-----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, VTjzxg1HOOWBOcMV96UUnI8ve4oCgX/zr2jk2JtEqM2ylyQxC7ZDiwa8+ZwQSeKC cM0Sf6s9KejiVLguwl8GpA== 0000740112-99-000005.txt : 19990512 0000740112-99-000005.hdr.sgml : 19990512 ACCESSION NUMBER: 0000740112-99-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990511 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONCORD EFS INC CENTRAL INDEX KEY: 0000740112 STANDARD INDUSTRIAL CLASSIFICATION: FUNCTIONS RELATED TO DEPOSITORY BANKING, NEC [6099] IRS NUMBER: 042462252 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-13848 FILM NUMBER: 99616377 BUSINESS ADDRESS: STREET 1: 2525 HORIZON LAKE DR STE 120 CITY: MEMPHIS STATE: TN ZIP: 38133 BUSINESS PHONE: 9013718000 MAIL ADDRESS: STREET 1: 2525 HORIZON LAKE DRIVE STREET 2: SUITE 120 CITY: MEMPHIS STATE: TN ZIP: 38133 FORMER COMPANY: FORMER CONFORMED NAME: CONCORD COMPUTING CORP DATE OF NAME CHANGE: 19920515 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended Commission file number 0-13848 March 31, 1999 ___________________________ CONCORD EFS, INC. (Exact name of registrant as specified in its charter) Delaware 04-2462252 ______________________________ _____________________ (State or other jurisdiction of (I.R.S. Employer Incorporation of Organization) Identification Number) 2525 Horizon Lake Drive, Suite 120, Memphis, Tennessee 38133 (Address of Principal Executive Offices) (901) 371-8000 (Registrant's telephone number, including area code) _________________ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes[X] No[ ] The number of shares of the registrant's Common Stock, $0.33 1/3 par value, as of March 31, 1999 was 128,330,320. CONCORD EFS, INC. AND SUBSIDIARIES INDEX Page No. -------- PART 1- Financial Information Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets March 31, 1999 and December 31, 1998 1 Condensed Consolidated Statements of Income Three Months ended March 31, 1999 and March 31, 1998 2 Condensed Consolidated Statements of Cash Flows Three Months ended March 31, 1999 and March 31, 1998 3 Notes to Condensed Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk 12 PART II - Other Information Item 2. Changes in Securities and Use of Proceeds 13 Item 4. Submission of Matters to a Vote of Stockholders 13 Item 6. Exhibits and Reports on Form 8-K 13 Signatures 15 CONCORD EFS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) March 31 December 31 1999 1998 ---------- ----------- (In thousands) ASSETS CURRENT ASSETS Cash and cash equivalents $ 77,285 $ 82,029 Securities available-for-sale 315,776 288,180 Accounts receivable, net 124,735 106,662 Inventories 11,324 11,396 Prepaid expenses and other 13,158 7,863 Deferred income taxes 6,305 5,977 -------- -------- TOTAL CURRENT ASSETS 548,583 502,107 OTHER ASSETS 18,270 23,615 PROPERTY AND EQUIPMENT 311,054 302,937 Less accumulated depreciation and amortization (157,406) (148,447) -------- -------- 153,648 154,490 INTANGIBLE ASSETS 146,974 146,712 Less accumulated amortization (47,838) (42,806) -------- -------- 99,136 103,906 -------- -------- TOTAL ASSETS $819,637 $784,118 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and other liabilities $125,307 $ 112,376 Accrued liabilities 71,532 47,641 Income taxes payable 19,489 10,148 Short-term borrowings 17,000 21,000 Current maturities of long-term debt 25,000 25,116 -------- -------- TOTAL CURRENT LIABILITIES 258,328 216,281 LONG-TERM DEBT, LESS CURRENT MATURITY 173,750 173,000 DEFERRED INCOME TAXES 15,605 21,336 OTHER LIABILITIES 8,905 12,966 STOCKHOLDERS' EQUITY: Common Stock-par value $0.33 1/3 per share; authorized 200,000 shares, issued and outstanding 128,330 shares at March 31, 1999; issued and outstanding 127,935 shares at December 31, 1998 42,777 42,646 Other stockholders' equity 320,272 317,889 -------- -------- TOTAL STOCKHOLDERS' EQUITY 363,049 360,535 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $819,637 $784,118 ======== ======== See Notes to Condensed Consolidated Financial Statements - Unaudited. -1- CONCORD EFS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three Months Ended March 31 ----------------------- 1999 1998 ------- ------- (In thousands, except per share data) Revenue $170,234 $134,666 Cost of operations 120,849 95,029 Selling, general and administrative expenses 12,368 13,100 Acquisition expenses and restructuring charges 34,810 - ------- ------- OPERATING INCOME 2,207 26,537 Other income (expense): Interest income 5,265 4,095 Interest expense (3,533) (3,346) ------- ------- INCOME BEFORE INCOME TAXES 3,939 27,286 Income taxes 6,807 9,937 ------- ------- NET INCOME (LOSS) $(2,868) $17,349 ======= ======= Per share data: Weighted average shares 128,014 127,486 ======= ======= Basic earnings (loss) ($0.02) $0.14 per share ======= ======= Adjusted weighted average shares and assumed conversions 133,083 130,849 ======= ======= Diluted earnings (loss) ($0.02) $0.13 per share ======= ======= See Notes to Condensed Consolidated Financial Statements - Unaudited. -2- CONCORD EFS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended March 31 --------------------- 1999 1998 -------- -------- (In thousands) NET CASH PROVIDED BY OPERATING ACTIVITIES $ 41,124 $ 19,521 INVESTING ACTIVITIES: Acquisition of property and equipment (11,628) (11,255) Purchases of securities available-for-sale (48,467) (43,795) Purchase of securities held-to-maturity (4,539) Sale of securities available-for-sale 13,575 12,667 Maturities of securities available-for-sale 5,564 8,851 Maturities of securities held-to-maturity 2,944 Merchants contracts purchased (4,896) (2,936) Other (928) -------- -------- NET CASH USED IN INVESTING ACTIVITIES (45,852) (38,991) FINANCING ACTIVITIES: Proceeds from sale of common stock 3,350 903 Proceeds from notes payable 7,000 26,275 Payments under credit agreement, net (4,000) (9,000) Payments on notes payable (6,366) (6,272) -------- -------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (16) 11,606 -------- -------- DECREASE IN CASH AND CASH EQUIVALENTS (4,744) (7,864) Cash and cash equivalents at beginning of period 82,029 82,592 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 77,285 $ 74,728 ======== ======== For purposes of these statements, the Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. See Notes to Condensed Consolidated Financial Statements - Unaudited. -3- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 1999 Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 1999 are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. For further information, refer to the consolidated financial statements and footnotes thereto included in the Registrant's annual report on Form 10-K for the year ended December 31, 1998. The balance sheet at December 31, 1998 has been derived from the consolidated audited financial statements included in exhibit 99 of the Company's Form 10-K for the year ended December 31, 1998. The balance sheet does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Restatement for Poolings The historical financial information presented in this Form 10-Q has been re- stated to include the results of Electronic Payment Services, Inc. ("EPS") and Digital Merchant Systems of Illinois, Inc. and American Bankcard International, Inc. (jointly named "DMS"). EPS and DMS were acquired in separate pooling-of- interests transactions. In accordance with pooling-of-interests method of accounting, no adjustments have been made to the historical carrying amounts of assets and liabilities of either DMS or EPS. However, the financial information has been restated to include the operating results of DMS and EPS for all stated periods prior to the combinations. On February 18, 1999, the stockholders approved the Company's issuance of shares in connection with its acquisition of EPS. The Company completed the merger with EPS on February 26, 1999 by exchanging 30,064,838 shares of the Company's common stock for all of the outstanding common stock of EPS. EPS provides transaction processing services to financial institutions and retailers throughout the United States. EPS also owns and operates electronic data processing and data-capture networks that process transactions originating at ATMs and point-of-sale terminals. On June 30, 1998, the Company merged with DMS. DMS is an independent sales organization in the credit card industry. The Company exchanged 4,425,000 shares of its common stock for all of the outstanding common stock of DMS. -4- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED) MARCH 31, 1999 Restatement for Pooling - continued The following table presents selected financial information, in thousands, split between the Company, EPS and DMS for the three months ended March 31, 1999 and 1998, respectively. Three months ended March 31 ---------------------------- 1999 1998 ------------- ------------- (Unaudited) (Unaudited) Revenue Concord EFS, Inc. $124,129 $ 69,632 EPS (1) 46,105 58,399 DMS (2) 6,635 -------- -------- $170,234 $134,666 ======== ======== Net income (loss) Concord EFS, Inc. ($7,782) $ 11,367 EPS (1) 4,914 5,189 DMS (2) 793 -------- -------- ($2,868) $ 17,349 ======== ======== (1) The 1999 amounts reflect the results of operations from January 1, 1999 through February 28, 1999. The results of operations from March 1, 1999 to March 31, 1999 are included in Concord EFS, Inc. amounts. (2) As the acquisition of DMS was completed on June 30, 1998, the 1999 amounts are included in Concord EFS, Inc. amounts. Stock Split The Board of Directors approved a three-for-two stock split on May 14, 1998. Shareholders of record as of June 1, 1998 were distributed additional shares on June 8, 1998. Comprehensive Income As of January 1, 1998, the Company adopted Financial Accounting Standards Board (FASB) Statement 130, "Reporting Comprehensive Income". Statement 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the Company's net income or stockholders' equity. Statement 130 requires unrealized gains or losses on the Company's available-for-sale securities, which prior to adoption were reported separately in stockholders' equity to be included in other comprehensive income. Prior year financial statements have been reclassified to conform to the requirements of Statement 130. During the first quarter of 1999 and 1998, total comprehensive income (loss), in thousands, amounted to ($3,747) and $17,485, respectively. -5- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED) MARCH 31, 1999 Earnings (Loss) Per Share The following table sets forth the computation of basic and diluted earnings (loss) per share (in thousands, except per share data): Three Months Ended March 31 1999 1998 ------- ------- Numerator: Net income (loss) $ (2,868) $17,349 ====== ====== Denominator: Denominator for basic earnings per share, weighted-average shares 128,014 127,486 Effect of dilutive securities, employee stock options 5,069 3,363 ------- ------- Denominator for diluted earnings per share adjusted for weighted-average shares and assumed conversions 133,083 130,849 ======= ======= Basic earnings (loss) per share ($0.02) $0.14 ======= ======= Diluted earnings (loss) per share ($0.02) $0.13 ======= ======= Excluding acquisition costs and restructuring charges described in management's discussion and analysis of financial condition and results of operations, basic and diluted earnings per share for the first quarter 1999 was $0.19 and $0.18, respectively. Earnings per share and related per share data have been restated to reflect all stock splits. Operations By Industry Segment In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which establishes standards for reporting financial information about operating segments in annual and interim financial statements. SFAS No. 131 requires that financial information be reported on the same basis that is reported internally for evaluating segment performance and allocating resources to segments. SFAS No. 131 addresses how supplemental financial information is disclosed in annual and interim reports; therefore, its adoption in 1998 had no impact on the financial condition or operating results of the Company. -6- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued (UNAUDITED) MARCH 31, 1999 Concord has two reportable segments: Merchant Card Services and ATM Services. Merchant Card Services include the processing of credit card transactions for all major credit card brands including VISA, MasterCard, American Express, Discover and Diners Club; the processing of debit card transactions for financial institutions issuing these and similar cards; and the provision of electronic payment services to supermarket chains and multiple lane retailers, financial institutions, petroleum and convenience stores, grocery stores, trucking companies and other retailers. ATM Services revenue consists of fee income and other surcharges charged for proprietary ATMs and processing fees for third party ATMs. The balance of the Company's revenue is derived principally from check verification and authorization services, sales of point-of-sale terminals and payroll processing services. ATM Services include transactional fee income and other surcharges charges for proprietary ATMs and processing fees for third party ATMs. The remaining balance of the Company's revenue is derived principally from check verification and authorization services, and sales of point-of-sale terminals. The Company evaluates performance and allocates resources based on profit or loss from operations. Items classified as "Other" include revenue not identifiable with the two reportable segments described above and costs of operations and selling, general and administrative expenses which are not allocated to the reportable segments. No single customer of the Company accounts for a material portion of the Company's revenues. Industry segment information, in thousands, for the three months ended March 31, 1999 and 1998 is presented below:
Merchant ATM Card Services Services Other Total ------------- ------------- ------------- ------------- Three months ended March 31, 1999 Revenue $112,326 $ 52,449 $ 5,459 $170,234 Cost of operations (63,564) (31,105) (26,180) (120,849) Acquisition costs and restructuring charges (34,810) (34,810) Selling, general, & administrative expenses (12,368) (12,368) Taxes & interest, net (5,075) (5,075) ------------- ------------- ------------- ------------- Net income (loss) $ 48,762 $ 21,344 $(72,974) $ (2,868) ============= ============= ============= ============= Three months ended March 31, 1998 Revenue $ 85,203 $ 45,202 $ 4,261 $134,666 Cost of operations (46,654) (26,264) (22,111) (95,029) Selling, general, & administrative expenses (13,100) (13,100) Taxes & interest, net (9,188) (9,188) ------------- ------------- ------------- ------------- Net income $ 38,549 $ 18,938 $(40,138) $ 17,349 ============= ============= ============= =============
