-----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, NrzSe4t/DvNGCvEVC+gc1b2BSQnBljSsOazAk61YDmwW3IoFSPNZ8nJWaDVv6oOP J/YfW2+INEm+/6+/rJIDBA== 0000950131-99-003284.txt : 19990519 0000950131-99-003284.hdr.sgml : 19990519 ACCESSION NUMBER: 0000950131-99-003284 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19990518 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: S-3/A SEC ACT: SEC FILE NUMBER: 333-77829 FILM NUMBER: 99629887 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 S-3/A 1 AMENDMENT #1 TO FORM S-3 As filed with the Securities and Exchange Commission on May 18, 1999 Registration No. 333-77829 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------- Amendment No. 1 to FORM S-3 REGISTRATION STATEMENT Under The Securities Act of 1933 -------------- Concord EFS, Inc. (Exact name of the Registrant as specified in its charter) Delaware 04-2462252 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2525 Horizon Lake Drive Suite 120 Memphis, TN 38133 (901) 371-8000 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) Dan M. Palmer Chairman of the Board of Directors and Chief Executive Officer 2525 Horizon Lake Drive Suite 120 Memphis, TN 38133 (901) 371-8000 (Name, address, including zip code, and telephone number, including area code, of agent for service) copies to: Imad I. Qasim, Esq. John D. Brinitzer, Esq. Sidley & Austin Cleary, Gottlieb, Steen & Hamilton One First National Plaza One Liberty Plaza Chicago, Illinois 60603 New York, New York 10006 -------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [_] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [_] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] -------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to Section 8(a), may determine. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- EXPLANATORY NOTE This Registration Statement contains two separate prospectuses. The first prospectus relates to the offering of the shares in the United States and Canada by a syndicate of U.S. underwriters (the "U.S. Tranche") and the second prospectus relates to the offering of the shares outside the United States and Canada by a syndicate of international underwriters (the "International Tranche"). The prospectus for the International Tranche will be identical to the prospectus for the U.S. Tranche except for the alternate front and back cover pages which appear in this Registration Statement immediately following the complete prospectus for the U.S. Tranche. ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ + + +The information in this prospectus is not complete and may be changed. We may + +not sell these securities until the registration statement filed with the + +Securities and Exchange Commission is effective. This prospectus is not an + +offer to sell these securities and it is not soliciting an offer to buy these + +securities in any state where the offer or sale is not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED MAY 18, 1999 PROSPECTUS 30,963,125 Shares [Concord Logo] Concord EFS, Inc. Common Stock -------- Concord EFS, Inc. is selling 2,000,000 shares of its common stock and the selling stockholders named in this prospectus are selling 28,963,125 shares of common stock for a total of 30,963,125 shares of common stock. Concord will not receive any proceeds from the sale of the shares by the selling stockholders. The underwriters named in this prospectus may purchase up to 4,640,000 additional shares of common stock from Concord under certain circumstances. Of the 30,963,125 shares of common stock that Concord and the selling stockholders are selling, 24,770,500 shares are being offered in the United States and Canada by a syndicate of U.S. underwriters and 6,192,625 shares are being offered concurrently outside the United States and Canada by a syndicate of international underwriters. The common stock is quoted on the Nasdaq National Market under the symbol "CEFT." The last reported sale price of the common stock on the Nasdaq National Market on May 14, 1999, was $28.625 per share. -------- Investing in the common stock involves risks. See "Risk Factors" beginning on page 6. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. --------
Per Share Total --------- ----- Public Offering Price........................................... $ $ Underwriting Discount........................................... $ $ Proceeds to Concord (before expenses)........................... $ $ Proceeds to the Selling Stockholders (before expenses).......... $ $
The underwriters are offering the shares subject to various conditions. The underwriters expect to deliver the shares to purchasers on or about , 1999. -------- Salomon Smith Barney William Blair & Company Goldman, Sachs & Co. Joint Book-Running Manager Joint Book-Running Manager Joint Lead Manager
J.P. Morgan & Co. Morgan Keegan & Company, Inc. , 1999 [Concord logo/diagrams illustrating front-end processing and back-end settlement operations] You should rely only on the information contained in or incorporated by reference in this prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of any of these securities in any state where the offer is not permitted. You should not assume that the information contained or incorporated by reference in this prospectus is accurate as of any date other than the date on the front of this prospectus. ---------------- TABLE OF CONTENTS
Page ---- Prospectus Summary........................................................ 1 Risk Factors.............................................................. 6 Use of Proceeds........................................................... 11 Price Range of Common Stock............................................... 12 Dividend Policy........................................................... 12 Capitalization............................................................ 13 Selected Consolidated Financial Data...................................... 14 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 16 Business.................................................................. 24 Management................................................................ 29 Principal and Selling Stockholders........................................ 31 United States Federal Tax Consequences to Non-United States Holders....... 33 Underwriting.............................................................. 35 Legal Matters............................................................. 38 Experts................................................................... 38 Where You Can Find More Information....................................... 39 Index to Consolidated Financial Statements................................ F-1
i PROSPECTUS SUMMARY You should read the following summary with the more detailed information about us, including the information set forth under the heading "Risk Factors," and our financial statements, with their accompanying notes, that are included in this prospectus and in the documents incorporated by reference in this prospectus. Unless otherwise indicated, the information contained in this prospectus assumes that the underwriters do not exercise their over-allotment option. Concord EFS, Inc. Concord EFS, Inc. is a fully integrated leading provider of electronic transaction authorization, processing, settlement and funds transfer services on a nationwide basis. We focus on marketing our services to supermarket chains and multiple lane retailers, financial institutions, petroleum and convenience stores, grocery stores, the trucking industry and other retailers. Our primary activity is merchant card services, in which we provide integrated electronic transaction services for credit card, debit card and electronic benefits transfer (EBT) card transactions. These transaction services include data capture, authorization and settlement services for over 400,000 point-of-sale terminals. We also provide automated teller machine (ATM) services, consisting of owning and operating the MAC(R)-branded electronic funds transfer (EFT) network and processing for approximately 35,000 ATMs nationwide, of which we own approximately 800. We have a bank subsidiary, EFS National Bank, which provides us with a number of competitive advantages. . 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 and thus do not have to pay a third- party vendor. . We perform services such as automated clearing house (ACH) and wire transfer internally and therefore do not have to pay another financial institution for such services. In 1998 we processed approximately 3.2 billion transactions, our revenue was $634.5 million and our operating income was $136.8 million. Between 1994 and 1998, our revenue and operating income grew at compound annual rates of 25.2% and 35.0%, respectively. Over this same period, our operating profit margin expanded from 15.9% to 21.6%. Investment Highlights We believe that the following factors are important in order to understand the growth potential of our business: Company Factors . We are focused on select markets which are switching rapidly to electronic transaction processing. We believe, therefore, that our transaction volume will grow more rapidly than the overall market. . We are a fully integrated company providing end-to-end payment services. We believe this gives us a competitive advantage because it allows our customers to acquire from us a full set of payment services required to process transactions and allows us to price our services competitively. . On February 26, 1999 we acquired Electronic Payment Services, Inc., which provides credit and debit card data capture and authorization services, owns and operates the MAC(R)-branded EFT network and processes ATM transactions on behalf of financial institutions and non-financial organizations. We believe this acquisition will benefit our business in a variety of ways, including, among other things, allowing us to offer settlement services to Electronic Payment Services' customers currently provided by others. 1 Industry Factors Key industry trends include: . According to The Nilson Report, an independent industry newsletter, consumer usage of the five major credit cards (VISA, MasterCard, American Express, Discover and Diners Club) increased to $1,156 billion in 1998 from $498 billion in 1993, a compound annual growth rate of 18.4%. . According to The Nilson Report, ATM transaction volume grew at a compound annual rate of 10.4% between 1995 and 1997 to a total of 10 billion transactions. . According to The Nilson Report, EBT transaction volume increased from $580 million in 1994 to $4.1 billion in 1997, representing a compound annual growth rate of 91.9%. Operating Strategy Our operating strategy is to: . focus on specific markets which are switching rapidly to electronic payment cards . provide a fully integrated range of services . cross-sell services to existing clients . maintain a high rate of recurring revenue through customer retention . access new customers . maintain a low-cost operating structure . provide and support a wide range of technology solutions . seek selective acquisitions 2 The Offering The following information regarding shares outstanding after the offering is based on the number of shares outstanding as of May 14, 1999. It does not include a total of 25,000,000 shares reserved for issuance under the Concord EFS, Inc. 1993 Incentive Stock Option Plan, as amended, and the Electronic Payment Services, Inc. 1995 Stock Option Plan, as amended. Under such plans, options for the purchase of 14,842,613 shares were outstanding as of May 14, 1999, of which options for the purchase of 7,117,688 shares were exercisable at that date. Throughout this prospectus, unless we have stated otherwise, we have assumed that the underwriters' over-allotment option for an additional 4,640,000 shares of common stock has not been exercised. Common stock offered: U.S. offering.............. 24,770,500 shares International offering..... 6,192,625 shares ----------- Total.................. 30,963,125 shares ----------- Common stock offered: Concord.................... 2,000,000 shares Selling stockholders....... 28,963,125 shares ----------- Total.................. 30,963,125 shares ----------- Common stock to be outstanding after the offering........... 130,446,732 shares How we will use our proceeds We intend to use the proceeds that we will receive from this offering for general corporate purposes, including for working capital, to augment our equity capital in accordance with the guidelines of the credit card associations as our processing transaction volume increases and potentially for debt repayment. We will not receive any of the proceeds from the sale of common stock by the selling stockholders. Nasdaq National Market symbol "CEFT"
------------ Our principal executive offices are located at 2525 Horizon Lake Drive, Suite 120, Memphis, Tennessee 38133 and our telephone number is (901) 371-8000. ------------ 3 SUMMARY CONSOLIDATED FINANCIAL DATA The summary consolidated financial data presented below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and notes to those financial statements included and incorporated by reference elsewhere in this prospectus. The summary consolidated financial data as of December 31, 1997 and 1998 and for the years ended December 31, 1996, 1997 and 1998 have been derived from our consolidated financial statements audited by Ernst & Young LLP which are included in this prospectus. The summary consolidated financial data as of December 31, 1994, 1995 and 1996 and for the years ended December 31, 1994 and 1995 have been derived from financial statements audited by Ernst & Young LLP which are not included in this prospectus. The summary consolidated financial data as of March 31, 1999 and for the three months ended March 31, 1998 and 1999 have been derived from our unaudited condensed consolidated financial statements which are included in this prospectus. The summary consolidated financial data has been restated for all periods presented to reflect the business combination of Concord and Electronic Payment Services on February 26, 1999, which was accounted for as a pooling of interests. The summary consolidated financial data for 1998 and 1997 has also been restated to reflect our acquisition in 1998 of Digital Merchant Systems of Illinois, Inc. and American Bankcard International, Inc. which was accounted for as a pooling of interests; prior periods were not restated because the results of the acquired companies for those periods were immaterial. Net income per share has been restated for all periods presented to reflect all stock splits through December 31, 1998, as well as to conform to the requirements of Financial Accounting Standards Board Statement No. 128, "Earnings Per Share." The unaudited financial information includes all adjustments consisting of normal recurring accruals that we consider necessary for a fair presentation of our consolidated financial position and consolidated results of operations for the periods reflected. The column "As Adjusted for the Offering" reflects the sale of 2,000,000 shares by Concord at an assumed public offering price of $28.625, after deducting underwriting discounts and commissions and estimated offering expenses.
Three Months Year Ended December 31, Ended March 31, ------------------------------------------------ ----------------- 1994 1995 1996 1997 1998 1998 1999 -------- -------- -------- -------- -------- -------- -------- (in thousands) (unaudited) Income Statement Data: Revenue................. $258,125 $295,552 $355,459 $490,030 $634,511 $134,666 $170,234 Cost of operations...... 184,958 197,394 241,273 340,770 446,515 95,029 120,849 Selling, general and administrative expenses............... 32,036 47,907 42,811 50,008 51,185 13,100 12,368 Acquisition expenses and restructuring charges.. -- -- -- -- -- -- 34,810 -------- -------- -------- -------- -------- -------- -------- Operating income........ 41,131 50,251 71,375 99,252 136,811 26,537 2,207 Interest income (expense), net......... (16,983) (13,766) (10,296) (1,789) 3,703 749 1,732 -------- -------- -------- -------- -------- -------- -------- Income before taxes..... 24,148 36,485 61,079 97,463 140,514 27,286 3,939 Income taxes............ 9,680 15,627 23,347 37,771 51,819 9,937 6,807 -------- -------- -------- -------- -------- -------- -------- Net income.............. $ 14,468 $ 20,858 $ 37,732 $ 59,692 $ 88,695 $ 17,349 $ (2,868) ======== ======== ======== ======== ======== ======== ======== Basic earnings per share.................. $ 0.13 $ 0.18 $ 0.32 $ 0.47 $ 0.69 $ 0.14 $ (0.02) Diluted earnings per share.................. $ 0.13 $ 0.18 $ 0.31 $ 0.46 $ 0.67 $ 0.13 $ (0.02) ======== ======== ======== ======== ======== ======== ======== Weighted average shares. 111,542 113,081 116,291 126,592 127,693 127,486 128,014 Adjusted weighted average shares and assumed conversions.... 113,912 116,854 120,189 129,937 131,947 130,849 133,083 ======== ======== ======== ======== ======== ======== ======== Other Data: Number of transactions processed (in millions).............. 1,427 1,694 2,065 2,549 3,203 NA NA
4
As of March 31, 1999 -------------------- As Adjusted for the Actual Offering -------- ----------- (in thousands, unaudited) Balance Sheet Data: Working capital............................................ $290,255 $344,115 Total assets............................................... 819,637 873,497 Long-term debt, less current maturities.................... 173,750 173,750 Total stockholders' equity................................. 363,049 416,909
5 RISK FACTORS Before you invest in our common stock, you should be aware that there are various risks, including those described below, that could have a material adverse effect on our business, including our operating results and financial condition. The risk factors listed in this section, as well as any cautionary language in this prospectus, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. You should carefully consider these risk factors, together with all of the other information included in this prospectus, before you decide whether to purchase shares of our common stock. 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 our Chief Executive Officer, our President, the President of Electronic Payment Services and a number of other 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. See "Business--Employees." If we are unsuccessful in fully integrating the operations of Electronic Payment Services, our financial condition and operating results could be adversely affected We cannot assure you that we will be able to integrate the operations of Electronic Payment Services without encountering difficulties or experiencing the loss of key Electronic Payment Services employees or customers, or that the benefits expected from such integration will be realized. If we are unsuccessful in fully integrating the operations of Electronic Payment Services, our financial condition and operating results could be adversely affected. See "Business--Acquisition of Electronic Payment Services." Changes in card association rules 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. 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 in the provision of transaction processing services. Further, with respect to our EBT business, the governmental issuers of the benefits set the rules and the financial institutions or processors hired by the government administer them. It is possible that the rules relating to our credit card, debit or EBT operations will be changed or administered in such a way as to adversely affect our operations. Changes in card association fees could increase our costs From time to time, VISA, MasterCard, Discover, American Express and Diners Club increase the organization and/or processing fees (known as interchange fees) that they charge. For example, in April 1999 VISA and MasterCard increased their fees by up to 10%, which was the largest increase in recent years. Most of our agreements with merchant customers permit fee increases to us to be passed on to the merchants. However, 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. 6 Revenue growth in ATM processing could slow because of restrictions on surcharging or a decline in the deployment of ATMs Revenue from "convenience fees" or "surcharges" imposed by owners of ATMs, including Concord, 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 both the federal and state levels to limit surcharges although restrictions have been implemented in only a limited number of jurisdictions to date. To the extent that ATM deployment declines due to the enactment of statutory restrictions on surcharges, fewer favorable retail ATM locations being available or other factors, demand for our ATM processing services may not continue to grow at recent rates or may decline. We are dependent on our VISA and MasterCard registrations We are registered with VISA and MasterCard as a certified processor and a member. In order to be designated as a certified processor with VISA and MasterCard and to be a member, we must continue to adhere to the standards of the VISA and MasterCard credit card associations. These standards are set by the respective member financial institutions of VISA and MasterCard, some of which are our competitors. In the event we fail to comply with these standards, our designation as a certified processor or status as a member could be suspended or terminated. We cannot assure you that VISA and MasterCard will maintain our registrations or that the current VISA and MasterCard 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 the VISA or MasterCard rules that prevent our registration or limit our ability to provide transaction processing and marketing services for VISA or MasterCard, would have an adverse effect on our ability to operate and our financial performance. We are subject to the credit risk of our merchant customers In the event a billing dispute between a credit card holder and a merchant is not resolved in favor of the merchant, the transaction is charged back to the merchant, and the purchase price is refunded to the cardholder. If that merchant files for bankruptcy or is otherwise unable or unwilling to pay, we must bear the credit risk for the full transaction amount. 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 financial condition and operating results. 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. We attempt to minimize our exposure to merchant fraud risk by conducting a credit review of a prospective merchant and monitoring the merchant's practices on an ongoing basis. We are also able to suspend a merchant's daily settlement if we suspect fraudulent activity. Nonetheless, 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 financial condition and operating results. Any significant Year 2000 code problem which arises, if not managed appropriately by us, our vendors, our customers, the networks or any other entities with which we interface, could have an adverse effect on our business The Year 2000 issue generally describes the various problems that may result from the improper processing of dates and date-sensitive transactions by computers and other equipment as a result of computer hardware and software using two digits to identify the year in a date. The failure to properly process dates could result in network and system failures or miscalculations causing disruptions in operations including, among other things, a temporary inability to process transactions, send invoices or engage in other routine 7 business activities. A failure of our customers or vendors, particularly telecommunications carriers, to cause their software and systems to be Year 2000 compliant could have a material adverse effect on us and on our ability to meet our obligations. Until the Year 2000 occurs, we will not know for sure that all systems will then function adequately. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Year 2000 Issues." We face significant and increasing competition in each of our lines of business The market for credit, debit and EBT card transaction processing services is highly competitive. The level of competition has increased significantly in recent years and this trend is expected to continue. Management estimates that the three largest credit and debit card processors account for roughly 50% of the total credit and debit card sales volume and that a single competitor accounts for well in excess of 50% of the total dollar volume of payment transaction processing for the trucking industry. Another single competitor accounts for in excess of 50% of the total dollar volume of check verifications. In addition, competitors to our MAC(R) network, which consist of other national and regional ATM networks, continue to consolidate as large banks merge and combine their ATM networks and shared ATM networks continue to combine into larger super-regional conglomerates. The continued expansion of the national debit networks operated by VISA and MasterCard also places increasing competitive pressure on other networks as banks seek to consolidate their network affiliations. Several of our competitors and potential competitors have greater capital, management, marketing and technological resources than we have, and we cannot assure you that we will continue to be able to compete successfully with such entities. In addition, increased competitive pricing pressures, including a possible reduction in transaction fees charged as a result of any increase in competition, would adversely affect our margins and may have an adverse effect on our financial condition and results of operations. See "Business--Competition." We could lose network service business if a new VISA debit card product is successful In 1998, VISA announced the introduction of an on-line debit card product, VISA Check Card II, that would compete with other on-line debit cards but would bear a higher card issuer reimbursement fee than is provided by most other networks, including the MAC(R) network we operate. The significant increase in the issuer reimbursement fee may act as an incentive for bank debit card issuers to issue the VISA Check Card II. Further, as proposed, the VISA product would not permit some competing network brands, such as MAC(R), to also appear on the card. If VISA successfully induces banks to issue this card in replacement of debit cards participating in the MAC(R) network, we could experience a loss of network service business. Loss of key customers could reduce our revenue and net income Like our competitors and as a result of our competitive business environment, we experience some turnover of customers. Attrition is due to several factors, including business closures and losses to competitors. Our contracts for credit and debit card and/or ATM processing services typically have terms of two to five years duration and renew automatically for successive one-year terms unless expressly terminated. However, we cannot assure you that any of these contracts will be allowed to renew or, if renewed, continued upon favorable terms. If they are not renewed, it will be unlikely that we would be able to reduce our costs in proportion to the lost revenue because many of our costs are fixed. Increased attrition could have an adverse effect on our revenue and net income. Continued consolidation in the banking and retail industries could adversely affect our growth . Our ATM processing services business could be adversely affected. As banks consolidate, our ability to successfully offer our ATM processing services will depend in part on whether the institutions that survive those consolidations are willing to outsource their ATM processing to third-party vendors like us, and whether those institutions have pre- existing relationships with any of our competitors. With respect to network services, larger institutions with more geographically dispersed customer bases 8 may wish to consolidate their network participation with fewer networks having the broadest geographic coverage and best service offerings. As regional networks continue to consolidate, 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. . We could lose customers and fee revenue could decrease. Continued consolidation in the retail industry, which makes up a substantial portion of our customer base, 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 revenue for us. Risks related to acquisitions Since the beginning of 1998 we have completed three acquisitions. Through these acquisitions and our other investments we have expanded our sales force and strengthened our breadth of service offerings. 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. Acquisitions involve risks that could cause our actual growth to differ from our expectations. For example: . We may not be able to continue to identify suitable acquisition candidates or to complete acquisitions on favorable terms. . 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 and our operating results could be adversely affected during the integration process. . We could incur additional indebtedness to finance acquisitions. Changes in rules and regulations governing financial institutions could limit our business We are a bank holding company subject to regulation under the Bank Holding Company Act of 1956 and to regulation by the Board of Governors of the Federal Reserve System (Federal Reserve). 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. The restrictions imposed by these and other laws governing the activities of national banks, savings banks and their holding companies and related regulations and restrictions imposed by these regulatory agencies limit 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 non-bank-related activities . non-bank mergers and acquisitions . dividends by banking entities . intercompany transactions Material changes in applicable federal or state regulation of financial institutions could increase 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. Furthermore, we are subject to the rules and regulations of the various credit card and debit card associations and networks which, among other things, prescribe capital requirements. 9 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, and our business has benefited from our ability to offer processing and payment services in line with the most recent technological improvements. We are committed to maintain our ability to customize processing and payment services to a wide variety of merchant electronic payment equipment, communication protocols, new technologies and customer processing needs. We cannot assure you, however, 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. We are dependent on third-party vendors for our operations Our processing services are dependent upon long-distance and local telecommunications carriers and access to telecommunications facilities on a 24-hour basis. Telecommunications facilities are susceptible to interruption by natural disasters. Although we maintain a disaster response plan which we consider adequate and which we regularly review, and although we have operated following natural disasters in the past without interruption of our processing services, it is possible that a natural disaster could cause extensive or long- term damage that interrupts our processing services or causes us to incur substantial additional expense to avoid interruption of services, either of which could have an adverse effect on our operations and financial condition. If additional state taxes are imposed on us, our financial condition and results of operations 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 financial condition and results of operations could be adversely affected. Shares eligible for future sale could adversely affect the market price of our common stock Sales of a substantial number of shares of our common stock in the public market following this offering could adversely affect the prevailing market price of the common stock and could impair Concord's ability to raise additional equity capital in the future. Upon completion of this offering, Concord will have 130,446,732 shares of common stock outstanding (based on outstanding shares as of May 14, 1999, assuming the underwriters do not exercise their over-allotment option and excluding 14,842,613 shares issuable upon exercise of options outstanding as of May 14, 1999). Of these shares, 121,005,515 shares (assuming the selling stockholders sell all of their 28,963,125 shares offered in this offering) will be freely tradable without restriction or further registration under the Securities Act of 1933 unless purchased by affiliates of Concord, as that term is defined in Rule 144 under the Securities Act. Of the remaining shares, approximately 4,425,000 shares were issued in connection with our acquisition of Digital Merchant Systems and American Bankcard International to the sole stockholder of those entities without registration under the Securities Act and are thus restricted shares as that term is defined in Rule 144. We have previously registered those shares for resale to the public. That person has not sold any of his shares under such registration and has agreed that, during the period beginning from May 10, 1999 and continuing to and including the date 90 days after the date of this prospectus, he will not, subject to limited exceptions, offer, sell or otherwise dispose of those shares without the prior written consent of Salomon Smith Barney. After the expiration of the lock-up period, those shares may be resold freely to the public. An additional 4,320,217 shares are held by directors and executive officers of Concord who have also agreed not to sell these shares for 90 days after the date of this prospectus. Following the expiration of the lock-up period, these shares will be eligible for sale in the public market subject to compliance with the volume limitations and other conditions of 10 Rule 144 applicable to securities held by affiliates. In addition, each of the selling stockholders has agreed not to sell or distribute any shares of our common stock except under this offering within seven days prior to, or 90 days after, the date of this prospectus. See "Underwriting." Furthermore, an additional 24,100,102 shares that may be issued in the future upon exercise of options granted and to be granted under our stock option plans have been registered under the Securities Act and therefore will be freely tradable when issued (subject to the volume limitations and other conditions of Rule 144 in the case of shares to be sold by affiliates of Concord). Options for the purchase of 14,842,613 shares were outstanding as of May 14, 1999, of which options for 7,117,688 shares were exercisable at that date. Of these exercisable options, 4,362,080 shares are covered by the lock-up period referred to above. 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, and there can be no assurance that an active market for our common stock can be sustained. See "Price Range of 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. Forward-looking statements This prospectus includes forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions, including those set forth in this section and the following sections of this prospectus: . ""Prospectus Summary--Investment Highlights" . ""Management's Discussion and Analysis of Financial Condition and Results of Operations" . ""Business--Strategy" and "--Competition" These forward-looking statements involve substantial risks and uncertainties which we believe are within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "expect," "anticipate," "intend," "plan," "believe," "estimate" and variations of such words and similar expressions are intended to identify such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this prospectus might not occur. USE OF PROCEEDS We will not receive any of the proceeds from the sale of common stock by the selling stockholders. The net proceeds to Concord from the sale of 2,000,000 shares of common stock in this offering at an assumed public offering price of $28.625 per share are estimated to be approximately $54 million, or $181 million if the underwriters exercise their over-allotment option in full, after deducting underwriting discounts and estimated offering expenses payable by Concord. We intend to use the net proceeds from this offering for general corporate purposes, including working capital, to augment our equity capital as our processing transaction volume increases and potentially for debt repayment. Pending application of the proceeds to the uses we have specified above, we intend to invest the net proceeds of the offering in various securities, including those issued by the United States government, its agencies and instrumentalities and/or interest-bearing obligations of states and municipalities. 11 PRICE RANGE OF COMMON STOCK Our common stock is traded on the Nasdaq National Market under the symbol "CEFT." The table below sets forth, for the periods presented, the range of high and low sales prices for our common stock as reported on the Nasdaq National Market.
Common Stock Price ------------------- High Low --------- --------- Year ended December 31, 1997: First Quarter...................................... $ 19.33 $ 12.50 Second Quarter..................................... 17.92 10.83 Third Quarter...................................... 20.00 17.17 Fourth Quarter..................................... 21.75 14.00 Year ended December 31, 1998: First Quarter...................................... 23.44 13.31 Second Quarter..................................... 26.50 19.00 Third Quarter...................................... 28.25 19.38 Fourth Quarter..................................... 42.38 19.00 Year ending December 31, 1999: First Quarter...................................... 43.88 25.38 Second Quarter (through May 14, 1999).............. 36.50 28.19
On May 14, 1999, the closing price of our common stock as reported on the Nasdaq National Market was $28.625 per share. As of March 31, 1999, we had approximately 337 holders of record of common stock. DIVIDEND POLICY 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 dividends in the foreseeable future. 12 CAPITALIZATION The following table sets forth our capitalization as of March 31, 1999 and as adjusted to reflect the sale of common stock offered by us in this offering at an assumed public offering price of $28.625, after deducting underwriting commissions and estimated offering expenses payable by us. At our annual stockholders meeting which is scheduled to be held on May 20, 1999, our stockholders will vote on whether to increase the authorized number of shares of our common stock from 200 million shares to 500 million shares. You should read this information in conjunction with our consolidated financial statements and the notes to those financial statements appearing elsewhere in this prospectus.
As of March 31, 1999 -------------------- As Adjusted for the Actual Offering -------- ----------- (in thousands) Short-term borrowings, including current portion of long- term debt................................................ $ 42,000 $ 42,000 Long-term debt............................................ $173,750 $173,750 Stockholders' equity: Common Stock, $0.33 1/3 par value per share, 200,000 shares authorized; 128,330 shares issued and outstanding, actual; 130,330 shares issued and outstanding, as adjusted............................... 42,777 43,444 Additional paid-in capital.............................. 61,388 114,581 Retained earnings and accumulated other comprehensive income................................................. 258,884 258,884 -------- -------- Total stockholders' equity............................ 363,049 416,909 -------- -------- Total capitalization................................ $536,799 $590,659 ======== ========
13 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data presented below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and notes to those financial statements included and incorporated by reference elsewhere in this prospectus. The selected consolidated financial data as of December 31, 1997 and 1998 and for the years ended December 31, 1996, 1997 and 1998 have been derived from our consolidated financial statements audited by Ernst & Young LLP, which are included in this prospectus. The selected consolidated financial data as of December 31, 1994, 1995 and 1996 and for the years ended December 31, 1994 and 1995 have been derived from financial statements audited by Ernst & Young LLP, which are not included in this prospectus. The selected consolidated financial data as of March 31, 1999 and for the three months ended March 31, 1998 and 1999 have been derived from our unaudited condensed consolidated financial statements which are included in this prospectus. The selected consolidated financial data has been restated for all periods presented to reflect the business combination of Concord and Electronic Payment Services on February 26, 1999, which was accounted for as a pooling of interests. The selected consolidated financial data for 1998 and 1997 has also been restated to reflect our acquisition in 1998 of Digital Merchant Systems and American Bankcard International which was accounted for as a pooling of interests; prior periods were not restated because the results of the acquired companies for those periods were immaterial. Net income per share has been restated for all periods presented to reflect all stock splits through December 31, 1998, as well as to conform to the requirements of Financial Accounting Standards Board Statement No. 128, "Earnings Per Share." The unaudited financial information includes all adjustments, consisting of normal recurring accruals, that we consider necessary for a fair presentation of our consolidated financial position and consolidated results of operations for the periods reflected.
