5% year over year. This growth in operating income per transaction was the result of declines in our cost per transaction outpacing declines in our revenue per transaction. Net interest income improved as a percent of revenue to 2.9% in 2000 compared to 1.8% in 1999. This improvement was the continued result of our using proceeds from our June 1999 stock offering to reduce our debt by $146.1 million at that time, which lowered interest expense by 14.1% as compared to 1999. The improvement was also the result of returns we received on our investing available cash from operations plus the remaining $61.7 million of the stock offering proceeds in various securities, which increased interest income by 62.3% over 1999. Our overall tax rate decreased to 35.7% in 2000 from 37.9% in 1999. Excluding the one-time acquisition charges and related tax component write-off, the tax rate was virtually unchanged at 35.5% in 2000 as compared to 35.4% in 1999. Net income, as a percent of revenue, increased to 15.2% in 2000 from 12.4% in 1999. The primary factor in this net margin improvement was the decrease in one-time acquisition and restructuring charges. Excluding the one-time charges and related tax items, net income as a percent of revenue increased to 15.9% in 2000 compared to 15.5% in 1999. -13- CONCORD EFS, INC AND SUBSIDIARIES MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS December 31, 2000 Calendar 1999 Compared to Calendar 1998 Revenue increased 33.5% to $889.9 million in 1999 from $666.5 million in 1998. In 1999 Payment Services accounted for 73.2% of revenue, and Network Services accounted for 26.8%. Revenue from Payment Services increased 34.9%, due primarily to increased transaction volumes and cross-selling settlement processing to several of our higher volume merchant clients. The increased volumes resulted from the addition of new merchants and the widening acceptance of debit and EBT card transactions at new and existing merchants. Network Services revenue increased 29.9% over 1998 as a result of an increase in the number of ATMs driven, the addition of new network and processing customers, increases in transaction volumes, and in-house processing of our signature debit service. The increased transaction volumes resulted primarily from increased use of our network debit cards for payment at the point of sale. Cost of operations increased in 1999 to 70.9% of revenue compared to 69.9% in 1998. This increase was due primarily to the addition of lower-margin revenue beginning in the fourth quarter of 1999 from cross-selling settlement processing to several of our higher volume merchants who command lower transaction pricing. Lower-margin revenue was also the result of additional interchange fees due to this cross-selling and processing our signature debit service in-house. This new lower-margin revenue was largely offset by a decrease, as a percent of revenue, in certain other operating costs, such as payroll expenses and depreciation and amortization expenses. Selling, general and administrative expenses decreased, as a percent of revenue, to 6.9% in 1999 from 9.0% in 1998. Although these expenses were up slightly on an absolute basis as a result of increases in salaries and wages, increasing to $61.3 million in 1999 from $60.1 million in 1998, this was partially offset by lower legal and other expenses. In 1999 we incurred one-time acquisition and restructuring charges of $36.2 million relating to our acquisition of Electronic Payment Services, Inc. Acquisition-related expenses were $10.5 million, consisting primarily of investment banking fees, as well as legal, accounting, registration, and other fees and expenses. The remaining $25.7 million was for restructuring charges as described below, in millions: Communications conversion costs $ 12.4 Asset write-offs 8.2 Signature debit conversion to in-house 2.8 Severance and other expenses 2.3 ------- Total $ 25.7 ======= In order to create a single communications infrastructure for our transaction processing businesses, we adopted a plan to convert Electronic Payment Services' communications network to Concord's, and accrued $12.4 million related to this conversion plan. -14- CONCORD EFS, INC AND SUBSIDIARIES MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS December 31, 2000 Calendar 1999 Compared to Calendar 1998, continued We incurred asset write-offs of $8.2 million. We de-emphasized certain geographic areas of the MAC(R) network, causing impairment to the related intangible assets of approximately $2.8 million. In addition, after review of certain Electronic Payment Services customer lists and the undiscounted cash flows estimated to be generated by the related intangible assets, we recognized an impairment loss of approximately $3.6 million. The remainder of the write-off was for assets that are no longer used or supported under revised marketing and business plans. Prior to its acquisition by Concord, Electronic Payment Services used a third party for its signature debit processing services. During 1999 we adopted a plan to take this process in-house, incurring additional restructuring charges of $2.8 million. Relating to our reallocation of resources in connection with the MAC network described above, we charged approximately $0.2 million for Electronic Payment Services employees who were terminated as the related facilities were closed. We incurred an additional charge of $2.1 million for certain other Electronic Payment Services employees who were terminated due to the reorganization of management of the combined company. Excluding acquisition and restructuring charges, operating income as a percent of revenue increased to 22.2% in 1999 from 21.1% in 1998 due to declines in selling, general and administrative expenses. Operating income increased on a per transaction basis to $0.047 per transaction in 1999 from $0.042 per transaction in 1998, an improvement of 11.9% year over year. This growth in operating income per transaction was the result of declines in our cost per transaction outpacing declines in our revenue per transaction. Net interest income increased as a percent of total revenue to 1.8% in 1999 compared to 0.5% in 1998. This improvement resulted primarily from two factors. Interest income increased by 49.5% over 1998 due to returns received on our investment in various securities of available cash flow from operations plus approximately $61.7 million in proceeds from our June 1999 stock offering. We also reduced our long- and short-term debt by $146.1 million with proceeds from the same offering, producing a 24.3% decrease in interest expense in 1999 compared to 1998. Our overall tax rate increased to 37.9% in 1999 from 36.7% in 1998. This increase resulted from certain nondeductible acquisition costs and a tax component write-off of $1.3 million incurred for impaired state tax net operating losses of Electronic Payment Services in 1999. Excluding the pre-tax charges and the tax component write-off, our tax rate decreased to 35.4% in 1999 from 36.7% in 1998. -15- CONCORD EFS, INC AND SUBSIDIARIES MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS December 31, 2000 Calendar 1999 Compared to Calendar 1998, continued Net income, as a percent of revenue, decreased in 1999 to 12.4% from 13.7% in 1998. The primary factors in this decrease in net margin were the one-time acquisition and restructuring charges related to the acquisition of Electronic Payment Services and the tax rate increase in 1999. Excluding the one-time charges and related tax items, net income as a percent of revenue increased to 15.5% in 1999 compared to 13.7% in 1998. Liquidity and Capital Resources We have consistently generated significant resources from operating activities. In 2000, 1999, and 1998 operating activities generated cash of $298.0 million, $196.9 million, and $173.5 million, respectively. Cash generated from operating activities can vary due to fluctuations in accounts receivable and accounts payable balances which are affected by increases in settlement volume from one year to the next, as well as the timing of settlements. We generally hold a significant amount of cash and securities because of the equity requirements of the credit card associations, which are calculated on settlement dollar volume, and because of the liquidity requirements associated with conducting settlement operations and owning ATM machines. During fiscal 2000, 1999, and 1998 we invested approximately $153.6 million, $191.4 million, and $88.0 million, respectively, in securities, net of sales and maturities. We also invested $76.2 million, $58.8 million, and $65.6 million, respectively, in capital expenditures, which were primarily for communications equipment, point of sale terminals, new computer equipment and capitalized software. We expect capital expenditures in the current year to be comparable to that of prior years. In addition to net cash provided by operating activities, we have financed ourselves historically through issuances of equity, the exercise of stock options, and borrowings. We issued 10.1 million shares of common stock in June 1999 and received proceeds of $207.8 million. Of those proceeds, we invested $61.7 million in securities and reduced long-term and short-term debt by $146.1 million. Stock issued upon exercises of options under Concord's incentive stock option plan provided $26.9 million of additional capital in 2000. As of year-end 2000, there were 22.1 million stock options outstanding, approximately 39.7% of which were exercisable. Although we cannot estimate the timing or amount of future cash flows from the exercise of stock options, we expect this to continue to be a source of funds. We have lines of credit with financial institutions totaling $55.0 million. As of December 31, 2000 and 1999 no amounts were outstanding on these lines of credit. As of December 31, 2000 we had $99.0 million of notes payable outstanding to, and $23.7 million in unused lines of credit with, the Federal -16- CONCORD EFS, INC AND SUBSIDIARIES MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS December 31, 2000 Liquidity and Capital Resources, continued Home Loan Bank. We hold securities with a market value of approximately $627.7 million that are available for operating needs or as collateral to obtain additional short-term financing, if needed. As of year-end, securities carried at approximately $110.4 million were pledged as collateral for the Federal Home Loan Bank advances. Net loans made by our bank subsidiaries as of December 31, 2000 and 1999 were $78.7 million and $30.9 million, respectively. Our February 2001 acquisition of the STAR network is an example of our practice of using our stock to make strategic acquisitions that we deem appropriate. Although the STAR acquisition is expected to have a neutral impact on our earnings in 2001, we believe that it lays the foundation for important growth opportunities in the future for our Network Services segment. The combined network, which is now comprised of MAC, Cash Station, and STAR, has 6,500 financial institution members with 124 million cards. Consumers carrying these cards have access to their deposit accounts at approximately 180,000 ATMs and 720,000 POS locations nationwide. Similar to the Electronic Payment Services and Cash Station acquisitions and their related integration into Concord, we anticipate recording acquisition and restructuring charges related to STAR, although no definite plans have been adopted as we are currently reviewing potential operational synergies. The acquisition of STAR is a significant event for Concord which will have a material effect on our historical financial statements as well as our future earnings. We believe that our available credit and cash generated by operations are adequate to meet our capital and operating needs. Effects of Inflation Our 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. We believe that replacement