-----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, QcF0BEU/t1Bde+xZLPf1KqXXUrBZ6yI40j3KzqX1tJZOqTAxuAMRsfH3QFVCpeUn a1YaGvpqpCAxHWyyYzV6Tw== 0000950131-02-000682.txt : 20020414 0000950131-02-000682.hdr.sgml : 20020414 ACCESSION NUMBER: 0000950131-02-000682 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020226 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONCORD EFS INC CENTRAL INDEX KEY: 0000740112 STANDARD INDUSTRIAL CLASSIFICATION: FUNCTIONS RELATED TO DEPOSITORY BANKING, NEC [6099] IRS NUMBER: 042462252 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-13848 FILM NUMBER: 02558256 BUSINESS ADDRESS: STREET 1: 2525 HORIZON LAKE DR STE 120 CITY: MEMPHIS STATE: TN ZIP: 38133 BUSINESS PHONE: 9013718000 MAIL ADDRESS: STREET 1: 2525 HORIZON LAKE DRIVE STREET 2: SUITE 120 CITY: MEMPHIS STATE: TN ZIP: 38133 FORMER COMPANY: FORMER CONFORMED NAME: CONCORD COMPUTING CORP DATE OF NAME CHANGE: 19920515 10-K 1 d10k.txt FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number 000-13848 CONCORD EFS, INC. (Exact Name of Registrant as Specified in its Charter) Delaware 04-2462252 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 2525 Horizon Lake Drive, Suite 120, Memphis, Tennessee 38133 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (901) 371-8000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.33 1/3 Par Value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The aggregate market value of the voting stock held by non-affiliates of the registrant on February 15, 2002 was $14,500,446,855. The number of shares of the registrant's Common Stock outstanding as of February 15, 2002 was 508,172,778. DOCUMENTS INCORPORATED BY REFERENCE Filings made by companies with the Securities and Exchange Commission (SEC) sometimes "incorporate information by reference." This means that the company is referring you to information that either was previously filed or will be filed with the SEC, and this information is considered to be part of the filing you are reading. The following materials are incorporated by reference into this Form 10-K: . Information contained in our Annual Report to Stockholders for the fiscal year ended December 31, 2001 is incorporated by reference in response to Items 1, 5, 6, 7, 7a, and 8. . Information contained in our Proxy Statement to be filed for the Annual Meeting of Stockholders to be held on May 23, 2002 is incorporated herein by reference in response to Items 10, 11, 12, and 13. FORWARD-LOOKING STATEMENTS This report may contain or incorporate by reference forward-looking statements made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties, and other factors, including those set forth in this paragraph. Important factors that could cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by those statements include, but are not limited to: (i) the failure to successfully execute our corporate consolidation plan, (ii) the loss of key personnel or inability to attract additional qualified personnel, (iii) the loss of key customers, (iv) increasing competition, (v) changes in card association rules and practices, (vi) the inability to remain current with rapid technological change, (vii) risks related to acquisitions, (viii) the imposition of additional state taxes, (ix) continued consolidation in the banking and retail industries, (x) business cycles and the credit risk of our merchant customers, (xi) the outcome of litigation involving VISA and MasterCard, (xii) utility and system interruptions or processing errors, (xiii) susceptibility to fraud at the merchant level, (xiv) changes in card association fees, products, or practices, (xv) restrictions on surcharging, (xvi) rules and regulations governing financial institutions and changes in such rules and regulations, and (xvii) volatility of the price of our common stock. We undertake no obligation to publicly update or revise any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, or changes to future results over time. See the cautionary statements included as Exhibit 99.2 to this Form 10-K for a more detailed discussion of the foregoing and other factors. INDUSTRY SOURCES Unless otherwise noted, the industry information provided in this Form 10-K, including the industry rankings, is based upon information contained in the following industry publications: . Thomson Financial's EFT Data Book 2002 Edition, for share of point of sale personal identification number (PIN)-secured debit transactions processed and share of PIN-secured debit payment transactions as of March 2001, . Thomson Financial's EFT Data Book 2002 Edition, for share of PIN-secured debit payment transactions, based on 2000 transactions, . Thomson Financial's 2002 Card Industry Directory, for share of automated teller machines driven as of March 2001, . The Nilson Report, Issue No. 751, for share of annual PIN-secured and signature debit payment transactions among the debit networks, based on 2000 transactions, and . The Nilson Report, Issue 739, for share of dollar volume of credit and signature debit card payments, based on 2000 transactions. We believe these publications contain the most current industry information published on the matters referenced, as of the date of this Form 10-K. CONCORD EFS, INC. FORM 10-K ANNUAL REPORT TABLE OF CONTENTS Item 1. BUSINESS ............................................................. 1 Item 2. PROPERTIES ........................................................... 12 Item 3. LEGAL PROCEEDINGS .................................................... 13 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .................. 14 Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS .................................................. 14 Item 6. SELECTED FINANCIAL DATA .............................................. 15 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................................................ 15 Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ........... 15 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .......................... 15 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES ................................................ 16 Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ................... 16 Item 11. EXECUTIVE COMPENSATION ............................................... 16 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ....... 16 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ....................... 16 Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K .... 17
PART I Item 1. BUSINESS Overview Concord EFS, Inc. is a leading, vertically integrated electronic transaction processor. We acquire, route, authorize, capture, and settle virtually all types of electronic payment and deposit access transactions for financial institutions and merchants nationwide. Our primary activities consist of Network Services, which provides automated teller machine (ATM) processing, debit card processing, deposit risk management, and coast-to-coast debit network access principally for financial institutions, and Payment Services, which provides payment processing for supermarkets, major retailers, petroleum dealers, convenience stores, restaurants, trucking companies, and independent retailers. In 2001 we processed approximately 9.1 billion transactions. Services Network Services. Network Services includes terminal driving and monitoring for ATMs, transaction routing and authorization via the combined STAR(sm), MAC(R), and Cash Station(R) debit network as well as other debit networks, deposit risk management, and real-time card management and authorization for personal identification number (PIN)-secured debit and signature debit cards. In addition, we operate the network switch that connects a coast-to-coast network of ATMs and point of sale (POS) locations that accept debit cards issued by our member financial institutions. Our network access services include transaction switching and settlement. In 2001 we processed approximately 2.3 billion PIN-secured debit transactions and approximately 3.2 billion ATM transactions. Our debit network has been built primarily through the acquisition of a number of regional debit networks, giving us a non-bankcard association, coast-to-coast debit network. In 1999, through our acquisition of Electronic Payment Services, Inc., we acquired the MAC network, which is concentrated in the Northeastern United States. In 2000, through our acquisition of Cash Station, Inc., we acquired the Cash Station network, which is concentrated in the Midwest. Most recently, in February 2001, we acquired Star Systems, Inc. (STAR), whose network spans the Western, Southwestern, and Southeastern United States. As a result of these acquisitions, as of December 31, 2001, our estimated 6,200 financial institution customers deployed almost 200,000 ATMs nationwide that carried at least one of our brands (STAR, MAC, or Cash Station). We market our debit network services under three different brand names: STAR, MAC, and Cash Station. We intend to consolidate all of our brands under the STAR brand name by 2004. We believe this will add to the name recognition of STAR as a coast-to-coast electronic funds transfer (EFT) brand. Through the approximately 865,000 branded POS locations connected to our combined network, we believe that in 2001 we switched approximately 50% of the total United States PIN-secured debit transactions at the point of sale. We believe that we enjoy a significant competitive advantage by owning a coast-to-coast debit network with the strength of the STAR brand that allows us to effectively cross-sell our services to both Network Services and Payment Services customers. For PIN-secured debit transactions using our combined STAR, MAC, and Cash Station debit network and for which we are both the acquiring processor and the debit card processor, we receive (1) a fee from the merchant for acquiring the transaction, (2) a network acquirer fee from the merchant plus a fee from the card issuing financial institution for running the transaction through our network switch, and (3) a fee from the card issuer for obtaining the authorization. For PIN-secured debit transactions that use our network, but where we do not have an acquiring relationship with the merchant and a processing relationship with the issuer, we still earn a network acquirer fee plus a fee for switching the transaction through our network. We hold an 85% ownership interest in Primary Payment Systems, Inc., which we believe is an industry leader in deposit account fraud detection systems. Through Primary Payment Systems, we have extended our services to provide deposit risk management services to our customers. Our deposit risk management products provide the financial services and retail industries with tools to reduce deposit account and securities account fraud and its related expense. Primary Payment Systems' products are marketed to financial institutions directly by Primary Payment Systems as well as through our STAR network. Primary Payment Systems also provides us with access to a number of financial institution customers who are customers of Primary Payment Systems but not our debit network. In 2001 Primary Payment Systems increased the breadth of its deposit risk management services with the acquisition of Wally Industries, Inc. d/b/a WJM Technologies. WJM provides front-end tools to help identify fraudulent deposit accounts before they are opened and activated. Through its Early Warning(R) software product, WJM screens new banking customer relationships. In December 2001 we announced that we had reached an agreement to acquire The Logix Companies, LLC, an electronic transaction processor based in Longmont, Colorado. A private limited liability company, Logix provides financial institutions, retailers, and independent sales organizations with ATM processing, electronic check conversion, identification and authentication services, database development and reporting, and merchant processing services. We expect to close the Logix transaction during the first quarter of 2002, subject to various conditions, including regulatory approval. Payment Services. Payment Services provides the systems and processing that allow retail clients to accept virtually any type of electronic payment, including all card types--credit, debit, electronic benefits transfer (EBT), prepaid, and proprietary cards--as well as a variety of check-based options. We focus on providing payment processing services to selected segments, with specialized systems designed for supermarkets, gas stations, convenience stores, and restaurants. In 2001 we processed approximately 3.6 billion of these payment transactions. Payment Services also includes providing payment cards that enable drivers of trucking companies to purchase fuel and obtain cash advances at truck stops. Our services are turn-key, providing merchants with POS terminal equipment, transaction routing and authorization, settlement, funds movement, and sponsorship into all credit card associations (such as VISA and MasterCard) and debit networks (such as STAR, Pulse, and NYCE). -2- Early in 2000 we completed two acquisitions in the Payment Services area. In February 2000 we completed our acquisition of Virtual Cyber Systems, Inc., an Internet software development company, and in January 2000 we completed our acquisition of National Payment Systems Inc. d/b/a Card Payment Systems, a New York-based reseller of payment processing services. Card Payment Systems provides card-based payment processing services to independent sales organizations, which in turn sell those services to merchants. We have benefited from the shift in payments from cash and checks to debit cards and EBT. We have also realized growth in transactions as a result of our merchants expanding into additional locations and the growth in our independent sales organization partners. We believe our end-to-end product has provided us with a competitive advantage. For PIN-secured debit transactions for which we are both the acquiring processor and the debit card processor, we are able to capture all of the applicable fees associated with each transaction, thereby maximizing our per transaction revenue opportunity. We believe we were the leading provider of payment services to the grocery and petroleum industries as of December 31, 2001. As a fully integrated transaction processor, we are able to provide our Payment Services customers with the following services: . Equipment--We sell or lease POS terminal equipment through volume purchasing arrangements with equipment vendors. . Front-End / Software--We provide the systems and software for POS applications that support a variety of non-cash payment types, including credit, debit, EBT, check authorization, electronic check conversion, and gift cards. . Communications Network--We manage and monitor the telecommunications networks that connect the terminals with our host and with the credit, debit, and EBT gateways connected to us. We support all major telecommunications options, including frame relay, dial-up, satellite, wireless, and digital subscriber line (DSL). . Transaction Authorization--We connect to all major credit card associations, debit networks, and magnetic-stripe EBT programs, allowing us to route transactions to the appropriate network for authorization and then relay this information back to the terminal to complete the transaction. . Merchant Accounting--We perform the merchant accounting function that aggregates transaction information by merchant for submission to the appropriate networks and for merchant-level settlement and reporting. . Settlement / Reporting--The credit card associations settle with our subsidiary EFS National Bank, which acts as the merchant's sponsoring bank. . Funds Movement--Through EFS National Bank, we move the funds from the networks to the merchant's bank via automated clearing house (ACH) transfers. -3- We believe that our ownership of EFS National Bank provides us with a number of competitive advantages in Payment Services: . We are a member of the credit and debit card associations and therefore do not have to pay another financial institution to sponsor us. . We settle our transactions directly through the Federal Reserve and thus do not have to pay a third-party vendor. . We perform services such as ACH and wire transfer internally and therefore do not have to pay another financial institution for such services. Operations by Business Segment "Note Q--Operations by Business Segment" on pages 46 to 48 of our Annual Report to Stockholders for the fiscal year ended December 31, 2001 (Annual Report to Stockholders) contains information about the relative contribution of our Network Services and Payment Services segments to our earnings and is incorporated herein by reference. Strategy Our strategy is to grow our Network Services and Payment Services businesses by providing a fully integrated range of processing services at competitive prices targeted to select markets with high growth characteristics. We have developed and continue to pursue the following initiatives to improve our competitive position and increase our share of the market for transaction processing services: . Focus on markets that are switching rapidly to electronic payment cards. We target markets in which the use of cash and checks has historically been high, such as supermarkets and gas stations. . Utilize a multi-faceted sales approach to target selected vertical markets. We seek to penetrate our selected markets through a segmented sales approach. As of January 31, 2002, approximately 325 corporate salespeople sold directly to small, medium, and large companies, and approximately 1,000 third party independent sales organizations and agent banks sold to smaller merchants. Our direct sales force is organized along key customer industry lines with specialization in the petroleum, supermarket, major retail, and restaurant industries. We believe that this vertical sales approach provides us with broad access to potential new customers. . Provide a fully integrated range of services. We believe that our vertically integrated structure allows us to be a highly efficient provider of electronic payment processing services. By providing a wide range of relevant services, we are able to customize services, to offer competitive prices, and to capitalize on the complete revenue opportunity with each of our clients. Further, for PIN-secured debit transactions for which we are both the acquiring processor and the debit -4- card processor, we are able to capture all of the applicable fees associated with each transaction, thereby maximizing our per transaction revenue opportunity. . Cross-sell our services to existing clients. With the acquisitions of STAR and Cash Station, we provided network access to approximately 6,200 financial institution customers as of December 31, 2001. These acquisitions created an opportunity to increase revenue and profits by cross-selling our ATM processing and debit card processing products to these existing financial institution customers, especially STAR and Cash Station members, which as of December 31, 2001 were under-penetrated with our processing services as compared to MAC network members. . Leverage our PIN-secured debit infrastructure. As a coast-to-coast debit network, we believe that we have significant opportunities to add additional services on our network. For example, we believe that most Internet-based transactions are currently fulfilled using established credit card payment methodologies. As the use of PIN-secured debit cards for retail purchases continues to rise, we believe that debit card usage on the Internet will also increase. We are also developing services to take advantage of our existing ATM network and card base, such as person-to-person payments. . Develop new products and services to meet market needs. We strive to offer our customers new payment alternatives and other products that will help them reduce their costs or improve revenues. Examples include electronic check conversion, which is designed to reduce the number of checks written for payment; gift cards and loyalty programs, which are value-added services to increase sales; an identification verification service, which is designed to reduce new account fraud losses and is expected to help financial institutions comply with the USA Patriot Act; and an Internet-based payment gateway, which allows new clients to connect to our processing platforms in hours rather than weeks, with minimal programming and without certification. . Maintain a highly efficient operating structure. We strive to maintain a highly efficient operating structure, including an emphasis on low overhead and cost control efforts. Additionally, through our banking subsidiary, EFS National Bank, we are able to participate directly in bank card associations and regional and national ATM and debit card networks to cost-effectively settle electronic transactions and to substantially reduce our ACH and wire transfer fees. We have been successful in leveraging the efficiency of our operating structure and efficiency improvements in telecommunications and other technologies. Between 1998 and 2001, we improved our operating income per transaction at a compound annual rate of 13%, excluding acquisition expenses and restructuring charges. . Seek selective acquisitions. We continue to look for opportunities to grow our business through selective acquisitions that will allow us to increase our customer base, increase profitable transaction volume, and reduce costs. For example, the acquisitions of STAR and Cash Station enabled us to increase our volume of PIN- -5- secured debit transactions at the point of sale. We have also increased our volume of credit transactions processed through the acquisition of Card Payment Systems. In addition, we recently announced that we had reached an agreement to acquire Logix, an electronic transaction processor that provides financial institutions, retailers, and independent sales organizations with ATM processing, electronic check conversion, identification and authentication services, database development and reporting, and merchant processing services. We expect to close the Logix transaction during the first quarter of 2002, subject to various conditions, including regulatory approval. Marketing and Customers We market our services and products on a nationwide basis to supermarkets, gas stations, convenience stores, restaurants, independent retailers, financial institutions, and trucking companies. We market both directly through our internal sales force and indirectly through independent sales organizations and their representatives. As of December 31, 2001, our sales force included approximately 75 corporate salespeople selling directly to medium and large companies; approximately 315 independent salespeople at H & F Services, Inc., an independent sales organization selling to small- and medium-sized companies; and approximately 970 third party independent sales organizations and agent banks selling to smaller merchants. On January 1, 2002, we acquired H & F Services, and as a result, our corporate sales force grew to 325 salespeople as of January 31, 2002, increasing our ability to penetrate all tiers of the market more efficiently. Our strategy is to use our in-house marketing expertise to target companies within selected industries and to use the extensive market penetration of independent sales organizations to further extend our sales reach into small, independent firms nationwide. Our relationship with independent sales organizations was augmented by our acquisition, early in 2000, of Card Payment Systems, which provides card-based payment processing services to independent sales organizations. As an integrated services provider, we have natural cross-selling opportunities within our client base. We acquired Electronic Payment Services in 1999, Cash Station in 2000, and STAR in 2001. Our acquisition of Electronic Payment Services granted us the opportunity to cross-sell settlement processing services to the approximately 80,000 merchant customer locations that primarily received only authorization services from Electronic Payment Services. Our acquisitions of Cash Station and STAR increased our client base to an estimated 865,000 branded POS locations and approximately 6,200 financial institution customers as of December 31, 2001 and afford us the opportunity to cross-sell ATM and card processing services to those Cash Station and STAR POS locations and financial institutions that primarily use third-party processors or process internally. We have historically had success in marketing through key trade association relationships, such as our endorsement by the National Grocers Association as the recommended provider of electronic services to grocers and our partnership with the Food Marketing Institute to develop and promote new payment products to the supermarket industry. We are also an authorized issuer of payment cards and processor of card transactions with the major truck stop chains, which provides a substantial advantage in selling our card payment -6- systems to trucking companies. Our relationships with the truck stop owners also affords us an opportunity to place ATMs at truck stops, which in turn provides a further advantage in selling our integrated processing and banking services to trucking companies and truck drivers. Our established presence in supermarket chains, grocery stores, convenience stores, and other small and mid-sized retailers gives us an advantage in establishing relationships with EBT providers, whose benefits are primarily accessed at such retail locations. Our customers are among the leaders in their industries. As of December 31, 2001, our Network Services customers included some of the largest financial institutions in the United States. As of December 31, 2001, our largest Network Services customers were Banc One Corporation, Charter One Bank FSB, First Union Corporation, PNC Bank Corporation, and Wells Fargo Bank, and our largest Payment Services customers were Delhaize America, Inc., Diamond Shamrock Refining & Marketing Company, PETsMART, Inc., Sunoco, Inc., and SUPERVALU, Inc. Competition The businesses of electronic payment processing and settlement, ATM processing, debit card processing, and debit network access services are all highly competitive. Our principal competitors include national and major regional banks, local processing banks, non-bank processors, and other independent service organizations, some of which have substantially greater capital and technological, management, and marketing resources than we have. We also compete with other electronic payment processing organizations and debit networks. The recent trend of consolidation in the banking industry in the United States has resulted in fewer opportunities for merchant portfolio acquisitions, as many small banks have been acquired by large banks, some of which compete with us in providing processing services. . In our Network Services segment, management estimates that: . as of March 2001, the three largest ATM processors, of which we believe that we were the largest, drove approximately 27% of total ATMs in the United States, . as of March 2001, the three largest regional debit networks, of which we believe that we were the largest, processed approximately 70% of all PIN-secured debit payment transactions, and . in 2000, VISA and MasterCard collectively accounted for over 65% of total annual debit payment transactions (both PIN-secured and signature debit transactions) among the debit networks. . In our Payment Services segment, we compete with other companies who have a significant share of each business. Management estimates that: . in 2000, the three largest acquirers of PIN-secured debit payment transactions, of which we believe that we were the largest, accounted for approximately 40% of all PIN-secured debit payment transactions and -7- . in 2000, the three largest bank card acquirers, which we believe that we were not among, processed approximately 65% of the total dollar volume of credit and signature debit card payments. There can be no assurance that we will continue to be able to compete successfully with such competitors. While we compete with VISA and MasterCard in our Network Services business, at the same time our Payment Services business relies on VISA and MasterCard for the authority to process transactions in the VISA and MasterCard systems. Moreover, VISA and MasterCard have existing products and rules that could make it difficult for us to compete against them, which could further increase VISA's and MasterCard's power in the debit network access portion of the Network Services business. In addition, the competitive pricing pressures that would result from any increase in competition could adversely affect our margins and may have a material adverse effect on our operating results and financial condition. We compete in terms of price, quality, speed, and flexibility in customizing systems to meet the particular needs of customers. We believe that we are one of the few fully integrated suppliers of a broad range of hardware, processing, banking, and data compilation services for use in transactions at retail locations. We also believe that we are one of the few processors that operates a coast-to-coast debit network, permitting us to offer comprehensive debit transaction processing services. Supervision and Regulation We and our subsidiaries are subject to a number of federal and state laws. We are both a financial holding company and a bank holding company registered with the Federal Reserve under the Bank Holding Company Act of 1956, as amended, which is administered by the Federal Reserve. As a financial holding company, we are subject to the Bank Holding Company Act, which generally prohibits us from: . directly or indirectly engaging in any activities other than banking, managing, or controlling banks and certain other activities that the Federal Reserve has approved as financial in nature, incidental to such a financial activity, or complementary to a financial activity and . acquiring, directly or indirectly, ownership or control of more than 5% of any class of voting shares of any company that is engaged in activities other than activities that the Federal Reserve has approved as financial in nature, incidental to such a financial activity, or complementary to a financial activity, with certain exceptions. For us to qualify as a financial holding company, our depository institution subsidiaries needed to have at least a "satisfactory" Community Reinvestment Act rating on their most recent examination, and we were required to certify that our depository institution subsidiaries are well -8- capitalized and well managed. If any of our depository institution subsidiaries ceases to be well capitalized or well managed, we are required to enter into an agreement with the Federal Reserve to bring that depository institution into compliance with applicable capital and management requirements. We are in the process of entering into such an agreement with the Federal Reserve as a result of the failure of our subsidiary, EFS Federal Savings Bank, to maintain compliance with these standards. In the interim, the Federal Reserve has required that in order to engage in new non-banking activities, including through acquisitions, we must comply with procedures applicable to bank holding companies that have not registered as financial holding companies. We were subject to those procedures prior to our registration as a financial holding company on September 8, 2000. Accordingly, we do not expect these requirements to have a material impact on our business. We are required to file with the Federal Reserve an annual report and such additional information as the Federal Reserve may require. We also are required to obtain the prior approval of the Federal Reserve before acquiring more than 5% of any class of voting stock of any bank that is not already controlled by us. The Federal Reserve may examine our records and each of our subsidiaries' records, including a review of our capital adequacy in relation to guidelines issued by the Federal Reserve. The Federal Reserve requires minimum capital levels as measured by three ratios: total capital to risk-weighted assets, tier one capital to risk-weighted assets, and tier one capital to average total assets. If the level of capital is deemed to be inadequate, the Federal Reserve may restrict our future expansion and operations and take certain other enforcement actions. The Federal Reserve possesses cease and desist powers over us if, among other things, our actions or actions of our subsidiaries represent unsafe or unsound practices or violations of law. Further, both of our depository institution subsidiaries exceed the capital requirements applicable to them to be considered well capitalized. Federal law also regulates transactions among us and our affiliates, including the amount of loans or investments that our banking affiliates, EFS National Bank and EFS Federal Savings Bank, may make to non-bank affiliates and the amount of advances that each may make to third parties collateralized by an affiliate's securities. In addition, various federal and state laws and regulations regulate the operations of EFS National Bank and EFS Federal Savings Bank, including laws and regulations requiring reserves against deposits, limiting the nature and pricing of loans, and restricting investments and other activities. Our bank affiliates are also limited in the amount of dividends that they may declare. Prior regulatory approval must be obtained before declaring any dividends if the amount of capital, surplus, and retained earnings is below certain statutory limits. EFS National Bank and EFS Federal Savings Bank also are generally prohibited from engaging in certain tie-in arrangements with their affiliates that condition the availability or price of their products and services on the customer also obtaining products or services from the affiliate or providing credit, property, or services to an affiliate. As a national bank, EFS National Bank operates under the rules and regulations of the Office of the Comptroller of the Currency, which is its primary regulator. As a federal savings bank, EFS Federal Savings Bank operates under the regulatory and supervisory jurisdiction of the Office of Thrift Supervision. EFS Federal Savings Bank is also a member of the Federal Reserve System and is therefore subject to certain provisions of the Federal Reserve Act. The Federal Deposit Insurance Corporation insures the domestic deposits of both banks. Each bank -9- also is subject to periodic examination by, and must make regularly scheduled reports of financial condition to, its respective regulatory agencies. Our EFT services sold to financial institutions are regulated by certain state and federal banking laws. Material changes in federal or state regulation could increase our cost of providing EFT services, change the competitive environment, or otherwise adversely affect us. We are not aware of any such change that is pending. We also are affected by the financial privacy provisions of the Gramm-Leach-Bliley Act (the GLB Act) and its implementing regulations, which apply to banks and other financial institutions. The GLB Act and regulations generally require financial institutions to disclose their practices for gathering and disclosing nonpublic personal financial information regarding consumers. Consumers also have the right to opt out of certain types of information sharing. We do not deal directly with consumers through our Payment Services or Network Services businesses. However, certain consumer financial information that we receive may be subject to limitations on reuse and redisclosure under the GLB Act. Additionally, pending legislation at the state and federal levels may further restrict our information gathering and disclosure practices. Although the GLB Act and other privacy laws have not had a material impact on our business to date, existing and potential future privacy laws may limit our ability to develop new products and services that make use of certain data gathered through our Network Services and Payment Services businesses. In addition to regulation by federal and state laws and governmental agencies, we are subject to the rules and regulations of the various credit card associations and debit networks, including requirements for equity capital commensurate with transaction processing dollar volume. Executive Officers of the Registrant The following table sets forth certain information concerning our executive officers as of February 15, 2002:
Name Age Position(s) - -------------------------- --------- --------------------------------------------------------------------- Dan M. Palmer 58 Chairman of the Board and Chief Executive Officer Edward A. Labry III 39 Director and President Vickie L. Brown 47 Senior Vice President Ronald V. Congemi 54 Director, Senior Vice President, and President of Network Services Richard M. Harter 65 Director and Secretary Edward T. Haslam 49 Senior Vice President, Chief Financial Officer, and Treasurer Marcia E. Heister 45 Senior Vice President, General Counsel, and Assistant Secretary
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Name Age Position(s) - ---------------------------- --------- --------------------------------------------------------------------- E. Miles Kilburn 39 Senior Vice President of Business Strategy and Corporate Development William E. Lucado 60 Senior Vice President, Chief Investment Officer, Chief Compliance Officer, and Assistant Secretary Steve A. Lynch 41 Senior Vice President and Chief Information Officer Christopher S. Reckert 39 Senior Vice President and Chief Marketing Officer