-7- CONCORD EFS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Form 10-Q may contain or incorporate by reference statements which may constitute "forward-looking" information, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended. Any such statements are not guarantees for future performance and involve risks and uncertainties, and actual results may differ materially from those contemplated by such forward-looking statements. Important factors that could cause actual results to differ materially from those in forward-looking statements include (i) the loss of key personnel or inability to attract additional qualified personnel, (ii) the failure to fully integrate the operations of EPS, (iii) changes in card association rules, (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) the failure of the Company, its vendors or its customers to appropriately manage Year 2000 code problems, (x) increasing competition, (xi) the success of a new VISA debit card product, (xii) the loss of key customers, (xiii) continued consolidation in the banking and retail industries, (xiv) risks related to acquisitions, (xv) changes in rules and regulations governing financial institutions, (xvi) the inability to remain current with rapid technological change, (xvii) dependence on third-party vendors, (xviii) the imposition of additional state taxes, (xix) volatility of the Company's common stock price and (xx) changes in interest rates. The Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future results over time. See the cautionary statements included as Exhibit 99 to this Form 10-Q for a more detailed discussion of the foregoing and other factors. Overview Concord EFS, Inc. (the "Company") is a fully integrated leading provider of electronic transaction authorization, processing, settlement and funds transfer services on a nationwide basis. The Company focuses on marketing its services to supermarket chains and multiple lane retailers, financial institutions, petroleum and convenience stores, grocery stores, the trucking industry and other retailers. The Company's primary activity is Merchant Card Services, in which it provides integrated electronic transaction services for credit card, debit card and electronic benefits transfer ("EBT") card transactions. These transaction services include data capture, authorization and settlement services for over 400,000 point-of-sale terminals. The Company also provides automated teller machine ("ATM") Services, consisting of owning and operating the MAC-branded electronic funds transfer network and processing for approximately 35,000 ATMs nationwide, of which it owns approximately 1,000. Recent Acquisitions On June 30, 1998, the Company completed a merger with DMS, which is an independent sales organizations for the transaction processing industry. The merger was accounted for as a pooling of interests in which the Company exchanged approximately 4.4 million of its shares for all of DMS. On February 26, 1999 the Company completed its acquisition of EPS, a company which provides transaction processing services to financial institutions and retailers throughout the United States. The acquisition was accounted for as a pooling of interests in which the Company exchanged 30.1 million of its shares for all of the outstanding common stock of EPS. The Company incurred $34.8 million of expenses related to the acquisition in the first quarter of 1999. These expenses included communication conversion costs, advisory fees and asset write-offs. Management continues to review potential operational synergies from the acquisition, such as duplicate facilities, computer hardware and software and other contractual relationships. -8- CONCORD EFS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued Restatement for Poolings The historical financial information presented in this Form 10-Q has been restated to include the results of EPS and DMS. In accordance with the pooling-of-interests method of accounting, no adjustments have been made to the historical carrying amounts of assets and liabilities of either DMS or EPS. However, the financial information has been restated to include the operating results of EPS and DMS for all stated periods prior to the combination. Components of Revenue and Expenses The substantial majority of the Company's revenue (66% in the first quarter of 1999 and 63% in the first quarter of 1998) is generated from fee income related to Merchant Card Services. These services include: -- the processing of credit card transactions for all major credit card brands including VISA, MasterCard, American Express, Discover and Diners Club; -- the processing of debit card transactions for financial institutions issuing these and similar cards; and -- the provision of electronic payment services to supermarket chains and multiple lane retailers, financial institutions, petroleum and convenience stores, grocery stores, trucking companies and other retailers. Revenue from Merchant Card Services includes primarily discount fees charged to merchants, which are a percentage of the dollar amount of each credit card transaction the Company processes, as well as a flat fee per transaction. The discount fee is negotiated with each merchant and typically constitutes a bundled rate for the transaction authorization, processing, settlement and funds transfer services we provide. This revenue and fees from other transactions are recognized at the time the merchants' transactions are processed. The other principal component of the Company's revenue derives from ATM Services (approximately 31% in the first quarter of 1999 and 34% in the first quarter of 1998). ATM Services revenue consists of fee income and other surcharges charged for proprietary ATMs and processing fees for third party ATMs. The balance of the Company's revenue is derived principally from check verification and authorization services, sales of point-of-sale terminals and payroll processing services. Cost of operations includes all costs directly attributable to the provision of services to the Company's customers. The most significant component of cost of operations includes interchange and assessment fees, which are amounts charged by the credit and debit card associations. Interchange and assessment fees are billed primarily as a percentage of dollar volume processed and, to a lesser extent, as a per-transaction fee. Cost of operations also includes telecommunications costs, occupancy costs, depreciation, the cost of equipment leased and sold, the cost of operating the Company's MAC network and other miscellaneous merchant supplies and services expenses. The Company's selling, general and administrative expenses include salaries and wages, and other general administrative expenses (including certain amortization costs). Results of Operations Revenue increased 26.4% to $170.2 million in the first quarter of 1999 from $134.7 million in the first quarter of 1998. Of first quarter 1999 revenue, merchant card services, ATM services and other services accounted for 66.0%, 30.8% and 3.2%, respectively. Revenue from merchant card services increased 31.8%, due primarily to increased transactional volumes. Increased volumes -9- CONCORD EFS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued Results of Operations - continued resulted from the addition of new merchants, the widening acceptance of debit and EBT card transactions at new and existing merchants and higher credit card transaction processing fees. The increase in fees was a pass-through to customers of higher interchange processing fees that were assessed by the credit card associations in April 1998. ATM services revenue increased 16.0%; the placement of new ATMs, new ATM processing customers and increases in transactional volumes accounted for the increase. Other revenue increased 28.1% due to increased terminal sales primarily to our new merchants. Cost of operations increased in the first quarter of 1999 to 71.0% of revenue compared to 70.6% in the first quarter of 1998. While credit card association interchange fees and certain other operating expenses were higher as a percentage of revenue in the first quarter of 1999 than in the first quarter of 1998, this was largely offset by a decrease, as a percentage of revenue, in payroll expenses. Excluding the acquisition expenses, restructuring charges and related tax items, net income, as a percentage of revenue, increased to 14.1% in the first quarter of 1999 compared to 12.9% in first quarter of 1998. The primary factor in this increase was that selling, general and administrative expenses decreased from $13.1 million or 9.7% of total revenue in the first quarter of 1998 to $12.4 million or 7.3% of total revenue in 1999 as personnel related costs were were lower in the first quarter of 1999. Net loss as a percentage of revenue was (1.7%) in the first quarter of 1999. Net income as a percentage of revenue was 12.9% in the first quarter of 1998. The primary factor in the change was the acquisition expenses and restructuring charges incurred in the first quarter of 1999 in connection with the acquisition of EPS. The total pretax charges were $34.8 million, as summarized below: Acquisition expenses $10.5 Communication conversion costs 12.4 Asset write-offs 8.2 Off-line debit conversion 2.8 Severance and other 0.9 ----- $34.8 ===== Acquisition related expenses were $10.5 million consisting primarily of investment banking fees, as well as legal, accounting, registration and other fees and expenses were also incurred. In order to create a single communication infrastructure for the Company's transaction processing businesses, the Company adopted a plan to convert EPS's communication network to Concord's. As the plan is implemented over the course of the next year, the Company expects to achieve operational and cost efficiencies. The accrual for the plan of conversion was $12.4 million. Asset write-offs of $8.2 million were incurred. For competitive reasons, certain geographic areas of the MAC network of EPS have been deemphacized by the Company, causing impairment to the related intangible assets of approximately $2.8 million. After review of certain EPS customer lists and the undiscounted cash flows estimated to be generated by the related intangible assets, the Company 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. -10- CONCORD EFS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued Results of Operations - continued EPS currently uses a third party bank for its off-line debit processing. During the quarter, the Company adopted a plan to take this process in-house and the related restructuring charges of $2.8 million were accrued. 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. Combined with the non-tax deductibility of certain acquisition costs, these items increased the effective tax rate in the first quarter of 1999. Liquidity and Capital Resources In the first quarter of 1999, the Company generated $41.1 million net cash from operating activities. The Company also received $7.0 million in proceeds from notes payable, and $3.4 million from stock issued from exercises of options under the Company's stock option plans. From cash provided from operating and financing activities, $29.3 million was invested in securities, net of sales and maturities, $11.6 million was spent on capital expenditures, $4.9 million was spent to purchase merchant contracts, and long-term debt and short-term borrowings were reduced by $6.4 million and $4.0 million, respectively. The capital expenditures were primarily for communications equipment, point-of-sale terminals, new computer equipment and capitalized software. The Company believes that available credit and cash generated from operations are adequate to meet the Company's capital needs. EFS National Bank and EFS Federal Savings Bank, wholly-owned subsidiaries of the Company, exceed required regulatory capital ratios. Impact of Year 2000 The Year 2000 preparedness efforts of the Company cover both information technologies ("IT") and non-IT systems. Non-IT systems include those systems used in the daily operations of buildings and facilities. IT systems include computer hardware, software and related applications. The Company has instituted a five-phase plan with the goal of having its IT and non-IT systems function properly with respect to dates in the year 2000 and beyond. These five phases are: awareness, assessment, renovation, validation and implementation. Based on progress to date, the Company has completed the awareness and assessment phases for all systems. The renovation, validation and implementation phases for internal and external mission critical systems and entities have been instituted concurrently and are on schedule for completion. The validation phase includes an independent review of results for all mission critical applications by the Company's internal audit staff and various regulatory agencies. There is no guarantee that the systems of other companies on which the Company's systems rely will be converted in a timely manner. However, contingency plans have been created for all mission critical vendor products and services. The contingency plans will be further enhanced and expanded to include business resumption planning during the first two quarters of 1999 with completion to coincide with the completion of the Year 2000 project. These plans will include both the Company's internal mission critical systems and third-party exposures, based on the evaluation of progress at that time. -11- CONCORD EFS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued Impact of Year 2000 - continued Additional testing of new or remediated systems and applications will continue as needed. If the Company does not complete the phases of its plan that are now underway, then its ability to process transactions for its customers could be adversely affected. The potential liability or lost revenue under this scenario could have a materially adverse effect on the Company's financial condition and results of operations. Quantitative and Qualitative Disclosures About Market Risk There have been no significant changes to our disclosures on quantitative and qualitative disclosures about market risk since December 31, 1998. For additional information, refer to Exhibit 99 - Supplemental Consolidated Financial Statements in our Form 10-K for the year ended December 31, 1998. -12- CONCORD EFS, INC. AND SUBSIDIARIES PART II OTHER INFORMATION Item 2: Changes in Securities and Use of Proceeds On February 26, 1999, the Company issued 30,064,835 shares of its common stock in connection with the Company's acquisition of all of the outstanding common stock of EPS. In the acquisition, EPS merged with a wholly owned subsidiary of the Company, and the shares, and options to purchase shares, of common stock of EPS outstanding at the time of the merger were converted into shares, and options to purchase shares, of common stock of the Company at a ratio of 7.9091 shares of common stock of the Company for one share of common stock of EPS. The 30,064,835 shares were issued to the 12 shareholders of EPS who held all of the outstanding shares of EPS common stock at the time of the merger, without registration under the Securities Act of 1933 in reliance on the exemption under Section 4(2) of that Act. The Company believes that each of these persons was either an accredited investor or had such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of the investment in shares of the Company; was afforded access to material information about the Company, understood that the shares of the Company acquired in the merger were "restricted securities" and agreed not to transfer those shares except pursuant to an effective registration statement under the Securities Act of 1933 or an exemption from registration under that act. On May 5, 1999, the Company filed with the Securities and Exchange Commission a registration statement on Form S-3 to register a total of 35,607,525 shares of its common stock for sale to the public. Of the 35,607,525 shares to be sold, 2,000,000 shares will be offered by the Company and 28,963,125 shares will be offered by selling stockholders who acquired their shares in connection with the acquisition by the Company of Electronic Payment Services, Inc. on February 26, 1999. An additional 4,644,400 shares will be offered by the Company to cover over-allotments. Item 4: Submission of Matters to a Vote of Security Holders A special meeting of stockholders of the Company was held on February 18, 1999. At that meeting, the stockholders voted on the following matters: (1) A proposal to approve the Company's issuance of shares of common stock in connection with the Company's acquisition of Electronic Payment Services, Inc. There were a total of 64,417,855 votes were cast for, 171,221 votes were cast against or withheld, and 228,867 abstentions and broker non-votes on this proposal. (2) A proposal to approve a proposed amendment to the Company's 1993 Incentive Stock Option Plan to increase the number of shares of common stock that may be issued under that plan from 13,668,750 shares to 25,000,000 shares and to add a new method for payment of shares upon exercise of options. There were a total of 41,456,130 votes were cast for, 22,997,923 votes were cast against or withheld, and 363,890 abstentions and broker non-votes on this proposal. Item 6: Exhibits and Reports on Form 8-K. (a) Exhibits (a) Exhibits Exhibit 10.1 - Employment Agreement, Richard N. Garman Exhibit 10.2 - Employment Agreement, Ruth Ann Marshall Exhibit 21 - Subsidiaries of the Registrant Exhibit 27 - Financial Data Schedule Exhibit 99 - Cautionary Statements -13- PART II OTHER INFORMATION - Continued (b) Reports on Form 8-K On March 10, 1999, the Company filed a Report on Form 8-K, dated February 26, 1999, to report, under Item 2 of that form, the Company's acquisition of all of the outstanding common stock of Electronic Payment Services, Inc. The report of independent auditors and audited consolidated financial statements of Electronic Payment Services, Inc. set forth below were filed with that Form 8-K pursuant to Item 7: Report of Independent Auditors Consolidated Balance Sheets as of December 31, 1998 and 1997 Consolidated Statements of Income for the years ended December 31, 1998, 1997, and 1996 Consolidated Statements of Changes in Stockholders' Equity (Deficiency) for the years ended December 31, 1998, 1997, and 1996 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997, and 1996 Notes to the Consolidated Financial Statements The unaudited pro forma consolidated financial statements as of and for the nine months ended September 30, 1998 and 1997, and for the three years ended December 31, 1997, including the notes thereto, of the Company, reflecting its acquisition of Electronic Payment Services, Inc., were incorporated by reference in Item 7 of the Form 8-K. -14- Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CONCORD EFS, INC. Date: May 10, 1999 By: /s/ Dan M. Palmer --------------------------- Dan M. Palmer Chairman of the Board and Chief Executive Officer Date: May 10, 1999 By: /s/ Thomas J. Dowling --------------------------- Thomas J. Dowling Vice President and Chief Financial Officer -15- CONCORD EFS, INC. AND SUBSIDIARIES FORM 10-Q LISTING OF EXHIBITS Exhibit Number Exhibit Description - -------------- --------------------------------------------------------------- Exhibit 10.1 Employment Agreement, Richard N. Garman Exhibit 10.2 Employment Agreement, Ruth Ann Marshall Exhibit 21 Subsidiaries of the Registrant Exhibit 27 Financial Data Schedule Exhibit 99 Cautionery Statements -14- EX-10.1 2 EMPLOYMENT AGREEMENT, RICHARD N. GARMAN EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT is made effective as of the 26th day of February, 1998, by and between ELECTRONIC PAYMENT SERVICES, INC. (the "Company"), a Delaware corporation, and Richard N. Garman ("Executive"). WHEREAS the Company desires to retain Executive's services pursuant to the terms of a written agreement, and Executive desires to provide such services to the Company; NOW, THEREFORE, the parties, intending to be legally bound, hereby agree as follows: 1. Employment. The Company hereby agrees to continue to employ Executive, and Executive hereby accepts such employment and agrees to perform Executive's duties and responsibilities, in accordance with the terms, conditions and provisions hereinafter set forth. This Agreement shall supersede and replace the agreement entered into between Employee and the Company as of August 28, 1995, which shall be void as of the date hereof. 