costs of equipment, furniture, and leasehold improvements will not materially affect operations. However, the rate of inflation affects our expenses, such as those for employee compensation and telecommunications, which may not be readily recoverable in the price of services offered by us. -17- CONCORD EFS, INC AND SUBSIDIARIES MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS December 31, 2000 Quantitative and Qualitative Disclosures About Market Risk Concord's securities are subject to risk resulting from interest rate fluctuations to the extent that there is a difference between the amount of our 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 84.2% of the market value of securities owned were funded through equity rather than debt. The principal objective of our asset/liability activities is to provide maximum levels of net interest income while maintaining acceptable levels of interest rate and liquidity risk and facilitating our funding needs. We use 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. The table at right provides comparative information about our 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, we have assumed our securities are similar enough to aggregate them for presentation purposes. If tax-equivalent yields of municipal securities had been used, the weighted-average interest rates would have been higher. December 31, 2000 2001 2002 2003 2004 2005 Thereafter Total Fair Value ----------------------------------------------------------------------------------------------- (in thousands) Assets: Securities available $36,675 $20,020 $41,475 $24,470 $13,030 $558,021 $693,691 $606,608 for sale Average interest rate 6.3% 6.4% 6.4% 6.5% 5.0% 6.6% Loans $6,614 $3,217 $1,374 $618 $1,276 $66,530 $79,629 $ 73,864 Average interest rate 9.6% 9.9% 6.4% 10.5% 8.8% 8.1% Liabilities: Deposits $106,800 $10,274 $6,183 $817 $1,760 - $125,834 $126,122 Average interest rate 4.9% 6.6% 6.8% 6.4% 6.8% Long-term debt - - $10,000 - - $89,000 $99,000 $ 96,809 Average interest rate 5.6% 5.6% December 31, 1999 2000 2001 2002 2003 2004 Thereafter Total Fair Value ----------------------------------------------------------------------------------------------- (in thousands) Assets: Securities available $71,760 $38,885 $32,494 $22,259 $24,999 $290,663 $481,060 $447,399 for sale Average interest rate 6.6% 6.7% 6.7% 6.2% 6.4% 5.9% Loans $6,305 $503 $20 $1,821 $729 $21,996 $31,374 $ 30,124 Average interest rate 7.6% 8.0% 9.4% 6.7% 10.3% 7.7% 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%
-18- CONCORD EFS, INC AND SUBSIDIARIES Consolidated Balance Sheets December 31 2000 1999 ------------------------------ (in thousands) Assets Current assets Cash and cash equivalents $ 188,260 $ 123,967 Securities available for sale 627,666 458,201 Accounts receivable, net 289,874 163,961 Inventories 15,087 18,076 Prepaid expenses and other current assets 20,234 11,573 Deferred income taxes 6,576 9,235 ----------- ----------- Total current assets 1,147,697 785,013 Loans, net 78,654 30,922 Property and equipment, net 192,212 168,169 Goodwill, net 53,170 54,046 Other intangible assets, net 75,644 57,186 Other assets 6,265 16,308 ----------- ----------- Total assets $1,553,642 $1,111,644 =========== =========== Liabilities and stockholders' equity Current liabilities Accounts payable and other liabilities $ 283,670 $ 130,848 Deposits 125,834 100,475 Accrued liabilities 42,287 51,145 Income taxes payable - 16,591 ----------- ----------- Total current liabilities 451,791 299,059 Long-term debt 99,000 75,000 Deferred income taxes 33,677 16,566 Other liabilities 3,704 9,669 ----------- ----------- Total liabilities 588,172 400,294 Commitments and contingent liabilities - - Stockholders' equity Common stock, $0.33 1/3 par value; authorized 500,000 shares, issued and outstanding 217,486 at December 31, 2000 and 214,608 at December 31, 1999 72,495 71,536 Additional paid-in capital 336,452 280,839 Retained earnings 558,538 371,507 Accumulated other comprehensive loss (2,015) (12,532) ----------- ----------- Total stockholders' equity 965,470 711,350 ----------- ----------- Total liabilities and stockholders' equity $1,553,642 $1,111,644 =========== =========== See Notes to Consolidated Financial Statements. -19- CONCORD EFS, INC AND SUBSIDIARIES Consolidated Statements of Income Year ended December 31 2000 1999 1998 -------------------------------------------- (in thousands, except per share data) Revenue $1,229,434 $ 889,941 $ 666,547 Cost of operations 903,979 631,741 466,207 Selling, general and administrative expenses 57,284 61,325 60,069 Acquisition and restructuring charges 11,691 36,189 - ----------- ----------- ----------- Operating Income 256,480 160,686 140,271 Other income (expense): Interest income 45,015 27,730 18,549 Interest expense (9,797) (11,409) (15,069) ----------- ----------- ----------- Income Before Taxes 291,698 177,007 143,751 Income taxes 104,223 67,037 52,695 ----------- ----------- ----------- Net Income $ 187,475 $ 109,970 $91,056 Pro forma provision for income taxes 260 2,484 458 ----------- ----------- ----------- Pro forma Net Income $ 187,215 $ 107,486 $90,598 =========== =========== =========== Per Share Data: Basic earnings per share - historical $0.87 $0.53 $0.45 =========== =========== =========== Diluted earnings per share - historical $0.84 $0.51 $0.44 =========== =========== =========== Basic earnings per share - pro forma $0.87 $0.52 $0.45 =========== =========== =========== Diluted earnings per share - pro forma $0.84 $0.50 $0.44 =========== =========== =========== Average Shares Outstanding: Basic shares 215,208 207,872 200,264 =========== =========== =========== Diluted shares 223,247 215,117 206,646 =========== =========== =========== See Notes to Consolidated Financial Statements. -20- 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, 1998 90,325 $ 30,108 $ 58,214 $ 175,770 $ 99 $264,191 Exercise of stock options 413 138 6,458 6,596 Three for two stock split 43,014 14,339 (14,339) Tax benefit of nonqualifying stock option exercises 3,630 3,630 Activity by pooled subsidiary (997) (997) Net income 91,056 91,056 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 92,126 ----------------------------------------------------------------------------- Balance at December 31, 1998 133,752 44,585 53,963 265,829 1,169 365,546 Exercise of stock options 2,664 888 21,714 22,602 Three for two stock split 71,444 23,814 (23,814) Offering of common stock 6,748 2,249 205,569 207,818 Tax benefit of nonqualifying stock option exercises 23,407 23,407 Activity by pooled subsidiary (4,292) (4,292) Net income 109,970 109,970 Change in net unrealized loss on securities available for sale, net of tax of $7,764 (13,701) (13,701) ---------- Comprehensive income 96,269 ----------------------------------------------------------------------------- Balance at December 31, 1999 214,608 71,536 280,839 371,507 (12,532) 711,350 Exercise of stock options 2,793 931 25,962 26,893 Tax benefit of nonqualifying stock option exercises 27,955 27,955 Stock issued for purchase acquisition 85 28 1,696 1,724 Activity by pooled subsidiary (444) (444) Net income 187,475 187,475 Change in net unrealized loss on securities available for sale, net of tax of $5,911 10,517 10,517 ---------- Comprehensive income 197,992 ----------------------------------------------------------------------------- Balance at December 31, 2000 217,486 $ 72,495 $336,452 $558,538 $ (2,015) $965,470 =============================================================================
See Notes to Consolidated Financial Statements. -21- CONCORD EFS, INC AND SUBSIDIARIES Consolidated Statements of Cash Flows Year ended December 31 2000 1999 1998 ------------------------------------- (in thousands) Operating activities Net income $187,475 $109,970 $ 91,056 Adjustments to reconcile net income to net cash provided by operating activities: Provision for losses on accounts receivable 5,039 3,474 3,654 Depreciation and amortization 77,907 65,488 55,799 Deferred income taxes 13,859 (168) 1,497 Net realized gain on sales of securities available for sale (154) (230) 1,234 Restructuring charges - 8,152 - Changes in operating assets and liabilities: Accounts receivable (130,291) (58,882) 496 Inventories 2,989 (6,680) (5,498) Prepaid expenses and other current assets (8,649) (3,785) (2,004) Accounts payable and other liabilities 152,819 79,486 28,987 Other, net (2,998) 73 701 ------------------------------------- Net cash provided by operating activities 297,996 196,898 173,454 Investing activities Acquisition of securities available for sale (260,544) (273,603) (240,783) Proceeds from sales of securities available for sale 77,077 51,051 105,617 Proceeds from maturity of securities available for sale 29,889 31,105 47,183 Acquisition of securities held to maturity - - (9,630) Proceeds from maturity of securities held to maturity - - 4,843 Purchases of loans (48,324) (15,781) (13,683) Net change in loans (69) 710 (127) Acquisition of property and equipment (76,182) (58,849) (65,633) Purchased merchant contracts (30,640) (26,869) (16,988) Other investing activity 251 (15,387) (24,155) ------------------------------------- Net cash used in investing activities (308,542) (307,623) (213,356) Financing activities Net increase in deposits 25,359 65,568 24,769 Repayment under credit agreement (net) - (21,500) (8,425) Proceeds from notes payable 42,000 12,500 45,425 Payments on notes payable (18,969) (135,116) (25,658) Proceeds from exercise of stock options 26,893 22,602 6,596 Proceeds from offering of common stock - 207,818 - Activity by pooled subsidiary (444) (4,292) (997) ------------------------------------- Net cash provided by financing activities 74,839 147,580 41,710 ------------------------------------- Net increase in cash and cash equivalents 64,293 36,855 1,808 Cash and cash equivalents at beginning of year 123,967 87,112 85,304 ------------------------------------- Cash and cash equivalents at end of year $ 188,260 $ 123,967 $ 87,112 ===================================== Supplemental disclosure of cash flow information: Interest paid $ 9,537 $ 12,186 $ 15,281 ===================================== Income taxes paid $ 77,533 $ 35,712 $ 46,347 ===================================== See Notes to Consolidated Financial Statements. -22- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 Note A - Significant Accounting Policies Nature of Operations: Concord is a vertically-integrated electronic transaction processor. Concord acquires, routes, authorizes, captures, and settles all types of non-cash payment transactions for retailers and financial institutions nationwide. Concord's primary activities consist of (1) Payment Services, which provides payment processing services for credit card, debit card, and electronic benefits transfer card transactions for retailers; and (2) Network Services, which provides network and ATM processing services for financial institutions. Principles of Consolidation: The consolidated financial statements include the accounts of Concord 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 combine the financial position, results of operations, and cash flows of the respective companies 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, and the excess of the purchase price over fair value of the assets is recorded as goodwill. 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 accounting principles generally accepted in the United States 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: Concord considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash equivalents consist primarily of federal funds sold through Concord's financial institutions and money market funds which invest in commercial paper, repurchase agreements, and instruments of domestic and foreign banks and other financial institutions. Accounts Receivable: The majority of Concord's accounts receivable is related to the gross settlement dollars due from associations, networks, and trucking company customers. Revenue from most Payment Services customers is collected daily from settlement funds due to Concord's merchants. In addition, Concord records an account receivable when revenue is recognized from sales of POS equipment or transactions by Concord's Payment Services and Network Services customers. 