Dan M. Palmer has been a director of Concord since May 1987, was appointed Chairman of the Board in 1991, and was named Chief Executive Officer of Concord in 1990. Mr. Palmer founded Union Planters National Bank's Electronic Fleet Systems operation in 1982, which was acquired by Concord in 1985. Edward A. Labry III has been a director of Concord since September 1993. Mr. Labry joined Concord in 1985, assumed the role of Chief Marketing Officer in 1990, and was named President of Concord in 1994. Vickie L. Brown joined Concord in 1979, was named Senior Vice President in 1991, and previously served in various financial and operations positions with Concord. Ronald V. Congemi has been a director of Concord since February 2001. Mr. Congemi was named Senior Vice President and President of Network Services of Concord in May 2001, and he has been President of STAR since its inception in 1984. Richard M. Harter has been a director of Concord and Secretary of Concord since its formation. From 1969 through 2001, Mr. Harter was a partner in Bingham Dana LLP, Concord's corporate counsel. Mr. Harter now serves as of counsel to that firm. Edward T. Haslam joined Concord in February 1999, became Chief Financial Officer in April 2000, and became Senior Vice President and Treasurer in May 2001. At various times, Mr. Haslam has served as Chief Operating Officer, Chief Financial Officer, Chief Accounting Officer, and Executive Vice President of Electronic Payment Services, which he joined in 1994. Marcia E. Heister joined Concord in February 1999, became General Counsel in June 2000, and became Senior Vice President and Assistant Secretary in May 2001. At various times, Ms. Heister has served as General Counsel, Corporate Secretary, and Executive Vice President of Electronic Payment Services, which she joined in 1994. E. Miles Kilburn joined Concord in February 2001 and was named Senior Vice President of Business Strategy and Corporate Development in May 2001. Prior to joining Concord, Mr. Kilburn served as Group Executive Vice President and Chief Financial Officer of STAR, having joined STAR in 1995 as Senior Vice President and Counsel. William E. Lucado was named Senior Vice President and Chief Investment and Compliance Officer of Concord in 1998 and became Assistant Secretary of Concord in May 2001. Mr. Lucado joined Concord in 1991. -11- Steve A. Lynch joined Concord in February 1999, became Chief Information Officer in April 2000, and became Senior Vice President in May 2001. Previously, Mr. Lynch served as Senior Vice President, Technology of Electronic Payment Services, which he joined in 1997. Prior to that, Mr. Lynch held various systems development management positions in the industry since 1983. Christopher S. Reckert was named Senior Vice President and Chief Marketing Officer of Concord in May 2001. Previously, Mr. Reckert served as Senior Vice President, Sales and has held various sales and marketing positions in the industry since 1987. Employees As of January 31, 2002, we employed 2,628 full and part-time personnel, including 696 data processing and technical employees, 1,297 in operations, and 635 in sales and administration. None of our employees are represented by a labor union. We consider our employee relations to be satisfactory. Item 2. PROPERTIES The following table sets forth certain information concerning our principal facilities as of December 31, 2001:
Area in Description / Lease Expiration Location Square Feet Business Segment (if applicable) - -------------------------- ----------------- ------------------------------------------ --------------------------- Bartlett, TN 19,160 Distribution Center and Warehouse, October 15, 2004 Payment Services Bartlett, TN 6,480 Operations and Warehouse, Payment August 15, 2004 Services Chicago, IL 21,719 Offices, Network Services December 31, 2007 Chicago, IL 20,231 Subleased July 31, 2002 Columbia, SC 6,314 Offices, Network Services August 31, 2004 Cordova, TN 48,119 Customer Service Center, Payment Services December 31, 2006 Cordova, TN 1,407 Federal Savings Bank Branch, Payment June 30, 2003 Services Elk Grove, IL 18,300 Data Processing Center and Operations, May 31, 2005 Payment Services Ft. Wright, KY 3,902 Sales Office, Network Services September 30, 2003 Maitland, FL 119,589 Offices and Data Processing Center, August 31, 2011 Network Services Maitland, FL 63,259 Offices and Operations, Network Services May 31, 2003 Maitland, FL 30,792 Offices and Operations, Network Services June 30, 2003 Marietta, GA 100,000 Offices and Data Processing Center, September 30, 2006 Payment Services Memphis, TN 43,375 Corporate Headquarters, Offices, Data September 30, 2003 Processing Center, and Operations, Payment Services
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Area in Description / Lease Expiration Location Square Feet Business Segment (if applicable) - -------------------------- ----------------- ------------------------------------------ --------------------------- Memphis, TN 11,535 Offices and Operations, Payment Services September 30, 2003 New York, NY 10,000 Offices, Payment Services January 31, 2009 North Olmsted, OH 36,627 Offices and Sales Office, Network December 31, 2003 Services Oakland, TN 800 Federal Savings Bank Branch, Payment Month-to-Month Services Petaluma, CA 8,132 Offices and Operations, Network Services May 31, 2003 Pittsburgh, PA 2,316 Sales Office, Network Services August 31, 2003 Pleasanton, CA 10,083 Offices, Payment Services October 31, 2003 Reston, VA 5,369 Offices, Network Services May 31, 2006 Reston, VA 7,813 Offices, Network Services May 31, 2002 San Diego, CA 19,544 Offices and Operations, Network Services February 28, 2003 Scottsdale, AZ 17,978 Offices and Operations, Network Services December 31, 2005 Shelby Oaks, TN 14,525 Offices, Payment Services December 31, 2003 Tempe, AZ 5,848 Offices, Payment Services October 31, 2003 Wilmington, DE 107,500 Corporate Offices, Offices, and May 21, 2005 Operations, Network Services Wilmington, DE 70,000 Offices, Data Processing Center, and Not Applicable Operations, Network Services
We believe all facilities were suitable and adequate for our businesses as of December 31, 2001. However, we periodically review our space requirements and may acquire new space to meet the needs of our businesses or consolidate and dispose of or sublet facilities that are no longer required. Item 3. LEGAL PROCEEDINGS In September 2000, EFS National Bank was named as a defendant in a purported class action lawsuit filed in the Circuit Court of Tennessee for the Thirtieth Judicial District at Memphis alleging that certain of EFS National Bank's rate and fee changes were improper under Tennessee law due to allegedly deficient notice. The plaintiffs filed an amended complaint alleging that the class consists of at least 60,000 merchants that were subjected to the allegedly improper rate and fee changes over a several-year period. The amended complaint seeks damages in excess of $15,000,000 as well as injunctive relief and unspecified punitive damages, treble damages, attorney fees, and costs. A substantial amount of discovery has taken place in this case. The parties are currently engaged in settlement discussions and have advised the Tennessee Court that they are attempting to resolve this matter. Ongoing discussions continue, and substantive issues remain that preclude -13- achieving a settlement at this time. The parties anticipate further discussions in an attempt to address and resolve the remaining issues. In July 1999, a purported class action complaint with similar allegations and requests for relief was filed in St. Charles County, Missouri, but there has not been a substantial amount of activity in the Missouri case. Although these matters are in the preliminary stages, EFS National Bank believes it has various defenses to the claims against it, and if these matters cannot be resolved by settlement, EFS National Bank intends to vigorously defend against all claims. Card Payment Systems was named as a defendant in a class action suit filed in April 2001 in the District Court, Harrison County, Texas. Plaintiffs alleged that the subsidiary had violated Section 227(b)(1)(C) of the Telephone Consumer Protection Act, 47 U.S.C. Section 227 et seq., and Section 35.47(9) of the Texas Business and Commerce Code by sending unsolicited advertisements by facsimile. Plaintiffs sought injunctive relief and statutory damages in the amount of $500 per facsimile and treble damages in the amount of $1,500 per facsimile for willful or knowing violations of the statutes. Card Payment Systems has entered into a settlement agreement pursuant to which the claims against Card Payment Systems were dismissed on January 25, 2002. We are also a party to various routine lawsuits arising out of the conduct of our business, none of which is expected to have a material adverse effect upon our financial condition or results of operations. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of stockholders in the fourth quarter of fiscal 2001. PART II Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Market Price of and Dividends on Our Common Stock and Related Stockholder Matters Information included under the caption "Market Value" on page 3 of our Annual Report to Stockholders is incorporated herein by reference. -14- Recent Issuances of Unregistered Securities In February 1999, in connection with the acquisition of Electronic Payment Services, we issued 90.1 million shares of our Common Stock, $0.33 1/3 par value per share, to the former stockholders of Electronic Payment Services in a transaction not registered under the Securities Act of 1933 (the Securities Act). The transaction was exempt from registration under Section 4(2) of the Securities Act. The unregistered shares were subsequently registered and resold in a transaction in June of 1999. In January 2000, in connection with the acquisition of Card Payment Systems, we issued approximately 12.5 million shares of our Common Stock, $0.33 1/3 par value per share, to the two former stockholders of Card Payment Services in a transaction not registered under the Securities Act. The transaction was exempt from registration under Section 4(2) of the Securities Act. The unregistered shares have not been subsequently registered. In February 2001, in connection with the acquisition of STAR, we issued approximately 48.0 million shares of our Common Stock, $0.33 1/3 par value per share, to the former stockholders of STAR in a transaction not registered under the Securities Act. The transaction was exempt from registration under Section 4(2) of the Securities Act. A majority of the unregistered shares were subsequently registered and resold in a transaction in June of 2001. Item 6. SELECTED FINANCIAL DATA Information included under the caption "Financial Highlights" on page 4 of our Annual Report to Stockholders is incorporated herein by reference. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information included under the caption "Management's Discussion & Analysis of Financial Condition and Results of Operations" on pages 12 to 22 of our Annual Report to Stockholders is incorporated herein by reference. Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information included under the caption "Management's Discussion & Analysis of Financial Condition and Results of Operations--Quantitative and Qualitative Disclosures About Market Risk" on pages 21 to 22 of our Annual Report to Stockholders is incorporated herein by reference. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The report of independent auditors and consolidated financial statements set forth below are included on pages 23 to 52 of our Annual Report to Stockholders and are incorporated herein by reference: . Report of Independent Auditors -15- . Consolidated Balance Sheets as of December 31, 2001 and 2000 . Consolidated Statements of Income for the years ended December 31, 2001, 2000, and 1999 . Consolidated Statements of Stockholders' Equity for the years ended December 31, 2001, 2000, and 1999 . Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000, and 1999 . Notes to Consolidated Financial Statements as of December 31, 2001 Quarterly results of operations for the years ended December 31, 2001 and 2000 under the caption "Note U--Quarterly Financial Results (Unaudited)" on page 51 of our Annual Report to Stockholders are incorporated herein by reference. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information included under the captions "Election of Directors" and "Committees; Attendance" in our Proxy Statement for the Annual Meeting of Stockholders to be held on May 23, 2002 (Proxy Statement) is incorporated herein by reference. See also the section captioned "Executive Officers of the Registrant" in Part I of this Form 10-K. Item 11. EXECUTIVE COMPENSATION Information included under the captions "Compensation of Directors," "Executive Compensation," "Compensation Committee Interlocks and Insider Participation," "Compensation Committee Report on Executive Compensation," and "Five Year Cumulative Stockholder Return" in our Proxy Statement is incorporated herein by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information included under the caption "Beneficial Ownership of Common Stock" in our Proxy Statement is incorporated herein by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information included under the caption "Certain Transactions" in our Proxy Statement is incorporated herein by reference. -16- PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS The following financial statements are incorporated by reference from pages 23 to 52 of our Annual Report to Stockholders for the fiscal year ended December 31, 2001, as provided in Item 8 above: . Report of Independent Auditors . Consolidated Balance Sheets as of December 31, 2001 and 2000 . Consolidated Statements of Income for the years ended December 31, 2001, 2000, and 1999 . Consolidated Statements of Stockholders' Equity for the years ended December 31, 2001, 2000, and 1999 . Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000, and 1999 . Notes to Consolidated Financial Statements as of December 31, 2001 Quarterly results of operations for the years ended December 31, 2001 and 2000 under the caption "Note U--Quarterly Financial Results (Unaudited)" on page 51 of our Annual Report to Stockholders are incorporated herein by reference. 2. FINANCIAL STATEMENT SCHEDULES All financial statement schedules are omitted, as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes. 3. EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K AND PARAGRAPH (C) BELOW See response to Item 14(c) below. (b) Reports on Form 8-K None. -17- (c) Exhibits
Exhibit No. Description - --------------- --------------------------------------------------------------------------------------------- 2.1 Agreement and Plan of Merger among Concord EFS, Inc., CEFT, Inc., and Electronic Payment Services, Inc., dated as of November 20, 1998, is incorporated herein by reference to Exhibit 2.1 to the current report on Form 8-K (File No. 000-13848), filed on March 10, 1999. 2.2 Agreement and Plan of Merger among Concord EFS, Inc., Orion Acquisition Corp., and Star Systems, Inc., dated as of October 6, 2000, is incorporated herein by reference to Exhibit 10 to Concord's quarterly report on Form 10-Q (File No. 000-13848), filed on November 14, 2000. 3.1 Restated Certificate of Incorporation of Concord EFS, Inc. is incorporated herein by reference to Exhibit 4.4 to Amendment No. 1 to Concord's registration statement on Form S-3 (File No. 333-61084), filed on June 4, 2001. 3.2 Amended and Restated Bylaws of Concord EFS, Inc. are incorporated herein by reference to Exhibit 4.2 to Concord's registration statement on Form S-8 (File No. 333-74215), filed on March 10, 1999. 10.1 Concord EFS, Inc. 1993 Incentive Stock Option Plan, as amended and restated, is incorporated herein by reference to Exhibit 99.1 to Concord's registration statement on Form S-8 (File No. 333-74215), filed on March 10, 1999. 10.2 Electronic Payment Services, Inc. 1995 Stock Option Plan, as amended, is incorporated herein by reference to Exhibit 99.1 to Concord's registration statement on Form S-8 (File No. 333-74213), filed on March 10, 1999. 10.3 Star Systems, Inc. 2000 Equity Incentive Plan is incorporated herein by reference to Exhibit 99.1 to Concord's registration statement on Form S-8 (File No. 333-56066), filed on February 23, 2001. 10.4* Incentive Agreement between Concord EFS, Inc. and Dan M. Palmer, dated as of February 26, 1998, is incorporated herein by reference to Exhibit 10.3 to Concord's annual report on Form 10-K (File No. 000-13848), filed on April 1, 1999. 10.5* Incentive Agreement between Concord EFS, Inc. and Edward A. Labry III, dated as of February 26, 1998, is incorporated herein by reference to Exhibit 10.2 to Concord's annual report on Form 10-K (File No. 000-13848), filed on April 1, 1999. 10.6* Employment Agreement between H&S Holding Company (renamed Star Systems, Inc.) and Ronald V. Congemi, dated as of March 1, 1999, and amendment thereto between Star Systems, Inc., Concord EFS, Inc., and Ronald V. Congemi, dated October 6, 2000, are incorporated herein by reference to Exhibit 10.6 to Concord's annual report on Form 10-K (File No. 000-13848), filed on April 2, 2001. 10.7* Agreement Terminating Salary Continuation Agreement between Star Systems, Inc., Concord EFS, Inc., and Ronald V. Congemi, dated October 6, 2000, is incorporated herein by reference to Exhibit 10.7 to Concord's annual report on Form 10-K (File No. 000-13848), filed on April 2, 2001. 10.8* Star Nonqualified Deferred Compensation Plan, effective as of January 1,
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Exhibit No. Description - --------------- --------------------------------------------------------------------------------------------- 2000, is incorporated herein by reference to Exhibit 10.8 to Concord's annual report on Form 10-K (File No. 000-13848), filed on April 2, 2001. 10.9 Stock Purchase and Sale Agreement between Payroll Company, Inc. and Concord EFS, Inc., dated March 30, 2001, is incorporated herein by reference to Exhibit 10.9 to Amendment No. 1 to Concord's annual report on Form 10-K (File No. 000-13848), filed on June 18, 2001. 10.10* Split-Dollar Agreement among Concord EFS, Inc., Ross N. Cohen, and Ronald V. Congemi, dated August 1, 2001 10.11* Amended and Restated Split-Dollar Agreement between Concord EFS, Inc. and Edward T. Haslam, dated August 1, 2001 10.12* Amended and Restated Split-Dollar Agreement among Concord EFS, Inc., J. Richard Buchignani, Benjamin C. Labry, and Edward A. Labry III, dated August 1, 2001 10.13* Amended and Restated Split-Dollar Agreement among Concord EFS, Inc., Thomas R. Renfro, Gary G. Arnold, and Danny M. Palmer, dated August 1, 2001 10.14* Amended and Restated Split-Dollar Agreement between Concord EFS, Inc. and Christopher S. Reckert, dated August 1, 2001 11 Statement Regarding Computation of Per Share Earnings is incorporated herein by reference to Concord's Annual Report to Stockholders for the year ended December 31, 2001, filed herewith as Exhibit 13, Notes to Consolidated Financial Statements, Note N. 13 Annual Report to Stockholders for the year ended December 31, 2001 21 List of Subsidiaries 23.1 Consent of Ernst & Young LLP 23.2 Consent of Deloitte & Touche LLP 99.1 Opinion of Deloitte & Touche LLP (Star Systems, Inc. years ended 2000 and 1999) 99.2 Cautionary Statements
- ---------- * Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this report. (d) Financial Statement Schedules All financial statement schedules are omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes. -19- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CONCORD EFS, INC. By: /s/ Dan M. Palmer ----------------------------- Dan M. Palmer Chairman of the Board of Directors and Chief Executive Officer Date: February 26, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - ------------------------------------- ---------------------------------------------- ---------------------- /s/ Dan M. Palmer Chairman of the Board of Directors and February 26, 2002 ------------------------- Chief Executive Officer Dan M. Palmer (Principal Executive Officer) /s/ Edward T. Haslam Senior Vice President, Chief Financial February 26, 2002 ------------------------- Officer, and Treasurer (Principal Edward T. Haslam Financial and Accounting Officer) /s/ Edward A. Labry III Director and President February 26, 2002 ------------------------- Edward A. Labry III /s/ Richard M. Harter Director and Secretary February 26, 2002 ------------------------- Richard M. Harter /s/ Douglas C. Altenbern Director February 26, 2002 ------------------------- Douglas C. Altenbern /s/ J. Richard Buchignani Director February 26, 2002 ------------------------- J. Richard Buchignani /s/ Ronald V. Congemi Director February 26, 2002 ------------------------- Ronald V. Congemi /s/ Richard P. Kiphart Director February 26, 2002 ------------------------- Richard P. Kiphart /s/ Jerry D. Mooney Director February 26, 2002 ------------------------- Jerry D. Mooney /s/ Paul L. Whittington Director February 26, 2002 ------------------------- Paul L. Whittington
CONCORD EFS, INC. LISTING OF EXHIBITS Exhibit No. Description - ----------------- ---------------------------------------------------------- 2.1 Agreement and Plan of Merger among Concord EFS, Inc., CEFT, Inc., and Electronic Payment Services, Inc., dated as of November 20, 1998, is incorporated herein by reference to Exhibit 2.1 to the current report on Form 8-K (File No. 000-13848), filed on March 10, 1999. 2.2 Agreement and Plan of Merger among Concord EFS, Inc., Orion Acquisition Corp., and Star Systems, Inc., dated as of October 6, 2000, is incorporated herein by reference to Exhibit 10 to Concord's quarterly report on Form 10-Q (File No. 000-13848), filed on November 14, 2000. 3.1 Restated Certificate of Incorporation of Concord EFS, Inc. is incorporated herein by reference to Exhibit 4.4 to Amendment No. 1 to Concord's registration statement on Form S-3 (File No. 333-61084), filed on June 4, 2001. 3.2 Amended and Restated Bylaws of Concord EFS, Inc. are incorporated herein by reference to Exhibit 4.2 to Concord's registration statement on Form S-8 (File No. 333-74215), filed on March 10, 1999. 10.1 Concord EFS, Inc. 1993 Incentive Stock Option Plan, as amended and restated, is incorporated herein by reference to Exhibit 99.1 to Concord's registration statement on Form S-8 (File No. 333-74215), filed on March 10, 1999. 10.2 Electronic Payment Services, Inc. 1995 Stock Option Plan, as amended, is incorporated herein by reference to Exhibit 99.1 to Concord's registration statement on Form S-8 (File No. 333-74213), filed on March 10, 1999. 10.3 Star Systems, Inc. 2000 Equity Incentive Plan is incorporated herein by reference to Exhibit 99.1 to Concord's registration statement on Form S-8 (File No. 333-56066), filed on February 23, 2001. 10.4* Incentive Agreement between Concord EFS, Inc. and Dan M. Palmer, dated as of February 26, 1998, is incorporated herein by reference to Exhibit 10.3 to Concord's annual report on Form 10-K (File No. 000-13848), filed on April 1, 1999. 10.5* Incentive Agreement between Concord EFS, Inc. and Edward A. Labry III, dated as of February 26, 1998, is incorporated herein by reference to Exhibit 10.2 to Concord's annual report on Form 10-K (File No. 000-13848), filed on April 1, 1999. 10.6* Employment Agreement between H&S Holding Company (renamed Star Systems, Inc.) and Ronald V. Congemi, dated as of March 1, 1999, and amendment thereto between Star Systems, Inc., Concord EFS, Inc., and Ronald V. Congemi, dated October 6, 2000, are incorporated herein by reference to Exhibit 10.6 to Concord's annual report on Form 10-K (File No. 000-13848), filed on April 2, 2001. 10.7* Agreement Terminating Salary Continuation Agreement between Star Systems, Inc., Concord EFS, Inc., and Ronald V. Congemi, dated October 6, 2000, is incorporated herein by reference to Exhibit 10.7 to Concord's annual report on Form 10-K (File No. 000-13848), filed on April 2, 2001. -21- Exhibit No. Description - ---------------- ----------------------------------------------------------- 10.8* Star Nonqualified Deferred Compensation Plan, effective as of January 1, 2000, is incorporated herein by reference to Exhibit 10.8 to Concord's annual report on Form 10-K (File No. 000-13848), filed on April 2, 2001. 10.9 Stock Purchase and Sale Agreement between Payroll Company, Inc. and Concord EFS, Inc., dated March 30, 2001, is incorporated herein by reference to Exhibit 10.9 to Amendment No. 1 to Concord's annual report on Form 10-K (File No. 000-13848), filed on June 18, 2001. 10.10* Split-Dollar Agreement among Concord EFS, Inc., Ross N. Cohen, and Ronald V. Congemi, dated August 1, 2001 10.11* Amended and Restated Split-Dollar Agreement between Concord EFS, Inc. and Edward T. Haslam, dated August 1, 2001 10.12* Amended and Restated Split-Dollar Agreement among Concord EFS, Inc., J. Richard Buchignani, Benjamin C. Labry, and Edward A. Labry III, dated August 1, 2001 10.13* Amended and Restated Split-Dollar Agreement among Concord EFS, Inc., Thomas R. Renfro, Gary G. Arnold, and Danny M. Palmer, dated August 1, 2001 10.14* Amended and Restated Split-Dollar Agreement between Concord EFS, Inc. and Christopher S. Reckert, dated August 1, 2001 11 Statement Regarding Computation of Per Share Earnings is incorporated herein by reference to Concord's Annual Report to Stockholders for the year ended December 31, 2001, filed herewith as Exhibit 13, Notes to Consolidated Financial Statements, Note N. 13 Annual Report to Stockholders for the year ended December 31, 2001 21 List of Subsidiaries 23.1 Consent of Ernst & Young LLP 23.2 Consent of Deloitte & Touche LLP 99.1 Opinion of Deloitte & Touche LLP (Star Systems, Inc. years ended 2000 and 1999) 99.2 Cautionary Statements - ------------------- * Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this report. -22- EX-10.10 3 dex1010.txt RONALD CONGEMI SPLIT-DOLLAR AGREEMENT EXHIBIT 10.10 SPLIT-DOLLAR AGREEMENT AGREEMENT (this "Agreement"), dated as of August l, 2001, by and among CONCORD EFS, INC., a corporation duly organized and existing under the laws of the State of Delaware (hereinafter sometimes called the "Corporation"), ROSS N. COHEN, an individual resident of the State of Alabama, Trustee of the RONALD V. CONGEMI 2001 TRUST, a trust settled under the laws of the State of Alabama (hereinafter called the "Owner"), and RONALD V. CONGEMI, an individual resident of the State of Tennessee ("Congemi"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, Congemi is a valued officer, director and employee of the Corporation and the Corporation desires to retain him in such capacities; WHEREAS, as an inducement to such continued employment, the Corporation desires to assist Congemi with his personal life insurance program by entering into this Agreement; WHEREAS, the Corporation is desirous of assisting Congemi in paying for life insurance on his life by entering into this Agreement with the Owner; WHEREAS, the Corporation has determined that this assistance can best be provided under a "split-dollar" arrangement and the Owner has applied for Insurance Policy No. 1Y200636 (the "Policy") issued by The New England Life Insurance Company (the "Insurer") in the face amount of $21,000,000 on Congemi's life; and WHEREAS, the Corporation and the Owner agree that the Policy shall be subject to this Split-Dollar Agreement. 1 NOW, THEREFORE, in consideration of the premises, and for other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the Corporation, Congemi and the Owner hereby mutually covenant and agree as follows: Section 1. Purchase of the Policy and Term of Funding Period 1.1 The Owner will purchase the Policy contemporaneously with the execution of this Agreement. The Corporation, Congemi and the Owner agree that (i) they will take all necessary actions to cause the Policy to be issued to the Owner and cause the Policy to conform to the terms of this Agreement, and (ii) the Policy will be subject to the terms and conditions of this Agreement and the Collateral Assignment, as that term is defined in Section 3 2 hereof. 1.2 The term during which the Corporation will fund the Policy under this Agreement shall commence on August 1, 2001, and shall end on the earlier of August 1, 2011, or the normal retirement date of Congemi, whichever shall first occur (the "Term"). For purposes of this Section 1, the term "normal retirement date" means the latter of (i) the date of the 65th birthday of Congemi or (ii) the date of the tenth anniversary of the date of hire of Congemi by the Corporation. 1.3 During the Term, the Corporation agrees to pay all premiums due on the Policy to the Insurer pursuant to the terms of the Policy, provided, however, that the Corporation agrees to pay an amount to the Insurer on the Policy not to exceed $1,500,000 per year. The Corporation shall, upon request of the Owner, promptly furnish the Owner evidence of timely payment of such premiums. 2 Section 2. Federal Income Tax Treatment 2.1 The Corporation and the Owner agree that, pursuant to Internal Revenue Notice 2001-10, 2001-5 IRB 459 (the "Notice"), for federal income tax purposes, the transactions set forth in this Agreement shall be characterized as an investment in the Policy for the Corporation's own account and accounted for and reported under Sections 61 and 83 of the Internal Revenue Code of 1986, as amended (the "Code"), and the Treasury regulations promulgated thereunder, as set forth in Section IV, A., 3 of the Notice. Notwithstanding the foregoing, the Corporation and the Owner reserve the right to amend or modify such federal income tax treatment pursuant to further guidance issued by the Internal Revenue Service subsequent to the date of this Agreement. 2.2 In accordance with Section 2.1 hereinabove, the Corporation and the Owner agree that (a) the Corporation will be treated as having acquired beneficial ownership of the Policy through its share of the premium payments; (b) the Owner will have compensation income under Section 61 of the Code equal to the value of the life insurance protection provided to the Owner each year that the arrangement remains in effect, reduced by any payments made by the Owner for such life insurance protection, (c) the Owner will have compensation income under Section 61 of the Code equal to any dividends or similar distributions made to the Owner under the Policy (including any dividends described in Rev. Rule. 66-110 applied to provide additional policy benefits), and (d) the Owner will have compensation income under Section 83(a) of the Code to the extent that the Owner acquires a substantially vested interest in the cash surrender value of the Policy, reduced under Section 83(a)(2) of the Code by any consideration paid by the Owner for such interest in the cash surrender value. 3 Section 3. Policy Ownership and Repayment of Premium Payments 3.1 The Owner shall be the sole and absolute owner of the Policy and may exercise all ownership rights granted to the owner thereof by the terms of the Policy, except as may otherwise be expressly provided herein. All incidents of ownership in the Policy are expressly retained by the Owner, including, as example and not as a limitation of the foregoing, the right to change the beneficiary of the Policy, the right to borrow on the security of the Policy (but only to the extent of the difference between (a) the cash value of the Policy and (b) the cumulative amount of the Corporation's interest in the Policy in excess of the amount of all outstanding prior loans to the Corporation made against the Policy); the right to pledge or assign its interest in the Policy for such loans or advances; the right, in the event of a termination of the Agreement, to realize against the cash value of the Policy (to the extent such cash value exceeds the Corporation's interest therein); the right, in the event of the Employee's death (as defined in Section 8.2 hereof), to exercise settlement options and realize against the proceeds of the Policy to the extent said proceeds exceed the Corporation's interest; and the right, subject to the interest of the Corporation to be reimbursed for its interest, to surrender or cancel the policy. The Owner has the right to assign its ownership rights to any person or entity it, in its absolute discretion, chooses, but such an assignment will be subject to the collateral assignment to the Corporation set forth in Section 3.2 hereof. 3.2 Except as may otherwise be expressly provided herein, the Corporation shall have no rights, interests or privileges of ownership in the Policy. To secure the repayment to the Corporation of the amount due the Corporation under Section 4.l(a) hereof, the Owner has, contemporaneously herewith, assigned an interest in the Policy to the Corporation as collateral (the "Collateral Assignment"), substantially in the form attached hereto as Exhibit A. which ---------- gives the Corporation the limited power to enforce its right to be repaid the amount due the 4 Corporation under Section 4.l(a) hereof. The Corporation may neither have nor exercise any right as collateral assignee of the Policy that could in any way defeat or impair the Owner's right to receive the net cash surrender value of the Policy decreased by any outstanding Policy loans to him on the death benefit proceeds of the Policy in excess of the amount due the Corporation under Section 4.l(a) hereof. The Collateral Assignment shall not be terminated, altered or amended by the Owner without the express prior written consent of the Corporation, except that the Owner may assign its ownership rights to a third party, subject to the Collateral Assignment, as provided in Section 3.1 hereof. 3.3 The Owner will not exercise any right under the Policy without first giving the Corporation written notice of the Owner's intention to exercise such right; provided, however, that a change of beneficiary having no effect on the Corporation's status as a beneficiary shall not require such notice. The Owner shall take no action with respect to the Policy that would in any way compromise or jeopardize the Corporation's right to be repaid the amount due the Corporation under Section 4.l(a) hereof, without the Corporation's express written consent. 3.4 The Corporation may not, without the prior written consent of the Owner, exercise its rights under the Policy, including, but not limited to, the transfer or assignment of its interest in the Policy to any person or entity as collateral. Section 4. Beneficiary Provisions 4.1 At the earliest time the life insurance proceeds become payable under the Policy, the Corporation and the Owner agree the Corporation and the Owner shall promptly take all action necessary to obtain payment of the death benefit provided under the Policy from the Insurer of the amount payable under the Policy, and payment of such death benefit will be divided and shared as follows: 5 (a) The Corporation, as collateral assignee under the Collateral Assignment, will be entitled to receive an amount of such death benefit payment equal to the aggregate premiums paid by it as of the date of the Employee's death (as defined in Section 8.2 hereof) reduced by the sum of (i) any amounts previously received by the Corporation from or to the credit of the Owner as a repayment of the liabilities created hereunder and (ii) any outstanding indebtedness incurred by the Corporation and owed to the Insurer which was secured by the Policy, including interest accrued thereon. If the Corporation has paid additional premiums attributable to a rider providing for waiver of premium in the event of the Congemi's disability, the term "premiums", as used in this Section 4 will not include any premiums waived pursuant to the terms of such rider while this Agreement is in force; and (b) The beneficiary or beneficiaries specified by the Owner as then in effect under the Policy shall receive the balance of the payment of such death benefit, if any. 4.2 It is agreed and understood that receipt by the Corporation of any death benefit proceeds as a beneficiary under the Policy shall be considered a repayment of the Corporation's premium payments under Section 4.1(a) hereof to the extent of such proceeds. To the extent that the Corporation does not receive death benefit proceeds or in the event that such proceeds are insufficient to repay the Corporation the amount provided in Section 4.l(a), the Owner shall be liable for the remaining balance of the amount provided in Section 4.1(a). Section 5. Termination of Agreement Notwithstanding anything to the contrary herein, this Agreement shall terminate on the first to occur of the following: 6 (a) Express cancellation of this Agreement by the Owner upon ninety (90) days written notice to the Corporation; or (b) Lapse or termination of the Policy after mutual written consent of the Owner and the Corporation to such lapse or termination. Section 6. Employee Retirement Income Security Act of 1974 6.1 For the purpose of the Employee Retirement Income Security Act of 1974 ("ERISA"), the Corporation will be the named fiduciary (the "Named Fiduciary") and the plan administrator (the "Plan Administrator") of the split-dollar life insurance arrangement created by this Agreement (the "Plan") for which this Agreement is hereby designated the written plan instrument. 