1.1. Employment Term. The term of this Agreement shall commence on February 26, 1998 (the "Effective Date") and shall continue for an indefinite period until terminated in accordance with Section 5 or Section 6 hereof. The period commencing as of the Effective Date and ending on the date on which the term of Executive's employment under the Agreement shall terminate is hereinafter referred to as the "Employment Term". 1.2. Duties and Responsibilities. Executive shall serve as President and Chief Executive Officer of the Company and in such other senior positions, if any, to which Executive may be appointed during the Employment Term. During the Employment Term, Executive shall perform all duties and accept all responsibilities incident to such positions as may be assigned to Executive by the Company's Board of Directors (the "Board"). Executive shall have the authority and responsibility normally associated with such positions to which Executive may be assigned, subject to the control of the Board. 1.3. Extent of Service. During the Employment Term, Executive agrees to use Executive's best efforts to carry out Executive's duties and responsibilities under Section 1.2 hereof and, consistent with the other provisions of this Agreement, to devote substantially all Executive's business time, attention and energy thereto. Except as provided in Section 3 hereof, the foregoing shall not be construed as preventing Executive from making minority investments in other businesses or enterprises, from serving on corporate or other business entity boards of directors or from serving in any charitable or civic capacity provided that Executive agrees not to become engaged in any other business activity which, in the reasonable judgment of the Board, is likely to interfere with Executive's ability to discharge Executive's duties and responsibilities to the Company. 1.4. Base Salary. For all the services rendered by Executive hereunder, the Company shall pay Executive a base salary ("Base Salary"), commencing on the Effective Date, at the annual rate of $330,000, payable in installments at such times as the Company customarily pays its other senior level executives (but in any event no less often than monthly). Executive's Base Salary shall be reviewed annually for appropriate adjustment (but shall not be reduced below that in effect on the Effective Date without Executive's written consent) by the Board pursuant to its normal performance review policies for senior level executives. 1.5. Retirement and Benefit Coverages. During the Employment Term, Executive shall be entitled to participate in all (a) employee pension and retirement plans and programs ("Retirement Plans") and (b) welfare benefit plans and programs ("Benefit Coverages"), in each case made available to the Company's senior level executives as a group or to its employees generally, as such Retirement Plans or Benefit Coverages may be in effect from time to time. Executive shall also be covered by an individual long-term disability insurance policy providing at least the level of coverage in effect for Executive on the Effective Date. 1.6. Reimbursement of Expenses and Dues; Vacation. Executive shall be provided with reimbursement of expenses related to Executive's employment by the Company on a basis no less favorable than that which may be authorized from time to time for senior level executives as a group, and shall be entitled to annual vacation and holidays in accordance with the Company's normal personnel policies for senior level executives. 1.7. Short-Term and Long- Term Incentive Compensation. Executive shall be entitled to participate in any short-term or long-term incentive compensation programs established by the Company for its senior level executives generally, depending upon achievement of certain individual or business performance objectives specified and approved by the Board (or a Committee thereof) in its sole discretion. 2. Confidential Information. All work products of Executive's efforts on behalf of or in relation to the Company, either on or off the Company's facilities, during the Employment Term shall be disclosed to the Company, shall be exclusive property of the Company and shall be used for the Company's exclusive benefit. This shall apply to all inventions, discoveries, designs, processes and improvements, and Executive shall cooperate fully with the Company in realizing such benefits, including but not limited to obtaining patents, copyrights, confidential treatment or the means of protecting the Company's exclusive rights to such work products. Executive recognizes and acknowledges that, during the Employment Term, Executive will also have access to, learn, be provided with and, in some cases, will prepare and create certain confidential and proprietary business information, work products and trade secrets of the Company, included but not limited to client and customer information and lists for the Company, internal organization or business structure of the Company, financial products and services of the Company, and work assignments or capabilities of any employee of the Company (herein collectively called the "Confidential Materials"), all of which are of substantial value to the Company in its business. Executive agrees not to use or cause to be used for Executive's own benefit or for the benefit of any third parties or to disclose to any third party in any manner, directly or indirectly, any of the Confidential Materials without the express prior written consent of the Board, unless such information is in the public domain through no fault of Executive or except when required to do so by a court of law, by any governmental agency having supervisory authority over the business of the Company or by any administrative or legislative body (including a committee thereof) with apparent jurisdiction to order Executive to divulge, disclose or make accessible such information, in which case Executive will inform the Company in writing promptly of such required disclosure, but in any event at least five business days prior to disclosure. All written Confidential Information (including, without limitation, in any computer or other electronic format) which comes into Executive's possession during the course of Executive's employment shall remain the property of the Company. Executive agrees to return to the Company either before or immediately upon the termination of Executive's employment with the Company, any and all Confidential Materials which are in tangible form including electronic or software, and any other documents, equipment and materials of any kind relating in any way to the business of the Company which are or may be in the possession, custody and control of Executive and which are or may be the property of the Company, whether Confidential or not, including any and all copies thereof which may have been made by or for Executive. Except as required in the performance of Executive's duties for the Company, or unless expressly authorized in writing by the Board, Executive shall not remove any written Confidential Information from the Company's premises, except in connection with the performance of Executive's duties for the Company and in a manner consistent with the Company's policies regarding Confidential Information. For the purposes of this Section 2, the term "Company" shall be deemed to include the Company and all Affiliates, as defined in Section 6.1(a), of the Company. 3. Non-Competition; Non-Solicitation. (a) During Executive's employment by the Company and for a period of one year after Executive's termination of employment for any reason, Executive will not, except with the prior written consent of the Board, directly or indirectly, own, manage, operate, join, control, finance or participate in the ownership, management, operation, control or financing of, or be connected as an officer, director, employee, partner, principal, agent, representative, consultant or otherwise with, or use or permit Executive's name to be used in connection with, any business or enterprise which is engaged in any business that is directly competitive with any business or enterprise in which the Company is engaged at the time of Executive's termination of employment. Executive acknowledges that the Company operates on a national basis (in the United States) and that this covenant of Executive can not be limited to a service area in which the Company does business. (b) The foregoing restrictions shall not be construed to prohibit the ownership by Executive of less than five percent (5%) of any class of securities of any corporation which is engaged in a competitive business having a class of securities registered pursuant to the Securities Exchange Act of 1934 (the "Exchange Act"), provided that such ownership represents a passive investment and that neither Executive nor any group of persons including Executive in any way, either directly or indirectly, manages or exercises control of any such corporation, guarantees any of its financial obligations, otherwise takes any part in its business, other than exercising Executive's rights as a shareholder, or seeks to do any of the foregoing. (c) Executive further covenants and agrees that during Executive's employment by the Company and for the period of one year thereafter, Executive will not, directly or indirectly, (i) solicit, divert, take away, or attempt to solicit, divert or take away, any of the Company's customers, or (ii) encourage any customer to reduce its patronage of the Company. (d) Executive further covenants and agrees that during Executive's employment by the Company and for the period of one year thereafter, Executive will not, except with the prior written consent of the Board, directly or indirectly, solicit or hire, or encourage the solicitation or hiring of, any person who was a managerial or higher level employee of the Company at any time during the term of Executive's employment by the Company by any employer other than the Company for any position as an employee, independent contractor, consultant or otherwise. The foregoing covenant of Executive shall not apply to any person after 12 months have elapsed subsequent to the date on which such person's employment by the Company has terminated. (e) For the purposes of this Section 3, the term "Company" shall be deemed to include the Company and the Affiliates, as defined in Section 6.1(a), of the Company. 4. Equitable Relief. (a) Executive acknowledges and agrees that the restrictions contained in Sections 2 and 3 are reasonable and necessary to protect and preserve the legitimate interests, properties, goodwill and business of the Company, that the Company would not have entered into this Agreement in the absence of such restrictions and that irreparable injury will be suffered by the Company should Executive breach any of the provisions of those Sections. Executive represents and acknowledges that (i) Executive has been advised by the Company to consult Executive's own legal counsel in respect of this Agreement, and (ii) that Executive has had full opportunity, prior to execution of this Agreement, to review thoroughly this Agreement with Executive's counsel. (b) Executive further acknowledges and agrees that a breach of any of the restrictions in Sections 2 and 3 cannot be adequately compensated by monetary damages. Executive agrees that the Company shall be entitled to preliminary and permanent injunctive relief, without the necessity of proving actual damages, as well as an equitable accounting of all earnings, profits and other benefits arising from any violation of Sections 2 or 3 hereof, which rights shall be cumulative and in addition to any other rights or remedies to which the Company may be entitled. In the event that any of the provisions of Sections 2 or 3 hereof should ever be adjudicated to exceed the time, geographic, service, or other limitations permitted by applicable law in any jurisdiction, it is the intention of the parties that the provision shall be amended to the extent of the maximum time, geographic, service, or other limitations permitted by applicable law, that such amendment shall apply only within the jurisdiction of the court that made such adjudication and that the provision otherwise be enforced to the maximum extent permitted by law. (c) If Executive breaches any of Executive's obligations under Sections 2 or 3 hereof, and such breach constitutes "cause," as defined in Section 5.3 hereof, or would constitute cause if it had occurred during the Employment Term, the Company shall thereafter remain obligated only for any benefits due in accordance with the terms of any applicable plans and programs of the Company. (d) Executive irrevocably and unconditionally (i) agrees that any suit, action or other legal proceeding arising out of Sections 2 or 3 hereof, including without limitation, any action commenced by the Company for preliminary and permanent injunctive relief and other equitable relief, may be brought in the United States District Court for the District of Delaware, or if such court does not have jurisdiction or will not accept jurisdiction, in any court of general jurisdiction in Wilmington, Delaware, (ii) consents to the non-exclusive jurisdiction of any such court in any such suit, action or proceeding, and (iii) waives any objection which Executive may have to the laying of venue of any such suit, action or proceeding in any such court. Executive also irrevocably and unconditionally consents to the service of any process, pleadings, notices or other papers in a manner permitted by the notice provisions of Section 10 hereof. (e) For the purposes of this Section 4, the term "Company" shall be deemed to include the Company and the Affiliates, as defined in Section 6.1(a), of the Company. 5. Termination. The Employment Term shall terminate upon the occurrence of any one of the following events: 5.1. Disability. The Company may terminate the Employment Term if Executive is unable substantially to perform Executive's duties and responsibilities hereunder to the full extent required by the Board by reason of illness, injury or incapacity for six consecutive months, or for more than six months in the aggregate during any period of twelve calendar months; provided, however, that the Company shall continue to pay Executive's Base Salary until the Company acts to terminate the Employment Term. If the Company terminates the Employment Term, Executive shall be entitled to receive (i) any amounts earned, accrued or owing but not yet paid under Section 1 above, (ii) a pro rata portion of any Short-Term or Long-Term Incentive Compensation provided under a program described in Section 1.7 for the portion of the performance period under any such program that Executive participated prior to the end of the Employment Term and (iii) any other benefits in accordance with the terms of any applicable plans and programs of the Company. Otherwise, the Company shall have no further liability or obligation to Executive for compensation under this Agreement. Executive agrees, in the event of a dispute under this Section 5.1, to submit to a physical examination by a licensed physician selected by the Board. 5.2. Death. The Employment Term shall terminate in the event of Executive's death. In such event, the Company shall pay to Executive's executors, legal representatives or administrators, as applicable, an amount equal to the installment of Executive's Base Salary set forth in Section 1.4 hereof for the month in which Executive dies. In addition, Executive's estate shall be entitled to receive (i) any other amounts earned, accrued or owing but not yet paid under Section 1 above, (ii) a pro rata portion of any Short-Term or Long-Term Incentive Compensation provided under a program described in Section 1.7 for the portion of the performance period under any such program that Executive participated prior to the end of the Employment Term and (iii) any other benefits in accordance with the terms of any applicable plans and programs of the Company. Otherwise, the Company shall have no further liability or obligation under this Agreement to Executive's executors, legal representatives, administrators, heirs or assigns or any other person claiming under or through Executive. 