-----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, Rxk84G5D8C2RXYGbyU4sS8EWyTX0gt6h3E6oRwQHgL+acjAkvh4autPgLqwJXQJx cQuntZNZNnV4g7sSE8yQLw== 0000950131-98-006240.txt : 19981125 0000950131-98-006240.hdr.sgml : 19981125 ACCESSION NUMBER: 0000950131-98-006240 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981123 ITEM INFORMATION: FILED AS OF DATE: 19981124 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONCORD EFS INC CENTRAL INDEX KEY: 0000740112 STANDARD INDUSTRIAL CLASSIFICATION: FUNCTIONS RELATED TO DEPOSITORY BANKING, NEC [6099] IRS NUMBER: 042462252 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-13848 FILM NUMBER: 98757857 BUSINESS ADDRESS: STREET 1: 2525 HORIZON LAKE DR STE 120 CITY: MEMPHIS STATE: TN ZIP: 38133 BUSINESS PHONE: 9013718000 MAIL ADDRESS: STREET 1: 2525 HORIZON LAKE DRIVE STREET 2: SUITE 120 CITY: MEMPHIS STATE: TN ZIP: 38133 FORMER COMPANY: FORMER CONFORMED NAME: CONCORD COMPUTING CORP DATE OF NAME CHANGE: 19920515 8-K 1 FORM 8-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OR EARLIEST EVENT REPORTED): NOVEMBER 23, 1998 CONCORD EFS, INC. ------------------------------ (Exact name of registrant as specified in its charter) Delaware 000-13848 04-2462252 - ------------------------------- ------------ ---------------------- (State or other jurisdiction or (Commission (I.R.S. Employer Incorporation of Organization) File Number) Identification Number) 2525 Horizon Lake Drive, Suite 120, Memphis, Tennessee 38133 ------------------------------------------------------ ----- (Address of Principal Executive Offices) (Zip Code) (901) 371-8000 -------------- (Registrant's telephone number, including area code) ITEM 5. OTHER EVENTS The Boards of Directors of Concord EFS, Inc. (Concord) and Electronic Payment Services, Inc. (EPS) announced the signing of an Agreement and Plan of Merger dated November 23, 1998 (the "Merger Agreement") pursuant to which Concord will acquire all of the outstanding common stock of EPS. At the consummation of the Merger Concord will issue approximately 32,310,000 shares of Concord common stock. The Merger is intended to be qualified as a tax-free reorganization and recorded for accounting purposes as a pooling of interests. The Merger Agreement is subject to approval of the Board of Governors of the Federal Reserve System and the stockholders of Concord. EPS owns and operates electronic data processing and data-capture networks that process transactions originating at Automated Teller Machines (ATMs) as well as Point of Sale (POS) terminals. EPS's main subsidiaries are the Buypass Corporation and Money Access Service, Inc. (MAS). Buypass is a major third-party POS processor and debit transaction acquirer. MAS is an ATM terminal driver and operates the MAC EFT network. If the Merger is approved, EPS will continue to operate its business as a wholly-owned subsidiary of Concord. EPS is a private company principally owned by five bank holding companies. Due to the fact the Merger Agreement is subject to regulatory and shareholder approval, Concord does not at this time deem the transaction to be "probable" under Rule 3-05 of Regulation S-X as promulgated by the Securities and Exchange Commission. However, Concord is voluntarily providing the Audited Consolidated Financial Statements of EPS included in Exhibit B and the Unaudited Consolidated Selected Financial Information of EPS included in Exhibit C. Assuming all regulatory and stockholder approvals are obtained and all other conditions precedent to the Merger Agreement are satisfied, the Company currently expects the transaction to be completed late in the first quarter of 1999. LISTING OF EXHIBITS Exhibit A: Press Release dated November 23, 1998, "Concord EFS, Inc. and Electronic Payment Services, Inc. Execute Merger Agreement." Exhibit B: Consolidated Financial Statements of Electronic Payment Services, Inc. Exhibit C: Unaudited Consolidated Selected Financial Information of Electronic Payment Services, Inc. As of September 30, 1998 and for the nine months ended September 30, 1998 and 1997. Exhibit D: Consent of Independent Auditors SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. CONCORD EFS, Inc (Registrant) Date November 23, 1998 By: /s/ Thomas J. Dowling ----------------------- Thomas J. Dowling Chief Financial Officer EX-99.A 2 PRESS RELEASE DATED 11/23/98 EXHIBIT A CONCORD EFS, INC. AND ELECTRONIC PAYMENT SERVICES, INC. EXECUTE MERGER AGREEMENT Memphis, Tennessee--November 23, 1998 - (NADSAQ: CEFT) Concord EFS, Inc. (Concord) and Electronic Payment Services, Inc. (EPS) are pleased to announce that they have entered into an agreement and plan of merger. The acquisition is structured as a tax-free reorganization in which Concord would issue 32.310 million shares of common stock for all of the outstanding shares of EPS common stock. The transaction would be accounted for as a pooling of interests transaction and is subject to the receipt of shareholder and regulatory approvals and satisfaction of other closing conditions. The transaction is expected to be accretive to Concord shareholders, consistent