6.2 The Corporation's Board of Directors may authorize a person or group of persons to fulfill the responsibilities of the Corporation as Plan Administrator, The Named Fiduciary or the Plan Administrator may employ others to render advice with regard to its responsibilities under the Plan. The Named Fiduciary may also allocate fiduciary responsibilities to others and may exercise any other powers necessary for the discharge of its duties, to the extent such exercise is not in conflict with ERISA. 6.3 The following claims procedures shall control the determination of benefit payments under the Plan: (a) Filing of a Claim for Benefits. Any insured, beneficiary or other ------------------------------ individual ("Claimant") entitled to benefits under the Plan or under the Policy will file a claim request with the Insurer with respect to such benefits (the "Claim for Benefits"). The Plan Administrator will, upon written request of a Claimant, make available copies 7 of any claim forms or instructions provided by the Insurer or advise the Claimant where copies of such forms or instructions may be obtained. (b) Denial of Claim. A Claim for Benefits will be denied if the --------------- Insurer determines that the Claimant is not entitled to receive such benefits. Notice of denial shall be furnished to the Claimant within a reasonable period of time after receipt of the Claim for Benefits by the Insurer. (c) Content of Notice. The Insurer shall provide to every Claimant ----------------- who is denied a Claim for Benefits written notice setting forth, in a manner calculated to be understood by the Claimant, the following: 1. The specific reason or reasons for the denial; 2. Specific reference to pertinent Plan provisions on which the denial is based; 3. A description of any additional material or information necessary for the Claimant to perfect the claim, and an explanation of why such material or information is necessary; and 4. An explanation of the Plan's Claim Review Procedure as set forth below. (d) Claim Review Procedure. The purpose of the Claim Review Procedure ---------------------- is to provide a method by which a Claimant may have a reasonable opportunity to appeal a denial of a Claim for Benefits to the Insurer for a full and fair review. To accomplish that purpose, the Claimant or his duly authorized representative: 1. May request a review upon written application to the Insurer; 8 2. May review pertinent Plan documents; and 3. May submit issues and comments in writing to the Insurer. A Claimant (or his duly authorized representative) shall request a review by filing a written application for review with the Insurer at any time within 60 days after receipt by the Claimant of written notice of the denial of his Claim for Benefits. (e) Decision on Review. A decision on review of a denied Claim for ------------------ Benefits shall be made in the following manner: 1. The decision on review shall be made by the Insurer, who may in its discretion hold a hearing on the denied claim. Such decision shall be made promptly, and not later than 60 days after receipt of the request for review, unless special circumstances (such as the need to hold a hearing) require an extension of time for processing, in which case a decision shall be rendered as soon as possible, but not later than 120 days after receipt of the request for review. 2. The decision on review shall be in writing and shall include specific reasons for the decision, written in a manner calculated to be understood by the Claimant, and specific references to the pertinent Plan provisions upon which the decision is based. Section 7. Reorganization 7.1 Nothing contained in this Agreement shall prevent any consolidation or merger of the Corporation with or into any other corporation or corporations (whether or not affiliated with the Corporation, or successive consolidations or mergers in which the Corporation or its successor or successors shall be a party or parties, or shall prevent any sale, conveyance or lease (or successive sales, conveyances or leases) of all or substantially all of the property of the 9 Corporation to any other corporation (whether or not affiliated with the Corporation) authorized to acquire and operate the same and which shall be organized under the laws of a State of the United States or the District of Columbia; provided, however, and the Company hereby covenants and agrees, that upon any such consolidation, merger, sale, conveyance or lease, the due and punctual performance and observance of all of the covenants and conditions of this Agreement to be performed by the Corporation shall be expressly assumed, by written instrument executed and delivered to Congemi, by the corporation (if other than the Corporation) formed by such consolidation, or into which the Corporation shall have been merged, or by the corporation which shall have acquired or leased such property. 7.2 In case of any such consolidation, merger, sale, conveyance or lease, and upon the assumption, as provided in Section 7,1 above, by the successor corporation of the due and punctual performance and observance of all covenants and conditions of this Agreement to be performed by the Corporation, such successor corporation shall succeed to and be substituted for the Corporation with the same effect as it had been named herein as the "Corporation". In the event of any such consolidation, merger, sale, conveyance or lease, the party named as the "Corporation" in this Agreement or any successor which shall thereafter have become such in the manner prescribed in Section 7.1 above may be dissolved, wound-up and liquidated at any time thereafter and such party shall be released from its liabilities and obligations under this Agreement. 7.3 Except as provided in Section 7.2 above, upon any distribution of assets of the Corporation, upon any dissolution, winding up, total or partial liquidation of the Corporation, voluntary or involuntary, or upon any reorganization or similar proceeding relating to the Corporation or any of its property, whether, bankruptcy, insolvency or receivership proceedings, 10 or upon a general assignment for the benefit of creditors, or any other marshalling of the assets and liabilities of the Corporation (each a "Winding Up"), the Corporation shall, prior to the taking of any corporate action in furtherance of any Winding Up, set aside in trust, irrevocably, for the benefit of Congemi, sufficient funds to satisfy all then-remaining obligations and liabilities of the Corporation under this Agreement; and if such trust is not established for the benefit of Congemi, then, upon any payment or distribution of assets of the Corporation of any kind or character, whether in cash, property or securities, an amount sufficient to satisfy such obligations and liabilities shall be paid by the liquidating trustee or agent or other person making such payment or distribution, whether a trustee in bankruptcy, a receiver or liquidating trustee or otherwise, directly to Congemi in satisfaction of the Corporation's obligations and liabilities hereunder. Section 8. Miscellaneous Provisions 8.1 This Agreement will be governed by and construed in accordance with the laws of the State of Tennessee applied without giving effect to any conflicts-of-law principles. 8.2 For purposes of this Agreement, the phrases, "Employee dies", "Employee's death" or the "death of the Employee", mean the death of Congemi, 8.3 This Agreement shall not be deemed to constitute a contract of employment between the parties, nor shall any provision hereof restrict the right of the Corporation to discharge Congemi, or restrict the right of Congemi to terminate employment. 8.4 This Agreement sets forth the entire agreement among the parties concerning the subject matter hereof, and any amendment or discharge will be made only in writing. This Agreement is binding on, enforceable by and against and shall benefit the parties, their legal 11 representatives, successors and assigns. No beneficiary under the Policy shall obtain any vested right to have this Agreement continued in full. 8.5 (a) Notwithstanding the provisions of this Agreement, any life insurance company which has issued a policy of insurance which is subject to the provisions of this Agreement, including, but not limited to, the Insurer and the Policy, is hereby authorized to act in accordance with the terms of such policy as if this Agreement did not exist, and the payment or other performance of its contractual obligations by any such insurance company, in accordance with the terms of any such policy, shall completely discharge such insurance company from all claim, suits and demands of all persons whatsoever. (b) Notwithstanding Section 6 hereof, the Insurer is not deemed a party to this split-dollar arrangement, is not bound by the split-dollar arrangement, or deemed to have notice of the provisions of this split-dollar arrangement. Rather, the Insurer will be bound only by the provisions of and endorsements on the Policy, and any payments made or actions taken by it in accordance with said provisions or endorsements will fully discharge it from all claims, suits and demands of all persons whatsoever. 8.6 Whenever possible each provision of this Agreement is to be interpreted in a manner as to be effective and valid under applicable law, but if any provision is prohibited or invalid under applicable law, that provision will be ineffective to the extent of the prohibition or invalidity, without invalidating the remainder of the provisions or the remaining portions of this Agreement. To the extent permitted by law, the parties waive any provision of the law that renders a provision contained in this Agreement prohibited or unenforceable in any respect. 12 IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and affixed their seals as of the date first above written. CONCORD EFS, INC. By: /s/ William E. Lucado ------------------------------------------- Its:_____________________________________________ RONALD V. CONGEMI 2001 TRUST By: /s/ Ross N. Cohen -------------------------------------------- Ross N. Cohen Its Trustee /s/ Ronald V. Congemi (L.S.) ------------------------------------------- RONALD V. CONGEMI 13 EX-10.11 4 dex1011.txt AMENDED EDWARD HASLAM SPLIT-DOLLAR AGREEMENT EXHIBIT 10.11 AMENDED AND RESTATED SPLIT-DOLLAR AGREEMENT AGREEMENT (this "Agreement"), dated as of August 1, 2001, by and between CONCORD EFS, INC., a corporation duly organized and existing under the laws of the State of Delaware (hereinafter sometimes called the "Corporation"), with the corporate headquarters located at 2525 Horizon Lake Drive, Suite 120, Memphis, Tennessee 38133, and EDWARD T. HASLAM, an individual resident of the State of Pennsylvania (hereinafter called the "Owner"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Corporation and the Owner entered into that certain Split-Dollar Agreement, dated as of August 1, 2000 (the "2000 Agreement"), which provided for a "split-dollar" arrangement with respect to a particular life insurance policy identified in the 2000 Agreement (the "2000 Policy"); WHEREAS, pursuant to Section 8.4 of the 2000 Agreement, the Corporation and the Owner wish to amend and restate the 2000 Agreement to provide for additional insurance coverage on the Owner's life to be owned by the Owner thereunder; WHEREAS, the Owner continues to be a valued officer and employee of the Corporation and the Corporation desires to retain him in such capacities; WHEREAS, as an inducement to such continued employment, the Corporation desires to assist the Owner with his personal life insurance program by entering into this Agreement with the Owner; WHEREAS, the Corporation has determined that this assistance can best be provided under a "split-dollar" arrangement and the Owner has, under the 2000 Agreement, applied for 1 Insurance Policy No. 1Y000488 (the "2000 Policy") issued by The New England Life Insurance Company (the "Insurer") in the face amount of $1,249,766 on the Owner's life; WHEREAS, the Owner has, under this Agreement, applied for Insurance Policy No. 1Y200628 (the "2001 Policy," and collectively with the 2000 Policy, the "Policy") issued by the Insurer in the face amount of $5,381,621 on Owner's Life; and WHEREAS, the Corporation and the Owner agree that the Policy shall be subject to this Agreement. NOW, THEREFORE, in consideration of the premises, and for other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the Corporation and the Owner hereby mutually covenant and agree as follows: Section 1. Purchase of the 2001 Policy and Term of Funding Period 1.1 The Owner has previously purchased the 2000 Policy subject to the 2000 Agreement. The Owner will purchase the 2001 Policy contemporaneously with the execution of this Agreement. The Corporation and the Owner agree that (i) they will take all necessary actions to cause the 2001 Policy to be issued to the Owner and cause the Policy to conform to the terms of this Agreement, and (ii) the Policy will be subject to the terms and conditions of this Agreement and the Collateral Assignment, as that term is defined in Section 3.2 hereof. 1.2 The term during which the Corporation will fund the 2000 Policy under this Agreement shall commence on August 1, 2000 and shall end on the earlier of August 1, 2010, and the term during which the Corporation will fund the 2001 Policy under this Agreement shall commence on August 1, 2001, and shall end on the earlier of August 1, 2011, respectively, or the normal retirement date of the Owner, whichever shall first occur (collectively, the "Term"). For purposes of this Section 1.2, the term "normal retirement date" means the latter of (i) the date of 2 the 65th birthday of the Owner or (ii) the date of the tenth anniversary of the date of hire of the Owner by the Corporation. Section 2. Payment of Premiums and Information Reporting 2.1 During the Term, the Corporation agrees to pay all premiums due on the Policy to the Insurer pursuant to the terms of the Policy, provided, however, that the Corporation agrees to pay an amount to the Insurer on the 2000 Policy not to exceed $75,000 per year and on the 2001 Policy not to exceed $250,000 per year. The Corporation shall, upon request of the Owner, promptly furnish the Owner evidence of timely payment of such premiums. 2.2 During the Term, in order to facilitate the payment of premiums on the Policy, it is agreed that the Corporation (a) annually forward on a timely basis the amount of premium required under this Agreement and pursuant to the terms of the Policy to the Insurer, and (b) annually furnish the Owner information concerning the economic benefit reportable by the Owner as gross income for federal income tax purposes. 2.3 The Corporation and the Owner believe that neither the 2000 Agreement and the 2000 Policy nor this Agreement and the 2001 Policy are subject to Internal Revenue Notice 2001-10, 2001-5 IRB 459 (the "Notice"). Notwithstanding the foregoing, if the parties hereto later determine that either the 2000 Policy or the 2001 Policy are subject to the Notice, or the Internal Revenue Service issues further guidance concerning the federal income taxation of split-dollar arrangement subsequent to the date of this Agreement, the Corporation and the Owner reserve the right to amend, restate and modify the Agreement pursuant to such further guidance. 3 Section 3. Policy Ownership and Repayment of Premium Payments 3.1 The Owner shall be the sole and absolute owner of the Policy and may exercise all ownership rights granted to the owner thereof by the terms of the Policy, except as may otherwise be expressly provided herein. All incidents of ownership in the Policy are expressly retained by the Owner, including, as example and not as a limitation of the foregoing, the right to change the beneficiary of the Policy, the right to borrow on the security of the Policy (but only to the extent of the difference between (a) the cash value of the Policy and (b) the cumulative amount of the Corporation's interest in the Policy in excess of the amount of all outstanding prior loans to the Corporation made against the Policy); the right to pledge or assign his interest in the Policy for such loans or advances; the right, in the event of a termination of this Agreement, to realize against the cash value of the Policy (to the extent such cash value exceeds the Corporation's interest therein); the right, in the event of the Employee's death (as defined in Section 8.2 hereof), to exercise settlement options and realize against the proceeds of the Policy to the extent said proceeds exceed the Corporation's interest in the Policy; and the right, subject to the interest of the Corporation to be reimbursed for its interest in the Policy, to surrender or cancel the Policy. The Owner has the right to assign his ownership rights to any person or entity he, in his absolute discretion, chooses, but such an assignment will be subject to the Collateral Assignment, as that term is defined in Section 3.2 hereof, to the Corporation. 3.2 Except as may otherwise be expressly provided herein, the Corporation shall have no rights, interests or privileges of ownership in the Policy. To secure the repayment to the Corporation of the amount equal to the aggregate premiums paid by it as of the date of the Employee's death (as defined in Section 8.2 hereof) reduced by the sum of (i) any amounts previously received by the Corporation from or to the credit of the Owner as a repayment of the 4 liabilities created hereunder and (ii) any outstanding indebtedness incurred by the Corporation and owed to the Insurer which was secured by the Policy, including interest accrued thereon, the Owner has, contemporaneously herewith, assigned an interest in the Policy to the Corporation as collateral (the "Collateral Assignment"), substantially in the form attached hereto as Exhibit A, which gives the Corporation the limited power to enforce its right to - ---------- be repaid the amount due the Corporation under this Agreement. The Corporation may neither have nor exercise any right as collateral assignee of the Policy that could in any way defeat or impair the Owner's right to receive the net cash surrender value of the Policy decreased by any outstanding Policy loans to him on the death benefit proceeds of the Policy in excess of the amount due the Corporation under this Agreement. The Collateral Assignment shall not be terminated, altered or amended by the Owner without the express prior written consent of the Corporation, except that the Owner may assign his ownership rights to a third party, subject to the Collateral Assignment, as provided in Section 3.1 hereof. 3.3 The Owner will not exercise any right under the Policy without first giving the Corporation written notice of the Owner's intention to exercise such right; provided, however, that a change of beneficiary having no effect on the Corporation's status as a beneficiary shall not require such notice. The Owner shall take no action with respect to the Policy that would in any way compromise or jeopardize the Corporation's right to be repaid the amount due the Corporation under Section 4.l(b) hereof, without the Corporation's express written consent. 3.4 The Corporation may not, without the prior written consent of the Owner, exercise its rights under the Policy, including, but not limited to, the transfer or assignment of its interest in the Policy to any person or entity as collateral. 5 3.5 (a) Within 60 days following the date of the termination of this Agreement under Section 5 hereof, the Owner shall repay to the Corporation the lesser of (a) the amount due the Corporation under Section 4.l(b) hereof, or (b) the cash surrender value of the Policy plus the amount of any outstanding Policy loans to the Owner, each determined as of the date of the termination of this Agreement. Upon receipt of such amount, the Corporation shall release the Collateral Assignment of the Policy, by the execution and delivery of an appropriate instrument of release and shall be removed as beneficiary under the Policy. (b) If the Owner fails to repay the Corporation the amount specified in Section 3.5(a) within the 60 day period referenced therein, the Owner shall execute any and all instruments that may be required to vest ownership of the Policy in the Corporation. Thereafter, the Owner shall have no further interest in, or rights under, the Policy, or rights under this Agreement. Section 4. Split of Death Benefit Proceeds 4.1 At the earliest time the life insurance proceeds become payable under the Policy, the Corporation and the Owner agree the Corporation and the personal representative of the Owner or the beneficiary or beneficiaries designated on the Policy by the Owner if other than the estate of the Owner, as the case may be, shall promptly take all action necessary to obtain payment of the death benefit provided under the Policy from the Insurer of the amount payable under the Policy, and payment of such death benefit will be divided and paid as follows: (a) The beneficiary or beneficiaries designated on the Policy by the Owner as then in effect under the Policy shall receive an amount of such death benefit payment equal to the product obtained by multiplying an amount equal to $300,000, plus 3% per annum beginning with the year 2001, times a factor of 5.0; and 6 (b) The Corporation, as collateral assignee under the Collateral Assignment, shall receive an amount of such death benefit payment equal to the aggregate premiums paid by it under this Agreement, but not to exceed an amount equal to the balance of the payment of such death benefit, if any. 4.2 It is agreed and understood that receipt by the Corporation of any death benefit proceeds as a beneficiary under the Policy shall be considered a repayment of the Corporation's premium payments under Section 4.l(b) hereof to the extent of such proceeds. Section 5. Termination of Agreement Notwithstanding anything to the contrary herein, this Agreement shall terminate on the first to occur of the following: (a) Express cancellation of this Agreement by the Owner upon ninety (90) days written notice to the Corporation; (b) Lapse or termination of the Policy after mutual written consent of the Owner and the Corporation to such lapse or termination; or (c) Termination of the Owner's employment by the Corporation (other than by reason of his death, disability or attaining normal retirement age). Section 6. Employee Retirement Income Security Act of 1974 6.1 For the purpose of the Employee Retirement Income Security Act of 1974 ("ERISA"), the Corporation will be the named fiduciary (the "Named Fiduciary") and the plan administrator (the "Plan Administrator") of the split-dollar life insurance arrangement created by this Agreement (the "Plan") for which this Agreement is hereby designated the written plan instrument. 7 6.2 The Corporation's Board of Directors may authorize a person or group of persons to fulfill the responsibilities of the Corporation as Plan Administrator. The Named Fiduciary or the Plan Administrator may employ others to render advice with regard to its responsibilities under the Plan. The Named Fiduciary may also allocate fiduciary responsibilities to others and may exercise any other powers necessary for the discharge of its duties, to the extent such exercise is not in conflict with ERISA. 6.3 The following claims procedures shall control the determination of benefit payments under the Plan: (a) Filing of a Claim for Benefits. Any insured, beneficiary or other ------------------------------ individual ("Claimant") entitled to benefits under the Plan or under the Policy will file a claim request with the Insurer with respect to such benefits (the "Claim for Benefits"). The Plan Administrator will, upon written request of a Claimant, make available copies of any claim forms or instructions provided by the Insurer or advise the Claimant where copies of such forms or instructions may be obtained. (b) Denial of Claim. A Claim for Benefits will be denied if the --------------- Insurer determines that the Claimant is not entitled to receive such benefits. Notice of denial shall be furnished to the Claimant within a reasonable period of time after receipt of the Claim for Benefits by the Insurer. (c) Content of Notice. The Insurer shall provide to every Claimant who ----------------- is denied a Claim for Benefits written notice setting forth, in a manner calculated to be understood by the Claimant, the following: 8 1. The specific reason or reasons for the denial; 2. Specific reference to pertinent Plan provisions on which the denial is based; 3. A description of any additional material or information necessary for the Claimant to perfect the claim, and an explanation of why such material or information is necessary; and 4. An explanation of the Plan's Claim Review Procedure as set forth below. (d) Claim Review Procedure. The purpose of the Claim Review Procedure ---------------------- is to provide a method by which a Claimant may have a reasonable opportunity to appeal a denial of a Claim for Benefits to the Insurer for a full and fair review. To accomplish that purpose, the Claimant or his duly authorized representative: 1. May request a review upon written application to the Insurer; 2. May review pertinent Plan documents; and 3. May submit issues and comments in writing to the Insurer. A Claimant (or his duly authorized representative) shall request a review by filing a written application for review with the Insurer at any time within 60 days after receipt by the Claimant of written notice of the denial of his Claim for Benefits. 9 (e) Decision on Review. A decision on review of a denied Claim for ------------------ Benefits shall be made in the following manner: 1. The decision on review shall be made by the Insurer, who may in its discretion hold a hearing on the denied claim. Such decision shall be made promptly, and not later than 60 days after receipt of the request for review, unless special circumstances (such as the need to hold a hearing) require an extension of time for processing, in which case a decision shall be rendered as soon as possible, but not later than 120 days after receipt of the request for review. 2. The decision on review shall be in writing and shall include specific reasons for the decision, written in a manner calculated to be understood by the Claimant, and specific references to the pertinent Plan provisions upon which the decision is based. Section 7. Reorganization 7.1 Nothing contained in this Agreement shall prevent any consolidation or merger of the Corporation with or into any other corporation or corporations (whether or not affiliated with the Corporation, or successive consolidations or mergers in which the Corporation or its successor or successors shall be a party or parties, or shall prevent any sale, conveyance or lease (or successive sales, conveyances or leases) of all or substantially all of the property of the Corporation to any other corporation (whether or not affiliated with the Corporation) authorized to acquire and operate the same and which shall be organized under the laws of a State of the 10 United States or the District of Columbia; provided, however, and the Corporation hereby covenants and agrees, that upon any such consolidation, merger, sale, conveyance or lease, the due and punctual performance and observance of all of the covenants and conditions of this Agreement to be performed by the Corporation shall be expressly assumed, by written instrument executed and delivered to the Owner, by the corporation or corporations (if other than the Corporation) formed by such consolidation, or into which the Corporation shall have been merged, or by the corporation or corporations which shall have acquired or leased such property. 7.2 In case of any such consolidation, merger, sale, conveyance or lease, and upon the assumption, as provided in Section 7.1 above, by the successor corporation of the due and punctual performance and observance of all covenants and conditions of this Agreement to be performed by the Corporation, such successor corporation shall succeed to and be substituted for the Corporation with the same effect as it had been named herein as the "Corporation". In the event of any such consolidation, merger, sale, conveyance or lease, the party named as the "Corporation" in this Agreement or any successor which shall thereafter have become such in the manner prescribed in Section 7.1 above may be dissolved, wound-up and liquidated at any time thereafter and such party shall be released from its liabilities and obligations under this Agreement. 7.3 Except as provided in Section 7.2 above, upon any distribution of assets of the Corporation, upon any dissolution, winding up, total or partial liquidation of the Corporation, voluntary or involuntary, or upon any reorganization or similar proceeding relating to the Corporation or any of its property, whether, bankruptcy, insolvency or receivership proceedings, or upon a general assignment for the benefit of creditors, or any other marshalling of the assets and liabilities of the Corporation (each a "Winding Up"), the Corporation shall, prior to the 11 taking of any corporate action in furtherance of any Winding Up, set aside in trust, irrevocably, for the benefit of the Owner, sufficient funds to satisfy all then-remaining obligations and liabilities of the Corporation under this Agreement; and if such trust is not established for the benefit of the Owner, then, upon any payment or distribution of assets of the Corporation of any kind or character, whether in cash, property or securities, an amount sufficient to satisfy such obligations and liabilities shall be paid by the liquidating trustee or agent or other person making such payment or distribution, whether a trustee in bankruptcy, a receiver or liquidating trustee or otherwise, directly to the Owner in satisfaction of the Corporation's obligations and liabilities hereunder. Section 8. Miscellaneous Provisions 8.1 This Agreement will be governed by and construed in accordance with the laws of the State of Tennessee applied without giving effect to any conflicts-of-law principles. 8.2 For purposes of this Agreement, the phrases, "Employee dies", "Employee's death" or the "death of the Employee", mean the death of the Owner. 8.3 This Agreement shall not be deemed to constitute a contract of employment between the parties, nor shall any provision hereof restrict the right of the Corporation to discharge the Owner, or restrict the right of the Owner to terminate employment. 8.4 This Agreement sets forth the entire agreement among the parties concerning the subject matter hereof, and any amendment or discharge will be made only in writing. This Agreement is binding on, enforceable by and against and shall benefit the parties, their legal representatives, successors and assigns. No beneficiary under the Policy shall obtain any vested right to have this Agreement continued in full. 12 8.5 (a) Notwithstanding the provisions of this Agreement, any life insurance company which has issued a policy of insurance which is subject to the provisions of this Agreement, including, but not limited to, the Insurer and the Policy, is hereby authorized to act in accordance with the terms of such policy as if this Agreement did not exist, and the payment or other performance of its contractual obligations by any such insurance company, in accordance with the terms of any such policy, shall completely discharge such insurance company from all claim, suits and demands of all persons whatsoever. (b) Notwithstanding Section 6 hereof, the Insurer is not deemed a party to this split-dollar arrangement, is not bound by the split-dollar arrangement, or deemed to have notice of the provisions of this split-dollar arrangement. Rather, the Insurer will be bound only by the provisions of and endorsements on the Policy, and any payments made or actions taken by it in accordance with said provisions or endorsements will fully discharge it from all claims, suits and demands of all persons whatsoever. 8.6 Whenever possible each provision of this Agreement is to be interpreted in a manner as to be effective and valid under applicable law, but if any provision is prohibited or invalid under applicable law, that provision will be ineffective to the extent of the prohibition or invalidity, without invalidating the remainder of the provisions or the remaining portions of this Agreement. To the extent permitted by law, the parties waive any provision of the law that renders a provision contained in this Agreement prohibited or unenforceable in any respect. 13 IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and affixed their seals as of the date first above written. CONCORD EFS, INC. By: /s/ Dan M. Palmer ----------------------------------------- Its: Chairman & CEO ----------------------------------------- /s/ Edward T. Haslam (L.S.) ------------------------------- EDWARD T. HASLAM 14 EX-10.12 5 dex1012.txt AMENDED EDWARD LABRY III SPLIT-DOLLAR AGREEMENT EXHIBIT 10.12 AMENDED AND RESTATED SPLIT-DOLLAR AGREEMENT AGREEMENT (this "Agreement"), dated as of August 1, 2001, by and among CONCORD EFS, INC., a corporation duly organized and existing under the laws of the State of Delaware (hereinafter sometimes called the "Corporation"), J. RICHARD BUCHIGNANI, an individual resident of the State of Tennessee, and BENJAMIN C. LABRY, an individual resident of the State of Tennessee, Co-Trustees of the EDWARD A. LABRY III TRUST, a trust settled under the laws of the State of Tennessee (hereinafter called the "Owner"), and EDWARD A. LABRY III, an individual resident of the State of Tennessee ("Labry"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Corporation, the Owner and Labry entered into that certain Split-Dollar Agreement, dated as of August 1, 1999 (the "1999 Agreement"), which provided for a "split-dollar" arrangement with respect to a particular life insurance policy identified in the 1999 Agreement (the "1999 Policy"); WHEREAS, pursuant to Section 8.4 of the 1999 Agreement, the Corporation, the Owner and Labry wish to amend and restate the 1999 Agreement to provide for additional insurance coverage on Labry's life to be owned by the Owner thereunder; WHEREAS, Labry continues to be a valued officer and employee of the Corporation and the Corporation desires to retain him in such capacities; 1 WHEREAS, as an inducement to such continued employment, the Corporation desires to assist Labry with his personal life insurance program by entering into this Agreement with Labry and the Owner; WHEREAS, the Corporation has determined that this assistance can best be provided under a "split-dollar" arrangement and the Owner has, under the 1999 Agreement, applied for Insurance Policy No. 1Y000484 (the "1999 Policy") issued by The New England Life Insurance Company (the "Insurer") in the face amount of $46,999,997 on Labry's life; WHEREAS, the Owner has, under this Agreement, applied for Insurance Policy No. 1Y200640 (the "2001 Policy", and collectively with the 1999 Policy, the "Policy") issued by the Insurer in the face amount of $70,000,000 on Labry's life; and WHEREAS, the Corporation and the Owner agree that the Policy shall be subject to this Agreement. NOW, THEREFORE, in consideration of the premises, and for other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the Corporation, the Owner and Labry hereby mutually covenant and agree as follows; Section 1. Purchase of the 2001 Policy and Term of Funding Period 1.1 The Owner has previously purchased the 1999 Policy subject to the 1999 Agreement. The Owner will purchase the 2001 Policy contemporaneously with the execution of this Agreement. The Corporation, Labry and the Owner agree that (i) they will take all necessary actions to cause the 2001 Policy to be issued to the Owner and cause the Policy to conform to the terms of this Agreement, and (ii) the Policy will be subject to the terms and conditions of this Agreement and the Collateral Assignment, as that term is defined in Section 3.2 hereof. 2 1.2 The term during which the Corporation will fund the 1999 Policy under this Agreement shall commence on August 1, 1999 and the term during which the Corporation will fund the 2001 Policy under this Agreement shall commence on August 1, 2001, respectively, and shall end on the first to occur of (i) the date of death of the Employee, as that term is defined in Section 8.2 hereof, or (ii) the date of the 65th birthday of Labry (collectively, the "Term"). Section 2. Payment of Premiums and Information Reporting 2.1 During the Term, the Corporation agrees to pay all premiums due on the Policy to the Insurer pursuant to the terms of the Policy, provided, however, that the Corporation agrees to pay an amount to the Insurer on the 1999 Policy not to exceed $400,000 per year and on the 2001 Policy not to exceed $1,100,000 per year. The Corporation shall, upon request of the Owner or Labry, promptly furnish the Owner and Labry evidence of timely payment of such premiums. 2.2 During the Term, in order to facilitate the payment of premiums on the Policy, it is agreed that the Corporation (a) annually forward on a timely basis the amount of premium required under this Agreement and pursuant to the terms of the Policy to the Insurer, (b) annually furnish Labry information concerning the economic benefit reportable by Labry as gross income for federal income tax purposes, and (c) annually notify the Owner of the amount of the deemed gift from Labry to the Owner. 