5.3. Cause. The Company may terminate the Employment Term, at any time, for "cause" upon written notice, in which event all payments under this Agreement shall cease, except for Base Salary to the extent already accrued, but Executive shall remain entitled to any other benefits in accordance with the terms of any applicable plans and programs of the Company. For purposes of this Agreement, Executive's employment may be terminated for "cause" if the Board determines, in the exercise of good faith and reasonable judgment, that any of the following has occurred: (a) Gross negligence or willful misconduct by Executive in the performance of Executive's duties for the Company; or (b) Executive intentionally and materially breached this Agreement, which breach has not been cured within 30 days after written notice of the breach was given by the Board to Executive. For purposes of this Agreement, an act or omission on the part of Executive shall be deemed "intentional" only if it was not due primarily to an error in judgment or negligence and was done by Executive not in good faith and without reasonable belief that the act or omission was in the best interest of the Company. 5.4. Termination Without Cause and Non-Renewal. (a) The Company may remove Executive, at any time, without cause from the position in which Executive is employed hereunder and Executive may terminate employment if Executive has "Good Reason," as defined in Section 6.1 below, to terminate the Agreement (in either such case the Employment Term shall be deemed to have ended) upon not less than 60 days' prior written notice to Executive or to the Company, as applicable; provided, however, that, in the event that such notice is given, Executive shall be under no obligation to render any additional services to the Company and, subject to the provisions of Section 3 hereof, shall be allowed to seek other employment. Upon any such removal or if Executive has Good Reason to terminate the Agreement, Executive shall be entitled to receive, as liquidated damages for the failure of the Company to continue to employ Executive, only the amount due to Executive under the Company's then current severance pay plan for employees. No other payments or benefits shall be due under this Agreement to Executive, but Executive shall be entitled to any other benefits in accordance with the terms of any applicable plans and programs of the Company. (b) Notwithstanding the provisions of Section 5.4(a), in the event that Executive offers to execute, and executes and does not revoke if offered, a written release upon such removal, termination or non-renewal, substantially in the form attached hereto as Annex 1, (the "Release"), of any and all claims against the Company and all related parties with respect to all matters arising out of Executive's employment by the Company (other than any entitlements under the terms of this Agreement or under any other plans or programs of the Company in which Executive participated and under which Executive has accrued a benefit), or the termination thereof, Executive shall be entitled to receive, in lieu of the payment described in Section 5.4(a), which Executive agrees to waive, (i) as liquidated damages for the failure of the Company to continue to employ Executive, 12 monthly cash payments, commencing within 30 days after the effective date of the removal or non-renewal, equal to one-twelfth of Executive's Base Compensation, as defined in Section 6.1 below; (ii) for a period equal to two years following the end of the Employment Term, Executive and Executive's spouse and dependents shall be eligible for a continuation of those Benefit Coverages, as in effect at the time of such termination or removal, and as the same may be changed from time to time, as if Executive had been continued in employment during said period or to receive cash in lieu of such benefits or premiums, as applicable, where such Benefit Coverages may not be continued (or where such continuation would adversely affect the tax status of the plan pursuant to which the Benefit Coverage is provided) under applicable law or regulations; (iii) any other amounts earned, accrued or owing but not yet paid under Section 1 above; (iv) any other benefits in accordance with the terms of any applicable plans and programs of the Company; and (v) all options to purchase shares of common stock of the Company previously granted to Executive shall be 100% vested and nonforfeitable and shall be exercisable until the earlier of (a) the last day of the 36th month following the removal, termination or non-renewal or (b) the expiration of the original term of the option. (vi) as additional consideration for the non-competition and non-solicitation covenant contained in Section 3, a single cash payment, within 30 days after the effective date of the removal or non-renewal, equal to Executive's Base Compensation, as defined in Section 6.1 below. 5.5. Voluntary Termination. Executive may voluntarily terminate the Employment Term upon 30 days' prior written notice for any reason. In such event, after the effective date of such termination, no further payments shall be due under this Agreement except that Executive shall be entitled to any benefits due in accordance with the terms of any applicable plan and programs of the Company. 6. Other Payments and Definitions. 6.1. Definitions. For all purposes of this Section 6, the following terms shall have the meanings specified in this Section 6.1 unless the context otherwise clearly requires: (a) "Affiliate" shall mean an "affiliate" as defined in Rule 12b-2 of the General Rules and Regulations under the Exchange Act. (b) "Base Compensation" shall mean, for the calendar year immediately preceding Executive's Termination of Employment, Executive's Base Salary and Short-Term Incentive Compensation, as reported for federal income tax purposes on Form W-2 for such calendar year, together with any and all salary reduction authorized amounts under any of the Company's benefit plans or programs for such calendar year. "Base Compensation" shall not include the value of any Long-Term Incentive Compensation, any stock options or any exercise thereunder. (c) "Change of Control" shall mean the happening of any of the following: 1. Prior to any registration of the Company's shares of common stock under Section 12 of the Securities Act of 1933: (i) When any "person," as such term is used in Sections 13(d) and 14(d) of the Exchange Act, other than the Company, its Affiliates, or any Company employee benefit plan (including any trustee of such plan acting as trustee), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than 50% of the combined voting power of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Common Stock") or (ii) the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Voting Securities"); or (ii) Consummation by the Company of a reorganization, merger or consolidation (a "Business Combination"), in each case, with respect to which all or substantially all of the individuals and entities who were the respective beneficial owners of the Outstanding Common Stock and Voting Securities immediately prior to such Business Combination do not, following such Business Combination, beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation, business trust or other entity resulting from or being the surviving entity in such Business Combination in substantially the same proportion as their ownership immediately prior to such Business Combination of the Outstanding Common Stock and Voting Securities, as the case may be; or (iii) Consummation of a complete liquidation or dissolution of the Company or sale or other disposition of all or substantially all of the assets of the Company other than to a corporation, business trust or other entity with respect to which, following such sale or disposition, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, is then owned beneficially, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Common Stock and Voting Securities immediately prior to such sale or disposition in substantially the same proportion as their ownership of the Outstanding Common Stock and Voting Securities, as the case may be, immediately prior to such sale or disposition. 2. After any registration of the Company's shares of common stock under Section 12 of the Securities Act of 1933: (i) An event described in 1(i) above but substituting 20% for 50%; (ii) An event described in 1(ii) or (iii) above; or (iii) Individuals who, as of the beginning of any twenty-four month period, constitute the Board (the "Incumbent Directors") cease for any reason to constitute at least a majority of the Board or cease to be able to exercise the powers of the majority of the Board, provided that any individual becoming a director subsequent to the beginning of such period whose election or nomination for election by the Company's stockholders was approved by a vote of at least a majority of the directors then comprising the Incumbent Directors shall be considered as though such individual were a member of the Incumbent Directors, but excluding, for this purpose, any such individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the Board (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act). (d) "Exchange Act" shall mean the Securities Exchange Act of 1934. (e) "Good Reason" shall mean grounds for Executive to institute a Termination of Employment with the Company (1) upon any failure of the Company materially to comply with and satisfy any of the terms of this Agreement, including any reduction by the Company of the authority, duties or responsibilities or reporting lines of Executive, any reduction of Executive's compensation or benefits due hereunder, or the assignment to Executive of duties which are materially inconsistent with the duties of Executive's position as defined in Section 1.2 above or (2) if Executive is transferred, without Executive's written consent, to a location that is more than 50 miles from Executive's principal place of business immediately preceding the Change of Control. (f) "Termination Date" shall mean the date of receipt of a Notice of Termination of this Agreement or any later date specified therein. (g) "Termination of Employment" shall mean the termination of Executive's actual employment relationship with the Company occasioned by the Company's action. (h) "Termination upon a Change of Control" shall mean a Termination of Employment upon or within two years after a Change of Control either (i) initiated by the Company for any reason other than Executive's (w) disability, as defined in Section 5.1 hereof, (x) death, (y) retirement on or after attaining age 65, or (z) "cause," as defined in Section 5.3 hereof, or (ii) initiated by Executive for Good Reason. 6.2. Notice of Termination. Any Termination upon a Change of Control shall be communicated by a Notice of Termination to the other party hereto given in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) briefly summarizes the facts and circumstances deemed to provide a basis for a Termination of Employment and the applicable provision hereof, and (iii) if the Termination Date is other than the date of receipt of such notice, specifies the Termination Date (which date shall not be more than 15 days after the giving of such notice). 6.3. Payments upon Termination. Subject to the provisions of Section 6.6 hereof, in the event of Executive's Termination upon a Change of Control, the Company agrees (a) in the event Executive executes the Release required by Section 5.4(b), to pay to Executive, in a single cash payment, within thirty days after the Termination Date, (i) Executive's Base Compensation, as defined in Section 6.1(b), and, in addition, all amounts, benefits and Benefit Coverages described in Section 5.4(b)(ii), (iii), (iv), (v) and (vi) or (b) in the event Executive fails or refuses to execute the Release required by Section 5.4(b), to pay to Executive, in a single cash payment, within thirty days after the Termination Date, the amount due under Section 5.4(a) above and, in addition, all other amounts and benefits described in Section 5.4(a). 6.4. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent or limit Executive's continuing or future participation in or rights under any benefit, bonus, incentive or other plan or program provided by the Company and for which Executive may qualify; provided, however, that if Executive becomes entitled to and receives all of the payments provided for in this Agreement, Executive hereby waives Executive's right to receive payments under any severance plan or similar program applicable to all employees of the Company. 6.5 Shareholder Approval. In the event that a Change of Control occurs prior to any registration of the Company's shares of common stock under Section 12 of the Securities Act of 1933, the Company covenants and agrees that it shall obtain a favorable vote of more than 75% of its stockholders in order to satisfy the requirements of Section 280G(b)(5)(B) of the Internal Revenue Code of 1986, as amended (the "Code"), in order to preclude the limitations of Section 280G and the excise tax of Section 4999 from applying. 6.6. Certain Increase in Payments. After any registration of the Company's shares of common stock under Section 12 of the Securities Act of 1933 or in the event the Company is breaches its obligation under Section 6.5: (a) Anything in this Agreement to the contrary notwithstanding, in the event that it shall be determined that any payment or distribution by the Company to or for the benefit of Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (the "Payment"), would constitute an "excess parachute payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), Executive shall be paid an additional amount (the "Gross-Up Payment") such that the net amount retained by Executive after deduction of any excise tax imposed under Section 4999 of the Code, and any federal, state and local income and employment tax and excise tax imposed upon the Gross-Up Payment shall be equal to the Payment. For purposes of determining the amount of the Gross-Up Payment, Executive shall be deemed to pay federal income tax and employment taxes at the highest marginal rate of federal income and employment taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Executive's residence on the Termination Date, net of the maximum reduction in federal income taxes that may be obtained from the deduction of such state and local taxes. (b) All determinations to be made under this Section 6 shall be made by the Company's independent public accountant immediately prior to the Change of Control (the "Accounting Firm"), which firm shall provide its determinations and any supporting calculations both to the Company and Executive within 10 days of the Termination Date. Any such determination by the Accounting Firm shall be binding upon the Company and Executive. Within five days after the Accounting Firm's determination, the Company shall pay (or cause to be paid) or distribute (or cause to be distributed) to or for the benefit of Executive such amounts as are then due to Executive under this Agreement. (c) In the event that upon any audit by the Internal Revenue Service, or by a state or local taxing authority, of the Payment or Gross-Up Payment, a change is finally determined to be required in the amount of taxes paid by Executive, appropriate adjustments shall be made under this Agreement such that the net amount which is payable to Executive after taking into account the provisions of Section 4999 of the Code shall reflect the intent of the parties as expressed in subsection (a) above, in the manner determined by the Accounting Firm. (d) All of the fees and expenses of the Accounting Firm in performing the determinations referred to in subsections (b) and (c) above shall be borne solely by the Company. The Company agrees to indemnify and hold harmless the Accounting Firm of and from any and all claims, damages and expenses resulting from or relating to its determinations pursuant to subsections (b) and (c) above, except for claims, damages or expenses resulting from the gross negligence or wilful misconduct of the Accounting Firm. 7. Survivorship. The respective rights and obligations of the parties under this Agreement shall survive any termination of Executive's employment to the extent necessary to the intended preservation of such rights and obligations. 8. Mitigation. Executive shall not be required to mitigate the amount of any payment or benefit provided for in this Agreement by seeking other employment or otherwise and there shall be no offset against amounts due Executive under this Agreement on account of any remuneration attributable to any subsequent employment that Executive may obtain. 