with Concord's strategy to supplement its strong internal growth with additive acquisitions. Dan M. Palmer, Chairman and CEO of Concord stated, "We believe this merger will combine two great internal growth companies. Traditionally Concord has been a marketing and service company focusing on growth while EPS has tremendous processing capabilities through the MAS, MAC and BUYPASS groups. Going forward we can broaden each of our markets by expanding into new industry segments of the transaction processing business. In summary, I truly believe this is a home run for Concord because simply combining the two companies is accretive to earnings per share before taking synergies into consideration." Richard N. Garman, President and CEO of EPS has stated openly in recent years that he was seeking public capitalization for EPS, either through an initial public offering (IPO) or through a merger with a public company. "This merger has important advantages over an IPO," he said. "Both EPS and Concord are acquirers and outsourcers, serving similar markets, and our respective product lines are complementary. This combination will enhance the products we offer today to our respective clients, and will open new markets for our services." Edward A. Labry III, President of Concord stated, "This merger allows the two companies to combine their experience and expertise in providing processing solutions to the fastest growing payment niches including supermarkets, oil and gas, and convenience store locations. We believe our current and future customers will benefit substantially by utilizing Concord's traditional vertically integrated processing approach. Combined, Concord gains many front-end certifications through EPS and EPS gains a settlement bank for a fully integrated processing solution." EPS, currently owned by Bank One Corporation, First Union Corporation, KeyCorp, National City Corporation and PNC Bank Corporation, will become a wholly-owned subsidiary of Concord. EPS currently operates BUYPASS Corporation and MONEY ACCESS SERVICE INC. which will continue as EPS subsidiaries. Concord provides electronic transaction authorization, processing, settlement and funds transfer services in selected markets. Concord's primary activity is card services, including credit, debit card and electronic benefit transfer (EBT) card transactions to supermarket chains, grocery stores, convenience store merchants and other retailers. Concord also provides electronic payment, banking products and payroll services to trucking companies, truck stops and other niche segments of the market. Electronic Payment Services, Inc. (EPS), a privately-held company headquartered in Wilimington, Delaware, is a leading electronic funds transfer (EFT) processor in the United States, with approximately 2.7 billion transactions annually. EPS is the holding company for BUYPASS Corporation, a major third-party POS processor and debit transaction acquirer with annual transaction volume of almost 1.2 billion; and MONEY ACCESS SERVICE INC. (MAS), an EFT processor and the nation's leading ATM terminal driver, with over 32,000 ATMs driven in all 50 states. MAS is operator of the MAC EFT network, the largest EFT network in the United States based on almost 1.5 billion switch transactions annually. MONEY ACCESS SERVICE INC. controls the license rights for the registered trademark MAC. The release may contain statements which may constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Investors are cautioned that any such statements are not guarantees for future performance and involve risks and uncertainties, and the actual results may differ materially from those contemplated by such forward-looking statements. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include significant fluctuations in interest rates, inflation, economic recession, significant changes in the federal and state legal and regulatory environment, and competition in the Company's markets. The Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future results over time. For more information, a conference call is scheduled for 10:00am Central Standard Time on November 24, 1998 at (800) 730-6105 (reference Concord EFS). The call will be a listen only type call with comments on the acquisition from Dan Palmer and Edward Labry. Contact: Edward A. Labry Concord EFS, Inc. (901) 371-8000 EX-99.B 3 CONSOLIDATED FIN. STATEMENTS Exhibit B - Consolidated Financial Statements of Electronic Payment Services, Inc. Electronic Payment Services, Inc. Consolidated Financial Statements As of December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997 Contents Report of Independent Auditors.............................................. 1 Audited Consolidated Financial Statements Consolidated Balance Sheets................................................. 2 Consolidated Statements of Income........................................... 4 Consolidated Statements of Changes in Stockholders' Equity (Deficiency)..... 5 Consolidated Statements of Cash Flows....................................... 6 Notes to Consolidated Financial Statements.................................. 8 Report of Independent Auditors The Board of Directors Electronic Payment Services, Inc. We have audited the accompanying consolidated balance sheets of Electronic Payment Services, Inc. as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in stockholders equity (deficiency), and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Electronic Payment Services, Inc. at December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP --------------------------- Philadelphia, Pennsylvania February 3, 1998 Electronic Payment Services, Inc. Consolidated Balance Sheets (dollars in thousands)