2.3 The Corporation, the Owner and Labry acknowledge that the Internal Revenue Service has issued Internal Revenue Notice 2001-10, 2001-5 IRB 459 (the "Notice"), which deals with the federal income tax treatment of split-dollar insurance arrangements. If the parties hereto later determine that either the 1999 Policy or the 2001 Policy are subject to the Notice, or the Internal Revenue Service issues further guidance concerning the federal income taxation of 3 split-dollar arrangement subsequent to the date of this Agreement, the Corporation, the Owner and Labry reserve the right to amend, restate and modify the Agreement pursuant to such further guidance. Section 3. Policy Ownership and Repayment of Premium Payments 3.1 The Owner shall be the sole and absolute owner of the Policy and may exercise all ownership rights granted to the owner thereof by the terms of the Policy, except as may otherwise be expressly provided herein. All incidents of ownership in the Policy are expressly retained by the Owner, including, as example and not as a limitation of the foregoing, the right to change the beneficiary of the Policy, the right to borrow on the security of the Policy (but only to the extent of the difference between (a) the cash value of the Policy and (b) the cumulative amount of the Corporation's interest in the Policy in excess of the amount of all outstanding prior loans to the Corporation made against the Policy); the right to pledge or assign its interest in the Policy for such loans or advances; the right, in the event of a termination of this Agreement, to realize against the cash value of the Policy (to the extent such cash value exceeds the Corporation's interest therein); the right, in the event of the Employee's death (as defined in Section 8.2 hereof), to exercise settlement options and realize against the proceeds of the Policy to the extent said proceeds exceed the Corporation's interest in the Policy; and the right, subject to the interest of the Corporation to be reimbursed for its interest in the Policy, to surrender or cancel the Policy. The Owner has the right to assign its ownership rights to any person or entity it, in its absolute discretion, chooses, but such an assignment will be subject to the Collateral Assignment, as that term is defined in Section 3.2 hereof, to the Corporation. 3.2 Except as may otherwise be expressly provided herein, the Corporation shall have no rights, interests or privileges of ownership in the Policy. To secure the repayment to the 4 Corporation of the amount due the Corporation under Section 4.l(a) hereof, the Owner has, contemporaneously herewith, assigned an interest in the Policy to the Corporation as collateral (the "Collateral Assignment"), substantially in the form attached hereto as Exhibit A, which gives the Corporation the limited power --------- to enforce its right to be repaid the amount due the Corporation under Section 4.l(a) hereof. The Corporation may neither have nor exercise any right as collateral assignee of the Policy that could in any way defeat or impair the Owner's right to receive the net cash surrender value of the Policy decreased by any outstanding Policy loans to the Owner on the death benefit proceeds of the Policy in excess of the amount due the Corporation under Section 4.1(a) hereof. The Collateral Assignment shall not be terminated, altered or amended by the Owner without the express prior written consent of the Corporation, except that the Owner may assign its ownership rights to a third party, subject to the Collateral Assignment, as provided in Section 3.1 hereof. 3.3 The Owner will not exercise any right under the Policy without first giving the Corporation written notice of the Owner's intention to exercise such right; provided, however, that a change of beneficiary having no effect on the Corporation's status as a beneficiary shall not require such notice. The Owner shall take no action with respect to the Policy that would in any way compromise or jeopardize the Corporation's right to be repaid the amount due the Corporation under Section 4.1(a) hereof, without the Corporation's express written consent. 3.4 The Corporation may not, without the prior written consent of the Owner, exercise its rights under the Policy, including, but not limited to, the transfer or assignment of its interest in the Policy to any person or entity as collateral. Section 4. Beneficiary Provisions 5 4.1 At the time the life insurance proceeds become payable under the Policy, the Corporation and the Owner agree the Corporation and the Owner shall promptly take all action necessary to obtain payment of the death benefit provided under the Policy from the Insurer of the amount payable under the Policy, and payment of such death benefit will be divided and paid as follows: (a) The Corporation, as collateral assignee under the Collateral Assignment, will be entitled to receive an amount equal to the aggregate premiums paid by it as of the date of the Employee's death (as defined in Section 8.2 hereof) reduced by the sum of (i) any amounts previously received by the Corporation from or to the credit of the Owner as a repayment of the liabilities created hereunder and (ii) any outstanding indebtedness incurred by the Corporation and owed to the Insurer which was secured by the Policy, including interest accrued thereon. If the Corporation has paid additional premiums attributable to a rider providing for waiver of premium in the event of the Labry's disability, the term "premiums", as used in this Section 4 will not include any premiums waived pursuant to the terms of such rider while this Agreement is in force; and (b) The beneficiary or beneficiaries designated by the Owner as then in effect under the Policy shall receive the balance of the payment of such death benefit, if any. 4.2 It is agreed and understood that receipt by the Corporation of any death benefit proceeds as a beneficiary under the Policy shall be considered a repayment of the Corporation's premium payments under Section 4.1(a) hereof to the extent of such proceeds. To the extent that the Corporation does not receive death benefit proceeds or in the event that such proceeds are insufficient to repay the Corporation the amount provided in Section 4.1(a), the Owner shall 6 repay to the Corporation the lesser of (a) the amount due the Corporation under Section 4.1(a) hereof, or (b) the net cash surrender value of the Policy increased by any outstanding Policy loans to the Owner. Section 5. Termination of Agreement Notwithstanding anything to the contrary herein, this Agreement shall terminate on the first to occur of the following: (a) Express cancellation of this Agreement by the Owner upon ninety (90) days written notice to the Corporation; or (b) Lapse or termination of the Policy after mutual written consent of the Owner and the Corporation to such lapse or termination. Section 6. Employee Retirement Income Security Act of 1974 6.1 For the purpose of the Employee Retirement Income Security Act of 1974 ("ERISA"), the Corporation will be the named fiduciary (the "Named Fiduciary") and the plan administrator (the "Plan Administrator") of the split-dollar life insurance arrangement created by this Agreement (the "Plan") for which this Agreement is hereby designated the written plan instrument. 6.2 The Corporation's Board of Directors may authorize a person or group of persons to fulfill the responsibilities of the Corporation as Plan Administrator. The Named Fiduciary or the Plan Administrator may employ others to render advice with regard to its responsibilities under the Plan. The Named Fiduciary may also allocate fiduciary responsibilities to others and may exercise any other powers necessary for the discharge of its duties, to the extent such exercise is not in conflict with ERISA. 7 6.3 The following claims procedures shall control the determination of benefit payments under the Plan: (a) Filing of a Claim for Benefits. Any insured, beneficiary or other ------------------------------ individual ("Claimant") entitled to benefits under the Plan or under the Policy will file a claim request with the Insurer with respect to such benefits (the "Claim for Benefits"). The Plan Administrator will, upon written request of a Claimant, make available copies of any claim forms or instructions provided by the Insurer or advise the Claimant where copies of such forms or instructions may be obtained. (b) Denial of Claim. A Claim for Benefits will be denied if the --------------- Insurer determines that the Claimant is not entitled to receive such benefits. Notice of denial shall be furnished to the Claimant within a reasonable period of time after receipt of the Claim for Benefits by the Insurer. (c) Content of Notice. The Insurer shall provide to every Claimant ----------------- who is denied a Claim for Benefits written notice setting forth, in a manner calculated to be understood by the Claimant, the following: 1. The specific reason or reasons for the denial; 2. Specific reference to pertinent Plan provisions on which the denial is based; 3. A description of any additional material or information necessary for the Claimant to perfect the claim, and an explanation of why such material or information is necessary; and 4. An explanation of the Plan's Claim Review Procedure as set forth below. 8 (d) Claim Review Procedure. The purpose of the Claim Review Procedure ---------------------- is to provide a method by which a Claimant may have a reasonable opportunity to appeal a denial of a Claim for Benefits to the Insurer for a full and fair review. To accomplish that purpose, the Claimant or his duly authorized representative: 1. May request a review upon written application to the Insurer; 2. May review pertinent Plan documents; and 3. May submit issues and comments in writing to the Insurer. A Claimant (or his duly authorized representative) shall request a review by filing a written application for review with the Insurer at any time within 60 days after receipt by the Claimant of written notice of the denial of his Claim for Benefits. (e) Decision on Review. A decision on review of a denied Claim for ------------------ Benefits shall be made in the following manner: 1. The decision on review shall be made by the Insurer, who may in its discretion hold a hearing on the denied claim. Such decision shall be made promptly, and not later than 60 days after receipt of the request for review, unless special circumstances (such as the need to hold a hearing) require an extension of time for processing, in which case a decision shall be rendered as soon as possible, but not later than 120 days after receipt of the request for review. 2. The decision on review shall be in writing and shall include specific reasons for the decision, written in a manner calculated to be understood by the Claimant, and specific references to the pertinent Plan provisions upon which the decision is based. 9 Section 7. Reorganization 7.1 Nothing contained in this Agreement shall prevent any consolidation or merger of the Corporation with or into any other corporation or corporations (whether or not affiliated with the Corporation, or successive consolidations or mergers in which the Corporation or its successor or successors shall be a party or parties, or shall prevent any sale, conveyance or lease (or successive sales, conveyances or leases) of all or substantially all of the property of the Corporation to any other corporation (whether or not affiliated with the Corporation) authorized to acquire and operate the same and which shall be organized under the laws of a State of the United States or the District of Columbia; provided, however, and the Corporation hereby covenants and agrees, that upon any such consolidation, merger, sale, conveyance or lease, the due and punctual performance and observance of all of the covenants and conditions of this Agreement to be performed by the Corporation shall be expressly assumed, by written instrument executed and delivered to Labry and the Owner, by the corporation or corporations (if other than the Corporation) formed by such consolidation, or into which the Corporation shall have been merged, or by the corporation or corporations which shall have acquired or leased such property. 7.2 In case of any such consolidation, merger, sale, conveyance or lease, and upon the assumption, as provided in Section 7.1 above, by the successor corporation of the due and punctual performance and observance of all covenants and conditions of this Agreement to be performed by the Corporation, such successor corporation shall succeed to and be substituted for the Corporation with the same effect as it had been named herein as the "Corporation". In the event of any such consolidation, merger, sale, conveyance or lease, the party named as the "Corporation" in this Agreement or any successor which shall thereafter have become such in the 10 manner prescribed in Section 7.1 above may be dissolved, wound-up and liquidated at any time thereafter and such party shall be released from its liabilities and obligations under this Agreement. 7.3 Except as provided in Section 7.2 above, upon any distribution of assets of the Corporation, upon any dissolution, winding up, total or partial liquidation of the Corporation, voluntary or involuntary, or upon any reorganization or similar proceeding relating to the Corporation or any of its property, whether, bankruptcy, insolvency or receivership proceedings, or upon a general assignment for the benefit of creditors, or any other marshalling of the assets and liabilities of the Corporation (each a "Winding Up"), the Corporation shall, prior to the taking of any corporate action in furtherance of any Winding Up, set aside in trust, irrevocably, for the benefit of the Owner, sufficient funds to satisfy all then-remaining obligations and liabilities of the Corporation under this Agreement; and if such trust is not established for the benefit of the Owner, then, upon any payment or distribution of assets of the Corporation of any kind or character, whether in cash, property or securities, an amount sufficient to satisfy such obligations and liabilities shall be paid by the liquidating trustee or agent or other person making such payment or distribution, whether a trustee in bankruptcy, a receiver or liquidating trustee or otherwise, directly to the Owner in satisfaction of the Corporation's obligations and liabilities hereunder. Section 8. Miscellaneous Provisions 8.1 This Agreement will be governed by and construed in accordance with the laws of the State of Tennessee applied without giving effect to any conflicts-of-law principles. 8.2 For purposes of this Agreement, the phrases, "Employee dies", "Employee's death" or the "death of the Employee", mean the death of Labry. 11 8.3 This Agreement shall not be deemed to constitute a contract of employment between the parties, nor shall any provision hereof restrict the right of the Corporation to discharge Labry, or restrict the right of Labry to terminate employment. 8.4 This Agreement sets forth the entire agreement among the parties concerning the subject matter hereof, and any amendment or discharge will be made only in writing. This Agreement is binding on, enforceable by and against and shall benefit the parties, their legal representatives, successors and assigns. No beneficiary under the Policy shall obtain any vested right to have this Agreement continued in full. 8.5 (a) Notwithstanding the provisions of this Agreement, any life insurance company which has issued a policy of insurance which is subject to the provisions of this Agreement, including, but not limited to, the Insurer and the Policy, is hereby authorized to act in accordance with the terms of such policy as if this Agreement did not exist, and the payment or other performance of its contractual obligations by any such insurance company, in accordance with the terms of any such policy, shall completely discharge such insurance company from all claim, suits and demands of all persons whatsoever. (b) Notwithstanding Section 6 hereof, the Insurer is not deemed a party to this split-dollar arrangement, is not bound by the split-dollar arrangement, or deemed to have notice of the provisions of this split-dollar arrangement. Rather, the Insurer will be bound only by the provisions of and endorsements on the Policy, and any payments made or actions taken by it in accordance with said provisions or endorsements will fully discharge it from all claims, suits and demands of all persons whatsoever. 8.6 Whenever possible each provision of this Agreement is to be interpreted in a manner as to be effective and valid under applicable law, but if any provision is prohibited or 12 invalid under applicable law, that provision will be ineffective to the extent of the prohibition or invalidity, without invalidating the remainder of the provisions or the remaining portions of this Agreement. To the extent permitted by law, the parties waive any provision of the law that renders a provision contained in this Agreement prohibited or unenforceable in any respect. -End- 13 IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and affixed their seals as of the date first above written. CONCORD EFS, INC. By: /s/ E. Miles Kilburn ---------------------------------------- Its: Senior Vice President --------------------------------------- EDWARD A. LABRY III TRUST By: /s/ J. Richard Buchignani, Trustee ---------------------------------------- J. Richard Buchignani Its Trustee By: /s/ Benjamin C. Labry, trustee ---------------------------------------- Benjamin C. Labry Its Trustee /s/ Edward A. Labry III (L.S.) ------------------------------ EDWARD A. LABRY III 14 EX-10.13 6 dex1013.txt AMENDED DAN PALMER SPLIT-DOLLAR AGREEMENT EXHIBIT 10.13 AMENDED AND RESTATED SPLIT-DOLLAR AGREEMENT AGREEMENT (this "Agreement"), dated as of August 1, 2001, by and among CONCORD EFS, INC., a corporation duly organized and existing under the laws of the State of Delaware (hereinafter sometimes called the "Corporation"), THOMAS R. RENFRO, an individual resident of the State of Tennessee, and GARY G. ARNOLD, an individual resident of the State of Arizona, Co-Trustees of the DANNY M. PALMER 1999 TRUST, a trust settled under the laws of the State of Tennessee (hereinafter called the "Owner"), and DANNY M. PALMER, an individual resident of the State of Tennessee ("Palmer"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Corporation, the Owner and Palmer entered into that certain Split-Dollar Agreement, dated as of August 1, 1999 (the "1999 Agreement"), which provided for a "split-dollar" arrangement with respect to a particular life insurance policy identified in the 1999 Agreement (the "1999 Policy"); WHEREAS, pursuant to Section 8.4 of the 1999 Agreement, the Corporation, the Owner and Palmer wish to amend and restate the 1999 Agreement to provide for additional insurance coverage on Palmer's life to be owned by the Owner thereunder; WHEREAS, Palmer continues to be a valued officer and employee of the Corporation and the Corporation desires to retain him in such capacities; 1 WHEREAS, as an inducement to such continued employment, the Corporation desires to assist Palmer with his personal life insurance program by entering into this Agreement with Palmer and the Owner; WHEREAS, the Corporation has determined that this assistance can best be provided under a "split-dollar" arrangement and the Owner has, under the 1999 Agreement, applied for Insurance Policy No. 1Y000486 (the "1999 Policy") issued by The New England Life Insurance Company (the "Insurer") in the face amount of $19,000,000 on Palmer's life; WHEREAS, the Owner has, under this Agreement, applied for Insurance Policy No. 1Y200642 (the "2001 Policy", and collectively with the 1999 Policy, the "Policy") issued by the Insurer in the face amount of $35,000,000 on Palmer's life; and WHEREAS, the Corporation and the Owner agree that the Policy shall be subject to this Agreement. NOW, THEREFORE, in consideration of the premises, and for other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the Corporation, the Owner and Palmer hereby mutually covenant and agree as follows; Section 1. Purchase of the 2001 Policy and Term of Funding Period 1.1 The Owner has previously purchased the 1999 Policy subject to the 1999 Agreement. The Owner will purchase the 2001 Policy contemporaneously with the execution of this Agreement. The Corporation, Palmer and the Owner agree that (i) they will take all necessary actions to cause the 2001 Policy to be issued to the Owner and cause the Policy to conform to the terms of this Agreement, and (ii) the Policy will be subject to the terms and conditions of this Agreement and the Collateral Assignment, as that term is defined in Section 3.2 hereof. 2 1.2 The term during which the Corporation will fund the 1999 Policy under this Agreement shall commence on August 1, 1999 and shall end on the earlier of August 1, 2009, and the term during which the Corporation will fund the 2001 Policy under this Agreement shall commence on August 1, 2001 and shall end on the earlier of August 1, 2011, respectively, or the normal retirement date of Palmer, whichever shall first occur (collectively, the "Term"). For purposes of this Section 1, the term "normal retirement date" means the latter of (i) the date of the 65th birthday of Palmer or (ii) the date of the tenth anniversary of the date of hire of Palmer by the Corporation. Section 2. Payment of Premiums and Information Reporting 2.1 During the Term, the Corporation agrees to pay all premiums due on the 2001 Policy to the Insurer pursuant to the terms of the 2001 Policy, provided, however, that the Corporation agrees to pay an amount to the Insurer on the 1999 Policy not to exceed $800,000 per year and on the 2001 Policy not to exceed $2,200,000 per year. The Corporation shall, upon request of the Owner or Palmer, promptly furnish the Owner and Palmer evidence of timely payment of such premiums. 2.2 During the Term, in order to facilitate the payment of premiums on the Policy, it is agreed that the Corporation (a) annually forward on a timely basis the amount of premium required under this Agreement and pursuant to the terms of the Policy to the Insurer, (b) annually furnish Palmer information concerning the economic benefit reportable by Palmer as gross income for federal income tax purposes, and (c) annually notify the Owner of the amount of the deemed gift from Palmer to the Owner. 2.3 The Corporation, the Owner and Palmer believe that neither the 1999 Agreement and the 1999 Policy nor this Agreement and the 2001 Policy are subject to Internal Revenue 3 Notice 2001-10, 2001-5 IRB 459 (the "Notice"). Notwithstanding the foregoing, if the parties hereto later determine that either the 1999 Policy or the 2001 Policy are subject to the Notice, or the Internal Revenue Service issues further guidance concerning the federal income taxation of split-dollar arrangement subsequent to the date of this Agreement, the Corporation, the Owner and Palmer reserve the right to amend, restate and modify the Agreement pursuant to such further guidance. Section 3. Policy Ownership and Repayment of Premium Payments 3.1 The Owner shall be the sole and absolute owner of the Policy and may exercise all ownership rights granted to the owner thereof by the terms of the Policy, except as may otherwise be expressly provided herein. All incidents of ownership in the Policy are expressly retained by the Owner, including, as example and not as a limitation of the foregoing, the right to change the beneficiary of the Policy, the right to borrow on the security of the Policy (but only to the extent of the difference between (a) the cash value of the Policy and (b) the cumulative amount of the Corporation's interest in the Policy in excess of the amount of all outstanding prior loans to the Corporation made against the Policy); the right to pledge or assign its interest in the Policy for such loans or advances; the right, in the event of a termination of this Agreement, to realize against the cash value of the Policy (to the extent such cash value exceeds the Corporation's interest therein); the right, in the event of the Employee's death (as defined in Section 8.2 hereof), to exercise settlement options and realize against the proceeds of the Policy to the extent said proceeds exceed the Corporation's interest in the Policy; and the right, subject to the interest of the Corporation to be reimbursed for its interest in the Policy, to surrender or cancel the Policy. The Owner has the right to assign its ownership rights to any person or entity 4 it, in its absolute discretion, chooses, but such an assignment will be subject to the Collateral Assignment, as that term is defined in Section 3.2 hereof, to the Corporation. 3.2 Except as may otherwise be expressly provided herein, the Corporation shall have no rights, interests or privileges of ownership in the Policy. To secure the repayment to the Corporation of the amount due the Corporation under Section 4.l(a) hereof, the Owner has, contemporaneously herewith, assigned an interest in the Policy to the Corporation as collateral (the "Collateral Assignment"), substantially in the form attached hereto as Exhibit A, which --------- gives the Corporation the limited power to enforce its right to be repaid the amount due the Corporation under Section 4.l(a) hereof. The Corporation may neither have nor exercise any right as collateral assignee of the Policy that could in any way defeat or impair the Owner's right to receive the net cash surrender value of the Policy decreased by any outstanding Policy loans to the Owner on the death benefit proceeds of the Policy in excess of the amount due the Corporation under Section 4.1(a) hereof. The Collateral Assignment shall not be terminated, altered or amended by the Owner without the express prior written consent of the Corporation, except that the Owner may assign its ownership rights to a third party, subject to the Collateral Assignment, as provided in Section 3.1 hereof. 3.3 The Owner will not exercise any right under the Policy without first giving the Corporation written notice of the Owner's intention to exercise such right; provided, however, that a change of beneficiary having no effect on the Corporation's status as a beneficiary shall not require such notice. The Owner shall take no action with respect to the Policy that would in any way compromise or jeopardize the Corporation's right to be repaid the amount due the Corporation under Section 4.1(a) hereof, without the Corporation's express written consent. 5 3.4 The Corporation may not, without the prior written consent of the Owner, exercise its rights under the Policy, including, but not limited to, the transfer or assignment of its interest in the Policy to any person or entity as collateral. Section 4. Beneficiary Provisions 4.1 At the time the life insurance proceeds become payable under the Policy, the Corporation and the Owner agree the Corporation and the Owner shall promptly take all action necessary to obtain payment of the death benefit provided under the Policy from the Insurer of the amount payable under the Policy, and payment of such death benefit will be divided and paid as follows: (a) The Corporation, as collateral assignee under the Collateral Assignment, will be entitled to receive an amount equal to the aggregate premiums paid by it as of the date of the Employee's death (as defined in Section 8.2 hereof) reduced by the sum of (i) any amounts previously received by the Corporation from or to the credit of the Owner as a repayment of the liabilities created hereunder and (ii) any outstanding indebtedness incurred by the Corporation and owed to the Insurer which was secured by the Policy, including interest accrued thereon. If the Corporation has paid additional premiums attributable to a rider providing for waiver of premium in the event of the Palmer's disability, the term "premiums", as used in this Section 4 will not include any premiums waived pursuant to the terms of such rider while this Agreement is in force; and (b) The beneficiary or beneficiaries designated by the Owner as then in effect under the Policy shall receive the balance of the payment of such death benefit, if any. 6 4.2 It is agreed and understood that receipt by the Corporation of any death benefit proceeds as a beneficiary under the Policy shall be considered a repayment of the Corporation's premium payments under Section 4.1(a) hereof to the extent of such proceeds. To the extent that the Corporation does not receive death benefit proceeds or in the event that such proceeds are insufficient to repay the Corporation the amount provided in Section 4.1(a), the Owner shall be liable for the remaining balance of the amount provided in Section 4.1(a). Section 5. Termination of Agreement Notwithstanding anything to the contrary herein, this Agreement shall terminate on the first to occur of the following: (a) Express cancellation of this Agreement by the Owner upon ninety (90) days written notice to the Corporation; or (b) Lapse or termination of the Policy after mutual written consent of the Owner and the Corporation to such lapse or termination. Section 6. Employee Retirement Income Security Act of 1974 6.1 For the purpose of the Employee Retirement Income Security Act of 1974 ("ERISA"), the Corporation will be the named fiduciary (the "Named Fiduciary") and the plan administrator (the "Plan Administrator") of the split-dollar life insurance arrangement created by this Agreement (the "Plan") for which this Agreement is hereby designated the written plan instrument. 6.2 The Corporation's Board of Directors may authorize a person or group of persons to fulfill the responsibilities of the Corporation as Plan Administrator. The Named Fiduciary or the Plan Administrator may employ others to render advice with regard to its responsibilities 7 under the Plan. The Named Fiduciary may also allocate fiduciary responsibilities to others and may exercise any other powers necessary for the discharge of its duties, to the extent such exercise is not in conflict with ERISA. 6.3 The following claims procedures shall control the determination of benefit payments under the Plan: (a) Filing of a Claim for Benefits. Any insured, beneficiary or other ------------------------------ individual ("Claimant") entitled to benefits under the Plan or under the Policy will file a claim request with the Insurer with respect to such benefits (the "Claim for Benefits"). The Plan Administrator will, upon written request of a Claimant, make available copies of any claim forms or instructions provided by the Insurer or advise the Claimant where copies of such forms or instructions may be obtained. (b) Denial of Claim. A Claim for Benefits will be denied if the --------------- Insurer determines that the Claimant is not entitled to receive such benefits. Notice of denial shall be furnished to the Claimant within a reasonable period of time after receipt of the Claim for Benefits by the Insurer. (c) Content of Notice. The Insurer shall provide to every Claimant ----------------- who is denied a Claim for Benefits written notice setting forth, in a manner calculated to be understood by the Claimant, the following: 1. The specific reason or reasons for the denial; 2. Specific reference to pertinent Plan provisions on which the denial is based; 8 3. A description of any additional material or information necessary for the Claimant to perfect the claim, and an explanation of why such material or information is necessary; and 4. An explanation of the Plan's Claim Review Procedure as set forth below. (d) Claim Review Procedure. The purpose of the Claim Review Procedure ---------------------- is to provide a method by which a Claimant may have a reasonable opportunity to appeal a denial of a Claim for Benefits to the Insurer for a full and fair review. To accomplish that purpose, the Claimant or his duly authorized representative: 1. May request a review upon written application to the Insurer; 2. May review pertinent Plan documents; and 3. May submit issues and comments in writing to the Insurer. A Claimant (or his duly authorized representative) shall request a review by filing a written application for review with the Insurer at any time within 60 days after receipt by the Claimant of written notice of the denial of his Claim for Benefits. (e) Decision on Review. A decision on review of a denied Claim for ------------------ Benefits shall be made in the following manner: 1. The decision on review shall be made by the Insurer, who may in its discretion hold a hearing on the denied claim. Such decision shall be made promptly, and not later than 60 days after receipt of the request for review, unless special circumstances (such as the need to hold a hearing) require an extension of time for processing, in which case a decision shall be rendered as soon as possible, but not later than 120 days after receipt of the request for review. 9 2. The decision on review shall be in writing and shall include specific reasons for the decision, written in a manner calculated to be understood by the Claimant, and specific references to the pertinent Plan provisions upon which the decision is based. Section 7. Reorganization 7.1 Nothing contained in this Agreement shall prevent any consolidation or merger of the Corporation with or into any other corporation or corporations (whether or not affiliated with the Corporation, or successive consolidations or mergers in which the Corporation or its successor or successors shall be a party or parties, or shall prevent any sale, conveyance or lease (or successive sales, conveyances or leases) of all or substantially all of the property of the Corporation to any other corporation (whether or not affiliated with the Corporation) authorized to acquire and operate the same and which shall be organized under the laws of a State of the United States or the District of Columbia; provided, however, and the Corporation hereby covenants and agrees, that upon any such consolidation, merger, sale, conveyance or lease, the due and punctual performance and observance of all of the covenants and conditions of this Agreement to be performed by the Corporation shall be expressly assumed, by written instrument executed and delivered to Palmer and the Owner, by the corporation or corporations (if other than the Corporation) formed by such consolidation, or into which the Corporation shall have been merged, or by the corporation or corporations which shall have acquired or leased such property. 7.2 In case of any such consolidation, merger, sale, conveyance or lease, and upon the assumption, as provided in Section 7.1 above, by the successor corporation of the due and punctual performance and observance of all covenants and conditions of this Agreement to be 10 performed by the Corporation, such successor corporation shall succeed to and be substituted for the Corporation with the same effect as it had been named herein as the "Bank". In the event of any such consolidation, merger, sale, conveyance or lease, the party named as the "Bank" in this Agreement or any successor which shall thereafter have become such in the manner prescribed in Section 7.1 above may be dissolved, wound-up and liquidated at any time thereafter and such party shall be released from its liabilities and obligations under this Agreement. 7.3 Except as provided in Section 7.2 above, upon any distribution of assets of the Corporation, upon any dissolution, winding up, total or partial liquidation of the Corporation, voluntary or involuntary, or upon any reorganization or similar proceeding relating to the Corporation or any of its property, whether, bankruptcy, insolvency or receivership proceedings, or upon a general assignment for the benefit of creditors, or any other marshalling of the assets and liabilities of the Corporation (each a "Winding Up"), the Corporation shall, prior to the taking of any corporate action in furtherance of any Winding Up, set aside in trust, irrevocably, for the benefit of the Owner, sufficient funds to satisfy all then-remaining obligations and liabilities of the Corporation under this Agreement; and if such trust is not established for the benefit of the Owner, then, upon any payment or distribution of assets of the Corporation of any kind or character, whether in cash, property or securities, an amount sufficient to satisfy such obligations and liabilities shall be paid by the liquidating trustee or agent or other person making such payment or distribution, whether a trustee in bankruptcy, a receiver or liquidating trustee or otherwise, directly to the Owner in satisfaction of the Corporation's obligations and liabilities hereunder. 11 Section 8. Miscellaneous Provisions 8.1 This Agreement will be governed by and construed in accordance with the laws of the State of Tennessee applied without giving effect to any conflicts-of-law principles. 8.2 For purposes of this Agreement, the phrases, "Employee dies", "Employee's death" or the "death of the Employee", mean the death of Palmer. 8.3 This Agreement shall not be deemed to constitute a contract of employment between the parties, nor shall any provision hereof restrict the right of the Corporation to discharge Palmer, or restrict the right of Palmer to terminate employment. 8.4 This Agreement sets forth the entire agreement among the parties concerning the subject matter hereof, and any amendment or discharge will be made only in writing. This Agreement is binding on, enforceable by and against and shall benefit the parties, their legal representatives, successors and assigns. No beneficiary under the Policy shall obtain any vested right to have this Agreement continued in full. 8.5 (a) Notwithstanding the provisions of this Agreement, any life insurance company which has issued a policy of insurance which is subject to the provisions of this Agreement, including, but not limited to, the Insurer and the Policy, is hereby authorized to act in accordance with the terms of such policy as if this Agreement did not exist, and the payment or other performance of its contractual obligations by any such insurance company, in accordance with the terms of any such policy, shall completely discharge such insurance company from all claim, suits and demands of all persons whatsoever. (b) Notwithstanding Section 6 hereof, the Insurer is not deemed a party to this split-dollar arrangement, is not bound by the split-dollar arrangement, or deemed to have notice of the provisions of this split-dollar arrangement. Rather, the Insurer will be bound only by the 12 provisions of and endorsements on the Policy, and any payments made or actions taken by it in accordance with said provisions or endorsements will fully discharge it from all claims, suits and demands of all persons whatsoever. 