Three Months Ended Year Ended December 31, March 31, ------------------------------------------------ ------------------- 1994 1995 1996 1997 1998 1998 1999 -------- -------- -------- -------- -------- --------- --------- (in thousands) (unaudited) Income Statement Data: Revenue................. $258,125 $295,552 $355,459 $490,030 $634,511 $ 134,666 $ 170,234 Cost of operations...... 184,958 197,394 241,273 340,770 446,515 95,029 120,849 Selling, general and administrative expenses............... 32,036 47,907 42,811 50,008 51,185 13,100 12,368 Acquisition expenses and restructuring charges.. -- -- -- -- -- -- 34,810 -------- -------- -------- -------- -------- --------- --------- Operating income........ 41,131 50,251 71,375 99,252 136,811 26,537 2,207 Interest income (expense), net......... (16,983) (13,766) (10,296) (1,789) 3,703 749 1,732 -------- -------- -------- -------- -------- --------- --------- Income before taxes..... 24,148 36,485 61,079 97,463 140,514 27,286 3,939 Income taxes............ 9,680 15,627 23,347 37,771 51,819 9,937 6,807 -------- -------- -------- -------- -------- --------- --------- Net income.............. $ 14,468 $ 20,858 $ 37,732 $ 59,692 $ 88,695 $ 17,349 $ (2,868) ======== ======== ======== ======== ======== ========= ========= Basic earnings per share.................. $ 0.13 $ 0.18 $ 0.32 $ 0.47 $ 0.69 $ 0.14 $ (0.02) Diluted earnings per share.................. $ 0.13 $ 0.18 $ 0.31 $ 0.46 $ 0.67 $ 0.13 $ (0.02) ======== ======== ======== ======== ======== ========= ========= Weighted average shares. 111,542 113,081 116,291 126,592 127,693 127,486 128,014 Adjusted weighted average shares and assumed conversions.... 113,912 116,854 120,189 129,937 131,947 130,849 133,083 ======== ======== ======== ======== ======== ========= ========= Other Data: Number of transactions processed (in millions).............. 1,427 1,694 2,065 2,549 3,203 NA NA
14
As of December 31, As of --------------------------------------------- March 31, 1994 1995 1996 1997 1998 1999 -------- -------- -------- -------- -------- ----------- (in thousands) (unaudited) Balance Sheet Data: Working capital......... $(33,519) $ 32,911 $ 69,860 $148,987 $285,826 $290,255 Total assets............ 314,366 396,144 554,462 619,196 784,118 819,637 Long-term debt, less current maturities..... 201,371 175,978 150,561 153,329 173,000 173,750 Total stockholders' equity (deficiency).... (73,450) 45,339 182,126 260,544 360,535 363,049
15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion together with our consolidated financial statements and the notes to those financial statements which are attached to this prospectus. The following discussion reflects the business combination of Concord and Electronic Payment Services on February 26, 1999 which was accounted for as a pooling of interests. This prospectus contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward- looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this prospectus, particularly in "Risk Factors." In addition to the other information in this prospectus, you should carefully consider the following discussion and the information set forth under "Risk Factors" in evaluating us and our business before purchasing our common stock in this offering. Overview Concord EFS, Inc. is a fully integrated leading provider of electronic transaction authorization, processing, settlement and funds transfer services on a nationwide basis. We focus on marketing our services to supermarket chains and multiple lane retailers, financial institutions, petroleum and convenience stores, grocery stores, the trucking industry and other retailers. Our primary activity is merchant card services, in which we provide integrated electronic transaction services for credit card, debit card and EBT card transactions. These transaction services include data capture, authorization and settlement services for over 400,000 point-of-sale terminals. We also provide ATM services, consisting of owning and operating the MAC(R)-branded EFT network and processing for approximately 35,000 ATMs nationwide, of which we own approximately 800. On June 30, 1998, we completed a merger with Digital Merchant Systems and American Bankcard International, which are independent sales organizations for the transaction processing industry. The merger was accounted for as a pooling of interests in which we exchanged approximately 4.4 million of our shares for all of the outstanding common stock of Digital Merchant Systems and American Bankcard International. The financial statements of these acquired companies prior to January 1, 1997 were immaterial for restatement; accordingly, the results of these companies affected only our 1997 and 1998 financial statements. See our consolidated financial statements and the notes to those financial statements included in this prospectus. On February 26, 1999 we completed our acquisition of Electronic Payment Services, a company which provides transaction processing services to financial institutions and retailers throughout the United States. See "Business--Acquisition of Electronic Payment Services, Inc." The acquisition was accounted for as a pooling of interests in which we exchanged 30.1 million of our shares for all of the outstanding common stock of Electronic Payment Services. We incurred $34.8 million of expenses related to the acquisition in the first quarter of 1999. These expenses included communication conversion costs, advisory fees and asset write-offs. Management continues to review potential operational synergies from the acquisition, such as duplicate facilities, computer hardware and software and other contractual relationships. See our consolidated financial statements and the notes to those financial statements included in this prospectus. Components of Revenue and Expenses The substantial majority of our revenue (66.7% in 1998 and 63.5% in 1997) is generated from fee income related to merchant card services. These services include: . the processing of credit card transactions for all major credit card brands including VISA, MasterCard, American Express, Discover and Diners Club; . the processing of debit card transactions for financial institutions issuing these and similar cards; and 16 . the provision of electronic payment services to supermarket chains and multiple lane retailers, financial institutions, petroleum and convenience stores, grocery stores, trucking companies and other retailers. Revenue from merchant card services includes primarily discount fees charged to merchants, which are a percentage of the dollar amount of each credit card transaction we process, as well as a flat fee per transaction. The discount fee is negotiated with each merchant and typically constitutes a bundled rate for the transaction authorization, processing, settlement and funds transfer services we provide. This revenue and fees from other transactions are recognized at the time the merchants' transactions are processed. The other principal component of our revenue derives from ATM services (approximately 31.3% in 1998 and 34.0% in 1997). ATM services revenue consists of fee income and other surcharges charged for proprietary ATMs and processing fees for third party ATMs. The balance of our revenue is derived principally from check verification and authorization services, sales of point-of-sale terminals and payroll processing services. The following table is a listing of revenue by service type for the periods indicated:
Three Months Year Ended December 31, Ended March 31, -------------------------- ---------------- 1996 1997 1998 1998 1999 -------- -------- -------- ------- -------- (in thousands) Merchant card services.......... $207,211 $311,167 $423,267 $85,203 $112,326 ATM services.................... 135,507 166,841 198,398 45,202 52,449 Other........................... 12,741 12,022 12,846 4,261 5,459
Cost of operations includes all costs directly attributable to our provision of services to our customers. The most significant component of cost of operations is interchange and assessment fees, which are amounts charged by the credit and debit card associations. Interchange and assessment fees are billed primarily as a percentage of dollar volume processed and, to a lesser extent, as a per-transaction fee. Cost of operations also includes telecommunications costs, occupancy costs, depreciation, the cost of equipment leased and sold, the cost of operating our MAC(R) network and other miscellaneous merchant supplies and services expenses. Our selling, general and administrative expenses include salaries and wages and other general administrative expenses (including certain amortization costs). Results of Operations The following table sets forth for the periods indicated the percentage of revenue represented by certain items on our consolidated statement of income.
Three Months Year Ended December 31, Ended March 31, ------------------------- ---------------- 1996 1997 1998 1998 1999 ------- ------- ------- ------- ------- Revenue....................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of operations............ 67.9 69.5 70.4 70.6 71.0 Selling, general and administrative expenses...... 12.0 10.2 8.1 9.7 7.3 Acquisition expenses and restructuring charges........ -- -- -- -- 20.4 ------- ------- ------- ------- ------- Operating income.............. 20.1 20.3 21.5 19.7 1.3 Interest income (expense), net.......................... (2.9) (0.4) 0.6 0.6 1.0 ------- ------- ------- ------- ------- Income before taxes........... 17.2 19.9 22.1 20.3 2.3 Income taxes.................. 6.6 7.7 8.2 7.4 4.0 ------- ------- ------- ------- ------- Net income (loss)............. 10.6% 12.2% 14.0% 12.9% (1.7%) ======= ======= ======= ======= =======
17 First Quarter 1999 Compared to First Quarter 1998 Revenue increased 26.4% to $170.2 million in the first quarter of 1999 from $134.7 million in the first quarter of 1998. Of first quarter 1999 revenue, merchant card services, ATM services and other services accounted for 66.0%, 30.8% and 3.2%, respectively. Revenue from merchant card services increased 31.8%, due primarily to increased transactional volumes. Increased volumes resulted from the addition of new merchants, the widening acceptance of debit and EBT card transactions at new and existing merchants and higher credit card transaction processing fees. The increase in fees was a pass-through to customers of higher interchange processing fees that were assessed by the credit card associations in April 1998. ATM services revenue increased 16.0%; the placement of new ATMs, new ATM processing customers and increases in transactional volumes accounted for the increase. Other revenue increased 28.1% due to increased terminal sales primarily to our new merchants. Cost of operations increased in the first quarter of 1999 to 71.0% of revenue compared to 70.6% in the first quarter of 1998. While credit card association interchange fees and certain other operating expenses were higher as a percentage of revenue in the first quarter of 1999 than in the first quarter of 1998, this was largely offset by a decrease, as a percentage of revenue, in payroll expenses. Excluding the acquisition expenses, restructuring charges and related tax items, net income, as a percentage of revenue, increased to 14.1% in the first quarter of 1999 compared to 12.9% in first quarter of 1998. The primary factor in this increase was that selling, general and administrative expenses decreased from $13.1 million or 9.7% of revenue in the first quarter of 1998 to $12.4 million or 7.3% of revenue in 1999 due to certain non-recurring expenses in the first quarter of 1998, as well as a decrease in personnel-related costs in the first quarter of 1999. Net loss as a percentage of revenue was (1.7)% in the first quarter of 1999. Net income as a percentage of revenue was 12.9% in the first quarter of 1998. The primary factor in the change was the acquisition expenses and restructuring charges incurred in the first quarter of 1999 in connection with the acquisition of Electronic Payment Services. The total pre-tax charges were $34.8 million, as summarized below: Acquisition-related expenses........................................ $10.5 Communication conversion costs ..................................... 12.4 Asset write-offs ................................................... 8.2 Off-line debit conversion........................................... 2.8 Severance and other................................................. 0.9 ----- $34.8 =====
Acquisition-related expenses were $10.5 million, consisting primarily of investment banking fees, as well as legal, accounting, registration and other fees and expenses. In order to create a single communication infrastructure for our transaction processing businesses, we adopted a plan to convert Electronic Payment Services' communication network to Concord's. As the plan is implemented over the course of the next year, we expect to achieve operational and cost efficiencies. The accrual for the plan of conversion was $12.4 million. We incurred asset write-offs of $8.2 million. For competitive reasons, we have deemphasized certain geographic areas of the MAC(R) network, causing impairment to the related intangible assets of approximately $2.8 million. After review of certain Electronic Payment Services' customer lists and the undiscounted cash flows estimated to be generated by the related intangible assets, we recognized an impairment loss of approximately $3.6 million. The remainder of the write-off was for assets that are no longer used or supported under revised marketing and business plans. Electronic Payment Services currently uses a third-party bank for its off- line debit processing. During the quarter, we adopted a plan to take this process in-house and we accrued the related restructuring charges of $2.8 million. 18 In addition to the pre-tax charges, we incurred a tax component write-off of $1.3 million for impaired state tax net operating losses of Electronic Payment Services. Combined with the non-tax deductibility of certain acquisition costs, these items increased the effective tax rate in the first quarter of 1999. Calendar 1998 Compared to Calendar 1997 Revenue increased 29.5% to $634.5 million in 1998 from $490.0 million in 1997. Merchant card services, ATM services and other services accounted for 66.7%, 31.3% and 2.0%, respectively, of 1998 revenue. Revenue from merchant card services increased 36.0%, due primarily to increased transactional volumes. Increased volumes resulted from the addition of new merchants and the widening acceptance of debit and EBT card transactions at new and existing merchants. Higher credit card transaction processing fees also contributed to the increase in revenue. The increase in fees was a pass-through of higher interchange fees that we were assessed by the credit card associations. ATM services revenue increased 18.9%; the placement of new ATMs, new ATM processing customers and increases in transactional volumes accounted for the increase. Other revenue increased 6.9% in 1998. Cost of operations increased in 1998 to 70.4% of revenue compared to 69.5% in the prior year. While credit card association interchange fees were higher as a percentage of revenue in 1998 than in 1997, this was largely offset by a decrease, as a percentage of revenue, in payroll expenses, depreciation and amortization and other operating expenses. Net income as a percentage of revenue increased in 1998 to 14.0% from 12.2% in the prior year. The primary component of the net margin improvement was due to selling, general and administrative expenses increasing only 2.4% from $50.0 million in 1997 to $51.2 million in 1998. As a result of the slower growth rate in these expenses, they were 8.1% of revenue in 1998 versus 10.2% in 1997. A second component of the net margin improvement was the combination of net interest income (expense) and income taxes. Net interest income increased to $3.7 million in 1998 from a net interest expense of $1.8 million in 1997. This resulted from an increase in our average investment securities portfolio, to $227.8 million in 1998 from $154.2 million in 1997, partially offset by an increase in our average total debt to $63.0 million in 1998 from $13.2 million in 1997. The increases were related, since we incurred $45.0 million in new debt, primarily notes payable to the Federal Home Loan Bank, to pay down $25.7 million of higher rate debt and purchase higher yielding investment securities. We also increased our allocation of municipal investment securities within the investment portfolio to 41.0% at year-end 1998 from 18.0% at year-end 1997. Municipal investment securities are generally tax-exempt for federal income tax purposes and have lower interest rates than taxable investment securities. This largely explains the decrease in our overall effective tax rate to 36.9% in 1998 from 38.8% in 1997. Calendar 1997 Compared to Calendar 1996 Revenue increased 37.9% to $490.0 million in 1997 from $355.5 million in 1996. Merchant card services, ATM services and other services accounted for 63.5%, 34.0% and 2.5%, respectively, of 1997 revenue. Merchant card services revenue increased 50.2% in 1997, due primarily to increased transactional volumes. Increased volumes resulted from the addition of new merchants and increased credit and debit card usage at existing merchants. ATM services revenue increased 23.1% in 1997 over 1996 due to an increase in the number of ATMs for which we are the transaction processor and an increase in the application of surcharges in ATM transactions. Other revenue decreased 5.6%. Costs of operations increased to $340.8 million or 69.5% of revenue in 1997 compared to $241.3 million or 67.9% of revenue in 1996. The margin increase was due primarily to the inclusion of the expenses of Digital Merchant Systems and American Bankcard International, which had been immaterial in 1996. Selling, general and administrative expenses were $50.0 million in 1997 compared to $42.8 million in 1996 as we grew our transaction processing business. They nonetheless decreased as a percentage of revenue to 10.2% in 1997 from 12.0% in 1996. Net interest expense decreased to $1.8 million in 1997 from $10.3 million in 1996. This 19 resulted from an increase in our average investment securities portfolio to $154.2 million in 1997 from $51.9 million in 1996, only partially offset by increased interest expense resulting from an increase in average total debt to $13.2 million in 1997 from $1.2 million in 1996. Our overall effective tax rate remained relatively constant. These were the primary factors for the increase in net income as a percentage of revenue to 12.2% in 1997 from 10.6% in 1996. Liquidity and Capital Resources Concord has consistently generated significant resources from operating activities. In 1998, 1997 and 1996 operating activities generated cash of $167.6 million, $79.6 million, and $139.4 million, respectively. Cash generated from operating activities can vary due to fluctuations in accounts receivable and accounts payable balances which are impacted by increases in settlement volume from one year to the next, as well as the timing of settlements. For example, a one day timing issue amounted to a difference of $35.1 million between 1996 and 1997. 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 1998, we invested approximately $93.6 million in securities, net of sales and maturities, and $65.2 million in capital expenditures, which were primarily for communications equipment, point-of-sale terminals, new computer equipment and capitalized software. Depending on the growth of our business, we currently expect our capital expenditures in 1999 to be somewhat lower than 1998. In addition to net cash provided by operating activities, we have financed ourselves historically through issuances of equity, the exercise of stock options and borrowings. We issued 3.45 million shares of common stock in October 1996 and received proceeds of $87.7 million. Of those proceeds, $30 million was contributed to EFS National Bank in order for it to remain in compliance with the guidelines of credit card associations as its processing transaction volume increased in 1997 and 1998. Stock issued upon exercises of options under Concord's incentive stock option plan provided $6.6 million of additional capital in 1998. 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 $60 million. As of March 31, 1999 and 1998, $17 million and $20 million, respectively, were outstanding on our lines of credit. As of March 31, 1999, we had $80 million of notes payable outstanding to the Federal Home Loan Bank. We also have a note payable to a former stockholder of Electronic Payment Services, of which $118.75 million remained due as of March 31, 1999, to be paid in equal quarterly installments of $6.25 million through 2003. For a further discussion of our debt financing, see Note F to the consolidated financial statements included in this prospectus. As of March 31, 1999, we held securities with a market value of approximately $229.8 million that are available for operating needs or as collateral to obtain additional short-term financing, if needed. We believe that our available credit and cash generated by operations are adequate to meet our capital and operating needs. Effects of Inflation Our assets are primarily monetary, consisting of cash, assets convertible into cash, securities owned and receivables. Because of their liquidity, these assets are not significantly affected by inflation. We believe that replacement costs of equipment, furniture and leasehold improvements will not materially affect operations. However, the rate of inflation affects our expenses, such as those for employee compensation and communications, which may not be readily recoverable in the price of services offered by us. 20 Year 2000 Issues The following discussion of the cost, status and timing of implementation of our Year 2000 project is based on our best estimates, which are derived using numerous assumptions of future events. We cannot guarantee that these assumptions will be correct or that these estimates will be accurate. Therefore, actual results could materially differ from those described below. Further, the discussion contains forward-looking statements which are all inherently uncertain. Any number of events might cause different actual results than those that we describe here. Some of the factors that could affect our Year 2000 readiness include: . loss of Concord personnel or outside consultants working on Year 2000 readiness; . any non-Year 2000 readiness of our customers; . any non-Year 2000 readiness of third-party networks and service providers; . failure to conduct or complete joint testing with third parties; . telecommunication disruptions; . failure to locate and correct all relevant application codes; and . undiscovered mistakes in our own Year 2000 readiness planning or implementation. Our Year 2000 preparedness efforts cover both information technology (IT) systems and non-IT systems. Non-IT systems are embedded systems used in the daily operations of buildings and facilities, such as micro controllers in lighting, heating/ventilation/air conditioning, security, elevator, fire, uninterrupted power-supply and other infrastructure systems. IT systems include computer hardware, software and related applications. Our State of Readiness. We have instituted a five-phase plan, in accordance with the Federal Financial Institutions Examination Council guidelines, with the goal of making our IT and non-IT systems function properly with respect to dates in the year 2000 and thereafter. Described below are simplified explanations of these phases, as well as the status of each phase as of March 31, 1999. . Awareness--During this phase we defined overall strategies, we initiated project timelines, formed project teams, defined high level strategies, and identified Year 2000 issues. The awareness phase is 100% complete for all systems. . Assessment--The assessment phase focused on assessing the size and complexity of our Year 2000 problems. During this phase we developed and used corporate inventory databases. We also identified and ranked the inventory according to how mission critical it is to us based on the overall business impact it could have in the event of a failure. Based on these assessments, we then made decisions to modify or re-engineer some systems or software programs. We then determined the activities that would be required to make the modifications and documented those activities using a project notebook, a project plan and a schedule. The assessment phase is 100% complete for all systems. . Renovation--The renovation phase encompassed the code remediation of in- house developed software and third-party developed software. Software code renovations were required on certain of our software systems. During the renovation efforts the Year 2000 teams and committees communicated routinely with the software programmers to monitor and track their progress. The renovation phase is 100% complete for all mission critical systems. . Validation--The validation phase was designed to test the ability of Year 2000 mission critical hardware and software to accurately process date sensitive data (including, but not limited to, calculating, comparing and sequencing) from, into and between the 20th and 21st centuries, including leap year calculations. The testing methodology used detailed test plans and appropriate supporting documentation to facilitate validation for a component or subdivision of a system. Prior to any testing activities we performed baseline processing in order to gather results against which each test was measured. This generally involved processing the individual system or component using current dates 21 and capturing results that we then compared to subsequent test results. Validation of Year 2000 compliance includes an independent review of the results by our internal audit staff and various regulatory agencies, including the Office of the Comptroller of the Currency and the Federal Reserve. We have internally completed the validation phase for all internal mission critical systems, subject to on-going regulatory review. Our objective has always been to test not only all mission critical systems, but also non-mission critical systems to the extent appropriate. We have officially scheduled testing of non-mission critical systems to begin after June 30, 1999. However, we have already tested several non-mission critical systems during the course of testing mission critical systems and we have found all of those tested to be compliant. We estimate that more than 40% of the non-mission critical systems have been tested to date. . Implementation--The implementation phase placed any renovated/validated hardware and software systems into production. The implementation phase for our internal mission critical systems is 100% complete. However, our processing systems also require testing for Year 2000 compliance by external entities, including our customers, credit and debit networks and vendors. As of March 31, 1999, approximately 80% of our external mission critical testing phase was complete. The remaining 20% has been delayed at the request of external entities, but we anticipate the implementation phase for all external mission critical systems to be substantially completed by June 30, 1999. Costs to Address our Year 2000 Issues. We have spent approximately $6.4 million in 1998 and $1.1 million in the three months ended March 31, 1999 on our Year 2000 project. We anticipate spending an additional $3.1 million to substantially complete our Year 2000 compliance project in accordance with our current schedule. These amounts exclude hardware expenditures needed for normal business growth even if the timing of acquisition has been accelerated to facilitate short-term Year 2000 testing or compliance. Third-Party Year 2000 Risks. Although we test third-party mission critical systems in connection with our five-phase Year 2000 plan, we are still subject to risks associated with third-party non-compliance. Long distance telecommunications carriers such as AT&T and MCI provide delivery of the majority of our data and voice communications. If a single or multiple long distance carriers fail, then the potential liability or the lost revenue under this scenario could have an adverse effect on our financial condition and results of operations. In addition, we cannot guarantee that the systems of other companies on which we rely will be fully Year 2000 compliant, and any failure or disruption of our external mission critical systems could also have an adverse effect on our financial condition and results of operations. For example, if a single or multiple credit networks such as VISA or MasterCard experience a failure or severe degradation then we could also be adversely affected since a significant percentage of our revenue are generated through VISA and MasterCard transactions. Our Contingency Plans. We have developed detailed contingency plans that have focused on identifying, restoring, and continuing core business functions and mission-critical systems that pose the greatest risk (including telecommunications and power outage). For example, in the event that our major telecommunications provider (AT&T) has an outage, then backup steps have been outlined in our contingency plans that use a national 800 number portability feature so that all data and voice calls will be routed through an alternate telecommunications provider (MCI). We have also developed contingency plans for all mission critical third party providers and vendor products and services. For example, in the event that a single credit network such as VISA experiences a failure, our authorization process would be to "stand in" for the regional credit network and provide authorizations based on certain predetermined limits. These plans are continuing to be further enhanced, refined and tested during the second quarter of 1999. 22 Quantitative and Qualitative Disclosures About Market Risk Concord's securities are subject to risk resulting from interest rate fluctuations to the extent that there is a difference between the amount of our interest-bearing assets and the amount of interest-bearing liabilities that are prepaid, mature or reprice in specific periods. This risk is mitigated by the fact that approximately 75% of the market value of securities owned were funded through equity rather than debt. The principal objective of our asset/liability activities is to provide maximum levels of net interest income while maintaining acceptable levels of interest rate and liquidity risk and facilitating our funding needs. We utilize an interest rate sensitivity model as the primary quantitative tool in measuring the amount of interest rate risk that is present at the end of each month. The following tables provide comparative information about our financial instruments that are sensitive to changes in interest rates. These tables present 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 utilized, the weighted-average interest rates would have been higher. December 31, 1998
Fair Value at 1999 2000 2001 2002 2003 Thereafter Total 12/31/98 ------- ------- ------- ------- ------- ---------- -------- ---------- (in thousands) Assets: Available-for-sale securities............ $34,705 $ 8,354 $15,956 $ 8,309 $17,624 $191,640 $276,588 $278,398 Average interest rate.. 6.2% 6.5% 4.8% 5.1% 4.8% 5.8% -- -- Liabilities: Short-term borrowings.. $21,000 -- -- -- -- -- $ 21,000 $ 21,000 Average interest rate.. 5.8% -- -- -- -- -- -- -- Long-term debt, including current portion............... $25,116 $25,000 $25,000 $53,000 $35,000 $ 35,000 $198,116 $196,652 Average interest rate.. 6.4% 6.4% 6.4% 6.1% 6.2% 5.4% -- --
December 31, 1997
Fair Value at 1998 1999 2000 2001 2002 Thereafter Total 12/31/97 ------- ------- ------- ------- ------- ---------- -------- ---------- (in thousands) Assets: Available-for-sale securities............ $13,987 $ 8,014 $12,306 $ 7,437 $ 4,461 $87,968 $134,173 $134,334 Average interest rate.. 6.6% 6.5% 6.6% 6.6% 6.5% 6.9% -- -- Held-to-maturity securities............ $ 1,717 $ 4,000 $ 232 $ 7,121 $ 3,375 $36,063 $ 52,508 $ 53,634 Average interest rate.. 7.8% 6.3% 5.4% 6.6% 5.1% 6.9% -- -- Liabilities: Short-term borrowings.. $29,000 -- -- -- -- -- $ 29,000 $ 29,000 Average interest rate.. 5.8% -- -- -- -- -- -- -- Long-term debt, including current portion............... $25,445 $25,329 $25,000 $25,000 $53,000 $25,000 $178,774 $178,666 Average interest rate.. 6.4% 6.4% 6.4% 6.4% 6.1% 6.4% -- --