December 31 1997 1996 ----------------------- Assets Current assets: Cash and equivalents $ 18,797 $ 24,793 Accounts receivable, less allowance of $1,907 and $2,933 in 1997 and 1996, respectively 24,137 22,493 Deferred income taxes 3,410 4,397 Due from stockholders 4,164 5,691 Inventory and supplies 639 1,254 Prepaid expenses and other current assets 1,409 2,015 ----------------------- Total current assets 52,556 60,643 Property and equipment 151,434 131,365 Accumulated depreciation and amortization (57,187) (44,990) ----------------------- 94,247 86,375 Intangible assets: Goodwill 82,071 82,071 Customer lists and other 25,046 23,796 ----------------------- 107,117 105,867 Accumulated amortization (30,133) (23,860) ----------------------- 76,984 82,007 Capitalized software development costs 20,404 23,609 Other assets 6,566 9,015 Total assets $250,757 $261,649 =======================
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December 31 1997 1996 ------------------------ Liabilities and stockholders' equity (deficiency) Current liabilities: Borrowings under credit agreement $ 29,000 $ 50,000 Current portion of long-term debt 25,000 25,000 Accounts payable 20,328 17,626 Due to stockholders 677 4,065 Accrued liabilities 21,398 21,415 Deferred income 5,961 282 Income taxes payable 8,426 3,001 ------------------------ Total current liabilities 110,790 121,389 Long-term debt, net of current portion 125,000 150,000 Deferred income, net of current portion 14,710 -- Deferred income taxes 15,269 23,282 Stockholders' equity (deficiency): Preferred stock, par value $163.60; 4,600 shares authorized, issued and outstanding 752 752 Common stock, par value $.01; 10,000,000 shares authorized; 3,750,000 shares issued and outstanding 38 38 Paid-in capital 196,001 196,001 Deemed dividend (245,400) (245,400) Retained earnings 33,597 15,587 ------------------------ Total stockholders' equity (deficiency) (15,012) (33,022) ------------------------ Total liabilities and stockholders' equity (deficiency) $ 250,757 $ 261,649 ========================
See accompanying notes. 3 Electronic Payment Services, Inc. Consolidated Statements of Income (dollars in thousands except per share data)
Year ended December 31 1997 1996 1995 ---------------------------------------- Revenues $ 202,310 $ 179,490 $ 163,379 Expenses: Processing and equipment 72,341 64,257 58,079 Customer and product support 30,956 26,900 24,693 Selling, general and administrative 33,267 32,847 35,755 Product development 14,654 14,861 13,479 Amortization of intangible assets 6,273 6,273 6,115 Interest expense, net of $556, $364 and $333 interest income in 1997, 1996 and 1995, respectively 12,590 14,310 15,882 ---------------------------------------- Total expenses 170,081 159,448 154,003 ---------------------------------------- Income before income taxes and minority interest 32,229 20,042 9,376 Provision for income taxes 14,181 8,821 5,481 ---------------------------------------- Net income before minority interest 18,048 11,221 3,895 Minority interest in earnings of subsidiaries -- 240 1,314 ---------------------------------------- Net income 18,048 10,981 2,581 Dividend on preferred stock 38 38 38 ---------------------------------------- Net income available for common stock $ 18,010 $ 10,943 $ 2,543 ======================================== Net income per common share $ 4.80 $ 3.20 $ 1.05 ======================================== Average common shares outstanding 3,750,000 3,417,404 2,419,615
See accompanying notes. 4 Electronic Payment Services, Inc. Consolidated Statements of Changes in Stockholders' Equity (Deficiency) (dollars in thousands)
Preferred Common Paid-in Deemed Retained Stock Stock Capital Dividend Earnings Total - ---------------------------------------------------------------------------------------------------------- December 31, 1994 $752 $24 $107,138 $(245,400) $ 2,101 $(135,385) Net income 2,581 2,581 Dividend on preferred stock (38) (38) Minority interest investment in subsidiaries, inclusive of their interest in earnings from March 2, 1995 88,637 88,637 - ---------------------------------------------------------------------------------------------------------- December 31, 1995 752 24 195,775 (245,400) 4,644 (44,205) Net income 10,981 10,981 Dividend on preferred stock (38) (38) Common stock issued in exchange for minority interest 14 (14) -- Minority interest investment in subsidiaries, inclusive of their interest in earnings through April 1, 1996 240 240 - ---------------------------------------------------------------------------------------------------------- December 31, 1996 752 38 196,001 (245,400) 15,587 (33,022) Net income 18,048 18,048 Dividend on preferred stock (38) (38) - ---------------------------------------------------------------------------------------------------------- December 31, 1997 $752 $38 $196,001 $(245,400) $33,597 $ (15,012) ==========================================================================================================