8.6 Whenever possible each provision of this Agreement is to be interpreted in a manner as to be effective and valid under applicable law, but if any provision is prohibited or invalid under applicable law, that provision will be ineffective to the extent of the prohibition or invalidity, without invalidating the remainder of the provisions or the remaining portions of this Agreement. To the extent permitted by law, the parties waive any provision of the law that renders a provision contained in this Agreement prohibited or unenforceable in any respect. 13 IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and affixed their seals as of the date first above written. CONCORD EFS, INC. By: /s/ Edward A. Labry -------------------------------- Its: President -------------------------------- DANNY M. PALMER 1999 TRUST By: /s/ Thomas R. Renfro --------------------------------- Thomas R. Renfro Its Trustee By: /s/ Gary G. Arnold --------------------------------- Gary G. Arnold Its Trustee /s/ Danny M. Palmer (L.S.) -------------------------- DANNY M. PALMER 14 EX-10.14 7 dex1014.txt AMENDED CHRISTOPHER RECKERT SPLIT-DOLLAR AGREEMNT EXHIBIT 10.14 AMENDED AND RESTATED SPLIT-DOLLAR AGREEMENT AGREEMENT (this "Agreement"), dated as of August 1, 2001, by and among CONCORD EFS, INC., a corporation duly organized and existing under the laws of the State of Delaware (hereinafter sometimes called the "Corporation"), and CHRISTOPHER S. RECKERT, an individual resident of the State of Tennessee (hereinafter called the "Owner"), W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Corporation and the Owner entered into that certain Split-Dollar Agreement, dated as of August 1, 1999 (the "1999 Agreement"), which provided for a "split-dollar" arrangement with respect to a particular life insurance policy identified in the 1999 Agreement (the "1999 Policy"); WHEREAS, pursuant to Section 8.4 of the 1999 Agreement, the Corporation and the Owner wish to amend and restate the 1999 Agreement to provide for additional insurance coverage on the Owner's life to be owned by the Owner thereunder; WHEREAS, the Owner continues to be a valued officer and employee of the Corporation and the Corporation desires to retain him in such capacities; WHEREAS, as an inducement to such continued employment, the Corporation desires to assist the Owner with his personal life insurance program by entering into this Agreement with the Owner; 1 WHEREAS, the Corporation has determined that this assistance can best be provided under a "split-dollar" arrangement and the Owner has, under the 1999 Agreement, applied for Insurance Policy No. 1Y000487 (the "1999 Policy") issued by The New England Life Insurance Company (the "Insurer") on the Owner's life; WHEREAS, the Owner has, under this Agreement, applied for Insurance Policy No 1Y200641 (the "2001 Policy"), and collectively with the 1999 Policy, the "Policy") issued by the Insurer in the face amount of $5,947,582 on the Owner's life; and WHEREAS, the Corporation and the Owner agree that the Policy shall be subject to this Agreement. NOW, THEREFORE, in consideration of the premises, and for other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the Corporation and the Owner hereby mutually covenant and agree as follows: Section 1. Purchase of the 2001 Policy and Term of Funding Period 1.1 The Owner has previously purchased the 1999 Policy subject to the 1999 Agreement. The Owner will purchase the 2001 Policy contemporaneously with the execution of this Agreement. The Corporation and the Owner agree that (i) they will take all necessary actions to cause the 2001 Policy to be issued to the Owner and cause the Policy to conform to the terms of this Agreement, and (ii) the Policy will be subject to the terms and conditions of this Agreement and the Collateral Assignment, as that term is defined in Section 3.2 hereof. 1.2 The term during which the Corporation will fund the 1999 Policy under this Agreement shall commence on August 1, 1999 and shall end on the earlier of August 1, 2009, 2 and the term during which the Corporation will fund the 2001 Policy under this Agreement shall commence on August 1, 2001, and shall end on the earlier of August 1, 2011, respectively, or the normal retirement date of the Owner, whichever shall first occur (collectively, the "Term"). For purposes of this Section 1.2, the term "normal retirement date" means the latter of (i) the date of the 65th birthday of the Owner or (ii) the date of the tenth anniversary of the date of hire of the Owner by the Corporation. Section 2. Payment of Premiums 2.1 During the Term, the Corporation agrees to pay all premiums due on the Policy to the Insurer pursuant to the terms of the Policy, provided, however, that the Corporation agrees to pay an amount to the Insurer on the 1999 Policy not to exceed $50,000 per year and on the 2001 Policy not to exceed $200,000 per year. The Corporation shall, upon request of the Owner, promptly furnish the Owner evidence of timely payment of such premiums. 2.2 During the Term, in order to facilitate the payment of premiums on the Policy, it is agreed that the Corporation (a) annually forward on a timely basis the amount of premium required under this Agreement and pursuant to the terms of the Policy to the Insurer, and (b) annually furnish the Owner information concerning the economic benefit reportable by the Owner as gross income for federal income tax purposes. 2.3 The Corporation and the Owner believe that neither the 1999 Agreement and the _1999 Policy nor this Agreement and the 2001 Policy are subject to Internal Revenue Notice 2001-10, 2001-5 IRB 459 (the "Notice"). Notwithstanding the foregoing, if the parties hereto later determine that either the 1999 Policy or the 2001 Policy are subject to the Notice, or the Internal Revenue Service issues further guidance concerning the federal income taxation of split- 3 dollar arrangement subsequent to the date of this Agreement, the Corporation and the Owner reserve the right to amend, restate and modify the Agreement pursuant to such further guidance. Section 3. Policy Ownership and Repayment of Premium Payments 3.1 The Owner shall be the sole and absolute owner of the Policy and may exercise all ownership rights granted to the owner thereof by the terms of the Policy, except as may otherwise be expressly provided herein. All incidents of ownership in the Policy are expressly retained by the Owner, including, as example and not as a limitation of the foregoing, the right to change the beneficiary of the Policy, the right to borrow on the security of the Policy (but only to the extent of the difference between (a) the cash value of the Policy and (b) the cumulative amount of the Corporation's interest in the Policy in excess of the amount of all outstanding prior loans to the Corporation made against the Policy); the right to pledge or assign his interest in the Policy for such loans or advances; the right, in the event of a termination of this Agreement, to realize against the cash value of the Policy (to the extent such cash value exceeds the Corporation's interest therein); the right, in the event of the Employee's death (as defined in Section 8.2 hereof), to exercise settlement options and realize against the proceeds of the Policy to the extent said proceeds exceed the Corporation's interest in the Policy; and the right, subject to the interest of the Corporation to be reimbursed for its interest in the Policy, to surrender or cancel the Policy. The Owner has the right to assign his ownership rights to any person or entity he, in his absolute discretion, chooses, but such an assignment will be subject to the Collateral Assignment, as that term is defined in Section 3.2 hereof, to the Corporation. 3.2 Except as may otherwise be expressly provided herein, the Corporation shall have no rights, interests or privileges of ownership in the Policy. To secure the repayment to the 4 Corporation of the amount equal to the aggregate premiums paid by it as of the date of the Employee's death (as defined in Section 8.2 hereof) reduced by the sum of (i) any amounts previously received by the Corporation from or to the credit of the Owner as a repayment of the liabilities created hereunder and (ii) any outstanding indebtedness incurred by the Corporation and owed to the Insurer which was secured by the Policy, including interest accrued thereon, the Owner has, contemporaneously herewith, assigned an interest in the Policy to the Corporation as collateral (the "Collateral Assignment"), substantially in the form attached hereto as Exhibit A, which gives the Corporation the limited power --------- to enforce its right to be repaid the amount due the Corporation. The Corporation may neither have nor exercise any right as collateral assignee of the Policy that could in any way defeat or impair the Owner's right to receive the net cash surrender value of the Policy decreased by any outstanding Policy loans to him on the death benefit proceeds of the Policy in excess of the amount due the Corporation. The Collateral Assignment shall not be terminated, altered or amended by the Owner without the express prior written consent of the Corporation, except that the Owner may assign his ownership rights to a third party, subject to the Collateral Assignment, as provided in Section 3.1 hereof. 3.3 The Owner will not exercise any right under the Policy without first giving the Corporation written notice of the Owner's intention to exercise such right; provided, however, that a change of beneficiary having no effect on the Corporation's status as a beneficiary shall not require such notice. The Owner shall take no action with respect to the Policy that would in any way compromise or jeopardize the Corporation's right to be repaid the amount due the Corporation under Section 4.l(b) hereof, without the Corporation's express written consent. 5 3.4 The Corporation may not, without the prior written consent of the Owner, exercise its rights under the Policy, including, but not limited to, the transfer or assignment of its interest in the Policy to any person or entity as collateral. 3.5 (a) Within 60 days following the date of the termination of this Agreement under Section 5 hereof, the Owner shall repay to the Corporation the lesser of (a) the amount due the Corporation under Section 4.l(b) hereof, or (b) the net cash surrender value of the Policy increased by any outstanding Policy loans to the Owner, each determined as of the date of the termination of this Agreement. Upon receipt of such amount, the Corporation shall release the Collateral Assignment of the Policy, by the execution and delivery of an appropriate instrument of release and shall be removed as beneficiary under the Policy. (b) If the Owner fails to repay the Corporation the amount specified in Section 3.5(a), the Owner shall execute any and all instruments that may be required to vest ownership of the Policy in the Corporation. Thereafter, the Owner shall have no further interest in, or rights under, the Policy, or rights under this Agreement. Section 4. Beneficiary Provisions 4.1 At the time the life insurance proceeds become payable under the Policy, the Corporation and the Owner agree the Corporation and the personal representative of the Owner or the beneficiary or beneficiaries designated on the Policy by the Owner if other than the estate of the Owner, as the case may be, shall promptly take all action necessary to obtain payment of the death benefit provided under the Policy from the Insurer of the amount payable under the Policy, and payment of such death benefit will be divided and paid as follows: 6 (a) The beneficiary or beneficiaries designated on the Policy by the Owner as then in effect under the Policy shall receive an amount of such death benefit equal to the product obtained by multiplying an amount equal to $250,000, plus 3% per annum beginning with the year 2000, times a factor of 5.0; and (b) The Corporation, as collateral assignee under the Collateral Assignment, shall receive the aggregate premiums paid by it under this Agreement, not to exceed an amount equal to the balance of the payment of such death benefit, if any. 4.2 It is agreed and understood that receipt by the Corporation of any death benefit proceeds as a beneficiary under the Policy shall be considered a repayment of the Corporation's premium payments under Section 4.1(b) hereof to the extent of such proceeds. Section 5. Termination of Agreement Notwithstanding anything to the contrary herein, this Agreement shall terminate on the first to occur of the following: (a) Express cancellation of this Agreement by the Owner upon ninety (90) days written notice to the Corporation; (b) Lapse or termination of the Policy after mutual written consent of the Owner and the Corporation to such lapse or termination; or (c) Termination of the Owner's employment by the Corporation (other than by reason of his death, disability or attaining normal retirement age). 7 Section 6. Employee Retirement Income Security Act of 1974 6.1 For the purpose of the Employee Retirement Income Security Act of 1974 ("ERISA"), the Corporation will be the named fiduciary (the "Named Fiduciary") and the plan administrator (the "Plan Administrator") of the split-dollar life insurance arrangement created by this Agreement (the "Plan") for which this Agreement is hereby designated the written plan instrument. 6.2 The Corporation's Board of Directors may authorize a person or group of persons to fulfill the responsibilities of the Corporation as Plan Administrator. The Named Fiduciary or the Plan Administrator may employ others to render advice with regard to its responsibilities under the Plan. The Named Fiduciary may also allocate fiduciary responsibilities to others and may exercise any other powers necessary for the discharge of its duties, to the extent such exercise is not in conflict with ERISA. 6.3 The following claims procedures shall control the determination of benefit payments under the Plan: (a) Filing of a Claim for Benefits. Any insured, beneficiary ------------------------------ or other individual ("Claimant") entitled to benefits under the Plan or under the Policy will file a claim request with the Insurer with respect to such benefits (the "Claim for Benefits"). The Plan Administrator will, upon written request of a Claimant, make available copies of any claim forms or instructions provided by the Insurer or advise the Claimant where copies of such forms or instructions may be obtained. 8 (b) Denial of Claim. A Claim for Benefits will be denied if the --------------- Insurer determines that the Claimant is not entitled to receive such benefits. Notice of denial shall be furnished to the Claimant within a reasonable period of time after receipt of the Claim for Benefits by the Insurer. (c) Content of Notice. The Insurer shall provide to every ----------------- Claimant who is denied a Claim for Benefits written notice setting forth, in a manner calculated to be understood by the Claimant, the following: 1. The specific reason or reasons for the denial; 2. Specific reference to pertinent Plan provisions on which the denial is based; 3. A description of any additional material or information necessary for the Claimant to perfect the claim, and an explanation of why such material or information is necessary; and 4. An explanation of the Plan's Claim Review Procedure as set forth below. (d) Claim Review Procedure. The purpose of the Claim Review ---------------------- Procedure is to provide a method by which a Claimant may have a reasonable opportunity to appeal a denial of a Claim for Benefits to the Insurer for a full and fair review. To accomplish that purpose, the Claimant or his duly authorized representative: 9 1. May request a review upon written application to the Insurer; 2. May review pertinent Plan documents; and 3. May submit issues and comments in writing to the Insurer. A Claimant (or his duly authorized representative) shall request a review by filing a written application for review with the Insurer at any time within 60 days after receipt by the Claimant of written notice of the denial of his Claim for Benefits. (e) Decision on Review. A decision on review of a denied Claim ------------------ for Benefits shall be made in the following manner: 1. The decision on review shall be made by the Insurer, who may in its discretion hold a hearing on the denied claim. Such decision shall be made promptly, and not later than 60 days after receipt of the request for review, unless special circumstances (such as the need to hold a hearing) require an extension of time for processing, in which case a decision shall be rendered as soon as possible, but not later than 120 days after receipt of the request for review. 2. The decision on review shall be in writing and shall include specific reasons for the decision, written in a manner calculated to be understood by the Claimant, and specific 10 references to the pertinent Plan provisions upon which the decision is based. Section 7. Reorganization 7.1 Nothing contained in this Agreement shall prevent any consolidation or merger of the Corporation with or into any other corporation or corporations (whether or not affiliated with the Corporation, or successive consolidations or mergers in which the Corporation or its successor or successors shall be a party or parties, or shall prevent any sale, conveyance or lease (or successive sales, conveyances or leases) of all or substantially all of the property of the Corporation to any other corporation (whether or not affiliated with the Corporation) authorized to acquire and operate the same and which shall be organized under the laws of a State of the United States or the District of Columbia; provided, however, and the Corporation hereby covenants and agrees, that upon any such consolidation, merger, sale, conveyance or lease, the due and punctual performance and observance of all of the covenants and conditions of this Agreement to be performed by the Corporation shall be expressly assumed, by written instrument executed and delivered to the Owner, by the corporation or corporations (if other than the Corporation) formed by such consolidation, or into which the Corporation shall have been merged, or by the corporation or corporations which shall have acquired or leased such property. 7.2 In case of any such consolidation, merger, sale, conveyance or lease, and upon the assumption, as provided in Section 7.1 above, by the successor corporation of the due and punctual performance and observance of all covenants and conditions of this Agreement to be performed by the Corporation, such successor corporation shall succeed to and be substituted for the Corporation with the same effect as it had been named herein as the "Corporation". In the 11 event of any such consolidation, merger, sale, conveyance or lease, the party named as the "Corporation" in this Agreement or any successor which shall thereafter have become such in the manner prescribed in Section 7.1 above may be dissolved, wound-up and liquidated at any time thereafter and such party shall be released from its liabilities and obligations under this Agreement. 7.3 Except as provided in Section 7.2 above, upon any distribution of assets of the Corporation, upon any dissolution, winding up, total or partial liquidation of the Corporation, voluntary or involuntary, or upon any reorganization or similar proceeding relating to the Corporation or any of its property, whether, bankruptcy, insolvency or receivership proceedings, or upon a general assignment for the benefit of creditors, or any other marshalling of the assets and liabilities of the Corporation (each a "Winding Up"), the Corporation shall, prior to the taking of any corporate action in furtherance of any Winding Up, set aside in trust, irrevocably, for the benefit of the Owner, sufficient funds to satisfy all then-remaining obligations and liabilities of the Corporation under this Agreement; and if such trust is not established for the benefit of the Owner, then, upon any payment or distribution of assets of the Corporation of any kind or character, whether in cash, property or securities, an amount sufficient to satisfy such obligations and liabilities shall be paid by the liquidating trustee or agent or other person making such payment or distribution, whether a trustee in bankruptcy, a receiver or liquidating trustee or otherwise, directly to the Owner in satisfaction of the Corporation's obligations and liabilities hereunder. 12 Section 8. Miscellaneous Provisions 8.1 This Agreement will be governed by and construed in accordance with the laws of the State of Tennessee applied without giving effect to any conflicts-of-law principles. 8.2 For purposes of this Agreement, the phrases, "Employee dies", "Employee's death" or the "death of the Employee", mean the death of the Owner. 8.3 This Agreement shall not be deemed to constitute a contract of employment between the parties, nor shall any provision hereof restrict the right of the Corporation to discharge the Owner, or restrict the right of the Owner to terminate employment. 8.4 This Agreement sets forth the entire agreement among the parties concerning the subject matter hereof, and any amendment or discharge will be made only in writing. This Agreement is binding on, enforceable by and against and shall benefit the parties, their legal representatives, successors and assigns. No beneficiary under the Policy shall obtain any vested right to have this Agreement continued in full. 8.5 (a) Notwithstanding the provisions of this Agreement, any life insurance company which has issued a policy of insurance which is subject to the provisions of this Agreement, including, but not limited to, the Insurer and the Policy, is hereby authorized to act in accordance with the terms of such policy as if this Agreement did not exist, and the payment or other performance of its contractual obligations by any such insurance company, in accordance with the terms of any such policy, shall completely discharge such insurance company from all claim, suits and demands of all persons whatsoever. 13 (b) Notwithstanding Section 6 hereof, the Insurer is not deemed a party to this split-dollar arrangement, is not bound by the split-dollar arrangement, or deemed to have notice of the provisions of this split-dollar arrangement. Rather, the Insurer will be bound only by the provisions of and endorsements on the Policy, and any payments made or actions taken by it in accordance with said provisions or endorsements will fully discharge it from all claims, suits and demands of all persons whatsoever. 8.6 Whenever possible each provision of this Agreement is to be interpreted in a manner as to be effective and valid under applicable law, but if any provision is prohibited or invalid under applicable law, that provision will be ineffective to the extent of the prohibition or invalidity, without invalidating the remainder of the provisions or the remaining portions of this Agreement. To the extent permitted by law, the parties waive any provision of the law that renders a provision contained in this Agreement prohibited or unenforceable in any respect. 14 IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and affixed their seals as of the date first above written. CONCORD EFS, INC. By: /s/ William E. Lucado --------------------------------------- Its: ______________________________________ /s/ Christopher S. Reckert (L.S.) ----------------------------- CHRISTOPHER S. RECKERT 15 EX-13 8 dex13.txt ANNUAL REPORT TO STOCKHOLDERS EXHIBIT 13 CONCORD EFS, INC. AND SUBSIDIARIES Financial Highlights 3 Stockholders' Letter 5 Managing Risk 8 Processing Payments 9 Connecting Consumers 10 Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Financial Statements 23 Corporate Directory 53 CONCORD EFS, INC. AND SUBSIDIARIES During the 15-year period between 1986 and 2001, Concord had 15 consecutive years of record earnings, and our stock outperformed every publicly traded company on both the Nasdaq 100 and the S&P 500. While we're proud of this track record, we believe that what's exciting about Concord is not just where we've been, but where we're going. The pages that follow highlight the inventive new products that we believe represent "what's next" for Concord and the payments industry. -2- CONCORD EFS, INC. AND SUBSIDIARIES FINANCIAL HIGHLIGHTS MARKET VALUE Our common stock trades on The Nasdaq National Market under the symbol "CEFT." The following table sets forth, for the periods presented, the range of high and low sales prices per share of our common stock, as reported on The Nasdaq National Market. HIGH LOW ---- --- Year ended December 31, 2001 First Quarter $24.97 $17.00 Second Quarter 28.47 18.72 Third Quarter 30.83 21.08 Fourth Quarter 33.36 23.65 Year ended December 31, 2000 First Quarter $14.00 $ 7.66 Second Quarter 14.56 9.31 Third Quarter 18.25 12.84 Fourth Quarter 24.06 16.50 As of February 15, 2002 we had approximately 74,000 holders of record of common stock. We have never paid cash dividends on our capital stock. It is our present policy to retain earnings to finance our operations and growth, and we do not expect to pay any cash dividends in the foreseeable future. -3- CONCORD EFS, INC. AND SUBSIDIARIES FINANCIAL HIGHLIGHTS The following consolidated selected financial data for the years ended December 31 (in thousands, except per share data) should be read in conjunction with our consolidated financial statements and the notes to those financial statements, which are included in this report.
INCOME STATEMENT DATA 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Revenue $1,707,002 $1,407,140 $1,060,010 $ 812,824 $ 622,573 Cost of Operations 1,203,815 1,009,954 735,467 552,469 421,969 Selling, General and Administrative Expenses 90,529 91,995 92,334 90,936 87,257 Acquisition Expenses and Restructuring Charges 125,362 11,691 36,189 - - Operating Income 287,296 293,500 196,020 169,419 113,347 Interest Income (Expense), Net 57,594 37,243 16,251 2,604 (1,688) Equity in Earnings (Loss) of Subsidiary - - - 281 (165) Income Taxes 127,958 120,220 82,906 65,709 45,081 Minority Interest in Subsidiary 526 597 124 - - Net Income $ 216,406 $ 209,926 $ 129,241 $ 106,595 $ 66,413 Basic Earnings per Share $ 0.44 $ 0.44 $ 0.28 $ 0.24 $ 0.15 Diluted Earnings per Share $ 0.42 $ 0.42 $ 0.27 $ 0.23 $ 0.15 Basic Shares 494,747 478,358 463,686 448,470 445,168 Diluted Shares 516,958 495,993 479,734 462,792 456,762 BALANCE SHEET DATA Working Capital $1,426,227 $ 754,999 $ 525,272 $ 296,137 $ 159,002 Total Assets $2,729,445 $1,828,286 $1,301,067 $1,002,282 $ 798,700 Long-Term Debt, Less Current Maturities $ 119,458 $ 109,911 $ 89,268 $ 190,625 $ 174,711 Total Stockholders' Equity $1,858,587 $1,132,531 $ 855,421 $ 493,248 $ 376,354 Percentage of Revenue Percentage Change --------------------- ----------------- 2001 2000 over over INCOME STATEMENT DATA 2001 2000 1999 2000 1999 ---- ---- ---- ---- ---- Revenue 100.0% 100.0% 100.0% 21.3% 32.7% Cost of Operations 70.5 71.8 69.4 19.2 37.3 Selling, General and Administrative Expenses 5.3 6.4 8.7 (1.6) (0.4) Acquisition Expenses and Restructuring Charges 7.4 0.9 3.4 972.3 (67.7) Operating Income 16.8 20.9 18.5 (2.1) 49.7 Interest Income, Net 3.4 2.6 1.5 54.6 129.2 Income Taxes 7.5 8.6 7.8 6.4 45.0 Minority Interest in Subsidiary 0.0 0.0 0.0 (11.9) 381.5 Net Income 12.7 14.9 12.2 3.1 62.4
-4- CONCORD EFS, INC. AND SUBSIDIARIES STOCKHOLDERS' LETTER Dear Stockholders: In 2001 Concord posted its 15th consecutive year of record earnings. Perhaps most importantly for you, our stockholders, is this impressive measure: During the 15-year period between 1986 and 2001, Concord's stock price increased over 83900%, easily outperforming every publicly traded company on the Nasdaq 100 and the S&P 500 and generating returns that were four times as large as the next best-performing company. We're proud of that track record, and we'd like to say "thank you" to our clients, business partners, stockholders, and 2,600 employees for helping us make 2001 another landmark year for Concord. Although the 2001 recession presented some challenges for Concord--such as a lower average ticket size and slower transaction volume growth in the second half of the year--we successfully managed through the economic downturn. Concord's 2001 revenue grew 21% over 2000, and net income and diluted earnings per share were up 39% and 33%, respectively, excluding acquisition expenses and restructuring charges. Business Highlights Our two business segments, Network Services and Payment Services, each had good internal growth from current business in 2001, as well as success in cross-selling additional products to current clients and signing contracts for new business with some of the nation's largest financial institutions and retailers. Network Services, which consists of network switching and processing services, added 275 new financial institution participants to our STAR\\sm\\ debit network and added thousands of new retail locations that accept the STAR automated teller machine (ATM)/debit card for payment. There are now over one million locations nationwide where STAR cardholders can get cash or pay for purchases. We also successfully cross-sold processing services to 412 STAR network members, thereby increasing our revenue per transaction. Major new contracts included Citizens Financial Group, Mid-States Corporate Federal Credit Union, and NWA Federal Credit Union. Network Services processed approximately 5.5 billion transactions in 2001. Payment Services, which provides point of sale processing and settlement services, processed approximately 3.6 billion transactions in 2001 and added approximately 102,600 new merchant locations through our direct sales, agent bank, and independent sales organization channels. Significant new and expanded business included contracts with Ultramar Diamond Shamrock, The Coastal Corporation, RaceTrac Petroleum, Sinclair Oil, Fleming Foods, American Dairy Queen, and Auntie Anne's Pretzels. In December we announced an agreement to acquire The Logix Companies, LLC, a private electronic transaction processor, which is expected to bring new product technology to each of Concord's business lines. Key products include an ATM processing platform with specialized services for retail deployers and an enhanced check conversion product featuring image capture. -5- Logix also operates a terminal-based identity verification product that reads driver's licenses and other forms of identification as a basis for authorizing age-related sales, such as alcohol and tobacco. We expect to close the Logix transaction during the first quarter of 2002, subject to various conditions, including regulatory approval. The Next Big Idea We believe that Concord's success over the years has been built on our ability to spot new opportunities early, to identify the next "big idea" that will drive continued earnings growth. In the late 1980s it was a shift to the recurring revenues of transaction processing. In the early 1990s it was a focus on emerging payment types in supermarkets and gas stations. And in the late 1990s it was an expansion into ATM processing and branded network services. On the pages that follow, we share highlights of some emerging products that we believe have the potential to be the next "big idea" in Concord's future. An example is risk management, a business we entered in 2001. Primary Payment Systems, Inc., our majority-owned subsidiary, provides new account, deposit, and payment risk management services to financial institutions and retailers. Primary Payment Systems' newest offering, called Identity Chek\\sm\\, is an identification verification service expected to help financial institutions comply with the new USA Patriot Act. In the future it may be used to perform advanced identity screening for a variety of transactions. Another example is our new Internet payment gateway, EFSnet\\sm\\, which allows new clients to connect to our payment processing platforms in hours rather than weeks, with minimal programming and without certification. Built using the newly created standards for Internet commerce, this unique Internet-based gateway is expected to transform the way clients connect to Concord for all types of Web-based and brick-and-mortar-based payments. Looking Ahead Concord begins 2002 in a strong position. We are the leading processor to the supermarket and petroleum industries, two large segments moving rapidly to electronic payments. We lead the payments industry in acquiring personal identification number (PIN)-secured debit and electronic benefits transfer transactions. Our acquisitions of the MAC(R), Cash Station(R), and STAR debit networks created the largest PIN-secured debit network in the U.S., and we are the largest ATM processor in the country. Individually these attributes are impressive, but combined they make Concord a driving force in the electronic payments industry and we are well positioned to benefit from the shift from cash and checks to electronic commerce. We also start 2002 with a balance sheet that is extremely strong on all measures. We took significant steps in 2001 to consolidate our operations and integrate recent acquisitions, which is expected to improve operating efficiency in 2002. We moved into two new state-of-the-art data centers, consolidated two other data centers, and re-engineered systems for improved performance. And with cash and securities of approximately $1.9 billion, we have significant resources to fuel future growth. Early in 2001 a commentator on a business news program called Concord "boring" for its steady growth and predictability. At Concord, we think a 15-year record of high growth rates and -6- reliable performance is, in fact, a very exciting quality for a company to possess. We hope you agree. Sincerely, /s/ Dan M. Palmer /s/ Edward A. Labry III - ----------------- ----------------------- Dan M. Palmer Edward A. Labry III Chairman and Chief Executive Officer President Concord gained significant financial recognition in 2001. The Wall Street Journal Shareholder Scoreboard listed Concord in its 14-member Honor Roll and 50 Best Performers, plus it ranked Concord 2nd out of 44 peer companies on five-year average returns. Concord joined the Forbes 500s, Fortune 1000, and S&P 500 Index, and Investor's Business Daily ranked Concord 2nd on its Decade's Best Performers list. Concord was also named to Forbes Platinum List of the 400 Best Big Companies in America. -7- CONCORD EFS, INC. AND SUBSIDIARIES WHAT'S NEXT IN MANAGING RISK Broad access to sophisticated computer systems, while enhancing the quality of life for many Americans, has also increased the risk of fraud as criminals use the advanced technology for forgery, counterfeiting, and identity theft. The impact on businesses is both significant and growing: Retailers annually lose an estimated $12 to $15 billion due to check fraud. New account fraud generates almost one-third of the fraud losses at financial institutions. Identity theft, the fastest-growing crime in the U.S., is expected to cost financial institutions an estimated $8 billion by 2004. And while the dollar impact of fraud is staggering, the urgent need for effective risk management is moving beyond the threat of simple financial losses into the arena of national security. Falsified identification that can be used to cash a bad check can also be used to open accounts, obtain credit, and purchase airline tickets. In recognition of this heightened risk, Congress passed the USA Patriot Act of 2001. This anti-terrorism legislation includes provisions for improved identification verification during the new account opening process as a way to restrict criminal entry and block terrorist access to the U.S. financial system. Effectively managing this increased risk requires more than simple access to information. It demands an unprecedented combination of emerging technology, risk management expertise, and real-time access to multiple data sources. In 2001 we began assembling the components of a comprehensive risk management service, featuring the proprietary systems of recent acquisitions: Primary Payment Systems (PPS), WJM Technologies, and The Logix Companies (pending, 2002). These systems include: . Real-time access to millions of deposit accounts nationwide for account status and transaction information to reduce the risk of taking fraudulent checks for payment or deposit; . A sophisticated computer system that examines a person's identification using proprietary analytics and information from multiple data sources to highlight questionable information that might indicate a suspicious identity during the new account opening process; and . Unique terminal software that reads information encoded on driver's licenses and other forms of government identification and displays on a terminal read-out information such as date of birth, gender, and physical characteristics for immediate authentication. In risky situations, advance warning of a potential threat can make all the difference. Our new risk management