-----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, AWPIzjYOq3p13PlUd1g+F3ccbOCfch0Rwv9pfsEHXTNeahiZDRrg8SUF97AG07Po dCxYunZG2fLNzwzLAvOSyg== 0000950135-96-004394.txt : 19961021 0000950135-96-004394.hdr.sgml : 19961021 ACCESSION NUMBER: 0000950135-96-004394 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19961017 SROS: NASD 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: 1933 Act SEC FILE NUMBER: 333-13309 FILM NUMBER: 96644964 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 CONCORD EFS, INC. AMENDMENT NO. 1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 17, 1996. FILE NO. 333-13309 ================================================================================ 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 Registrant as specified in its charter) DELAWARE 04-2462252 (State or other jurisdiction of organization) (I.R.S. Employer Identification No.)
2525 HORIZON LAKE DRIVE, SUITE 120, MEMPHIS, TENNESSEE 38133 (901) 371-8000 (Address and telephone number of registrant's principal executive offices) ------------------------------------ DAN M. PALMER CHAIRMAN OF THE BOARD OF DIRECTORS AND CHIEF EXECUTIVE OFFICER CONCORD EFS, INC. 2525 HORIZON LAKE DRIVE, SUITE 120 MEMPHIS, TENNESSEE 38133 (901) 371-8000 (Name, address and telephone number of agent for service) with copies to: RICHARD M. HARTER, ESQ. GLENN W. REED, ESQ. BINGHAM, DANA & GOULD LLP GARDNER, CARTON & DOUGLAS 150 FEDERAL STREET 321 NORTH CLARK STREET BOSTON, MASSACHUSETTS 02110 CHICAGO, ILLINOIS 60610 (617) 951-8000 (312) 245-8446
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, 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. / / ------------------------------------ CALCULATION OF REGISTRATION FEE - ----------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF TITLE OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE FEE - ----------------------------------------------------------------------------------------------------------- Common Stock $0.33 1/3 Par Value......... 2,300,000 shares(1) $24.625(2) $56,637,500(2) $17,163 - ----------------------------------------------------------------------------------------------------------- Common Stock $0.33 1/3 Par Value......... 1,150,000 shares(3) $26.1875(4) $30,115,625(4) $9,126 - -----------------------------------------------------------------------------------------------------------
(1) Amount of shares to be registered as set forth in initial filing on October 2, 1996. Includes a maximum of 300,000 shares which may be purchased by the Underwriters to cover over-allotments, if any. (2) Calculated in accordance with Rule 457(c) based on the average of the high and low prices reported in the consolidated trading system on September 26, 1996. (3) Additional shares to be registered pursuant to this Amendment No. 1. Includes a maximum of 150,000 shares which may be purchased by the Underwriters to cover over-allotments, if any. (4) Calculated in accordance with Rule 457(a) and (c) based on the average of the high and low prices reported on the consolidated trading system on October 10, 1996. 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 THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED OCTOBER 17, 1996 PROSPECTUS 3,000,000 SHARES [CONCORD EFS, INC. LOGO] COMMON STOCK ------------------------ All of the shares of the Common Stock offered hereby are being sold by Concord EFS, Inc. (the "Company" or "Concord"). The Common Stock offered hereby is quoted on the Nasdaq National Market under the symbol "CEFT". On October 16, 1996, the last reported sale price of the Common Stock was $27.00 per share. See "Price Range of Common Stock." SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES OF COMMON STOCK OFFERED HEREBY. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ================================================================================================= PRICE TO UNDERWRITING DISCOUNT PROCEEDS TO PUBLIC AND COMMISSION(1) COMPANY(2) - ------------------------------------------------------------------------------------------------- Per Share........................ $ $ $ Total(3)......................... $ $ $ ================================================================================================= (1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting estimated offering expenses of $365,000 payable by the Company. (3) The Company has granted to the Underwriters a 30-day option to purchase up to an additional 450,000 shares of Common Stock, solely to cover over-allotments, if any. See "Underwriting." If all such shares are purchased, the total Price to Public, Underwriting Discount, and Proceeds to Company will be $ , $ , and $ , respectively.
The shares of Common Stock are offered by the several Underwriters when, as and if delivered to and accepted by them and subject to their right to reject orders in whole or in part. It is expected that delivery of the certificates for the shares of Common Stock will be made on or about , 1996. WILLIAM BLAIR & COMPANY MONTGOMERY SECURITIES MORGAN KEEGAN & COMPANY, INC. ADAMS, HARKNESS & HILL, INC. The date of this Prospectus is October , 1996 3 IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). SEE "UNDERWRITING." AVAILABLE INFORMATION The Company is subject to the informational requirements of the Exchange Act and in accordance therewith files periodic reports and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information concerning the Company may be inspected and copies may be obtained (at prescribed rates) at the public reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the Commission located at Seven World Trade Center, 13th Floor, New York, New York 10048 and at Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can also be obtained by mail from the Public Reference Section, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of prescribed rates. In addition, electronically filed documents, including reports, proxy and information statements and other information regarding the Company, can be obtained from the Commission's Web site at: http://www.sec.gov. The Company's Common Stock is listed on the National Market System of The Nasdaq Stock Market, and reports, proxy statements and other information concerning the Company can also be inspected at the offices of the National Association of Securities Dealers, Inc. at 1735 K Street, Washington, D.C. 20006. The Company has filed a Registration Statement on Form S-3 (the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), with the Commission with respect to the Common Stock being offered pursuant to this Prospectus. As permitted by the rules and regulations of the Commission, this Prospectus omits certain of the information contained in the Registration Statement. For further information with respect to the Company and the Common Stock being offered pursuant to this Prospectus, reference is hereby made to such Registration Statement, including the exhibits filed as part thereof. Statements contained in this Prospectus concerning the provisions of certain documents filed with, or incorporated by reference in, the Registration Statement are not necessarily complete, each such statement being qualified in all respects by such reference. Copies of all or any part of the Registration Statement, including the documents incorporated by reference therein or exhibits thereto, may be obtained upon payment of the prescribed rates at the offices of the Commission set forth above. ------------------------------ "EFS," "Concord EFS" and "EFS National Bank" are trademarks and trade names of the Company. All other trademarks, brand marks and trade names used in this Prospectus are trademarks, brand marks, trade names or registered marks of their respective owners. ------------------------------ The Company's executive offices are located at 2525 Horizon Lake Drive, Suite 120, Memphis, Tennessee 38133 and its telephone number is (901) 371-8000. 2 4 - -------------------------------------------------------------------------------- PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including notes thereto, appearing elsewhere, or incorporated by reference, in this Prospectus. Unless otherwise indicated, all information in this Prospectus assumes the Underwriters' over-allotment option is not exercised. See "Underwriting." The shares of Common Stock offered hereby involve a high degree of risk. Investors should carefully consider the information set forth under the heading "Risk Factors." THE COMPANY The Company provides electronic transaction authorization, processing, settlement and funds transfer services in selected markets. Concord's primary activity is card services, which involves the provision of integrated electronic transaction services for credit card, debit card and electronic benefits transfer ("EBT") card transactions to supermarket chains, grocery stores, convenience store merchants and other retailers. The Company believes it is one of the few fully integrated transaction processors, supplying electronic payment and verification terminals, cash dispensing machines ("ATMs"), processing services, payment settlement, depository services and transaction data compilation. In addition, the Company is one of the few companies offering full credit and debit card processing on a nationwide basis. The Company also provides electronic payment and banking facilities to a large customer base in the trucking industry for use at major truck stop chains throughout the United States. In addition to maintaining a network of over 350 ATMs at truck stops nationwide, the Company provides fuel purchase cards, ATM bank cards and general banking services to truck drivers. The Company offers trucking companies payroll deposit and cash forwarding services, as well as real-time data compilation with respect to fuel volume usage, fuel expenditures, vehicle and driver tracking and truck routine maintenance schedules. In addition, the Company provides check verification services to grocery and other retail merchants. The Company's transaction payment and credit systems provide a recurring stream of revenue from transaction fees through a highly diversified and stable customer base. Between the years ended September 30, 1991 and December 31, 1995, the Company's net revenue increased from $48.1 million to $127.8 million (a compound annual growth rate of 27.6%) and its net income increased from $7.3 million to $18.3 million (a compound annual growth rate of 26.0%). Card services (77% of net revenue for the first six months of 1996) represents the fastest growing portion of the Company's revenues, increasing from $47.5 million in fiscal year 1993 to $92.2 million in fiscal year 1995, during which period the number of merchant locations served by the Company increased by approximately 26% per annum. Concord offers merchants a cost-effective, reliable, turnkey debit and credit card processing system. The Company is able to provide its system on a profitable basis because of its low-cost operational structure, which includes efficient marketing, volume purchasing arrangements with equipment and communications vendors, and direct membership by its subsidiary, EFS National Bank, in bank card associations (such as VISA and MasterCard) and national and regional debit card networks (such as Interlink, MAC, Explore and NYCE). In 1992, Concord entered into an agreement with the National Grocers Association, Inc. ("NGA") whereby Concord became the preferred vendor of the NGA for electronic payment services for a range of applications, including both turnkey packaged solutions and customized payment service agreements covering credit and debit card transaction processing. The agreement has enabled Concord to increase substantially its grocery store customer base. Currently, 6% to 7% of grocery transactions use credit or debit card payment, and the Company believes that this percentage is growing rapidly. - -------------------------------------------------------------------------------- 3 5 The Company seeks to grow its funds transfer and payment transaction processing business by providing a fully integrated range of transfer and processing services at competitive prices. The principal elements of the Company's strategy include the following: - The Company focuses on specific markets that historically have been underserved by the transaction processing industry, seeking a diverse group of customers with low credit risk profiles. - The Company seeks to be a low-cost, highly reliable provider of electronic payment processing services by providing a fully integrated range of relevant services, including designing equipment solutions, selling and leasing equipment, authorizing transactions, capturing information on its own host computer, directly participating in all major credit and debit card associations and networks, and effecting settlement of payment transactions and transfer of funds. - The Company offers maximum technological versatility for the provision of electronic processing services for a wide variety of communication protocols and processing equipment of different manufacturers, in order to provide a tailored solution to the customer's specific needs. - The Company adheres to a balanced marketing approach through the use of internal marketing specialists, independent sales representatives and a number of independent sales organizations ("ISOs") in an effort to provide at the most efficient cost broader access to new merchant customers and portfolio acquisition opportunities nationwide. Recent Company initiatives include: (i) introduction of processing services for the emerging EBT programs for the electronic provision of food stamp and other public assistance benefits, utilizing the Company's installed base in grocery, convenience store and other retail merchants; (ii) installation of and processing for a network of ATMs primarily in locations based upon the Company's existing relationships with major truck stop chains and grocery and convenience stores; (iii) enhancement of the Company's existing check verification programs with access to nationwide check verification databases; and (iv) entering into a multi-year contract to provide credit card and POS debit processing services to Comdata Network, Inc., a subsidiary of Ceridian Corporation, in the gaming and leisure markets. THE OFFERING Common Stock being offered by the Company... 3,000,000 shares Common Stock outstanding after the offering.................................... 60,224,807 shares(1) Use of proceeds............................. To augment the equity capital of EFS National Bank, for the acquisition of merchant processing portfolios and other processing businesses, and for working capital and other general corporate purposes. See "Use of Proceeds." Nasdaq Stock Market Symbol.................. CEFT - --------------- (1) Excludes an aggregate of 3,538,690 shares of Common Stock reserved for issuance upon exercise of options outstanding as of September 23, 1996. 4 6 SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED FISCAL YEARS ENDED DECEMBER 31, JUNE 30, ------------------------------------------------ ----------------- 1991(1) 1992(1) 1993 1994 1995 1995 1996 ------- ------- ------- ------- -------- ------- ------- STATEMENT OF INCOME DATA: Revenues...................... $48,144 $65,562 $75,443 $96,213 $127,762 $55,825 $74,752 Cost of operations............ 31,137 46,024 53,188 69,840 90,579 40,014 53,037 Selling, general and administrative expenses..... 5,572 5,969 7,861 8,312 10,913 5,072 5,958 Operating income.............. 11,435 13,569 14,394 18,061 26,270 10,739 15,757 Net income.................... $ 7,273 $ 8,974 $ 9,863 $12,713 $ 18,315 $ 7,540 $10,931 Net income per share(2)....... $ 0.13 $ 0.16 $ 0.18 $ 0.23 $ 0.32 $ 0.13 $ 0.19 Weighted average common and common equivalent shares outstanding(2).............. 54,996 55,169 55,676 55,898 57,858 57,163 58,988
JUNE 30, 1996 ----------------------- AS ACTUAL ADJUSTED(3) -------- ----------- BALANCE SHEET DATA: Working capital....................................................... $ 77,863 $ 153,841 Total assets.......................................................... 173,267 249,245 Long-term debt........................................................ 773 773 Total stockholders' equity............................................ 106,141 182,119 - --------------- (1) Fiscal year 1991 ended September 30, 1991. The last calendar quarter of 1991 is not included in either the 1991 or 1992 fiscal year financial information as set forth above. (2) Earnings per share and related share data have been restated to reflect all stock splits and stock dividends effected to date. (3) Adjusted to give effect to the sale of 3,000,000 shares of Common Stock offered hereby, at an assumed public offering price of $27.00 per share, after deducting the underwriting discount and estimated offering expenses, and the application of the estimated net proceeds described in "Use of Proceeds."