9. Arbitration; Expenses. In the event of any dispute under the provisions of this Agreement other than a dispute in which the primary relief sought is an equitable remedy such as an injunction, the parties shall be required to have the dispute, controversy or claim settled by arbitration in the City of Wilmington, Delaware accordance with National Rules for the Resolution of Employment Disputes then in effect of the American Arbitration Association, before a panel of three arbitrators, two of whom shall be selected by the Company and Executive, respectively, and the third of whom shall be selected by the other two arbitrators. Any award entered by the arbitrators shall be final, binding and nonappealable and judgment may be entered thereon by either party in accordance with applicable law in any court of competent jurisdiction. This arbitration provision shall be specifically enforceable. The arbitrators shall have no authority to modify any provision of this Agreement or to award a remedy for a dispute involving this Agreement other than a benefit specifically provided under or by virtue of the Agreement. If Executive prevails on any material issue which is the subject of such arbitration or lawsuit, the Company shall be responsible for all of the fees of the American Arbitration Association and the arbitrators and any expenses relating to the conduct of the arbitration (including the Company's and Executive's reasonable attorneys' fees and expenses). Otherwise, each party shall be responsible for its own expenses relating to the conduct of the arbitration (including reasonable attorneys' fees and expenses) and shall share the fees of the American Arbitration Association. 10. Notices. All notices and other communications required or permitted under this Agreement or necessary or convenient in connection herewith shall be in writing and shall be deemed to have been given when hand delivered or mailed by registered or certified mail, as follows (provided that notice of change of address shall be deemed given only when received): If to the Company, to: Marcia E. Heister, General Counsel Electronic Payment Services, Inc. 1100 Carr Road Wilmington, DE 19808 With a required copy to: Morgan, Lewis & Bockius 2000 One Logan Square Philadelphia, PA 19103-6993 Attention: Robert J. Lichtenstein, Esquire If to Executive, to: Richard N. Garman 4208 Kennett Pike Greenville, DE 19807 or to such other names or addresses as the Company or Executive, as the case may be, shall designate by notice to each other person entitled to receive notices in the manner specified in this Section. 11. Contents of Agreement; Amendment and Assignment. (a) This Agreement sets forth the entire understanding between the parties hereto with respect to the subject matter hereof and cannot be changed, modified, extended or terminated except upon written amendment approved by the Board and executed on its behalf by a duly authorized officer and by Executive. (b) All of the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective heirs, executors, administrators, legal representatives, successors and assigns of the parties hereto, except that the duties and responsibilities of Executive under this Agreement are of a personal nature and shall not be assignable or delegatable in whole or in part by Executive. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form and substance satisfactory to Executive, expressly to assume and agree to perform this Agreement in the same manner and to the extent the Company would be required to perform if no such succession had taken place. 12. Severability. If any provision of this Agreement or application thereof to anyone or under any circumstances is adjudicated to be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect any other provision or application of this Agreement which can be given effect without the invalid or unenforceable provision or application and shall not invalidate or render unenforceable such provision or application in any other jurisdiction. If any provision is held void, invalid or unenforceable with respect to particular circumstances, it shall nevertheless remain in full force and effect in all other circumstances. 13. Remedies Cumulative; No Waiver. No remedy conferred upon a party by this Agreement is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to any other remedy given under this Agreement or now or hereafter existing at law or in equity. No delay or omission by a party in exercising any right, remedy or power under this Agreement or existing at law or in equity shall be construed as a waiver thereof, and any such right, remedy or power may be exercised by such party from time to time and as often as may be deemed expedient or necessary by such party in its sole discretion. 14. Beneficiaries/References. Executive shall be entitled, to the extent permitted under any applicable law, to select and change a beneficiary or beneficiaries to receive any compensation or benefit payable under this Agreement following Executive's death by giving the Company written notice thereof. In the event of Executive's death or a judicial determination of Executive's incompetence, reference in this Agreement to Executive shall be deemed, where appropriate, to refer to Executive's beneficiary, estate or other legal representative. 15. Miscellaneous. All section headings used in this Agreement are for convenience only. This Agreement may be executed in counterparts, each of which is an original. It shall not be necessary in making proof of this Agreement or any counterpart hereof to produce or account for any of the other counterparts. 16. Withholding. The Company may withhold from any payments under this Agreement all federal, state and local taxes as the Company is required to withhold pursuant to any law or governmental rule or regulation. Executive shall bear all expense of, and be solely responsible for, all federal, state and local taxes due with respect to any payment received under this Agreement. 17. Governing Law. This Agreement shall be governed by and interpreted under the laws of the state of Delaware without giving effect to any conflict of laws provisions. 18. Establishment of Trust. The Company has established an irrevocable trust fund pursuant to a trust agreement to hold assets to satisfy any of its obligations under certain employee benefit plans and shall use such trust, in the event of a Change of Control or in the event that a Change of Control is imminent, as defined in that trust, to satisfy its obligations under this Agreement. Funding of such trust fund shall be subject to the terms of the agreement pursuant to which the trust was established. IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have executed this Agreement as of the date first above written. Attest: ELECTRONIC PAYMENT SERVICES, INC. By:/s/Mary Beth Lis By:/s/Marcia E. Heister ------------------------------- --------------------------------- Asst. Secretary Marcia E. Heister General Counsel Accepted:/s/Richard N. Garman --------------------------- EX-10.2 3 EMPLOYMENT AGREEMENT, RUTH ANN MARSHALL EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT is made effective as of the 26th day of February, 1998, by and between ELECTRONIC PAYMENT SERVICES, INC. (the "Company"), a Delaware corporation, and Ruth Ann Marshall ("Executive"). WHEREAS the Company desires to retain Executive's services pursuant to the terms of a written agreement, and Executive desires to provide such services to the Company; NOW, THEREFORE, the parties, intending to be legally bound, hereby agree as follows: 1. Employment. The Company hereby agrees to continue to employ Executive, and Executive hereby accepts such employment and agrees to perform Executive's duties and responsibilities, in accordance with the terms, conditions and provisions hereinafter set forth. 1.1. Employment Term. The term of this Agreement shall commence on February 26, 1998 (the "Effective Date") and shall continue for an indefinite period until terminated in accordance with Section 5 or Section 6 hereof. The period commencing as of the Effective Date and ending on the date on which the term of Executive's employment under the Agreement shall terminate is hereinafter referred to as the "Employment Term". 1.2. Duties and Responsibilities. Executive shall serve as Executive Vice President and Group Executive of the Company and in such other senior positions, if any, to which Executive may be appointed during the Employment Term. During the Employment Term, Executive shall perform all duties and accept all responsibilities incident to such positions as may be assigned to Executive by the Company's Board of Directors (the "Board") or the Company's Chief Executive Officer (the "CEO"). Executive shall have the authority and responsibility normally associated with such positions to which Executive may be assigned, subject to the control of the Board and the CEO. 1.3. Extent of Service. During the Employment Term, Executive agrees to use Executive's best efforts to carry out Executive's duties and responsibilities under Section 1.2 hereof and, consistent with the other provisions of this Agreement, to devote substantially all Executive's business time, attention and energy thereto. Except as provided in Section 3 hereof, the foregoing shall not be construed as preventing Executive from making minority investments in other businesses or enterprises, from serving on corporate or other business entity boards of directors or from serving in any charitable or civic capacity provided that Executive agrees not to become engaged in any other business activity which, in the reasonable judgment of the Board or the CEO, is likely to interfere with Executive's ability to discharge Executive's duties and responsibilities to the Company. 1.4. Base Salary. For all the services rendered by Executive hereunder, the Company shall pay Executive a base salary ("Base Salary"), commencing on the Effective Date, at the annual rate of $200,000, payable in installments at such times as the Company customarily pays its other senior level executives (but in any event no less often than monthly). Executive's Base Salary shall be reviewed annually for appropriate adjustment (but shall not be reduced below that in effect on the Effective Date without Executive's written consent) by the Board pursuant to its normal performance review policies for senior level executives. 1.5. Retirement and Benefit Coverages. During the Employment Term, Executive shall be entitled to participate in all (a) employee pension and retirement plans and programs ("Retirement Plans") and (b) welfare benefit plans and programs ("Benefit Coverages"), in each case made available to the Company's senior level executives as a group or to its employees generally, as such Retirement Plans or Benefit Coverages may be in effect from time to time. Executive shall also be covered by an individual long-term disability insurance policy providing at least the level of coverage in effect for Executive on the Effective Date. 1.6. Reimbursement of Expenses and Dues; Vacation. Executive shall be provided with reimbursement of expenses related to Executive's employment by the Company on a basis no less favorable than that which may be authorized from time to time for senior level executives as a group, and shall be entitled to annual vacation and holidays in accordance with the Company's normal personnel policies for senior level executives. 1.7. Short-Term and Long-Term Incentive Compensation. Executive shall be entitled to participate in any short-term or long-term incentive compensation programs established by the Company for its senior level executives generally, depending upon achievement of certain individual or business performance objectives specified and approved by the Board (or a Committee thereof) in its sole discretion. 2. Confidential Information. All work products of Executive's efforts on behalf of or in relation to the Company, either on or off the Company's facilities, during the Employment Term shall be disclosed to the Company, shall be exclusive property of the Company and shall be used for the Company's exclusive benefit. This shall apply to all inventions, discoveries, designs, processes and improvements, and Executive shall cooperate fully with the Company in realizing such benefits, including but not limited to obtaining patents, copyrights, confidential treatment or the means of protecting the Company's exclusive rights to such work products. Executive recognizes and acknowledges that, during the Employment Term, Executive will also have access to, learn, be provided with and, in some cases, will prepare and create certain confidential and proprietary business information, work products and trade secrets of the Company, included but not limited to client and customer information and lists for the Company, internal organization or business structure of the Company, financial products and services of the Company, and work assignments or capabilities of any employee of the Company (herein collectively called the "Confidential Materials"), all of which are of substantial value to the Company in its business. Executive agrees not to use or cause to be used for Executive's own benefit or for the benefit of any third parties or to disclose to any third party in any manner, directly or indirectly, any of the Confidential Materials without the express prior written consent of the Board, unless such information is in the public domain through no fault of Executive or except when required to do so by a court of law, by any governmental agency having supervisory authority over the business of the Company or by any administrative or legislative body (including a committee thereof) with apparent jurisdiction to order Executive to divulge, disclose or make accessible such information, in which case Executive will inform the Company in writing promptly of such required disclosure, but in any event at least five business days prior to disclosure. All written Confidential Information (including, without limitation, in any computer or other electronic format) which comes into Executive's possession during the course of Executive's employment shall remain the property of the Company. Executive agrees to return to the Company either before or immediately upon the termination of Executive's employment with the Company, any and all Confidential Materials which are in tangible form including electronic or software, and any other documents, equipment and materials of any kind relating in any way to the business of the Company which are or may be in the possession, custody and control of Executive and which are or may be the property of the Company, whether Confidential or not, including any and all copies thereof which may have been made by or for Executive. Except as required in the performance of Executive's duties for the Company, or unless expressly authorized in writing by the Board, Executive shall not remove any written Confidential Information from the Company's premises, except in connection with the performance of Executive's duties for the Company and in a manner consistent with the Company's policies regarding Confidential Information. For the purposes of this Section 2, the term "Company" shall be deemed to include the Company and all Affiliates, as defined in Section 6.1(a), of the Company. 3. Non-Competition; Non-Solicitation. (a) During Executive's employment by the Company and for a period of one year after Executive's termination of employment for any reason, Executive will not, except with the prior written consent of the Board, directly or indirectly, own, manage, operate, join, control, finance or participate in the ownership, management, operation, control or financing of, or be connected as an officer, director, employee, partner, principal, agent, representative, consultant or otherwise with, or use or permit Executive's name to be used in connection with, any business or enterprise which is engaged in any business that is directly competitive with any business or enterprise in which the Company is engaged at the time of Executive's termination of employment. Executive acknowledges that the Company operates on a national basis (in the United States) and that this covenant of Executive can not be limited to a service area in which the Company does business. (b) The foregoing restrictions shall not be construed to prohibit the ownership by Executive of less than five percent (5%) of any class of securities of any corporation which is engaged in a competitive business having a class of securities registered pursuant to the Securities Exchange Act of 1934 (the "Exchange Act"), provided that such ownership represents a passive investment and that neither Executive nor any group of persons including Executive in any way, either directly or indirectly, manages or exercises control of any such corporation, guarantees any of its financial obligations, otherwise takes any part in its business, other than exercising Executive's rights as a shareholder, or seeks to do any of the foregoing. (c) Executive further covenants and agrees that during Executive's employment by the Company and for the period of one year thereafter, Executive will not, directly or indirectly, (i) solicit, divert, take away, or attempt to solicit, divert or take away, any of the Company's customers, or (ii) encourage any customer to reduce its patronage of the Company. (d) Executive further covenants and agrees that during Executive's employment by the Company and for the period of one year thereafter, Executive will not, except with the prior written consent of the Board or the CEO, directly or indirectly, solicit or hire, or encourage the solicitation or hiring of, any person who was a managerial or higher level employee of the Company at any time during the term of Executive's employment by the Company by any employer other than the Company for any position as an employee, independent contractor, consultant or otherwise. The foregoing covenant of Executive shall not apply to any person after 12 months have elapsed subsequent to the date on which such person's employment by the Company has terminated. (e) For the purposes of this Section 3, the term "Company" shall be deemed to include the Company and the Affiliates, as defined in Section 6.1(a), of the Company. 