23 BUSINESS Overview Concord EFS, Inc. is a fully integrated leading provider of electronic transaction authorization, processing, settlement and funds transfer services on a nationwide basis. We focus on marketing our services to supermarket chains and multiple lane retailers, financial institutions, petroleum and convenience stores, grocery stores, the trucking industry and other retailers. Our primary activity is merchant card services, in which we provide integrated electronic transaction services for credit card, debit card and EBT card transactions. These transaction services include data capture, authorization and settlement services for over 400,000 point-of-sale terminals. We also provide ATM services, consisting of owning and operating the MAC(R)-branded EFT network and processing for approximately 35,000 ATMs nationwide, of which we own approximately 800. We have a bank subsidiary, EFS National Bank, which provides us with a number of competitive advantages. . We are a member of the credit and debit card associations and therefore do not have to pay another bank to sponsor us. . We settle our transactions directly, 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 bank for such services. Accordingly, our ownership of EFS National Bank allows us to capture all of the fee revenue and margin generated by each transaction in the electronic payment process. We are one of the few companies offering full credit and debit card processing on a nationwide basis. Our transaction processing services cover all stages of the transaction, from the initial data capture at the point of sale and account verification on our own host computer which permit the sale (known as front-end services), to accounting, reporting and settlement activities which permit billing to the customer (known as back-end services). Acquisition of Electronic Payment Services, Inc. In February 1999, we broadened our service offerings by acquiring Electronic Payment Services, Inc., which owns and operates MAC(R), one of the country's largest EFT networks, provides ATM services to five of the nation's largest banks and is a leading provider of point-of-sale credit card, debit card and EBT processing services to merchants. Electronic Payment Services has a client base of approximately 2,500 customers, comprised of financial institutions and retailers throughout the United States, including many of the largest banks, petroleum companies and largest supermarkets. In 1998, Electronic Payment Services processed over 2.7 billion transactions. The addition of Electronic Payments Services' strong front-end point-of-sale capabilities to our established back-end settlement business enables us to offer a more comprehensive, fully integrated set of services to our customers. Electronic Payment Services' ATM business brings to us strong relationships with financial institutions which benefit our traditional merchant acquiring business by providing us opportunities to purchase or serve in an agent capacity for banks' merchant portfolios. In addition to the revenue opportunities presented by the acquisition of Electronic Payment Services, we believe that there are also significant opportunities to reduce expenses. We incurred $34.8 million of expenses related to the acquisition in the first quarter of 1999. These expenses included communication conversion costs, advisory fees and asset write-offs. Management continues to review potential operational synergies from the acquisition, such as duplicate facilities, computer hardware and software and other contractual relationships. We also believe that our enhanced scale should enable us to receive better pricing in several areas of our business, including fees charged by telecommunications and other technology vendors. 24 The acquisition of Electronic Payment Services was accounted for as a pooling-of-interests in connection with which we issued approximately 30.1 million shares of our common stock to former Electronic Payment Services stockholders. The selling stockholders listed in the table under the heading "Principal and Selling Stockholders--Beneficial Ownership" were all stockholders of Electronic Payment Services and obtained their shares of our common stock in connection with our acquisition of Electronic Payment Services. Industry Overview The transaction processing industry provides merchants with credit, debit and EBT payment processing services and provides consumers and financial institutions with ATM services. The following factors have contributed to the rapid growth in the processing industry in recent years. Increased Use of Credit and Debit Cards. According to annual reports by the VISA and MasterCard associations, credit and debit card transactions are projected to increase in relation to cash and check transactions for the foreseeable future. According to the Nilson Report, consumer usage of the five major credit cards (VISA, MasterCard, American Express, Discover and Diners Club) increased to $1,156 billion in 1998 from $498.0 billion in 1993, representing a compound annual growth rate of 18.4%. We believe that the increased use of credit and debit cards as a payment vehicle will continue in the retail markets, particularly supermarket chains, grocery stores and petroleum and convenience stores. ATM Usage. According to The Nilson Report, ATM transaction volume grew at a compound annual rate of 10.4% between 1995 and 1997 to a total of 10.0 billion transactions. This growth has been largely driven by the enhanced profit potential at off-site locations resulting from ATM surcharging and the lower cost of limited function machines installed off-site. Growth of EBT Programs. According to The Nilson Report, EBT transaction volume increased from $580 million in 1994 to $4.1 billion in 1997, representing a compound annual growth rate of 91.9%. Because the federal government has mandated that all food stamp payments be processed electronically by October 2002, we believe that this market represents a substantial growth opportunity. Strategy Our strategy is to provide a full range of transaction processing services to markets with significant growth prospects. We have developed and continue to pursue the following initiatives to capitalize on our competitive position in the growing market for transaction processing services: . Focus on markets that are switching rapidly to electronic payment cards. We target markets in which the penetration of electronic payment systems is relatively low. We believe that these markets will grow faster than the overall electronic payment processing industry. . Provide a fully integrated range of services. We believe that our fully integrated structure allows us to be a low-cost provider of electronic payment processing services. By providing a fully integrated 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. . Cross-sell services to existing clients. Following the acquisition of Electronic Payment Services, we now offer a more comprehensive set of electronic payment processing services. This creates an opportunity to increase revenue by cross-selling services to pre-existing clients of Concord and Electronic Payment Services. Specifically, settlement services can be sold to Electronic Payment Services' front-end customers. . Maintain a high rate of recurring revenue through customer retention. We focus on providing dependable service and competitive pricing in order to retain our customers . We believe that our ability to provide integrated multiple services also enhances customer retention. 25 . Access new customers. We use a variety of marketing approaches to develop our customer base, by having our senior executives focused on marketing and through a 400-person direct sales force and independent sales organizations. Our direct sales force is organized in part by distribution channels along key customer industry lines. We believe that this approach provides us with broad access to potential new customers. . Maintain a low-cost operating structure. We strive to maintain a low- cost 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. . Provide and support a wide range of technology solutions. We provide and support equipment manufactured by a variety of companies in order to supply electronic processing services for the wide variety of systems used by existing and potential customers. We also design systems for a tailored solution to our customers' needs. Our own computer network employs a host-based point-of-sale technology which permits us to rapidly upgrade terminal software, deploy new products and maintain our networks on a cost-effective basis from a central location. . Seek selective acquisitions. We 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. Services We provide a comprehensive set of transaction processing services and products to supermarket chains, multiple lane retailers, trucking companies, petroleum and convenience stores, grocery stores, financial institutions, independent sales organizations and other retailers nationwide. Merchant Card Services. Our merchant card services consist of processing credit card transactions for all major credit card brands including VISA, MasterCard, American Express, Discover and Diners Club. In addition, we process debit card transactions for banks issuing these and similar cards. Debit card transactions permit direct payment debit from a point-of-sale terminal against the cardholder's deposit account. Merchant card services also include electronic payment services in supermarket chains and multiple lane retailers, grocery stores, petroleum and convenience stores and other retailers. We also process payments effected with EBT cards against funds made available by public assistance benefit programs through the primary EBT third-party providers. Merchant card services also provide services to the trucking industry, including a variety of flexible payment systems that enable drivers of trucking companies to use payment cards to purchase fuel and to obtain cash advances at truck stops. Point-of-sale services include point-of-sale terminal driving, credit, debit and EBT gateway processing, network management, and settlement and reporting services. Driving means providing the software and telecommunications network which allows the machine to operate, capturing customers' card information and authorizing individual transactions. A credit, debit or EBT card transaction occurs in two stages. At the time of the transaction, the data related to the purchase is collected; the card is checked to verify that it is not expired, stolen or forged; and the cardholders' account is accessed to check credit limits or available balances. This is termed data capture and authorization, and the functions are collectively referred to as front-end services. At a later time, generally overnight, all the credit card purchases that took place at the merchant are collected together, revalidated and reorganized, and submitted for settlement of the funds, and the debit and EBT card transactions are settled by directly debiting each cardholder's account on the basis of the initial instruction. Merchant accounting, reporting and settlement activities are referred to as back-end services which are performed primarily through our bank subsidiary, EFS National Bank. 26 ATM Services. Our ATM services include driving and monitoring ATMs and processing the transactions generated at those ATMs, including providing access to other networks through gateways. We also operate, and on a selective basis own, ATMs located at truck stops and grocery stores nationwide. The federal thrift charter held by our subsidiary, EFS Federal Savings Bank, facilitates the strategic deployment of ATMs by allowing the deployment of ATMs anywhere in the country without the requirement of a bank branch location. We also own and operate a regional EFT network under the MAC(R) brand which is a shared network of ATM and point-of-sale terminals. Our network provides transaction switching, settlement and reporting to a wide range of financial institutions, merchants and retail ATM deployers nationwide which join EFT networks to enable customers to complete transactions at ATMs and point-of-sale terminals that are not controlled by the card issuing institution. The network switches transactions between an ATM or point-of-sale terminal and the issuing institution so that a customer's account information can be retrieved to authorize a transaction. In addition to the switching functions, the network participates in the settlement and reporting of the transaction. Other. We also provide check verification and authorization services and sell point-of-sale terminals. We also sell payroll processing services to our retail, grocery store, trucking company and truck stop merchants. We recently entered into an agreement with E-Com Systems, Inc. to provide a system to exchange secure Internet data and documents and process electronic payments between food manufacturers, wholesalers, brokers and supermarkets. The program utilizes a new Internet-based technology solution that allows companies to implement the full range of electronic data interchange transactions with their trading partners, regardless of their size. This is expected to result in enhanced efficiencies and cost savings without compromising security. Marketing We have grown our merchant customer base nationwide primarily through the efforts of our direct sales force, through independent sales organizations and through key trade association relationships, including the National Grocers Association. In 1998, we acquired Digital Merchant Systems and American Bankcard International, which are independent sales organizations for the transaction processing industry. Our direct sales force is organized in part by industry distribution channel to facilitate maximum cross-selling. These distribution channels include financial institution, petroleum/convenience store and hospitality, supermarket/major retail and indirect channels. We believe that our marketing opportunities should expand due to a number of factors. First, as an integrated services provider, we believe we have cross- selling marketing opportunities. Following the acquisition of Electronic Payment Services, we now offer a more comprehensive set of electronic payment processing services. This creates an opportunity to increase revenue by cross- selling services to pre-existing clients of Concord and Electronic Payment Services. Second, we expect EBT transaction volume to continue to grow rapidly as the federal government has mandated that all food stamp programs be converted to EBT by October 2002. Our established presence in grocery stores, supermarket chains, multiple lane retailers, petroleum and convenience stores and other small and mid-size retailers gives us an advantage in establishing relationships with EBT providers, whose benefits are utilized largely at those types of retail locations. Third, as an authorized issuer of payment cards and processor of card transactions at the major truck stop chains, we have a substantial advantage in selling our point-of-sale ATM and integrated processing and banking services to trucking companies and truck drivers. Our established relationships with the truck stop owners also afford an opportunity to sell the placement of ATMs at truck stops. Competition The markets in which we operate are all highly competitive. Our principal competitors include major national, regional and local banks, non-bank processors and other independent service organizations, many of which have substantially greater capital, management, marketing and technological resources. While we are 27 currently one of the largest processors in the electronic payment processing market, we compete against other companies which have a substantial share of each market. We estimate the three largest credit and debit card processors account for roughly 50% of the total credit and debit card sales volume, and that a single competitor accounts for well in excess of 50% of the total dollar volume of payment transaction processing for the trucking industry. Another single competitor accounts for in excess of 50% of the total dollar volume of check verifications. We own and operate the MAC(R)-branded EFT network, one of the largest networks in the country. Key competitors are other national and regional EFT networks, especially those that have high membership in markets overlapping ours, as well as other processors and large financial institutions. These competitors continue to consolidate as large banks merge and combine their EFT networks into larger super-regional conglomerates. The continued expansion of the national debit networks operated by VISA and MasterCard also increases competitive pressures. For all of our business lines, we compete on the basis of product, quality, customer service, speed and flexibility in customizing systems to meet the particular needs of customers, and price. We believe that we are one of the few fully integrated suppliers of a broad range of processing, banking and data compilation services for use in transactions at merchant and financial institution locations. We also believe we have been able to successfully compete in all business lines, but there are no assurances that this will continue. Supervision and Regulation Concord and its subsidiaries are subject to a number of federal and state laws. As a bank holding company, we are subject to regulation under the Bank Holding Company Act of 1956 which is administered by the Board of Governors of the Federal Reserve. Under the Bank Holding Company Act, we are generally prohibited from: . directly engaging in any activities other than banking, managing or controlling banks, and bank-related activities; . acquiring ownership or control of 5% or more of the voting shares of any company which is not a bank or bank holding company (the primary exception to this prohibition involves activities which the Federal Reserve determines are closely related to banking); and . engaging in certain tie-in arrangements with our bank (or between our bank and its affiliates) with respect to the lease or sale of property, furnishing of services, or the extension of credit. The Bank Holding Company Act also restricts, to some extent, future mergers with other bank holding companies and banks. Our bank subsidiaries, EFS National Bank and EFS Federal Savings Bank, are also regulated by the Office of the Comptroller of the Currency and the Office of Thrift Supervision, respectively. Employees As of March 31, 1999, Concord and its subsidiaries employed approximately 2,100 full and part-time personnel, including 325 data processing and technical employees, 950 in operations, and 825 in sales and administration. Many of our employees are highly skilled, and we believe our future success will depend in a large part on our ability to attract and retain such employees. We have incentive agreements with Dan M. Palmer and Edward A. Labry III, and we have employment agreements with Richard N. Garman, Ruth Ann Marshall and two other key employees of Electronic Payment Services. The employment agreements with the employees of Electronic Payment Services have no fixed term but may be terminated at any time with a fixed amount of severance to be paid only if the employee is terminated or removed without cause (or in the case of Mr. Garman, if he terminates his employment with good reason). If a release is signed, severance and benefits will be paid to Mr. Garman, Ms. Marshall and the two other key employees for one year (and benefits for an additional year in the case of Mr. Garman) with options vesting. We do not have any material employment contracts with other employees. None of our employees are represented by a labor union and we have experienced no work stoppages. We consider our employee relations to be excellent. 28 MANAGEMENT Directors and Executive Officers The following table sets forth certain information concerning our directors and executive officers as of March 31, 1999:
Name Age Position(s) ---- --- ---------------------------------------------- Dan M. Palmer......... 56 Chairman of the Board and Chief Executive Officer Edward A. Labry III... 36 President and Director Vickie Brown.......... 46 Senior Vice President, Chief Operating Officer Thomas J. Dowling..... 33 Vice President, Chief Financial Officer Richard N. Garman..... 42 President and Chief Executive Officer of Electronic Payment Services William E. Lucado..... 58 Senior Vice President, Chief Investment and Compliance Officer Ruth Ann Marshall..... 45 Executive Vice President of Electronic Payment Services Douglas C. Altenbern*. 61 Director David C. Anderson*+... 56 Director Richard Buchignani*... 50 Director Richard M. Harter*.... 62 Director Joyce Kelso........... 57 Director Richard P. Kiphart*... 57 Director Jerry D. Mooney*+..... 46 Director Paul Whittington*+ .. 63 Director
*Member of the Board's Audit Committee. +Member of the Board's Compensation Committee. Dan M. Palmer became Chairman of the Board in February 1991. Mr. Palmer has been Chief Executive Officer of Concord since August 1989, and a director of Concord since May 1987. Mr. Palmer has been the Chief Executive Officer of EFS National Bank (formerly EFS, Inc.) since its inception in 1982. He joined Union Planters National Bank in June 1982 and founded the EFS operations within the bank. He continued as President and Chief Executive Officer of EFS when it was acquired by Concord in March 1985. Edward A. Labry III joined EFS in 1984. He was made Director of Marketing in March 1987 and Vice President of Sales in February 1988. In August 1990, he was elected to Chief Marketing Officer of Concord. In February 1991, he was elected Senior Vice President of Concord. He became President of Concord in October 1994, and President of EFS National Bank in December 1994. Vickie Brown joined Concord in 1979 as an accountant. She served as Treasurer from 1982 through 1991, was elected Vice President in April 1985 and Senior Vice President in February 1991. Ms. Brown served as Chief Operating Officer of Concord Computing Corporation from 1990 through 1992. Ms. Brown has been Chief Operating Officer of Concord since 1997. Thomas J. Dowling joined Concord in May 1992 as Assistant Controller. Mr. Dowling became Vice President and Controller of Concord in September 1995 and Chief Financial Officer in September, 1998. Prior to May 1992, he was a senior audit accountant and CPA at Ernst & Young LLP. 29 Richard N. Garman joined Electronic Payment Services in 1995 as President and Chief Operating Officer and assumed the role of Chief Executive Officer in 1997. Since Concord's acquisition of Electronic Payment Services on February 26, 1999, he has continued to serve as President and Chief Executive Officer of Electronic Payment Services. Prior to joining Electronic Payment Services, Mr. Garman was a partner in the investment banking firm of Montgomery Securities. William E. Lucado joined Concord in 1991 as a Vice President. He was named Senior Vice President, Compliance Officer for EFS National Bank in 1992, and in 1994 he was also elected Senior Vice President of Concord. In 1995, he was elected a Senior Vice President, Investment Officer and Compliance Officer, Corporate Secretary, and Director of EFS National Bank and other subsidiary companies. In 1996, he was elected Assistant Secretary of Concord and in 1997 he was elected President of EFS Federal Savings Bank. He was named Chief Investment and Compliance Officer of Concord in 1998. Ruth Ann Marshall joined Electronic Payment Services in 1995 as Group Executive responsible for its two subsidiaries, BUYPASS Corporation and Money Access Services, Inc. In 1998 she was named Executive Vice President of Electronic Payment Services. Prior to joining Electronic Payment Services, Ms. Marshall served as Director of Customer Financing for IBM Credit Corporation, where she previously held several management positions. Douglas C. Altenbern has been a director of Concord since February 1998. Mr. Altenbern served as Vice Chairman of First Financial Management Corporation until 1989, at which time he resigned to found Argosy Network Corporation, of which he served as Chairman and CEO. In 1992 he sold his interest in Argosy and in 1993 founded Pay Systems of America, of which he served as Chairman and CEO through December 1996. He currently is a private investor and serves as a director on the Boards of The Bradford Funds, Inc., OPTS, Inc., Interlogics, Inc. CSM, Inc. and Equitas. David C. Anderson has been a director of Concord since August 1992. Mr. Anderson was Senior Vice President and Chief Financial Officer with Federal Express in Memphis, Tennessee for seven years and Executive Vice President and Chief Financial Officer at Burlington Northern in Fort Worth, Texas for three years prior to his retirement in 1995. Richard Buchignani has been a director of Concord since August 1992. He is a partner in the Memphis, Tennessee office of the law firm of Wyatt, Tarrant & Combs, who also serves as local counsel to Concord. Mr. Buchignani has been affiliated with the law firm since 1995 when most of the members of his firm of 18 years joined Wyatt, Tarrant & Combs. Richard M. Harter has been Concord's Secretary and a director since Concord's formation. He is a partner of Bingham Dana & Gould LLP, legal counsel to Concord. Joyce Kelso has been a director of Concord since May 1991. She was Vice President in charge of Customer Service when EFS began operations. In August 1990, she was elected Senior Vice President of Concord. On January 1, 1995, Mrs. Kelso semi-retired, and on January 1, 1997, she became fully retired. Richard P. Kiphart has been a director of Concord since March 1997. In 1972 he became a Principal of William Blair & Company, L.L.C. He served as head of Equity Trading from 1972 to 1980. He joined the Corporate Finance Department in 1980, and was made head of that department in January 1995. Jerry D. Mooney has been a director of Concord since August 1992. Since August 1997, he had been President and CEO of ServiceMaster Employer Services, Inc. He retired from this position in late 1998. Prior to then he was President of Healthcare New Business Initiatives and formerly served as Chairman, President and CEO of Service-Master Diversified Health Services, Inc. (formerly VHA Long Term Care) since 1981. Paul L. Whittington has been a director of Concord since May 1993. Mr. Whittington had been the Managing Partner of the Memphis, Tennessee and Jackson, Mississippi offices of Ernst & Young from 1988 until his retirement in 1991. Since 1979, he had been the partner in charge of consulting at various Ernst & Young offices. 30 Properties Our principal executive offices, which are leased, are located at 2525 Horizon Lake Drive, Suite 120, Memphis, Tennessee 38133. We also own a building in Wilmington, Delaware which is used as a data center, and we lease approximately 20 other properties which are used for sales and support, data processing field service and various other aspects of our operations. PRINCIPAL AND SELLING STOCKHOLDERS Beneficial Ownership The following table sets forth certain information regarding the beneficial ownership of our common stock as of May 14, 1999, and as adjusted to reflect the sale of the shares in this offering, of: . each of the directors and executive officers of Concord; . all the directors and executive officers as a group; . each owner of more than 5% of the equity securities of Concord; and . each selling stockholder. The information in the table assumes that the underwriters will not exercise their over-allotment option to purchase additional shares in this offering. Unless otherwise indicated, the address for each director and executive officer of Concord is 2525 Horizon Lake Drive, Suite 120, Memphis, Tennessee 38133.
Shares Shares Beneficially Beneficially Owned Prior Owned After to Offering Shares Offering Name and Address of Beneficial ------------------ Being ------------------ Owner Number Percent Offered Number Percent - ------------------------------ ---------- ------- --------- ---------- ------- Dan M. Palmer(1)............... 2,300,622 1.8% -- 2,300,622 1.8% Edward A. Labry III(2)......... 1,838,234 1.4 -- 1,838,234 1.4 Vickie Brown(1)................ 65,905 * -- 65,905 * Thomas J. Dowling(1)........... 25,889 * -- 25,889 * Richard N. Garman(3)........... 830,453 * -- 830,453 * William E. Lucado(4)........... 55,128 * -- 55,128 * Ruth Ann Marshall(5)........... 182,857 * -- 182,857 * Joyce Kelso(6)................. 260,398 * -- 260,398 * Richard P. Kiphart(6).......... 3,678,355 2.9 -- 3,678,355 2.8 Richard M. Harter(7)........... 86,366 * -- 86,366 * Jerry D. Mooney(7)............. 41,916 * -- 41,916 * David C. Anderson(7)........... 21,759 * -- 21,759 * J. Richard Buchignani(7)....... 21,825 * -- 21,825 * Paul Whittington(7)............ 19,228 * -- 19,228 * Douglas C. Altenbern........... 12,000 * -- 12,000 * All directors and executive officers as a group (15 persons)(8)............... 9,440,935 7.4 -- 9,440,935 7.2 William Blair & Company, 13,189,581 10.3 -- 13,189,581 10.1 L.L.C.(9)..................... 222 West Adams Street Chicago, IL 60606 AMVESCAP PLC and 7,439,355 5.8 -- 7,439,355 5.7 Subsidiaries(10).............. 11 Devonshire Square London, England EC2M 4YR Selling Stockholders(11): BANK ONE CORPORATION......... 5,931,825 4.6 5,931,825 -- -- Corestates Holdings, Inc..... 5,931,825 4.6 5,931,825 -- -- KeyCorp...................... 5,931,825 4.6 5,235,825 696,000 * National City Corporation.... 5,931,825 4.6 5,931,825 -- -- PNC Network Holdings Corp.(12)................... 5,931,825 4.6 5,931,825 -- --
- -------- 31 * Denotes less than 1%. (1) Shares owned are unexercised stock options. (2) Shares owned include 1,835,156 shares covered by unexercised stock options. (3) Shares owned include 625,806 shares covered by unexercised stock options. (4) Shares owned include 54,678 shares covered by unexercised stock options. (5) Shares owned include 132,832 shares covered by unexercised stock options. (6) Shares owned include 4,500 shares covered by unexercised stock options. (7) Shares owned include 14,166 shares covered by unexercised stock options. (8) Shares owned include 4,215,608 shares covered by unexercised stock options. (9) Based on a Schedule 13G dated as of March 16, 1999, filed by William Blair & Company, L.L.C. (Blair). Includes 1,794,903 shares as to which Blair has sole voting power and 13,189,581 shares as to which Blair has sole dispositive power. Blair disclaims beneficial ownership as to 11,394,678 of such shares. (10) Based on a Schedule 13G dated as of February 10, 1999, filed by AMVESCAP PLC and Subsidiaries. (11) Based upon information provided by the selling stockholders. (12) We have been advised by PNC Network Holdings Corp. that the selling stockholder will be PNC Network Holdings Corp. and may also include one or both of the following transferees: (i) the PNC Bank Foundation, and (ii) a charitable remainder trust of which PNC Network Holdings Corp. or one of its affiliates is the income beneficiary and the PNC Bank Foundation is the remainder beneficiary. 32 UNITED STATES FEDERAL TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS This is a general discussion of United States federal tax consequences of the acquisition, ownership and disposition of our common stock by a beneficial holder that, for United States federal income tax purposes, is a nonresident alien individual, a foreign corporation, a foreign partnership or a foreign estate or trust (a "Non-United States Holder"). We have based this summary upon the United States federal tax law in effect as of the date of this prospectus. These laws may change, possibly retroactively. We do not discuss all aspects of United States federal taxation that may be important to you in light of your particular circumstances, such as special tax rules that apply if you are a financial institution, insurance company, broker- dealer, tax-exempt organization or investor holding our common stock as part of a "straddle" or other integrated investment. We urge you to consult your tax advisor about the United States federal tax consequences of acquiring, holding and disposing of our common stock in your particular circumstances, as well as any tax consequences that may arise under the laws of any foreign, state, local or other taxing jurisdiction. Dividends Dividends paid to a Non-United States Holder will generally be subject to withholding of United States federal income tax at the rate of 30%, or such lower rate as may be provided by an applicable income tax treaty between the United States and the country of which the Non-United States Holder is a tax resident. If, however, the dividend is effectively connected with the conduct of a trade or business in the United States by the Non-United States Holder, the dividend will be exempt from withholding (subject to satisfaction of applicable certification procedures) and will instead be subject to the United States federal income tax imposed on net income on the same basis that applies to United States persons generally (assuming, if required by an applicable tax treaty, the dividends are attributable to a permanent establishment maintained by such non-United States Holder within the United States), and, for corporate holders and under some circumstances, the branch profits tax. For purposes of determining whether tax is to be withheld at a reduced rate as specified by a treaty, we generally will presume that dividends we pay on or before December 31, 2000 to an address in a foreign country are paid to a resident of that country. Under recently finalized Treasury regulations, which in general are expected to apply to dividends that we pay after December 31, 2000, to obtain a reduced rate of withholding under a treaty, a Non-United States Holder generally will be required to provide an Internal Revenue Service Form W-8BEN certifying that Non-United States Holder's entitlement to treaty benefits. In addition, in the case of common stock held by a foreign partnership, the certification requirement generally will apply to the partners of the partnership and the partnership must provide certain information, including a United States taxpayer identification number. 33 Gain on Disposition A Non-United States Holder will generally not be subject to United States federal income tax, including by way of withholding, on gain recognized on a sale or other disposition of our common stock unless: . the gain is effectively connected with the conduct of a trade or business in the United States by the Non-United States Holder or . in the case of a Non-United States Holder who is a nonresident alien individual and who holds our common stock as a capital asset, that holder is present in the United States for 183 or more days in the taxable year of the disposition and certain other requirements are met. Gain that is effectively connected with the conduct of a trade or business in the United States by the Non-United States Holder will be subject to the United States federal income tax imposed on net income on the same basis that applies to United States persons generally, and, for corporate holders and under some circumstances, the branch profits tax, but will not be subject to withholding. Non-United States Holders should consult any applicable income tax treaties that may provide for different rules. United States Federal Estate Taxes Our common stock that is owned or treated as owned by an individual who is not a citizen or resident of the United States, as specially defined for United States federal estate tax purposes, on the date of that person's death will be included in his or her estate for United States federal estate tax purposes, unless an applicable estate tax treaty provides otherwise. Information Reporting and Backup Withholding Generally, we must report annually to the United States Internal Revenue Service and to each Non-United States Holder the amount of dividends that we paid to a holder and the amount of tax that we withheld on such dividends. This information may also be made available to the tax authorities of a country in which the Non-United States Holder resides. United States information reporting requirements and backup withholding tax will generally not apply to dividends that we pay on our common stock to a Non- United States Holder at an address outside the United States, except that, with respect to payments made after December 31, 2000, a Non-United States Holder will be entitled to this exemption only if it provides a Form W-8BEN (or satisfies certain documentary evidence requirements for establishing that it is a Non-United States Holder) or otherwise establishes an exemption. Payments by a United States office of a broker of the proceeds of a sale of our common stock are subject to both backup withholding at a rate of 31% and information reporting, unless the holder certifies its Non-United States Holder status under penalties of perjury or otherwise establishes an exemption. Information reporting requirements, but not backup withholding, will also apply to payments of the proceeds from sales of our common stock by foreign offices of United States brokers, or foreign brokers with certain types of relationships to the United States, unless the broker has documentary evidence in its records that the holder is a Non-United States Holder and certain other conditions are met, or the holder otherwise establishes an exemption. Backup withholding is not an additional tax. Any amounts that we withhold under the backup withholding rules will be refunded or credited against the Non-United States Holder's United States federal income tax liability, if the required information is furnished to the United States Internal Revenue Service. 34 UNDERWRITING Subject to the terms and conditions stated in the U.S. underwriting agreement dated the date hereof, each of the U.S. underwriters named below, for whom Salomon Smith Barney Inc., William Blair & Company, L.L.C., Goldman, Sachs & Co., J.P. Morgan Securities Inc. and Morgan Keegan & Company, Inc. are acting as representatives, has severally agreed to purchase, and Concord and the selling stockholders have agreed to sell to such U.S. underwriter, the number of shares set forth opposite the name of such U.S. underwriter.
Number of U.S. Underwriter Shares ---------------- ---------- Salomon Smith Barney Inc....................................... William Blair & Company, L.L.C................................. Goldman, Sachs & Co............................................ J.P. Morgan Securities Inc..................................... Morgan Keegan & Company, Inc................................... ---------- Total...................................................... 24,770,500 ==========
Subject to the terms and conditions stated in the international underwriting agreement dated the date hereof, each of the international underwriters named below, for whom Salomon Brothers International Limited, William Blair & Company, L.L.C., Goldman Sachs International, J.P. Morgan Securities Ltd. and Morgan Keegan & Company, Inc. are acting as representatives, has severally agreed to purchase, and Concord and the selling stockholders have agreed to sell to such international underwriter, the number of shares set forth opposite the name of such international underwriter.