5 7 RISK FACTORS An investment in the shares of Common Stock being offered hereby involves a high degree of risk. Prospective investors should consider carefully the following risk factors, in addition to the other information contained in this Prospectus, before purchasing the shares of Common Stock offered hereby. This discussion also identifies important cautionary factors that could cause the Company's actual results to differ materially from those projected in forward looking statements of the Company made by, or on behalf of, the Company. In particular, the Company's forward looking statements, including those regarding expected growth in the various areas of the Company's operations, the adequacy of the Company's capital resources, the future profitability of the Company in connection with particular types of funds transfer processing and electronic payment transactions, and other statements regarding trends relating to revenue and expense items, could be affected by a number of risks and uncertainties, including changes in the banking, trucking and retail market areas of the general economy, changes in consumer spending and consumer credit, technological changes in electronic processing of payment and credit transactions, and the various risks and uncertainties described below. RISKS OF SUSTAINING CURRENT GROWTH RATE. The Company's growth strategy involves seeking new merchant and trucking customer relationships, the acquisition of merchant processing portfolios from other processing service providers and the possible acquisition of transaction processing or related companies. The Company intends to continue seeking growth opportunities in order to achieve greater economies of scale and increased transaction dollar volume. The Company in the past has grown its merchant customer base primarily through its in-house telemarketing and sales force working with independent sales representatives nationwide. The Company has recently reorganized its marketing efforts by adding marketing professionals focused upon certain markets, reducing its telemarketing staff, outsourcing certain marketing activities and otherwise expanding its relationships with independent sales organizations nationwide. There can be no assurance that the Company's marketing efforts will be successful in maintaining the current level of growth or expanding access to growth opportunities. The Company has historically followed a conservative and highly selective approach to the acceptance of new customers and the acquisition of merchant portfolios. While the Company intends to maintain the same level of selectivity, there can be no assurance that the Company will not suffer in the future from higher rates of chargeback default and merchant fraud. In addition, should the Company sustain its historical rate of growth, there can be no assurance that the Company will be able to attract and retain adequate qualified personnel to handle the increased transaction volume or to maintain its historical level of reliability and responsiveness in processing services. Any of the foregoing could have a material adverse effect on the Company's financial condition and results of operations. See "Business -- Business Strategy," "-- Principal Services" and "-- Marketing." RISKS OF PORTFOLIO ACQUISITIONS. The Company expects to derive a growing portion of its future revenue from acquired merchant processing portfolios. In its acquisition of merchant processing portfolios, the Company conducts careful investigation to avoid portfolios in which there is a high risk of loss from chargebacks, merchant failure or fraud. Notwithstanding the Company's diligence and investigation, however, there is a risk that merchants contained in an acquired portfolio will have higher risk profiles than the Company would have selected in a new individual merchant customer. There can be no assurance that the Company will not experience a higher rate of loss from chargebacks, merchant failure or merchant fraud as a result of experiencing a larger portion of its growth from the acquisition of portfolios, which could have a material adverse effect on the Company's financial condition and results of operations. In addition, the acquisition of a processing portfolio is typically followed by a certain attrition of merchants included in the portfolio, due to the transition in processing procedures and personnel. As a result, the Company may not realize the expected economic benefits associated with a merchant portfolio acquisition. Moreover, the acquisition of merchant processing portfolios may require substantial capital resources and the addition of substantial numbers of trained personnel. The Company also faces increasing competition for portfolio acquisition opportunities. There can be no assurance that such opportunities will continue to be available in the future or available at costs consistent with the Company's prior experience. See "Business -- Business Strategy," "-- Principal Services" and "-- Marketing." 6 8 CREDIT CARD SYSTEM RISKS. The Company's subsidiary, EFS National Bank, is a member of the VISA and MasterCard organizations and is a registered processor of Discover, American Express, Diners Club and JCB (Japan Credit Bank) transactions. The rules of the credit card associations are set by member banks or, in the case of Discover, American Express, Diners Club and JCB, by the card issuers, and such banks and issuers are competitors of the Company in the provision of transaction processing services. There can be no assurance that the rules relating to such credit card operations will not be changed in such a way as to materially adversely affect the Company's operations. The dramatic growth in the availability of credit cards and the expansion of available credit under such cards to the consuming public has been a matter of concern to U.S. federal banking regulators and other governmental regulatory authorities. A substantial increase in credit card delinquency or action by regulatory authorities to substantially restrict the availability of credit card credit could materially affect the Company's results of operations and financial condition. In addition, from time to time, VISA, MasterCard, Discover, American Express, Diners Club and JCB increase the organization and/or processing fees that such organizations charge. Most of the Company's agreements with its merchant customers permit fee increases to the Company to be passed on to the merchants. There can be no assurance, however, that competitive pressures will not result in the Company's absorbing a portion of such increases in the future, which event could have a material adverse effect on the Company. See "Business -- Principal Services"," -- Competition" and " -- Regulation of Financial Services." CHARGEBACK RISK. 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 has become bankrupt or is otherwise unable or unwilling to pay, the Company must bear the credit risk for the full transaction amount. Historically, the Company has maintained accounting reserves to cover the chargeback risks, and such reserves have exceeded chargeback experience. There can, however, be no assurance that the Company will not experience a significant increase in chargebacks in the future, which could require the Company to maintain larger reserves. Increases in chargebacks that are not paid by merchants, or increases in the Company's chargeback reserves to cover increased chargeback experience, could have a material adverse effect on the Company's financial condition and operating results. See "Business -- Principal Services -- Card Services." MERCHANT FRAUD. Merchant fraud includes recording false sales transactions or false credits. The Company attempts to minimize its exposure to merchant fraud risk by conducting a credit review of a prospective merchant and monitoring the merchant's practices on an ongoing basis. The Company also has the ability to suspend a merchant's daily settlement if fraudulent activity is suspected. In its card services, the Company under certain circumstances bears the risk of incidents of merchant fraud. There can be no assurance that incidents of merchant fraud will not increase in the future. Increased incidents of merchant fraud could have a material adverse effect on the Company's financial condition and operating results. See "Business -- Principal Services -- Card Services." EXPANSION OF ATM NETWORKS. The Company has only recently entered the business of placing and operating ATMs, and the Company intends to increase its ATM business through the placement of additional ATMs in truck stops, grocery stores, convenience stores and other merchant locations that have been traditionally underserved by ATMs. The placement of ATMs involves a substantial initial capital expense and significant ongoing funding expense, and the Company's margin of profit on ATM operations has historically been low. However, since the implementation of surcharging by the major ATM networks in April 1996, the Company's ATM operations have begun to be more profitable. While the profitability of ATM operations is expected to increase due to surcharging, there can be no assurance that such surcharges will continue to be permissible under ATM network rules or applicable federal or state banking regulations. Various states may restrict or regulate the placement of ATMs and the amount of surcharge fees. In addition, there can be no assurance that ATMs placed by the Company will receive sufficient volumes of transactions to achieve expected profitability. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Principal Services -- Trucking Services" and " -- New Initiatives." CUSTOMER ATTRITION RISK. The Company, like its competitors, experiences some turnover of customers. The Company considers this to be a normal aspect of the competitive business environment. Although the Company has been successful both in retaining its merchant customers by high quality customer service and in 7 9 achieving growth by employing a variety of sales methods, there can be no assurance that the Company will continue to be successful in the future in minimizing and offsetting customer attrition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Marketing Developments" and "Business -- Marketing." CONTRACT EXPIRATION RISK. The Company has contractual relationships that are subject to expiration, renewal and renegotiation. The Company has many individual contracts for credit and debit card and/or ATM processing services. These contracts typically have terms of two to five years' duration and renew automatically for successive one-year terms unless expressly terminated prior to expiration. No such individual contract is considered to be material to the Company's earnings. The Company's recently signed contract with Comdata Network, Inc., a subsidiary of Ceridian Corporation, for processing credit, debit and ATM transactions has an initial term that, based upon management's estimates of the roll-out dates for services, will expire in April 2000. The Company's designation as the recommended (nonexclusive) electronic payment services processor for the National Grocers Association, Inc., pursuant to an agreement entered into in 1992, expires in December 2000. While the Company's processing contracts are typically automatically renewable unless expressly terminated by either party, there can be no assurance that any such contract will be renewed or, if renewed, continued upon terms favorable to the Company. See "Business -- Principal Services." DEPENDENCE ON KEY PERSONNEL. The Company is dependent upon the ability and experience of its Chief Executive Officer, its President and a number of other key management personnel who have substantial experience with the Company's operations, the rapidly changing electronic payment processing industry and the selected markets in which the Company offers its services. Although each of the senior executives of the Company has extensive experience with the Company's affairs and the Company believes it is adequately staffed with key middle managers, there can be no assurance that the loss of the services of one or a combination of the Company's senior executives or key managers would not have a material adverse effect on the Company's operations. The Company's success also depends on its ability to continue to attract, manage and retain other qualified middle management, technical and clerical personnel as the Company grows. Although the Company has not experienced difficulty in attracting capable personnel in the past, there can be no assurance that the Company will be able to attract or retain such personnel. See "Business -- Managers and Employees" and "Management." COMPETITION. The markets for electronic payment processing, credit and debit card payment settlement, check authorization programs, fuel card and cash forwarding services, and ATM services are all highly competitive. The Company's principal competitors include major national and regional banks, local processing banks, non-bank processors and other independent service organizations, many of which have substantially greater capital, management, marketing and technological resources than those of the Company. There can be no assurance that the Company will continue to be able to compete successfully with such competitors. The competitive pricing pressures that would result from any increase in competition could adversely affect the Company's margins and may have a material adverse effect on the Company's financial condition and results of operations. In addition, the Company competes with other electronic payment processing organizations for growth opportunities. The recent consolidation in the banking industry in the United States has resulted in fewer opportunities for merchant portfolio acquisitions, as many small banks have been acquired by large banks, some of which are competitors with the Company in the provision of processing services. There can be no assurance that the Company will be able to compete effectively for existing growth opportunities on terms favorable to the Company. See "Business -- Competition." BANK AND FINANCIAL SERVICES REGULATIONS. The Company is a bank holding company subject to regulation under the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and to regulation by the Board of Governors of the Federal Reserve System (the "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. The Federal Deposit Insurance Corporation insures the deposits of EFS National Bank. The restrictions imposed by such laws, the regulations thereunder and the regulatory agencies having jurisdiction in respect thereof limit the discretion of the Company, EFS National Bank and their affiliates in operating their businesses. Such restrictions include restrictions upon the Company's engaging in non-bank-related activities, restrictions upon mergers and 8 10 acquisitions, restrictions upon dividends by banking entities, and other restrictions upon intercompany transactions. Material changes in applicable federal or state regulation of financial institutions could increase the cost to the Company of providing its services, change the competitive environment or otherwise adversely affect the Company. No assurance can be given that such laws and regulations will not be amended, or interpreted differently by regulatory authorities, or that new laws and regulations will not be adopted, the effect of which could be to affect adversely the operations, financial condition and prospects of the Company. Furthermore, the Company is subject to the rules and regulations of the various credit card and debit card associations and networks. See "Business -- Regulation of Financial Services." SUSCEPTIBILITY TO ECONOMIC FLUCTUATIONS. The markets targeted by the Company (supermarket chains, grocery stores, convenience store merchants and other retailers, trucking companies and truckers) are all susceptible to adverse changes in general economic conditions. The Company has sought historically and intends to continue to mitigate this risk by conservative selectivity in the markets and retailer customers which it serves, but there can be no assurance that an adverse change in the economy will not materially adversely affect the Company's operations and financial condition. In addition, the Company issues fuel purchase and other forms of credit and debit cards for the account of trucking companies, and has trucking company receivables outstanding. Although the Company's trucking company receivables are for the most part secured by letters of credit, bonds and insurance, economic changes having a severe impact upon the trucking industry could adversely affect the Company. See "Business -- Business Strategy" and "-- Principal Services." TECHNOLOGY RISK. The Company's ability to provide its services is heavily dependent upon its use of and access to computing and telecommunications technology. The transaction payment processing business has been characterized by rapid technological change, and the Company's business has benefited from its ability to offer processing and payment services in accordance with the most recent technological improvements. The Company's management is committed to its ability to customize processing and payment services to a wide variety of merchant electronic payment equipment, communication protocols, new technologies and customer processing needs. There can be no assurance, however, that the Company will be able to continue to incorporate new developments in payment processing technology, or that the requirement to adapt to new technology will not involve substantial cost and increased competitive pressure. The Company's processing services are dependent upon long-distance and local telecommunications carriers and access to telecommunications facilities on a 24-hour basis. Telecommunications facilities are susceptible to interruption by natural disasters. Although the Company maintains a disaster response plan which it considers adequate and which it regularly reviews, and although the Company has operated following natural disasters in the past without interruption of its processing services, there can be no assurance that a natural disaster will not occur that causes extensive or long-term damage that interrupts the Company's processing services or that causes the Company to incur substantial additional expense to avoid interruption of services, either of which could have an adverse effect on the Company's operations and financial condition. See "Business -- Equipment and Technology." 9 11 USE OF PROCEEDS The net proceeds to the Company from the offering, at an assumed initial offering price of $27.00 per share, are estimated to be $76.0 million ($87.4 million if the Underwriters' over-allotment option is exercised in full) after deduction of underwriting discounts and commissions and estimated offering expenses. The Company currently anticipates that at the completion of the offering the Company will have cash, cash equivalents and short-term investments of approximately $137 million (assuming the Underwriters' over-allotment option is not exercised). Of this amount, during the period beginning in the fourth quarter of 1996, approximately $30 million will be used as a capital contribution to the Company's national bank subsidiary, EFS National Bank, to augment the equity capital of EFS National Bank in order that it will remain in compliance with the guidelines of credit card associations as its processing transaction volume increases. It is expected that portions of this additional EFS National Bank equity will be utilized from time to time to acquire selected merchant payment processing portfolios from banks and other processing organizations. The Company typically has a number of potential merchant portfolio acquisitions under consideration at any time. The balance of the net proceeds held by the Company will be available for working capital and general corporate purposes, including placing additional ATMs, the possible acquisition of transaction processing businesses and use in other subsidiaries of the Company. The Company has no specific plans or commitments for any such acquisition and is not currently engaged in negotiations regarding any such acquisition. Actual allocation of the net proceeds and the balance of the Company's current capital resources to various purposes may vary substantially from the Company's current estimates. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Pending any such application of proceeds, the Company intends to invest the net proceeds of the offering in short- and medium-term, interest-bearing obligations, including those issued by the United States government, its agencies and instrumentalities and/or interest-bearing obligations of states and municipalities. PRICE RANGE OF COMMON STOCK The Common Stock is traded on the Nasdaq National Market under the symbol "CEFT." The following table sets forth, for the periods indicated, the range of high and low sale prices for the Common Stock as reported by Nasdaq. Quotations have been restated to reflect all stock splits and stock dividends effected to date.
HIGH LOW ------ ------ 1994 First Quarter.......................................................... $ 5.00 $ 4.15 Second Quarter......................................................... 5.07 3.89 Third Quarter.......................................................... 5.73 4.19 Fourth Quarter......................................................... 7.55 5.48 1995 First Quarter.......................................................... $ 8.52 $ 6.52 Second Quarter......................................................... 11.89 8.00 Third Quarter.......................................................... 14.22 10.67 Fourth Quarter......................................................... 20.00 11.11 1996 First Quarter.......................................................... $19.83 $12.56 Second Quarter......................................................... 24.25 17.33 Third Quarter.......................................................... 28.50 21.50 Fourth Quarter (through October 16, 1996).............................. 28.75 22.25
On October 16, 1996, the last reported sale price of the Common Stock on the Nasdaq National Market was $27.00 per share. As of September 23, 1996, there were approximately 300 holders of record of the Common Stock. 10 12 DIVIDEND POLICY The Company has never paid cash dividends on its capital stock. It is the present policy of the Company's Board of Directors to retain earnings to finance expansion of the Company's operations, and the Company does not expect to pay dividends in the foreseeable future. CAPITALIZATION The following table sets forth the capitalization of the Company as of June 30, 1996, and as adjusted to give effect to the sale by the Company of 3,000,000 shares of Common Stock in the offering (at an assumed initial offering price of $27.00 per share) and use of the estimated net proceeds therefrom. See "Use of Proceeds." This table should be read in conjunction with the Company's consolidated financial statements and the notes thereto, which are incorporated by reference in this Prospectus.
JUNE 30, 1996 ------------------------ ACTUAL AS ADJUSTED -------- ----------- (IN THOUSANDS) Debt, including current maturities.................................. $ 1,178 $ 1,178 Stockholders' equity: Common Stock, $0.33 1/3 par value; 80,000,000 shares authorized; 56,647,653 shares issued and outstanding, 59,647,653 shares issued and outstanding, as adjusted(1)......................... 18,883 19,883 Additional paid-in capital........................................ 6,433 81,411 Retained earnings................................................. 81,871 81,871 Unrealized losses on securities, net of taxes..................... (1,046) (1,046) -------- -------- Total stockholders' equity, net................................ 106,141 182,119 -------- -------- Total capitalization........................................... $107,319 $183,297 ======== ======== - --------------- (1) Excludes an aggregate of 3,538,690 shares of Common Stock reserved for issuance upon the exercise of options outstanding as of September 23, 1996.
11 13 SELECTED FINANCIAL DATA The following consolidated selected statement of income and balance sheet data for each of the five years in the period ended December 31, 1995 have been derived from the Company's consolidated financial statements audited by Ernst & Young LLP, independent auditors. The audited consolidated balance sheets at December 31, 1995 and 1994 and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years ended December 31, 1995 and the related notes thereto are set forth in the Company's Annual Report on Form 10-K and are incorporated by reference in this Prospectus. The statement of income and balance sheet data for the six months ended June 30, 1995 and 1996 were derived from the Company's unaudited condensed consolidated financial statements as set forth in the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, which are incorporated by reference in this Prospectus, and, in the opinion of management of the Company, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results of the periods. Results for the six months ended June 30, 1996 are not necessarily indicative of the results to be expected for the full year. The following data should be read in conjunction with the Company's consolidated financial statements and the related notes thereto, which are incorporated by reference, and "Management's Discussion and Analysis of Financial Condition and Results of Operations," which appears elsewhere herein.
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ---------------------------------------------------- ------------------ 1991(1) 1992(1) 1993 1994 1995 1995 1996 ------- ------- ------- ------- -------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF INCOME DATA: Revenues.......................... $48,144 $65,562 $75,443 $96,213 $127,762 $55,825 $74,752 Cost of operations................ 31,137 46,024 53,188 69,840 90,579 40,014 53,037 Selling, general and administrative.................. 5,572 5,969 7,861 8,312 10,913 5,072 5,958 ------- ------- ------- ------- -------- ------- ------- Operating income................ 11,435 13,569 14,394 18,061 26,270 10,739 15,757 Interest income, net.............. 661 503 825 1,588 2,116 949 1,263 ------- ------- ------- ------- -------- ------- ------- Income before taxes and minority interest............. 12,096 14,072 15,219 19,649 28,386 11,688 17,020 Income taxes...................... 4,717 5,011 5,357 6,979 10,146 4,191 6,089 ------- ------- ------- ------- -------- ------- ------- Income before minority interest...................... 7,379 9,061 9,862 12,670 18,240 7,497 10,931 Minority interest................. (106) (87) 1 43 75 44 -- ------- ------- ------- ------- -------- ------- ------- Net income...................... $ 7,273 $ 8,974 $ 9,863 $12,713 $ 18,315 $ 7,540 $10,931 ======= ======= ======= ======= ======== ======= ======= Net income per share(2)........... $ 0.13 $ 0.16 $ 0.18 $ 0.23 $ 0.32 $ 0.13 $ 0.19 ======= ======= ======= ======= ======== ======= ======= Weighted average common and common equivalent shares outstanding(2).................. 54,996 55,169 55,676 55,898 57,858 57,163 58,988 ======= ======= ======= ======= ======== ======= ======= DECEMBER 31, ---------------------------------------------------- JUNE 30, 1991(1) 1992(1) 1993 1994 1995 1996 ------- ------- ------- ------- -------- -------- BALANCE SHEET DATA: Working capital................... $16,318 $26,240 $34,655 $41,520 $ 68,213 $ 77,863 Total assets...................... 44,562 56,316 71,033 99,462 156,887 173,267 Long-term debt, less current maturities...................... 55 -- -- 1,371 978 773 Total stockholders' equity........ 26,289 39,573 50,251 61,935 89,545 106,141 - --------------- (1) Fiscal year 1991 ended September 30, 1991. The last calendar quarter of 1991 is not included in either the 1991 or 1992 fiscal year information as set forth above. (2) Earnings per share and related share data have been restated to reflect all stock splits and stock dividends effected to date.