See accompanying notes. 5 Electronic Payment Services, Inc. Consolidated Statements of Cash Flows (dollars in thousands)
Year ended December 31 1997 1996 1995 ------------------------------------- Operating activities Net income before minority interest $18,048 $11,221 $ 3,895 Adjustments to reconcile net income before minority interest to net cash provided by operating activities: Depreciation and amortization 29,364 25,687 21,232 Deferred tax provision (benefit) (7,017) 6,683 4,941 Other noncash income and expense items (9) (204) 213 Changes in: Accounts receivable (1,644) 573 243 Inventory and supplies 615 (251) 372 Prepaid expenses and other current assets 606 (311) 853 Accounts payable 2,702 6,755 (2,611) Due to (from) stockholders (1,861) 3,069 58 Accrued liabilities (17) 2,810 (35) Deferred income 5,679 178 (176) Income taxes payable 5,425 3,669 (1,265) ------------------------------------- Cash provided by operating activities $51,891 $59,879 $27,720 -------------------------------------
6
Year ended December 31 1997 1996 1995 -------------------------------------- Investing activities Acquisition of property and equipment $(28,892) $(31,658) $(29,786) Proceeds from licensing agreement 25,000 -- -- Other investing activity, net (7,957) (12,972) (7,182) -------------------------------------- Cash used for investing activities (11,849) (44,630) (36,968) -------------------------------------- Financing activities Borrowings (repayments) under credit agreement, net (21,000) 15,000 (500) Long-term debt repayments (25,000) (25,000) (50,171) Payments on notes payable to stockholders -- -- (23,263) Proceeds of minority investment in subsidiaries -- -- 74,539 Dividends paid on preferred stock (38) (38) (38) -------------------------------------- Cash (used for) provided by financing activities (46,038) (10,038) 567 -------------------------------------- Change in cash and equivalents (5,996) 5,211 (8,681) Cash and equivalents, beginning of year 24,793 19,582 28,263 -------------------------------------- Cash and equivalents, end of year $ 18,797 $ 24,793 $ 19,582 ======================================
See accompanying notes. 7 Electronic Payment Services, Inc. Notes to Consolidated Financial Statements (dollars in thousands) 1. Organization, Nature of Business and Equity Transactions Electronic Payment Services, Inc. (the "Company") owns and operates electronic data processing and data-capture networks that process transactions originating at Automated Teller Machines ("ATM") as well as Point of Sale ("POS") terminals. The majority of customers of ATM processing services are commercial banks, savings and loan institutions, credit unions, independent sales organizations and other financial services providers. Geographically, ATM customers are in all 50 states and are concentrated in the eastern half of the United States. POS transaction processing customers are a wide variety of retailers, commercial banks and other credit card processors. POS customers of the Company are located in all 50 states. The Company is indirectly subject to fluctuations in retail activity and experiences seasonal variability in ATM and POS transaction levels. The Company was formed on December 4, 1992 through a Corporate Joint Venture Agreement between CoreStates Financial Corp, Banc One Corporation, PNC Financial Corp and KeyCorp ("Original Stockholders"). The authorized capital stock of the Company at inception consisted of 3,000,000 shares of common stock and 1,500,000 shares of mandatory redeemable preferred stock. In exchange for common stock, preferred stock and/or cash, the Original Stockholders contributed certain assets, liabilities, wholly owned processing subsidiaries and/or cash. The assets and liabilities contributed were recorded at the Original Stockholders' net book value as of December 1, 1992. The cash paid and preferred stock issued upon formation were recorded as dividends. In connection with the recapitalization of the Company in December 1993, the number of authorized shares of capital stock was increased to 10,000,000 shares. In December 1993, the Company and the Original Stockholders entered into a recapitalization agreement whereby 1,495,400 shares of mandatory redeemable preferred stock with a par value of $163.60 were exchanged for a promissory note in the principal amount of $250,000. As part of the transaction, the redemption feature of the preferred stock was eliminated. The premium associated with this exchange was charged directly to stockholders' equity. 