-----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, G0awuVjW/4yOTaLyGJCZ/kERrgXGgPxFAq95qnH4OABkhEeb+3dtNK6dMu8PSS5f IhU/107hYPLYQJQHZBJBiQ== 0000740112-01-000014.txt : 20010417 0000740112-01-000014.hdr.sgml : 20010417 ACCESSION NUMBER: 0000740112-01-000014 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20010416 ITEM INFORMATION: FILED AS OF DATE: 20010416 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: 8-K/A SEC ACT: SEC FILE NUMBER: 000-13848 FILM NUMBER: 1603267 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 8-K/A 1 0001.txt CURRENT REPORT ON FORM 8-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMENDMENT NO. 1 TO FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of report (Date of earliest event reported): February 1, 2001 CONCORD EFS, INC. (Exact Name of Registrant as Specified in Charter) Delaware 000-13848 04-2462252 (State or Other Jurisdiction (Commission File Number) (IRS Employer of Incorporation) Identification No.) 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 N/A (Former Name or Former Address, if Changed Since Last Report) Item 2. Acquisition or Disposition of Assets. Concord EFS, Inc., a Delaware corporation (the "Company"), completed its acquisition of all of the outstanding common stock of Star Systems, Inc., a Delaware corporation ("Star"), on February 1, 2001. The acquisition was accomplished through the merger of Orion Acquisition Corp., a wholly owned subsidiary of the Company, with and into Star, with Star surviving as a wholly owned subsidiary of the Company. Star operates and will continue to operate a PIN-secured debit network. The merger of Orion Acquisition Corp. and Star was accounted for as a pooling of interests for accounting purposes and is intended to constitute a tax-free reorganization under the Internal Revenue Code of 1986, as amended. The consideration for the acquisition consisted of the issuance by the Company of unregistered shares of its common stock, par value $0.33 1/3 per share (the "Company Common Stock"). Immediately prior to the effective time of the merger: o 5,160,338 shares of Star's common stock, par value $.01 per share (the "Star Common Stock"), were issued and outstanding and held by 49 stockholders. Star's stockholders consisted of banking institutions which were members of the Star network, or affiliates thereof. Each share of Star Common Stock issued and outstanding immediately prior to the effective time of the merger was converted into the right to receive 4.6452 shares of Company Common Stock. o options to acquire 167,703 shares of Star Common stock granted under the Star Systems, Inc. 2000 Equity Incentive Plan, as amended, were outstanding. These options were converted into options to purchase Company Common Stock, with the number of shares subject to each option and the exercise price adjusted by the 4.6452 exchange ratio. The exchange ratio was determined based upon arm's length negotiations between the Company and Star. In connection with the execution of the Merger Agreement, shareholders of Star owning in the aggregate more than a majority of the outstanding common stock of Star entered into separate voting agreements with the Company to approve the merger. Pursuant to the Merger Agreement, Star's President and Chief Executive Officer, Ronald V. Congemi, was elected to the Board of Directors of the Company. In connection with the closing of the merger, Mr. Congemi was granted options to purchase 200,000 shares of Company Common Stock and E. Miles Kilburn, Star's Executive Vice President and Chief Financial Officer, was granted options to purchase 100,000 shares of Company Common Stock, in each case pursuant to the terms of the Company's 1993 Incentive Stock Option Plan, as amended. In connection with the consummation of the merger, on February 1, 2001 the Company issued a press release. Copies of the Merger Agreement, the form of Stockholder Agreement and the press release issued by the Company on February 1, 2001 are filed as exhibits hereto and are incorporated by reference herein. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. This Form 8-K/A is being submitted to file the audited financial statements of Star Systems, Inc. and to report and file the supplemental financial statements of Concord EFS, Inc. giving retroactive effect to the merger of the Company and Star on February 1, 2001, which has been accounted for as a pooling of interests. (a) Financial Statements of Business Acquired. The Star Systems, Inc. and Subsidiaries Consolidated Financial Statements as of and for the year ended December 31, 2000 and Independent Auditors' Report, attached hereto as Exhibit 99.2, is incorporated herein by reference. (b) Pro Forma Financial Information. The supplemental audited consolidated financial statements and supplementary data as of December 31, 2000 and 1999 and for each of the three years in the period ended December 31, 2000, attached hereto as Exhibit 99.3, is incorporated herein by reference. (c) Exhibits: The following exhibits are filed with this Form 8-K: No. Description of Exhibits 2.1* Agreement and Plan of Merger, dated as of October 6, 2000, by and among the Company, Orion Acquisition Corp. and Star 10.1*Form of Stockholder Agreement (incorporated by reference from Exhibit A to the Merger Agreement attached hereto as Exhibit 2.1) 23.1 Consent of Ernst & Young LLP 23.2 Consent of Deloitte & Touche LLP 23.3 Consent of PricewaterhouseCoopers LLP 23.4 Consent of Arthur Andersen LLP 99.1*Press Release issued by the Company on February 1, 2001. 99.2 Financial Statements of Business Acquired. Star Systems, Inc. and Subsidiaries, Consolidated Financial Statements as of and for the year ended December 31, 2000 and Independent Auditors' Report 99.3 Supplemental Consolidated Financial Statements and Supplemental Management's Discussion and Analysis of Concord EFS, Inc. and Subsidiaries as of December 31, 2000 and 1999 and for each of the three years in the period ended December 31, 2000 and Report of Independent Auditors 99.4 Opinion of Ernst & Young LLP (Concord EFS, Inc. years ended 1998, 1999 and 2000) 99.5 Opinion of Deloitte & Touche LLP (Star Systems, Inc. years ended 1999 and 2000) 99.6 Opinion of PricewaterhouseCoopers LLP (Honor Technologies, Inc. year ended 1998) 99.7 Opinion of Arthur Andersen LLP (Star System, Inc. year ended 1998) * Previously filed. Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. CONCORD EFS, INC. Date: April 16, 2001 By: /s/ Thomas J. Dowling Thomas J. Dowling Senior Vice President Exhibit Index The following is a list of the Exhibits filed herewith. Ex No. Description of Exhibit 2.1* Agreement and Plan of Merger, dated as of October 6, 2000, by and among the Company, Orion Acquisition Corp. and Star 10.1*Form of Stockholder Agreement (incorporated by reference from Exhibit A to the Merger Agreement attached hereto as Exhibit 2.1) 23.1 Consent of Ernst & Young LLP 23.2 Consent of Deloitte & Touche LLP 23.3 Consent of PricewaterhouseCoopers LLP 23.4 Consent of Arthur Andersen LLP 99.1*Press Release issued by the Company on February 1, 2001 99.2 Financial Statements of Business Acquired. Star Systems, Inc. and Subsidiaries Consolidated Financial Statements as of and for the year ended December 31, 2000 and Independent Auditors Report 99.3 Supplemental Consolidated Financial Statements and Supplemental Management's Discussion and Analysis of Concord EFS, Inc. and Subsidiaries as of December 31, 2000 and 1999 and for each of the three years in the period ended December 31, 2000 and Report of Independent Auditors 99.4 Opinion of Ernst & Young LLP (Concord EFS, Inc. years ended 1998, 1999 and 2000) 99.5 Opinion of Deloitte & Touche LLP (Star Systems, Inc. years ended 1999 and 2000) 99.6 Opinion of PricewaterhouseCoopers LLP (Honor Technologies, Inc. year ended 1998) 99.7 Opinion of Arthur Andersen LLP (Star System, Inc. year ended 1998) * Previously filed. EX-23.1 2 0002.txt CONSENT OF ERNST & YOUNG LLP Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-3 No. 333-62069; 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 April, 4, 2001, with respect to the supplemental consolidated financial statements of Concord EFS, Inc. and subsidiaries included as Exhibit 99.3 in its Current Report on Form 8-K/A dated April 16, 2001, filed with the Securities and Exchange Commision. /s/Ernst & Young LLP Memphis, Tennessee April 11, 2001. EX-23.2 3 0003.txt CONSENT OF DELOITTE & TOUCHE LLP Exhibit 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-62069 on Form S-3 and Registration Statement Nos. 033-60871, 333-74213, 333-74215, and 333-56066 on Form S-8 of Concord EFS, Inc. of our report dated March 2, 2001 (relating to the 1999 and 2000 consolidated financial statements of Star Systems, Inc. not presented separately in Exhibit 99.3) appearing in this Form 8-K/A. /s/DELOITTE & TOUCHE LLP Certified Public Accountants Orlando, Florida April 12, 2001 EX-23.3 4 0004.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP Exhibit 23.3 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No.333-62069) and Form S-8 (No's.33-60871, 333-74213, 333-74215, 333-56066) of Concord EFS, Inc. of our report dated April 23, 1999 relating to the financial statements of Honor Technologies, Inc., which appears in the Current Report on Form 8-KA of Concord EFS, Inc. dated April 16, 2001. /s/ PricewaterhouseCoopers LLP Orlando, Florida April 12, 2001 EX-23.4 5 0005.txt CONSENT OF ARTHUR ANDERSEN LLP Exhibit 23.4 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated April 12, 1999, on the financial statements of Star System, Inc. for the year ended December 31, 1998 included as Exhibit 99.7 in Concord EFS, Inc.'s (Concord) current Report 8-K/A dated April 16, 2001 into Concord's previously filed Registration Statements File No 333-62069, 33-60871, 333-74213, 333-74215 and 333-56066. /s/ Arthur Andersen LLP Phoenix, Arizona April 11, 2001 EX-99.2 6 0006.txt STAR CONSOLIDATED FINANCIAL STATEMENTS Exhibit-99.2 STAR SYSTEMS, INC. AND SUBSIDIARIES Consolidated Financial Statements as of and for the Year Ended December 31, 2000 and Independent Auditors' Report STAR SYSTEMS, INC. AND SUBSIDIARIES TABLE OF CONTENTS Page INDEPENDENT AUDITORS' REPORT ................................... 1 FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2000: Consolidated Balance Sheet ................................... 2 Consolidated Statement of Income ............................. 3 Consolidated Statement of Stockholders' Equity ............... 4 Consolidated Statement of Cash Flows ......................... 5 Notes to Consolidated Financial Statements ................... 6 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Star Systems, Inc.: We have audited the accompanying consolidated balance sheet of Star Systems, Inc. and subsidiaries (the Company) as of December 31, 2000, and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2000, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. /s/ DELOITTE & TOUCHE LLP Certified Public Accountants Orlando, Florida March 2, 2001 STAR SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET DECEMBER 31, 2000 ASSETS CURRENT ASSETS: Cash and cash equivalents ................................... $ 43,502,033 Securities available for sale ............................... 21,758,947 Accounts receivable ......................................... 17,881,794 Prepaid expenses and other current assets ................... 2,198,751 Deferred income tax assets .................................. 