12 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company provides electronic transaction authorization, processing, settlement and funds transfer services for a variety of customized customer applications in selected markets, including supermarket chains, grocery stores, convenience store merchants and other retailers and the trucking industry. The Company's annual revenues and net income have grown from $48.1 million and $7.3 million, respectively, in 1991 to $127.8 million and $18.3 million in 1995. Revenue growth has been achieved primarily through (i) increased transaction processing on behalf of existing customers, (ii) the addition of new and ancillary services to the Company's merchant customer base, such as check verification, debit card processing and EBT, and (iii) the addition of new customers in existing service areas, primarily through marketing of the Company's services to merchants and, more recently, through acquisition of selected merchant portfolios from other processing service providers. Management believes the acquisition of new merchant accounts, favorable customer retention rates, the increasing use and acceptance of credit and debit cards and the specialized services the Company offers to the trucking industry provide the Company with a growing revenue base. COMPONENTS OF REVENUES AND EXPENSES The Company derives revenues from (i) fees charged to merchants for processing credit and debit card and EBT transactions and for providing check verification services; (ii) the lease and sale of point-of-sale ("POS") equipment to retail merchants; (iii) transaction fees for use of the Company's private label fuel card and other service fees derived from the Company's services to the trucking industry; and (iv) transaction fees and, more recently, surcharges assessed for use of the Company's ATM machines. Revenues from credit card services have historically constituted a significant portion of the Company's total revenues. Such revenues consist primarily of "discount fees" charged to merchants, which fees are a percentage of the dollar amount of each credit card transaction processed by the Company. The discount fee is negotiated with each merchant and typically constitutes a bundled rate for the transaction authorization, processing, settlement and funds transfer services provided by the Company. These revenues and fees from other transactions are recognized at the time the merchants' transactions are processed. Revenues related to the direct sale of POS equipment are recognized when the equipment is shipped. The following table is a listing of revenues by service type for the periods listed:
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, -------------------------------- ------------------- 1993 1994 1995 1995 1996 ------- ------- -------- ------- ------- (IN THOUSANDS) Card Services......................... $47,482 $66,959 $ 92,223 $41,454 $57,735 Trucking Services..................... 12,022 12,853 16,687 7,380 10,762 Check Verification Services........... 9,279 9,954 12,168 4,359 3,667 Equipment Sales and Other............. 6,660 6,447 6,684 2,632 2,588 ------- ------- -------- ------- ------- $75,443 $96,213 $127,762 $55,825 $74,752 ======= ======= ======== ======= =======
Cost of operations includes all costs directly attributable to the Company's provision of services to its merchant and trucking industry customers. The most significant component of cost of operations includes interchange and assessment fees, which are amounts charged by the credit card associations for clearing services, advertising and other expenses. Interchange and assessment fees are billed primarily as a percent of dollar volume processed and, to a lesser extent, as a per-transaction fee. Cost of operations also includes the cost of equipment leased and sold and other miscellaneous merchant supplies and services expenses. The Company's selling, general and administrative expenses include salaries and wages, telephone costs, provisions for chargebacks, merchant fraud, bad debts, and other general administrative expenses. 13 15 MARKETING DEVELOPMENTS The Company has historically generated growth of its merchant customer base through marketing by highly skilled senior managers, commissioned telemarketers and outside sales representatives. To meet its growth objectives, the Company has substantially reorganized its marketing activities since the beginning of 1996. The Company has increased the size of its marketing staff that is focused on growth opportunities in large and middle market store chains and other multiple store customers. Beginning July 1, 1996, the Company reduced the portion of its in-house telemarketing staff focused upon telemarketing to smaller potential merchant customers, and entered into arrangements with independent sales organizations ("ISOs") to outsource a portion of such telemarketing activity and purchase new accounts from such ISOs. The expenses and commissions related to such telemarketing and sales activity historically have been currently expensed in the periods in which incurred. The acquisition cost relating to merchant contracts and portfolios purchased from ISOs will be capitalized and amortized over the estimated useful life of the merchant contracts, which the Company presently estimates to be five years, in order to match acquisition costs against future revenues. RESULTS OF OPERATIONS The following table sets forth for the periods indicated information derived from the consolidated statements of income of the Company, expressed as a percentage of net sales for such period, and the percentage change in such items compared to the amount for the prior year period.
PERCENTAGE OF REVENUES PERCENTAGE INCREASE ------------------------------------------ ------------------------------ YEARS ENDED SIX MONTHS SIX MONTHS ENDED DECEMBER 31, ENDED JUNE 30, 1994 1995 JUNE 30, 1996 ----------------------- --------------- OVER OVER OVER 1993 1994 1995 1995 1996 1993 1994 JUNE 30, 1995 ----- ----- ----- ----- ----- --- --- ---------------- Revenues.................................. 100.0% 100.0% 100.0% 100.0% 100.0% 27.5% 32.8% 33.9% Cost of operations........................ 70.5 72.6 70.9 71.7 7l.0 31.3 29.7 32.5 Selling, general & administrative......... 10.4 8.6 8.6 9.1 8.0 5.7 31.3 17.5 ----- ----- ----- ----- ----- Operating income........................ 19.1 18.8 20.5 19.2 21.0 25.5 45.5 46.7 Interest income, net...................... 1.1 1.7 1.7 1.7 1.7 92.5 33.2 33.2 ----- ----- ----- ----- ----- Income before taxes and minority interest.............................. 20.2 20.5 22.2 20.9 22.7 29.1 44.5 45.6 Income taxes.............................. 7.1 7.3 7.9 7.5 8.1 30.3 45.4 45.3 ----- ----- ----- ----- ----- Income before minority interest......... 13.1 13.2 14.3 13.4 14.6 28.5 44.0 45.8 Minority interest......................... 0.0 0.0 0.0 0.1 0.0 N/A* N/A* N/A* ----- ----- ----- ----- ----- Net income.............................. 13.1% 13.2% 14.3% 13.5% 14.6% 28.9% 44.1% 45.0% ===== ===== ===== ===== ===== - --------------- * As the percentage of revenue relating to minority interest rounds to 0.1% or less, the percentage increase is not meaningful for comparative purposes.
SIX MONTHS ENDED JUNE 30, 1996 AND 1995 Revenue and net income for the six months ended June 30, 1996 increased 34% and 45%, respectively, compared to revenue and net income in the same period of the prior year. The increase in total revenue for the six months ended June 30, 1996 was attributable to the addition of new customers and additional volume from existing customers in card services and trucking services. These increases were partially offset by reduced revenue from check verification services in the period. The Company owns and operates over 350 ATMs at major truck stops across the country. ATM surcharge revenue, which began in the second quarter of 1996, accounted for approximately 30% of the increase in trucking services revenue for the six month period of 1996. Net income as a percentage of revenue increased from 13.5% for the six months ended June 30, 1995 to 14.6% for the six months ended June 30, 1996. Approximately three quarters of this increase was due to card services revenue growth coupled with slower increases in operational costs and selling, general and administra- 14 16 tive expenses. The remaining one quarter of the increase was attributable to net margin on ATM surcharge revenue. YEARS ENDED DECEMBER 31, 1995 AND 1994 Net income increased by 44% in 1995 over net income in 1994 due to increased revenues in all three of the Company's core businesses and decreases in telephone and maintenance operating costs. Revenues from card services increased 38% as a result of the addition of grocery and retail merchants and volume increases in credit and debit card usage. Continued marketing efforts combined with merchant association endorsements were responsible for the new customers. Trucking services revenues rose 30% due to the growth in ATM revenues and increases in the number of trucking customers. Revenues from check verification services rose 22% on the addition of new merchants utilizing such services. Net income as a percentage of revenue increased in 1995 to 14.3% from 13.2% in 1994 as operational costs grew at a slower rate than transaction revenue. Savings of approximately $2.3 million in telephone and maintenance expenses were recognized in 1995. Selling, general and administrative expenses in the year ended December 31, 1994 were significantly affected by costs associated with the Company's antitrust lawsuit against Deluxe Data Systems, Inc. ("Deluxe"). The lawsuit, initiated in January 1993, alleged that Deluxe was monopolizing electronic benefits transfer business in the state of Maryland. The dispute with Deluxe was settled in July 1995, and the terms of the settlement had no material financial statement impact in the fiscal year 1995. YEARS ENDED DECEMBER 31, 1994 AND 1993 Net income increased by 29% in 1994 over net income in 1993 due to increased revenues in card services, trucking services and check verification services. Card services revenues increased 41%, while trucking services and check services revenues increased 7%. The increase in these revenues was due to additional volume from existing customers and the addition of new customers. Continuing marketing efforts were responsible for the new customers. Profit margins remained consistent with the prior year as incremental operational costs related to service volume growth and new services were offset by increased interest income. SELECTED QUARTERLY OPERATING RESULTS; SEASONALITY The following table sets forth certain unaudited financial data for each of the Company's ten most recent financial quarters. This data has been derived from unaudited financial statements that, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such quarterly information when read in conjunction with the financial statements and related notes included elsewhere, or incorporated by reference, in this Prospectus. The operating results for any 1996 quarter are not necessarily indicative of results for any future period.
1994 QUARTERS ENDED 1995 QUARTERS ENDED 1996 QUARTERS ENDED ------------------------------------------ ------------------------------------------ ------------------- MAR. 31, JUN. 30, SEPT. 30, DEC. 31, MAR. 31, JUN. 30, SEPT. 30, DEC. 31, MAR. 31, JUN. 30, 1994 1994 1994 1994 1995 1995 1995 1995 1996 1996 -------- -------- --------- -------- -------- -------- --------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues.......... $19,639 $22,126 $25,195 $29,253 $25,928 $29,897 $33,945 $37,992 $33,895 $40,857 Operating income.......... 3,442 3,981 4,626 6,012 4,920 5,819 6,955 8,575 6,627 9,130 Net income........ $ 2,435 $ 2,833 $ 3,289 $ 4,156 $ 3,459 $ 4,081 $ 4,840 $ 5,935 $ 4,659 $ 6,271 Net income per share........... $ 0.05 $ 0.05 $ 0.06 $ 0.07 $ 0.06 $ 0.07 $ 0.08 $ 0.10 $ 0.08 $ 0.11
The Company's operations are subject to seasonal variation relating to the greater volume of transactions in the supermarket, grocery store and other retailer markets served by the Company in the last quarter of the calendar year in which the major consumer purchase holidays fall. In fiscal 1995, 29.7% of the Company's total annual revenues were realized in the fourth quarter. 15 17 LIQUIDITY AND CAPITAL RESOURCES Historically, the Company has generated significant cash from operating activities. During the years ended December 31, 1995, 1994 and 1993, operating activities generated cash of $28.3, $19.9 and $12.6 million, respectively. During fiscal 1995, the Company invested $10.4 million in securities, net, and $8.1 million in capital expenditures. In the six months ended June 30, 1996, operating activities generated cash of $10.4 million, and the Company invested $7.9 million in securities, net, and $8.7 million in capital expenditures. Capital expenditures were primarily for new computer equipment and cash dispensing machines (ATMs). The Company funded these purchases from cash generated from operations. Significant changes in accounts receivable and accounts payable result from the day of the week on which the calendar year-end falls combined with the increase in settlement volume from one year to the next. Stock issued upon exercises of options under the Company's incentive stock option plan generated $4.1 million in additional cash in 1995 and $1.6 million in additional cash in the first six months of 1996. In connection with such option exercises, the Company also realized a tax benefit of $4.1 million in the 1995 fiscal year and realized a tax benefit of $1.7 million in the first six months of 1996. At June 30, 1996, the Company had unused unsecured lines of credit of $10 million with financial institutions and held securities with a market value of approximately $28.6 million. Such securities are available for operating needs or as collateral to obtain short-term financing if needed. The Company expects to fund continued growth for the foreseeable future from the proceeds of this offering, currently available resources and future earnings. EFS National Bank, a national bank and wholly-owned subsidiary of the Company, is currently in compliance with all prescribed governmental capital requirements. However, due to the expected growth of the volume of credit card processing, EFS National Bank will need additional equity capital in order to remain in compliance with the guidelines of certain credit card associations. The association guidelines for VISA, which are the most restrictive association guidelines with respect to recommended minimum equity capital, specify that the equity capital of a processing organization should equal or exceed the average weekly transaction processing volume over the most recent thirteen weeks. At June 30, 1996, EFS National Bank had equity capital of $66.5 million and was in compliance with the VISA guidelines. The additional capital contribution which the Company intends to make to EFS National Bank out of the net proceeds of the offering made hereby will allow for further growth in the processing volume without the need for additional capital contributions. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In March 1995, the FASB issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Company adopted Statement No. 121 in the first quarter of 1996 and the effect of the adoption was not material. In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-based Compensation," which provides an alternative to APB Opinion No. 25 in accounting for stock-based compensation issued to employees. For companies that continue to account for stock-based compensation arrangements under APB Opinion No. 25, as the Company expects to do, Statement No. 123 requires disclosure of the pro forma effect on net income and earnings per share of its fair value based accounting for those arrangements. The Company expects to comply with Statement No. 123 for the current fiscal year. EFFECTS OF INFLATION Because of the liquidity of the Company's primarily monetary assets, they are not significantly affected by inflation. However, the rate of inflation affects the Company's expenses, such as those for employee compensation and communications. 16 18 BUSINESS The Company provides electronic transaction authorization, processing, settlement and funds transfer services in selected markets. Concord's primary activity is card services, which involves the provision of integrated electronic transaction services for credit card, debit card and electronic benefits transfer ("EBT") card transactions to supermarket chains, grocery stores, convenience store merchants and other retailers. The Company believes it is one of the few fully integrated transaction processors, supplying electronic payment and verification terminals, ATMs, processing services, payment settlement, depository services and transaction data compilation. The Company is one of the few companies offering full credit and debit card processing on a nationwide basis. The Company also provides electronic payment and banking facilities to a large customer base in the trucking industry for use at major truck stop chains throughout the United States. In addition to maintaining a network of over 350 ATMs at truck stops nationwide, the Company provides fuel purchase cards, ATM bank cards and general banking services cards to truck drivers. The Company offers trucking companies payroll deposit and cash forwarding services, as well as real-time data compilation with respect to fuel volume usage, fuel expenditures, vehicle and driver tracking and truck routine maintenance schedules. In addition, the Company provides check verification services to grocery and other retail merchants. The Company's transaction payment and credit systems provide a recurring stream of revenue from transaction fees through a highly diversified and stable customer base. INDUSTRY OVERVIEW The transaction processing industry makes possible on an electronic and virtually instantaneous basis transfer of funds, transaction payment processing, credit verification and transaction data compilation among POS terminals, ATMs, payroll depositors, customer deposit accounts, EBT providers and credit approval and verification databases. The processing industry has grown rapidly in recent years as a result of the following factors: 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. Consumer usage of VISA and MasterCard cards for purchases and cash advances in the United States was $574.53 billion in 1995 compared to $463.51 billion in 1994, representing an increase of 24%, and U.S. consumer usage of the five major credit cards (VISA, MasterCard, American Express, Discover and Diners Club) increased to $745.55 billion in 1995 from $612.91 billion in 1994, an increase of 22% (The Nilson Report, April 1996). VISA and MasterCard charge volume is projected to exceed $950.0 billion by the year 2000 (The Nilson Report, January 1995). The Company believes that the increased use of credit and debit card payment has been especially evident in certain retail markets, such as grocery and convenience stores. Spread of EBT Programs. The utilization of electronic transfer and processing has recently expanded into public assistance programs. The Company believes public assistance payments account for approximately 10% of all grocery transactions in dollar volume. Accordingly, the increasing conversion of food stamp and other assistance vouchers to EBT programs is expected to increase substantially the use of electronic payment terminals in grocery stores and other small retail merchant locations. EBT programs have developed to provide public assistance benefits more efficiently and in a manner less susceptible to theft and fraud. The first EBT program was implemented in Maryland in 1991. The Company expects all food stamp programs in the United States to be converted to EBT over the next three to five years. To date, 13 states have initiated EBT programs. Growth of Trucking Transaction Processing. To minimize the need for truck drivers to carry cash, and to reduce the cost of purchasing fuel through use of cash rather than credit, the Company and other payment service providers in the early 1980s initiated special fuel card programs to cover fuel and other authorized expenditures at participating truck stops. More recently, fuel cards have been widely superseded by trucking company electronic payment cards, POS payment terminals at truck stops and, most recently, ATMs at major truck stops, to provide more rapid payment settlement for vendors to the trucking industry, more complete and 17 19 current expenditure records for the trucking companies and payroll and cash distribution facilities for drivers on the road. In 1995 the total trucking card transaction volume in the United States processed by the seven major payment services providers to the trucking industry was $8.36 billion (The Nilson Report, February 1996). Increased Use of Check Verification. Traditional check verification programs involve check-cashing cards and a card holder database for a particular merchant or retail chain. Recently certain national check verification databases have been developed which allow a merchant to verify a tendered check with respect to the check writer's history with other merchants as well. Unlike check verification programs, check guarantee programs underwrite the credit risk of an accepted check, though at a higher cost (typically 2.5% to 4% of the face amount) compared to the service charge of pennies per check for verification alone. Recently the utilization of check verification services has demonstrated more rapid growth than the utilization of guarantee services: the dollar volume of checks verified by the twenty-two largest verification providers increased 16% from 1994 to 1995, while the dollar volume of checks guaranteed by the eighteen largest guarantee providers increased 4% (The Nilson Report, April 1996). Check verification programs are especially attractive to certain high-volume, low-margin retail businesses, such as grocery and convenience stores. BUSINESS STRATEGY The Company's objective is to grow its funds transfer and payment transaction processing business, providing a fully integrated range of relevant transfer and processing services at competitive prices. The Company seeks to accomplish this objective by implementing the following strategies: Focus on Selected Markets. The Company has focused on specific markets that have been historically underserved by the processing industry: supermarket chains, grocery stores, convenience store merchants and other small retail stores and chains, and the trucking industry. Within these markets, the Company seeks to identify a diverse group of customers with low credit risk histories. Provide Low-Cost, Fully Integrated Services. The Company seeks to be a low cost, highly-reliable provider of electronic payment processing services by providing a fully integrated range of relevant services. To reduce overall cost, the Company engineers and provides its own equipment solutions, sells and leases POS equipment, authorizes its own transactions, captures all information on its own host computer, has direct links to all major credit and debit card associations and networks, and effects the settlement of payment transactions and the transfer of funds to the merchant. The Company established EFS National Bank in order to provide direct credit card association membership and debit network sponsorship, and to directly perform the settlement of transactions. In addition, by controlling each stage of the electronic payment transaction, the Company seeks to provide a higher quality of service, reducing the possibility of error. As a result, the Company believes that it has been able to establish one of the highest customer retention rates in the industry in the provision of such services. Offer Technological Versatility. The Company designs its programs to be compatible with a wide variety of communications protocols and a broad array of electronic processing equipment. The Company offers a wide range of communication mechanisms, depending upon the customer's location and specific needs. For larger retailers and merchant chains, speed, reliability and integration with other systems are crucial. Utilize Multiple Marketing Channels. To provide broader access to new merchant customers and portfolio acquisition opportunities nationwide at the most efficient cost, the Company has adopted a balanced marketing approach through the use of internal marketing specialists, independent sales representatives and a number of ISOs. Beginning in 1996, the Company has reorganized its marketing operations by adding marketing professionals focused upon multistore merchants in certain specialized markets, by reducing its in-house telemarketing staff, by outsourcing certain telemarketing operations, and by expanding its relationships with ISOs. The Company's relationships with trade associations and other electronic services providers have been important elements in the Company's marketing focus. The Company's largest trade association relationship is with the National Grocers Association, Inc., pursuant to which the Company is the preferred vendor for electronic payment services to grocers. The Company also has established relationships with a number of other industry associations. 