8 Electronic Payment Services, Inc. Notes to Consolidated Financial Statements (continued) (dollars in thousands) 1. Organization, Nature of Business and Equity Transactions (continued) The preferred stockholder has limited voting rights and the preferred stock provides for a 5% cumulative dividend, payable quarterly, plus an additional performance dividend. The performance dividend is equal to a percentage of the Company's net income that exceeds a threshold amount. No performance dividends have been paid or incurred since inception. On March 2, 1995, the Company entered into a series of transactions with KeyCorp and National City Corporation (together with the Original Stockholders, the "Stockholders") whereby these banks made cash capital contributions totaling $74,539 to two subsidiaries of the Company, contributed assets to a subsidiary of the Company and sold assets to a subsidiary of the Company. As a result of the transactions, equity of the Company was increased by a total of $87,323 and goodwill was recognized totaling $13,352. At December 31, 1995, the consolidated minority stockholders' share in the equity (deficit) of the subsidiaries was $16,046. Effective April 1, 1996, the minority stockholders agreed to merge their ownership interest in the subsidiaries into the Company. In connection with the merger, the Company issued 1,330,385 shares of common stock and adjusted paid-in capital for the par value of the common stock issued. The minority stockholders' share of earnings in the subsidiaries of $240 in 1996 and $1,314 in 1995 has been deducted from earnings to determine net income of the Company and has adjusted the minority interest share of the consolidated deficiency in assets. 2. Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to prior-year amounts to conform with current-year presentation. 9 Electronic Payment Services, Inc. Notes to Consolidated Financial Statements (continued) (dollars in thousands) 2. Significant Accounting Policies (continued) Cash and Equivalents The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Included in cash and equivalents at December 31, 1997 and 1996 is $1,023 and $1,486, respectively, of cash maintained in automated teller machines. Property and Equipment Property and equipment are stated at cost and depreciated over their estimated useful lives using the straight-line method. Major classes of property and equipment and their estimated useful lives are as follows:
December 31 Estimated 1997 1996 Useful Lives ------------------------------------- Land $ 1,050 $ 1,050 Indefinite Building and improvements 14,591 14,081 40 years Leasehold improvements 8,291 7,407 Lease term Software costs 38,045 28,418 5 years Computer and communication equipment 77,950 71,521 3-5 years Furniture and equipment 11,507 8,888 3-10 years ----------------------- $151,434 $131,365 =======================
Included in property and equipment at December 31, 1997 and 1996 are $31,043 and $21,924, respectively, of capitalized software costs incurred to develop computer systems and programming. Software costs of $9,119 and $11,696 were capitalized during 1997 and 1996, respectively. Capitalized software costs placed in service during 1997 and 1996 were $7,569 and $4,630, respectively. Amortization expense related to the assets placed in service totaled $2,084 and $982 in 1997 and 1996, respectively. 10 Electronic Payment Services, Inc. Notes to Consolidated Financial Statements (continued) (dollars in thousands) 2. Significant Accounting Policies (continued) Inventory and Supplies Inventory is valued at the lower of cost (first-in, first-out) or market and consists of terminals, printers and other related equipment held for resale and plastic ATM cards. Intangible Assets Intangible assets, which were contributed as part of the formation of the Company, consist of goodwill, agreements not to compete and values ascribed to customer lists. As described in Note 1, $13,352 of goodwill was recorded in 1995 as a result of the equity transactions. Goodwill and amounts assigned to the customer lists are being amortized by the straight-line method over 15-25 years and 10 years, respectively. Agreements not to compete are amortized over the life of the agreements. Other Assets Included in other assets at December 31, 1997 and 1996 are $6,021 and $8,434, respectively, of payments made to customers under the Company's conversion assistance program. These payments, which were primarily for promotional sign replacements and card reissuance, were made to customers converting to the MAC network and are being amortized over five years. Amortization expense associated with these assets was $3,037, $2,907 and $2,333 for the year ended December 31, 1997, 1996 and 1995, respectively. Capitalized Software Development Costs During 1994, the Company capitalized $4,365 of software development costs incurred after technological feasibility was established in connection with the planned introduction of a stored value electronic payment card. The Company capitalized $8,384, $11,584 and $667 in 1995, 1996 and 1997, respectively, related to the