530,946 -------------- Total current assets ............................... 85,872,471 DEFERRED INCOME TAX ASSETS .................................... 1,431,382 PROPERTY AND EQUIPMENT - Net .................................. 22,450,301 GOODWILL (Net of accumulated amortization of $25,904,435) ..... 96,878,386 OTHER ASSETS .................................................. 3,503,671 -------------- TOTAL ......................................................... $210,136,211 ============== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable ........................................... $ 11,900,923 Income taxes payable ....................................... 307,015 Current portion of capital lease obligations ............... 1,408,675 Current portion of note payable ............................ 3,357,143 Other current liabilities .................................. 9,430,273 -------------- Total current liabilities ......................... 26,404,029 OTHER LIABILITIES ............................................ 2,427,980 CAPITAL LEASE OBLIGATIONS - Less current portion ............. 280,035 NOTE PAYABLE - Less current portion .......................... 10,910,714 -------------- Total liabilities ................................. 40,022,758 COMMITMENTS AND CONTINGENCIES (Note 8) MINORITY INTEREST ............................................ 3,052,144 STOCKHOLDERS' EQUITY: Common stock, Class A voting - $0.01 par value, 6,000,000 shares authorized, 5,160,338 shares issued and outstanding at December 31, 2000 .......... 51,603 Common stock, Class B nonvoting - $0.01 par value, 2,000,000 shares authorized, no shares issued and outstanding at December 31, 2000 ... - Capital in excess of par value ............................. 101,064,190 Retained earnings .......................................... 65,406,260 Accumulated other comprehensive income - net of tax ........ 539,256 -------------- Total stockholders' equity ........................ 167,061,309 -------------- TOTAL ......................................................... $210,136,211 ============== See notes to consolidated financial statements. STAR SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME YEAR ENDED DECEMBER 31, 2000 REVENUES ...................................................... 182,773,701 OPERATING EXPENSES ............................................ 113,087,385 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES .................. 34,710,809 -------------- INCOME FROM OPERATIONS ........................................ 34,975,507 OTHER INCOME (EXPENSE): Interest income ............................................. 3,166,643 Interest expense ............................................ (1,142,253) Gain on sale of securities available for sale and other income (expense) ..................................... 2,044,624 -------------- Total other income (expense) ....................... 4,069,014 -------------- INCOME BEFORE PROVISION FOR INCOME TAXES ...................... 39,044,521 PROVISION FOR INCOME TAXES .................................... 15,996,513 -------------- INCOME BEFORE MINORITY INTEREST ............................... 23,048,008 MINORITY INTEREST IN NET INCOME OF SUBSIDIARY ................. 596,647 -------------- NET INCOME .................................................... $ 22,451,361 ============== See notes to consolidated financial statements. STAR SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY YEAR ENDED DECEMBER 31, 2000 Accumulated Other Capital Comprehensive Total Common in Excess Retained Income, Net Stockholders' Stock of Par Value Earnings of Tax Equity - ------------------------------ ------------ ----------------- ---------------- ----------------- -------------- BALANCE, JANUARY 1, 2000 $ 51,603 $ 101,064,190 $ 42,954,899 $ - $ 144,070,692 Net income 22,451,361 22,451,361 Other comprehensive income: Unrealized gain on securities available for sale - net of income tax effect of $374,738 539,256 539,256 Comprehensive income 22,990,617 - ------------------------------ ------------ ----------------- ---------------- ----------------- -------------- BALANCE, DECEMBER 31, 2000 $ 51,603 $ 101,064,190 $ 65,406,260 $ 539,256 $ 167,061,309 ============================== ============ ================= ================ ================= ==============
See notes to consolidated financial statements. STAR SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 2000 CASH FLOWS FROM OPERATING ACTIVITIES: Net income ................................................ $ 22,451,361 Adjustments to reconcile net income to net cash provided by operating activities: Minority interest in net income of subsidiary ........... 596,647 Depreciation and amortization ........................... 18,708,487 Loss on termination of lease ............................ 1,772,252 Gain on sale of securities available for sale ........... (2,179,111) Change in operating assets and liabilities - net of effect of consolidation of Primary Payment Systems, Inc. beginning in 1999: Accounts receivable ................................. (391,028) Prepaid expenses and other current assets ........... (927,937) Deferred income tax assets .......................... (248,189) Other assets ........................................ (852,909) Accounts payable and other current liabilities ...... 490,218 Income taxes payable ................................ (2,918,147) Other liabilities ................................... (999,774) -------------- Net cash provided by operating activities ........ 35,501,870 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment ........................ (10,931,033) Purchase of available for sale securities ................. (47,612,722) Proceeds from the sale of securities available for sale ... 29,694,279 Purchase of additional Primary Payment Systems, Inc. shares (3,150,000) -------------- Net cash used in investing activities ............ (31,999,476) CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on obligations under capital leases .... (2,873,854) Principal payments on notes payable ....................... (3,357,143) Dividends paid ............................................ (2,901,000) -------------- Net cash used in financing activities ............ (9,131,997) -------------- CHANGE IN CASH AND CASH EQUIVALENTS ......................... (5,629,603) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ................ 49,131,636 -------------- CASH AND CASH EQUIVALENTS, END OF YEAR ...................... $ 43,502,033 ============== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest ................................................ $ 1,160,820 Income taxes ............................................ $ 18,885,797 SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Additions to equipment included in accounts payable ..... $ 2,197,000 See notes to consolidated financial statements. STAR SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2000 1. ORGANIZATION AND NATURE OF BUSINESS The Company Star Systems, Inc. and subsidiaries (the Company or Star) are primarily engaged in operating a shared electronic funds transfer network serving financial institutions. Star Systems, Inc.'s subsidiaries include Star Systems, LLC (SSLLC), Star Systems Holdings, Inc. (SSH), Star Systems Assets, Inc. (SSA), and Star Networks, Inc. (SNI). At December 31, 2000, Star also owns approximately 67% of Primary Payment Systems, Inc. (PPS), which operates an accelerated check verification service. The Company has Class A and Class B stock. The Company is authorized to issue 6 million and 2 million Class A and Class B shares, respectively. No stockholder may own more than 19% of the authorized number of Class A stock, except with respect to capital stock acquired by a stockholder as a result of a consolidation. In the event a stockholder owns excess Class A stock, it will be automatically converted to Class B stock, which has no voting rights. The stockholders are comprised of 49 financial institutions. Business Restructuring Effective January 1, 2000, the Company underwent an internal business restructuring. Prior to the restructuring, Star Systems, Inc.'s subsidiaries included Star Payment Systems, Inc. (SPSI), Star Technologies West LLC, Star Networks, Inc., and Star System Services, Inc. SPSI owned 52% of PPS. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of Star Systems, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated. The Company has included PPS in the consolidated financial statements in 2000. On February 29, 2000, the Company purchased for $3,150,000 additional shares of PPS from an existing stockholder to increase its ownership from 52% to 67% and, accordingly, recorded approximately $3,006,000 in goodwill, representing the excess of the amount paid over the fair value of equity in the net assets acquired, to be amortized over 20 years. Cash and Cash Equivalents Cash equivalents represent highly liquid investments with original maturities of three months or less. Cash equivalents, which amounted to approximately $17,000,000 at December 31, 2000, consist primarily of money market funds which invest in commercial paper, repurchase agreements and instruments of domestic and foreign banks and savings and loans. All cash is held at stockholder institutions. Securities Available for Sale Debt and equity securities are classified as available for sale based upon the intent and ability of the Company. Securities available for sale are recorded at fair value with net unrealized gains and losses reported in stockholders' equity as an element of other comprehensive income. Gain or loss on the sale of securities is based on the specific identification method. Premiums and discounts on all securities are amortized to expense and accredited to income over the life of the securities using the effective interest method. Property and Equipment Property and equipment includes computer equipment, furniture and equipment, and leasehold improvements and is stated at cost. Depreciation is computed on the straight-line method over the estimated useful lives, ranging from three to five years. The cost of the development of internal-use computer software during the application development stage is capitalized and amortized on a straight-line basis over three to five years. STAR SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2000 Goodwill and Other Intangible Assets Goodwill, representing the excess of cost over the fair value of net assets acquired, is being amortized on a straight-line basis over 10 to 20 years. Other intangible assets include licenses, signage costs, and certain data conversion costs. Signage costs are paid to member financial institutions and are amortized over five years. Costs to obtain software that allow for access and conversion of old data by the Company's systems, as well as related telecommunications equipment, are capitalized as conversion costs and amortized over five years. Revenue Recognition Annual membership and processor fees are charged to participating institutions annually and amortized on a straight-line basis over the annual period. Transaction fees and ATM terminal driving revenues are charged to participating institutions and are recognized as revenue in the period of service. Card services fees relating to the embossing and encoding of ATM, credit and debit cards and other miscellaneous services are recognized as revenue as services