18 20 PRINCIPAL SERVICES The Company operates in the transaction processing and payment services industry, providing targeted markets with a fully integrated range of services and products for credit card, debit card and EBT card transactions, trucking company services, check verification, data compilation and payment settlement. CARD SERVICES Card services accounted for 77% of the Company's revenue in the first six months of 1996. The Company processes credit card transactions using VISA, MasterCard, Discover, American Express, Diners Club and JCB cards. The Company processes debit card transactions for banks issuing such cards, which permit direct payment debit from the POS terminal against the card holder's deposit account. In addition, in those states where EBT programs have been implemented, the Company similarly processes payments effected with EBT cards against funds made available by public assistance benefit programs through the primary EBT third-party providers. The bank card (e.g., VISA and MasterCard) transaction process begins when the consumer presents the card and the merchant "swipes" the card at the POS terminal and enters the transaction amount. The Company processes the data from the POS terminal through the relevant electronic communications network to the card issuer. The transaction is approved or rejected by the issuer bank, and the response is transmitted almost instantaneously back through the Company's processing systems to the POS terminal. The purchase transaction is then confirmed against the authorization data retained in the Company's system, whereupon the Company (through its subsidiary, EFS National Bank) settles the payment by crediting the merchant with the transaction amount less the agreed discount rate, and submits the transaction through the relevant network for crediting by the issuing bank to EFS National Bank of the transaction amount less the interchange and/or association fee. To complete the transaction, the issuing bank bills the consumer for the transaction amount. The authorization process is similar for other credit card (e.g., Discover and American Express), debit card (e.g., Explore and NYCE) and EBT transactions. In a credit card or EBT transaction, the credit card issuer or EBT primary provider effects the payment settlement by crediting the merchant's account with the issuer and credits the Company's account with the related processing service fee. In a debit card transaction, the transaction is initiated by the consumer's insertion of the personal identification number, and the transaction is settled by directly debiting the cardholder's account in the payment amount plus the surcharge (if any), crediting the merchant in the payment amount less the processing service charge, paying the network fee and crediting the Company in the amount of the processing service charge plus the surcharge (if applicable). The Company's principal business is the provision of electronic payment services to supermarket chains, grocery stores, convenience store merchants and other retailers. The Company has been selective in the merchants to which it has marketed its services and has historically chosen retailers whose businesses are less economically volatile and involve less risk of chargeback and merchant fraud. The Company will not, for instance, deal with merchants who book transactions for delivery at a later date, such as mail-order retailers and travel agents. No single customer of the Company accounts for a material portion of the Company's revenues. TRUCKING SERVICES The Company's trucking services accounted for 14% of its revenue in the first six months of 1996. The Company provides a variety of flexible payment systems that enable truckers to use payment cards to purchase fuel and services and to obtain cash advances at more than 4,000 truck stops. Through its national bank subsidiary, EFS National Bank, the Company offers payroll and cash distribution programs to trucking companies and truck drivers. In connection with the issuance of ATM bank cards to truck drivers and payroll distribution programs, EFS National Bank opens individual payroll deposit accounts and/or full service checking accounts in the truck drivers' names. Payroll deposit accounts are special purpose accounts for deposit by the trucking company of payments for the drivers' accounts, with the drivers' benefits limited to the right of withdrawal. Under this program, the trucking company transmits payment instructions to EFS 19 21 National Bank, and the specified funds are made available to the designated drivers within minutes. A substantial number of truck drivers with payroll deposit accounts choose to open full-service checking accounts with EFS National Bank. The Company also provides trucking companies with private label fuel cards for use by their drivers. When such fuel cards are utilized, the Company gathers fuel purchase and other trucking data at the same time as it processes the payment transaction; the data gathered by the Company include truck vehicle and trailer identification numbers and odometer mileage, in addition to fuel volume and expenditure information. The data gathered from aggregate transactions of a trucking company provide current information with respect to fuel volume usage, fuel expenditures, vehicle and driver tracking and truck routine maintenance schedules. The trucking company customer has real-time direct access to the Company's database for the trucking company's drivers and operations. The Company has established over 350 ATMs at selected locations of major truck stop chains nationwide. As the Company and its competitors place ATM cards in truck drivers' hands, the Company's ATMs will be increasingly utilized, and the Company will receive fees both from the use of its own ATM cards and those of its competitors. The Company is a member of all major ATM networks, including Cirrus and Plus. CHECK VERIFICATION SERVICES The Company provides check verification programs, which may be customized to a particular merchant's needs or to a particular market. The Company's check payment verification services accounted for approximately 5% of its revenue in the first six months of 1996. The traditional check verification program, which is customized to the specific merchant or merchant chain, consists of a positive and negative file based upon the check writing history for the checking account party with the specific merchant or merchant chain. Under the program's negative file, if a customer tenders a check at any one store of a merchant chain that is returned for insufficient funds, any additional checks tendered by such customer will be rejected at all stores of the merchant chain. Under the positive file, if a customer cashes a check at any one store in a chain, the amount of that check reduces for the specified time period that customer's check-cashing limit for further check presentation at any other store of the chain. Beginning in the fall of 1995, the Company began to offer a new check verification program for electronic comparison of a tendered check against a nationwide multi-merchant database which aggregates the bad check experiences of all participating merchants. The Company has entered into arrangements with two providers of such nationwide check history databases. For check verification utilizing a nationwide database, the merchant "swipes" the magnetic ink bank and account identification ("MICR") line of the check using an electronic check reader, and the check account number is immediately compared against the nationwide database, which will not verify the tendered check while a previous bad check on such account remains outstanding against any other merchant using the database. The Company is able to customize a particular merchant's use of the nationwide database to include checking against various identification references in addition to the check MICR, such as the driver's license number and social security number of the purchaser. Currently, the Company's fees deriving from check verification utilizing the nationwide databases represent an insignificant portion of total check verification revenues; however, the Company believes merchant use of the nationwide verification databases will increase as their benefits become more widely known. Check verification programs provide more limited payment assurance than check guarantee programs but at a substantially lower cost. Typically only approximately 1% of checks tendered to merchants are rejected for insufficient funds or other reasons. Guarantee charges typically range from 2.5% to 4% of the face value of a check, while check verification charges amount to only pennies per check. In addition, electronic check verification is virtually instantaneous, while obtaining the payment benefit under a check guarantee for a rejected check involves substantial delay and additional merchant effort. The Company believes that its check verification services represent a valuable add-on product which enhances the card processing and settlement services offered by the Company to supermarket chains, grocery stores, convenience store merchants and other 20 22 retailers, and are of particular value in comparison to check guarantee programs to high-volume, low-margin retailers. NEW INITIATIVES Concord's relationship with supermarket chains, grocery stores, convenience store merchants, other retailers and truck stop chains has provided the opportunity to place ATMs in underserved locations where convenient access to cash withdrawal is needed. On April l, 1996, the national ATM networks, Cirrus and Plus, lifted their prohibition of surcharges on ATM transactions nationwide. This change allows the Company, as ATM owner, to charge a fee (typically $1.00 per transaction) to the customer utilizing the ATM. On May 2, 1996, the Company announced the execution of a processing agreement with Comdata Network, Inc., a wholly owned subsidiary of Ceridian Corporation and a leading payment services provider to the trucking and gaming industries. Under the agreement, the Company will process Comdata's credit card transactions and POS debit transactions originating principally in the gaming industry, including casinos, cruise ships, hotels, restaurants and similar entertainment and recreational locations, and Comdata will market the Company's processing services to its gaming operations. The Comdata agreement is for a term of three years. Due to the time expected to be required to complete the roll-out of services under the Comdata contract, the Company does not expect to realize significant revenues from the contract until the second quarter of 1997. The contract should extend to April 1, 2000. EQUIPMENT AND TECHNOLOGY The Company often provides to its processing customers, on either a sale or rental basis, POS electronic payment terminals and related equipment, and the Company services or replaces equipment that it sells or leases. Large retail merchant customers typically purchase POS terminals and related equipment, while small retail merchants usually rent requisite equipment on a month-to-month or longer term basis. Through its subsidiary, Concord Equipment Sales, Inc., the Company maintains an inventory of POS electronic payment equipment for ready availability to processing customers. To provide processing services for a wide variety of customers' needs and preferences, the Company has adapted its processing programs to, and will sell or rent to the customer, a wide variety of electronic payment equipment manufactured by a number of the major manufacturers. In addition, the Company adapts its services and the POS equipment manufactured by others to the specific communication protocols and data collection requirements of its customers. The Company's technicians design customized software packages to adapt POS equipment to particular retail merchants' specifications. Although the Company does not manufacture POS equipment, its technicians can custom design hardware for manufacture by other parties necessary to meet customer needs. MARKETING The Company markets its services and products on a nationwide basis directly and through ISOs and independent sales representatives to supermarket chains, grocery stores, convenience store merchants and other retailers, electronic funds transfer networks, financial institutions and trucking companies. Historically, the Company has grown its merchant customer base primarily through its in-house telemarketing and sales force working with independent contractor sales representatives nationwide. During 1996, the Company has reorganized its sales and marketing activities relating to its card services business by adding marketing professionals focused upon multistore merchants in certain specialized markets, by reducing the Company's in-house telemarketing staff, by outsourcing a portion of its telemarketing activities to independent sales organizations, and by expanding its relationships with ISOs nationwide. The Company's strategy is to increase its in-house marketing expertise in certain specialized market areas and broaden its access to growth opportunities nationwide by utilizing the broader market penetration of ISOs. The Company believes that the most promising growth opportunities currently exist in certain small retail merchant chains in specialized markets, and in the acquisition of merchant processing portfolios developed by smaller processing services providers. See "Risk Factors -- Risks of Sustaining Current Growth Rate," "Management's Discussion and 21 23 Analysis of Financial Condition and Results of Operations -- Marketing" and "Business -- Business Strategy." The Company has had success historically in marketing through key trade association relationships, such as its relationship with the NGA, as the recommended provider of electronic services to grocers, and through agreements with other payment services providers. Management is committed to the cultivation of such trade association relationships and the development of arrangements with other service providers. As an integrated services provider, the Company has natural cross-selling marketing opportunities. When the Company established itself with the major truck stop chains as an authorized issuer of payment cards and processor of card transactions, the Company gained a substantial advantage in selling its card payment systems to trucking companies. The Company's established relationships with the truck stop owners also afforded an opportunity to sell the placement of ATMs at truck stops, which in turn provided a further advantage in selling the Company's integrated processing and banking services to trucking companies and truck drivers. The Company's established presence in grocery stores, grocery chains, convenience stores and other small and mid-size retailers gives it an advantage in establishing relationships with EBT providers, whose benefits are utilized largely at such retail locations. The Company's sales offices are located in suburbs of Memphis, Tennessee and Chicago, Illinois. The Company's executive officers actively participate in the Company's marketing efforts. COMPETITION The markets for electronic payment processing, credit and debit card payment settlement, check authorization programs, fuel card and cash forwarding services, and ATM services are all highly competitive. The Company's principal competitors include major national and regional banks, local processing banks, non-bank processors and other independent service organizations, many of which have substantially greater capital, management, marketing and technological resources than those of the Company. The three largest credit and debit card processors accounted for 49.5% of the total credit and debit card sales volume in 1995 (The Nilson Report, April 1996). A single competitor accounted for 58.6% of the total dollar volume of payment transaction processing for the trucking industry in 1995 (The Nilson Report, February 1996). A single competitor accounted for 66.6% of the total dollar volume of check verifications in the United States in 1995 (The Nilson Report, April 1996). There can be no assurance that the Company will continue to be able to compete successfully with such competitors. In addition, the competitive pricing pressures that would result from any increase in competition could adversely affect the Company's margins and may have a material adverse effect on the Company's financial condition and results of operations. The Company competes in its markets in terms of price, quality, speed and flexibility in customizing systems to meet the particular needs of customers. The Company believes that it is one of the few fully integrated suppliers of a broad range of hardware and processing, banking and data compilation services for use in transactions at retail locations. The Company also competes with other electronic payment processing organizations for growth opportunities. The recent consolidation in banking in the United States has resulted in fewer opportunities for merchant portfolio acquisitions, as many small banks have been acquired by large banks, some of which are competitors with the Company in the provision of processing services. REGULATION OF FINANCIAL SERVICES The Company and its subsidiaries are subject to a number of federal and state laws. As a bank holding company, the Company is subject to regulation under the Bank Holding Company Act (the "BHC Act"), which is administered by the Board of Governors of the Federal Reserve. Under the BHC Act, the Company is generally prohibited from directly engaging in any activities other than banking, managing or controlling banks, and bank-related activities. The BHC Act prohibits a bank holding company, with certain exceptions, from acquiring, directly or indirectly, 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 22 24 which the Federal Reserve determines are closely related to banking. A bank is also generally prohibited from engaging in certain tie-in arrangements with its bank holding company or affiliates with respect to the lease or sale of property, the furnishing of services, or the extension of credit. The BHC Act contains certain restrictions concerning future mergers with other bank holding companies and banks. Under the BHC Act, a bank holding company is required to file with the Federal Reserve annual and quarterly reports and such additional information as the Federal Reserve may from time to time require. The Federal Reserve may examine the Company's and each of its subsidiary's records, including a review of capital adequacy in relation to guidelines established by the Federal Reserve. If the level of capital is deemed to be inadequate, the Federal Reserve may restrict the future expansion and operations of the Company. The Federal Reserve possesses cease and desist powers over a bank holding company if its actions or actions of any of its subsidiaries represent unsafe or unsound practices or violations of law. Transactions among the Company and its affiliates are also regulated by federal law, including the amount of a banking affiliate's loan to, or investments in, non-bank affiliates and the amount of advances to third parties collateralized by securities of an affiliate. In addition, various requirements and restrictions under federal and state laws regulate the operations of the Company's banking affiliates, requiring the maintenance of reserves against deposits, limiting the nature of loans and the interest that may be charged thereon, restricting investments and other activities. The Company's banking affiliates are also limited in the amount of dividends that they may declare. Prior regulatory approval must be obtained before declaring any dividends if the amount of capital, surplus and retained earnings is below certain statutory minimums. As a national bank established under the National Bank Act, EFS National Bank operates under the rules and regulations of the Comptroller of the Currency and is also a member of the Federal Reserve System, subject to provisions of the Federal Reserve Act. The Federal Deposit Insurance Corporation insures the domestic deposits of all subject banks, including EFS National Bank. Periodic audits and regularly scheduled reports of financial information are required by the various regulatory agencies with jurisdiction over the Company, EFS National Bank and their affiliates. Federal laws also regulate certain transactions among EFS National Bank and its affiliates, including the Company. The Company's electronic funds transfer services sold to financial institutions are regulated by certain state and federal banking laws. Material changes in federal or state regulation could increase the cost to the company providing electronic funds transfer services, change the competitive environment or otherwise adversely affect the Company. In addition to regulation by federal and state laws and governmental agencies, the Company is subject to the rules and regulations of the various credit card and debit card associations and networks, including requirements for equity capital commensurate with processing transaction dollar volume. MANAGERS AND EMPLOYEES In recent years, the Company has pursued a strategy of adding key managers and diversifying managerial responsibility for areas of the Company's operations, in order to provide the requisite managerial depth and experience to support the Company's growth. While the Company needs to continue to attract and retain key personnel, the Company believes that it is well positioned for its current operations and growth, as well as for adjustment to the loss of any particular key persons. As of August 31, 1996, the Company employed 445 individuals on a full and part-time basis, including 49 data processing and technical employees, 315 employees in operations and 81 employees in sales and administration. Many of the Company's employees are highly skilled, and the Company believes its future success will depend in large part on its ability to attract and retain such employees. The Company does not have employment contracts with any of its executives or other personnel. None of the Company's employees is covered by collective bargaining agreements. The Company considers relations with its employees to be excellent, and the Company believes that it has been highly successful in attracting experienced and capable personnel. However, there can be no assurance that the Company will continue to do so. 23 25 FACILITIES The following table sets forth certain information concerning the principal facilities of the Company, all of which are leased:
APPROXIMATE AREA IN LEASE LOCATION SQUARE FEET PRIMARY USES EXPIRATION - -------- ----------- ------------ --------------- Memphis, TN.............. 43,375 Corporate Offices & EFS National July 31, 2000 Bank Operations Elk Grove, IL............ 20,330 Data Processing, Field Service month-to-month and Customer Service Operations Aurora, CO............... 3,072 Field Service month-to-month West Chester, PA......... 1,300 Field Service May 31, 1997
The Company believes all facilities are adequate for its purposes. LEGAL PROCEEDINGS The Company is a party to various routine lawsuits arising out of the conduct of its business, none of which, either individually or in the aggregate, are expected to have a material adverse effect upon the Company's operations, financial condition or prospects. 24 26 MANAGEMENT DIRECTORS, OFFICERS AND KEY MANAGERS The directors, officers and key managers of the Company are as follows:
NAME AGE POSITION ---- --- -------- Dan M. Palmer.......................... 53 Chairman of the Board of Directors of the Company, and Chief Executive Officer of the Company and EFS National Bank Edward A. Labry III.................... 33 President of the Company and of EFS National Bank, and Director William E. Lucado...................... 55 Senior Vice President of the Company and EFS National Bank Thomas J. Dowling...................... 30 Vice President and Controller of the Company and EFS National Bank Richard M. Harter(1)................... 60 Secretary and Director Joyce Kelso............................ 55 Director Jerry D. Mooney(1)(2).................. 43 Director David C. Anderson(1)(2)................ 54 Director J. Richard Buchignani(1)............... 47 Director Paul L. Whittington(1)(2).............. 60 Director - --------------- (1) Member of the Board's Audit Committee. (2) Member of the Board's Compensation Committee.