4. Equitable Relief. (a) Executive acknowledges and agrees that the restrictions contained in Sections 2 and 3 are reasonable and necessary to protect and preserve the legitimate interests, properties, goodwill and business of the Company, that the Company would not have entered into this Agreement in the absence of such restrictions and that irreparable injury will be suffered by the Company should Executive breach any of the provisions of those Sections. Executive represents and acknowledges that (i) Executive has been advised by the Company to consult Executive's own legal counsel in respect of this Agreement, and (ii) that Executive has had full opportunity, prior to execution of this Agreement, to review thoroughly this Agreement with Executive's counsel. (b) Executive further acknowledges and agrees that a breach of any of the restrictions in Sections 2 and 3 cannot be adequately compensated by monetary damages. Executive agrees that the Company shall be entitled to preliminary and permanent injunctive relief, without the necessity of proving actual damages, as well as an equitable accounting of all earnings, profits and other benefits arising from any violation of Sections 2 or 3 hereof, which rights shall be cumulative and in addition to any other rights or remedies to which the Company may be entitled. In the event that any of the provisions of Sections 2 or 3 hereof should ever be adjudicated to exceed the time, geographic, service, or other limitations permitted by applicable law in any jurisdiction, it is the intention of the parties that the provision shall be amended to the extent of the maximum time, geographic, service, or other limitations permitted by applicable law, that such amendment shall apply only within the jurisdiction of the court that made such adjudication and that the provision otherwise be enforced to the maximum extent permitted by law. (c) If Executive breaches any of Executive's obligations under Sections 2 or 3 hereof, and such breach constitutes "cause," as defined in Section 5.3 hereof, or would constitute cause if it had occurred during the Employment Term, the Company shall thereafter remain obligated only for any benefits due in accordance with the terms of any applicable plans and programs of the Company. (d) Executive irrevocably and unconditionally (i) agrees that any suit, action or other legal proceeding arising out of Sections 2 or 3 hereof, including without limitation, any action commenced by the Company for preliminary and permanent injunctive relief and other equitable relief, may be brought in the United States District Court for the District of Delaware, or if such court does not have jurisdiction or will not accept jurisdiction, in any court of general jurisdiction in Wilmington, Delaware, (ii) consents to the non-exclusive jurisdiction of any such court in any such suit, action or proceeding, and (iii) waives any objection which Executive may have to the laying of venue of any such suit, action or proceeding in any such court. Executive also irrevocably and unconditionally consents to the service of any process, pleadings, notices or other papers in a manner permitted by the notice provisions of Section 10 hereof. (e) For the purposes of this Section 4, the term "Company" shall be deemed to include the Company and the Affiliates, as defined in Section 6.1(a), of the Company. 5. Termination. The Employment Term shall terminate upon the occurrence of any one of the following events: 5.1. Disability. The Company may terminate the Employment Term if Executive is unable substantially to perform Executive's duties and responsibilities hereunder to the full extent required by the Board by reason of illness, injury or incapacity for six consecutive months, or for more than six months in the aggregate during any period of twelve calendar months; provided, however, that the Company shall continue to pay Executive's Base Salary until the Company acts to terminate the Employment Term. If the Company terminates the Employment Term, Executive shall be entitled to receive (i) any amounts earned, accrued or owing but not yet paid under Section 1 above, (ii) a pro rata portion of any Short-Term or Long-Term Incentive Compensation provided under a program described in Section 1.7 for the portion of the performance period under any such program that Executive participated prior to the end of the Employment Term and (iii) any other benefits in accordance with the terms of any applicable plans and programs of the Company. Otherwise, the Company shall have no further liability or obligation to Executive for compensation under this Agreement. Executive agrees, in the event of a dispute under this Section 5.1, to submit to a physical examination by a licensed physician selected by the Board. 5.2. Death. The Employment Term shall terminate in the event of Executive's death. In such event, the Company shall pay to Executive's executors, legal representatives or administrators, as applicable, an amount equal to the installment of Executive's Base Salary set forth in Section 1.4 hereof for the month in which Executive dies. In addition, Executive's estate shall be entitled to receive (i) any other amounts earned, accrued or owing but not yet paid under Section 1 above, (ii) a pro rata portion of any Short-Term or Long-Term Incentive Compensation provided under a program described in Section 1.7 for the portion of the performance period under any such program that Executive participated prior to the end of the Employment Term and (iii) any other benefits in accordance with the terms of any applicable plans and programs of the Company. Otherwise, the Company shall have no further liability or obligation under this Agreement to Executive's executors, legal representatives, administrators, heirs or assigns or any other person claiming under or through Executive. 5.3. Cause. The Company may terminate the Employment Term, at any time, for "cause" upon written notice, in which event all payments under this Agreement shall cease, except for Base Salary to the extent already accrued, but Executive shall remain entitled to any other benefits in accordance with the terms of any applicable plans and programs of the Company. For purposes of this Agreement, Executive's employment may be terminated for "cause" if the Board determines, in the exercise of good faith and reasonable judgment, that any of the following has occurred: (a) Gross negligence or willful misconduct by Executive in the performance of Executive's duties for the Company; or (b) Executive intentionally and materially breached this Agreement, which breach has not been cured within 30 days after written notice of the breach was given by the Board to Executive. For purposes of this Agreement, an act or omission on the part of Executive shall be deemed "intentional" only if it was not due primarily to an error in judgment or negligence and was done by Executive not in good faith and without reasonable belief that the act or omission was in the best interest of the Company. 5.4. Termination Without Cause and Non-Renewal. (a) The Company may remove Executive, at any time, without cause from the position in which Executive is employed hereunder (in such case the Employment Term shall be deemed to have ended) upon not less than 60 days' prior written notice to Executive; provided, however, that, in the event that such notice is given, Executive shall be under no obligation to render any additional services to the Company and, subject to the provisions of Section 3 hereof, shall be allowed to seek other employment. Upon any such removal, Executive shall be entitled to receive, as liquidated damages for the failure of the Company to continue to employ Executive, only the amount due to Executive under the Company's then current severance pay plan for employees. No other payments or benefits shall be due under this Agreement to Executive, but Executive shall be entitled to any other benefits in accordance with the terms of any applicable plans and programs of the Company. (b) Notwithstanding the provisions of Section 5.4(a), in the event that Executive offers to execute, and executes and does not revoke if offered, a written release upon such removal, termination or non-renewal, substantially in the form attached hereto as Annex 1, (the "Release"), of any and all claims against the Company and all related parties with respect to all matters arising out of Executive's employment by the Company (other than any entitlements under the terms of this Agreement or under any other plans or programs of the Company in which Executive participated and under which Executive has accrued a benefit), or the termination thereof, Executive shall be entitled to receive, in lieu of the payment described in Section 5.4(a), which Executive agrees to waive, (i) as liquidated damages for the failure of the Company to continue to employ Executive, 12 monthly cash payments, commencing within 30 days after the effective date of the removal or non-renewal, equal to one-twelfth of Executive's Base Compensation, as defined in Section 6.1 below; (ii) for a period equal to one year following the end of the Employment Term, Executive and Executive's spouse and dependents shall be eligible for a continuation of those Benefit Coverages, as in effect at the time of such termination or removal, and as the same may be changed from time to time, as if Executive had been continued in employment during said period or to receive cash in lieu of such benefits or premiums, as applicable, where such Benefit Coverages may not be continued (or where such continuation would adversely affect the tax status of the plan pursuant to which the Benefit Coverage is provided) under applicable law or regulations; (iii) any other amounts earned, accrued or owing but not yet paid under Section 1 above; (iv) any other benefits in accordance with the terms of any applicable plans and programs of the Company; and (v) all options to purchase shares of common stock of the Company previously granted to Executive shall be 100% vested and nonforfeitable and shall be exercisable until the earlier of (a) the last day of the 36th month following the removal, termination or non-renewal or (b) the expiration of the original term of the option. 5.5. Voluntary Termination. Executive may voluntarily terminate the Employment Term upon 30 days' prior written notice for any reason. In such event, after the effective date of such termination, no further payments shall be due under this Agreement except that Executive shall be entitled to any benefits due in accordance with the terms of any applicable plan and programs of the Company. 6. Other Payments and Definitions. 6.1. Definitions. For all purposes of this Section 6, the following terms shall have the meanings specified in this Section 6.1 unless the context otherwise clearly requires: (a) "Affiliate" shall mean an "affiliate" as defined in Rule 12b-2 of the General Rules and Regulations under the Exchange Act. (b) "Base Compensation" shall mean, for the calendar year immediately preceding Executive's Termination of Employment, Executive's Base Salary and Short-Term Incentive Compensation, as reported for federal income tax purposes on Form W-2 for such calendar year, together with any and all salary reduction authorized amounts under any of the Company's benefit plans or programs for such calendar year. "Base Compensation" shall not include the value of any Long-Term Incentive Compensation, any stock options or any exercise thereunder. (c) "Change of Control" shall mean the happening of any of the following: 1. Prior to any registration of the Company's shares of common stock under Section 12 of the Securities Act of 1933: (i) When any "person," as such term is used in Sections 13(d) and 14(d) of the Exchange Act, other than the Company, its Affiliates, or any Company employee benefit plan (including any trustee of such plan acting as trustee), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than 50% of the combined voting power of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Common Stock") or (ii) the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Voting Securities"); or (ii) Consummation by the Company of a reorganization, merger or consolidation (a "Business Combination"), in each case, with respect to which all or substantially all of the individuals and entities who were the respective beneficial owners of the Outstanding Common Stock and Voting Securities immediately prior to such Business Combination do not, following such Business Combination, beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation, business trust or other entity resulting from or being the surviving entity in such Business Combination in substantially the same proportion as their ownership immediately prior to such Business Combination of the Outstanding Common Stock and Voting Securities, as the case may be; or (iii) Consummation of a complete liquidation or dissolution of the Company or sale or other disposition of all or substantially all of the assets of the Company other than to a corporation, business trust or other entity with respect to which, following such sale or disposition, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, is then owned beneficially, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Common Stock and Voting Securities immediately prior to such sale or disposition in substantially the same proportion as their ownership of the Outstanding Common Stock and Voting Securities, as the case may be, immediately prior to such sale or disposition. 2. After any registration of the Company's shares of common stock under Section 12 of the Securities Act of 1933: (i) An event described in 1(i) above but substituting 20% for 50%; (ii) An event described in 1(ii) or (iii) above; or (iii) Individuals who, as of the beginning of any twenty-four month period, constitute the Board (the "Incumbent Directors") cease for any reason to constitute at least a majority of the Board or cease to be able to exercise the powers of the majority of the Board, provided that any individual becoming a director subsequent to the beginning of such period whose election or nomination for election by the Company's stockholders was approved by a vote of at least a majority of the directors then comprising the Incumbent Directors shall be considered as though such individual were a member of the Incumbent Directors, but excluding, for this purpose, any such individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the Board (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act). (d) "Exchange Act" shall mean the Securities Exchange Act of 1934. (e) "Good Reason" shall mean grounds for Executive to institute a Termination of Employment with the Company (1) upon any reduction (from the level in effect on the date of the Change of Control) of Executive's compensation or benefits due hereunder or (2) after a Change of Control, if Executive is transferred, without Executive's written consent, to a location that is more than 50 miles from Executive's principal place of business immediately preceding the Change of Control. (f) "Termination Date" shall mean the date of receipt of a Notice of Termination of this Agreement or any later date specified therein. (g) "Termination of Employment" shall mean the termination of Executive's actual employment relationship with the Company occasioned by the Company's action. (h) "Termination upon a Change of Control" shall mean a Termination of Employment upon or within two years after a Change of Control either (i) initiated by the Company for any reason other than Executive's (w) disability, as defined in Section 5.1 hereof, (x) death, (y) retirement on or after attaining age 65, or (z) "cause," as defined in Section 5.3 hereof, or (ii) initiated by Executive for Good Reason. 6.2. Notice of Termination. Any Termination upon a Change of Control shall be communicated by a Notice of Termination to the other party hereto given in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) briefly summarizes the facts and circumstances deemed to provide a basis for a Termination of Employment and the applicable provision hereof, and (iii) if the Termination Date is other than the date of receipt of such notice, specifies the Termination Date (which date shall not be more than 15 days after the giving of such notice). 