are performed. Revenues from accelerated check verification services are recognized based upon the extent of usage of the database during a period by participating financial institutions and check acceptance companies. Advertising Advertising is expensed as incurred and totaled approximately $10,264,694 during 2000. Income Taxes The Company uses the asset and liability method to measure and record deferred income tax assets and liabilities. Deferred income tax assets and liabilities reflect the future income tax effects of temporary differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and are measured using enacted tax rates that apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred income tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Comprehensive Income In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (Statement 130), effective for fiscal years beginning after December 15, 1997. Statement 130 established standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. Comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners and is presented in the statements of stockholders' equity. During 2000, the Company invested in securities classified as available for sale. Unrealized gains and losses on securities available for sale are elements of other comprehensive income as defined by Statement 130. Accordingly, net unrealized gains, net of income taxes, as of December 31, 2000 on the Company's available for sale securities portfolio are presented with net income for the year ended December 31, 2000 in the accompanying consolidated statement of stockholders' equity as comprehensive income for the year ended December 31, 2000. STAR SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2000 Stock-Based Compensation Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (Statement 123), requires disclosure of stock-based compensation arrangements and encourages (but does not require) compensation cost to be measured based on the fair value of the equity instrument awarded. Companies are permitted to apply Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), which recognizes compensation cost based on the intrinsic value of the equity instrument awarded. The Company applies APB 25 to account for its stock-based employee compensation awards. (See Note 10 for the effect on net income if the Company had applied the fair value method as prescribed by Statement 123.) Impairment of Long-Lived Assets Long-lived assets, including property and equipment and certain intangible assets to be held and used by the Company, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Impairment losses are recognized if expected discounted future cash flows of the related assets are less than their carrying values. Measurement of an impairment loss is based on the fair value of the asset. Long-lived assets and certain identifiable intangibles to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. During a review of the Company's assets for potential impairment in 2000, management determined that capitalized signage costs and certain deferred data conversion costs were impaired as a result of internal changes in the business. Amounts charged to earnings and included in amortization of intangibles for the year ended December 31, 2000 were approximately $930,000 and $1,680,000 for signage costs and certain data conversion costs, respectively. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. Concentrations of Credit Risk Financial instruments which potentially expose the Company to concentrations of credit risk consist principally of temporary cash investments. The Company's policy is to place its temporary cash investments with high credit quality financial institutions. The Company's temporary cash investments consist of bank deposits and money-market funds. Derivatives Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (Statement 133), is effective for all fiscal years beginning after June 15, 2000. Statement 133, as amended and interpreted, established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. All derivatives, whether designated in hedging relationships or not, will be required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair-value hedge, the changes in the fair value of the derivative and the hedged item will be recognized in earnings. If the derivative is designated as a cash-flow hedge, changes in the fair value of the derivative will be recorded on other comprehensive income and will be recognized in the consolidated statements of income when the hedged item affects earnings. Statement 133 defines new requirements for designation and STAR SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2000 Derivatives, continued documentation of hedging relationships, as well as ongoing effectiveness assessments in order to use hedge accounting. For a derivative that does not qualify as a hedge, changes in fair value will be recognized in earnings. Management has completed its evaluation of the various issues related to Statement 133, including performing an inventory of derivative and embedded derivative instruments and has identified an interest rate swap, which is considered a derivative instrument as defined by Statement 133, as of January 1, 2001. No other derivative instruments, as defined by Statement 133, were identified by the Company. When the Company adopted Statement 133, as amended, on January 1, 2001, the effect was not material to the Company's consolidated financial position or results of operations. Fair Value of Financial Instruments The Company's financial instruments include cash and cash equivalents, investments, accounts receivable, accounts payable, and notes payable to banks. Investments are carried at fair value. The carrying amount of notes payable to banks approximates fair value based on interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities. The carrying amounts of other financial instruments approximate their fair value because of their short-term maturities. 3. SECURITIES AVAILABLE FOR SALE Securities available for sale at December 31, 2000 are summarized as follows: Cost or Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------------------------------------------------- Equity securities $ 2,215,244 $ 885,573 $ 375,061 $ 2,725,756 Corporate bonds 4,482,381 131,573 - 4,613,954 Government bonds 13,127,628 254,677 - 13,382,305 Mortgage-backed securities 1,019,700 17,232 - 1,036,932 ------------------------------------------------------- Debt securities 18,629,709 403,482 - 19,033,191 ------------------------------------------------------- Total securities $20,844,953 $ 1,289,055 $ 375,061 $21,758,947 ======================================================= Equity Securities Equity securities include securities that are restricted as to their sale until September 2001. The fair value of these securities is approximately $545,000 at December 31, 2000. In September 2000, the Company sold its investment in Card Alert Services (CAS) in exchange for common stock of an unrelated company resulting in a gain on the sale of approximately $1,460,000, which is included within other income in the accompanying consolidated statement of income for the year ended December 31, 2000. The common stock received in the transaction is included with securities available for sale in the accompanying consolidated balance sheet as of December 31, 2000. STAR SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2000 Corporate and Government Bonds and Mortgage-Backed Securities The amortized cost and estimated fair value of debt securities available for sale at December 31, 2000, by contractual maturity, are shown below. The entire principal amount of mortgage-backed and related securities is shown in the year of contractual maturity. Expected maturities will differ from the maturities shown because borrowers have the right to call or prepay obligations with or without call or prepayment penalties, and principal is paid down over the contractual life of mortgage-backed and related securities. Amortized Estimated Available for Sale Cost Fair Value ------------- ------------- Due less than five years $ - $ - Due after five years through ten years 5,710,284 5,804,169 Due after ten years 12,919,425 13,229,022 ------------- ------------- Total $18,629,709 $19,033,191 ============= ============= During the year ended December 31, 2000, proceeds from sales of securities available for sale were $29,694,279, and these sales resulted in gross realized gains of $740,926 and losses of $26,825. 4. PROPERTY AND EQUIPMENT Property and equipment consist of the following at December 31, 2000: Computer hardware $ 18,978,833 Computer software 12,497,182 Furniture and equipment 11,782,015 Leasehold improvements 4,402,900 Card services equipment 1,031,419 Other fixed assets 7,872,360 -------------- 56,564,709 Accumulated depreciation (34,114,408) -------------- $ 22,450,301 ============== Computer hardware at December 31, 2000 includes approximately $8,900,000 held under capital leases. Accumulated depreciation related to such assets at December 31, 2000 was approximately $8,400,000. 5. OTHER CURRENT LIABILITIES Other current liabilities consist of the following at December 31, 2000: Accrued salary and related accruals $5,867,335 Accrued professional fees 209,896 Accrued market research 449,750 Accrual for signage reimbursement 220,418 Accrual for lease termination 1,780,625 Other 902,249 ------------- $ 9,430,273 ============= STAR SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2000 6. NOTE PAYABLE Note payable consists of the following at December 31, 2000: Promissory note payable, interest payable at LIBOR (6.85% at December 31, 2000), plus 0.50%, maturing on March 15, 2003. Collateralized by a security interest in all former HTI member contracts. Original balance of the loan was $23,500,000 and repayable in monthly installments with a final principal payment on March 15, 2003. $ 14,267,857 Current portion (3,357,143) -------------- $ 10,910,714 ============== Aggregate principal payments for the years subsequent to December 31, 2000, are as follows: 2001 $ 3,357,143 2002 3,357,143 2003 7,553,571 ------------- $14,267,857 ============= The Company entered into an interest rate swap agreement in connection with the promissory note payable. The swap agreement effectively converts this note from floating-rate debt to fixed-rate debt with interest at 6.38%. The differential in the rates is recorded as an adjustment to interest expense. On February 22, 2000, the agreement was amended. As a result of the amendment, the maturity date was changed from March 15, 2003 to March 15, 2002, and the fixed rate under the swap agreement was reduced from 6.38% to 6.15% for the period commencing February 15, 2000 through the maturity date. The estimated fair value of the swap agreement was a loss of $24,370 as of December 31, 2000. The note payable and accrued interest were paid in full through funds advanced from Concord EFS, Inc. (see Note 12), and the interest rate swap was terminated, on February 1, 2001. 