The members of the Board of Directors are elected by the stockholders each year at the annual meeting of stockholders. Executive officers of the Company are elected by the Board of Directors on an annual basis and serve at the discretion of the Board of Directors. There are no family relationships among directors or executive officers of the Company. DAN M. PALMER became Chairman of the Board of Directors in February 1991. Mr. Palmer has been Chief Executive Officer of the Company since August 1989, and a Director of the Company since May 1987. Mr. Palmer has been the Chief Executive Officer of EFS National Bank and its predecessor since 1985. He joined Union Planters National Bank in June 1982 and founded its electronic fleet services division. He became President and Chief Executive Officer of EFS, Inc. when the operations of the EFS division were acquired by the Company in March 1985. EDWARD A. LABRY III joined the Company in 1984. He was made Director of Marketing of EFS, Inc. in March 1987 and Vice President of Sales in February 1988. In August 1990, he was elected Chief Marketing Officer of the Company. He was elected Senior Vice President of the Company in February 1991, President of the Company in October 1994, and President of EFS National Bank in December 1994. WILLIAM E. LUCADO joined the Company 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 the Company. In 1995, he was elected a Senior Vice President, Corporate Secretary, and Director of EFS National Bank, Concord Computing Corporation, and Concord Equipment Sales, Inc. In 1996, he was elected Assistant Secretary of the Company. Prior to joining the Company, Mr. Lucado had been President of a management consulting firm which served the banking industry. Mr. Lucado is responsible for compliance, risk management and investments for the Company and its subsidiaries. THOMAS J. DOWLING joined the Company in May 1992 as Assistant Controller. Mr. Dowling has been Vice President and Controller of the Company since September 1995. Prior to May 1992, he was a senior audit accountant and CPA at Ernst & Young LLP. RICHARD M. HARTER has been the Company's Secretary and a Director since the formation of the Company in 1970. He is a partner of Bingham, Dana & Gould LLP, legal counsel to the Company. 25 27 JOYCE KELSO has been a Director of the Company since May 1991, and was Senior Vice President of the Company prior to her retirement on January 1, 1995. She had previously served as Vice President in charge of Customer Service of EFS National Bank and its predecessor since EFS, Inc. began operations, and in August 1990, she was elected Senior Vice President of the Company. Since her retirement, Mrs. Kelso has served as a consultant to the Company. JERRY D. MOONEY has been a Director of the Company since August 1992. He was the founder, President and Chief Executive Officer of ServiceMaster Diversified Health Services, Inc. (formerly VHA Long Term Care) from 1981 through 1995 and now serves as President of Healthcare New Business Initiatives for ServiceMaster. DAVID C. ANDERSON has been a Director of the Company since August 1992. He retired as Executive Vice President and Chief Financial Officer of Burlington Northern, Inc. in Fort Worth, Texas, in October 1995. Prior to his association with Burlington Northern, Mr. Anderson served as Senior Vice President and Chief Financial Officer of Federal Express Corporation. J. RICHARD BUCHIGNANI has been a Director of the Company since August 1992. He is a partner in the Memphis office of the law firm of Wyatt, Tarrant and Combs, legal counsel to EFS National Bank. PAUL L. WHITTINGTON has been a Director of the Company since May 1993. He was Managing Partner of the Memphis, Tennessee and Jackson, Mississippi offices of Ernst & Young LLP from 1988 until his retirement in 1991. 26 28 UNDERWRITING The Underwriters named below (the "Underwriters") have severally agreed, subject to the terms and conditions set forth in the Underwriting Agreement by and among the Company and the Underwriters, to purchase from the Company, and the Company has agreed to sell to the Underwriters, the respective number of shares of Common Stock (excluding the over-allotment option) set forth opposite each Underwriter's name:
NUMBER OF UNDERWRITERS SHARES ------------ --------- William Blair & Company, L.L.C.......................... Montgomery Securities................................... Morgan Keegan & Company, Inc............................ Adams, Harkness & Hill, Inc............................. --------- Total......................................... 3,000,000 =========
The nature of the Underwriter's obligations under the Underwriting Agreement is such that all shares of the Common Stock offered hereby, excluding shares covered by the over-allotment option granted to the Underwriters, must be purchased if any are purchased. In the event of a default by any Underwriter, the Underwriting Agreement provides that, in certain circumstances, purchase commitments of the nondefaulting Underwriters pertaining to the Underwriting Agreement may be increased or such Underwriting Agreement may be terminated. The Underwriters have advised the Company that the Underwriters propose to offer the Common Stock to the public initially at the public offering price set forth on the cover page of this Prospectus and to select dealers at such price less a concession of not more than $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $.10 per share to certain other dealers. After the public offering contemplated hereby, the public offering and other selling terms may be changed by the Underwriters. The Company has granted to the Underwriters an option exercisable within 30 days after the date of this Prospectus, to purchase up to an additional 450,000 shares of Common Stock to cover over-allotments, at the same price per share to be paid by the Underwriters for the other shares offered hereby. If the Underwriters purchase any such additional shares pursuant to this option, each Underwriter will be committed to purchase such additional shares in approximately the same proportion as set forth in the table above. The Underwriters may exercise the option only for the purpose of covering over-allotments, if any, made in connection with the distribution of shares of Common Stock offered hereby. The Company, its Chief Executive Officer and its President have each agreed not to offer, sell or otherwise dispose of any Common Stock or any securities convertible into Common Stock or register for sale under the Securities Act any Common Stock for a period of 90 days after the date of this Prospectus without the prior written consent of the Underwriters. The rules of the Commission generally prohibit the Underwriters and other members of the selling group, if any, from making a market in the Common Stock during a "cooling-off" period immediately preceding the commencement of sales in the offering. The Commission has, however, adopted exemptions from these rules that permit passive market making under certain conditions. The rules permit an Underwriter or other members of the selling group, if any, to continue to make a market in the Common Stock subject to the condition, among others, that its bid not exceed the highest bid by a market maker not connected with the offering and that its net purchases on any one trading day not exceed prescribed limits. Pursuant to these exemptions, certain Underwriters and other members of the selling group, if any, may engage in passive market making in the Common Stock during the cooling-off period. 27 29 The Company has agreed to indemnify the Underwriters and their controlling persons against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the Underwriters may be required to make in respect thereof. Certain principals of William Blair & Company, L.L.C., one of the Underwriters, beneficially own an aggregate of 3,541,698 shares of Common Stock, which will represent 5.9% of the outstanding Common Stock of the Company 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 the Company's Common Stock. Accordingly, this offering is being made in conformity with certain applicable provisions of Schedule E to the Bylaws of the National Association of Securities Dealers, Inc. CERTAIN LEGAL MATTERS The validity of the Common Stock to be issued in the offering is being passed upon for the Company by Bingham, Dana & Gould LLP, 150 Federal Street, Boston, Massachusetts. Certain legal matters relating to the offering will be passed upon for the Underwriters by Gardner, Carton & Douglas, 321 North Clark Street, Chicago, Illinois. Richard M. Harter, a partner of Bingham, Dana & Gould LLP, holds 61,437 shares of the Common Stock and is the Secretary and a Director of the Company. At September 27, 1996, a profit sharing and retirement savings plan established for the benefit of partners and employees of Gardner, Carton & Douglas beneficially held 30,000 shares of the Company's Common Stock. EXPERTS The consolidated financial statements of Concord EFS, Inc. as of December 31, 1995 and 1994 and for each of the three years in the period ended December 31, 1995 incorporated by reference in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon included therein, incorporated herein by reference, and are included in reliance upon such report, given upon the authority of such firm as experts in auditing and accounting. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE There are incorporated herein by reference the following documents or portions of documents filed by the Company with the Commission: (1) the Company's Annual Report for the year ended December 31, 1995; (2) the Company's Annual Report on Form 10-K for the year ended December 31, 1995; (3) the Company's Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31 and June 30, 1996; (4) the Company's Proxy Statement dated March 29, 1996; and (5) the description of the Common Stock contained in the Company's Registration Statement on Form 8-A under the Exchange Act filed on September 4, 1985, together with any and all amendments and reports filed for the purpose of updating such description. All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to the termination of the offering of the Common Stock shall be deemed to be incorporated by reference in this Prospectus and to be a part hereof from the date of filing such documents. Any statement contained herein or in a document, all or a portion of which is incorporated or deemed to be incorporated by reference herein, shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document or portion thereof which also is or is deemed to be incorporated by reference herein 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. The Company will provide without charge to each person, including any beneficial owner, to whom a Prospectus is delivered, upon written or oral request of such person, a copy of any or all of the information that has been incorporated by reference herein (other than exhibits to the information unless such exhibits are incorporated by reference into the information that the Prospectus incorporates). Such written requests should be addressed to Concord EFS, Inc., Attention: Investor Relations, 2525 Horizon Lake Drive, Suite 120, Memphis, Tennessee 38133. Telephone requests may be directed to Investor Relations at (901) 371-8000. 28 30 ================================================================================ NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITIES OFFERED HEREBY TO ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, IMPLY THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. ------------------ TABLE OF CONTENTS
PAGE ------ Available Information.................. 2 Prospectus Summary..................... 3 Risk Factors........................... 6 Use of Proceeds........................ 10 Price Range of Common Stock............ 10 Dividend Policy........................ 11 Capitalization......................... 11 Selected Financial Data................ 12 Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 13 Business............................... 17 Management............................. 25 Underwriting........................... 27 Certain Legal Matters.................. 28 Experts................................ 28 Incorporation of Certain Documents by Reference......................... 28
================================================================================ ================================================================================ 3,000,000 SHARES [CONCORD EFS, INC. LOGO] COMMON STOCK --------------------------- PROSPECTUS OCTOBER , 1996 --------------------------- WILLIAM BLAIR & COMPANY MONTGOMERY SECURITIES MORGAN KEEGAN & COMPANY, INC. ADAMS, HARKNESS & HILL, INC. ================================================================================ 31 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The estimated expenses in connection with the issuance and distribution of the securities being registered, other than underwriting compensation, are: SEC Registration Fee.................................... $ 26,289 NASD Fee................................................ 9,262 Nasdaq National Market Fees............................. 17,500 Transfer Agent and Registrar Fees and Expenses.......... 5,000* Printing and Engraving Expenses......................... 60,000* Legal Fees and Expenses................................. 190,000* Blue Sky Fees and Expenses.............................. 10,000* Accounting Fees and Expenses............................ 40,000* Miscellaneous........................................... 6,949* -------- Total................................................... $365,000 ======== - --------------- * Estimates
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the Delaware General Corporation Law (the "DGCL") empowers a Delaware corporation to indemnify its officers and directors and certain other persons to the extent and under the circumstances set forth therein. Article Seventh of the Registrant's Restated Certificate of Incorporation provides that no director of the Registrant shall be liable for monetary damages for breach of fiduciary duty, with certain exceptions. Article VII of the By-Laws of the Registrant provides for advancement of expenses and indemnification of officers and directors of the Registrant and certain other persons against liabilities and expenses incurred by any of them to the fullest extent permitted by the DGCL. In addition, certain of the directors and officers of the Registrant may be entitled to indemnification and advancement of expenses under the charter documents and by-laws of the Registrant's subsidiaries, EFS National Bank, Concord Computing Corporation, Concord Equipment Sales, Inc., and Network EFT, Inc. The Registrant maintains insurance for the benefit of its directors and officers insuring such persons against certain liabilities, including liabilities under the securities laws, which might be incurred in connection with the performance of their duties. Section 10 of the Underwriting Agreement among the Registrant and the Underwriters will provide for indemnification by the Registrant of the Underwriters and each person, if any, who controls any Underwriter, against certain liabilities and expenses, as stated therein, which may include liabilities under the Securities Act. The Underwriting Agreement will also provide that the Underwriters shall similarly indemnify the Registrant, its directors, officers, and controlling persons, as set forth therein. II-1 32 ITEM 16. EXHIBITS. 1.1 Form of Underwriting Agreement. 3.1* Restated Certificate of Incorporation dated as of September 4, 1996. 5 Opinion of Bingham, Dana & Gould LLP. 23.1 Consent of Bingham, Dana & Gould LLP (included in Exhibit 5). 23.2 Consent of Ernst & Young LLP. 24* Power of Attorney. - --------------- * Previously filed. ITEM 17. UNDERTAKINGS. (A) The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act, each filing of the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Exchange Act (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Exchange Act) 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) The undersigned Registrant hereby undertakes to deliver or cause to be delivered with the Prospectus, to each person to whom the Prospectus is sent or given, the latest annual report to security holders that is incorporated by reference in the Prospectus and furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3 under the Exchange Act; and, where interim financial information required to be presented by Article 3 of Regulation S-X is not set forth in the Prospectus, to deliver, or cause to be delivered to each person to whom the Prospectus is sent or given, the latest quarterly report that is specifically incorporated by reference in the Prospectus to provide such interim financial information. (C) Insofar as indemnification for liabilities arising under the Securities Act 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 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 and will be governed by the final adjudication of such issue. (D) The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, 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, 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 33 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 Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Memphis and the State of Tennessee as of October 17, 1996. CONCORD EFS, INC. /s/ DAN M. PALMER By:----------------------------------- Dan M. Palmer, Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Registration Statement on Form S-3 has been signed below as of October 17, 1996 by the following persons on behalf of the Registrant and in the capacities indicated.