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. -23- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 Note A - Significant Accounting Policies, continued 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. Inventories: Inventories are stated at the lower of cost (first-in, first-out method) or market. Inventories consist primarily of POS terminals. Loans: A substantial portion of the loan portfolio is represented by mortgage loans in Memphis, Tennessee and the surrounding communities purchased through Concord's financial institution subsidiaries (the Banks). The Banks originate loans to home builders in the construction industry as well as a limited number of commercial and consumer loans. The ability of Concord's debtors to honor their contracts is dependent upon the real estate and general economic conditions of this area. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs and the allowance for loan losses. Interest income is accrued on the unpaid principal balance. The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent. In all cases, loans are placed on non-accrual or charged off at an earlier date if collection of principal or interest is considered doubtful. Interest income is subsequently recognized on impaired loans only to the extent cash payments in excess of past due principal amounts are received. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management determines that a loan balance is uncollectible. Subsequent recoveries, if any, are credited to the allowance. 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. Goodwill and Other Intangible Assets: Goodwill is amortized on a straight-line basis over 15 to 25 years. Amortization expense on purchased merchant contracts is recognized on a straight-line basis over an estimated useful life of six years. Intangibles other than purchased merchant contracts, such as customer lists, are amortized over 5 to 15 years. -24- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 Note A - Significant Accounting Policies, continued 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 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 acquired companies, purchased merchant contracts and customer lists, that no impairment of goodwill or the other intangible assets existed at December 31, 2000. Income Taxes: Concord accounts for income taxes using the liability method. 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 Concord which are recorded as a cost of operations at the same time the services are provided. Revenue from service contracts and product sales is recognized when the service is provided or the equipment is shipped. Service contracts and related sales include all revenue under system service contracts, including revenue from sales of terminal hardware when the contract includes such sales. Concord may incur losses from cardholder disputes in the case of merchant insolvency or bankruptcy. Based on historical losses, Concord believes its allowance for doubtful accounts is adequate. The allowance for doubtful accounts is established as losses are estimated to have occurred through a provision for bad debts charged to earnings. Losses are charged against the allowance when management confirms that a receivable balance is uncollectible. Subsequent recoveries, if any, are credited to the allowance. Stock-based Compensation: Concord 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, Concord recognizes no compensation expense for the stock option grants. Reclassification: Certain 1999 and 1998 amounts have been reclassified to conform to the 2000 presentation. -25- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 Note B - Business Combinations On August 21, 2000 Concord acquired Cash Station, Inc., a debit network. The acquisition was accounted for as a pooling of interests transaction in which Concord issued 2.5 million shares of its common stock. On January 31, 2000 Concord acquired National Payment Systems Inc. d/b/a Card Payment Systems (CPS), a reseller of payment processing services. The acquisition was accounted for as a pooling of interests transaction in which Concord issued 6.2 million shares of its common stock. On February 26, 1999 Concord acquired Electronic Payment Services, Inc. (EPS), a payment processor and operator of a debit network. The acquisition was accounted for as a pooling of interests transaction in which Concord issued 45.1 million shares of its common stock. On June 30, 1998 Concord acquired Digital Merchant Systems of Illinois, Inc. and American Bankcard International, Inc. (jointly named DMS). The acquisition was accounted for as a pooling of interests transaction in which Concord issued 6.6 million shares of its common stock. -26- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 Note B - Business Combinations, continued The following table presents selected financial information split among Concord, Cash Station, and CPS: Year ended December 31 2000 1999 1998 ------------------------------------------- (in thousands, except per share data) Revenue: Concord EFS, Inc. $1,215,893 $ 830,059 $ 634,511 CPS (1) 4,047 41,909 15,915 Cash Station (2) 9,494 17,973 16,121 ------------------------------------------- Combined $1,229,434 889,941 666,547 =========================================== Pro forma net income: Concord EFS, Inc. 186,009 101,652 88,695 CPS (1) 650 7,096 1,309 Cash Station (2) 816 1,222 1,052 Pro forma provision for CPS income taxes (3) (260) (2,484) (458) ------------------------------------------- Combined $ 187,215 $ 107,486 $ 90,598 =========================================== Pro forma basic earnings per share combined $0.87 $0.52 $0.45 =========================================== Pro forma diluted earnings per share combined $0.84 $0.50 $0.44 =========================================== (1) The 2000 amounts reflect the results of CPS operations from January 1, 2000 through January 31, 2000 (unaudited). The CPS results of operations from February 1, 2000 to December 31, 2000 are included in Concord EFS, Inc. amounts. Results for the years ended December 31, 1999 and 1998 are unaudited. (2) The 2000 amounts reflect the results of Cash Station operations from January 1, 2000 through June 30, 2000 (unaudited). Results of operations from July 1, 2000 to December 31, 2000 are included in Concord EFS, Inc. amounts. (3) The results of operations include pro forma income taxes that would have been required if CPS had been a taxable corporation. The former owners of CPS were responsible for income taxes for the periods prior to the merger. On February 7, 2000 Concord acquired Virtual Cyber Systems, Inc. (VCS), an Internet software development company. The acquisition of VCS, for which Concord paid approximately $2.0 million, was accounted for as a purchase transaction and was immaterial to Concord's financial statements. -27- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 Note B - Business Combinations, continued Acquisition expenses and restructuring charges were $11.7 million for the year ended December 31, 2000. These pre-tax expenses and charges consisted of advisory, legal, and accounting fees incurred in the acquisitions of CPS and Cash Station, and severance and network de-conversion costs incurred in the acquisition of Cash Station. Acquisition and restructuring charges of $36.2 million were incurred in the year ended December 31, 1999 in connection with the acquisition of EPS. The pre-tax expenses and charges were for acquisition expenses, communications conversion costs, asset write-offs, signature debit conversion, severance costs, and other. As of December 31, 2000 approximately $3.4 million of these expenses related to Cash Station were accrued but unpaid. The following table details the reserve balance, in millions, from the various acquisition expenses and charges: 2000 Expenses Cash or Balance & Charges Balance Description Non-cash 12/31/99 Accrued Activity 12/31/00 - ------------------------------------------------------------------------------- EPS: Communications conversion costs Cash $11.3 $ - $11.3 $- Severance and other Cash 1.4 - 1.4 CPS: Advisory, legal and accounting Cash - 0.8 0.8 Cash Station: Compensation and severance Cash - 4.2 3.2 1.0 Legal and accounting fees Cash - 2.2 2.2 - Network de-conversion costs Cash - 4.5 2.1 2.4 --------------------------------------------- $12.7 $11.7 $ 21.0 $3.4 ============================================= 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 in 1999. -28- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 Note C - Accounts Receivable, Net Accounts receivable, net, consisted of the following at December 31: 2000 1999 ----------------------------- (in thousands) Receivable from VISA and MasterCard $ 179,103 $ 70,857 Receivable from trucking companies 40,871 32,078 Other accounts receivable 72,919 63,755 ----------------------------- 292,893 166,690 Allowance for doubtful accounts (3,019) (2,729) ----------------------------- Accounts receivable, net $ 289,874 $ 163,961 ============================= Note D - 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, 2000 U.S. government and agency securities $101,860 $329 $(2,279) $ 99,910 Mortgage-backed securities 168,836 441 (1,811) 167,466 Corporate securities 165,377 1,281 (1,928) 164,730 Municipal securities 173,989 1,977 (1,464) 174,502 ------------------------------------------------------- Total debt securities 610,062 4,028 (7,482) 606,608 Equity securities 21,070 10 (22) 21,058 ------------------------------------------------------- $631,132 $4,038 $(7,504) $627,666 ======================================================= 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 70,926 - (1,123) 69,803 Municipal securities 157,246 109 (7,472) 149,883 ------------------------------------------------------- Total debt securities 467,054 158 (19,813) 447,399 Equity securities 10,802 - - 10,802 ------------------------------------------------------- $477,856 $158 $(19,813) $458,201 ======================================================= -29- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 Note D - Securities Available for Sale, continued The scheduled maturities of debt securities at December 31, 2000 were as follows: Amortized Fair Cost Value ------------------------- (in thousands) Due in one year or less $ 36,688 $ 36,573 Due in one to five years 97,777 97,262 Due in five to ten years 111,576 111,465 Due after ten years 364,021 361,308 ------------------------- $610,062 $606,608 ========================= Expected maturities on mortgage-backed 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 $110.4 million at December 31, 2000 were pledged as collateral for the Federal Home Loan Bank advances. Note E - Loans, Net Loans, net, consisted of the following at December 31: 2000 1999 ------------------------ (in thousands) Mortgage (1-4 family) $ 57,501 $ 25,069 Small business administration 12,102 - Construction and development 7,376 3,594 Commercial 2,154 2,597 Consumer 496 114 ------------------------ 79,629 31,374 Allowance for loan losses (975) (452) ------------------------ Loans, net $ 78,654 $ 30,922 ======================== -30- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 Note F - Property and Equipment, Net Property and equipment, net, consisted of the following at December 31: 2000 1999 ------------------------ (in thousands) Land $ 1,050 $ 1,050 Building & improvements 16,050 15,862 Computer facilities and equipment 288,507 250,574 Furniture and equipment 58,673 62,784 Leasehold improvements 13,356 11,810 ------------------------ 