7. INCOME TAXES The provision for income taxes for the year ended December 31, 2000 is as follows: Current: Federal $ 14,915,313 State 1,329,389 -------------- 16,244,702 Deferred: Federal (371,490) State 123,301 -------------- (248,189) -------------- $ 15,996,513 ============== STAR SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2000 7. INCOME TAXES, continued For the year ended December 31, 2000, the Company's provision for income taxes differed from the amount computed by applying the statutory federal income tax rate as follows: Federal statutory rate $ 13,665,582 State income taxes (net of federal income tax benefit) 944,248 Amortization of goodwill 1,510,765 Other - net (124,082) -------------- Provision for income taxes $ 15,996,513 ============== Deferred income taxes arise from temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. A summary of the components of deferred income tax assets at December 31, 2000 is as follows: Current: Marketing accrual $ 171,265 Accrued vacation 182,348 Other accrued liabilities 78,254 Deferred rent 233,694 State taxes (197,855) Other 63,240 ------------- Total current $ 530,946 ============= Noncurrent: Deferred compensation $ 902,585 Depreciation and amortization 662,468 Merger costs 124,068 Other accrued liabilities 674,874 Unrealized gain on securities available for sale (374,738) Investments (557,875) ------------- Total noncurrent $ 1,431,382 ============= STAR SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2000 8. COMMITMENTS Operating Leases The Company leases various facilities and equipment under noncancelable operating lease agreements. Total rent expense under these operating leases amounted to approximately $3,000,000 for the year ended December 31, 2000. Future minimum lease payments under operating leases with initial or remaining noncancelable lease terms in excess of one year at December 31, 2000 are as follows: Year 2001 $ 5,000,037 2002 5,399,343 2003 3,494,886 2004 2,300,078 2005 2,283,240 Thereafter 13,824,549 ----------- Total $32,302,133 =========== In July 2000, the Company committed to enter into a new operating lease for new office space to house its corporate offices and Florida data center. At the same time, the Company notified lessors of its intention to early terminate existing leases effective August 2001. The total loss related to the early termination is approximately $1,952,000. Approximately $1,772,000 of the loss termination has been accrued as of December 31, 2000, with the charge included in occupancy costs in the accompanying consolidated statement of income. The remaining portion of the loss will be recognized during 2001 prior to the actual lease terminations. Capital Lease Obligations The Company leases certain computer hardware under capital leases. At December 31, 2000, future minimum lease payments due under these capital leases are as follows: Year 2001 $ 1,475,103 2002 290,197 ------------- Total minimum lease payments 1,765,300 Amount representing interest (76,590) ------------- Present value of minimum lease payments 1,688,710 Current portion of capital lease obligations (1,408,675) ------------- Capital lease obligations $ 280,035 ============= STAR SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2000 Software Licenses The Company licenses a portion of its computer software under various noncancelable agreements, which expire on various dates through 2002. Software license expense under these agreements totaled approximately $4,606,000 during 2000. Future minimum payments under software license agreements with initial or remaining noncancelable terms in excess of one year at December 31, 2000 are as follows: Year 2001 $1,236,358 2002 851,885 2003 675,080 2004 675,080 2005 761,066 Thereafter 337,540 ------------ $4,537,009 ============ The Company is party to a regional switch services agreement with eFunds, Inc. (eFunds). Under the terms of the agreement, eFunds provides switch operations, direct link, and certain other computer processing and support services needed by SPSI for the communication and settlement of electronic funds transfers initiated at automated teller machines and point-of-sale devices. The agreement was renewed on December 31, 2000 for two years with an automatic renewal on December 31, 2002 for two years if all parties do not object at least 180 days before expiration; however, either party may terminate the agreement in the event of default, upon 60 days written notice. SPSI pays eFunds various monthly and transaction fees and expenses as specified in the agreement. Total fees and expenses under this agreement were approximately $24,669,000 for the year ended December 31, 2000. Employment and Consulting Agreements The Company has employment agreements with certain members of executive management through March 2002. The employment agreements provide that the employees receive stipulated amounts of annual compensation and, under certain circumstances, provide for additional incentive compensation. The Company entered into a consulting agreement with a former employee of the Company on March 1, 1999, which provides for annual payments of $75,000 through March 1, 2001. 9. RETIREMENT PLANS Defined Contribution Plan The Company maintains one defined contribution plan (the Plan). Employees of the Company are eligible to become participants in the Plan upon completion of three months employment and upon attaining the age of twenty-one and one-half years. Participation in the Plan is voluntary. The Company matches 200% of the employee's contribution, up to 6% of eligible compensation. Company contributions vest ratably over two years if 1000 hours of service is achieved each year. Total Company contributions to the Plan were approximately $3,524,000 for the year ended December 31, 2000. Money Purchase Plan The Company maintained a defined contribution money purchase plan (the Purchase Plan) covering substantially all SSI, SNI, and SSLLC employees located in San Diego and PPS employees. The Company matched an amount equal to 6% of Participants' compensation. In 2000, the Company contributed approximately $114,000 to the Purchase Plan. This plan was terminated effective September 30, 2000. All funds in the Purchase Plan were transferred to the Defined Contribution Plan. STAR SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2000 Nonqualified Deferred Compensation Plan The Company established a nonqualified deferred compensation plan, effective January 1, 2000, for the purpose of providing deferred compensation to a select group of management or highly compensated employees. Participation in the plan is at the discretion of the Company. A participant may elect to defer up to 50% of the participant's compensation excluding bonus, and up to 100% of the participant's bonus related to current year services. Company contributions are at the discretion of the Company and vest ratably over two years if 500 hours of service is achieved each year. As of December 31, 2000, the balance in this account was approximately $295,000 and is included in cash and cash equivalents and other liabilities. The Company did not elect to make a contribution for the year ended December 31, 2000. Deferred Compensation Trust In October 1998, the Company established a deferred compensation trust for the purchase of a $980,000 annuity to provide a supplemental retirement benefit to HTI's President and Chief Executive Officer (the Participant). Certain stockholders made capital contributions to the Company totaling $824,000 to partially fund the retirement account. The remaining balance was funded by the Company. As of December 31, 2000, the balance of this retirement account, plus accrued interest, totaled approximately $1,545,000 and is included with other assets and other liabilities in the accompanying consolidated balance sheets. 10. EQUITY INCENTIVE PLAN On January 1, 2000, the Company established the 2000 Equity Incentive Plan (the Plan) to foster and promote the long-term financial success of the Company by awarding equity incentives to those individuals who make substantial contributions to the Company as determined by the Board of Directors (the Board). Directors, consultants, advisors, officers and employees of the Company can be awarded options at the discretion of the Board for the purchase of common stock of the Company. As defined within the Plan, the option price shall be determined by the Board, but in no event be less than the fair market value of the shares of common stock subject to the stock option on the date the stock option is granted. In addition, the options can vest over a period not to exceed five years and have a termination date not to exceed ten years after the effective date of grant. These periods are to be determined by the Board upon each option grant. All options granted fully vest upon a change in control of the Company. Upon the execution of the Plan, 258,000 shares of common stock were reserved for issuance under the Plan. Effective January 1, 2000, the Board granted options to acquire an aggregate of 167,703 common shares of common stock at an exercise price of $47.42, which approximated the fair value of each outstanding share at the time of grant. No compensation expense was recognized in 2000 related to the granting of the stock options. The options granted were scheduled to vest ratably over a four-year period and are scheduled to terminate on the tenth anniversary of the date of grant. No options were exercised or terminated in 2000. At December 31, 2000, a total of 90,297 shares of the Company's common stock were available for future grants of stock options. On September 14, 2000, all of the options issued under the Plan became fully vested upon the Board's approval of a proposed change of control of the Company (see Note12). STAR SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2000 Pro forma information regarding net income is required by Statement 123 and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using the following assumptions: Risk-free interest rate 6.5 % Expected life 4 yrs Dividend yield 0 % Volatility 0 % For purposes of pro forma disclosures, the estimated fair value of the options was charged to expense since all options fully vested during the year ended December 31, 2000. If the Company had applied the fair value method in accounting for its stock options granted during the year ended December 31, 2000, net income would have been approximately $20,661,000. 11. TRANSACTIONS WITH RELATED PARTIES A significant portion of the transactions handled by the Company are with its stockholder institutions. During the year ended December 31, 2000, approximately $84,000,000 of transaction and other fees were earned from these institutions. Accounts receivable at December 31, 2000 include approximately $8,000,000 from these institutions relating to amounts billed for various fees and other services. 12. MERGER WITH CONCORD EFS, INC. On September 14, 2000 and November 20, 2000, the Board of Directors and the Company's stockholders, respectively, approved an agreement and Plan of Merger (the Agreement) with Concord EFS, Inc. (Concord). Under the Agreement, each share of Star common stock and each stock option was converted into 4.6452 shares of Concord stock. The merger, which was effective on February 1, 2001, is expected to be accounted for as a pooling of interests. EX-99.3 7 0007.txt SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS Exhibit-99.3 SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS Supplemental Selected Consolidated Financial Data 1 Supplemental Management's Discussion and Analysis of Financial Condition and Results of Operations 3 Supplemental Consolidated Balance Sheets as of December 31, 2000 and 1999 13 Supplemental Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998 14 Supplemental Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998 15 Supplemental Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 16 Notes to Supplemental Consolidated Financial Statements 17 Report of Independent Auditors Exhibit 99.6 CONCORD EFS, INC AND SUBSIDIARIES SUPPLEMENTAL SELECTED CONSOLIDATED FINANCIAL DATA The following supplemental consolidated selected financial data (in thousands, except per share data) should be read in conjunction with the supplemental consolidated financial statements and notes contained in this document. Year ended December 31 INCOME STATEMENT DATA 2000 1999 1998 1997 1996 Revenue $1,407,140 $1,060,010 $812,824 $622,573 $436,371 Cost of Operations 1,009,954 735,467 552,469 421,969 288,401 Selling, General and Administrative Expenses 91,995 92,334 90,936 87,257 67,925 Acquisition and Restructuring Charges 11,691 36,189 - - - Operating Income 293,500 196,020 169,419 113,347 80,045 Interest Income (Expense), Net 37,243 16,251 2,604 (1,688) (10,087) Equity in Earnings (Loss) of Subsidiary - - 281 (165) (394) Income Taxes 120,220 82,906 65,709 45,081 26,970 Minority Interest in Subsidiary 597 124 - - - Net Income 209,926 129,241 106,595 66,413 42,594 Basic Earnings per Share $0.88 $0.56 $0.48 $0.30 $0.21 Diluted Earnings per Share $0.85 $0.54 $0.46 $0.29 $0.20 Basic Shares 239,179 231,843 224,235 222,584 207,133 Diluted Shares 247,997 239,867 231,396 228,381 213,759 BALANCE SHEET DATA Working Capital $ 754,999 $ 525,272 $296,137 $159,002 $ 75,235 Total Assets 1,761,665 1,305,495 968,745 798,700 600,698 Long-Term Debt, Less Current Maturities 109,911 89,268 190,625 174,711 152,161 Total Stockholders' Equity 1,132,531 855,421 493,248 376,354 202,062