6.3. Payments upon Termination. Subject to the provisions of Section 6.6 hereof, in the event of Executive's Termination upon a Change of Control, the Company agrees (a) in the event Executive executes the Release required by Section 5.4(b), to pay to Executive, in a single cash payment, within thirty days after the Termination Date, (i) Executive's Base Compensation, as defined in Section 6.1(b), and, in addition, all amounts, benefits and Benefit Coverages described in Section 5.4(b)(ii), (iii), (iv), and (v) or (b) in the event Executive fails or refuses to execute the Release required by Section 5.4(b), to pay to Executive, in a single cash payment, within thirty days after the Termination Date, the amount due under Section 5.4(a) above and, in addition, all other amounts and benefits described in Section 5.4(a). 6.4. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent or limit Executive's continuing or future participation in or rights under any benefit, bonus, incentive or other plan or program provided by the Company and for which Executive may qualify; provided, however, that if Executive becomes entitled to and receives all of the payments provided for in this Agreement, Executive hereby waives Executive's right to receive payments under any severance plan or similar program applicable to all employees of the Company. 6.5 Shareholder Approval. In the event that a Change of Control occurs prior to any registration of the Company's shares of common stock under Section 12 of the Securities Act of 1933, the Company covenants and agrees that it shall obtain a favorable vote of more than 75% of its stockholders in order to satisfy the requirements of Section 280G(b)(5)(B) of the Internal Revenue Code of 1986, as amended (the "Code"), in order to preclude the limitations of Section 280G and the excise tax of Section 4999 from applying. 6.6. Certain Increase in Payments. After any registration of the Company's shares of common stock under Section 12 of the Securities Act of 1933 or in the event the Company is breaches its obligation under Section 6.5: (a) Anything in this Agreement to the contrary notwithstanding, in the event that it shall be determined that any payment or distribution by the Company to or for the benefit of Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (the "Payment"), would constitute an "excess parachute payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), Executive shall be paid an additional amount (the "Gross-Up Payment") such that the net amount retained by Executive after deduction of any excise tax imposed under Section 4999 of the Code, and any federal, state and local income and employment tax and excise tax imposed upon the Gross-Up Payment shall be equal to the Payment. For purposes of determining the amount of the Gross-Up Payment, Executive shall be deemed to pay federal income tax and employment taxes at the highest marginal rate of federal income and employment taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Executive's residence on the Termination Date, net of the maximum reduction in federal income taxes that may be obtained from the deduction of such state and local taxes. (b) All determinations to be made under this Section 6 shall be made by the Company's independent public accountant immediately prior to the Change of Control (the "Accounting Firm"), which firm shall provide its determinations and any supporting calculations both to the Company and Executive within 10 days of the Termination Date. Any such determination by the Accounting Firm shall be binding upon the Company and Executive. Within five days after the Accounting Firm's determination, the Company shall pay (or cause to be paid) or distribute (or cause to be distributed) to or for the benefit of Executive such amounts as are then due to Executive under this Agreement. (c) In the event that upon any audit by the Internal Revenue Service, or by a state or local taxing authority, of the Payment or Gross-Up Payment, a change is finally determined to be required in the amount of taxes paid by Executive, appropriate adjustments shall be made under this Agreement such that the net amount which is payable to Executive after taking into account the provisions of Section 4999 of the Code shall reflect the intent of the parties as expressed in subsection (a) above, in the manner determined by the Accounting Firm. (d) All of the fees and expenses of the Accounting Firm in performing the determinations referred to in subsections (b) and (c) above shall be borne solely by the Company. The Company agrees to indemnify and hold harmless the Accounting Firm of and from any and all claims, damages and expenses resulting from or relating to its determinations pursuant to subsections (b) and (c) above, except for claims, damages or expenses resulting from the gross negligence or willful misconduct of the Accounting Firm. 7. Survivorship. The respective rights and obligations of the parties under this Agreement shall survive any termination of Executive's employment to the extent necessary to the intended preservation of such rights and obligations. 8. Mitigation. Executive shall not be required to mitigate the amount of any payment or benefit provided for in this Agreement by seeking other employment or otherwise and there shall be no offset against amounts due Executive under this Agreement on account of any remuneration attributable to any subsequent employment that Executive may obtain. 9. Arbitration; Expenses. In the event of any dispute under the provisions of this Agreement other than a dispute in which the primary relief sought is an equitable remedy such as an injunction, the parties shall be required to have the dispute, controversy or claim settled by arbitration in the City of Wilmington, Delaware accordance with National Rules for the Resolution of Employment Disputes then in effect of the American Arbitration Association, before a panel of three arbitrators, two of whom shall be selected by the Company and Executive, respectively, and the third of whom shall be selected by the other two arbitrators. Any award entered by the arbitrators shall be final, binding and nonappealable and judgment may be entered thereon by either party in accordance with applicable law in any court of competent jurisdiction. This arbitration provision shall be specifically enforceable. The arbitrators shall have no authority to modify any provision of this Agreement or to award a remedy for a dispute involving this Agreement other than a benefit specifically provided under or by virtue of the Agreement. If Executive prevails on any material issue which is the subject of such arbitration or lawsuit, the Company shall be responsible for all of the fees of the American Arbitration Association and the arbitrators and any expenses relating to the conduct of the arbitration (including the Company's and Executive's reasonable attorneys' fees and expenses). Otherwise, each party shall be responsible for its own expenses relating to the conduct of the arbitration (including reasonable attorneys' fees and expenses) and shall share the fees of the American Arbitration Association. 10. Notices. All notices and other communications required or permitted under this Agreement or necessary or convenient in connection herewith shall be in writing and shall be deemed to have been given when hand delivered or mailed by registered or certified mail, as follows (provided that notice of change of address shall be deemed given only when received): If to the Company, to: Marcia E. Heister, General Counsel Electronic Payment Services, Inc. 1100 Carr Road Wilmington, DE 19809 With a required copy to: Morgan, Lewis & Bockius 2000 One Logan Square Philadelphia, PA 19103-6993 Attention: Robert J. Lichtenstein, Esquire If to Executive, to: Ruth Ann Marshall 500 Rock Springs Road Atlanta, GA 30324 or to such other names or addresses as the Company or Executive, as the case may be, shall designate by notice to each other person entitled to receive notices in the manner specified in this Section. 11. Contents of Agreement; Amendment and Assignment. (a) This Agreement sets forth the entire understanding between the parties hereto with respect to the subject matter hereof and cannot be changed, modified, extended or terminated except upon written amendment approved by the Board and executed on its behalf by a duly authorized officer and by Executive. (b) All of the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective heirs, executors, administrators, legal representatives, successors and assigns of the parties hereto, except that the duties and responsibilities of Executive under this Agreement are of a personal nature and shall not be assignable or delegatable in whole or in part by Executive. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form and substance satisfactory to Executive, expressly to assume and agree to perform this Agreement in the same manner and to the extent the Company would be required to perform if no such succession had taken place. 12. Severability. If any provision of this Agreement or application thereof to anyone or under any circumstances is adjudicated to be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect any other provision or application of this Agreement which can be given effect without the invalid or unenforceable provision or application and shall not invalidate or render unenforceable such provision or application in any other jurisdiction. If any provision is held void, invalid or unenforceable with respect to particular circumstances, it shall nevertheless remain in full force and effect in all other circumstances. 13. Remedies Cumulative; No Waiver. No remedy conferred upon a party by this Agreement is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to any other remedy given under this Agreement or now or hereafter existing at law or in equity. No delay or omission by a party in exercising any right, remedy or power under this Agreement or existing at law or in equity shall be construed as a waiver thereof, and any such right, remedy or power may be exercised by such party from time to time and as often as may be deemed expedient or necessary by such party in its sole discretion. 14. Beneficiaries/References. Executive shall be entitled, to the extent permitted under any applicable law, to select and change a beneficiary or beneficiaries to receive any compensation or benefit payable under this Agreement following Executive's death by giving the Company written notice thereof. In the event of Executive's death or a judicial determination of Executive's incompetence, reference in this Agreement to Executive shall be deemed, where appropriate, to refer to Executive's beneficiary, estate or other legal representative. 15. Miscellaneous. All section headings used in this Agreement are for convenience only. This Agreement may be executed in counterparts, each of which is an original. It shall not be necessary in making proof of this Agreement or any counterpart hereof to produce or account for any of the other counterparts. 16. Withholding. The Company may withhold from any payments under this Agreement all federal, state and local taxes as the Company is required to withhold pursuant to any law or governmental rule or regulation. Executive shall bear all expense of, and be solely responsible for, all federal, state and local taxes due with respect to any payment received under this Agreement. 17. Governing Law. This Agreement shall be governed by and interpreted under the laws of the state of Delaware without giving effect to any conflict of laws provisions. 18. Establishment of Trust. The Company has established an irrevocable trust fund pursuant to a trust agreement to hold assets to satisfy any of its obligations under certain employee benefit plans and shall use such trust, in the event of a Change of Control or in the event that a Change of Control is imminent, as defined in that trust, to satisfy its obligations under this Agreement. Funding of such trust fund shall be subject to the terms of the agreement pursuant to which the trust was established. 19. Prior Agreements. Any prior agreement between the Company and Executive regarding Executive's employment by the Company is superseded by this Agreement and shall be terminated and of no further force or effect. IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have executed this Agreement as of the date first above written. Attest: ELECTRONIC PAYMENT SERVICES, INC. By:/s/Marcia E. Heister By:/s/Richard N. Garman ---------------------------------- ---------------------------------- Secretary Richard N. Garman President and Chief Executive Officer Accepted:/s/Ruth Ann Marshall ---------------------------- Ruth Ann Marshall EX-21 4 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 CONCORD EFS, INC. FOR THE QUARTER ENDED MARCH 31, 1999 SUBSIDIARIES OF THE REGISTRANT Jurisdiction of Company Organization Ownership - ------------------------------- ---------------------------- ---------- EFS National Bank National Bank Charter 100% EFS Federal Savings Bank Federal Savings Bank Charter 100% Concord Computing Corporation Delaware 100% Concord Retail Services, Inc. Delaware 100% Concord Equipment Sales Tennessee 100% Pay Systems of America, Inc. Tennessee 100% Digital Merchants Systems of Illinois, Inc. Illinois 100% American Bankcard, Intl, Inc. Illinois 100% Electronic Payment Services, Inc. Delaware 100% EX-27 5 FINANCIAL DATA SCHEDULE
5 1000 3-MOS 3-MOS DEC-31-1999 DEC-31-1998 MAR-31-1999 MAR-31-1998 77285 74728 315776 159051 127495 92182 2760 2785 11324 7023 548583 352858 311054 251693 157406 122301 819637 654647 258328 166435 0 0 0 0 0 0 42777 27364 320272 255217 819637 654647 170234 134666 170234 134666 120849 95029 133217 108129 34810 0 1312 957 3533 3346 3939 27286 6807 9937 (2868) 17349 0 0 0 0 0 0 (2868) 17349 (0.02) 0.14 (0.02) 0.13
EX-99 6 CAUTIONERY STATEMENTS EXHIBIT 99 CONCORD EFS, INC. AND SUBSIDIARIES CAUTIONARY STATEMENTS This Form 10-Q may contain or incorporate by reference statements which may constitute "forward-looking" information, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Prospective investors are cautioned that any such statements are not guarantees of future performance and involve substantial risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. Important factors that could cause actual results to differ materially from those in forward-looking statements include the following. Concord EFS, Inc. (the "Company") undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future results over time. 1. If the Company loses key personnel or is unable to attract additional qualified personnel as it grows, our business could be adversely affected The Company is dependent upon the ability and experience of its Chief Executive Officer, its President, the President of its subsidiary, Electronic Payment Services, Inc. ("Electronic Payment Services"), and a number of other key management personnel who have substantial experience with its operations, the rapidly changing electronic payment processing industry and the selected markets in which the Company offers its services. It is possible that the loss of the services of one or a combination of these senior executives or key managers would have an adverse effect on the Company's operations. The Company's success also depends on its ability to continue to attract, manage and retain other qualified middle management and technical and clerical personnel as it grows. The Company cannot assure you that it will continue to attract or retain such personnel. 2. If the Company is unsuccessful in fully integrating the operations of Electronic Payment Services, its financial condition and operating results could be adversely affected The Company cannot assure you that it will be able to integrate the operations of Electronic Payment Services without encountering difficulties or experiencing the loss of key Electronic Payment Services employees or customers, or that the benefits expected from such integration will be realized. If the Company is unsuccessful in fully integrating the operations of Electronic Payment Services, its financial condition and operating results could be adversely affected. 3. Changes in card association rules could adversely affect the Company's business One of the Company's bank subsidiaries, EFS National Bank, is a member of the VISA and MasterCard organizations and is a registered processor of Discover, American Express and Diners Club transactions. The rules of the credit card associations are set by member banks or, in the case of Discover, American Express and Diners Club, by the card issuers, and some of those banks and issuers compete with the Company in the provision of transaction processing services. Further, with respect to the Company's electronic benefits transfer ("EBT") business, the governmental issuers of the benefits set the rules and the financial institutions or processors hired by the government administer them. It is possible that the rules relating to the Company's credit card, debit or EBT operations will be changed or administered in such a way as to adversely affect its operations. 