services will offer the tools, information, and analysis that can help retailers and financial institutions avoid deposit fraud losses and improve transaction security. -8- CONCORD EFS, INC. AND SUBSIDIARIES WHAT'S NEXT IN PROCESSING PAYMENTS Most payment processors, including Concord, acquire, authorize, and settle payment transactions using software systems built on proprietary programs. And while this in-house software development often produces high-quality services, it also creates work. To communicate with the processor's systems, the client company must re-program its systems, certify that its programming was successful, and re-certify every time the processor upgrades its products. This process, which is typical in the industry, usually takes several weeks. Until now. We have developed a groundbreaking Internet-based payment gateway, EFSnet\\sm\\, which allows clients to connect to our payment platform in hours rather than weeks. EFSnet removes the traditional barriers of programming, certification, and periodic re-certification by acting as a translator between open Internet language and our proprietary processing language. Implementation is faster and upgrades are automatic, because clients write to EFSnet in simplified and universal Internet language, rather than certifying directly to our processing platform. EFSnet was built using the new "Web Services" standards and protocols, including extensible markup language (XML) and simple object access protocol (SOAP), which were recently adopted by the World Wide Web Consortium for standardizing Internet communications. We believe that these standards, which represent an entirely new way of communicating between dissimilar systems, will form the basis for all connections in the future. And we believe that EFSnet is the first live payment application in the U.S. to use these open Internet standards, putting us ahead of the technology curve. The first application for EFSnet has been acquiring and processing credit card payments on retailer Web sites, but this is only the beginning. The EFSnet gateway can be used to facilitate a wide range of emerging Web-based payments, such as gift cards, online checks, and business-to-business purchase cards with detailed reporting. In addition, brick-and-mortar retailers can use EFSnet as a secure Internet connection in place of traditional dial-up connections to authorize credit and debit card payment authorizations and check verification in traditional stores. Instead of the usual six- to eight-second delay of a dial-up connection, an Internet line is always connected, allowing retailers to enjoy the same processing speed as a dedicated leased-line connection without the expensive installation and maintenance costs. Faster, better, cheaper: At Concord, the future is now as we concurrently add new payment services and transform the way clients connect to and communicate with our processing platforms. -9- CONCORD EFS, INC. AND SUBSIDIARIES WHAT'S NEXT IN CONNECTING CONSUMERS "Connecting people with their money\\sm\\" is the objective of the STAR network. And billions of times each year, we connect consumers with their money via a coast-to-coast network of almost 200,000 automated teller machines and almost 900,000 retail locations where they can access their deposit accounts to get cash or pay for purchases. This consumer convenience is possible because the STAR network, at its core, is about connectivity: Online, real-time connections to financial institutions, third party processors, retailers, networks, and approximately 112 million deposit accounts across the U.S. This broad connectivity offers a wealth of opportunities to create new deposit access services, making life simpler for consumers while creating new revenue opportunities for our financial institution participants. As an example, we expect that in the not-too-distant future millions of Americans will be able to use our extensive network of STAR ATMs to send cash to, and receive cash from, other consumers. Called person-to-person payments, these transactions are secure transfers of money between individuals that can be used for personal payments, cash advances to college students, transfers to family members in other countries, or to send money to people who do not have bank accounts and cannot cash checks. This money transfer service will allow STAR cardholders to initiate "send money" transactions from their deposit accounts at a STAR ATM to designated recipients, while the recipients will be able to use a card at any STAR ATM nationwide to access the funds. Although there are other money transfer services in operation today, the service concept described above is proprietary, protected by Concord-owned patents that cover the use of cards to send and receive money at ATMs and other self-service terminals. Beyond the ATM network, there are also opportunities to leverage our real-time connection to over 6,200 financial institutions with inter-bank person-to-person transactions initiated via financial institution Web sites, telephones, and branches. Connecting people with their money, and next, connecting consumers to each other. Just one more step into the exciting future of Concord's Network Services. -10- CONCORD EFS, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Consolidated Balance Sheets 23 Consolidated Statements of Income 24 Consolidated Statements of Stockholders' Equity 25 Consolidated Statements of Cash Flows 26 Notes to Consolidated Financial Statements 27 Report of Independent Auditors 52 -11- CONCORD EFS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS December 31, 2001 You should read the following discussion together with our consolidated financial statements and the notes to those financial statements, which are included in this report. This report may contain forward-looking statements made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties, and other factors, including those set forth in this paragraph. Important factors that could cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by those statements include, but are not limited to: (i) the failure to successfully execute our corporate consolidation plan, (ii) the loss of key personnel or inability to attract additional qualified personnel, (iii) the loss of key customers, (iv) increasing competition, (v) changes in card association rules and practices, (vi) the inability to remain current with rapid technological change, (vii) risks related to acquisitions, (viii) the imposition of additional state taxes, (ix) continued consolidation in the banking and retail industries, (x) business cycles and the credit risk of our merchant customers, (xi) the outcome of litigation involving VISA and MasterCard, (xii) utility and system interruptions or processing errors, (xiii) susceptibility to fraud at the merchant level, (xiv) changes in card association fees, products, or practices, (xv) restrictions on surcharging, (xvi) rules and regulations governing financial institutions and changes in such rules and regulations, and (xvii) volatility of the price of our common stock. We undertake no obligation to publicly update or revise any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, or changes to future results over time. See the cautionary statements included as Exhibit 99.2 to our annual report on Form 10-K filed on February 26, 2002 for a more detailed discussion of the foregoing and other factors. Overview Concord EFS, Inc. (Concord) is a leading vertically integrated electronic transaction processor. We acquire, route, authorize, capture, and settle virtually all types of electronic payment and deposit access transactions for financial institutions and merchants nationwide. Our primary activities consist of Network Services, which provides automated teller machine (ATM) processing, debit card processing, deposit risk management, and coast-to-coast debit network access principally for financial institutions, and Payment Services, which provides payment processing for supermarkets, major retailers, petroleum dealers, convenience stores, restaurants, trucking companies, and independent retailers. In 2001 we processed approximately 9.1 billion transactions. Network Services includes terminal driving and monitoring for ATMs, transaction routing and authorization via the combined STAR\\sm\\, MAC(R), and Cash Station(R) debit network as well as other debit networks, deposit risk management, and real-time card management and authorization for personal identification number (PIN)-secured debit and signature debit cards. In addition, we operate the network switch that connects a coast-to-coast network of ATMs and -12- point of sale (POS) locations that accept debit cards issued by our member financial institutions. Our network access services include transaction switching and settlement. In 2001 we processed approximately 2.3 billion PIN-secured debit transactions and approximately 3.2 billion ATM transactions. We recently expanded our debit network in our Network Services area through two acquisitions. On February 1, 2001 we completed our acquisition of Star Systems, Inc. (STAR), the nation's largest PIN-secured debit network, based in Maitland, Florida. The merger was accounted for as a pooling-of-interests transaction in which we exchanged approximately 48.0 million shares of our common stock for all of STAR's outstanding common stock. On August 21, 2000 we completed our acquisition of Cash Station, Inc., a leading midwest PIN-secured debit network based in Chicago, Illinois. This acquisition was accounted for as a pooling-of-interests transaction in which we exchanged approximately 5.0 million shares of our stock for all of the outstanding common stock of Cash Station. As a result of our acquisition of STAR and Cash Station and subsequent purchase of shares, we acquired a majority interest in Primary Payment Systems, Inc., a company providing deposit risk management services to merchants and financial institutions. We own an 85.5% interest in Primary Payment Systems, with the remainder owned by certain financial institutions and a credit union service provider. Primary Payment Systems' deposit risk management services provide advance notification of potential losses associated with fraudulent checks or high risk accounts utilizing a national database composed of approximately 165.7 million deposit accounts. In 2001 Primary Payment Systems expanded its operations in the deposit risk management area through its acquisition of Wally Industries, Inc. d/b/a WJM Technologies. WJM's front-end tools, which screen new deposit accounts before they are opened, increase the breadth of Primary Payment Systems' deposit risk management services. Primary Payment Systems believes that the addition of WJM will enable it to develop more powerful fraud filters that can be extended to other markets, as well as provide additional cross-selling opportunities and augment customer retention. In December 2001 we announced that we had reached an agreement to acquire The Logix Companies, LLC, an electronic transaction processor based in Longmont, Colorado. A private limited liability company, Logix provides financial institutions, retailers, and independent sales organizations with ATM processing, electronic check conversion, identification and authentication services, database development and reporting, and merchant processing services. We expect to close the Logix transaction during the first quarter of 2002, subject to various conditions, including regulatory approval. Payment Services provides the systems and processing that allow retail clients to accept virtually any type of electronic payment, including all card types--credit, debit, electronic benefits transfer (EBT), prepaid, and proprietary cards--as well as a variety of check-based options. We focus on providing payment processing services to selected segments, with specialized systems designed for supermarkets, gas stations, convenience stores, and restaurants. In 2001 we processed approximately 3.6 billion of these payment transactions. Payment Services also includes providing payment cards that enable drivers of trucking companies to purchase fuel and -13- obtain cash advances at truck stops. Our services are turn-key, providing merchants with POS terminal equipment, transaction routing and authorization, settlement, funds movement, and sponsorship into all credit card associations (such as VISA and MasterCard) and debit networks (such as STAR, Pulse and NYCE). Early in 2000 we completed two acquisitions in the Payment Services area. In February 2000 we completed our acquisition of Virtual Cyber Systems, Inc., an Internet software development company. This acquisition, for which we paid approximately $2.0 million, was accounted for as a purchase transaction and was immaterial to our financial statements. In January 2000 we completed our acquisition of National Payment Systems Inc. d/b/a Card Payment Systems, a New York-based reseller of payment processing services. Card Payment Systems provides card-based payment processing services to independent sales organizations, which in turn sell those services to merchants. The acquisition was accounted for as a pooling-of-interests transaction in which we exchanged approximately 12.5 million shares of our stock for all of the outstanding shares of Card Payment Systems. In the first quarter of 2001 we initiated a company-wide consolidation plan to address areas of operating redundancies created by our recent acquisitions. The plan includes consolidation of data centers and other facilities to eliminate redundancies, the reassignment or termination of certain employees timed to coincide with the integration of redundant processing platforms, and the functional integration of the STAR organization into Concord. We incurred a charge of $86.4 million, net of taxes, related to our consolidation plan, including costs incurred in combining operating platforms and facilities, communications conversion costs, asset write-offs, and severance and compensation costs, as well as investment banking fees and advisory, legal, and accounting fees incurred in connection with the acquisition of STAR. During the past nine months we began implementing the plan to capture synergies within our network operations and align our resources across the enterprise for greater efficiency and improved service delivery. We expect to complete our consolidation activities by the end of the first quarter of 2002. An example of the vertical integration of our services is our ownership of two financial institutions, EFS National Bank and EFS Federal Savings Bank. These banks allow us to provide our merchants with bank sponsorship into credit and debit card associations and to own and deploy ATMs. Traditional banking activities such as lending and deposit-taking are also provided. Restatement of Historical Financial Information The financial information for prior periods presented below and elsewhere in this report has been restated for the results of Electronic Payment Services, Inc., STAR, Cash Station, and Card Payment Systems in accordance with the pooling-of-interests method of accounting for business combinations. The financial information includes the financial position, operating results, and cash flows for all periods presented. -14- Critical Accounting Policies The critical accounting policies that are most important to the presentation of our financial statements relate to revenue recognition, capitalization of purchased merchant contracts, and impairment of long-lived assets. Revenue from the processing of credit, debit, and other transactions represents approximately 86.0% of our total revenue and is recognized at the time the transaction is processed. This revenue is collected either the next day as a charge against the merchant's settlement payment or through an automated debit to the customer's account no later than the 25th day of the following month. Credit card revenue is recorded gross of interchange and network fees. Debit and EBT fees are recorded gross of other network fees charged to us. Interchange and network fees represent amounts charged by the credit and debit networks and appear as both revenue and cost of operations in our financial statements. Since this revenue is recorded as transactions are processed and settlement occurs timely, we experience a low level of losses on collection. No material amounts of revenue are recorded based on estimates or assumptions. We capitalize the cost of purchased merchant contracts. We expense the cost of merchant contracts originated through our corporate sales force. Purchased merchant contracts are amortized over a useful life of six years based on our attrition experience. If merchant contracts purchased in 2001 had been expensed, income before taxes would have been reduced by approximately $24.7 million. Management evaluates long-lived assets for impairment in accordance with Statement of Financial Accounting Standard 121, "Accounting For the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." These assets include property and equipment, goodwill, and certain other intangible assets such as purchased merchant contracts. The impairment review is performed on an annual basis or whenever indications of impairment are present by comparing undiscounted cash flows to the carrying value of the related assets. If this review indicates the carrying amount may not be recoverable, impairment losses are measured and recognized based on the difference between the estimated discounted cash flows over the remaining life of the assets and the assets' carrying value. Components of Revenue and Expenses Network Services and Payment Services are our two reportable business segments. These business units are managed separately because they offer distinct products for different end users. All of our revenue is generated in the United States, and no single customer accounts for a material portion of our revenue. The majority of our revenue is tied to contracts with terms of between three and five years. A principal component of our revenue is derived from Network Services (38.5% in 2001 and 37.2% in 2000). Network Services revenue consists of processing fees for driving and monitoring ATMs, processing fees for managing debit card records, and access and switching fees for network access. We recognize this revenue at the time of the transaction. The majority of our revenue (61.5% in 2001 and 62.8% in 2000) is generated from fee income related to Payment Services. Revenue from Payment Services primarily includes discount fees -15- charged to merchants, which are a percentage of the dollar amount of each credit card transaction we process, as well as a flat fee per transaction. The discount fee, primarily charged to smaller merchants, is negotiated with each merchant and typically constitutes a bundled rate for the transaction authorization, processing, settlement, and funds transfer services we provide, plus the interchange fees charged by the credit card associations and collected by us. The balance of Payment Services revenue is derived from transaction fees for processing credit card transactions for larger merchants, debit card and EBT card transactions, check verification and authorization services, and sales of POS terminals. We recognize this revenue at the time of the transaction. One result of basing revenue on the total dollar volume processed is that lower ticket size or other reduction in total purchases causes a reduction in our revenue. However, net income is not correspondingly affected because the majority of our transactions are priced on a fixed fee per transaction basis. The following table lists revenue by segment for the years ended December 31 (in millions): 2001 2000 1999 ---- ---- ---- Network Services $ 657.0 $ 523.2 $ 414.5 Payment Services 1,050.0 883.9 645.5 --------- --------- --------- Total $ 1,707.0 $ 1,407.1 $ 1,060.0 Cost of operations includes all costs directly attributable to our providing services to our customers. The most significant component of cost of operations is interchange and network fees, which represent amounts charged by the credit and debit networks. Interchange and network fees are billed primarily as a percentage of dollar volume processed and, to a lesser extent, as a transaction fee. This amount is a direct expense of the revenue component described above, so that when total dollar volume processed declines, due to lower ticket size or other reduction in total purchases, there is a corresponding decline in cost of operations. Cost of operations also includes telecommunications costs, personnel costs, occupancy costs, depreciation, the cost of equipment leased and sold, the cost of operating our debit network, and other miscellaneous merchant supplies and services expenses. We strive to maintain a highly efficient operational structure, which includes volume purchasing arrangements with equipment and communications vendors and direct membership by our subsidiary, EFS National Bank, in bank card associations and major debit networks. The following table lists cost of operations by segment for the years ended December 31 (in millions): 2001 2000 1999 ---- ---- ---- Network Services $ 348.9 $ 304.9 $ 247.9 Payment Services 854.9 705.1 487.6 --------- --------- ---------- Total $ 1,203.8 $ 1,010.0 $ 735.5 Our selling, general and administrative expenses include certain salaries and wages and other general administrative expenses. These costs are not allocated to the reportable segments. -16- Information regarding the net income generated by and the total assets allocated to each of our business segments is included under the caption "Note Q - Operations by Business Segment" in the notes to our consolidated financial statements and is incorporated herein by reference. Results of Operations The following table shows the percentage of revenue represented by certain items on our consolidated statements of income for the years ended December 31:
2001 2000 1999 ---- ---- ---- Revenue 100.0% 100.0% 100.0% Cost of operations 70.5 71.8 69.4 Selling, general and administrative expenses 5.3 6.4 8.7 Acquisition expenses and restructuring charges 7.4 0.9 3.4 ----------- ---------- ----------- Operating income 16.8 20.9 18.5 Interest income, net 3.4 2.6 1.5 ----------- ---------- ----------- Income before taxes 20.2 23.5 20.0 Income taxes 7.5 8.6 7.8 ----------- ---------- ----------- Net income 12.7% 14.9% 12.2% =========== ========== ===========
Calendar 2001 Compared to Calendar 2000 Revenue increased 21.3% to $1,707.0 million in 2001 from $1,407.1 million in 2000. In 2001 Network Services accounted for 38.5% of revenue, and Payment Services accounted for 61.5%. Network Services revenue increased 25.6% over 2000 as a result of the addition of new network and processing customers and increases in transaction volumes. The increased transaction volumes resulted primarily from increased use of our network debit cards for payment at the point of sale. Revenue from Payment Services increased 18.8% over 2000, due primarily to increased transaction volumes. The increased volumes resulted from the addition of new merchants and the widening acceptance of debit and EBT card transactions at new and existing merchants. Cost of operations decreased in 2001 to 70.5% of revenue compared to 71.8% in 2000. This decrease was due primarily to a decrease as a percentage of revenue in certain operating costs such as telecommunications, payroll expenses, and depreciation and amortization expenses. These decreases resulted from cost efficiencies from our company-wide consolidation activities. Selling, general and administrative expenses decreased as a percentage of revenue to 5.3% in 2001 from 6.4% in 2000. This decrease is primarily attributable to lower marketing expense. Acquisition expenses and restructuring charges in 2001 were $125.4 million compared to $11.7 million in 2000. In the first quarter of 2001, we initiated a company-wide consolidation plan to address areas of operating redundancies created by our recent acquisitions. The plan includes consolidation of data centers and other facilities to eliminate redundancies, the -17- reassignment or termination of certain employees timed to coincide with the integration of redundant processing platforms, and the functional integration of the STAR organization into Concord. The charge of $125.4 million ($86.4 million, net of taxes) consisted of $63.9 million for combining various STAR processing platforms and facilities that will be closed and consolidated. We also accrued $16.0 million for duplicate products and systems such as abandoned products and internal systems that do not support our new network strategy, and we accrued $19.1 million for the various data center services contracts that were terminated as part of the overall restructuring. The consolidation of products, services, processing platforms, and facilities created personnel duplications. As a result, we accrued compensation and severance costs of $9.8 million to diminish redundancies and consolidate operational groups. In addition to these charges, we accrued other expenses of $1.0 million and advisory, legal, and accounting fees totaling $15.6 million in connection with the STAR merger. During the past nine months we began implementing the plan to capture synergies within our network operations and align our resources across the enterprise for greater efficiency and improved service delivery. We expect to complete our consolidation activities by the end of the first quarter of 2002, and we believe our remaining accrual of approximately $5.3 million is adequate. Excluding acquisition expenses and restructuring charges, operating income as a percentage of revenue increased to 24.2% in 2001 from 21.7% in 2000. Operating income increased on a per transaction basis to $0.045 per transaction in 2001 from $0.038 per transaction in 2000, an improvement of 18.4% year over year. This increase in operating income and growth in operating income per transaction resulted from cost efficiencies from our company-wide consolidation activities, increased economies of scale, and declining selling, general and administrative expenses. Net interest income improved as a percentage of revenue to 3.4% in 2001 compared to 2.6% in 2000. This improvement resulted primarily from our increased investment in various securities of available cash flow from operations plus approximately $420.6 million in proceeds from our June 2001 stock offering, which increased interest income by 46.7% compared to 2000. Our overall tax rate increased to 37.1% in 2001 from 36.3% in 2000. Excluding the charges and the tax component write-off, our tax rate was 35.5% in 2001 compared to 36.1% in 2000. This decrease was the result of an overall decrease in our state tax rates. Net income as a percentage of revenue decreased in 2001 to 12.7% from 14.9% in 2000. The primary factor in this decrease in net margin was the acquisition expenses and restructuring charges related to the acquisition of STAR. Excluding the charges and related tax items, net income as a percentage of revenue increased to 17.7% in 2001 compared to 15.5% in 2000. Calendar 2000 Compared to Calendar 1999 Revenue increased 32.7% to $1,407.1 million in 2000 from $1,060.0 million in 1999. In 2000 Network Services accounted for 37.2% of revenue, and Payment Services accounted for 62.8%. Network Services revenue increased 26.2% over 1999 as a result of an increase in the number of ATMs driven, the addition of new network and processing customers, increases in transaction -18- volumes, and the full-year impact of in-house processing of our signature debit service. The increased transaction volumes resulted primarily from increased use of our network debit cards for payment at the point of sale. Revenue from Payment Services increased 36.9%, due primarily to increased transaction volumes and cross-selling settlement processing to several of our higher volume merchants who were previously using only front-end processing services. The increased volumes resulted from the addition of new merchants and the widening acceptance of debit and EBT card transactions at new and existing merchants. Cost of operations increased in 2000 to 71.8% of revenue compared to 69.4% in 1999. This increase was due primarily to the addition of lower-margin revenue beginning in the fourth quarter of 1999 and continuing through the third quarter of 2000. This lower-margin revenue resulted principally from cross-selling settlement processing to several of our higher volume merchants who command lower transaction pricing. Lower-margin revenue was also the result of additional interchange fees due to this cross-selling and processing of our signature debit service in-house. This new lower-margin revenue was partially offset by a decrease as a percentage of revenue in certain other operating costs, such as payroll expense, and depreciation and amortization expense. Selling, general and administrative expenses decreased as a percentage of revenue to 6.4% in 2000 from 8.7% in 1999. Within selling, general and administrative expenses, increases in salaries and wages were offset by lower legal and other expenses. Acquisition expenses and restructuring charges decreased to $11.7 million in 2000 from $36.2 million in 1999. The charges in 2000 included $3.0 million in advisory, legal, and accounting fees incurred in connection with the acquisitions of Card Payment Systems and Cash Station. An additional $4.2 million in compensation and severance costs and $4.5 million in network de-conversion costs were incurred in the Cash Station acquisition. Excluding acquisition expenses and restructuring charges, operating income as a percentage of revenue declined slightly to 21.8% in 2000 from 21.9% in 1999 due to lower-margin revenue. This lower-margin revenue, which resulted from lower revenue per transaction and additional interchange fees, partially masked an increase in operating income per transaction, which resulted from improved economies of scale and declining selling, general and administrative expenses. Excluding acquisition expenses and restructuring charges, operating income per transaction increased to $0.038 per transaction in 2000 from $0.035 per transaction in 1999, an increase of 8.6% year over year. This growth in operating income per transaction was the result of declines in our cost per transaction outpacing declines in our revenue per transaction. Net interest income improved as a percentage of revenue to 2.6% in 2000 compared to 1.5% in 1999. This improvement was the continued result of our using proceeds from our June 1999 stock offering to reduce our debt by $146.1 million at that time, which lowered interest expense by 17.2% as compared to 1999. The improvement was also the result of returns we received on our investing available cash from operations plus the remaining $61.7 million of the stock offering proceeds in various securities, which increased interest income by 63.6% over 1999. -19- Our overall tax rate decreased to 36.3% in 2000 from 39.1% in 1999. Excluding the charges and related tax component write-off, the tax rate was 36.1% in 2000 compared to 36.7% in 1999. Net income as a percentage of revenue increased to 14.9% in 2000 from 12.2% in 1999. The primary factor in this net margin improvement was the decrease in acquisition expenses and restructuring charges. Excluding the charges and related tax items, net income as a percentage of revenue increased to 15.5% in 2000 compared to 14.8% in 1999. Liquidity and Capital Resources We have consistently generated significant resources from operating activities. In 2001, 2000, and 1999 operating activities generated cash of $661.9 million, $404.5 million, and $198.9 million, respectively. Cash generated from operating activities can vary due to fluctuations in accounts receivable and accounts payable balances, which are affected by increases in settlement volume from one year to the next, as well as the timing of settlements. We generally hold a significant amount of cash and securities because of the equity requirements of the credit card associations, which are calculated on settlement dollar volume, and because of the liquidity requirements associated with conducting settlement operations and owning ATM machines. During fiscal 2001, 2000, and 1999 we invested approximately $574.5 million, $171.5 million, and $191.4 million, respectively, in securities available for sale, net of sales and maturities. We also invested $136.9 million, $87.1 million, and $67.6 million, respectively, in capital expenditures, which were primarily for capitalized and purchased software and computer facilities and equipment. In addition to net cash provided by operating activities, we have historically financed our operations through issuance of equity, the exercise of stock options, and borrowings. We issued 17.8 million shares of common stock in June 2001 and received proceeds of $420.6 million, which we invested in securities. Stock issued upon exercises of options under Concord's incentive stock option plan provided $38.0 million of additional capital in 2001. As of December 31, 2001, there were 45.8 million stock options outstanding, approximately 45.7% of which were exercisable. Although we cannot estimate the timing or amount of future cash flows from the exercise of stock options, we expect this to continue to be a source of funds. We have lines of credit with financial institutions totaling $90.0 million. As of December 31, 2001 and 2000 no amounts were outstanding on these lines of credit. As of December 31, 2001 we had $119.5 million of advances outstanding to, and $21.8 million in unused lines of credit with, the Federal Home Loan Bank (FHLB). We hold securities with a market value of approximately $1,228.8 million that are available for operating needs or as collateral to obtain additional short-term financing, if needed. These operating needs include the equity requirements of the credit card associations and the liquidity requirements associated with conducting settlement operations. As of December 31, 2001, securities carried at approximately $107.3 million were pledged as collateral for the FHLB advances. -20- Net loans made by our bank subsidiaries as of December 31, 2001 and 2000 were $89.0 million and $78.7 million, respectively. Since 1999 we have made several strategic acquisitions. Our acquisition of the STAR network is an example of our practice of using our stock to make these acquisitions. Any future acquisitions may involve the issuance of our stock. If additional acquisitions are made, we may incur acquisition expenses and restructuring charges in connection with combining operations as in the case of STAR, Cash Station, and Electronic Payment Services. In December 2001, we announced that we had reached an agreement to acquire Logix, an electronic transaction processor. We expect to close the Logix transaction during the first quarter of 2002, subject to various conditions, including regulatory approval. The following table lists our contractual obligations due by period for long-term debt, operating leases and software license agreements with initial or remaining terms in excess of one year at December 31, 2001 (in millions):
2002 2003-2004 2005-2006 Thereafter Total ---- --------- --------- ---------- ----- Long-term debt $ - $ 10.0 $ 2.7 $ 106.8 $ 119.5 Operating leases 11.0 16.6 11.7 13.4 52.7 Software licenses 0.8 1.4 1.1 - 3.3 ------------ ---------- ---------- ---------- ---------- Total $ 11.8 $ 28.0 $ 15.5 $ 120.2 $ 175.5
We believe that our cash and cash equivalents, securities, available credit and cash generated by operations are adequate to meet our capital and operating needs. Effects of Inflation Our assets are primarily monetary, consisting of cash, assets convertible into cash, securities, and receivables. Because of their liquidity, these assets are not significantly affected by inflation. We believe that replacement costs of equipment, furniture, and leasehold improvements will not materially affect operations. However, the rate of inflation affects our expenses, such as those for employee compensation and telecommunications, which may not be readily recoverable in the price of our services. Quantitative and Qualitative Disclosures About Market Risk Our securities are subject to risk resulting from interest rate fluctuations to the extent that there is a difference between the amount of our interest-bearing assets and the amount of interest-bearing liabilities that are prepaid, mature, or reprice in specific periods. The impact of interest rate fluctuations on securities available for sale is reflected in accumulated other comprehensive income in our financial statements. This risk is mitigated by the fact that as of December 31, 2001, approximately 91.2% of the market value of securities owned was funded through equity rather than debt. The principal objective of our asset/liability activities is to provide maximum levels of net interest income while maintaining acceptable levels of interest rate and liquidity risk and facilitating our funding needs. We use an interest rate sensitivity model as the primary quantitative tool in measuring the amount of interest rate risk that is present at the end of each month. -21- The following table provides comparative information about our financial instruments that are sensitive to changes in interest rates. This table presents principal cash flows and related weighted-average interest rates by expected maturity dates. Additionally, we have assumed our securities are similar enough to aggregate them for presentation purposes. If tax-equivalent yields of municipal securities had been used, the weighted-average interest rates would have been higher.