Number of International Underwriter Shares ------------------------- --------- Salomon Brothers International Limited.......................... William Blair & Company, L.L.C.................................. Goldman Sachs International..................................... J.P. Morgan Securities Ltd...................................... Morgan Keegan & Company, Inc.................................... --------- Total....................................................... 6,192,625 =========
The U.S. underwriting agreement and the international underwriting agreement provide that the obligations of the several underwriters to purchase the shares included in this offering are subject to approval of certain legal matters by counsel and to certain other conditions. The U.S. underwriting agreement and the international underwriting agreement provide that the obligations of the U.S. underwriters and the international underwriters are such that if any of the shares are purchased by the U.S. underwriters pursuant to the U.S. underwriting agreement, or by the international underwriters pursuant to the international underwriting agreement, all the shares agreed to be purchased by either the U.S. underwriters or the international underwriters, as the case may be, pursuant to their respective agreements (other than those covered by the over-allotment option described below) must be so purchased. The price to public and underwriting discount per share for the U.S. offering and the international offering will be identical. The closing of the international offering is a condition to the closing of the U.S. offering and the closing of the U.S. offering is a condition to the closing of the international offering. The underwriters propose to offer some of the shares directly to the public at the public offering price set forth on the cover page of this prospectus and some of the shares to certain dealers at the public offering price less a concession not in excess of $ per share. The underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share on sales to certain other dealers. If all of the shares are not sold at the initial offering price, the representatives may change the public offering price and the other selling terms. 35 Concord has granted to the U.S. underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to 4,640,000 additional shares of common stock from Concord at the public offering price less the underwriting discount. The underwriters may exercise such option solely for the purpose of covering over-allotments, if any, in connection with this offering. To the extent such option is exercised, each underwriter will be obligated, subject to certain conditions, to purchase a number of additional shares approximately proportionate to such underwriter's initial purchase commitment. Each U.S. underwriter has severally agreed that, as part of the distribution of 24,770,500 shares offered by the U.S. underwriters, (i) it is not purchasing any such shares for the account of anyone other than a United States or Canadian person and (ii) it has not offered or sold, and will not offer or sell, directly or indirectly, any such shares or distribute any U.S. prospectus to any person outside the United States or Canada, or to anyone other than a United States or Canadian person. Each international underwriter has severally agreed that, as part of the distribution of 6,192,625 shares by the international underwriters, (i) it is not purchasing any such shares for the account of any United States or Canadian person and (ii) it has not offered or sold, and will not offer or sell, directly or indirectly, any such shares or distribute any international prospectus to any person in the United States or Canada, or to any United States or Canadian person. The foregoing limitations do not apply to stabilization transactions or to certain other transactions specified in the U.S. underwriting agreement, the international underwriting agreement and the agreement between U.S. underwriters and international underwriters, including: (i) certain purchases and sales between the U.S. underwriters and the international underwriters; (ii) certain offers, sales, resales, deliveries or distributions to or through investment advisors or other persons exercising investment discretion; (iii) purchases, offers or sales by a U.S. underwriter who is also acting as an international underwriter; and (iv) other transactions specifically approved by the representatives. As used herein, "United States or Canadian person" means any person who is a national or resident of the United States or Canada, any corporation, partnership or other entity created or organized in or under the laws of the United States or Canada or of any political subdivision thereof, and any estate or trust the income of which is subject to United States or Canadian Federal income taxation, regardless of its source (other than any non- United States or non-Canadian branch of any United States or Canadian person), and includes any United States or Canadian branch of a person other than a United States or Canadian person. Pursuant to the agreement between U.S. underwriters and international underwriters, sales may be made between the U.S. underwriters and the international underwriters of such number of shares as may be mutually agreed. The price of any shares so sold shall be the public offering price less an amount not greater than the concession to securities dealers. To the extent that there are sales between the U.S. underwriters and the international underwriters, the number of shares initially available for sale by the U.S. underwriters or by the international underwriters may be more or less than the amount specified on the cover page of this prospectus. Any offer of the shares in Canada will be made only pursuant to an exemption from the registration and qualification requirements in any jurisdiction in Canada in which such offer is made. Each international underwriter has severally represented and agreed that it (i) has not offered or sold, and prior to the expiration of six months from the closing date, will not offer or sell in the United Kingdom any shares other than to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (whether as principal or agent) for the purpose of their business or in circumstances which constitute an offer to the public in the United Kingdom for the purposes of the Public Offers of Securities Regulation 1995, (ii) has complied and will comply with all applicable provisions of the Financial Services Act 1986 with respect to anything done by it in relation to the international securities, in, from or otherwise involving the United Kingdom and (iii) has only issued or passed on and will only issue or pass onto any person in the United Kingdom any document received by it in connection with the issue of the shares if that person is of a kind described in Article 11(3) of the Financial Services Act of 1986 (Investment Advertisements) (Exemptions) Order 1996 (as amended) or is a person to whom the document may otherwise lawfully be issued or passed on. 36 No action has been or will be taken in any jurisdiction by Concord, the selling stockholders, the U.S. underwriters or the international underwriters that would permit any offering to the general public of the shares offered hereby in any jurisdiction other than the United States. Purchasers of the shares offered hereby may be required to pay stamp taxes and other charges in accordance with the laws and practices of the country of purchase in addition to the offering price set forth on the cover page of this prospectus. In connection with the offering, Concord, Concord's executive officers and directors, and an additional existing stockholder of Concord have agreed that they will not, directly or indirectly, during the period ending 90 days after the date of this prospectus, in each case without the prior written consent of Salomon Smith Barney Inc. and William Blair & Company, L.L.C. on behalf of the underwriters: . offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock; or . enter into any swap or other arrangement that transfers to another person, in whole or in part, any of the economic consequences of ownership of the common stock, whether any transaction described above is to be settled by delivery of common stock or other securities, in cash, or otherwise. The restrictions described in the previous paragraph do not apply to: . the sale of the shares to the underwriters; . the issuance of shares in connection with future acquisition transactions; . the issuance by Concord of options to purchase shares under its existing option plans, the issuance by Concord of shares of common stock upon the exercise of an option or a warrant or the conversion of a security outstanding on the date of this prospectus or the sale or transfer of shares of common stock upon the exercise of certain options; or . certain other limited circumstances in the case of the additional existing stockholder of Concord. In addition, each of the selling stockholders has agreed not to sell or distribute any shares of common stock of Concord except under this offering within seven days prior to, or 90 days after, the date of this prospectus. Salomon Smith Barney Inc. and William Blair & Company, L.L.C. in their sole discretion may release any of the securities subject to these lock-up agreements at any time without notice. The common stock is quoted on the Nasdaq National Market under the symbol "CEFT." The following table shows the underwriting discounts and commissions to be paid to the underwriters by Concord and the selling stockholders in connection with this offering. These amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase additional shares of common stock.
Paid by Concord Paid by Selling Stockholders ------------------------- -------------------------------- No Exercise Full Exercise No Exercise Full Exercise ----------- ------------- -------------- --------------- Per share..... $ $ $ $ Total......... $ $ $ $
In connection with the offering, Salomon Smith Barney Inc., on behalf of the underwriters, may purchase and sell shares of common stock in the open market. These transactions may include over-allotment, syndicate covering transactions and stabilizing transactions. Over-allotment involves syndicate sales of common stock in excess of the number of shares to be purchased by the underwriters in the offering, which creates a syndicate short position. Syndicate covering transactions involve purchases of the common stock in the open market after 37 the distribution has been completed in order to cover syndicate short positions. Stabilizing transactions consist of certain bids or purchases of common stock made for the purpose of preventing or retarding a decline in the market price of the common stock while the offering is in progress. The underwriters also may impose a penalty bid. Penalty bids permit the underwriters to reclaim a selling concession from a syndicate member when Salomon Smith Barney Inc., in covering syndicate short positions or making stabilizing purchases, repurchases shares originally sold by that syndicate member. Any of these activities may cause the price of the common stock to be higher than the price that otherwise would exist in the open market in the absence of such transactions. These transactions may be effected on the Nasdaq National Market or in the over-the-counter market or otherwise and, if commenced, may be discontinued at any time. In addition, in connection with this offering, certain of the underwriters and selling group members may engage in passive market making transactions in the common stock on the Nasdaq National Market prior to the pricing and completion of the offering. Passive market making consists of displaying bids on the Nasdaq National Market no higher than the bid prices of independent market makers and making purchases at prices no higher than those independent bids and effected in response to order flow. Net purchases by a passive market maker on each day are limited to a specified percentage of the passive market maker's average daily trading volume in the common stock during a specified period and must be discontinued when such limit is reached. Passive market making may cause the price of the common stock to be higher than the price that otherwise would exist in the open market in the absence of such transactions. If passive market making is commenced, it may be discontinued at any time. Concord estimates that its total expenses related to this offering will be $1,100,000. The representatives have performed certain investment banking and advisory services for Concord and the selling stockholders from time to time for which they have received customary fees and expenses. The representatives may, from time to time, engage in transactions with and perform services for Concord in the ordinary course of their business. As of May 11, 1999, certain principals (including Richard P. Kiphart, a director of Concord) of William Blair & Company, L.L.C., one of the underwriters, beneficially own an aggregate of 5,579,537 shares of Concord's common stock, which will represent 4.3% of the outstanding common stock of Concord upon the closing of this offering. In addition, certain mutual funds affiliated with, and certain discretionary accounts advised by, William Blair & Company, L.L.C., beneficially own shares of common stock. Accordingly, this offering is being made in conformity with certain applicable provisions of Rule 2720 of the Conduct Rules of the National Association of Securities Dealers, Inc. Concord and each of the selling stockholders have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933, or to contribute to payments the underwriters may be required to make in respect of any of those liabilities. LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for Concord by Sidley & Austin, Chicago, Illinois, and for the underwriters by Cleary, Gottlieb, Steen & Hamilton, New York, New York. EXPERTS Ernst & Young LLP, independent auditors, have audited our consolidated financial statements at December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998, as set forth in their report. We have included our consolidated financial statements in this prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP's report, given on their authority as experts in accounting and auditing. 38 WHERE YOU CAN FIND MORE INFORMATION We file annual, quarterly and special reports, proxy statements and other information with the Securities Exchange Commission (SEC). You may read and copy any document we file at the public reference facilities of the SEC in Washington, D.C., Chicago, Illinois and New York, New York. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. Our SEC filings are also available to the public from the SEC's web site at http://www.sec.gov. The SEC allows us to "incorporate by reference" the information we file with them, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be part of this prospectus and any later information that we file with the SEC will automatically update and supersede this information. We incorporate by reference the documents listed below and any additional documents we file with the SEC until the offering of the common stock is terminated. This prospectus is part of a registration statement on Form S-3 that we filed with the SEC. The documents we incorporate by reference are: . Our Annual Report on Form 10-K for the year ended December 31, 1998. . Our Quarterly Report on Form 10-Q for the quarter ended March 31, 1999. . Our Current Report on Form 8-K filed on March 10, 1999. . Our Current Report on Form 8-K filed on May 6, 1999. . The description of our common stock that is contained in our Registration Statement on Form 8-A filed on September 4, 1985 together with any and all amendments and reports filed for the purpose of updating such description. Any statement contained in this prospectus or in a document incorporated by reference is modified or superseded for purposes of this prospectus to the extent that a statement contained in any such document modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this prospectus. You may request a copy of these filings, at no cost, by writing or telephoning us at the following address: Concord EFS, Inc. Attn: Investor Relations 2525 Horizon Lake Drive Suite 120 Memphis, Tennessee 38133 (901) 371-8000 39 CONCORD EFS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Financial Statements at December 31, 1998 and December 31, 1997 and for each of the three years in the period ended December 31, 1998 Consolidated Balance Sheets............................................ F-2 Consolidated Statements of Income...................................... F-3 Consolidated Statements of Stockholders' Equity........................ F-4 Consolidated Statements of Cash Flows.................................. F-5 Notes to Consolidated Financial Statements............................. F-6 Report of Independent Auditors......................................... F-20 Financial Statements at March 31, 1999 and for each of the three-month periods ended March 31, 1999 and March 31, 1998 Condensed Consolidated Balance Sheets (unaudited)...................... F-21 Condensed Consolidated Statements of Income (unaudited)................ F-22 Condensed Consolidated Statements of Cash Flows (unaudited)............ F-23 Notes to Condensed Consolidated Financial Statements (unaudited)....... F-24
F-1 CONCORD EFS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31 -------------------- ASSETS 1998 1997 ------ --------- --------- (in thousands) Current assets Cash and cash equivalents.............................. $ 82,029 $ 82,592 Securities available-for-sale (amortized cost of $286,370 at December 31, 1998 and $140,038 at December 31, 1997)............................................. 288,180 140,199 Accounts receivable, less allowance of $2,324 at December 31, 1998 and $3,340 at December 31, 1997..... 106,662 82,467 Inventories............................................ 11,396 5,898 Prepaid expenses and other current assets.............. 7,863 5,984 Deferred income taxes.................................. 5,977 4,600 --------- --------- Total current assets................................. 502,107 321,740 Securities held-to-maturity (fair value of $53,634 at December 31, 1997)...................................... 52,508 Other assets............................................. 23,615 27,656 Property and equipment................................... 302,937 240,954 Accumulated depreciation and amortization.............. (148,447) (114,438) --------- --------- 154,490 126,516 --------- --------- Intangible assets........................................ 146,712 122,982 Accumulated amortization............................... (42,806) (32,206) --------- --------- 103,906 90,776 --------- --------- Total assets......................................... $ 784,118 $ 619,196 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities Accounts payable and other liabilities................. $ 112,376 $ 70,403 Accrued liabilities.................................... 47,641 38,489 Income taxes payable................................... 10,148 9,416 Short-term borrowings.................................. 21,000 29,000 Current maturities of long-term debt................... 25,116 25,445 --------- --------- Total current liabilities............................ 216,281 172,753 --------- --------- Long-term debt, less current maturities.................. 173,000 153,329 Deferred income taxes.................................... 21,336 17,860 Other liabilities........................................ 12,966 14,710 Stockholders' equity Common stock, $0.33 1/3 par value; authorized 200,000 shares, Issued and outstanding 127,935 shares at December 31, 1998 and 86,447 shares at December 31, 1997.................................................. 42,646 28,816 Additional paid-in capital............................. 55,018 58,622 Retained earnings...................................... 261,702 173,007 Accumulated other comprehensive income................. 1,169 99 --------- --------- Total stockholders' equity........................... 360,535 260,544 --------- --------- Total liabilities and stockholders' equity........... $ 784,118 $ 619,196 ========= =========
See notes to consolidated financial statements. F-2 CONCORD EFS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
For Year Ended December 31 ---------------------------- 1998 1997 1996 -------- -------- -------- (in thousands, except per share data) Revenue.......................................... $634,511 $490,030 $355,459 Cost of operations............................... 446,515 340,770 241,273 Selling, general and administrative expenses..... 51,185 50,008 42,811 -------- -------- -------- Operating income................................. 136,811 99,252 71,375 Other income (expense): Interest income................................ 18,379 12,287 4,468 Interest expense............................... (14,676) (14,076) (14,764) -------- -------- -------- Income before taxes.............................. 140,514 97,463 61,079 Income taxes................................... 51,819 37,771 23,347 -------- -------- -------- Net income....................................... $ 88,695 $ 59,692 $ 37,732 ======== ======== ======== Per share data: Basic earnings per share....................... $ 0.69 $ 0.47 $ 0.32 ======== ======== ======== Diluted earnings per share..................... $ 0.67 $ 0.46 $ 0.31 ======== ======== ======== Weighted average shares........................ 127,693 126,592 116,291 ======== ======== ======== Adjusted weighted average shares and assumed conversions 131,947 129,937 120,189 ======== ======== ========
See notes to consolidated financial statements. F-3 CONCORD EFS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated Common Stock Additional Other --------------- Paid-In Retained Comprehensive Shares Amount Capital Earnings Income Total ------- ------- ---------- -------- ------------- -------- (in thousands) Balance at January 1, 1996................... 33,848 $11,282 $(41,326) $ 75,583 $ (200) $ 45,339 Exercise of stock options.............. 1,074 358 4,496 4,854 Secondary offering of common stock......... 3,450 1,150 86,761 87,911 Tax benefit of disqualifying disposition of incentive stock option shares........ 6,586 6,586 Three for two stock splits............... 42,488 14,163 (14,163) Net income............ 37,732 37,732 Net unrealized losses on securities, net of tax.................. (296) (296) -------- Comprehensive income.. 37,436 ------- ------- -------- -------- ------ -------- Balance at December 31, 1996................... 80,860 26,953 42,354 113,315 (496) 182,126 Restatement for poolings of interests............ 4,511 1,504 4,110 5,614 ------- ------- -------- -------- ------ -------- Restated balance at January 1, 1997........ 85,371 28,457 46,464 113,315 (496) 187,740 Exercise of stock options.............. 1,076 359 6,300 6,659 Tax benefit of disqualifying disposition of incentive stock option shares........ 5,858 5,858 Net income............ 59,692 59,692 Net unrealized gains on securities, net of tax.................. 595 595 -------- Comprehensive income.. 60,287 ------- ------- -------- -------- ------ -------- Balance at December 31 1997................... 86,447 28,816 58,622 173,007 99 260,544 Exercise of stock options.............. 413 138 6,458 6,596 Three for two stock split................ 41,075 13,692 (13,692) Tax benefit of disqualifying disposition of incentive stock option shares........ 3,630 3,630 Net income............ 88,695 88,695 Cumulative effect of accounting change.... 776 776 Net unrealized gains on securities, net of tax.................. 294 294 -------- Comprehensive income.. 89,765 ------- ------- -------- -------- ------ -------- Balance at December 31, 1998................... 127,935 $42,646 $ 55,018 $261,702 $1,169 $360,535 ======= ======= ======== ======== ====== ========
See notes to consolidated financial statements. F-4 CONCORD EFS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31 ------------------------------- 1998 1997 1996 --------- --------- --------- (in thousands) Operating activities Net income.................................. $ 88,695 $ 59,692 $ 37,732 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.............. 55,390 41,566 34,827 Provision for losses on accounts receivable................................ 3,654 1,445 817 Deferred income taxes (benefit)............ 1,520 (7,330) 6,896 Changes in operating assets and liabilities: Accounts receivable....................... (27,849) (17,489) 25,581 Inventories............................... (5,498) (291) 161 Other current assets...................... (1,879) (1,024) (342) Accounts payable and other liabilities.... 41,973 (22,425) 20,084 Accrued liabilities....................... 13,310 25,414 13,636 Other liabilities......................... (1,744) -- -- --------- --------- --------- Net cash provided by operating activities..... 167,572 79,558 139,392 Investing activities Acquisition of property and equipment....... (65,205) (44,042) (47,727) Securities held-to-maturity: Acquisition of securities.................. (9,630) (17,141) (57,135) Proceeds from maturity of securities....... 4,843 21,347 809 Securities available-for-sale: Acquisition of securities.................. (241,314) (156,515) (36,054) Proceeds from sales of securities.......... 104,383 48,401 -- Proceeds from maturity of securities....... 48,098 32,178 173 Merchant contracts purchased................ (16,946) (12,986) (3,565) Acquisition of business..................... (6,000) -- -- Proceeds from licensing agreement........... -- 25,000 -- Other....................................... (4,302) (2,406) (13,464) --------- --------- --------- Net cash used in investing activities......... (186,073) (106,164) (156,963) Financing activities Proceeds from exercise of stock options..... 6,596 6,659 4,854 Proceeds from secondary offering of common stock...................................... -- -- 87,911 Proceeds from notes payable................. 45,000 28,000 -- Borrowing (repayment) under credit agreement (net)...................................... (8,000) (21,000) 15,000 Payments on notes payable................... (25,658) (25,418) (25,392) --------- --------- --------- Net cash provided by (used in) financing activities................................... 17,938 (11,759) 82,373 --------- --------- --------- Net (decrease) increase in cash and cash equivalents.................................. (563) (38,365) 64,802 Cash and cash equivalents at beginning of period....................................... 82,592 120,957 56,155 --------- --------- --------- Cash and cash equivalents at end of period.... $ 82,029 $ 82,592 $ 120,957 ========= ========= ========= Disclosures of cash flow information: Cash paid during the period for: Interest.................................... $ 14,346 $ 13,725 $ 14,768 ========= ========= ========= Income taxes................................ $ 46,346 $ 32,940 $ 9,326 ========= ========= =========
See notes to consolidated financial statements. F-5 CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 Note A--Significant Accounting Policies Principles of Consolidation: The consolidated financial statements include the accounts of Concord EFS, Inc. (Parent) and its wholly-owned subsidiaries, Concord Computing Corporation (Concord), EFS National Bank (EFSNB), EFS Federal Savings Bank (EFSFSB), Concord Retail Services, Inc., Concord Equipment Sales, Inc. (formerly VMT, Inc.), Pay Systems of America, Inc. (PSA), Digital Merchant Systems, Inc. (DMS), and Electronic Payment Services, Inc. (EPS), (collectively, the Company). The Company repurchased the minority interest in Network EFT, Inc. during 1996 and transferred its residual business and operational assets to Concord. All material intercompany balances and transactions have been eliminated in consolidation. Basis of Presentation: These consolidated financial statements give retroactive effect to the merger of the Parent and EPS on February 26, 1999, which has been accounted for using the pooling of interests method as described in Note L to the consolidated financial statements. Operations: The Company provides transaction processing, authorization and settlement services, throughout the United States. The primary components of these services are Merchant Card Services and ATM Services, comprising approximately 98% of revenues in 1998. The Company requires certain customers to provide letters of credit, surety bonds or cash deposits as collateral for outstanding accounts receivable. Cash Equivalents: The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Securities Held-to-Maturity and Available-for-Sale: Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost. Debt and equity securities not classified as held-to-maturity or trading are classified as available-for-sale. Available-for-sale securities are stated at fair value, with the unrealized gains and losses, net of tax, reported as a component of accumulated other comprehensive income in stockholders' equity. The amortized cost of debt securities classified as held-to-maturity or available-for-sale 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 is included in interest income from investments. Interest and dividends are included in interest income from investments. Realized gains and losses, and declines in value judged to be other-than-temporary are included in net securities gains (losses). The cost of securities sold is based on the specific identification method. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities". Although the Statement is effective for years beginning after June 15, 1999, the Company adopted the statement early on July 1, 1998. Under provisions of the Statement, the Company reclassified all securities held-to-maturity to securities available-for-sale as of July 1, 1998. The adoption of SFAS No. 133 resulted in the cumulative effect of an accounting change of $776,000 being recognized as an increase in other comprehensive income. Inventories: Inventories are stated at the lower of cost (first-in, first- out method) or market. Other Assets: Included in other assets at December 31, 1998 and 1997 are approximately $3,888,000 and $6,021,000, respectively, of payments made to customers under the Company's conversion assistance program. F-6 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 approximately $3,105,000, $3,037,000 and $2,907,000 for the years ended December 31, 1998, 1997 and 1996, respectively. During 1994, after technological feasibility was established, the Company began capitalizing software development costs incurred in connection with the planned introduction of a stored value electronic payment card. The Company capitalized approximately $667,000 and $11,584,000 in 1997 and 1996, respectively, related to the development of the stored value card. 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 $25,000,000. 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. 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. Intangible Assets: Intangible assets consist of the following at December 31:
1998 1997 -------- -------- (in thousands) Goodwill............................................... $ 82,071 $ 82,071 Purchased merchant contracts........................... 33,497 15,865 Customer lists and other............................... 31,144 25,046 -------- -------- $146,712 $122,982 ======== ========
Goodwill and amounts assigned to the customer lists are being amortized by the straight-line method over 15-25 years. Agreements not to compete are amortized over the life of the agreements. Purchased merchant contracts are recorded at cost and are evaluated by management for impairment at each balance sheet date through review of actual attrition and cash flows generated by the contracts in relation to the expected attrition and cash flows and the recorded amortization expense. If, upon review, actual attrition and cash flows indicate impairment of the value of the purchased merchant contracts, an impairment loss would be recognized. Amortization expense was recognized on a straight-line basis over an estimated useful life of five years through December 31, 1997. Effective January 1, 1998, the Company changed the estimated useful life of its purchased merchant contracts to six years. This change in accounting estimate is accounted for under the provisions of Accounting Principles Board (APB) Opinion No. 20, "Accounting Changes." Accordingly, the net book value of purchased merchant contracts as of January 1, 1998 is amortized over the remaining useful life of the contracts (using six years). Additionally, all purchased merchant contracts capitalized in 1998 are being amortized over a period of six years. The effect of the change in accounting estimate in 1998 was an increase to net income of approximately $583,000. On July 20, 1998, the Company acquired the terminal driving business of a certain entity. The acquisition was accounted for under the purchase method; accordingly, results of operations from this business have been included in the consolidated statements of income since the date of acquisition. The total cost of the acquisition was approximately $6 million and substantially all of the purchase price was allocated to customer lists based upon the fair value of the assets acquired. The customer lists are being amortized by the straight-line method over 15 years. Use of Estimates: The preparation of the consolidated 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. F-7 Income Taxes: The Company and its wholly-owned subsidiaries file a consolidated Federal tax return. Each subsidiary provides for income taxes using the liability method on a separate-return basis and remits to or receives from the Company amounts currently payable or receivable. Revenue Recognition: Revenue from credit card and other transaction processing activities are recorded when the service is provided, gross of interchange and network fees charged to the Company, which are recorded as a cost of operations when the transactions have been settled. Revenues from service contracts and product sales are recognized when the service is provided or the equipment is shipped. Service contracts and related sales include all revenues under system service contracts, including revenues from sales of terminal hardware when the contract included such sales. Earnings Per Share: Basic and diluted earnings per share are calculated in accordance with SFAS No. 128, "Earnings Per Share." All earnings per share amounts for all periods have been presented to conform to the Statement 128 requirements. Earnings per share, related per share data, stock options and stock option prices have been restated to reflect all stock splits through December 31, 1998. Stock-based Compensation: The Company grants options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of the grant. These stock option grants are accounted for in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees," and accordingly, the Company recognizes no compensation expense for the stock option grants. Comprehensive Income: In 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" which established new rules for the reporting and display of comprehensive income and its components; however, the adoption of this statement in 1998 had no impact on the Company's net income or stockholders' equity. SFAS No. 130 requires unrealized gains or losses on the Company's available-for-sale securities, to be included in accumulated other comprehensive income in stockholders' equity. Prior year financial statements have been reclassified to conform to the requirements of SFAS No. 130. F-8 Note B--Securities The following is a summary of securities available-for-sale and held-to- maturity:
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------- (in thousands) Securities Available-for-sale December 31, 1998 U.S. Government and agency Securities...................... $ 29,603 $ 281 $ (74) $ 29,810 Mortgage-backed securities....... 130,355 395 (370) 130,380 Municipal securities............. 116,630 1,972 (394) 118,208 -------- ------ ----- -------- Total debt securities.......... 276,588 2,648 (838) 278,398 Equity securities................ 9,782 9,782 -------- ------ ----- -------- $286,370 $2,648 $(838) $288,180 ======== ====== ===== ======== December 31, 1997 U.S. Treasury securities......... $ 4,003 $ 2 $ $ 4,005 U.S. Government and agency Securities...................... 41,338 (131) 41,207 Mortgage-backed securities....... 77,638 387 (180) 77,845 Municipal securities............. 11,194 87 (4) 11,277 -------- ------ ----- -------- Total debt securities.......... 134,173 476 (315) 134,334 Equity securities................ 5,865 5,865 -------- ------ ----- -------- $140,038 $ 476 $(315) $140,199 ======== ====== ===== ======== Securities Held-to-Maturity: December 31, 1997 U.S. Government and agency Securities...................... $ 9,256 $ 60 $ $ 9,316 Mortgage-backed securities....... 19,818 187 20,005 Municipal securities............. 23,434 879 24,313 -------- ------ ----- -------- $ 52,508 $1,126 $ $ 53,634 ======== ====== ===== ========
There were no material gains or losses on securities sold during the three years ended December 31, 1998. The scheduled maturities of securities available-for-sale, excluding equity securities, at December 31, 1998, was as follows:
Available-for-Sale ------------------ Amortized Fair Cost Value --------- -------- (in thousands) Due in one year or less............................... $ 34,705 $ 34,631 Due in one to five years.............................. 50,243 51,038 Due in five to ten years.............................. 109,563 110,683 Due after ten years................................... 82,077 82,046 -------- -------- $276,588 $278,398 ======== ========
For purposes of the maturity table, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the weighted-average contractual maturities of underlying collateral. The mortgage-backed securities may mature earlier than their weighted-average contractual maturities because of principal prepayments. F-9 Expected maturities on other 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 $95 million and $52 million at December 31, 1998 and December 31, 1997, respectively, were pledged to secure notes payable to the Federal Home Loan Bank. Note C--Inventories At December 31, inventories consisted of:
1998 1997 ------- ------ (in thousands) Point of sale equipment................................... $10,457 $5,745 Repair parts.............................................. 939 153 ------- ------ $11,396 $5,898 ======= ======
Note D--Property and Equipment At December 31, property and equipment consisted of:
1998 1997 -------- -------- (in thousands) Land................................................... $ 1,050 $ 1,050 Building & improvements................................ 15,101 14,591 Computer facilities and equipment...................... 254,378 199,833 Office furniture and equipment......................... 21,855 16,582 Leasehold improvements................................. 10,553 8,898 -------- -------- $302,937 $240,954 ======== ========
Depreciation expense was approximately $39.1 million, $33.5 million and $28.4 million for the years ended December 31, 1998, 1997 and 1996, respectively. Note E--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 million. Borrowings under the agreement are unsecured and bear interest at variable rates. Borrowings of $21 million and $29 million, which approximated fair value, were outstanding under the agreement at December 31, 1998 and 1997, respectively. Average borrowings under this agreement during 1998 were $29.4 million at an effective interest rate of 5.81%. During 1997, average borrowings were approximately $41.3 million at an effective interest rate of 5.84% and, during 1996, average borrowings were approximately $39.9 million at an effective interest rate of 5.82%. 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. The Company also has available $20 million in unsecured lines of credit with other financial institutions, which expire on various dates throughout 1999. No amounts were outstanding on these lines at December 31, 1998 or 1997. F-10 Note F--Long-Term Debt and Leases At December 31, long-term debt consisted of:
1998 1997 -------- -------- (in thousands) Notes payable to the Federal Home Loan Bank........... $ 73,000 $ 28,000 Note payable to bank for ATMs......................... 116 561 Note payable to stockholder........................... 125,000 150,213 -------- -------- 198,116 178,774 Less current maturities............................... (25,116) (25,445) -------- -------- $173,000 $153,329 ======== ========
Notes payable to the Federal Home Loan Bank are adjustable rate advances due between May 20, 2002 and September 11, 2008. Current interest rates range from 5.41% to 6.08% and are secured by securities available-for-sale with a market value of approximately $95 million and $52 million at December 31, 1998 and 1997, respectively. The note payable to bank to purchase cash dispensing machines (ATMs) is payable through March 1, 1999 in monthly installments of $38,969 including interest at 6.25% and is secured by ATMs with a net book value of $701,034 at December 31, 1998 and $981,445 at December 31, 1997. Note payable to stockholder represents an unsecured promissory note payable due in equal quarterly installments through 2003, which bears interest at 6.40%. Annual maturities of the note are $25 million per year through 2003. The Company rents office facilities and equipment under noncancelable operating leases expiring at various dates through 2005. Rental expense for operating leases amounted to approximately $5.1 million, $4.8 million and $5.1 million for the years ended December 31, 1998, 1997 and 1996, respectively. On May 22, 1998, the Company entered into a $15 million operating lease agreement replacing the remainder of the original subrental agreement on EPS's headquarters. The terms for the operating lease provide for initial seven-year term through 2005 with an option to renew for two additional five year terms. Future maturities of notes payable and minimum lease payments for operating leases with initial or remaining terms in excess of one year are as follows:
Notes Operating Payable Leases -------- --------- (in thousands) Year ending December 31: 1999................................................. $ 25,116 $ 4,994 2000................................................. 25,000 3,642 2001................................................. 25,000 2,879 2002................................................. 53,000 2,400 2003................................................. 35,000 1,969 Thereafter........................................... 35,000 1,632 -------- ------- Total future payments................................ $198,116 $17,516 ======== =======
Note G--Employee Benefit Plans Effective March 1, 1998, the Company established the Concord EFS Savings Plan (the Plan). Employees who have reached the age of 21 and completed one year of service with the Company are eligible to participate in the Plan. The Plan provides for voluntary tax-deferred contributions by eligible employees and discretionary Company contributions. The Company's cost related to the Plan in 1998 was approximately $114,000. F-11 The Electronic Payment Services, Inc. Retirement Savings Plan (the EPS Plan) covers substantially all employees of EPS. Under the terms of the EPS 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 EPS Plan includes a Section 401(k) savings feature wherein EPS 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 1998, 1997 and 1996 expenses under the EPS Plan were approximately $3,685,000, $3,095,000 and $2,687,000, respectively. Note H--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 the Company's deferred tax liabilities and assets at December 31, are as follows:
1998 1997 ------- ------- (in thousands) Deferred tax liabilities: Property and equipment................................. $ 3,976 $ 6,113 Intangibles............................................ 4,460 4,923 Securities available-for-sale.......................... 641 62 Capitalization of research & development costs......... 13,994 8,619 Other.................................................. 1,284 1,132 ------- ------- Total deferred tax liabilities........................... 24,355 20,849 ------- ------- Deferred tax assets: Net operating loss carryforward........................ $ 2,003 $ 2,626 Nondeductible reserves................................. 5,311 3,762 Bad debt allowance..................................... 248 502 Inventory.............................................. 37 57 Merchant contracts purchased........................... 1,361 488 Other.................................................. 36 154 ------- ------- Total deferred tax assets................................ 8,996 7,589 ------- ------- Net deferred tax liabilities............................. $15,359 $13,260 ======= =======
F-12 The components of the provision (benefit) for income taxes for the three years ended December 31 are as follows:
1998 1997 1996 ------- ------- ------- (in thousands) Allocated to net income: Current Federal.................................... $47,622 $41,005 $15,706 State...................................... 2,677 4,096 745 ------- ------- ------- 50,299 45,101 16,451 Deferred Federal.................................... 435 (6,297) 6,797 State...................................... 1,085 (1,033) 99 ------- ------- ------- 1,520 (7,330) 6,896 ------- ------- ------- $51,819 $37,771 $23,347 ======= ======= ======= Allocated to other comprehensive income: Deferred Federal.................................... $ 504 $ 281 $ (138) State...................................... 75 42 (20) ------- ------- ------- $ 579 $ 323 $ (158) ======= ======= =======
The reconciliation of income taxes computed at the U.S. federal statutory tax rate of 35% to income tax expense for the three years ended December 31 are as follows:
1998 1997 1996 ------- ------- ------- (in thousands) Tax at statutory rate.......................... $49,180 $34,112 $21,378 State income taxes, net of federal benefit..... 2,461 1,989 538 Nondeductible amortization of goodwill......... 1,076 1,031 1,042 Tax exempt interest income..................... (1,175) (511) (124) Other, net..................................... 277 1,150 513 ------- ------- ------- $51,819 $37,771 $23,347 ======= ======= =======
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. The Company has federal and state net operating loss carryforwards that expire on various dates through 2006 and are subject to annual limitations. F-13 Note I--Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share:
Year Ended December 31 -------------------------- 1998 1997 1996 -------- -------- -------- (in thousands, except per share data) Numerator: Net income........................................ $ 88,695 $ 59,692 $ 37,732 ======== ======== ======== Denominator: Denominator for basic earnings per share, weighted-average shares.......................... 127,693 126,592 116,291 Effect of dilutive securities, employee stock options.......................................... 4,254 3,345 3,898 -------- -------- -------- Denominator for diluted earnings per share-- adjusted weighted-average shares and assumed conversions...................................... 131,947 129,937 120,189 ======== ======== ======== Basic earnings per share............................ $ 0.69 $ 0.47 $ 0.32 ======== ======== ======== Diluted earnings per share.......................... $ 0.67 $ 0.46 $ 0.31 ======== ======== ========
Note J--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 13,668,750 shares of Common Stock for the benefit of the Company's key employees. Options are granted at not less than 100% of the market value on the date of the grant (110% in the case of a holder of more than 10% of the outstanding shares) and generally become exercisable within four years of the date of the grant. Information pertaining to the Concord Plan is summarized below, in thousands, except price per share:
Number of Weighted Weighted Shares Average Average Options Under Option Exercise Price Aggregate Price Exercisable ------------ -------------- --------------- ----------- Outstanding at January 1, 1996................ 6,323 $ 3.68 $ 23,283 2,903 ======== ===== Granted............... 1,308 13.73 Exercised............. (1,877) 2.59 Terminated............ (501) 4.26 ------ Outstanding at December 31, 1996............... 5,253 6.51 $ 34,203 2,380 ======== ===== Granted............... 3,129 15.22 Exercised............. (1,614) 4.13 Terminated............ (40) 10.87 ------ Outstanding at December 31, 1997............... 6,728 11.11 $ 74,732 1,860 ======== ===== Granted............... 2,989 20.37 Exercised............. (477) 6.52 Terminated............ (34) 14.60 ------ 9,206 $14.34 $132,006 2,988 ====== ======== =====
The weighted average grant date fair value of options granted during 1998, 1997 and 1996 was $6.15, $4.67 and $3.65, respectively. F-14 The following table provides additional information regarding options outstanding as of December 31, 1998:
Weighted Average Remaining Weighted Average Contractual Life Number of Exercise Price Option Exercise Options Weighted Average of Options Options of Options Price Range Outstanding Exercise Price in Years Exercisable Exercisable - --------------- ----------- ---------------- ---------------- ----------- ---------------- $ 2.73- $ 4.79 1,162 $ 3.31 4.92 1,155 $ 3.30 5.93- 13.00 1,882 9.73 6.82 1,029 9.06 15.08- 26.13 6,162 17.83 8.66 804 15.55 $ 2.73- $26.13 9,206 $14.34 7.81 2,988 $ 8.58
In 1995, EPS adopted the Electronic Payment Services, Inc. 1995 Stock Option Plan, as amended (the EPS Plan). In connection with the merger of EPS with the Parent as discussed in Note L, all outstanding options in the EPS Plan accelerated and vested in November 1998. The total amount of option shares (after conversion to Concord EFS, Inc. shares) at December 31, 1998 was 2,244,795, at a weighted average exercise price of $8.48. The Company has elected to follow APB No. 25 and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under SFAS No. 123, "Accounting for Stock Based Compensation," requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB No. 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 1998, 1997, and 1996, respectively: risk-free interest rates of 6.0%, 6.25%, and 6.5%, and volatility factors of the expected market price of the Company's common stock of .358, .344, and .265. Assumptions that remained constant for all years were dividend yields of 0% and a weighted average expected life of the options of three years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company'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, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information is as follows for the years ended December 31 (in thousands, except for earnings per share):
1998 1997 1996 ------- ------- ------- Pro forma net income............................. $77,327 $55,137 $36,647 Pro forma basic earnings per share............... $ 0.61 $ 0.44 $ 0.32 Pro forma diluted earnings per share............. $ 0.59 $ 0.42 $ 0.30
Pro forma disclosures are not likely to be representative of the effects 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. On February 18, 1999, the shareholders approved an amendment to the Concord Plan to increase the shares issuable under the plan from 13,668,750 to 25,000,000 shares. F-15 Note K--Employment Agreements In February 1998, the Company entered into incentive agreements with its CEO and President, each for a term of five years expiring February 2003. Each agreement sets out the executive's annual base pay, provides for the establishment of an incentive compensation program under which each executive will have a bonus potential of 50% of annual base salary, and provides for grants of stock options, including regular stock options of up to 375,000 shares a year based on performance and 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. Employment agreements are also in effect for the President and Chief Executive Officer of EPS and four of his direct reports. The agreements have no fixed term but are terminable at any time with a fixed amount of severance to be paid only in the event of termination or removal without cause (or with "good cause" in the case of the President and Chief Executive Officer). Note L--Mergers and Acquisitions On June 30, 1998, the Company merged with Digital Merchant Systems of Illinois, Inc. and American Bankcard International, Inc. (jointly named DMS). DMS is a leading independent sales organization in the credit card industry. The mergers were accounted for using the pooling of interests method of accounting. The Company exchanged 4,425,000 shares of its common stock for all of the outstanding common stock of DMS. In accordance with pooling of interests accounting, no adjustments have been made to the historical carrying value of the assets and liabilities of DMS. The following table presents selected financial information, split between the Company, EPS and DMS:
Year ended December 31 ----------------------- 1998 1997 ----------- ----------- Revenue: Concord EFS, Inc............................... $ 361,604 $ 240,004 EPS............................................ 258,773 219,956 DMS(1)......................................... 14,134 30,070 ----------- ----------- $ 634,511 $ 490,030 =========== =========== Net income: Concord EFS, Inc............................... $ 61,857 $ 42,746 EPS............................................ 24,924 18,010 DMS(1)......................................... 1,914 (1,064) ----------- ----------- $ 88,695 $ 59,692 =========== ===========
- -------- (1) The 1998 amounts reflect the results of operations from January 1, 1998 through June 30, 1998. The results of operations from July 1, 1998 through December 31, 1998 are included in Concord EFS, Inc. amounts. The financial statements of DMS prior to January 1, 1997, were immaterial for restatement. On February 18, 1999, the shareholders approved the Company's issuance of shares in connection with its acquisition of EPS. The Company completed the merger with EPS on February 26, 1999 by issuing 30,064,838 shares of the Company's common stock for all of the outstanding common stock of EPS. The acquisition was accounted for using the pooling of interests method of accounting. The consolidated financial statements present financial information restated for all years presented. EPS provides transaction processing services to financial institutions, and retailers throughout the United States. EPS also owns and operates electronic data processing and data-capture networks that process transactions originating at ATMs and point-of-sale terminals. F-16 In connection with the acquisition of EPS, the Company expects to incur approximately $10.5 million in acquisition related expenses in the first quarter of 1999. These expenses are primarily investment banking, legal and accounting fees. Although no definite plan has been adopted, management is currently reviewing operational synergies, such as duplicate facilities, computer and communication hardware and software and other contractual relationships including severance that may require additional charges in the second quarter of 1999 and beyond. Management plans to complete this analysis by May 31, 1999. Note M--Operations By Industry Segment In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which establishes standards for reporting financial information about operating segments in annual and interim financial statements. SFAS No. 131 requires that financial information be reported on the same basis that is reported internally for evaluating segment performance and allocating resources to segments. SFAS No. 131 addresses how financial information is disclosed in annual and interim reports; therefore, its adoption in 1998 had no impact on the financial condition or operating results of the Company. Concord has two reportable segments: Merchant Card Services and ATM Services. The Company's revenue from Merchant Card Services results from processing credit card transactions using VISA, MasterCard, Discover, American Express and Diner's Club Cards. In addition, the Company processes debit card transactions for banks issuing such cards. Merchant Card Services provides electronic payment services to supermarket chains, grocery stores, convenience store merchants and other retailers. Merchant Card Services also includes trucking services providing a variety of flexible payment systems that enable drivers of trucking companies to use payment cards to purchase fuel and services and to obtain cash advances at truck stops. ATM Services include transactional fee income and surcharge revenue from ATMs owned by the Company as well as ATM transaction processing for ATMs owned by the Company's merchants. The Company evaluates performance and allocates resources based on profit or loss from operations. Items classified as "Other" include revenue not identifiable with the two reportable segments described above and costs of operations and selling, general and administrative expenses which are not allocated to the reportable segments. The accounting policies of the reportable segments are the same as those described in Note A Significant Accounting Policies. F-17 The Company's reportable segments are business units that offer different products. The reportable segments are each managed separately because they are distinct products for different end users. No single customer of the Company accounts for a material portion of the Company's revenues. Industry segment information for the years ended December 31, 1998, 1997, and 1996 is presented below:
Merchant ATM Card Services Services Other Total ------------- --------- --------- --------- (in thousands) Year ended December 31, 1998 Revenue....................... $ 423,267 $ 198,398 $ 12,846 $ 634,511 Cost of operations............ (231,616) (118,968) (95,931) (446,515) Selling, general, & administrative expenses...... (51,185) (51,185) Taxes & interest, net......... (48,116) (48,116) --------- --------- --------- --------- Net income.................... $ 191,651 $ 79,430 $(182,386) $ 88,695 ========= ========= ========= ========= Year ended December 31, 1997 Revenue....................... $ 311,167 $ 166,841 $ 12,022 $ 490,030 Cost of operations............ (164,366) (95,311) (81,093) (340,770) Selling, general, & administrative expenses...... (50,008) (50,008) Taxes & interest, net......... (39,560) (39,560) --------- --------- --------- --------- Net income.................... $ 146,801 $ 71,530 $(158,639) $ 59,692 ========= ========= ========= ========= Year ended December 31, 1996 Revenue....................... $ 207,211 $ 135,507 $ 12,741 $ 355,459 Cost of operations............ (121,183) (71,423) (48,667) (241,273) Selling, general, & administrative expenses...... (42,811) (42,811) Taxes & interest, net......... (33,643) (33,643) --------- --------- --------- --------- Net income.................... $ 86,028 $ 64,084 $(112,380) $ 37,732 ========= ========= ========= =========
Note N--Commitments and Contingencies The Company is a party to various claims and litigation in the normal course of business, none of which is expected to have a material effect on the consolidated financial statements. Note O--Debt and Dividend Restrictions In accordance with federal banking laws, certain restrictions exist regarding the ability of the banking subsidiary to transfer funds to the Parent 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, 1998, approximately $128,521,000 of undistributed earnings of EFSNB, included in consolidated retained earnings, was available for distribution to the Parent as dividends without prior regulatory approval. Under Federal Reserve regulations, the banking subsidiary is also limited as to the amount it may loan to affiliates, including the Parent, unless such loans are collateralized by specific obligations. At December 31, 1998, the maximum amount available for transfer from EFSNB to the Parent in the form of loans approximated 5.99% of consolidated net assets. Note P--Related Party Transactions The former stockholders of EPS are also customers of the Company and services are billed to them at rates comparable to nonrelated customers. Approximately 10%, 11%, and 14% of revenues were billed to these stockholders during 1998, 1997 and 1996, respectively. F-18 Note Q--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 for which it is practicable to estimate that value. These fair values are provided for disclosure purposes only, and do not impact carrying values of financial statement amounts. Cash and Cash Equivalents: The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets' fair values. Securities (Including Mortgage-backed Securities): 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. Long-term Borrowings: The fair values of the Company's long-term borrowings are estimated using discounted cash flow analyses based on the Company's current incremental borrowing rates for similar types of borrowing arrangements.
Carrying Amount Fair Value --------------- ---------- December 31, 1998 Financial Assets: Cash and cash equivalents........................ $ 82,029 $ 82,029 Available-for-sale securities.................... 288,180 288,180 Financial liabilities: Notes payable.................................... 198,116 196,652 December 31, 1997 Financial Assets: Cash and cash equivalents........................ $ 82,592 $ 82,592 Available-for-sale securities.................... 140,199 140,199 Held-to-maturity securities...................... 52,508 53,634 Financial liabilities: Notes payable.................................... 178,774 178,666
F-19 CONCORD EFS, INC. AND SUBSIDIARIES REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders Concord EFS, Inc. We have audited the accompanying consolidated balance sheets of Concord EFS, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. 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 Concord EFS, Inc. and subsidiaries as of December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Memphis, Tennessee February 26, 1999 F-20 CONCORD EFS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31 December 31 1999 1998 --------- ----------- (in thousands) ASSETS ------ Current assets Cash and cash equivalents............................. $ 77,285 $ 82,029 Securities available-for-sale......................... 315,776 288,180 Accounts receivable, net.............................. 124,735 106,662 Inventories........................................... 11,324 11,396 Prepaid expenses and other current assets............. 13,158 7,863 Deferred income taxes................................. 6,305 5,977 --------- --------- Total current assets................................ 548,583 502,107 Other assets............................................ 18,270 23,615 Property and equipment.................................. 311,054 302,937 Accumulated depreciation and amortization............. (157,406) (148,447) --------- --------- 153,648 154,490 --------- --------- Intangible assets....................................... 146,974 146,712 Accumulated amortization.............................. (47,838) (42,806) --------- --------- 99,136 103,906 --------- --------- Total assets........................................ $ 819,637 $ 784,118 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities Accounts payable and other liabilities................ $ 125,307 $ 112,376 Accrued liabilities................................... 71,532 47,641 Income taxes payable.................................. 19,489 10,148 Short-term borrowings................................. 17,000 21,000 Current maturities of long-term debt.................. 25,000 25,116 --------- --------- Total current liabilities........................... 258,328 216,281 --------- --------- Long-term debt, less current maturities................. 173,750 173,000 Deferred income taxes................................... 15,605 21,336 Other liabilities....................................... 8,905 12,966 Stockholders' equity Common Stock, $0.33 1/3 par value; authorized 200,000 shares, issued and outstanding 128,330 shares at March 31, 1999 and 127,935 shares at December 31, 1998................................................. 42,777 42,646 Additional paid-in capital............................ 61,388 55,018 Retained earnings and accumulated other comprehensive income............................................... 258,884 262,871 --------- --------- Total stockholders' equity.......................... 363,049 360,535 --------- --------- Total liabilities and stockholders' equity.......... $ 819,637 $ 784,118 ========= =========
See notes to condensed consolidated financial statements--unaudited. F-21 CONCORD EFS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For Three Months Ended March 31 ------------------------ 1999 1998 ----------- ----------- (in thousands, except per share data) Revenue.............................................. $ 170,234 $ 134,666 Cost of operations................................... 120,849 95,029 Selling, general and administrative expenses......... 12,368 13,100 Acquisition expenses and restructuring charges....... 34,810 -- ----------- ----------- Operating income..................................... 2,207 26,537 Other income (expense): Interest income.................................... 5,265 4,095 Interest expense................................... (3,533) (3,346) ----------- ----------- Income before income taxes........................... 3,939 27,286 Income taxes....................................... 6,807 9,937 ----------- ----------- Net income (loss).................................... $ (2,868) $ 17,349 =========== =========== Per share data: Basic earnings (loss) per share ................... $ (0.02) $ 0.14 =========== =========== Diluted earnings (loss) per share ................. $ (0.02) $ 0.13 =========== =========== Weighted average shares............................ 128,014 127,486 =========== =========== Adjusted weighted average shares and assumed conversions....................................... 133,083 130,849 =========== ===========
See notes to condensed consolidated financial statements--unaudited. F-22 CONCORD EFS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31 ------------------ 1999 1998 -------- -------- (in thousands) Net cash provided by operating activities................... $ 41,124 $ 19,521 Investing activities Acquisition of property and equipment..................... (11,628) (11,255) Securities held-to-maturity: Acquisition of securities............................... (4,539) Proceeds from maturity of securities.................... 2,944 Securities available-for-sale: Acquisition of securities............................... (48,467) (43,795) Proceeds from sales of securities....................... 13,575 12,667 Proceeds from maturity of securities.................... 5,564 8,851 Merchants contracts purchased............................. (4,896) (2,936) Other..................................................... (928) -------- -------- Net cash used in investing activities....................... (45,852) (38,991) Financing activities Proceeds from sale of common stock........................ 3,350 903 Proceeds from notes payable............................... 7,000 26,275 Repayment under credit agreement (net).................... (4,000) (9,000) Payments on notes payable................................. (6,366) (6,572) -------- -------- Net cash provided by (used in) financing activities......... (16) 11,606 -------- -------- Net decrease in cash and cash equivalents................... (4,744) (7,864) Cash and cash equivalents at beginning of period............ 82,029 82,592 -------- -------- Cash and cash equivalents at end of period.................. $ 77,285 $ 74,728 ======== ========
For purposes of these statements, the Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. See notes to condensed consolidated financial statements--unaudited. F-23 CONCORD EFS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 1999 Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 1999 are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. For further information, refer to the consolidated financial statements and footnotes thereto included in the Registrant's annual report on Form 10-K for the year ended December 31, 1998. The balance sheet at December 31, 1998 has been derived from the consolidated audited financial statements included in Exhibit 99 of the Company's Form 10-K for the year ended December 31, 1998. The balance sheet does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Restatement for Poolings The historical financial information presented herein has been restated to include the results of Electronic Payment Services, Inc. ("EPS") and Digital Merchant Systems of Illinois, Inc. and American Bankcard International, Inc. (jointly named "DMS"). EPS and DMS were acquired in separate pooling-of- interests transactions. In accordance with pooling-of-interests method of accounting, no adjustments have been made to the historical carrying amounts of assets and liabilities of either DMS or EPS. However, the financial information has been restated to include the operating results of DMS and EPS for all stated periods prior to the combinations. On February 18, 1999, the stockholders approved the Company's issuance of shares in connection with its acquisition of EPS. The Company completed the merger with EPS on February 26, 1999 by exchanging 30,064,838 shares of the Company's common stock for all of the outstanding common stock of EPS. EPS provides transaction processing services to financial institutions and retailers throughout the United States. EPS also owns and operates electronic data processing and data-capture networks that process transactions originating at ATMs and point-of-sale terminals. On June 30, 1998, the Company merged with DMS. DMS is an independent sales organization in the credit card industry. The Company exchanged 4,425,000 shares of its common stock for all of the outstanding common stock of DMS. F-24 The following table presents selected financial information, in thousands, split between the Company, EPS and DMS for the three months ended March 31, 1999 and 1998, respectively.
Three months ended March 31 ------------------ 1999 1998 -------- -------- (Unaudited) Revenue Concord EFS, Inc........................................... $124,129 $ 69,632 EPS (1).................................................... 46,105 58,399 DMS (2).................................................... 6,635 -------- -------- $170,234 $134,666 ======== ======== Net income (loss) Concord EFS, Inc........................................... $ (7,782) $ 11,367 EPS (1).................................................... 4,914 5,189 DMS (2).................................................... 793 -------- -------- $ (2,868) $ 17,349 ======== ========
- -------- (1) The 1999 amounts reflect the results of operations from January 1, 1999 through February 28, 1999. The results of operations from March 1, 1999 to March 31, 1999 are included in Concord EFS, Inc. amounts. (2) As the acquisition of DMS was completed on June 30, 1998, the 1999 amounts are included in Concord EFS, Inc. amounts. Stock Split The Board of Directors approved a three-for-two stock split on May 14, 1998. Shareholders of record as of June 1, 1998 were distributed additional shares on June 8, 1998. Comprehensive Income As of January 1, 1998, the Company adopted Financial Accounting Standards Board (FASB) Statement 130, "Reporting Comprehensive Income." Statement 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the Company's net income or stockholders' equity. Statement 130 requires unrealized gains or losses on the Company's available-for-sale securities, which prior to adoption were reported separately in stockholders' equity to be included in other comprehensive income. Prior year financial statements have been reclassified to conform to the requirements of Statement 130. During the first quarter of 1999 and 1998, total comprehensive income (loss), in thousands, amounted to ($3,747) and $17,485, respectively. F-25 Earnings (Loss) Per Share The following table sets forth the computation of basic and diluted earnings (loss) per share (in thousands, except per share data):
Three Months Ended March 31 -------------------- 1999 1998 --------- --------- Numerator: Net income (loss)................................. $ (2,868) $ 17,349 ========= ========= Denominator: Denominator for basic earnings per share, weighted-average shares.......................... 128,014 127,486 Effect of dilutive securities, employee stock options.......................................... 5,069 3,363 --------- --------- Denominator for diluted earnings per share adjusted for weighted-average shares and assumed conversions...................................... 133,083 130,849 ========= ========= Basic earnings (loss) per share..................... $ (0.02) $ 0.14 ========= ========= Diluted earnings (loss) per share................... $ (0.02) $ 0.13 ========= =========
Excluding acquisition costs and restructuring charges described in Management's Discussion and Analysis of Financial Condition and Results of Operations, basic and diluted earnings per share for the first quarter 1999 was $0.19 and $0.18, respectively. Earnings per share and related per share data have been restated to reflect all stock splits. Operations By Industry Segment In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which establishes standards for reporting financial information about operating segments in annual and interim financial statements. SFAS No. 131 requires that financial information be reported on the same basis that is reported internally for evaluating segment performance and allocating resources to segments. SFAS No. 131 addresses how supplemental financial information is disclosed in annual and interim reports; therefore, its adoption in 1998 had no impact on the financial condition or operating results of the Company. Concord has two reportable segments: Merchant Card Services and ATM Services. Merchant Card Services include the processing of credit card transactions for all major credit card brands including VISA, MasterCard, American Express, Discover and Diners Club; the processing of debit card transactions for financial institutions issuing these and similar cards; and the provision of electronic payment services to supermarket chains and multiple lane retailers, financial institutions, petroleum and convenience stores, grocery stores, trucking companies and other retailers. ATM Services revenue consists of fee income and other surcharges charged for proprietary ATMs and processing fees for third-party ATMs. The balance of the Company's revenue is derived principally from check verification and authorization services, sales of point-of-sale terminals and payroll processing services. F-26 ATM Services include transactional fee income and other surcharges charged for proprietary ATMs and processing fees for third party ATMs. The remaining balance of the Company's revenue is derived principally from check verification and authorization services, sales of point-of-sale terminals and payroll processing services. The Company evaluates performance and allocates resources based on profit or loss from operations. Items classified as "Other" include revenue not identifiable with the two reportable segments described above and costs of operations and selling, general and administrative expenses which are not allocated to the reportable segments. No single customer of the Company accounts for a material portion of the Company's revenues. Industry segment information, in thousands, for the three months ended March 31, 1999 and 1998 is presented below:
Merchant ATM Card Services Services Other Total ------------- -------- --------- --------- Three months ended March 31, 1999 Revenue........................ $112,326 $ 52,449 $ 5,459 $ 170,234 Cost of operations............. (63,564) (31,105) (26,180) (120,849) Selling, general, & administra- tive expenses................. (12,368) (12,368) Acquisition costs and restruc- turing charges................ (34,810) (34,810) Taxes & interest, net.......... (5,075) (5,075) -------- -------- --------- --------- Net income (loss).............. $ 48,762 $ 21,344 $ (72,974) $ (2,868) ======== ======== ========= ========= Three months ended March 31, 1998 Revenue........................ $ 85,203 $ 45,202 $ 4,261 $ 134,666 Cost of operations............. (46,654) (26,264) (22,111) (95,029) Selling, general, & administrative expenses....... (13,100) (13,100) Taxes & interest, net.......... (9,188) (9,188) -------- -------- --------- --------- Net income..................... $ 38,549 $ 18,938 $ (40,138) $ 17,349 ======== ======== ========= =========
F-27 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 30,963,125 Shares Concord EFS, Inc. Common Stock [CONCORD LOGO] -------- PROSPECTUS , 1999 -------- Salomon Smith Barney William Blair & Company Goldman, Sachs & Co. J. P. Morgan & Co. Morgan Keegan & Company, Inc. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ + + +The information in this prospectus is not complete and may be changed. We may + +not sell these securities until the registration statement filed with the + +Securities and Exchange Commission is effective. This prospectus is not an + +offer to sell these securities and it is not soliciting an offer to buy these + +securities in any state where the offer or sale is not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ ALTERNATE INTERNATIONAL COVER PAGE SUBJECT TO COMPLETION, DATED MAY 18, 1999 PROSPECTUS 30,963,125 Shares [CONCORD LOGO] Concord EFS, Inc. Common Stock -------- Concord EFS, Inc. is selling 2,000,000 shares of its common stock and the selling stockholders named in this prospectus are selling 28,963,125 shares of common stock for a total of 30,963,125 shares of common stock. Concord will not receive any proceeds from the sale of the shares by the selling stockholders. The underwriters named in this prospectus may purchase up to 4,640,000 additional shares of common stock from Concord under certain circumstances. Of the 30,963,125 shares of common stock that Concord and the selling stockholders are selling, 24,770,500 shares are being offered in the United States and Canada by a syndicate of U.S. underwriters and 6,192,625 shares are being offered concurrently outside the United States and Canada by a syndicate of international underwriters. The common stock is quoted on the Nasdaq National Market under the symbol "CEFT." The last reported sale price of the common stock on the Nasdaq National Market on May 14, 1999, was $28.625 per share. -------- Investing in the common stock involves risks. See "Risk Factors" beginning on page 6. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. --------
Per Share Total --------- ----- Public Offering Price........................................... $ $ Underwriting Discount........................................... $ $ Proceeds to Concord (before expenses)........................... $ $ Proceeds to the Selling Stockholders (before expenses).......... $ $
The underwriters are offering the shares subject to various conditions. The underwriters expect to deliver the shares to purchasers on or about , 1999. -------- Salomon Smith Barney Goldman Sachs International William Blair & Company International Joint Book-Running Manager Joint Book-Running Manager Joint Lead Manager
J.P. Morgan Securities Ltd. Morgan Keegan & Company, Inc. , 1999 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ALTERNATE INTERNATIONAL BACK COVER PAGE 30,963,125 Shares Concord EFS, Inc. Common Stock [CONCORD LOGO] -------- PROSPECTUS , 1999 -------- Salomon Smith Barney International William Blair & Company Goldman Sachs International J. P. Morgan Securities Ltd. Morgan Keegan & Company, Inc. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 14. Other Expenses of Issuance and Distribution SEC registration fee.......................................... $ 325,386 The Nasdaq National Market fee................................ 17,500 National Association of Securities Dealers fee................ 30,500 Legal fees and expenses....................................... 250,000 Accounting fees and expenses.................................. 150,000 Printing and engraving expenses............................... 210,000 Blue Sky fees................................................. 5,000 Miscellaneous................................................. 111,614 ---------- Total..................................................... $1,100,000 ==========
- -------- All of the above expenses will be borne by the Registrant. Item 15. Indemnification of Officers and Directors Section 145 of the DGCL empowers a Delaware corporation to indemnify any persons who are, or are threatened to be made, parties to any threatened, pending or completed legal action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation), by reason of the fact that such person was an officer or director of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, provided that such officer or director acted in good faith and in a manner he reasonably believed to be in or not opposed to the corporation's best interests, and, for criminal proceedings, had no reasonable cause to believe his conduct was illegal. A Delaware corporation may indemnify officers and directors in an action by or in the right of the corporation under the same conditions, except that no indemnification is permitted without judicial approval if the officer or director is adjudged to be liable to the corporation in the performance of his duty. Where an officer or director is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him against the expenses which such officer or director actually and reasonably incurred. In accordance with the DGCL, the Registrant's Restated Certificate of Incorporation contains a provision to limit the personal liability of the Registrant's directors for violations of their fiduciary duty. This provision eliminates each director's liability to the Registrant or its stockholders for monetary damages except to the extent provided by the DGCL (i) for any breach of the director's duty of loyalty to the Registrant or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under section 174 of the DGCL providing for liability of directors for unlawful payment of dividends or unlawful stock purchases or redemptions, or (iv) for any transactions from which a director derived an improper personal benefit. The effect of this provision is to eliminate the personal liability of directors for monetary damages for actions involving a breach of their fiduciary duty of care, including any such actions involving gross negligence. The Registrant's Restated Certificate of Incorporation and By-Laws provide for indemnification of the Registrant's officers and directors to the fullest extent permitted by applicable law. In addition, the Registrant maintains insurance policies which provide coverage for its officers and directors in certain situations where the Registrant cannot directly indemnify such officers or directors. II-1 Item 16. Exhibits
Exhibit Number Description of Exhibit ------- ---------------------- 1.1 Form of Underwriting Agreement. 3.1 Restated Certificate of Incorporation of the Registrant is incorporated herein by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-8 (File No. 333- 74215), filed on March 10, 1999. 3.2 By-Laws of the Registrant are incorporated herein by reference to Exhibit 4.2 to the Registrant's Registration Statement on Form S-8 (File No. 333-74215), filed on March 10, 1999. 5.1 Opinion of Sidley & Austin. 23.1 Consent of Sidley & Austin (included in Exhibit 5.1 hereto). 23.2 Consent of Ernst & Young LLP. 24.1 Powers of Attorney.