Change Percentage of Revenue 2000 1999 Year ended December 31 over over INCOME STATEMENT DATA 2000 1999 1998 1999 1998 Revenue 100.0% 100.0% 100.0% 32.7% 30.4% Cost of Operations 71.8 69.4 68.0 37.3 33.1 Selling, General and Administrative Expenses 6.4 8.7 11.2 (0.4) 1.5 Acquisition and Restructuring Charges 0.9 3.4 - (67.7) - Operating Income 20.9 18.5 20.8 49.7 15.7 Interest Income (Expense), Net 2.6 1.5 0.3 129.2 524.1 Equity in Earnings of Subsidiary - - 0.1 - (100.0) Income Taxes 8.6 7.8 8.1 45.0 26.2 Minority Interest in Subsidiary 0.0 0.0 - - - Net Income 14.9% 12.2% 13.1% 62.4% 21.2%
-1- CONCORD EFS, INC AND SUBSIDIARIES SUPPLEMENTAL SELECTED CONSOLIDATED FINANCIAL DATA - Continued 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. -2- CONCORD EFS, INC AND SUBSIDIARIES SUPPLEMENTAL MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS December 31, 2000 You should read the following discussion together with our supplemental consolidated financial statements and the notes to the supplemental financial statements which are included in this report. These supplemental consolidated financial statements contain 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 nationwide 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 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). -3- 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. 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. 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. Our debit network which is comprised of our MAC, Cash Station, and STAR networks, now 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. We believe that this national network of cards and terminals provides the critical mass necessary to bring new products to the financial services industry, including person-to-person payments, check electronification, and secure debit payment on the Internet. The acquisition of STAR is a significant event for Concord which will have a material effect on our future earnings. In connection with the STAR acquisition and its related integration into Concord, we anticipate recording acquisition and restructuring charges, net of tax, between $75 million and $90 million related to STAR. As a result of the STAR and Cash Station 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. 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. -4- Restatement of Historical Financial Information The supplemental financial information presented below and elsewhere in this report has been restated for the results of STAR in accordance with the pooling of interests method of accounting for business combinations. The supplemental financial information includes the financial position, operating results, and cash flows of STAR for all periods presented. Components of Revenue and Expenses The majority of our revenue (62.8% in 2000 and 60.9% in 1999) is generated from fee income related to Payment Services. Revenue from Payment Services primarily includes 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 balance 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 (37.2% in 2000 and 39.1% 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. The following table is a listing of revenue by segment for the periods indicated: Year ended December 31 2000 1999 1998 ------------------------------------------ (in millions) Payment Services $ 883.9 $ 645.5 $ 478.9 Network Services 523.2 414.5 333.9 ---------- ---------- ---------- Total $1,407.1 $1,060.0 $ 812.8 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. -5- The following table lists cost of operations by segment for the periods indicated: Year ended December 31 2000 1999 1998 ------------------------------------------ (in millions) Payment Services $ 705.1 $ 487.6 $ 357.6 Network Services 304.9 247.9 194.9 ---------- ---------- ---------- Total $1,010.0 $ 735.5 $ 552.5 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. Results of Operations The following table shows, for the periods indicated, the percent of revenue represented by certain items on our supplemental consolidated statements of income: Year ended December 31 2000 1999 1998 ---------------------------------- Revenue 100.0% 100.0% 100.0% Cost of operations 71.8 69.4 68.0 Selling, general and administrative expenses 6.4 8.7 11.2 Acquisition and restructuring charges 0.9 3.4 - -------- -------- -------- Operating income 20.9 18.5 20.8 Interest income, net 2.6 1.5 0.3 Equity in earnings of subsidiary - - 0.1 -------- -------- -------- Income before taxes 23.5 20.0 21.2 Income taxes 8.6 7.8 8.1 -------- -------- -------- Net income 14.9% 12.2% 13.1% ======== ======== ======== Calendar 2000 Compared to Calendar 1999 Revenue increased 32.7% to $1,407.1 million in 2000 from $1,060.0 million in 1999. In 2000 Payment Services accounted for 62.8% of revenue, and Network Services accounted for 37.2%. Revenue from Payment Services increased 36.9%, 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 26.2% 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. -6- Cost of operations increased in 2000 to 71.8% of revenue compared to 69.4% 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. Selling, general and administrative expenses decreased, as a percent of revenue, to 6.4% in 2000 from 8.7% in 1999. Within selling, general and administrative expenses, increases in salaries and wages were offset by lower legal and other expenses. 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 21.9% 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 $0.038 per transaction in 2000 from $0.035 per transaction in 1999, an increase of 8.6% 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 2.6% in 2000 compared to 1.5% 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 17.2% 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 63.6% over 1999. Our overall tax rate decreased to 36.3% in 2000 from 39.1% in 1999. Excluding the one-time acquisition charges and related tax component write-off, the tax rate was 36.2% in 2000 compared to 36.7% in 1999. Net income, as a percent of revenue, increased to 14.9% in 2000 from 12.2% 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 15.5% in 2000 compared to 14.8% in 1999. -7- Calendar 1999 Compared to Calendar 1998 Revenue increased 30.4% to $1,060.0 million in 1999 from $812.8 million in 1998. In 1999 Payment Services accounted for 60.9% of revenue, and Network Services accounted for 39.1%. Revenue from Payment Services increased 34.8%, 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 24.1% 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 69.4% of revenue compared to 68.0% 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 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 8.7% in 1999 from 11.2% in 1998. Although these expenses were up on an absolute basis as a result of increases in salaries and wages, they were 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. 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. -8- 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 21.9% in 1999 from 20.8% in 1998 due to declines in selling, general and administrative expenses. Operating income increased on a per transaction basis to $0.035 per transaction in 1999 from $0.031 per transaction in 1998, an improvement of 12.9% 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 1.5% in 1999 compared to 0.3% in 1998. This improvement resulted primarily from two factors. Interest income increased by 47.4% 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-term and short-term debt by $146.1 million with proceeds from the same offering, producing a 24.0% decrease in interest expense in 1999 compared to 1998. Our overall tax rate increased to 39.1% in 1999 from 38.1% 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 36.7% in 1999 from 38.1% in 1998. Net income, as a percent of revenue, decreased in 1999 to 12.2% from 13.1% 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 14.8% in 1999 compared to 13.1% 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 $333.5 million, $236.9 million, and $193.8 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 -9- 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 $171.5 million, $191.4 million, and $88.0 million, respectively, in securities avaialable for sale, net of sales and maturities. We also invested $87.1 million, $67.6 million, and $70.7 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 22.9 million stock options outstanding, approximately 41.8% 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 Home Loan Bank (FHLB). In addition to these advances, notes payable of $14.3 were outstanding. We hold securities with a market value of approximately $649.4 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 FHLB advances. Net loans made by our bank subsidiaries as of December 31, 2000 and 1999 were $78.7 million and $30.9 million, respectively. Since 1998, Concord has made several strategic acquisitions. Our February 2001 acquisition of the STAR network is an example of our practice of using our stock to make these acquisitions. Any future acquisitions may involve the issuance of our stock. If additional acquisitions are made, Concord may incur acquisition costs and restructuring charges in connection with combining operations as in the case of STAR, Cash Station, and Electronic Payment Services. We believe that our available credit and cash generated by operations are adequate to meet our capital and operating needs. -10- 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. 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 82.6% 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 below 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 millions) Assets: Securities available for sale $36.7 $20.0 $41.5 $24.5 $13.0 $577.1 $712.8 $625.6 Average interest rate 6.3% 6.4% 6.4% 6.5% 5.0% 6.6% Loans $6.6 $3.2 $1.4 $0.6 $1.3 $66.5 $79.6 $73.9 Average interest rate 9.6% 9.9% 6.4% 10.5% 8.8% 8.1% Liabilities: Deposits $106.8 $10.2 $6.2 $0.8 $1.8 - $125.8 $126.1 Average interest rate 4.9% 6.6% 6.8% 6.4% 6.8% Long-term debt $3.4 $3.4 $17.5 - - $89.0 $113.3 $111.1 Average interest rate 6.2% 6.2% 5.8% 5.6%