Fair December 31, 2001 2002 2003 2004 2005 2006 Thereafter Total Value ---- ---- ---- ---- ---- ---------- ----- ----- (in millions) Assets: Securities available for sale $ 19.0 $ 23.7 $ 18.0 $ 7.2 $ 65.3 $ 1,130.6 $ 1,263.8 $1,210.8 Average interest rate 6.0% 5.5% 6.1% 4.9% 5.0% 6.3% Loans $ 9.1 $ 0.1 $ 4.9 $ 3.4 $ 4.1 $ 69.2 $ 90.8 $ 93.1 Average interest rate 5.3% 7.3% 6.1% 9.0% 8.6% 7.7% Liabilities: Deposits $145.2 $ 10.0 $ 4.1 $ 1.8 $ 1.9 - $ 163.0 $ 164.1 Average interest rate 2.6% 5.8% 5.0% 6.8% 5.1% Long-term debt - $ 10.0 - - $ 2.7 $ 106.8 $ 119.5 $ 149.0 Average interest rate 5.6% 5.2% 5.5% Fair December 31, 2000 2001 2002 2003 2004 2005 Thereafter Total Value ---- ---- ---- ---- ---- ---------- ----- ----- (in millions) Assets: Securities available for sale $ 36.7 $ 20.0 $ 41.5 $ 24.5 $ 13.0 $ 577.1 $ 712.8 $ 625.6 Average interest rate 6.3% 6.4% 6.4% 6.5% 5.0% 6.6% Loans $ 6.6 $ 3.2 $ 1.4 $ 0.6 $ 1.3 $ 66.5 $ 79.6 $ 73.9 Average interest rate 9.6% 9.9% 6.4% 10.5% 8.8% 8.1% Liabilities: Deposits $106.8 $ 10.2 $ 6.2 $ 0.8 $ 1.8 - $ 125.8 $ 126.1 Average interest rate 4.9% 6.6% 6.8% 6.4% 6.8% Long-term debt $ 3.4 $ 3.4 $ 17.5 - - $ 89.0 $ 113.3 $ 111.1 Average interest rate 6.2% 6.2% 5.8% 5.6%
-22- CONCORD EFS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, ------------ 2001 2000 ---- ---- (in thousands) ASSETS CURRENT ASSETS Cash and cash equivalents $ 682,906 $ 298,383 Securities available for sale 1,228,805 649,425 Accounts receivable, net 134,496 307,756 Inventories 20,971 15,087 Prepaid expenses and other current assets 34,346 22,125 Deferred income taxes 13,054 6,732 ----------- ----------- TOTAL CURRENT ASSETS 2,114,578 1,299,508 Loans, net 89,038 78,654 Property and equipment, net 267,451 214,662 Goodwill, net 158,632 150,049 Other intangible assets, net 85,712 75,644 Other assets 14,034 9,769 ----------- ----------- TOTAL ASSETS $ 2,729,445 $ 1,828,286 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and other liabilities $ 488,789 $ 363,601 Deposits 162,972 125,834 Accrued liabilities 29,837 48,307 Accrued restructuring charges 5,315 3,410 Income taxes payable 1,438 - Current maturities of long-term debt - 3,357 ----------- ----------- TOTAL CURRENT LIABILITIES 688,351 544,509 Long-term debt 119,458 109,911 Deferred income taxes 55,437 31,871 Other liabilities 4,202 6,412 ----------- ----------- TOTAL LIABILITIES 867,448 692,703 ----------- ----------- Commitments and contingent liabilities - - Minority interest in subsidiary 3,410 3,052 ----------- ----------- STOCKHOLDERS' EQUITY Common stock, $0.33 1/3 par value; authorized 750,000 shares, issued and outstanding 508,055 at December 31, 2001 and 482,913 at December 31, 2000 169,352 160,970 Additional paid-in capital 852,169 349,093 Retained earnings 840,350 623,944 Accumulated other comprehensive loss (3,284) (1,476) ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 1,858,587 1,132,531 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,729,445 $ 1,828,286 =========== ===========
See Notes to Consolidated Financial Statements. -23- CONCORD EFS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31, ----------------------- 2001 2000 1999 ---- ---- ---- (in thousands, except per share data) Revenue $ 1,707,002 $ 1,407,140 $ 1,060,010 Cost of operations 1,203,815 1,009,954 735,467 Selling, general and administrative expenses 90,529 91,995 92,334 Acquisition expenses and restructuring charges 125,362 11,691 36,189 ----------- ----------- ----------- OPERATING INCOME 287,296 293,500 196,020 Other income (expense): Interest income 70,668 48,182 29,456 Interest expense (13,074) (10,939) (13,205) ----------- ----------- ----------- INCOME BEFORE TAXES AND MINORITY INTEREST 344,890 330,743 212,271 Income taxes 127,958 120,220 82,906 ----------- ----------- ----------- INCOME BEFORE MINORITY INTEREST 216,932 210,523 129,365 Minority interest in net income of subsidiary 526 597 124 ----------- ----------- ----------- NET INCOME $ 216,406 $ 209,926 $ 129,241 =========== =========== =========== Pro forma provision for income taxes - 260 2,484 ----------- ----------- ----------- PRO FORMA NET INCOME $ 216,406 $ 209,666 $ 126,757 =========== =========== =========== PER SHARE DATA: Basic earnings per share - historical $ 0.44 $ 0.44 $ 0.28 =========== =========== =========== Diluted earnings per share - historical $ 0.42 $ 0.42 $ 0.27 =========== =========== =========== Basic earnings per share - pro forma $ 0.44 $ 0.44 $ 0.27 =========== =========== =========== Diluted earnings per share - pro forma $ 0.42 $ 0.42 $ 0.26 =========== =========== =========== AVERAGE SHARES OUTSTANDING: Basic shares 494,747 478,358 463,686 =========== =========== =========== Diluted shares 516,958 495,993 479,734 =========== =========== ===========
See Notes to Consolidated Financial Statements. -24- CONCORD EFS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated Additional Other Common Stock Paid-In Retained Comprehensive Shares Amount Capital Earnings Income (Loss) Total ------ ------ ------- -------- ------------ ----- (in thousands) BALANCE AT DECEMBER 31, 1998 449,200 $149,733 $ 49,931 $292,415 $ 1,169 $ 493,248 Exercise of stock options 7,714 2,571 20,031 - - 22,602 Offering of common stock 20,244 6,748 201,070 - - 207,818 Tax benefit of nonqualifying stock option exercises - - 23,407 - - 23,407 Activity by pooled subsidiaries - - - (7,194) - (7,194) Net income - - - 129,241 - 129,241 Change in net unrealized loss on securities available for sale, net of tax of $7,764 - - - - (13,701) (13,701) ---------- Comprehensive income 115,540 --------- -------- -------- -------- ------- ---------- BALANCE AT DECEMBER 31, 1999 477,158 159,052 294,439 414,462 (12,532) 855,421 Exercise of stock options 5,586 1,862 25,031 - - 26,893 Tax benefit of nonqualifying stock option exercises - - 27,955 - - 27,955 Stock issued for purchase acquisition 169 56 1,668 - - 1,724 Activity by pooled subsidiaries - - - (444) - (444) Net income - - - 209,926 - 209,926 Change in net unrealized loss on securities available for sale, net of tax of $5,536 - - - - 11,056 11,056 ---------- Comprehensive income 220,982 --------- -------- -------- -------- ------- ---------- BALANCE AT DECEMBER 31, 2000 482,913 160,970 349,093 623,944 (1,476) 1,132,531 Exercise of stock options 7,384 2,462 35,537 - - 37,999 Offering of common stock 17,758 5,920 414,710 - - 420,630 Tax benefit of nonqualifying stock option exercises - - 52,829 - - 52,829 Net income - - - 216,406 - 216,406 Change in net unrealized loss on securities available for sale, net of tax of $974 - - - - (1,808) (1,808) ---------- Comprehensive income 214,598 --------- -------- -------- -------- ------- ---------- BALANCE AT DECEMBER 31, 2001 508,055 $169,352 $852,169 $840,350 $(3,284) $1,858,587 ========= ======== ======== ======== ======= ==========
See Notes to Consolidated Financial Statements. -25- CONCORD EFS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, ----------------------- 2001 2000 1999 ---- ---- ---- (in thousands) OPERATING ACTIVITIES Net income $ 216,406 $ 209,926 $ 129,241 Adjustments to reconcile net income to net cash provided by operating activities: Minority interest in subsidiary 526 597 124 Provision for losses on accounts receivable and loans 1,964 5,039 3,474 Depreciation and amortization 94,091 96,615 82,682 Deferred income taxes 18,356 13,610 (616) Net realized gain on sales of securities available for sale (3,615) (2,333) (230) Restructuring charges 20,825 - 8,152 Changes in operating assets and liabilities: Accounts receivable 171,159 (130,682) (58,846) Inventories (5,884) 2,989 (6,680) Prepaid expenses and other current assets (12,203) (9,577) (3,656) Accounts payable and other liabilities 160,353 224,358 40,295 Other, net (116) (5,995) 4,951 ----------- ---------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 661,862 404,547 198,891 INVESTING ACTIVITIES Acquisition of securities available for sale (1,343,032) (308,157) (273,603) Proceeds from sales of securities available for sale 598,389 106,771 51,051 Proceeds from maturity of securities available for sale 170,163 29,889 31,105 Purchases of loans (36,089) (48,324) (15,781) Net change in loans 24,980 (69) 710 Acquisition of property and equipment (136,865) (87,113) (67,596) Purchased merchant contracts (30,157) (30,640) (26,869) Business acquisition (19,700) - - Other investing activity (5,807) (2,899) (16,733) ----------- ---------- --------- NET CASH USED IN INVESTING ACTIVITIES (778,118) (340,542) (317,716) FINANCING ACTIVITIES Net increase in deposits 37,138 25,359 65,568 Repayment under credit agreement (net) - - (21,500) Proceeds from notes payable 21,000 42,000 12,500 Payments on notes payable (14,579) (22,326) (138,873) Payments on leases payable (1,409) (2,874) (4,017) Proceeds from exercise of stock options 37,999 26,893 22,602 Proceeds from offering of common stock 420,630 - 207,818 Activity by pooled subsidiaries - (3,345) (4,293) ----------- ---------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES 500,779 65,707 139,805 ----------- ---------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS 384,523 129,712 20,980 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 298,383 168,671 147,691 ----------- ---------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 682,906 $ 298,383 $ 168,671 =========== ========== ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 12,943 $ 10,698 $ 13,943 =========== ========== ========= Income taxes paid $ 64,781 $ 96,419 $ 48,494 =========== ========== =========
See Notes to Consolidated Financial Statements. -26- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 Note A - Significant Accounting Policies Nature of Operations: Concord EFS, Inc. (Concord) is a vertically integrated electronic transaction processor. Concord acquires, routes, authorizes, captures, and settles virtually all types of electronic payment and deposit access transactions for financial institutions and merchants nationwide. Concord's primary activities consist of Network Services, which provides automated teller machine (ATM) processing, debit card processing, deposit risk management, and coast-to-coast debit network access principally for financial institutions, and Payment Services, which provides payment processing for supermarkets, major retailers, petroleum dealers, convenience stores, restaurants, trucking companies, and independent retailers. Principles of Consolidation: The consolidated financial statements include the accounts of Concord and its subsidiaries after elimination of all material intercompany balances and transactions. Business Combinations: The consolidated financial statements have been restated for all transactions accounted for as poolings of interests to combine the financial position, results of operations, and cash flows of the respective companies for all periods presented. Transactions accounted for under the purchase method of accounting reflect the net assets of the acquired company at fair value on the date of acquisition, and the excess of the purchase price over fair value of the assets is recorded as goodwill. The results of operations of the purchased company are included since the date of acquisition. Use of Estimates: The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Revenue Recognition: Revenue from credit card and other transaction processing activities is recorded when the service is provided, gross of interchange and network fees charged to Concord, which are recorded as a cost of operations at the same time the services are provided. Revenue from service contracts and product sales is recognized when the service is provided or the equipment is shipped. Service contracts and related sales include all revenue under system service contracts, including revenue from sales of terminal hardware when the contract includes such sales. Cash Equivalents: Concord considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash equivalents consist primarily of federal funds sold through Concord's financial institutions, money market funds that invest in commercial paper, repurchase agreements, and instruments of domestic and foreign banks and other financial institutions. -27- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 Note A - Significant Accounting Policies, continued Accounts Receivable: The majority of Concord's accounts receivable is related to the gross settlement dollars due from associations, networks, and trucking company customers. Revenue from most Payment Services customers is collected daily from settlement funds due to Concord's merchants or through an automated debit to the customer's account in the next month. Transaction revenue from Network Services customers is recorded as a receivable at month end and collected through a debit to the customer's account during the next month. In addition, Concord records an account receivable when revenue is recognized from sales of point of sale (POS) equipment to Payment Services customers. Concord may incur losses from cardholder disputes in the case of merchant insolvency or bankruptcy. Based on historical losses, Concord believes its allowance for doubtful accounts is adequate. The allowance for doubtful accounts is established as losses are estimated to have occurred through a provision for bad debts charged to earnings. Losses are charged against the allowance when management confirms that a receivable balance is uncollectible. Subsequent recoveries, if any, are credited to the allowance. Securities Available for Sale: Management determines the appropriate classification of debt securities at the time of purchase and evaluates such designation as of each balance sheet date. Securities available for sale are stated at fair value, with the unrealized gains and losses, net of tax, reported as a component of accumulated other comprehensive income (loss) in stockholders' equity. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of mortgage-backed securities, over the estimated life of the security. Such amortization, interest, and dividends are included in interest income from investments. The cost of securities sold is based on the specific identification method. Inventories: Inventories are stated at the lower of cost (first-in, first-out method) or market. Inventories consist primarily of POS terminals. Loans: A substantial portion of the loan portfolio is represented by mortgage loans in Memphis, Tennessee and the surrounding communities purchased through Concord's financial institution subsidiary, EFS Federal Savings Bank. EFS Federal Savings Bank originates loans to home builders in the construction industry as well as a limited number of commercial and consumer loans. The ability of Concord's debtors to honor their contracts is dependent upon the real estate and general economic conditions of this area. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are generally reported at their outstanding unpaid principal balances net of the related allowance for loan losses. Interest income is accrued on the unpaid principal balance. -28- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 Note A - Significant Accounting Policies, continued The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent. In all cases, loans are placed on non-accrual or charged off at an earlier date if collection of principal or interest is considered doubtful. Interest income is subsequently recognized on non-accrual loans only to the extent cash payments in excess of past due principal amounts are received. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management determines that a loan balance is uncollectible. Subsequent recoveries, if any, are credited to the allowance. Property and Equipment: Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Goodwill and Other Intangible Assets: Goodwill and other intangible assets are stated at cost. Amortization is computed using the straight-line method over an estimated useful life of 10 to 25 years for goodwill, 6 years for purchased merchant contracts, and 5 to 15 years for intangibles other than purchased merchant contracts, such as customer lists. The estimated life for purchased merchant contracts is re-evaluated based on attrition experience. Impairment of Long-Lived Assets: Management evaluates long-lived assets for impairment in accordance with Statement of Financial Accounting Standard 121, "Accounting For the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." These assets include property and equipment, goodwill, and certain other intangible assets such as purchased merchant contracts. The impairment review is performed on an annual basis or whenever indications of impairment are present by comparing undiscounted cash flows to the carrying value of the related assets. If this review indicates the carrying amount may not be recoverable, impairment losses are measured and recognized based on the difference between the estimated discounted cash flows over the remaining life of the assets and the assets' carrying value. Income Taxes: Concord accounts for income taxes using the liability method. Stock-Based Compensation: Concord grants options to employees and directors for a fixed number of shares with an exercise price equal to the fair value of the shares at the date of the grant. These stock option grants are accounted for in accordance with APB Opinion 25, "Accounting for Stock Issued to Employees;" accordingly, Concord recognizes no compensation expense for the stock option grants. -29- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 Note A - Significant Accounting Policies, continued Recent Pronouncements: In June 2001 the Financial Accounting Standards Board issued Statements of Financial Accounting Standards 141, "Business Combinations," and 142, "Goodwill and Other Intangible Assets." SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completed after June 30, 2001. SFAS 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives. SFAS 142 requires that these assets be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. Additionally, SFAS 142 requires that goodwill included in the carrying value of equity method investments no longer be amortized. Concord has adopted SFAS 142 effective January 1, 2002. Application of the nonamortization provisions of SFAS 142 is immaterial to Concord's financial statements. Concord has tested goodwill for impairment using the two-step process prescribed in SFAS 142. The first step is a screen for potential impairment, while the second step measures the amount of the impairment, if any. Concord has performed the first of the required impairment tests for goodwill as of January 1, 2002 and has determined that the carrying amount of goodwill is not impaired. Reclassification: Certain 2000 and 1999 amounts have been reclassified to conform to the 2001 presentation. This reclassification includes an increase in cash and corresponding increase in accounts payable representing a network settlement liability previously netted against cash. Note B - Business Combinations On February 1, 2001 Concord acquired Star Systems, Inc. (STAR\\sm\\), a debit network. The acquisition was accounted for as a pooling-of-interests transaction in which Concord issued approximately 48.0 million shares of its common stock. STAR was formed as a result of an Agreement of Mergers and Reorganization (the Agreement), dated October 2, 1998 and effective March 1, 1999, between Honor Technologies, Inc. (HTI), a Delaware corporation, and Star Systems, Inc. (SSI), a nonprofit California mutual benefit corporation. As a result of the Agreement, HTI and SSI became wholly owned subsidiaries of STAR in a combination accounted for as a pooling-of-interests transaction. On August 21, 2000 Concord acquired Cash Station, Inc. (Cash Station(R)), a debit network. The acquisition was accounted for as a pooling-of-interests transaction in which Concord issued approximately 5.0 million shares of its common stock. -30- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 Note B - Business Combinations, continued On January 31, 2000 Concord acquired National Payment Systems Inc. d/b/a Card Payment Systems, a reseller of payment processing services. The acquisition was accounted for as a pooling-of-interests transaction in which Concord issued approximately 12.5 million shares of its common stock. On February 26, 1999 Concord acquired Electronic Payment Services, Inc., a payment processor and operator of a debit network. The acquisition was accounted for as a pooling-of-interests transaction in which Concord issued approximately 90.1 million shares of its common stock. The following table presents selected financial information split among Concord, Card Payment Systems, Cash Station, STAR, SSI, and HTI for the years ended December 31 (in thousands, except per share data) :
2001 2000 1999 ---- ---- ---- Revenue: Concord $ 1,692,130 $ 1,215,893 $ 830,059 Card Payment Systems (1) - 4,047 41,909 Cash Station (2) - 9,494 17,973 STAR (3) 15,396 184,866 152,748 SSI (4) - - 8,851 HTI (5) - - 14,229 Intercompany eliminations (6) (524) (7,160) (5,759) ----------- ----------- ----------- Combined revenue $ 1,707,002 $ 1,407,140 $ 1,060,010 =========== =========== =========== Pro forma net income: Concord $ 213,478 $ 186,009 $ 101,652 Card Payment Systems (1) - 650 7,096 Cash Station (2) - 816 1,222 STAR (3) 2,928 22,451 16,409 SSI (4) - - 1,624 HTI (5) - - 1,238 Pro forma provision for Card Payment Systems income taxes (7) - (260) (2,484) ----------- ----------- ----------- Combined pro forma net income $ 216,406 $ 209,666 $ 126,757 =========== =========== =========== Pro forma basic earnings per share combined $ 0.44 $ 0.44 $ 0.27 =========== =========== =========== Pro forma diluted earnings per share combined $ 0.42 $ 0.42 $ 0.26 =========== =========== ===========
-31- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 Note B - Business Combinations, continued (1) The 2000 amounts reflect the results of Card Payment Systems operations from January 1, 2000 through January 31, 2000 (unaudited). The Card Payment Systems results of operations from February 1, 2000 are included in Concord amounts. Results for the years ended December 31, 1999 are unaudited. (2) The 2000 amounts reflect the results of Cash Station operations from January 1, 2000 through June 30, 2000 (unaudited). Results of operations from July 1, 2000 are included in Concord amounts. (3) The 2001 amounts reflect the results of STAR operations from January 1, 2001 through January 31, 2001. Results of operations from February 1, 2001 are included in Concord amounts. The 2000 amounts reflect the results of STAR operations from January 1, 2000 through December 31, 2000. The 1999 amounts reflect the results of STAR operations from March 1, 1999. (4) The 1999 amounts reflect the results of SSI operations from January 1, 1999 through February 28, 1999 (unaudited). Results of operations from March 1, 1999 are included in STAR amounts. (5) The 1999 amounts reflect the results of HTI operations from January 1, 1999 through February 28, 1999 (unaudited). Results of operations from March 1, 1999 are included in STAR amounts. (6) All material activity between Concord and STAR has been eliminated. (7) The results of operations include pro forma income taxes that would have been required if Card Payment Systems had been a taxable corporation. The former owners of Card Payment Systems were responsible for income taxes for the periods prior to the acquisition. As a result of Concord's acquisition of STAR and Cash Station, Concord owns a majority interest in Primary Payment Systems, Inc., a deposit risk management company. In April 2001 Concord increased its ownership position in Primary Payment Systems to 85.5% through the purchase of newly issued shares, which largely funded Primary Payment Systems' acquisition of Wally Industries, Inc. d/b/a WJM Technologies. The acquisition of WJM, for which Primary Payment Systems paid approximately $20.0 million, was accounted for as a purchase transaction and is immaterial to Concord's financial statements. Amortization of goodwill from this acquisition is computed using the straight-line method over an estimated useful life of twenty years. On February 7, 2000 Concord acquired Virtual Cyber Systems, Inc., an Internet software development company. The acquisition of Virtual Cyber Systems, for which Concord paid approximately $2.0 million, was accounted for as a purchase transaction and is immaterial to Concord's financial statements. -32- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 Note B - Business Combinations, continued Acquisition expenses and restructuring charges were $125.4 million ($86.4 million, net of taxes) for the year ended December 31, 2001. The expenses and charges were a result of a company-wide consolidation plan to address areas of operating redundancies created by recent acquisitions. The plan includes consolidation of data centers and other facilities to eliminate redundancies, the reassignment or termination of certain employees timed to coincide with the integration of redundant processing platforms, and the functional integration of the STAR organization into Concord. The expenses and charges consisted of $63.9 million for combining various processing platforms, $16.0 million for the consolidation of duplicate products and internal systems, $15.6 million for advisory, legal, and accounting fees, $19.1 million for the termination of certain data center services contracts, $9.8 million for compensation and severance costs, and $1.0 million for other expenses. In connection with the consolidation plan, Concord expects to eliminate approximately 250 positions, 210 of which were eliminated as of December 31, 2001. Compensation and severance costs paid and charged against the restructuring charge accrual were $7.3 million through December 31, 2001. As of December 31, 2001, $5.3 million of the restructuring charges were accrued but unpaid. Concord expects to complete the consolidation activities by the end of the first quarter of 2002. Acquisition expenses and restructuring charges were $11.7 million ($8.2 million, net of taxes) for the year ended December 31, 2000. The expenses and charges consisted of advisory, legal, and accounting fees incurred in the acquisitions of Card Payment Systems and Cash Station and severance and network de-conversion costs incurred in connection with the acquisition of Cash Station. As of December 31, 2000, $3.4 million of the restructuring charges were accrued but unpaid. During 2001, cash outlays of $3.4 million were paid and charged against the restructuring charge accrual. As of December 31, 2001, there was no remaining balance related to the 2000 restructuring charge accrual. Acquisition expenses and restructuring charges were $36.2 million ($27.8 million, net of taxes) for the year ended December 31, 1999. The expenses and charges consisted of acquisition expenses, communication conversion costs, asset write-offs, signature debit conversion, severance costs, and other expenses in connection with the acquisition of Electronic Payment Services. As of December 31, 2001, there was no remaining balance related to the 1999 restructuring charge accrual. -33- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 Note B - Business Combinations, continued The following table presents a summary of activity in the 2001 restructuring charge accrual (in thousands): Acquisition expenses and restructuring charges $ 125,362 Cash outlays 99,222 Non-cash writedowns and charges - asset impairment 18,776 Non-cash writedowns and charges - other 2,049 ---------- Balance, December 31, 2001 $ 5,315 ========== The following table presents a summary of the remaining components of the 2001 restructuring charge accrual (in thousands): Office closings, operational de-conversions, and contract terminations $ 2,790 Compensation, severance, and other 2,525 ---------- Balance, December 31, 2001 $ 5,315 ========== Note C - Accounts Receivable, Net Accounts receivable, net, consisted of the following at December 31 (in thousands): 2001 2000 ---- ---- VISA and MasterCard accounts receivable $ 2,279 $ 179,103 Trucking companies accounts receivable 28,206 40,871 Network accounts receivable 52,282 42,939 Payment accounts receivable 37,385 31,733 Other accounts receivable 17,749 16,276 --------- --------- 137,901 310,922 Allowance for doubtful accounts (3,405) (3,166) --------- --------- Accounts receivable, net $ 134,496 $ 307,756 ========= ========= -34- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 Note D - Securities Available for Sale The following is a summary of securities available for sale (in thousands):
Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value ---- ----- ------ ---------- December 31, 2001 U.S. government and agency securities $ 108,595 $ 381 $ (910) $ 108,066 Mortgage-backed securities 511,079 2,740 (2,067) 511,752 Corporate securities 272,960 3,893 (7,991) 268,862 Municipal securities 323,650 2,508 (4,015) 322,143 ---------- ---------- ---------- ---------- Total debt securities 1,216,284 9,522 (14,983) 1,210,823 Equity securities 17,574 408 - 17,982 ---------- ---------- ---------- ---------- Total securities available for sale $1,233,858 $ 9,930 $ (14,983) $1,228,805 ========== ========== ========== ========== December 31, 2000 U.S. government and agency securities $ 114,988 $ 584 $ (2,279) $ 113,293 Mortgage-backed securities 169,856 458 (1,811) 168,503 Corporate securities 169,859 1,412 (1,928) 169,343 Municipal securities 173,989 1,977 (1,464) 174,502 ---------- ---------- ---------- ---------- Total debt securities 628,692 4,431 (7,482) 625,641 Equity securities 23,285 896 (397) 23,784 ---------- ---------- ---------- ---------- Total securities available for sale $ 651,977 $ 5,327 $ (7,879) $ 649,425 ========== ========== ========== ==========
The scheduled maturities of debt securities were as follows at December 31, 2001 (in thousands): Amortized Cost Fair Value ---- ---------- Due in one year or less $ 19,117 $ 19,293 Due in one to five years 114,471 115,476 Due in five to ten years 117,033 117,346 Due after ten years 965,663 958,708 ---------- ---------- $1,216,284 $1,210,823 ========== ========== -35- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 Note D - Securities Available for Sale, continued Expected maturities on mortgage-backed securities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties. Securities carried at approximately $107.3 million at December 31, 2001 were pledged as collateral for the Federal Home Loan Bank (FHLB) advances. Note E - Loans, Net Loans, net, consisted of the following at December 31 (in thousands): 2001 2000 ---- ---- Mortgage (1-4 family) $45,544 $57,501 Small Business Administration 27,689 12,102 Construction and development 8,579 7,376 Commercial 8,542 2,154 Consumer 408 496 -------- -------- 90,762 79,629 Allowance for loan losses (1,724) (975) -------- -------- Loans, net $89,038 $78,654 ======== ======== Note F - Property and Equipment, Net Property and equipment, net, consisted of the following at December 31 (in thousands):
Useful Lives 2001 2000 ------------ ---- ---- Land - $ 1,050 $ 1,050 Buildings and improvements 40 years 16,615 16,050 Capitalized and purchased software 5 years 163,090 108,940 Computer facilities and equipment 3-5 years 225,146 219,808 Furniture and equipment 3-5 years 73,029 70,545 Leasehold improvements 2.5-10 years 16,845 17,807 ---------- ----------- 495,775 434,200 Accumulated depreciation (228,324) (219,538) ---------- ----------- Property and equipment, net $ 267,451 $ 214,662 ========== ===========
Depreciation expense was $63.1 million, $61.4 million, and $54.2 million for the years ended December 31, 2001, 2000, and 1999, respectively. -36- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 Note G - Goodwill, Net Goodwill, net, consisted of the following at December 31 (in thousands): 2001 2000 ---- ---- Goodwill $223,054 $203,439 Accumulated amortization (64,422) (53,390) --------- --------- Goodwill, net $158,632 $150,049 ========= ========= Amortization expense related to goodwill was $10.9 million, $9.5 million, and $9.3 million for the years ended December 31, 2001, 2000, and 1999, respectively. Note H - Other Intangible Assets, Net Other intangible assets, net, consisted of the following at December 31 (in thousands): 2001 2000 ---- ---- Purchased merchant contracts $121,010 $ 90,883 Customer lists 33,674 33,644 --------- --------- 154,684 124,527 Accumulated amortization (68,972) (48,883) --------- --------- Other intangible assets, net $ 85,712 $ 75,644 ========= ========= Total amortization expense related to other intangible assets was $20.1 million, $14.9 million, and $9.8 million for the years ended December 31, 2001, 2000, and 1999, respectively. Amortization expense on purchased merchant contracts is recognized using the straight-line method over an estimated useful life of six years. Amortization expense associated with purchased merchant contracts was $17.7 million, $12.7 million, and $7.7 million for the years ended December 31, 2001, 2000, and 1999, respectively. Customer lists consist of contract rights including agreements not to compete and other values assigned to the assets. Amortization expense associated with these assets was $2.4 million, $2.2 million, and $2.1 million for the years ended December 31, 2001, 2000, and 1999, respectively. -37- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 Note I - Commitments and Contingencies Concord licenses a portion of its computer software under various non-cancelable agreements, which expire on various dates through 2006. Software license expense under these agreements totaled $4.8 million, $4.6 million, and $4.2 million for the years ended December 31, 2001, 2000, and 1999, respectively. Concord rents facilities under non-cancelable operating leases expiring at various dates through 2011. Rental expense for operating leases amounted to $8.2 million, $8.0 million, and $8.8 million for the years ended December 31, 2001, 2000, and 1999, respectively. Concord has entered into operating lease agreements for facilities with renewal options. The lease for offices in Wilmington, Delaware expires in May 2005 with an option to renew for two additional five-year terms. The lease for offices and the data processing center in Maitland, Florida expires in August 2011 with an option to renew for three additional five-year terms. The lease for offices and the data processing center in Marietta, Georgia expires in September 2006 with an option to renew for two additional five-year terms. Future minimum lease payments for operating leases and software license agreements with initial or remaining terms in excess of one year at December 31, 2001 are as follows (in thousands): Software Operating Licenses Leases -------- ------ 2002 $ 761 $11,026 2003 722 9,618 2004 719 6,901 2005 718 6,447 2006 348 5,245 Thereafter - 13,415 -------- -------- Total future payments $ 3,268 $52,652 ======== ======== In September 2000 EFS National Bank was named as a defendant in a purported class action lawsuit filed in the Circuit Court of Tennessee for the Thirtieth Judicial District at Memphis alleging that certain of EFS National Bank's rate and fee changes were improper under Tennessee law due to allegedly deficient notice. The plaintiffs filed an amended complaint alleging that the class consists of at least 60,000 merchants that were subjected to the allegedly improper rate and fee changes over a several-year period. The amended complaint seeks damages in excess of $15.0 million as well as injunctive relief and unspecified punitive damages, treble damages, attorney fees, and costs. -38- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 Note I - Commitments and Contingencies, continued A substantial amount of discovery has taken place in this case. The parties are currently engaged in settlement discussions and have advised the Tennessee Court that they are attempting to resolve this matter. Ongoing discussions continue, and substantive issues remain that preclude achieving a settlement at this time. The parties anticipate further discussions in an attempt to address and resolve the remaining issues. In July 1999 a purported class action complaint with similar allegations and requests for relief was filed in St. Charles County, Missouri, but there has not been a substantial amount of activity in the Missouri case. Although these matters are in the preliminary stages, EFS National Bank believes it has various defenses to the claims against it, and if these matters cannot be resolved by settlement, EFS National Bank intends to vigorously defend against all claims. Due to the current status of the claims, EFS National Bank cannot predict the outcome of the lawsuits, and accordingly, no amounts have been accrued in the financial statements relating to these contingencies. Concord is also a party to various routine lawsuits arising out of the conduct of its business, none of which is expected to have a material adverse effect upon its financial condition or results of operations. Note J - Long-Term Debt Long-term debt consisted of the following at December 31 (in thousands): 2001 2000 ---- ---- FHLB advances $119,458 $ 99,000 Notes payable - 14,268 -------- -------- Total long-term debt 119,458 113,268 Current portion of notes payable - (3,357) -------- -------- Total long-term debt, less current portion $119,458 $109,911 ======== ======== FHLB advances were at fixed rates ranging from 4.5% to 6.4% at December 31, 2001 with a final maturity date in 2008. Concord had approximately $21.8 million available on unused lines of credit with the FHLB at December 31, 2001. Notes payable were paid off on February 1, 2001 in connection with the acquisition of STAR. Concord has $90.0 million available in unsecured lines of credit with financial institutions, which expire on various dates throughout 2005. No amounts were outstanding on these lines at December 31, 2001 or 2000. -39- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 Note J - Long-Term Debt, continued Scheduled maturities of FHLB advances as of December 31, 2001 are $10.0 million in 2003, $2.7 million in 2006, and $106.8 million thereafter. Note K - Employee Benefit Plans Effective March 1, 1998 Concord established the Concord EFS Retirement Savings Plan (the Concord Retirement Plan). Employees who have reached the age of 21 and who have completed one year of service with Concord are eligible to participate in the Concord Retirement Plan. This 401(k) Plan provides for voluntary tax-deferred contributions by eligible employees and discretionary contributions by Concord. Total expenses related to the Concord Retirement Plan were $2.7 million, $2.7 million, and $2.0 million for the years ended December 31, 2001, 2000, and 1999, respectively. STAR maintained a defined contribution plan (the STAR Retirement Plan). Employees of STAR were eligible to become participants in the STAR Retirement Plan upon completion of three months of employment and upon attaining the age of 21.5 years. Participation in the STAR Retirement Plan was voluntary. Total expenses related to the STAR Retirement Plan were $2.8 million, $3.5 million, and $3.0 million for the years ended December 31, 2001, 2000, and 1999, respectively. The STAR Retirement Plan was terminated as of December 31, 2001, and all participants became participants in the Concord Retirement Plan. -40- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 Note L - Income Taxes Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of Concord's deferred tax liabilities and assets at December 31 are as follows (in thousands):
2001 2000 ---- ---- Deferred tax liabilities: Capitalization of internal use software $19,266 $17,359 Restructuring charges 3,973 179 Depreciation 17,435 10,761 Intangible amortization 1,084 1,019 Purchased merchant contracts 6,610 1,436 Other 7,069 1,117 ------- ------- Total deferred tax liabilities 55,437 31,871 ------- ------- Deferred tax assets: Net unrealized loss on securities available for sale 1,772 837 Bad debt allowance 2,079 2,132 Restructuring charges 5,868 1,470 Depreciation 470 370 Other 2,865 1,923 ------- ------- Total deferred tax assets 13,054 6,732 ------- ------- Net deferred tax liability $42,383 $25,139 ======= =======
The components of the provision (benefit) for income taxes for the years ended December 31 are as follows (in thousands): 2001 2000 1999 ---- ---- ---- Current Federal $105,967 $102,942 $73,428 State 3,635 3,668 10,094 -------- -------- ------- 109,602 106,610 83,522 -------- -------- ------- Deferred Federal 18,356 11,816 (1,930) State - 1,794 1,314 -------- -------- ------- 18,356 13,610 (616) -------- -------- ------- $127,958 $120,220 $82,906 ======== ======== ======= -41- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 Note L - Income Tax, continued The reconciliation of income taxes computed at the U.S. federal statutory tax rate of 35.0% to income tax expense for the years ended December 31 is as follows (in thousands):
2001 2000 1999 ---- ---- ---- Tax at statutory rate $120,711 $115,760 $74,294 State income taxes, net of federal benefit 3,256 3,551 5,092 Acquisition costs 5,250 753 2,292 Nondeductible amortization of goodwill 2,601 2,549 2,523 Tax-exempt interest income (3,931) (2,560) (2,319) Other, net 71 167 1,024 ---------- ---------- ---------- $127,958 $120,220 $82,906 ========== ========== ==========
Income tax benefits resulting from the disqualifying dispositions of certain employee incentive stock option shares were credited to additional paid-in capital because no compensation expense was charged to income for financial reporting purposes related to the exercise of such options. Note M - Stockholders' Equity The Board of Directors approved a two-for-one stock split on August 30, 2001. On September 28, 2001 additional shares were distributed to shareholders of record as of September 14, 2001. All appropriate share data, earnings per share, and per share data have been restated to reflect the stock split. In June 2001 Concord issued and sold approximately 17.8 million shares of its common stock pursuant to a registration statement filed with the Securities and Exchange Commission. Pursuant to the same registration statement, the selling stockholders named in the registration statement sold approximately 34.1 million shares of Concord common stock. Most of the selling stockholders were the previous owners of STAR who had received unregistered common stock of Concord in connection with the February 1, 2001 acquisition. Net of the underwriting discount and other expenses of the offering, Concord received $420.6 million for the common stock it issued and sold. Concord did not receive any proceeds from the sale of shares by the selling stockholders. In June 1999 Concord completed an offering of 20.2 million shares of its common stock, and within the same offering, an additional 89.0 million shares of common stock were sold by the previous owners of Electronic Payment Services for a total of 109.2 million shares of common stock. Net of the underwriting discount and other expenses of the offering, Concord received $207.8 million for the common stock it issued and sold. The previous owners of Electronic Payment Services had received unregistered common stock of Concord in connection with the February 26, 1999 acquisition. Concord did not receive any proceeds from the sale of shares by the previous owners of Electronic Payment Services. -42- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 Note N - Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share for the years ended December 31 (in thousands, except per share data):