Item 17. Undertakings (a) The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. (c) The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-2 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Memphis, State of Tennessee, on May 18, 1999. Concord EFS, Inc. /s/ Dan M. Palmer By: _________________________________ Dan M. Palmer Chairman of the Board of Directors and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this amendment to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated: /s/ Dan M. Palmer Chairman of the Board of Dated: May 18, ____________________________________ Directors and Chief 1999 Dan M. Palmer Executive Officer (Principal Executive Officer) /s/ Thomas J. Dowling Vice President, Chief Dated: May 18, ____________________________________ Financial Officer 1999 Thomas J. Dowling (Principal Financial and Accounting Officer) /s/ Edward A. Labry III President and Director Dated: May 18, ____________________________________ 1999 Edward A. Labry III * Director ____________________________________ Douglas C. Altenbern * Director ____________________________________ David C. Anderson * Director ____________________________________ Richard Buchignani * Director ____________________________________ Richard M. Harter * Director ____________________________________ Joyce Kelso * Director ____________________________________ Richard P. Kiphart
II-3 * Director ____________________________________ Jerry D. Mooney * Director ____________________________________ Paul Whittington
/s/ William E. Lucado Dated: May 18, 1999 *By: _____________________ William E. Lucado Attorney- in-fact II-4 EXHIBIT INDEX TO REGISTRATION STATEMENT ON FORM S-3 CONCORD EFS, INC. Item 16. Exhibits
Exhibit Number Description of Exhibit ------- ---------------------- 1.1 Form of Underwriting Agreement. 3.1 Restated Certificate of Incorporation of the Registrant is incorporated herein by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-8 (File No. 333-74215), filed on March 10, 1999. 3.2 By-Laws of the Registrant are incorporated herein by reference to Exhibit 4.2 to the Registrant's Registration Statement on Form S-8 (File No. 333-74215), filed on March 10, 1999. 5.1 Opinion of Sidley & Austin. 23.1 Consent of Sidley & Austin (included in Exhibit 5.1 hereto). 23.2 Consent of Ernst & Young LLP. 24.1 Powers of Attorney.
EX-1.1 2 FORM OF UNDERWRITING AGREEMENT Exhibit 1.1 CGSH draft: 5/14/99 Concord EFS, Inc. 24,770,500 Shares/a/ Common Stock ($0.33 1/3 par value) U.S. Underwriting Agreement New York, New York ., 1999 Salomon Smith Barney Inc. William Blair & Company, L.L.C. Goldman, Sachs & Co. J.P. Morgan Securities Inc. Morgan Keegan & Company, Inc. As U.S. Representatives of the several U.S. Underwriters, c/o Salomon Smith Barney Inc. 388 Greenwich Street New York, New York 10013 Ladies and Gentlemen: Concord EFS, Inc., a corporation organized under the laws of Delaware (the "Company"), proposes to sell to the several U.S. Underwriters, for whom the U.S. Representatives are acting as representatives, 1,600,000 shares of Common Stock, $0.33 1/3 par value ("Common Stock") of the Company, and the Selling Stockholders propose to sell to the several U.S. Underwriters 23,170,500 shares of Common Stock (said shares to be issued and sold by the Company and shares to be sold by the Selling Stockholders collectively being hereinafter called the "U.S. Underwritten Securities"). The Company also proposes to grant to the U.S. Underwriters an option to purchase up to 3,712,000 shares of Common Stock to cover over-allotments (the "U.S. Option Securities" and together with the U.S. Underwritten Securities, the "U.S. Securities"). It is understood that the Company and the Selling Stockholders are concurrently entering into the International Underwriting Agreement providing for the sale by the Company and the Selling Stockholders of an aggregate of 6,192,625 shares of Common Stock (said shares to be sold by the Company and the Selling Stockholders pursuant to the International Underwriting Agreement being hereinafter called the "International Underwritten Securities") and providing for the grant to the International Underwriters of an option to purchase from the Company up to 928,000 shares of Common Stock (the "International Option Securities" and together with the International Underwritten Securities, the "International - ------------ /a/ Plus an option to purchase from the Company up to 3,712,000 additional U.S. Securities to cover over-allotments. Securities"). It is further understood and agreed that the International Underwriters and the U.S. Underwriters have entered into an Agreement Between U.S. Underwriters and International Underwriters dated the date hereof (the "Agreement Between U.S. Underwriters and International Underwriters"), pursuant to which, among other things, the International Underwriters may purchase from the U.S. Underwriters a portion of the U.S. Securities to be sold pursuant to this U.S. Underwriting Agreement and the U.S. Underwriters may purchase from the International Underwriters a portion of the International Securities to be sold pursuant to the International Underwriting Agreement. The use of the neuter in this U.S. Underwriting Agreement shall include the feminine and masculine wherever appropriate. Any reference herein to the Registration Statement, the Preliminary Prospectuses or the Prospectuses shall be deemed to refer to and include the documents incorporated by reference therein pursuant to Item 12 of Form S-3 which were filed under the Exchange Act on or before the Effective Date of the Registration Statement or the issue date of such Preliminary Prospectuses or the Prospectuses, as the case may be; and any reference herein to the terms "amend", "amendment" or "supplement" with respect to the Registration Statement, any Preliminary Prospectuses or the Prospectuses shall be deemed to refer to and include the filing of any document under the Exchange Act after the Effective Date of the Registration Statement, or the issue date of any Preliminary Prospectuses or the Prospectuses, as the case may be, deemed to be incorporated therein by reference. Certain terms used in this U.S. Underwriting Agreement are defined in Section 17 hereof. 1. Representations and Warranties. (i) The Company represents and warrants to, and agrees with, each U.S. Underwriter as set forth below in this Section 1. (a) The Company meets the requirements for use of Form-3 under the Act and has prepared and filed with the Commission a registration statement (file number 333-77829) on Form S-3, including related preliminary prospectuses, for registration under the Act of the offering and sale of the Securities. The Company may have filed one or more amendments thereto, including the related preliminary prospectuses, each of which has previously been furnished to you. The Company will next file with the Commission either (1) prior to the Effective Date of such registration statement, a further amendment to such registration statement (including the form of final prospectuses) or (2) after the Effective Date of such registration statement, final prospectuses in accordance with Rules 430A and 424(b). In the case of clause (2), the Company has included in such registration statement, as amended at the Effective Date, all information (other than Rule 430A Information) required by the Act and the rules thereunder to be included in such registration statement and the Prospectuses. As filed, such amendment and form of final prospectuses, or such final prospectuses, shall contain all Rule 430A Information, together with all other such required information, and, except to the extent the U.S. Representatives shall agree in writing to a modification, shall be in all substantive respects in the form furnished to you prior to the Execution Time or, to the extent not completed at the Execution Time, shall contain only such specific additional information and other changes (beyond that contained in the latest Preliminary Prospectuses) as the Company has advised you, prior to the Execution Time, will be included or made therein. 2 It is understood that two forms of prospectuses are to be used in connection with the offering and sale of the Securities: one form of prospectus relating to the U.S. Securities, which are to be offered and sold to United States and Canadian Persons, and one form of prospectus relating to the International Securities, which are to be offered and sold to persons other than United States and Canadian Persons. The U.S. Prospectus and the International Prospectus are identical except for the outside front cover page and the outside back cover page. (b) On the Effective Date, the Registration Statement did or will, and when the Prospectuses are first filed (if required) in accordance with Rule 424(b) and on the Closing Date (as defined in this U.S. Underwriting Agreement) and on any date on which Option Securities are purchased, if such date is not the Closing Date (a "settlement date"), each Prospectus (and any supplements thereto) will, comply in all material respects with the applicable requirements of the Act and the Exchange Act and the respective rules thereunder; on the Effective Date and at the Execution Time, the Registration Statement did not or will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading; and, on the Effective Date, each Prospectus, if not filed pursuant to Rule 424(b), will not, and on the date of any filing pursuant to Rule 424(b) and on the Closing Date and any settlement date, each Prospectus (together with any supplement thereto) will not, include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no representations or warranties as to the information contained in or omitted from the Registration Statement, or the Prospectuses (or any supplement thereto) in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of any Underwriter through the Representatives specifically for inclusion in the Registration Statement or the Prospectuses (or any supplement thereto). (c) Each of the Company and its subsidiaries has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction in which it is chartered or organized with full corporate power and authority to own or lease, as the case may be, and to operate its properties and conduct its business as described in the Prospectuses, and is duly qualified to do business as a foreign corporation and is in good standing under the laws of each jurisdiction which requires such qualification; (d) All the outstanding shares of capital stock of each Subsidiary have been duly and validly authorized and issued and are fully paid and nonassessable, and, except as otherwise set forth in the Prospectuses, all outstanding shares of capital stock of the Subsidiaries are owned by the Company either directly or through wholly owned subsidiaries free and clear of any perfected security interest or any other security interests, claims, liens or encumbrances; (e) the Company's authorized equity capitalization is as set forth in the Prospectuses; the capital stock of the Company conforms in all material respects to the description thereof contained in the Prospectuses; the outstanding shares of Common Stock (including the Securities being sold under the Underwriting Agreements by the 3 Selling Stockholders) have been duly and validly authorized and issued and are fully paid and nonassessable; the Securities being sold under the Underwriting Agreements by the Company have been duly and validly authorized, and, when issued and delivered to and paid for by the U.S. Underwriters pursuant to this U.S. Underwriting Agreement and by the International Underwriters pursuant to the International Underwriting Agreement, will be fully paid and nonassessable; the Securities being sold by the Selling Stockholders are duly quoted, and admitted and authorized for trading on the Nasdaq National Market and the Securities being sold hereunder by the Company are duly quoted, and admitted and authorized for trading, subject to official notice of issuance, on the Nasdaq National Market; the certificates for the Securities are in valid and sufficient form; the holders of outstanding shares of capital stock of the Company are not entitled to preemptive or other rights to subscribe for the Securities; and, except as set forth in the Prospectuses, no options, warrants or other rights to purchase, agreements or other obligations to issue, or rights to convert any obligations into or exchange any securities for, shares of capital stock of or ownership interests in the Company are outstanding; (f) There is no franchise, contract or other document of a character required to be described in the Registration Statement or Prospectuses, or to be filed as an exhibit thereto, which is not described or filed as required; and the statements in the Prospectuses under the headings "United States Federal Tax Consequences to Non-United States Holders" and "Business Supervision and Regulation" fairly summarize the matters therein described. (g) This Agreement has been duly authorized, executed and delivered by the Company and constitutes a valid and binding obligation of the Company, enforceable in accordance with its terms. (h) The Company is not and, after giving effect to the offering and sale of the Securities and the application of the proceeds thereof as described in the Prospectuses, will not be an "investment company" as defined in the Investment Company Act of 1940, as amended. (i) No consent, approval, authorization, filing with or order of any court or governmental agency or body is required in connection with the transactions contemplated herein, except such as have been obtained under the Act and such as may be required under the blue sky laws of any jurisdiction in connection with the purchase and distribution of the Securities by the U.S. Underwriters in the manner contemplated herein and in the Prospectuses. (j) Neither the issue and sale of the Securities nor the consummation of any other of the transactions herein contemplated nor the fulfillment of the terms hereof will conflict with, result in a breach or violation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries pursuant to, (i) the charter or by-laws of the Company or any of its subsidiaries, (ii) the terms of any indenture, contract, lease, mortgage, deed of trust, note agreement, loan agreement or other agreement, obligation, condition, covenant or instrument to which the Company or any of its subsidiaries is a party or bound or to which its or their property is 4 subject, or (iii) any statute, law, rule, regulation, judgment, order or decree applicable to the Company or any of its subsidiaries of any court, regulatory body, administrative agency, governmental body, arbitrator or other authority having jurisdiction over the Company or any of its subsidiaries or any of its or their properties. (k) No holders of securities of the Company have rights to the registration of such securities under the Registration Statement, except for the registration rights of the Selling Stockholders. (l) The consolidated historical financial statements and schedules of the Company and its consolidated subsidiaries included in the Prospectuses and the Registration Statement present fairly in all material respects the financial condition, results of operations and cash flows of the Company as of the dates and for the periods indicated, comply as to form with the applicable accounting requirements of the Act and have been prepared in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods involved (except as otherwise noted therein). The selected financial data set forth under the caption "Selected Consolidated Financial Data" in the Prospectuses and Registration Statement fairly present, on the basis stated in the Prospectuses and the Registration Statement, the information included therein. (m) Neither the Company nor any of its subsidiaries has sustained since the date of the latest audited financial statements included and incorporated by reference in the Prospectuses any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectuses; and, since the respective dates as of which information is given in the Registration Statement and the Prospectuses, there has not been any change in the capital stock or long- term debt of the Company or any of its subsidiaries or any material adverse change, or any development involving a prospective material adverse change, in or affecting the condition (financial or otherwise), earnings, business or properties of the Company and its subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business, except as set forth in or contemplated in the Prospectuses (exclusive of any supplement thereto). (n) No action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company or any of its subsidiaries or its or their property is pending or, to the best knowledge of the Company, threatened that (i) could reasonably be expected to have a material adverse effect on the performance of this Agreement or the consummation of any of the transactions contemplated hereby or (ii) could reasonably be expected to have a material adverse effect on the condition (financial or otherwise), prospects, earnings, business or properties of the Company and its subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business. (o) Each of the Company and each of its subsidiaries owns or leases all such properties as are necessary to the conduct of its operations as presently conducted. 5 (p) Neither the Company nor any subsidiary is in violation or default of (i) any provision of its charter or bylaws, (ii) the terms of any indenture, contract, lease, mortgage, deed of trust, note agreement, loan agreement or other agreement, obligation, condition, covenant or instrument to which it is a party or bound or to which its property is subject, or (iii) any statute, law, rule, regulation, judgment, order or decree of any court, regulatory body, administrative agency, governmental body, arbitrator or other authority having jurisdiction over the Company or such subsidiary or any of its properties, as applicable. (q) Ernst & Young LLP, who have certified certain financial statements of the Company and its consolidated subsidiaries and delivered their report with respect to the audited consolidated financial statements and schedules included in the Prospectuses, are independent public accountants with respect to the Company within the meaning of the Act and the applicable published rules and regulations thereunder. (r) There are no transfer taxes or other similar fees or charges under Federal law or the laws of any state, or any political subdivision thereof, required to be paid in connection with the execution and delivery of this Agreement or the issuance by the Company or sale by the Company of the Securities. (s) The Company has filed all foreign, federal, state and local tax returns that are required to be filed or has requested extensions thereof (except in any case in which the failure so to file would not have a material adverse effect on the condition (financial or otherwise), prospects, earnings, business or properties of the Company and its subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business, except as set forth in or contemplated in the Prospectuses (exclusive of any supplement thereto) and has paid all taxes required to be paid by it and any other assessment, fine or penalty levied against it, to the extent that any of the foregoing is due and payable, except for any such assessment, fine or penalty that is currently being contested in good faith or as would not have a material adverse effect on the condition (financial or otherwise), prospects, earnings, business or properties of the Company and its subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business, except as set forth in or contemplated in the Prospectuses (exclusive of any supplement thereto). (t) No labor problem or dispute with the employees of the Company or any of its subsidiaries exists or is threatened or imminent, and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its or its subsidiaries' principal suppliers, contractors or customers, that could have a material adverse effect on the condition (financial or otherwise), prospects, earnings, business or properties of the Company and its subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business, except as set forth in or contemplated in the Prospectuses (exclusive of any supplement thereto). (u) The Company and each of its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which they are engaged; all policies of 6 insurance insuring the Company or any of its subsidiaries or their respective businesses, assets, employees, officers and directors are in full force and effect; the Company and its subsidiaries are in compliance with the terms of such policies and instruments in all material respects; and there are no claims by the Company or any of its subsidiaries under any such policy or instrument as to which any insurance company is denying liability or defending under a reservation of rights clause; neither the Company nor any such subsidiary has been refused any insurance coverage sought or applied for; and neither the Company nor any such subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a material adverse effect on the condition (financial or otherwise), prospects, earnings, business or properties of the Company and its subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business, except as set forth in or contemplated in the Prospectuses (exclusive of any supplement thereto). (v) No subsidiary of the Company is currently prohibited, directly or indirectly, from paying any dividends to the Company, from making any other distribution on such subsidiary's capital stock, from repaying to the Company any loans or advances to such subsidiary from the Company or from transferring any of such subsidiary's property or assets to the Company or any other subsidiary of the Company, except as described in or contemplated by the Prospectuses. (w) The Company and its subsidiaries possess all licenses, certificates, permits and other authorizations issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct their respective businesses, and neither the Company nor any such subsidiary has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a material adverse effect on the condition (financial or otherwise), prospects, earnings, business or properties of the Company and its subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business, except as set forth in or contemplated in the Prospectuses (exclusive of any supplement thereto). (x) The Company and each of its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (y) The Company has not taken, directly or indirectly, any action designed to or which has constituted or which might reasonably be expected to cause or result, under the 7 Exchange Act or otherwise, in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities. (z) The Company and its subsidiaries are (i) in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws"), (ii) have received and are in compliance with all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) have not received notice of any actual or potential liability for the investigation or remediation of any disposal or release of hazardous or toxic substances or wastes, pollutants or contaminants, except where such non-compliance with Environmental Laws, failure to receive required permits, licenses or other approvals, or liability would not, individually or in the aggregate, have a material adverse change in the condition (financial or otherwise), prospects, earnings, business or properties of the Company and its subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business, except as set forth in or contemplated in the Prospectuses (exclusive of any supplement thereto). Neither the Company nor any of the subsidiaries has been named as a "potentially responsible party" under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended. (aa) Each of the Company and its subsidiaries has fulfilled its obligations, if any, under the minimum funding standards of Section 302 of the United States Employee Retirement Income Security Act of 1974 ("ERISA") and the regulations and published interpretations thereunder with respect to each "plan" (as defined in Section 3(3) of ERISA and such regulations and published interpretations) in which employees of the Company and its subsidiaries are eligible to participate and each such plan is in compliance in all material respects with the presently applicable provisions of ERISA and such regulations and published interpretations. The Company and its subsidiaries have not incurred any unpaid liability to the Pension Benefit Guaranty Corporation (other than for the payment of premiums in the ordinary course) or to any such plan under Title IV of ERISA. (bb) The subsidiaries listed on Annex A attached hereto are the only significant subsidiaries of the Company as defined by Rule 1-02 of Regulation S-X (the "Subsidiaries"). (cc) The Company and its subsidiaries own, possess, license or have other rights to use, on reasonable terms, all patents, patent applications, trade and service marks, trade and service mark registrations, trade names, copyrights, licenses, inventions, trade secrets, technology, know-how and other intellectual property (collectively, the "Intellectual Property") necessary for the conduct of the Company's business as now conducted or as proposed in the Prospectuses to be conducted, and (a) to the Company's knowledge, there are no rights of third parties to any such Intellectual Property; (b) to the Company's best knowledge, there is no material infringement by third parties of any such Intellectual Property; (c) there is no pending or, to the Company's best knowledge, threatened action, suit, proceeding or claim by others challenging the Company's rights 8 in or to any such Intellectual Property, and the Company is unaware of any facts which would form a reasonable basis for any such claim; (d) to the Company's best knowledge, there is no pending or threatened action, suit, proceeding or claim by others challenging the validity or scope of any such Intellectual Property, and the Company is unaware of any facts which would form a reasonable basis for any such claim; (e) there is no pending or, to the Company's knowledge, threatened action, suit, proceeding or claim by others that the Company infringes or otherwise violates any patent, trademark, copyright, trade secret or other proprietary rights of others, and the Company is unaware of any other fact which would form a reasonable basis for any such claim; (f) to the Company's knowledge, there is no U.S. patent or published U.S. patent application which contains claims that dominate or may dominate any Intellectual Property described in the Prospectuses as being owned by or licensed to the Company or that interferes with the issued or pending claims of any such Intellectual Property; and (g) there is no prior art of which the Company is aware that may render any U.S. patent held by the Company invalid or any U.S. patent application held by the Company unpatentable which has not been disclosed to the U.S. Patent and Trademark Office. (dd) The Company and its subsidiaries do not have any material lending or other relationship with any bank or lending affiliate of the Underwriters and the Company does not intend to use any of the proceeds from the sale of the Securities hereunder to repay any outstanding debt owed to any affiliate of the Underwriters. (ee) The Company and its subsidiaries have implemented a comprehensive, detailed program to analyze and address the risk that the computer hardware and software used by them may be unable to recognize and properly execute date-sensitive functions involving certain dates prior to and any dates after December 31, 1999 (the "Year 2000 Problem"), and have determined that such risk will be remedied on a timely basis without material expense and will not have a material adverse effect upon the financial condition and results of operations of the Company and its subsidiaries, taken as a whole; and the Company believes, after due inquiry, that each supplier, vendor, customer or financial service organization used or serviced by the Company and its subsidiaries has remedied or will remedy on a timely basis the Year 2000 Problem, except to the extent that a failure to remedy by any such supplier, vendor, customer or financial service organization would not have a material adverse effect on the Company and its subsidiaries, taken as a whole. The Company is in compliance with the Commission's staff legal bulletin No. 5 dated January 12, 1998 related to Year 2000 compliance, as amended to date. Any certificate signed by any officer of the Company and delivered to the Representatives or counsel for the Underwriters in connection with the offering of the Securities shall be deemed a representation and warranty by the Company, as to matters covered thereby, to each U.S. Underwriter. (ii) Each Selling Stockholder represents and warrants to, and agrees with, each U.S. Underwriter that: (a) Such Selling Stockholder is the lawful owner of the U.S. Securities to be sold by such Selling Stockholder under this U.S. Underwriting Agreement and upon sale and 9 delivery of, and payment for, such U.S. Securities, as provided in this U.S. Underwriting Agreement, such Selling Stockholder will convey to the U.S. Underwriters good and marketable title to such U.S. Securities, free and clear of all liens, encumbrances, equities and claims whatsoever. (b) Such Selling Stockholder has not taken, directly or indirectly, any action designed to or which has constituted or which might reasonably be expected to cause or result, under the Exchange Act or otherwise, in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the U.S. Securities. (c) Certificates in negotiable form for such Selling Stockholder's U.S. Securities have been placed in custody, for delivery pursuant to the terms of this U.S. Underwriting Agreement, under a Custody Agreement and Power of Attorney duly authorized (if applicable) executed and delivered by such Selling Stockholder, in the form heretofore furnished to you (the "Custody Agreement") with _______________, as Custodian (the "Custodian"); the U.S. Securities represented by the certificates so held in custody for each Selling Stockholder are subject to the interests under this U.S. Underwriting Agreement of the U.S. Underwriters; the arrangements for custody and delivery of such certificates, made by such Selling Stockholder under this U.S. Underwriting Agreement and under the Custody Agreement, are not subject to termination by any acts of such Selling Stockholder, or by operation of law, whether by the death or incapacity of such Selling Stockholder or the occurrence of any other event; and if any such death, incapacity or any other such event shall occur before the delivery of such U.S. Securities under this U.S. Underwriting Agreement, certificates for the U.S. Securities will be delivered by the Custodian in accordance with the terms and conditions of this U.S. Underwriting Agreement and the Custody Agreement as if such death, incapacity or other event had not occurred, regardless of whether or not the Custodian shall have received notice of such death, incapacity or other event. (d) No consent, approval, authorization or order of any court or governmental agency or body is required for the consummation by such Selling Stockholder of the transactions contemplated in this U.S. Underwriting Agreement, except such as may have been obtained under the Act and such as may be required under the blue sky laws of any jurisdiction and the securities laws of any jurisdiction outside the United States in connection with the purchase and distribution of the U.S. Securities by the U.S. Underwriters and such other approvals as have been obtained. (e) Neither the sale of the U.S. Securities being sold by such Selling Stockholder nor the consummation of any other of the transactions in this U.S. Underwriting Agreement contemplated by such Selling Stockholder or the fulfillment of the terms hereof by such Selling Stockholder will conflict with, result in a breach or violation of, or constitute a default under any law or the charter or by-laws of such Selling Stockholder or the terms of any indenture or other agreement or instrument to which such Selling Stockholder or any of its subsidiaries is a party or bound, or any judgment, order or decree applicable to such Selling Stockholder or any of its subsidiaries of any court, regulatory body, administrative agency, governmental body or arbitrator having jurisdiction over such Selling Stockholder or any of its subsidiaries. 10 (f) Such Selling Stockholder has no reason to believe that the representations and warranties of the Company contained in this Section 1 are not true and correct, is familiar with the Registration Statement and has no knowledge of any material fact, condition or information not disclosed in the Prospectuses or any supplement thereto which has adversely affected or may adversely affect the business of the Company or any of its subsidiaries; and the sale of Securities by such Selling Stockholder pursuant hereto is not prompted by any information concerning the Company or any of its subsidiaries which is not set forth in the Prospectuses or any supplement thereto. (g) In respect of any statements in or omissions from the Registration Statement or the Prospectuses or any supplements thereto made in reliance upon and in conformity with information furnished in writing to the Company by any Selling Stockholder specifically for use in connection with the preparation thereof, such Selling Stockholder hereby makes the same representations and warranties to each U.S. Underwriter as the Company makes to such U.S. Underwriter under paragraph (i)(b) of this Section. Any certificate signed by any officer of any Selling Stockholder and delivered to the Representatives or counsel for the Underwriters in connection with the offering of the Securities shall be deemed a representation and warranty by such Selling Stockholder, as to matters covered thereby, to each U.S. Underwriter. 2. Purchase and Sale. (a) Subject to the terms and conditions and in reliance upon the representations and warranties set forth in this U.S. Underwriting Agreement, the Company and the Selling Stockholders agree, severally and not jointly, to sell to each U.S. Underwriter, and each U.S. Underwriter agrees, severally and not jointly, to purchase from the Company and the Selling Stockholders, at a purchase price of $ . per share, the amount of the U.S. Underwritten Securities set forth opposite such U.S. Underwriter's name in Schedule I to this U.S. Underwriting Agreement. (b) Subject to the terms and conditions and in reliance upon the representations and warranties set forth in this U.S. Underwriting Agreement, the Company hereby grants an option to the several U.S. Underwriters to purchase up to 3,712,000 U.S. Option Securities at the same purchase price per share as the U.S. Underwriters shall pay for the U.S. Underwritten Securities. Said option may be exercised only to cover over-allotments in the sale of the U.S. Underwritten Securities by the U.S. Underwriters. Said option may be exercised in whole or in part at any time (but not more than once) on or before the 30th day after the date of the U.S. Prospectus upon written or telegraphic notice by the U.S. Representatives to the Company setting forth the number of shares of the U.S. Option Securities as to which the several U.S. Underwriters are exercising the option and the settlement date. The number of U.S. Option Securities to be purchased by each U.S. Underwriter shall be the same percentage of the total number of shares of the U.S. Option Securities to be purchased by the several U.S. Underwriters as such U.S. Underwriter is purchasing of the U.S. Underwritten Securities, subject to such adjustments as you in your absolute discretion shall make to eliminate any fractional shares. 3. Delivery and Payment. Delivery of and payment for the U.S. Underwritten Securities and the U.S. Option Securities (if the option provided for in Section 2(b) hereof shall have been exercised on or before the third Business Day prior to the Closing Date) shall be made 11 at 10:00 AM, New York City time, on . , 1999, or at such time on such later date not more than three Business Days after the foregoing date as the U.S. Representatives and the International Representatives shall designate, which date and time may be postponed by agreement among the U.S. Representatives, the International Representatives, the Selling Stockholders and the Company or as provided in Section 9 hereof (such date and time of delivery and payment for the U.S. Securities being called in this U.S. Underwriting Agreement the "Closing Date"). Delivery of the U.S. Securities shall be made to the U.S. Representatives for the respective accounts of the several U.S. Underwriters against payment by the several U.S. Underwriters through the U.S. Representatives of the respective aggregate purchase prices of the U.S. Securities being sold by the Company and each of the Selling Stockholders to or upon the order of the Company and the Selling Stockholders by wire transfer payable in same-day funds to the accounts specified by the Company and the Selling Stockholders. Delivery of the U.S. Underwritten Securities and the U.S. Option Securities shall be made through the facilities of The Depository Trust Company unless the U.S. Representatives shall otherwise instruct. Each Selling Stockholder will pay all applicable state transfer taxes, if any, involved in the transfer to the several U.S. Underwriters of the U.S. Securities to be purchased by them from such Selling Stockholder and the respective U.S. Underwriters will pay any additional stock transfer taxes involved in further transfers. If the option provided for in Section 2(b) hereof is exercised after the third Business Day prior to the Closing Date, the Company will deliver the U.S. Option Securities (at the expense of the Company) to the U.S. Representatives, at 388 Greenwich Street, New York, New York, on the date specified by the U.S. Representatives (which shall be within three Business Days after exercise of said option) for the respective accounts of the several U.S. Underwriters, against payment by the several U.S. Underwriters through the U.S. Representatives of the purchase price thereof to or upon the order of the Company by wire transfer payable in same-day funds to the accounts specified by the Company. If settlement for the U.S. Option Securities occurs after the Closing Date, the Company will deliver to the U.S. Representatives on the settlement date for the U.S. Option Securities, and the obligation of the U.S. Underwriters to purchase the U.S. Option Securities shall be conditioned upon receipt of, supplemental opinions, certificates and letters confirming as of such date the opinions, certificates and letters delivered on the Closing Date pursuant to Section 6 hereof. It is understood and agreed that the Closing Date shall occur simultaneously with the "Closing Date" under the International Underwriting Agreement, and that the settlement date, if any, shall occur simultaneously with the "settlement date" under the International Underwriting Agreement. 