377,636 342,080 Accumulated depreciation (185,424) (173,911) ------------------------ Property and equipment, net $ 192,212 $ 168,169 ======================== Depreciation expense was $52.3 million, $44.1 million, and $39.5 million for the years ended December 31, 2000, 1999, and 1998, respectively. Note G - Goodwill, Net Goodwill, net, consisted of the following at December 31: 2000 1999 ------------------------ (in thousands) Goodwill $80,657 $77,936 Accumulated amortization (27,487) (23,890) ------------------------ Goodwill, net $53,170 $54,046 ======================== Amortization expense related to goodwill was $3.7 million, $3.7 million, and $3.9 million for the years ended December 31, 2000, 1999, and 1998, respectively. Note H - Other Intangible Assets, Net Other intangible assets, net, consisted of the following at December 31: 2000 1999 ------------------------ (in thousands) Purchased merchant contracts $ 90,883 60,413 Customer lists 33,644 31,144 ------------------------ 124,527 91,557 Accumulated amortization (48,883) (34,371) ------------------------ Other intangible assets, net $ 75,644 57,186 ======================== Total amortization expense related to other intangible assets was $14.9 million, $9.8 million, and $8.8 million for the years ended December 31, 2000, 1999, and 1998, respectively. -31- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 Note H - Other Intangible Assets, Net, continued Amortization expense on purchased merchant contracts is recognized on a straight-line basis over an estimated useful life of six years. Amortization expense associated with purchased merchant contracts was $12.7 million, $7.7 million, and $6.1 million for the years ended December 31, 2000, 1999, and 1998, respectively. Customer lists consist of contract rights including agreements not to compete and other values assigned to the assets. Amortization expense associated with these assets was approximately $2.2 million, $2.1 million, and $2.7 million for the years ended December 31, 2000, 1999, and 1998, respectively. Note I - Short-Term Borrowings Concord has available $55.0 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, 2000 or 1999. Note J - Commitments, Long-Term Debt and Contingent Liabilities Long-term debt consisted of Federal Home Loan Bank (FHLB) advances totaling $99.0 million and $75.0 million at December 31, 2000 and 1999, respectively, with a final maturity date in 2008. FHLB advances were at fixed rates ranging from 4.75% to 6.40% at December 31, 2000. Concord had approximately $23.7 million available on unused lines of credit with the FHLB at December 31, 2000. Concord repaid an unsecured note to a former stockholder during 1999 in the amount of $125.0 million. The interest rate on the debt was 6.40%. Concord rents office facilities and equipment under non-cancelable operating leases expiring at various dates through 2006. Rental expense for operating leases amounted to approximately $5.0 million, $5.9 million, and $5.4 million for the years ended December 31, 2000, 1999, and 1998, respectively. On May 22, 1998 Concord entered into a $15.0 million operating lease agreement replacing the remainder of the original subrental agreement on Concord's offices in Wilmington, Delaware. 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. -32- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 Note J - Commitments, Long-Term Debt and Contingent Liabilities, continued 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) 2001 $ - $ 3,906 2002 - 3,969 2003 10,000 3,660 2004 - 2,154 2005 - 1,321 Thereafter 89,000 272 ----------------------- Total future payments $99,000 15,282 ======================= Concord is a party to various other claims and litigation in the normal course of business. None of these claims is expected to have a material effect on Concord's consolidated financial position or results of operations. Note K - Employee Benefit Plans Effective March 1, 1998 Concord established the Concord EFS Retirement Savings Plan (the Plan). Employees who have reached the age of 21 and completed one year of service with Concord are eligible to participate in the Plan. The Plan provides for voluntary tax-deferred contributions by eligible employees and discretionary contributions by Concord. Concord's cost related to the Plan was approximately $2.7 million, $2.0 million, and $0.1 million in 2000, 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 and 1998 expenses under the EPS Plan were approximately $0.5 million and $3.7 million, respectively. -33- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 Note L - 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 Concord's deferred tax liabilities and assets at December 31 are as follows: 2000 1999 ------------------------ Deferred tax liabilities: (in thousands) Capitalization of internal use software $17,359 $17,060 Restructuring charges 303 (6,007) Depreciation 10,761 4,000 Intangible amortization 1,681 3,775 Purchased merchant contracts 1,436 387 Other 2,137 (2,649) ------------------------ Total deferred tax liabilities 33,677 16,566 ------------------------ Deferred tax assets: Net unrealized loss on securities available for sale 1,212 7,123 Nondeductible reserves - 1,802 Bad debt allowance 2,132 730 Inventories 123 44 Restructuring charges 1,470 - Depreciation 370 166 Other 1,269 (630) ------------------------ Total deferred tax assets 6,576 9,235 ------------------------ Net deferred tax liability $27,101 $ 7,331 ======================== The components of the provision (benefit) for income taxes for the three years ended December 31 are as follows: 2000 1999 1998 --------------------------------- (in thousands) Current Federal $ 88,025 $59,791 $48,275 State 2,339 7,414 2,923 --------------------------------- 90,364 67,205 51,198 --------------------------------- Deferred Federal 12,188 (1,327) 416 State 1,671 1,159 1,081 --------------------------------- 13,859 (168) 1,497 --------------------------------- $104,223 $67,037 $52,695 --------------------------------- -34- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 Note L - Income Taxes, continued The reconciliation of income taxes computed at the U.S. federal statutory tax rate of 35% to income tax expense for the three years ended December 31 is as follows: 2000 1999 1998 ------------------------------------ (in thousands) Tax at statutory rate $102,094 $61,952 $50,313 State income taxes, net of federal benefit 2,607 3,249 2,204 Acquisition costs 753 2,292 - Nondeductible amortization of goodwill 1,038 1,021 1,076 Tax-exempt interest income (2,560) (2,319) (1,175) Other, net 291 842 277 ------------------------------------ $104,223 $67,037 $52,695 ==================================== Income tax benefits resulting from the disqualifying dispositions of certain employee incentive stock option shares were credited to additional paid-in capital because no compensation expense was charged to income for financial reporting purposes related to the exercise of such options. Note M - Stockholders' Equity In June 1999 Concord 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 other expenses of the offering, Concord 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 Concord in connection with the February 26, 1999 acquisition. Concord did not receive any proceeds from the sale of shares by the previous owners of EPS. -35- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 Note N - Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share: Year ended December 31 2000 1999 1998 -------------------------------------- (in thousands, except per share data) Numerator: Net income $187,475 $109,970 $91,056 ====================================== Denominator: Denominator for basic earnings per share, weighted-average shares 215,208 207,872 200,264 Effect of dilutive employee stock options 8,039 7,245 6,382 -------------------------------------- Denominator for diluted earnings per share-adjusted weighted-average shares and assumed conversions 223,247 215,117 206,646 ====================================== Basic earnings per share $0.87 $0.53 $0.45 ====================================== Diluted earnings per share $0.84 $0.51 $0.44 ====================================== Earnings per share and related share data have been restated to reflect all stock splits. Note O - 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 Concord's key employees. Options are granted at 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. Options generally expire 10 years from the grant date. At December 31, 2000, 8.2 million shares were available to be granted. -36- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 Note O - Incentive Stock Option Plans, continued Information pertaining to the Concord Plan is summarized below, in thousands, except price per share: Number of Weighted Weighted Shares Average Average Under Exercise Aggregate Options Option Price/Share Price Exercisable ------------------------------------------------------------- Outstanding at January 1, 1998 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 Granted 5,774 19.68 Exercised (2,793) 9.75 Terminated (247) 18.90 ------------------------------------------------------------- Outstanding at December 31, 2000 22,148 $15.47 $342,551 8,797 ============================================================= The weighted average fair value of options granted during 2000, 1999, and 1998 was $8.82, $9.29, and $4.10, respectively. -37- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 Note O - Incentive Stock Option Plans, continued Additional information regarding options outstanding as of December 31, 2000 is summarized below: Weighted Average Weighted Weighted Remaining Number Average Option Options Average Contractual of Options Exercise Price Exercise Outstanding Exercise Life of Options Exercisable of Options Price Range (thousands) Price/Share in Years (thousands) Exercisable - ------------------------------------------------------------------------------------------------------------- $ 2.28- 8.67 2,672 $ 5.35 4.43 2,672 $ 5.35 $10.06-12.78 8,332 11.83 7.62 5,044 11.51 $15.50-21.00 6,850 19.01 9.82 502 20.74 $21.08-29.94 4,294 23.17 9.48 579 22.38 -------- -------- $ 2.28-29.94 22,148 $ 15.47 8.28 8,797 $ 10.88 ======== ========