-11- December 31, 1999 2000 2001 2002 2003 2004 Thereafter Total Fair Value ----------------------------------------------------------------------------- (in millions) Assets: Securities available for sale $71.8 $38.9 $32.5 $22.2 $25.0 $290.7 $481.1 $447.4 Average interest rate 6.6% 6.7% 6.7% 6.2% 6.4% 5.9% Loans $6.3 $0.5 $0.1 $1.8 $0.7 $22.0 $31.4 $ 30.1 Average interest rate 7.6% 8.0% 9.4% 6.7% 10.3% 7.7% Liabilities: Deposits $90.9 $6.5 $2.6 $0.2 $0.3 - $100.5 $100.6 Average interest rate 4.2% 5.7% 5.6% 5.3% 5.8% Long-term debt $3.4 $3.4 $21.3 $17.5 - $47.0 $92.6 $ 89.8 Average interest rate 6.4% 6.4% 6.1% 5.9% 5.4%
-12- CONCORD EFS, INC AND SUBSIDIARIES Supplemental Consolidated Balance Sheets December 31 2000 1999 --------------------------- (in thousands) Assets Current assets Cash and cash equivalents $ 231,762 $ 173,099 Securities available for sale 649,425 458,201 Accounts receivable, net 307,756 181,452 Inventories 15,087 18,076 Prepaid expenses and other current assets 22,125 12,844 Deferred income taxes 6,732 9,888 ------------ ------------ Total current assets 1,232,887 853,560 Loans, net 78,654 30,922 Property and equipment, net 214,662 186,567 Goodwill, net 150,049 154,411 Other intangible assets, net 75,644 57,186 Other assets 9,769 22,849 ------------ ------------ Total assets $1,761,665 $1,305,495 ============ ============ Liabilities and stockholders' equity Current liabilities Accounts payable and other liabilities $ 296,980 $ 144,701 Deposits 125,834 100,475 Accrued liabilities 51,717 59,939 Income taxes payable - 19,816 Current maturities of long-term debt 3,357 3,357 ------------ ------------ Total current liabilities 477,888 328,288 Long-term debt 109,911 89,268 Deferred income taxes 31,871 15,131 Other liabilities 6,412 14,785 ------------ ------------ Total liabilities 626,082 447,472 ------------ ------------ Commitments and contingent liabilities - - Minority interest in subsidiary 3,052 2,602 ------------ ------------ Stockholders' equity Common stock, $0.33 1/3 par value; authorized 500,000 shares, issued and outstanding 241,457 at December 31, 2000 and 238,579 at December 31, 1999 80,485 79,526 Additional paid-in capital 429,578 373,965 Retained earnings 623,944 414,462 Accumulated other comprehensive loss (1,476) (12,532) ------------ ------------ Total stockholders' equity 1,132,531 855,421 ------------ ------------ Total liabilities and stockholders' equity $1,761,665 $1,305,495 ============ ============ See Notes to Supplemental Consolidated Financial Statements. -13- CONCORD EFS, INC AND SUBSIDIARIES Supplemental Consolidated Statements of Income Year ended December 31 2000 1999 1998 -------------------------------------------- (in thousands, except per share data) Revenue $1,407,140 $1,060,010 $ 812,824 Cost of operations 1,009,954 735,467 552,469 Selling, general and administrative expenses 91,995 92,334 90,936 Acquisition and restructuring charges 11,691 36,189 - ------------ ------------ ----------- Operating Income 293,500 196,020 169,419 Other income (expense): Interest income 48,182 29,456 19,984 Interest expense (10,939) (13,205) (17,380) Equity in earnings of unconsolidated subsidiary - - 281 ------------ ------------ ----------- Income Before Taxes and Minority Interest 330,743 212,271 172,304 Income taxes 120,220 82,906 65,709 ------------ ------------ ----------- Income Before Minority Interest 210,523 129,365 106,595 Minority interest in net income of subsidiary 597 124 - ------------ ------------ ----------- Net Income $ 209,926 $ 129,241 $ 106,595 ============ ============ =========== Pro forma provision for income taxes 260 2,484 458 ------------ ------------ ----------- Pro forma Net Income $ 209,666 $ 126,757 $ 106,137 ============ ============ =========== Per Share Data: Basic earnings per share - historical $0.88 $0.56 $0.48 ============ ============ =========== Diluted earnings per share - historical $0.85 $0.54 $0.46 ============ ============ =========== Basic earnings per share - pro forma $0.88 $0.55 $0.47 ============ ============ =========== Diluted earnings per share - pro forma $0.85 $0.53 $0.46 ============ ============ =========== Average Shares Outstanding: Basic shares 239,179 231,843 224,235 ============ =========== =========== Diluted shares 247,997 239,867 231,396 ============ =========== =========== See Notes to Supplemental Consolidated Financial Statements. -14- CONCORD EFS, INC AND SUBSIDIARIES Supplemental 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 100,978 $ 33,659 $154,955 $ 186,817 $ 99 $ 375,530 Exercise of stock options 413 138 6,458 6,596 Three for two stock split 48,341 16,114 (16,114) Tax benefit of nonqualifying stock option exercises 3,630 3,630 Activity by pooled subsidiaries 824 (997) (173) Net income 106,595 106,595 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 107,665 ------------------------------------------------------------------------ Balance at December 31, 1998 149,732 49,911 149,753 292,415 1,169 493,248 Exercise of stock options 2,664 888 21,714 22,602 Three for two stock split 79,435 26,478 (26,478) 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 subsidiaries (7,194) (7,194) Net income 129,241 129,241 Change in net unrealized loss on securities available for sale, net of tax of $7,764 (13,701) (13,701) --------- Comprehensive income 115,540 ------------------------------------------------------------------------ Balance at December 31, 1999 238,579 79,526 373,965 414,462 (12,532) 855,421 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 subsidiaries (444) (444) Net income 209,926 209,926 Change in net unrealized loss on securities available for sale, net of tax of $5,536 11,056 11,056 --------- Comprehensive income 220,982 ------------------------------------------------------------------------ Balance at December 31, 2000 241,457 $ 80,485 $429,578 $623,944 $(1,476) $1,132,531 ========================================================================
See Notes to Supplemental Consolidated Financial Statements. -15- CONCORD EFS, INC AND SUBSIDIARIES Supplemental Consolidated Statements of Cash Flows Year ended December 31 2000 1999 1998 ------------------------------------- (in thousands) Operating activities Net income $ 209,926 $ 129,241 $ 106,595 Adjustments to reconcile net income to net cash provided by operating activities: Minority interest in subsidiary 597 124 - Equity in earnings of unconsolidated subsidiary - - (281) Provision for losses on accounts receivable 5,039 3,474 3,654 Depreciation and amortization 96,615 82,682 70,729 Deferred income taxes 13,610 (616) 945 Net realized gain on sales of securities available for sale (2,333) (230) (1,234) Restructuring charges - 8,152 - Changes in operating assets and liabilities: Accounts receivable (130,682) (58,846) (443) Inventories 2,989 (6,680) (5,498) Prepaid expenses and other current assets (9,577) (3,656) (1,620) Accounts payable and other liabilities 153,309 78,260 23,987 Other, net (5,995) 4,951 (2,996) ------------------------------------- Net cash provided by operating activities 333,498 236,856 193,838 Investing activities Acquisition of securities available for sale (308,157) (273,603) (240,783) Proceeds from sales of securities available for sale 106,771 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 (87,113) (67,596) (70,652) Purchased merchant contracts (30,640) (26,869) (16,988) Other investing activity (2,899) (16,733) (24,620) ------------------------------------- Net cash used in investing activities (340,542) (317,716) (218,840) 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 68,925 Payments on notes payable (22,326) (138,873) (52,876) Payments on leases payable (2,874) (4,017) (4,435) Proceeds from exercise of stock options 26,893 22,602 6,596 Proceeds from offering of common stock - 207,818 - Activity by pooled subsidiaries (3,345) (4,293) (173) ------------------------------------- Net cash provided by financing activities 65,707 139,805 34,381 ------------------------------------- Net increase in cash and cash equivalents 58,663 58,945 9,379 Cash and cash equivalents at beginning of year 173,099 114,154 104,775 ------------------------------------- Cash and cash equivalents at end of year $ 231,762 $ 173,099 $ 114,154 ===================================== Supplemental disclosure of cash flow information: Interest paid $ 10,698 $ 13,943 $ 17,622 ===================================== Income taxes paid $ 96,419 $ 48,494 $ 59,684 ===================================== See Notes to Supplemental Consolidated Financial Statements. -16- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL 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. Basis of Presentation: These supplemental consolidated financial statements give retroactive effect to the merger of Concord and Star Systems, Inc. (STAR) on February 1, 2001, which was accounted for using the pooling of interests method as described in Note B to the supplemental consolidated financial statements. Accounting principles generally accepted in the United States proscribe giving effect to a consummated business combination accounted for by the pooling of interests method in financial statements that do not include the date of consummation. These supplemental consolidated financial statements do not extend through the date of consummation; however, they will become Concord's historical consolidated financial statements after financial statements covering the date of consummation of the business combination are issued. STAR was formed as a result of an Agreement of Mergers and Reorganization (the Agreement) dated October 2, 1998 effective March 1, 1999 between Honor Technologies, Inc. (HTI), organized under the laws of the State of Delaware, and Star System, Inc. (SSI), a nonprofit mutual benefit corporation under the laws of the State of California. As a result of the Agreement, HTI and SSI became wholly owned subsidiaries of STAR in a combination accounted for as a pooling of interests. Concord owns a majority interest of 74% in Primary Payment Systems, Inc. (PPS), a risk management service, as a result of Concord's acquisitions of STAR and Cash Station. PPS is immaterial to Concord's financial statements. Concord has consolidated PPS in the supplemental consolidated financial statements in 2000 and 1999. Prior to 1999, Concord considered its majority ownership in PPS as temporary; therefore, its investment was accounted for under the equity method of accounting. Principles of Consolidation: The supplemental consolidated financial statements include the accounts of Concord and its subsidiaries after elimination of all material intercompany balances and transactions. Business Combinations: The supplemental 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 supplemental 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. -17- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 Note A - Significant Accounting Policies, continued 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. 