development of the stored value card. 11 Electronic Payment Services, Inc. Notes to Consolidated Financial Statements (continued) (dollars in thousands) 2. Significant Accounting Policies (continued) Capitalized Software Development Costs (continued) On July 25, 1997, the Company entered into an agreement with an unrelated third party whereby the Company granted perpetual licensing rights to the technology to the third party in exchange for $25 million. The agreement further grants the third party exclusive rights to the technology for a period of four years. The proceeds received from the licensing agreement have been deferred and are being earned over the exclusivity period of the agreement. The development costs capitalized are being amortized over the same period. Revenue Recognition Revenue for processing fees is recognized and billed when the services are performed. Revenue related to equipment sales is recognized upon the installation of the equipment. Income Taxes The Company accounts for income taxes under the liability method whereby deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Such temporary differences result in deferred income taxes computed at rates estimated to be in effect when the underlying differences will be reported in the Company's federal and state income tax returns. The Company and its subsidiaries file a consolidated federal income tax return. Supplemental Cash Flow Information Total interest paid was $13,033, $14,686 and $18,277 during 1997, 1996 and 1995, respectively. 12 Electronic Payment Services, Inc. Notes to Consolidated Financial Statements (continued) (dollars in thousands) 2. Significant Accounting Policies (continued) Per Share Data In 1997, the Financial Accounting Standards Board issued Statement Number 128, "Earnings per Share" ("FAS 128"). FAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per common share is the same as basic earnings per common share for 1997, 1996 and 1995. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 3. Income Taxes The components of deferred tax liabilities and assets as of December 31 are as follows:
1997 1996 ---------------------- Deferred tax liabilities: Depreciation $ 3,671 $ 3,433 Intangibles 4,923 5,845 Research and development capitalized costs 8,619 15,558 Other 1,045 1,062 ---------------------- 18,258 25,898 ---------------------- Deferred tax assets: Net operating loss carryforward 2,626 3,113 Nondeductible reserves 3,762 3,897 Other 11 11 ---------------------- 6,399 7,021 ---------------------- Net deferred tax liabilities $11,859 $18,877 ======================
13 Electronic Payment Services, Inc. Notes to Consolidated Financial Statements (continued) (dollars in thousands) 3. Income Taxes (continued) The components of income tax expense are as follows:
Year ended December 31 1997 1996 1995 ---------------------------------------- Current: Federal $17,527 $1,485 $ 381 State 3,671 653 159 ---------------------------------------- 21,198 2,138 540 ---------------------------------------- Deferred: Federal (5,977) 6,610 5,170 State (1,040) 73 (229) ---------------------------------------- (7,017) 6,683 4,941 ---------------------------------------- Provision for income taxes $14,181 $8,821 $5,481 ========================================
Following is a reconciliation of the effective income tax rate with the statutory federal income tax rate:
Year ended December 31 1997 1996 1995 ---------------------------------- Federal tax rate 35.0% 35.0% 34.0% State taxes, net of federal benefit 5.3 2.3 14.4 Nondeductible amortization of goodwill 3.2 5.2 9.8 Other 0.5 1.5 0.2 ---------------------------------- Effective income tax rate 44.0% 44.0% 58.4% ==================================
During 1997, 1996 and 1995, income taxes of $16,079, $1,290 and $3,459, respectively, were paid to various state and federal agencies. As of December 31, 1997, various subsidiaries of the Company have federal and state net operating loss carryforwards that expire on various dates through 2006 and are subject to annual limitations. 14 Electronic Payment Services, Inc. Notes to Consolidated Financial Statements (continued) (dollars in thousands) 4. Short-Term Borrowings The Company maintains a credit agreement with a third-party bank which provides for short-term borrowings through March 1999 of up to $75,000. Borrowings under the agreement are unsecured and bear interest at variable rates. Borrowings of $29,000 and $50,000, which approximated fair value, were outstanding under the agreement at December 31, 1997 and 1996, respectively. Average borrowings during 1997 were $41,266 at an effective interest rate of 5.84%. During 1996, average borrowings were $39,913 at an effective interest rate of 5.82% and during 1995, average borrowings were $31,630 at an effective interest rate of 6.86%. The agreement requires the Company to maintain certain financial ratios and to comply with certain covenants as defined, including limitations as to debt to be incurred and prepayments on the Company's long-term debt. 5. Long-Term Debt The Company has a $250,000 unsecured promissory note payable to a stockholder due in equal quarterly installments through 2003, which bears interest at 6.40%. Annual maturities of the note are $25,000 per year through 2003. The stockholder promissory note was issued on December 23, 1993 in connection with the recapitalization of the Company. 