Prior to its merger with Concord, EPS adopted the Electronic Payment Services, Inc. 1995 Stock Option Plan, as amended (the EPS Plan). In connection with the merger of EPS with Concord, 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. As discussed below, Concord has elected to follow APB No. 25 and related interpretations in accounting for its employee stock options because 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, no compensation expense is recognized because the exercise price of Concord's employee stock options equals the market price of the underlying stock on the date of grant. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if Concord 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 2000, 1999, and 1998, respectively: risk-free interest rates of 5.0%, 5.0%, and 6.0%, and volatility factors of the expected market price of Concord's common stock of .512, .582, and .358. Assumptions that remained constant for all years were dividend yields of 0% and a weighted average expected life of the options of three years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because -38- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 Note O - Incentive Stock Option Plans, continued can materially affect the fair value estimate, it is management's opinion that 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. Concord's pro forma information is as follows for the years ended December 31 (in thousands, except for earnings per share): 2000 1999 1998 ------------------------------------- Pro forma net income $164,788 $94,368 $82,356 Pro forma basic earnings per share $0.77 $0.45 $0.41 Pro forma diluted earnings per share $0.74 $0.44 $0.40 Pro forma disclosures are not likely to be representative 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 P - Employment Agreements In February 1998 Concord 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 salary, provides an incentive compensation program with a bonus potential of 50% of annual base salary, provides for grants of regular stock options of up to 562,500 shares a year based on performance, and provides for grants of 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. -39- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 Note Q - Operations by Business Segment Concord has two reportable segments: Payment Services and Network Services. Concord's revenue from Payment Services results from processing payment transactions made by credit cards (such as VISA, MasterCard, Discover, American Express, and Diner's Club), and debit cards (such as STAR, Pulse, and NYCE). Payment Services also includes providing payment cards that enable drivers of trucking companies to purchase fuel and obtain cash advances at truck stops. Network Services revenue consists of processing fees for driving and monitoring ATMs, processing fees for managing debit card records, access and switching fees for network access, and fees and other surcharges charged for proprietary ATMs. Concord evaluates performance and allocates resources based on profit or loss from operations. Items classified as "Other" include amounts not identifiable with the two reported segments described above. The accounting policies of the reportable segments are the same as those described in Note A - Significant Accounting Policies. Assets are allocated between Payment Services and Network Services based upon Concord's evaluation of the revenue earned by the particular assets. Assets classified as "Other" include assets not identifiable with the two reported segments. Concord's reportable segments are business units that are managed separately because they offer distinct products for different end users. No single customer of Concord accounts for a material portion of Concord's revenue. -40- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 Note Q - Operations by Business Segment Business segment information for the years ended December 31, 2000, 1999, and 1998 is presented below in thousands: Payment Network Services Services Other Total ---------------------------------------------------- 2000 Revenue $ 889,941 $ 339,493 $ - $1,229,434 Cost of operations (711,108) (192,871) - (903,979) Selling, general & administrative expenses - - (57,284) (57,284) Acquisition & restructuring charges (776) (10,915) - (11,691) Taxes & interest, net - - (69,005) (69,005) ---------------------------------------------------- Net income (loss) 178,057 $ 135,707 (126,289) 187,475 ==================================================== Assets by segment $ 887,067 $ 170,836 $ 495,739 $1,553,642 ==================================================== 1999 Revenue $ 651,233 $ 238,708 $ - $ 889,941 Cost of operations (493,306) (138,435) - (631,741) Selling, general & administrative expenses - - (61,325) (61,325) Acquisition & restructuring charges (6,436) (19,253) (10,500) (36,189) Taxes & interest, net - - (50,716) (50,716) ---------------------------------------------------- Net income (loss) 151,491 81,020 (122,541) 109,970 ==================================================== Assets by segment $ 620,750 $ 169,685 $ 321,209 $1,111,644 ==================================================== 1998 Revenue $ 482,842 $ 183,705 $ - $ 666,547 Cost of operations (361,559) (104,648) - (466,207) Selling, general & administrative expenses - - (60,069) (60,069) Taxes & interest, net - - (49,215) (49,215) ---------------------------------------------------- Net income (loss) $ 121,283 $ 79,057 $(109,284) $ 91,056 ==================================================== Assets by segment $ 440,700 $ 174,448 $ 178,052 $ 793,200 ==================================================== -41- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 Note R - Debt and Dividend Restrictions In accordance with federal banking laws, certain restrictions exist regarding the ability of Concord's financial institution subsidiaries to transfer funds to Concord 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, 2000, approximately $213.3 million and $8.1 million of undistributed earnings of EFS National Bank (EFSNB) and EFS Federal Savings Bank (EFSFSB), respectively, included in consolidated retained earnings, were available for distribution to Concord 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 Concord, unless such loans are collateralized by specific obligations. At December 31, 2000, the maximum amount available for transfer in the form of loans to Concord from EFSNB and EFSFSB, respectively, approximated 2.73% and 0.51% of Concord's consolidated net assets. Note S - 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 Concord 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. Loans: Fair values of all categories of loans are estimated by discounting their expected future cash flows using interest rates currently being offered for loans with similar terms, reduced by an estimate of credit losses inherent in the portfolio. 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-rate, fixed-maturity deposits approximate their respective carrying values at the reporting date. Short-Term Borrowings: The interest rates on short-term borrowings are variable rates; accordingly, fair value approximates the outstanding balance. Advances from the FHLB: The fair values of Concord's long-term borrowings are estimated using discounted cash flow analyses based on Concord's current incremental borrowing rates for similar types of borrowing arrangements. -42- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 Note S - Disclosures About Fair Value of Financial Instruments The following table summarizes the carrying amount compared to the fair value of financial instruments according to the methods and assumptions listed above: Carrying Amount Fair Value -------------------------------------- (in thousands) December 31, 2000 Financial assets: Cash and cash equivalents $ 188,260 $ 188,260 Securities available for sale 627,666 627,666 Loans 78,654 73,864 Financial liabilities: Deposits 125,834 126,122 Advances from the FHLB 99,000 96,809 December 31, 1999 Financial assets: Cash and cash equivalents $ 123,967 $ 123,967 Securities available for sale 458,201 458,201 Loans 30,922 30,124 Financial liabilities: Deposits 100,475 100,557 Advances from the FHLB 75,000 72,099 -43- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 Note T - Subsequent Event Concord acquired Star Systems, Inc. (STAR), a debit network, on February 1, 2001. The merger was accounted for as a pooling of interests transaction in which Concord issued 24.8 million shares of its common stock. The following table represents selected unaudited pro forma financial information split between Concord and STAR: Year ended December 31 2000 1999 1998 ---------------------------------------- (in thousands, except per share data) Revenue Concord EFS, Inc. $1,229,434 $ 889,941 $666,547 STAR 182,774 163,344 141,210 ---------------------------------------- Pro forma combined 1,412,208 1,053,285 807,757 ======================================== Net income Concord EFS, Inc. 187,475 109,970 91,056 STAR 22,451 19,271 15,539 ---------------------------------------- Pro forma combined $ 209,926 $ 129,241 $106,595 ======================================== Pro forma basic earnings per share combined $0.88 $0.56 $0.48 ======================================== Pro forma diluted earnings per share combined $0.85 $0.54 $0.46 ======================================== Concord owns a majority interest of 74% in Primary Payment Systems, Inc., a risk management service, as a result of Concord's acquisitions of STAR and Cash Station. Primary Payment Systems will be immaterial to Concord's financial statements. Similar to the EPS and Cash Station acquisitions and their related integration into Concord, Concord anticipates recording acquisition and restructuring charges related to STAR, although no definite plans have been adopted as management is currently reviewing potential operational synergies. -44- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 Note U - Quarterly Financial Results (Unaudited) The following table provides an unaudited summary of quarterly results for the calendar years 2000 and 1999. The quarterly information reported previously on Form 10-Q for these quarters has been restated to reflect mergers accounted for as pooling of interests. 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter ------------------------------------------------ (in thousands, except per share data) 2000 Revenue $262,444 $294,941 $318,700 $353,349 Operating income 51,670 64,237 59,747 80,826 Net income 37,918 46,474 44,053 59,030 Per share: Basic earnings $0.18 $0.22 $0.20 $0.27 Diluted earnings $0.17 $0.21 $0.20 $0.26 1999 Revenue $182,335 $208,217 $231,253 $268,136 Operating income 4,100 46,049 52,427 58,110 Net income (loss) (1,202) 31,097 37,572 42,503 Per share: Basic earnings (loss) ($0.01) $0.15 $0.18 $0.20 Diluted earnings (loss) ($0.01) $0.15 $0.17 $0.19 -45- CONCORD EFS, INC AND SUBSIDIARIES Report of Independent Auditors Board of Directors and Stockholders of Concord EFS, Inc. We have audited the accompanying consolidated balance sheets of Concord EFS, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of Concord'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, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Memphis, Tennessee February 8, 2001 Corporate directory 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 Pay Systems of America, 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 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 Edward T. Haslam, Chief Financial Officer Concord EFS, Inc. Steve A. Lynch, Chief Information Officer Concord EFS, Inc. Christopher Reckert, Senior Vice President Sales, Concord EFS, Inc. Marcia E. Heister, General Counsel and Assistant Secretary, Concord EFS, Inc. William E. Lucado, Senior Vice President Chief Investment and Compliance Officer Concord EFS, Inc. and EFS National Bank Vickie Brown, Chief Operating Officer EFS National Bank Thomas J. Dowling, Chief Financial Officer EFS National Bank Corporate Headquarters 2525 Horizon Lake Drive, Suite 120 Memphis, Tennessee 38133 1.800.238.7675 Transfer Agent & Registrar State Street Bank and Trust Company C/O EquiServe P.O. Box 43011 Providence, Rhode Island 02940-3011 1.800.426.5523 Corporate Counsel Bingham Dana LLP Boston, Massachusetts Independent Auditors Ernst & Young LLP Memphis, Tennessee Annual Meeting The annual meeting of stockholders will be held at 9:30 a.m. Central time on Thursday, May 24, 2001 at Colonial Country Club, 2736 Countrywood Parkway, Memphis, Tennessee. Investor Information Copies of the Concord EFS, Inc. Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, (including the financial statements and the financial statement schedules it contains) may be obtained without charge upon written request to Investor Relations at the corporate address. Concord press releases, product information and other news are also available through the company web site located at http://www.concordefs.com. Trademarks MAC, Cash Station, and STAR are registered trademarks of Concord EFS, Inc. and its subsidiaries. All other product or company names mentioned are for identification purposes only and may be trademarks of their respective owners. concord efs, inc. Corporate Headquarters 2525 Horizon Lake Drive Suite 120 Memphis, TN 38133