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. -18- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 Note A - Significant Accounting Policies, continued 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 and other intangible assets are stated at cost. Amortization is computed using the straight-line basis over an estimated useful life of 10 to 25 years for goodwill, 6 years for purchased merchant contracts, and 5 to 15 years for intangibles other than purchased merchant contracts, such as customer lists. Impairment of Long-Lived Assets: Management evaluates long-lived assets, including property and equipment, goodwill, and certain other intangible assets to be held and used by Concord for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Impairment losses are recognized if expected discounted future cash flows of the related assets are less than their carrying values. Measurement of an impairment loss is based on the fair value of the asset. 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. -19- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 Note B - Business Combinations On February 1, 2001, Concord acquired STAR, a debit network. The acquisition was accounted for as a pooling of interests transaction in which Concord issued approximately 24.8 million shares of its common stock. As discussed in Note A, STAR was formed on March 1, 1999 as a result of the combination of HTI and SSI which was accounted for as a pooling of interests. 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. The following table presents selected financial information split among Concord, CPS, Cash Station, STAR, SSI, and HTI: Year ended December 31 2000 1999 1998 ------------------------------------------- (in thousands, except per share data) Revenue: Concord $1,215,893 $ 830,059 $ 634,511 CPS (1) 4,047 41,909 15,915 Cash Station (2) 9,494 17,973 16,121 ------------------------------------------- Historical combined $1,229,434 $ 889,941 $ 666,547 STAR (3) 184,866 152,748 - SSI (4) - 8,851 48,790 HTI (5) - 14,229 101,412 Intercompany eliminations (6) (7,160) (5,759) (3,925) ------------------------------------------- Supplemental combined $1,407,140 $1,060,010 $ 812,824 =========================================== Pro forma net income: Concord 186,009 101,652 88,695 CPS (1) 650 7,096 1,309 Cash Station (2) 816 1,222 1,052 ------------------------------------------- Historical combined 187,475 109,970 91,056 STAR (3) 22,451 16,409 - SSI (4) - 1,624 6,842 HTI (5) - 1,238 8,697 Pro forma provision for CPS income taxes (7) (260) (2,484) (458) ------------------------------------------- Supplemental combined $ 209,666 $ 126,757 $ 106,137 =========================================== Pro forma basic earnings per share supplemental combined $0.88 $0.55 $0.47 =========================================== Pro forma diluted earnings per share supplemental combined $0.85 $0.53 $0.46 =========================================== -20- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 (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 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 amounts. (3) The 2000 amounts reflect the results of STAR operations from January 1, 2000 through December 31, 2000. The 1999 amounts reflect the results of STAR operations from March 1, 1999 to December 31, 1999. (4) The 1999 amounts reflect the results of SSI operations from January 1, 1999 through February 28, 1999 (unaudited). Results of operations from March 1, 1999 to December 31, 1999 are included in STAR amounts. (5) The 1999 amounts reflect the results of HTI operations from January 1, 1999 through February 28, 1999 (unaudited). Results of operations from March 1, 1999 to December 31, 1999 are included in STAR amounts. (6) All material activity between Concord and STAR has been eliminated. (7) 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. -22- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL 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. -22- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL 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 90,801 81,246 ----------------------- 310,775 184,181 Allowance for doubtful accounts (3,019) (2,729) ----------------------- Accounts receivable, net $ 307,756 $ 181,452 ======================= 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 $114,988 $ 584 $(2,279) $113,293 Mortgage-backed securities 169,856 458 (1,811) 168,503 Corporate securities 169,859 1,412 (1,928) 169,343 Municipal securities 173,989 1,977 (1,464) 174,502 ------------------------------------------------------- Total debt securities 628,692 4,431 (7,482) 625,641 Equity securities 23,285 896 (397) 23,784 ------------------------------------------------------- $651,977 $5,327 $(7,879) $649,425 ======================================================= 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 ======================================================= -23- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL 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 117,286 117,269 Due after ten years 376,941 374,537 ------------------------- $628,692 $625,641 ========================= 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 ======================== -24- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL 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 328,748 289,551 Furniture and equipment 70,545 72,466 Leasehold improvements 17,807 15,810 ------------------------ 434,200 394,739 Accumulated depreciation (219,538) (208,172) ------------------------ Property and equipment, net $214,662 $ 186,567 ======================== Depreciation expense was $61.4 million, $54.2 million, and $48.1 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 $ 203,439 $ 197,562 Accumulated amortization (53,390) (43,151) ----------------------- Goodwill, net $ 150,049 $ 154,411 ======================= Amortization expense related to goodwill was $9.5 million, $9.3 million, and $9.5 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. -25- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL 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 - Commitments and Contingencies Concord licenses a portion of its computer software under various noncancelable agreements, which expire on various dates through 2002. Software license expense under these agreements totaled approximately $4.6 million, $4.2 million, and $3.3 million during 2000, 1999, and 1998 respectively. Concord rents office facilities and equipment under non-cancelable operating leases expiring at various dates through 2011. Rental expense for operating leases amounted to approximately $8.0 million, $8.8 million, and $7.5 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 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. Future minimum lease payments for operating leases and software license agreements with initial or remaining terms in excess of one year at December 31, 2000 are as follows: Software Operating Licenses Leases -------------------------- (in thousands) 2001 $ 1,236 $ 8,906 2002 852 9,368 2003 675 7,155 2004 675 4,454 2005 761 3,604 Thereafter 338 14,097 -------------------------- Total future payments $ 4,537 $47,584 ========================== 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. Concord is a party to various claims and litigation in the normal course of business. None of these claims is expected to have a material effect on Concord's consolidated financial position or results of operations. -26- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 Note J - Long-Term Debt Long-term debt consisted of the following at December 31, 2000 and 1999: 2000 1999 ------------------------ (in thousands) Federal Home Loan Bank (FHLB) advances $ 99,000 $ 75,000 Notes payable 14,268 17,625 ------------------------ Total long-term debt 113,268 92,625 Current portion of notes payable (3,357) (3,357) ------------------------ Total long-term debt, less current portion $109,911 $ 89,268 ======================== FHLB advances were at fixed rates ranging from 4.75% to 6.40% at December 31, 2000 with a final maturity date in 2008. Concord had approximately $23.7 million available on unused lines of credit with the FHLB at December 31, 2000. Notes payable were at a variable rate of LIBOR plus 0.50%, 7.085% at December 31, 2000, maturing on March 15, 2003. Notes payable were collateralized by a security interest in all former HTI member contracts. The original balance of notes payable was $23.5 million which was repayable in monthly installments with a final principal payment on March 15, 2003. 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%. Future maturities of FHLB advances and notes payable are as follows: FHLB Notes Advances Payable ---------------------- Year ending December 31: (in thousands) 2001 $ - $ 3,357 2002 - 3,357 2003 10,000 7,554 2004 - - 2005 - - Thereafter 89,000 - ---------------------- Total future payments $ 99,000 $ 14,268 ====================== Note K - Employee Benefit Plans Effective March 1, 1998 Concord established the Concord EFS Retirement Savings Plan (the Concord Plan). Employees who have reached the age of 21 and completed one year of service with Concord are eligible to participate in the Concord Plan. The Concord Plan provides for voluntary tax-deferred contributions by eligible employees and discretionary contributions by Concord. Total expenses related to the Concord Plan were approximately $2.7 million, $2.0 million, and $0.1 million for the years ended December 31, 2000, 1999, and 1998, respectively. -27- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 Note K - Employee Benefit Plans, continued 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 at December 31 of the plan year. In addition, the EPS Plan included voluntary tax-deferred employee contributions and discretionary contributions by EPS. Total expenses related to the EPS Plan were approximately $0.5 million and $3.7 million for the years ended December 31, 1999 and 1998, respectively. STAR maintains a defined contribution plan (the STAR Plan). Employees of STAR are eligible to become participants in the STAR Plan upon completion of three months employment and upon attaining the age of 21 1/2. Participation in the STAR plan is voluntary. Total expenses related to the STAR Plan were $3.5 million, $3.0 million, and $1.6 million for the years ended December 31, 2000, 1999, and 1998, respectively. The STAR Plan will be terminated as of December 31, 2001 and all participants will become participants in the Concord Plan. STAR maintains a deferred compensation trust to provide supplemental retirement benefits to the former President and Chief Executive Officer of HTI. The balance of this retirement account, plus accrued interest, totaled approximately $1.5 million as of December 31, 2000 and 1999 and was included with other assets and other liabilities in the supplemental consolidated financial statements. 