6. Commitments and Contingencies The Company leases office space and equipment under noncancelable operating leases expiring at various dates through 2008. Certain leases obligate the Company to pay property taxes, insurance and maintenance expenses. Total rental expense under operating leases was $3,953 in 1997, $4,607 in 1996 and $5,043 in 1995. 15 Electronic Payment Services, Inc. Notes to Consolidated Financial Statements (continued) (dollars in thousands) 6. Commitments and Contingencies (continued) Future minimum rental commitments as of December 31, 1997 are as follows: 1998 $ 4,066 1999 4,035 2000 2,771 2001 2,350 2002 2,008 2003 and thereafter 7,296 ------- Total minimum rental commitments $22,526 =======
In the normal course of business, the Company is party to various claims and legal proceedings. Although the ultimate outcome of these matters is presently not determinable, management, after consultation with legal counsel, does not believe that the resolution of these matters will have a material adverse effect upon the Company's financial position. 7. Employee Benefit Plans The Electronic Payment Services, Inc. Retirement Savings Plan covers substantially all employees of the Company. Under the terms of the plan, each qualified employee receives a company retirement contribution of 2% of compensation, as defined, based upon employment status at December 31 of the plan year. In addition, the plan includes a Section 401(k) savings feature wherein the Company will match employee contributions up to 4.5% of compensation as defined, and additionally, contains a discretionary profit-sharing contribution of up to 1.5% of compensation as defined. Total 1997, 1996 and 1995 expenses under the plan were $3,095, $2,687 and $2,533, respectively. 16 Electronic Payment Services, Inc. Notes to Consolidated Financial Statements (continued) (dollars in thousands) 8. Stock Option Plan In 1995, the Company adopted a stock option plan under which designated employees may be granted options to purchase shares of the Company including Incentive Stock Options and Non-qualified Stock Options as defined in the Internal Revenue Code of 1986 as amended. The maximum number of shares of common stock with respect to which options may be granted is 500,000 shares. The plan was amended and restated effective October 1, 1996. Under the terms of the plan, the exercise price of the option is determined by the Company. All options granted to date have been at a price equal to the estimated fair market value at the date of the grant. The exercise period for the options may not exceed ten years from the date of the grant; however, options granted under the plan before October 22, 1996 have a term of five years from the date of the grant. The Company has the right but not the obligation to purchase any shares issued under the plan at an appraised price determined in accordance with the terms of the plan as of the end of the preceding year. Options become vested in 25% increments on each March 31 of the year following the year in which the option was granted. Vesting may be accelerated based upon death or retirement of the employee or a change in the control of the Company. At December 31, 1997, options for 39,557 shares were exercisable at an average price of $67.50. The weighted average remaining term of options outstanding at December 31, 1997 is 8.8 years. 17 Electronic Payment Services, Inc. Notes to Consolidated Financial Statements (continued) (dollars in thousands) 8. Stock Option Plan (continued) Following is a summary of options granted under the plan:
Number of Weighted Shares Option Price ---------------------------- Granted during 1994 47,822 $60.00 Granted during 1995 52,397 $60.00 ------- Outstanding at December 31, 1995 100,219 $60.00 Granted during 1996 95,676 $73.00 Forfeited during 1996 (26,199) Options transferred in exchange for cash (8,070) ------- Outstanding at December 31, 1996 161,626 $67.70 Granted during 1997 80,500 $66.00 Forfeited during 1997 (41,574) ------- Outstanding at December 31, 1997 200,552 $68.27 =======