4. Offering by Underwriters. It is understood that the several U.S. Underwriters propose to offer the U.S. Securities for sale to the public as set forth in the U.S. Prospectus. 5. Agreements. (i) The Company agrees with the several U.S. Underwriters that: 12 (a) The Company will use its best efforts to cause the Registration Statement, if not effective at the Execution Time, and any amendment thereof, to become effective. Prior to the termination of the offering of the Securities, the Company will not file any amendment of the Registration Statement or supplement to the Prospectuses or any Rule 462(b) Registration Statement unless the Company has furnished you a copy for your review prior to filing and will not file any such proposed amendment or supplement to which you reasonably object. Subject to the foregoing sentence, if the Registration Statement has become or becomes effective pursuant to Rule 430A, or filing of the Prospectuses is otherwise required under Rule 424(b), the Company will cause the Prospectuses, properly completed, and any supplement thereto to be filed with the Commission pursuant to the applicable paragraph of Rule 424(b) within the time period prescribed and will provide evidence satisfactory to the U.S. Representatives of such timely filing. The Company will promptly advise the U.S. Representatives (1) when the Registration Statement, if not effective at the Execution Time, shall have become effective, (2) when the Prospectuses, and any supplement thereto, shall have been filed (if required) with the Commission pursuant to Rule 424(b) or when any Rule 462(b) Registration Statement shall have been filed with the Commission, (3) when, prior to termination of the offering of the Securities, any amendment to the Registration Statement shall have been filed or become effective, (4) of any request by the Commission or its staff for any amendment of the Registration Statement, or any Rule 462(b) Registration Statement, or for any supplement to the Prospectuses or for any additional information, (5) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the institution or threatening of any proceeding for that purpose and (6) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Securities for sale in any jurisdiction or the institution or threatening of any proceeding for such purpose. The Company will use its best efforts to prevent the issuance of any such stop order or the suspension of any such qualification and, if issued, to obtain as soon as possible the withdrawal thereof. (b) If, at any time when a prospectus relating to the Securities is required to be delivered under the Act, any event occurs as a result of which either of the Prospectuses as then supplemented would include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein in the light of the circumstances under which they were made not misleading, or if it shall be necessary to amend the Registration Statement or supplement either of the Prospectuses to comply with the Act or the rules thereunder, the Company promptly will (1) notify the U.S. Representatives of any such event; (2) prepare and file with the Commission, subject to the second sentence of paragraph (i)(a) of this Section 5, an amendment or supplement which will correct such statement or omission or effect such compliance; and (3) supply any supplemented Prospectuses to you in such quantities as you may reasonably request. (c) As soon as practicable, the Company will make generally available to its security holders and to the U.S. Representatives an earnings statement or statements of the Company and its subsidiaries which will satisfy the provisions of Section 11(a) of the Act and Rule 158 under the Act. 13 (d) The Company will furnish to the U.S. Representatives and counsel for the U.S. Underwriters, without charge, signed copies of the Registration Statement (including exhibits thereto) and to each other U.S. Underwriter a copy of the Registration Statement (without exhibits thereto) and, so long as delivery of a prospectus by a U.S. Underwriter or dealer may be required by the Act, as many copies of each U.S. Preliminary Prospectus and the U.S. Prospectus and any supplement thereto as the U.S. Representatives may reasonably request. (e) The Company will arrange, if necessary, for the qualification of the Securities for sale under the laws of such jurisdictions as the U.S. Representatives may designate and will maintain such qualifications in effect so long as required for the distribution of the U.S. Securities; provided that in no event shall the Company be obligated to qualify to do business in any jurisdiction where it is not now so qualified or to take any action that would subject it to service of process in suits, other than those arising out of the offering or sale of the Securities, in any jurisdiction where it is not now so subject. (f) The Company will not, without the prior written consent of Salomon Smith Barney Inc. and William Blair & Company, L.L.C., offer, sell, contract to sell, pledge, or otherwise dispose of, (or enter into any transaction which is designed to, or might reasonably be expected to, result in the disposition (whether by actual disposition or effective economic disposition due to cash settlement or otherwise) by the Company or any affiliate of the Company or any person in privity with the Company or any affiliate of the Company) directly or indirectly, including the filing (or participation in the filing) of a registration statement with the Commission in respect of, or establish or increase a put equivalent position or liquidate or decrease a call equivalent position within the meaning of Section 16 of the Exchange Act, any other shares of Common Stock or any securities convertible into, or exercisable, or exchangeable for, shares of Common Stock, or publicly announce an intention to effect any such transaction, for a period of 90 days after the date of the Underwriting Agreement; provided, however, that the Company may issue and sell Common Stock (i) in connection with acquisition transactions (ii) pursuant to any employee stock option plan, stock ownership plan or dividend reinvestment plan of the Company in effect at the Execution Time, or (iii) issuable upon the conversion of securities or the exercise of warrants outstanding at the Execution Time. (g) The Company will not take, directly or indirectly, any action designed to or which has constituted or which might reasonably be expected to cause or result, under the Exchange Act or otherwise, in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities. (h) The Company agrees to pay the costs and expenses relating to the following matters: (i) the preparation, printing or reproduction and filing with the Commission of the Registration Statement (including financial statements and exhibits thereto), each Preliminary Prospectus, each Prospectus, and each amendment or supplement to any of them; (ii) the printing (or reproduction) and delivery (including postage, air freight charges and charges for counting and packaging) of such copies of the Registration Statement, each Preliminary Prospectus, each Prospectus, and all amendments or supplements to any of them, as may, in each case, be reasonably requested for use in 14 connection with the offering and sale of the Securities; (iii) the preparation, printing, authentication, issuance and delivery of certificates for the Securities, including any stamp or transfer taxes in connection with the original issuance and sale of the Securities; (iv) the printing (or reproduction) and delivery of this U.S. Underwriting Agreement and the International Underwriting Agreement, any blue sky memorandum and all other agreements or documents printed (or reproduced) and delivered in connection with the offering of the Securities; (v) the registration of the Securities under the Exchange Act and the listing of the Securities on the Nasdaq National Market; (vi) any registration or qualification of the Securities for offer and sale under the securities or blue sky laws of the several states (including filing fees and the reasonable fees and expenses of counsel for the Underwriters relating to such registration and qualification); (vii) any filings required to be made with the National Association of Securities Dealers, Inc. (including filing fees and the reasonable fees and expenses of counsel for the Underwriters relating to such filings); (viii) the transportation and other expenses incurred by or on behalf of Company representatives in connection with presentations to prospective purchasers of the Securities; (ix) the fees and expenses of the Company's accountants and the fees and expenses of counsel (including local and special counsel) for the Company; and (x) all other costs and expenses incident to the performance by the Company and the Selling Stockholders of their obligations under the Underwriting Agreements. (ii) Each U.S. Underwriter agrees that (i) it is not purchasing any of the U.S. Securities for the account of anyone other than a United States or Canadian Person, (ii) it has not offered or sold, and will not offer or sell, directly or indirectly, any of the U.S. Securities or distribute any U.S. Prospectus to any person outside the United States or Canada, or to anyone other than a United States or Canadian Person, and (iii) any dealer to whom it may sell any of the U.S. Securities will represent that it is not purchasing for the account of anyone other than a United States or Canadian Person and agree that it will not offer or resell, directly or indirectly, any of the U.S. Securities outside the United States or Canada, or to anyone other than a United States or Canadian Person or to any other dealer who does not so represent and agree; provided, however, that the foregoing shall not restrict (A) purchases and sales between the International Underwriters on the one hand and the U.S. Underwriters on the other hand pursuant to the Agreement Between U.S. Underwriters and International Underwriters, (B) stabilization transactions contemplated under the Agreement Between U.S. Underwriters and International Underwriters, conducted through Salomon Smith Barney Inc. (or through the U.S. Representatives and International Representatives) as part of the distribution of the Securities, and (C) sales to or through (or distributions of U.S. Prospectuses or U.S. Preliminary Prospectuses to) United States or Canadian Persons who are investment advisors, or who otherwise exercise investment discretion, and who are purchasing for the account of anyone other than a United States or Canadian Person. (iii) The agreements of the U.S. Underwriters set forth in paragraph (ii) of this Section 5 shall terminate upon the earlier of the following events: (a) a mutual agreement of the U.S. Representatives and the International Representatives to terminate the selling restrictions set forth in paragraph (ii) of this Section 5 and in Section 5(ii) of the International Underwriting Agreement; or 15 (b) the expiration of a period of 30 days after the Closing Date, unless (A) the U.S. Representatives shall have given notice to the Company and the International Representatives that the distribution of the U.S. Securities by the U.S. Underwriters has not yet been completed, or (B) the International Representatives shall have given notice to the Company and the U.S. Representatives that the distribution of the International Securities by the International Underwriters has not yet been completed. If such notice by the U.S. Representatives or the International Representatives is given, the agreements set forth in such paragraph (ii) shall survive until the earlier of (1) the event referred to in clause (a) of this subsection (iii) or (2) the expiration of an additional period of 30 days from the date of any such notice. (iv) Each Selling Stockholder agrees with the several Underwriters that: (a) Such Selling Stockholder will not, without the prior written consent of Salomon Smith Barney Inc. and William Blair & Company, L.L.C., offer, sell, contract to sell, pledge or otherwise dispose of, (or enter into any transaction which is designed to, or might reasonably be expected to, result in the disposition (whether by actual disposition or effective economic disposition due to cash settlement or otherwise) by the Company or any affiliate of the Company or any person in privity with the Company or any affiliate of the Company) directly or indirectly, or file (or participate in the filing of) a registration statement with the Commission in respect of, or establish or increase a put equivalent position or liquidate or decrease a call equivalent position within the meaning of Section 16 of the Exchange Act with respect to, any shares of capital stock of the Company or any securities convertible into or exercisable or exchangeable for such capital stock, or publicly announce an intention to effect any such transaction, for a period of 90 days after the date of this U.S. Underwriting Agreement, other than shares of Common Stock disposed of as bona fide gifts approved by Salomon Smith Barney Inc. and William Blair & Company, L.L.C. (b) Such Selling Stockholder will not take any action designed to or which has constituted or which might reasonably be expected to cause or result, under the Exchange Act or otherwise, in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities. (c) Such Selling Stockholder will advise you promptly, and if requested by you, will confirm such advice in writing, so long as delivery of a prospectus relating to the Securities by an underwriter or dealer may be required under the Act, of (i) any material change in the Company's condition (financial or otherwise), prospects, earnings, business or properties, (ii) any change in information in the Registration Statement or the Prospectuses relating to such Selling Stockholder or (iii) any new material information relating to the Company or relating to any matter stated in the Prospectuses which come to the attention of such Selling Stockholder. (d) Such Selling Stockholder agrees to pay the fees and expenses of counsel (including local and special counsel) for such Selling Stockholder. 16 6. Conditions to the Obligations of the U.S. Underwriters. The obligations of the U.S. Underwriters to purchase the U.S. Underwritten Securities and the U.S. Option Securities, as the case may be, shall be subject to the accuracy of the representations and warranties on the part of the Company and the Selling Stockholders contained in this U.S. Underwriting Agreement as of the Execution Time, the Closing Date and any settlement date pursuant to Section 3 hereof, to the accuracy of the statements of the Company and the Selling Stockholders made in any certificates pursuant to the provisions hereof, to the performance by the Company and the Selling Stockholders of their respective obligations under this U.S. Underwriting Agreement and to the following additional conditions: (a) If the Registration Statement has not become effective prior to the Execution Time, unless the U.S. Representatives and the International Representatives agree in writing to a later time, the Registration Statement will become effective not later than (i) 6:00 PM New York City time on the date of determination of the public offering price, if such determination occurred at or prior to 3:00 PM New York City time on such date or (ii) 9:30 AM on the Business Day following the day on which the public offering price was determined, if such determination occurred after 3:00 PM New York City time on such date; if filing of either of the Prospectuses, or any supplement thereto, is required pursuant to Rule 424(b), the Prospectuses, and any such supplement, will be filed in the manner and within the time period required by Rule 424(b); and no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted or threatened. (b) The Company shall have requested and caused Sidley & Austin, counsel for the Company, to have furnished to the Representatives their opinion, dated the Closing Date and addressed to the Representatives, to the effect that: (i) each of the Company and EFS National Bank, EFS Federal Savings Bank, Concord Computing Corporation, Concord Retail Services, Inc., Concord Equipment Sales, Pay Systems of America, Inc., Digital Merchants Systems of Illinois, Inc., American Bankcard, International, Inc. and Electronic Payment Services, Inc. (individually a "Subsidiary" and collectively the "Subsidiaries") has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction in which it is chartered or organized, with full corporate power and authority to own or lease, as the case may be, and to operate its properties and conduct its business as described in the Prospectuses, and is duly qualified to do business as a foreign corporation and is in good standing under the laws of each jurisdiction which requires such qualification, and the Company is duly registered as a bank holding company under the Bank Holding Company Act of 1956, as amended; (ii) all the outstanding shares of capital stock of each Subsidiary have been duly and validly authorized and issued and are fully paid and nonassessable, and, except as otherwise set forth in the Prospectuses, all outstanding shares of capital stock of the Subsidiaries are owned by the Company either directly or through wholly owned subsidiaries free and clear of any perfected security interest and, to the knowledge of such counsel, after due inquiry, any other security interest, claim, lien or encumbrance; 17 (iii) the Company's authorized equity capitalization is as set forth in the Prospectuses; the capital stock of the Company conforms in all material respects to the description thereof contained in the Prospectuses; the outstanding shares of Common Stock (including the Securities being sold under the Underwriting Agreements by the Selling Stockholders) have been duly and validly authorized and issued and are fully paid and nonassessable; the Securities being sold under the Underwriting Agreements by the Company have been duly and validly authorized, and, when issued and delivered to and paid for by the U.S. Underwriters pursuant to this U.S. Underwriting Agreement and by the International Underwriters pursuant to the International Underwriting Agreement, will be fully paid and nonassessable; the Securities being sold by the Selling Stockholders are duly quoted, and admitted and authorized for trading on the Nasdaq National Market and the Securities being sold hereunder by the Company are duly quoted, and admitted and authorized for trading, subject to official notice of issuance, on the Nasdaq National Market; the certificates for the Securities are in valid and sufficient form; the holders of outstanding shares of capital stock of the Company are not entitled to preemptive or other rights to subscribe for the Securities; and, except as set forth in the Prospectuses, no options, warrants or other rights to purchase, agreements or other obligations to issue, or rights to convert any obligations into or exchange any securities for, shares of capital stock of or ownership interests in the Company are outstanding; (iv) to the knowledge of such counsel, there is no pending or threatened action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company or any of its subsidiaries or its or their property of a character required to be disclosed in the Registration Statement which is not adequately disclosed in the Prospectuses, and there is no franchise, contract or other document of a character required to be described in the Registration Statement or Prospectuses, or to be filed as an exhibit thereto, which is not described or filed as required; the descriptions contained in the Prospectuses under the heading "United States Federal Tax Consequences to Non-United States Holders" constitute fair summaries of those statutes and regulations discussed therein applicable to the offering of the Securities; and the statements in the Prospectuses under the heading "Business Supervision and Regulation" fairly summarize the matters therein described; (v) the Registration Statement has become effective under the Act; any required filing of the Prospectuses, and any supplements thereto, pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b); to the knowledge of such counsel, no stop order suspending the effectiveness of the Registration Statement has been issued, no proceedings for that purpose have been instituted or threatened and the Registration Statement and each of the Prospectuses (other than the financial statements and other financial information contained therein, as to which such counsel need express no opinion) comply as to form in all material respects with the applicable requirements of the Act and the Exchange Act and the respective rules thereunder; and such counsel has no reason to believe that on the Effective Date or at the Execution Time the Registration Statement contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectuses as of the date thereof and on the Closing Date included or include any untrue statement of a 18 material fact or omitted or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading (in each case, other than the financial statements and other financial information contained therein, as to which such counsel need express no opinion); (vi) the Underwriting Agreements have been duly authorized, executed and delivered by the Company; (vii) the Company is not and, after giving effect to the offering and sale of the Securities and the application of the proceeds thereof as described in the Prospectuses, will not be, an "investment company" as defined in the Investment Company Act of 1940, as amended; (viii) no consent, approval, authorization, filing with or order of any court or governmental agency or body is required in connection with the transactions contemplated in the Underwriting Agreements, except such as have been obtained under the Act and such as may be required under the blue sky laws of any jurisdiction in connection with the purchase and distribution of the Securities by the Underwriters in the manner contemplated in and the Underwriting Agreements and in the Prospectuses and such other approvals (specified in such opinion) as have been obtained; (ix) neither the issue and sale of the Securities, nor the consummation of any other of the transactions contemplated in the Underwriting Agreements nor the fulfillment of the terms of the Underwriting Agreements will conflict with, result in a breach or violation of or imposition of any lien, charge or encumbrance upon any property or assets of the Company or its subsidiaries pursuant to, (i) the charter or by-laws of the Company or its subsidiaries, (ii) the terms of any indenture, contract, lease, mortgage, deed of trust, note agreement, loan agreement or other agreement, obligation, condition, covenant or instrument to which the Company or its subsidiaries is a party or bound or to which its or their property is subject, or (iii) any statute, law, rule, regulation, judgment, order or decree applicable to the Company or its subsidiaries of any court, regulatory body, administrative agency, governmental body, arbitrator or other authority having jurisdiction over the Company or its subsidiaries or any of its or their properties; and (x) no holders of securities of the Company have rights to the registration of such securities under the Registration Statement except for such rights of the Selling Stockholders. In rendering such opinion, such counsel may rely (A) as to matters involving the application of laws of any jurisdiction other than the State of Illinois or the Federal laws of the United States, to the extent they deem proper and specified in such opinion, upon the opinion of other counsel of good standing whom they believe to be reliable and who are satisfactory to counsel for the Underwriters and (B) as to matters of fact, to the extent they deem proper, on certificates of responsible officers of the Company and public officials. Reference to the Prospectuses in this paragraph (b) include any supplements thereto at the Closing Date. 19 (c) The Selling Stockholders shall have requested and caused ___________, counsel for the Selling Stockholders, to have furnished to the Representatives their opinion dated the Closing Date and addressed to the Representatives, to the effect that: (i) the Underwriting Agreements, and the Custody Agreement and Power- of-Attorney have been duly authorized, executed and delivered by the Selling Stockholders, the Custody Agreement is valid and binding on the Selling Stockholders and each Selling Stockholder has full legal right and authority to sell, transfer and deliver in the manner provided in the Underwriting Agreements and the Custody Agreement the Securities being sold by such Selling Stockholder under the Underwriting Agreements; (ii) the delivery by each Selling Stockholder to the several Underwriters of certificates for the Securities being sold under the Underwriting Agreements by such Selling Stockholder against payment therefor as provided in the Underwriting Agreements, will pass good and marketable title to such Securities to the several Underwriters, free and clear of all liens, encumbrances, equities and claims whatsoever; (iii) no consent, approval, authorization or order of any court or governmental agency or body is required for the consummation by any Selling Stockholder of the transactions contemplated in the Underwriting Agreements, except such as may have been obtained under the Act and such as may be required under the blue sky laws of any jurisdiction and the securities laws of any jurisdiction outside the United States in connection with the purchase and distribution of the Securities by the Underwriters and such other approvals (specified in such opinion) as have been obtained; and (iv) neither the sale of the Securities being sold by any Selling Stockholder nor the consummation of any other of the transactions contemplated in the Underwriting Agreements by any Selling Stockholder or the fulfillment of the terms hereof by any Selling Stockholder will conflict with, result in a breach or violation of, or constitute a default under any law or the charter or By-laws of the Selling Stockholder or the terms of any indenture or other agreement or instrument known to such counsel and to which any Selling Stockholder or any of its subsidiaries is a party or bound, or any judgment, order or decree known to such counsel to be applicable to any Selling Stockholder or any of its subsidiaries of any court, regulatory body, administrative agency, governmental body or arbitrator having jurisdiction over any Selling Stockholder or any of its subsidiaries. In rendering such opinion, such counsel may rely (A) as to matters involving the application of laws of any jurisdiction other than the State of ______________ or the Federal laws of the United States, to the extent they deem proper and specified in such opinion, upon the opinion of other counsel of good standing whom they believe to be reliable and who are satisfactory to counsel for the U.S. Underwriters and the International Underwriters, and (B) as to matters of fact, to the extent they deem proper, on certificates of responsible officers of the Selling Stockholders and public officials. (d) The Representatives shall have received from Cleary, Gottlieb, Steen & Hamilton, counsel for the Underwriters, such opinion or opinions, dated the Closing Date and addressed to the Representatives, with respect to the issuance and sale of the Securities, the 20 Registration Statement, the Prospectuses (together with any supplement thereto) and other related matters as the Representatives may reasonably require, and the Company and each Selling Stockholder shall have furnished to such counsel such documents as they request for the purpose of enabling them to pass upon such matters. (e) The Company shall have furnished to the Representatives a certificate of the Company, signed by the Chairman of the Board or the President and the principal financial or accounting officer of the Company, dated the Closing Date, to the effect that the signers of such certificate have carefully examined the Registration Statement, the Prospectuses, any supplements to the Prospectuses and the Underwriting Agreements and that: (i) the representations and warranties of the Company in the Underwriting Agreements are true and correct in all material respects on and as of the Closing Date with the same effect as if made on the Closing Date and the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to the Closing Date; (ii) no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or, to the Company's knowledge, threatened; and (iii) since the date of the most recent financial statements included in the Prospectuses (exclusive of any supplement thereto), there has been no material adverse effect on the condition (financial or otherwise), prospects, earnings, business or properties of the Company and its subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business, except as set forth in or contemplated in the Prospectuses (exclusive of any supplement thereto). (f) Each Selling Stockholder shall have furnished to the Representatives a certificate, signed by the Chairman of the Board or the President and the principal financial or accounting officer of such Selling Stockholder, dated the Closing Date, to the effect that the signers of such certificate have carefully examined the Registration Statement, the Prospectuses, any supplement to either of the Prospectuses and this U.S. Underwriting Agreement and the International Underwriting Agreement and that the representations and warranties of such Selling Stockholder in this U.S. Underwriting Agreement and the International Underwriting Agreement are true and correct in all material respects on and as of the Closing Date to the same effect as if made on the Closing Date. (g) The Company shall have requested and caused Ernst & Young LLP to have furnished to the Representatives letters, dated respectively as of the Execution Time and as of the Closing Date, in form and substance satisfactory to the Representatives, confirming that they are independent accountants within the meaning of the Act and the applicable rules and regulations adopted by the Commission thereunder and that they have performed a review of the unaudited interim financial information of the Company for the three-month period ended March 31, 1999 and as at March 31, 1999, in accordance with Statement on Auditing Standards No. 71, and stating in effect that: 21 (i) in their opinion the audited financial statements and financial statement schedules included and incorporated by reference in the Registration Statement and the Prospectuses and reported on by them comply as to form in all material respects with the applicable accounting requirements of the Act and the Exchange Act and the related rules and regulations adopted by the Commission; (ii) on the basis of a reading of the latest unaudited financial statements made available by the Company and its subsidiaries; their limited review, in accordance with standards established under Statement on Auditing Standards No. 71, of the unaudited interim financial information for the three-month period ended March 31, 1999, and as at March 31, 1999 [, as indicated in their report dated _______________, 1999 included/incorporated by reference in the Registration Statement and the Prospectuses]; carrying out certain specified procedures (but not an examination in accordance with generally accepted auditing standards) which would not necessarily reveal matters of significance with respect to the comments set forth in such letter; a reading of the minutes of the meetings of the stockholders, directors, board of directors' audit committee and compensation committee of the Company and the Subsidiaries; and inquiries of certain officials of the Company who have responsibility for financial and accounting matters of the Company and its subsidiaries as to transactions and events subsequent to December 31, 1998, nothing came to their attention which caused them to believe that: (1) any unaudited financial statements included or incorporated by reference in the Registration Statement and the Prospectuses do not comply as to form in all material respects with applicable accounting requirements of the Act and with the related rules and regulations adopted by the Commission with respect to financial statements included or incorporated by reference in quarterly reports on Form 10-Q under the Exchange Act; and said unaudited financial statements are not in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements included or incorporated by reference in the Registration Statement and the Prospectuses; (2) with respect to the period subsequent to March 31, 1999, there were any changes, at a specified date not more than five days prior to the date of the letter, in the long-term debt of the Company and its subsidiaries or capital stock of the Company or decreases in the stockholders' equity of the Company or decreases in working capital of the Company and its subsidiaries as compared with the amounts shown on the March 31, 1999 consolidated balance sheet included or incorporated by reference in the Registration Statement and the Prospectuses, or for the period from April 1, 1999 to such specified date there were any decreases, as compared with the corresponding period in the preceding quarter, in revenue, operating income or income before taxes or in total or per share amounts of net income of the Company and its subsidiaries except in all instances for changes or decreases set forth in such letter, in which case the letter shall be accompanied by an explanation by the Company as to the significance thereof unless said explanation is not deemed necessary by the Representatives; 22 (3) the information included or incorporated by reference in the Registration Statement and Prospectuses in response to Regulation S-K, Item 301 (Selected Financial Data), Item 302 (Supplementary Financial Information) and Item 402 (Executive Compensation) is not in conformity with the applicable disclosure requirements of Regulation S-K; and (iii) they have performed certain other specified procedures as a result of which they determined that certain information of an accounting, financial or statistical nature (which is limited to accounting, financial or statistical information derived from the general accounting records of the Company and its subsidiaries) set forth in the Registration Statement and the Prospectuses, including the information set forth under the captions "Capitalization", "Selected Consolidated Financial Data", "Management's Discussion and Analysis of Financial Condition and Results of Operation" and "Business" in the Prospectuses, the information included or incorporated by reference in Items 1, 2, 6, 7 and 11 of the Company's Annual Report on Form 10-K, incorporated by reference in the Registration Statement and the Prospectuses, and the information included in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Company's Quarterly Report on Form 10-Q, incorporated by reference in the Registration Statement and the Prospectuses, agrees with the accounting records of the Company and its subsidiaries, excluding any questions of legal interpretation. References to the Prospectuses in this paragraph (g) include any supplement thereto at the date of the letter. (h) Subsequent to the Execution Time or, if earlier, the dates as of which information is given in the Registration Statement (exclusive of any amendment thereof) and the Prospectuses (exclusive of any supplement thereto), there shall not have been (i) any change or decrease specified in the letter or letters referred to in paragraph (g) of this Section 6 or (ii) any change, or any development involving a prospective change, in or affecting the condition (financial or otherwise), earnings, business or properties of the Company and its subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business, except as set forth in or contemplated in the Prospectuses (exclusive of any supplement thereto) the effect of which, in any case referred to in clause (i) or (ii) above, is, in the sole judgment of the U.S. Representatives, so material and adverse as to make it impractical or inadvisable to proceed with the offering or delivery of the U.S. Securities as contemplated by the Registration Statement (exclusive of any amendment thereof) and the Prospectuses (exclusive of any supplement thereto). (i) The closing of the purchase of the U.S. Underwritten Securities to be issued and sold by the Company and the Selling Stockholders pursuant to the U.S. Underwriting Agreement shall occur concurrently with the closing of the International Underwritten Securities to be issued and sold by the Company and the Selling Stockholders pursuant to the International Underwriting Agreement. 