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 179 (6,180) Depreciation 10,761 4,000 Intangible amortization 1,019 3,581 Purchased merchant contracts 1,436 387 Other 1,117 (3,717) ------------------------ Total deferred tax liabilities 31,871 15,131 ------------------------ Deferred tax assets: Net unrealized loss on securities available for sale 837 7,123 Nondeductible reserves - 1,802 Bad debt allowance 2,132 730 Inventories 123 44 Restructuring charges 1,470 - Depreciation 370 166 Other 1,800 23 ------------------------ Total deferred tax assets 6,732 9,888 ------------------------ Net deferred tax liability $25,139 $ 5,243 ======================== -28- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 Note L - Income Taxes, continued 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 $102,942 $73,428 $59,529 State 3,668 10,094 5,235 --------------------------------- 106,610 83,522 64,764 --------------------------------- Deferred Federal 11,816 (1,930) (100) State 1,794 1,314 1,045 --------------------------------- 13,610 (616) 945 --------------------------------- $120,220 $82,906 $65,709 ================================= 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 $115,760 $74,294 $60,306 State income taxes, net of federal benefit 3,551 5,092 3,699 Acquisition costs 753 2,292 - Nondeductible amortization of goodwill 2,549 2,523 2,537 Tax-exempt interest income (2,560) (2,319) (1,175) Other, net 167 1,024 342 ------------------------------------ $120,220 $82,906 $65,709 ==================================== 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. -29- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL 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 $209,926 $129,241 $106,595 ====================================== Denominator: Denominator for basic earnings per share, weighted-average shares 239,179 231,843 224,235 Effect of dilutive employee stock options 8,818 8,024 7,161 -------------------------------------- Denominator for diluted earnings per share-adjusted weighted-average shares and assumed conversions 247,997 239,867 231,396 ====================================== Basic earnings per share $0.88 $0.56 $0.48 ====================================== Diluted earnings per share $0.85 $0.54 $0.46 ====================================== 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. -30- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL 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 6,553 18.55 Exercised (2,793) 9.75 Terminated (247) 18.90 ----------- Outstanding at December 31, 2000 22,927 $15.29 $350,476 9,576 =========== ========== ======= The weighted average fair value of options granted during 2000, 1999, and 1998 was $8.28, $9.29, and $4.10, respectively. -31- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL 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 9,111 11.69 6.85 5,823 11.34 $15.50-21.00 6,850 19.01 8.82 502 20.74 $21.08-29.94 4,294 23.17 8.48 579 22.38 -------- -------- $ 2.28-29.94 22,927 $ 15.29 7.46 9,576 $ 10.83 ======== ========
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 were exercised by the expiration date of November 23, 1999. Prior to its merger with Concord, STAR adopted the Star Systems, Inc. 2000 Equity Incentive Plan (the STAR Plan). In connection with the merger of STAR with Concord, all outstanding options in the STAR Plan were vested and became exercisable. None of the options were issuable upon exercise until February 2001, when the shares subject to issuance under these options were registered. The total amount of option shares (after conversion to Concord EFS, Inc. shares) at December 31, 2000 was approximately 0.8 million, at a weighted average exercise price of $10.21. 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. -32- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 Note O - Incentive Stock Option Plans, continued The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because Concord's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, 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 $184,922 $113,639 $97,895 Pro forma basic earnings per share $0.77 $0.49 $0.44 Pro forma diluted earnings per share $0.75 $0.47 $0.42 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. -33- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL 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 -34- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL 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 $ 883,890 $ 523,250 $ - $1,407,140 Cost of operations (705,057) (304,897) - (1,009,954) Selling, general & administrative expenses - - (91,995) (91,995) Acquisition & restructuring charges (776) (10,915) - (11,691) Taxes & interest, net - - (82,977) (82,977) Minority interest in subsidiary - - (597) (597) -------------------------------------------------- Net income (loss) $ 178,057 $ 207,438 (175,569) 209,926 ================================================== Assets by segment $ 887,067 $ 378,859 $ 495,739 $1,761,665 ================================================== 1999 Revenue $ 645,474 $ 414,536 $ - $1,060,010 Cost of operations (487,547) (247,920) - (735,467) Selling, general & administrative expenses - - (92,334) (92,334) Acquisition & restructuring charges (6,436) (19,253) (10,500) (36,189) Taxes & interest, net - - (66,655) (66,655) Minority interest in subsidiary - - (124) (124) -------------------------------------------------- Net income (loss) 151,491 147,363 (169,613) 129,241 ================================================== Assets by segment $ 620,750 $ 363,536 $ 321,209 $1,305,495 ================================================== 1998 Revenue $ 478,917 $ 333,907 $ - $ 812,824 Cost of operations (357,634) (194,835) - (552,469) Selling, general & administrative expenses - - (90,936) (90,936) Equity in earnings of subsidiary - - 281 281 Taxes & interest, net - - (63,105) (63,105) ---------------------------------------------------- Net income (loss) $ 121,283 $ 139,072 $ (153,760) $ 106,595 ==================================================== Assets by segment $ 440,700 $ 349,993 $ 178,052 $ 968,745 ==================================================== -35- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL 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 2.30% and 0.43% 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. FHLB Advances: The fair values of FHLB advances are estimated using discounted cash flow analyses based on Concord's current incremental borrowing rates for similar types of borrowing arrangements. Notes Payable: The carrying amount of notes payable to banks approximates fair value based on interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities. -36- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL 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 Fair Amount Value ---------------------------- (in thousands) December 31, 2000 Financial assets: Cash and cash equivalents $ 231,762 $ 231,762 Securities available for sale 649,425 649,425 Loans 78,654 73,864 Financial liabilities: Deposits 125,834 126,122 FHLB advances 99,000 96,809 Notes payable 14,268 14,300 December 31, 1999 Financial assets: Cash and cash equivalents $ 173,099 $ 173,099 Securities available for sale 458,201 458,201 Loans 30,922 30,124 Financial liabilities: Deposits 100,475 100,557 FHLB advances 75,000 72,099 Notes payable 17,625 17,672 -37- CONCORD EFS, INC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 Note T - 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 $302,917 $338,848 $363,908 $401,467 Operating income 57,789 74,032 70,045 91,634 Net income 41,512 52,282 50,246 65,886 Per share: Basic earnings $0.17 $0.22 $0.21 $0.27 Diluted earnings $0.17 $0.21 $0.20 $0.26 1999 Revenue $221,565 $251,053 $274,149 $313,243 Operating income 12,589 53,143 63,228 67,060 Net income 3,332 34,946 43,476 47,487 Per share: Basic earnings $0.01 $0.15 $0.18 $0.20 Diluted earnings $0.01 $0.15 $0.18 $0.19 -38- EX-99.4 8 0008.txt OPINION OF ERNST & YOUNG LLP Exhibit 99.4 CONCORD EFS, INC AND SUBSIDIARIES Report of Independent Auditors Board of Directors and Stockholders of Concord EFS, Inc. We have audited the supplemental consolidated balance sheets of Concord EFS, Inc. and subsidiaries (formed as a result of the consolidation of Concord EFS, Inc. and Star Systems, Inc.) as of December 31, 2000 and 1999, and the related supplemental consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. The supplemental consolidated financial statements give retroactive effect to the merger of Concord EFS, Inc. and Star Systems, Inc. on February 1, 2001, which has been accounted for using the pooling of interests method as described in the notes to the supplemental consolidated financial statements. These supplemental consolidated financial statements are the responsibility of the management of Concord EFS, Inc. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Star Systems, Inc. which reflect total assets constituting 11.8% for 2000 and 14.8% for 1999 of the related supplemental consolidated financial statements totals, and which reflect net income constituting approximately 10.7%, 14.9%, and 14.6% of the related supplemental consolidated financial statements totals for the years ended December 31, 2000, 1999, and 1998, respectively. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to data included for Star Systems, Inc., is based solely on the reports of the other auditors. 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 and the reports of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of the other auditors, the supplemental 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, after giving retroactive effect to the merger of Star Systems, Inc., as described in the notes to the supplemental consolidated financial statements in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Memphis, Tennessee April 4, 2001 EX-99.5 9 0009.txt OPINION OF DELOITTE & TOUCHE LLP Exhibit 99.5 Independent Auditors' Report To the Board of Directors and Stockholders of Star Systems, Inc.: We have audited the consolidated balance sheets of Star Systems, Inc. and subsidiaries (the Company) as of December 31, 2000 and 1999, and the related consolidated statements of income, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 consolidated financial statements (not presented separately in Exhibit 99.3) referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2000 and 1999, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. /s/ DELOITTE & TOUCHE LLP Certified Public Accountants Orlando, Florida March 2, 2001 EX-99.6 10 0010.txt OPINION OF PRICEWATERHOUSECOOPERS Exhibit 99.6 Independent Accountants Report Stockholders of HONOR Technologies, Inc.: In our opinion, the consolidated statements of income, of changes in stockholders' equity and of cash flows (not presented separately herein) present fairly, in all material respects, the results of operations and cash flows of HONOR Technologies, Inc. and its subsidiaries (the Company) for the year ended December 31, 1998 in conformity with generally accepted accounting principles. Those financial statements are the responsibility of the Company's management; our responsibilty is to express an opinion on those financial statements based our audit. We conducted our audit of those statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP Orlando, Florida April 23, 1999 EX-99.7 11 0011.txt OPINION OF ARTHUR ANDERSEN LLP Exhibit 99.7 Report of Independent Public Accountants To the Board of Directors of Star System, Inc.: We have audited the statements of income, changes in members' equity, and cash flows for the year ended December 31, 1998 of Star System, Inc. (a California nonprofit mutual benefit corporation). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above (not presented separately herein) present fairly, in all material respects, the results of operations and cash flows of Star System, Inc. for the year ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP San Diego, California April 12, 1999 -----END PRIVACY-ENHANCED MESSAGE-----