4. Changes in card association fees could increase the Company's costs From time to time, VISA, MasterCard, Discover, American Express and Diners Club increase the organization and/or processing fees (known as interchange fees) that they charge. For example, in April 1999 VISA and MasterCard increased their fees by up to 10%, which was the largest increase in recent years. Most of the Company's agreements with merchant customers permit these fee increases to be passed on to the merchants. However, it is possible that competitive pressures will result in the Company absorbing a portion of such increases in the future, which would increase its operating costs and reduce its profit margin. 5. Revenue growth in automated teller machine ("ATM") processing could slow because of restrictions on surcharging or a decline in the deployment of ATMs Revenue from "convenience fees" or "surcharges" imposed by owners of ATMs, including the Company, has been a significant factor in the recent growth in the Company's ATM processing business since such fees have encouraged ATM owners to deploy additional terminals. There have been initiatives at both the federal and state levels to limit surcharges, although restrictions have been implemented in only a limited number of jurisdictions to date. To the extent that ATM deployment declines due to the enactment of statutory restrictions on surcharges, fewer favorable retail ATM locations being available or other factors, demand for the Company's ATM processing services may not continue to grow at recent rates or may decline. 6. The Company is dependent on its VISA and MasterCard registrations The Company is registered with VISA and MasterCard as a certified processor and a member. In order to be designated as a certified processor with VISA and MasterCard and to be a member, the Company must continue to adhere to the standards of the VISA and MasterCard credit card associations. These standards are set by the respective member financial institutions of VISA and MasterCard, some of which are the Company's competitors. In the event the Company fails to comply with these standards, its designation as a certified processor or status as a member could be suspended or terminated. The Company cannot assure you that VISA and MasterCard will maintain the Company's registrations or that the current VISA and MasterCard rules allowing it to market and provide transaction processing services will remain in effect. The termination of the Company's member registration or its status as a certified processor, or any changes in the VISA or MasterCard rules that prevent its registration or limit its ability to provide transaction processing and marketing services for VISA or MasterCard, would have an adverse effect on the Company's ability to operate and its financial performance. 7. The Company is subject to the credit risk of its merchant customers In the event a billing dispute between a credit card holder and a merchant is not resolved in favor of the merchant, the transaction is charged back to the merchant, and the purchase price is refunded to the cardholder. If that merchant files for bankruptcy or is otherwise unable or unwilling to pay, the Company must bear the credit risk for the full transaction amount. The Company cannot assure you that chargebacks will not increase in the future. Increases in chargebacks that are not paid by merchants could have an adverse effect on the Company's financial condition and operating results. 8. The Company may be susceptible to fraud occurring at the merchant level Merchant fraud includes recording false sales transactions or false credits by the merchant or its customers. The Company attempts to minimize its exposure to merchant fraud risk by conducting a credit review of a prospective merchant and monitoring the merchant's practices on an ongoing basis. The Company is also able to suspend a merchant's daily settlement if it suspects fraudulent activity. Nonetheless, under some circumstances the Company bears the risk of incidents of merchant fraud. It is possible that incidents of merchant fraud could increase in the future. Increased incidents of merchant fraud could have an adverse effect on the Company's financial condition and operating results. 9. Any significant Year 2000 code problem which arises, if not managed appropriately by the Company, its vendors, its customers, the networks or any other entities with which the Company interfaces, could have an adverse effect on the Company's business The Year 2000 issue generally describes the various problems that may result from the improper processing of dates and date-sensitive transactions by computers and other equipment as a result of computer hardware and software using two digits to identify the year in a date. The failure to properly process dates could result in network and system failures or miscalculations causing disruptions in operations including, among other things, a temporary inability to process transactions, send invoices or engage in other routine business activities. A failure of the Company's customers or vendors, particularly telecommunications carriers, to cause their software and systems to be Year 2000 compliant could have a material adverse effect on the Company and on its ability to meet its obligations. Until the Year 2000 occurs, the Company will not know for sure that all systems will then function adequately. 10. The Company faces significant and increasing competition in each of its lines of business The market for credit, debit and EBT card transaction processing services is highly competitive. The level of competition has increased significantly in recent years and this trend is expected to continue. Management estimates that the three largest credit and debit card processors account for roughly 50% of the total credit and debit card sales volume and that a single competitor accounts for well in excess of 50% of the total dollar volume of payment transaction processing for the trucking industry. Another single competitor accounts for in excess of 50% of the total dollar volume of check verifications. In addition, competitors to the Company's MAC network, which consist of other national and regional ATM networks, continue to consolidate as large banks merge and combine their ATM networks and shared ATM networks continue to combine into larger super-regional conglomerates. The continued expansion of the national debit networks operated by VISA and MasterCard also places increasing competitive pressure on other networks as banks seek to consolidate their network affiliations. Several of the Company's competitors and potential competitors have greater capital, management, marketing and technological resources than the Company has, and the Company cannot assure you that it will continue to be able to compete successfully with such entities. In addition, increased competitive pricing pressures, including a possible reduction in transaction fees charged as a result of any increase in competition, would adversely affect the Company's margins and may have an adverse effect on its financial condition and results of operations. 11. The Company could lose network service business if a new VISA debit card product is successful In 1998, VISA announced the introduction of an on-line debit card product, VISA Check Card II, that would compete with other on-line debit cards but would bear a higher card issuer reimbursement fee than is provided by most other networks, including the MAC network the Company operates. The significant increase in the issuer reimbursement fee may act as an incentive for bank debit card issuers to issue the VISA Check Card II. Further, as proposed, the VISA product would not permit some competing network brands, such as MAC, to also appear on the card. If VISA successfully induces banks to issue this card in replacement of debit cards participating in the MAC network, the Company could experience a loss of network service business. 12. Loss of key customers could reduce the Company's revenue and net income Like its competitors and as a result of its competitive business environment, the Company experiences some turnover of customers. Attrition is due to several factors, including business closures and losses to competitors. The Company's contracts for credit and debit card and/or ATM processing services typically have terms of two to five years duration and renew automatically for successive one-year terms unless expressly terminated. However, the Company cannot assure you that any of these contracts will be allowed to renew or, if renewed, continued upon favorable terms. If they are not renewed, it will be unlikely that the Company would be able to reduce its costs in proportion to the lost revenue because many of its costs are fixed. Increased attrition could have an adverse effect on the Company's revenue and net income. 13. Continued consolidation in the banking and retail industries could adversely affect the Company's growth -- The Company's ATM processing services business could be adversely affected. As banks consolidate, the Company's ability to successfully offer its ATM processing services will depend in part on whether the institutions that survive those consolidations are willing to outsource their ATM processing to third-party vendors like the Company, and whether those institutions have pre-existing alliances with any of the Company's competitors. With respect to network services, larger institutions with more geographically dispersed customer bases may wish to consolidate their network participation with fewer networks having the broadest geographic coverage and best service offerings. As regional networks continue to consolidate, the Company may lose network business if it is unable to continue to offer a range of products that is competitive in terms of geographic distribution as well as quality and breadth of service. -- The Company could lose customers and fee revenue could decrease. Continued consolidation in the retail industry, which makes up a substantial portion of the Company's customer base, could impede its ability to grow as the survivors of such consolidation may have relationships with competitors or may be more interested in pursuing internal processing options due to their increased scale. Larger merchants with larger transaction volumes may also demand lower fees which could result in lower revenue for the Company. 14. Risks related to acquisitions Since the beginning of 1998 the Company has completed three acquisitions. Through these acquisitions and its other investments the Company has expanded its sales force and strengthened its breadth of service offerings. The Company expects to continue to seek selective acquisitions as an element of its growth strategy. It is possible that recent or future acquisitions could have an adverse effect upon the Company's operating results, particularly in the fiscal quarters immediately following the completion of such transactions, while the operations of the acquired entities are being integrated into its operations. Acquisitions involve risks that could cause the Company's actual growth to differ from our expectations. For example: -- The Company may not be able to continue to identify suitable acquisition candidates or to complete acquisitions on favorable terms. -- The Company may not be able to successfully integrate acquired businesses in a timely manner. The Company may also incur substantial costs, delays or other operational or financial problems during the integration process and its operating results could be adversely affected during the integration process. -- The Company could incur additional indebtedness to finance acquisitions. 15. Changes in rules and regulations governing financial institutions could limit the Company's business The Company is a bank holding company subject to regulation under the Bank Holding Company Act of 1956 and to regulation by the Board of Governors of the Federal Reserve System. EFS National Bank is a national banking association established under the National Bank Act and is subject to regulation by the Office of the Comptroller of the Currency as well as the Federal Reserve. The Company's other bank subsidiary, EFS Federal Savings Bank, operates under the Home Owners Loan Act and the rules of the Office of Thrift Supervision, which has primary regulatory and supervisory jurisdiction over it. The Federal Deposit Insurance Corporation insures the domestic deposits of both banks. The restrictions imposed by these and other laws governing the activities of national banks, savings banks and their holding companies and related regulations and restrictions imposed by these regulatory agencies limit the Company's discretion and the discretion of EFS National Bank, EFS Federal Savings Bank and their affiliates in operating their businesses. These limitations include restrictions on: -- engaging in non-bank-related activities -- non-bank mergers and acquisitions -- dividends by banking entities -- intercompany transactions Material changes in applicable federal or state regulation of financial institutions could increase the Company's operating costs, change the competitive environment or otherwise adversely affect the Company. The Company cannot assure you that these laws and regulations will not be amended, or interpreted differently by regulatory authorities, or that new laws and regulations will not be adopted, which could adversely affect its operations, financial condition and prospects. Furthermore, the Company is subject to the rules and regulations of the various credit card and debit card associations and networks which, among other things, prescribe capital requirements. 16. The Company must remain current with rapid technological change The Company's ability to provide services is heavily dependent upon its use of and access to computing and telecommunications technology. The transaction payment processing business has been characterized by rapid technological change, and the Company's business has benefitted from its ability to offer processing and payment services in line with the most recent technological improvements. The Company is committed to maintain its ability to customize processing and payment services to a wide variety of merchant electronic payment equipment, communication protocols, new technologies and customer processing needs. The Company cannot assure you, however, that it will be able to continue to incorporate new developments in payment processing technology, or that the costs involved in doing so will not be substantial. 17. The Company is dependent on third-party vendors for its operations The Company's processing services are dependent upon long-distance and local telecommunications carriers and access to telecommunications facilities on a 24-hour basis. Telecommunications facilities are susceptible to interruption by natural disasters. Although the Company maintains a disaster response plan which it considers adequate and which it regularly reviews, and although the Company has operated following natural disasters in the past without interruption of its processing services, it is possible that a natural disaster could cause extensive or long-term damage that interrupts the Company's processing services or causes it to incur substantial additional expense to avoid interruption of services, either of which could have an adverse effect on the Company's operations and financial condition. 18. If additional state taxes are imposed on the Company, its financial condition and results of operations could be adversely affected Transaction processing companies like the Company may be subject to state taxation of certain portions of their fees charged to merchants for their services. Application of this tax is an ongoing issue in the industry and the states have not yet adopted uniform guidelines implementing these regulations. If the Company is required to pay these taxes and is unable to pass this tax expense through to its merchant customers, its financial condition and results of operations could be adversely affected. 19. The price of the Company's common stock could be volatile In recent years, there has been and may continue to be significant volatility in the market price for the Company's common stock, and there can be no assurance that an active market for the common stock can be sustained. Factors such as changes in quarterly operating results, the gain or loss of significant contracts, the entry of new competitors into the Company's markets, changes in management, announcements of technological innovations or new products by the Company or its competitors, and general events and circumstances beyond the Company's control could have a significant impact on the future market price of the Company's common stock and the relative volatility of such market price. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted against that company. If similar litigation were instituted against the Company, it could result in substantial costs and a diversion of management's attention and resources, which could have an adverse effect on the Company's business. -----END PRIVACY-ENHANCED MESSAGE-----