23 (j) Prior to the Closing Date, the Company and the Selling Stockholders shall have furnished to the Representatives such further information, certificates and documents as the Representatives may reasonably request. (k) The Securities shall have been listed and admitted and authorized for trading on the Nasdaq National Market, and satisfactory evidence of such actions shall have been provided to the Representatives. (l) At the Execution Time, the Company shall have furnished to the Representatives a letter substantially in the form of Exhibit A hereto (and in the case of Richard N. Garman and Ruth Ann Marshall, substantially in the form of Exhibit B hereto) from each executive officer and director of the Company, which persons are listed on Schedule III hereto, KeyCorp and Sam Buchbinder, all addressed to the Representatives. If any of the conditions specified in this Section 6 shall not have been fulfilled in all material respects when and as provided in this U.S. Underwriting Agreement and the International Underwriting Agreement, or if any of the opinions and certificates mentioned above or elsewhere in this U.S. Underwriting Agreement shall not be in all material respects reasonably satisfactory in form and substance to the U.S. Representatives and counsel for the Underwriters, this U.S. Underwriting Agreement and all obligations of the U.S. Underwriters under this U.S. Underwriting Agreement may be canceled at, or at any time prior to, the Closing Date by the U.S. Representatives. Notice of such cancellation shall be given to the Company and each Selling Stockholder in writing or by telephone or facsimile confirmed in writing. The documents required to be delivered by this Section 6 shall be delivered at the office of Cleary, Gottlieb, Steen & Hamilton, counsel for the Underwriters, at One Liberty Plaza, New York, New York 10006, on the Closing Date. 7. Reimbursement of U.S. Underwriters' Expenses. If the sale of the U.S. Securities provided for in this U.S. Underwriting Agreement is not consummated because any condition to the obligations of the U.S. Underwriters set forth in Section 6 hereof is not satisfied, because of any termination pursuant to Section 10 hereof or because of any refusal, inability or failure on the part of the Company or any Selling Stockholders to perform any agreement in this U.S. Underwriting Agreement or comply with any provision hereof other than by reason of a default by any of the U.S. Underwriters, the Company will reimburse the U.S. Underwriters severally through Salomon Smith Barney Inc. on demand for all out-of-pocket expenses (including reasonable fees and disbursements of counsel) that shall have been incurred by them in connection with the proposed purchase and sale of the Securities. If the Company is required to make any payments to the Underwriters under this Section 7 because of any Selling Stockholder's refusal, inability or failure to satisfy any condition to the obligations of the Underwriters set forth in Section 6, the Selling Stockholders pro rata in proportion to the percentage of Securities to be sold by each shall reimburse the Company on demand for all amounts so paid. 8. Indemnification and Contribution. (a) The Company agrees to indemnify and hold harmless each U.S. Underwriter, the directors, officers, employees and agents of each U.S. Underwriter and each person who controls any U.S. Underwriter within the meaning of either the 24 Act or the Exchange Act against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Act, the Exchange Act or other Federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the registration statement for the registration of the Securities as originally filed or in any amendment thereof, or in any U.S. or International Preliminary Prospectus or in either of the Prospectuses, or in any amendment thereof or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and agrees to reimburse each such indemnified party, as incurred, for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with written information furnished to the Company by or on behalf of any U.S. Underwriter through the U.S. Representatives specifically for inclusion therein. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) Each Selling Stockholder severally agrees to indemnify and hold harmless the Company, each of its directors, each of its officers who signs the Registration Statement, each U.S. Underwriter, the directors, officers, employees and agents of each U.S. Underwriter and each person who controls the Company or any U.S. Underwriter within the meaning of either the Act or the Exchange Act and each other Selling Stockholder, if any, to the same extent as the foregoing indemnity from the Company to each U.S. Underwriter, but only with reference to written information furnished to the Company by or on behalf of such Selling Stockholder specifically for inclusion in the documents referred to in the foregoing indemnity. This indemnity agreement will be in addition to any liability which any Selling Stockholder may otherwise have. (c) Each U.S. Underwriter severally and not jointly agrees to indemnify and hold harmless the Company, each of its directors, each of its officers who signs the Registration Statement, and each person who controls the Company within the meaning of either the Act or the Exchange Act and each Selling Stockholder, to the same extent as the foregoing indemnity to each U.S. Underwriter, but only with reference to written information relating to such U.S. Underwriter furnished to the Company by or on behalf of such U.S. Underwriter through the U.S. Representatives specifically for inclusion in the documents referred to in the foregoing indemnity. This indemnity agreement will be in addition to any liability which any U.S. Underwriter may otherwise have. The Company and each Selling Stockholder acknowledge that the statements set forth in the last paragraph of the cover page regarding delivery of the Securities and, under the heading "Underwriting", (i) the sentences related to concessions and reallowances and (ii) the paragraph related to stabilization, syndicate covering transactions and penalty bids in any U.S. or International Preliminary Prospectuses and the Prospectuses constitute the only information furnished in writing by or on behalf of the several U.S. Underwriters for inclusion in any U.S. or International Preliminary Prospectus or the Prospectuses. 25 (d) Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 8, notify the indemnifying party in writing of the commencement thereof; but the failure so to notify the indemnifying party (i) will not relieve it from liability under paragraph (a), (b) or (c) above unless and to the extent it did not otherwise learn of such action and such failure results in the forfeiture by the indemnifying party of substantial rights and defenses and (ii) will not, in any event, relieve the indemnifying party from any obligations to any indemnified party other than the indemnification obligation provided in paragraph (a), (b) or (c) above. The indemnifying party shall be entitled to appoint counsel of the indemnifying party's choice at the indemnifying party's expense to represent the indemnified party in any action for which indemnification is sought (in which case the indemnifying party shall not thereafter be responsible for the fees and expenses of any separate counsel retained by the indemnified party or parties except as set forth below); provided, however, that such counsel shall be satisfactory to the indemnified party. Notwithstanding the indemnifying party's election to appoint counsel to represent the indemnified party in an action, the indemnified party shall have the right to employ separate counsel (including local counsel), and the indemnifying party shall bear the reasonable fees, costs and expenses of such separate counsel if (i) the use of counsel chosen by the indemnifying party to represent the indemnified party would present such counsel with a conflict of interest, (ii) the actual or potential defendants in, or targets of, any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, (iii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of the institution of such action or (iv) the indemnifying party shall authorize the indemnified party to employ separate counsel at the expense of the indemnifying party. An indemnifying party will not, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action, suit or proceeding. (e) In the event that the indemnity provided in paragraph (a), (b) or (c) of this Section 8 is unavailable to or insufficient to hold harmless an indemnified party for any reason, the Company, the Selling Stockholders and the U.S. Underwriters agree to contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigating or defending same) (collectively "Losses") to which the Company, one or more of the Selling Stockholders and one or more of the U.S. Underwriters may be subject in such proportion as is appropriate to reflect the relative benefits received by the Company, by the Selling Stockholders and by the U.S. Underwriters from the offering of the U.S. Securities; provided, however, that in no case shall any U.S. Underwriter (except as may be provided in any agreement among underwriters relating to the offering of the U.S. Securities) be responsible for any amount in excess of the underwriting discount or commission applicable to the Securities purchased by such U.S. Underwriter hereunder. If the allocation provided by the immediately preceding sentence is unavailable for any reason, the Company, the Selling Stockholders and the U.S. Underwriters shall contribute in such proportion as is appropriate to 26 reflect not only such relative benefits but also the relative fault of the Company, of the Selling Stockholders and of the U.S. Underwriters in connection with the statements or omissions which resulted in such Losses as well as any other relevant equitable considerations. Benefits received by the Company and by the Selling Stockholders shall be deemed to be equal to the total net proceeds from the offering (before deducting expenses) received by each of them, and benefits received by the U.S. Underwriters shall be deemed to be equal to the total underwriting discounts and commissions, in each case as set forth on the cover page of the U.S. Prospectus. Relative fault shall be determined by reference to, among other things, whether any untrue or any alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information provided by the Company, the Selling Stockholders on the one hand or the U.S. Underwriters on the other, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The Company, the Selling Stockholders and the U.S. Underwriters agree that it would not be just and equitable if contribution were determined by pro rata allocation or any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this paragraph (e), no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 8, each person who controls a U.S. Underwriter within the meaning of either the Act or the Exchange Act and each director, officer, employee and agent of a U.S. Underwriter shall have the same rights to contribution as such U.S. Underwriter, and each person who controls the Company within the meaning of either the Act or the Exchange Act, each officer of the Company who shall have signed the Registration Statement and each director of the Company shall have the same rights to contribution as the Company, subject in each case to the applicable terms and conditions of this paragraph (e). 9. Default by a U.S. Underwriter. If any one or more U.S. Underwriters shall fail to purchase and pay for any of the U.S. Securities agreed to be purchased by such U.S. Underwriter or U.S. Underwriters under this U.S. Underwriting Agreement and such failure to purchase shall constitute a default in the performance of its or their obligations under this U.S. Underwriting Agreement, the remaining U.S. Underwriters shall be obligated severally to take up and pay for (in the respective proportions which the amount of U.S. Securities set forth opposite their names in Schedule I hereto bears to the aggregate amount of U.S. Securities set forth opposite the names of all the remaining U.S. Underwriters) the U.S. Securities which the defaulting U.S. Underwriter or U.S. Underwriters agreed but failed to purchase; provided, however, that in the event that the aggregate amount of U.S. Securities which the defaulting U.S. Underwriter or U.S. Underwriters agreed but failed to purchase shall exceed 10% of the aggregate amount of U.S. Securities set forth in Schedule I hereto, the remaining U.S. Underwriters shall have the right to purchase all, but shall not be under any obligation to purchase any, of the U.S. Securities, and if such nondefaulting U.S. Underwriters do not purchase all the U.S. Securities, this U.S. Underwriting Agreement will terminate without liability to any nondefaulting U.S. Underwriter, the Selling Stockholders or the Company. In the event of a default by any U.S. Underwriter as set forth in this Section 9, the Closing Date shall be postponed for such period, not exceeding five Business Days, as the U.S. Representatives shall determine in order that the required changes in the Registration Statement and the Prospectuses or in any other documents or arrangements may be effected. Nothing contained in this U.S. Underwriting Agreement shall relieve any defaulting U.S. Underwriter of its liability, if any, to 27 the Company, the Selling Stockholders and any nondefaulting U.S. Underwriter for damages occasioned by its default under this U.S. Underwriting Agreement. 10. Termination. This U.S. Underwriting Agreement shall be subject to termination in the absolute discretion of the U.S. Representatives, by notice given to the Company prior to delivery of and payment for the U.S. Securities, if at any time prior to such time (i) trading in the Company's Common Stock shall have been suspended by the Commission or the Nasdaq National Market or trading in securities generally on the New York Stock Exchange or the Nasdaq National Market shall have been suspended or limited or minimum prices shall have been established on such Exchange or the Nasdaq National Market, (ii) a banking moratorium shall have been declared either by federal or new york state authorities or (iii) there shall have occurred any outbreak or escalation of hostilities, declaration by the united states of a national emergency or war, or other calamity or crisis the effect of which on financial markets is such as to make it, in the sole judgment of the U.S. Representatives, impractical or inadvisable to proceed with the offering or delivery of the Securities as contemplated by the U.S. Prospectus (exclusive of any supplement thereto). 11. Representations and Indemnities to Survive. The respective agreements, representations, warranties, indemnities and other statements of the Company or its officers, of each Selling Stockholder and of the U.S. Underwriters set forth in or made pursuant to this U.S. Underwriting Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of any U.S. Underwriter, any Selling Stockholder or the Company or any of the officers, directors, employees, agents or controlling persons referred to in section 8 hereof, and will survive delivery of and payment for the U.S. Securities. The provisions of Sections 7 and 8 hereof shall survive the termination or cancellation of this U.S. Underwriting Agreement. 12. Notices. All communications under this U.S. Underwriting Agreement will be in writing and effective only on receipt, and, if sent to the U.S. Representatives, will be mailed, delivered or telefaxed to the Salomon Smith Barney Inc. General Counsel (fax no.:(212) 816-7912) and confirmed to such General Counsel at Salomon Smith Barney Inc., 388 Greenwich Street, New York, New York, 10013, Attention: General Counsel; or, if sent to the Company, will be mailed, delivered or telefaxed to [facsimile number] and confirmed to it at , attention of _________; or if sent to any Selling Stockholder, will be mailed, delivered or telefaxed and confirmed to it at the address set forth in Schedule II hereto. 13. Successors. This U.S. Underwriting Agreement will inure to the benefit of and be binding upon the parties hereto and their respective successors and the officers, directors, employees, agents and controlling persons referred to in Section 8 hereof, and no other person will have any right or obligation under this U.S. Underwriting Agreement. 14. Applicable Law. This U.S. Underwriting Agreement will be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed within the State of New York. 15. Counterparts. This U.S. Underwriting Agreement may be signed in one or more counterparts, each of which shall constitute an original and all of which together shall constitute one and the same agreement. 28 16. Headings. The Section headings used in this U.S. Underwriting Agreement are for convenience only and shall not affect the construction hereof. 17. Definitions. The terms which follow, when used in this U.S. Underwiting Agreement, shall have the meanings indicated. "Act" shall mean the Securities Act of 1933, as amended, and the rules and regulations of the Commission promulgated thereunder. "Business Day" shall mean any day other than a Saturday, a Sunday or a legal holiday or a day on which banking institutions or trust companies are authorized or obligated by law to close in New York City. "Commission" shall mean the Securities and Exchange Commission. "Effective Date" shall mean each date and time that the Registration Statement, any post-effective amendment or amendments thereto and any Rule 462(b) Registration Statement became or become effective. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission promulgated thereunder. "Execution Time" shall mean the date and time that this U.S. Underwriting Agreement is executed and delivered by the parties hereto. "International Preliminary Prospectus" shall have the meaning set forth under "U.S. Preliminary Prospectus." "International Prospectus" shall mean such form of prospectus relating to the International Securities as first filed pursuant to Rule 424(b) after the Execution Time or, if no filing pursuant to Rule 424(b) is made, such form of prospectus included in the Registration Statement at the Effective Date. "International Representatives" shall mean the addressees of the International Underwriting Agreement. "International Securities" shall mean the International Underwritten Securities and the International Option Securities. "International Underwriters" shall mean the several underwriters named in Schedule I to the International Underwriting Agreement. "International Underwriting Agreement" shall mean the International Underwriting Agreement dated the date hereof related to the sale of the International Securities by the Company and the Selling Stockholders to the International Underwriters. 29 "Option Securities" shall mean the U.S. Option Securities and the International Option Securities. "Preliminary Prospectus" shall have the meaning set forth under "U.S. Preliminary Prospectus.""Prospectuses" and "each Prospectus" shall mean the U.S. Prospectus and the International Prospectus. "Registration Statement" shall mean the registration statement referred to in paragraph 1(i)(a) above, including exhibits and financial statements, as amended at the Execution Time (or, if not effective at the Execution Time, in the form in which it shall become effective) and, in the event any post-effective amendment thereto or any Rule 462(b) Registration Statement becomes effective prior to the Closing Date, shall also mean such registration statement as so amended or such Rule 462(b) Registration Statement, as the case may be. Such term shall include any Rule 430A Information deemed to be included therein in the Effective Date as provided by Rule 430A. "Representatives" shall mean the U.S. Representatives and the International Representatives. "Rule 424", "Rule 430A" and "Rule 462" refer to such rules under the Act. "Rule 430A Information" shall mean information with respect to the Securities and the offering thereof permitted to be omitted from the Registration Statement when it becomes effective pursuant to Rule 430A. "Rule 462(b) Registration Statement" shall mean a registration statement and any amendments thereto filed pursuant to Rule 462(b) relating to the offering covered by the registration statement referred to in Section 1(a)(i) hereof. "Securities" shall mean the U.S. Securities and the International Securities. "Selling Stockholders" shall mean the persons named on Schedule II to the U.S. Underwriting Agreement and the International Underwriting Agreement. "Underwriter" and "Underwriters" shall mean the U.S. Underwriters and the International Underwriters. "Underwriting Agreements" still mean the U.S. Underwriting Agreement and the International Underwriting Agreement. "Underwritten Securities" shall mean the International Underwritten Securities and the U.S. Underwritten Securities. "U.S. Preliminary Prospectus" and the "International Preliminary Prospectus", respectively, shall mean any preliminary prospectus with respect to the offering of the U.S. Securities and the International Securities, as the case may be, referred to in paragraph 1(i)(a) above and any preliminary prospectus with respect to the offering of the U.S. Securities and the International Securities, as the case may be, included in the Registration Statement at the Effective Date that omits Rule 430A Information; and the U.S. Preliminary Prospectus and the International Preliminary Prospectus are hereinafter collectively called the "Preliminary Prospectuses". 30 "U.S. Prospectus" shall mean the prospectus relating to the Securities that is first filed pursuant to Rule 424(b) after the Execution Time or, if no filing pursuant to Rule 424(b) is required, shall mean the form of final prospectus relating to the Securities included in the Registration Statement at the Effective Date. "U.S. Representatives" shall mean the addressees of the U.S. Underwriting Agreement. "U.S. Securities" shall mean the U.S. Underwritten Securities and the U.S. Option Securities. "U.S. Underwriting Agreement" shall mean this agreement relating to the sale of the U.S. Securities by the Company and the Selling Stockholders to the U.S. Underwriters. "U.S. Underwriters" shall mean the several underwriters named in Schedule I to the U.S. Underwriting Agreement. "United States or Canadian Person" shall mean any person who is a national or resident of the United States or Canada, any corporation, partnership, or other entity created or organized in or under the laws of the United States or Canada or of any political subdivision thereof, or any estate or trust the income of which is subject to United States or Canadian Federal income taxation, regardless of its source (other than any non-United States or non-Canadian branch of any United States or Canadian Person), and shall include any United States or Canadian branch of a person other than a United States or Canadian Person. "U.S." or "United States" shall mean the United States of America (including the states thereof and the District of Columbia), its territories, its possessions and other areas subject to its jurisdiction. 31 If the foregoing is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicate hereof, whereupon this letter and your acceptance shall represent a binding agreement among the Company, the Selling Stockholders, and the several U.S. Underwriters. Very truly yours, Concord EFS, Inc. By: ------------------------------------ Name: Title: Bank One Corporation By: ------------------------------------ Name: Title: Corestates Holdings, Inc. By: ------------------------------------ Name: Title: KeyCorp. By: ------------------------------------ Name: Title: National City Corporation By: ------------------------------------ Name: Title: PNC Network Holdings Corp. By: ------------------------------------ Name: Title: 32 The foregoing Agreement is hereby confirmed and accepted as of the date first above written. By: Salomon Smith Barney Inc. By: --------------------------------------- Name: Title: By: William Blair & Company, L.L.C. By: --------------------------------------- Name: Title: By: Goldman, Sachs & Co. By: --------------------------------------- For themselves and the other several U.S. Underwriters named in Schedule I to the foregoing Agreement. 33 SCHEDULE I
Number of Underwritten Securities to be Underwriters Purchased - ------------ ---------------------- Salomon Smith Barney Inc.................. William Blair & Company, L.L.C............ Goldman, Sachs & Co....................... J.P. Morgan Securities Inc................ Morgan Keegan & Company, Inc.............. [Additional Underwriters] ------------------- Total........................... ===================
34 SCHEDULE II -----------
Number of Underwritten Securities --------------------------------- Selling Stockholders: to be Sold - --------------------- ---------- Bank One Corporation [address, fax no.] Corestates Holdings, Inc. [address, fax no.] KeyCorp. [address, fax no.] National City Corporation [address, fax no.] PNC Network Holdings Corp. [address, fax no.] ---------- Total..................... ==========
35 SCHEDULE III ------------ List of Executive Officers and Directors ---------------------------------------- Dan M. Palmer Edward A. Labry Vickie Brown Thomas J. Dowling Richard N. Garman William E. Lucado Ruth Ann Marshall Joyce Kelso Richard P. Kiphart Richard M. Harter Jerry D. Mooney David C. Anderson J. Richard Buchignani Paul Whittington Douglas C. Altenbern 36 CGSH draft: 5/14/99 [Form of Lock-Up Agreement] EXHIBIT A [Letterhead of officer, director or major stockholder of] Concord EFS, Inc. Concord EFS, Inc. Public Offering of Common Stock ------------------------------- , 1999 Salomon Brothers International Limited Salomon Smith Barney Inc. William Blair & Company, L.L.C. Goldman, Sachs & Co. Goldman Sachs International J.P. Morgan Securities Ltd. J.P. Morgan Securities Inc. Morgan Keegan & Company, Inc. As Representatives of the several U.S. Underwriters and International Underwriters, c/o Salomon Smith Barney Inc. 388 Greenwich Street New York, New York 10013 Ladies and Gentlemen: This letter is being delivered to you in connection with the proposed U.S. Underwriting Agreement and International Underwriting Agreement (the "Underwriting Agreements"), among Concord EFS, Inc., a Delaware corporation (the "Company"), each of the Selling Stockholders named therein and each of you as representatives of a group of U.S. Underwriters and International Underwriters named therein, relating to an underwritten public offering of Common Stock, $0.33 1/3 par value (the "Common Stock"), of the Company. In order to induce you and the other U.S. Underwriters and International Underwriters to enter into the Underwriting Agreements, the undersigned will not, without the prior written consent of Salomon Smith Barney Inc. and William Blair & Company, L.L.C., offer, sell, contract to sell, pledge or otherwise dispose of, (or enter into any transaction which is designed to, or might reasonably be expected to, result in the disposition (whether by actual disposition or effective economic disposition due to cash settlement or otherwise) by the Company or any affiliate of the Company or any person in privity with the Company or any affiliate of the Company) directly or indirectly, including the filing (or participation in the filing of) a registration statement with the Securities and Exchange Commission in respect of, or establish or increase a put equivalent position or liquidate or decrease a call equivalent position within the meaning of Section 16 of the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Securities and Exchange Commission promulgated thereunder with respect to, any shares of capital stock of the Company or any securities convertible into, or 37 exercisable or exchangeable for such capital stock, or publicly announce an intention to effect any such transaction, for a period of 90 days after the date of the Underwriting Agreements, other than shares of Common Stock disposed of as bona fide gifts approved by Salomon Smith Barney Inc. and William Blair & Company L.L.C. If for any reason the Underwriting Agreements shall be terminated prior to the Closing Date (as defined in the Underwriting Agreements), the agreement set forth above shall likewise be terminated. Yours very truly, [Signature of officer, director or major stockholder] [Name and address of officer, director or major stockholder] 38 CGSH draft: 5/14/99 [Form of Lock-Up Agreement for Richard Garman and Ruth Ann Marshall] EXHIBIT B [Letterhead] Concord EFS, Inc. Concord EFS, Inc. Public Offering of Common Stock ------------------------------- , 1999 Salomon Brothers International Limited Salomon Smith Barney Inc. William Blair & Company, L.L.C. Goldman, Sachs & Co. Goldman Sachs International J.P. Morgan Securities Ltd. J.P. Morgan Securities Inc. Morgan Keegan & Company, Inc. As Representatives of the several U.S. Underwriters and International Underwriters, c/o Salomon Smith Barney Inc. 388 Greenwich Street New York, New York 10013 Ladies and Gentlemen: This letter is being delivered to you in connection with the proposed U.S. Underwriting Agreement and International Underwriting Agreement (the "Underwriting Agreements"), among Concord EFS, Inc., a Delaware corporation (the "Company"), each of the Selling Stockholders named therein and each of you as representatives of a group of U.S. Underwriters and International Underwriters named therein, relating to an underwritten public offering of Common Stock, $0.33 1/3 par value (the "Common Stock"), of the Company. In order to induce you and the other U.S. Underwriters and International Underwriters to enter into the Underwriting Agreements, the undersigned will not, without the prior written consent of Salomon Smith Barney Inc. and William Blair & Company, L.L.C., offer, sell, contract to sell, pledge or otherwise dispose of, (or enter into any transaction which is designed to, or might reasonably be expected to, result in the disposition (whether by actual disposition or effective economic disposition due to cash settlement or otherwise) by the Company or any affiliate of the Company or any person in privity with the Company or any affiliate of the Company) directly or indirectly, including the filing (or participation in the filing of) a registration statement with the Securities and Exchange Commission in respect of, or establish or increase a put equivalent position or liquidate or decrease a call equivalent position within the meaning of Section 16 of the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Securities and Exchange Commission promulgated thereunder with 39 respect to, any shares of capital stock of the Company or any securities convertible into, or exercisable or exchangeable for such capital stock, or publicly announce an intention to effect any such transaction, for a period of 90 days after the date of the Underwriting Agreements, other than shares of Common Stock (i) issued after the date of the Underwriting Agreements under the Electronic Payment Services, Inc. 1995 Stock Option Plan, as amended effective at the date of the Underwriting Agreements or (ii) disposed of as bona fide gifts approved by Salomon Smith Barney Inc. and William Blair & Company L.L.C. If for any reason the Underwriting Agreements shall be terminated prior to the Closing Date (as defined in the Underwriting Agreements), the agreement set forth above shall likewise be terminated. Yours very truly, [Signature] [Name and address] 40 Annex A Subsidiaries EFS National Bank EFS Federal Savings Bank Concord Computing Corporation Concord Retail Services, Inc. Concord Equipment Sales Pay Systems of America, Inc. Digital Merchants Systems of Illinois, Inc. American Bankcard, International, Inc. Electronic Payment Services, Inc. EX-5.1 3 OPINION OF SIDLEY & AUSTIN EXHIBIT 5.1 [Sidley & Austin letterhead] May 18, 1999 Board of Directors Concord EFS, Inc. 25252 Horizon Lake Drive Suite 120 Memphis, TN 38133 Re: Registration Statement on Form S-3 (No. 333-77829) Ladies and Gentlemen: We refer to the Registration Statement on Form S-3, Registration No. 333- 77829 (the "Registration Statement") filed by Concord EFS, Inc., a Delaware corporation (the "Company"), with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Securities Act"), relating to the registration of 35,603,125 shares of common stock, par value $.33 1/3 per share, of which 2,000,000 shares are being offered by the Company and up to an additional 4,640,000 shares are being offered by the Company to cover over- allotments (collectively, the "New Shares") and 28,963,125 shares are being offered by the selling stockholders named therein (the "Selling Stockholder Shares"). In rendering this opinion, we have examined and relied upon a copy of the Registration Statement. We have also examined or caused to be examined originals, or copies of originals certified to our satisfaction, of such agreements, documents, certificates and statements of government officials and other instruments, and have examined such questions of law and have satisfied ourselves as to such matters of fact, as we have considered relevant and necessary as a basis for this opinion. We have assumed the authenticity of all documents submitted to us as originals, the genuineness of all signatures, the legal capacity of all natural persons and the conformity with the original documents of any copies thereof submitted to us for examination. Based on the foregoing, and subject to the qualifications and limitations hereinafter set forth, we are of the opinion that: 1. The Company is a validly existing corporation under the laws of the State of Delaware. 2. The New Shares will be legally issued, fully paid and nonassessable when (i) the Registration Statement, as finally amended (including any necessary post-effective amendments), shall have become effective under the Securities Act; (ii) the Company's Board of Directors or duly authorized committee thereof shall have duly adopted final resolutions authorizing the issuance and sale of the New Shares as contemplated by the Registration Statement; and (iii) certificates representing the New Shares shall have been duly executed, countersigned and registered and duly delivered to the purchasers thereof against payment of the agreed consideration therefor. 3. The Selling Stockholder Shares have been legally issued and are fully paid and nonassessable. We do not find it necessary for the purposes of this opinion to cover, and accordingly we express no opinion as to, the application of the securities or "Blue Sky" laws of the various states to the sale of the securities to be registered pursuant to the Registration Statement. Without limiting the generality of the foregoing, we express no opinion in connection with the matters contemplated by the Registration Statement, and no opinion may be implied or inferred, except as expressly set forth herein. This opinion is limited to the Delaware General Corporation Law and the Securities Act. We hereby consent to the filing of this opinion as Exhibit 5.1 to the Registration Statement and to all references to our firm in the Registration Statement or the Prospectus included therein. Very truly yours, /s/ Sidley & Austin EX-23.2 4 CONSENT OF ERNST & YOUNG LLP. Exhibit 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" in Amendment No. 1 to the Registration Statement (Form S-3, No. 333-77829) and related Prospectus of Concord EFS, Inc. for the registration of 35,603,125 shares of its common stock and to the inclusion and incorporation by reference therein of our report dated February 26, 1999, with respect to the consolidated financial statements of Concord EFS, Inc. included in the Registration Statement and included as Exhibit 99 to its Annual Report on Form 10-K for the year ended December 31, 1998, filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP Memphis, Tennessee May 14, 1999 EX-24.1 5 POWERS OF ATTORNEY Exhibit 24.1 POWER OF ATTORNEY Know All Men By These Presents, that each person whose signature appears below does hereby constitute and appoint Thomas J. Dowling and William E. Lucado, and each of them, his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to execute the Registration Statement on Form S-3 relating to the sale of common stock of Concord EFS, Inc. and any and all amendments thereto, and to file the same, together with all exhibits thereto, and other documents in connection therewith with the Securities and Exchange Commission, granting unto each of said attorneys full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully as and to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that each of said attorneys, or his substitute, may lawfully do and cause to be done by virtue hereof. In Witness Whereof, each of the undersigned has executed this instrument this 3rd day of May, 1999. /s/ Edward A. Labry III /s/ Dan M. Palmer _____________________________________ ______________________________________ Edward A. Labry III Dan M. Palmer /s/ Douglas C. Altenbern /s/ David C. Anderson _____________________________________ ______________________________________ Douglas C. Altenbern David C. Anderson /s/ Richard Buchignani /s/ Richard M. Harter _____________________________________ ______________________________________ Richard Buchignani Richard M. Harter /s/ Joyce Kelso /s/ Richard P. Kiphart _____________________________________ ______________________________________ Joyce Kelso Richard P. Kiphart /s/ Jerry D. Mooney /s/ Paul L. Whittington _____________________________________ ______________________________________ Jerry D. Mooney Paul L. Whittington -----END PRIVACY-ENHANCED MESSAGE-----