EX-20 6 0006.txt NOTICE OF ANNUAL MEETING OF STOCKHOLDERS EX-20 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. will be held at Colonial Country Club, 2736 Countrywood Parkway, Memphis, Tennessee on May 24, 2001 beginning at 9:30 a.m. CST, for the following purposes: 1. To elect directors to serve for the ensuing year; 2. To approve the Amendment to the Certificate of Incorporation to increase the number of authorized shares of Common Stock; 3. To transact such other business as may properly come before the annual meeting and any adjournments thereof. The Board of Directors has fixed the close of business on March 16, 2001 as the record date for determination of the stockholders entitled to notice of and to vote at the Annual Meeting. Concord's By-Laws 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 transact business. By Order of the Board of Directors Richard M. Harter Secretary April 6, 2001 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 6, 2001 This Proxy Statement is furnished in connection with the solicitation by the Board of Directors of Concord EFS, Inc. of proxies for use at its Annual Meeting of Stockholders to be held on May 24, 2001 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 Concord before it is voted. A majority in interest of the outstanding shares, whether 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 whether a quorum is present 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. At the Annual Meeting, the voting will be by voice vote unless any stockholder entitled to vote requests that voting be by ballot. BENEFICIAL OWNERSHIP OF COMMON STOCK Concord's only issued and outstanding class of voting securities is its Common Stock, par value $0.33 1/3 per share. Each stockholder of record is entitled to one vote for each share registered in that stockholder's name on March 16, 2001. As of that date, our Common Stock was held by approximately 54,000 stockholders. The following table sets forth, as of March 16, 2001, the ownership of our Common Stock by each person who is known to us to own beneficially more than 5% of our outstanding Common Stock, by each director who owns shares and by all of our directors and officers as a group. Amount and Nature of Beneficial Percent of Ownership Outstanding Beneficial Owner (1) Owned Shares (2) - -------------------------------------------- -------------------- -------- Dan M. Palmer, Chairman of the Board & CEO 5,105,775 (3) 2.1% Edward A. Labry III, Director and President 4,422,192 (4) 1.8% Edward T. Haslam, Chief Financial Officer 95,250 (5) * Vickie Brown, Chief Operations Officer 56,561 (6) * William E. Lucado, Sr. Vice-President 89,737 (7) * Douglas C. Altenbern, Director 16,750 (8) * J. Richard Buchignani, Director 40,274 (9) * Ronald V. Congemi, Director 239,706 (10) * Richard M. Harter, Director and Secretary 121,550 (9) * Richard P. Kiphart, Director 5,239,282 (11) 2.2% Jerry D. Mooney, Director 60,612 (9) * Paul Whittington, Director 34,593 (9) * All officers and directors as a group 15,522,282 (12) 6.4% (12 persons) William Blair & Company, L.L.C. 222 West Adams Street Chicago, IL 60606 19,496,453 (13) 8.1% (1) The address of each beneficial owner who is also a director or officer is the same as Concord's. (2) Percentage ownership is based on 242,043,621 shares issued and outstanding as of March 16, 2001, plus the number of shares subject to options exercisable within 60 days after the record date by the person or the aggregation of persons for which such percentage ownership is being determined. (3) Shares owned include 5,085,775 shares covered by stock options exercisable within 60 days after the record date. (4) Shares owned include 4,387,575 shares covered by stock options exercisable within 60 days after the record date. (5) Shares owned include 91,250 shares covered by stock options exercisable within 60 days after the record date. (6) Shares owned include 56,560 shares covered by stock options exercisable within 60 days after the record date. (7) Shares owned include 89,062 shares covered by stock options exercisable within 60 days after the record date. (8) Shares owned include 6,750 shares covered by stock options exercisable within 60 days after the record date. (9) Shares owned include 28,000 shares covered by stock options exercisable within 60 days after the record date. (10) Shares owned consist of shares covered by stock options exercisable within 60 days after the record date. (11) Shares owned include 13,500 shares covered by stock options exercisable within 60 days after the record date. (12) Shares owned include an aggregate of 10,082,178 shares covered by stock options exercisable within 60 days after the record date. (13) The number of shares owned is based on an amended Schedule 13G filed on February 14, 2001 by William Blair and Company, L.L.C. ("Blair") reflecting ownership as of December 31, 2000. The amended Schedule 13G provides that such number of shares includes 5,858,185 shares beneficially owned by principals of Blair with respect to which Blair disclaims beneficial ownership and 13,638,268 shares held in client accounts at Blair with respect to which Blair disclaims beneficial ownership. 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 unwilling or unable to serve. In the event that any nominee should be unwilling to serve or not be available, the persons named in the proxies will vote for the others and may vote for a substitute for such nominee. The nine nominees receiving the highest number of affirmative votes will be elected as directors. Shares not voted, whether due to abstention, broker non-vote or otherwise, will have no impact on the election of directors. 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 or her age; his or her business experience during at least the past five years, including all positions and offices held with Concord or any of its subsidiaries; his or her experience as a director of Concord; and any other directorships held by him or her. There are no family relationships among the nominees. Also, there is no arrangement or understanding between any nominee and any other person pursuant to which he or she is to be selected as a director or nominee, except that, in connection with the acquisition of Star Systems, Inc., Concord agreed that its Board of Directors would elect Mr. Congemi to become a director of Concord. Office with Concord, Business Nominees and Ages Experience and Year First Elected Director - --------------------------- ---------------------------------------------- Dan M. Palmer (58) Mr. Palmer has been a director of Concord since May 1987, and was appointed Chairman of the Board in 1991. He was named Chief Executive Officer of Concord in 1990, and Chief Executive Officer of EFS National Bank upon its formation in 1992. He joined Union Planters National Bank in 1982 and founded the bank's Electronic Fleet Systems (EFS) operation, which was later acquired by Concord. He continued as President and Chief Executive Officer of EFS following the acquisition in 1985. Edward A. Labry III (38) Mr. Labry was named President of Concord EFS, Inc. and EFS National Bank in 1994. Mr. Labry joined Concord in 1984 as a salesman in Concord's trucking services division, assuming responsibility for all sales and marketing in that unit in 1987. In 1990, Mr. Labry was named chief marketing officer for all Concord companies, and was appointed senior vice president in 1991. He is a member of the international Advisory Councils for Visa and MasterCard, and serves as director on the board of MS Carriers. Douglas C. Altenbern (64)*+ Mr. Altenbern has been a director of Concord 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, Inc. 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. Richard Buchignani (52)* Mr. Buchignani has been a director of Concord since August 1992. He is a partner in the Memphis, Tennessee office of the law firm of Wyatt, Tarrant & Combs, LLP, who also serves as local counsel to Concord. 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, LLP. Ronald V. Congemi (54) Mr. Congemi was appointed director of Concord effective February 22, 2001. From 1975 to 1984, he served in a variety of management positions at VISA International. In 1984, he joined Star System, Inc. network as founding President. Mr. Congemi became President and CEO of the newly merged HONOR Technologies, Inc. and Star System, Inc. network (renamed Star Systems, Inc.) in March 1999, and he continues to serve as President. He has served on the board of directors of the Electronic Funds Transfer Association and as member of both the Consumer Bankers Association Committee on Electronic Funds Transfer and the BITS Infrastructure Review Group. Richard M. Harter (64)* Mr. Harter has been Concord's Secretary and a director of Concord since Concord's formation. He is a partner of Bingham Dana LLP, legal counsel to Concord. Richard P. Kiphart (58)* Mr. Kiphart has been a director of Concord since March 1997. In 1972 he became a principal of William Blair & Company, L.L.C. 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. Jerry D. Mooney (48)*+ Mr. Mooney has been a director of Concord since August 1992. Since August 1997, he had been President and COO of ServiceMaster Employer Services, Inc. He retired from this position in 1998. Prior to then he was President of Healthcare New Business Initiatives and formerly served as Chairman, President and CEO of ServiceMaster Diversified Health Services, Inc. (formerly VHA Long Term Care) since 1981. Paul L. Whittington (65)*+ Mr. Whittington has been a director of Concord 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.
* Member of the Board's Audit Committee. + Member of the Board's Compensation Committee. COMPENSATION OF DIRECTORS Concord currently pays to each non-employee director of Concord an $8,000 cash director fee each year for attending scheduled board meetings. Each non-employee director receives $1,000 for any special meetings of the full Board or any committee attended. Concord pays the chairman of its Audit Committee an additional $4,000 cash fee each year. In addition, non-employee directors are granted options to purchase 10,875 shares of Concord'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 $2,000 for each meeting attended. This director is granted options to purchase only 9,000 shares of Concord's stock in the same manner as the other non-employee directors. Directors are reimbursed for expenses incurred in attending meetings of the Board of Directors and committees of the Board. Three of the nine nominees are employees of Concord or its subsidiaries and are not separately compensated for serving as directors. EXECUTIVE COMPENSATION The following summary compensation table is intended to provide a comprehensive overview of Concord's executive pay practices. It includes the cash compensation paid or accrued by Concord and its subsidiaries for services in all capacities during the fiscal year ended December 31, 2000 to, or on behalf of, each of Concord's named executives. Named executives include the Chief Executive Officer and the President and the three highest paid executive officers. Summary Compensation Table Long-Term Name and Principal Position Year Annual Compensation Compensation ------------------------------ ---------------------- Salary Bonus Securities ($) ($) Underlying Options* - ------------------------------------ --------- ------------- ------------ ---------------------- Dan M. Palmer 2000 683,654 175,000 1,843,750 Chairman of the Board 1999 538,750 393,750 1,687,500 Chief Executive Officer, Concord 1998 466,538 331,250 1,687,500 Edward A. Labry III 2000 683,654 175,000 1,843,750 President, Concord 1999 538,750 393,750 1,687,500 1998 466,538 331,250 1,687,500 Edward T. Haslam 2000 233,654 195,000 30,000 Chief Financial Officer, 1999 186,200 237,500 185,000 Concord 1998 178,150 85,000 55,363 Vickie Brown 2000 212,308 40,000 25,000 Chief Operations Officer, 1999 203,462 40,000 77,500 EFS National Bank 1998 184,519 20,000 56,250 William E. Lucado 2000 200,577 30,000 20,000 Senior Vice President, 1999 191,827 40,000 45,000 Concord 1998 164,000 15,000 33,750 * Options awarded have been restated to reflect all stock splits.