/s/ DAN M. PALMER Chairman of the Board and Chief Executive Officer - ------------------------------------- (principal executive officer) Dan M. Palmer * President and Director - ------------------------------------- Edward A. Labry III * Vice President and Controller - ------------------------------------- (principal financial and accounting officer) Thomas J. Dowling * Secretary and Director - ------------------------------------- Richard M. Harter * Director - ------------------------------------- Joyce Kelso * Director - ------------------------------------- Jerry D. Mooney * Director - ------------------------------------- David C. Anderson * Director - ------------------------------------- Richard Buchignani * Director - ------------------------------------- Paul L. Whittington
/s/ DAN M. PALMER *By: -------------------------------- Dan M. Palmer Attorney-in-fact II-3 34 EXHIBIT INDEX 1.1 Form of Underwriting Agreement. 3.1* Restated Certificate of Incorporation dated as of September 4, 1996. 5 Opinion of Bingham, Dana & Gould LLP. 23.1 Consent of Bingham, Dana & Gould LLP (included in Exhibit 5). 23.2 Consent of Ernst & Young LLP. 24* Power of Attorney. - --------------- * Previously filed. II-4 EX-1.1 2 FORM OF UNDERWRITING AGREEMENT 1 Exhibit 1.1 DRAFT OF OCTOBER 16, 1996 6:09 AM CONCORD EFS, INC. 3,000,000 Shares Common Stock* UNDERWRITING AGREEMENT October ___, 1996 WILLIAM BLAIR & COMPANY, L.L.C. MONTGOMERY SECURITIES MORGAN KEEGAN & COMPANY, INC. ADAMS, HARKNESS & HILL, INC. c/o William Blair & Company, L.L.C. 222 West Adams Chicago, Illinois 60606 Ladies and Gentlemen: SECTION 1. Introductory. Concord EFS, Inc. ("Company"), a Delaware corporation, has an authorized capital stock consisting of 80,000,000 shares, $0.33 1/3 par value, of Common Stock ("Common Stock"), of which ____________ shares will be outstanding as of the closing of the transaction contemplated by this Agreement. The Company proposes to issue and sell 3,000,000 shares of its authorized but unissued Common Stock ("Firm Shares") to you (the "Underwriters"), each of which are acting severally and not jointly. In addition, the Company proposes to grant to the Underwriters an option to purchase up to 450,000 additional shares of Common Stock ("Option Shares") as provided in Section 4 hereof. The Firm Shares and, to the extent such option is exercised, the Option Shares, are hereinafter collectively referred to as the "Shares." You have advised the Company that you propose to make a public offering of each of your respective portions of the Shares as soon as you deem advisable after the registration statement hereinafter referred to becomes effective, if it has not yet become effective, and the Pricing Agreement hereinafter defined has been executed and delivered. Prior to the purchase and public offering of the Shares by you, the Company and each of you shall enter into an agreement substantially in the form of Exhibit A hereto (the "Pricing Agreement"). The Pricing Agreement may take the form of an exchange of any standard form of written telecommunication between the Company and the Underwriters and shall specify such applicable information as is indicated in Exhibit A hereto. The offering of the Shares will be governed by this Agreement, as supplemented by the Pricing Agreement. From and after the date of the execution and delivery of the Pricing Agreement, this Agreement shall be deemed to incorporate the Pricing Agreement. The Company hereby confirms its agreement with the Underwriters as follows: SECTION 2. Representations and Warranties of the Company. The Company represents and warrants to the several Underwriters that: - -------- * Plus an option to acquire up to 450,000 additional shares to cover overallotments 2 (a) A registration statement on Form S-3 (File No. 333-13309) and a related preliminary prospectus with respect to the Shares have been prepared and filed with the Securities and Exchange Commission ("Commission") by the Company in conformity with the requirements of the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder (collectively, the "1933 Act;" all references herein to specific rules are rules promulgated under the 1933 Act); and the Company has so prepared and has filed such amendments thereto, if any, and such amended preliminary prospectuses as may have been required to the date hereof. If the Company has elected not to rely upon Rule 430A, the Company has prepared and will promptly file an amendment to the registration statement and an amended prospectus. If the Company has elected to rely upon Rule 430A, it will prepare and file a prospectus pursuant to Rule 424(b) that discloses the information previously omitted from the prospectus in reliance upon Rule 430A. There have been or will promptly be delivered to you three signed copies of such registration statement and amendments, together with three copies of all documents incorporated by reference therein, three copies of each exhibit filed therewith, and conformed copies of such registration statement and amendments (but without exhibits) and of the related preliminary prospectus or prospectuses and final forms of prospectus for each of the Underwriters. Such registration statement (as amended, if applicable) at the time it becomes effective and the prospectus constituting a part thereof (including the information, if any, deemed to be part thereof pursuant to Rule 430(b) and/or Rule 434 and the information incorporated therein by reference), as from time to time amended or supplemented, are hereinafter referred to as the "Registration Statement," and the "Prospectus," respectively, except that if any revised prospectus shall be provided to the Underwriters by the Company for use in connection with the offering of the Shares which differs from the Prospectus on file at the Commission at the time the Registration Statement became or becomes effective (whether or not such revised prospectus is required to be filed by the Company pursuant to Rule 424(b)), the term Prospectus shall refer to such revised prospectus from and after the time it was provided to the Underwriters for such use. If the Company elects to rely on Rule 434 of the 1933 Act, all references to "Prospectus" shall be deemed to include, without limitation, the form of prospectus and the term sheet, taken together, provided to the Underwriters by the Company in accordance with Rule 434 of the 1933 Act "Rule 434 Prospectus"). Any registration statement (including any amendment or supplement thereto or information which is deemed part thereof) filed by the Company under Rule 462(b) ("Rule 462(b) Registration Statement") shall be deemed to be part of the "Registration Statement" as defined herein, and any prospectus (including any amendment or supplement thereto or information which is deemed part thereof) included in such registration statement shall be deemed to be part of the "Prospectus", as defined herein, as appropriate. The Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder are hereinafter collectively referred to as the "Exchange Act." Any reference herein to any preliminary prospectus or the Prospectus shall be deemed to refer to and include the documents incorporated by reference therein pursuant to Form S-3 under the 1933 Act ("Incorporated Documents"), as of the date of such preliminary prospectus or Prospectus, as the case may be. Any document filed by the Company under the Exchange Act after the effective date of the Registration Statement or the date of the Prospectus and incorporated by reference in the Prospectus shall be deemed to be included in the Registration Statement and the Prospectus as of the date of such filing. -2- 3 The Incorporated Documents, when they were or are filed with the Commission, conformed or will conform in all material respects to the requirements of the Exchange Act and none of such documents contained or will contain an untrue statement of a material fact or omitted or will omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. (b) The Commission has not issued any order preventing or suspending the use of any preliminary prospectus, and each preliminary prospectus has conformed in all material respects with the requirements of the 1933 Act and, as of its date, has not included any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein not misleading; and when the Registration Statement became or becomes effective, and at all times subsequent thereto, up to the First Closing Date or the Second Closing Date hereinafter defined, as the case may be, the Registration Statement, including the information deemed to be part of the Registration Statement at the time of effectiveness pursuant to Rule 430A(b), if applicable, and the Prospectus and any amendments or supplements thereto, contained or will contain all statements that are required to be stated therein in accordance with the 1933 Act and in all material respects conformed or will in all material respects conform to the requirements of the 1933 Act, and neither the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, included or will include any untrue statement of a material fact or omitted or will omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the Company makes no representation or warranty as to information contained in or omitted from any preliminary prospectus, the Registration Statement, the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by or on behalf of any Underwriter specifically for use in the preparation thereof. (c) The Company and its subsidiaries have been duly incorporated and are validly existing as corporations in good standing under the laws of their respective places of incorporation, with corporate power and authority to own their properties and conduct their business as described in the Prospectus; each of the Company and its subsidiaries is duly qualified to do business as a foreign corporation under the corporation law of, and is in good standing as such in, each jurisdiction in which it owns or leases substantial properties, has an office, or in which substantial business is conducted and such qualification is required except in any such case where the failure to so qualify or be in good standing would not have a material adverse effect upon the Company and its subsidiaries taken as a whole; and no proceeding of which the Company has knowledge has been instituted and continues in any such jurisdiction, revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such power and authority or qualification. (d) Except for Network EFT, Inc. (of which the Company owns 99.2% of the outstanding capital stock), the Company owns directly or indirectly 100 percent of the issued and outstanding capital stock of each of its subsidiaries, free and clear of any claims, liens, encumbrances or security interests and all of such capital stock has been duly authorized and validly issued and is fully paid and nonassessable. (e) The issued and outstanding shares of capital stock of the Company as set forth in the Prospectus have been duly authorized and validly issued, are fully paid and nonassessable, and conform to the description thereof contained in the Prospectus. -3- 4 (f) The Shares have been duly authorized and when issued, delivered and paid for pursuant to this Agreement, will be validly issued, fully paid and nonassessable, and will conform to the description thereof contained in the Prospectus. (g) The making and performance by the Company of this Agreement and the Pricing Agreement have been duly authorized by all necessary corporate action and will not violate any provision of the Company's charter or bylaws and will not result in the breach, or be in contravention, of any provision of any agreement, franchise, license, indenture, mortgage, deed of trust, or other instrument to which the Company or any subsidiary is a party or by which the Company, any subsidiary or the property of any of them may be bound or affected, or any order, rule or regulation applicable to the Company or any subsidiary of any court or regulatory body, administrative agency or other governmental body having jurisdiction over the Company or any subsidiary or any of their respective properties, or any order of any court or governmental agency or authority entered in any proceeding to which the Company or any subsidiary was or is now a party or by which it is bound. No consent, approval, authorization or other order of any court, regulatory body, administrative agency or other governmental body is required for the execution and delivery of this Agreement or the Pricing Agreement or the consummation of the transactions contemplated herein or therein, except for compliance with the 1933 Act and blue sky laws applicable to the public offering of the Shares by the several Underwriters and clearance of such offering with the National Association of Securities Dealers, Inc. ("NASD"). This Agreement has been duly executed and delivered by the Company. (h) The accountants who have expressed their opinions with respect to certain of the financial statements included or incorporated by reference in the Registration Statement are independent accountants as required by the 1933 Act. (i) The consolidated financial statements of the Company included or incorporated by reference in the Registration Statement present fairly the consolidated financial position of the Company as of the respective dates of such financial statements, and the consolidated results of operations and cash flows of the Company for the respective periods covered thereby, all in conformity with generally accepted accounting principles consistently applied throughout the periods involved, except as disclosed in the Prospectus. The financial information set forth in the Prospectus under "Selected Financial Data" presents fairly on the basis stated in the Prospectus, the information set forth therein. The pro forma financial statements and other pro forma information included in the Prospectus present fairly the information shown therein, have been prepared in accordance with generally accepted accounting principles and the Commission's rules and guidelines with respect to pro forma financial statements and other pro forma information, have been properly compiled on the pro forma basis described therein, and, in the opinion of the Company, the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate under the circumstances. (j) Neither the Company nor any subsidiary is in violation of its charter or bylaws or is in default under any consent decree or order of any court or administrative body, or is in default with respect to any material provision of any lease, loan agreement, franchise, license, permit or other contract obligation to which it is a party; and there does not exist any -4- 5 state of facts which constitutes an event of default as defined in such documents or which, with notice or lapse of time or both, would constitute such an event of default, in each case, except for defaults which neither singly nor in the aggregate are material to the Company and its subsidiaries taken as a whole. (k) There are no material legal or governmental proceedings pending, or to the Company's knowledge, threatened to which the Company or any subsidiary is or may be a party or of which material property owned or leased by the Company or any subsidiary is or may be the subject, or related to environmental or discrimination matters which are not disclosed in the Prospectus, or which question the validity of this Agreement or the Pricing Agreement or any action taken or to be taken pursuant hereto or thereto. (l) There are no holders of securities of the Company having rights to registration thereof or preemptive rights to purchase Common Stock except as disclosed in the Prospectus. Holders of registration rights have waived such rights with respect to the offering being made by the Prospectus. (m) The Company and each of its subsidiaries have good and marketable title to all the properties and assets reflected as owned in the financial statements hereinabove described (or elsewhere in the Prospectus), subject to no lien, mortgage, pledge, charge or encumbrance of any kind except those, if any, reflected in such financial statements (or elsewhere in the Prospectus) or which are not material to the Company and its subsidiaries taken as a whole. The Company and each of its subsidiaries hold their respective leased properties which are material to the Company and its subsidiaries taken as a whole under valid and binding leases. (n) The Company has not taken and 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 Shares. (o) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, and except as contemplated by the Prospectus, the Company and its subsidiaries, taken as a whole, have not incurred any material liabilities or obligations, direct or contingent, nor entered into any material transactions not in the ordinary course of business and there has not been any material adverse change in their condition (financial or otherwise) or results of operations nor any material change in their capital stock, short-term debt or long-term debt. (p) The Company agrees not to sell, contract to sell or otherwise dispose of any Common Stock or securities convertible into Common Stock (except Common Stock issued pursuant to currently outstanding options, warrants or convertible securities) for a period of 90 days after this Agreement becomes effective without the prior written consent of the Underwriters. (q) There is no material document of a character required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement which is not described or filed as required. -5- 6 (r) The Company together with its subsidiaries owns and possesses all right, title and interest in and to, or has duly licensed from third parties, all patents, patent rights, trade secrets, inventories, know-how, trademarks, trade names, copyrights, service marks and other proprietary rights ("Trade Rights") material to the business of the Company and each of its subsidiaries taken as a whole. Neither the Company nor any of its subsidiaries has received any notice of infringement, misappropriation or conflict from any third party as to such material Trade Rights which has not been resolved or disposed of and neither the Company nor any of its subsidiaries has infringed, misappropriated or otherwise conflicted with material Trade Rights of any third parties, which infringement, misappropriation or conflict would have a material adverse effect upon the condition (financial or otherwise) or results of operations of the Company and its subsidiaries taken as a whole. (s) The conduct of the business of the Company and each of its subsidiaries is in compliance in all respects with applicable federal, state, local and foreign laws and regulations, except where the failure to be in compliance would not have a material adverse effect upon the condition (financial or otherwise) or results of operations of the Company and its subsidiaries taken as a whole. (t) The Company has filed all necessary federal and state income and franchise tax returns and has paid all taxes shown as due thereon, and there is no tax deficiency that has been, or to the knowledge of the Company might be, asserted against the Company or any of its properties or assets that would or could be expected to have a material adverse affect upon the condition (financial or otherwise) or results of operations of the Company and its subsidiaries taken as a whole. (u) A registration statement relating to the Common Stock has been declared effective by the Commission pursuant to the Exchange Act and the Common Stock is duly registered thereunder. The Shares have been listed on the Nasdaq National Market, subject to notice of issuance or sale of the Shares, as the case may be. (v) The Company is not, and does not intend to conduct its business in a manner in which it would become, an "investment company" as defined in Section 3(a) of the Investment Company Act of 1940, as amended ("Investment Company Act"). (w) The Company confirms as of the date hereof that it is in compliance with all provisions of Section 1 of Laws of Florida, Chapter 92-198, An Act Relating to Disclosure of Doing Business with Cuba, and the Company further agrees that if it commences engaging in business with the government of Cuba or with any person or affiliate located in Cuba after the date the Registration Statement becomes or has become effective with the Commission or with the Florida Department of Banking and Finance (the "Department"), whichever date is later, or if the information reported in the Prospectus, if any, concerning the Company's business with Cuba or with any person or affiliate located in Cuba changes in any material way, the Company will provide the Department notice of such business or change, as appropriate, in a form acceptable to the Department. SECTION 3. Representations and Warranties of the Underwriters. The Underwriters represent and warrant to the Company that the information set forth (a) on the cover page of the -6- 7 Prospectus with respect to price, underwriting discount and terms of the offering and (b) under "Underwriting" in the Prospectus was furnished to the Company by and on behalf of the Underwriters for use in connection with the preparation of the Registration Statement and is correct and complete in all material respects. SECTION 4. Purchase, Sale and Delivery of Shares. On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell to the Underwriters, and the Underwriters agree, severally and not jointly, to purchase the Firm Shares from the Company at the price per share set forth in the Pricing Agreement. The obligation of each Underwriter to the Company shall be to purchase from the Company that number of full shares which (as nearly as practicable, as determined by you) bears to 3,000,000, the same proportion as the number of Shares set forth opposite the name of such Underwriter in Schedule A hereto bears to the total number of Firm Shares to be purchased by all Underwriters under this Agreement. The initial public offering price and the purchase price shall be set forth in the Pricing Agreement. At 9:00 A.M. Chicago Time on the fourth business day, if permitted under Rule 15c6-1 under the Exchange Act, (or the third business day if required under Rule 15c6-1 under the Exchange Act or unless postponed in accordance with the provisions of Section 12) following the date the Registration Statement becomes effective (or, if the Company has elected to rely upon Rule 430A, the fourth business day, if permitted under Rule 15c6-1 under the Exchange Act, (or the third business day if required under Rule 15c6-1 under the Exchange Act) after execution of the Pricing Agreement), or such other time not later than ten business days after such date as shall be agreed upon by the Underwriters and the Company, the Company will deliver to you at the offices of Gardner, Carton & Douglas or through the facilities of The Depository Trust Company for the accounts of the several Underwriters, certificates representing the Firm Shares to be sold by it against payment of the purchase price therefor by delivery of federal or other immediately available funds, by wire transfer or otherwise, to the Company. Such time of delivery and payment is herein referred to as the "First Closing Date." The certificates for the Firm Shares so to be delivered will be in such denominations and registered in such names as you request by notice to the Company and the Custodian prior to 10:00 A.M., Chicago Time, on the third full business day preceding the First Closing Date, and will be made available at the Company's expense for checking and packaging by the Underwriters at 10:00 A.M., Chicago Time, on the first full business day preceding the First Closing Date. Payment for the Firm Shares so to be delivered shall be made at the time and in the manner described above at the offices of counsel for the Underwriters. In addition, on the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company hereby grants an option to the several Underwriters to purchase, severally and not jointly, up to an aggregate of 450,000 Option Shares, at the same purchase price per share to be paid for the Firm Shares, for use solely in covering any overallotments made by the Underwriters in the sale and distribution of the Firm Shares. The option granted hereunder may be exercised at any time (but not more than once) within 30 days after the date of the initial public offering upon notice by you to the Company setting forth the aggregate number of Option Shares as to which the Underwriters are exercising the option, the names and denominations in which the certificates for such shares are to be registered and the time and place at which such certificates will be delivered. Such time of delivery (which may not be earlier than the First Closing Date), being herein referred to as the "Second Closing Date," shall be determined by you, but if at any time other than the First Closing Date, shall not be earlier than three nor later than 10 full business days after delivery of such notice of exercise. The number of Option Shares to be purchased by each Underwriter shall be determined by multiplying the number of Option Shares to be sold by a fraction, the -7- 8 numerator of which is the number of Firm Shares to be purchased by such Underwriter as set forth opposite