2001 2000 1999 ---- ---- ---- Numerator: Net income $216,406 $209,926 $129,241 ======== ======== ======== Denominator: Denominator for basic earnings per share, weighted-average shares 494,747 478,358 463,686 Effect of dilutive stock options 22,211 17,635 16,048 -------- -------- -------- Denominator for diluted earnings per share, adjusted weighted- average shares and assumed conversions 516,958 495,993 479,734 ======== ======== ======== Basic earnings per share $ 0.44 $ 0.44 $ 0.28 ======== ======== ======== Diluted earnings per share $ 0.42 $ 0.42 $ 0.27 ======== ======== ========
Excluding acquisition expenses and restructuring charges and related taxes, diluted earnings per share were $0.59, $0.44, and $0.33 for the years ended December 31, 2001, 2000, and 1999, respectively. Earnings per share and related share data have been restated to reflect all stock splits. Note O - Incentive Stock Option Plans The Concord EFS, Inc. 1993 Incentive Stock Option Plan, as amended (the Concord Plan) allows for the grant of up to 75.0 million shares of common stock for the benefit of Concord's directors and key employees. Options are granted at 100% of the market value on the date of the grant (110% in the case of a holder of more than 10% of the outstanding shares) and generally become exercisable over a four-year period from the date of the grant. Options generally expire ten years from the grant date. At December 31, 2001, 9.3 million shares were available to be granted. -43- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 Note O - Incentive Stock Option Plans, continued Information pertaining to the Concord Plan is summarized as follows (in thousands, except price per share):
Number of Weighted Weighted Shares Average Average Under Exercise Aggregate Options Option Price/Share Price Exercisable ------ ----------- ----- ----------- Outstanding at December 31, 1998 34,768 $ 4.39 $152,655 15,796 ======= ====== Granted 13,470 10.81 Exercised (7,714) 2.93 Terminated (1,236) 9.64 ----------- Outstanding at December 31, 1999 39,288 6.71 $263,753 15,680 ======= ====== Granted 13,234 9.29 Exercised (5,586) 4.81 Terminated (494) 10.11 ----------- Outstanding at December 31, 2000 46,442 7.64 $354,850 19,486 ======= ====== Granted 7,542 21.29 Exercised (7,384) 5.15 Terminated (761) 11.33 ----------- Outstanding at December 31, 2001 45,839 $10.23 $468,772 20,929 =========== ======= ======
The weighted average fair value of options granted during 2001, 2000, and 1999 was $6.64, $4.14, and $4.65, respectively. Additional information regarding options outstanding as of December 31, 2001 is summarized as follows:
Weighted Average Weighted Weighted Remaining Number Average Option Options Average Contractual of Options Exercise Price Exercise Outstanding Exercise Life of Options Exercisable of Options Price Range (thousands) Price/Share in Years (thousands) Exercisable ----------- ----------- ----------- -------- ----------- ----------- $ 0.96 - 5.94 10,155 $ 4.71 4.95 10,144 $ 4.63 $ 6.39 - 10.42 17,018 $ 7.99 7.15 5,930 $ 6.90 $10.50 - 15.69 11,181 $11.24 7.38 4,855 $ 11.20 $21.03 - 29.67 7,485 $21.29 9.17 - - ------------ ------------ $ 0.96 - 29.67 45,839 $10.23 7.05 20,929 $ 6.80 ============ ============
-44- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 Note O - Incentive Stock Option Plans, continued Prior to its acquisition by Concord, Electronic Payment Services adopted the Electronic Payment Services, Inc. 1995 Stock Option Plan, as amended (the EPS Plan). In connection with Concord's acquisition of Electronic Payment Services, all outstanding options in the EPS Plan were accelerated and vested in February 1999. The total amount of option shares (after conversion to Concord shares) at December 31, 1998 was approximately 6.8 million, at a weighted average exercise price of $2.83. All outstanding options in the EPS Plan were exercised by the expiration date of November 23, 1999. Prior to its acquisition by Concord, STAR adopted the Star Systems, Inc. 2000 Equity Incentive Plan (the STAR Plan). In connection with Concord's acquisition of STAR, all outstanding options in the STAR Plan were vested and became exercisable. The total amount of option shares (after conversion to Concord shares) at December 31, 2000 was approximately 1.6 million, at a weighted average exercise price of $5.11. None of the options were issuable upon exercise until February 2001, when the shares subject to issuance under these options were registered. As discussed below, Concord has elected to follow APB 25 and related interpretations in accounting for its employee stock options because the alternative fair value accounting provided for under SFAS 123, "Accounting for Stock Based Compensation," requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, no compensation expense is recognized because the exercise price of Concord's employee stock options equals the market price of the underlying stock on the date of grant. Pro forma information regarding net income and earnings per share is required by SFAS 123 and has been determined as if Concord had accounted for its employee stock options under the fair value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 2001, 2000, and 1999, respectively: risk-free interest rates of 4.8%, 5.0%, and 5.0% and volatility factors of the expected market price of Concord's common stock of 0.381, 0.512, and 0.582. Assumptions that remained constant for all years were dividend yields of 0% and a weighted-average expected life of the options of three years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because Concord's employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, it is management's opinion that the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is -45- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 Note O - Incentive Stock Option Plans, continued amortized to expense over the options' vesting period. Concord's pro forma information is as follows for the years ended December 31 (in thousands, except for earnings per share): 2001 2000 1999 ---- ---- ---- Pro forma net income $187,632 $184,453 $113,335 Pro forma basic earnings per share $ 0.38 $ 0.39 $ 0.24 Pro forma diluted earnings per share $ 0.36 $ 0.37 $ 0.24 Pro forma disclosures are not likely to be representative of reported pro forma net income and earnings per share in future years as additional options may be granted in future years and the vesting of options already granted will impact the pro forma disclosures. Note P - Employment Agreements In February 1998 Concord entered into incentive agreements with its Chief Executive Officer and President, each for a term of five years expiring February 2003. Each agreement sets out the executive's annual base salary, provides an incentive compensation program with a bonus potential of 50% of annual base salary, provides for grants of regular stock options of up to 1,125,000 shares a year based on performance, and provides for grants of special stock options contingent upon, or providing accelerated vesting upon, the average market price of Concord stock reaching and maintaining certain levels. The agreements contain certain non-compete provisions and change in control provisions regarding the acceleration of outstanding stock options and the payment of bonuses. Note Q - Operations by Business Segment Concord has two reportable segments: Network Services and Payment Services. Network Services revenue consists of processing fees for driving and monitoring ATMs, processing fees for managing debit card records, and access and switching fees for network access. Revenue from Payment Services primarily includes discount fees charged to merchants, which are a percentage of the dollar amount of each credit card transaction Concord processes, as well as a flat fee per transaction. The discount fee, primarily charged to smaller merchants, is negotiated with each merchant and typically constitutes a bundled rate for the transaction authorization, processing, settlement, and funds transfer services Concord provides, plus the interchange fees charged by the credit card associations and collected by Concord. The balance of Payment Services revenue is derived from transaction fees for processing debit card and electronic benefits transfer card transactions, check verification and authorization services, and sales of POS terminals. -46- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 Note Q - Operations by Business Segment, continued Concord evaluates performance and allocates resources based on profit or loss from operations. Items classified as "Other" include amounts not identifiable with the two reported segments described above. The accounting policies of the reportable segments are the same as those described in Note A - Significant Accounting Policies. Assets are allocated between Network Services and Payment Services based upon Concord's evaluation of the revenue earned by the particular assets. Assets classified as "Other" represent securities available for sale. Concord's reportable segments are business units that are managed separately because they offer distinct products for different end users. No single customer of Concord accounts for a material portion of Concord's revenue. -47- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 Note Q - Operations by Business Segment, continued Business segment information for the years ended December 31, 2001, 2000, and 1999 is presented as follows (in thousands):
Network Payment Services Services Other Total -------- -------- ----- ----- 2001 Revenue $657,037 $1,049,965 $ - $1,707,002 Cost of operations 348,951 854,864 - 1,203,815 Selling, general and administrative expenses - - 90,529 90,529 Acquisition expenses and restructuring charges 103,575 21,787 - 125,362 Taxes and interest, net - - 70,364 70,364 Minority interest in subsidiary - - 526 526 -------- ---------- ----------- ---------- Net income (loss) $204,511 $ 173,314 $ (161,419) $ 216,406 ======== ========== =========== ========== Assets by segment $688,191 $ 812,449 $ 1,228,805 $2,729,445 ======== ========== =========== ========== 2000 Revenue $523,250 $ 883,890 $ - $1,407,140 Cost of operations 304,897 705,057 - 1,009,954 Selling, general and administrative expenses - - 91,995 91,995 Acquisition expenses and restructuring charges 10,915 776 - 11,691 Taxes and interest, net - - 82,977 82,977 Minority interest in subsidiary - - 597 597 -------- ---------- ----------- ---------- Net income (loss) $207,438 $ 178,057 $ (175,569) $ 209,926 ======== ========== =========== ========== Assets by segment $455,446 $ 723,415 $ 649,425 $1,828,286 ======== ========== =========== ========== 1999 Revenue $414,536 $ 645,474 $ - $1,060,010 Cost of operations 247,920 487,547 - 735,467 Selling, general and administrative expenses - - 92,334 92,334 Acquisition expenses and restructuring charges 19,253 6,436 10,500 36,189 Taxes and interest, net - - 66,655 66,655 Minority interest in subsidiary - - 124 124 -------- ---------- ----------- ---------- Net income (loss) $147,363 $ 151,491 $ (169,613) $ 129,241 ======== ========== =========== ========== Assets by segment $373,659 $ 469,207 $ 458,201 $1,301,067 ======== ========== =========== ==========
-48- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 Note R - Debt and Dividend Restrictions In accordance with federal banking laws, certain restrictions exist regarding the ability of Concord's financial institution subsidiaries to transfer funds to Concord in the form of cash dividends, loans, or advances. The approval of certain regulatory authorities is required to pay dividends in excess of earnings retained in the current year plus retained net earnings for the preceding two years. As of December 31, 2001, approximately $152.5 million and $12.0 million of undistributed earnings of EFS National Bank and EFS Federal Savings Bank, respectively, included in consolidated retained earnings were available for distribution to Concord as dividends without prior regulatory approval. Under Federal Reserve regulations, these subsidiaries are also limited as to the amount they may loan to affiliates, including Concord, unless such loans are collateralized by specific obligations. At December 31, 2001, the maximum amount available for transfer in the form of loans to Concord from EFS National Bank and EFS Federal Savings Bank, respectively, approximated 1.46% and 0.57% of Concord's consolidated net assets. Note S - Disclosures About Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments. These fair values are provided for disclosure purposes only and do not necessarily indicate the amount Concord would pay or receive in a market transaction with an unrelated third party. Cash and Cash Equivalents: The carrying amounts reported in the balance sheet for cash and cash equivalents approximate the fair values of those assets. Securities Available for Sale: Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans: Fair values of all categories of loans are estimated by discounting their expected future cash flows using interest rates currently being offered for loans with similar terms, reduced by an estimate of credit losses inherent in the portfolio. Deposits: Fair values of fixed-rate, fixed-maturity deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on similar deposits to a schedule of aggregated expected monthly maturities on time deposits. The fair values disclosed for deposits other than fixed-rate, fixed-maturity deposits approximate their respective carrying values at the reporting date. -49- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 Note S - Disclosures About Fair Value of Financial Instruments, continued FHLB Advances: The fair values of FHLB advances are estimated using discounted cash flow analyses based on Concord's current incremental borrowing rates for similar types of borrowing arrangements. Notes Payable: The carrying amount of notes payable to banks approximates fair value based on interest rates that are currently available to Concord for issuance of debt with similar terms and remaining maturities. The following table summarizes the carrying amount compared to the fair value of financial instruments according to the methods and assumptions listed above (in thousands): Carrying Fair Amount Value ------ ----- December 31, 2001 Financial assets: Cash and cash equivalents $ 682,906 $ 682,906 Securities available for sale 1,228,805 1,228,805 Loans 89,038 93,104 Financial liabilities: Deposits 162,972 164,108 FHLB advances 119,458 148,968 Notes payable - - December 31, 2000 Financial assets: Cash and cash equivalents $ 298,383 $ 298,383 Securities available for sale 649,425 649,425 Loans 78,654 73,864 Financial liabilities: Deposits 125,834 126,122 FHLB advances 99,000 96,809 Notes payable 14,268 14,300 -50- CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 Note T - Subsequent Events On January 1, 2002 Concord acquired H & F Services, Inc., an independent sales organization, for $8.9 million. Prior to the acquisition, Concord had purchased merchant contracts through H & F Services. Concord believes that this acquisition will increase Concord's control over the sales channel, including pricing and compensation. The acquisition is expected to reduce the average cost of acquiring merchant contracts, reduce the cost of operations, and increase selling, general and administrative expenses. In December 2001 Concord announced an agreement to acquire The Logix Companies, LLC, an electronic transaction processor. Concord expects to close the Logix transaction during the first quarter of 2002, subject to various conditions, including regulatory approval. Note U - Quarterly Financial Results (Unaudited) The following table provides an unaudited summary of quarterly results for the calendar years 2001 and 2000 (in thousands, except per share data). The quarterly information reported previously on Form 10-Q for these quarters has been restated to reflect mergers accounted for as poolings of interests. 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter ------- ------- ------- ------- 2001 Revenue $ 375,638 $ 420,686 $ 437,074 $ 473,604 Cost of operations 270,268 299,619 304,414 329,514 Net income (loss) (25,992) 71,182 81,456 89,760 Per share: Basic earnings (loss) $ (0.05) $ 0.15 $ 0.16 $ 0.18 Diluted earnings (loss) $ (0.05) $ 0.14 $ 0.16 $ 0.17 2000 Revenue $ 302,917 $ 338,848 $ 363,908 $ 401,467 Cost of operations 222,515 240,771 259,315 287,353 Net income 41,512 52,282 50,246 65,886 Per share: Basic earnings $ 0.09 $ 0.11 $ 0.11 $ 0.14 Diluted earnings $ 0.08 $ 0.11 $ 0.10 $ 0.13 Excluding acquisition expenses and restructuring charges, diluted earnings per share was $0.12 for the first quarter of 2001. -51- CONCORD EFS, INC. AND SUBSIDIARIES REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders of Concord EFS, Inc. We have audited the accompanying consolidated balance sheets of Concord EFS, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. These consolidated financial statements are the responsibility of the management of Concord EFS, Inc. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Star Systems, Inc., a wholly-owned subsidiary, which statements reflect total assets constituting 11.4% at December 31, 2000 of the related consolidated financial statements totals, and which statements reflect net income constituting approximately 10.7% and 14.9% of the related consolidated financial statements totals for the years ended December 31, 2000 and 1999, respectively. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to data included for Star Systems, Inc., is based solely on the report of the other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of the other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Concord EFS, Inc. and subsidiaries at December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP Memphis, Tennessee February 19, 2002 -52- CONCORD EFS, INC. AND SUBSIDIARIES CORPORATE DIRECTORY CORPORATE DIRECTORY Board of Directors (and their principal occupation) Dan M. Palmer Chairman of the Board and Chief Executive Officer, Concord EFS, Inc. Douglas C. Altenbern* Retired Chairman and Chief Executive Officer, Pay Systems of America, Inc. J. Richard Buchignani, Esq.* Partner, Wyatt, Tarrant & Combs, LLP Ronald V. Congemi Senior Vice President and President of Network Services, Concord EFS, Inc. Richard M. Harter, Esq. Of Counsel, Bingham Dana LLP Richard P. Kiphart* Head of Corporate Finance Department, William Blair & Company LLC Edward A. Labry III President, Concord EFS, Inc. Jerry D. Mooney* Director and Vice President, Bond, Johnson & Bond, Inc. Paul L. Whittington* Retired Partner, Ernst & Young LLP * Audit Committee Member Executive Officers Dan M. Palmer, Chairman of the Board and Chief Executive Officer Edward A. Labry III, President Vickie L. Brown, Senior Vice President Ronald V. Congemi, Senior Vice President and President of Network Services Richard M. Harter, Secretary Edward T. Haslam, Senior Vice President, Chief Financial Officer, and Treasurer Marcia E. Heister, Senior Vice President, General Counsel, and Assistant Secretary E. Miles Kilburn, Senior Vice President of Business Strategy and Corporate Development -53- William E. Lucado, Senior Vice President, Chief Investment Officer, Chief Compliance Officer, and Assistant Secretary Steve A. Lynch, Senior Vice President and Chief Information Officer Christopher S. Reckert, Senior Vice President and Chief Marketing Officer Corporate Headquarters 2525 Horizon Lake Drive, Suite 120 Memphis, Tennessee 38133 1.800.238.7675 Transfer Agent & Registrar State Street Bank and Trust Company c/o EquiServe Limited Partnership P.O. Box 43011 Providence, Rhode Island 02940-3011 1.800.426.5523 Corporate Counsel Bingham Dana LLP Boston, Massachusetts Independent Auditors Ernst & Young LLP Memphis, Tennessee Annual Meeting The annual meeting of stockholders will be held at 9:30 a.m. Central time on Thursday, May 23, 2002 at Colonial Country Club, 2736 Countrywood Parkway, Memphis, Tennessee. Investor Information Copies of the Concord EFS, Inc. Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, may be obtained without charge upon written request to Investor Relations at the corporate address. Concord press releases, product information, and other news are available on Concord's web site, which is located at http://www.concordefs.com. Trademarks STAR, MAC, Cash Station, Identity Chek, EFSnet, and "Connecting People With Their Money" are service marks or are registered trademarks of Concord EFS, Inc. and its subsidiaries. All other product or company names mentioned are for identification purposes only and may be trademarks of their respective owners. -54- EX-21 9 dex21.txt LIST OF SUBSIDIARIES EXHIBIT 21 CONCORD EFS, INC. LISTING OF SUBSIDIARIES
State of Percentage Subsidiary Incorporation Ownership - ------------------------------------------ ---------------------------------- -------------------- BUYPASS Corporation Georgia 100% BUYPASS Inco Corporation Delaware 100% CIFS LLC Delaware 100% CIFS Corporation Delaware 100% Concord Computing Corporation Delaware 100% Concord Equipment Sales, Inc. Tennessee 100% EFS Federal Savings Bank Tennessee 100% EFS National Bank Delaware 100% EFS Services, Inc. Tennessee 100% EFS Transportation Services, Inc. Tennessee 100% Electronic Payment Services, Inc. Delaware 99.9% EPSF Corporation Delaware 100% JOT, Inc. Nevada 100% MAS Inco Corporation Delaware 100% MAS Ohio Corporation Delaware 100% MONEY ACCESS SERVICE INC. Delaware 100% National Payment Systems Inc. New York 100% NPSF Corporation Delaware 100% Primary Payment Systems, Inc. Delaware 85.49% Star Networks, Inc. Delaware 100% Star Systems Assets, Inc. Delaware 100% Star Systems, Inc. Delaware 100% Star Systems, LLC Delaware 100% Virtual Cyber Systems, Inc. Arizona 100%
EX-23.1 10 dex231.txt CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.1 CONCORD EFS, INC. CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Concord EFS, Inc. and subsidiaries of our report dated February 19, 2002, included in the 2001 Annual Report to Stockholders of Concord EFS, Inc. We consent to the incorporation by reference in the Registration Statements (Form S-4 No. 333-81162; Form S-8: Nos. 33-60871, 333-74213, 333-74215 and 333-56066) of Concord EFS, Inc. and subsidiaries and in the related Prospectuses of our report dated February 19, 2002, with respect to the consolidated financial statements of Concord EFS, Inc. and subsidiaries incorporated by reference in this Annual Report (Form 10-K) for the year ended December 31, 2001. /s/ ERNST & YOUNG LLP Memphis, Tennessee February 19, 2002 EX-23.2 11 dex232.txt CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23.2 [DELOITTE & TOUCHE LETTERHEAD] INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-81162 on Form S-4 and Registration Statement Nos. 033-60871, 333-74213, 333-74215, and 333-56066 on Form S-8 of Concord EFS, Inc. of our report dated March 2, 2001 (relating to the 1999 and 2000 consolidated financial statements of Star Systems, Inc. not presented separately therein) appearing in this Form 10-K. /s/ DELOITTE & TOUCHE LLP Orlando, Florida February 22, 2002 EX-99.1 12 dex991.txt OPINION OF DELOITTE & TOUCHE LLP EXHIBIT 99.1 [DELOITTE & TOUCHE LETTERHEAD] INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Star Systems, Inc.: We have audited the consolidated balance sheets of Star Systems, Inc. and subsidiaries (the Company) as of December 31, 2000, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the two years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements (not presented separately herein) referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2000, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. /s/ DELOITTE & TOUCHE LLP Orlando, Florida March 2, 2001 EX-99.2 13 dex992.txt CAUTIONARY STATEMENTS EXHIBIT 99.2 CONCORD EFS, INC. CAUTIONARY STATEMENTS Press releases and the reports and other documents we file with the Securities and Exchange Commission may contain or incorporate by reference forward-looking statements made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements reflect management's expectations, estimates, and assumptions, based on information available at the time the document, or any document incorporated therein by reference, was prepared. These forward-looking statements include, but are not limited to, statements regarding future events, plans, goals, objectives, and expectations. The words "anticipate," "believe," "estimate," "expect," "plan," "intend," "likely," "will," "should," and similar expressions are intended to identify forward-looking statements. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties, and other factors which may cause our actual performance or achievements to be materially different from any future results, performance, or achievements expressed or implied by those statements. Important factors that could cause our actual results to differ materially from those in forward-looking statements include, but are not limited to, those indicated below. We undertake no obligation to publicly update or revise any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, or changes to future results over time. You are cautioned not to rely on forward-looking statements. 1. If we fail to successfully execute our corporate consolidation plan, our operating results and financial condition could be adversely affected. In the first quarter of 2001, we initiated a company-wide consolidation plan to integrate our recent acquisitions, including Star Systems, Inc. (STARsm). The plan is intended, among other things, to eliminate operational redundancies and functionally integrate the STAR organization into Concord. We cannot assure you that we will be able to combine our operations without encountering difficulties or experiencing the loss of key employees or customers or that the expected benefits from such combination will be realized. If we are unsuccessful in executing our consolidation plan, our operating results and financial condition could be adversely affected. 2. If we lose key personnel or are unable to attract additional qualified personnel as we grow, our business could be adversely affected. We are dependent upon the ability and experience of a number of our key management personnel who have substantial experience with our operations, the rapidly changing electronic payment processing industry, and the selected markets in which we offer our services. It is possible that the loss of the services of one or a combination of our senior executives or key managers would have an adverse effect on our operations. Our success also depends on our ability to continue to attract, manage, and retain other qualified middle management and technical and clerical personnel as we grow. We cannot assure you that we will continue to attract or retain such personnel. 3. Loss of key customers could reduce our revenue and net income. As a result of our competitive business environment, we experience some customer attrition. Customer attrition is due to several factors, including losses to competitors, business acquisitions and mergers, and business closures. We cannot assure you that any of our contracts for credit and debit card, automated teller machine (ATM) processing, and/or debit network access services will be renewed or, if renewed, will be renewed on terms as favorable to us as at present. If they are not renewed, we may not be able to reduce our costs in proportion to the lost revenue, because many of our costs are fixed. Increased attrition could therefore have an adverse effect on our revenue and net income. 4. We face significant competition in each of our lines of business. The businesses of electronic payment processing and settlement, ATM processing, debit card processing, and debit network access services are all highly competitive. The level of competition has increased in recent years, and other service providers have established a sizable market share in some of the service areas in which we compete. In addition, competitors to our network, which consist of other national and regional debit networks, continue to consolidate as large banks merge and combine their debit networks and as shared debit 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 our competitors and potential competitors have greater capital and technological, management, and marketing resources than we have, and we cannot assure you that we will continue to be able to compete successfully with such entities. In addition, the competitive pricing pressures that would result from any increase in competition could adversely affect our margins and may have an adverse effect on our operating results and financial condition. 5. Current or future card association rules and practices could adversely affect our business. 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. We compete directly with VISA and MasterCard in the provision of transaction processing services. Further, 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 are our competitors with respect to these services. With respect to our electronic benefits transfer (EBT) business, the governmental issuers of the benefits set the rules governing such transactions, and the financial institutions or processors hired by the government administer them. We cannot assure you that the credit card associations will maintain our registrations or that the current card association or EBT rules allowing us to market and provide transaction processing services will remain in effect. The termination of our member registration or our status as a certified processor, or any changes in card association or EBT rules that limit our ability to provide transaction processing and marketing services, could have an adverse effect on our transaction volumes and revenue or operating costs. In addition, if we were precluded from processing any of these card association transactions, there can be no assurance that our processing clients would continue to use us to process transactions in other networks. In addition, our STAR network, as a result of the combination of the STAR, MAC(R), and Cash Station(R) networks, is the first regional debit network that may potentially be viewed as achieving national status in terms of size and geographic coverage. Current VISA and MasterCard rules prohibit their members from issuing the debit cards or credit cards of any competing national network, with the exception of each other. These rules also prohibit the coexistence of competing national marks on their credit and branded debit cards. If VISA or MasterCard were to determine that STAR is a competing national network and mark, they could attempt to prohibit their members from issuing STAR-branded cards and/or prohibit the coexistence of the STAR mark with the VISA and/or MasterCard marks on debit and credit cards. If this occurred, we cannot predict whether, when forced to choose between us and other brands, issuing banks would favor us over VISA or MasterCard. Further, we could lose access to the VISA or MasterCard network and cardholders, which could adversely affect our ATM transactions, personal identification number (PIN)-secured and signature debit transactions, credit card transactions, and prospects for future growth. In addition, VISA's combined PIN-based and signature debit product called VISA Check Card II could adversely impact our Network Services business if a significant number of financial institutions issue the product or if VISA reinstitutes its original rule prohibiting the placement of competing debit marks on the product. 6. We must remain current with rapid technological change. Our ability to provide services is heavily dependent upon our use of and access to computing and telecommunications technology. The transaction payment processing business has been characterized by rapid technological change. We cannot assure you that we 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. 7. Acquisitions involve risks that could cause our actual growth to differ from our expectations. We expect to continue to seek selective acquisitions as an element of our growth strategy. It is possible that recent or future acquisitions could have an adverse effect upon our 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 our operations. For example, we may not be able to successfully integrate acquired businesses in a timely manner. We may also incur substantial costs, delays, or other operational or financial problems during the integration process. In addition, we could incur additional indebtedness to finance acquisitions. 8. If additional state taxes are imposed on us, our operating results and financial condition could be adversely affected. Transaction processing companies like us may be subject to state taxation of certain portions of their fees charged to customers 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 we are required to pay these taxes and are unable to pass this tax expense through to our customers, our operating results and financial condition could be adversely affected. 9. Continued consolidation in the banking and retail industries could adversely affect our growth. . Our Network Services business could be adversely affected. As banks consolidate, our ability to successfully offer our Network Services will depend in part on whether the institutions that survive those consolidations are willing to outsource their ATM and debit processing to third-party vendors like us and whether those institutions have pre-existing relationships with any of our competitors. Larger institutions with more geographically dispersed customer bases may wish to consolidate their network participation with fewer networks having the broadest geographic coverage and the best service offerings. As regional networks continue to consolidate, we may lose network business if we are 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. Larger banks that continue to participate in our network may also process proportionately fewer ATM transactions through our network as more transactions can be handled within the bank's own internal systems. . Our Payment Services business could lose customers, and fee revenue could decrease. Continued consolidation in the retail industry, which makes up a substantial portion of our customer base for Payment Services, could impede our 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 operating margins for us. 10. We are subject to the business cycles and credit risk of our merchant customers. A recessionary economic environment could have a negative impact on our customers, particularly smaller merchants and trucking companies, which could, in turn, negatively impact our financial results. If our customers make fewer sales of their products and services, we will have fewer transactions to process, resulting in lower revenue. In addition, in a recessionary environment our merchant customers could experience a higher rate of bankruptcy filings which could adversely affect us financially. We bear credit risk for billing disputes between credit card holders and bankrupt merchants. 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 normally charged back to the merchant, and the purchase price is refunded to the cardholder. However, if that merchant files for bankruptcy or is otherwise unable or unwilling to pay, we must bear the credit risk for the full transaction amount of these chargebacks. Billing disputes would include instances where a customer ordered goods or services on credit, but those goods and services are not delivered by the defunct merchant. We 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 our operating results and financial condition. 11. The outcome of litigation involving VISA and MasterCard could have a negative impact on our business. VISA and MasterCard have been sued by the Department of Justice (DOJ) for alleged violation of the federal antitrust laws arising out of their respective functionally identical policies of (1) allowing members in the respective organization to issue cards participating in the other organization's system and (2) prohibiting their members from issuing cards in competing systems other than VISA, MasterCard, or Citigroup, the largest owner/member of VISA and MasterCard. The potential impact of this litigation on us depends upon whether or not the DOJ is successful, and if it is successful, the relief ordered by the court. We do not currently issue cards in either system and have not been deemed to operate a competing system by either VISA or MasterCard. If VISA and MasterCard are permitted to prohibit members from issuing cards in competing systems, however, there could be a significant negative impact on us if VISA or MasterCard were then to deem the STAR debit network to be a competing system for these purposes. VISA and MasterCard also have been sued in a class action case brought by merchants who allege that VISA and MasterCard have (1) unlawfully tied merchant acceptance of VISA and MasterCard signature debit cards to merchant acceptance of VISA and MasterCard credit cards and (2) attempted and conspired to monopolize the market for debit cards, a market in which we compete against VISA and MasterCard. The potential impact of this litigation on us depends upon whether or not the plaintiffs are successful and, if they are successful, the relief ordered by the court or, if they are not successful, the business practices adopted by VISA and MasterCard as a result. 12. Utility and system interruptions or processing errors could adversely affect our operations. In order to process transactions promptly, our computer equipment and network servers must be functional on a 24-hour basis, which requires access to telecommunications facilities and the availability of electricity. Further, with respect to certain processing services for the STAR debit network, we are dependent on the systems and services of a third party vendor. Telecommunications services and the electricity supply are susceptible to disruption. Computer system interruptions and other processing errors, whether involving our own systems or our third party vendor's system, may result from such disruptions or from human error or other unrelated causes. Any extensive or long-term disruptions in our processing services could cause us to incur substantial additional expense, which could have an adverse effect on our operations and financial condition. 13. We 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. Under some circumstances we bear 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 our operating results and financial condition. 14. Changes in card association fees, products, or practices could increase our costs or otherwise limit our operations. 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%. It is possible that competitive pressures will result in our absorbing a portion of such increases in the future, which would increase our operating costs and reduce our profit margin. Furthermore, the rules and regulations of the various card associations and networks prescribe certain capital requirements. Any increase in the capital level required would further limit our use of capital. 15. Revenue growth in ATM processing could slow because of restrictions on surcharging. Revenue from "convenience fees" or "surcharges" imposed by owners of ATMs, including us, has been a significant factor in the recent growth in our ATM processing business, since such fees have encouraged ATM owners to deploy additional terminals. There have been initiatives at the federal, state, and local levels to limit surcharges. To the extent that ATM deployment does not continue to grow at recent rates due to the enactment and successful enforcement of statutory restrictions on surcharges, the availability of fewer favorable retail ATM locations, or other factors, demand for our ATM processing services may not continue to grow at recent rates or may decline. 16. Rules and regulations governing financial institutions and changes to those rules and regulations could limit our business. We are a financial holding company and a bank holding company subject to regulation under the Bank Holding Company Act of 1956, as amended, and to regulation by the Board of Governors of the Federal Reserve System (Federal Reserve). Our two bank subsidiaries are subject to additional regulation. 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. 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 under the Federal Deposit Insurance Act. The restrictions imposed by these and other laws governing the activities of national banks, federal savings banks, and their holding companies and related regulations and restrictions imposed by regulatory agencies limit our 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 activities that are not approved by the Federal Reserve as financial in nature or incidental or complementary to a financial activity, . restrictions on mergers and acquisitions involving companies engaged in activities other than those approved by the Federal Reserve as financial in nature or incidental or complementary to a financial activity, . narrower constraints on activities, mergers, and acquisitions if EFS National Bank or EFS Federal Savings Bank do not remain well capitalized and well managed or do not maintain "satisfactory" ratings under the Community Reinvestment Act, . minimum capital requirements at both the holding company and bank levels, . restrictions on dividends by banking entities, . restrictions on intercompany transactions, and . restrictions on tie-ins involving the products or services of EFS National Bank or EFS Federal Savings Bank. Our failure to comply with financial institution rules and regulations applicable to us could have a material adverse effect on us, including incurring financial or other penalties, being subject to cease and desist orders, and, in certain cases, being required to divest one or more of our depository institution subsidiaries. Material changes in applicable federal or state regulation of financial institutions could increase our operating costs, change the competitive environment, or otherwise adversely affect us. We 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 our operations, financial condition, and prospects. In addition, we are subject to the financial privacy provisions of the Gramm-Leach-Bliley Act (the GLB Act). As a result, certain consumer financial information that we receive may be subject to limitations on reuse and redisclosure under the GLB Act. Additionally, pending legislation at the state and federal levels may further restrict our information gathering and disclosure practices. Existing and potential future privacy laws may limit our ability to develop new products and services that make use of certain data gathered through our Network Services and Payment Services businesses. 17. The price of our common stock could be volatile. In recent years, there has been and may continue to be significant volatility in the market price for our common stock. Factors such as changes in quarterly operating results, the gain or loss of significant contracts, the entry of new competitors into our markets, changes in management, announcements of technological innovations or new products by us or our competitors, and general events and circumstances beyond our control could have a significant impact on the future market price of our 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 us, it could result in substantial costs and a diversion of our management's attention and resources, which could have an adverse effect on our business. -----END PRIVACY-ENHANCED MESSAGE-----