Stock Options The following tables present the following types of information for options granted to Concord's named executives under Concord's 1993 Incentive Stock Option Plan. Table I presents information regarding options granted and the potential realizable value of such options, and Table II presents information regarding options exercised in the latest fiscal year and the number of unexercised options held. Except as otherwise indicated in the table, provided that the person remains employed by Concord or its subsidiaries, each of the options listed in the table remains outstanding for a period of 10 years and vests in four equal installments commencing on the first anniversary of the applicable grant date. Table I Options/SARs Granted in 2000 Individual Grants -------------------------------------------------------------------- Name Number of Securities % of Total Underlying Options/ Exercise Potential Realizable Value Options/ SARs Granted or Base at Assumed Annual Rates of SARs Granted to Employees Price Expiration Stock Price Appreciation (#) in 2000 ($/Share) Date for Option Term ----------------------------- 5% ($) 10%($) - ------------------------ ----------- ---- ---------------- ---------- ----------- ------------ ------------ Dan M. Palmer 1,562,500 (1) 27.1% $18.13 2/17/2010 17,810,492 45,135,285 281,250 (2) 4.9% $28.44 9/09/2010 5,031,149 12,749,920 Edward A. Labry III 1,562,500 (1) 27.1% $18.13 2/17/2010 17,810,492 45,135,285 281,250 (2) 4.9% $28.44 9/09/2010 5,031,149 12,749,920 Edward T.Haslam 30,000 0.5% $18.13 2/17/2010 341,961 866,597 Vickie Brown 25,000 0.4% $18.13 2/17/2010 284,968 722,165 William E. Lucado 20,000 0.3% $18.13 2/17/2010 227,974 577,732
(1) Includes options for 562,500 shares which vest over a period of four years and options for 1,000,000 shares which vest on the earlier of February 17, 2005 or a change in control of Concord. (See "Change in Control Arrangements" below for further details.) (2) These options vest on February 26, 2003. Table II Aggregated Option/SAR Exercises in 2000 and 2000 Year-End Option Values Number of Securities Underlying Value of Unexercised Unexercised In-the-Money Options/SARs at Options/SARs at Fiscal Year End (#) Fiscal Year End ($) Shares Acquired on Value ($) Exercisable/ Exercisable/ Name Exercise (#) Realized(1) Unexercisable Unexercisable (2) - -------------------------- --------------------- ---------------- ----------------------- --------------------- Dan M. Palmer 400,000 16,216,426 4,523,277(E) 155,076,578(E) 4,116,249(U) 103,105,404(U) Edward A. Labry III 400,000 16,084,756 3,825,077(E) 126,129,981(E) 4,116,249(U) 103,105,404(U) Edward T. Haslam -0- -0- 46,250(E) 1,037,733(E) 168,750(U) 3,887,574(U) Vickie Brown 159,324 4,793,381 19,373(E) 613,408(E) 111,250(U) 2,791,954(U) William E. Lucado 42,981 1,037,684 55,937(E) 1,669,768(E) 86,562(U) 2,218,792(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, 2000. (E) Exercisable at December 31, 2000. (U) Unexercisable at December 31, 2000. Change in Control Arrangements The Incentive Agreements between Concord and each of Mr. Palmer and Mr. Labry contain a change in control provision. Under the agreements, a change in control occurs if any person becomes the beneficial owner of 50% or more of the combined voting power of Concord's then outstanding voting securities, if Concord's stockholders approve a plan to liquidate Concord, or if Concord sells or disposes of all or substantially all of its assets. Upon a change in control, the agreements provide that the full bonus potential under the agreements will be paid for the year in which the change in control occurs, and all stock options granted before the change in control become fully and immediately exercisable. In addition, Mr. Palmer's and Mr. Labry's obligations under the non-compete, non-solicitation and confidentiality provisions of the agreements are shortened to a period of six months following a change in control. Concord's 1993 Incentive Stock Option Plan also contains a change in control provision. Each option granted under the plan vests on the date on which any person or entity becomes the beneficial owner of 20% or more of Concord's outstanding shares entitled to vote in the election of directors. COMMITTEES; ATTENDANCE The Board of Directors held four regular meetings during the fiscal year ended December 31, 2000. Each of the directors attended at least 75% of the total number of meetings of the Board and the total number of meetings held by all board committees on which he or she served. During the fiscal year ended December 31, 2000, the Audit Committee held three meetings, and the Compensation Committee held two meetings. The Board of Directors has no Nominating Committee. Compensation Committee Interlocks and Insider Participation Mr. Altenbern, Mr. Mooney and Mr. Whittington are members of the Compensation Committee, none of whom is or was an executive officer or employee of Concord or had any relationship with Concord requiring disclosure under securities regulations. No Concord officer served on the compensation committee of the board of any entity with an executive officer serving on Concord's Board of Directors. Compensation Committee Report on Executive Compensation General Policy It is the policy of the Compensation Committee to establish base salaries, award bonuses and grant stock options to executive officers in such amounts as will assure the continued availability to Concord of the services of the executives and will recognize the contributions made by the executives to the success of Concord's business and the growth over time in the market capitalization of Concord. 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 Concord and its subsidiaries at levels that it believes to be higher than average for comparable companies in order to give the executives significant incentive to improve Concord's revenue 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 Concord's 1993 Incentive Stock Option Plan, as amended, and bonus arrangements for senior officers meet the requirement that they be "performance based" and, therefore, exempt from the limitations on deductibility. The Committee's present intention is to comply with Section 162(m) unless the Committee feels that compliance in a particular instance would not be in the best interest of Concord 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 provides for a one-time option grant of 1,125,000 shares with a "reload" feature. Under this reload feature, after the stock market price reached $21.33 per share for a stated period, a new option for 562,500 shares was granted at $21.33, and after the stock market price reached $28.44, a new option for 281,250 shares was granted at $28.44. The Chief Executive Officer's and the 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 2001 base salary and bonus for the Chief Executive Officer and President, the Committee considered Concord's historic rate of increase in revenues and the rate of increase in diluted earnings per share. Additionally, the Committee noted that for the preceding three years Concord's market capitalization growth averaged approximately 77% per year and that these individuals were responsible for past growth and uniquely situated to contribute to Concord's future growth. Douglas C. Altenbern Jerry D. Mooney Paul L. Whittington Description of Audit Committee The Audit Committee, consisting of Messrs. Mooney (Chairman), Altenbern, Buchignani, Harter, Kiphart and Whittington, oversees Concord's financial statements provided to its stockholders and Concord's systems of internal control. The Committee recommends to the Board of Directors both the selection of Concord's independent accountants and the fees and other compensation to be paid to them. In consultation with the selected independent accountants and Concord's internal auditors, the Audit Committee reviews the adequacy of Concord's financial reporting processes. Audit Committee Report During the year ended December 31, 2000, the Audit Committee reviewed and discussed the audited financial statements with management and the independent auditors, Ernst & Young, LLP. The Committee discussed with the independent auditors the matters required to be discussed by the Statement of Auditing Standards No. 61, Communications with Audit Committees, as amended, by the Auditing Standards Board of the American Institute of Certified Public Accountants and reviewed the results of the independent auditors' examination of the financial statements. The Committee also reviewed the written disclosures and the letter from the independent auditors required by Standard No. 1, Independence Discussions with Audit Committees, as amended, discussed with the auditors the auditors' independence, and satisfied itself that the non-audit services provided by Concord's auditors are compatible with maintaining the auditors' independence. Based on its reviews and discussions, the Audit Committee recommends to the Board of Directors that the financial statements be included or incorporated by reference in the Annual Report on Form 10-K for the year ended December 31, 2000 for filing with the Securities and Exchange Commission. The Committee is governed by a charter which has been adopted by the Board of Directors and is included as Appendix A. The Board of Directors has determined that the members of the Audit Committee are independent as defined in the National Association of Securities Dealers' listing standards. This report shall not be deemed to be incorporated by reference into any filings with the Securities and Exchange Commission under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that Concord specifically incorporates it by reference. Jerry D. Mooney Douglas Altenbern J. Richard Buchignani Richard M. Harter Richard P. Kiphart Paul L. Whittington FIVE YEAR CUMULATIVE STOCKHOLDER RETURN Below is a performance graph, which compares Concord's cumulative total stockholder return during the previous five years with the NASDAQ stock market and the NASDAQ financial stocks (Concord's peer group). NASDAQ NASDAQ Date Concord EFS, Inc. Stock Market Financial Stocks - --------- ----------------- ---------------- ---------------- 12/31/95 100.00 100.00 100.00 12/31/96 150.44 123.04 128.36 12/31/97 132.47 150.69 196.31 12/31/98 338.49 212.51 190.73 12/31/99 308.53 394.92 189.46 12/31/00 514.47 237.62 207.03 AMENDMENT TO CONCORD'S CERTIFICATE OF INCORPORATION TO INCREASE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK Concord's authorized capital stock currently consists of 500,000,000 shares of Common Stock, $0.33 1/3 par value. The Board of Directors finds it advisable that Concord's Certificate of Incorporation be amended to increase the number of authorized shares of Common Stock to 750,000,000 shares, $0.33 1/3 par value. The holders of Common Stock are not entitled to preemptive rights to purchase Concord's Common Stock. The authorized shares of Common Stock can be issued without stockholder approval upon such terms and in consideration of such amounts as the Board of Directors determines is in Concord's best interest. The Board in the past has issued stock to effect stock splits, to fulfill the exercise of stock options and to make acquisitions. It has no current plans to issue any additional shares of its Common Stock, although Concord currently expects that it will engage in a disciplined process in 2001 to eliminate the stock overhang resulting from its acquisition of Star Systems, Inc. (in which Concord issued 24.75 million shares of unregistered Common Stock). Dilutive Effect of Issuance of Additional Shares The authorization of additional shares of Common Stock pursuant to this proposal will have no dilutive effect upon the proportionate voting power of Concord's present stockholders. However, issuance of additional shares could have a substantial dilutive effect on present stockholders. Anti-takeover Effect The issuance of additional shares of Common Stock by Concord may also make it more difficult to obtain stockholder approval of various actions, such as a merger or other corporate combination. The proposed increase in the number of authorized shares of Common Stock could enable the Board of Directors to render more difficult an attempt by another person or entity to obtain control of Concord, although the Board of Directors has no present intention of issuing additional shares for such purpose and has no present knowledge of any takeover efforts by any person or entity. Recommended Vote An affirmative vote of a majority of Concord's outstanding Common Stock entitled to vote is necessary to adopt the amendment to Concord's Certificate of Incorporation to increase the number of authorized shares of Common Stock to 750,000,000 shares. Abstentions and broker non-votes will not be counted toward the vote and, thus, will have the effect of a vote against the proposed amendment. The Board of Directors recommends that you vote "FOR" the proposal. OTHER MATTERS The Board of Directors knows of no matters which are likely to be presented for action at the Annual Meeting other than the proposals specifically set forth in the Notice and referred to herein. If any other matter properly comes before the Annual Meeting for action, it is intended that the persons named in the accompanying proxy and acting hereunder