The fair value of options granted during 1997, 1996 and 1995 was $16.68, $18.45 and $8.13, respectively, and was calculated using the Black-Scholes pricing model adjusted to reflect the lower volatility associated with a private company. The assumptions used to value the options were: expected life of 5 years, risk-free interest rate of 6.0%, no expected dividends and volatility of 1%. The Company uses the provisions of Accounting Principles Board Opinion Number 25, "Accounting for Stock Issued to Employees" to account for option activity. No compensation expense has been recognized for the value of the options at the grant date as the grant price was equal to the estimated value of the Company's stock. If the provisions of Financial Accounting Standards Board Statement 18 Electronic Payment Services, Inc. Notes to Consolidated Financial Statements (continued) (dollars in thousands) 8. Stock Option Plan (continued) Number 123, "Accounting for Stock Based Compensation" ("FAS 123"), had been applied in determining net income for 1997, reported net income would have been $17,643 and net income per common share would have been $4.70. Under FAS 123, reported net income for 1996 and 1995 would have been $10,861 and $2,515, respectively, and net income per common share would have been $3.18 and $1.04, respectively. The effects of applying the provisions of FAS 123 are not indicative of future amounts as FAS 123 has not been applied to options issued before January 1, 1995 and additional awards are anticipated in future years. 9. Related Party Transactions In connection with its formation and the 1995 equity transaction, the Company entered into transitional services agreements with the Stockholders and their affiliates whereby they agreed to provide, at cost, certain processing and other services until such time as the Company was able to provide its own services. Charges for these services were $4,300, $6,400 and $10,200 during 1997, 1996 and 1995, respectively. The Stockholders are also customers of the Company and services are billed to them at rates comparable to nonrelated customers. Approximately 27%, 27% and 20% of revenues were billed to the Stockholders during 1997, 1996 and 1995, respectively. 19 EX-99.C 4 UNAUDITED CONSOLIDATED SELECTED FIN. INFORMATION Exhibit C - Unaudited Consolidated Selected Financial Information of Electronic Payment Services, Inc. Electronic Payment Services, Inc. Consolidated Balance Sheet--Unaudited (In thousands) As of September 30, 1998 Assets Current assets Cash and equivalents $ 16,425 Accounts receivable, less allowance of $1,829 and $1,907 in 1998 and 1997, respectively 27,412 Deferred income taxes 3,022 Due from stockholders 3,462 Inventory and supplies 578 Prepaid expenses and other current assets 2,448 -------- Total current assets 53,347 Property and equipment 180,870 Accumulated depreciation and amortization (73,394) -------- 107,476 Intangible assets Goodwill 82,071 Customer lists and other 30,970 -------- 113,041 Accumulated amortization (35,001) -------- 78,040 Capitalized software development costs 16,133 Other assets 4,781 -------- Total assets $259,777 ========
Electronic Payment Services, Inc. Consolidated Balance Sheet - Unaudited (in thousands) As of September 30, 1998 Liabilities and stockholders' equity Current liabilities Borrowings under credit agreement $ 28,000 Current portion of long-term debt 25,000 Accounts payable 21,125 Due to stockholders 1,153 Accrued liabilities 27,510 Deferred income 7,870 Income taxes payable 9,405 --------- Total current liabilities 120,063 Long-term debt, net of current portion 106,250 Other liabilities 14,544 Deferred income taxes 15,208 Stockholders' equity (deficiency) Preferred stock, par value $163.60; 4,600 shares authorized, issued and outstanding 752 Common stock, par value $.01; 10,000,000 shares authorized; 3,752,375 and 3,750,000 shares issued and outstanding 38 Paid-in capital 196,162 Deemed dividend (245,400) Retained earnings 52,160 --------- Total stockholders' equity 3,712 --------- Total liabilities and stockholders' equity $ 259,777 =========
Electronic Payment Services, Inc. Consolidated Statements of Income - Unaudited (in thousands except per share data)
Nine Months Ended September 30 ---------------------- 1998 1997 ---------- ---------- Revenues $ 172,371 $ 148,425 Expenses: Processing and equipment 62,263 51,962 Customer and product support 25,086 23,345 Selling, general and administrative 25,884 25,440 Product development 14,495 11,582 Amortization of intangible assets 4,866 4,707 Interest expense, net of $544 and $391 interest income in 1998 and 1997, respectively 7,725 9,860 ---------- ---------- Total expenses 140,319 126,896 ---------- ---------- Income before income taxes 32,052 21,529 Provision for income taxes 13,462 9,473 ---------- ---------- Net income 18,590 12,056 Dividend on preferred stock 28 28 ---------- ---------- Net income available for common stock $ 18,562 $ 12,028 ========== ========== Net income per common share $ 4.95 $ 3.21 ========== ========== Average common shares outstanding 3,750,374 3,750,000
EX-23 5 CONSENT OF INDEPENDENT AUDITORS Exhibit 23 Consent of Independent Auditors We consent to the incorporation by reference, in the Registration Statement (Form S-3 No. 333-62069) and related Prospectus of Concord EFS, Inc. for the registration of 4,554,342 shares of its common stock, of our report dated February 3, 1998 with respect to the consolidated financial statements of Electronic Payment Services, Inc. for the three years in the period ended December 31, 1997, included in its Current Report on Form 8-K dated November 23, 1998, filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP ---------------------------- Philadelphia, Pennsylvania November 23, 1998 -----END PRIVACY-ENHANCED MESSAGE-----