its name in Schedule A and the denominator of which is the total number of Firm Shares (subject to such adjustments to eliminate any fractional share purchases as you in your absolute discretion may make). Certificates for the Option Shares will be made available at the Company's expense for checking and packaging at 10:00 A.M., Chicago Time, on the first full business day preceding the Second Closing Date. The manner of payment for and delivery of the Option Shares shall be the same as for the Firm Shares as specified in the preceding paragraph. SECTION 5. Covenants of the Company. The Company covenants and agrees that: (a) The Company will advise you promptly of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the institution of any proceedings for that purpose, or of any notification of the suspension of qualification of the Shares for sale in any jurisdiction or the initiation or threatening of any proceedings for that purpose, and will also advise you promptly of any request of the Commission for amendment or supplement of the Registration Statement, of any preliminary prospectus or of the Prospectus, or for additional information. (b) The Company will give you notice of its intention to file or prepare any amendment to the Registration Statement (including any post-effective amendment) or any Rule 462(b) Registration Statement or any amendment or supplement to the Prospectus (including any revised prospectus which the Company proposes for use by the Underwriters in connection with the offering of the Shares which differs from the prospectus on file at the Commission at the time the Registration Statement became or becomes effective, whether or not such revised prospectus is required to be filed pursuant to Rule 424(b) and any term sheet as contemplated by Rule 434) and will furnish you with copies of any such amendment or supplement a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file any such amendment or supplement or use any such prospectus to which you or counsel for the Underwriters shall reasonably object. (c) If the Company elects to rely on Rule 434 of the 1933 Act, the Company will prepare a term sheet that complies with the requirements of Rule 434. If the Company elects not to rely on Rule 434, the Company will provide the Underwriters with copies of the form of prospectus, in such numbers as the Underwriters may reasonably request, and file with the Commission such prospectus in accordance with Rule 424(b) of the 1933 Act by the close of business in New York City on the second business day immediately succeeding the date of the Pricing Agreement. If the Company elects to rely on Rule 434, the Company will provide the Underwriters with copies of the form of Rule 434 Prospectus, in such numbers as the Underwriters may reasonably request, by the close of business in New York on the business day immediately succeeding the date of the Pricing Agreement. (d) If at any time when a prospectus relating to the Shares is required to be delivered under the 1933 Act any event occurs as a result of which the Prospectus, including any amendments or supplements, would include an untrue statement of a material fact, or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend the Prospectus, including any amendments or supplements thereto and including any revised prospectus which the Company proposes for use by the Underwriters in -8- 9 connection with the offering of the Shares which differs from the prospectus on file with the Commission at the time of effectiveness of the Registration Statement, whether or not such revised prospectus is required to be filed pursuant to Rule 424(b) to comply with the 1933 Act, the Company promptly will advise you thereof and will promptly prepare and file with the Commission an amendment or supplement which will correct such statement or omission or an amendment which will effect such compliance; and, in case any Underwriter is required to deliver a prospectus nine months or more after the effective date of the Registration Statement, the Company upon request, but at the expense of such Underwriter, will prepare promptly such prospectus or prospectuses as may be necessary to permit compliance with the requirements of Section 10(a)(3) of the 1933 Act. (e) Neither the Company nor any of its subsidiaries will, prior to the earlier of the Second Closing Date or termination or expiration of the related option, incur any liability or obligation, direct or contingent, or enter into any material transaction, other than in the ordinary course of business, except as contemplated by the Prospectus. (f) Neither the Company nor any of its subsidiaries will acquire any capital stock of the Company prior to the earlier of the Second Closing Date or termination or expiration of the related option nor will the Company declare or pay any dividend or make any other distribution upon the Common Stock payable to stockholders of record on a date prior to the earlier of the Second Closing Date or termination or expiration of the related option, except in either case as contemplated by the Prospectus. (g) Not later than March 31, 1998 the Company will make generally available to its security holders an earnings statement (which need not be audited) covering a period of at least 12 months beginning after the effective date of the Registration Statement, which will satisfy the provisions of the last paragraph of Section 11(a) of the 1933 Act. (h) During such period as a prospectus is required by law to be delivered in connection with offers and sales of the Shares by an Underwriter or dealer, the Company will furnish to you at its expense, subject to the provisions of subsection (d) hereof, copies of the Registration Statement, the Prospectus, each preliminary prospectus, the Incorporated Documents and all amendments and supplements to any such documents in each case as soon as available and in such quantities as you may reasonably request, for the purposes contemplated by the 1933 Act. (i) The Company will cooperate with the Underwriters in qualifying or registering the Shares for sale under the blue sky laws of such jurisdictions as you designate, and will continue such qualifications in effect so long as reasonably required for the distribution of the Shares. The Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any such jurisdiction where it is not currently qualified or where it would be subject to taxation as a foreign corporation. (j) During the period of five years hereafter, the Company will furnish you with a copy (i) as soon as practicable after the filing thereof, of each report filed by the Company with the Commission, any securities exchange or the NASD; (ii) as soon as practicable after the release thereof, of each material press release in respect of the Company; and (iii) as soon as available, of each report of the Company mailed to stockholders. -9- 10 (k) The Company will use the net proceeds received by it from the sale of the Shares being sold by it in the manner specified in the Prospectus. (l) If, at the time of effectiveness of the Registration Statement, any information shall have been omitted therefrom in reliance upon Rule 430A and/or Rule 434, then immediately following the execution and delivery of the Pricing Agreement, the Company will prepare, and file or transmit for filing with the Commission in accordance with such Rule 430A, Rule 424(b) and/or Rule 434, copies of an amended Prospectus, or, if required by such Rule 430A and/or Rule 434, a post-effective amendment to the Registration Statement (including an amended Prospectus), containing all information so omitted. If required, the Company will prepare and file, or transmit for filing, a Rule 462(b) Registration Statement not later than the date of the execution of the Pricing Agreement. If a Rule 462(b) Registration Statement is filed, the Company shall make payment of, or arrange for payment of, the additional registration fee owing to the Commission required by Rule 111. (m) The Company will comply with all registration, filing and reporting requirements of the Exchange Act and the Nasdaq National Market. SECTION 6. Payment of Expenses. Whether or not the transactions contemplated hereunder are consummated or this Agreement becomes effective as to all of its provisions or is terminated, the Company agrees to pay (i) all costs, fees and expenses (except legal fees and disbursements of counsel for the Underwriters and the expenses incurred by the Underwriters other than those contemplated by clause (ii) below) incurred in connection with the performance of the Company's obligations hereunder, including without limiting the generality of the foregoing, all fees and expenses of legal counsel for the Company and of the Company's independent accountants, all costs and expenses incurred in connection with the preparation, printing, filing and distribution of the Registration Statement, each preliminary prospectus and the Prospectus (including all Incorporated Documents, exhibits and financial statements) and all amendments and supplements provided for herein, this Agreement, the Pricing Agreement and the Blue Sky Memorandum, (ii) all costs, fees and expenses (including legal fees not to exceed $7,500 and disbursements of counsel for the Underwriters) incurred by the Underwriters in connection with qualifying or registering all or any part of the Shares for offer and sale under blue sky laws, including the preparation of a blue sky memorandum relating to the Shares and clearance of such offering with the NASD; and (iii) all fees and expenses of the Company's transfer agent, printing of the certificates for the Shares and all transfer taxes, if any, with respect to the sale and delivery of the Shares to the several Underwriters. SECTION 7. Conditions of the Obligations of the Underwriters. The obligations of the several Underwriters to purchase and pay for the Firm Shares on the First Closing Date and the Option Shares on the Second Closing Date shall be subject to the accuracy of the representations and warranties on the part of the Company herein set forth as of the date hereof and as of the First Closing Date or the Second Closing Date, as the case may be, to the accuracy of the statements of officers of the Company made pursuant to the provisions hereof, to the performance by the Company of their respective obligations hereunder, and to the following additional conditions: (a) The Registration Statement shall have become effective either prior to the execution of this Agreement or not later than 1:00 P.M., Chicago Time, on the first full business day after the date of this Agreement, or such later time as shall have been consented to -10- 11 by you but in no event later than 1:00 P.M., Chicago Time, on the third full business day following the date hereof; and prior to the First Closing Date or the Second Closing Date, as the case may be, 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 shall be pending or, to the knowledge of the Company, shall be contemplated by the Commission. If the Company has elected to rely upon Rule 430A and/or Rule 434A, the information concerning the initial public offering price of the Shares and price-related information shall have been transmitted to the Commission for filing pursuant to Rule 424(b) within the prescribed period and the Company will provide evidence satisfactory to the Underwriters of such timely filing (or a post-effective amendment providing such information shall have been filed and declared effective in accordance with the requirements of Rules 430A and 424(b)). If a Rule 462(b) Registration Statement is required, such Registration Statement shall have been transmitted to the Commission for filing and become effective within the prescribed time period and, prior to the First Closing date, the Company shall have provided evidence of such filing and effectiveness in accordance with Rule 462(b). (b) The Shares shall have been qualified for sale under the blue sky laws of such states as shall have been specified by the Underwriters. (c) The legality and sufficiency of the authorization, issuance and sale or transfer and sale of the Shares hereunder, the validity and form of the certificates representing the Shares, the execution and delivery of this Agreement and the Pricing Agreement, and all corporate proceedings and other legal matters incident thereto, and the form of the Registration Statement and the Prospectus (except financial statements) shall have been approved by counsel for the Underwriters exercising reasonable judgment. (d) You shall not have advised the Company that the Registration Statement or the Prospectus or any amendment or supplement thereto, contains an untrue statement of fact, which, in the opinion of counsel for the Underwriters, is material or omits to state a fact which, in the opinion of such counsel, is material and is required to be stated therein or necessary to make the statements therein not misleading. (e) Subsequent to the execution and delivery of this Agreement, there shall not have occurred any change, or any development involving a prospective change, in or affecting particularly the business or properties of the Company or its subsidiaries, whether or not arising in the ordinary course of business, which, in the judgment of the Underwriters, makes it impractical or inadvisable to proceed with the public offering or purchase of the Shares as contemplated hereby. (f) There shall have been furnished to you, on the First Closing Date or the Second Closing Date, as the case may be, except as otherwise expressly provided below: (i) An opinion of Bingham, Dana & Gould LLP, counsel for the Company, addressed to the Underwriters and dated the First Closing Date or the Second Closing Date, as the case may be, to the effect that: (1) the Company has been duly incorporated and is validly existing as a corporation in good standing under the -11- 12 laws of the State of Delaware with corporate power and authority to own its properties and conduct its business as described in the Prospectus; and the Company has been duly qualified to do business as a foreign corporation under the corporation law of, and is in good standing as such in, every jurisdiction where the ownership or leasing of real property requires such qualification except where the failure so to qualify would not have a material adverse effect upon the condition (financial or otherwise) or results of operations of the Company and its subsidiaries taken as a whole; (2) an opinion to the same general effect as clause (1) of this subparagraph (i) in respect of each subsidiary of the Company; (3) except as disclosed in the Registration Statement, the Company owns of record directly or indirectly 100 percent of the outstanding capital stock of each subsidiary, and to the best knowledge of such counsel, such stock is owned free and clear of any claims, liens, encumbrances or security interests; (4) the authorized capital stock of the Company, of which there is outstanding the amount set forth in the Registration Statement and Prospectus (except for subsequent issuances, if any, pursuant to stock options or other rights referred to in the Prospectus), conforms as to legal matters in all material respects to the description thereof in the Registration Statement and Prospectus; (5) the issued and outstanding capital stock of the Company has been duly authorized and validly issued and is fully paid and nonassessable; (6) the certificates for the Shares to be delivered hereunder are in due and proper form, and when duly countersigned by the Company's transfer agent and delivered to you or upon your order against payment of the agreed consideration therefor in accordance with the provisions of this Agreement and the Pricing Agreement, the Shares represented thereby will be duly authorized and validly issued, fully paid and nonassessable; (7) the Registration Statement has become effective under the 1933 Act, and, to the best knowledge of such counsel, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the 1933 Act, and the Registration Statement (including the information deemed to be part of the Registration Statement at the time of effectiveness pursuant to Rule 430A(b) and/or Rule 434, if applicable), the Prospectus and each amendment or supplement thereto (except for the financial statements and other statistical or financial data included therein as to which such counsel need express no opinion) comply as to form in all material respects with the requirements of the 1933 Act; and the statements in the Registration Statement and the Prospectus summarizing statutes, rules and regulations are -12- 13 accurate in summary form and fairly present the information required to be presented by the 1933 Act or the rules and regulations thereunder, in all material respects and such counsel does not know of any statutes, rules and regulations required to be described or referred to in the Registration Statement or the Prospectus that are not described or referred to therein as required; (8) this Agreement and the Pricing Agreement and the performance of the Company's obligations hereunder have been duly authorized by all necessary corporate action and this Agreement and the Pricing Agreement have been duly executed and delivered by and on behalf of the Company, and are legal, valid and binding agreements of the Company, except as enforceability of the same may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights and by the exercise of judicial discretion in accordance with general principles applicable to equitable and similar remedies and except as to those provisions relating to indemnities or contribution for liabilities arising under the 1933 Act or other federal or state securities laws as to which no opinion need be expressed; and no approval, authorization or consent of any public board, agency, or instrumentality of the United States or of any state or other jurisdiction is necessary in connection with the issue or sale of the Shares by the Company pursuant to this Agreement (other than under the 1933 Act, applicable blue sky laws and the rules of the NASD) or the consummation by the Company of any other transactions contemplated hereby; (9) the execution and performance of this Agreement will not contravene any of the provisions of, or result in a default under, any agreement, franchise, license, indenture, mortgage, deed of trust, or other instrument known to such counsel, of the Company or any of its subsidiaries or by which the property of any of them is bound and which contravention or default would be material to the Company and its subsidiaries taken as a whole; or violate any of the provisions of the charter or bylaws of the Company or any of its subsidiaries or, so far as is known to such counsel, violate any statute, order, rule or regulation of any regulatory or governmental body having jurisdiction over the Company or any of its subsidiaries; (10) the Company is not an "investment company" or a person "controlled by" an "investment company" within the meaning of the Investment Company Act. In addition, such counsel shall state that, in the course of their representation of the Company in connection with the Registration Statement, no facts have come to their attention that have caused them to believe that either the Registration Statement (including the information deemed to be part of the Registration Statement at the time of effectiveness pursuant to Rule 430A(b) and/or Rule 434, if applicable) or the Prospectus, or the Registration Statement or the Prospectus as amended or supplemented (except as aforesaid), as of their respective effective or issue dates, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus -13- 14 as amended or supplemented, if applicable, as of the First Closing Date or the Second Closing Date, as the case may be, contained any untrue statement of a material fact or omitted to state any material fact necessary to make the statements therein not misleading in light of the circumstances under which they were made; and such counsel does not know of any legal or governmental proceedings pending or threatened required to be described in the Prospectus which are not described as required, nor of any contracts or documents of a character required to be described in the Registration Statement or Prospectus or to be filed as exhibits to the Registration Statement which are not described or filed, as required. In rendering such opinion, such counsel may state that they are relying upon the certificate of State Street Bank & Trust Company, the transfer agent for the Common Stock, as to the number of shares of Common Stock at any time or times outstanding, and that insofar as their opinion relates to the accuracy and completeness of factual matters contained in the Prospectus and Registration Statement, it is based upon a general review with the Company's representatives and independent accountants of the information contained therein, without independent verification by such counsel of the accuracy or completeness of such information. Such counsel may also rely upon the opinions of other competent counsel and, as to factual matters, on certificates of officers of the Company and of state officials, in which case their opinion is to state that they are so doing and copies of said opinions or certificates are to be attached to the opinion unless said opinions or certificates (or, in the case of certificates, the information therein) have been furnished to the Underwriters in other form. (ii) Such opinion or opinions of Gardner, Carton & Douglas, counsel for the Underwriters, dated the First Closing Date or the Second Closing Date, as the case may be, with respect to the incorporation of the Company, the validity of the Shares to be sold by the Company, the Registration Statement and the Prospectus and other related matters as you may reasonably require, and the Company shall have furnished to such counsel such documents and shall have exhibited to them such papers and records as they request for the purpose of enabling them to pass upon such matters. (iii) A certificate of the Chairman and the President of the Company, dated the First Closing Date or the Second Closing Date, as the case may be, to the effect that: (1) the representations and warranties of the Company set forth in Section 2 of this Agreement are true and correct as of the date of this Agreement and as of the First Closing Date or the Second Closing Date, as the case may be, 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 such Closing Date; and (2) the Commission has not issued an order preventing or suspending the use of the Prospectus or any preliminary prospectus filed as a part of the Registration Statement or any amendment thereto; no stop order suspending the effectiveness of the Registration Statement has been issued; -14- 15 and to the best knowledge of the respective signers, no proceedings for that purpose have been instituted or are pending or contemplated under the 1933 Act. The delivery of the certificate provided for in this subparagraph shall be and constitute a representation and warranty of the Company as to the facts required in the immediately foregoing clauses (1) and (2) of this subparagraph to be set forth in said certificate. (iv) At the time the Pricing Agreement is executed and also on the First Closing Date or the Second Closing Date, as the case may be, there shall be delivered to you a letter addressed to you, as the Underwriters, from Ernst & Young L.L.P., independent accountants, the first one to be dated the date of the Pricing Agreement, the second one to be dated the First Closing Date and the third one (in the event of a second closing) to be dated the Second Closing Date, to the effect set forth in Schedule B. There shall not have been any change or decrease specified in the letters referred to in this subparagraph which makes it impractical or inadvisable in the judgment of the Underwriters to proceed with the public offering or purchase of the Shares as contemplated hereby. (v) Such further certificates and documents as you may reasonably request. All such opinions, certificates, letters and documents shall be in compliance with the provisions hereof only if they are satisfactory to you and to Gardner, Carton & Douglas, counsel for the Underwriters, which approval shall not be unreasonably withheld. The Company shall furnish you with such manually signed or conformed copies of such opinions, certificates, letters and documents as you request. If any condition to the Underwriters' obligations hereunder to be satisfied prior to or at the First Closing Date is not so satisfied, this Agreement at your election will terminate upon notification to the Company without liability on the part of any Underwriter or the Company, except for the expenses to be paid or reimbursed by the Company pursuant to Sections 6 and 8 hereof and except to the extent provided in Section 10 hereof. SECTION 8. Reimbursement of Underwriters' Expenses. If the sale to the Underwriters of the Shares on the First Closing Date is not consummated because any condition of the Underwriters' obligations hereunder is not satisfied or because of any refusal, inability or failure on the part of the Company to perform any agreement herein or to comply with any provision hereof, unless such failure to satisfy such condition or to comply with any provision hereof is due to the default or omission of any Underwriter, the Company agrees to reimburse you upon demand for all out-of-pocket expenses (including reasonable fees and disbursements of counsel) that shall have been reasonably incurred by you in connection with the proposed purchase and the sale of the Shares. Any such termination shall be without liability of any party to any other party except that the provisions of this Section, Section 7 and Section 11 shall at all times be effective and shall apply. SECTION 9. Effectiveness of Registration Statement. You and the Company will use your, its and their best efforts to cause the Registration Statement to become effective, if it has not yet become -15- 16 effective, and to prevent the issuance of any stop order suspending the effectiveness of the Registration Statement and, if such stop order be issued, to obtain as soon as possible the lifting thereof. SECTION 10. Indemnification. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of the 1933 Act or the Exchange Act against any losses, claims, damages or liabilities, joint or several, to which such Underwriter or such controlling person may become subject under the 1933 Act, the Exchange Act or other federal or state statutory law or regulation, at common law or otherwise (including in settlement of any litigation if such settlement is effected with the written consent of the Company), 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 any material fact contained in the Registration Statement, including the information deemed to be part of the Registration Statement at the time of effectiveness pursuant to Rule 430A and/or Rule 434, if applicable, any preliminary prospectus, the Prospectus, or any amendment 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 will reimburse each Underwriter and each such controlling person for any legal or other expenses reasonably incurred by such Underwriter or such controlling person 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 (i) any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, any preliminary prospectus, the Prospectus or any amendment or supplement thereto in reliance upon and in conformity with written information furnished to the Company by or on behalf of any Underwriter, specifically for use therein; or (ii) if such statement or omission was contained or made in any preliminary prospectus and corrected in the Prospectus and (1) any such loss, claim, damage or liability suffered or incurred by any Underwriter (or any person who controls any Underwriter) resulted from an action, claim or suit by any person who purchased Shares which are the subject thereof from such Underwriter in the offering and (2) such Underwriter failed to deliver or provide a copy of the Prospectus to such person at or prior to the confirmation of the sale of such Shares in any case where such delivery is required by the 1933 Act. In addition to their other obligations under this Section 10(a), the Company agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, described in this Section 10(a), it will reimburse the Underwriters on a monthly basis for all reasonable legal and other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Company's obligation to reimburse the Underwriters for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) Each Underwriter will severally indemnify and hold harmless the Company, each of its directors, each of its officers who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of the 1933 Act or the Exchange Act, against any losses, claims, damages or liabilities to which the Company, or any such director, officer or controlling person may become subject under the 1933 Act, the Exchange Act or other federal or state statutory law or regulation, at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of such Underwriter), insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue or alleged untrue statement of any material fact contained in the Registration Statement, any preliminary prospectus, the -16- 17 Prospectus, or any amendment 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, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, any preliminary prospectus, the Prospectus, or any amendment or supplement thereto in reliance upon and in conformity with Section 3 of this Agreement or any other written information furnished to the Company by such Underwriter specifically for use in the preparation thereof; and will reimburse any legal or other expenses reasonably incurred by the Company, or any such director, officer or controlling person in connection with investigating or defending any such loss, claim, damage, liability or action. In addition to their other obligations under this Section 11(b), the Underwriters agree that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, described in this Section 11(b), they will reimburse the Company on a monthly basis for all reasonable legal and other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Underwriters' obligation to reimburse the Company for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have. (c) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party under this Section, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party except to the extent that the indemnifying party was prejudiced by such failure to notify. In case any such action is brought against any indemnified party, and it notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with all other indemnifying parties similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party; provided, however, if the defendants in 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, or the indemnified and indemnifying parties may have conflicting interests which would make it inappropriate for the same counsel to represent both of them, the indemnified party or parties shall have the right to select separate counsel to assume such legal defense and otherwise to participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of its election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed such counsel in connection with the assumption of legal defense in accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel, approved by the Underwriters in the case of paragraph (a) representing all indemnified parties not having different or additional defenses or potential conflicting interest among themselves who are parties to such action), (ii) 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 commencement of the action or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying -17- 18 party. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability arising out of such proceeding. (d) If the indemnification provided for in this Section is unavailable to an indemnified party under paragraphs (a) or (b) hereof in respect of any losses, claims, damages or liabilities referred to therein, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Underwriters from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Underwriters in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The respective relative benefits received by the Company and the Underwriters shall be deemed to be in the same proportion in the case of the Company as the total price paid to the Company for the Shares by the Underwriters (net of underwriting discount but before deducting expenses), and in the case of the Underwriters as the underwriting discount received by them bears to the total of such amounts paid to the Company and received by the Underwriters as underwriting discount in each case as contemplated by the Prospectus. The relative fault of the Company and the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Company or by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages and liabilities referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provisions of this Section, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section are several in proportion to their respective underwriting commitments and not joint. (e) The provisions of this Section shall survive any termination of this Agreement. Section 11. Default of Underwriters. It shall be a condition to the agreement and obligation of the Company to sell and deliver the Shares hereunder, and of each Underwriter to purchase the Shares hereunder, that, except as hereinafter in this paragraph provided, each of the Underwriters shall purchase and pay for all Shares agreed to be purchased by such Underwriter hereunder upon tender to the Underwriters of all such Shares in accordance with the terms hereof. If any Underwriter or -18- 19 Underwriters default in their obligations to purchase Shares hereunder on the First Closing Date and the aggregate number of Shares which such defaulting Underwriter or Underwriters agreed but failed to purchase does not exceed 10 percent of the total number of Shares which the Underwriters are obligated to purchase on the First Closing Date, the Underwriters may make arrangements satisfactory to the Company for the purchase of such Shares by other persons, including any of the Underwriters, but if no such arrangements are made by such date the nondefaulting Underwriters shall be obligated severally, in proportion to their respective commitments hereunder, to purchase the Shares which such defaulting Underwriters agreed but failed to purchase on such date. If any Underwriter or Underwriters so default and the aggregate number of Shares with respect to which such default or defaults occur is more than the above percentage and arrangements satisfactory to the Underwriters and the Company for the purchase of such Shares by other persons are not made within 36 hours after such default, this Agreement will terminate without liability on the part of any nondefaulting Underwriter or the Company, except for the expenses to be paid by the Company pursuant to Section 6 hereof and except to the extent provided in Section 10 hereof. In the event that Shares to which a default relates are to be purchased by the nondefaulting Underwriters or by another party or parties, the Underwriters or the Company shall have the right to postpone the First Closing Date for not more than seven business days in order that the necessary changes in the Registration Statement, Prospectus and any other documents, as well as any other arrangements, may be effected. As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this Section. Nothing herein will relieve a defaulting Underwriter from liability for its default. SECTION 12. Effective Date. This Agreement shall become effective immediately as to Sections 7, 9, 10 and 13 and as to all other provisions at 10:00 A.M., Chicago Time, on the day following the date upon which the Pricing Agreement is executed and delivered, unless such a day is a Saturday, Sunday or holiday (and in that event this Agreement shall become effective at such hour on the business day next succeeding such Saturday, Sunday or holiday); but this Agreement shall nevertheless become effective at such earlier time after the Pricing Agreement is executed and delivered as you may determine on and by notice to the Company or by release of any Shares for sale to the public. For the purposes of this Section, the Shares shall be deemed to have been so released upon the release for publication of any newspaper advertisement relating to the Shares or upon the release by you of telegrams (i) advising Underwriters that the Shares are released for public offering, or (ii) offering the Shares for sale to securities dealers, whichever may occur first. SECTION 13. Termination. Without limiting the right to terminate this Agreement pursuant to any other provision hereof: (a) This Agreement may be terminated by the Company by notice to you or by you by notice to the Company at any time prior to the time this Agreement shall become effective as to all its provisions, and any such termination shall be without liability on the part of the Company to any Underwriter (except for the expenses to be paid or reimbursed pursuant to Section 6 hereof and except to the extent provided in Section 10 hereof) or of any Underwriter to the Company. (b) This Agreement may also be terminated by you prior to the First Closing Date, and the option referred to in Section 4, if exercised, may be cancelled at any time prior to the Second Closing Date, if (i) trading in securities on the New York Stock Exchange shall have -19- 20 been suspended or minimum prices shall have been established on such exchange, or (ii) a banking moratorium shall have been declared by Illinois, New York, or United States authorities, or (iii) there shall have been any change in financial markets or in political, economic or financial conditions which, in the opinions of the Underwriters, either renders it impracticable or inadvisable to proceed with the offering and sale of the Shares on the terms set forth in the Prospectus or materially and adversely affects the market for the Shares, or (iv) there shall have been an outbreak of major armed hostilities between the United States and any foreign power which in the opinion of the Underwriters makes it impractical or inadvisable to offer or sell the Shares. Any termination pursuant to this paragraph (b) shall be without liability on the part of any Underwriter to the Company or on the part of the Company to any Underwriter (except for expenses to be paid or reimbursed pursuant to Section 6 hereof and except to the extent provided in Section 10 hereof). SECTION 14. Representations and Indemnities to Survive Delivery. The respective indemnities, agreements, representations, warranties and other statements of the Company, of its officers, and of the several Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or the Company or any of its or their partners, officers or directors or any controlling person, as the case may be, and will survive delivery of and payment for the Shares sold hereunder. SECTION 15. Notices. All communications hereunder will be in writing and, if sent to the Underwriters will be mailed, delivered or telegraphed and confirmed to you c/o William Blair & Company, L.L.C., 222 W. Adams Street, Chicago, Illinois 60606, with a copy to Gardner, Carton & Douglas, 321 North Clark Street, Suite 3400, Chicago, Illinois 60610-4795 (Attention: Glenn W. Reed); and if sent to the Company will be mailed, delivered or telegraphed and confirmed to the Company at its corporate headquarters with a copy to Bingham, Dana & Gould LLP, 150 Federal Street, Boston, MA 02110 (Attention: Richard M. Harter). SECTION 16. Successors. This Agreement and the Pricing Agreement will inure to the benefit of and be binding upon the parties hereto and their respective successors, personal representatives and assigns, and to the benefit of the officers and directors and controlling persons referred to in Section 10, and no other person will have any right or obligation hereunder. The term "successors" shall not include any purchaser of the Shares as such from any of the Underwriters merely by reason of such purchase. SECTION 17. Partial Unenforceability. If any section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, such determination shall not affect the validity or enforceability of any other section, paragraph or provision hereof. SECTION 18. Applicable Law. This Agreement and the Pricing Agreement shall be governed by and construed in accordance with the laws of the State of Illinois. -20- 21 If the foregoing is in accordance with your understanding of our agreement, kindly sign and return to us the enclosed duplicates hereof, whereupon it will become a binding agreement among the Company and the several Underwriters including you, all in accordance with its terms. Very truly yours, CONCORD EFS, INC. By:_______________________________ The foregoing Agreement is hereby confirmed and accepted as of the date first above written. WILLIAM BLAIR & COMPANY, L.L.C. MONTGOMERY SECURITIES MORGAN KEEGAN & COMPANY, INC. ADAMS, HARKNESS & HILL, INC. By: WILLIAM BLAIR & COMPANY, L.L.C. By__________________________________ Principal -21- 22 SCHEDULE A
Number of Firm Shares to be Underwriter Purchased - ----------- --------- William Blair & Company, L.L.C. Montgomery Securities Morgan, Keegan & Company, Inc. Adams, Harkness & Hill, Inc. --------- TOTAL 3,000,000 =========
-22- 23 SCHEDULE B Comfort Letter of Ernst & Young LLP (1) They are independent public accountants with respect to the Company and its subsidiaries within the meaning of the 1933 Act. (2) In their opinion the consolidated financial statements of the Company and its subsidiaries included or incorporated by reference in the Registration Statement and the consolidated financial statements of the Company from which the information presented under the caption "Selected Consolidated Financial Data" has been derived which are stated therein to have been examined by them comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the Exchange Act. (3) On the basis of specified procedures (but not an examination in accordance with generally accepted auditing standards), including inquiries of certain officers of the Company and its subsidiaries responsible for financial and accounting matters as to transactions and events subsequent to December 31, 1995, a reading of minutes of meetings of the stockholders and directors of the Company and its subsidiaries since December 31, 1995, a reading of the latest available interim unaudited consolidated financial statements of the Company and its subsidiaries (with an indication of the date thereof) and other procedures as specified in such letter, nothing came to their attention which caused them to believe that (i) the unaudited consolidated financial statements of the Company and its subsidiaries included or incorporated by reference in the Registration Statement do not comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the Exchange Act or that such unaudited financial statements are not fairly presented in accordance with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements included in the Registration Statement, and (ii) at a specified date not more than five days prior to the date thereof in the case of the first letter and not more than two business days prior to the date thereof in the case of the second and third letters, there was any change in the capital stock or long-term debt or short-term debt (other than normal payments) of the Company and its subsidiaries on a consolidated basis or any decrease in consolidated net current assets or consolidated stockholders' equity as compared with amounts shown on the latest unaudited balance sheet of the Company included in the Registration Statement or for the period from the date of such balance sheet to a date not more than five days prior to the date thereof in the case of the first letter and not more than two business days prior to the date thereof in the case of the second and third letters, there were any decreases, as compared with the corresponding period of the prior year, in consolidated net sales, consolidated income before income taxes or in the total or per share amounts of consolidated net income except, in all instances, for changes or decreases which the Prospectus discloses have occurred or may occur or which are set forth in such letter. (4) They have carried out specified procedures, which have been agreed to by the Underwriters, with respect to certain information in the Prospectus specified by the Underwriters, and on the basis of such procedures, they have found such information to be in agreement with the general accounting records of the Company and its subsidiaries. -23- 24 EXHIBIT A CONCORD EFS, INC. 3,000,000 Shares Common Stock* PRICING AGREEMENT ______________, 1996 WILLIAM BLAIR & COMPANY, L.L.C. MONTGOMERY SECURITIES MORGAN KEEGAN & COMPANY, INC. ADAMS, HARKNESS & HILL, INC. c/o William Blair & Company 222 West Adams Street Chicago, Illinois 60606 Ladies and Gentlemen: Reference is made to the Underwriting Agreement dated ___________, 1996 (the "Underwriting Agreement") relating to the sale by the Company and the purchase by the Underwriters of the above Shares. All terms herein shall have the definitions contained in the Underwriting Agreement except as otherwise defined herein. Pursuant to Section 4 of the Underwriting Agreement, the Company agrees with the Underwriters as follows: 1. The initial public offering price per share for the Shares shall be $__________. 2. The purchase price per share for the Shares to be paid by the several Underwriters shall be $_____________, being an amount equal to the initial public offering price set forth above less $____________ per share. Schedule A is amended as follows: - -------- * Plus an option to acquire up to 450,000 additional shares to cover overallotments -24- 25 If the foregoing is in accordance with your understanding of our agreement, kindly sign and return to us the enclosed duplicates hereof, whereupon it will become a binding agreement among the Company and the several Underwriters, including you, all in accordance with its terms. Very truly yours, CONCORD EFS, INC. By________________________ The foregoing Agreement is hereby confirmed and accepted as of the date first above written. WILLIAM BLAIR & COMPANY, L.L.C. MONTGOMERY SECURITIES MORGAN KEEGAN & COMPANY, INC. ADAMS, HARKNESS & HILL, INC. By: WILLIAM BLAIR & COMPANY, L.L.C. By ________________________________ Principal -25- EX-5 3 OPINION OF BINGHAM, DANA & GOULD LLP. 1 Exhibit 5 LETTERHEAD OF BINGHAM, DANA & GOULD LLP October 17, 1996 Concord EFS, Inc. 2525 Horizon Lake Drive, Suite 120 Memphis, TN 38133 Dear Ladies and Gentlemen: We have acted as counsel for Concord EFS, Inc., a Delaware corporation (the "Company"), in connection with the registration under the Securities Act of 1933, as amended (the "Securities Act"), of 3,450,000 shares (including 450,000 shares reserved to cover over-allotments, if any) of the Company's Common Stock, par value $0.33 1/3 per share (the "Shares"), pursuant to a Registration Statement on Form S-3, File No. 333-13309 (as amended, the Registration Statement"), initially filed with the Securities Exchange Commission on October 2, 1996. As such counsel, we have reviewed the corporate proceedings of the Company with respect to the authorization of the issuance of the Shares. We have also examined and relied upon originals or copies, certified or otherwise identified or authenticated to our satisfaction, of such corporate records, instruments, agreements or other documents of the Company, and certificates of officers of the Company as to certain factual matters, and have made such investigation of law and have discussed with officers and representatives of the Company such questions of fact, as we have deemed necessary or appropriate as a basis for the opinions hereinafter expressed. In our examination, we have assumed the genuineness of all signatures, the conformity to the originals of all documents reviewed by us as copies, the authenticity and completeness of all original documents reviewed by us in original or copy form and the legal competence of each individual executing any document. We have also assumed that an Underwriting Agreement, dated October __, 1996 substantially in the form of Exhibit 1.1 to the Registration Statement, between the Company and William Blair & Company L.L.C., Montgomery Securities, Morgan Keegan & Company, Inc., and Adams, 2 Concord EFS, Inc. October 17, 1996 Page 2 Harkness & Hill, Inc. (the "Underwriting Agreement"), will have been duly executed and delivered pursuant to the authorizing resolutions of the Board of Directors of the Company and that the Shares will be sold and transferred only upon the payment therefor as provided in the Underwriting Agreement. We have further assumed that the registration requirements of the Act and all applicable requirements of state laws regulating the sale of securities will have been duly satisfied. This opinion is limited solely to the Delaware General Corporation Law as applied by courts located in Delaware. Based upon and subject to the foregoing, we are of the opinion that: 1. The issuance and sale of the Shares as contemplated in the Registration Statement have been duly authorized by the Company. 2. The Shares, when issued, sold, delivered and paid for in accordance with the provisions of the Underwriting Agreement, will be validly issued, fully paid and non-assessable. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to this firm under the heading "Legal Matters" in the Prospectus included in the Registration Statement. Very truly yours, BINGHAM, DANA & GOULD LLP EX-23.2 4 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.2 CONCORD EFS, INC. CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Selected Financial Data" and "Experts" in Amendment No. 1 to the Registration Statement (Form S-3, No 333-13309) and related Prospectus of Concord EFS, Inc. for the registration of 3,000,000 shares of its common stock and to the incorporation by reference therein of our report dated January 26, 1996, with respect to the consolidated financial statements of Concord EFS, Inc. incorporated by reference in its Annual Report (Form 10-K) for the year ended December 31, 1995, and the related financial statement schedule included therein, filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP Memphis, Tennessee October 17, 1996 -----END PRIVACY-ENHANCED MESSAGE-----