will vote or refrain from voting in accordance with their best judgment pursuant to the discretionary authority conferred by the proxy. CERTAIN TRANSACTIONS In connection with the acquisition of Star Systems, Inc., Concord entered into two agreements with Mr. Congemi, who currently serves as a director of Concord and President of Star Systems, Inc. Under one of these agreements, Mr. Congemi agreed to remain at Star Systems, Inc. through the closing of the transaction with Concord and agreed to various other provisions, including confidentiality and non-competition provisions, and Concord agreed to grant Mr. Congemi an option to purchase 200,000 shares of Concord Common Stock. The options granted were pursuant to the terms of Concord's 1993 Incentive Stock Option Plan, as amended, have a 10-year term, have an exercise price equal to the fair market value of Concord's stock on February 1, 2001 and vest with respect to 25% of the shares subject to the option each year as long as Mr. Congemi remains employed by Concord or any of its subsidiaries. Under the second agreement with Mr. Congemi, his Salary Continuation Agreement with Star Systems, Inc. was terminated and certain benefits under that agreement were credited to Mr. Congemi and will become payable pursuant to the terms of the Star Non-Qualified Deferred Compensation Plan. Bingham Dana LLP serves as legal counsel to Concord. Richard M. Harter, Secretary and Director of Concord, is a partner of that firm. Wyatt, Tarrant and Combs, LLP also serves as legal counsel to Concord. J. Richard Buchignani, Director of Concord, is a partner of that firm. In connection with Concord's acquisition of Star Systems, Inc., William Blair & Company, L.L.C. served as financial advisors to Concord and issued a fairness opinion to Concord's Board of Directors. As of December 31, 2000, certain principals (including Richard P. Kiphart, a director of Concord) of William Blair & Company, L.L.C. beneficially owned an aggregate of 5,858,185 shares of Concord's Common Stock. INFORMATION CONCERNING AUDITORS Concord has engaged Ernst & Young LLP as independent auditors to audit its financial statements for the year ended December 31, 2000. Information regarding fees for services rendered by Ernst & Young LLP is provided below. 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. Audit Fees The aggregate fees billed for professional services rendered for the audit of Concord's financial statements for the year ended December 31, 2000 and the review of the financial statements included in Concord's Forms 10-Q for the year then ended were $343,000. All Other Fees All other fees billed for services rendered by Ernst & Young LLP were $1,292,000, including audit related services of $243,000 and non-audit services of $1,049,000. Audit related services generally include fees for business combinations, accounting consultations, Securities and Exchange Commission registration statements and internal control reviews. STOCKHOLDERS' PROPOSALS Stockholder proposals to be submitted for vote at the 2002 Annual Meeting must be delivered to Concord on or before December 7, 2001. EXPENSES OF SOLICITATION Solicitations of proxies by mail is expected to commence on April 6, 2001, and the cost thereof will be borne by Concord. Copies of solicitation materials will also be furnished to brokerage firms, fiduciaries and custodians to forward to their principals, and Concord will reimburse them for their reasonable expenses. By Order of the Board of Directors Richard M. Harter Secretary ANNUAL REPORT ON FORM 10-K Concord will deliver without charge to each of its stockholders, upon their written request, a copy of its most recent annual report on Form 10-K and any information contained in any subsequent reports filed with the Securities and Exchange Commission. Requests for such information should be directed to Investor Relations, Concord EFS, Inc., 2525 Horizon Lake Drive, Suite 120, Memphis, Tennessee 38133. Appendix A CONCORD EFS, Inc. AUDIT COMMITTEE CHARTER Organization This charter governs the operations of the audit committee. The committee shall review and reassess the charter at least annually and obtain the approval of the board of directors. The committee shall be appointed by the board of directors and shall comprise at least three directors, each of whom are independent of management and the Company. Members of the committee shall be considered independent if they have no relationship that may interfere with the exercise of their independence from management and the Company. All committee members shall be financially literate, and at least one member shall have accounting or related financial management expertise. Statement of Policy The audit committee shall provide assistance to the board of directors in fulfilling their oversight responsibility to the shareholders, potential shareholders, the investment community, and others relating to the Company's financial statements and the financial reporting process, the systems of internal accounting and financial controls, the internal audit function, the annual independent audit of the Company's financial statements, and the legal compliance and ethics programs as established by management and the board. In so doing, it is the responsibility of the committee to maintain free and open communication between the committee, independent auditors, the internal auditors and management of the Company. In discharging its oversight role, the committee is empowered to investigate any matter brought to its attention with full access to all books, records, facilities, and personnel of the Company and the power to retain outside counsel, or other experts for this purpose. Responsibilities and Processes The primary responsibility of the audit committee is to oversee the Company's financial reporting process on behalf of the board and report the results of their activities to the board. Management is responsible for preparing the Company's financial statements, and the independent auditors are responsible for auditing those financial statements. The committee in carrying out its responsibilities believes its policies and procedures should remain flexible, in order to best react to changing conditions and circumstances. The committee should take the appropriate actions to set the overall corporate "tone" for quality financial reporting, sound business risk practices, and ethical behavior. The following shall be the principal recurring processes of the audit committee in carrying out its oversight responsibilities. The processes are set forth as a guide with the understanding that the committee may supplement them as appropriate. The committee shall have a clear understanding with management and the independent auditors that the independent auditors are ultimately accountable to the board and the audit committee, as representatives of the Company's shareholders. The committee shall have the ultimate authority and responsibility to evaluate and, where appropriate, recommend the replacement of the independent auditors. The committee shall discuss with the auditors their independence from management and the Company including the matters in the written disclosures required by the Independence Standards Board and shall consider the compatibility of nonaudit services with the auditors' independence. Annually, the committee shall review and recommend to the board the selection of the Company's independent auditors, subject to shareholders' approval. The committee shall discuss with the internal auditors and the independent auditors the overall scope and plans for their respective audits including the adequacy of staffing and compensation. Also, the committee shall discuss with management, the internal auditors, and the independent auditors the adequacy and effectiveness of the accounting and financial controls, including the Company's system to monitor and manage business risk, and legal and ethical compliance programs. Further, the committee shall meet separately with the internal auditors and the independent auditors, with and without management present, to discuss the results of their examinations. The committee shall review the interim financial statements with management and the independent auditors prior to the filing of the Company's Quarterly Report on Form 10-Q. Also, the committee shall discuss the results of the quarterly review and any other matters required to be communicated to the committee by the independent auditors under generally accepted auditing standards. The chair of the committee may represent the entire committee for the purposes of this review. The committee shall review with management and the independent auditors the financial statements to be included in the Company's Annual Report on Form 10-K (or the annual report to shareholders if distributed prior to the filing of Form 10-K), including their judgment about the quality, not just acceptability, of accounting principles, the reasonableness of significant judgments, and the clarity of the disclosures in the financial statements. Also, the committee shall discuss the results of the annual audit and any other matters required to be communicated to the committee by the independent auditors under generally accepted auditing standards. March 2001 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. held by the undersigned on March 16, 2001, at the Annual Meeting of Stockholders to be held on Thursday, May 24, 2001 at Colonial Country Club, 2736 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 ENVELOPE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Please sign exactly as your name(s) appear(s) hereon. When shares are held by joint tenants, both should sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title, as such. If a corporation, please sign in full corporate name by president or other authorized officer. If a partnership, please sign in partnership name by authorized person and state title. - -------------------------------------------------------------------------------- [X] PLEASE MARK VOTES AS IN THIS EXAMPLE This proxy, when properly executed, will be voted in the manner directed by the undersigned stockholder. If no direction is made, this proxy will be voted FOR the actions described in Items 1 and 2. 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 For All Nominees Withhold Except Douglas C. Altenbern Edward A. Labry [ ] [ ] [ ] J. Richard Buchignani Jerry D. Mooney Ronald V. Congemi Dan M. Palmer Richard M. Harter Paul L. Whittington Richard P. Kiphart 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 name(s) of the nominee(s). Your shares will be voted "For" the remaining nominee(s). 2. To approve the Amendment to the Certificate of Incorporation to increase the number of authorized shares of Common Stock; Approve Disapprove Abstain [ ] [ ] [ ] 3. 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 Vote by Telephone Vote by Internet It's fast, convenient, and immediate! It's fast, convenient, and your vote Call Toll-Free on a Touch-Tone Phone is immediately confirmed and posted. Follow these four easy steps: Follow these four easy steps: 1. Read the accompanying Proxy 1. Read the accompanying Proxy Statement and Proxy Card. Statement and Proxy Card. 2. Call the toll-free number 2. Go to the Website 1-877-PRX-VOTE (1-877-779-8683) http://www.eproxyvote.com/ceft 3. Enter your Control Number located on your Proxy 3. Enter your Control Number located on your Card. Proxy Card. 4. Follow the recorded instructions. 4. Follow the instructions provided. Your vote is important! Your vote is important! Call 1-877-PRX-VOTE anytime! Go to http://www.proxyvote.com/ceft anytime! Do not return your Proxy Card if you are voting by Telephone or Internet
EX-21 7 0007.txt LISTING OF SUBSIDIARIES EXHIBIT 21 CONCORD EFS, INC. LISTING OF SUBSIDIARIES State of Percentage Subsidiary Incorporation Ownership - -------------------------------------------------------------------------------- BUYPASS Corporation Georgia 100% BUYPASS Inco Corporation Delaware 100% Cash Station, Inc. Delaware 100% Concord Computing Corporation Delaware 100% Concord Equipment Sales, Inc Tennessee 100% EFS Federal Savings Bank Tennessee 100% EFS National Bank Delaware 100% EFS Services, Inc. Tennessee 100% EFS Transportation Services, Inc. Tennessee 100% Electronic Payment Services, Inc. Delaware 99.9% EPSF Corporation Delaware 100% JOT, Inc. Nevada 100% MAS Inco Corporation Delaware 100% MAS Ohio Corporation Delaware 100% MONEY ACCESS SERVICE INC. Delaware 100% National Payment Systems Inc. New York 100% NPSF Corporation Delaware 100% Pay Systems of America, Inc. Tennessee 100% Primary Payment Systems, Inc. Delaware 74% Star Networks, Inc. Delaware 100% Star Systems Assets, Inc. Delaware 100% Star Systems Holdings, Inc. Delaware 100% Star Systems, Inc Delaware 100% Star Systems, LLC Delaware 99% Virtual Cyber Systems, Inc. Arizona 100% EX-23 8 0008.txt 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 8, 2001, included in the 2000 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, 333-74215 and 333-56066) of Concord EFS, Inc. and in the related Prospectuses of our report dated February 8, 2001, 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, 2003. /s/Ernst & Young LLP Memphis, Tennessee March 27, 2001
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